DIRECT TAX - Nangia & Co

Tax & Regulatory Newsletter 

Issue 05 

AUGUST, 2010 

NANGIA & CO. 

Chartered Accountants 

New Delhi – Mumbai - Dehradun


Issue 05 – AUGUST, 2010 

NANGIA & CO. 


New Delhi – Mumbai - Dehradun 

What’s inside… 

DIRECT TAX 

Taxability of hire charges: Income to arise where property is 

delivered to the hirer; 

Applicability of MAT provisions to Non Resident companies; 

Profits from supply of ‘shrink-wrapped’ software is not ‘Royalty’; 

Royalty paid by Non Resident does not ‘arise’ in India if there is no 

‘economic link’ between the PE and the Royalty; 

Professional firms can have ‘Service PE’ in India and services 

rendered offshore for projects in India are also taxable in India; 

Transfer Pricing Law for using foreign trademarks and 

advertisement; 

Income tax Returns of all companies to be filed electronically 

with digital signature mandatorily; 

INDIRECT TAX 

Finance Minister’s Speech – Meeting with the 

Committee of State Finance on GST; 

FEMA/RBI & FDI POLICY 

Empowered 

External Commercial Borrowing Policy – Take-out Finance; 

Export of Goods and Services – Write off of unrealized export 

bills and surrender of export incentives. 

DIRECT TAX 

Taxability of hire charges: Income to arise where property 

is delivered to the hirer 

Seabird Exploration FZ, LLC *“the 

applicant”+, a company incorporated 

under the laws of the United Arab 

Emirates, engaged in the provision of 

geophysical services to the oil and gas 

industry in India entered into 

agreements with numerous vessel 

providing companies for hiring their 

vessels to be used anywhere globally, though no crew or services 

associated with such vessels were provided in terms of the 

agreements. The agreements for the hiring of vessels were executed 

outside India and the hire charges were also paid outside India, the 

vessels were also delivered to and returned outside India. The 

applicant contended that since the agreements were executed 

outside India and the hire charges were also payable outside India, it 

was not liable to tax under the Indian Tax Law and hence filed an 

application before the Tax Authorities for a ‘NIL’ withholding tax 

order for remitting the hire charges. The Assessing Officer passed an 

order for withholding taxes at the rate of 4.224% deeming the income 

taxable in India in terms of the provisions of Section 44BB of the 

Income Tax Act, 1961. 

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The applicant approached the Authority of Advance Ruling for 

resolution of the issue contending that the only provision which could 

cover the hire charges was the deeming provision as stipulated in 

Section 44BB of the Income Tax Act, 1961 which specifically stated 

that income earned “through or from any asset or source of income 

in India” was taxable in India and the source was traceable to India 

only if the income generating activity was contingent upon its use in 

India. The source of income of the lessor lied in delivering and 

transferring the control of the vessels to the applicant and not its 

subsequent utilization in India or elsewhere and the hire charges 

were payable irrespective of the use of the vessel or place of usage of 

such vessel which was all at the discretion of the applicant. Since the 

source of income was outside India the hire charges were not taxable 

in India. 

The Authority for Advance Ruling 

held that the ‘source of income’ 

for hire charges of a vessel was to 

be determined having regard to 

the place where the agreement 

for hire was executed but the 

place where the vessel was 

delivered/situated at the time of 

entering into the agreement. In the present case, since at the time of 

renewal of the agreements the vessels were situated in India, there 

was constructive delivery of the movable property in India and, 

accordingly, the resultant hire charges were taxable in India. It was 

further observed - 

That mere physical presence of a Non Resident’s vessel in the 

territorial waters of India pursuant to the hiring of vessel on 

bareboat charter terms, without anything more, did not 

constitute a Permanent Establishment of the Non Resident in 

India; 

Furthermore, the single angle of the execution of an agreement 

for letting out the vessel did not conclude the transaction and had 

to be followed by the delivery of the thing hired. The agreement 

and delivery were essential and integral parts of a hire 

transaction, therefore, in case of movable property, income arose 

at the place where the property was delivered to the hirer, unless 

there were any special stipulations; 

Therefore, where the agreements were executed outside India 

and the delivery of the vessels also took place outside India, the 

source of income could not be said to be located in India by 

reason of the mere presence of the vessels in India without the 

volition of the lessor. However, if the vessels were located in India 

at the time the agreements were entered into or renewed, the 

transaction could materialize only with the delivery of the vessels 

in India and, therefore, the consequential hire charges could be 

said to be sourced in India; 

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Applying the above principles to the facts of the case where some 

of the agreements were renewed, the vessels were situated in 

India on the date of such renewal, therefore, to that extent, the 

delivery pursuant to the renewed agreements was deemed to 

have taken place in India and, consequently, hire charges were to 

be taxed in India; 

Since the hire charges were covered by the special provision i.e. 

Section 44AB of the Income Tax Act, 1961 and the ‘Royalty’ 

definition in the Indian tax law excluded such amounts referred to 

in the special provision from its ambit, the hire charges could not 

be taxed as ‘Royalty’. 

[Source: AAR No. 829 of 2009 dated July 23, 2010] 

Applicability of MAT provisions to Non Resident 

companies 

Timken Co. *“the applicant”+, a 

company incorporated in the United 

States of America proposed to transfer 

shares held by it in Timken India, a 

company incorporated in India to 

Timken Mauritius Limited, a Mauritian 

company as a part of its global 

restructuring exercise. Since the applicant had held the shares in the 

Indian company for more than 12 months and proposed to transfer 

them through a recognized stock exchange the transaction was 

exempt from capital gains tax. 

The questions put forth by the applicant before the Authority for 

Advance Ruling were - 

Whether the provisions of Section 115JB relating to payment of 

Minimum Alternative Tax ["MAT"] were applicable only to 

domestic Indian companies or to foreign companies that have a 

physical business presence in India as well? 

In case the MAT provisions were held to be applicable to Foreign 

Companies, since the applicant was a foreign company which did 

not have any physical presence in India in the form of an office or 

branch and also in the light of the declaration provided by the 

applicant that it did not have a permanent establishment in India 

in terms of Article 5 of India-USA Double Taxation Avoidance 

Agreement, whether the provisions of Section 115JB of the Act 

would be applicable on the sale of shares of a listed company i.e. 

Timken India Limited, by the applicant, which has suffered 

Securities Transaction Tax and accordingly was tax exempt under 

Section 10(38) of the Act? 

The applicant contended as under – 

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Since long term capital gain on transfer of shares was exempt 

under the Income Tax Act, the same could not be brought to tax 

under the MAT regime; 

The expression ‘company’ used in the MAT provisions was defined 

in the general definition section of the Indian Tax Law to mean 

any Indian company or a company incorporated under the laws of 

a country outside India, however this definition was qualified by 

the expression ‘unless the context otherwise requires’, therefore 

the use of the definition required an evaluation of the 

circumstances and the context in which it was to be used, which 

clarified that the definition meant only an Indian company; 

The MAT regime mandated the preparation of financial 

statements as per the Indian Company Law which would imply 

that a foreign company would have to recast its global financial 

statements in accordance to the Indian Company Law for the MAT 

provisions to apply and it was hence difficult to accept that the 

legislature intended to apply the MAT regime to foreign 

companies; 

The administrative circulars issued also indicated that the MAT 

rate was arrived at based on the rate applicable to domestic 

companies. 

The Authority for Advance Ruling ruled that – 

Application of the definition of 

the term ‘company’ to a foreign 

company without enquiring 

into the opening words used, 

i.e., ‘unless the context 

otherwise requires’ would 

make the MAT regime unworkable. Furthermore, several 

provisions under the Indian Tax Law were to be read together as 

part of a larger scheme and every clause was to be construed with 

reference to the context and other clauses of the Law to make a 

consistent enactment of the whole statute; 

The context of the MAT regime, the Finance Minister’s speech 

and the administrative circulars did indicate that the MAT regime 

was not designed to be applicable to a foreign company, which 

had no presence or a Permanent Establishment in India; 

The ruling in the case of P. No. 14 of 1997 (supra), relied upon by 

the Revenue, was rendered in a different context wherein the 

entity was doing business in India and also had a Permanent 

Establishment in India and, therefore, was required to comply 

with the provisions of the Indian Company Law and maintain 

books of accounts. The applicant had no established place of 

business in India in the form of an office or branch or a Permanent 

Establishment and was therefore not required to prepare its 

financial statements as per the Indian Company Law and hence 

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was not liable to pay tax under the MAT regime on sale of shares 

of a listed Indian company that was exempt from capital gains tax 

under the Indian Tax Law. 

[Source: AAR No. 836 of 2009 dated July 23, 2010] 

Profits from supply of ‘shrink-wrapped’ software is not 

‘Royalty’ 

Velankani Mauritius Limited, *“the 

taxpayer”+, a Mauritian company 

engaged in the supply of software 

supplied ‘off-the-shelf’ ‘shrinkwrapped’ 

software to Infosys 

Technologies, an Indian company 

and took the view that the profits 

there from were not taxable in India 

as it did not have a Permanent Establishment in India. The Assessing 

Officer as well as the Commissioner of Income Tax (Appeals) 

disagreed with the taxpayer and proceeded to assess the profits as 

‘Royalty’ under Section 9(1)(vi) of the Income Tax Act, 1961. 

The Income Tax Appellate Tribunal upon appeal held that - 

In the case of CIT vs. Samsung Electronics [227 CTR 335], which 

was relied upon by the Tax Authority, the Karnataka High Court 

had confined its decision to the issue of responsibility of the 

assessee under Section 195 in deducting tax at source before 

making remittances to Non Residents. Even though the Court had 

ruled in favour of the Revenue on the application of the TDS 

provisions, it was made clear that it has not examined the 

question of tax liability of the Non Resident assessee in respect of 

the payments received from assesses in India; 

On the question whether income from supply of software could 

be assessed as ‘Royalty’, reference was drawn to the case in 

Motorola Inc vs. DCIT [95 ITD 269] wherein the Delhi Special 

Bench had held that the crux of the issue was whether the 

payment was for a copyright or for a copyrighted article. If it was 

for a copyright, it had to be classified as ‘Royalty’ under the 

Income Tax Act, 1961 and the DTAA and if it was for a copyrighted 

article, then it only represented the purchase price of an article 

and could not be considered as ‘Royalty’ either under the Act or 

the DTAA; 

This principle was also laid down by the Authority for Advance 

Ruling in a ruling applied by the Airport Authority of India as well 

as by the Income Tax Appellate Tribunal in the case of Sonata 

Software [6 SOT 700] wherein it was held that the payments 

partook the character of purchase and sale of goods, and as there 

was no Permanent Establishment in India, no income accrued or 

deemed to accrue or arise in India; 

The case of Tata Consultancy Services Vs. State of AP [271 ITR 401 

(SC)] was also referred to wherein it was held that even though 

the copyright in a software programme remained with the 

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originator of the programme, the moment copies were made and 

marketed, it became ‘goods’ which were assessable to Sales Tax. 

It was held that even intellectual property became ‘goods’ once 

put onto a media whether in the form of books or computer disks 

or cassettes. Accordingly, profits on sale of software could not be 

assessed as ‘Royalty’ either under the Indian Tax Law or under the 

DTAA. 

[Source: Velankani Mauritius Limited Vs. DDIT (ITAT Bangalore) 

dated July 08, 2010] 

Royalty paid by Non Resident does not ‘arise’ in India if 

there is no ‘economic link’ between the PE and the 

Royalty 

SET Satellite (Singapore) Limited *“the 

taxpayer”+, a tax resident of Singapore, 

was engaged in the business of 

acquiring television programs, motion 

pictures and sports events and 

exhibiting the same on its television 

channels from Singapore. The taxpayer entered into a contract with 

the Global Cricket Council, another company based in Singapore for 

obtaining the right to broadcast, distribute and exhibit cricket 

matches through territories of various countries including India. An 

Indian company of the taxpayer was also engaged for undertaking the 

marketing activities for the taxpayer. The Assessing Officer concluded 

that the taxpayer had a Permanent Establishment in India under the 

‘Agency Permanent Establishment rule’ of the Indo-Singapore tax 

treaty on account of the marketing activities undertaken by the 

Indian company. Upon appeal the first appellate authority ruled in 

favour of the taxpayer to which the tax authority preferred an appeal 

before the Income Tax Appellate Tribunal. 

Before the Income Tax Appellate Tribunal 

the taxpayer contended that even if the 

payments constituted ‘Royalty’, they did 

not arise in India as per the DTAA as the 

payment was made by a tax resident of 

Singapore. Also, the ‘Royalty’ was not 

incurred in connection with the taxpayer’s Permanent Establishment 

in India, it was incurred in connection with its broadcasting activities 

in Singapore and was independent of the activities of the Indian 

company. It was also stated that the ‘Royalty’ was also not borne by 

the Permanent Establishment because for it to be construed as being 

borne by the Permanent Establishment it should have had an 

economic link with the taxpayer’s Permanent Establishment in India. 

Reliance was also placed on the OECD commentary on Article 11 

dealing with taxation of interest which stated that for interest to 

arise, it should have an ‘economic link’ with the Permanent 

Establishment. 

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The Revenue contended that the taxpayer had a place of business in 

India since its source of revenue was from advertisements which 

were broadcasted by an Indian channel and paid mainly by persons in 

India. Also, there was a direct economic link between the collection 

of advertisement revenue by the taxpayer from India and payments 

made to the Singapore company for acquisition of broadcasting rights 

and hence the Indian company which carried on marketing activities 

constituted a Permanent Establishment of the taxpayer. The Income 

Tax Appellate Tribunal ruling in favour of the taxpayer observed - 

The Royalty arose in Singapore since the taxpayer was a tax 

resident of Singapore. For Royalty to arise in India three 

conditions had to be satisfied i.e. (a) Payment should be made to 

a Non Resident; (b) There should be a Permanent Establishment in 

connection to which the Royalty was incurred; and (c) The Royalty 

should be borne by the Permanent Establishment; 

Mere existence of a Permanent Establishment could not lead to 

the conclusion that Royalty arose in India, the liability should have 

been incurred in connection with as well as borne by the 

Permanent Establishment in India; 

The existence of an ‘economic link’ was essential for Royalty to be 

taxed in India and in the present case there was no such economic 

link between the taxpayer and the Permanent Establishment. 

[Source: DDIT Vs. SET Satellite (Singapore) Limited (ITAT 

Mumbai) dated June 25, 2010] 

Professional firms can have ‘Service PE’ in India and 

services rendered offshore for projects in India are also 

taxable in India 

Linklaters LLC *“the taxpayer”+, a 

UK-based limited liability 

partnership engaged in the practice 

of law, did not have a branch or 

office in India but rendered legal 

services in India. These services 

were rendered from its office in the 

UK and at times its partners and 

staff members visited India to 

render these services. During the tax year under consideration, the 

taxpayer’s partners and staff were present in India for a period 

exceeding 90 days. 

The taxpayer filed a return of income declaring ’NIL’ taxable income 

on the basis that it did not have a Permanent Establishment *“PE”] in 

India under the UK Treaty for its income to be taxable in India either 

as business profits or as income from Independent Personal Services 

*“IPS”+. The taxpayer argued that the Service PE rule was merely an 

illustration of the Basic PE rule and was to be considered as resulting 

in a PE only if it satisfied the Basic PE rule. Also, the taxpayer’s 

activities in India did not satisfy the requirement of ‘furnishing of 

services’ as it was an international professional enterprise rendering 

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services directly to its clients whereas the IPS article of the UK Treaty 

extended only to individuals and, hence, it could not be applied to a 

partnership like the taxpayer. 

The Assessing Officer rejected 

the taxpayer’s arguments and 

concluded that it had a PE in 

India under the Services PE rule 

and proceeded to tax its entire 

Income in relation to India projects (including services rendered from 

the UK office) on the basis of actual revenues received. On appeal, 

the first appellate authority agreed with the Assessing Officer on the 

existence of the PE but restricted taxation to the extent of services 

rendered in India. 

Upon appeal by both sides the Income Tax Appellate Tribunal ruled 

that – 

Though a UK partnership was a “person” under Article 3(2), the 

question whether it was a “resident of UK” was of question. 

Article 4(1) defined a “resident of a Contracting State” to mean a 

person “liable to tax in that State by reasons of domicile, 

residence, place of management or any other criterion of similar 

nature”. Also, according to the OECD Report on Partnerships, 

mere computation of income at the level of partnership was not 

sufficient to hold that the partnership firm was ‘liable to taxation’ 

in the residence country, however, this view was not correct and 

had also been rejected by India. A partnership was eligible to the 

benefits of the DTAA provided the entire profits of the firm were 

taxed in UK whether in the hands of the firm or in the hands of 

the partners directly; 

The Service PE formed part of the second category of the two 

heterogeneous categories of PE in the Indo-UK tax treaty which 

consisted of extensions of the basic PE rule and deemed PEs and 

hence did not need to satisfy the requirement of a Basic PE rule. 

Also, the term ‘rendering’ and ‘furnishing’ were interchangeably 

used and the term furnishing could not exclude the rendering of 

professional service directly to clients as suggested by the 

taxpayer; 

The IPS article of the UK Treaty could not be applied as it related 

to performance of services by individuals; 

As regards the quantum of profits attributable to the PE, the 

argument that by virtue of Article 7(2), the PE must be assessed 

by taking the value of services rendered by the PE at the market 

value of such services in India and not the price at which the 

taxpayer billed its clients was not acceptable. The fiction of 

hypothetical independence in Article 7(2) was confined to a PE’s 

transactions with its head office and branches and did not extend 

to transactions with third parties. The arms length principle in 

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Article 7(2) was relevant only for intra organization transactions 

or transactions with Associated Enterprises. Accordingly, the 

revenues earned by the taxpayer were to be taken at actual 

figures and no adjustments are permissible in the same; 

Further, Article 7 (1) provided for the taxability of profits “directly 

or indirectly attributable” to the PE. The words “profits indirectly 

attributable to the PE” incorporated the “force of attraction” 

principle. To give effect to the “force of attraction” principle, in 

addition to taxability of income in respect of services rendered by 

the PE in India, any income in respect of the services rendered to 

an Indian project, which were similar to the services rendered by 

the PE were also to be taxed in India in the hands of the taxpayer 

irrespective of whether such services were rendered through the 

PE or directly by the GE. There could not be any professional 

services rendered in India which were not, at least indirectly, 

attributable to carrying out professional work in India. This 

indirect attribution was enough to bring the income from such 

services within the ambit of taxability in India. Hence, the entire 

profits relating to services rendered by the taxpayer, whether in 

India or outside, in respect of Indian projects was taxable in India. 

[Source: ITA No. 4896 & 5085/Mum/03 dated July 17, 2010] 

Transfer Pricing Law for using foreign trademarks and 

advertisement 

Maruti Suzuki India Limited *“the taxpayer”+, 

an Indian company engaged in the business 

of manufacture and sale of automobiles, 

besides trading in spares and components of 

automotive vehicles entered into a License 

Agreement with Suzuki in the year 1992 for 

the manufacture and sale of certain models of Suzuki four wheel 

motor vehicles. As per the terms of the Agreement, Suzuki agreed to 

provide the necessary technical collaboration and licenses of the 

Suzuki products and parts and also granted exclusive right to use 

licensed information and the licensed trademark ‘Suzuki’. 

The Transfer Pricing Officer *“TPO”+ issued a notice to the taxpayer to 

determine the Arms Length Price of the international transactions 

between the taxpayer and Suzuki. The initial approach of the TPO was 

that there was a ‘deemed transfer’ of ‘Maruti’ brand name to Suzuki 

for which the taxpayer should receive an arm’s length consideration 

based on the fair market value of the brand (‘deemed transfer 

theory’). In the final order, the TPO abandoned the ‘deemed transfer 

theory’ and proposed to make an adjustment under the ‘assister in 

development theory’ wherein he disallowed the Royalty paid to 

Suzuki for use of trademark and the advertisement expenses incurred 

in promoting the ‘Suzuki’ trademark on the basis that the huge 

advertisement and promotional expenditure was made to develop a 

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market for the vehicles, which included promotion of the trademark 

‘Suzuki’. 

The TPO relied on the OECD 

Transfer Pricing Guidelines 

relating to intangible property in 

support of the above theory. The 

US case law of DHL Inc. and 

Subsidiaries vs. Commissioner 

[TCM 1998-461] was also 

referred to in the order wherein 

the ‘bright-line’ test was advocated by the Court. The taxpayer 

challenging the order of the TPO filed a writ petition in the High 

Court. The High Court remanding the matter back to the TPO for a 

fresh adjudication ruling that – 

The onus was on a taxpayer to satisfy the TPO that the Arms 

Length Price was computed in consonance with the provisions of 

the law and the TPO could reject the price computed by the 

taxpayer and determine it only where he found that the taxpayer 

has not discharged the onus placed on it, or that the data used by 

the taxpayer was unreliable, incorrect or inappropriate, or there 

was certain evidence, which discredited the data used or the 

methodology adopted by the taxpayer. As the TPO had 

abandoned the ‘deemed transfer theory’, originally proposed in 

the notice in favor of the ‘assister in development theory’, in the 

final order, it was obligatory for him to issue a fresh notice for the 

change in approach for making the proposed adjustment; 

If a domestic entity, irrespective of whether it was an 

independent entity or an Associated Enterprise of a foreign entity, 

felt that the use of a foreign brand name and/or its logo was likely 

to be beneficial to it, there could be no dispute about the business 

decision to use the foreign brand or logo on payment of a royalty. 

However, in the case of Associated Enterprises, such royalty 

payment would have to satisfy the arm’s length test. There were 

valid business reasons for the taxpayer to enter into an 

agreement with Suzuki in order to meet the increased 

competition from foreign players. In such a case, the benefit from 

the association of a reputed name and logo may outweigh the 

loss, if any, in the value of the domestic brand. The test was to 

determine what a comparable entity, placed in the position of the 

taxpayer, would have done and only then could it be determined 

whether Suzuki had given any subsidy to the taxpayer in the 

payment of royalty or it got more than what it ought to have. The 

Tax Authority had not tried to find out what royalty, if any, a 

comparable independent entity would have paid for the benefits 

derived by the taxpayer under the Agreement; 

If a domestic Associate Enterprise uses a foreign trademark, no 

payment to the foreign entity on account of such user was 

necessary in case the user of the trademark was discretionary. 

However, the “income” arising from such transaction was 

required to be determined at arm‘s length price. If a domestic 

Associate Enterprise was mandatorily required to use the foreign 

trademark on its products, the foreign entity would have to make 

payment to the domestic entity on account of the benefit the 

foreign entity derives in the form of marketing intangibles from 

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such mandatory use of the trademark. Even where payment was 

made by the foreign entity, the arm‘s length price in respect of 

the international transaction was to be determined taking into 

consideration all the rights obtained and obligations incurred by 

the parties under the international transaction including the value 

of marketing intangibles obtained by the foreign entity on account 

of compulsory use of its trademark by the domestic entity. 

Suitable adjustments in this regards would have to be made 

considering the individual profiles of these entities and other facts 

and circumstances justifying such adjustments; 

The advertisement expenditure incurred by a domestic entity on 

advertising, promotion and marketing its products, using a foreign 

trademark/logo did not require a compensation by the owner of 

the trademark since the benefits of the expenditure accrue to the 

domestic entity only. The benefit which the owner of the foreign 

brand/logo received in the form of the increased awareness and 

goodwill of its brand in the domestic market, was purely 

incidental. Compensation for the advertisement costs incurred by 

a domestic entity became relevant only where such a payment 

was agreed by the foreign entity and/or the expenses incurred by 

the domestic entity on advertisement exceed normal expenses, 

which an independent entity would incur in this regard; 

If the expenses incurred by the domestic Associate Enterprise 

were more than what a comparable independent domestic entity 

would have incurred, the foreign entity was required to suitably 

compensate the domestic entity in respect of the advantage 

obtained by it in the form of brand building and increased 

awareness of its brand in the domestic market. The said “arms 

length price” would have to be determined by taking into 

consideration all the rights obtained and obligations incurred by 

the two entities, including the advantage obtained by the foreign 

entity. In determining whether the advertisement expenses 

incurred by the domestic Associate Enterprise on advertising the 

brand trademark/logo of the foreign entity are more than what an 

independent domestic entity would have incurred, the TPO had to 

identify appropriate comparables and make suitable adjustments 

considering the individual profiles of these entities and other facts 

and circumstances justifying such adjustments. 

[Source: Maruti Suzuki India Limited Vs. Addl.CIT (TPO)[High 

Court of Delhi dated July 01, 2010] 

Income Tax Returns of all companies to be filed 

electronically with digital signature mandatorily 

The Central Board of Direct Taxes has 

amended the Rules relating to electronic 

filing of income tax returns vide 

Notification No. 49/2010 dated which 

come into effect from July 09, 2010. 

As per the amended Rules, it is now mandatory for all companies to 

file income tax return [in Form No. ITR-6] electronically with digital 

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signature. Earlier, companies could file their electronic returns with or 

without digital signature. 

Further, now all individual and Hindu Undivided Families, who are 

required to get their accounts audited under Section 44AB of the 

Income tax Act 1961, are also required to file their income tax return 

[in Form No. ITR-4] electronically, with or without digital signature. 

Earlier, this condition was applicable only to companies and 

partnership firms. 

INDIRECT TAX 

[Source: Notification No. 49/2010 dated July 09, 2010] 

Finance Minister’s Speech – Meeting with the 

Empowered Committee of State Finance on GST 

The Finance Minister concluded his 

meeting with the Empowered 

Committee of State Finance on GST 

on July 21, 2010. A summary of 

major disclosures in his Speech are 

as under – 

Threshold Limits 

Exemption limit for both Central Goods and Service Tax *“CGST”+ and 

State Goods and Service Tax [“SGST”+ has been prescribed at INR 10 

Lakh. 

Exemptions 

All 99 items exempted under the existing VAT regime shall continue 

to remain exempt from both CGST & SGST. A review of existing 

exemptions from Central Excise Duty has been proposed to align the 

list of goods exempt with CGST & SGST. 

Compensation to States 

The Central Government is to fully compensate the States for the 

revenue loss sustained on account of reduction in the Central Sales 

Tax during the year 2009-10 with the balance amount to be released 

immediately; 

The Center shall also compensate the States for subsuming (into GST), 

purchase tax on food grains, which would be provided along with the 

VAT compensation over the next four years; 

The Center may also increase the amount of compensation to the 

States on adoption of GST as recommended by the Thirteenth 

Finance Commission in case the need so arises. 

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Rates 

In the first year of implementation, the lower rate for goods shall be 

6% and the standard rate would be 10% under CGST and SGST. 

Services would be charged at 8% under both CGST and SGST. These 

rates would ensure a single rate for CGST and SGST in the range of 

12% to 20% in the first year of implementation; 

During the second year of GST implementation the lower rate on 

goods would be maintained at 6% and the standard rate would be 

reduced to 9% under both CGST and SGST though such reduction 

would be subject to the revenue receipt of the Center and the State; 

During the third year of GST implementation, the lower rate for goods 

would be increased to 8% and the standard rate reduced to 8% for 

both CGST and SGST. The rate for services under both CGST and SGST 

would also continue to be 8%. 

FEMA/RBI & FDI POLICY 

[Source: PIB press release dated July 21, 2010] 

External Commercial Borrowing Policy – Take-out 

Finance 

Existing norms do not permit refinancing of domestic Rupee loans 

with External Commercial Borrowing *“ECB”+. However, keeping in 

view the special funding needs of the infrastructure sector the ECB 

policy has been reviewed and a scheme of take-out finance has been 

introduced wherein take-out financing arrangements have been 

permitted through ECB, under the approval route, for refinancing of 

Rupee loans availed of from the domestic banks by eligible borrowers 

in the sea port and airport, roads including bridges and power sectors 

for the development of new projects. 

The following conditions were mandated to be complied with - : 

The Corporate developing the infrastructure project is to have a 

tripartite agreement with domestic banks and overseas 

recognized lenders for either a conditional or unconditional takeout 

of the loan within three years of the scheduled Commercial 

Operation Date. The scheduled date of occurrence of the take-out 

is to be clearly mentioned in the agreement; 

The loan is to have a minimum average maturity period of seven 

years; 

The domestic bank financing the infrastructure project is to 

comply with the extant prudential norms relating to take-out 

financing; 

The fee payable, if any, to the overseas lender until the take-out is 

not to exceed 100 bps per annum; 

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On take-out, the residual loan agreed to be taken out by the 

overseas lender would be considered as ECB and the loan is to be 

designated in a convertible foreign currency and all extant norms 

relating to ECB are be complied with; 

Domestic Banks / Financial Institutions are not permitted to 

guarantee the take-out finance; 

The domestic bank will not be allowed to carry any obligation on 

its balance sheet after the occurrence of the take-out event; 

Reporting arrangement as prescribed under the ECB policy is to be 

adhered to. 

[Source: A. P. (DIR Series) Circular No. 4 dated July 22, 2010] 

Export of Goods and Services – Write off of unrealized 

export bills and surrender of export incentives 

As per existing norms AD Category I banks were permitted to accede 

to the requests for ‘write-off’ made by the exporters, subject to the 

conditions, inter alia, that the exporter had to surrender 

proportionate export incentives, if availed of, in respect of the 

relative shipments. 

It has since been announced in the Foreign Trade Policy (FTP) 2009-14 

that realisation of export proceeds shall not be insisted upon, under 

any of the Export Promotion Schemes under the Foreign Trade Policy, 

subject to the following conditions:- 

The write-off on the basis of merit shall be allowed by the Reserve 

Bank or by the AD Category – I banks on behalf of the Reserve 

Bank, as per the extant guidelines; 

The exporter has to produce a certificate from the Foreign Mission of 

India concerned, about the fact of non-recovery of export 

proceeds from the buyer; and 

This would not be applicable in self-write-off cases. 

The above relaxation is applicable for the exports made with effect 

from August 27, 2009. 

It has also been clarified that since 

the Drawback Scheme was governed 

by the provisions of the Customs Act, 

1962, the aforementioned provisions 

would not be applicable to the Duty 

Drawback scheme. Therefore, the 

drawback amount shall have to be 

recovered even if the claim is settled 

by the ECGC or the write–off is 

allowed by the Reserve Bank. 

Page | 14



NANGIA & CO. 



Accordingly, the AD Category I banks have been directed not to insist 

on the surrender of the proportionate export incentives, other than 

under the Duty Drawback scheme, if availed of, by the exporter under 

any of the Export Promotion Schemes under the FTP 2009-14, subject 

to the fulfillment of conditions detailed. 

[Source: A. P. (DIR Series) Circular No. 3 dated July 22, 2010] 

**** 

IMPORTANT COMPLIANCE DATES 

August, 2010 

August 05 Payment of Service Tax 

August 07 Payment of Withholding Taxes 

August 15 Payment of Provident Fund 

August 21 Payment of ESIC Dues 

August 28 Payment of VAT 

August 28 Filing of Monthly VAT Return 

Page | 15

OUR OFFICES 

NEW DELHI 

Suite ‐ 4A, Plaza M‐6, 

Jasola, 

New Delhi ‐ 110025 

Tel: +91 (11) 4737 1000/4174 8000 

Mob: +91 98100 02628 

Fax: +91 (11) 4737 1010 

Email: nangia@nangia.com 

MUMBAI 

1st Floor, Bahubali Building, 

17/17 H, Cawasji Patel Street, 

Fort, 

Mumbai - 400001, 

Maharashtra 

Tel: +91(022) 4041 6060 


DEHRADUN 

75/7 Rajpur Road, 

Dehradun - 28001 

Uttarakhand 

Tel: +91(135) 2742026, 2747084 

Fax: +91(135) 2740186 


www.nangia.com 

The Information provided in this document is provided for information purpose only, and should not be construed as legal advice on any subject 

matter. No recipients of content from this document, client or otherwise, should act or refrain from acting on the basis of any content included 

in the document without seeking the appropriate legal or professional advice on the particular facts and circumstances at issue. The Firm 

expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this document.

DIRECT TAX - Nangia & Co

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