Bilimoria Mehta & Co.

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Bilimoria Mehta & Co.
CHARTERED ACCOUNTANTS
For private circulation & for internal use only.
This booklet summarises the important proposals included in the budget speech made by the Honourable Finance Minister on 28th February 2011.
Whilst every care has been taken in the preparation of this document it may contain inadvertent errors for which we shall not be held responsible.
It must be stressed that the finance bill may contain proposals which have not been referred to in the budget speech and additionally, the detailed
proposals are liable to amendment during the passage of the finance bill through Parliament. The information given in this document provides a
bird’s eye view on the changes proposed and should not be relied for the purpose of economic or financial decision. Each such decision would call
for specific reference of the relevant statutes and consultation of an expert.
INDEX

FOR EWO R D , EXECU T I VE SUM M ARY & RE C E NT DEVE LOPME NTS

FOREWORD 2
EXECUTIVE SUMMARY 4
BACKDROP TO THE BUDGET AND RECENT DEVELOPMENTS 6

E CO N OM IC S URVEY
OVERVIEW OF ECONOMIC SURVEY 42

KEY BU D G E T PRO PO SALS

BUDGET AT A GLANCE 52
DIRECT TAXES 53
INDIRECT TAXES 60
ANNOUNCEMENT OF INITIATIVES FOR SELECT AREAS 65

I MPAC T ON S ELECT I N D U ST R I ES
ANALYSIS FOR INDUSTRIES 68
FOREWORD
EXECUTIVE SUMMARY
RECENT DEVELOPMENTS
FOREWORD
The India Budget 2011 (containing the Finance Bill 2011 along with the
Budget Statement for the year 2011-12) was presented by Mr. Pranab
Mukherjee, the Honorable Minister of Finance before the House of
Parliament on Monday 28th February 2011. This Budget has been
presented in the backdrop of an extremely challenging economic and
political environment (with the Prime Minister admitting to an ethical
and governance deficit) .
On top of the priority list was taming inflation (which had recently
shot up to 20 per cent before coming down to almost 9 per cent
) while at the same time sustaining the high growth rates and
reining in the deficit However, the globally rising crude prices
(due to the Jasmine revolution in the Middle East) and the already
increased interest rates with a view to contain inflation left very
little elbow room to the Finance Minister. These challenges were
further accentuated by the three objectives of the UPA policy viz.
maintaining growth momentum, fiscal discipline and continuing
with the inclusive growth strategy.
To put it modestly, the Finance Minister was certainly faced with a
daunting task of presenting a balanced Budget which would provide
relief to all sections of the Society and at the same time be growth
oriented.
And the good news is that the Finance Minister has delivered just
that—a balanced Budget!!
The Budget 2011 aims to work out a budget strategy that can meet
up with the challenges. The Budget lays down a road map to cater
to the needs of the nation and provides for resolving the national
economic problems. Requisite emphasis has been placed on
providing support to farmers & rural sector. The Budget Statement
continued with the necessary thrust towards Infrastructure
development being the key to future economic growth and to attain
8-10 percent GDP growth.
The Budget sketches out a number of schemes and proposals raising
the outlay for infrastructure, education and development of North East
and Jammu & Kashmir and giving a big push to agriculture. Several
measures have been taken to boost the economic growth to 9 per
cent and attempts have been made to allocate funds to Infrastructure
and Industry. On the investment front, it is proposed to raise the
FII limit for investment in corporate bonds issued in infrastructure
sector. With regard to indirect taxes, various amendments have been
introduced to improvise the tax administration.
2
Although, the GDP has been showing a consistent growth pattern
since the past 2 years with 8.6 per cent in 2010-11, the industrial
growth has been experiencing a significant downtrend in the
preceding two months. The Budget seeks to provide the necessary
budgetary support to the industrial sector to fuel the momentum to
the economy to enable continuation of the growth story.
With a view to seamlessly integrate with the proposed Direct Tax
Code, the Budget offers income tax concessions by enhancing general
category of exemption limits for individual taxpayers from ` 1,60,000
to ` 1,80,000 giving uniform tax relief of ` 2,000. It provides a relief
to senior citizens by reducing the qualifying age from 65 to 60 years.
Current surcharge of 7.5 per cent on domestic companies is proposed
to be reduced to 5 per cent. Rate of Minimum Alternative Tax proposed
to be increased from 18 per cent to 18.5 per cent of book profits. In
light of the on-going emphasis on transparency and discouragement
towards use of Offshore jurisdictions, a special section has been
introduced in the Income Tax Act for the first time which would act as
a ‘Toolbox to counter measures in respect of transactions’.
Having regard to the healthy growth in indirect taxes in 2010-11, the
Finance Minister had an option to roll back the Central excise duty
to levels prevailing in November 2008. However, in an attempt to
mobilize higher investment rates by the industry through improved
business margins, the existing rate of Central excise duty has been
maintained at 10 per cent. The actual collections of Service Tax do not
reflect the full potential of this sector. While retaining the standard
rate of service tax at 10 per cent, several services are proposed to be
brought under the service tax regime.
The current scheme of interest subvention on 1 percent on housing
loans is now extended to ` 15 lakhs where the cost should not
exceed 25 lakh thereby giving importance to the affordable sector.
The proposed increase in the rural housing fund to ` 3000 crore
from ` 2000 crore will open several opportunities for real estate
development in rural areas.
The Budget has emphasized on curbing inflation, fiscal consolidation
and expenditure control and highlighted various initiatives such as
FRBM Act implementation, creation of debt management cell, rolling
out policy for attracting FDI investment, various pending legislation
to be taken in the forthcoming Parliament session such as Insurance
Law, Life Insurance Bill, Pension Bill and Banking Law amendment. A
five fold strategy is to be put into operation to deal with the problem
of generation and circulation of black money.
 INDIA BUDGET 2011
an analysis

As a promising economy, with a voice on the global stage, India stands

at the threshold of a decade which presents immense possibilities.
Without letting the recent strains and tensions hold the country back
from converting these possibilities into realities and with oneness
of heart, the Budget aims to facilitate and offer necessary & well
deserved support towards building a developed India.

Monday, February 28, 2011

Mumbai
INDIA

3
EXECUTIVE SUMMARY
DIRECT TAXES
• Exemption limit for the general category of individual taxpayers is
enhanced from `1,60,000 to `1,80,000 giving uniform tax relief of
` 2,000.
• Qualifying age for senior citizens reduced from 60 years from the
present 65 years and exemption limit enhanced to ` 250,000.
• A new category of Very Senior Citizens above 80 years are eligible
for higher exemption limit of ` 500,000.
• Current surcharge of 7.5 per cent on domestic companies reduced
to 5 per cent.
• Current surcharge of 2.5 per cent on foreign companies reduced
to 2 per cent.
• Weighted deduction in case of approved scientific research
programmes is increased from 175 per cent to 200 per cent.
• Investment linked deduction to business developing affordable
housing.
• Benefit of investment linked deduction extended to business
engaged in the production of fertilisers.
• Additional deduction of ` 20,000 for investment in long-term
infrastructure bonds extended for one more year.
• Sunset clause introduced in undertaking engaged in commercial
production of mineral oil.
• Transfer Pricing Officer has power to conduct survey for obtaining
information or conducting inquiry.
• Plus or minus 5 per cent variation between an arms length
transaction and actual price of the transaction to be replaced
by such percentage as may be prescribed by the Central
Government.
• Transaction with persons located in specified jurisdiction shall
be deemed as associated enterprise and shall be subjected to
transfer pricing regulation.
• Transaction with persons located in specified jurisdiction shall be
disallowed /treated as income if required documents not furnished
or source of income of the other person is not explained.
• Rate of Minimum Alternative Tax increased from 18 per cent to
18.5 per cent of book profits.
• Minimum Alternative Tax shall now apply to developers of SEZ
and units operating in SEZ’s.
• Limited liability partnerships are now subject to Alternate
Minimum Tax provisions.
• Interest received by non-residents from Infrastructure Debt Fund
would now attract a TDS at the rate of 5 per cent.
4
• Foreign dividends received by Indian Holding Company from
Foreign Subsidiary Company shall be subjected to tax at the rate
of 15 per cent without any deduction for expenses.
• The due date for filing return of income in case of companies
required to file Transfer Pricing Report has now been extended to
30th November of the assessment year.
• Liaison offices required to file regular information regarding the
activities of their offices in India within 60 days from the end of
the financial year.
INDIRECT TAXES
SE RVIC E TAX
• Standard rate of Service Tax retained at 10 per cent, while seeking
a closer fit between present regime and its GST successor.
• Hotel accommodation in excess of ` 1,000 per day and service
provided by air conditioned restaurants that have license to serve
liquor added as new services for levying Service Tax.
• Tax on all services provided by hospitals with 25 or more beds
with facility of central air conditioning.
• Service Tax on air travel both domestic and international raised.
• Services provided by life insurance companies in the area of
investment and some more legal services proposed to be brought
into tax net.
• All individual and sole proprietor tax payers with a turn over upto
` 60 lakh freed from the formalities of audit.
• To encourage voluntary compliance the penal provision for Service
Tax are being rationalised. Similar changes being carried out in
Central Excise and Custom laws.
C E NTRAL E XC ISE
• Central Excise Duty to be maintained at standard rate of 10 per
cent.
• Reduction in number of exemptions in Central Excise rate
structure.
• Nominal Central Excise Duty of 1 per cent imposed on 130 items
entering in the tax net.
• Lower rate of Central Excise Duty enhanced from 4 per cent to 5
per cent.
• Optional levy on branded garments or made up proposed to be
converted into a mandatory levy at unified rate of 10 per cent.
 INDIA BUDGET 2011
an analysis

• Scope of exemptions from Excise Duty enlarged to include

equipments needed for storage and warehouse facilities on
agricultural produce.
• Concessional Excise Duty of 10 per cent to vehicles based on Fuel
cell technology.
• Reduction in Excise Duty on kits used for conversion of fossil fuel
vehicles into Hybrid vehicles.
• Excise Duty on LEDs reduced to 5 per cent and special CVD being
fully exempted.
• Parallel Excise Duty exemption for domestic suppliers producing
capital goods needed for expansion of existing mega or ultra
mega power projects.
• Out right concession to factory-built ambulances from Excise
Duty.

C U S TOM S
• Peak rate of Custom Duty held at its current level.
• Basic Custom Duty reduced for various items to encourage
domestic value addition vis-à-vis imports, to remove duty
inversion and anomalies and to provide a level playing field to
the domestic industry.
• Rate of Export Duty for all types of iron ore enhanced and unified
at 20 per cent ad valorem.
• Basic Custom Duty on two critical raw materials of cement
industry viz. petcoke and gypsum is proposed to be reduced to 2.5
per cent.
• Full exemption from basic Customs Duty and a concessional
rate of Central Excise Duty extended to batteries imported by
manufacturers of electrical vehicles.
• Exemption granted from basic custom duty and special CVD to
critical parts/assemblies needed for Hybrid vehicles.
• Scope of exemptions from basic Customs Duty for work of art and
antiquities extended to apply for exhibition or display in private
art galleries open to the general public.
• Exemption from Import Duty for spares and capital goods required
for ship repair units extended to import by ship owners.

5
BACKDROP TO THE BUDGET AND
RECENT DEVELOPMENTS
RECENT AMENDMENTS
I N C OM E TA X – DO M ESTI C TAXATION

AMENDMENTS/CIRCULARS/NOTIFICATIONS clarification exempting such individuals from interest/penalties for

VALUATION RULES ANNOUNCED BY CBDT late payments of taxes due.
CBDT has announced valuation guidelines on April 8, 2010 (“Valuation
Rules”) specifying the methodology for calculation of value of shares AMENDMENTS TO THE TDS RULES
of a company. The fair market value of listed shares traded on the CBDT, vide issuance of a notification, has amended the rules relating
stock exchange shall be equal to the value as recorded on the stock to provisions dealing with date and mode of payment of Tax Deducted
exchange. at Source (TDS), issuance of TDS certificate and filing of ‘statement
of TDS’ (TDS return). Forms for TDS certificate have been revised to
The value of listed shares traded off the stock exchange shall be include the receipt number of the TDS return filed by the deductor.
equal to the lowest price of such shares on the valuation date. If there As per the notification, the Tax-deduction Account Number (TAN) of
is no trading on the valuation date, the date immediately preceding the deductor, Permanent Account Number (PAN) of the deductee,
the valuation date shall be considered to determine the price. and receipt number of TDS return filed by the deductor will form the
unique identification for allowing tax credit claimed by the taxpayer
The formulae for calculation of the value of unlisted shares appears in his income-tax return.
to be geared towards using the net asset value methodology based
on the difference between assets and liabilities as appearing on the The revised due dates for furnishing TDS return are as under:
face of the Balance Sheet. While no formal report is required to be Date of ending of the Due Date
obtained from a merchant banker / accountant with respect to such quarter of the
financial year
valuation, the rules require reliance to be placed on the value of assets
30th June 15th July of the financial year
as per the balance sheet – without specifying whether the balance
30th September 15th October of the financial year
sheet is required to be audited. Considering that tax authorities may
31st December 15th January of the financial year
question the manner in which valuation has been done in the event
31st March 15th May of the financial year
it is based on unaudited results, this rule may result in requirement
immediately following the financial year
of additional audit for the company at the time of investment, thus
in which deduction is made
increasing the cost and time of the transaction.
Due date for furnishing TDS certificate to the employee or deductee
The value of unlisted shares and securities, other than equity shares or payee is revised as under:
in an unlisted company, shall be estimated as per a report from a Category Periodicity of Due date
merchant banker / accountant. This rule would cover preference furnishing
TDS certificate
shares, debentures and other securities. This may add on to the cost
Salary Annual By 31st day of May of the
of making the investment. The valuation date is the date of receipt
(Form No.16) financial year immediately
of property (including shares). It is also important to note that the
following the financial year in
Finance Act 2009 had already introduced an amendment to section
which the income was paid
56 relating to investments by individuals at lower than fair market
and tax deducted.
value. The Valuation Rules are also applicable with respect to such
Non-Salary Quarterly Within fifteen days from the
Investments made by individuals. It is also relevant to note that
(Form No.16A) due date for furnishing the
while these Valuation Rules were not in place last year, tax could
statement of tax deducted at
not be paid by individuals due to the methodology of valuation not
source under rule 31A.
been prescribed. The Government has however not come out with a
6
 INDIA BUDGET 2011
an analysis
CHANGES TO RULES RELATING TO E-FILING OF I-T RETURNS
CBDT has amended the Rules relating to electronic filing of Income
Tax returns vide a notification. As per the amended Rules, it is now
mandatory for all companies to file Income Tax returns electronically,
in Form No. ITR-6 with digital signature.
As per the amended rules, now, all Individuals and Hindu Undivided
Families (HUFs), who are required to get their accounts audited
under section 44AB of the Act, are also required to file their Income
Tax return in Form No. ITR-4 electronically, with or without digital
signature.
COST OF INFLATION INDEX FOR 2010 - 2011
In exercise of the powers conferred by clause (v) of the Explanation to
section 48 of the Act, the Central Government has notified the Cost
of Inflation Index for 2010 - 2011 as 711.
RECOGNISED PROVIDENT FUND – 8.5 PER CENT RATE NOTIFIED
The Central Government vide Notification No. 69/2010 [F.No.
142/14/2010- SO (TPL)], dated 26-08-2010 has fixed with effect from
1st day of September, 2010, 8.5 per cent as the rate referred to in
Rule 6(b) of Part A of Fourth Schedule.
ENHANCEMENT OF EXEMPTION LIMIT SPECIFIED UNDER
SECTION 10(10)(III)
Central Government vide its Notification No. 43/2010 [F.No.
200/33/2009-IT(A-I)]/S.O. 1414(E), dated 11-06-2010 has enhanced
the exemption limit of gratuity to ` 10,00,000/- in relation to
employees who retire or die on or after 24th day of May, 2010 or
whose employment is terminated on or after the said date.
WIDENING OF EXISTING ROAD - DEFINITION OF A NEW
INFRASTRUCTURE FACILITY
It has been decided by the CBDT that widening of an existing road
by constructing additional lanes as a part of a highway project by an
undertaking would be regarded as a new “infrastructure facility” for
the purpose of section 80IA(4)(i) of the Act. However, relaying of an
existing road would not be classifiable as a new infrastructure facility
for this purpose.
SECTION 197 OF THE INCOME-TAX ACT, 1961 – CERTIFICATE OF
LOWER DEDUCTION OR NON-DEDUCTION OF TAX AT SOURCE
Earlier, it was laid down by CBDT that certificates for lower deduction
or nil deduction of tax at source under section 197 are not to be issued
indiscriminately and for any such issue, prior approval of the concerned
Range Head shall be obtained by the A.O. Subsequently Instruction
No. 7/2009, dated 23-12-2009, read with letter F.No.275/23/2007-
IT (B) dated 08-02-2010, has laid down monetary limits for prior
administrative approval of the CIT-TDS or DIT-International Taxation,
as the case may be. Now, as per new direction by CBDT dated 25th
May, 2010, the certificates under section 197 shall be generated and
issued by the A.O. mandatorily through ITD system only. It has been
also clarified by CBDT that in case, due to certain reasons, it is not
possible to generate the certificate through the system on the date
of its issue, the A.O. shall upload the necessary data on the system
within seven days of the date of issue (manually) of the certificate.
The Prior administrative approval by the Range Head and by the CIT-
TDS / DIT-International is required in both the cases.
AMENDMENTS IN INCOME TAX RULES WITH REGARD TO TAX
DEDUCTION/ COLLECTION AT SOURCE PROVISIONS
CBDT has amended the Income Tax Rules, 1962 (‘the Rules’) by
notifying Income Tax (6th Amendment) Rules, 2010 in respect of
the tax deduction at source (TDS)/ tax collection at source (TCS)
provisions and compliance requirements (furnishing of quarterly
statements, issue of certificates, etc.) The new rules shall apply in
respect of TDS/ TCS on or after 1st April 2010.
The new Rules have amended the due date for issuing the TDS
certificates to employees in Form 16 (for salary payments) from
30th April to 31st May following the end of relevant financial year
and to deductees in Form 16A (for payments other than salary) on a
quarterly basis (vis-à-vis the existing flexibility of issuing the same
on an annual basis as well.). The TDS certificate Forms have been
consequently amended. Additionally, the due date for furnishing the
quarterly statement (Form 24Q/ Form 26Q/ Form 27Q) for the last
quarter of the relevant financial year has been amended from 15th
June to 15th May following the end of such quarter.
The new rules are effective for tax deducted/ collected at source on
or after 1st April 2010. Any tax deducted/ collected at source before
the said date will be governed by the provisions existing before these
amendments. As per the press release by the CBDT, the TAN of the
deductor, PAN of the deductee, and receipt number of TDS statement
filed by the deductor will form the unique identification for allowing
credit of taxes claimed by the taxpayer in his income-tax return.
SCHEME FOR SLUM REDEVELOPMENT
CBDT vide its notification has notified that the Scheme for Slum
Development prepared by Maharashtra Government under sub-
section 2 of section (37) of the Maharashtra Regional Town Planning
Act, 1966, will be considered as a scheme for the purpose of clauses
(a) and (b) of sub-section (10) of section 80IB of the Income Tax Act
1961. Any amendments to the Scheme shall be required to be re-
7
notified by the CBDT. The notification shall be deemed to apply to
projects approved by a local authority under the aforesaid scheme on
or after 1st April 2004 and before 31st March 2008 thereby making
the income arising from such projects eligible for deduction under the
section 80IB(10) from the A.Y. 2005 - 2006 onwards.
SUPREME COURT DECISIONS
A PAY BACK IS NOT EXPENDITURE IN THE SCHEME OF SECTION
14A
It was held by the Supreme Court that a pay back is not expenditure
under the scheme of section 14A. For attracting section 14A, there has
to be a proximate cause for disallowance, which, is its relationship
with the tax exempt income and since pay-back or return of investment
is not such proximate cause, section 14A is not applicable.
Sections 14A and 94(7) operate in the different field. Section 14A
dealt with disallowance of expenditure incurred in earning tax-free
income against the profits; on the other hand, section 94(7) dealt with
disallowance of the loss on the asset.
BSE CARD IS AN “INTANGIBLE ASSET” AND ELIGIBLE FOR
DEPRECIATION UNDER SECTION 32(1)(ii)
The Supreme Court held that right of membership conferred upon a
member under Bombay Stock Exchange (BSE) membership card in
terms of rules and Bye-laws of BSE, as they stood during relevant
assessment years, was a ‘business or commercial right’ which gave
a non-defaulting continuing member a right to access exchange and
to participate therein and, in that sense, it was a licence or akin to a
licence in terms of section 32(1)(ii). Accordingly, reversing the decision
of Bombay High Court, the Supreme Court held that BSE Card is an
“intangible asset” and eligible for depreciation under section 32(1)(ii).
LOSS ON ACCOUNT OF FLUCTUATION IN FOREIGN EXCHANGE
RATES ALLOWABLE UNDER SECTION 37
It was held by the Supreme Court that assessee having maintained
accounts on mercantile system of accounting, loss claimed by the
assessee on account of fluctuation in the rate of foreign exchange
as on the date of balance sheet in respect of loans taken for revenue
purposes is allowable as business expenditure under section 37(1),
notwithstanding the fact that the liability has not been discharged in
the year in which the fluctuation in the rate of foreign exchange has
occurred.
It was further held that, in respect of foreign exchange loans in
capital account, prior to amendment to section 43A w.e.f. 01-04-
2003, assessee could adjust cost of imported assets acquired in
foreign currency, on account of fluctuation in rate of exchange.
8
CAPITAL OR REVENUE RECEIPT?
The Apex Court, in this case, clarified that the amount received
by assessee from the supplier by way of liquidated damages was
towards compensation for sterilization of profit earning source and
not in ordinary course of its business and, therefore, it was a capital
receipt in its hand.
SECTION 40A (2) WAS NOT EXAMINED AS EXERCISE WAS
“REVENUE-NEUTRAL”. THE HIGH COURT RECOMMENDED THAT
TRANSFER PRICING PROVISIONS SHOULD BE EXTENDED TO
DOMESTIC TRANSACTIONS TO “REDUCE LITIGATION”
The Apex Court held that in the case of domestic transactions, the
under-invoicing of sales and over-invoicing of expenses ordinarily will
be revenue neutral in nature, except in two circumstances:
[i] If one of the related Companies is loss making and the other is
profit making and profit is shifted to the loss making concern; and
[ii] If there are different rates for two related units [on account of
different status, area based incentives, nature of activity, etc.] and if
profit is diverted towards the unit on the lower side of tax arbitrage.
It was also held that Section 40A(2) and Section 80IA(10), should be
amended empowering the A.O. to make adjustments to the income
declared by the assessee having regard to the fair market value of the
transactions between the related parties. The A.O. may thereafter
apply any of the generally accepted methods of determination of
arm’s length price, including the methods provided under Transfer
Pricing Regulations.
MAT CREDIT AVAILABLE UNDER SECTION 115JAA HAS TO BE
EXCLUDED WHILE CALCULATING “ASSESSED TAX” UNDER
SECTION 234B
If an assessee is entitled to a tax credit as a consequence of the
assessee making payment of tax under section 115JA(1) in the year
one, then, the set off of such tax credit follows as a matter of course
once the conditions mentioned in section 115JAA are fulfilled and
the grant of such credit is not dependent upon determination by the
A.O. Hence, credit of such MAT has to be reckoned in the calculation
of “assessed tax”.
ADJUSTMENT TO BOOK PROFITS ON ACCOUNT OF WITHDRAWAL
FROM RESERVES
It was clarified by the Supreme Court that in terms of clause (i) of
Explanation to section 115JB(2), that it is only if reserves created
had gone to increase book profits in any earlier year when provisions
of section 115JB were applicable, that assessee would be entitled
to reduce amount withdrawn from such reserves, if such withdrawal
is credited to profit and loss account. For that purpose, amount
 INDIA BUDGET 2011
an analysis
withdrawn from any reserve must, in effect, impact net profit as
shown in profit and loss account and unless an adjustment has effect
of increasing net profit as shown in profit and loss account, that entry
cannot be said to be a credit to profit and loss account.
SECTION 271(1)(c) PENALTY CANNOT BE IMPOSED EVEN FOR
MAKING DEBATABLE CLAIMS
The Supreme Court held that existence of conditions prescribed
under section 271(1)(c) is a must for initiating penalty proceedings.
Merely because the tax-payer has claimed expenditure which was
not accepted by revenue authorities, that by itself would not attract
penalty. By any stretch of imagination, making an incorrect claim in
law cannot tantamount to furnishing inaccurate particulars. It held
that the decision in the case of Dharmendra Textile has overruled the
decision in the case of Dilip N. Shroff only to the extent of inference
that mens rea was essential ingredient for levy of penalty.
PENALTY UNDER SECTION 271(1)(c) IS LEVIABLE EVEN IF THE
ASSESSMENT IS AT A LOSS
Following its earlier decision in the case of Gold Coin Health Food
(P) Ltd., the Supreme Court held that clause (a) of Explanation 4 to s.
271(1)(c) replaced w.e.f. 01-04-2003 was clarificatory in nature and
would apply to all assessments even prior to A.Y. 2003 - 2004. Hence,
penalty could be levied in a case where addition of concealed income
reduces returned loss and finally assessed income is also loss.
INTEREST, WHICH ACCRUES TO THE ASSESSEE FOR NON-
REFUND OF TDS, PARTAKES THE CHARACTER OF THE “AMOUNT
DUE” UNDER SECTION 244A
In the instant case, the Apex Court rejected the department’s
contention that the words ‘any amount’ would not include interest
which accrued to assessee for non-refunding of amount of refund
due for certain months. Interest, which accrues to the assessee
for non-refund of TDS, partakes the character of the “amount due”
under section 244A and becomes an integral part of the principal
amount which is not refunded after it becomes due and payable.
It was therefore held that the assessee was entitled to interest on
determined refund of TDS, including interest thereon.
HIGH COURT DECISIONS
SECTION 14A – VARIOUS ASPECTS
The Tribunal’s decision in Daga Capital & Management Ltd (Mum)
being challenged, the Bombay High Court has laid down that:
• The argument that, section 14A does not apply to shares and
units because (i) the income there from is not “tax-free” in view
of the ‘dividend distribution tax’ paid by the payer and (ii) the
potentiality of taxable income arising on sale thereof, is not
acceptable because the dividend distribution tax is paid by the
company under section 115-O on its own account and not on
behalf of the shareholder;
• Sections 14A(2) and (3) are constitutionally valid;
• Rule 8D is not ultra vires section 14A;
• As Rule 8D was introduced w.e.f. 24-03-2008, it is prospective
and applies for A.Y. 2008 - 2009 and onwards;
• For assessment years where Rule 8D is not applicable, the A.O.
has to apply section 14A on a “reasonable basis”;
• In the affidavit in reply filed by the Revenue, it was averred that
if any interest is paid on borrowings specifically for any particular
income or receipt then such interest would not be apportioned.
(For example borrowings for plant, machinery, etc.)
SECTION 14A APPLIES WHERE SHARES ARE HELD AS
INVESTMENT AND THE ONLY BENEFIT DERIVED IS DIVIDEND
The Kerala High Court concluded that deduction of interest under
section 36(1)(iii) on borrowed funds utilized for the acquisition of
shares is admissible only if shares are held as stock in trade and
the assessee is engaged in the business of trading in shares. So far
as the acquisition of shares in the form of investment is concerned
and where the only benefit derived is dividend income which is
not assessable under the Act, disallowance under section 14A is
attracted.
DISALLOWANCE UNDER SECTION 14A NOT PERMISSIBLE IN
ABSENCE OF DIRECT NEXUS
Where the expenditure on interest was set off against income from
interest and investment in shares, and funds were out of dividend
income, the disallowance under section 14A is not sustainable.
Punjab and Haryana High Court ruled that disallowance is not
permissible if there is no nexus between expenditure incurred and
income generated.
THOUGH MAIN OBJECT IS TO DO BUSINESS IN SHARES, SHARES
CAN BE HELD AS A CAPITAL ASSET AND NOT STOCK-IN-TRADE
The Delhi High Court, held in favour of the assessee that, it cannot be
presumed that every acquisition by a dealer in a particular commodity
is acquisition for the purpose of his business. In each case, the
question is one of intention, to be gathered from the evidence of
conduct and dealings by the acquirer with the commodity. The nature
of activity, intention and conduct played a crucial role in the entire
gamut of transaction. As per the circular issued by the CBDT, the
assessee is entitled to have income from both heads, namely, capital
gains as well as business income.
9
DESPITE NON-USER OF ASSET, DEPRECIATION ADMISSIBLE IF IT
IS PART OF “BLOCK OF ASSETS”
The word “used” even though interpreted in wider sense, cannot
extend for non-user of assets for number of years. However, the
Delhi High Court considering the concept of block of assets held that
assessee is entitled for depreciation on assets of the unit which is
closed for last several years but forms part of block.
Depreciation allowance can be claimed, if the asset in question
is shown to be capable of diminishing in value on account of any
factor known to the prevailing accounting or commercial practice
like ordinary wear and tear; unusual damage; inadequacy and
obsolescence. However, perusal of many decisions clearly shows that
the consensus of judicial opinion is in favour of adopting the liberal
interpretation for the word ‘Use for Business Purpose’, which includes
passive use as well. Hence, claim of depreciation was allowed to the
assessee.
“GOODWILL” IS AN “INTANGIBLE ASSET” UNDER SECTION 32(1)
(ii) AND ELIGIBLE FOR DEPRECIATION
In the instant case, the assessee being aggrieved with the order under
section 263 of the CIT (in which matter was set aside), preferred an
appeal before the Tribunal.
The Tribunal held that Section 263 of the Act cannot be invoked to
correct each and every type of mistake or error committed by the A.O.
if it is not “prejudicial to the interests of the revenue”. Every loss of
revenue as a consequence of the A.O.’s order cannot be treated as
prejudicial to the interests of the Revenue. On facts, as the assessee
had made full disclosure of the facts of the claim and the A.O. had
examined the claim and taken a view; the assessment order cannot
be termed by CIT as “erroneous and prejudicial to the interests of the
revenue”.
Depreciation was claimed on goodwill by the assessee on account of
payment made for the marketing and trading, reputation, trade style
and name, marketing and distribution, territorial know-how, including
information or consumption patterns and habits of consumers in the
territory. The Tribunal treated the same to be valuable commercial
asset similar to other intangibles mentioned in the definition of the
block of assets and, hence, the same is eligible to depreciation.
CHARACTERIZATION OF PAYMENT AS GOODWILL - FORM OF
TRANSACTION CAN BE IGNORED
The Madras High Court held that the corporate veil could be
lifted and the form of transaction could be ignored where the
arrangement to pay technical know-how and non-compete
10
fees between the persons involved is merely a colourable
device to evade taxes. Therefore, the entire amount received
towards transfer of technical know how and non-compete fees
was assessable as “goodwill” and accordingly such sums are
chargeable as long term capital gains.
SPECULATION LOSS CAN BE SET OFF AGAINST DELIVERY BASED
PROFITS
The Bombay High Court held that assessee-company, according to
Explanation to section 73, is deemed to carry on a speculation business
to the extent to which the business consists of the purchase and sale
of shares. Once the assessee is carrying on speculation business and
the profits and gains have arisen from such business, the assessee is
entitled to set off carried forward losses from speculation business,
even where the transactions of purchase and sale of shares were
settled by physical delivery.
BENEFIT OF INDEXATION IS TO BE ALLOWED EVEN IF THERE IS
RESULTANT LOSS
There is nothing in the proviso to section 112 which deprive an
assessee of indexation benefit where there is resultant loss.
Accordingly, the contention of the revenue, that assessee is entitled
to set off under section 70, but without the benefit of indexation, is
not accepted by Bombay High Court.
IF A.O. DOES NOT ASSESS INCOME FOR WHICH REASONS WERE
RECORDED UNDER SECTION 147, HE CANNOT ASSESS OTHER
INCOME UNDER SECTION 147
In this case, the Bombay High Court had to consider validity of the
assessment when the income sought to have escaped in the reasons
recorded under section 148 is not assessed, but other additions are made
in the assessment order passed under section 147. It was held that:-
• Section 147 provides that the A.O. may assess the income which
has escaped assessment “and also” any other income chargeable
to tax which has escaped assessment and which comes to his notice
subsequently in the course of the proceedings under this section”.
Explanation 3 to section 147 inserted by Finance (No. 2) Act, 2009
w.r.e.f. 01.04.1989 provides that the A.O. “may assess or reassess
the income in respect of any issue … notwithstanding the reasons
for such issues have not been included in the reasons recorded …”
• The words “and also” indicate that reassessment must be with
respect to the income for which the A.O. has formed an opinion
and also in respect of any other income which comes to his notice
subsequently. However, if the A.O. accepts the objection of the
assessee and does not assess the income which was the basis
of the notice, it is not open to him to assess income under some
other issue independently;
 INDIA BUDGET 2011
an analysis
• Explanation 3 to section 147 was inserted to supersede the
judgments in Vipin Khanna (P&H) and Travancore Cements (Ker.)
where it was held that the A.O. could not assess income in respect
of issues unconnected with the issue for which the notice was
issued. However, Explanation 3 does not affect the judgments in
Shri Ram Singh (Raj.) and Atlas Cycle Industries (P&H), where
it was held that if the A.O. accepted that the reasons for which
the notice was issued were not correct, he would cease to have
jurisdiction to proceed with the reassessment;
• Explanation 3 lifts the embargo inserted by judicial interpretation
on the making of a section 147 assessment in respect of items
not referred to in the recorded reasons. However, it does not
and cannot override the substantive part of section 147 that the
income for which the notice was issued must be assessable.
SECTION 147 REOPENING FOR RECTIFYING MISTAKES
RECTIFIABLE UNDER SECTION 154 IS INVALID
Bombay High Court held if the power to rectify an order under
section 154(1) is adequate to meet a mistake or error in the order of
assessment, the A.O. must take recourse to that power as opposed
to the wider power to reopen the assessment. If the error can be
rectified under section 154, it would be arbitrary for the A.O. to
reopen the entire assessment under section 147.
Further, the error in the order was not attributable to a fault or
omission on the part of the assessee and the assessee cannot be
penalized for a fault of the A.O. Hence, when one or more modes
of assessment or remedies are available to the taxing Authority, the
Authority must adopt that remedy which causes least prejudice to
the assessee.
CONTRACT MANUFACTURING – WHETHER WILL AMOUNT TO
SALE?
Bombay High Court held that though a product is manufactured to
the specifications of a customer, the agreement would constitute
a contract for sale, if (i) the property in the article passes to the
customer upon delivery and (ii) the material that was required was
not sourced from the customer/purchaser, but was independently
obtained by the manufacturer from a third party. Hence, section 194C
is not applicable.
“DISCOUNT” FOR SUPPLY OF SIM CARDS IS “COMMISSION” FOR
THE PURPOSE OF SECTION 194H
The Kerala High Court held that,
• The sale of a Sim Card cannot be considered as “Sale” because a
Sim Card has no value or use for the subscriber other than to get
connection to the mobile network.
• The supply of the Sim Card is only for the purpose of rendering
continued services by the assessee to the subscriber of the mobile
phone.
• Consequently, the charges collected by the assessee at the time
of delivery of Sim Cards or Recharge coupons are for rendering
services to ultimate subscribers.
• In substance, the discount given at the time of sale of Sim Cards
or Recharge coupons by the assessee to the distributors is a
payment for services rendered to the assessee and falls within
section 194H.
The contention that discount is not paid by the assessee to the
distributor but is reduced from the price and so deduction under
section 194H is not possible, is not acceptable because the assessee
should have given discount net of the tax amount or given full discount
and recovered tax amount thereon from the distributors.
WHETHER PAYMENT FOR PROVISION OF BANDWIDTH LIABLE TO
TDS?
In the instant case, the assessee provided internet access of a certain
bandwidth to its subscribers, and levied a charge for the services
rendered to its subscribers in India. The main server, on the basis
of which the internet services are provided, is located in USA. The
Delhi High Court held that payment to US company for provision of
bandwidth is not a technical service under section 9(1)(vii) of the Act
and hence, assessee was not liable to deduct tax at source.
DISCLOSURE OF INTEREST AT NET VALUE WILL NOT
TANTAMOUNT TO “FAILURE TO DISCLOSE MATERIAL FACTS”
Receipt of interest on tax refund and netting it off against interest
under section 220 was disclosed in Return of Income and also during
the course of assessment. Hence, there is no failure on the part of the
assessee to disclose material facts. Accordingly, the Bombay High
Court held that the notice of reassessment beyond the period of four
years was not valid and was liable to be quashed.
NON-RESIDENTS ARE NOT LIABLE TO PAY INTEREST UNDER
SECTION 234B. SECTION 234D APPLIES FROM A.Y. 2004 - 2005
AND IS NOT RETROSPECTIVE
• The Delhi High Court held that as the non-resident recipient was
not liable to pay advance tax, in view of section 209(1)(d) and
section 195, it was not permissible for the Revenue to charge
interest under section 234B.
• The High Court stated that section 234D inserted by the Finance
Act 2003 with effect from 01-06-2003, is in the nature of a
substantive provision and applies only for the A.Y. 2004 - 2005
and onwards and is not retrospective. The Court further held
that a provision by which an authority is empowered to levy and
11
 collect interest, even if construed as forming part of the machinery
provisions, is substantive law.
RECOVERY PROCEEDINGS - NO COERCIVE RECOVERY IF FIRST
APPEAL READY FOR HEARING
In the instant case, the A.O. without considering the pendency
of appeals, issued demand notices and took steps to attach the
bank account of the assessee. Writ petition was filed by the
assessee before the Kerala High Court, which was opposed
by the department on the ground that the assessee had been
seeking adjournments for hearing before the Commissioner
(Appeals). The High Court was pleased to allow the writ petition
and held that:
• The appellate authority is directed to dispose off the appeals at
the earliest possible, after affording an opportunity of hearing to
the assessee, at any rate within a period of one month from the
date of receipt of a copy of the Court’s judgement;
• Till such time orders are passed by the appellate authority,
recovery steps shall be kept in abeyance;
• If there is any non-cooperation on the part of the assessee, the
appellate authority is at liberty to finalize the appeals without
providing any further opportunity of hearing.
TRIBUNAL DECISIONS
FOR SECTION 10B FOREIGN EXPENDITURE FOR SELF PURPOSES
AND TURNOVER RETAINED ABROAD CANNOT BE REDUCED FROM
“EXPORT TURNOVER”
Special Bench Chennai Tribunal held as under:
• The definition of “export turnover” in section 10B excludes
“expenses incurred in foreign exchange in providing technical
services outside India”. Expenses incurred in a foreign country
towards pay roll, in connection with staff in the foreign branch
are not covered in the definition. Even as per Circular Nos.
621 dated 19-12-1991 and 694 dated 23-11-1994, expenditure
incurred onsite abroad was eligible for deduction under section
10B of the Act. Circular No. 694 dated 23-11-1994 clarifies that
the expenditure incurred at client’s site abroad is eligible for
deduction under section 10A and 10B.
• The Tribunal was of the considered view that the A.O. was not
justified in excluding a part to the export proceeds retained by
the appellant abroad in accordance with the RBI guidelines while
computing deduction under section 10B of the Act. Once the
appellant receives the export proceeds in foreign exchange abroad
within due dates and the same are utilized by the appellant for
the purpose of its own business through its branch office abroad,
the said sale proceeds are required to be considered as deemed
receipts in India.
12
DISALLOWANCE OF INTEREST ON BORROWED FUNDS UNDER
SECTION 14A ON BASIS THAT ASSESSEE OUGHT TO HAVE USED
OWN FUNDS TO REPAY LOANS AND NOT INVEST IN SHARES
The argument that the assessee could have utilized its surplus funds
in repaying the borrowings instead of investing in shares and by not
doing so, there was diversion of borrowed funds towards investment
in shares to earn dividend income was not accepted by the Mumbai
Tribunal in view of the ratio laid down in the court of CIT vs. Hero
Cycles Ltd 323 ITR 518, where it was held that if investment in shares
is made by an assessee out of own funds and not out of borrowed
funds, disallowance under section 14A is not sustainable.
TIMESHARE MEMBERSHIP FEE IS TAXABLE ONLY OVER THE
TERM OF CONTRACT
The Chennai Special Bench held that:
• Two conditions necessary for income to have “accrued to” or
“earned by” an assessee are:
– the assessee has contributed to its accruing or arising by
rendering services or otherwise, and
– a debt has come into existence and he must have acquired a
right to receive the payment.
Though, a debt is created in favour of the assessee
immediately on execution of the agreement, the assessee
has a continuing obligation to provide services over the term
of contract. Hence, income could not accrue to it.
• Consequently, the entire amount of timeshare membership fee
receivable by the assessee up front at the time of enrolment of a
member is not chargeable to tax in the initial year.
AMOUNT PAID FOR NON-COMPETE RIGHTS WHILE ACQUIRING
BUSINESS IS CAPITAL EXPENDITURE
It was concluded by Special Bench of Delhi Tribunal that the ‘non-
compete agreement’ was part and parcel of the entire transaction
of acquisition of business covered under the first test of initial
outlay of the business and thus it was capital expenditure. This test
covered expenditure made for the initial outlay or for the expansion of
business or substantial replacement of the equipment. The incurring
of expenditure also brought enduring benefit to the assessee,
irrespective of when the payment is made. Even payment made to
ward off competition from a rival dealer would constitute capital
expenditure.
IF NPV OF FUTURE SALES TAX LIABILITY IS PAID, THERE IS NO
“REMISSION” ACCORDING TO SECTION 41(1) OF THE ACT
It was held by Special Bench of Mumbai Tribunal that in paying the
NPV, the assessee had paid the equivalent of the Future Value of
the sum and its payment discharged the full liability, there was no
 INDIA BUDGET 2011
an analysis
remission or cessation of liability by the State Government. It was a
simple case of collecting the amount at NPV which was due later.
The fact that the assessee had not obtained the modified Eligibility
Certificate or that it used the expression ‘remission’ of loan liability
in its books are irrelevant because the making or absence of an entry
cannot determine rights and liabilities of the parties involved.
RETURNS PROCESSED UNDER SECTION 143(1)(a) CANNOT BE
REOPENED FOR REASSESSMENT UNDER SECTION 147 WITHOUT
JUSTIFIED “REASONS TO BELIEVE”
Mumbai Tribunal held that:
• Violation of Section 11(5) read with section 13(1)(d) by the
assessee did not result in the said amount being chargeable to
tax in the hands of the assessee. The fact that the amount was
not invested in the prescribed manner did not mean that it could
be assessed as income.
• The reasons recorded were required to be self explanatory and
read as recorded by the A.O. No substitution, addition or deletion
was permissible. No inference could be allowed to be drawn on
the basis of reasons not recorded.
• The fact that only an intimation was passed under section 143(1)
(a) was irrelevant, because, it was important to inquire whether
the A.O. had proper “reasons to believe” that income had escaped
assessment. In the absence of proper “reasons”, the reopening
was invalid.
DESPITE SERVICE OF SECTION 148 NOTICE IN TIME, NON-SUPPLY
OF “REASONS FOR REOPENING” WITHIN TIME, RENDERS THE
REOPENING VOID
It was held by Delhi Tribunal that as per section 149(1)(b) of the Act, a
notice under section 148 cannot be issued after six years from the end
of the A.Y. but at the same time must be issued within a reasonable
time. A notice under section 148 without the communication of the
reasons is meaningless in as much as the A.O. is bound to furnish
the reasons within a reasonable time. Delhi Tribunal held that the
issuance of the notice and the communication and furnishing of
reasons go hand-in-hand. The expression ‘within a reasonable period
of time’ cannot be stretched to such an extent that it extends even
beyond the six years stipulated in section 149.
As the reasons for furnishing the notice have not been issued to the
assessee within a reasonable period, the validity of the notice under
section 148 could not be upheld. Thus, it was decided that the order
was not sustainable and the appeal of the assessee was accordingly
allowed.
INTE RNATIONAL TAXATION
CIRCULARS / NOTIFICATIONS / PRESS RELEASES
CBDT Corrigendum No. 5/2010 dated 30th September, 2010
CBDT vide its Circular No. 5/2010 dated 3rd June, 2010 provided
explanations to the provisions of The Finance (No.2) Act, 2009.
Accordingly for determination of arm’s length price in cases of
international transactions, where more than one price is determined
by the most appropriate method, the arm’s length price shall be taken
to be the arithmetical mean of such price. However, if the arithmetical
mean, so determined, is within five per cent of the transfer price, then
the transfer price shall be treated as the arm’s length price and no
adjustment is required to be made. This amendment has been made
applicable with effect from 1st April, 2009 and will accordingly apply in
respect of assessment year 2009-10 and subsequent years. However as
per the corrigendum no. 5 dated 30th September, 2010 the amendment
has been made applicable with effect from 1st October, 2009 and shall
accordingly apply in relation to all cases in which proceedings are
pending before the Transfer Pricing Officer (TPO) on or after such date.
CBDT Notification No. 22/2010[F. NO. 142/5/2010-SO(TPL)]/SO
776(E), dated 8th April, 2010
As per section 90, the Central Government can enter into an
agreement with any country outside India or any “specified territory”.
Further Explanation 2 to Section 90 of the Act states that the Central
Government will notify the “specified territories”. The Central
Government vide Notification No. 22/2010, dated 7 April 2010
notified nine areas outside India as ‘specified territories’.
Name of the Country Territory
Bermuda a British Overseas Territory
British Virgin Islands a British Overseas Territory
Cayman Islands a British Overseas Territory
Gibraltar a British Overseas Territory
Guernsey a British Crown Dependency
Isle of Man a British Crown Dependency
Jersey a British Crown Dependency
Netherlands Antilles an Autonomous Part of the Kingdom of
Netherlands
Macau a Special Administrative Region of The
People’s Republic of China
CBDT Notification No. 25/2010-FTD-II/[F.NO. 500/124/97-FTD-II]/
S.O. 909(E), dated 20th April, 2010
The Central Government notified “Hong Kong Special Administrative
Region of the People’s Republic of China” as ‘specified territory’ for
the purposes of the Explanation 2 to S.90 of the Act.
13
Recent TIEAs between India and certain ‘Specified Territories’
As a result of theseabove referred notifications, the Central Government can initiate and negotiate agreements for exchange of information
(i.e. tax information exchange agreements (TIEA)) for the prevention of evasion or avoidance of income tax and assistance in collection of
income tax with these specified territories. Accordingly India has entered into a TIEA with the Bahamas, British Virgin Islands, Isle of Man and
Bermuda.

Specified Date of Remarks

Territory Signing
Bahamas 11th February, 2011 The agreement provides for sharing information, including exchange of banking and ownership
information. Although the information shared will be covered under the secrecy clause, it can be
shared with specified tax authorities or authorities concerned with determination of tax appeals.
Information can also be shared for other purposes with the prior consent of the giving party.
British Virgin 9th February, 2011 The agreement provides for sharing information, including exchange of banking and ownership
Islands (BVI) information, and also of past information in criminal tax matters. Though, the requesting state
has to provide some minimum details about the information requested.The information shared
Isle of Man 4th February, 2011 will be covered under the secrecy clause, it can be shared with specified tax authorities or
authorities concerned with determination of tax appeals (status of the secrecy clause with
Bermuda 7th October, 2010 BVI is unknown as the text of TIEA is yet not available).

Agreement for Avoidance of Double Taxation entered by India

Double Taxation Avoidance Agreements (DTAA) entered / notified by the Government are provided in the following table for quick reference:-

Country With Effective Date Withholding tax rates for Dividend, Interest, Royalties,
Fees for Technical Services Amendment
Finland (Revised) 1st April, 2011 Dividend - 10 per cent
Interest - 10 per cent
Royalties and FTS - 10 per cent
United Mexican 1st April, 2011 Dividend - 10 per cent
States (Mexico) Interest - 10 per cent
Royalties and FTS - 10 per cent
SAARC Member 1st April, 2011 The said agreement is a ‘limited’ multilateral agreement on avoidance of double taxation and
States multilateral agreement for mutual administrative assistance in tax matters.
The agreement provides taxation rules in the hands of professors, teachers, students who are
residents of a member State with respect to income earned in another member State.
Switzerland Awaited* The revised agreement contains provisions on the exchange of information in accordance with
(*Agreement signed date 30th August, 2010) the OECD standard, which are in line with the parameters decided by the (Swiss) Federal
Council.
In the case of dividends, interest, royalties and FTS, lowest withholding tax rate – which India
has with another OECD nation – will automatically apply to Switzerland.
Shipping and aircraftcompanies operating internationally would have to pay tax on their
profits only in their country of domicile.
Norway Awaited* Dividend, Interest, Royalties and FTS - 10 per cent
(*Agreement signed on 2nd February, 2011) The renegotiated DTAA have articles on: ‘Residence’ based on effective management
determined through mutual agreement procedure, ‘Associate Enterprises’,Exchange Of
Information, Limitation of Benefit, etc.

14
 INDIA BUDGET 2011
an analysis
On September 30, India and Mozambique signed a Double Taxation
Agreement (DTA). The text of the said DTAA is yet to be notified.
The following Social Security Agreements were entered into/notified
by India during FY 2010 – 2011:
Country Date of Signing Status
Hungary 4th Feb 2010 Not in Force
Switzerland 3rd Sept 2009 In Force from
29th Jan 2011
SU P R E M E C O U RT
Payments to non-residents would be subject to withholding
tax only if the income is chargeable to tax in India. (GE India
Technology)
Assessee was acting as distributor of imported, pre-packaged shrink
wrapped standardized software from various suppliers (including
Microsoft) outside India. The appellant effected the payment without
withholding tax therefrom on the understanding that the payment
does not constitute income chargeable to tax in India and accordingly,
no tax has been withheld. However, AO observed that the sale of
software included a license to use the software, payments made
therefore constitute royalty, which was deemed to accrue or arise
in India, and accordingly taxable in India. The High court accepted
the order passed by the AO. On appeal, the SC observed, the
payer is under obligation to withhold tax only if payment so made
is chargeable to tax in India, wholly or partly. Where the payment
made by the resident to the nonresident was an amount which was
not chargeable to tax in India, then no tax is deductible at source
even though the assessee had not made an application under section
195(2) of the Act.
Receipt of income in India attracts tax, irrespective of whether the
income accrued or arose in India or outside India. (Kanchanganga
Sea Foods Ltd)
The assessee, an Indian company, is engaged in sale and export of
seafood had obtained a permit to fish in the exclusive economic zone
of India. To exploit the fishing rights, the assessee-company entered
into an agreement chartering two fishing vessels, with a non-resident
company incorporated in Hong Kong. The agreement provided that the
charter fee shall be payable by way of 85 per cent of gross earning
from the fish-sales. The assessee contended that the non-resident
does not carry any activities in India which results in income accruing
to it India and there was no receipt of income in India as 85 per cent of
the catch, meant for the non-resident, was sold outside India and its
sale proceeds were also realized outside India. Further, the assessee
did not make any payment to the non-resident, but, instead, received
15 per cent of the value of the catch from the non-resident.
SC held that, from a plain reading of the provision of S. 5(2) it is
evident that total income of non-resident company shall include
all income from whatever source derived, received, accrues, arises
or deemed to be received, accrue or arise in India. In the present
case, the recipient was held to have gained control over 85 per
cent of the catch of fish only when it was apportioned at the
Indian port where it was valued for local levies and custom duty.
The recipient must have control over the receipts to constitute it
as income. Thus the non-resident company effectively received
the charter fee in India. Therefore, the receipt of 85 per cent of the
catch was in India and this being the first receipt in the eye of law
and being in India would be chargeable to tax u/s 5(2).
H IGH C OURT
Whether payments for using segment capacity in a transponder
for uplinking/downlinking data is taxable? (Asia Satellite
Telecommunications Co)
The assessee, a Hong Kong company, had two satellites called
AsiaSat-1 & AsiaSat-2 which were launched into space and
placed in geostationary orbit. The satellites did not use Indian
orbital slots nor were they positioned over Indian airspace.
The footprints of the satellites extended over several countries
including India. The assessee entered into agreements with TV
channels & others who desired to utilize the transponder capacity
available on the satellites to relay their signals. The assessee
claimed that since no operations were carried out in India, no
part of the income generated by it from the customers to whom
the aforesaid services are provided was chargeable to tax in
India. The AO took the view that the assessee had a “business
connection” u/s 9(1)(i) in India and hence revenue is attributable to
India on the ground that most of the channels were India specific
and the advertisement revenue was from India. On appeal, the
CIT (A) reversed the AO on the point of S. 9(1)(i) though he held
that the income was taxable as “royalty” u/s 9(1)(vi) holding that
the payment made was for use of a “process” and assessable
as “royalty” u/s 9(1)(vi). The same was confirmed by the tribunal
holding that the assessee had derived income from “lease of
transponder capacity” of the satellites which is taxable u/s 9(1)
(vi)(iv) of the Act. The HC, reversing the order of Tribunal, ruled
that such payments do not constitute royalty as the assessee does
not grant the customer a right to use the process of transmitting
signals/data under the arrangement. Further merely because the
footprint area included India and programmes were watched by
Indian viewers did not mean that the assessee was carrying out
business operations in India.
15
Reimbursement of travelling expenses of technicians of employees
deputed to establishment of Indian customer shall not be
chargeable to tax. (Krupp Udhe GmbH)
In the present case, the assessee had supplied compressor for
an ammonia storage tank. Since the compressors were found in
damaged condition, the assessee had deputed two of its technicians
to the Indian customer’s establishment. The consideration received
comprised of inspection fees and reimbursement of travel expenses.
The question was before the HC whether reimbursement of expenses
can be included in income and be subject to TDS.
The HC held that under no circumstances reimbursement of expenses
can be considered as revenue receipts and in the present case the
Tribunal had also held that the assessee received no amount in excess
of the expenditure incurred. The HC also referred to another case
wherein it was stated that sharing of expenses of the research utilized
by the subsidiary as well as the head office organization shall not be
considered as income assessable to tax in India. Interest u/s 234B is
not leviable where income of the assessee is subject to TDS.
Transaction of transfer of shares of a foreign company between
two non-residents having a sufficient nexus with Indian fiscal
jurisdiction, capital gains arising out of the same could be said to
accrue or arise in India. (Vodafone International Holdings B.V.)
Assessee, a non-resident company, acquired shares of another non-
resident company, the effect of which is transfer to assessee a capital
asset in India in the form of right to enter into telecom business in
India with controlling interest in a company situated in India. Show-
cause notice was issued to assessee seeking to treat the assessee
as in default for failure to deduct tax at source while making payment
to vendor. The HC held that though shares themselves are assets
but transfer of shares may also be a mode or a vehicle to transfer
some other asset. Jurisdiction to tax non-residents is based on the
existence of a nexus with India. Need for apportionment could arise
when source rule applies and the income can be taxed in more than
one jurisdiction. On the provisions of S. 195, the courts opined that
application of withholding tax (WHT) provision is not only restricted
to residents only but also has extra-territorial application. WHT
obligation is limited to the appropriate portion taxable in India. Once
nexus between the person sought to be taxed and India is shown to
exist, WHT provisions apply. WHT provisions are machinery provisions
which together with the charging provisions constitute an integrated
code under the Act. Application of WHT provisions depends on
examination of facts and circumstance of each case. Based on how
the assessee construed the transaction in the present case, the nexus
of the transaction was established by assessing the true nature and
character of a transaction. The label which parties may ascribe to the
16
transaction is not determinative of its character. The nature of the
transaction has to be ascertained from the covenants of the contract
and from the surrounding circumstances. Indian company (capital
asset situated in India), was at all times intended to be the target
company and a transfer of the controlling interest in Indian Company
was the purpose which was achieved by the transaction.Transfer of
share in an overseas company was merely a mode of effectuating the
goal. The transaction entailed the acquisition of diverse rights and
entitlements namely controlling interest in Indian Company, right to
do business in India, right to use brand in India etc, which constituted
capital assets in itself. The real taxable event is divestment or
relinquishment of the vendor. If there was no such divestment or
relinquishment, there would be no occasion for the income to arise.
Apportionment of the consideration lies within the jurisdiction of the
Assessing Officer during the course of the assessment proceedings.
Once the nexus with Indian fiscal jurisdiction is shown to exist, the
provisions of S. 195 would operate.
Hierarchical discipline should be observed while implementing
fiscal legislation, otherwise the exercise of powers by the tax
officer would be arbitrary. (Mckinsey & Company Inc)
Application of the assessee, a US company, for grant of a certificate
under S. 195(3) rejected by the Dy. Director of IT on the grounds that
a draft assessment order has been made and a demand has been
raised for one assessment year and secondly, that a demand is
outstanding for another assessment year under the mutual agreement
procedure (MAP). The assessing officer is not justified in rejecting the
application as the impugned order itself states that what has been
issued is a draft assessment order and that the matter in question is
pending before the Dispute Resolution Panel. As regards the second
circumstance, the object of the MoU between the Governments of
India and USA is to ensure the efficient processing of the MAP cases
by deferring assessments or by suspending collection of any amount
of tax including related interest and penalties which form the subject-
matter of MAP proceedings. Assessee has invoked the MAP and has
furnished a bank guarantee in pursuance of the provisions of the
MoU. Assessee having invoked the MAP, there is a consequential
suspension of the collection of tax demands and withholding taxes on
income under the MoU. It has been granted certificates under S. 195(3)
both before and after the said assessment order was passed. Thus,
the basis on which certificate under S. 195(3) is declined is contrary
to law and amounts to a patent disregard of the binding provisions of
the MoU and no statutory appeal is available against the impugned
order. Further, denial of certificate under S. 195(3), despite the grant
of such a certificate for nearly twelve years in the immediate past,
would have serious ramifications to the business operations of the
assessee. Thus, the impugned order declining the grant of certificate
 INDIA BUDGET 2011
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is quashed and set aside and the AO is directed to pass fresh orders
after giving an opportunity of being heard to the assessee.
AAR rulings are binding despite contrary rulings of AAR.
Assessment order following binding precedent is not amenable to
sec. 263 revision (The Prudential Assurance Company)
The assessee, a FII based in UK, applied for an advance ruling on
whether the profits arising to it from purchase and sale of Indian
securities was “business profits” and whether in the absence of a
‘permanent establishment’ in India, the said profits were chargeable
to tax under the India-UK DTAA. The AAR issued a ruling dated
30.4.2001 holding that the profits were “business profits” and that
they were not chargeable to tax in India in the absence of a PE.
Subsequently, the AAR took the contrary view in Fidelity Northstar
Fund that as a FII was prevented by SEBI regulations from trading in
shares, the profits arising to it was assessable as “capital gains” and
not “business profits”. Based on the said ruling in Fidelity Northstar
Fund, the DIT issued a notice u/s 263 in which the view was taken
that the subsequent ruling of the AAR was a “change in law” and the
ruling obtained by the assessee was no longer “binding” u/s 245S(2)
and that the assessment orders passed on the basis of the ruling
were “erroneous and prejudicial to the interests of the revenue”.
The assessee filed a writ petition to challenge the said notice and
it was held by HC that S.245S stipulates that an advance ruling is
binding on the applicant, the CIT and the authorities subordinate to
him in relation to which it was sought. S. 245S(2) postulates that the
ruling shall cease to be binding if there is a change in law or facts on
the basis of which the advance ruling has been pronounced. Once a
ruling has been pronounced by the Authority, its’ binding effect can
only be displaced in accordance with the procedure stipulated in law.
The DIT while applying AAR of Fidelity Northstar Fund ignored the
clear mandate of the statutory provision that a ruling was binding
only on the applicant and the revenue in relation to the transaction
for which it is sought. Further, the DIT could not have found fault
with the AO for having followed a binding ruling. Where the AO has
followed a binding principle of law laid down in a precedent which
has binding force and effect, his order cannot be termed “erroneous
and prejudicial to the interests of the revenue” and it is not open to
the DIT to exercise revisional jurisdiction u/s 263.
TRIBUNAL DECISIONS
Income from supply of ‘shrink-wrapped’ software assessable as
‘royalty’. A tax-treaty can be unilaterally overridden. (Microsoft
Corpration)
Till 31.12.1998, Microsoft Corporation, USA(“MS Corp”) directly
entered into agreements with Indian distributors for sale of Microsoft
products being “off the shelf”/ “shrink wrapped” software, on
principal to principal basis. The Indian Distributors, in turn, sold these
Microsoft products to re-sellers/consumers. The business model was
changed w.e.f. 1.1.1999. MS Corp granted Gracemac Corporation,
USA (“Gracemac”), a wholly owned subsidiary, an exclusive right
to manufacture and distribute Microsoft products (“MS products”).
Gracemac further granted a non-exclusive license to Microsoft
Operations Pte Ltd Singapore (“MO”) to manufacture and distribute
MS products. MO paid Gracemac royalty on each MS product sold.
MO entered into a distribution agreement with Microsoft Regional
Service Corporation, Singapore (“MRSC”) for distribution of MS
products in Asia, including India. The MS products were sold to the
end-users through resellers in India, appointed by MRSC. Importantly,
all the intellectual property in MS products vested with MS Corp and
the end-users signed an End-User License Agreement (“EULA”) with
MS Corp, which laid down the terms of use of the MS product. In the
case of MS Corp (till the change in business model), the assessee
accepted that income from licensing software to OEMs was “royalty”
though it argued that income from licensing software to distributors
was “sale of a copyrighted article” and not assessable in India for
want of a PE. In the case of Gracemac(after change in business
model), it was argued that as the royalty was received from MO,
the source of the royalty (though based on sales in India) was not in
India and consequently not assessable in India. In the case of MRSC,
it was argued that revenue was derived from sales of software to
independent distributors and not from licensing and the revenue
was not assessable to tax in India for want of a PE. The AO & CIT
(A) took the view that the revenue received by all three parties was
assessable as “royalty” under S. 9(1)(vi) as well as Art. 12 of the
India - USA DTAA.
The Tribunal held that the income received for supply of software
was assessable as “royalty” under s. 9(1)(vi) as a copyright subsisted
in a computer programme and it was also a literary as also a
scientific work. A computer programme was also a patent, invention
or process. As end-users had made payment for transfer of rights
(including the granting of a license) in respect of copyright, patent,
invention, process, literary or scientific work, the payment would be
in the nature of royalty. While holding so, the Tribunal distinguished
the decisions in the case of Tata Consultancy Services and Motorola
and refused to rely on OECD commentary stating that the same merely
contains the views of the authors and cannot be equated with the
court decisions or law. As regards Art. 12(3) of the India - USA DTAA,
the Tribunal held that the definition of the term “royalty” was identical
as that in A. 9(1)(vi) and there was no conflict between the Act and
tax treaty. Assuming there was a conflict between the Act and the
DTAA, Tribunal held that the proposition that the DTAA will prevail
over the Act was not infallible and that later domestic tax legislation
17
could over-ride treaty provisions if there was an irreconcilable
conflict. Accordingly, the payments received by MS Corp from end
users through distributors in respect of sale of computer software
is taxable as royalty u/s 9(1)(vi). As regards Gracemac, Tribunal held
that as end users had made payments for grant of license in respect
of copyright in computer programmes, the consideration was taxable
as “royalty” in the hands of Gracemac. However, as regards MRSC,
the Tribunal the income ought to have been assessed as business
income u/s 9(1)(i) as it had a “business connection” with distributors
in India.
[Subsequent to decision of MS Corp, Mumbai Tribunal pronounced in the
case of Reliance Industries Limited that once the computer software is put
onto a media and sold, then it becomes like goods and is not a patent or
invention. Thus, the payment made for purchase of software is not royalty
as the same is a purchase of copyrighted article and not a copyright. The
same view had also been taken earlier in the case of Velankani Mauritius
and Kansai Nerolac Paints before the decision of MS Corp.]
Royalty paid by Non-resident to another Non-resident is not
taxable if not related to and borne by PE in India. (SET Satellite
Singapore Pte)
Assessee, a tax resident of Singapore, entered into an agreement
with GCC, also a tax resident of Singapore, to obtain ‘rights’ to
transmit, broadcast, exhibit, perform, including cable programs and/
or otherwise distribute, make available to the public any moving
visual or audio visual representations and/or images of matches,
players or play in any event, the feed, the highlights, package and
any recording and other material by means of any media throughout
licensed territory of various countries including India.
Payments made by the assessee to GCC cannot be said to arise in
India under Art. 12(7) of the tax treaty since the payer i.e., assessee
is not a resident of India. As per the first limb of Art. 12(7) of the
tax treaty, royalties cannot arise in India, since the payer is not a
resident of India. Second limb of Art. 12(7) of the tax treaty deals with
a scenario where the payments are made by a non-resident, where
such non-resident has a PE in India. However, a mere existence of a
PE in India cannot lead to a conclusion that royalties arise in India
because in addition to the existence of PE, for royalties to arise in
India under Art. 12(7) of the tax treaty, it is essential that liability to
pay such royalties has been incurred in connection with and is borne
by the PE of the payer in India. There is no economic link between
the payment of royalties and the PE of the assessee in India. Such
economic link is entirely with the assessee’s head office in Singapore.
Thus, the payments to GCC cannot be said to have been incurred in
connection with the assessee’s PE in India. The PE in India was also
not involved in any way with the acquisition of the right to broadcast
18
the cricket matches, nor did the PE bear the cost of payments to GCC
hence the payments to GCC cannot be said to have been borne by the
assessee’s PE in India. Thus even if it is assumed that the payment for
broadcasting cricket constitutes royalty, such royalty does not arise in
India within the meaning of provisions of Art. 12(7) of the tax treaty.
Though foreign income-taxes not eligible for deduction u/s 37(1),
despite bar in DTAA, credit for State taxes to be given u/s 91 in
addition to Federal taxes. (Tata Sons)
The assessee in the present case had paid taxes under federal and
state laws of USA and claimed deduction u/s 37(1) and simultaneously
claimed credit for taxes u/s 90 and 91 of the Act, thus claiming a
double benefit. The Tribunal held that payment of foreign taxes is
appropriation of income and u/s 40(a)(ii) foreign taxes are also
covered. As a consequence of which the assessee is not entitled to
claim deduction for foreign taxes u/s 37(1). The Tribunal also held that
the India - US tax treaty restricts benefit under the treaty to federal
taxes. Thus the assessee can claim credit for federal taxes under the
tax treaty as envisaged u/s 90 and the assessee shall be entitled to
claim credit for state taxes u/s 91 of the Act.
Thin Capitalization rules not applicable in India. (Besix Kier Dabhol
,SA) (Tribunal)
Assessee, a Belgian company , set up project office in India for
executing the project of construction of fuel jetty and break water.
The PE raised the borrowing directly from the shareholders in the
ratio of their stake. The debt- equity ratio post restructuring was
248:1. The assessee claimed deduction in respect of interest paid
on the debt. The AO disallowed the claim on the ground of abnormal
debt-equity ratio and as if the interest has been paid to self. CIT (A)
upheld the order of AO. On further appeal, Tribunal, allowing the claim
of the assessee, observed that, in absence of “thin capitalization
rule” in India, it is not open for department to re-characterize debt
as equity for the purpose of considering whether or not interest on
loan is deductible and any attempt to neutralize thin capitalization
is contrary to the scheme of non-discrimination envisaged under
Art. 25(5) of the DTAA. It further observed that tax payer financial
structure, all the time, does not constitute colorful device unless such
financial structure prohibited by the Act or DTAA.
Income which has been assessed to tax in the hands of the non-
resident recipient cannot be assessed again in the hands of the
representative assessee. (Hindalco Industries Ltd)
Non-resident company A sold shares in Indian company to the assessee
and earned capital gain from sale of such shares. AO treated the
assessee company as an agent of A u/s. 163 contending that S. 163(1)
(c) is clearly attracted and mere deduction of TDS u/s 195 by assessee
 INDIA BUDGET 2011
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on payments made to company A will not deprive AO to treat assessee
as an agent of A and pass an order u/s. 163. CIT (A) upheld the view of
the AO. Tribunal held that there is no dispute on chargeability of income
derived by company A on sale of shares as capital gains of an Indian
company. Since the income so chargeable to tax was received by A from
assessee, therefore S. 163(1)(c) was clearly attracted. Further, the fact
that the agent had deducted tax u/s 195 will not be a bar to proceed
and pass an order u/s. 163 and since the law does not contemplate any
time-limit for initiating proceedings u/s. 163, it cannot be time barred.
However, it was held that assessment of capital gains having been
made in the hands of the non-resident principal, no assessment of such
capital gains could validly be made in the hands of the assessee being
an agent of non-resident.
Permanent establishment vis-a-vis construction or assembly
project. (J Ray Mcdermott Eastern Hemisphere Ltd.)
Assessee, a Mauritian company, was engaged in executing certain
installation contracts in two offshore fields in the Indian continental
shelf. Contracts were awarded by the same entity, directly or indirectly,
and the work was carried out at the same place, by them. AO contended
that in terms of such arrangement, provisions of the treaty were abused
by artificial arrangements, and for that reason alone, the time spent on
all the activities was required to be aggregated. Assessee contended
that the applicability of the threshold time-limit under Art. 5(2)(i) of
the India - Mauritius DTAA, takes into account the duration of the
activities of the foreign enterprise on a particular site or a particular
project or supervisory activity connected therewith, and not all the
activities in a tax jurisdiction as a whole. Thus, each of the building
site, construction project, assembly project or supervisory activities in
connection therewith is to be viewed on standalone basis. However,
CIT (A) upheld the view of AO and held that assessee has PE in India.
On appeal to Tribunal, it was held that in case of alleged artificial
splitting of contracts or other alleged modes of maneuverings to enter
into sham arrangements to defeat the provisions of the treaty, onus lies
on the Revenue authorities to establish the factual elements embedded
in such allegations. Merely because different construction, project or
supervisory activities are carried out at nearby physical locations, these
activities are not required to be seen in conjunction with each other.
There was no finding by any of the revenue authorities to the effect
that the three contracts executed by the assessee in two offshore fields
are inextricably interconnected, interdependent or could be seen as a
coherent whole in conjunction with each other. Thus, the aggregation
of time spent on various contracts was not required to be made, it was
to be examined whether time spent on a specific contract is more than
nine months or not. Accordingly, the Tribunal remitted the matter to CIT
(A) to ascertain the duration of each project on the basis of aforesaid
principles.
Whether deputation of personnel results in a permanent
establishment. (Tekmark Global Solution LLC)
Assessee, an American company, was selecting and offering
personnel to work under the control and supervision of an Indian
company LH in India. This was not a part of any technical services to
be rendered by the assessee to LH. Further, deputed persons for all
practical purposes were employees of LH and carried out the work
allotted to them by LH. Assessee had no control over the activities or
the work to be performed by the said persons and assessee recovered
actual salary payable to the deputed persons. Assessee contended
that since the services rendered by them are independent and not
under the control of the assessee, the deputed persons cannot be
considered as constituting a PE of the assessee in India. Further, they
stated that even assuming that there is a PE of the assessee in India,
there is no profit accruing from the activities in India as the assessee
is paid only the actual salary paid by it in advance to the deputed
personnel. Therefore, CIT (A) held that no income arose to the
assessee in India in the course of deputing personnel to LH. Assessee
having deputed personnel to an Indian company who work under the
control and supervision of the latter, the deputation cannot be treated
as part of any technical services to be rendered by the assessee to
the Indian company and, therefore, no income arose to the assessee
in India on reimbursement of actual salary of deputed employees by
the Indian company. Revenue appealed against the order of CIT (A).
Tribunal rejected revenue’s appeal and upheld CIT (A) decision.
Fees for Technical Services are taxable even if rendered outside
India. (Ashapura Minichem Ltd)
The assessee, an Indian company, entered into an agreement with
a Chinese company for bauxite testing services in its laboratories
(outside India) and for preparation of test reports. The assessee filed
an application u/s 195(1) in which it argued that as the services were
rendered outside India and the recipient did not have a permanent
establishment in India, the payments were not chargeable to tax
under the India - China DTAA and no tax was required to be withheld
at source. The AO took the view that the payments constituted “fees
for technical services” u/s 9(1)(vii) and Art. 12 of the DTAA and tax
was required to be withheld at 10 per cent. This was upheld by the
CIT (A). The assessee subsequently appealed to the Tribunal.
The Tribunal held that under the amended Explanation to S. 9(1), it
is no longer necessary that in order to attract taxability in India, the
services must also be rendered in India, utilization of these services
in India is enough to attract its taxability in India u/s 9(1)(vii) of
Act. As regards taxability under the India - China DTAA, Art. 12(4)
defines “fees for technical services” as the “provision of services
of managerial, technical or consultancy nature” by a resident of a
19
Contracting State in the other Contracting State. The argument of
the assessee that in using the words “in the Contracting State“, Art.
12(4) incorporates the “place of performance test” and negates the
“source rule” and that services rendered offshore are not taxable
was not accepted by the Tribunal for two reasons. Firstly, because
the expression “provision for services” is wider than the term
“provision for rendering of services” and covers services rendered
in the one State but used in the other State. Secondly, because such
interpretation will render Art. 12(6) redundant. It held that deeming
fiction under Art. 12(6) provides that irrespective of the situs of
technical services having been rendered, the fees for technical
services will be deemed to have accrued in the tax jurisdiction in
which person making the payment is located.
Outsourcing of services to an Indian affiliate constitutes PE in
India. (eFunds Corporation)
Assessee, a US company, entered into contracts with its clients for
providing IT enabled services and assigned or sub-contracted the
work to its wholly-owned Indian subsidiary (EFI) for execution. It has
also entered into master subcontractor agreement, financial shared
services agreement and call centre agreement with EFI whereby the
latter would provide various services to the assessee. Assessment
proceedings for AY 2002 - 2003 for the assessee were completed
wherein AO held that assessee had business connection under
domestic tax law and also PE in India under Art. 5(1) and Art. 5(2)(i)
of India - US tax treaty and attributed income to the PE based on the
proportion of written down value of the gross global assets vis-à-vis
the assets in India. The AO also initiated re-assessment proceedings
for certain tax years prior and subsequent to AY 2003 - 2004. The
assessee invoked MAP proceedings under Art. 27 of the tax treaty
for AY 2002 - 2003. While the US Competent Authorities did not
agree on technical merits that assessee had PE in India, a method
of attribution of income was prescribed to avoid double taxation.
The AO accordingly finalized the re-assessment proceedings for the
years prior and subsequent to AY 2002 - 2003 and concluded that the
assessee had business connection/ PE in India and also attributed
income based on the methodology prescribed in the MAP order.
The CIT (A) provided partial relief to assessee by recommending a
different method for attribution.
On appeal, Tribunal held:
• Assessee had business connection in India: Since the
assessee either assigned or sub-contracted to eFunds India
the contracts entered into by it with its clients, the assessee
and EFI therefore came under legal obligation to provide
services to the clients. Considering FAR between the assessee
and EFI, it was clear that EFI did not have the requisite assets,
20
software and database needed for providing the services. EFI
also did not bear any significant risk. Further, the corporate
office of EFI oversaw the operations of eFunds group entities
globally and the sales team undertook marketing efforts for
affiliates of the group. These activities were carried out on
a continuous basis over a period and thus, the assessee had
business connection in India.
• Assessee had PE in India: Referring to the Technical Explanation
on the India - US tax treaty issued by US Department of Treasury,
the Tribunal observed that the articles of the tax treaty are
differently worded as compared the OECD and prescribed a
lower threshold with respect to existence of PE. Based on
other facts of the case, Tribunal held that there existed a PE
of the taxpayer under Article 5(1) of the DTAA in respect of
the back-office operations and software development services
being carried by EFI. Further the assessee also had PE under
Article 5(2)(i) of the DTAA since they maintained premises as
a sales outlet in India. Based on the nature of the activities
carried on by EFI and relying on the disclosures made in
the global financial statements, the Tribunal also came to
a conclusion that the activities cannot be considered to be
preparatory and auxiliary as they constituted the core income
generating activities.
• Application of MAP to other years: Since the assessee could not
point out any change in the business model as compared to the
years under MAP, it held clear that assessee had PE in India in
accordance with MAP resolution.
• Method of attribution of profits to PE: Tribunal held that the profits
attributable to the PE were to be worked out by applying the
proportion of depreciated cost of Indian assets to global assets,
including EFI’s assets, to the aggregate of global profits and then
reducing the resultant figure by the assessed profits of EFI.
Gains arising from disposal of assets would be taxable in the PE
State even if they are realized after the PE ceases to exist. (Cartier
Shipping Co. Ltd)
Assessee was non-resident company owning a jack up rig which was
given on hire to an Indian company for used in drilling, prospecting
and production of hydrocarbons in the offshore oil fields. The rig
constituted a PE of the assessee in India under the India - Mauritius
DTAA and consequently income earned was offered to tax in India on
net basis after claiming depreciation on rig. During the relevant year,
assessee’s charter agreement was terminated and the assessee vide
an agreement of sale dated 15.09.1997 sold the rig to a non-resident
company which took over the same on 06.10.1997. The assessee
contended that income/capital gains arising on sale of rig was not
assessable in India as the sale of the rig took place outside India.
 INDIA BUDGET 2011
an analysis
The Tribunal held that the PE is to be treated as hypothetically
independent of the non-resident. Also that the assets of the PE are
to be recognized as such and the profit or gains on sale of assets of
the PE have to be treated as profits of the PE. The gains or losses
on sale of PE assets have to be treated as “accruing or arising
in India” irrespective of whether the assets were sold in India or
outside India. The income from sale of rig can also be deemed to
have accrued or arisen in India u/s 9(1)(i) as the rig was part of a
“business connection” and “an asset or source of income” in India.
The argument of the assessee that the gains on transfer of PE/
PE assets are taxable only if the PE exists were not acceptable by
the Tribunal on the reasoning that then the provision for taxability
of gains on PE/ PE assets in the source country will be rendered
redundant. The provisions can also then be avoided by simply
deferring the transfer till the closure of the PE. The Tribunal further
held on facts that the argument that the sale of the rig took place
on 06.10.1997 outside India and after termination of the charter is
not correct because the record showed that the rig was first sold
and as a consequence the charter was terminated and the rig was
moved to international waters for delivery to the buyer and that it
was not a case where the business came to an end, the rig was
moved to international waters and then, by an unconnected event,
the rig was sold.
Business Profits of a Permanent Establishment are not taxable on
gross basis as Fees for Technical Services. (Rio Tinto Technical
Services)
The assessee, an Australian company, set up a permanent
establishment (PE) in India to render technical services for
evaluation of coal deposits and conducting feasibility studies for
transportation of iron ore. The AO accepted that the income was
business profits under Art. 7 of the India-Australia DTAA but held
that as no rate of tax was prescribed in the DTAA and the nature
of the income was “fees for technical services” and the income
would be assessable u/s 115A & 44D of the Act. This was upheld
by the CIT (A).
On further appeal by the assessee, Tribunal held that the assessee
was not rendering simple technical or consultancy services but was
rendering specific activities through the PE. Accordingly, Art. 12 of
the tax treaty was not applicable and the income attributable to a PE
was assessable under Art. 7 of the DTAA. Under Art. 7(2), the PE was
deemed to be a wholly independent enterprise and under Art. 7(3),
deduction in accordance with and subject to the law relating to the
tax in India was allowable. Since Art. 7 of the tax treaty came into
play, S. 9(1)(vii) was not applicable. Art. 7(2) of the DTAA specified
that the PE in India was to be treated as a wholly independent
enterprise in India, and therefore S. 44D and 115A would not apply
in such a case.
Maintenance of stock by customer does not constitute a PE of
foreign enterprise in India. (Airline Rotables Ltd)
The assessee is a company in UK provides spare parts and component
support to aircraft operators. The assessee entered into an agreement
with Indian customer to provide such services. Under the agreement,
the assessee received consideration for repairing and overhauling the
components and for use and right to use of replacement components.
The assessee maintained stock of replacement components with
its customer in India along with its main depot in UK. The customer
held goods as bailee and the stock continued as property of the
assessee at all times. The Revenue contended that there exists a PE
and attributed 10 per cent of gross receipts as taxable in India. The
question before the Tribunal was whether maintenance of stock with
customer constitutes a PE.
The Tribunal held that for a fixed place PE to exist it should satisfy the
following three criteria namely, (1) existence of physical location, (2)
right to use that place, (3) carrying out business through that place.
In the present case the assessee did not have a sole right to use
the place. The stock was under the control of its customer. Thus this
maintenance of stock with customer did not constitute a fixed place
PE. With regards to agency PE, the Tribunal held that the stock was
held by the customer for stand by use and not for delivery. Further,
no business of the assessee was carried out through the agent since
maintenance of stock with the customer is the end result of the
assessee’s business and not an intermediate step to get the business.
Thus the assessee does not have a PE in India and hence no income
can be attributable to the alleged PE in the present case. However the
Tribunal held that though the profits are not taxable under Art. 7 of
the India – UK DTAA, taxability is required to be examined under Art.
13 of the tax treaty. The matter has been remanded to first appellate
authority for this limited aspect.
Attribution of profit to permanent establishment. (Rolls Royce PLC)
The taxpayer is a company incorporated in the UK engaged in the
business of supplying airplane engines and spare parts to Indian
customers. The taxpayer’s UK subsidiary, Rolls Royce India Limited
(RRIL), has a branch office in India which is engaged in the business
of providing certain support services to the taxpayer on a cost-plus
basis. In its earlier order, the tribunal held that the taxpayer had
a PE in India in the form of a fixed place through which business or
enterprises wholly or partly are carried out and premises was used as
a sales outlet for receiving or soliciting orders and agency PE through
RRIL. Assessee filed an application for rectification of order passed by
21
the tribunal on the grounds that Tribunal did not apply the principle
outlined by the SC in the case of Morgan Stanley and an administrative
circular issued by Indian tax authorities, which concluded that where a
taxpayer had a PE that was remunerated on an arm’s length basis, no
further income was attributable to the taxpayer. The Tribunal reiterated
that since the activities of a PE (branch of a UK affiliate) went beyond
the terms of a support services agreement and the taxpayer’s sales to
Indian customers were not secured entirely through the services of
this branch PE but by assigning personnel to India, resulting in a fixed
place PE, the remuneration of the branch PE on a cost-plus basis under
the support services agreement did not fully represent the value of the
profits attributable to the taxpayer’s PE in India.
Though foreign artistes are chargeable to tax in India, their
agents are not in the absence of a PE. (Wizcraft International
Entertainment)
The assessee, an event organizer, entered into an agreement with
“Colin Davie Artiste Services”, a UK company, under which the latter
agreed to procure renowned foreign entertainers like “Diana King” &
“Shaggy” for performances in India. The assessee agreed to pay a fee
to the entertainers as well to Colin Davie and to reimburse expenses
incurred. In respect of the fees paid to the entertainers, the assessee
accepted that the same was chargeable to tax in India under Article 18
of the India-UK DTAA and deducted tax at source u/s 195. However,
in respect of the fees paid to Colin Davie and amounts paid towards
reimbursement of expenses, the assessee argued that the same were
not liable to tax in India. The AO took the view that as the payment
to Colin Davie was high, it was actually meant for payment to the
entertainers. He also held that the nature of services agreed to be
rendered by Colin Davie were such that it could not be performed
without having a presence in India. On appeal, the CIT (A) accepted
the stand of the assessee. On appeal by the department to tribunal it
was held that the contention of the AO that the entire consideration
including the fee to be paid to Colin Daive is in fact fees payable to
the artiste for performance in India is not substantiated. On the other
hand, it is well known that internationally reputed performers are not
easily approachable and to discuss with them about performing in
India, time schedule, structure of the show/concert, venues, itinerary,
fees etc requires good business negotiation and persuasive skill apart
from accessibility. Accordingly, agents, who act as a link and who have
acumen and skills to negotiate with such artists/performers are required
to be engaged and paid fees. As Colin Davie was not a performer, his
income was not covered under Article 18 of the DTAA but was covered
by Article 7 and as the service was rendered outside India and there
was no PE, the same was not assessable to tax in India. Even under
the Act, commission paid to agents for services rendered outside India
is not chargeable to tax in India and there is no obligation to deduct
22
tax u/s 195. As regards payment made towards reimbursement of
expenses, the law is well settled that the same is not chargeable to tax
and there was no obligation to deduct tax at source.
Professional Firms can have a ‘service PE’. The words “indirectly
attributable to the PE” encompass the “force of attraction”
principle and even services rendered offshore for Indian projects
are assessable in India. (Linklaters LLP-Mumbai)
Assessee, a UK based law firm, rendered professional services to
clients in India and also from outside India. Lawyers were sent to
India for rendering of service whose aggregate period of stay was
more than 90 days. Assessee argued that there was no PE and that
since its income fell under Art. 15 of India – UK DTAA which applied
only to individual and not firms, its entire income including income
arising from work done in India was not taxable in India. The AO
took the view that as the assessee had furnished services in India for
more than 90 days, it had a PE under Art. 5(2)(k) of the tax treaty. On
the quantum, he held that the entirety of the invoices raised by the
assessee was assessable in India. On appeal, the CIT (A) upheld the
existence of the PE though he held that only the income attributable
to the PE was assessable to tax.
On further appeal before the tribunal, as regards taxability under the
domestic law, it held that in view of the retrospective amendment
to S. 9(1) by the Finance Act, 2010, mere utilization of the services
in India was sufficient to attract taxability in India. Even though no
question was raised about entitlement of assessee to tax treaty
benefits, Tribunal held that the assessee was eligible to the benefits
of treaty as long as entire profits are taxed in UK whether in the hands
of firm or individual partners. Also Art. 5(2)(k) was on stand-alone
basis and does not require fixed place of business to exist, for a PE
to be created provided threshold time period of more than 90 days as
prescribed was met. Further, it held that while professional services
rendered by an individual are governed by Art. 15, professional
services rendered by an enterprise are governed by Art. 5(2)(k) read
with Art. 7. The argument of the revenue that by virtue of Art. 7(2),
the PE must be assessed by taking the value of services rendered by
the PE at the market value of such services in India and not the price
at which the assessee billed its’ clients was not acceptable since
the fiction of hypothetical independence in Art. 7(2) was confined to
a PE’s transactions with its head office and branches and could not
extend to transactions with third parties. Accordingly, the revenues
earned by the assessee are to be taken at actual figures and no
adjustments would be permissible in the same. Further, as regards
the quantum of profits attributable to the PE, Tribunal referring to the
language of Art. 7(1) held that indirect attribution to PE incorporates
the force of attraction principle. Thus services rendered by assessee
 INDIA BUDGET 2011
an analysis
to its clients in India even where they were not rendered by PE were
to be regarded as indirectly attributable to the PE and thus taxable
in India.
DECISIONS OF THE AUTHORITY FOR ADVANCE
RULING
Transfer pricing provisions would not be attracted to the transfer
of shares of an Indian company by a Bahraini company, to its
subsidiary in Cyprus without any consideration as no capital gains
would be chargeable to tax in India on such transfer of shares.
(Amiantit International Holding Ltd)
The applicant, a Bahraini company, proposed to transfer shares
held by it in an Indian group company in favour of its subsidiary in
Cyprus without stipulating any consideration therefor, as a part of
reorganization of business of the group. The question before AAR
was whether the applicant was liable to tax in India in relation to
the such proposed transfer of shares and whether transfer pricing
provisions were applicable in such a case?
The contention of the Revenue that the charge under S. 45 is squarely
attracted and that the mere fact that money consideration has not
passed would not put the transfer out of the domain of S. 45 was
not accepted by AAR. It held that the possibility of the applicant
improving its overall business by virtue of reorganization and making
better returns in near or distant future could hardly be regarded as
a consideration accruing or arising to the applicant when he had
no right to receive a definite or an ascertainable amount or benefit
from the transferee. It also held that the Revenue failed to explain
as to how the overall objectives of reorganization and the resultant
changes in investment could be evaluated in terms of money. Nothing
in the form of money or money’s worth or capable of being turned into
money would accrue or arise to the applicant on the date of transfer.
If the ‘consideration’ was incapable of being valued in definite terms
or it remained unascertainable on the date of occurrence of taxable
event, question of applying s. 45 r/w s. 48 did not arise. Relying
on the decision of B.C. Srinivasa Setty, it concluded that applicant
was not liable to tax in India in relation to transfer of shares when
the computation mechanism failed under the provisions of the Act.
Further, relying on the decision of Re Dana Corporation, consequently,
the AAR held that transfer pricing provisions in Chapter X are not
attracted.
Reimbursement of expenditure incurred for R&D under a cost
sharing arrangement cannot be treated as royalty and shall not be
liable to tax in India where no services are being rendered and all
parties to the arrangement shall have free access to the fruits of
R&D. (ABB India)
The applicant, ABB India is part of ABB Group, wherein ABB Research
Limited, Zurich (‘ABB Zurich’) coordinates and directs all basic R&D
for the group. ABB Zurich receives a coordination fee from each
participating ABB entity for its role as administrator and coordinating
agency under the Agreement. The applicant in the present case
wished to participate in the cost contribution agreement with ABB
Zurich. None of the personnel of ABB Zurich are required to visit
India for rendering any work. The entire cost of the basic R&D shall
be allocated amongst the participants based upon an allocation
key. Before the AAR the question was as to payment made by the
applicant to its group entity for cost sharing of basic R&D activities
amount to royalty.
The AAR held that ABB Zurich was not rendering any services of
technical or consultancy in nature. Further, no payment was made by
the applicant in consideration of conferment of any rights in respect
of any intellectual property rights, knowledge, data, and technical
experience. All the participants to the agreement are entitled to
royalty free access to information, IPR’s generated out of the basic
R&D and ABB Zurich does not have a right to withhold information/
results from the participating entities. Any licence fee derived by ABB
Zurich from limited commercial exploitation of licences would be
used to reduce the overall amount each participant should contribute
under the agreement. ABB Zurich merely acts coordinating agency
and receives coordination fee, which is taxable in India and the same
is not disputed by the applicant.
Hire charges on dry lease arrangements not taxable in India if the
transaction is not concluded in India. (Seabird Exploration FZ, LLC )
The applicant (tax resident of UAE) engaged in the business of
rendering geophysical services to ONGC (tax resident of India), entered
into bareboat charter agreements with various vessel providing
companies (VPC). Applicant filed a withholding tax application
under S. 195 of the Act for payments due to VPC requesting for a nil
withholding tax order since VPC do not have any income chargeable to
tax in India. However, the AO passed an order directing the applicant
to deduct tax at source @ 4.224 per cent of gross payments being
income computable under s. 44BB of the Act.
The AAR held that mere physical presence of the non-resident’s
vessel in the territorial waters of India pursuant to the hiring of the
vessel by the applicant did not, without anything more, constitute a
PE. Non-resident owner of the vessel did not indulge in any business
operations in India. Thus, no income has accrued or arisen to the
owner of the vessel by reason of any business connection in India. A
hire transaction is completed by execution of the document, i.e., the
agreement for letting out the movable property followed by delivery
23
of thing hired. The stipulations in the present agreement specifically
contemplate delivery of the vessel, at any port in the world. Income in
the case of movable property arises at the place where the property
is delivered to the hirer unless there are any special stipulations.
Income in respect of those vessels delivered in India has accrued in
India and hence taxable in India. If the entire transaction is concluded
outside India the income is not accruing or arising in India. Even if the
vessel owner carried out inspection of the vessel in India to ensure
its proper maintenance by the applicant, that cannot be considered to
be an income triggering business operation in India. Vessel providing
companies is not concerned with the place of usage of the vessel by
the applicant. Thus income derived by the applicant by hiring vessels
under global usage bareboat charter agreements is to be deemed to
have accrued or arisen in India only in the cases where the vessels
were delivered or are deemed to have been delivered to the applicant
in India and not in the cases where the bareboat charter agreement
took place outside India and delivery also took place outside India.
Since the hire charges were covered by the special provision and the
‘royalty’ definition in the Act excludes such amounts referred to in
the special provision from its ambit, the hire charges cannot be taxed
as royalty.
Provision of S. 115JB (Minimum Alternative Tax) is not applicable
to a foreign company which does not have presence or PE in India.
(TimkenCompany)
Timken Company, an applicant-US based company, is a leading
manufacturer of engineered bearings, alloys etc. holds significant
stake in Timken India which was initially set up in Joint Venture with
TATA Iron & Steel Company (TISCO). As a part of restructuring plan,
an applicant proposed to transfer his stake to another group company
in Mauritius. The shares were held by the applicant for more than
12 months. Applicant took the stand that proposed transaction will
not attract capital gain taxation in India if the STT is paid on the
said transaction. Issue posed before the AAR was, whether MAT
provisions are applicable to a foreign company having no physical
business presence or PE in India. AAR ruled that S. 115JB of the Act
is not apply to foreign company which does not have presence or PE
in India, since a foreign company is not under obligation to prepare its
world account applying the provision of S. 210 of the companies Act.
Income from trading in derivatives is in the nature of business
income (Royal Bank of Canada)
The applicant is a company incorporated in Canada and is engaged
in business of banking and other financial services. It also trades in
securities including derivatives. The applicant is registered as an FII in
India and maintains its books of accounts as per Canadian accounting
principles, wherein profits from trading in derivatives are treated as
24
business profits. Under the Act, FII are subject to special provision
in respect of income derived from securities. The primary question
before AAR was, whether income from trading in derivatives be
classified as business income under the provisions of the Act or India
– Canada tax treaty and whether income from proposed transaction
in shares or other securities in the nature of business income. The
AAR held that the income from trading in derivatives was in the
nature of business income. This can be seen from the volume and
the frequency of the derivative transaction. It also placed reliance on
its earlier rulings wherein income from trading in exchange traded
derivative was in the nature of business income. In absence of PE in
India, such income was not taxable in India. In respect of proposed
transaction of dealing in shares, the character of such transaction
would be based on the treatment given in the books of account and
based on the actual pattern of dealing in such transaction.
India-Mauritius tax treaty benefits cannot be denied on the ground
that assessee is a subsidiary of a USA Corporation. (E*Trade
Mauritius Ltd)
The applicant, a resident of Mauritius, was a subsidiary of a USA
company. It received capital contribution and loans from the USA
parent which were used to purchase shares in ILFS, an Indian
company. On sale of the shares, the applicant earned capital gains
which were chargeable to tax under the Act. However, under Art. 13(4)
of the India - Mauritius tax treaty, such gains were not chargeable to
tax in India. The applicant filed an application for advance ruling on
the question whether in view of the said Art. 13(4), the gains were
chargeable to tax in India. The revenue resisted the application on the
ground that though the legal ownership ostensibly vested with the
applicant, the real and beneficial owner of the capital gains was the
US Company which controlled the applicant and the applicant was
merely a facade made use of by the US holding Company to avoid
capital gains tax in India.
In light of SC decision in case of Azadi Bachao Andolan, the AAR
held that tax avoidance was not objectionable if it was within the
framework of law and not prohibited by law. Further, it held that by
virtue of Circular No. 789, dt. 13th April, 2000 which had been upheld
by the SC, the tax residency certificate issued by the Mauritius
authorities was a presumptive evidence of the beneficial ownership
of the shares and the gains arising therefrom, even if it did not give
rise to a conclusive presumption.
On facts, it held that as all legal formalities for purchase of the
shares and their subsequent transfer had been gone through and the
consideration had been received by the applicant, it could be said
that the capital gain had not arisen to the applicant but to its holding
 INDIA BUDGET 2011
an analysis
company based in USA simply because the source of funds for the
purchase of shares was traceable to the latter or that it had played
a role in suggesting or negotiating the sale or that the consideration
ultimately had gone to that US Company in the form of dividends or
diminution of capital. The applicant was thus not liable to pay tax in
India on the capital gain in respect of the transfer of shares by virtue
of Art. 13(4) of the Indo - Mauritius DTAA.
Payments for referral services cannot be termed as royalty/fees
for technical services. (Real Resourcing Ltd)
The applicant was a company incorporated in the UK. The applicant
provided recruitment services (placing candidates with an Indian
company) as well as referral services (referring potential Indian
candidates to a recruitment company based in India). The applicant
had an address in New Delhi which was a virtual office wherein the
applicant had rented use of the address and telephone numbers in New
Delhi without any actual office space. The applicant had no physical
presence in India. The question before the AAR was whether the
payment received by the applicant from the Indian clients was liable
to withholding u/s 195 of the Act and/or under India – UK DTAA.
The AAR held that collecting data, analyzing it and making a database
for providing information on suitable candidates for recruitment was
in the nature of consultancy services but it could not be considered to
be ancillary and subsidiary to the enjoyment/application of the right
or information referred to in the India-UK tax treaty. By giving access
to the data base, it could not be said that the information concerning
industrial, commercial or scientific experience would be transmitted
by the applicant to the recruiting agencies. Consideration for
providing information concerning industrial, commercial or scientific
experience basically involved the sharing of technical know-how and
experience which was not the case here and hence the payment for
referral fees was not in the nature of royalties. Further, taking steps
to make available the experience and skill of candidates available for
recruitment did not at all fall within the ambit of “making available”
the technical knowledge and experience of the service provider and
thus the payment for referral fees could also not be in the nature
of fees for technical services. It further held that catering to the
function of referring potential Indian candidates to the Indian based
recruitment company without creating any commitment to recruit
them did not, without anything more, give rise to an inference of
PE. The address in New Delhi was basically a virtual office and was
given so as to serve as a contact point and for routine work of an
inconsequential nature. On such facts, they could not have created a
PE and in absence of PE, the same could also not be taxed also under
Art. 7 of India – UK DTAA.
TRANSFER PRICING
Whether profit before interest and tax (‘PBIT’) is to be adopted
as profit level indicator (‘PLI’) for TNMM analysis or Profit before
Depreciation Interest and Tax (‘PBDIT’). (Fiat India Pvt. Ltd)
Assessee, Fiat India Pvt Limited, is engaged in the business of
manufacturing and selling of passenger cars and trading of spare parts.
Assessee adopted TNMM and made comparability adjustments viz. under
utilization of capacity, higher incidence of octroi and excise duty (due to
slow moving stock), low volume from otherwise profitable spare parts
business, relatively higher employee salary costs due to underutilization.
TPO considered PBDIT as the PLI and accordingly made adjustment. In
response, assessee sufficiently explained and demonstrated material
differences in the facts of the assessee and comparable companies.
Assessee being in asset intensive industry, depreciation should be
considered for the purpose of computing the operating margin to lead
to a meaningful outcome. Hence, PBIT was considered as the PLI .The
Tribunal has allowed adjustments made to the assessee’s financial data
as against the financial data of comparable companies as required by
Rule 10(B)(1)(e)(iii) of Income Tax Rules, 1962.
Whether quantity difference, geographical difference, customer
profile and survival strategy in a competitive market are to
be taken into consideration for determining ALP and whether
purchase price for the AE could be more than its selling price.
(Dufon Laboratories)
Assessee, engaged in the business of manufacturing a specialized
chemical sold such specialized chemical to its AE in USA in various
lots. In the same FY, assessee also sold similar chemical to third
parties in USA, Taiwan and Korea. Assessee adopted CUP method
comparing the prices with unrelated party in USA. Transaction with
unrelated party in Taiwan and Korea considered as stray transactions
by Assessee. TPO accepted CUP method by considering mean of the
entire sale made to third parties (USA, Taiwan and Korea). Assessee
contended that the factors such as volume, geographical location,
etc. were not considered by the TPO while making a comparability
analysis. On appeal, CIT (A) held that the new legislation was to curb
tax avoidance by abuse of transfer pricing and under CUP Method,
the price of the goods or services is directly compared with the price
in uncontrolled transaction under similar conditions. Therefore, CIT
(A), held that the AO had worked out a price, which was more than
the actual price paid by all its customers to AE, a classical paradox
where the basic purchase price from assessee was more than selling
price for AE and accordingly deleted the additions made by TPO. On
appeal, Tribunal upheld CIT(A) view, considering adjustments on
account of quantity difference, geographical difference, customer
profile and survival strategy in a competitive market are to be taken
into consideration for determining ALP because a) volume sold is
25
a significant factor in fixing the price, b) geographical situations in
several ways influence the transfer pricing, c) difference in client
profile is important factor and d) dependence on AE for capturing and
maximizing profits in flourishing markets was relevant.
Whether AO is justified in levying penalty merely on the ground
of adopting different method and adjustments made on account of
the difference in the methods followed. (Firmenich Aromatics)
In the present case, assessee had certain transactions with its AEs.
On reference by AO, TPO applied CUP Method in place of TNMM
Method applied by the assessee. The difference in the amount
arrived at by the TPO on account of application of CUP Method was
added to the income and accordingly additions were made. Further,
AO invoked the provisions of S. 271(1)(c), holding that the assessee
had furnished inaccurate particulars of income to conceal the
taxable income. On appeal, CIT(A) agreed with the assessee that the
disallowance of amounts does not amount to furnishing inaccurate
particulars, and additions made to the ALP on account of difference of
opinion in selecting the method of computation does not tantamount
to furnishing inaccurate particulars of income. Revenue appealed
against CIT(A), wherein Tribunal dismissed revenue’s appeal stating
that difference in method adopted by assessee and TPO can only be
considered as bona fide difference of opinion which cannot lead to
levy of penalty u/s 271(1)(c).
Pass-through costs and recoveries are to be excluded in computing
operating profits and costs under TNMM. (Cheil Communication
India Private Limited)
The assessee, a wholly owned subsidiary of Cheil Communications
Inc. Korea, was engaged in providing advertising, communication and
other related services to its AEs. The assessee facilitated placements
of such advertisements on hoardings. For this purpose, assessee made
payments to third parties (advertisement agencies, printing presses,
etc.) for renting of advertising hoardings, air -time on television, etc.
The assessee made the payments on behalf of its clients (AEs) to
these third parties only upon the receipt of an equivalent amount
from its client on a back to back basis. Such third party payments did
not represent any value-added functions undertaken by the assessee
since the costs were in the nature of pass through costs i.e. the costs
of renting advertising space on behalf of the AEs. The assessee during
the proceedings before the TPO substantiated its stand by stating that
the corresponding costs were disclosed net of pass - through costs in
its books of account and hence the assessee had computed the net
profit margin accordingly. TPO considered gross receipts as operating
revenue and included corresponding gross costs (including the pass
through costs) as part of the operating expenses in the taxpayer’s
profit and loss account to arrive at the net profit margin. On appeal,
26
the Tribunal held that such “Pass-through costs and recoveries” are to
be excluded in computing operating profits and costs under TNMM.
If commercial transaction is at arms’ length, no transfer pricing
addition required for non-charging of interest on overdue debt.
(Nimbus Communications Ltd)
The assessee had an “international transaction” with its AE because
of which it was due to receive payment which was overdue. No
interest was charged on the said dues. The TPO took the view that
charging of interest on outstanding balances after about 30 days was
the expected normal ALP and made an adjustment on that account
charging the notional interest calculated at 2.19 per cent (i.e. 30 days
LIBOR). CIT (A) confirmed TPO’s contention. On appeal to the Tribunal,
it was held that a TP adjustment can be made u/s 92 in respect of
an “international transaction”. A continuing debit balance is not an
“international transaction” per se but is a “result” of the international
transaction. A continuing debit balance reflects that the payment, even
though due, has not been made by the debtor. It is not necessary that
a payment is to be made as soon as it becomes due. Many factors,
including terms of payment and normal business practices, influence
the fact of payment in respect of a commercial transaction. It was
emphasized that unlike a loan or borrowing, it is not an independent
transaction which can be viewed on standalone basis. What has
to be examined is whether the commercial transaction is at arms
length. The payment terms are an integral part of any commercial
transaction and the transaction value takes into account the terms of
payment such as permissible credit period as well. Even the residuary
clause in the definition of ‘international transaction’ i.e. “any other
transaction having a bearing on the profits, incomes, losses or assets
of such enterprises” does not apply to a continuing debit balance as
there is nothing on record to show that as a result of not realizing
the debts from the AE there has been an impact on profits, incomes,
losses or assets of the assessee. Further, when an ALP is made in
respect excessive credit period allowed under the CUP method,
the comparable has to be dues recoverable from a debtor and not
a borrower. The adoption of 30 days LIBOR is not justified because
LIBOR is relevant only in the case of lending or borrowing of funds
and not to commercial over-dues. Assuming it as an ‘international
transaction’, CUP method (internal or external) should have been
applicable.
(However, contrary view has been taken by Bangalore Tribunal
in case of Logix Micro Systems Pvt. Ltd. wherein it was held
that even if commercial transaction is at arms’ length, debt
overdue for long period attracts transfer pricing interest.)
CUP ALP of slump sale should be determined with valuation report
and failing that on IT WDV but not on Company law WDV. (Intel
Asia Electronics Inc)
 INDIA BUDGET 2011
an analysis
The assessee, a foreign company with a branch in India, decided to
close down the branch and transfer all assets and liabilities of the
branch as a going concern to its AE in India. The consideration was
to be determined as the difference between the value of assets and
liabilities in the books of the assessee. For transfer pricing purposes,
the assessee adopted the CUP method and obtained a valuation report
which computed the ALP of the assets & liabilities. The TPO rejected
the valuation on the ground that it was arbitrary and held that the “book
value” of the assets and liabilities should be taken to be the ALP. On first
appeal CIT (A), confirmed the view of TPO. On appeal to the Tribunal,
it was held that the CUP method for determining the ALP is suitable
when goods of a similar type are sold by independent enterprises. In
an isolated transaction of sale of the PE as a ‘going concern’ to the
AE, there are no similar comparable independent transactions available
for comparison. In order to determine the ALP in the absence of other
identical transactions, the valuation by a registered valuer is the most
appropriate means under CUP method. However, as the valuation report
filed by the assessee is not reliable, the only option is to adopt the
value of the assets sold as per the company law or income-tax WDV.
As the depreciation rates prescribed by company law are static, the
WDV of the assets so arrived at will not be at par with the net present
market value and, therefore, the valuation of the assets based on the
book value is not justifiable. The only reasonable approach is to value
the assets by applying the depreciation rates as provided by the Act for
it is more dynamic and so schemed to bring in a notional charge on the
profit and loss account to arrive at the actual income of an assessee
keeping in view of the depletion of the assets.
DRP must not pass “laconic” orders but must deal with assessee’s
objections. (GAP International Sourcing India Pvt. Ltd)
The Disputes Resolution Panel (DRP) issued direction u/s 144C
against which the assessee filed an appeal before the Tribunal. The
principal ground was that the DRP had not considered the assessee’s
submissions and issued a very “laconic and non-speaking direction”.
It was held that S. 144C empowers the DRP to issue directions for the
guidance of the AO to enable him to complete the assessment. It can
confirm, reduce or enhance the variations proposed in the draft order.
However, as against the provisions of S. 144C, the DRP has passed
a very laconic order. Though voluminous submissions were made
before the DRP against the draft assessment order, the DRP brushed
aside everything without even a whisper of the assessee’s objections
and submissions. The directions of the DRP are too laconic to be left
uncommented. The directions given by the DRP almost tantamount to
supervising the AO’s draft order and in that sense it can be equated
that appellate jurisdiction being exercised. Therefore, referring to
apex court’s ruling in case of Sahara India (Farms) wherein it was held
that even “an administrative order has to be consistent with the rules
of natural justice” Tribunal upheld the assessee’s plea and remanded
the matter to the DRP.
For generic drugs, CUP is appropriate method despite quality
differences (Serdia Pharmaceuticals (I) Pvt Ltd)
The assessee, a pharmaceutical company, imported ‘Active
Pharmaceutical Ingredient’ (‘API’s) from its foreign AE and used them
for manufacture of drugs. For transfer pricing purposes, the assessee
adopted the TNMM as the most appropriate method and claimed that
its transactions with the AE’s were at arms length. However, TPO held
that the assessee had purchased the APIs from the AE’s at prices
that were higher than that paid for similar APIs by other companies
in India. He rejected the contention of the assessee that the higher
prices paid by the assessee were justified owing to their superior
quality. The TPO held that the TNMM was not a “reliable” method
and that the CUP was, on facts, the most appropriate method and
computed the ALP on that basis. On appeal, the CIT (A) upheld the
stand of the TPO. On appeal by assessee to ITAT, it was held that
while innovators of drugs are allowed monopolistic pricing during
the period when patents are in force so as to recoup the research
and development costs, once the patent period expires, the higher
pricing of the drug vis-à-vis prices of generic drugs manufactured by
competitors cannot be justified on the ground of heavy R&D costs. On
argument that as sec. 92C the assessee has the unfettered discretion
to adopt the TNMM and the TPO is not entitled to reject that method
without showing deficiencies/ defects therein, it is stated that it is
open to the TPO to reject the TNMM and adopt the CUP method on
the basis “most appropriate” on the facts of the case. Generally,
the TNMM is a “method of last resort” and should be adopted only
when the standard methods (CUP, Resale Price Method and Cost Plus
Method) cannot be reasonably applied. The standard (transaction)
methods have an inherent edge over the profit method (TNMM) in
most situations and wherever both methods can be applied in an
equally reliable manner, the transaction methods should be preferred
over TNMM. However, on merits, the CUP method is the ‘most
appropriate method’ to determine the arm’s length price in the cases
of generic drug manufacturers so long as comparables are available.
As the API imported by the assessee was a generic drug and not patent
protected, the CUP method could be used. The price movements and
demand sensitivity to the price indicate that the APIs imported by the
assessee were not unique items and that such business models being
adopted by pharmaceutical companies leave ample scope for them to
manipulate API prices so as to regulate profitability of their controlled
entities in the end use jurisdiction.
27
SERV IC E TA X
CIRCULARS/ NOTIFICATION/ PRESS RELEASES.
Issue of completion certificate in case of construction:
Architect registered with the Council of Architecture constituted
under the Architects Act, 1972 ( 20 of 1972); or chartered engineer
registered with the Institution of Engineers (India); or licensed
surveyor of the respective local body of the city or town or village
or development or planning authority are included in the definition
of ‘competent authority’ for issuing Completion certificate in case of
services covered under sub-clauses (zzq) and (zzzh) of clause (105)
of section 65 of the Finance Act, relating to commercial or industrial
construction or construction of complex.
Refund
Refund on export of goods under Notification 17/2009 has been
extended to service provided by airports authority or any other person
in any airport in respect of the export of said goods.
Services provided within port or airport:
Servcies provided wholly within the port or airports are now covered
under Port and airport services. However, some of the activities
provided within port or airport are exempted.
Packaged or canned softwares:
Earlier only packaged or canned software for single user were
exempted subject to certain conditions, but now the same are
exempted from the provision of the service tax law provided that:
• The value of the said goods domestically produced or imported,
for the purposes of levy of the duty of Central Excise or the
additional duty of customs leviable, if imported
• The appropriate duties of excise on such value have been paid by
the manufacturer, duplicator or the person holding the copyright
to such software, in respect of software manufactured in India;
or
The appropriate duties of customs including the additional duty of
customs on such value have been paid by the importer in respect
of software which has been imported into India;
• a declaration made by the service provider on the invoice relating
to such service that no amount in excess of the retail sale
price declared on the said goods has been recovered from the
customer.
Widening the scope of service
The scope of the ‘Management, Maintenance and Repairs of roads’
has been extended to ‘Management, Maintenance or Repair of roads,
bridges, tunnels, dams, airports, railways and transport terminals’.
28
Clarification on on-going works contracts entered into
prior to 01.06.2007
The Board upholding the judgement of the High Court of Andhra
Pradesh in the matter of M/s. Nagarjuna Construction Company
Limited vs. Government of India (2010 TIOL 403 HC AP ST) as
regards service tax on on-going works contracts entered into prior
to 01.06.2007 with regard to the services like Construction; Erection,
commissioning or installation; Repair services were classifiable
under respective taxable services even if they were in the nature of
works contract and Whether in such cases of continuing contracts,
the Works Contract (Composition Scheme for payment of Service Tax)
Rules, 2007 under Notification No. 32/2007-ST dated 22/05/2007
would be applicable? has clarified that the services needs to be
reclassified and may or may not be able to opt under the composition
scheme based on the circumstances.
Payment through Debit/ Credit notes or entries in the
books
The board has clarified that any payments made by way of debit/
credit notes or debit/ credit entries in the books would be considered
as deemed payments and service tax credit under the Cenvat Credit
Rules 2004 can be claimed.
CASE LAWS
Only aggrieved party can challenge the issuance of the
notices.
In the present case the appellant had submitted various contractual
agreements with its Private bus operators. The department in turn
had raised demand notices on this bus operators as it was the duty
of the appellant to make payment of service tax. The appellant in
turn filed a writ petition but was rejected on the ground that only
the aggrieved party, which is in the present case are the private bus
operators, can file appeal and not the appellant. It is the private
bus operators who should take appropriate remedy under the Act to
challenge the order.
Though software is “goods”, its supply may be a “service”
and not a “sale”.
In the present case, the assessee had entered into 3 types of sales of
software viz. Shrink Wrap software with End User License Agreement
(EULA), Multi User software/ license & Internet download (wherein
software could be downloaded from the internet for users in different
locations). The software was further classified into two types, namely,
canned software and customized software.
Hon’ble Madras High Court made an important noting in the present
case which could give rise to many litigations in the future.
 INDIA BUDGET 2011
an analysis
The Hon’ble Madras High Court noted that while software is “goods”,
all transactions may not necessarily be considered as “sale”. While
making this statement, the Court, in addition to various other
definitions, also referred to Article 366 (12) of the Constitution for the
definition of ‘the goods’. While stating this point, the Court pointed
out that the EULA entered by the assessee showed that the dominant
intention of the parties was to keep the copyright of each software
with the developer and only the right to use was transferred to the
assessee. By entering into an agreement, the developer did not sell
the software as such. Accordingly, when a transaction takes place
between the assessee and its customers, it is not the sale of the
software as such, but only the contents of the data stored in the
software which would amount to only service.
Accordingly, the argument that as software is ‘goods’, all transactions
of canned / packaged software or customized software is a sale is
not acceptable as it may vary depending upon the term of End User
License Agreement.
FEM A / IN D U ST R I AL PO LI CY
INBOUND AND OUTBOUND POLICY
IMPORTANT RECENT DEVELOPMENTS IN INBOUND
INVESTMENTS POLICIES:
FDI AND FII RELATED DEVELOPMENTS:
• The Department of Industrial Policy and Promotion has decided
to issue Circulars on Consolidated FDI Policy at regular intervals
which reflects the current policy framework on FDI. This would
consolidate into one document all the prior policies/regulations
on FDI which are contained in the press notes, press releases,
circulars, notifications, issued by DIPP and RBI till the date of
issue of the said Circular. Two Circulars have been issued till
date. The last one being on October 1, 2010. Its next revision is
expected to be published on 31st March, 2011
• Investments in Warrants, Partly Paid Shares etc:
Instruments like warrants, partly paid shares etc., which are
not considered as a part of capital under the Foreign Exchange
Management Act, can now be issued under the FDI Policy to a
person resident outside India under the approval route.
• Down Stream Investments made by Indian Companies
‘owned’ or ‘controlled’ by non-resident entities:
For the purpose of downstream investment, the FDI policy states
that the operating-cum-investing/investing companies would have
to bring in requisite funds from abroad and not leverage funds from
the domestic market for such investments. This led to confusion
as to whether this would preclude companies from making down
stream investments through “internal accruals”. To remove
such perplexity, it has been explicitly clarified that downstream
investments through internal accruals are permissible subject to
the guidelines for downstream investments by Indian companies
which are “owned and/or controlled by non-resident entities”.
• Cash & Carry Wholesale Trading among group
companies:
Cash & Carry Wholesale Trading among companies of the same group
was permitted subject to various conditions. One of these conditions
was that such sale to the group companies should be for internal use
only. This condition of internal use has now been removed.
• Investments in Share Swap:
FIPB approval would be a pre requisite for investment by swap
of shares. Further, it has been provided that irrespective of the
amount involved, valuation of the such shares will have to be
made by a Category I Merchant Banker registered with SEBI or an
Investment Banker outside India registered with the appropriate
regulatory authority in the host country.
• Minimum Capitalization Requirement:
In sectors such as NBFC and Construction Development where
“Minimum capitalization” requirement has been stipulated,
the following clarification has been made with respect to the
treatment of share premium money received:
– Share premium received shall be included while calculating
minimum capitalization requirement, only when it is received
by the company upon issue of the shares to the non-resident
investor;
– However, such premium paid by the transferee during post-
issue transfer of shares beyond the issue price of the share,
cannot be taken into account while calculating minimum
capitalization requirement.
• FDI in Manufacturing of Cigarettes:
FDI in manufacturing of ‘cigars, cheroots, cigarillos and cigarettes,
of tobacco or of tobacco substitutes’, had been prohibited and has
been formally included in the list of activities/sectors prohibited
for FDI.
• FDI in Agriculture & Animal Husbandry:
In order to provide clarification on the coverage of “controlled
conditions” as used in defining the sector specific FDI Policy for
Agriculture & Animal Husbandry, the term “controlled conditions”
29
 has now been separately defined in respect of each of the
following:
– animal husbandry,
– development of seeds,
– pisciculture and aquaculture and
– floriculture / horticulture / cultivation of vegetables and
mushrooms.
• Release of Discussion Papers by DIPP for public opinions
and comments:
Department of Industrial Policy and Promotion has released the
five Discussion Papers on various aspects of FDI policy asking for
the comments and opinions from the public at large in order to
take into consideration the views of the people before making
changes in the current policy. These five discussion papers
related to the following issue:
– Foreign Direct Investment in Limited Liability Partnerships;
– Issue of Shares for consideration other than cash;
– Foreign / Technical Collaborations in case of Existing Ventures
/ Tie-ups in India;
– FDI in Multi-Brand Retail Trading;
– FDI in Defence Sector.
RELATED TO EXTERNAL COMMERCIAL BORROWINGS (ECB):
INFRASTRUCTURE SECTOR:
• Expansion in the Definition of Infrastructure Sector under
the ECB Policy:
The definition of Infrastructure Sector has been expanded to
include “cold storage or cold room facility, including for farm
level pre-cooling, for preservation or storage of agricultural and
allied produce, marine products and meat” for the purpose of ECB
Policy.
• Comprehensive policy framework on the facility of credit
enhancement:
In view of the growing needs of funds in the infrastructure sector,
the existing norms on structured obligations have been revised.
Accordingly, a comprehensive policy framework on the facility of
credit enhancement by eligible non-resident entities has been
developed. The features of this policy are as follows:
– The facility of credit enhancement would be extended
to domestic debt raised through issue of capital market
instruments, such as debentures and bonds, by Indian
companies engaged exclusively in the development of
infrastructure and by the Infrastructure Finance Companies
(IFCs) as classified in the RBI Circular DNBS.PD. CC No.
168/03.02.089/2009-10 dated February 12, 2010;
30
– The credit enhancement should be provided by multilateral/
regional financial institutions and Government owned
development financial institutions;
– The underlying debt instrument should have a minimum
average maturity of seven years;
– Prepayment and call / put options is not permissible for such
capital market instruments up to an average maturity period
of 7 years;
– Guarantee fee and other costs in connection with credit
enhancement is restricted to a maximum 2 per cent of the
principal amount involved;
– On invocation of the credit enhancement, if the guarantor
meets the liability and if the same is permissible to be repaid
in foreign currency to the eligible non-resident entity, the all-
in-cost ceilings, as applicable to the relevant maturity period
of the Trade Credit / ECBs, would apply to the novated loan.
Presently, the all-in-cost ceilings, depending on the average
maturity period, are applicable as follows:
Average maturity period of All-in-cost ceilings
the loan on invocation over 6 month Libor
Up to 3 years 200 basis points
Three years and up to five years 300 basis points
More than five years 500 basis points
– In case of default and if the loan is serviced in Indian Rupees,
the applicable rate of interest would be the coupon of the
bonds or 250 bps over the prevailing secondary market yield
of 5 years Government of India security, as on the date of
novation, whichever is higher;
– IFCs proposing to avail of the credit enhancement facility
should comply with the eligibility criteria and prudential norms
laid down in the circular DNBS.PD.CC No.168 / 03.02.089
/ 2009-10 dated February 12, 2010 and in case the novated
loan is designated in foreign currency, the IFC should hedge
the entire foreign currency exposure; and
– The reporting arrangements as applicable to the ECBs would
be applicable to the novated loans.
• Refinancing of Domestic Rupee Loans:
Keeping in view the special funding needs of the infrastructure
sector, a scheme of take-out finance has been put in place under
the approval route of the ECB policy. The salient Features of the
Take- out Financing Scheme are as follows:
– The scheme is applicable for refinancing of Rupee loans
availed of from the domestic banks by eligible borrowers in
the sea port and airport, roads including bridges and power
sectors for the development of new projects;
 INDIA BUDGET 2011
an analysis
– The corporate developing the infrastructure project should
have a tripartite agreement with domestic banks and overseas
recognized lenders for either a conditional or unconditional
take-out of the loan within three years of the scheduled
Commercial Operation Date (COD);
– The loan should have a minimum average maturity period of
seven years;
– The domestic bank financing the infrastructure project should
comply with the extant prudential norms relating to take-out
financing;
– The fee payable, if any, to the overseas lender until the take-
out shall not exceed 100 bps per annum;
– On take-out, the residual loan agreed to be taken- out by the
overseas lender would be considered as ECB and the loan
should be designated in a convertible foreign currency and all
extant norms relating to ECB should be complied with;
– Domestic banks / Financial Institutions will not be permitted
to guarantee the take-out finance;
– The domestic bank will not be allowed to carry any obligation
on its balance sheet after the occurrence of the take-out
event;
– Reporting arrangement as prescribed under the ECB policy
should be adhered to;
– Eligible borrowers should apply to the Reserve Bank for
necessary approval before entering into take-out finance
arrangement.
• ECBs by the Infrastructure Finance Companies (IFCs) for
on-lending to the infrastructure sector, are now permitted
as follows:
– Under the automatic route if the total outstanding ECBs
including the proposed ECB does not exceed 50 per cent of
the Owned Funds;
– Under the RBI approval route if the total outstanding ECBs
including the proposed ECB exceed 50 per cent of the Owned
Funds;
These ECB’s are subject to the following additional conditions:
– the norms prescribed in the Circular DNBS.PD.CC No.168 /
03.02.089 / 2009-10 dated February 12, 2010;
– hedging of the currency risk in full.
OTHERS:
• The facility of buy back of FCCB had been discontinued w.e.f.
January 1, 2010 under the automatic route. This time limit for
application for buy back of FCCB under the approval route has
been further extended up to June 30, 2011 though earlier it was
discontinued w.e.f. June 30, 2010.
RELATED TO ESTABLISHMENT OF BRANCH OFFICE (BO)/ LIAISON
OFFICE(LO) IN INDIA BY FOREIGN ENTITIES:
• Time Limit for Submission of Annual Activity Certificate
(AACs):
The time limit for submission of Annual Activity Certificate (AACs)
from the Auditors along with the Balance Sheet by BO/ LO has
been revised as follows:
– Where annual accounts of BO/LO are finalized as at the end
of March 31 time limit for submitting ACC has been extended
from 30th April to 30th September of that year;
– Where the annual accounts of the BO/ LO are finalized with
reference to a date other than March 31, ACC to be submitted
within six months from the date of the Balance Sheet.
RELATED TO VALUATION OF INVESTMENTS :
• Discounted Cash Flow (DCF) valuations introduced for
foreign investments in India
– RBI has issued a Notification no. FEMA 205/2010-RB dated
7th April, 2010 that replaced the then prevailing Valuation
Methodology prescribed under FDI Scheme with regard to
issue and transfer of shares to a non-resident;
– Consequently, the erstwhile methodology as prescribed,
vide erstwhile Controller of Capital Issues guidelines (CCI
guidelines), stands replaced with the new Discounted Free
Cash Flow (DCF) method;
– As per the said Notification issued by RBI, price of shares to
be issued to persons resident outside India under Schedule I,
shall not be less than-
(a) the price worked out in accordance with the SEBI
guidelines, as applicable, where the shares of the
company is listed on any recognized stock exchange in
India;
(b) the fair valuation of shares done by a SEBI registered
Category-I Merchant Banker or a Chartered Accountant
as per the discount cash flow method, where the shares
of the company is not listed on any recognized stock
exchange in India; and
(c) the price as applicable to transfer of shares from resident
to non-resident as per the pricing guidelines laid down by
the Reserve Bank from time to time, where the issue of
shares is on preferential allotment.
– Thus, in the case of a company whose shares are not listed
on any recognized stock exchange in India, the fair value of
the shares to be issued to the person resident outside India
shall be the valuation done by a SEBI registered Category-I
Merchant Banker or a Chartered Accountant as per the
Discount Cash Flow (DCF) method;
31
The comparative framework of the valuation of foreign investments in Listed Companies:

Type of Issue Previous framework Revised Framework

Issue of shares The price of shares should not have been lower than No change.
the price arrived at as per the applicable Securities
and Exchange Board of India (“SEBI”) guidelines.
Rights Issue The offer on right basis to persons resident outside The offer on right basis should be at a price as
India should not have been lower than the price at determined by the company.
which the offer is made to resident shareholders.
Preferential Allotment No separate category of preferential allotment A new category of preferential allotment has been
existed. Shares were issued in line with norms created. Price of shares issued on preferential
applicable to issuance of shares. allotment should not be lower than the price as
applicable to transfer of shares from residents to
non-residents. This pricing norm is given herein below.
Transfer by resident to The transfer by way of sale should have been at a The price of shares transferred by way of sale should
non-resident (i.e. to foreign price not less than the ruling market price. not be less than the price at which a preferential
national, Non-Resident Indian allotment of shares can be made under the SEBI
(“NRI”), Foreign Institutional guidelines, as applicable, provided that the same
Investor (“FII”) and is determined for such duration as specified therein,
incorporated non-resident preceding the relevant date, which shall be the
entity other than erstwhile date of purchase or sale of shares (“Preferential
Overseas Corporate Body (“OCB”)) Allotment Price”).
Transfer by resident to The transfer by way of sale should have been at a The price of shares transferred by way of sale
non-resident (i.e. to foreign price not less than the ruling market price. should not be less than the price at which a
national, Non-Resident Indian preferential allotment of shares can be made under
(“NRI”), Foreign Institutional the SEBI guidelines, as applicable, provided that
Investor (“FII”) and the same is determined for such duration as
incorporated non-resident specified therein, preceding the relevant date,
entity other than erstwhile which shall be the date of purchase or sale of
Overseas Corporate Body (“OCB”)) shares (“Preferential Allotment Price”).
Transfer by non-resident Where the shares of an Indian company were traded The price of shares transferred by way of sale should
(i.e. by incorporated non- on stock exchange: not be more than the Preferential Allotment Price.
resident entity, erstwhile OCB, a) If the sale was effected through a merchant
foreign national, NRI, FII) to banker registered with the SEBI or through a stock
resident. broker registered with the stock exchange, the price
should have been the prevailing market price on
stock exchange;
b) If the transfer was other than that referred to in
clause A above, the price should have been arrived
at by taking the average quotations (average of daily
high and low) for one week preceding the date of
application with 5 percent variation.
Where, however, the shares were being sold by
the foreign collaborator or the foreign promoter
of the Indian company to the existing promoters
in India with the objective of passing management
control in favour of the resident promoters the

32
 INDIA BUDGET 2011
an analysis
Type of Issue Previous framework Revised Framework

proposal for sale would have been considered

at a price which could be higher by up to a ceiling
of 25 percent over the price arrived at as above.
Where the shares of the company were thinly
traded, the pricing norms of unlisted companies
were applicable.

The comparative framework of the valuation of foreign investments in Unlisted Companies:

Type of Issue Previous framework Revised Framework
Issue of shares Price of shares should not have been lower than Price of shares should not be lower than the fair
the fair valuation arrived at by a Chartered valuation done by a SEBI registered Category-1
Accountant (“CA”) as per ex- CCI valuation. Merchant Banker (“MB”) or a CA as per the DCF
method.
Rights Issue The offer on right basis to the persons resident No change.
outside India should have been at a price which is
not lower than that at which the offer is made to
resident shareholders.
Preferential Allotment No separate category of preferential allotment A new category of preferential allotment has been
existed. Shares were issued in line with norms created. Price of shares issued on preferential
applicable to issuance of shares. allotment should not be lower than the price as
applicable to transfer of shares from residents to non-
residents. This pricing norm is given herein below.
Transfer by resident to non- The price of shares should not have been lower than The transfer of shares should be at a price not less
resident the fair valuation done by a CA as per ex- CCI than the fair value to be determined by a MB or a CA
valuation. as per the DCF method.
Transfer by non-resident to Where the shares of an Indian company were not The transfer of shares should be at a price not more
resident listed on stock exchange or were thinly traded, than the fair value to be determined by a MB or a CA
i) if the consideration payable for the transfer did not as per the DCF method.
exceed INR 2 million (approximately USD 43,850)
per seller per company, at a price mutually agreed
to between the seller and the buyer, based on any
valuation methodology currently in vogue, on
submission of a certificate from the statutory auditors
of the Indian company whose shares are proposed
to be transferred, regarding the valuation of the shares,
and
ii) if the amount of consideration payable for the
transfer exceeded INR 2 million per seller per
company, the transfer could be at a price arrived
at, at the seller’s option, in any of the following
manner, namely:
a) a price based on earning per share (“EPS”) linked
to the Price Earning (P/E) multiple, or a price based
on the NAV linked to book value multiple, whichever
was higher, or

33
Type of Issue Previous framework Revised Framework

b) the prevailing market price in small lots as may

have been laid down by the RBI so that the entire
shareholding was sold in not less than five trading
days through screen based trading system, or
c) where the shares were not listed on any stock exchange,
at a price which was lower of the two independent valuations
of share, one by statutory auditors of the company and the
other by a CA or by a MB.
IMPORTANT RECENT DEVELOPMENTS IN OUTBOUND
INVESTMENTS POLICIES:
• Liberalization in Overseas Investments in construction & RBI has also specified operational checkpoints for submission of
maintenance of submarine cable systems: a compounding application and indicative factors which may be
Indian companies are now allowed to participate in a consortium taken into consideration for the purpose of passing compounding
with other international operators to construct and maintain order and adjudging the quantum of sum on payment of which
submarine cable systems on co-ownership basis under the contravention will be compounded. The compounding order has
automatic route provided that the Indian company has obtained to be issued within 180 days from the receipt of the application.
necessary licence from the Department of Telecommunication, • A person resident in India is now permitted to enter into currency
Ministry of Telecommunication & Information Technology, options on a stock exchange to hedge an exposure to risk or
Government of India to establish, install, operate and maintain otherwise, subject to prescribed terms and conditions.
International Long Distance Services and also by obtaining • Over the Counter Foreign Exchange Derivatives and
a certified copy of the Board Resolution approving such Overseas Hedging of Commodity Price and Freight Risks:
investment. RBI has come up with revised Comprehensive Guidelines
These investments in unincorporated entities overseas will be w.e.f February 01, 2011 on Over the Counter Foreign Exchange
subjected to the reporting requirements in form ODI, including Derivatives and Overseas Hedging of Commodity Price and
Annual Performance Report (APR). Freight Risks. These guidelines permit set of products which can
• A person resident in India is permitted w.e.f April 20, 2009 to be used in each of the below mentioned categories.
issue corporate guarantee in favour of an overseas lessor for – Persons resident in India (other than AD Category I banks);
financing imports through operating lease effected in conformity – Persons resident outside India;
with the Foreign Trade Policy. – Authorised Dealers Category I;
– Commodity Derivatives;
OTHER IMPORTANT RECENT DEVELOPMENTS: – Freight Derivatives.
• New directions for compounding proceedings with a view These guidelines also list out the permitted participants,
to rationalize and enhance transparency: purposes, operational guidelines, terms & conditions for each of
RBI has come up with new set of directions with the objective the products. The RBI Comprehensive Guidelines on Derivatives
for rationalization and streamlining the compounding process issued in April 2007 would also apply mutatis mutandis to Foreign
and procedure for compounding and to enhance transparency Exchange derivatives.
and effect smooth implementation of the compounding process.
These new directions supersede its earlier directions w.e.f. June • Extension of time limit for realization of export values of
28, 2010. goods /software:
The time limit of twelve months for realization and repatriation
RBI has listed out the indicative points in which nature of the of the amounts representing the full export value of goods or
contraventions need to be bifurcated viz. contravention of software exports from the date of export has been extended up
technical and/or minor in nature or contravention of serious to March 31, 2011 from June 30, 2010.
nature or contravention, prima facie, involving money-laundering, • The maximum limit up to which Authorized Dealers and Full
national and security concerns. Fledged Money Changers can sell foreign exchange in the form
34
 INDIA BUDGET 2011
an analysis
of foreign currency notes and coins without prior permission from
the Reserve Bank to the travellers proceeding to countries other
than Iraq, Libya, Islamic Republic of Iran, Russian Federation and
other Republics of Commonwealth of Independent States has
been increased from USD 2,000 to USD 3,000.
SEB I
IMPORTANT RECENT DEVELOPMENTS
Initiatives to cut Red Tapism
The Market Regulator plans to cut Red Tapism by doing away with
unnecessary regulations, such as the need for its prior approval
before market entities can change it’s top management or legal
status. Presently, these entities are required to seek a prior approval
from SEBI for any change in it’s status or constitution’.
As per the proposed revision of its regulations, SEBI would require
the market entities to seek its prior approval, only in the case of a
change in control for which the intermediary has knowledge. For
other changes, the market entities would need to inform SEBI in it’s
various periodical filings.
Corporate Governance
SEBI now wants MFs to be more active in corporate governance and
hence it has now allowed MFs to voice its opinion as they are vehicles
for small investors. SEBI has now made it mandatory for funds to
disclose whether they voted for or against moves (suggested by
companies in which they have invested) such as mergers, demergers,
corporate governance issues, appointment and removal of directors.
MFs have to disclose it on its website as well as annual report.
Additional instructions for an application to secure Registration as
FII with SEBI
As per the new guideline issued by SEBI, in addition to the general
instructions with regard to the filing of an application to secure registration
as FII (vide Form A) and registration as sub account (vide Form AA), on
or after April 7, 2010, the below mentioned additional declaration and
undertaking shall be required to be enclosed to the application form.
Declaration:
The applicants are required to provide the following declaration on
its letter head:
• that it is not a Protected Cell Company (PCC) or Segregated
Portfolio Company (SPC) and does not have an equivalent
structure by whatever nomenclature.
• that it is not a Multi Class Share Vehicle (MCV) by constitution and
does not have an equivalent structure by whatever nomenclature.
It contains only single class of share.
• that it is a MCV by constitution and has more than one class of shares or
has an equivalent structure and that a common portfolio is maintained
for all classes of shares and satisfies broad based criteria.
OR
• A segregated portfolio is maintained for separate classes of
shares wherein each such class of shares are in turn broad
based.
Undertaking:
In case the applicant is/ proposed to be a MCV or an equivalent
structure and have more than one class of shares, it shall undertake
the following on its letter head:
• Common portfolios shall be allocated across various share classes
and it shall be broad based;
OR
• If portfolios are segregated for each distinct share class, then
each such share class shall satisfy the broad based criteria;
• In case of change in structure/ constitution/ addition of classes of
shares, prior approval of SEBI shall be taken;
• In case of any addition of share classes, it shall follow the criteria
at (a) above
For all new applications to be filed with SEBI to secure registering
as FII/Sub Account on or after April 7, 2010, the above mentioned
declaration and undertaking are required to be enclosed. In case, the
same is not provided, the forms shall be treated as incomplete.
Prohibition on Protected Cell Companies (PCC) and Segregated
Portfolio Companies (SPC) Extended to Existing Entities
SEBI being suspicious that the very structure of the Foreign Institutional
Investors could be misused for round-tripping, whereas earlier the
regulator’s concentration was on misuse of P-note issuances by FIIs,
has now prohibited registrations to FIIs and/or a sub-account if it is a
Protected Cell Company (PCC) or Segregated Portfolio Company (SPC)
or it has an equivalent structure by whatever nomenclature.
ASBA facility mandatory for QIBs and NIIs:
SEBI has made it mandatory to provide the ASBA facility for non-
retail investors (Qualified Institutional Buyers and Non-Institutional
Investors) making applications in public / rights issues with effect
from May 01, 2011.
Initial registration of intermediaries to be for five years:
The intermediaries would be granted registration initially for a period
of five years. On assessment of the performance of the intermediary
35
and its track record during the initial five years, it will be granted
registration on permanent basis.
Self clearing members for currency derivative segment:
The self clearing members in the currency derivative segment are
now required to have minimum net worth of 5 crore.
Recommendation to MCA on related party transactions :
SEBI has decided to put a recommendation to the Ministry of
Corporate Affairs to suitably amend Clause 166 of the Companies
Bill, 2009 in order to disallow the interested shareholders from voting
on the special resolution of the prescribed related party transaction.
This will protect small and diversified shareholders in listed
companies from abusive related party transactions. The investigation
in the matter of Satyam Computer Services Limited led to such a
development.
Curtailment in prolonged allotment of units and dispatch of
account statements by NFOs’
Small investors will now be relieved as they won’t have to wait
too long to get it’s first account statement and units allotted once
they have invested in a new fund offer (NFO) of a mutual fund (MF)
scheme. All NFOs, except equity-linked saving schemes, will now be
open for a maximum of 15 days only, from previously 30 days for
open-ended funds and 45 days for closed-end schemes. Once the NFO
closes, funds will now have to allot units and dispatch the account
statements within five days, down from 30 days earlier. Thus, SEBI
has done well in making MFs more transparent, consequently playing
an active role in corporate governance.
Launch of Data Ware Housing and Business Intelligence System at
SEBI.
The SEBI has launched Data Ware Housing and Business Intelligence
System (DWBIS) with the primary objective of significantly enhancing
its capability of the investigation and surveillance functions of SEBI.
Several modules have been enacted to address crimes like insider
trading, front running etc in the system.
SEBI trims individual FIIs purchase limit for bonds.
The SEBI has now reduced the limit for a single entity to ` 200
crore from ` 300 crore in case of Government papers; the limit for
corporate bonds was curtailed to ` 2,000 crore from the existing `
10,000 crore.
Mandatory disclosures by the Media Groups of its stake in
corporate sector.
In view of media groups entering into ‘private treaties’ with listed
companies or companies coming out with a public offer, SEBI had
36
made recommendations to the Press Council of India regarding
disclosure by the media group of its stake in corporate sector. The
Media Companies shall now be required to disclose the stake and
the percentage of stake held by it in the news report/article/editorial
in newspapers/television relating to the company in which its group
holds such stake. Any other disclosures relating to such agreements
such as any nominee of the media group on the board of directors of
the company, any management control or other details which may
be required to be disclosed and which may be a potential conflict of
interest for media group, should also be mandatorily disclosed.
SEBI has amended clause 35 of the listing agreement
SEBI has amended the clause 35 of the listing agreement as regard to
the format and frequency of filing of Shareholding pattern as under:
• Mandatory filing of shareholding pattern by the companies as
per Clause 35 one day prior to the date of listing, which shall be
uploaded on the website of exchanges before commencement of
trading.
• In case of any change exceeding 2 percent (increase or decrease)
of the paid up share capital of the company post a corporate
event, the companies shall file a revised shareholding pattern
with the stock exchanges within 10 days from the date of such
change in the capital structure.
• In the quarterly shareholding pattern, the disclosure of shares
held by custodians, against which depository receipts have been
issued, shall be classified as ‘promoter/promoter group’ and
‘non-promoter’.
AC C OUNTS AND AUDIT
IMPORTANT RECENT DEVELOPMENTS
IFRS IMPLEMENTATION DEFERRED:-
The government has deferred the implementation of International
Financial Reporting Standards (IFRS) in phased manner due to the
lack of clarity on various tax issues. Date for implementation would
be notified after various taxes related issues are resolved.
35 ACCOUNTING STANDARDS IN LINE WITH IFRS:-
National Advisory Committee on Accounting Standard (NACAS)
has notified 35 converged accounting standards (IND AS). Date of
implementation would be notified later.
Indian Accounting Standard Description of the Accounting
(Ind AS) Standards
(Ind AS) 1 Presentation of Financial
Statement
 INDIA BUDGET 2011
an analysis
(Ind AS) 2 Inventories
ACCOUNTING STANDARD – 30, 31, 32 – FINANCIAL
(Ind AS) 7 Statement of Cash Flows
INSTRUMENTS ISSUED BY THE INSTITUTE OF CHARTERED
(Ind AS) 8 Accounting Policies, Changes in
ACCOUNTANTS OF INDIA
Accounting Estimates and Errors
Accounting for financial assets and financial liabilities is covered by
(Ind AS) 10 Events after the Reporting Period
three separate standards.
AS 30: Financial Instruments: Recognition and Measurement
(Ind AS) 11 Construction Contracts
AS 31: Financial Instruments: Presentation
(Ind AS) 12 Income Taxes
AS 32: Financial Instruments: Disclosures
(Ind AS) 16 Property, Plant and Equipment
(Ind AS) 17 Leases
These three Standards which were originally issued by the ICAI
(Ind AS) 18 Revenue
in 2007, on a recommendatory basis, are now mandatory for
(Ind AS) 19 Employee Benefits
Level I Companies for accounting periods commencing on or after
(Ind AS) 20 Accounting for Government Grants
01/04/2011. Once the Standards are operative, AS 13 (Accounting for
and Disclosure of Government
Investments) will stand superseded, except for the portions relating
Assistance
to classification and accounting treatment of Investment Property.
(Ind AS) 21 The Effects of Changes in Foreign
Exchange Rates
However, India’s accounting rule-setter has said that most Indian
(Ind AS) 23 Borrowing Costs
companies, barring a few big ones, will not have to follow a stringent
(Ind AS) 24 Related Party Disclosures
rule that mandates incorporation of valuation gains or losses on complex
(Ind AS) 27 Consolidated and Separate
financial instruments, such as derivatives, in their income statements.
Financial Statements
(Ind AS) 28 Investments in Associates
The Institute of Chartered Accountants of India (ICAI) has deferred
(Ind AS) 29 Financial Reporting in
accounting standard (AS) 30 that operationalises this requirement for
Hyperinflationary
companies that are not in the first phase of convergence of Indian
(Ind AS) 31 Interests in Joint Ventures
accounting norms with globally recognized international financial
(Ind AS) 32 Financial Instruments:
reporting standards, or IFRS.
Presentation
(Ind AS) 33 Earnings per Share
EXPOSURE DRAFT OF THE ACCOUNTING STANDARD 33 -
(Ind AS) 34 Interim Financial Reporting
SHARE BASED PAYMENT
(Ind AS) 36 Impairment of Assets
The ICAI recently published for public comment, an exposure
(Ind AS) 37 Provisions, Contingent Liabilities
Draft of the Accounting Standard 33, Share based payment. AS
and Contingent Assets
33 encompasses:
(Ind AS) 38 Intangible Assets
– Equity-settled share-based payment transactions (e.g. the grant
(Ind AS) 39 Financial Instruments: Recognition
of shares or share options to employees)
and Measurement
– Cash-settled share-based payment transactions (e.g. the grant
(Ind AS) 40 Investment Property
of share appreciation rights to employees, which entitle the
(Ind AS) 101 First-time Adoption of Indian
employees to future cash payments based on the increase in the
Accounting Standards
entity’s share price)
(Ind AS) 102 Share-based Payment
– Share based payment transactions with cash alternatives in which
(Ind AS) 103 Business Combinations
the entity receives goods or services and either the entity or the
(Ind AS) 104 Insurance Contracts
supplier of those goods or services (the counterparty) has a choice of
(Ind AS) 105 Non-current Assets Held for Sale
settling the transaction in cash, other assets, or equity instruments.
and Discontinued Operations
AS 33 is not restricted to transactions with employees. For example,
(Ind AS) 106 Exploration for and Evaluation of
if an external supplier of goods or services is paid in shares, share
Mineral Resources
options or cash based on the price (or value) of shares or other equity
(Ind AS) 107 Financial Instruments: Disclosures
instruments of the entity, AS 33 must be applied.
(Ind AS) 108 Operating Segments

37
AS 33 does not cover the following transactions: Accordingly, the Central Government has, by notification, stated
– Transfer of equity instruments that are clearly not payments for that, the permission may be granted on a general basis wherever
goods and services the Board of Directors of the holding company gives its consent and
– Transactions with shareholders as a whole, i.e., when the the conditions prescribed by the Ministry are complied with. The
shareholders act solely in their capacity as shareholders conditions to be met by the companies are as follows:-
– Transactions within the scope of AS 30 (Revised), Financial – The Board of Directors of the Company has by resolution given
instrument, Recognition and Measurement consent for not attaching the balance sheet of the subsidiary
– Share-based payments award to acquire goods in the context concerned;
of a business combination to which AS 14 (revised), Business – The Company shall present in the annual report, the consolidated
Combinations applies. financial statements of holding Company and all subsidiaries duly
audited by its statutory auditors;
GENERAL EXEMPTION UNDER SECTION 211 VIDE PRESS – The consolidated financial statement shall be prepared in strict
NOTE NO. 2/2011 DATED 8.2.2011 compliance with applicable Accounting Standards and, where
Section 211 of the Companies Act, 1956 requires that the balance applicable, Listing Agreement as prescribed by the Securities and
sheet and profit and loss account of a company shall be in the form set Exchange Board of India;
out in Part I of Schedule VI or in such other form as may be approved – The Company shall disclose, in the consolidated balance sheet,
by the Central Government either generally or in any particular case. the following information in aggregate for each subsidiary
including subsidiaries of subsidiaries:- (a) capital, (b) reserves, (c)
Accordingly, the Central Government has, by notification, issued a total assets, (d) total liabilities, (e) details of investment (except
general exemption whereby the categories of companies in column in case of investment in the subsidiaries), (f) turnover, (g) profit
(2) of the Table below will be exempted from the disclosures given before taxation, (h) provision for taxation, (i) profit after taxation
in column 3: and (j) proposed dividend;
– The holding company shall undertake in its annual report that
SN Class of Companies Exemptions from para(s) of annual accounts of the subsidiary companies and the related
Part-II of Schedule VI. detailed information shall be made available to shareholders of
1. Companies producing para 3(i)(a), 3(ii(a), 3(ii)(d), 4-C, 4-D the holding and subsidiary companies seeking such information at
Defence Equipments (a) to (e) except (d). any point of time. The annual accounts of the subsidiary companies
including Space Research; shall also be kept for inspection by any shareholders in the head
2. Export Oriented company para 3(i)(a) 3(ii)(a), 3(ii)(b), 3(ii)(d). office of the holding company and of the subsidiary companies
(whose export is more concerned and a note to the above effect will be included in the
than 20 per cent of the annual report of the holding company. The holding company shall
turnover); furnish a hard copy of details of accounts of subsidiaries to any
3. Shipping companies para 4-D (a) to (e) except (d). shareholder on demand;
(Including Airlines); – The holding as well as subsidiary companies in question shall
4. Hotel companies para 3(i)(a) and 3(ii)(d) regularly file such data to the various regulatory and Government
(including Restaurants); authorities as may be required by them;
5. Manufacturing para 3(i)(a) and 3(ii)(a). – The company shall give Indian rupee equivalent of the figures
companies/multi-product given in foreign currency appearing in the accounts of the
companies; subsidiary companies along with exchange rate as on closing day
6 Trading companies; para 3(i)(a) and 3(ii)(b) of the financial year.

DIRECTION UNDER SECTION 212 VIDE PRESS NOTE NO. 3/2011
DATED 8.2.2011
Section 212 of the Companies Act, 1956 requires holding companies
to attach with its balance sheet a copy of the balance sheet, profit
and loss account, etc. of each of its subsidiaries.
38
MANAGERIAL REMUNERATION IN UNLISTED COMPANIES
HAVING NO PROFITS/ INADEQUATE PROFITS VIDE PRESS
NOTE NO. 4/2011 DATED 8.2.2011
Public limited companies (listed and unlisted) with no profits/
inadequate profits are currently required to approach the Ministry
for approval in those cases where the remuneration of Directors/
 INDIA BUDGET 2011
an analysis
Equipments in the Power 8 to 40 years
equivalent managerial personnel exceeds certain limits.
sector
Equipments in the Steel sector 20 to 25 years
Schedule XIII of the Companies Act 1956 is being amended to
Furniture and Fittings 10 years
provide that unlisted companies (which are not subsidiaries
Motor Vehicles 5 to 13 years
of listed companies) shall not require Government approval
Ships 10 to 28 years
for managerial remuneration in cases where they have no
Aircrafts 17 years
profits/ inadequate profits, provided they meet the other
Office Equipment 5 years
conditions including special resolution of shareholders and
Electrical Equipment 10 years
absence of default on payment to creditors stipulated in the
Computer and data processing 6 years
Schedule.
equipment
Laboratory Equipment 10 years
STANDARD ON INTERNAL AUDIT (SIA) 17 “CONSIDERATION
Library Books 3 years
OF LAWS AND REGULATIONS IN AN INTERNAL AUDIT”
The objectives of the internal auditor are:
– To obtain sufficient appropriate audit evidence regarding Further, the schedule provides that in the case of intangible assets,
compliance with the provisions of those laws and regulations the useful life should be in accordance with the terms of the contract
generally recognized to have a direct effect on the determination or on the basis of the relevant legal requirements, unless the useful
of material amounts and disclosures in the financial statements; life as per the relevant Accounting Standard is shorter. For other
– To perform specified audit procedures to help identify intangible assets having a definite useful life, the indicative useful
instances of noncompliance with other laws and regulations life may be taken as 10 years. Finally, those intangible assets having
that may have a significant impact on the functioning of the indefinite useful life shall be account for as per relevant Accounting
entity; and Standard as such assets are not to be amortized.
– To respond appropriately to non-compliance or suspected
noncompliance with laws and regulations identified during the AUDITING MADE MANDATORY FOR GOLD ETFS
internal audit. The physical gold underlying the Gold ETF units will now have to be
verified by auditors and reported in the half yearly report submitted
EXPOSURE DRAFT OF SCHEDULE XIV TO THE COMPANIES by trustees of the fund to the SEBI. In a circular issued recently,
ACT, 1956. SEBI said this requirement will come into effect from the half yearly
The Accounting Standards Board of the Institute of Chartered report ending April 2011. With gold ETFs becoming popular amongst
Accountants of India (ICAI) has issued the Exposure Draft to lay down the investors, SEBI`s objective through this is to keep a tab on the
the indicative useful lives of the various tangible assets over which custodians of these units. The Trustees report should also verify
depreciable amount of an asset is to be allocated systematically whether the assets of gold ETFs are in compliance with the asset
as depreciation, which is in accordance with the IFRS Converged allocation mentioned in the Scheme Information document.
Accounting Standard 10 on ‘Property, Plant and Equipment’. This
would later be notified under Companies (Accounting Standard)
Rules. The range of indicative useful lives of various tangible assets
to be applied for the calculation of depreciation as per the schedule
is as under:

Category of Tangible Assets Range of useful lives

Buildings 3 to 60 years
General Plant and Machinery 15 years
Special Plant and Machinery 6 to 13 years
Equipments in 2 to 10 years
Telecommunication sector
Equipments in Oil and Gas 8 to 30 years
sector

39
40
ECONOMIC SURVEY
OVERVIEW OF ECONOMIC SURVEY
The Economic Survey for 2010-11 cites a new Index of Government
Economic Power showing that India is now the fifth greatest global
economic power after the US, China , Japan and Germany, and is
well ahead of Britain or France. Based on the performance of the
economy over the last five years and analysis of the underlying trends
of critical variables, India’s real GDP is expected to grow by 9 per cent
in 2011 – 2012.
Economic Survey estimates real GDP growth of 8.6 per cent in 2010-
2011 which is showing a consistent growth pattern since past 2 years
amidst the global downtrend. Economic survey predicts India growing
at 9 per cent in 2012 with the backing of service industry. Indian
economy shows strength and resilience amidst global slowdown
since 2008-2009 and domestic slowdown in agriculture and allied
sectors and high inflation.
high inflation numbers from the previous period. Earlier the same was
due to shortage of food grain production due to weather conditions
and the current reason being higher demand due to increase in
purchasing power of the people from lower level of society.
Trade deficit increased by 2.4 per cent to USD 82billion in 2010-11.
Steady growth in exports after the global financial crisis in 2008-2009
and comparative slow growth in imports has aided in narrowing the
gap in trade deficit.
Finance minister Pranab Mukherjee expressed his concern at the rise
in food prices as well as rise in oil prices triggered by the turmoil in
the Arab world. With increase in saving and investment rates and
intention to gradually exit from stimulus package, it is expected that
economy’s growth rate may exceed 9 per cent.

Agriculture Sector grew at 3.4 per cent during first half of 2010-11
but it needs further support in form of private and public investment
to achieve and sustain a growth rate of 4 per cent.
Industrial growth is showing a downtrend, quarter on quarter however
the average growth for the 3 quarters has been 8.6 per cent compared
to previous year.
GDP GROW TH
The Advance estimates released by the CSO reveal the growth in real
GDP at 8.6 per cent in 2010 - 2011, which followed a revised growth
of 8.0 per cent in 2009 – 2010( from 7.4 per cent) and 6.8 per cent
(from 6.7 per cent) in 2008 - 2009, the economy has moved closer to
the pre crisis levels.

Service sector has been identified by Economic Survey as the potential

growth engine as it shares 57.3 per cent in the GDP with the growth
rate of 10.1 per cent in 2009-10 garnering FDI equity inflows of 21
per cent of total inflows and a share of 35 per cent in total exports in
the same period.

Bank Credit started showing an uptrend since June 2010 and year-on-
year growth for the nine months was high at 23.7 per cent as compared
to 11.3 per cent for the corresponding period of the previous year.

Foreign exchange reserves have increased by USD 18.2 billion to USD

297.3 billion at the end of December, 2010. This level of reserves
provides about 10 Months of import cover. Indian Rupee depreciated
against major international currencies 1.5 per cent against USD, 3.2
per cent against Pound Sterling and 12.2 per cent against Japanese
Yen since April 2010. It remained in range of 44-47 per USD during
the same period. Compositionally, there are significant changes in the GDP as per the
Quick Estimates with growth in agriculture at 0.4 per cent (0.2 per
Inflation has been a real dampener in the Indian growth. The double cent as per the Revised Estimates); growth in industry of 8.0 per cent
digit WPI numbers on food items has been the highlight for the same. as against 9.3 per cent in the Revised Estimates and a sharper rise
However there has been a significant shift in the composition of the in growth in services at 10.1 per cent as against the 8.5 per cent
42
 INDIA BUDGET 2011
an analysis
indicated in the Revised Estimates. Growth in GDP at factor cost
current prices was placed at 16.1 per cent in the Quick Estimates as
against a level of 12.2 per cent suggested by the Revised Estimates.
QUARTERLY TREND
The revisions to the annual GDP estimates between the Quick
Estimates released on 31 January 2011 and the Revised Estimates
for 2004 10 released in May 2010 indicate some likely revisions in
the quarterly GDP estimates for the current and previous years. These
revisions to quarterly GDP are likely to be made available at a later
date. The available data (reported also in the Mid-year Analysis 2010)
indicated a robust growth momentum with growth in real GDP at 8.9
per cent in each of the first two quarters as well as the first half of
the current fiscal. The growth in real GDP and its broad based nature
indicated that economic recovery that began in 2009-10 has gathered
momentum and is at the robust level that obtained prior to the global
crisis. Growth in the GDP constant market prices is placed at 10.4
per cent in the first half of the current fiscal. That fiscal stimulus
packages were central to the recovery as attested by the demand-side
aggregates, was reported in detail in the mid-year analysis 2010.
I N D U S T R IA L G ROW TH
Industrial production in 2010 – 2011(April - December) has witnessed
a very good growth in the first quarter however gradually reducing
in the subsequent quarters. The IIP in the 1st quarter of 2010 -
2011 was at 11.9 per cent thereby reducing to 9.1 & 5.3 per cent
in the subsequent quarters. However the overall growth in April –
December 2010 has been around 8.6 per cent which is at par with the
corresponding period of previous year.
INFL ATION
CONCERNS
A new WPI series has been released with 2004 - 2005 as its base as
against the base of 1993 - 1994 and the price quotations have been
increased to 5482 from 1918 old series in order to denote a correct
picture of the economy. This year has witnessed a Higher inflation
then the inflation in the preceding year. Not only so the average
inflation from April –December 2010 of 9.4 per cent was much higher
than the average inflation of the past decade which was around 8.9
per cent. The headline inflation had remained in double digits from
March to July 2010 more so because of the inflation in the primary
articles (weight 20.12 per cent) and fuel and power (weight 14.91 per
cent) which hovered in the range of 14.7 per cent to 21.5 per cent and
10.3 per cent to 14.4 per cent as against the inflation in manufactured
products (weight 64.97 per cent) which remained in the range of 4.5
per cent to 6.4 per cent.
Movement of the consumption pattern of a country can be analyzed
through its deflator generated by the Private Final Consumption
Expenditure (PFCE) at current prices over constant prices base 2004
- 2005. Generally PFCE is positively correlated to standard of living.
There has been noticed an upward swing in the PFCE deflator to 132.9
from 100 in 2004-05. The advanced estimates indicate the index at
145.9 thereby indicating an upward swing in the standard of living.
MEASURES
The Government monitors the price situation regularly as price
stability remains high on its agenda. Measures taken to contain
43
prices of essential commodities include selective ban on exports and
futures trading in food grains, zero import duty on select food items,
permitting import.
FI SC A L D EV E LPO M ENTS AND PUBLIC
FI N A N C E
Among the emerging economies, India had one of the largest fiscal
expansions of the order of about 10 per cent of the GDP in both
2009 and 2010. In terms of proportions of potential GDP also, the
expansion was sizeable in 2009 in the case of India; it was estimated
to have declined to 8.7 per cent in 2010. Going forward, the Fiscal
Monitor indicated that the fiscal adjustment in emerging economies
in general which was driven by economic recovery in 2010 would be
driven by discretionary policies in 2011 a development that would be
noteworthy in light of the fact that the discretionary impulse of the
expansion was estimated to be small.
In actual terms, the Budget for 2010-11 had estimated the level of
fiscal deficit at ` 3,81,408 crore and revenue deficit at ` 2,76,512
crore. At the time of presentation of the Budget for 2010-11 it was
envisaged that nominal GDP (GDP at current market prices) would
grow by 12.5 per cent and was estimated at ` 69,34,700 crore. As
proportions of the nominal GDP, fiscal and revenue deficits were
estimated at 5.5 per cent and 4.0 per cent respectively. As per the
advance estimates (AE) released by the Central Statistics Office
(CSO) on 7 February 2011, the nominal GDP for 2010-11 was placed
at ` 78,77,947 crore, which represents a year on year growth of
20.3 per cent, and was 7.8 percentage points higher than envisaged
at the time of Budget formulation. As proportions of the GDP as per
44
the AE, budgeted fiscal and revenue deficits work out to 4.8 per cent
and 3.5 per cent for the current fiscal. Thus, as proportions of the
GDP, the recent trends in deficit indicators, post-crisis, have been
influenced to some extent by the swings in the levels of aggregate
demand.
Against the backdrop of the fast-paced recovery of the economy
in 2009-10 and the elevated levels of food inflation as well as the
recommendations of the Thirteenth Finance Commission (ThFC), the
budget for 2010-11 resumed the path of fiscal consolidation to make
economic growth more broad based and ensure that supply-demand
imbalances are managed better. Acting on the ThFC recommendation
for limiting the combined public debt to GDP ratio to 68 per cent
by 2014-15, the Union Budget for 2010-11 came up with a promise
to analyse the issues in a Status Paper, which would also unveil
the roadmap for reduction. The Budget for 2010-11 indicated that
effective management of public expenditure by bringing it in line with
the Government’s objectives, particularly through proper targeting of
subsidies, was a key factor in fiscal management.
The Economic and Functional Classification of the Central Government
Budget details the impact of the operations of the Central Government
on the levels of consumption expenditure and capital formation. Of
the total expenditure of ` 10,79,985 crore in budgeted estimate (BE)
2010-11 (equivalent of 13.7 per cent of the GDP), 21 per cent was used
up as consumption expenditure (amounting to ` 2,24,027 crore or 2.8
per cent of the GDP) and 18 per cent resulted in capital formation
(amounting to ` 1,94,473 crore or 2.5 per cent of the GDP) with the
rest being accounted for as transfer payments (mainly to States).The
levels of dissavings of the Government came down progressively and
in 2007-08 became positive savings; however, the fiscal expansion
resulted in the re-emergence of dissavings in 2008-09. After briefly
going up in 2008-09 to a level of ` 2,53,712 crore, the dissavings
of the Government were estimated at ` 1,92,705 crore in 2010-11
(BE). As the gap between the level of savings and capital formation is
financed preponderantly by draft on the other sectors of the domestic
economy, the reversal of dissavings is an imperative.
FISCAL OUTCOME
The outcomes in terms of key fiscal indicators were much better than
was envisaged by the Budget estimates on account of the higher than
estimated revenue from telecom 3G/BWA auctions and indirect taxes.
The headroom so available facilitated additional expenditure proposed
through supplementary demands for grants. The data on Union
finances for April-December 2010 released by the Controller General of
Accounts on 31 December 2010 indicated that the key fiscal indicators
were broadly on the consolidation track charted by the Budget for 2010-
 INDIA BUDGET 2011
an analysis

Growth in gross tax revenue in the nine months of the current fiscal
was 26.8 per cent (year on year) as against a level of 17.9 per cent
envisaged for the fiscal by the BE. Non-tax revenues grew by 136.4
per cent in the first nine months of current fiscal as against a level of
growth of 23.7 per cent in the corresponding period last year and 32 per
cent envisaged by the BE. Revenue receipts grew by over 50 per cent
in the first nine months. In major taxes the following were the year on
year growth rates: customs 65.8 per cent;
As against an increase of 17.5 per cent in 2008-09, growth in bank
credit moderated to 16.9 per cent in 2009-10.
During 2010-11 credit started picking up in a strong way from early
June 2010 and since then the growth in bank credit has shown a
continuous increasing trend. The year-on-year growth in bank credit
as on 17 December 2010 was high at 23.7 per cent as compared to
11.3 per cent for the corresponding period of the previous year.

Central excise 36.5 per cent, service tax 19.7 per cent; corporate FORE IGN E XC H ANGE
income tax 20.4 per cent, and personal year on year growth in total Foreign exchange reserves are an important component of the
expenditure in the first nine months of the current fiscal was at Balance of Payment (BOP) and an essential element in the analysis
11.2 per cent as against a level of 18.5 per cent in 2009-10 (April- of an economy’s external position. India’s foreign exchange reserves
December) and 8.5 per cent envisaged for the full year by BE 2010- comprise foreign currency assets (FCAs), gold, special drawing
11. While Plan expenditure grew by 18.9 per cent in April-December rights (SDRs) and reserve tranche position (RTP) in the International
2010-11 as against 23.0 per cent in 2009-10 (April-December), non- Monetary Fund (IMF).
Plan expenditure grew by 7.9 per cent as against 16.6 per cent. As
per the CGA, 84.7 per cent of the gross market borrowings were
completed by end of December 2010. Reflecting the above trend in
revenue and expenditure, revenue deficit was placed at ` 1,16,309
crore, which was 42.1 per cent of its BE and lower by 53.7 per cent
than the April-December 2009 level. Fiscal deficit was ` 1,71,249
crore, which came to 44.9 per cent of its BE and represented a decline
of 44.8 per cent over the level in April-December 2009.

FI N A N C IA L IN TER M EDI AT I O N A ND
M A R K E TS
Broader and deeper financial markets will be crucial for mobilizing
higher savings and intermediating them efficiently to finance higher
investment and growth. India’s financial markets continued to gain
strength in recent years, in the wake of steady reforms since 1991.
Prudent regulations and institutions protected the economy from the
recent global financial shocks. And its dynamism is a leading factor
in the current recovery.

Looking to the future, the twin challenges are to continue this
progress on gradual financial reform and to modernize regulations
and institutions to ensure its continued safety and stability.
The past year saw banking deposit growth slow-down, as real interest
rates were depressed, especially compared to returns in other fast-
recovering asset markets (real estate, gold, and stock markets).
Bank credit that started picking up from the last quarter of 2009-10
continued its momentum during 2010-11 as well. The pickup in credit
reflected the improved demand conditions associated with stronger
industrial recovery and growth. Telecom operators raised credit to
pay for 3G/broadband wireless access (BWA) spectrums, which partly
contributed to stronger credit growth in the first quarter of 2010-11.
In the current fiscal 2010-11, on month-on month basis, foreign
exchange reserves have shown an increasing trend. The reserves
increased by USD 18.2 billion from USD 279.1 billion at the end of
March, 2010 to USD 297.3 at the end of December, 2010. This level
of reserves provides about 10 Months of import cover.
Foreign Currency Assets (FCAs) are the major constituent of foreign
exchange reserves in India. FCAs increased by USD 13.1 billion (5.1
per cent) from USD 254.7 billion at end-March 2010 to USD 267.8
billion at end-December 2010. The increase was largely attributed to
valuation gain, aid receipts and purchase of US dollar by the Reserve
Bank of India.
45
Country-wise details of foreign exchange reserves show that India is
the fourth largest foreign exchange reserve holder in the world, after
China, Japan and Russia.
E XC H A N G E RATE
The exchange rate policy is guided by the broad principles of careful
monitoring and management of exchange rates with flexibility, while
allowing the underlying demand and supply conditions to determine
its movements over a period in an orderly manner.
The monthly average exchange rate of the rupee has generally been
range-bound, moving in the range of ` 44-47 per US dollar between
April-December 2010. The exchange rate of the rupee (monthly
average of buying and selling by the Foreign Exchange Dealer
Association of India [FEDAI], depreciated by 1.5 per cent against USD
from ` 44.50 per USD in April 2010 to ` 45.16 per USD in December
2010. Similarly, the rupee depreciated by 3.2 per cent against the
pound sterling, and 12.2 per cent against the Japanese yen during the
same period, while it appreciated by 1.2 per cent against the euro.
E X P ORTS - IM PO RTS
India’s current account position during 2009 - 10 continued to reflect
the impact of the global economic downturn and deceleration in world
trade, witnessed since the second half of 2008-09. On a Balance of
Payments basis, India’s merchandise exports of USD 182.2 billion
during 2009-10 posted a decline of 3.6 per cent, as against USD 189.0
billion in 2008-09, which recorded a positive growth of 13.7 per cent
over the exports of USD 166.2 billion in 2007-08. Similarly, import
payments of USD 300.6 billion also recorded a decline of 2.6 per cent
46
in 2009-10, as compared to USD 308.5 billion in 2008-09, which was
19.8 per cent higher than the imports of USD 257.6 billion in 2007-
08. Though the decline in exports was relatively higher than that in
imports, the merchandise trade deficit in absolute terms decreased
marginally to USD 118.4 billion (8.6 per cent of GDP) during 2009-10
from USD 119.5 billion (9.8 per cent of GDP) in 2008-09.
The widening of India’s current account deficit during the first half
of 2010-11(April-September 2010) reflects the impact of the growth
asymmetry between India and the rest of the world. India’s exports
and imports growth momentum, which started during the second
half of 2009-10, continued during the first half of 2010-11 also. On
Balance of Payments basis, India’s merchandise exports during the
first quarter (April-June 2010) and second quarter (July-September
2010) of 2010-11 recorded a growth of 43.6 per cent and 25.0 per cent
respectively, as against a decline of 31.8 per cent and 19.1 per cent in
the corresponding quarters of 2009-10. During H1 of 2010-11, exports
recorded a growth of 33.8 per cent as against negative growth of
25.7 per cent during the corresponding period of the previous year.
Similarly, imports witnessed a growth of 34.2 per cent and 22.8 per
cent during the first two quarters of 2010- 11, as against a decline
of 20.8 per cent and 21.3 percent recorded during the corresponding
quarters of 2009-10. Imports posted a growth of 28.2 per cent during
the first half of 2010-11, as compared to negative growth of 21.1
per cent during H1 of 2009 - 10. The rising imports of oil, pearls, and
semiprecious stones have contributed significantly to a burgeoning
import bill. Rising crude oil prices, along with growth in quantity of oil
imports, has led to a higher oil import bill during the first half of 2010-
11. Despite the higher export growth compared to imports during
April-September 2010-11, the trade deficit widened in absolute terms
 INDIA BUDGET 2011
an analysis
by 19.7 per cent to USD 66.9 billion in the first half of 2010-11, as
compared to USD 55.9 billion during the same period last year.
INFRASTRUCTURE
One of the major requirements for sustainable and inclusive economic
growth is an extensive and efficient infrastructure network. It is critical
for the effective functioning of the economy and industry. To accelerate
the pace of infrastructure development and reduce the infrastructure
deficit, the Government has initiated a host of projects and schemes to
upgrade physical infrastructure in all crucial sectors. Total investment
in infrastructure during the Eleventh Plan period based on the revised
data available during the first two years of the Eleventh Plan and it is
now estimated that it would be ` 20,54,205 crore, which is comparable
with the initial investment planned. The contribution of the private
sector during the first two years was 34.32 per cent and 33.74 per cent
respectively, higher than the targeted 30 per cent.
POWER GENERATION
The Eleventh Plan envisaged capacity addition of 78,700 MW in the
power sector, of which 19.9 per cent was hydro, 75.8 per cent thermal,
and the rest nuclear power. This has been revised to 62,374 MW
now comprising 8,237 MW hydro, 50,757 MW thermal and 3380 MW
nuclear power. Capacity addition of 32,032 MW has been achieved
till 31 December 2010 and projects with a capacity of 30,725 MW are
under construction for commissioning during the remaining period of
Eleventh Plan.
RURAL ELECTRIFICATION:
Under the Rajeev Gandhi Grameen Vidyutikaran Yojana (RGGVY),
87,791 villages have been electrified and connections released to
135.31 lakh below poverty line (BPL) households up to 30th November
2010. Under the Tenth Five Year Plan, 235 projects covering 68,763
villages and 83.10 lakh BPL connections were sanctioned at a cost of
` 9,732.90 crore. In Phase I of the Eleventh Plan period, 338 projects
have been sanctioned for implementation at a cost of ` 16,620.61
crore for electrification of 49,736 villages and release of connections
to 163.34 lakh BPL households. Till 30 November 2010, 333 projects
have been awarded and franchisees are in place in 1, 10,567 villages
in 16 States.
OIL AND GAS PRODUCTION:
During the current financial year (2010-11), production of crude oil is
estimated at 37.96 million metric tonne (MMT), which is about 12.67
per cent higher than the crude oil production of 33.69 MMT during
2009-10. The projected production for natural gas, including coal
bed methane (CBM), for 2010-11 is 53.59 billion cubic meters (BCM)
which is 12.80 per cent higher than the production of 47.51 BCM in
2009-10. The increase in natural gas production is primarily from the
KG deepwater block.
EXPLORATION OF DOMESTIC OIL AND GAS
India has an estimated sedimentary area of 3.14 million sq. km,
comprising 26 sedimentary basins. Prior to the adoption of the
New Exploration Licensing Policy (NELP), only 11 per cent of India’s
sedimentary basin was under exploration. Since operationalization of
the NELP in 1999, the Government of India has awarded 47.3 per cent
of it for exploration. So far 87 oil and gas discoveries have been made
by private/joint venture (JV) companies in 26 blocks and more than
640 MMT of oil-equivalent hydrocarbon reserves have been (DGH)
and U S Geological Survey (USGS), USA for exchange of scientific
knowledge and technical personnel in the field of gas hydrate and
research energy is in progress. An MOU was recently signed in the
area of marine gas hydrate research and technology development
between the Leibniz Institute of Marine Sciences, Germany, and
DGH for research on methane production from gas hydrate by carbon
dioxide sequestration.
ROADS
NATIONAL HIGHWAYS DEVELOPMENT PROJECT (NHDP)
About 25 per cent of the total length of National Highways (NHs)
is single lane / intermediate lane, about 52 per cent is two lane
standard, and the balance 23 per cent is four lane standard or more.
In 2010-11, the achievement under various phases of the NHDP up
to November 2010 has been about 1,007 km and projects have been
awarded for a total length of about 3,780 km.
CONSTRUCTION OF RURAL ROADS UNDER THE PRADHAN
MANTRI GRAM SADAK YOJNA (PMGSY)
The PMGSY was launched to provide single all-weather connectivity
to eligible unconnected habitations having population of 500 persons
and above in plain areas and 250 persons and above in hill States,
the tribal (Schedule-V) areas, desert (as identified in the Desert
Development Programme) areas, and LWE-affected districts as
identified by the Ministry of Home Affairs.
Under the programme, up to November 2010 about 4.19 lakh km roads
to benefit 1,07,974 habitations have been cleared with an estimated
cost of ` 1,18,298 crore. A sum of ` 75,404 crore has been released
to the States/UTs and about ` 74,345 crore has been spent. So far,
2,98,809.72 km road length has been completed and new connectivity
has been provided to over 73,651 habitations. Work on a road length
of about 1,20,181 km is in full swing.
47
CIVIL AVIATION
The Civil Aviation Sector witnessed a strong recovery during 2010 from
the adverse impact of the recent global financial crisis. The scheduled
domestic passenger traffic at 51.53 million clocked a growth rate of
19 per cent during January-December 2010 as compared to 43.3
million during the corresponding period in 2009. Domestic cargo
transported by air increased from 3.4 million tonnes in 2009 to 4.7
million tonnes in 2010 registering a growth rate of 30 per cent. At
present 12 scheduled airlines are operational (10 passenger and 2
cargo). The total number of aircraft in their fleet has risen by one to
419 at the end of December 2010. The non-scheduled operators as on
December 2010 have 360 air-craft in their fleet.
SERVICES SECTOR
India stands out for the size and dynamism of its services sector. The
contribution of the services sector to the Indian economy has been
manifold: a 55.2 per cent share in gross domestic product (GDP),
growing by 10 per cent annually, contributing to about a quarter
of total employment, accounting for a high share in foreign direct
investment (FDI) inflows and over one-third of total exports, and
recording very fast (27.4 per cent) export growth through the first half
of 2010-11.
SERVICES EMPLOYMENT IN INDIA
Although the primary sector (agriculture mainly) is the dominant
employer followed by the services sector, the share of services has
been increasing over the years while that of primary sector has been
decreasing. Between 1993-94 to 2004-05, there was a sharp fall
in the share of the primary sector in employment. The consequent
rise in share of employment of the other two sectors was almost
equally divided between the secondary and tertiary sectors. In 2007-
08 compared to 2004-05, though inflows in April 2000–December
2010 is around 44 per cent. If construction is included then the share
rises to 51 per cent. The financial and non-financial services sector
which falls purely in the services category is the largest recipient
of FDI equity inflows with a 21 per cent share. This is followed by
the other two sectors, namely computer software and hardware, and
telecommunications each with 8 per cent share.
FOREIGN DRIECT INVESTMENT IN SERVICES IN INDIA
The measurement of the share of services in FDI inflows encounters
problems as it is difficult to clearly differentiate activities between
services and goods in sectors such as computer hardware and
software, telecommunications, and construction. Nevertheless,
the share of the four sectors combined (services [financial and
nonfinancial], computer hardware and software, telecommunications,
and housing and real estate), predominantly consisting of services, in
48
FDI equity in the services sector also fell by 29.1 per cent (in US dollar
terms). The first nine months of 2010-11 have also not shown any
improvement on the FDI front, overall and in services sectors.
SERVICES EXPORTS
India is also moving towards a services-led export growth. During 2004-
05 to 2008-09 as per the Balance of Payments data, merchandise and
services exports grew by 22.2 and 25.3 per cent respectively. Services
growth slowed in 2009-10 as a result of the global recession, but
the decline was less pronounced than the slowdown in merchandise
export growth, and has recovered rapidly in the first half of 2010-11
with a growth of 27.4 per cent. The overall openness of the economy
reflected by total trade including services as a percentage of GDP
shows a remarkable increase from 29.2 per cent in 2000-01 to 53.9
per cent in 2008-09, though it dipped to 46.1 per cent in 2009-10
due to the global crisis. The dip was more due to fall in share of
merchandise trade to GDP to 35 per cent in 2009-10 compared to 41
per cent in 2008-09. The fall in the share of services trade to GDP was
less than 2 percentage points from 12.9 per cent to 11.2 per cent.
TE LE C OMMUNIC ATIONS
GROWTH
The opening of the sector has not only led to rapid growth but also
helped a great deal towards maximization of consumer benefits as
tariff have been falling across the board. From only 76.54 million
telephone subscribers in 2004, the number increased to 764.77 million
at the end of November 2010. Wireless telephone connections have
contributed to this growth as their number rose from 35.62 million in
March 2004 to 729.58 million at the end of November 2010. The wire-
line has shown a decline from 40.92 million in 2004 to 35.19 million
in November 2010
TELEDENSITY
With increasing private-sector participation, the share of the private
sector in total telephone connections has increased to 84.5 per cent
in November 2010 from a meager 5 per cent in 1999. Teledensity,
an important indicator of telecom penetration, rose from 7.02 per
cent in March 2004 to 64.34 per cent in November 2010. Thus there
has been continuous improvement in the overall teledensity of the
country. Rural teledensity which was above 1.57 per cent in March
2004 has increased to 30.18 per cent at the end of November 2010.
Urban teledensity has increased from 20.74 per cent in March 2004
to 143.95 per cent at the end of November 2010.
With the penetration of mobile services and flourishing of private
service providers, rural telephone connections have gone up from 12.3
million in March 2004 to 250.94 million in November 2010. The share
 INDIA BUDGET 2011
an analysis

of rural telephones in total telephones has steadily increased from
around 16 per cent in 2004 to 32.81 per cent as on 30th November
2010. During 2009-10, the growth rate of rural telephones was 62.6
per cent as against 37.32 per cent for urban telephones. The private
sector has contributed crucially to the growth of rural telephones by
providing about 84.5 per cent of telephones as in November 2010.
INTERNET / BROADBAND
With supportive policies, broadband subscribers grew from 8.77
million as in March 2010 to about 10.71 million up to November 2010.
A target of 20 million by 2010 has been set in broadband policy. The
auction of Broad Band Wireless Access (BWA) spectrum has been
successfully conducted. Newer Access technologies like BWA can
significantly transform the character of internet/broadband scenario
in India. This will encourage further expansion of wireless service
with a vision of providing ‘Broadband for all’.
NEW HORIZONS FOR FURTHER GROWTH
THIRD-GENERATION (3G) TELECOM SERVICES
The explosive growth of the telecom industry in India is being
followed by the urge to move towards better technology and the
next level of service delivery. While the last five years have been
transformational for Indian telecom industry, the next few years look
even more exciting. One of the key new frontiers is 3G technology.
The auction of 3G/WBA spectrum has been successfully conducted.
This will encourage further expansion of wireless services.
moves taken by the Government, incentives offered, large talent pool
in R&D, and low labour cost which can provide an impetus to the
industry. Exports of telecom equipment have also increased from `
11,000 crore in 2008-09 to ` 13,500 crore during 2009-10 and are
expected to increase to ` 14,000 crore in 2010-11.
ACTIVITIES UNDER UNIVERSAL SERVICE OBLIGATION FUND
(USOF)
The USOF continues to be used to subsidize the development of the
telecom sector in rural areas. Support is provided from the USOF
for operation and maintenance of village public telephones (VPT) in
revenue villages identified as per Census 2001. There are still about
62,443 uncovered villages which would also be provided with VPT
facility with subsidy support from the USOF. Agreements were signed
with Bharati Sanchar Nigam Limited (BSNL) whereby 40,101 villages
have been covered under VPTs. As on 31st December 2010, 61,985
VPTs have been provided by BSNL. In order to provide broadband
connectivity to rural areas under the purview of the USOF, out of a
total of 8,88,832 wire line broadband connections, 2,32,852 have
been provided till 30th November 2010.

MOBILE NUMBER PORTABILITY (MNP)

MNP allows any subscriber to change his service provider without
changing his mobile phone number. The much-awaited MNP was
launched on 25th November 2010 in Haryana and is now available
to more than 700 million subscribers across the country since 20th
January, 2011.

MANUFACTURING
Indian telecom industry manufactures a complete range of wire line
telecom equipment using state-of-the-art technology. Considering
the growth of wireless, there are excellent opportunities for domestic
and foreign investors in manufacturing sector. Presently most of the
wireless core equipment is being imported and there is great potential
to manufacture these items in the country. The last five years saw
many renowned telecom companies setting up their manufacturing
bases in India. The production of telecom equipments in value terms
increased from ` 48,800 crore during 2008-09 to ` 51,000 crore
during 2009-10. The worth of telecom equipment including customer
premises equipment (CPE) produced during 2010-11 is expected to
be about ` 53,500 crore. There are favorable factors such as policy
49
50
KEY BUDGET PROPOSALS
BUDGET AT A GLANCE
INR in crores
2009-2010 2010-2011 2010-2011 2011-2012
Actuals Budget Estimates Revised Estimates Budget Estimates

1. Revenue Receipts 572811 682212 783833 789892

2. Tax Revenue (net to Centre) 456356 534094 563685 664457
3. Non-tax Revenue 116275 148114 220148 125435
4. Capital Receipts (5+6+7)$ 451676 426537 432743 467837
5. Recoveries of Loans 8613 5129 9001 15020
6. Other Receipts 24581 40000 22744 40000
7. Borrowings and other Liabilities$ 418482 381408 400998 412817
8. Total Receipts (1+4)$ 1024487 1108749 1216576 1257729
9. Non-plan Expenditure 721096 735657 821552 816182
10. On Revenue Account of which, 657925 643599 726749 733558
11. Interest Payments 213093 248664 240757 267986
12. On Capital Account 63171 92058 94803 82624
13. Plan Expenditure 303391 373092 395024 441547
14. On Revenue Account 253884 315125 326928 363604
15. On Capital Account 49507 57967 68096 77943
16. Total Expenditure (9+13) 1024487 1108749 1216576 1257729
17. Revenue Expenditure (10+14) 911809 958724 1053677 1097162
18. Of which, grants for creating of 31317 90792 146853
Capital Assets
19. Capital Expenditure (12+15) 112678 150025 162899 160567
19. Revenue Deficit (17-1) 338998 276512 269844 307270
(5.2) (4.0) (3.4) (3.4)
20. Effective Revenue (17-18) 245195 179052 160417
(3.5) (2.3) (1.8)
20. Fiscal Deficit {16-(1+5+6)} 418482 381408 400998 412817
(6.0) (6.8) (6.7) (4.6)
21. Primary Deficit (20-11) 205389 132744 160241 144831
(3.1) (1.9) (2.0) (1.6)

@ Actuals for 2009-10 are provisional.

$ Does not include receipts in respect of Market Stabilization Scheme (MSS).
* Includes draw-down of Cash Balance.
# Excluding Grants for creation of Capital Assets.
Note : GDP for BE 2011-2012 has been projected at ` 8980860 crore assuming 14 per cent growth over the advance estimates of
2010-2011 (` 7877947 crore) released by CSO.
52
 INDIA BUDGET 2011
an analysis

direct tax
INCOME TAX
The proposals in the Finance Bill shall become applicable from Assessment Year 2012 – 2013 (i.e. the financial year to end on March 31, 2012),
unless otherwise specifically stated.

TAX R AT E S
INCOME TAX RATES

FOR INDIVIDUALS, HINDU UNDIVIDED FAMILY, ASSOCIATION OF PERSONS AND BODY OF INDIVIDUALS
Income Existing rates Proposed rates
Tax Surcharge Education Total Tax Surcharge Education Total
Cess per cent Cess per cent

` 1,60,001 to ` 1,80,000 10 – 0.30 10.30 – – – –

(Individuals other than covered
under Note 1 and 2 below)
` 1,80,001 to ` 5,00,000 10 – 0.30 10.30 10 – 0.30 10.30
` 5,00,001 to ` 8,00,000 20 – 0.60 20.60 20 – 0.60 20.60
` 8,00,001 and above 30 – 0.90 30.90 30 – 0.90 30.90

1) The eligibility age of senior citizens has reduced from 65 to 60 years.

2) In the case of a resident woman below the age of sixty years, the basic exemption limit is ` 1, 90,000/-. For income upto ` 5,00,000 tax
@ 10.30 per cent shall be applicable.
3) In the case of a resident individual of the age of sixty years or above, the basic exemption limit is ` 2,50,000/-. For income upto ` 5,00,000
tax @ 10.30 per cent shall be applicable.
4) A new category of ‘Very Senior Citizens’ of the age 80 years and above will be eligible for a higher exemption limit of ` 5 lakh.

FOR CO-OPERATIVE SOCIETIES

Income Tax Rates

Up to ` 10,000 10 per cent

` 10,001 to 20,000 20 per cent
` 20,001 and above 30 per cent
On the above, surcharge is not applicable. Education Cess is applicable at the rate of 3 per cent.

FOR LOCAL AUTHORITIES

Local Authorities are taxable at the rate of 30 per cent. Surcharge is not applicable. Education Cess is applicable at the rate of 3 per cent.

FOR PARTNERSHIP FIRM

• Partnership Firms are taxable @ 30 per cent.
• No surcharge shall be levied in the case of a firm.
• Education Cess is applicable @ 3 per cent on income tax (inclusive of Surcharge, if any).

FOR DOMESTIC COMPANIES

• Domestic companies are taxable @ 30 per cent.
• Surcharge is proposed to be reduced from present 7.5 per cent to 5 per cent if income is in excess of ` 1,00,00,000.
• Education Cess is applicable @ 3 per cent on income tax (inclusive of surcharge, if any).
53
• The rate of tax on profits from life insurance business is 12.5 per
cent plus surcharge and Education Cess.
• Minimum Alternet Tax is proposed to be increased from present
18 per cent to 18.5 per cent of book profit
FOR FOREIGN COMPANIES
• Foreign companies are taxable @ 40 per ecnt.
• Surcharge is proposed to be reduced from present 2.5 per cent to
2 per cent if income is in excess of ` 1,00,00,000.
• Education Cess is applicable @ 3 per cent on income tax (inclusive
of surcharge, if any).
DOMESTIC TAXATION
Amendment in Definition of charitable purpose
• Under existing provisions, the first proviso to S.2(15) provides
that any activity in the nature of trade, commerce or business
or rendering of any service in relation to trade, commerce or
business for a cess or fee would be excluded from the definition
of “charitable purpose” irrespective of the nature of use or
application of the income from such activity.
• It is proposed to amend section 2(15) to enhance the current
monetary limit in respect of receipts from such activities
mentioned in first proviso to S.2(15) from ten lakh rupees to
twenty five lakh rupees. The amendment shall take effect from
1st April 2012.
Exemption of certain perquisites paid to Chairmen and
Members of Union Public Service Commission
• It is proposed to amend S.10 retrospectively from 1st April 2008 to
exempt specified perquisites and allowances notified by Central
Government and paid to both serving as well as retired Chairmen
and members of Union Public Service Commission.
Exemption of specified income of notified body, authority,
trust, board or commission
• It is proposed to insert a new clause in S.10 to take effect from
1st June 2011 wherein exemption is proposed to be provided from
income tax to any specified income of a notified body, authority,
board, trust or commission which is set up or constituted by
Central, State, or Provincial Act or Central or State Government
and which is not engaged in any commercial activity and having
the object of regulating or administering an activity for benefit of
general public.
• A consequential amendment is proposed in S. 139 for filing of the
return of income by such notified entity.
54
Exemption of income from notified infrastructure debt
fund
• It is proposed to insert a new clause in S.10 wherein income
received from infrastructure debt fund notified by Central
Government and set up in accordance with the prescribed
guidelines would be exempt from tax.
• It is also proposed to amend S.115A to provide that any interest
received by a non- resident from such notified debt fund shall be
taxable at rate of five per cent.
• A new S.194LB is proposed to be inserted to provide that tax shall
be deducted at source at rate of five percent by such notified debt
fund on any interest paid by it to a non-resident.
• These amendments shall take effect from 1st June 2011.
Extension of time limit for obtaining exemption from
Employees Provident Fund Organisation (EPFO)
• It is proposed to extend the time limit in order to enable EPFO to
process the application made by various establishments seeking
exemption u/s 17 of the EPF & MP Act from 31st Dec 2010 to 31st
March 2011.
Increase in the weighted deduction of amount paid/
incurred for scientific research
• It is proposed to amend clause (a) of sub section (2AA) of S.35
so as to enhance the weighted deduction from one hundred
and seventy five per cent to two hundred percent on account of
amount paid to a National Laboratory or a university or an Indian
Institute of Technology (IIT) or a specified person for the purpose
of an approved scientific research programme. This amendment is
proposed to take effect from 1st April, 2012 and will, accordingly,
apply in relation to the assessment year 2012-13 and subsequent
years.
Amendment in provisions related to deductions in respect
of the expenditure on specified business
• It is proposed to amend S.35AD to include following two new
business as “Specified Business” with effect from 1st April
2012:
i) The business of developing and building a housing project
under a scheme for affordable housing framed by the Central
Government, or the State Government as the case may be,
and notified by the Board in this behalf in accordance with the
guidelines as may be prescribed, vide insertion of sub clause
(vii) in clause (c) of S. 35AD(8).
ii) The production of fertilizer in India, vide insertion of sub
clause (viii) in clause (c) of S. 35AD(8).
• It is proposed to insert new clause (ad) and (ae) in sub section (5)
 INDIA BUDGET 2011
an analysis
of S.35AD to specify that the date of commencement of operations
shall be on or after the 1st of April 2011 for the business to be
specified u/s 35AD(8)(c) (vii) and (viii) respectively. This amendment
will take effect from 1st April 2012 and will apply in relation to
assessment year 2012-13 and subsequent years.
• It is proposed to amend the sub clauses (iv) and (v) of clause
(c) of S. 35(8) so as to omit the word “new” from the existing
definition of “specified business” in respect of new hotel and
new business. The word “new” is proposed to be removed in
order to remove ambiguity u/s 73A. With this amendment, loss
of the assessee on account of a “specified business” claiming
deduction u/s 35AD would be allowed to be set off against the
profit of another ‘specified business”, whether or not the latter
is eligible for deduction u/s 35AD. Therefore, an assessee who
currently operates a hospital or a hotel would be able to set off the
profits of such business against the losses, if any, from the hotel
or hospital which is eligible for deduction under section 35AD.
The amendment will take effect retrospectively from 1st April,
2011 and will, accordingly, apply in relation to the assessment
year 2011-12 and subsequent years.
Benefits related to contribution to pension schemes
• It is proposed to insert a new clause (iva) in S. 36(1) to provide that
the contribution made by an employer to a notified pension scheme
to the extent of 10 per cent of salary would be allowed as a deduction
to the employer in computing the income under the head “Profits and
gains of business or profession”. The aforesaid amendment will take
effect from 1st April 2012 (i.e. AY 2012 - 2013).
• It is also proposed to amend S. 80CCE so as to exclude the
contributions made by an employer to a notified pension scheme,
from the limit of deduction of one lakh rupees available to an
individual cumulatively under existing S.80C, 80CCC, 80CCD. The
aforesaid amendment will take effect from 1st April 2012 (i.e. AY
2012 - 2013).
Deduction for investment in long-term infrastructure
bonds
• It is proposed to amend S. 80CCF to allow deduction on account
of investment made in notified long-term infrastructure bonds
during financial year 2011 – 2012. The amendment will take
effect from 1st April 2012 (i.e. AY 2012 - 2013).
Deduction in respect of profit and gains from business of
generation and distribution of power
• It is proposed to extend the time limit for an undertaking set up
for generation and distribution of power if it begins to generate
power upto 31st March 2012.
• It is proposed to extend the time limit for an undertaking which
starts transmission or distribution by laying a network of new
transmission or distribution lines upto 31st March 2012.
• It is proposed to extend the time limit for an undertaking which
undertakes substantial renovation and modernization of existing
network of transmission or distribution lines upto 31st March
2012.
Sunset of tax holiday for certain entities engaged in
commercial production of mineral oil
• It is proposed to provide that the deduction under this clause
shall not apply to blocks licensed under a contract awarded after
31st March 2011 under the New Exploration Licencing Policy
announced by the Government of India.
• This amendment shall take effect from 1st April 2012 and will,
accordingly, apply in relation to the Assessment Year 2012-2013
and subsequent years.
Amendments affecting SEZ developers/units in SEZ
• It is proposed to insert a proviso to S. 115JB(6) to provide that the
provisions of S. 115JB(6) exempting SEZ developers and units
in SEZ from Minimum Alternate Tax(MAT) would be inapplicable
with effect from 1st April 2012 (i.e. AY 2012 - 2013).
• It is proposed to insert a proviso to S. 115O(6) to discontinue the
availability of exemption from Dividend Distribution Tax(DDT) in
case of SEZ developers with effect from 1st June 2011. Similarly,
it is proposed to correspondingly omit Explanation to S. 10(34) of
the Act with effect from 1st June 2011.
• Consequential amendments have also been proposed to be made
in the Second Schedule of the SEZ Act, 2005.
Increase in rate of Minimum Alternate Tax(MAT)
• It is proposed to amend S. 115JB(1) to increase the rate of MAT to
18.5 per cent commencing AY 2012 – 2013 from the existing rate
of 18 per cent of book profits of the company.
Special Provisions relating Limited Liability
Partnerships(LLP)
• Special Provisions relating to applicability of Alternate Minimum
Tax(AMT) to Limited Liability Partnerships(LLP) vide proposed
insertion of Chapter XII-BA:
– It is proposed to insert S. 115JC to provide for AMT at the
rate of 18.5 per cent in case the tax payable at such rate on
the “adjusted total income” is less than the tax payable as
per normal provisions of the Act.
– Proposed S.115JC(2) explains “adjusted total income” as total
income of the LLP before giving effect to proposed Chapter
55
 XII-BA as increased by deductions claimed under Chapter VIA
and deduction u/s 10AA.
– It is proposed to insert S. 115JD to provide for credit of AMT
paid by LLP over the tax payable as per normal provisions of
the Act and to provide that the same would be allowed to
be carried forward upto tenth assessment year immediately
succeeding the assessment year in which such tax credit
becomes allowable.
– Further, it is proposed u/s 115JD that the tax credit would be
set off against the tax payable as per normal provisions of
the Act in the assessment year in which tax payable as per
normal provisions of the Act exceeds AMT.
Tax on distribution of income to unit holders
• It is proposed to expand the scope of S.115R to include additional
income tax on distribution by Mutual Fund at the rate of:
– 25 per cent if the recipient is an individual or HUF in case of
distribution by money market mutual fund or a liquid fund
– 30 per cent if the recipient is any other person in case of
distribution by money market mutual fund or a liquid fund
– 12.5 per cent if the recipient is an individual or HUF in case of
distribution by a debt fund other than money market mutual
fund or liquid fund and
– 30 per cent if the recipient is any other person in case of
distribution by debt fund other than a money market mutual
fund or a liquid fund.
• This amendment shall take effect from 1st June 2011.
• Distribution of income by an equity oriented unit shall continue to
be exempt from tax.
Exemption to certain class of persons of furnishing a return
of income Section 139(1C)
• It is proposed to insert Section 139(1C) with effect from 1st June,
2011, which empowers the Central Government to exempt, by
notification in the official Gazette, any class or classes of persons
from the requirement of furnishing a return of income, having
regard to such conditions as may be specified in the notification.
Amendment to Section 143(1B)
• It is proposed to amend Section 143(1B) for extending the time
limit for issue of notification from 31st March 2011 to 31st March
2012 for the purpose of giving effect to the scheme made under
section 143(1A).
Provision relating to Settlement Commission
• A tax payer who is the subject matter of a search would continue
to be allowed to file an application for settlement if additional
56
income tax payable on the income disclosed in the application
exceeds fifty lakh rupees. It is proposed to insert a provision to
also enable filing of a settlement application by a person who is
related to such tax payer in whose case proceedings have been
initiated as a result of search or a requisition of books of accounts,
if additional income tax payable in their application exceeds ten
lakh rupees.
• It is proposed to insert sub section (6B) to S.245D to enable the
Settlement Commission to rectify an order passed u/s 245D(4),
for any mistake apparent from the record within a period of six
months from the date of order. Further, it is proposed that if the
liability of the applicant will be affected, then before passing the
rectification order, an opportunity of being heard would be given
to both parties i.e. to the applicant and also to the Commissioner.
This amendments will take effect from 1st June, 2011.
(The aforesaid provision is proposed to be introduced to annul the
effect of decisions rendered by Delhi HC in the case of Capital Cables
(India) (P) Ltd wherein it was held that the order of the settlement
commission was conclusive and final and subsequently could not be
re-opened/rectified once the order had been passed).
Deletion of Section 282B
• It is proposed to omit Section 282B regarding allotment of
Document Identification Number with retrospective effect from
1st April, 2011.
INTERNATIONAL TAXATION
TRANSFER PRICING
Determination of Arms length price
• It is proposed to substitute +/-5 per cent variation as permitted
u/s 92C between the actual price and arms length price by such
percentage for various business segments as may be notified by
the Central Government.
• This amendment shall take effect from 1st April 2012 and will,
accordingly, apply in relation to the Assessment Year 2012-2013.
Powers of Transfer Pricing Officer
• It is proposed to provide that the Transfer Pricing Officer shall
have the jurisdiction to determine the arms length price of
the transaction which is noticed by him also in the course of
proceedings before him. The transactions shall be in addition to
the transactions referred to the TPO by the Assessing Officer.
(The aforesaid provision is proposed to be introduced in order to annul
the effect of CBDT instruction no. 3 of 2003 and the decision rendered
by Delhi ITAT in the case of Amadeus India Private Limited).
• It is currently provided u/s 92CA that the TPO can exercise powers
 INDIA BUDGET 2011
an analysis
available to the AO u/s 131(1) and 133(6) which include powers
of summoning or calling for detail for the purpose of inquiry or
investigation into the matter.
• It is also proposed that TPO shall have the power to conduct a
survey u/s 133A of the Act in order to conduct on the spot inquiry
and verification.
• This amendment shall take effect from 1st June 2011.
Extension of time limit for filing the tax return in cases
where transfer pricing audit is mandatory
• It is proposed to extend the due date of filing the return of income
from 30th September of the assessment year to 30th November
of the assessment year for corporate assessees who have
undertaken international transaction and filed a transfer pricing
report in Form 3CEB.
• This amendment is proposed to take effect from 1st April, 2011.
Special measures in respect of transactions with person
located in notified jurisdictional area introduced by
insertion of new S.94A
• It is proposed to introduce new S.94A in the Act effective from
1st June, 2011 as a counter measure in respect of transactions
with persons located in a notified jurisdictional area. These
anti avoidance provisions are aimed to discourage transactions
by a resident assessee with persons located in any country or
jurisdiction which does not effectively exchange information with
India.
• Proposed section provides as under:
– Enabling powers to central government to notify any country
or territory outside India which does not have effective
exchange of information by it with India, as a notified
jurisdictional area.
– Scope of the term “person located in a notified jurisdictional
area” is given wider meaning to include (a) a person resident
in such notified area, (b) a company established in such
notified area and (c) permanent establishment in notified
such of any non-resident of such notified area.
– These provisions will be applicable in case of any transaction by
an assessee, where either of the party is located in such notified
jurisdictional area. If so, then following implications shall follow:
– All the parties to the transaction shall be deemed to
be associated enterprises and the transaction shall be
deemed to international transaction and accordingly,
compliance under provisions of section 92 to section
92F, also known as transfer pricing provisions shall be
applicable.
– Any payments to any financial institution located in such
jurisdictional area shall be allowed as deduction only if
assessee provides an authorization, in prescribed form,
authorizing the board or any other income tax authority to
seek relevant information from such financial institution
on behalf of assessee.
– Any expenditure or allowance (including depreciation)
arising from the transaction with a person located in such
jurisdictional area shall be allowed as deduction only if
assessee maintains such other document and furnishes
such information as may be prescribed in this behalf.
– If any sum is received from a person located in the notified
jurisdictional area in any previous year, then, the onus is
on the assessee to satisfactorily explain, the source of
such money in the hands of such person or in the hands of
the beneficial owner, of in case of his failure to do so, the
amount shall be deemed to be as income of the assessee
for that previous year.
– Any payment made to a person located in the notified
jurisdictional area shall be liable to deduction of tax at the
source at the highest rate of tax specified in the relevant
provision of the Act or rates in force or 30 percent.
PROVISION AND AMENDMENTS TO FACILITATE
EXCHANGE OF INFORMATION BETWEEN TAX
AUTHORITIES OF INDIA AND OTHER FOREIGN
TERRITORY
Income tax authorities empowered to seek information
under exchange of information from tax authorities outside
India
• It is proposed to amend section 131 to insert new sub-section
which proposes to empower officer not below the rank of
Assistant Commissioner of Income tax rights relating to discovery,
production of evidence etc to make enquiry or investigation in
respect of any person or class of persons in relation to double
tax avoidance agreement or exchange of information agreement.
Further, it is also proposed to empower such authority, as notified
by board, to impound and retain any books of account and other
documents produced before it in any proceedings under the Act.
Assessing officer empowered to call for information
• It is proposed to empower certain income tax authorities such
as assessing officer, the Deputy Commissioner (Appeals), Joint
Commissioner or the Commissioner (Appeals) to call for any
information under double tax avoidance agreement or exchange
of information agreement from tax authorities of country outside
India. Such powers are proposed to be conferred effective from
1st June, 2011
57
 Extension of time limit for assessments in case of exchange
of information
• S.153 of the Act provides for the time limits for completion of
assessments and reassessments. In this regard, certain exclusion
were provided in respect of specified period for computing
the period of limitation for completion of assessments and
reassessments.
• It is now proposed to exclude the time taken in obtaining
information from the tax authorities in jurisdictions situated
outside India, under a double tax avoidance agreement or
exchange of information agreement, from the statutory time limit
prescribed for completion of assessment or reassessment.
Period of exclusion specified by amendment in Explanation
to S.153
• In light of amendment in S.153, it is proposed that the period
commencing from the date on which a reference for exchange of
information is made by a competent authority and ending with
the date on which the information so requested is received by the
Commissioner subject to maximum period of six months, shall
be excluded from the statutory time limit provided u/s 153 for
completion of assessment or reassessment.
OTHER AMENDMENTS RELATING TO
INTERNATIONAL TAX
Taxation of foreign dividends at a concessional rate of 15
per cent
• It is proposed to tax dividends received by an Indian holding
company from subsidiary foreign company at concessional rate of
rate of 15 per cent. However, no expenditure in relation to earning
such dividend shall be allowed under the Act. A “subsidiary
foreign company” shall mean a company in which the Indian
company holds more than half of its nominal equity share capital.
“Dividends” shall have same meaning as provided u/s 2(22) but
will not include deemed dividend by way of advancement of loan
as provided u/s 2(22)(e).
Insertion of new provisions for reporting of activities of
liaison offices
• It is proposed to introduce a new S.285 mandating the filing of
annual information by non-residents in respect of their liaison
offices in India, within sixty days from the end of financial year,
in the prescribed form and providing prescribed details relating to
their liaison offices in India.
(The aforesaid provision is proposed to be introduced in order to
closely examine the activities actually carried out by the liaison office
as it has been held in various decisions rendered by courts of law that
a liaison office does not constitute permanent establishment of the
foreign company on the premise that it is not permitted by RBI to
undertake business generating activities).

TDS
TDS R AT E S F O R ASSESSM EN T YE AR 2012- 13 ( FINANC IAL YE AR 2011- 12)

(A) On payments to residents (subject to notes below)

Sr Payments to Criteria for Deduction Section Company Partnership Individual,

No Resident Payee Firm HUF, AOP, BOI
Rate (per cent)
1 Interest on Securities Payment in excess of ` 2,500 193 10 10 10
2 Other Interest ( Refer Note 3) Payment in excess of ` 5,000 194A 10 10 10
3 Winning From Lotteries Payment in excess of ` 10,000 194B 30 30 30
4 Winning From Horse Race Payment in excess of ` 5,000 194BB 30 30 30
5 Payment to contractors Payment in excess of ` 30,000 194C 2 2 1
(other than for transport) per contract or ` 75,000 p.a.
6 Insurance Commission Payment in excess of ` 20,000 194D 10 10 10
7 Commission / Brokerage Payment in excess of ` 5,000 p.a. 194H 10 10 10

58
 INDIA BUDGET 2011
an analysis
8 Rent for Land or Building/
Furniture and Fixture Payment in excess of 194I 10 10 10
Rent for Plant & machinery, ` 1,80,000 p.a. 2 2 2
Equipments
9 Professional Fees/Royalties Payment in excess of 194J 10 10 10
` 30,000 p.a.
Notes
1 No surcharge or cess shall be applicable while deducting tax at source on payments other than salaries to residents.
2 W.e.f. 1st April, 2010, the rate of TDS will be 20 per cent in all cases, if PAN is not quoted by the deductee.
3 For interest on Bank Deposits and Deposits with Post Office, the threshold limit is ` 10,000.

(B) On payments to non-residents (subject to notes below)

Sr No Payments to Non-Resident Payee Criteria for Deduction Section Rate

(per cent)
1 Tax on Short Term Capital Gains On sale of shares or units of mutual funds 111A 15
where STT is paid.
2 Tax on Long Term Capital Gains Not being long term capital gains referred 112 20
to section 10(33), 10(36) and 10(38) ie. listed shares,
units of mutual funds and units of UTI.
3 Winning From Lotteries Payment in excess of ` 10,000 194B 30
4 Winning From Horse Race Payment in excess of ` 5,000 194BB 30
5 Tax on royalty on copyrights, matters included (a) Agreement made on or after 1st June, 1997 115A(1)(b)/ 20
in industrial policy or under approved but before 1st June, 2005 115A(1A)
agreements by an Indian concern or by (b) Agreement made after 1st June, 2005 115A(1)(b)/ 10
Government of India 115A(1A)
6 Tax on fees for technical services matters (a) Agreement made on or after 1st June, 1997 before 115A(1)(b) 20
included in industrial policy or under 1st June, 2005
approved agreements by an Indian concern (b) Agreement made on or after 1st June,2005 115A(1)(b) 10
or by Government of India
7 Tax on Interest (a) On borrowings in foreign currency by an Indian 115A(1)(a) 20
concern or by Government of India other than interest
refered in (b) below
(b) On notified infrastructure debt fund
(w.e.f 1st June 2011) 194LB 5
8 Other income (a) In case of non-resident companies – 40
(b) In case of non-residents other than – 30
non-resident companies

Notes:
1 For NRI’s opting to be taxed under chapter XII-A, tax shall be deductible at the rate of ten percent on long term capital gains and twenty
percent on investment income.
2 The above rates will be increased by a surcharge at the rate of two percent (previously two and half percent ) in the case of foreign company
where the income or the aggregate of such incomes paid or likely to be paid exceeds one crore rupees.
3 Education cess and higher education cess shall be levied at the rate of two percent and one percent respectively
4 W.e.f. 1st April, 2010, the rate of TDS will be 20 per cent in all cases, if PAN is not quoted by the deductee.
5 Treaty rates will differ from Country to Country.
59
INDIRECT TAX proposed to be amended to cover services rendered by a club or
association to its non-members also, from presently restricted to
EFFECTIVE DATE OF VARIOUS CHANGES its members only.
Particulars Date from when effective • The present services provided by the hospitals, nursing homes,
New Services and Changes in From a date to be notified after “specialty clinic” has been widened by substituting the words
Existing Services the enactment of the Finance “clinical establishment” which has been defined and it includes
Bill, 2011 and covers hospitals, dispensaries, nursery home, etc which
Point of Taxation Rules under the 01/04/2011 has air conditioned facility and more than 25 beds. However,
Finance Act, 1994 establishments owned or controlled by government or local
Amendment to Export of Service 01/04/2011 authority are excluded.
Rules, 2004
Amendment to Taxation of 01/04/2011 ABATEMENTS & EXEMPTIONS
Service (Provided from Outside • An abatement of 25 per cent from the taxable value is being
India and Received in India) Rules, 2006 provided for the purpose of levy of service tax under ‘Transport of
Amendments to CENVAT Credit 01/04/2011 goods through coastal and inland shipping’.
Rules, 2004 (Other than those • An abatement of 70 per cent has been provided for the services
specified in the relevant provided by air conditioned restaurants having a license to serve
Notifications) alcohol.
Legislative changes in Customs Date of enactment of the • Short term accommodation provided by hotels, guest houses, etc
and Excise Finance Bill, 2011 has been granted an abatement of 50 per cent.
New Rates of Custom duty 01/03/2011 • Exemption is being provided to ‘Works contract’ service provided
New Rates of Excise duty 01/03/2011 for construction or finishing of new residential complex under
Specific levy change for Transport 01/04/2011 ‘Jawaharlal Nehru National Urban Renewal Mission’ and ‘Rajiv
of Passengers by Air Service Awaas Yojana’.
• Exemption is being provided to services provided within a port
SERVICE TAX or other port or an airport under the ‘Works contract’ service for
INTRODUCTION OF NEW SERVICES AND specified purposes.
ALTERATION TO EXISTING SERVICES. • Exemption is being provided to ‘Rashtriya Swasthya Bima Yojana’
• Services provided by air conditioned restaurants having a license under the ‘General insurance service’.
to serve alcohol in relation to food and beverages will now be • Value of air freight included in the assessable value of goods for
liable to service tax. charging customs duties is being excluded from taxable value for
• Accommodation provided by guest house, inns, clubs or campsites the purpose of levy of service tax under the ‘Transport of goods by
for a period less than 3 months will now be liable to service tax. air service’.
• Preschool coaching and training centre or any institute or • Services related to transportation of goods by road, rail or air
establishment which were excluded in the definition have now when both the origin and the destination are located outside
been included. India is being exempted from service tax.
• The definition of “Support services of business or commerce” • A modified scheme is being introduced to refund service tax
has been expanded to include not only operational assistance but to SEZ units and developers and notification No. 9/2009-ST is
also administrative assistance. being superceded. In the modified scheme, ‘wholly consumed’
• The taxable services of “authorized service station” has been services are being defined in the notification in order to extend
widened by deleting the definition of authorized service station ‘outright exemption’ and to permit refund of all other services on
and covering all types of persons providing services of repair, a proportionate basis.
renovation, etc. However, the services for 3 wheeled auto
rickshaw and goods carriage vehicles have been excluded. WITHDRAWAL OR AMENDMENTS OF EXEMPTIONS:
• The words “risk cover in life insurance” has been deleted thus • The rates of service tax on travel by air are being revised as
expanding the scope of Insurance services. follows:
• The taxable service in relation to “club or association services” is – Domestic travel (economy class): from ` 100 to ` 150
60
 INDIA BUDGET 2011
an analysis
– International travel (economy class): from ` 500 to ` 750
– Domestic travel (other than economy class) 10 per cent
(Standard rate)
• Exemption from service tax on the membership fees under ‘Club
or association service’ is being given to the associations or
chambers representing industry or commerce for the period from
16.06.2005 to 31.03.2008.
• Retrospective effect is being given to notification No.20/2009-ST
dated 07.07.2009 exempting service tax on inter-State or intra-
State transportation of passengers in a vehicle bearing Contract
carriage permit or a tourist vehicle permit for the period from
01.04.2000 to 06.07.2009.
AMENDMENTS TO RULES AND NOTIFICATIONS:
• The monetary limit of ` 1,00,000/- for adjustment under Rule 6(4B)
(iii) of the Service Tax Rules, 1994 is being raised to ` 2,00,000/-
w.e.f. 01/04/2011.
• Rule 6(7A) of the Service Tax Rules, 1994 is being amended to
provide that an insurer carrying on life insurance business shall
have the option to pay tax,—
– on the amount of gross premium charged from a policy holder
reduced by the amount allocated for investment, where the
breakup of the amount allocated for investment is shown
separately to the policy holder;
– on an amount calculated @ 1.5per cent of the gross amount
of premium charged from a policy holder in cases other than
above; towards the discharge of his service tax liability
instead of paying service tax at the rate specified.
– Such option shall not be available in cases where the entire
premium paid by the policy holder is only towards risk cover
in life insurance.
• The composition rate pertaining to sale and purchase of foreign
exchange has been reduced from 0.25 per cent to 0.1 per cent of
the gross amount of currency exchanged towards discharge of
service tax liability.
• The valuation of money changing services has been defined in the
Service Tax (Determination of Value) Rules, 2006 as under:
– for a currency exchanged either from or to Indian Rupees,
shall be equal to the units of currency exchanged multiplied
by the difference in the buying rate or the selling rate, as the
case may be, and the RBI reference rate for that currency for
that day;
– for a currency where the RBI reference rate is not available,
shall be 1 per cent of the gross amount of Indian Rupees
provided or received, by the person changing the money;
– where neither of the currencies exchanged is Indian Rupee,
shall be equal to 1 per cent of the lesser of the two amounts
the person changing the money would have received by
converting any of the two currencies into Indian Rupee on
that day.
• Export of Services Rules, 2005 and Taxation of Services (Provided
from Outside India and Received in India) Rules, 2006 are being
amended so as to move some of the specified services from one
category to another.
• Works Contract (Composition Scheme for Payment of Service
Tax) Rules, 2007 has been amended. Under new rule i.e. Works
Contract (Composition Scheme for Payment of Service Tax)
Amendment Rules, 2011, CENVAT credit of tax paid on taxable
services relating to commissioning & installation, commercial or
industrial construction and construction of residential complex
shall be available only to the extent of 40 per cent of the service
tax paid when such tax has been paid on the full value of the
service after availing CENVAT credit on inputs.
AMENDMENTS IN ACT
• Sub-section (1A) of section 73 together with both the provisos
to sub-section (2) have been omitted. As a result, the benefit of
reduction of penalty available in cases of fraud, collusion, etc.
under proviso to section 73 (1A) shall not be available. Further,
a new sub-section is being inserted to provide for reduced
penalty in cases, where during the course of audit, verification or
investigation, it is found that the transactions not reported to the
department are available in the records or invoices. Moreover,
penalty is being reduced to 1 per cent per month of the tax amount
upto a maximum of 25 per cent.
• Reduce the penalty for delayed payment under section 76 from
2 per cent to 1 per cent per month or ` 100 per day, whichever
is higher. Maximum penalty reduced to 50per cent of the tax
amount.
• Increase to the maximum penalty under section 77 from ` 5,000
to ` 10,000.
• Amendment section 78 to revise the maximum penalty. Penalty
will be hereafter mandatory and equal to tax evaded. Moreover,
in situations covered under section 4A, the penalty shall be 50 per
cent of the tax amount. Further, the penalty is being reduced to 25
per cent if the tax dues are paid within one month together with
interest and reduced penalty. For assessees having a turnover of
upto ` 60 lakh in any of the years covered in the show cause
notice or in the preceding year, the period of one month shall be
revised to 90 days.
• Reduce interest rate by 3 per cent for assessees with a turnover
of upto ` 60 lakh, both under section 73B and section 75.
• Increase the maximum penalty for delay in filing of return to be
increased from ` 2,000 to ` 20,000.
61
• A new section 88 is being inserted so as to create first charge customs officers to verify the self assessment and if required,
on the property of the defaulter for recovery of service tax dues reassess duty on the imported or export goods. It is being further
from such defaulter, subject to provisions of section 529A of the provided that the officers may conduct audit in certain situations
Companies Act, the Recovery of Debt due to Bank and Financial either in their own office or at the premises of the importer or
Institution Act, 1993 and Securitisation and Reconstruction of exporter.
Financial Assets and Enforcement of Security Interest Act, 2002. • Section 18 is being amended to make the provisions relating to
• The provisions relating to prosecution are reintroduced and are as provisional assessment of duty applicable in case an importer or
follows: exporter is unable to make self-assessment with the proposed
– Provision of service without invoice; scheme of ‘self-assessment’.
– Availment and utilization of Cenvat credit without receipt of • Section 19 is being amended to align the provisions relating
inputs or input services; to determination of duty where goods consist of articles liable
– Submitting false information; and to different rates of duty with the proposed scheme of ‘self-
– Non-payment of collected amount of service tax for a period assessment’ under section 17.
of more than six months. • Sub-section (1) of section 27 is being substituted so as to enhance
– The sanction for the prosecution will be granted at the level the time limit for claiming refund of duty and interest from six
of Chief Commissioner. months to one year. This will bring uniformity for both demanding
duty and claiming refund.
POINT OF TAXATION RULES, 2011 • Section 28 is being substituted so as to make the provisions more
• The Point of Taxation Rules, 2011 have been framed and made coherent and clear and to harmonize the demand period in normal
effective from 01.04.2011. These rules determine the point in cases to one year.
time when the services shall be deemed to be provided. • Section 28AA and 28AB are being substituted with a revised
Provision of Raising of Payment Point of section 28AA so as to make the provisions relating to interest
service invoice Taxation more coherent and clear.
Before After After Earlier of raising of • Section 46 is being amended to provide that an entry of imported
invoice and payment. goods shall be presented electronically and to empower the
Before Before After Raising of invoice. Commissioner of Customs to allow filing of entry in any other
Before After Before Payment. manner when it is infeasible to present electronically.
After Before After Payment. • Section 50 is being amended to provide that an entry of export
After Before Before Earlier of raising of goods shall be presented electronically and to empower the
invoice and payment. Commissioner of Customs to allow filing of entry in any other
After After Before Raising of invoice. manner when it is infeasible to present electronically.
• Section 75 is being amended to enable the Central Government to
CUSTOMS prescribe circumstances under which drawback would be allowed
even though the export remittances are not received within the period
GENERAL specified in the Foreign Exchange Management Act.
• The First Schedule to the Customs Tariff Act, 1975 is being • Section 110A is being amended to empower the adjudicating
amended vide Clause 57 of the Bill to give effect to the tariff authority to allow release of seized goods.
changes relating to the Union Customs Duties. • Section 124 is being amended to provide for issuance of a show
• The basic customs duty rates of 2 per cent, 2.5 per cent and 3 per cause notice with prior approval of an officer not below the rank
cent are being unified at the median rate of 2.5 per cent. of an Assistant Commissioner of Customs.
• Section 131D is being inserted retrospectively with effect from
AMENDMENTS TO CUSTOMS ACT, 1962 20th October, 2010 to empower the Board to issue instructions
• Section 2 is being amended to include ‘self-assessment’ within relating to non-filing of appeal in certain cases in line with
the definition of ‘assessment’. National Litigation Policy.
• Section 17 is being amended to replace the existing system of • A new section 142A is being inserted so as to create first charge
assesment with ‘self-assessment’ of duty on imported and export on the property of the defaulter for recovery of the customs dues
goods by the importer or exporter. The revised provisions empower from such defaulter subject to provisions of section 529A of the
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 INDIA BUDGET 2011
an analysis
Companies Act, the Recovery of Debt due to Bank and Financial
Institution Act, 1993 and Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002.
• Section 150 is being amended so as to provide that the balance
of sale proceeds of unclaimed cargo sold in auction shall be paid
to the Government when it cannot be paid to the owner within six
months.
• Section 151A is being amended so as to empower the Board
to also issue instructions to customs authorities on any other
matters under the Customs Act or any other Act for the time
being in force so far as they relate to prohibition, restrictions or
procedure relating to import or export of goods.
• Section 157 is being amended to empower the Board to prescribe
regulations for specifying the manner of conducting audit at the office
of the proper officer of customs or at the premises of the importer.
AMENDMENTS TO CUSTOMS TARIFF ACT, 1975
• Section 3 is being amended to substitute the reference to
Standards of Weight & Measures Act, 1976 with Legal Metrology
Act, 2009 with effect from 1st March, 2011.
• Section 9AA is being amended so as to enable the Central
Government to reduce the anti-dumping duty imposed under the
provisions of sub-section (1) of section 9A on an article or an
importer where such importer proves to the satisfaction of the
Central Government that he has paid anti-dumping duty in excess
of his actual margin of dumping.
• Customs Tariff (Identification, Assessment and Collection of Anti
Dumping duty on Dumped Articles and for Determination of Injury)
Rules, 1995 is being amended so as to revise provisions of rule 23
so as to align the same with Article 11 of the WTO Agreement on
anti dumping and also to insert Annexure-III containing principles
to determine the non-injurious price.
AMENDMENTS TO THE SCHEDULES TO THE CUSTOMS
TARIFF ACT, 1975
• The First Schedule is being amended to include editorial changes
in the Harmonized System of Nomenclature (HSN) in certain
chapters, which would be effective from 1st January, 2012.
• Description of heading 9804 in the First Schedule is being
amended to cover all dutiable items intended for personal use,
imported by post or air and to prescribe a tariff rate of 35 per cent
for tariff items under the heading.
• The Second Schedule is being amended so as to align the
entries with the Harmonized System of Nomenclature (HSN) and
introduce a new entry for de-oiled rice bran cake. The effective
rates of export duty on all items other than iron ores lumps, fines
and pellets; and de-oiled rice bran cake are being maintained.
EXCISE
• The concessional rate of excise duty of 4 per cent is being increased
to 5 per cent.
• Sugar and textile items are being omitted from the schedule of
the Additional Duties of Excise (Goods of Special Importance)
Act, 1957
• Standards of Weight & Measures Act, 1976 has been replaced
with Legal Metrology Act, 2009 for the purpose of Section 4A.
• An excise duty of 1 per cent without Cenvat credit facility is being
imposed on about 130 specified items, which were hitherto either
fully exempt from excise duty or chargeable to nil rate of excise
duty. General SSI exemption would be available to all products
covered under this new levy.
• A mandatory excise duty of 10 per cent is being imposed on
readymade garments and textile made up bearing a brand name
or sold under a brand name. General SSI scheme is also being
extended to readymade garments and other textile made up
articles. Duty shall be charged on the tariff value @ 60 per cent of
its retail sale price.
• Computers and other peripherals which were fully exempted will
now attract a concessional rate of excise duty of 5 per cent.
• A new scheme is being drafted out in respect of which the period
of limitation would be five years but which would attract general
penalty of 50 per cent of the duty. Waiver of show cause notice
and conclusion of proceedings would be available if the duty
along with interest and specified penalty is paid before the issue
of show cause notice in such cases.
• A new section has been inserted so as to create first charge on
the property of the defaulter for recovery of central excise dues
from such defaulter subject to provisions of the Companies Act,
the Recovery of Debt due to Bank and Financial Institution Act,
1993 and Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002.
• The Joint Commissioner or the Additional Commissioner of the
Central Excise himself has been vested with powers to search or
authorize a central excise officer to carry out the search of any
premises.
• A new Section 35R is being inserted retrospectively with effect
from 20th October, 2010 so as to empower the Board to issue
instructions relating to non-filing of appeal in certain cases in line
with National Litigation Policy.
• Section 38(2) is being amended to make its provisions applicable
to notifications issued under section 5B also.
63
AMENDMENTS TO THE SCHEDULES OF CENTRAL EXCISE
TARIFF ACT, 1985
• A tariff rate of 5 per cent is being prescribed for specified items,
which are being subjected to an effective rate of 1 per cent excise
duty without Cenvat credit facility.
• Chapter Note 5 of Chapter 15 is being amended to insert heading
1501, 1502, 1503, 1504, 1505 and tariff item 1516 1000 therein.
• Chapter note has been inserted in Chapter 22 & 63 so as to
define the expression ‘brand name’ and to provide that affixing a
brand name on the product, labelling or re-labelling of containers
or packing or repacking from bulk packs to retail packs or the
adoption of any treatment to render the product marketable to the
consumer, shall amount to manufacture.
• Excise duty on silver powder, silver unwrought and semi-
manufactured silver in specified forms is being increased from
Nil to 10 per cent.
• The process of galvanisation in chapter 72 will be treated as
manufacturing activity.
• The First Schedule is also being amended to include editorial changes
in the Harmonized System of Nomenclature (HSN) in certain chapters,
which would be effective from 1st January, 2012.
• The Third Schedule is being amended retrospectively to include
certain specified goods, which were notified under section 4A.
treated as credit not availed for the purpose of an applicable
exemption;
– clarify the value of services in cases where the same is not
clearly defined and tax is collected on a compounding or
specific principle;
– Rule 6(5) is being omitted which provided that cenvat credit
can be availed on certain services which are exclusively used
in relation to exempted goods or exempted services.
• ‘Banking and other financial services’ can utilize only 50 per cent
of the Cenvat credit availed for utilization towards payment of
service tax.
• Only 80 per cent of the Cenvat credit availed will be available for
utilization towards payment of service tax by the providers of life
insurance service and management of investment under ULIP.
• A new rule 6(6A) is being inserted to provide that the provisions
of sub-rule (1), (2), (3) and (4) of the said Rule shall not apply
to taxable services provided to SEZ Unit or Developer without
payment of service tax.

AMENDMENTS TO CENVAT CREDIT RULES, 2004:

• Definitions of Input, input services, capital goods, exempted
goods and exempted services has been amended to bring better
clarity. An important thing to be noted is that even trading activity
is covered under the exempted services.
• Rule 3 and 4 are being amended to disallow utilization of credit
for paying duty on concessional goods.
• A retrospective amendment has been made from 18/04/2006 to
provide credit of service tax paid under section 66A of the Finance
Act, 1994 shall also be permissible.
• Ship breaking units can avail Cenvat credit of maximum 85 per
cent of the additional duty of customs (CVD) paid at the time of
importation of ships for breaking.
• Reversal of Cenvat credit is allowed in case any payment made
towards an invoice of input service is received back.
• A new set of guidelines are provided to tax payers rendering both
dutiable and exempted goods or services by amending Rule 6 to
– reduce the requirement of payment of 6 per cent of the value
of exempted services to 5 per cent;
– provide an option to maintain separate accounts for inputs
alone and reverse the amount of input services credit as per
the allocation formula in rule 6 (3A).
– provide that a payment made under this rule shall be
64
 INDIA BUDGET 2011
an analysis
ANNOUNCEMENT OF INITIATIVES
FOR SELECT AREAS
OVERALL INVESTMENT ENVIRONMENT
Divestment of PSUs - Considering overwhelming response to public
issues of PSUs during current year, ` 40,000 crore are planned to
be raised through disinvestment in 2011-12. However, government
committed to retain at least 51 per cent ownership and management
control of the PSU.
Other salient features towards investment environment are
summarise as under:
• Foreign Direct Investment: Discussions are underway to
further liberalize the FDI policy to increase foreign investment
into India.
• Foreign Citizen: Currently, only FIIs and sub-accounts registered
with the SEBI and NRIs are allowed to invest in mutual fund
schemes. To liberalize the portfolio investment route, it has
been decided to permit SEBI registered Mutual Funds to accept
subscriptions in the equity scheme from foreign investors who
meet the KYC requirements. This would enable Indian Mutual
Funds to have direct access to foreign investors and widen the
class of foreign investors in Indian equity market.
To enhance the flow of funds to the infrastructure sector, the FII
limit for investment in corporate bonds, with residual maturity
of over five years issued by companies in infrastructure sector,
is being raised by an additional limit of US Dollar 20 billion
taking the limit to US Dollar 25 billion. This will raise the total
limit available to the FIIs for investment in corporate bonds to US
Dollar 40 billion. FIIs would also be permitted to invest in unlisted
bonds with a lock-in period of three years although they will be
allowed to trade amongst themselves during the lock-in period.
• Financial Sector Legislative Initiatives: To take the process of
financial sector reforms further, various legislations are proposed
in 2011-12 and amendments are proposed to the Banking
Regulation Act in the context of additional banking licenses to
private sector players.
• Capitalization: During 2011-12, ` 6,000 crore would be provided
to enable public sector banks to maintain a minimum of Tier I
capital adequacy ratio of 8 per cent and ` 500 crore would be
provided to enable Regional Rural Banks to maintain a capital
adequacy ratio of at least 9 per cent.
• Micro Finance Institutions: “India Microfinance Equity Fund” of `
100 crore would be created with SIDBI. Government is considering
putting in place appropriate regulatory framework to protect the
interest of small borrowers and “Women’s SHG’s Development
Fund” would be created with a corpus of ` 500 crore.
INFRASTRUCTURE AND NATIONAL GROWTH
DRIVERS
NATIONAL POLICIES
With GDP estimated to have grown at 8.6 per cent in 2010-11 in real
terms, economy has shown remarkable resilience with monetary policy
measures taken expected to further moderate inflation in times to come.
Exports have grown by 29.4 per cent, while imports have recorded
a growth of 17.6 per cent during 2010-11 over the corresponding
period last year. Indian economy expected to grow at 9 per cent in
2011-12. Further, share of manufacturing sector to GDP is expected to
grow from about 16 per cent to 25 per cent over a period of 10 years.
Government would come out with a manufacturing policy along with
two committees set up for greater transparency and accountability in
procurement policy; and for allocation, pricing and utilization of natural
resources. Further, issues relating to reconciliation of environmental
concern from various departmental activities including those related to
infrastructure and mining would be considered by a Group of Ministers.
Environment friendly National Mission for hybrid and electric vehicle
would be launched. Financial assistance would be made available for
metro projects in national capital and four metropolitan cities. Capital
investment in fertiliser production is proposed to be included as an
infrastructure sub-sector.
MICRO SMALL AND MEDIUM ENTERPRISES
` 5,000 crore would be provided to SIDBI for refinancing incremental
lending by banks to these enterprises and ` 3,000 crore would be
provided to NABARD to provide support to handloom weaver co-
operative societies which have become financially unviable due to non-
repayment of debt by handloom weavers facing economic stress.
HOUSING SECTOR FINANCE
Existing scheme of interest subvention of 1 per cent on housing loan
is further liberalized and existing housing loan limit is enhanced to
` 25 lakh for dwelling units under priority sector lending. Further,
provision under Rural Housing Fund is enhanced to ` 3,000 crore.
To enhance credit worthiness of economically weaker sections and
LIG households, a Mortgage Risk Guarantee Fund is proposed to be
created under Rajiv Awas Yojana.
65
AGRICULTURE
Being an agrarian economy focus is maintained on agricultural sector
and accordingly, allocation under Rashtriya Krishi Vikas Yojana
(RKVY) was increased from ` 6,755 crore to ` 7,860 crore. In order
to improve rice based cropping system in this north east region
allocation of 400 crore has been made and allocation of ` 300 crore
each has been made towards:
• Integrating development of 60,000 pulses villages in rainfed
areas
• Bringing 60,000 hectares under oil palm plantations,
• Implementation of vegetable initiative to provide quality vegetable
at competitive prices
• Promotion higher production of Bajra, Jowar, Ragi and other
millets, which are highly nutritious and have several medicinal
properties.
• Promotion animal based protein production through livestock
development, dairy farming, piggery, goat rearing and fisheries.
• Acceleration Fodder Development Programme is proposed to
benefit farmers in 25,000 villages.
Government adopted a national mission to promote organic farming
methods, combining modern technology with traditional farming
practices. In order to support farmers, credit flow for farmers has
been raised from ` 3,75,000 crore to ` 4,75,000 crore in 2011-12.
Interest subvention is proposed to be enhanced from 2 per cent to
3 per cent for providing short-term crop loans to farmers who repay
their crop loan on time. Further, approval is being given to set up 15
more Mega Food Parks during 2011-12 and steps are being taken
to augment the storage capacity through private entrepreneurs and
warehousing corporations.
INFRASTRUCTURE AND INDUSTRY
Infrastructure development is supported with allocation of ` 2,14,000
crore in 2011-12 and a comprehensive policy would be framed for
further developing PPP projects. IIFCL proposes to achieve cumulative
disbursement target of ` 20,000 crore by March 31, 2011 and ` 25,000
crore by March 31, 2012. In order to undertake financing scheme, seven
projects are sanctioned with debt of ` 1,500 crore and another `
5,000 crore will be sanctioned during 2011-12. To boost infrastructure
development, tax free bonds of ` 30,000 crore are proposed to be
issued by Government undertakings during 2011-12.
SOCIAL DEVELOPMENT
National Food Security Bill (NFSB) is to be introduced in the Parliament
during the course of this year. Allocation for social sector in 2011-12 (`
66
1,60,887 crore) increased by 17 per cent over current year. It amounts
to 36.4 per cent of total plan allocation.
UNORGANISED SECTOR
Exit norms under co-contributory pension scheme “Swavalamban”
would be relaxed. Benefit of Government contribution would be
extended from three to five years for all subscribers who enroll
during 2010-11 and 2011-12. Further, eligibility for pension under
Indira Gandhi National Old Age Pension Scheme for BPL beneficiaries
reduced is from 65 years of age to 60 years and those above 80 years
of age will be given pension of ` 500 per month instead of ` 200 at
present.
EDUCATION
• Sarva Shiksha Abhiyan: ` 21,000 crore are allocated for the
scheme during the year and pre-matric scholarship scheme would
be introduced for needy SC/ST students studying in classes IX
and X.
• National Knowledge Network: It is proposed to provide
connectivity to all 1,500 institutions of Higher Learning and
Research through optical fiber backbone by March, 2012.
• Innovations: National Innovation Council would be set up to
prepare road map for innovations in India and special grant would
be provided to various universities and academic institutions to
recognize excellence.
SKILL DEVELOPMENT
Additional ` 500 crore is proposed to be provided for National Skill
Development Fund during the next year. Further, an international
award with prize money of ` 1 crore is being instituted for promoting
values of universal brotherhood.
HEALTH
Plan allocations for health would be stepped-up by 20 per cent and
scope of Rashtriya Swasthya Bima Yojana to be expanded to widen
the coverage.
IMPACT ON SELECT INDUSTRIES
INDUSTRY SPECIFIC ANALYSIS
PLASTICS
Ever since 1957, the Plastic Industry in India has made significant
achievements as it made a modest but promising beginning by
commencing production of Polystyrene.
Today, Indian Plastic processing sector comprises of over 30,000 units
involved in producing a variety of items through injection moulding,
blow moulding, extrusion and calendaring. The Indian plastic industry
has taken great strides and in the past few decades, the industry has
grown to the status of a leading sector in the country with a sizable
base.
Continuous advancements and developments in Plastic technology,
processing machineries, expertise and cost effective manufacturing
is fast replacing the typical materials. On the basis of value added
share, the Indian Plastic industry is about 0.50 per cent of India’s
GDP. The export of plastic products also yields about 1 per cent of
the country’s exports. The sector has a large presence of small scale
companies in the industry, which account for more than 50 per cent
turnover of the industry and provides employment to an estimated 0.4
million people in the country.
domestic Indian Plastic Industry expects for the investment of
nearly USD 80 billion over the next four years.
• Plastic plays a significant role in the key sectors of the economy,
including agriculture, water management, automobiles,
transportation, construction, telecommunication and electronics,
besides defence and aerospace, computers and power
transmissions.
• As of now, the Indian Plastic industry has enormous potential
for growth as polymer use in India is far below then the world
level. With increasing competition in the global market and the
constant drive to improve our living standards, the scope for use
of plastics is bound to increase manifold and make the production
double in the coming years.
DIRECT TAX PROPOSALS
• It is proposed to reduce surcharge from 7.5 per cent to 5 per cent
for domestic companies.
• Minimum Alternate Tax is proposed to be increased from 18 per
cent to 18.5 per cent.
SUMMARY
There are no major proposals in the budget affecting this Industry.

ROLE OF PLASTIC INDUSTRY IN THE INDIAN ECONOMY POWER

2005 2015
@ 15 per cent CARG, 4.7 Million 18.9 Million India is world’s 6th largest energy consumer, accounting for 3.40 per
Consumption of Plastic Polymers Tonnes Tonnes cent of global energy consumption. Due to India’s economic rise, the
Employment In Plastic Industry 2.5 Million 9.5 Million demand for energy has grown at an average of 3.60 per cent per
(Direct+ Indirect) annum over the past 30 years. The total demand for electricity in India
Plastic Industry’s Turnover ` 35,000 ` 1,33,245 is expected to cross 9,50,000 MW by 2030.
Crores Crores
Export of Plastic Products USD 1,900 USD 10,215 INDUSTRY CAPACITY
@ 30 per cent CARG Million Million Grand Total Installed Capacity is 1,69,748.80 MW. At the end of
Contribution of Polymers and ` 6,200 ` 15,990 October 2010, the installed power generation capacity of India
Plastic Products to the Exchequer Crores Crores stood at 1,67,278.36 MW, while the per capita energy consumption
stood at 733.54 KWh (2008 - 2009). The Indian government has set
LATEST DEVELOPMENTS an ambitious target to add approximately 78,000 MW of installed
• The Indian Plastic industry is at the verge of high growth rate generation capacity by 2012.
over about 10 per cent - 12 per cent which is contributed by high
growth rates, in turn, from the end-user industries. THERMAL POWER
• As the Plastic industry is heavily dependent on automotive sector, Current installed capacity of Thermal Power is 1,11,034.48 MW which
launching of new cars in the small segments are expected to drive is 65.40 per cent of total installed capacity. The state of Maharashtra
the demand for plastics. is the largest producer of thermal power in the country.
• India is likely to dominate the world’s Plastic Industries with the
domestic per capita consumption set to double by 2012 as the
68
 INDIA BUDGET 2011
an analysis
HYDRO POWER
The installed capacity as on October, 2010 is approximately 37,367.40
MW (22.01 per cent).
NUCLEAR POWER
Currently, seventeen nuclear power reactors produce 4,560.00 MW
(2.68 per cent of total installed base).
RENEWABLE POWER (RES)
Current installed base of renewable energy is 16,786.98 MW which
is 9.88 per cent of total installed base with the southern state of
Tamil Nadu contributing nearly a third of it (5,008.26 MW) largely
through wind power.
WIND POWER
As of October 2010, India’s installed wind power generation capacity
stood at 11,632.44 MW. Additionally, India has committed massive
amount of funds for the construction of various nuclear reactors
which would generate at least 30,000 MW.
SOLAR POWER
In July 2009, India unveiled a USD 19 billion plan to produce 20,000
MW of solar power by 2020.
INVESTMENTS
Aided by the ambitious plan to add around 78.7 GW of additional
generation capacity in the 11th plan by the year 2012, according
to CRISIL Research estimates, about ` 7,50,000 crores is likely to
be invested in the power sector over the next five years by 2013 -
2014. Of this, ` 4,80,000 crores is expected to be invested in the
power generation space. Nearly half of the investments in the power
generation space is likely to be made by the private sectors.
GOVERNMENT INITIATIVES
The development of power sector is a key driver for economic and
social growth of any country in the world, so for India. The Ministry
of Power has set a goal - ‘Mission 2012: Power for All’. This mission
would require that the installed generation capacity should be at
least 2,00,000 MW by 2012 from the present level of 1,67,278.36
MW. Power requirement will double by 2020 to 4,00,000 MW (Data
Source CEA, as on 30/10/2010).
EXPECTATIONS FROM GOVERNMENT
• Services required by the power sector for setting up, operation
and maintenance should be exempt from service tax as is the
case with other infrastructure sector projects (e.g. construction
of roads, bridges, ports, airport, maintenance of roads etc.). The
extension of such exemption to the power generation projects
would go a long way in reducing the cost of power generation,
especially as power producers are not entitled for credit of the
taxes paid on procurements.
• Full customs duty exemption is not granted to captive power
plants and non-mega projects. Considering the requirement of
power for all at low cost, it is imperative that full exemption
from customs duty is also provided to such power plants. Every
mega watt of power generation would lead to more sustainable
inclusive growth targeted by the government.
• Setting up of a power generation project generally takes 3 to 4
years and various machinery, equipment and tools are imported,
on temporary basis, for executing the project. Currently, benefit
of concessional customs duty is available if such goods are re-
exported within 18 months. The period for re-export may be
extended / relaxed for such longer duration projects.
• Outright exemption from excise duty for supplies to power
projects that are currently eligible for deemed export benefits.
• Few state governments such as Maharashtra provide concessional
VAT rate for setting up power projects. The key for promotion of
power sector and generation of power at affordable rates, for the
masses, lies in synchronized action at central and state level.
In the end, nothing in indirect tax is being complete unless we have
reference to the goods and services tax (GST). The first discussion
draft paper on the GST has excluded the power sector from the
purview of the GST. In other words, electricity duty would not be
subsumed in the GST. However, the thirteenth finance commission
recommends inclusion of power sector in the GST.
DIRECT TAX PROPOSALS
• Terminal date for deduction under section 80IA(4)(iv) is extended
for the further period of one year i.e. up to 31st March 2012.
This amendment will take effect from 1st April, 2012 and will,
accordingly, apply in relation to A.Y. 2012 - 2013 and subsequent
years.
• It is proposed to reduce surcharge from 7.5 per cent to 5 per cent
for domestic companies.
• Minimum Alternate Tax is proposed to be increased from 18 per
cent to 18.5 per cent.
INDIRECT TAX PROPOSALS
• No excise duty on equipment for Ultra Mega Power Project
• On-going metro projects will be provided financial help for speedy
execution
• Excise duty on LED bulbs reduced from 10 per cent to 5 per cent
and full exemption on the special CVD of 4 per cent.
69
CEMENT
SECTOR STRUCTURE/MARKET SIZE
India is the world’s second largest producer of cement according to
the Cement Manufacturers’ Association.
The industry’s capacity utilization currently hovers around 78 per
cent, down from 87 per cent last fiscal. It may fall to 77 per cent in
2011 - 2012. With country’s GDP pegged to grow 8 per cent annually
going forward, cement industry is likely to grow in double digit over
long term and outlook for demand remains positive. Demand for
cement from sectors such as road, railways, ports and power projects
is expected to improve with the Centre planning to invest about `
4,60,000 crores (USD 1 trillion) in the Twelfth Plan (2012 - 2017).
With a view to have inclusive growth of all sectors, emphasis would
be to create demand for real estate sector with focus on affordable
housing, Government led higher infra spending in the form of higher
fund allocation and incentive for public private partnership (PPP) to
keep robust demand for cement. Cement industry currently faces
multiple challenges both internal and external. On one hand, demand
is moderating especially in the North region and muted to negative
growth in Southern region, industry is also facing higher input and
fuel costs. The situation was also aggravated due to hike in diesel
prices, making transport cost (freight) dearer. With low demand in
over supply regime, industry is unable to pass on the higher costs to
end user thereby keeping their margin under pressure or voluntarily
opt to keep volume low. The fall in demand during the last few months
has largely been due to the slowdown in the housing sector which
accounts for about 65 per cent of cement consumption. The cement
prices in India are rising and are higher than the rates in neighbouring
countries. One of the reasons for price rise of cement is the profit
motive of the cement companies.
NEW INVESTMENTS
• Cement and gypsum products have received cumulative foreign
direct investment (FDI) of USD 1,971.79 million between April
2000 and September 2010.
• Dalmia Bharat Enterprises plans to invest USD 554.32 million
to set up two green-field cement plants in Karnataka and
Meghalaya.
• Bharathi Cement plans to double its production capacity by the
end of the current financial year by expanding its plant in Andhra
Pradesh, with an investment of USD 149.97 million.
• Madras Cements Ltd is planning to invest USD 178.4 million to
increase the manufacturing capacity of its Ariyalur plant in Tamil
Nadu to 4.5 MT from 2 MT by April 2011.
70
• My Home Industries Limited (MHI), a 50:50 joint venture (JV)
between the Hyderabad-based My Home Group and Ireland’s
building material major CRH Plc, plans to scale up its cement
production capacity from the existing 5 million tonnes per annum
(mtpa) to 15 mtpa by 2016. The company would undertake this
capacity expansion at a cost of USD 1 billion.
• Shree Cement, plans to invest USD 97.13 million this year to
set up a 1.5 million MT clinker and grinding unit in Rajasthan.
Jaiprakash Associates plans to invest USD 640 million to increase
its cement capacity.
• Swiss cement company Holcim plans to invest USD 1 billion in
setting up 2-3 green-field manufacturing plants in the country in
the next five years to serve the rising domestic demand.
GOVERNMENT INITIATIVES
A Parliamentary panel reviewing the performance of the cement
industry suggested that the government set up a statutory regulatory
body to check the possibility of cartelisation and price rise , the
tendencies of market dominance, under-utilization of capacity.
The Ministry of Road Transport and Highways has planned to invest
USD 354 billion in road infrastructure by 2012. Housing, infrastructure
projects and the nascent trend of concrete roads would continue to
accelerate the consumption of cement.
Gujarat plans to treble its cement production capacity in 3-5 years.
Proposals have been invited from cement companies such as ACC,
ABG, Ambuja Cement, Emami, Indiabulls, Adani group, Ultratech and
L&T and the state hopes to raise its capacity from 20 million tonnes
per annum to 70 million tonnes.
EXPECTATIONS
Given the backdrop of Government thrust to accelerate economic
growth, industry expectations are high to reduce excise duty on
cement. Industry is also expecting to abolish import duty on coal
and pet coke as against 5 per cent currently. Impact will be that
the abolition of import duty would reduce the operational cost for
the cement industry. Most Cement Companies would be benefitted
depending on imported fuel.
DIRECT TAX PROPOSALS
• It is proposed to reduce surcharge from 7.5 per cent to 5 per cent
for domestic companies.
• Minimum Alternate Tax is proposed to be increased from 18 per
cent to 18.5 per cent.
INDIRECT TAX PROPOSALS
 INDIA BUDGET 2011
an analysis

• Basic Custom Duty on two critical raw materials of cement STEEL

industry viz. petcoke and gypsum is proposed to be reduced from
5 per cent to 2.5 per cent. India became the fourth largest producer of crude steel in the world
• The rates of excise duty on cement and cement clinker are being in 2010 as against the eighth position in 2003 and is expected to
revised as follows: become the second largest producer of crude steel in the world by
2015. Led by strong demand for autos and engineering services, the
Mini cement plant: domestic steel demand in India remains robust.
Cement Present Rate Proposed Rate
1.Cleared in packaged form – GROWTH ASPECTS
(i) of retail sale price not ` 185 per tone 10 per cent ad The steel industry is expected to play a major role in India’s economic
exceeding ` 190 per 50 kg valorem development in the coming years. The steel industry of India has a very
bag or of per tonne equivalent high growth potential and is expected to register significant growth
retail sale price not exceeding in the coming decades. The per capita-consumption of steel in India,
` 3800; according to latest available estimates, is only 29 kg. This is much
(ii) of retail sale price ` 315 per tonne 10 per cent ad less compared to the global average of 140 kg. India is expected to
exceeding ` 190 per 50 kg valorem + emerge as a strong force in the global steel market in coming years.
bag or of per tonne equivalent ` 30 per tonne The two major aspects that are expected to play a significant role
retail sale price exceeding ` 3800; in the growth of the steel industry in India are abundant availability
2. Cleared other than in ` 215 per tonne 10 per cent ad of iron ore and well established facilities for steel production in the
packaged form. valorem country. One of the major initiatives that need to be taken is to focus
on increasing the consumption of steel in the rural areas of India. The
Other than mini cement plant: potential for the growth of consumption of steel in the rural areas of
Cement Present Rate Proposed Rate India for purposes like rural housing, rural infrastructure, etc is high
1. Cleared in packaged form,— which needs to be tapped efficiently.
(i) of retail sale price not ` 290 per tone 10 per cent ad
exceeding ` 190 per 50 kg valorem + ` 80 The major sectors where consumption of steel is expected to grow in
bag or of per tonne equivalent per tone the coming years are construction, housing, ground transportation, Hi-
retail sale price not tech engineering industries such as power generation, petrochemicals
exceeding ` 3800; and fertilizers.
(ii) of retail sale price 10 per cent of 10 per cent ad
exceeding ` 190 per 50 kg retail sale price valorem + ` 160 In order to realize the growth potential in the steel industry of India, it
bag of per tonne equivalent per tonne is essential to ensure that the industry can remain competitive. One of
retail sale price exceeding ` 3800; the major aspects in this regard is the availability of inputs. Shortage
3. Cleared other than in 10 per cent or 10 per cent ad of inputs like coke has led to increase in costs earlier. Moreover proper
valorem infrastructure facilities like transport infrastructure, power etc are of
packaged form. ` 290 per tonne, prime importance in maintaining the competitiveness of the industry.
whichever is higher
Cement Clinker ` 375 per tonne 10 per cent ad GOVERNMENT INITIATIVE
valorem + In order to encourage R & D activities in iron and steel sector, Ministry
` 200 per tonne of Steel is providing financial assistance from Steel Development
Fund (SDF) and Plan Fund.
OTHER PROPOSAL • 64 research projects initiated by public and private undertakings,
Allocation of ` 2,14,000 crores for infrastructure in F.Y. 2011 – 2012 research laboratories, educational and other promotional
will increase the demand for cement. institutions have so far been approved at a cost of USD 98.45
million during 2010, of which the SDF component is USD 61.92
million. So far 31 projects have been completed and 24 research
projects are underway.
71
• USD 26.28 million was allocated from Plan Fund during the 11th
five year plan for promotion of R & D in steel sector. Under this
scheme eight R & D projects have been approved with Plan fund
of USD 24.72 million.
CONSUMPTION
As per the World Steel Association, India is seen to be emerging as
the world’s third-biggest steel consumer after China and the United
States. India consumed and procured about 60 million tonnes of steel
this year.
Indian steel consumption is seen more than doubling to 122 million
tonnes in 2015 on robust investment and infrastructure demand. An
unprecedented hike in steel prices would have a major impact on
products.
EXPECTATIONS
Steel prices have increased substantially over past few months and
this has forced the domestic steel industry to consider a cut in import
duty. However sharp rise in steel price will push product prices higher
adding to inflationary pressure. The domestic steel industry has
requested the government to cut down import duty to nil from 5 per
cent and levy duty on HR coil. In addition to it, the steel firms have
asked the finance ministry to grant infrastructure status to the steel
industry. Such a move by the finance ministry would ensure long-term
funds and tax holidays for the steel industry.
The federal government may increase export duty on iron ore to limit
shipments and boost the availability for domestic steel makers. The
government had last year raised export duty on iron ore lumps to 15
per cent. The industry expects at least a 5 per cent increase on the
export of iron ore lumps, but it wants duty to be increased on iron ore
fines as well.
The request comes in wake of steel prices shooting up by over 30
per cent in the last two months, on fears of possible increase in coal
prices from major producing nation Australia.
Steel manufacturers have increased prices by 30 per cent in the last
two months anticipating that Australia may hike the coke price in
view of the recent floods that impacted its coal mines. There is no
reason for the Indian steel producers to affect a hefty ` 9,000 per
tonne increase in prices in January and February 2011. Even the public
sector SAIL has become a party to this steep increase in steel prices,
which is only adding to the current inflationary trends. Industrial
output dipped to a 20-month low of 1.60 per cent in December from
18 per cent in the same month in 2009.
72
Most developed countries have regulations that are aimed to
protect the domestic steel industry. The Indian steel industry has
comparatively much lesser protection through regulations. Proper
regulatory measures should be adopted by the government to protect
the domestic steel industry.
DIRECT TAX PROPOSALS
• It is proposed to reduce surcharge from 7.5 per cent to 5 per cent
for domestic companies.
• Minimum Alternate Tax is proposed to be increased from 18 per
cent to 18.5 per cent.
INDIRECT TAX PROPOSALS
• Full exemption from basic customs duty is being extended to
stainless steel scrap.
• Basic custom duty on ferro-nickel is being reduced from 5 per
cent to 2.5 per cent.
• Statutory rate of export duty on iron ores is being increased from
20 per cent to 30 per cent while unifying the effective rate of
export duty on iron ore fines and lumps at 20 per cent.
• Iron ore pellets are being fully exempted from the export duty.
OTHER PROPOSAL
Allocation of ` 2,14,000 crores for infrastructure in F.Y. 2011 – 2012
will increase the demand for steel.
REAL ESTATE
The real estate sector in India is of great importance and provides
a big investment opportunity. India is the most viable investment
destination in real estate. India, in particular Mumbai and Delhi, are
good real estate investment options for 2011. Residential properties
maintain their growth momentum and hence are viewed as more
promising than other sectors. Further, real estate companies are
coming up with various residential and commercial projects in Tier-II
and Tier-III cities and the growth is mainly due to increase in demand
for organized realty and availability of land at affordable prices in
these cities.
Housing and real estate sector including cineplex, multiplex,
integrated townships and commercial complexes etc, attracted a
cumulative foreign direct investment (FDI) worth USD 9,072 million
from April 2000 to October 2010 wherein the sector witnessed FDI
amounting USD 716 million during April-October 2010.
Integrated townships, healthcare facilities, hospitality and sports
facilities, retail malls, logistics hubs and commercial and residential
 INDIA BUDGET 2011
an analysis
complexes are coming up in seven small cities in West Bengal,
Tripura and Rajasthan. Tata Housing is planning to launch about 10
new residential projects in both affordable and luxury segments in
2010 - 2011, with an investment of about USD 268.9 million along
with its partners.
The International Finance Corporation will continue to invest roughly
USD 1 billion in India every year for the next two or three years. Around
a dozen new Special Economic Zones (SEZs) are likely to come up in
the state in the next few years which will attract investment of more
than ` 42,000 crores.
With property boom spreading in all directions, real estate in India is
touching new heights. The industry was reeling under the pressure
of rising input costs for the past six months or more. “Prices of steel
and cement - the two most important inputs for construction - have
jumped 30 to 50 per cent in six months and have impacted the real
estate prices. Property prices have shot up and now interest rates are
going up making monthly mortgage payments more expensive.
Budget expectation includes measures to lower interest rates on
home loans, reduction in stamp duty and rollback of service tax on
projects under construction. Foreign investors have so far contributed
significant capital to India’s real estate market. Aggregate FDI inflows
into the real estate sector are recorded at approximately 7.42 per cent
of the total inflows. There was, however, a growing demand to do away
with the three-year lock-in period for FDI investments in realty. The
current policy does not allow external commercial borrowings (ECB)
for real estate sector, except in case of integrated townships, due to
end-use restrictions. This has led to an increase in cost of fund and
also the cost of land, resulting in properties being priced excessively.
Opening of ECB in real estate sector would help in reducing the cost
of fund as well as property prices. Hence, ECB should be allowed for
funding of real estate projects. There is a hope of developers that the
benefits of section 80IB in respect of residential units of less than
1,500 square feet area would be restored in the budget.
Developers who are raising funds at high interest rates also expect
to get an infrastructure status to access funds at lower rates. The
inflation-hit industry also expects customs duty on steel and cement
to be reduced. Special Residential Zones (SRZs) should be taken off
the drawing board and finally implemented, and developers who focus
on ultra-low-cost housing, either through SRZs or otherwise, should
be given more sops. A ‘Real Estate Regulatory Authority (RERA)’ for
bringing more transparency be created and enactment of the Model
Real Estate (Regulations of Development) Act is also expected.
DIRECT TAX PROPOSALS
• 100 per cent deduction is available for any expenditure of capital
nature (other than on land, goodwill and financial instrument)
incurred wholly and exclusively, for the purposes of developing and
building a housing project, commencing operations on and after 1st
April, 2011, under a scheme for affordable housing framed by the
Central Government or a State Government and notified by the CBDT.
These amendments will take effect from 1st April, 2012 and will,
accordingly, apply in relation to the A.Y. 2012 - 2013 and subsequent
years.
• It is proposed to reduce surcharge from 7.5 per cent to 5 per cent
for domestic companies.
• Minimum Alternate Tax is proposed to be increased from 18 per
cent to 18.5 per cent.
OTHER PROPOSALS
• Existing scheme of interest subvention of 1 per cent on housing
loan further liberalized.
• Existing housing loan limit enhanced to ` 25 lakhs for dwelling
units under priority sector lending.
• Provision under Rural Housing Fund enhanced to ` 3,000 crores.
• To enhance credit worthiness of economically weaker sections
and LIG households, a Mortgage Risk Guarantee Fund to be
created under Rajiv Awas Yojana.
ENGINEERING
Engineering in India not only gives tremendous sense of pride to
the Indian industry, it also provides great confidence to the global
technical and engineering community. Indian Engineering and R & D
(ER & D) is coming of age and is doing so more rapidly now to create
its own identity within the overall IT segment. Engineering and R & D
Services is a USD 10 billion industry and approximately 20 per cent of
the USD 50 billion industry (export oriented revenue) from India.
Companies need to invest heavily in expanding the ecosystem around
their products much like what Apple has done with iTunes that has
fueled the growth of products like iPod, iPhone and iPad. Rise in
digital content, convergence, mobility, cloud, ubiquitous applications,
localized products, clean tech, smart devices and massive investments
in infrastructure are some of the major contributors that will drive
not only higher growth for ER & D but will also increase the level of
innovation in this sector.
Engineering exports from India have grown considerably in the last
few years with a growth rate which has been much higher than the
world average.
73
Underlining the changing market scenario at global level the minister
of Commerce and Industries Anand Sharma says that 40 per cent
of the Indian exports in the engineering sector go to the developed
countries. According to him, Indian engineering exports are going to
touch 50 billion US dollars in the current fiscal, while it is expected
to touch 150 billion dollars in 2015. The engineering exports have
already reached 40 billion dollars. India is becoming a hub for
designing of auto and engineering goods.
This, indeed, is a robust target and if engineering is able to maintain
its share of nearly 22 per cent in total exports then by 2014, India’s
total exports should be in the range of USD 500 billion. India continues
to be one of the fastest growing exporters of engineering goods,
growing at a CAGR of 30.10 per cent, trailing only China among major
engineering exporters, but well above the global engineering average
export growth of 13 per cent. Significantly, the country’s engineering
export growth rate has been higher than its overall exports.
DIRECT TAX PROPOSALS
• It is proposed to reduce surcharge from 7.5 per cent to 5 per cent
for domestic companies.
• Minimum Alternate Tax is proposed to be increased from 18 per
cent to 18.5 per cent.
INDIRECT TAX PROPOSALS
• The benefit of full exemption from basic customs duty and CVD
currently available to ‘Tunnel Boring machine’ and parts thereof
for hydro-electric power projects is being extended to such
machines for highway development projects also.
• The concessional import duty of 5 per cent basic customs duty,
5 per cent CVD and Nil SAD currently applicable to high-speed
printing machinery is being extended to mailroom equipment
compatible with such printing machinery imported by registered
newspaper establishments.
• A concessional rate of 5 per cent basic customs duty, 5 per cent
CVD and Nil SAD is being extended to parts and components
for manufacture of 23 specified high voltage transmission
equipments.
• Full exemption from basic customs duty is being extended on bio-
based asphalt sealer and preservation agent, millings remover
and crack filler, asphalt remover and corrosion protectant and
sprayer system for bio-based asphalt applications.
TEXTILES
Indian Textile industry contributes 14 per cent of the total industrial
output and 15 per cent of exports. The Industry ranked second in
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terms of employment generation employing more than 35 million
people. The industry is going through major technology upgradation
to increase the productivity during the last few years to counter
global competition.
The Government expects the industry numbers to triple by the next
decade to USD 220 billion from the current USD 70 billion considering
the rising demand from the western countries. With the US economy
showing good signs of recovery, textile demand would increase
at a rapid pace going forward. The textile industry with help from
TUFs scheme has already modernized with a lot of textile majors
now having integrated business models right from raw materials to
garments. To further support the growth story of the industry there
are favourable expectation from the union budget.
The Textiles Ministry said it will seek an enhanced budgetary
allocation of up to ` 8,000 crores for 2011 - 2012 to realize the
targets fixed for the growth of the sector. The government had made
a budgetary provision of ` 5,608 crores for the textiles sector; `
4,725 crores for planned expenditure and ` 883.08 crores for non-
planned expenditure in the current fiscal.
EXPECTATIONS
• EXCISE DUTY
PRESENT POSITION
– Excise duty on textile machinery in general is at 10 per cent.
– Excise duty on specified machinery under List 2 of Notification
No.6/2006 dated 01-03-2006 and its subsequent amendment
Notification No.8/2008 dated 01-03-2008 and No.25/2008 dated
29.4.2008 is at 4 per cent.
– Excise duty on raw materials, parts, components and accessories
on all machines is at 8 per cent.
– Excise duty on Automatic Loom and Projectile Loom is NIL.
FISCAL REFORMS
– Excise duty on all items of textile machinery should be at 8 per
cent, there should be no exemption.
– Excise duty on all parts, components and accessories of the
textile machinery should be less than complete machinery i.e. at
the level of 4 per cent.
• CUSTOMS DUTY
PRESENT POSITION
– Customs duty on textile machinery and components in general is
7.50 per cent.
– Customs duty on specified machinery is at 5 per cent.
 INDIA BUDGET 2011
an analysis
FISCAL REFORMS
– Floor level of customs duty on capital goods should be at 7.50 per
cent.
– The rate of duty on raw-materials, parts, components &
accessories should be less than that on complete machinery, in
general, at least to 5 per cent.
– Reduce import duty on dedicated parts, components and
accessories of shuttle-less looms & other hi-tech machines which
are not made in India so far, from 5 per cent to zero duty.
– Further, the CVD component should include all duties and taxes
paid by the domestic manufacturers for their product i.e. it should
include excise duty + local taxes (VAT, CST etc.) + Octroi.
• POLICY MATTERS
PRESENT POSITION
– Import of textile machinery in second hand condition under the
Technology Upgradation Fund Scheme and its derivatives namely
20 per cent CLCS and 15 per cent CLCS Schemes are harming the
TEI.
FISCAL REFORMS
– Uniform treatment to the domestic suppliers of machinery to
EPCG licence holders and 100 per cent EOU as both are Deemed
Export.
– Imported second-hand textile machinery should not be given
subsidy under the Technology Upgradation Fund Scheme and
its derivatives namely 20 per cent CLCS and 15 per cent CLCS
Scheme, in the name of modernization.
– Ban on import of second-hand shuttle-less looms with weft
insertion rate less than 750 meters per minute.
– Tax break for a period 5 years for any unit manufacturing hi-tech
item of textile machinery with or without foreign collaboration.
• SCHEMES
PRESENT POSITION
– At present there are no Schemes.
FISCAL REFORMS
– Scheme for modernization, technology upgradation and
productivity advancement of the Textile Engineering Industry
(TEI).
– Schemes to support with 100 per cent Grant-in-aid for Research
& Development in the Textile Engineering Industry.
– Schemes to support setting up of CFCs and one Cluster Park in
Surat, Ahmedabad and Coimbatore and one CFC at Kolkata for
Manufacture of Jute machinery with 75 per cent financial aid for
the TEI as there is need for development and manufacture hi-
tech machinery in weaving, processing and technical textiles/jute
sector.
DIRECT TAX PROPOSALS
• It is proposed to reduce surcharge from 7.5 per cent to 5 per cent
for domestic companies.
• Minimum Alternate Tax is proposed to be increased from 18 per
cent to 18.5 per cent.
INDIRECT TAX PROPOSALS
• Optional levy on branded garments or made up articles of textiles
proposed to be converted into a mandatory levy at unified rate of
10 per cent.
• Full exemption from excise duty has been provided in cases of
Specified parts of sewing machines (other than those with inbuilt
motors) and Cotton stalk particle board.
• Full exemption from excise duty available to automatic looms and
projectile looms is being withdrawn.
• Optional excise duty payment abolished.
OTHER PROPOSAL
` 3,000 crores to be provided to NABARD to provide support
to handloom weaver co-operative societies which have become
financially unviable due to non-repayment of debt by handloom
weavers facing economic stress.
AUTOMOBILES AND FORGINGS
World over the Automobile Industry forms about 10 per cent of a
country’s gross domestic product (GDP). In the last recessionary
period, all major economies tried to give a boost to their
automobile sector by providing fiscal support to meet their GDP
growth objectives. In the last budget government had partially
rolled back the stimulus provided to the auto players by increasing
the excise duty to 10 per cent, due to which and the booming
economy, the automotive sector has emerged stronger post the
2008 recession, continued its growth momentum in the current
fiscal (YTD FY2011) with 30 per cent growth in volume of sales
of numbers of vehicles. Concerns related to the slowdown in the
sector due to increased excise duty in the last budget proved
wrong as demand remained high. As a result of increased demand,
almost all major automobile manufacturers have invested heavily
to increase the capacity and production, which is evident from the
new Capacity Addition and Capital Investment in the earlier Years
i.e. approximately 2.46 million units with capital investment of
US $ 5.08 billion.
75
In the last quarter, the automobile industry has started showing
signs of a slowdown as compared to the higher sales numbers due
to strong growth in the last year on account of increased demand
post recession. Increasing input costs, rising vehicle and crude
prices, general inflation and an upward trend in interest rates have
also resulted in moderating the auto demand. Most auto majors have
expressed their concerns and the industry is expected to grow at 10-
12 per cent in CY11 compared to 31 per cent in CY10.
The Society of Indian Automobile Manufacturers (SIAM) has urged the
government to retain excise duty at the existing levels. It is expected
that the status quo on excise duty will be maintained on small cars,
two-wheelers and commercial vehicles. However, the rates on luxury
cars and utility vehicles may be raised on account of concerns raised
by the environment ministry.
DIRECT TAX PROPOSALS
• It is proposed to reduce surcharge from 7.5 per cent to 5 per cent
for domestic companies.
• Minimum Alternate Tax is proposed to be increased from 18 per
cent to 18.5 per cent.
INDIRECT TAX PROPOSALS
• On motor Vehicles, which are registered as Ambulance and
factory Built Ambulances concessional rate of 10 per cent excise
duty is being proposed.
• Concessional Excise duty of 10 per cent is proposed for hydrogen
vehicles based on fuel cell technology. Concessional rate of 5 per
cent of excise duty has been extended to specified parts of vehicles
and plug in kits for conversion of normal fuel vehicles into hybrid
vehicles.
• A vehicle with passenger capacity of 13 (including driver), if
attracts a normal duty of 10 per cent , the manufacturer would
be entitled to a refund of the amount representing 2 per cent ie
one fifth of the total duty if the vehicle is subsequently registered
as taxi.
SUMMARY
The increase in flow of money to the rural areas from ` 3,75,000
crores to ` 4,75,000 crores may lead to demand creation in rural
areas. The announcement of setting up of National Mission for Hybrid
and Electric Hybrid vehicles may result in technological up-gradation
for automobile industry.
76
MEDIA & ENTERTAINMENT
Media, the fourth estate, when entwined with the entertainment
component, represents an effective facet of consumers in India.
Technology has played a key role in influencing the entertainment
industry, by redefining its products, cost structure and distribution.
The phenomenal exponential development witnessed in recent years
in media and entertainment has made these one of the most rapidly
performing sectors in our economy. The emergence of innumerable
TV channels and private FM radio operators has bridged the gaps and
taken entertainment and information to every nook and corner of the
country. Government’s liberal economic policy paved way for dynamic
local entrepreneurs to spearhead this boom. As per the Department of
Industrial Policy & Promotion (DIPP) the information and broadcasting
industry, including print media, has witnessed FDI inflow of US$ 2.04
billion, during April 2000 and September 2010.
According to the FICCI 2010 report, the Indian media & entertainment
industry is expected to grow at a compounded annual growth rate
(CAGR) of 13 per cent over 2009-14 to reach ` 109,100 crore. This
along with the structural changes in the industry, eg digitization, and
the improving spending trend of the urban and rural Indians augurs
well for the growth of the sector in the coming years.
Overall, FY2011 has been a positive year for the media and
entertainment sector as expansion was witnessed in the print
and broadcasting sectors. Moreover, recovery in economy saw
revival in advertisement revenues, which helped the companies to
maintain margins despite higher material costs (newsprint and movie
distribution expenses). Digitization is also taking place rapidly and
set to increase 4 times by 2014.
The Indian animation industry is expected to grow at 20 per cent
to reach US$ 253 million by 2013 from the current US$ 122 million,
according to a study by an industry body. The Indian gaming market
alone has been estimated at US$ 239 million and is expected to grow
at a compounded annual growth rate of over 50 per cent to reach US$
1.3 billion by 2013.
A report by research firm Media Partners Asia (MPA) stated that India
is poised to become the world’s largest direct-to-home (DTH) satellite
pay TV market with 36.1 million subscribers by 2012, overtaking
the US. Furthermore, in its report titled ‘Asia Pacific Pay-TV and
Broadband Markets 2010’, MPA said India’s DTH subscriber base will
increase from 17 million in 2009 to 45 million by 2014 and 58 million
by 2020.
 INDIA BUDGET 2011
an analysis
The television industry is projected to continue to be the major
contributor to the overall industry revenue pie and is estimated to
grow at a rate of 12.9 per cent cumulatively over the next five years,
from an estimated US$ 5.69 billion in 2009 to US$ 10.45 billion by
2014.
Radio is considered a mass medium. It ideally suits the Indian
environment - leveraging its twin advantages of wide coverage and
cost effectiveness. Currently, the sector generates annual revenues
worth US$ 49.5 million and is growing at around 20 percent annually.
The radio advertising industry is projected to grow at a CAGR of 12.2
per cent over 2010-14, reaching US$ 342.7 million in 2014 from the
present US$ 192.8 million in 2009.
Due to the tremendous uptake of the mobile value-added services
(VAS) market, the industry is projected to grow at a CAGR of 28.6
per cent over 2010-14, reaching US$ 567.6 million in 2014, The key
growth driver for the music industry over the next five years will be
digital music, and its share is expected to move from 29 per cent in
2009 to 75 per cent in 2014.
DIRECT TAXES PROPOSALS:
• It is proposed to reduce surcharge from 7.5 per cent to 5 per cent
for domestic companies.
• Minimum Alternate Tax is proposed to be increased from 18 per
cent to 18.5 per cent.
INDIRECT TAX PROPOSALS:
• It is proposed to exempt colour, unexposed cinematographic
jumbo rolls of 400 feet and 1000 feet from CVD by providing full
exemption from custom duty.
• Basic custom duty on waste paper is proposed to be reduced from
5 per cent to 2.5 per cent.
SUMMARY
Reduction in Basic custom duty on waste paper will result in reduction
in cost of raw material for print media. Cinematographic jumbo rolls
of 400 feet and 1000 feet exempted from custom duty will also result
in reduction in cost of raw material for print media.
FINANCE SECTOR
INTRODUCTION
India’s financial markets continued to gain strength in recent years,
in the wake of steady reforms since 1991. Prudent regulations and
financial institutions protected the Indian economy from the recent
global financial shocks. As real interest rates were depressed, growth
of banking deposit has shown slow-down, especially compared to
returns in other fast-recovering asset markets (real estate, gold,
and stock markets). Efforts are needed to expand domestic capital
markets and to widen the role of non-banking financial institutions,
especially in corporate bond and debt markets.
BANKS
Bank credit continued its momentum during 2010-2011 which
had started picking up from the last quarter of 2009-2010. During
the financial year 2010-2011, growth in bank credit extended by
scheduled commercial banks (SCBs) stood at 12.2 per cent as on 17
December 2010 as compared to 6.0 per cent for the corresponding
period in 2009-2010. During the financial year so far, private-sector
banks faired better in terms of growth in credit extended as compared
to public-sector banks (PSBs) and foreign banks. Domestic deposit
rates of SCBs have moved up so far during 2010-2011.
MICRO FINANCE
RBI had issued guidelines to banks for mainstreaming micro-credit and
enhancing the outreach of microcredit providers. This has stipulated
that microcredit extended by banks to individual borrowers directly
or through any intermediary would henceforth be reckoned as part of
their priority sector lending. The gathering momentum in the micro-
finance sector has brought into focus the issue of regulating the
sector. A draft Micro-Financial Sector (Development and Regulation)
Bill 2010 is under consideration of the Government.
CAPITAL MARKETS
PRIMARY MARKET
The year 2010-2011 has seen the Indian capital market put the worst
behind and move towards strong growth. The cumulative amount
mobilized as on 30 November 2010-2011 through initial public offers
(IPOs), follow on public offers (FPOs) and rights issues has marginally
declined. The average IPO size for the current financial year is ` 827
crores as compared to ` 633 crores in the previous financial year,
showing an increase of 30.6 per cent. Further, ` 2,197 crore was
mobilized through debt issue as compared to ` 2500 crore in 2009-
10. The amount of capital mobilized through private placement in
2010-11 (as on 30 November 2010) is ` 1,47,400 crore as compared
to ` 2,12,635 crore in 2009-10. During 2010-11 (as in November
2010), mutual funds mobilized ` 12,185 crore from the market as
compared to ` 83,080 crore in 2009-10.
SECONDARY MARKET
As on 31 December 2010, Indian benchmark indices the Sensex and
Nifty, increased by 17.0 per cent and 17.9 per cent respectively over the
77
closing value of 2009-10. The free float market capitalization of Nifty,
the Sensex, Nifty Junior, and BSE 500 showed an increase of 19.8 per
cent, 22.8 per cent, 15.5 per cent and 20.8 per cent respectively over
their values in financial year 2009-10. The number of registered FIIs
increased to 1718 as on 31 December 2010 from 1713 on 31 March
2010. The number of registered sub-accounts also increased to 5503
from 5378 during the same period. In the Indian equity market, as
compared to previous year FIIs investment also increased.
INSURANCE SECTOR
The insurance sector was opened for private participation with the
enactment of the Insurance Regulatory and Development Authority Act
1999. While permitting foreign participation in ventures set up by the
private sector, the Government restricted participation of the foreign
joint venture partner through the FDI route to 26 per cent of the paid-up
equity of the insurance company. Since the opening up of the sector, the
number of participants has gone up from six insurers in the year 2000
to 48 insurers operating in the life, non-life, and reinsurance segments.
The post-liberalization period has been witness to tremendous growth
in the insurance industry, more so in the life segment.
DIRECT TAX PROPOSALS
• Following Tax incentives are proposed to attract foreign funds for
financing of infrastructure:
– create special vehicles in the form of notified infrastructure
debt funds;
– interest payment on the borrowings of these funds to attract
withholding tax rate of 5 per cent instead of the current rate
of 20 per cent;
– exempt the income of the fund from tax.
• Additional deduction under section 80 CCF of ` 20,000 for
investment in long-term infrastructure bonds proposed to be
extended for one more year.
INDIRECT TAX PROPOSALS
• Services provided by Life Insurance companies in the area of
investment proposed to be brought into service tax bracket.
OTHER PROPOSALS
• Amendments proposed to the Banking Regulation Act in the
context of additional banking licences to private sector players.
• For investment in corporate bonds issued in infrastructure sector,
FII limits have been proposed to increase to enhance the flow of
funds for Infrastructure sector.
• “India Microfinance Equity Fund” of ` 100 crore to be created
with SIDBI.
• Liberalising the existing scheme of interest subvention of 1 per
cent on housing loans by extending it to housing loan upto ` 15
78
lakh where the cost of the house does not exceed ` 25 lakh from
the present limit of ` 10 lakh and ` 20 lakh respectively.
• Existing housing loan limit to be enhanced from ` 20 lakh to ` 25
lakh for dwelling units under priority sector lending.
• Setting up a Financial Sector Legislative Reforms Commission
to rewrite and streamline the financial sector laws, rules and
regulations and bring them in harmony with the requirements of
a modern financial sector.
SUMMARY
The Direct, indirect and other proposals have positive and favorable
impact on the finance sector.
PHARMA
The domestic pharma industry continues to grow at 11-12 per cent,
dwarfing the global average of five-six percent. Similarly, improved
traction in productivity trends has prevented margin pressures,
notwithstanding the intensifying competitive landscape domestically.
The government’s Vision 2015 statement indicates an 18 per cent plus
CAGR for the pharma sector, translating to a doubling of revenues to
US$ 40 billion over the next five years. Growth will be driven by all
verticals: domestic formulations, generics exports, and outsourcing
(CRAMS). The government has recently announced the setting up of
a venture fund that will target the infusion of INR 20 billion into the
sector.
Exports of pharmaceuticals has consistently outstripped imports.
India currently exports drug intermediates, active pharmaceutical
ingredients (APIs), finished dosage formulations, bio– pharmaceuticals
and clinical services. The top five destinations of Indian pharmaceutical
products are the USA, Germany, Russia, the UK and China. The
domestic pharma sector has also expanded in recent years.
The Department of Pharmaceuticals in collaboration with the Ministry
of MSME has introduced a Scheme for Schedule ‘M’ Compliance
by small-scale industrial (SSI) units in the pharma sector under the
overall umbrella of the Credit Linked Subsidy Scheme (CLCSS). Under
the scheme, pharma SSI units are eligible for 15 per cent upfront
capital subsidy on Institutional finance upto ` 1 crore availed of them
for adoption of improved technology to make themselves Schedule
‘M’ Compliant. Apart from this, the government is also planning to set
up special zones at international cargo terminals for pharma products,
which will guarantee proper testing facility, storage conditions and
customer clearances. This drive will further increase drug exports.
Recently the Drug & Pharmaceutical Manufactures Association has
received an in-principle approval for its proposed Special Economic
 INDIA BUDGET 2011
an analysis
Zone (SEZ) for Pharmaceuticals, bulk drugs, Active Pharmaceuticals
Ingredients (APIs) and formulation to be located at Nakkapalli mandal
in Vishakhapatnam district. , The Indian modern retail segment is at a nascent stage with penetration
Other new initiatives that are being contemplated by the Department
include the launching of the access to affordable medicine Jan Aushadhi
Campaign (around 3000 Jan Aushdhi Stores), measures for setting
up world class pharma infrastructure in India through public-private
partnership (PPP) and providing impetus for manufacturing of new
medical devices and pharma machinery. The Governments initiative
behind promulgating Jan Aushadhi Campaign is to make quality the
hallmark of medicine availability in the country, by ensuring, access to
quality medicines through the Central Pharma Public Sector Undertakings
(CPSU) supplies and through GMP Compliant manufacturers which will
help the private sector pharma manufacturers
The growth trajectory in the key markets of Indian pharma remains
robust. The recent study shows positive view on the sector. Exports
still hold significant promise as Indian pharma has a low market
share of 10 per cent in the USA and a 5 per cent share in the other
emerging markets. The large first-to-file (FTF) opportunities and
strong abbreviated new drug application (ANDA) pipeline makes the
US opportunity attractive. With product-specific opportunities and
scaling up in niche segments, the Indian pharmaceutical (pharma)
companies appear to be better prepared to address the growth
opportunities.
DIRECT TAX PROPOSALS
• It is proposed to reduce surcharge from 7.5 per cent to 5 per cent
for domestic companies.
• Minimum Alternate Tax is proposed to be increased from 18 per
cent to 18.5 per cent.
INDIRECT TAX PROPOSALS
• P & P medicines imported for retail sale is being exempted from
Special Additional Duty of Customs.
• Customs duty on four life savings drugs and bulk drugs is being
reduced from 10 per cent to 5 per cent with NIL CVD ( by way of
excise duty exemption).
• Basic Customs duty on lactose for use in the manufacturer of
homoeopathic medicines is being reduced from 25 per cent to 10
per cent.
SUMMARY
Indirect tax proposals will have favourable impact on pharma sector.
RETAIL SECTOR
of less than 6 per cent, in an overall retail industry size of $350 billion.
A favorable demographic profile and an increasing purchasing power
coupled with a changing mindset towards an organized retail format
augurs well for the modern retail players. Along with a strong revenue
momentum, the players’ efforts towards front end as well as back end
cost rationalization and optimization will start bearing fruits in time to
come. We remain positive on Indian retail as a structural domestic play.
The Indian retail industry is the fifth largest in the world, where
97 per cent of it is unorganized. With growing market demand, the
industry is expected to grow at a pace of 25-30 per cent annually and
it accounts for over 10 per cent of India’s GDP and around 8 per cent
of the employment.
Organized retail in India has the potential to add approximately over
` 2,000 billion (US$45 billion) business generating employment
for some 2.5 million people in various retail operations and over
10 million additional workforce in retail support activities including
contract production and processing, supply chain and logistics, retail
real estate development and management etc. It is estimated that it
will cross the $650 billion mark by 2011, with an already estimated
investment of around $421 billion slated for the next four years
THE POTENTIAL OF THE INDIAN RETAIL SECTOR
The high growth projected in domestic retail demand will be fuelled by:
• The migration of population to higher income segments with
increasing per capita incomes.
• An increase in urbanization.
• Changing consumer attitudes especially the increasing use of
credit cards.
• The growth of the population in the 20 to 49 years age band There
is retail opportunity in most product categories and for all types
of formats.
• Food and Grocery: The largest category; largely unorganized
today.
• Home Improvement and Consumer Durables: Over 20 per cent
p.a. CAGR estimated in the next 10 years
• Apparel and Eating Out: 13 per cent p.a. CAGR projected over 10
years Opportunities for investment in supply chain infrastructure:
Cold chain and logistics India also has significant potential
to emerge as a sourcing base for a wide variety of goods for
international retail companies
• Many international retailers including Wal-Mart, GAP, JC Penney
etc. are already procuring from India.
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Another important topic of discussion for a while now has been 100
per cent FDI in retail. Allowing FDI into the sector would help reduce
the gap between prices of a commodity from farm to fork. India’s
infrastructure development needs are vast and there is scope for
development of retail and logistics .It is a well known fact that, even
the Tier I cities in India lack proper infrastructure.
Large investments in infrastructure would lead to a rise in farm
productivity, manufacturing, processing and cold storage facilities.
This would cut down wastage caused due to difficult road connectivity
and spurt growth in employment, exports and GDP. This would also
help revive the textile and handicrafts sector. With appropriate control
in place, exports can double in three years. Clearly, FDI is only going
to benefit customers, economy and infrastructure. India’s experience
in telecom, automobile, insurance sector clearly shows the success
of FDI policy.
International retailers see India as the last retailing frontier left as
the China’s retail sector is becoming saturated. However, the Indian
Government restrictions on the FDI are creating ripples among the
international players like Wal-Mart, Tesco and many other retail
giants struggling to enter Indian markets. As of now the Government
has allowed only 51 per cent FDI in the sector to ‘one-brand’ shops
like Nike, Reebok etc. However, other international players are
taking alternative routes to enter the Indian retail market indirectly
via strategic licensing agreement, franchisee agreement and cash
and carry wholesale trading (since 100 per cent FDI is allowed in
wholesale trading).
Top on the list of pre-budget expectations is the retail industry’s long
standing demand of giving it a separate industry status with its own
ministry. This decisive step will be truly reforming in organizing this
highly unorganized sector.
While GST is yet to be introduced, imposition of service tax on rentals
adds severe burden on consumers, costing 1-1.5 per cent of the
retailer’s annual turnover. This is a big amount considering that retail
itself is a 3 per cent profit business. Also, due to the high rentals
in India (as high as 12 per cent of the turnover), the retail business
has many hindrances to its growth. This is in sharp contrast to the
average cost between 3 per cent and 5 per cent across the world.
Hence, service tax elimination and implementation of good and service
tax (GST) if considered in this Union Budget will be ideal to adopt a single
rate structure with a common rate for goods and services. Such a tax
regime will benefit both the retailers and consumers as the streamlining
of taxes will help reduce the retail prices of most of the items.
80
At present entry into India’s retail sector can be done through three
different routes. The current formats permitted by the Government of
India for the International players are through Franchise agreements,
cash and carry wholesale trading and Strategic licensing agreements.
The Economic Survey 2010-11 released recently by the Government of
India advocates permitting FDI in retail in a phased manner beginning
with metros as also simultaneously incentivizing the existing retail
shops to modernize.
DIRECT TAX PROPOSALS
• It is proposed to reduce surcharge from 7.5 per cent to 5 per cent
for domestic companies.
• Minimum Alternate Tax is proposed to be increased from 18 per
cent to 18.5 per cent.
INDIRECT TAX PROPOSALS
• Full exemption of excise duty is withdrawn on Computer goods
which will attract 5 per cent concessional rate of excise duty
which will lead to increase MRP cost.
• Concessional CVD @5 per cent (by a way of central Excise
exemption) and full exemption on SAD is being provided to LEDs
used for Manufacture of LED Lights and Light fixtures.
SUMMARY
The India’s retail sector that has been anticipating some good news
on allowing FDI in the multi -brand segment is left untouched by
Finance Minister Pranab Mukherjee.
SUGAR
Sugar production in India is cyclic in nature. The 2006-07 and
2007-08 sugar seasons (October-September) were years of high
production whereas the 2008-09 and 2009-10 seasons were years
of low production. The decline in sugar production in 2008-09 and
2009-10 put upward pressure on domestic sugar prices and the
Central Government had to take a number of measures to augment
domestic stocks of sugar and contain sugar prices during this period
such as allowing import of duty-free sugar, imposing stock-holding
and turnover limits on sugar, bringing khandsari sugar under the
ambit of stockholding and turnover limits and suspension of futures
trading in sugar. The sugar production in 2010-11 is expected to be
better at about 24.5 million tones, as per estimates given by Cane
Commissioners against 19 million tones in 2009 -10
The estimated sugarcane production as per the first advance estimates
2009-10 is 24.95 million tones against a production of 27.39 million
 INDIA BUDGET 2011
an analysis
tones as per the fourth advance estimates 2008-09. There is,
therefore, decline in the production of sugarcane of about 9 per cent
in the current year compared to last year. The compound growth rate
of area, production, and yield of sugarcane during 2000-01 to 2009-
10 has declined compared to the 1980s. The decline in growth rate
of yield during this period is because of relatively higher decline in
growth rate of production compared to decline in growth rate of area
Concerned. Efforts are required to increase yield rate of this crop to
avoid fluctuations in production and spikes in price of sugar.
The Government has changed concept of ‘statuary minimum
price(SMP)’ to that of ‘ fair and remunerative price’ (FRP) for
sugarcane producers to provide reasonable margin on account of
‘risk’ and ‘profit’ and is uniformly applicable to all States. For the
2010-11 sugar season, the Central Government has fixed an FRP of
` 139.12 per quintal linked to a basic recovery rate of 9.5 per cent
subject to a premium of ` 1.46 for every 0.1 percentage increase in
recovery above that level.
On 24 February 2011, the spot sugar prices on the Mumbai wholesale
terminal market increased by ` 10-15, per quintal tracking bullish
sentiment at the mill level
The large sugar firms with mills in Uttar Pradesh, which produces
nearly one-fourth of India’s sugar output like Balrampur Chini and Bajaj
Hindustan recently declared their results. As per their estimates the
final sugar output would be about 24 million tones (mt). That is about
1.5 mt short of the industry estimate at the start of the season. By mid-
March, a final figure will become available. The output is adequate
to meet India’s requirement of about 23 mt, and the rest could be
exported at remunerative prices. But the government is expected to
allow exports only if it does not cause a rise in domestic prices. By-
products of this process, molasses, alcohol (including ethanol), and
co-generation of power will all see higher volumes against last year,
boosting profitability. Thus the outlook for sugar firms appears better
against last year, but unless sugar prices rise significantly from their
current levels, at least by about 10-15 per cent, their profitability will
be under pressure in fiscal 2012.
DIRECT TAXES PROPOSALS:
• It is proposed to reduce surcharge from 7.5 per cent to 5 per cent
for domestic companies.
• Minimum Alternate Tax is proposed to be increased from 18 per
cent to 18.5 per cent.
INDIRECT TAX PROPOSALS:
• Basic custom duties is being reduced on specified agriculture
machinery for sugarcane harvesters from 5 per cent to 2.5 per
cent and on parts and components required on manufacture of
equipments reduced from 7.5 per cent to 5 per cent .
OTHER PROPOSALS
• The target of credit flow to the farmers has been increased from
` 3,75,000 crore this year to ` 4,75,000 crore in 2011-2012.
Banks have been asked to step up direct lending for agriculture
and credit to small and marginal farmers.
• The existing interest subvention scheme of providing short term
crop loans to farmers at 7 per cent interest will be continued
during 2011-2012 and enhance the additional subvention to 3 per
cent in 2011-2012. The effective rate of interest for such farmers
will be 4 per cent per annum.
• The total allocation of Rashtriya Krishi Vikas Yojana (RKVY) is
being increased from ` 6,755 crore in 2010-2011 to ` 7,860
crore in 2011-2012
SUMMARY
All these budget proposals will help sugarcane farmers to increase
their productivity and profitability.
TELECOM
The Indian telecom industry has grown by leaps and bounds. Currently,
with 750 million subscribers, it still stands at an all India penetration
level of 60 per cent, and rural penetration of as low as 30 per cent, thus
providing ample growth opportunity. Of late, the sector had witnessed
high competition, impacting players’ earnings profile. With the completion
of the 3G auction process and stabilizing competition, we believe the
domestic environment remains strong. Rural teledensity which was
above 1.57 per cent in March 2004 has increased to 30.18 per cent at
the end of November 2010. Urban teledensity has increased from 20.74
per cent in March 2004 to 143.95 per cent at the end of November 2010.
But high level of regulatory uncertainty (recommendations/ proposals
relating to one time excess spectrum charge, high payments towards
license renewal fee) coupled with spectrum shortage still plague the
industry, and hence we remain cautious on the sector.
The opening of the sector has not only led to rapid growth but also
helped a great deal towards maximization of consumer benefits as tariff
have been falling across the board. From only 76.54 million telephone
subscribers in 2004, the number increased to 764.77 million at the end
of November 2010. Wireless telephone connections have contributed
to this growth as their number rose from 35.62 million in March 2004 to
729.58 million at the end of November 2010. The wire-line has shown a
decline from 40.92 million in 2004 to 35.19 million in November 2010.
81
TELEDENSITY
With increasing private-sector participation, the share of the private
sector in total telephone connections has increased to 84.5 per cent
in November 2010 from a meager 5 per cent in 1999.Teledensity, an
important indicator or telecom penetration, rose from 7.02 per cent in
March 2004 to 64.34 per cent in November 2010. Thus there has been
continuous improvement in the overall teledensity of the country.
With the penetration of mobile services and flourishing of private
service providers, rural telephone connections have gone up from
12.3 million in March 2004 to 250.94 million in November 2010. The
share of rural telephones in total telephones has steadily increased
from around 16 per cent in 2004 to 32.81 per cent as on 30 November
2010. During 2009-10, the growth rate of rural telephones was 62.6
per cent as against 37.32 per cent for urban telephones. The private
sector has contributed crucially to the growth of rural telephones by
providing about 84.5 per cent of telephones as in November 2010.
Further, the much-awaited MNP was also launched on 25 November
2010 which allows any subscriber to change his service provider
without changing his mobile phone number.
MANUFACTURING
Indian telecom industry manufactures a complete range of wire-line
telecom equipment using state-of-the-art technology. Considering the
growth of wireless, there are opportunities for domestic and foreign
investors in manufacturing sector. Presently most of the wireless
core equipment is being imported and there is great potential to
manufacture these items in the country. The last five years saw
many renowned telecom companies setting up their manufacturing
bases in India. The production of telecom equipments in value terms
increased from ` 48,800 crore during 2008-09 to ` 51,000 crore
during 2009-10. The worth of telecom equipment including customer
premises equipment (CPE) produced during 2010-11 is expected to
be about ` 53,500 crore. There are favourable factors such as policy
moves taken by the Government, incentives offered, large talent pool
in R&D, and low labour cost which can provide an impetus to the
industry. Exports of telecom equipment have also increased from `
11,000 crore in 2008-09 to ` 13,500 crore during 2009-10 and are
expected to increase further to ` 14,000 crore in 2010-11
INTERNET / BROADBAND
The number of broadband subscribers grew from 8.77 million in
March 2010 to about 10.71 million up to November 2010 indicating
an annualized growth of 22 per cent. Newer Access technologies
like Broad Band Wireless Access (BWA) can significantly transform
the character of internet/broadband scenario in India. This will
82
encourage further expansion of wireless service with a vision of
providing ‘Broadband for all’.
FUTURE OUTLOOK
3G telecom services: The explosive growth of the telecom industry in
India is being followed by the urge to move towards better technology
and the next level of service delivery. While the last five years have
been transformational for Indian telecom industry, the next few years
look even more exciting. One of the key new frontiers is 3G technology.
The auction of 3G/WBA spectrum has been successfully conducted.
This will encourage further expansion of wireless services.
Moreover, recent regulator recommendation has stimulated some
uncertainty in the sector, especially with regards to recent 2G pricing
and license renewal fees. However, increasing rural penetration and
data services offers immense potential going forward.
Foreign direct investment (FDI) ceilings have been raised from 49
per cent to 74 per cent. This has made telecom one of major sectors
attracting FDI inflows.
DIRECT TAXES PROPOSALS
• It is proposed to reduce surcharge from 7.5 per cent to 5 per cent
for domestic companies.
• Minimum Alternate Tax is proposed to be increased from 18 per
cent to 18.5 per cent.
INDIRECT TAX PROPOSALS
• Full Exemption from Basic Custom Duty is being extended to parts/
components required for the manufacture of PC connectivity cable
and sub-parts of Parts & Components of Battery charger, hands
free head phones and PC connectivity cable of mobile handsets
including cellular phones.
• Full exemption from Special Additional Duty (SAD) u/s 3(5) of the
Custom Tariff Act 1975, presently available upto 31.03.2011 on
parts, components and accessories for manufacture of mobile
handsets including cellular phones is being extended upto
31.03.2012
SUMMARY
The industry had expected for an exemption of service tax on
broadband. However, budget did not made any announcement as
such. However, increasing rural penetration and data services offers
immense potential going forward. Budget proposals related to indirect
tax will have favourable impact on telecom sector.
 Compiled by:

T.P. Ostwal & Associates Bilimoria Mehta & Co.

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Lakhani & Associates

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Tel: +91 22 4069 3900

For private circulation & for internal use only.

This booklet summarises the important proposals included in the budget speech made by the Honourable Finance Minister on 28th February 2011.
Whilst every care has been taken in the preparation of this document it may contain inadvertent errors for which we shall not be held responsible.
It must be stressed that the finance bill may contain proposals which have not been referred to in the budget speech and additionally, the detailed
proposals are liable to amendment during the passage of the finance bill through Parliament. The information given in this document provides a
bird’s eye view on the changes proposed and should not be relied for the purpose of economic or financial decision. Each such decision would call
for specific reference of the relevant statutes and consultation of an expert.
Bilimoria Mehta & Co.
CHARTERED ACCOUNTANTS
Fourth Floor, Bharat House
104, Mumbai Samachar Marg
Fort, Mumbai - 400 023.
Tel: +91 22 4069 3900
Bilimoria Mehta & Co.
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