VOL II                                                      ISSUE NO. 20                                    September 26, 2017          

In This Issue

India: FDI Policy 2017 Introduces Startups

The Department of Industrial Policy and Promotion, under the aegis of the Ministry of Commerce and Industry released the Consolidated Foreign Direct Investment Policy 2017 with effect from August 28, 2017. FDI 2017 supersedes the consolidated FDI Policy 2016 issued by the DIPP on June 7, 2016 and consolidates all the press notes issued by the DIPP from June 7, 2017 to August 27, 2017.

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India: Income Tax authorities to scrutinize startups and unlisted subsidiaries of MNCs

The income tax department has recently decided to scrutinize many start-ups and unlisted subsidiaries of Indian companies as well as multinational companies. The bone of contention seems to be the unjustifiable and excessive evaluation of shares as against their fair market value. Notices are being sent to these companies and startups under Section 56 (2) (viib) of the Income Tax Act, 1961(hereinafter referred to as “the Act”).

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India: Liaison And Project Offices do not constitute a Permanent Establishment for Tax Purposes In India

The High Court of Delhi in its recent judgement of DIT Vs. Mitsui & Co. Ltd (ITA 13/2005) expounded the criteria of classification of taxpayers as being a Permanent Establishment in India and the income directly or indirectly attributable to them being taxable.

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India: Government exempts import duty on goods for FIFA U-17 World Cup, India

The Ministry of Finance (Department of Revenue) vide notification no. 75/2017-Customs has exempted from import duty sports items and a wide range of goods for the upcoming FIFA U-17 World Cup India. The U-17 World Cup is the first FIFA event to be held in India and will be spread over six cities starting October 6 and is scheduled to have 52 matches, with the final being scheduled in the iconic Salt Lake Stadium.

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India: Six months waiting period Section 13B (2) of Hindu Marriage Act for Divorce by mutual consent not Mandatory: Supreme Court

In the recent case of AMARDEEP SINGH VS. HARVEEN KAUR, CA NO, 11158 OF 2017 it has been held by the Supreme Court that the period of 6 months, as mentioned in Section 13B(2) is not mandatory but directory, it will be open to the court to exercise its discretion in the facts and circumstances of each case where there is no possibility of parties resuming cohabitation and there are chances of alternative rehabilitation.

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India: FDI Policy 2017 Introduces Startups

 

 

 

Source: http://www.pinnaclefinancial.in/

 

Introduction

 

The Department of Industrial Policy and Promotion (hereinafter referred to as “DIPP”), under the aegis of the Ministry of Commerce and Industry released the Consolidated Foreign Direct Investment Policy 2017[1] (hereinafter referred to as “FDI 2017”) with effect from August 28, 2017. FDI 2017 supersedes the consolidated FDI Policy 2016 issued by the DIPP on June 7, 2016 and consolidates all the press notes issued by the DIPP from June 7, 2017 to August 27, 2017.

 

Of the many reforms introduced by FDI 2017 to attract foreign investment and boost economic growth, the most remarkable one is the inclusion of provisions specific to startups in FDI 2017 for the very first time.

 

Raising Funds

 

The FDI 2017 lists start-ups as a separate section and spells out provisions that allow them to raise foreign money from venture capital funds and other investors through instruments such as convertible notes. FDI 2017 has allowed startups to raise 100% funds from SEBI (Securities and Exchange Board of India) registered Foreign Venture Capital Investors (hereinafter referred to as “FVCI”) under the automatic route. The startup companies can issue equity or equity linked instruments or debt instruments to FVCI against receipts of foreign remittance. If a startup is organized as a partnership firm or a Limited Liability Partnership (LLP), the investment can be made in the capital or through any profit-sharing arrangement. FVCIs may also invest under the FDI Scheme, as non-resident entities, in other companies, subject to FDI Policy and the Foreign Exchange Management Act, 1999 (hereinafter referred to as “FEMA”).

 

 

 

 

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[1]Available at http://dipp.nic.in/sites/default/files/CFPC_2017_FINAL_RELEA SED_28.8.17.pdf 

Issue of Convertible notes by Startups

 

FDI 2017 has introduced the issuance of Convertible Notes by startups to persons outside India. Convertible Notes are instruments representing debt repayable at the option of the holder, or convertible into equity shares within 5 years from issue. Clause 2.1.9 of FDI 2017 defines Convertible Notes as “an instrument issued by a startup company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument.”

 

This provision is in pursuance to amendment of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Fifteenth Amendment) Regulations, 2016[2], dated 10 January 2017. The aforesaid amendment allows startups to issue convertible notes to foreign investors. The amendment states that A person resident outside India (other than an individual who is citizen of Pakistan or Bangladesh or an entity which is registered / incorporated in Pakistan or Bangladesh), may purchase convertible notes issued by an Indian startup company for an amount of twenty five lakh rupees or more in a single tranche. Earlier, FDI in startups could only be made by foreign venture capital investors by subscribing to equity or equity linked instruments or debt instruments

 

Conditions for issue of Convertible Notes

 

As per FDI 2017, startups can issue convertible notes to person resident outside India subject to the following conditions:

  1.  A person resident outside India (other than an individual who is citizen of Pakistan or Bangladesh or an entity which is registered / incorporated in Pakistan or Bangladesh), may purchase convertible notes issued by an Indian startup company for an amount of twenty five lakh rupees or more in a single tranche.

  2.  A startup company engaged in a sector where foreign investment requires Government approval may issue convertible notes to a non-resident only with approval of the Government

  3.  A startup company issuing convertible notes to a person resident outside India shall receive the amount of consideration by inward remittance through banking channels or by debit to the Escrow account maintained by the person concerned in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016, as amended from time to time.

  4.  Non-Residents may acquire or transfer Convertible Notes from or to persons resident India or Non-Residents only in accordance with applicable pricing guidelines under FEMA

  5.  Start-ups issuing Convertible Notes must comply with reporting requirements prescribed by the Reserve Bank of India

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[2]Available at https://rbi.org.in/scripts/NotificationUser.aspx?Id=10825&Mode=0

 

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India: Income Tax authorities to scrutinize startups and unlisted subsidiaries of MNCs

 

 

Source : http://www.incometaxindia.gov.in

 

The income tax department has recently decided to scrutinize many start-ups and unlisted subsidiaries of Indian companies as well as multinational companies. The bone of contention seems to be the unjustifiable and excessive evaluation of shares as against their fair market value. Notices are being sent to these companies and startups under Section 56 (2) (viib) of the Income Tax Act, 1961(hereinafter referred to as “the Act”).

 

Section 56 of the Act deals with the specific sources of income which are chargeable for income tax under the Act. According to sub-clause vii of the said section, it is clear that the income received by companies, with respect to shares is considered as a taxable source of income. Also, according to clause vii(b), if these shares are received, for a consideration which is in excess of the ‘fair market value’ of the shares then such aggregate income falls within the ambit of taxable income.

The explanation to this clause defines, fair market value to be such value:

  • as may be determined in accordance with such method as may be prescribed; or

  • as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher;

Wherever the valuation of shares is done at a suspiciously higher rate, than the fair market value, the IT authorities are investigating for illegalities with a fine-toothed comb. The news article in Economic Times, dated September 13, 2017 states that “fair market value is assessed by the tax department based on past transactions and record of similar comparable companies… It is a commonly a commonly accepted practice among startups to calculate fair market value based in the discounted cash flow method, which is based on the present value of cash flow expected to be earned by the business in future.”

 

What is especially notable is that even though startups do not have the business structuring, practices and desired commercial results/ gains as of now, it is highly likely, that because of their strong and unique intangible assets in which investors and the statutory authorities foresee a promising future are being valued at a high market value. In the coming months it would be interesting to see that in the midst of the startup frenzy nation, will the IT Authorities target these nascent companies for higher valuation or find their valuation reasonable owing to their promising future!

 

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India: Liaison And Project Offices do not constitute a Permanent Establishment for Tax Purposes In India

 

Source : http://delhihighcourt.nic.in/


The High Court of Delhi in its recent judgement of DIT Vs. Mitsui & Co. Ltd (ITA 13/2005) expounded the criteria of classification of taxpayers as being a Permanent Establishment in India and the income directly or indirectly attributable to them being taxable. The Hon’ble Court through this judgement, established that the Liaison and Project Offices did not constitute Permanent Establishment (PE) and the income from the business turnover or imports in India was exempted from the purview of Double Taxation Avoidance Agreement (DTAA). It was held that where the taxpayer is not carrying on any activity of business, it cannot be regarded as PE.

 

Brief Facts

 

The taxpayer is a non-resident company headquartered in Japan and had two projects in India. Income Tax Return was filed by the taxpayer which was subsequently revised. The Assessing officer (AO) scrutinized and made addition to the taxable income concluding the taxpayer to be a Permanent Establishment (PE) in India with respect to the Indo-Japanese (‘DTAA’). As per the view of AO, the LO of the taxpayer helped it in finding new purchasers and sellers of goods and merchandise.

 

The taxpayer contended that it complied to the RBI guidelines to have an LO in India and that the said LOs merely provided information to the overseas offices and, thus the taxpayer had declared Nil income in respect of its liaison activity in India.

 

Considering the details of telephone expenses of the Project Office (PO), the AO concluded that some part thereof pertained to the LO and it was difficult to say that LO was separated from the project operations.

 

The AO contemplated the income from the project as taxable under Section 44BBB of the Act by taking the profit at 10 per cent of the total turnover and thus added some amount to the taxpayer’s income disallowing the loss claimed.

 

The Commissioner of Income Tax (Appeals) and eventually the Income Tax Appellate Tribunal arrived at the conclusion that the taxpayer as not a PE and income directly or indirectly attributable to these branches/offices is not taxable in India.

 

Decision

 

The Hon’ble Court upheld the correctness of the decision of the ITAT that:

 

1. Indian branches/offices of the taxpayer and their activities cannot be regarded as permanent establishment in India and income directly or indirectly attributable to these branches/offices is not taxable in India

2. The taxpayer does not have any permanent establishment in India and its income from business turnover/imports in India was exempt in view of Agreement for Avoidance for Double Taxation between Indian and Japan  

Ratio

 

The Court gave detailed reasoning for their judgment which was based on the following points:

  1. In order to establish that the taxpayer is a PE, it is essential that such place was “a fixed place of business through which the business of an enterprise is wholly or partly carried out” and does not merely have an office, factory or workshop. (Articles 5(1) & (2) of DTAA).

  2. The use of facility solely for the purpose of search or display or for the maintenance of place for business solely for the purchases of goods or collecting information or for any other activity “preparatory or auxiliary in character” would take the outside the ambit of a PE.

  3. Merely because some portion of the telephone expenses were attributable to the LO or that the Chief Representative was managing both the LO as well as the PO was insufficient to conclude the LO was being used to carry on the business of the enterprises.

  4. After having treated the POs as separate taxable units and having offered the profits therefrom to tax under Section 44 BBB of the Income tax Act, the said POs cannot also be treated as PEs for the purpose of the DTAA.

  5. With respect to the issue of activity of ‘preparatory or auxiliary character’ the court considered the decision in National Petroleum Company Construction v. DIT as per which

  • Liaison office can act as a channel of communication between the principal place of business and the entities in India and cannot undertake any commercial trading or industrial activity;

  • Project office can play a much wider role but shall not undertake or carry on any other activity other than the “activity relating and incidental to execution of the project”.

  1. The taxpayer complied with the RBI regulations for running LO and the same had been accepted the RBI.

Opinion

 

In order to establish their business in India, the foreign companies enter the country through Liaison offices and Project Offices.

Being an extension of the Company headquartered abroad, Liaison offices primarily function to act as a media to connect the Parent Company with the Indian counterparts, aiding in development of prospective business ventures by collecting market information, providing technical and financial assistances and promoting imports and exports. For a Liaison Office to be established in India, mandatory compliances to RBI regulations should be made. The Liaison offices are strictly prohibited from carrying out any commercial activities in India directly or indirectly.

Project Offices manage large-scale, single, independent projects which are established only for the duration of the projects. These offices can undertake all activities that relate to the execution of project and its function and its function is not limited only to act as a channel of communication. RBI regulations permitting the setting up of project offices in India imposes restrictions on them preventing them thereby to undertake any activity other than execution of project.

 

The present judgement has endorsed the fact that, the taxpaying foreign offices are not involved in business transactions with Indian customers, no income accrues or arises in India. Accordingly, they should not be construed as a Permanent Establishment to enable them tax exemption in the view of DTAA. This will be beneficial in the longer run to promote investments in India.

 

 

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India: Government exempts import duty on goods for FIFA U-17 World Cup, India

 

 

Introduction

 

The Ministry of Finance (Department of Revenue) vide notification no.75/2017-Customs has exempted from import duty sports items and a wide range of goods for the upcoming FIFA U-17 World Cup India. The Central Government enforced the notification, in exercise of the powers conferred under sub-Section (1) of Section 25 of Customs Act, 1962.  

  • Section 25(1) – It grants the Central Government with the power to exempt certain good from custom duty to be levied upon them, if it deems fit.

“Power to grant exemption from duty - If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the Official Gazette, exempt generally either absolutely or subject to such conditions (to be fulfilled before or after clearance) as may be specified in the notification goods of any specified description from the whole or any part of duty of customs leviable thereon”

 

FIFA U-17, 2017

 

 

Source : http://img.fifa.com

 

The U-17 World Cup is the first FIFA event to be held in India and will be spread over six cities starting October 6 and is scheduled to have 52 matches, with the final being scheduled in the iconic Salt Lake Stadium. This tournament will also be the 17th edition of FIFA U-17 World Cup. Bids for the tournament were submitted as early as November 15, 2013, to host the tournament, and four countries namely India, Azerbaijan, Ireland and Uzbekistan submitted their respective bids, out of which India was declared to be the hosts by FIFA on December 5, 2013.

 

Exemption from Customs Duty

 

The Central Government being satisfied in the public interest, has exempted from import duty goods for the FIFA U-17 World Cup. One of the primary reasons behind this welcome decision by the Government is the promotion and expansion of the sport across the nation, and at the same time encouraging the youth for future sporting endeavors, as football is the top-most watched, as well as, played sport all over the globe.

 

The Notification

 

However, even though the notification has exempted goods when imported into India, there are a few conditions laid down to it. One such condition is that the importers shall have to furnish undertakings that all the goods, excluding gift items, souvenirs, mementos will be re-exported within three months of conclusion of the World Cup.

 

Other conditions that have been laid down for such exemption are given below in “Table A”:-

 

Table A

 

S. No. Goods Conditions
1

The following goods:
(i) All sports goods, sports equipment and sports requisites; fitness equipments; team uniform/ clothing; spares, accessories and consumables of the same.
(ii) Doping control equipment.
(iii) First aid kits.
(iv) Satellite phones/GPS, paging communication systems and other communication equipments; video/plasma screen, electronic score board for display; time control devices, stop watches; timing, scoring and result management systems, marquees, tents and other IT equipment such as projectors, printers, computers, smartphones, routers, etc.
(v) Food stuff, energy drinks, isotonic, tonic water.
(vi) Pharmaceuticals and medical consumables.
(vii) Training, medical or other equipment for use in the event.
(viii) Dining/kitchen items, office consumables, stationery and gift items, souvenirs, mementoes etc.
(ix) Uniforms/clothing material and other sports apparels as well as sewing machines.
(x) Goods for display/ exhibition/ stalls/ reception etc.
(xi) All others goods including but not limited to trophies, medals, prizes (such as golden boot/ glove), etc.

(a) Imported by any of the persons specified in the “Table B” below in relation to the FIFA under 17 World Cup India, 2017.

(b) The importer, at the time of clearance of the goods, produces a certificate to the Assistant Commissioner of Customs or Deputy Commissioner of Customs as the case may be, from the Director (Sports), Department of Sports, the Ministry of Youth Affairs and Sports, Government of India, indicating –

(i) the name and address of the importer and the description, quantity and value of the said goods; and

(ii) that the said goods are required for the purpose specified in condition (a) above.

(c) The importer, at the time of clearance of the goods, furnishes an undertaking that,- (i) all such goods, excluding gift items, souvenirs, mementoes shall be re-exported within three months from the date of conclusion of FIFA under 17 World Cup India, 2017. (ii) a utilization certificate for the goods consumed shall be furnished from the Director (Sports), the Department of Sports, the Ministry of Youth Affairs and Sports, Government of India, within three months from the date of conclusion of FIFA under 17 World Cup India, 2017.

 

S. No. Goods Conditions
Broadcast equipments and supplies used in organizing and during the event.

(a) Imported by FIFA Host Broadcasters in relation to the FIFA under 17 World Cup India, 2017.

(b) The importer, at the time of clearance of the goods produces a certificate to the Assistant Commissioner of Customs or Deputy Commissioner of Customs as the case may be, from the Director (Sports), the Department of Sports, the Ministry of Youth Affairs and Sports, Government of India, indicating –

(i) the name and address of the importer and the description, quantity and value of the said goods; and

(ii) that the said goods are required for the purpose specified in condition (a) above.

(c) The importer, at the time of clearance of the goods, furnishes an undertaking that all such goods shall be re-exported within three months from the conclusion of FIFA under 17 World Cup India, 2017.

Furniture and fixtures/ fittings, power generation and distribution systems, air conditioning equipment.

(a) Imported by any of the persons specified in the “Table B” below in relation to the FIFA under 17 World Cup India, 2017.

(b) The importer, at the time of clearance of the goods produces a certificate to the Assistant Commissioner of Customs or Deputy Commissioner of Customs as the case may be, from the Director (Sports), the Department of Sports, the Ministry of Youth Affairs and Sports, Government of India, indicating –

(i) the name and address of the importer and the description, quantity and value of the said goods; and

(ii) that the said goods are required for the purpose specified in condition (a) above.

(c) The importer, at the time of clearance of the goods, furnishes an undertaking that all such goods shall be re-exported within three months from the conclusion of FIFA under 17 World Cup India, 2017.

 

S. No. Importer (Entities and Individuals)
1 FIFA and FIFA Subsidiaries
2 FIFA Confederations
3 Participating FIFA Member Associations, including Hosting Association
4 FIFA Contractors (including FIFA Host Broadcasters)
5 FIFA staff and officials and members of the FIFA delegation, including match officials
6 FIFA Confederations and FIFA Member Associations staff and officials
7 FIFA Listed Individuals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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India: Six months waiting period Section 13B (2) of Hindu Marriage Act for Divorce by mutual consent not Mandatory: Supreme Court

 

Source : http://supremecourtofindia.nic.in/

 

In the recent case of AMARDEEP SINGH VS. HARVEEN KAUR, CA NO, 11158 OF 2017 it has been held by the Supreme Court that the period of 6 months, as mentioned in Section 13B(2) is not mandatory but directory, it will be open to the court to exercise its discretion in the facts and circumstances of each case where there is no possibility of parties resuming cohabitation and there are chances of alternative rehabilitation. For a better understanding the brief facts along with the section and judgements have been discussed below-

 

BRIEF FACTS-

 

The marriage of the Appellant and the Respondent took place on 16th January, 1994 at Delhi. Two children were born from the wedlock in 1995 and 2003 respectively. Some dispute arose between the parties and thereafter both the parties started living separately in 2008. On 28th April, 2017 a settlement was arrived between the parties to resolve all the disputes and seek divorce by mutual consent. The Respondent wife is to be given permanent alimony of Rs.2.75 crores. The Appellant husband handed over two cheques of Rs.50,00,000/-, which have been duly honoured, towards part payment of permanent alimony. Custody of the children is to be with the Appellant. Accordingly, a Civil Suit was filed before the Family Court (West), Tis Hazari Court, New Delhi and on 8th May, 2017 and statements of the parties were recorded. The parties have sought waiver of the period of six months for the second motion on the ground that they have been living separately for the last more than eight years and there is no possibility of their re union. Any delay will affect the chances of their resettlement. The parties have moved to Supreme Court on the ground that only Supreme Court can relax the six months period as per previous decisions of this Court.

 

DECISION OF THE COURT-

 

The question which came up for consideration before the Hon’ble Supreme Court was whether exercise of power under Article 142 of the Constitution to waive the period under Section 13B(2) of the Hindu Marriage Act was mandatory or directory. While determining this point the Hon’ble Supreme Court referred the decision in the case of Manish Goel vs. Rohini Goel (2010) 4 SCC 393, wherein the bench of two Hon’ble Judges of this Court held that jurisdiction of this court under Article 142 could not be used to waive the statutory period of six months for the second motion under Section 13B, as doing so will be passing an order in contravention of a statutory provision.  

The court further held that “after considering the above decisions, we are of the view that since Manish Goel (supra) holds the field, in absence of contrary decisions by a larger Bench, power under Article 142 of the Constitution cannot be exercised contrary to the statutory provisions, especially when no proceedings are pending before this Court and this Court is approached only for the purpose of waiver of the statute.”

 

In this regard the Hon’ble Court held that in determining the question whether provision is mandatory or directory, language alone is not always decisive. The Court was of the view that where the Court dealing with a matter is satisfied that a case is made out to waive the statutory period under Section 13B(2), it can do so after considering the following :

  1. The statutory period of six months specified in Section 13B(2), in addition to the statutory period of one year under Section 13B(1) of separation of parties is already over before the first motion itself;

  2. All efforts for mediation/conciliation including efforts in terms of Order XXXIIA Rule 3 CPC/Section 23(2) of the Act/Section 9 of the Family Courts Act to reunite the parties have failed and there is no likelihood of success in that direction by any further efforts;

  3. The parties have genuinely settled their differences including alimony, custody of child or any other pending issues between the parties;

  4. The waiting period will only prolong their agony;

  5. The waiver Application can be filed one week after the first motion giving reasons for the prayer for waiver. If the above conditions are satisfied, the waiver of the waiting period for the second motion will be at the discretion of the Court.

CONCLUSION-

 

The court concluded that the provision of section 13 B (2) of the HMA is not mandatory but is directive

 

The court went on to hold that “Since we are of the view that the period mentioned in Section 13B(2) is not mandatory but directory, it will be open to the Court to exercise its discretion in the facts and circumstances of each case where there is no possibility of parties resuming cohabitation and there are chances of alternative rehabilitation.

The parties are now at liberty to move the concerned court for fresh consideration in the light of this order. The appeal is disposed of accordingly.”

 

The Court was of the opinion that in conducting such proceedings, the court can also use the medium of video conferencing and also permit genuine representation of the parties through close relations, where the parties are unable to appear in person for any just and valid reason as may satisfy the court.

 

 

 

 

 

 

 

 

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