Import of Services - Payment of Service Tax from 18.4.2006

Section 66A of Finance Act 1994 provides for payment of service tax by recipient of services in case the provider of services is from outside the country and he has no permanent establishment in the country. There was enormous debate about first the constitutional validity of this and also the date of enactment of this Section.

Finally to set rest to all matters the CBEC has issued

SERVICE TAX INSTRUCTION [F. NO. 276/8/2009-CX-8A], DATED 26-9-2011

Which states that the date of enactment of 66A will be 18.4.2006 and not 1.1.2005 as earlier contested vide

F No. 275/7/2010-CX-8A, dated 30-6-2010

Foreign Direct Investment (FDI) IN TRADING

Chapter 6.1 of Consolidated FDI Circular 2 of 2011 dated 1^st October 2011, lists prohibited sectors for FDI, topping the list is

“Retail Trading (except single brand product retailing, where 51% FDI Is allowed)

Clearly no FDI is permitted in Retail trading (B2C) except the exception of single brand product trading. 

Does this mean FDI will not be allowed in trading at all?  The answer is NO.

As per Chapter 6.2.16 - 100% FDI is allowed in

“Cash & Carry Wholesale Trading / Wholesale Trading (including sourcing from Medium & Small Enterprises)”

Cash & Carry Whole Sale Trading / Wholesale trading means:

“Sale to Retailers, industrial, commercial or professional business and not to consumers directly, in short All B2B transactions irrespective of the size or volume of sales”.

Salient Features of FDI in Cash & Carry Wholesale trade

1.      Wholesale trade should be made only to buyers who have either

a.      A VAT / Excise registration or

b.      A Trade licence under Shops & Establishments Act or

c.      A Trade licence for carrying out retail trading from Government Authorities or

d.      A certificate of Incorporation as a Trust or Society and materials purchased for their self consumption

2.      It is the responsibility of the FDI Venture to keep all details of the buyers and buyer’s compliance with any one of the points made in point 1 above

3.      Wholesale trade is not permitted among group companies beyond 25% of the total turnover of the FDI venture

4.      Under Wholesale Trade the FDI venture is free to extend credit for his sales subject to applicable regulations, if any

5.      Cannot open retail outlets

6.      Cannot sell to consumers directly only B2B allowed

Conclusion

100% FDI is possible in B2B ventures, 51% FDI is allowed in Single brand retailing

Share Buyback of Less than 10% of a Private Limited Company or Unlisted Public Company & if the shareholder is a Foreign Entity

Buyback of Shares is an elaborate process. The purpose of this article is to provide the steps required for buy back of shares in case of (all conditions cumulative): 

1. The company is a Private Limited or Unlisted Public Company
2. Buyback is of less than 10% of Equity shares
3. The Shareholder is of a foreign national or a foreign company and
4. The shares are not de-materialized

Relevant Legislations :   

1. Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities) Rules, 1999
2. Companies Act, 1956 – Specifically Section 77A, 77AA & 77B
3. Income tax Act, 1961
4. Foreign Exchange Management Act, 1999 (FEMA), rules and regulations thereunder

Company Law Implications

All provisions listed under Section 77A, 77AA & 77B of Companies Act, 1956 should be followed. Also provisions contained in Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities) Rules, 1999 should be adhered to.

To list major implications: 

1. Buyback should be authorised by Articles
2. Buyback should be less than 25% of total paidup capital and free reserves of the company
3. Buyback should not exceed 25% of share capital in a year
4. Debt Equity ratio should not be more than 2:1 after buyback

Income Tax Implications

Buy back whether Dividend? - Provisions of Section 2(22) of Income tax Act, 1961 is relevant

“Dividend does not include………any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956”

Transfer Pricing – The buy back transaction would be considered as International Transactions and it would attract Transfer Pricing regulations if the company buys back the shares and its non resident shareholders are part of the same group.

Capital Gains Tax - For the non-resident shareholders, If the shares are held for less than one year provisions of “Short Term Capital Gains” apply, incase shares are held for more than one year then provisions of “Long Term Capital Gains” apply

Applicability of Tax Treaty – To explore the taxable impact of Capital Gains tax a close reading of relevant Tax Treaties between the countries should be made (county in which the company is incorporated & the county in which the shareholder is incorporated), and if an exemption is available from payment of tax in India, then it is prudent to make an application under section 195(2) of the income tax Act for full clarity.

Filing of income tax return – the non resident shareholder should file an income tax return (see CBDT circular 91 of 2008 dated 28th August, 2008) to give an opportunity to the Revenue authority to examine the payment of Capital Gains Tax or the claim for exemption under Double Taxation Avoidance Agreement.

FEMA Implications

Transfer of Shares under Buy back from non residents is covered under Automatic route (No.A.P (Dir Series) Circular No.10 dated 30th August 2005). Hence prior approval of RBI is not required.

Share Valuation

If shares are not listed then valuation should be done using “Discounted Cash flow” method by either a SEBI registered Category I Merchant Banker or a Chartered Accountant

Secretarial Matters

1. Hold Board Meeting (as buyback is less than 10%), and approve the proposal for buyback in the meeting
2. The approval in the board should include the following
1. Full & complete disclosure of all material facts
2. The necessity of buyback
3. Method of buyback
4. Amount to be paid for this buyback along with valuation certificate
3. Prepare and File “Offer Letter” with the Registrar of Companies in eform 62. The disclosures to be included in Offer Letter are clearly illustrated in Schedule II to “Private Limited Company and Unlisted Public Companies (Buyback of Securities), Rules 1999”
4. The offer letter should contain “Declaration of Directors” as contained in clause xii of Schedule 1 of the “Private Limited Company and Unlisted Public Companies (Buyback of Securities), Rules 1999”
5. The offer letter should contain “Report by Company’s Auditors” as contained in clause xiii of Schedule 1 of the “Private Limited Company and Unlisted Public Companies (Buyback of Securities), Rules 1999”
6. Prepare “Declaration of Solvency” in Form 4A and file the same with Registrar of Companies in eform 62 along with letter of offer
7. Despatch the Letter of Offer to Shareholders within 21 days of filing with the ROC (this preferably should be done through registered post or Speed Post or Certificate of Posting)
8. The offer shall be kept open for 15 days and not more than 30 days from the date of despatch of offer letter
9. In case the number of shares offered by shareholders exceed the total number of shares proposed to be bought back then the acceptance per shareholder will be on proportionate basis
10. Within 15 days of closure of offer the offers received should be verified. The shares offered will be deemed to be accepted unless a communication of rejection is made within 21 days from the date of closure of offer
11. The company should open a “Special Bank Account” and deposit therein all the monies payable on this buyback
12. Payment to shareholders should be made within 7 days from the date of 15 days of closure of offer (or 21 days from the date of communication of rejection)
13. File eForm 4c (return in respect of buy back of securities) with ROC within 30 days after completion of buyback

RBI & Remittance Formalities

The following should be submitted to authorised dealers (banks) to remit out the proceeds of share buyback

1. A2 Form in duplicate
2. Board Resolution authorising the buyback
3. Form 15CA & 15CB in duplicate
4. Form FC-TRS in quadruplicate
5. Offer letter to shareholders
6. Consent letters from shareholders (for acceptance of buyback)
7. Share valuation certificate
8. Undertaking from Directors (clause xii of Schedule I as mentioned above)

One copy of FC-TRS counter signed by banker should be received back for company records

Destruction of shares

Once the shares are bought back, these shares should be destroyed and fresh share certificates should be issued (if required). Necessary Board resolutions need to be passed for this.

Maintenance of Registers

Share extinguishment register and Share buyback register should be maintained within 7 days of completion of buyback

Form 4B needs to be prepared and signed as per provisions of section 77A(9) of the

Companies Act, 1956

Stamp Duty implication

Buy back of shares does not come under the definition of “Transfer of Shares” under the Companies Act, 1956 and hence will not attract Stamp Duty.

Divident Distribution Tax - Section 115O – AY2012-13

Dividend is taxable in India under section 115O of the Income tax Act, 1961. Effective rate of Dividend Distribution tax from 1st April 2011 is 16.2225% (15% basic rate + 5% surcharge + 2% education cess and 1% higher education cess). This tax cannot be avoided on payment of dividend, even if no income tax is payable by the company on its total income.

This dividend distribution tax (DDT) should be paid within 14 days of declaration of dividend or distribution of dividend or payment of dividend whichever is earlier.

For remittance of dividend abroad (overseas), If dividend tax is paid before distribution of dividend, authorised dealers (banks) do not insist for Form 15CA & 15CB

If in case dividend is paid to your group company (headquarters) abroad (this will happen mostly in case of MNC’s) filing of annual income tax returns is mandatory for such companies. As a first step those companies should apply for and obtain PAN number.

Consolidated FDI Policy - India - October 2011

Ministry of Commerce & Industry, Department of Industrial Policy & Promotion has issued Consolidated "Foreign Direct Investment Policy" effective 1st October 2011. 

This consolidated FDI Policy provides all details relating to FDI into India. 

The detaild policy can we viewed at the link below.

http://dipp.nic.in/English/Policies/FDI_Circular_02_2011.pdf

Excise Duty on Free Samples

The purpose of this article is to explain in brief provisions of Excise law on free samples.

Industries need to provide samples for various requirements.

1. Trade samples to potential customers for sales development
2. Sales to quality control / Research & Development for testing & product development purposes
3. Samples for display at exhibitions, fairs etc
4. Samples for placing quotations etc
5. Samples to various Government authorities for various purposes under different legislations

The following are the relevant legislations concerning free samples removal and payment of excise duty

1. Central Excise Act, 1944 – section 4(1)(b)
2. Central Excise Rules, 2002 – section 8, section 11
3. Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 – Rule 4, Rule 8 & Rule 11
4. Circular No. 813/10/2005 CX dated 25.4.2005
5. Circular no. 915/5/2010-CX dated 19.02.2010

Question No.1 – Are free samples subject to excise duty

The simple answer is yes. In a recent judgement

Citation Medley Pharmaceuticals Ltd. v. CCE, (2011) 2 SCC 601

Supreme Court has held that “EXCISE DUTY IS PAYABLE EVEN IN CASE OF FREE SUPPLY OF GOODS, AS SALE IS NOT A NECESSARY CONDITION FOR CHARGING DUTY”

Question No.2 – How to pay duty for free samples

We have follow procedures laid down under Rule 11 of Central Excise Rules, 2002 and prepare invoice accordingly (similar to finished goods movement). Excise duty has to be deposited as laid down under Rule 8 of Central Excise Rules 2002

Question No.3 – Is it necessary to pay duty for all the samples mentioned above (5 categories as above)

Yes. We have to pay duty on all samples including samples given to Quality Control & R&D, as excise duty is charged on manufacture and not on sales.

Question No.4 – On what value should we pay excise duty

Here reference should be made to Rule 4 of Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000. This has been confirmed by the department through 2 circulars :

1. Circular No. 813/10/2005 CX dated 25.4.2005 (for section 4 valuation)
2. Circular no. 915/5/2010-CX dated 19.02.2010 (for section 4A valuation – MRP based valuation)

Rule 4 is reproduced here – “value of the excisable goods shall be based on the value of such goods sold by the assesse for delivery at any other time nearest to the time of removal of goods under assessment, subject, if necessary, to such adjustment….”

If we are unable to get the value under Rule 4, and If there is no other price then recourse should be made to Rule 8 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules 2000 which provides valuation at Cost Price + 10%

Summary

All samples suffer excise duty please pay duty on the relevant value to avoid disputes

Section 192A of Companies Act, 1956 – Passing of resolution by Postal Ballot

A Company is a perpetual entity owned by its members, who have delegated the powers of running the company to the Board of Directors. Members in turn exercise their ownership rights through various meetings AGM / EGM, which provide directions / authorizations to the Board of Directors.

But at times members (read shareholders) participation especially the non-promoter, non-institutional category read “Individual Investors” especially the “Small Individual Investors” is quite low and they do not exercise their rights as members but remain as passive members due to varied reasons like paucity of time or purchase of shares just for capital appreciation or due to locational disadvantages.

In order to bring about high level of participation of all members in critical decisions of the companies “The Companies (passing of the resolution by Postal Ballot) Rules, 2001” was formed, this has been superseded by “The Companies (passing of the resolution by Postal Ballot) Rules, 2011” from 30th May 2011.

The above rule mandates that certain business should be passed only through a Postal Ballot sent to all members. The following is the brief procedure:

1. Company has to send a notice to all members either through

      a. Registered Post Acknowledgement due or

      b. any other secured mode provided by Department of posts or

     c. through “E-mail” – provided the company has email addresses of all members

2. An advertisement in English and the Vernacular language newspaper of the state in which the company is registered stating that the notice has been dispatched

3. The notice should mention the date by which the postal ballot should reach the company beyond which it is not valid

4. Procedure for Postal Ballot should be clearly explained in the notice. In case of Electronic Voting the process should be explained as provided by the Electronic voting providing agency. At the moment the following are the 2 agencies authorized vide Ministry of Corporate Affairs Circular No.21/2011 dated 2.5.2011

     a. National Securities Depository Limited – NSDL

     b. Central Depository Services (India) Limited – CDSL

5. A scrutinizer is appointed to conduct the postal ballot

6. The scrutinizer being an independent person conduct the postal ballot and provide a report to the Board of Directors

The following are the salient features of Postal Ballot

1. All members will get a voting sheet at the convenience of their location and they can vote from wherever they are

2. Shareholders cannot appoint Proxies

3. Higher level of member participation in critical issues

4. Cost of conducting meetings is reduced

A company has an option to carry out as many businesses in postal ballot, however the following are mandatory to be conducted only through postal ballot

1. Alteration in the Object Clause of Memorandum;

2. Alteration of Articles of Associations in relation to insertion of provisions defining private company;

3. Buy-back of own shares by the company under sub-section (1) of section 77A;

4. Issue of shares with differential voting rights as to voting or dividend or other wise under sub-clause (ii) of clause (a) of section 86;

5. Change in place of Registered Office out side local limits of any city, town or village as specified in sub-section (2) of section 146;

6. Sale of whole or substantially the whole of undertaking of a company as specified under sub-clause (a) of sub-section (1) of section 293;

7. Giving loans or extending guarantee or providing security in excess of the limit prescribed under sub-section (1) of section 372A;

8. Election of a director under proviso to sub-section (1) of section 252 of the Act;

9. Variation in the rights attached to a class of shares or debentures or other securities as specified under section 106.

Having seen the legal provisions as above it is pertinent to discuss whether the objective of this postal ballot has been achieved. I was reading a research article which can be reached through http://www.lawyersclubindia.com/articles/Impact-of-Postal-Ballot-Mechanism-in-Improving-Shareholders--1381.asp which states that on an average around 5% of the shareholders participate in the postal ballot process however these 5% represent atleast 60% of the shareholding. This again brings to the fore that the “Small Individual Investors” for whom this postal ballot will be beneficial and for whose benefit this has been brought in are not utilizing the same for varied reasons. It is high time they realize their responsibilities and participate in the company affairs so that Corporate Governance issues in companies and upheld. Small investors should raise their voice in running the company affairs and should actively participate rather than leaving it to the Directors and majority shareholders.

Shareholder activism is one which will ensure that corporates uphold higher level of Corporate Governance and legal compliance, you may recall shareholders activism was the prime reason why Satyam scandal got broken inspite of the Board giving the nod for buyout of Matyas. This active participation will also help small investors to grow their investment value. Keeping away from corporate affairs will prove detrimental to value growth.

ATTENTION SMALL INVESTORS PLEASE PARTICPATE AND GROW.