Wednesday, September 29, 2010

Mah Satyam - Big story of the Month

Mahindra Satyam, earlier known as Satyam Computer, on Wednesday announced its financial results for the first time the Satyam fraud came to light.

The the year ended March 31, 2010, it reported a net sales of Rs. 124.60 crore on net sales of Rs. 5481 crore. For year ended March 2009, the restated earnings show a net loss at Rs. 8,176.8 crore on net sales of Rs. 8,812.6 crore.

Its cash balance as on March 31, 2010, remained at Rs. 2178.6 crore.

Mahindra Satyam's board met today to consider the results. Satyam Computer had earlier announced its numbers for the July-September 2008 quarter.

The company is expected to declare the financials of the first two quarters of this fiscal (April-June and July-September 2010) on November 15, 2010.

Satyam's founder and former chairman B Ramalinga Raju in January 2009 had admitted to a multi-crore accounting fraud, so far the biggest corporate scam in India, plunging the company in to a crisis. 

Following Raju's revelation, the company's administration was taken over by a government-nominated board, which subsequently cleared sale of the company to Mahindra Group.

Tech Mahindra took over reins of the company in April 2009 and rebranded it as Mahindra Satyam. The Company Law Board had given exemption to Mahindra Satyam from publishing results for two financial years. The audited numbers is likely to give a clear picture about the financial health of the company.

Earlier, Mahindra Satyam (formerly Satyam Computer) said it will delist from the New York Stock Exchange as it is unable to comply with US market guidelines.

The company would delist its American Depositary Receipts (ADRs) from the NYSE on October 14. ADRs are shares issued by non-American companies to raise money in the US.

Mahindra Satyam Chairman Vineet Nayyar said in a filing to the BSE the company would not be able to file restated US-GAAP financial statements for the period ended March 31, 2009 on or prior to October 15, the deadline given the US regulator SEC.

In anticipation of better-than-expected numbers from the company, the stock ended flat, outperforming the benchmark Sensex which ended 148 points lower today.

Separately, the Supreme Court on Tuesday adjourned the hearing on a plea by CBI to cancel the bail granted to B Rama Raju, brother of B Ramalinga Raju, and four others accused in the Rs. 14,000-crore Satyam accounting fraud.

A bench comprising Justices Dalveer Bhandari and Deepak Verma adjourned the matter to October 19. Earlier, the apex court had issued notices to Rama Raju, brother of Satyam founder B Ramalinga Raju, former Satyam CFO V Srinivas and three other employees G Ramakrishna, Venkatapathi Raju and Ch Srisailam asking them why their bail should not be cancelled.

The apex court was hearing the petition filed by CBI against the Andhra Pradesh high court order, which in July, 2010, granted bails to the accused--Rama Raju, V Srinivas, G Ramakrishna, Venkatapathi Raju and Ch Srisailam--in the country's largest corporate fraud.

CBI has also challenged the bail granted by the High Court to Satyam founder Ramalinga Raju last week. Ramalinga Raju, his brother Rama Raju and eight others were arrested last year after the Satyam founder admitted to fudging the accounts of the IT company.

Friday, September 17, 2010

ROC to take action against defaulting companies

ROC to take action against defaulting companies
ROCs have issued Show Cause Notices to the defaulting companies which have not filed their Balance Sheets and Annual Returns within the time.

Recently, ROCs have issued Show Cause Notices to the defaulting companies which have not filed their Balance Sheets and Annual Returns within the time prescribed under Section 159 and 220 of the Companies Act, 1956. DIN3 was introduced by Companies (Amendment) Act, 2006 to have correct data of directors. After launch of MCA-21, all companies were requested to correct their company's master data and director's database by filing DIN3. Certain companies have not availed this opportunity, with the result their master data and directors database could not be updated. In case any discrepancy is found in Show Cause Notice issued, the same may kindly be intimated to respective ROC for necessary action.
Source: Notice as displayed on MCA Website
Ankitha Singhvi
Hope sees the invisible, feels the intangible & achieves the impossible :)

Reports of the Parliamentary Standing Committee on Finance on the Companies Bill, 2009 and the Company Secretaries (Amendment) Bill, 2010.

Reports of the Parliamentary Standing Committee on Finance on the Companies Bill, 2009 and the Company Secretaries (Amendment) Bill, 2010.
The Hon'ble Parliamentary Standing Committee on Finance placed their report on the Companies Bill, 2009 as well as report on the Company Secretaries (Amendment) Bill, 2010 before the Lok Sabha on 31st August, 2010.
The reports are placed on the website of the Institute
Report on the Companies Bill, 2009
The recommendations contained in the Report on the Companies Bill, 2009 include the following with regard to the profession of Company Secretaries:
1. Annual Return
(i) The following additional clause may be added in clause 82(1) "(j) details, as may be prescribed, in respect of shares held by or on behalf of the Foreign Institutional Investors indicating their names, addresses/countries of incorporation/registration and percentage of shareholding held by them."
(ii) The suggestion for placing an obligation on the Company to provide every assistance to the Company Secretary in whole time practice to enable him to verify any record or information etc. in connection with certification of annual return of the company may be considered for inclusion in the clause.
(iii) The Committee recommend that the new provision requiring return to be filed with Registrar, in case promoters' stake changes beyond a limit, in order to provide audit trail of ownership may be duly incorporated in the Bill.
(iv) The Committee recommend that any adverse remarks or qualification, made by the Company Secretary in whole-time practice, while certifying the annual return, should be necessarily explained for or commented upon in the Board's report.
2. Directors' Responsibility Statement
The Directors' Responsibility Statement referred to in sub-clause (3) of clause 120 shall state that – 
"(f) The directors had devised proper systems to ensure compliance with the provisions of this Act and rules made there under and that such systems were adequate and operating effectively"
3. Key Managerial Personnel
The Committee is of the view that the proposal originally contained in the Bill in clause 178(1) regarding appointment of KMP may be retained with a view to providing flexibility to decide the threshold limit
of companies which shall compulsorily have whole-time KMP. (i.e. every company belonging to such class or description of companies as may be prescribed by the rules shall be required to appoint all the three Key Managerial Personnel – Managing Director, Company Secretary and Chief Financial Officer).
4. Secretarial Audit
Provisions to be included in the Bill to mandate Secretarial Audit for bigger companies.
New Clause 178A –
(1) Every company having a paid up share capital of rupees five crore or more or such other amount as may be prescribed by Central Government from time to time shall annex with its Board's Report made in terms of sub-section (3) of section 120 of the Act, a Secretarial Audit Report given by a company secretary in practice in such form as may be prescribed.
(2) It shall be the duty of the company to give all assistance and facilities to the company secretary in practice for auditing the secretarial and other records of the company.
(3) The Board of directors, in their Report made in terms of sub-section (3) of section 120 of the Act, shall explain in full any qualification or observation or other remarks made by company secretary in practice in his report under sub-section(1)
(4) Where any default is made in complying with the provisions of this section, -
(a) the company and every officer who is in default shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees;
(b) The company secretary in practice who is in default shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
5. Functions/Role of Company Secretary
The functions of Company Secretaries to be provided.
New Clause 178C – The functions of Company Secretaries shall include :-
(a) to convene Board and general meetings, to attend the board and general meetings and maintain the record of the minutes of these meetings.
(b) to obtain approvals from the Board, general meetings, the Government and such other authorities as required under the provisions of this Act;
(c) to assist and advise the board in the conduct of the affairs of the company;
(d) to assist and advise the board in ensuring good corporate governance and in complying with the corporate governance requirements and good practice;
(e) to ensure that the company complies with the applicable secretarial standards.
Explanation – For the purpose of this clause, the term "Secretarial Standards" means Secretarial Standards issued by the Institute of Company Secretaries of India and approved by the Central Government."
6 Incorporation of Companies
With a view to ensuring greater accountability, the Committee recommend that necessary changes may be made in clause 7(1)(b) requiring certificate of compliances under this clause to be given both by the
professional as well as by Director/Manager/Secretary of the Company.
Report on the Company Secretaries (Amendment) Bill, 2010
Secretary of the Council
As pointed out by the ICSI, it would be in the fitness of things that the Secretary of the Council of the Institute is a qualified member of the Institute. The Committee, therefore, recommend that the stipulations of section 16(1)(a) relating to the appointment of the Secretary of the Council are reviewed for reinstating the position prevailing earlier whereby the Secretary had to necessarily be a member of the Institute.
Ankitha Singhvi

Wednesday, September 15, 2010

Companies Bill 2009- Auditors to pay investors for fraud by companies

Companies Bill 2009- Auditors to pay investors for fraud by companies

The new Companies Bill could contain a provision that will make auditors compensate retail investors in cases of corporate fraud, a measure aimed at bringing in more accountability into audit profession. In a representation made before the parliamentary standing committee on finance, the ministry of corporate affairs has suggested several such measures to restore investors' confidence, affected by the alleged involvement of auditors in the Satyam scam.

The final version of the bill could also contain a provision empowering regulators to initiate civil and criminal action against auditors/ audit firms, if they are found to be a part of a fraud committed by any company.

The government is also looking to set up an independent body to oversee the quality of audit in the country. The body, being conceived on the lines of the Public Company Accounting Oversight Board in the US, will cut into the authority of the Institute of Chartered Accountants of India (ICAI). The ICAI has opposed the creation of this new body, which is seen as the government's lack of faith in ICAI.

While the idea behind the proposal is to raise the accountability of auditors and imbibe greater reliability in corporate accounts, the move is likely to be supplemented with greater authority to auditors to verify financial details provided by companies.

A suggestion in this regard has been made by the parliamentary standing committee, which seeks to give auditors access to financial records of the subsidiaries of companies, which are outside India, and financial data on their transactions "The idea is to draw a balance between accountability and authority. Auditors will be given greater authority to do their work," said an official in the ministry of corporate affairs.

Ankitha Singhvi

Tuesday, September 14, 2010

BSE Card Is "Intangible Asset" For Depreciation: Supreme Court

Techno Shares & Stocks vs. CIT (Supreme Court)

BSE Card is an "intangible asset" and eligible for depreciation u/s 32(1)(ii)

S. 32 (1), as amended w.e.f. 1.4.1998 allows depreciation on "intangible assets" being, inter alia, "licenses … or any other business or commercial rights of similar nature". The Tribunal took the view that a BSE card was an "intangible asset" eligible for depreciation. On appeal by the Revenue, the High Court (323 ITR 69) reversed the Tribunal on the ground that it was not a "license" and the words "business or commercial rights" relate to intellectual properties and not all categories of business or commercial rights. On appeal by the assessee, HELD reversing the High Court:

.. (iii) Under Rule 5 of the BSE Rules, membership is a personal permission from the Exchange which is nothing but a "licence" which enables the member to exercise rights and privileges attached thereto. It is this licence which enables the member to trade on the floor of the Exchange and to participate in the trading session on the floor of the Exchange. It is this licence which enables the member to access the market. Therefore, the right of membership, which includes right of nomination, is a "licence" or "akin to a licence" which is one of the items which falls in s. 32(1)(ii). The right to participate in the market has an economic and money value. It is an expense incurred by the assessee which satisfies the test of being a "licence" or "any other business or commercial right of similar nature" in terms of s. 32(1)(ii).

Source: ITAT Online

Ankitha Singhvi

Recommendation to Make Formulation of a CSR Policy Mandatory for Big Companies

Recommendation to Make Formulation of a CSR Policy Mandatory for Big Companies

In response to the overwhelming concerns shown by the Standing Committee of Parliament on Finance (SCF), which thoroughly examined The Companies Bill, 2009, on the extent of Corporate Social Responsibility (CSR) being undertaken by corporates and the need for a comprehensive CSR policy, the Ministry of Corporate Affairs have agreed that the Bill may now include provisions to mandate that every company having [(net worth of Rs. 500 crore or more, or turnover of Rs. 1000 crore or more)] or [a net profit of Rs. 5 crore or more during a year] shall be required to formulate a CSR Policy to ensure that every year at least 2% of its average net profits during the three immediately preceding financial years shall be spent on CSR activities as may be approved and specified by the company. The Directors shall be required to make suitable disclosures in this regard in their report to members. 

In case any such company does not have adequate profits or is not in a position to spend prescribed amount on CSR activities, the directors would be required to give suitable disclosure/reasons in their report to the members. 

While welcoming the Ministry's acceptance of the Committee's suggestion to bring Corporate Social Responsibility (CSR) in the statue itself, the Committee feels that separate disclosures required to be made by companies in their Annual Report by way of CSR statement indicating the company policy as well as the specific steps taken thereunder will be a sufficient check on non-compliance

Ankitha Singhvi

Monday, September 13, 2010

DTC - A hit on FII

The Direct Taxes Code, which was recently tabled in the Parliament has as one of its noble objectives, reducing the uncertainty and litigation for the foreign investors. However, the recent version of the Bill may have just done the opposite for the Foreign Institutional Investors (FIIs). One hopes that some of these proposals are unintended and when the Standing Committee reviews the Bill, they will be suitably amended.

The Bill has largely restored the existing tax framework for taxation of capital gains. While long term capital gains will continue to be tax exempt, transactions outside the exchange, which are not subject to securities transaction tax, will be taxed at the rate of 30% as against 10%/20% under the existing regime. However, indexation benefit will be available on such gains.

Also, the FIIs will not be permitted to set off or carry forward losses arising from sale of long term investments. Short term gains will be taxed at ordinary rates with a 50% deduction. Thus, most FIIs will pay the short term capital gains tax at the effective rate of 15%. Further, only 50% of short term losses will be permitted to be set off and carried forward.

The Bill provides that the income earned by FIIs will be deemed as capital gains. This would not have much impact on the FIIs as most FIIs at present offer their income to tax as capital gains. The deemed characterisation under the Bill implies that income from derivative transactions, which are currently treated as business income, will now be taxed as capital gains. Considering that most derivative contracts have a maturity period of between 30-90 days, the income from the derivative transactions will be subject to tax at 15%.

Given that the Bill permits all non-resident taxpayers, including FIIs, to opt to be governed by the treaty if it is more beneficial, it will be interesting to see if investors who have access to a tax treaty can take a view that their income from derivative transactions should be treated as business income under the treaty and not taxable in India, in the absence of a Permanent Establishment. However, the intent under the Bill clearly seems to be to treat all income of FIIs as capital gains.

For FIIs investing from favourable treaty jurisdictions, all capital gains will be tax exempt. Though, structures without much commercial substance are likely to face challenges with the advent of general anti-avoidance rule ('GAAR').
As per the proposed GAAR, if the structure has been set up to obtain an unintended 'tax benefit' or involves treaty shopping, the Indian tax authorities will have the ability to lift the corporate veil or deny the treaty benefits.

While the detailed rules and safe harbours are still to be announced, it is apprehended that holding structures set up in tax favourable jurisdictions such as Mauritius and Cyprus will be presumed to be set up for tax avoidance and the onus to prove otherwise will be on the taxpayers.

This uncertainty might tilt the balance in favour of certain well established jurisdictions such as Singapore, which already have an objective substance test built into their tax treaty with India. For those FIIs who have traders based in jurisdictions from where they invest, it may be easier to meet the commercial substance test.

The significant impact on the FIIs will be as regards the taxation of their investors. The Bill deviates from the current law and has sought to tax offshore transfer of shares in companies which hold at least 50% or more investment in the form of Indian assets.

As a consequence, non-residents investing in an open-ended offshore fund set up as a company may be subject to Indian tax upon redemption of offshore shares. This might create unintended cascading tax burden on the investors in the offshore funds set up as collective investment vehicles, and which have more than 50% asset allocation to India.

However, the offshore derivative instruments may not be caught in the tax net as generally participatory notes issued by FIIs are neither shares nor considered as 'interest' in the issuer. Therefore it may be possible to contend that income from participatory notes continues to remain outside the purview of the Code and hence not taxable in India.

The overall impact of the Bill on FIIs seems to be positive and restoring the current capital gains tax regime is certainly a welcome move. The potential taxation of investors and the uncertainty on tax treaty availability due to GAAR are dampeners. Detailed rules and safe harbours will need to be reviewed to assess the potential impact.

Provisions of DTC 2010 versus DTC 2009

QUESTION: Direct Taxes Code Bill was introduced in Parliament. How far is it different from the draft Code, 2009?

ANSWER: The Bill is proposed to be effective only from April 1, 2012, so as to cover the income of the financial year 2011-12. It will also go to the Parliamentary Committee before it is taken up by Parliament.

This is welcome because it will no longer be rushed through as it was earlier apprehended. There have been some material changes from the draft Code, 2009. The proposal for tax on gross assets has been dropped but the tax on branch profits will remain requiring reconciliation with Double Tax Avoidance Agreements.

The proposals for substantial reduction in tax rates and in slab revision proposed in the draft Code are now replaced by practical return to the existing rates admittedly prompted by the need for calibrating the rates with expected revenue even as had been indicated in the Revision Paper. Tax rates under the existing law, the draft Code and the Bill may be analysed in the accompanying chart.

Women will lose the right to the special exemption to which they are entitled to under the existing law as well as the proposal in the first draft Code.
As regards firms and companies, the relief is only removal of surcharges and cesses which were even otherwise expected to be temporary.

The prevailing rate at 30 per cent will continue as against 25 per cent in the earlier draft. There is no change in the rate of tax on distributed dividend by a company, which will continue at 15 per cent. Minimum Alternate Tax for companies will continue with the tax rate jacked up to 20 per cent from 15 per cent. The new tax on branch profits would be 15 per cent.

There are proposals for new levies on income distributed to holders of equity-oriented units of mutual funds and the amount distributed under approved equity-oriented life insurance schemes at 5 per cent. The proposed EET scheme in the draft Code does not find a place in the Bill so that outright deductions for savings now available under Sec. 80C will continue, while the EET scheme will be limited to present provisions under Sec. 80CCC and 80CCD.

Exemption now available for long-term capital gains on transfer of listed shares, where securities transaction tax is suffered, will continue despite the earlier proposal to the contrary. Other changes can be considered in due course

Wednesday, September 8, 2010

DTC- No taxes break on Home Loan Principal amount.

DTC No taxes break on payment of Home Loan Principal amount 

The simplified Direct Tax Code (DTC) Bill introduced in Parliament on Monday, which will become effective from April 1, 2012, holds a few surprises, including the withdrawal of tax deduction on the principal component of housing loans. The bill, that will replace the Income Tax Act 1961, seeks an increase in exemption threshold of individuals from the current Rs 1.60 lakh to Rs 2 lakh and reduce corporate taxes to a flat 30%.

Revenue secretary Sunil Mitra pointed out that only the interest component of a housing loan will be considered for deductions. So, if your equated monthly installment is Rs 1.50 lakh, comprising interest and principal outgo of Rs 75,000 each, you can avail deduction of only the interest.

The DTC operation has been put on hold for a year to allow all three categories—tax practitioner, tax payer and tax administrator—enough time to become adequately familiar with the new provisions. The bill will now be referred to a parliamentary committee for examination.

If you were depending on a housing loan to cover most of your deduction, the decision to exclude the principal amount will bring it down substantially. Housing loan comprises 50% of the total deduction of up to Rs 3 lakh on savings. Other deductions allowed for individual taxpayers include Rs 1 lakh on pension, PF and gratuity and up to Rs 50,000 for tuition fees, pure life insurance premium and health insurance.

There is no mention of LTA or LTC in the bill exemption list, indicating that these sops have been dumped.

Shalini Haridoss Nair

Saturday, September 4, 2010

Software Supply Is Not "Sale": Madras High Court

Infotech Software Dealers Association vs. UOI (Madras High Court)

Though software is "goods", its supply may be a "service" and not a "sale"

S. 65(105)(zzzze) of the Finance Act, 1995 inserted by the F (No. 2) Act, 2009 provides for the levy of service tax on "any service provided … to any person, by any other person in relation to information technology software for use in the course, or furtherance, of business or commerce, including … acquiring the right to use information technology software …" The Petitioner, an association of software resellers, contented inter alia that as software had been held to be "goods" by the Supreme Court in Tata Consultancy Services 271 ITR 401 and as there was a "sale" attracting VAT, there could not also be a "service" and that s. 65(105)(zzzze) was unconstitutional. HELD dismissing the Petition:

(i) Two questions arise for consideration: (a) whether software is goods and (b) if so, whether in all case of transactions, it would amount to sale or in some transactions it could be considered to be a service;

(ii) All software is "goods". Article 366(12) of the Constitution defines the term "goods" to include all materials, commodities and articles. It is an inclusive definition. Though a software programme consists of various commands which enable the computer to perform a designated task and the copyright in that programme remains with the originator of the programme, yet because software is an article of value, it is "goods". Indian law does not make a distinction between tangible property and intangible property. Tata Consultancy Services 271 ITR 401 (SC) followed;

(iii) However, while software is "goods", all transactions are not necessarily a "sale". The transaction may be one which is either an 'exclusive sale' or 'an exclusive service' or one which has the elements of a sale and service. A perusal of a sample 'End User Licence Agreement' (EULA) shows that the dominant intention of the parties is that the developer keeps the copyright of each software is only the right to use with copyright protection. By the agreement, the developer does not sell the software as such. The Petitioner in turn enters into a EULA for marketing the software to the end-user. Accordingly, when a transaction takes place between the Petitioner and its customers, it is not the sale of the software as such, but only the contents of the data stored in the software which would amount to only service. To bring the deemed sale under Article 366(29A)(d) of the Constitution, there must be a transfer of right to use any goods and when the goods as such is not transferred, the question of deeming sale of goods does not arise and in that sense, the transaction would be only a service and not a sale;

(iv) Accordingly, the argument that as software is 'goods', all transactions of canned / packaged software or customized software is a sale is not acceptable. The question whether a transaction amounts to a sale or service depends upon the individual transaction. Parliament cannot be said not to have the legislative competence to tax the transaction if it is shown to be a service.


Ankitha Singhvi

Wednesday, September 1, 2010

Shares Income: LTCG remains exempt and Short Term Capital Gain taxable at half the rate under DTC

Shares Income: LTCG remains exempt and Short Term Capital Gain taxable at half the rate under DTC

DTC Bill proposes to tax short-term capital gains arising from stocks and mutual funds at half the marginal rate.So, if your marginal tax rate is 30 per cent, you will pay a short-term capital gains tax at 15 per cent. As far as long-term capital gains tax goes, it has been kept out of the tax net, subject to the payment of securities transaction tax (STT).

The move benefits small investors. Individuals whose marginal tax rate is 20 per cent or 10 per cent will pay only 10 per cent and 5 per cent respectively, against the current reg-ime where they pay 15 per cent.

Investors in the highest tax bracket will pay 15 per cent as short-term capital gains tax, which is equivalent to the current tax of 15 per cent.

"Thus if an investor holds his shares for more than a year and has paid the STT (at the rate of 0.25 per cent, which exists today) on them, the entire amount of capital gains that he gets is not subject to tax," said Hemal Zobalia, executive director, KPMG. This comes as a booster to the stock markets where investors were apprehensive about their investments.

Source: Tax Guru


Ankitha Singhvi

Exemption limit for wealth tax to go up to Rs 1 cr

Exemption limit for wealth tax to go up to Rs 1 cr

The Direct Taxes Code (DTC) Bill proposes to raise the exemption limit for imposing wealth tax to Rs 1 crore from Rs 15 lakh at present, a move that will help a lot of taxpayers avoid the levy. The Rs 1 crore limit proposed in the Direct Taxes Code Bill, however, is much less that the exemption of Rs 50 crore proposed in the original draft.

The DTC proposes to levy wealth tax at the rate of 1 per cent. Broadly, net wealth refers to taxable wealth, which means the excess of assets over debts. The tax is levied only on specified assets under the Act and not on all assets.

Ankitha Singhvi