The February 2014 issue of 'Missive' covers various tax topics including updates on direct tax, transfer pricing, and service tax matters. It highlights important CBDT circulars regarding tax deductions and clarifies the treatment of income from capital gains. The document also includes case law related to tax liabilities for foreign companies and the distinction between copyright rights and software licensing.

1. MISSIVE
Volume XXXIII
February 2014

2. Topics Page
No
Direct Tax 1
Transfer Pricing 5
Service Tax 6
Central Excise 7
Value Added Tax 8
Customs 8
FEMA 9
Company Law 14
Transactions that made
headlines
14
Never hold your head high with
pride or ego, even the winner of a gold
medal gets his medal only when he
puts his head down!!!
Index
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3. 1
DIRECT TAX
CBDT Circular No. 1/2014 dated
15.01.2014
CBDT Directs Assessing Officers to Respect
Citizens Charter In TDS matters
The CBDT has issued Instruction No. 1/2014
dated 15.01.2014 to the Chief Commissioners
stating that though the Citizens Charter
prescribes a time limit of one month for a
decision u/s 197 on application for no
deduction of tax or deduction of tax at lower
rate, there is considerable delay in issuing the
lower/non deduction certificate. The CBDT has
directed that the commitment to tax payers as
per the Citizens Charter must be thoroughly
adhered by the Assessing Officers and all
applications for lower or no deduction of tax
at source filed u/s 197 of the Income-tax Act,
1961 must be disposed of within the stipulated
time frame.
CBDT Circular No. 1/2014 dated
13.01.2014
CBDT Accepts High Court Verdict Of No
TDS On Service-Tax Component
The CBDT has issued Circular No. 1/2014 dated
13.01.2014 pointing out that the Rajasthan High
Court has taken the view in CIT(TDS) vs.
Rajasthan Urban Infrastructure (copy
attached) that if as per the terms of the
agreement between the payer and the
payee, the amount of service-tax is to be paid
separately and was not included in the fees for
professional services or technical services, no
TDS is required to be made on the service-tax
component u/s 194J of the Act. Pursuant
thereto, the CBDT has decided in exercise of
powers u/s 119 that wherever the terms of the
agreement/ contract between the payer and
the payee, the service tax component
comprised in the amount is indicated
separately, tax shall be deducted at source
under Chapter XVII-B of the Act on the amount
paid/payable without including such service
tax component.
CIT vs. Jaipur Vidyut Vitran Nigam Ltd.
(Rajasthan High Court)
Employees’ PF/ ESI Contribution is also
covered by s. 43B & allowable as a
deduction u/s 36(1)(va) if paid by the “due
date” for filing ROI
Facts
In AY 2001-02 etc, the assessee claimed a
deduction for payment of (employees’
contribution) to GPF, CPF and ESI u/s 36(1)(va)
read with s. 43B of the I.T. Act. The basis of the
claim was that though the amount was not
paid on or before the due date under the
respective Act, the same was deposited on or
before the due date of furnishing of the
Income-tax returns u/s 139 of the I.T. Act and,
therefore, in view of s. 43B read with s.
36(1)(va), the entire amount was allowable.
The AO rejected the claim for deduction
though the Tribunal allowed it. Aggrieved, the
department approached to the High Court
Judgment
The High Court HELD dismissing that, No
substantial question of law arise out of the
orders of the ITAT as it is an admitted fact that
the entire amount was deposited by the
assessee at least on or before the due date of
filing of the returns u/s 139 of the I.T. Act. If the
amount has been deposited on or before the
due date of filing the return u/s 139 then the
amount cannot be disallowed u/s 43B or u/s
36(1)(va) of the Act
ITO vs. Haresh Chand Agarwal HUF (ITAT
Agra)

4. 2
Section 147: Failure to compute capital
gains u/s 50C does not lead to
escapement of income
Facts
The assessee sold property for Rs.6 lakh and
offered capital gains on that basis. The AO
accepted the claim without examining the
applicability of s. 50C. He later (within 4 years
from the end of the AY) reopened the
assessment on the basis that the stamp duty
valuation was Rs. 25 lakhs and the capital
gains had to computed on that basis u/s 50C.
The assessee challenged the reopening inter
alia on the ground that the failure to apply s.
50C did not mean income had escaped
assessment. The CIT(A) accepted the plea.
Aggrieved, the department approached to
the Tribunal.
Judgment
Section 50C is not a final determination to
prove that it is a case of escapement of
income. The report of the approved valuer
may give estimated figure on the basis of facts
of each case. Therefore, mere applicability of
section 50C would not disclose any
escapement of income in the facts and
circumstances of the case. The AO at the
original assessment stage considered all the
documents and material produced before him
and has accepted the cost of property as was
declared by the assessee. The reassessment is
on change of opinion which is not justified
CIT vs. DHTC Logistics Ltd (Delhi High Court)
Section 272B penalty on deductor for
wrong/ non-stating of PAN in TDS return is
not applicable if information is not
furnished by deductee. Penalty is Rs.
10000 per deductor and not per wrong
PAN
Facts
The assessee filed a TDS return in which the
PAN of 30,706 deductees was either missing or
was incorrectly stated. The AO held that as
penalty of Rs. 10,000 u/s 272B was levaible for
the non-mentioning of the PAN, the penalty
had to be computed per PAN/deductee. He
accordingly levied penalty of Rs. 30.70 crore at
the rate of Rs. 10,000 per deductee.
The CIT(A) restricted the penalty to Rs. 10,000
on the ground that as per the CBDT’s letter
dated 05.08.2008 bearing No. 275/24/2007-
IT(B), s. 272B penalty is linked to the person/
deductor and not with the number of defaults
in the PAN quoted in the TDS return. The
Tribunal upheld the view of the CIT (A).
Aggrieved, the department approached to
the High Court .
Judgment
The High Court held dismissing the appeal that,
there are two reasons why the appeal cannot
be entertained:
Firstly, the AO in the penalty order u/s 272B has
not specifically referred to any default or
failure by the assessee mentioning PAN
Number even when the said particulars and
details were available. The stand taken by the
assessee was that the PAN Numbers were not
furnished by the truck owners and, therefore,
they were not quoted by them or PAN
Numbers as informed were quoted. In case,
the PAN Numbers are not furnished by the
deductees, the assessee cannot be penalized
u/s 272B. Section139A also imposes the
obligation on the deductees to furnish PAN
Number to the deductor.
Secondly, the stand taken by the revenue is
contrary to the stand taken by the CBDT. The
AO had imposed penalty of Rs.10, 000/- in
each case where PAN Number was not
provided by the deductee. However, the CBDT
has in letter dated 5.8.2008 vide
No.275/24/2007-IT(B) clarified that penalty of
Rs.10,000 u/s 272B is linked to the person, i.e.,
the deductor who is responsible to deduct TDS,

5. 3
and not to the number of defaults regarding
the PAN quoted in the TDS return. Therefore,
regardless of the number of defaults in each
return, maximum penalty of Rs.10, 000/- can be
imposed on the deductor. Penalty cannot be
imposed by calculating the number of
defective entries in each return and by
multiplying them with Rs.10, 000/-. This also
appears to be a legislative intent, as in many
cases, the TDS amount may be small or
insignificant fraction of Rs.10, 000.
Subhas Chandra Parmanandka vs.ITO (ITA
No.1614/Kol/2010)
Kolkata Tribunal holds the income from
‘transfer of right to purchase flat’ as
‘capital gains’
Facts
The taxpayer had booked a space with a
builder in Kolkata by paying an advance
amount. Subsequently, the builder being
unable to provide the booked space paid
compensation towards cancellation of the
agreement.
The taxpayer offered the differential amount of
compensation received and advance paid as
long term capital gain and claimed exemption
under section 54F
The AO treated the compensation as ‘Income
from undisclosed source’. As per the AO, the
booking of the space was never converted
into ownership of the flat and hence was not a
long term capital asset, consequently denying
exemption on the LTCG
Aggrieved, the taxpayer approached to the
tribunal with the issue that, whether gain from
the relinquishment of the right to purchase a
flat is a Long Term Capital Gain & for the same
exemption can be claimed under section 54 of
the Income Tax Act.
Tribunal’s ruling
The Tribunal held that the receipts on the
transfer of the right to purchase the flat was
LTCG, and was eligible for deduction under
section 54F of the Act.
The observations of the Tribunal were as
follows:
 Once the taxpayer has entered into an
agreement, it becomes the right of the
taxpayer and such right is an asset
which has a value. When surrendered
or transferred after 36 months, gains if
any, arising on the transfer of such asset
is liable to be treated only as LTCG.
 Further, when an income falls under a
specific head (income from capital
gains) it cannot be taxed under a
residuary head (income from other
sources).
 Since the source of the income is not
disputed, the income cannot be
treated as ‘undisclosed income’
Samsung Heavy Industries Co. Ltd.vs. DIT
(ITA No. 01 of 2012)
Tax liability cannot be fastened on foreign
company without establishing that the
income is attributable to the Permanent
Establishment situated in India
Facts
The taxpayer, a foreign company, entered into
a contract with ONGC and Larsen & Toubro as
consortium partners. The taxpayer was having
Project Office (PO) in India
Under the contract, the taxpayer received
revenue in respect of inside India activities as
well as outside India activities. In respect of
inside India activities, it has incurred certain
expenses and after deducting such expenses,

6. 4
it has earned a loss and therefore, filed loss
return of income
The Assessing Officer (AO) refused to accept
the deduction claimed by the taxpayer. The
AO also held that 25 percent of the revenues
claimed by the taxpayer have been earned
from outside India activities should be brought
to tax in India.
Judgment
 Article 7(1) of the tax treaty, provides
that profits of an enterprise of a
Contracting State shall be taxable only
in that State unless the enterprise
carries on business in the other
Contracting State through a PE. The
said paragraph also provides that the
profits of the enterprise may be taxed
in the other State only so much of the
same as is attributable to that PE.
 There was no finding recorded by the
tax authority that the revenue earned
by the taxpayer were said to have
been received on account of within
India activity.
 As per the tax treaty, if an enterprise
does not have PE in India, it has no
obligation to either submit any tax
return with, or pay any tax to India.
 Neither the AO, nor the Tribunal has
recorded any evidence to justify that
the PO of the taxpayer is a PE in India
through which it carried on business
and 25 per cent of the gross receipt is
attributable to the said business.
 The High Court set aside the judgment
and order under appeal as well as the
assessment order, in so far as the same
relates to imposition of tax liability on
the 25 percent of the gross receipt
upon the taxpayer.
Accordingly, the High Court held that tax
liability could not be fastened without
establishing that the same is attributable to the
tax identity or PE of the enterprise situate in
India
Delhi High Court vs. Infrsoft Pvt Ltd. (IT
Appeal No. 1034 of 2009)
India's Delhi High Court distinguishes
copyright rights and copyrighted article in
software transactions
Facts
The Assessee is an international software
marketing and development company of an
international group. The holding company is
based in US being Assessee Corporation. The
Assessee opened a branch office in India. The
branch in India imports the package in the
form of floppy disk or CD’s depending on the
requirements of their customers. The system is
delivered to a client. The delivery of system
entails installation of the system on the
computers of the customers and training of the
customers for operation of the system. The
branch office further undertakes the
responsibility of updation and operational
training apart from providing support for
solving any software issues. The Assessee
customizes the software depending on the
needs of Indian customers and then license is
granted to Indian customers for use of the
software
The taxpayer filed its return of income in India
declaring business loss. The same was assessed
under Section 143(3) of the Act. The Assessing
Officer taxed the receipt on sale of licensing
the software as “royalty” as per Article 13 of
Indo-US Double Taxation Avoidance
Agreement.
Aggrieved by the order of the AO, the
Assessee filed an appeal before the
Commissioner of Income-tax (Appeals)
(hereinafter referred to as the 'CIT (A)'). The
CIT(A) rejected the submission of Assessee.
Aggrieved by the order of the AO as
confirmed by the CIT(A), the Assessee

7. 5
Company filed an appeal before the Income-
tax Appellate Tribunal (ITAT for Short.
The ITAT held that the amount received by the
Assessee under the licence agreement for
allowing the use of the software was not
royalty either under the Income-tax Act or
under the DTAA. The ITAT set aside the order of
the CIT(A) and restored the matter to the file of
the AO with a direction to reframe the
assessment in terms of the said decision.
Aggrieved by the decision of the ITAT, the
Revenue has filed the present appeal.
Judgment
The High court held that consideration
received by the taxpayer for the grant of
license for use of customized software is a
“Royalty” within the meaning of Indian-US tax
Treaty. The observations of the High Court were
as follows:
(i) We have not examined the effect of
the subsequent amendment to section
9 (1)(vi) of the Act and also whether
the amount received for use of
software would be royalty in terms
thereof for the reason that the Assessee
is covered by the DTAA, the provisions
of which are more beneficial.
(ii) The amount received by the Assessee
under the licence agreement for
allowing the use of the software is not
royalty under the DTAA.
(iii) What is transferred is neither the
copyright in the software nor the use of
the copyright in the software, but what
is transferred is the right to use the
copyrighted material or article which is
clearly distinct from the rights in a
copyright. The right that is transferred is
not a right to use the copyright but is
only limited to the right to use the
copyrighted material and the same
does not give rise to any royalty
income and would be business
income.
TRANSFER PRICING
SINOSTEEL INDIA (P.) LTD. DY. CIT
Under CUP method, a quotation which
hasn't fructified into a transaction can’t be
used for benchmarking
The Delhi Tribunal in the case of Sinosteel India
(P.) Ltd. Dy. CIT held as under:-
 The statute read with rules specifically
provides that the ALP under the CUP
method should be determined by
considering 'the price charged or paid' in
a comparable uncontrolled 'transaction',
any 'quotation' which has not fructified
into a 'transaction' can be substituted
with the actual price charged or paid in
a transaction;
 As the law provides for considering the
price charged or paid in a comparable
uncontrolled transaction, there can be
no scope for considering a quotation
price in isolation which is not preceded
with or succeeded by any actual
transaction.
M/s. Net Freight (India) Private Limited
TS-363-ITAT-2013-TP(DEL)-TP.
Delhi Tribunal rules on application of Profit
Split Method

8. 6
The Tribunal observed that under Indian
transfer pricing rules, the PSM is applicable
mainly in international transactions:
(a) Involving transfer of unique intangibles;
or in multiple international transactions
that are so interrelated they cannot be
evaluated separately.
Under the transfer pricing rules, a taxpayer can
adopt either contribution PSM, where the
entire system profits are split among the various
AEs who are parties to the transaction or RPSM,
where each of the AEs who are parties to the
transaction in question are first assigned basic
returns for the routine functions performed by
them, and thereafter the residual profits are
split among the AEs.
Where RPSM is adopted, the Tribunal held that
in the first stage the profits need to be split
among the AEs on the basis of reliable external
market data, which indicate how unrelated
parties have split the profits in similar
circumstances. At the first stage,
benchmarking with reliable external market
data is to be done. In this step, the combined
net profits are partially allocated to each
enterprise so as to provide it with an
appropriate base return keeping in view the
nature of the transaction.
The residual profits may be split as per relative
contribution of the AEs, which need not be
benchmarked by external market or
comparable data. However, a scientific
methodology may be applied for allocating
the residual profits.
Based on the facts of the case, the Tribunal
upheld in favor of the taxpayer the use of
RPSM as the MAM.
SERVICE TAX
Exemption for Sponsorship of Sporting
events extended even if participating
team represents Country
Services by way of sponsorship of sporting
events organized by a national sports
federation, or its affiliated federations were
exempt if participating teams or individuals
represent any district, state or zone. The
aforesaid exemption has been extended even
if  participating teams or individuals
represents Country.
Notification No. 1/2014-Service Tax dated 10th
January, 2014
Clarifications relating to exemption
provided to Resident Welfare Association
With reference to serial No. 28(c) of notification
No. 25/2012 dated June 20, 2012 which
provides for exemption to service by RWA to its
own members by way of reimbursement of
charges or share of contribution up to an
amount of five thousand rupees per month per
member for sourcing of goods or services from
a third person for the common use of its
members in a housing society or a residential
complex, the Board had clarified certain
doubts regarding such exemption vide Circular
No. 175 /01 /2014 – ST dated January 10, 2014
which have been discussed below:
S.
No
Doubt Clarification
1 If the per month per
member contribution
of any or some
members of a RWA
exceeds five
No

9. 7
thousand rupees,
whether the
exemption of five
thousand rupees be
available for such
members?
2 Is threshold
exemption under
notification No.
33/2012-ST available
to RWA?
Yes
3 Does ‘aggregate
value’ for the
purpose of threshold
exemption, include
the value of exempt
service?
No
4 If a RWA provides
certain services such
as payment of
electricity or water bill
issued by third
person, in the name
of its members,
acting as a 'pure
agent' of its
members, is exclusion
from value of taxable
service available for
the purposes of
exemptions provided
in Notification
33/2012-ST or
25/2012-ST?
Yes
5 Is CENVAT credit
available to RWA for
payment of service
tax?
Yes
Circular No. 175 /01 /2014 – ST dated 10th
January, 2014
CENTRAL EXCISE
Amendment to CENVAT Credit Rules(CCR),
2004
Rule 3, sub rule 5(c) of CCR, provides that
where on any goods manufactured or
produced by an assessee, the payment of
duty is ordered to be remitted under Rule 21 of
the Central Excise Rules, 2002, the CENVAT
credit taken on inputs used in the manufacture
or production of said goods shall be reversed.
The aforesaid provision has been amended.
Now, even the CENVAT credit on input services
used in or in relation to the manufacture or
production of said remitted goods is required
to be reversed.
Further, an explanation has been inserted after
Sub-rule 5(C) which clarify that the amount
payable under sub-rules (5), (5A), (5B) and
(5C), unless specified otherwise, shall be paid
by the manufacturer of goods or the provider
of output service by debiting the CENVAT
credit or otherwise on or before the 5th day of
the following month except for the month of
March, where such payment shall be made on
or before the 31st day of the month of March.
Also, an earlier explanation which provide for
the recovery of cenvat credit taken by the
manufacturer of goods or the provider of
output services under sub-rules (5), (5A) and
(5B) in the manner as provided in rule 14, has
been amended. Now if the manufacturer of
goods or the provider of output services fails to
pay the amount payable under sub-rules (5),
(5A), (5B) and (5C) , it shall be recovered, in
the manner as provided in rule 14, for recovery
of CENVAT credit wrongly taken and utilised."

10. 8
Notification No. 01/2014-Central Excise (N.T.)
dated 8th January, 2014
VALUE ADDED TAX
De-notification of Bank of India as
appropriate Government Treasury
Bank of India, which was earlier notified as
Appropriate Government Treasury for the
purpose of depositing VAT/CST dues in relation
to a dealer who is, or liable to be, registered
under DVAT Act, 2004, is denotified for
collections of VAT/CST dues from the dealers
referred above with effect from 15th January,
2014.
Notification No.F.7
(400)/Policy/VAT/2011/PF/1207-1220 dated 8th
January, 2014
CUSTOMS
Conversion Rate for Foreign Exchange
Rate of exchange of conversion of each of the
following foreign currency into Indian currency
or vice versa shall, with effect from 17th
January, 2014 be the rate mentioned against it
in the given tables:
SCHEDULE-I
S.
No.
Foreign
Currency
Rate of exchange of
one unit of foreign
currency equivalent to
Indian rupees
(For
Imported
Goods)
(For Export
Goods)
1. Australian
Dollar
55.05 53.70
2. Bahrain 168.30 159.10
Dinar
3. Canadian
Dollar
57.05 55.75
4. Danish
Kroner
11.45 11.10
5. EURO 85.05 83.05
6. Hong Kong
Dollar
8.00 7.90
7. Kuwait Dinar 224.60 211.60
8. New
Zealand
Dollar
52.10 50.65
9. Norwegian
Kroner
10.20 9.90
10. Pound
Sterling
102.15 99.90
11. Singapore
Dollar
48.95 47.90
12. South
African Rand
5.85 5.50
13. Saudi
Arabian Riyal
16.90 16.00
14. Swedish
Kroner
9.70 9.40
15. Swiss France 68.70 67.05
16. UAE Dirham 17.30 16.35
17. US Dollar 62.20 61.20
SCHEDULE-II
S.
No.
Foreign
Currency
Rate of exchange of
100 units of foreign
currency equivalent
to Indian rupees
(For
Imported
Goods)
(For
Export
Goods)
1. Japanese
Yen
59.55 58.15
2. Kenya
Shilling
74.00 69.85

11. 9
Notification No. 3/2014-Customs (N.T.) dated
16th January, 2014
CASE LAWS
Barnala Builders & Property Consultants
v. Deputy Commissioner of Central
Excise & Service Tax
Order Rejecting VCES is appealable
Recently, Hon’ble Punjab & Haryana High
Court in the case of Barnala Builders & Property
Consultants v. Deputy Commissioner of
Central Excise & Service Tax, (2013) 40
taxmann.com 369 (Punjab & Haryana), has
appraised that an order rejecting an
assessee’s application under Section 106(2) of
The Finance Act pertaining to VCES is
appealable.
The Hon’ble High Court highlighted the fact
that Section 106(2) after incorporation in the
Finance Act, 1994 forms a part and parcel of
the Act and hence all the other provisions of
the Act shall be equally applicable to it.
Therefore, an appeal by an assessee under
Section 86 is acceptable. Further, circular
170/5/2013 dated 08-08-2013 rejecting the right
of an assessee is considered incorrect as per
the cited judgment.
Rajasthan State Beverages Corpn. Ltd.
vs. CCE
Business Auxiliary Services
Where on facts, the appellant was granted an
exclusive privilege to carry on wholesale trade
in liquor but never had the ownership/title in
the liquor supplied to it by the distilleries the
Tribunal held that the appellant was providing
services in relation to marketing/sale of goods
belonging to the distilleries (and not purchase
and sale of liquor) and accordingly the same
would be liable for service tax under the
category of business auxiliary services.
Anand Construction Co vs. CCE
Commercial or Industrial Construction service
Where the assessee constructed a hostel for
residence of students studying in a medical
institute, it was held that the hostel was not
used for an activity of commercial or industrial
nature, in view of CBEC Circular No
80/10/2004-ST dated 10-9-2004 and
accordingly the appellants were held as not
liable to pay service tax
ICC Reality (India) Pvt. Ltd vs. CCE
Renting of immovable property
On facts of the case, where the appellants
rented out immovable property to tenants and
also recovered electricity charges separately
from them, the Tribunal held that electricity is
‘goods’ Chargeable to excise duty (nil rate)
under the Central Excise Act, 1944 and
Maharashtra Value Added Tax Act, 2005 and
accordingly the electricity charges collected
from the tenants would not be liable for service
tax under the category of “renting of
immovable property services”
FEMA
A.P. (DIR Series) Circular No. 83 dated
January 3, 2014

12. 10
Overseas Direct Investments – Rollover of
Guarantees
The RBI has decided not to treat / reckon the
renewal / rollover of an existing / original
guarantee, which is part of the total financial
commitment of the Indian party in terms of
Regulation 6 of the Notification on [Foreign
Exchange Management (Transfer or Issue of
any Foreign Security) (Amendment)
Regulations, 2004], as a fresh financial
commitment, subject to the conditions,
prescribed in the circular.
If the conditions prescribed in the circular are
not met, the Indian party shall obtain prior
approval of the Reserve Bank for rollover /
renewal of the existing guarantee through the
designated AD bank.
A.P. (DIR Series) Circular No. 84 dated
January 6, 2014
Issue of Non convertible/ redeemable bonus
preference shares or debentures -
Clarifications
In terms of Regulation 2(ii) and Regulation 5 of
the Foreign Exchange Management (Transfer
or Issue of Security by a Person Resident
outside India) Regulations, 2000 equity shares,
compulsorily and mandatorily convertible
preference shares and compulsorily and
mandatorily convertible debentures are
treated as a part of share capital for the
purpose of Foreign Direct Investment.
Reserve Bank of India has been granting
permission, on case to case basis, for issuing
non-convertible / redeemable bonus
preference shares or debentures to non-
resident shareholders from the general reserve
under a Scheme of Arrangement by a Court,
under the provisions of the Companies Act, as
applicable. On a review and to rationalize and
simplify the procedures, it has been decided
that an Indian company may issue non-
convertible / redeemable preference shares or
debentures to non-resident shareholders,
including the depositories that act as trustees
for the ADR/GDR holders, by way of distribution
as bonus from its general reserves under a
Scheme of Arrangement approved by a Court
in India under the provisions of the Companies
Act, as applicable, subject to no-objection
from the Income Tax Authorities.
This general permission to Indian companies is
only for issue of non-convertible/ redeemable
preference shares or debentures to non-
resident shareholders by way of distribution as
bonus from the general reserves and the issue
of preference shares (excluding non-
convertible / redeemable preference shares)
and convertible debentures (excluding
optionally convertible / partially convertible
debentures) under the FDI scheme would
continue to be subject to A.P. (DIR Series)
Circular Nos.73 and 74 dated June 8, 2007 as
hitherto.
A.P. (DIR Series) Circular No. 85 dated
January 6, 2014
External Commercial Borrowings (ECB) Policy –
Liberalisation of definition of Infrastructure
Sector
The RBI has reviewed and decided that, for the
purpose of ECB, ‘Maintenance, Repairs and
Overhaul’ (MRO) will also be treated as a part
of airport infrastructure. Accordingly, MRO, as
distinct from the related services which are
other than infrastructure, will be considered as
part of the sub-sector of Airport in the Transport
Sector of Infrastructure.

13. 11
All other aspects of ECB policy shall remain
unchanged.
A.P. (DIR Series) Circular No. 86 dated
January 9, 2014
Foreign Direct Investment – Pricing Guidelines
for FDI instruments with optionality clauses
As per the extant instructions of Foreign
Exchange Management (Transfer or Issue of
Security by a Person Resident outside India)
Regulations, 2000, only equity shares or
preference shares / debentures are eligible to
be issued to persons resident outside India
under the Foreign Direct Investment Scheme in
terms of Regulation 5 (1) of Foreign Exchange
Management (Transfer and Issue of shares by
a Person Resident outside India) Regulations,
2000.
The extant position has been reviewed and on
a review, it has now been decided that
optionality clauses may henceforth be allowed
in equity shares and compulsorily and
mandatorily convertible preference
shares/debentures to be issued to a person
resident outside India under the Foreign Direct
Investment (FDI) Scheme. The optionality
clause will oblige the buy-back of securities
from the investor at the price prevailing/value
determined at the time of exercise of the
optionality so as to enable the investor to exit
without any assured return. The provision of
optionality clause shall be subject to the
following conditions:
(a) There is a minimum lock-in period of one
year or a minimum lock-in period as
prescribed under FDI Regulations,
whichever is higher. The lock-in period
shall be effective from the date of
allotment of such shares or convertible
debentures or as prescribed for defence
and construction development sectors,
etc. in Annex B to Schedule 1 of
Notification No. FEMA. 20 as amended
from time to time;
(b) After the lock-in period, as applicable
above, the non-resident investor
exercising option/right shall be eligible to
exit without any assured return, as under:
(i) In case of a listed company, the non-
resident investor shall be eligible to
exit at the market price prevailing at
the recognised stock exchanges;
(ii) In case of unlisted company, the non-
resident investor shall be eligible to
exit from the investment in equity
shares of the investee company at a
price not exceeding that arrived at
on the basis of Return on Equity (RoE)
as per the latest audited balance
sheet. Any agreement permitting
return linked to equity as above shall
not be treated as violation of FDI
policy/FEMA Regulations.
Note: For the above purpose, RoE
shall mean Profit After Tax / Net Worth;
Net Worth would include all free
reserves and paid up capital.
(iii) Investments in Compulsorily
Convertible Debentures (CCDs) and
Compulsorily Convertible Preference
Shares (CCPS) of an investee
company may be transferred at a
price worked out as per any
internationally accepted pricing
methodology at the time of exit duly
certified by a Chartered Accountant
or a SEBI registered Merchant Banker.
The guiding principle would be that

14. 12
the non-resident investor is not
guaranteed any assured exit price at
the time of making such
investment/agreement and shall exit
at the price prevailing at the time of
exit, subject to lock-in period
requirement, as applicable.
All existing contracts will have to comply with
the above conditions to qualify as FDI
compliant.
A.P. (DIR Series) Circular No. 87 dated
January 9, 2014
Resident Bank account maintained by
residents in India – Joint holder – liberalization
As per the extant regulations individual
residents in India were permitted to include
non-resident close relative(s) (relatives as
defined in Section 6 of the Companies Act,
1956) as a joint holder(s) in their resident
savings bank accounts on “former or survivor”
basis. However, such non-resident Indian close
relatives are not eligible to operate the
account during the life time of the resident
account holder in terms of said instructions.
The RBI reviewed the extant provisions and has
decided that for operational convenience the
Non-Resident Indians (NRIs), as defined in
Regulation 2(vi) of FEMA Notification No.5
dated May 3, 2000, may be permitted to
operate such accounts on “Either or Survivor”
basis. Accordingly, AD banks may include an
NRI close relative (relatives as defined in
Section 6 of the Companies Act, 1956) in
existing / new resident bank accounts as joint
holder with the resident account holder on
“Either or Survivor” basis subject to the
conditions prescribed in the circular.
A.P. (DIR Series) Circular No. 90 dated
January 9, 2014
Provisions under section 6 (4) of Foreign
Exchange Management Act, 1999 -
Clarifications
As per Section 6 (4) of FEMA, 1999, a person
resident in India may hold, own, transfer or
invest in foreign currency, foreign security or
any immovable property situated outside India
if such currency, security or property was
acquired, held or owned by such person when
he was resident outside India or inherited from
a person who was resident outside India.
Vide this circular the RBI has clarified the
transactions covered by this section:
(i) Foreign currency accounts opened
and maintained by such a person
when he was resident outside India;
(ii) Income earned through employment
or business or vocation outside India
taken up or commenced while such
person was resident outside India, or
from investments made while such
person was resident outside India, or
from gift or inheritance received while
such a person was resident outside
India;
(iii) Foreign exchange including any
income arising therefrom, and
conversion or replacement or accrual
to the same, held outside India by a
person resident in India acquired by
way of inheritance from a person
resident outside India.
(iv) A person resident in India may freely
utilise all their eligible assets abroad as
well as income on such assets or sale
proceeds thereof received after their

15. 13
return to India for making any
payments or to make any fresh
investments abroad without approval
of Reserve Bank, provided the cost of
such investments and/ or any
subsequent payments received
therefor are met exclusively out of
funds forming part of eligible assets
held by them and the transaction is not
in contravention to extant FEMA
provisions.
A.P. (DIR Series) Circular No. 93 dated
January 15, 2014
Clarification- Establishment of Liaison Office/
Branch Office/ Project Office in India by
Foreign Entities - General Permission
In terms of Regulation 4 of Notification
No.FEMA.22/2000-RB dated May 3, 2000, viz.,
Foreign Exchange Management
(Establishment in India of Branch or Office or
other Place of Business) Regulations, 2000, as
amended from time to time, no entity or
person, being a citizen of Pakistan,
Bangladesh, Sri Lanka, Afghanistan, Iran or
China shall establish in India, a branch office or
a liaison office or a project office or any other
place of business by whatever name called,
without the prior permission of the Reserve
Bank.
Vide this circular it is clarified that the provisions
of Regulation 4 of Notification No. FEMA
22/2000-RB dated 3rd May 2000, ibid, along
with their specified conditions apply for entities
from Hong Kong and Macau also.
Accordingly, applications from entities
registered in / resident of Hong Kong and
Macau, for establishment of Liaison/ Branch/
Project Offices or any other place of business
by whatever name called shall require prior
approval from Reserve Bank of India.
A.P. (DIR Series) Circular No. 94 dated
January 16, 2014
Conversion of External Commercial Borrowing
and Lumpsum Fee/Royalty into Equity
In terms of A.P. (DIR Series) Circular No. 15
dated October 1, 2004, an Indian company
can issue equity shares against External
Commercial Borrowings (ECB) subject to
conditions mentioned therein and pricing
guidelines as prescribed by the Reserve Bank
from time to time regarding value of equity
shares to be issued. The Reserve Bank has
received some references regarding how the
rupee amount against which equity shares are
to be issued shall be arrived at; in other words,
what rate of exchange shall be applied to the
amount in foreign currency borrowed or owed
by the resident entity from/to the non-resident
entity.
It is clarified that where the liability sought to
be converted by the company is
denominated in foreign currency as in case of
ECB, import of capital goods, etc. it will be in
order to apply the exchange rate prevailing
on the date of the agreement between the
parties concerned for such conversion.
Reserve Bank will have no objection if the
borrower company wishes to issue equity
shares for a rupee amount less than that
arrived at as mentioned above by a mutual
agreement with the ECB lender. It may be
noted that the fair value of the equity shares to
be issued shall be worked out with reference to
the date of conversion only.
It is further clarified that the principle of
calculation of INR equivalent for a liability
denominated in foreign currency as
mentioned in the above paragraph shall

16. 14
apply, mutatis mutandis, to all cases where
any payables/liability by an Indian company
such as, lump sum fees/royalties, etc. are
permitted to be converted to equity shares or
other securities to be issued to a non-resident
subject to the conditions stipulated under the
respective Regulations.
A.P. (DIR Series) Circular No. 95 dated
January 17, 2014
Merchanting Trade Transactions
In the light of the recommendations of the
Technical Committee on Services/Facilities to
Exporters (Chairman: Shri G. Padmanabhan),
to further liberalise and simplify the procedure,
the existing guidelines for merchanting or
intermediary trade transactions have been
reviewed and accordingly in supersession of
the existing guidelines, the revised guidelines
have been laid down in this circular and will
come into effect immediately.
COMPANY LAW
Clarification with regard to,taking
accounts of comments/inputs from
Income Tax Department and other sector
Regulators while filing reports by Regional
Directors u/s 394A of Companies Act,1956.
[General Circular no.1/2014 dated
15thJanuary,2014]
Pursuant to the examination carried out by the
Ministry in a recent case, wherein a Regional
Director had not projected the objections of
the Income Tax Department under section 394,
dealing with cases involving
reconstruction/amalgamation, the Ministry of
Corporate Affairs had decided that while
responding to notices on behalf of the Central
Government u/s 394A, the Regional Director
concerned shall invite specific comments from
Income Tax Department within 15 days of
receipt of notice before filing his response to
the Court. In case, no response from the
Income Tax Department is forthcoming, then it
may be presumed that the Income Tax
Department has no objection to the action
proposed u/s 391 or 394, as the case may be.
In this regard, the Ministry further clarified that,
the Regional Directors must also obtain the
feedback from the sectoral Regulator(s), if
required, in the same manner as from the
Income Tax Department.
Further, it has been emphasized by the Ministry
that, except in the case where there are
reasonable compelling reasons for doubting
the correctness of the views of Income Tax
Department or any other sectoral Regulator,
the Regional Director should directly project
the views of the concerned
department/Regulator in his representation,
without deciding the correctness or otherwise,
of the objections/views of the Income Tax
Department or other Regulators. In case of
compelling reasons for doubting the
correctness of such views, the Regional
Director must make a reference to the Ministry
for taking up the matter with the concerned
Ministry, before filing the representation with
the court u/s 394A.
TRANSACTIONS THAT
MADE HEADLINES
 Aditya Birla Group selling BPO arm to
private investors backed by CX Partners
for $260M.
 HPCL arm to buy stake in two gas fields
in Australia for $74M`

17. 15
 Japan’s ARKRAY to buy IVD business of
Span Diagnostics for $16M.
 Singapore’s Wilmar may buy up to 25%
stake in Shree Renuka Sugars.
 Bharat Forge sells entire 51.85% stake in
Chinese JV to local partner for $28.2M.
 DLF set to sell Aman Resorts to a US firm
for close to $350M
 CK Birla Group firm acquires a part of
Caterpillar’s mining product distribution
business
 Alstom India to sell transportation
systems unit to French parent for
around $29M
 Air Water completes acquisition of
Ellenbarrie Industrial Gases for $17.3M
 Lenovo to buy Motorola handset
business from Google for $2.91B

18. www.spnagrath.com
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