Wednesday, December 26, 2012


On 18th December, 2012 the Companies Bill, 2011 had been passed by the Lok Sabha. However, it was passed with certain modifications as recommended by the Parliamentary Standing Committee on Finance. Some of the amendments to the Companies Bill (as passed by the Lok Sabha) are as under:

1) Definition of 'key managerial personnel'(KMP) in clause 2(51) amended to include ‘Whole-time director' within its realm. Further, the pre-condition of CFO’s appointment by BOD to treat him as KMP was deleted;

2) As per amended clause 3, in case of One Person Company, nominee mentioned in Memorandum of Association would become member not only on subscriber's death but also in the case of subscriber's incapacity to contract due to insanity, etc.;

3) Words ‘of money’ omitted from Sec. 2(64) to cover bonus shares in paid-up share capital;

4) As per amended clause 2(40), the ‘statement of changes in equity’ should form an integral part of the financial statements of companies governed by Ind-AS;

5) Clause 23 amended to allow a private company to make rights and bonus issues;

6) Members are empowered to offer whole of their holdings of shares to public in offer for sale; earlier this was restricted to part shareholdings only;

7) In accordance with the Supreme Court's interpretation of section 67 of the Companies Act, 1956 in Sahara India Real Estate Corpn. Ltd. v. SEBI [2012] 115 SCL 478/25 18, clause 42 was amended to define 'private placement' in order to curb public issues in the garb of private placement;

8) Time-limit for filing annual return in clause 92(4) relaxed from 30 days to 60 days from the date of AGM or due date of AGM, if the AGM wasn’t convened;

9) Corporate Social Responsibility spending has been made mandatory;

10) As per amended clause 139 appointment of auditors for five years needs to be ratified by members at every Annual General Meeting;

11) Clause 152(6) provides that not less than two-thirds of the total number of directors of a public company shall be liable to retire by
rotation and be appointed by the company in general meeting. The independent directors are being excluded from the "total number of directors" for computing the proportion, nonetheless they are appointed under this Act or any other law;

12) As per newly inserted clause 245(2), where members or depositors seek any other suitable action from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner;

13) Provisions relating to voluntary rotation of auditing partner (in case of audit firm) modified to provide that members may rotate the partner at such interval as may be resolved by members instead of every year.

Tribunal applied ‘force of attraction rule’ to tax income indirectly connected to PE in India

The basic philosophy underlying the ‘force of attraction’ rule is that when an enterprise sets up a PE in another country, it brings itself within the jurisdiction of that another country to such a degree that such another country can properly tax all profits that the enterprise derives from such country- whether the transactions are routed and performed through the PE or not

In the instant case, the moot question that arose for consideration before the Tribunal was “Whether services rendered by PE in India to Indian project could only be made taxable and similar services rendered by general enterprise of such PE outside India will not be taxable as the same doesn’t amount to income indirectly attributable to PE in India”

The Tribunal held in favour of revenue as under:

1) It held that not only the profits directly attributable to the work performed by the PE but the entire profits whether “directly” or “indirectly” attributable to the PE could be made taxable;

2) The connotations of “profits indirectly attributable to permanent establishment” do indeed extend to incorporation of the ‘force of attraction’ rule embedded in Article 7(1);

3) In addition to taxability of income in respect of services rendered by the PE in India, any income in respect of the services rendered to an Indian project, which is similar to the services rendered by the PE, should also to be taxed in India in the hands of the assessee irrespective of the fact whether such services are rendered through the PE, or directly by the general enterprise;

4) This indirect attribution, in view of the specific provisions of India UK tax treaty, was enough to bring the income from such services within ambit of taxability in India. The twin conditions to be satisfied for taxability of related profits are: (i) the services should be similar or relatable to the services rendered by the PE in India; and (ii) the services should be ‘directly or indirectly attributable to the Indian PE’, i.e., rendered to a project or client in India. In effect, thus, entire profits relating to services rendered by the assessee, whether rendered in India or outside India, in respect of Indian projects are taxable in India;

5) The Tribunal has taken a considered view on interpretation of the aforesaid article that the entire profit relating to services rendered by the assessee whether rendered in India or outside India, in respect of Indian Project are taxable in India and it was not permissible to review the decision of the Tribunal in the guise of rectification under section 254(2) - Linklaters & Paines v. ITO, International Taxation [2012] 28 250 (Mumbai - Trib.)