SEBI plans to widen definition of insider in insider norms and to reduce timeline to complete delisting process

The SEBI board met in Mumbai on November 19, 2014 and approved of new regulation in place of existing insider trading regulations and amendment to delisting regulations. It has widened the definition of insider under amended insider trading norms and has reduced the time-line for completing delisting process.

Some of the changes approved by SEBI are outlined hereunder:

1)Amendment to Insider trading norms: In order to strengthen the regulatory framework dealing with insider trading in India, SEBI has approved of new regulation in place of the existing Insider Trading regulations. The salient features of the proposed regulations are as under:

a)Definition of ‘insider’ broadened: The definition of insider has been widened. Following persons have been included in the definition of ‘insider’:

Persons connected in any contractual, fiduciary or employment relationship that allows such persons access to unpublished price sensitive information (UPSI).

Immediate relatives would be presumed to be connected persons, with a right to rebut the presumption.

b)Insider trading norms aligned with international practices: The requirement of communication of UPSI in the case of legitimate business transaction has been recognized, in law, and a safeguard has been provided.

c)Disclosure of UPSI in public domain: Disclosure of UPSI in public domain has been made mandatory before trading, so as to rule out asymmetry of information in the market, as prevalent in other jurisdictions.

2)Insertion of uniform regulation in place of listing agreement: SEBI has approved of conversion of Listing Agreement to Listing Regulations. Listing Regulations, interalia, would be comprehensive Regulations in respect of various types of listed securities. These Regulations would consolidate and streamline the provisions of existing listing agreements, thereby ensure better enforceability.

3)Amendment to delisting regulations: SEBI has approved certain changes to SEBI (Delisting of Equity Shares) Regulations, 2009:

a)Conditions for delisting:

It has been proposed that delisting would be considered successful only when the shareholding of the acquirer together with the shares tendered by public shareholders reach 90% of the total share capital of the company, and Atleast 25% of the number of public shareholders, (holding shares in dematerialised mode as on the date of the Board meeting approve of the delisting proposal) tender in the reverse book building process.

b)Exemption from reverse book building process: Further, companies whose paid-up capital and net worth does not exceed Rs.10 crores and Rs.25 crores, respectively, as on the last day of the previous financial year are exempted from following the Reverse Book Building process.

c)Reduction in time-line to complete delisting: Timelines for completing the delisting process has been reduced from 137 calendar days (approx 117 working days) to 76 working days.

4)Risk based supervision of market intermediaries: SEBI is in the process of formalizing its risk based approach towards supervision of market intermediaries which will be in alignment with the global best practices. The system will be implemented in a phased manner.

5) Granting Single Registration to Depository Participants: With a view to further simplify the registration requirements for Depository Participants (DPs), the Board has approved of the policy of granting single registration for the application of initial registration as well as the permanent registration for operating with both the Depositories.

6) Use of Secondary Market infrastructure for public issuance (“e-IPO”): The Board has approved the proposal to frame suitable regulations for using Secondary Market infrastructure for public issuance (“e-IPO”) after going through the public consultation process

7) Imposing restrictions on wilful defaulters - Amendments to Regulations framed under SEBI Act, 1992: The Board has approved of the proposal to review the policy in respect of restricting an issuer company / its promoter / directors, categorized as wilful defaulter, from raising capital after going through the public consultation process.

Sales incentives to employees establish LO promotional activities in India; treated as PE of foreign Co.

Facts:

a)The assessee, a company incorporated in US, established a Liaison Office (‘LO’) in India. During assessment the Assessing Officer (‘AO’) contended that the activities of the LO extended to searching for the prospective buyers and for promoting sales of the assessee in India.

b)The AO posed a few queries before the Chief Representative Officer (‘CRO’) of the assessee which were explained by him.

c)In one of the queries pertaining to the remuneration schemes for the employees, the CRO explained that the employees were entitled to sales incentives to the extent of 25% of their annual remunerations. Further, the performance of the employees was judged by the number of direct orders received by them.

d)The CRO further explained that the incentive plan was a standard term which was inadvertently included in the offer letters given to the employees. In fact, no such incentive was given to any employees during the year.

e)On basis of such an enquiry, the Assessing Officer held that the activities of LO were not limited to preparatory or auxiliary activities in India and they had extended to marketing and promotional activities as well. Accordingly, the income attributable to the LO in India would be taxable in India. The Commissioner (Appeals) and the Tribunal upheld the order of the Assessing Officer.

The High Court upheld order of the Tribunal:

The High Court upheld the order of the Tribunal which provided that:

1)Whether or not any incentive was paid to an employee during the year was not material. What was relevant was the nature of the incentive plan.

2)Nature of incentives to employees indicated that purpose of LO was not just to advertise products of assessee but extended to activities which traversed the actual marketing of the products of assessee in India.

3)The explanation that the incentive plan, being a standard language, was inadvertently included in the offer letter was far-fetched, because the assessee carrying over a transnational business with a range of advisors could not be assumed to have committed an inadvertent mistake on this significant issue.

4)Therefore, LO would be treated as PE of foreign company.

5)However, on the issue of determination of the income attributable to the LO which had to be taxed in India, the High Court restored the matter before the AO. - BROWN AND SHARPE INC. V. CIT [2014] 51 taxmann.com 327 (Allahabad)

Time gap of 30 days isn't intended between book closure date and record date for declaration of dividend, says SAT

As per clause 16 of 'Listing agreement' time gap of 30 days is intended to be between two book closures and two record dates and not between a book closure and a record date

Facts:

a)The appellant-company, listed on BSE and NSE (‘respondents’), had declared book closure date for the purpose of its AGM. The AGM was held and on the same day interim dividend was declared and the record date was fixed.

b)Thereafter, both the respondent's alleged that time gap between book closure date and record date was less than 30 days which was violative of clause 16 of the 'Listing Agreement'.

c)The SEBI held that appellant-company had violated clause 16 and, accordingly, called upon appellant to comply with it.

On appeal the Securities Appellate Tribunal held as under:

1)On perusal of clause 16 of ‘Listing Agreement’ it was seen that in a year there could be more than one book closure for the purpose of declaration of dividend or the rights issue or bonus shares, etc.

2)If more than one book closure was postulated under clause 16 of the listing agreement, then the time gap of 30 days under clause 16 would be referred to as the time gap between two book closure dates and it could not be inferred that time gap should be between book closure date and record date.

3)Where a company kept its transfer books closed during AGM as per clause 16 and also sought to declare dividend, then stipulating record date for such dividend after 30 days of book closure date as well as payment of dividend would be violative of section 205A of the Companies Act, 1956 – ORACLE FINANCIAL SERVICES SOFTWARE LTD. V. SECURITIES AND EXCHANGE BOARD OF INDIA [2014] 51 TAXMANN.COM 24 (SAT - MUMBAI)

Forex losses arising from services provided to foreign AEs are operative in nature; to be part of PLI for TP study

Foreign exchange loss in case of providing services to AEs is to be considered as operative in nature and, hence, is to be included in PLI calculation of an assessee.

Facts:

One of the grounds raised for appeal was as under:

The DRP/AO had erred in confirming the action of the TPO in considering the foreign exchange loss as operating, though the loss was mainly due to the re-instatement of balances at the year end and did not pertain to the operations of the Appellant.

The Tribunal held as under:

1)The Bangalore Bench of the Tribunal in the case of SAP Labs India P. Ltd v. ACIT [2011] 44 SOT 156 (Bang.), observed as follows:

a)The foreign exchange fluctuation gain was nothing but an integral part of the sales proceeds of an assessee carrying on export business.

b)The Courts and Tribunals have held that foreign exchange fluctuation gains form part of the sale proceeds of an exporter-assessee. The foreign exchange fluctuation income could not be excluded from the computation of the operating margin of the assessee-company.

2)Thus, following the aforesaid decision of the Tribunal, it was to be held that while computing the margin for determining the ALP, the foreign exchange gain/loss has to be taken as part of the operating margin. Therefore, foreign exchange loss in case of providing services to AEs was to be considered as operative in nature and, hence, was to be included in the PLI calculation of the assessee. - KENEXA TECHNOLOGIES (P.) LTD. V. DY.CIT [2014] 51 taxmann.com 282 (Hyderabad - Trib.)

Provision of suspension of legal proceedings under SICA prevails over provisions of debt recovery under RDDB Act

Section 22 of SICA covers and interdicts instances of application for recovery made under the provisions of the RDDB Act. Provisions of SICA, in particular section 22, shall prevail over provisions for recovery of debts in the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (‘RDDB’).

Issues:

a)Whether as per bar contained in section 22 of Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’), no recovery proceeding could be effected against defaulting-Company?

b)Since Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (‘RDDB’) was a subsequent enactment, whether provisions under sub-section (2) of section 34 of RDDB Act would have an overriding effect over other laws mentioned therein, including SICA?

The Supreme Court held as under:

1)Proceedings by way of an application for recovery according to a summary procedure as provided for under the RDDB Act are not referred to in Section 22 of SICA simply because the RDDB Act had not then been enacted.

2)Though the RDDB Act is the later enactment, sub-section (2) of Section 34 specifically provides that the provisions of the Act or the rules thereunder, shall be in addition to, and not in derogation of the other laws mentioned therein including SICA.

3)Section 22 of SICA clearly covers and interdicts such an application for recovery made under the provisions of the RDB Act. Therefore, the provisions of SICA, in particular Section 22, shall prevail over the provision for the recovery of debts in the RDDB Act. – KSL & INDUSTRIES LTD. V. ARIHANT THREADS LTD. [2014] 51 TAXMANN.COM 252 (SC)

Consent fee paid to SEBI without admitting alleged violation by broker couldn’t be held as penalty; deduction allowed

IT: When SEBI accepted consent application (settlement application) without admitting or denying guilt by assessee-stock-broker, resultant consent fee paid to SEBI could not be equated with a “penalty” - The fee was paid for purpose of business, to settle a dispute with SEBI and to be able to conduct business without interruption - Thus, consent fee was allowable as business expenditure under Section 37.

Facts:

a)The assessee-company was engaged in share broking business. It filed its return of income. on examination of the said return, the Assessing Officer (‘AO’) noticed that assessee had paid a sum of Rs. 50 lakhs to SEBI as consent fee.

b)On further examination, he noticed that the SEBI had recommended suspension of Certificate of Registration of assessee as stock broker for a period of nine months for violating the various regulations framed by SEBI. After hearing the assessee, period of suspension was reduced to four months.

c)The assessee challenged said order by filing an appeal before the Securities Appellate Tribunal. While the said appeal was pending, the SEBI issued a circular whereby it agreed to settle the disputes in consideration of ‘Consent Application’ furnished by the assessee on payment of consent fee.

d)Thus, the AO took the view that the said amount of Rs.50 lakhs was a compounding fee paid for offences committed under SEBI (Stock Brokers and sub-brokers)Regulations, 1992. Accordingly, he held that it was a penalty paid for infraction of law and, hence, disallowed the said claim by invoking the Explanation to Sec. 37(1) of the Income-tax Act (‘I-T Act’). On appeal, the CIT(A) deleted the disallowance made by AO. The aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

The Tribunal upheld the order of the CIT(A) which provided as under:

a)It was apparent from the Circular issued by the SEBI that instances of administrative/civil actions which included, inter-alia, orders of suspension from trading, etc., were different from criminal actions.

b)Further, it was apparent from the order of SEBI that the appellant had been suspended from doing trading activity for a period of four months and had not been awarded any monetary fines. It had been mentioned in the said order that the consent application of the appellant was without admitting or denying the guilt. SEBI had also accepted the application on this basis.

c)Thus, SEBI had accepted that guilt might or might not be established at the end of the appellate proceedings. Therefore, the fee paid could not be equated with a “penalty” which had necessarily to be a punishment for infraction of a law or a regulation having statutory force.

d)The fee was claimed to have been paid for the purposes of business to settle a dispute with SEBI and to be able to conduct its business without interruption. Thus, if the concerned impost was purely compensatory in nature, the same was an allowable expense under section 37 of the I-T Act. – ITO V. RELIANCE SHARE & STOCK BROKERS (P.) LTD. [2014] 51 taxmann.com 215 (Mumbai - Trib.)

RBI prescribes stringent norms for NBFCs on lines of banking norms

In order to bring Non Banking Finacial Company (NBFC) regulations in alignment with the banking norms, RBI has issued revised regulatory framework for NBFCs. The key changes introduced to regulatory framework are delineated below:

1)Limit of minimum ‘Net Owned Fund’ raised to Rs. 2 Crores: As per new regulations, it shall be mandatory for all NBFCs to attain a limit of minimum Net Owned Fund (‘NOF’) of Rs. 200 lakhs by the end of March 2017, as per the milestone given below:

a)Rs. 100 lakh by the end of March 2016,

b)Rs. 200 lakh by the end of March 2017.

NBFCs failing to achieve the aforesaid ceiling within the stipulated time shall not be eligible to hold the Certificate of Registration (‘CoR’) as NBFCs. It will be incumbent upon such NBFCs, the NOF of which falls below Rs. 200 lakh, to submit a certificate of statutory auditor certifying compliance to the revised levels at the end of each of the two financial years, i.e. (March 2016 and March 2017).

2)Existing unrated asset finance companies to get themselves rated: In order to move over to a regimen of only credit rated NBFCs accepting public deposits, the existing unrated asset finance companies are required to get themselves rated by March 31, 2016.

3)Revised Systemic Significance: The threshold limit for defining systemic significance for non-deposit accepting NBFCs (‘NBFCs-ND’) has been revised in the light of the overall increase in the growth of the NBFC sector. Now systemically important non-Deposit taking NBFCs (‘NBFCs-ND-SI’) should have asset size of Rs. 500 crore and above as per the last audited balance sheet.

4)Assets size of NBFCs in case of multiple NBFCs: NBFCs that are part of a corporate group or floated by a common set of promoters will not be viewed on a standalone basis. The total assets of NBFCs in a group (including deposit taking NBFCs, if any) will be aggregated to determine if such consolidation falls within the asset sizes two categories, i.e., NBFCs-ND or NBFCs-ND-SI.

5)Compliance with prudential norms and conduct of business regulations: All NBFCs-ND with assets of Rs. 500 crore and above, irrespective of whether they have accessed public funds or not, shall comply with prudential regulations as applicable to NBFCs-ND-SI. They shall also comply with conduct of business regulations if customer interface exists.

6)Prudential regulations applicable to NBFCs-ND with assets of less than Rs. 500 crores: The NBFCs-ND with asset size of less than Rs. 500 crores, are exempted from the requirement of maintaining Capital To Risk Asset Ratio (CRAR) and complying with credit concentration norms.

7)Revised criteria for NPA classification: The revised norms would reduce the period in a phased manner so that the norms would become at par with banks by March 31, 2018.

8)Revised provisioning norms for Standard Assets: The provision for standard assets for NBFCs-ND-SI and for all NBFCs-D, had been increased to 0.40%. The compliance to the revised norm will be phased in as given below:

a)0.30% by the end of March 2016.

b)0.35% by the end of March 2017.

c)0.40% by the end of March 2018

9)Revised corporate governance and disclosure norms for NBFCs: NBFCs-D with minimum deposits of Rs. 20 crores, and NBFCs-ND with minimum asset size of Rs. 50 crores are required to constitute an Audit Committee. NBFCs-D with minimum deposits of Rs. 20 crores and NBFCs-ND with minimum assets of Rs. 100 crores are advised to constituting Nomination Committee to ensure ‘fit and proper’ status of proposed/existing directors and Risk Management Committee.

10)Minimum Tier-I capital: Non-deposit taking NBFCs with minimum asset size of Rs. 500 crores and all deposit taking NBFCs are required to maintain minimum Tier-I capital of 10% by the end of March 2014 and 8.5% by the end of March 2016.

  Circular No. DNBR (PD) CC.No.002/03.10.001/2014-15 Dated, 10-11-2014

Short deduction of tax due to application of wrong provision won't lead to sec. 40(a)(ia) disallowance

Facts:

a)The Tribunal held that the assessee had to deduct tax under section 194-I and that the provisions of section 194C were not applicable in respect of transactions entered between the assessee and the contractee.

b)On appeal, the High Court confirmed the order of the Tribunal. However, the High Court restored the matter back to the file of the Tribunal for the limited purposes of applicability of section 40(a)(ia) in respect of short deduction of tax at 2.06% instead of at 10%.

c)On remand, the revenue contended that for the short deduction of TDS there would be disallowance under section 40(a)(ia).

The Tribunal held in favour of assessee as under:

1)In case of Apollo Tyres Ltd. v. Dy. CIT [2013] 35 taxmann.com 593 (Coch.) it was held that section 40(a)(ia) did not envisage a situation where there was short deduction/lesser deduction as in case of section 201(1A) of the Act.

2)There was an obvious omission to include short deduction/lesser deduction in section 40(a)(ia) of the Act. Therefore, in case of short/lesser deduction of tax the entire expenditure could not be disallowed whose genuineness was not doubted by the Assessing Officer.

3)Thus, in view of the decision of this Tribunal in Apollo Tyres (Supra) short deduction of tax could not be a reason or basis for disallowance under section 40(a)(ia). Accordingly, the orders of the lower authorities were to be set aside and the disallowance made under section 40(a)(ia) was to be deleted. - THREE STAR GRANITES (P.) LTD. V. ACIT [2014] 49 taxmann.com 578 (Cochin - Trib.)

Sum paid to NR without deduction of tax would not invite sec. 40(a)(i) disallowance if such sum was capitalized

Where assessee had not claimed payment made to non-resident for providing engineering site services as expenditure but capitalised it and claimed only depreciation thereon, no disallowance could be made under section 40(a)(i).

Facts:

a)The assessee, a non-banking financial company, made payment to non-resident for providing engineering site services but did not deduct tax at the time of payment. The Assessing Officer disallowed the entire payment made by the assessee.

b)The assessee submitted that no disallowance could be made as it had not claimed said payment as expenditure but capitalized it and only depreciation was claimed thereon.

c)On appeal, the CIT(A) upheld order of the Assessing Officer. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)The payment made to non-resident for technical services was admittedly taxable in India, therefore, the assessee was bound to deduct tax at source. The assessee could claim the same as expenditure. However, such claim of expenditure could be allowed only in case the assessee deducted the tax at the time of payment.

2)In the instant case, the deduction was not claimed as expenditure while computing the income chargeable to tax. The CIT(A) observed that irrespective of the fact whether the assessee had claimed deduction or not disallowance had to be made since tax was not deducted.

3)Both the authorities had not examined whether the amount paid to the non- resident was deducted while computing the income chargeable to tax or not. The language of section 40 clearly provides that the amount paid to non-resident (on which tax is not deducted) shall not be deducted while computing the income chargeable to tax.

4)Therefore, if the assessee had not deducted the amount (i.e., claimed it as expenditure) while computing the chargeable income, there was no necessity for further disallowance. - Muthoot Finance Ltd. v. ACIT [2014] 49 taxmann.com 580 (Cochin - Trib.)

SEBI norms and clause 35 of listing agreement don't require promoters to make disclosure of encumbered shares

Neither any regulation of SEBI nor clause 35 of the Listing Agreement casts an obligation on promoter to make disclosures of shares encumbered to listed company. SEBI was not justified in directing listed company to disclose details of shares which were 'otherwise encumbered' by promoter to Stock Exchanges.

Facts:

a)SEBI imposed penalty upon appellants under Section 23E of the Securities Contract Regulation Act and Section 15HA of the SEBI Act for allegedly violating clause 35 of the Listing Agreement and Regulations 3(d) and 4(2)(f) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

b)Issue raised in appeal was:

Whether a listed Company was required to disclose details of ‘otherwise encumbered’ shares held by the promoter under clause 35 of the Listing Agreement even though there was no obligation cast upon the promoter to make such disclosures to the listed Company?

The Securities Appellate Tribunal held as under:

1)Since neither any regulation of SEBI nor clause 35 of the Listing Agreement would casts an obligation on the promoter to make disclosure of encumbered shares to the listed Company, and

2)In the absence of such disclosure made by promoter, SEBI was not justified in directing the listed Company to disclose details of shares which were ‘otherwise encumbered’ by the promoter. Accordingly, penalty imposed by SEBI was to be set aside. – GOLDEN TOBACCO LTD. V. SECURITIES AND EXCHANGE BOARD OF INDIA [2014] 51 TAXMANN.COM 51 (SAT - MUMBAI)