HorizonsAn FPI Bulletin

June 2016

The information and opinions contained in this document have been compiled or arrived at from published sources believed to be reliable, but no representation or warranty is made to their accuracy, completeness or correctness. This document is for information purposes only and is not an advisory for investment/ disinvestment. The information contained in this document is published for the assistance of the recipient but is not to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient. This information is not for soliciting any business or subscription or a recommendation to invest/ disinvest in any investment avenues. This document is not intended to be a substitute for professional, technical or legal advice. All opinions expressed in this document are subject to change without notice.

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Whilst due care has been taken in the preparation of this document and information contained herein, neither Grant Thornton nor Stock Holding Corporation of India

Disclaimer

2 | Horizons 2016

Snapshot of recent trends 4

Relevant changes in the regulatory framework 7

Income tax updates 10

Relevant jurisprudence 18

Recent news update 20

Glossary 25

Our view 26

Contact us 31

Contents

Horizons 2016 | 3

Snapshot of recent trends

4 | Horizons 2016

Trends in FPI investment (crore)

Source: NSDL

Site https://www.fpi.nsdl.co.in/web/Reports/Yearwise.aspx?RptType=6

Date: 31 May 2016

Horizons 2016 | 5

FPI Investment limits in government securities

FPI Investment limits in corporate bonds

S.No Instrument Type

Eligible Categories of FPIs

Upper Limit (Refer to Note 1)

Investment Unutilised Auctioned Limits available with FPIs

Total Investment including Unutilised Auctioned Limits

% of Limits Utilised

Limit Available for Investment

(INR Cr) (INR Cr) (INR Cr) (INR Cr) (INR Cr) (A) (B) (C) (D)=(B)+(C) (E)=(D)/(A) (F)=(A)-(D)1 Central

Government Securities (Refer to Note 2)

All Categories 140,000 135,060 2,447 137,507 98.22 2,493

Central Government Securities (Refer to Notes 2, 3)

Long Term FPIs

50,000 35,845 Not applicable 35,845 71.69 14,155

2 State Development Loans

All Categories 10,500 3,401 Not applicable 3,401 32.39 7,099

Total Government Securities

200,500 174,306 2,024 176,753 88.16 23,747

S.No Instrument type

Eligible categories of FPIs

Upper limit Upper limit (Refer to Note 1)

Investment Unutilised auctioned limits available with FPIs

Total investment including unutilised auctioned limits

% of Limits utilised

(INR Cr) (INR Cr) (INR Cr) (INR Cr)

(A) (B) (C) (D)=(B)+( C ) (E)=(D)/(A)

1 Corporate Bonds (Refer to Note 2)

All Categories 51 244,323 162,676 0 162,676 66.58

1(a) Commercial Paper (No fresh Investment is permitted wef February 4, 2015) (Refer to Note 3)

All Categories 2 9,978 0 0 0 0

1(b) Credit Enhanced Bonds (Refer to Note 4)

All Categories 5 23,953 0 - 0 0

Total Corporate Debt

51 244,323 162,676 0 162,676 66.58

Notes:i. Upper Limits are as prescribed vide SEBI circular ref.

no. CIR/IMD/FPIC/8/2015 dated October 06, 201.5ii. Includes Gross Long Positions in Interest Rate

Futures as per SEBI circular ref. no. CIR/MRD/DRMNP/2/2014 dated January 20, 2014.

iii. Limit applicable to FPIs registered with SEBI under the categories of Sovereign Wealth Funds, Multilateral Agencies, Endowment funds, Insurance funds, pension funds and Foreign Central banks as per SEBI circular ref. no. CIR/IMD/FIIC/ 17/2014 dated July 23, 2014.

iv. Beginning April 01, 2013, FPIs can invest in Corporate Debt without purchasing debt limits till the overall investment reaches 90%, after which the auction mechanism will be initiated for allocation of the remaining limits. As per SEBI circular ref. no. CIR/IMD/FIIC/1/2015 dated February 03, 2015, all investments within the limit of US$ 51 billion for Corporate Debt are required to be made in corporate bonds with a minimum residual maturity of three years.

v. Limit of US$ 2 billion within the overall limit of US$ 51 billion for Corporate Debt

vi. Limit of US$ 5 billion within the overall limit of US$ 51 billion for Corporate Debt

vii. Re-investments of coupons in Government Securities as per SEBI circular ref. nos. CIR/IMD/FIIC/2/2015 dated February 5, 2015 & CIR/IMD/FPIC/8/2015 dated October 06, 2015.

viii. Unutilised Limit available with the entity under re-investment eligibility as per SEBI circular ref. no. CIR/IMD/FIIC/2/2015 dated February 5, 2015.

The data displayed above is updated as on and upto October 09, 2015 i.e., the date of last transaction as reported by

Custodians

Disclaimer: All reasonable care has been taken to ensure that the information contained herein is not misleading or untrue. It is to be noted, we make no representation as to its accuracy or completeness. The Email is meant for Private use and the SHCIL, its associate companies, and employees are not responsible for any losses or consequences, if any, arising from the use of the information contained in this email.Source: NSDL (extracts from FPI Monitor - FII / FPI Investments)

Date:30 May 2016

6 | Horizons 2016

Regulations from the Securities and Exchange Board of India (SEBI) and other regulatory bodies

Transactions in derivatives by regulated institutional entities on electronic platforms(RBI/2015-16/392 FMRD. DIRD. No.9/ 14.03.01/2015-16 dated 5 May 2016)

At present regulated entities, other than scheduled banks, are unable to conduct transactions on electronic platforms for interest rate swaps (IRS) without participation of RBI/ RBI regulated agency/ scheduled bank.

In this regard, RBI vide a notification dated 5 May 2016 has allowed the regulated institutional entities, subject to the approval of their respective sectoral regulators, to apply for membership of electronic trading platforms in IRS which have CCIL as the central counterparty for settlement/ transactions with effect from 1 June 2016.

Foreign investment in units issued by Real Estate Investment Trusts, Infrastructure Investment Trusts and Alternative Investment Funds governed by SEBI regulations(RBI Circular No.RBI/2015-16/377 A.P (DIR Series) Circular No.63 dated 21 April 2016) RBI vide its notification dated 16 November 2015 had permitted investment by FPIs in the units of REITs, Invits and AIFs.

RBI, in consultation with the Government of India, has released the investment regime. The salient features of the new investment regime are:

a) A person resident outside India including a Registered Foreign Portfolio Investor (RFPI) and a Non-Resident Indian (NRI) can invest in the Investment Vehicles.

b) Inwards remittance for investment shall be made through

the normal banking channel including by debit to an NRE or an FCNR account.

c)Investor may sell or transfer in any manner or redeem the units as per regulations framed by SEBI or directions issued by RBI.

d)Downstream investment by an Investment Vehicle shall be regarded as foreign investment if either the sponsor or the Manager or the Investment Manager is not Indian ‘owned and controlled’.

e)In case the sponsors or managers or investment managers are organized in a form other than companies or LLPs, SEBI shall determine whether the sponsor or manager or investment manager is foreign owned and controlled.

f)The extent of foreign investment in the corpus of the Investment Vehicle will not be a factor to determine as to whether downstream investment of the Investment Vehicle concerned is foreign investment or not.

g)Downstream investment by an investment Vehicle that is reckoned as foreign investment shall have to comply with FPI policy.

Downstream investment in an LLP by an investment Vehicle that is reckoned as foreign investment has to confirm the provisions of Schedule 9 of the Principal Regulations as the extant FDI policy for foreign investments in LLPs.

h)An Alternative Investment Fund Category III with foreign investment shall make portfolio investment in only those securities or instruments in which RFPI is permitted to invest.

i)The Investment Vehicle receiving foreign investment shall be required to make such report and in such format to Reserve Bank of India or to SEBI as may be prescribed by them from time to time.

Key changes in the regulatory framework

Horizons 2016 | 7

Comments: The permission granted for investment in special vehicle such as REITs, Invits and AIFs provides an additional avenue of investment for the FPIs.

Investments by FPIs in Government securities(SEBI Circular No. IMD/FPIC/CIR/P/2016/45 dated March 29, 2016) and

(RBI Circular No.RBI/2015-16/348 A.P (dir Series) Circular No.55 dated March 29, 2016)

RBI in its Fourth Bi-monthly Policy Statement had announced a Medium Term Framework (MTF) for FPI limits in Government securities in consultation with the Government of India.

It has been decided to enhance the limit for investment by FPIs in Government Securities, for the next half year, as follows:

Central Government securities State Development Loans

In Crores

For all FPIs Additional for Long Term FPIs

Total For all FPIs Aggregate

(including Long Term FPIs)

Existing Limits 1,35,400 44,100 5,76,400 7,000 1,86,500

Revised limits with effect from 4 April, 2016

1,40,000 50,000 1,90,000 10,500 2,00,500

Revised limits with effect from 5 July, 2016

1,44,000 56,000 2,00,000 14,000 2,14,000

•Further, keeping in view the extent of utilisation of the limits for Central Government securities by long term and other investors, it has been decided that from the next half-year onwards i.e. from 01 October 2016, any unutilised limit within the Government debt limit for Long Term FPIs, at the end of the half-year, shall be made available for investment as additional limit to all categories of FPIs for the subsequent half-year.

•All other existing terms and conditions, including the security-wise limits, investment of coupons being permitted outside the limits and investments being restricted to securities with a minimum residual maturity of three years shall continue to apply.

Investments by FPIs in REIT, Invits, AIFs and corporate bonds (SEBI Circular No.CIR/IMD/FPIC/39/2016 dated 15 March 2016)

a. REITs, Invits and AIFs In line with the RBI notification, necessary amendments have been made by SEBI to allow investment by FPI’s in the units of REITs, Invits and AIFs. It has further been provided that an FPI shall not hold more than twenty five percent stake in a category III AIFs.

b. Corporate bonds under default Pursuant to the RBI Circular permitting FPI to acquire NCDs/bonds, which are under, either fully or partly, in the repayment of principal on maturity or principal instalment in the case of an amortising bond, necessary amendments have been by SEBI in line with the RBI circular.

8 | Horizons 2016

Such NCDs/bonds restructured based on negotiations with the issuing Indian company, shall have a minimum revised maturity period of three years.

The FPIs shall disclose to the Debenture Trustees, the terms of their offer to the existing debenture holders / beneficial owners of such NCDs / bonds under default, from whom they propose to acquire.

All investments by FPIs in such bonds shall be reckoned against the extant corporate debt limit of INR 244,323 cr. All other terms and conditions pertaining to FPI investments in corporate debt securities shall continue to apply.

Budget 2016

Regulatory proposals • In order to obviate the need for prior approval of

government for FPI, the existing limit of 24% for investment by FPIs into central public sector enterprises, other than banks, in stock exchanges is proposed to be increased to 49%. It is also proposed to increase the basket of FDI instruments to include hybrid instruments. This will provide greater flexibility for FDI and possibly increase the velocity of investments into India.

•The existing 24% limit for investment by Foreign Portfolio Investors (FPI) in Central Public Sector Enterprises (other than Banks, listed in stock exchanges), will be increased to 49% to obviate the need for prior approval of Government for increasing the FPI investment.

•FDI Policy to be amended to provide for a composite cap across all types of foreign investments (direct and indirect), including FPI.

•FPI, up to an aggregate foreign investment level of 49% or sectoral / statutory cap, whichever is lower, will not be subject to either the Government approval or compliance of sectoral conditions, provided such investment does not

result in transfer of ownership and / or control of Indian entities from resident Indian citizens to non-resident entities.

•Limits for FPI in debt securities shall henceforth be announced / fixed in rupee terms (previously announced / fixed in USD terms).

•Effective 12 October 2015, the aggregate FPI in Central Government securities will be 20% of the amount outstanding for each Central Government security.

Comments: The relaxation of investment limits for the sectors will enable the industries to explore investment options from the institutional investors at better valuations.

Horizons 2016 | 9

Particular Capital Gain

Shares acquired on or before 01 April 2017

Capital gains tax exemption under Article 13(4) of India Mauritius DTAA will continue to be available irrespective of when these shares are sold

Shares acquired on or after 01 April 2017 and sold before 31 March 2019

Capital gains shall be taxable in India. However, 50% of the domestic tax rate of India shall apply subject to LoB clause

Shares acquired on or after 01 April 2017 and sold after 31 March 2019

Capital gains shall be taxable in India at the prevailing domestic tax rate

Recent amendments:

Protocol to India-Mauritius Double Tax Avoidance Agreement signedThe Central Board of Direct Taxes have issued a press release intimating that the Government of India (GoI) and Mauritius have signed a Protocol for amendment to the existing India - Mauritius DTAA. The text of the Protocol has been released by Mauritius Government, which is discussed herein below:

•Source-based taxation of capital gains on shares: A Mauritian resident shall be taxable in India on capital gains arising from alienation of shares acquired on or after 01 April 2017. However, in respect of such capital gains arising between 01 April 2017 and 31 March 2019, the capital gains tax rate will be limited to 50% of the domestic tax rate of India (refer table on page 17), subject to the fulfilment of the conditions in the Limitation of Benefits Article. Proposed taxation can be summarised as follows:

Limitation of Benefits (LOB): Article 4 to the Protocol prescribes source based taxation in case of alienation of shares acquired on or after 01 April 2017. However, for cases of gains on alienation of such shares arising in India during the transition period (period beginning on 1st April, 2017 and ending on 31st March, 2019) the tax rate applicable on such gains shall not exceed 50% of the ‘domestic tax rate of India’ In this regard, Article 8 of the protocol which prescribes ‘LOB clause’ mentions that the benefit of 50% reduced rate of taxation shall not be available in following cases-

i. the affairs are arranged with the primary purpose to take benefit of provision granting reduced rate of tax; or

ii. the company claiming the aforesaid benefit is a ‘shell or a conduit company’

iii. A ‘shell or a conduit company’ is defined to mean any legal entity with negligible/nil business operations or carrying on no real and continuous business activities.

iv. Further, a resident is deemed not to be a shell/conduit company, if its expenditure on operations in its home country is equal to or exceeds INR 2.7 million (approx. 0.04 mn USD/1.5 mn Mauritius Rupees) in the immediately preceding 12-month period from the date the capital gains arise or if it is listed in a recognized stock exchange of the Contracting State.

•Source-based taxation of interest income: Interest arising in India to Mauritian resident banks will be subject to withholding tax in India at the rate of 7.5% in respect of debt claims or loans made after 31st March, 2017. However, interest income of Mauritian resident banks in respect of debt-claims existing on or before 31st March, 2017 shall be exempt from tax in India

•Other income: The Protocol has extended source based taxation to ‘Other Income’ not dealt in expressly in any of the Articles of the DTAA. India has been granted the right to tax any such income in arising in the hands of Mauritian resident.

Comment: Grandfathering of investments till 31 March 2017 provides some breather to the existing investors and the fund houses. Further transition period starting from 1st April, 2017 to 31st March, 2019 has been prescribed, wherein shares acquired on or after 01 April 2017 and disposed during such period shall be subject to 50% of the domestic tax rate of India, subject to the fulfilment of the conditions in the LOB. From 1 April 2019 and onwards, capital gains earned by Mauritian entity will be taxable in India as per the domestic tax rates of India.

Income tax updates

10 | Horizons 2016

The amendment will have a greater ramifications on the Foreign Direct Investment of India coming from Mauritius as well as Singapore considering the co-terminus clause in India-Singapore treaty with India-Mauritius treaty.

Mandatory E-filing an appeal to CIT(A) using Form 35(CBDT Notification No. 11/2016, F.No.149/150/2015-TPL dated 1 March 2016) and (CBDT Notification no.5/2016 dated 6 April 2016) and Circular No.20/2016)

CBDT notified mandatory e-filing of Form 35 for an appeal before Commissioner of Income-tax (Appeals). The Form shall not be accepeted in physical form and it must be duly verified by using digital signature or Electronic Verification Code (EVC).

Form 35 is essential form to be filed with Income Tax Department for appeal to Commissioner of Income tax (Appeals) against the order passed by the Assessing officer/Dy Commissioner of Income Tax/CPC intimation u/s 143(1) .The provisions and requirements of the said form are covered under section 246 of the Income Tax Act, 1961 and Rule 45 in the Income Tax Rules, 1962.

Further form 35 may be accompanied by any relevant supporting document(s) as may be applicable earlier.

Pursuant to the aforesaid notification for mandatory filing form 35 online, CBDT has notified filing form 35 online through Electronic Verification Code (“EVC”). EVC is a unique code generated based on the PAN/TAN of the assessee and will be specifically used to verify a single form at a time. The EVC would be stored against the Assessee-PAN/TAN details.

Further, the notifications also provides for various methods of obtaining EVC such as through Net Banking Channel, via Aadhar Card, through Automatic Teller Machine (ATM), registered e-mail id and mobile number and using a DEMAT Account was also added.

In order to mitigate any inconvenience caused to the taxpayers on account of the new requirement of mandatory e-filing appeals, it has been decided by CBDT to extend the time limit for filing of such e-appeals. E-appeals which were due to be filed by 15-5-2016 can be filed up to 15-6-2016. All e-appeals filed within this extended period would be treated as appeals filed in time. In view of the extended window for filing e-appeals, taxpayers who could not successfully e-file their appeal and had filed paper appeals are required to file an e-appeal in accordance with Rule 45 before the extended period i.e. 15-6-2016. Such e-appeals would also be treated as appeals filed within time.

Revised rule 8AA for determination of holding period for convertible securities(CBDT Notification No. 18/2016

(CBDT Notification No. 18/2016

F.No.142/1/2016-TPL dated 17 March 2016)

The CBDT has notified Rule 8AA prescribing the method for determination of period of holding of capital assets, being shares or debentures acquired by on conversion of bonds, debenture, debenture stock or deposit certificates in any form.

As per the new Rule, the period for which bond, debenture, debenture-stock or deposit certificate, was held by the taxpayer prior to conversion shall be considered for determining the period of holding of such shares or debentures acquired upon conversion.

The new rule will be effective from 1 April 2016.

Horizons 2016 | 11

New DTAA between India and Indonesia[Notification No. 17/2016 F.No.503/4/2005-FTD-II dated 16 March, 2016]

India has signed a new Double Taxation Avoidance Agreement (DTAA) with Indonesia on February 5, 2016. The new DTAA would come into effect from 1 January 2017 in Indonesia and from 1 April 2017 in India.

Consequently, new DTAA would replace that erstwhile DTAA in August, 1987 w.e.f. 19th December, 1987.

The key changes in New DTAA applicable to an FPI are summarised below:

•Change in withholding tax rates:

The new DTAA introduces Limitation of benefit (LOB) clause as per which benefit, if any, available under the DTAA to a resident of a Contracting State shall not be available if its affairs were arranged in such a manner as if it was the main purpose or one of the main purposes to take the benefits of this Agreement.

Comment: The significant aspects of the new pact include the introduction of a ‘limitation of benefit’ (LOB) clause and provision for exchange of banking information for tax administration purposes. These measures will support India’s fight against black money.

Guidelines for taxation of fund manager under section 9A (CBDT Notification dated 15 March 2016, Income Tax (5th Amendment) Rules, 2016)

Finance Act, 2015 inserted a new section 9A, which stated that in case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund would not constitute business connection in India of the said fund. The section further stated that an eligible investment fund shall not be said to be resident in India for this purpose merely because the eligible fund manager, undertaking fund management activities on its behalf, is situated in India.

CBDT has prescribed guidelines for a fund manager which such person is required to fulfill in order to be governed by the beneficial provisions of section 9A. The guidelinesinter alia, include independence of the person to a fund; the person is regulated in accordance with the specified regulations; the person is acting in the ordinary course of his business as a fund manager; the person along with his connected persons shall not be entitled, directly or indirectly, to more than 20% of the profits accruing or arising to the eligible investment fund from the transactions carried out by the fund through the fund manager.

Primarily the notification clarifies the threshold limit for investments and nature of investments; compliance requirements including transfer pricing documentation; administrative mechanism to ascertain the taxability before-hand, etc. The CBDT has now issued detailed Rules for the application of such provisions. Some of the key provisions are as under:

• In case investor of the fund is other than natural person, declaration from the direct investor will be adequate in case direct investor is other than the Government or Central Bank or sovereign fund or multilateral agency or an appropriately regulated investor.

•Where the investment in the fund has been made directly by an institutional investor for the applicability of conditions in relation to the number of investors and participation interest in the fund entity, investor diversification-related conditions in the fund, and the requirements of resident Indian investors not being more

Income As per the New DTAA

Existing DTAA

Dividend 10% 15%

Interest 10% 10%

Capital Gains - Shares

Taxable in India Exempt

Capital Gains – Other securities

Exempt Exempt

12 | Horizons 2016

than five per cent (clause c) in the fund, could be looked-through at the institutional entity level (subject to certain conditions).

•The notification has provided for the window of compliance in case of non-fulfilment of certain eligibility conditions. CBDT prescribes rules for applicability of section 9A

• It provides that the fund shall not be denied benefit in case of non-fulfilment of the investor diversification-related conditions mentioned for funds newly set-up till a period of 18 months or till final closing, whichever is earlier, or funds that are in the process of being wound up for a period of one year, or the funds that cannot meet the conditions for reasons beyond their control, does not disentitle them to claim the benefits of such provisions.

•The Rules provide clarity on control and management of business in India by providing for the objective threshold of 26%. The said insertion is in line with the other sections of the Act, e.g., 26% voting rights to determine associated enterprise for the purpose of invoking transfer pricing provisions.

•Computing arm’s length price in respect of any remuneration paid by the eligible investment fund to an eligible fund manager will be treated as transaction between the eligible investment fund and the eligible fund manager as an international transaction between associated enterprises.

•The fund manager shall keep and maintain information and documents as are required under section 92D and the rules made thereunder. The fund manager is required to comply with the transfer pricing provisions and to submit an additional report via Form 3CEJ. The benefits of section 9A shall not be denied to the fund on non-fulfilment of sub-section 3(m) of section 9A of the Act which otherwise satisfies all other conditions specified in section 9A.

•The fund may be denied the benefit in case remuneration paid or payable by the fund to the fund manager is not at arm’s length price for a period of 3 previous years in succession or for any 3 years of the preceding four previous years. The safe harbour benefits availed by the

fund will be impacted only if the remuneration paid or payable by the fund to the fund manager has been determined to be not at arm’s length price for a period of 3 consecutive previous years or for any three out of the preceding 4 previous years.

•An investment fund may at its option seek approval of the Board regarding its eligibility for the purposes of section 9A.The fund seeking approval may make an application in writing, enclosing relevant documents and evidences, to respective revenue authority. The application shall be made at least before 3 month of the beginning of previous year for which fund pursues the approval. A committee shall examine the application and submit its recommendations regarding grant of approval or otherwise and the conditions, if any, subject to which such an approval is to be granted.

•The Board, on the basis of the recommendations of the Committee, shall within sixty days from the end of the month in which the application has been made by an order in writing grant approval to the fund subject to such conditions as it may deem fit or for reasons to be recorded in writing reject the application.

• In order to provide for robust compliance the rules provide that the statement is required to be furnished under sub-section (5) of section 9A for every financial year by the eligible investment fund in Form No.3CEK duly verified in the manner indicated therein, to the Assessing Officer who has the jurisdiction over the fund or would have had the jurisdiction had such fund been assessable to tax in India but for the provision of section 9A.The annual statement shall be furnished electronically under digital signature.

Comment: The operative guidelines will provide the much required clarity to implement the beneficial provision for the fund manager

Horizons 2016 | 13

Clarification regarding nature of share buy-back transactions (CBDT Circular No. 03/2016 dated 26 February 2016)

As per provisions of Section 46A of the Act, any consideration received by a shareholder or a holder of other specified securities from any company on purchase of its own shares/other specified securities shall be, subject to provisions contained in section 48, deemed to be capital gains. Further, sub-clause (iv) of clause (22) of section 2 of the Act excludes any payment made by a company on purchase of its own shares in accordance with the provisions contained in section 77A of the Companies Act from the ambit of ‘dividend’.

Finance Act, 2013 subsequently introduced section 115QA to provide that any amount of distributed income by a company on buyback of unlisted shares shall be charged to tax and the company so distributing its income shall be liable to pay additional income-tax at the rate of twenty percent of the distributed income.

Between the period 01.04.2000 till 31.05.2013, provisions of Section 46A read with section 2(22)(iv) of the Act clearly provide that the income arising to a shareholder on buy-back of shares was to be treated as income from capital gains and not dividend income. However, the tax authorities have issued notices to companies wherein buy-back transaction was executed demanding DDT treating the surplus paid on buy-back as dividend.

Accordingly, the CBDT has clarified that consideration received on buy-back of shares between the period 01.04.2000 till 31.05.2013 would be taxed as capital gains in the hands of the recipient in accordance with section 46Aof the Act and no such amount shall be treated as dividend in view of provisions of section 2(22)(iv).

With a view to bring about further clarity on this issue as a step towards non-adversarial tax regime, the CBDT has directed the tax officers that no fresh notice for assessment/reassessment/non-deduction of tax at source where buyback

of shares has taken place prior to 01.06.2013 and the case is covered under section 46A read with section 2(22)(iv) of the Act. In cases where notices have already been issued and assessment proceedings are pending, tax authorities shall complete the assessment keeping in view the above legal position.

Comment: The clarification should bring an end to the on-going litigation on taxability of excess capital repayment on buy-back transactions executed before 1 June 2013.

CBDT clarifies on Benefit of India –United Kingdom DTAA to UK partnership firms(CBDT Circular No. 02/2016, dated 25 February 2016)

An amending Protocol to the India-UK DTAA was notified vide Notification No 10 of 2014 dated 10 Feb 2014 w.e.f. 27 December 2013. As a result of the aforesaid Protocol, inter alia, the earlier defintion of the term ‘person’ in Article 3(1)(f) of the DTAA was amended to delete the exclusion of UK partnership firms, and in addition, it had been provided in Article 4 of the DTAA that in case of partnership firms, “resident of a contracting states” applies only to the extent that income derived by such partnership firm is subject to tax in that State as the income of a resident either in its hands or in the hands of its partners or beneficiaries.

In this context, CBDT has clarified that partnerships, trusts or estates resident in any of the countries, whether India or U.K., would be included within the purview of the India-U.K. DTAA as a “person” and the income of such entities would be taxable either in its own hands or in the hands of its partners/beneficiaries.

CBDT instructions for Rectification application filed by taxpayers(CBDT Instruction No. 01/2016, dated 15 February 2016) and (CBDT Instruction No. 02/2016, dated 15 February 2016)

CBDT directed department officers that prescribed time-limit of 6 months in passing order u/s 154(8) of Income-tax

14 | Horizons 2016

Act, 1961 to rectify any mistake apparent from record must be followed strictly.

Further, CBDT has directed that all rectification applications must be disposed of after passing an order in writing, to be duly served upon the taxpayer concerned and not by merely making necessary rectification on the AST System.

Protocol for amendment in India-Belarus DTAA[Notification No. 2/2016/F.No. 501/07/1999-FTD-I]

India and the Republic of Belarus initially had an agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on property (Capital) since 27 September 1997.

The respective Government has entered into a protocol which amends the article dealing with exchange of information by providing internationally accepted standards for effective exchange of information on tax matters including bank information and information without domestic tax interest. The Central Government hereby notifies that all the provisions of the said protocol in this notification shall be given effect to in the Union of India with effect from the 19th November, 2015.

Finance Act, 2016 amendments

Applicability of Minimum Alternate Tax (MAT) on foreign companiesIn line with the CBDT circular accepting recommendation of A P Shah Committee, foreign companies not having PE / registered place of business in India have been kept outside the purview of Minimum Alternate Tax.

This amendment is proposed to be made effective retrospectively from the 01 April 2001 and shall accordingly apply

in relation to assessment year 2001-02 and subsequent years.

Provision for tax relief to Rupee Denominated BondReserve Bank of India (RBI) has decided progressive approach for financials market globalization by allowing Indian companies to issue rupee denominated offshore bonds.

To encourage investing in the bond market, Central Board of Direct Taxes (CBDT) has clarified in October 2015 that that capital gains arising due to appreciation of rupee between date of issue and redemption would be exempt from tax.

Accordingly, Section 48 of the Act has been amended which states as follows:

In case of assessee being a non-resident , any gain arising on account of appreciation of rupee against a foreign currency at the time if redemption of rupee denominated bond of an Indian Company of subscribed by him shall be ignored for the purpose of computation full value of consideration under this section”

Capital gains arising due to appreciation of rupee between date of issue and redemption against the currency in which investment is made will be exempt from tax

This amendment is proposed to be made effective from the 1 April 2017 and shall accordingly apply in relation to assessment year 201 7-18 and subsequent assessment years.

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New tax regime for securitisation trust and its investorsIn respect of taxation of business trusts comprising of Real Estate Investment Trust (REITs) and Infrastructure Investment Trust (Invits) regulated by SEBI a specific taxation regime has been incorporated in the Act. Under this regime, the multiple taxation due to interposition of business trust is avoided. Under the SEBI regulation, these business trusts can hold the income generating asset either directly or through a Special Purpose Vehicle (SPV). The SPV can be a company or an LLP. Under SEBI Regulation, SPV is defined to mean any company or LLP in which REIT holds or proposes to hold controlling interest which is not less than fifty percent of the equity share capital or interest. The SPV should hold at least 80% of the assets in properties and not invest in other SPV. The earlier tax regime provided that in case of REITs, the income by way of interest paid by SPV being a company to REIT is given pass through i.e. it is not taxed at the level of REIT but in the hands of respective investors of REIT. The rental income from directly held assets by REIT is also allowed a pass through. In respect of assets held through an SPV, if SPV is a company then the company pays normal corporate tax and thereafter when the income is distributed to the REIT being a shareholder, it suffers DDT which is paid by the SPV and thereafter the income is exempt both in the hands of REIT and also its investors.

It has been represented by the stakeholders that levy of dividend distribution tax at the level of SPV when it distributes its current income to the business trust makes the business trust structure tax inefficient and adversely impacts the rate of return for the investor. This is more so, as under SEBI regulations both the SPV and business trust are obligated to distribute 90% of their

operating income to the investors, whereas in case of normal real estate company, there is no requirement of such annual distribution of dividends In order to rationalise the tax regime for securitisation trust and its investors, and to provide tax pass through treatment, the Act has been amended to substitute the existing special regime for securitisation trusts by a new regime.

The new regime will apply to securitisation trust being an SPV defined under SEBI (Public Offer and Listing of Securitised Debt Instrument) Regulations, 2008 or SPV as defined in the guidelines on securitisation of standard assets issued by RBI or being setup by a securitisation company or a reconstruction company in accordance with the SARFAESI Act;

The income of securitisation trust shall continue to be exempt. However, exemption in respect of income of investor from securitisation trust would not be available and any income from securitisation trust would be taxable in the hands of investors;

The income accrued or received from the securitisation trust shall be taxable in the hands of investor in the same manner and to the same extent as it would have happened had investor made investment directly in the underlying assets and not through the trust.

These amendments will take effect from 1 June 2016.

Change in rate of Securities Transaction tax in case where option is not exercised

Securities transaction tax on sale of an option in securities where option is not exercised is 0.017 % of the option premium. The rate has been increased from 0.017 % to 0.05 %.

This amendment will take effect from 1 June 2016.

Change in Surcharge rates for non-corporate entitiesSurcharge on income tax is increased to 15% from 12% in case of income earned by individual, HUF, AOP, Artificial Juridical Person whose total income exceeds Rs.1 crore in a financial year.

Change in holding period of Unlisted Shares for constituting long term capital assetsThe holding period of unlisted shares to constitute a long term capital asset would be reduced to 2 years instead of the existing holding period of 3 years.

16 | Horizons 2016

These amendments are proposed to be made effective from the 1 April 2017 and shall accordingly apply in relation to assessment year 2017-18 and subsequent years.

Other key amendments•Exchange of units on consolidation or merger of plan of

mutual fund would not constitute transfer for the purpose of computing capital gain tax

•AIF shall withhold tax from payment to non-resident investors at the rates in force which includes rates applicable as per tax treaty. Further, the non-resident investors now have also been given an option to apply for lower or nil withholding tax certificate

Tax rates applicable to FPIs for financial year 2016-17

Sr. No. Nature of Income Non-Corporates / Corporates – income upto 10 mn

Non - Corporates income above 10mn

Corporates - Income from 10mn to 100mn

Corporates - Income more than 100 mn

1 Capital gains*

Short-term capital gains (STT paid)

15.45% 17.7675% 15.759% 16.22%

Long-term capital gains* (STT paid)

Exempt Exempt Exempt Exempt

Short-term capital gains* (no STT)

30.90% 35.535% 31.518% 32.445%

Long-term capital gains* (no STT )

10.30% 11.845% 10.506% 10.815%

2 Dividend Exempt Exempt Exempt Exempt

3 Interest (gross)@ 20.60%/ 23.69%/ 21.012%/

23.69%/ 5.15% 5.9225% 5.253% 21.63%/

@Interest received from rupee denominated corporate bonds or Government Securities earned by FII / FPI for interest payable between 1 June 2013 to 30 June 2017, would be taxable @5% u/s 194LD, subject to certain conditions

*In case of listed shares and securities held for more than 12 months - Long term; else short term In case of unlisted shares and securities held for more than 24 months - Long term; else short term In case of other assets held for more than 36 months – Long term; else short term

Horizons 2016 | 17

Recent rulings

Aberdeen Claims Administration Inc., In Re Vs. Advance Rulings (2016) 381 ITR 0055 (AAR)Various US-based Mutual funds (investors) were holding ordinary as well as American Depository Shares (ADs) of the Indian Company, Satyam. Due to a fraud on account of financial manipulations the share prices of Satyam drastically fell forcing investors to dispose-off their holding. This conduct gave rise to legal claims by the investors against Satyam and its auditor PwC. With a view to avoid protracted litigation the investors entered in to settlement agreement with Satyam and PwC separately. The issue arose as to taxability of the settlement claims in India.

The AAR held that amount received by investors under a settlement for giving up right to sue is not assessable as either capital gains or as business profits.

. In this regard, the AAR held that the right to sue would be a capital asset under section 2(14) of the Income-tax Act, 1961. However, it cannot be taxed as income from capital gains as its cost of acquisition cannot be determined, resulting in failure of the computation provisions. Therefore, right to sue cannot be subjected to income tax under the head ‘capital gains’.

The AAR further relied on Circular No.4 of 2007 issued by the CBDT.In this case the shares of Satyam were purchased, held as investment and sold only after the fraud became public. On facts, applying Circular No. 4 of 2007, AAR held that the Aberdeen is an investor in shares. This was opposed to the stand by the revenue that the transfer of right would be treated as business income. Thus, AAR concluded that the settlement amount received by the investors is not taxable in India.

Wipro Ltd vs. ITO (ITAT Bangalore) [(2016) 46 CCH 0187 BangTrib]The assessee has filed its quarterly E-TDS returns in respect of the payment to non-residents. The Assessing Officer (The AO) issued an intimation giving the summary of short deduction and interest payable for delayed deposit of tax. The AO along with intimation under Section 200A also issued a demand notice under Section 156 of the Act.

The assessee challenged the action of the AO before the CIT (Appeals) on the ground that demand under Section 200A was raised without giving an opportunity of hearing to the assessee.The assessee further contended that it has deducted the tax in accordance with the provisions of the respective DTAA and therefore there was no shortfall in the deduction of tax at source in respect of the payments made to non-residents. The CIT (Appeals) agreed with the stand of the AO.

On further appeal, the Bangalore ITAT held that the explanation below sub-section-1 of Section 200A clarifies that in respect of deduction of tax at source where such rate is not in accordance with provisions of this Act can be considered as an incorrect claim apparent from the statement. However, the question is of applying the rate of 20% as provided u/s 206AA on remittance subject to lower rate under DTAA, requires a long drawn reasoning and finding. Hence, applying the rate of 20% without considering the provisions of DTAA and consequent adjustment while framing the intimation u/s 200A is beyond the scope of the said provision. The ITAT, on merits, held that when the recipient is eligible for the benefit of DTAA then there is no scope for deduction of tax at source @ 20% as provided under the provisions of section 206AA.

Relevant jurisprudence

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Accordis Beheer B V Vs. Director Of income tax officer (International Taxation) (2016) 157 Ltd 0373 (Mumbai)Accordis Beheer B V (the assessee) is a tax resident of Netherlands, held 38.24% of shares M/s Century Enka Ltd, an Indian public listed company.

The assessee tendered shares under a scheme of arrangement, by way of buy back, as per the approval given by Hon’ble High Court of Calcutta u/s 391 of the Companies Act. The said tendering of shares resulted in a gain.

The assessee placed reliance on paragraph 5 of Article 13 of India Netherlands DTAA in order to contend that the capital gain referred above is not taxable in India. The same was not accepted by both the AO and Ld CIT(A). Aggrieved by this decision of Ld CIT(A), the assessee has filed appeal before ITAT.

The MumbaiITAT, held that the attempt of assessee to bring buy back of shares within the of term “re-organisation” was not correct, since object of the arrangement was not financial restructuring, but to provide an exit route to non-resident shareholders and hence capital gain arising on transfer of shares shall be taxable in India.

Horizons 2016 | 19

Recent news updates

Source: Article dated 01 March 2016 Economic Times

20 | Horizons 2016

Article dated 04 May 2016 Financial Express

Horizons 2016 | 21

Business Line Dated 19 May 2016

22 | Horizons 2016

DNA Dated 11 May 2016

Horizons 2016 | 23

Business Standard Dated 11 May 2016

24 | Horizons 2016

Glossary

AAR The Authority for Advance Ruling

AD Authorised Dealers

AO Assessing Officer

APA Advance Pricing Agreement

CBDT Central Board of Direct Taxes

CIT Commissioner of Income-tax

CIT(A) Commissioner of Income-tax (Appeals)

CP Commercial Paper

DDIT Deputy Director of Income-tax

DIT Director of Income-tax

DTAA Double Taxation Avoidance Agreement

ECB External Commercial Borrowings

FDI Foreign Direct Investment

FEMA Foreign Exchange Management Act, 1999

FII Foreign Institutional Investor

FPI Foreign Portfolio Investor

HC High Court

ITAT Income Tax Appellate Tribunal

RBI Reserve Bank of India

SEBI Securities and Exchange Board of India

SEBI (FPI) Regulations Securities and Exchange Board of India (Foreign Portfolio Regulations), 2014

The Act The Income-tax Act, 1961

Horizons 2016 | 25

The Central Board of Direct Taxes have released a press release dated 10 May 2016 intimating that the Government of India and Mauritius have signed a Protocol for amendment to the existing India - Mauritius DTAA which mainly on source based taxation. This protocol brings in a certain amount of certainty, which is positive but now the bigger impact will be seen on entities established in Singapore. The government has indicated, they would amend the India-Singapore before 31 March 2017

Our view

26 | Horizons 2016

About Stock Holding Corporation of India Limited

Stock Holding Corporation of India Limited (SHCIL) was promoted by public financial institutions and incorporated as a limited company on 28 July 1986. SHCIL is the first and largest custodian in the country engaged in providing custodial services to various clients since over 25 years. SHCIL provides post trading and custodial services to, among others, institutional investors, foreign institutional investors, foreign portfolio investors, mutual funds, banks, insurance companies and pension funds. SHCIL also provides Professional Clearing Member services to institutional and retail trading members in the futures and options segment. In addition, SHCIL offers its clients Constituent Subsidiary Ledger Account (CSGL Account) services for their transactions/ holdings in government of India securities and other securities issued by the various State governments.

SHCIL is the only non-banking custodian permitted by the RBI to offer this service. SHCIL has also been accorded membership of NDS-OM, a real-time order matching system for trading in government of India securities. SHCIL has received a “No Action letter” under Section 17 f(5) of the U.S. Securities and Exchange Commission Regulations, which permits it to offer custodial services to US-based funds.

In terms of the SEBI (Foreign Portfolio Investors) Regulations, 2014 notified on 7 January 2014, SHCIL, being a custodian of securities registered with SEBI on the date of commencement of the regulations, is permitted to act as a Designated Depository Participant (DDP).

Besides, SHCIL also has a pan India presence and caters to the diverse investment needs of over a million retail clients through its 195 branches. SHCIL, through its two wholly-owned subsidiaries, also offers brokerage services (SHCIL Services Ltd.) and end-to-end document management solutions and repository services to the insurance sector (SHCIL Projects Ltd).

SHCIL is registered with SEBI as DDP. SHCIL will grant Registration to FPIs on behalf of SEBI and will carry out other allied activities in compliance with the regulations and other guidelines.

Contact us

To know more about Stock Holding Corporation of India Limited, please visit www.shcil.com or contact us at the below mentioned address:

Address: Stock Holding Corporation of India Limited 301, Centre Point, Dr Babashaeb Ambedkar Road, Parel – Mumbai - 400012E: marketing.institutions@stockholding.comT: +91 22 6177 9038/ +91 22 2778 5202 M: +91 99877 76259/ +9199877 76171

About Stock Holding Corporation of India Limited

Horizons 2016 | 27

About Grant Thornton

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