India legislation guide
By Atul Sharma
Lakshmi Kumaran & Sridharan
Tel: +91 11 2619 2243 Fax: +91 11 2619 7578 Website: www.lslaw.in
Taxation
Before the business community can recover from ripples created by the tax liabilities arising from the judgment of Vodafone, the Bombay High Court has brought a fresh perspective to tax planning in its decision in the matter of Aditya Birla Nuvo Ltd (ABNL). It has also provided some important take-aways on availing the benefits of Double Taxation Avoidance Agreements.
In the ABNL matter, the High Court held that capital gains arising from the sale of shares in Idea Cellular by its Mauritian shareholder, AT&T Mauritius, were not protected by the India-Mauritius DTAA. The court affirmed the revenue department stance that the beneficial owner and investor in this case was New Cingular Wireless, a US resident and therefore not protected under the India-Mauritius DTAA.
The decision highlights the importance of factual disclosures to the income tax department while availing exemption from deducting tax at source. Corporate planners should tread the Mauritius route with caution, as such peripheral and overriding agreements run the risk of being challenged by the IT Department.
Anti-avoidance rules
The vigilance and strict interpretation by the tax authorities is likely to continue in the coming years with India re-negotiating DTAAs with several countries known as tax-heavens as well as introducing the General Anti-avoidance Rules (GAAR) in the Direct Tax Code.
The Code proposes provisions under transactions entered by assessees that may be disregarded and re-characterised if they are considered by the Revenue to inter alia lack commercial substance. The application of GAAR will also override the benefits availed under a DTAA. The implementation of such provisions is yet to be tested against the proposed objective standards promised by the Government in the second discussion paper accompanying the Bill. This is no guarantee that the noble objectives of GAAR will not actually cause more hardship to the assessees due to the unprecedented sweeping powers being given to the tax authorities to examine and challenge transactions.
Investments
The Government of India has proposed to set up a Pension Fund Regulatory & Development Authority, which may allow FDI of up to 26% in this sector giving global players access to more than US$2 billion in assets. The new scheme is likely to be based on individually-defined contribution pension schemes. These would have unique features such as central record-keeping, and the selection of market players would be through competitive bidding on costs, fees and charges for the funds as well as fund managers.
The proposal to allow FDI in multi-brand retailing, after more than a decade of stagnation, has recently gained momentum, with the Department of Industrial Policy & Promotion (DIPP) floating a discussion paper in 2010 seeking the views of industry. The Cabinet Committee on Economic Affairs (CCEA) has also recently approved opening up this sector to FDI. This will be in a systematic and phased manner, with a clear set of conditions on procurement of farm produce, domestically manufactured merchandise, and imported goods. The government is likely to allow FDI up to 51% to enable domestic players to enter joint ventures and have access to things like technology, know-how and best management practices. The final decision is this regard is still awaited.
Intellectual property
The DIPP has issued a discussion paper mooting the idea of granting legislative protection for utility models. The discussion paper highlights minimal usage of the current patent system by India entities for reasons such as higher costs and complexities in obtaining a patent. The DIPP suggests that a variation of known technologies, as practiced by Indian entities but otherwise not patentable, ought to be protected albeit for a shorter duration.
The acceptance of the proposal may effectively circumvent the thresholds of the patent law, and undermine the IP portfolios of companies entering into India. On the other hand, draft amendments to the Patent Act proposes that India becomes an international search authority, which would provide huge cost advantages to companies intending to do prior art searches.
On the trade mark and copyright front, India has adopted the Madrid Protocol by way of an amendment to the Trademarks Act, 1999. The Madrid Protocol is an international treaty that allows a trade mark owner to seek registration in any of the countries that have joined the Protocol by filing a single application known as an ‘international application’.
The Copyright Amendment Bill, 2011 seeks to introduce a unique concept under which even after assignment of a cinematographic work or sound recording, the owner of the work will continue to have the right to claim royalties for any subsequent assignments. The definition of ‘author’ will be broadened to make a principal director for cinematographic work and a producer of a sound recording also authors. The proposals are expected to significantly impact all of those foreign production houses operating in, or seeking to enter, India.