The classification of income as speculative or non-speculative is vital, as speculative losses can be carried forward only for four years and set off only against speculative incomes.
Finance Act 2013 states that commodity derivatives would not be treated as ‘speculative transaction’ from April 1, 2013, provided
it is executed on an electronic screen-based system through an intermediary of a recognised association (such as MCX or NCDEX); and it is supported by a contract note containing prescribed particulars.
This move by the Finance Ministry was long due, especially because a similar treatment is accorded to screen-based securities derivatives. The restrictions on speculative losses primarily aimed to prevent taxpayers from claiming fictitious losses in the absence of authentic audit trails. Screen-based trading has resolved this problem, which the Finance Minister recognised in 2005, and screen-based securities derivatives were categorised as non-speculative.
What remains unanswered is whether commodity derivatives for prior years would be categorised as ‘speculative’’. A differential treatment may give rise to a different categorisation of the same income in different years, thereby causing hardship while setting off losses. A similar transitional issue, now under litigation, was faced when a securities derivative was classified as ‘non-speculative’. Clarifications are needed.
Transfer pricing relief for MNCs
The Delhi Income Tax Appellate Tribunal in the case of Sojitz India Pvt Ltd recently held that the Transfer Pricing Officer cannot re-characterise transactions unless facts warrant it. The judgement clearly differentiates between an indent trading function (routine services that facilitate trade without any ownership of goods or bearing any risks) and a trader (who undertakes the ownership of goods and takes entrepreneurial risks in the trading activity). The tribunal also disregarded the officer’s allegation of human/ supply chain intangibles created by the Indian entity as contrary to the facts on record.
This comes as a relief to several distribution multinationals in India that have a similar business model. Moreover, the key principle that transactions cannot be arbitrarily re-characterised by Revenue authorities for transfer pricing, unless the facts so warrant, is an important development (in line with the Supreme Court’s decision of adopting the “look at” approach in the Vodafone case). Such arbitrary re-characterisation is a key cause for protracted TP litigations in India, which is widely believed to be responsible for the fall in foreign direct investments.
Retrospective amendment hangs fire
The Vodafone tax case shook investors’ confidence, after the favourable ruling of the Supreme Court was followed by retroactive amendments to tax laws.
In what can be termed a shot in the arm for taxpayers (especially multinationals investing in India through a layered structure), the Andhra Pradesh High Court has overruled the Authority for Advance Rulings in the case of Sanofi Pasteur Holding SA. The court held that in the absence of evidence to prove that the non-resident entities were set up only as tax-avoidant devices, piercing or lifting the corporate veil is not permitted. It also held that the retrospective amendments to Income-tax Act 1961 do not have a bearing on the benefits/ protection available under a tax treaty. However, the Centre has filed a special leave petition on the Sanofi matter in the Supreme Court, calling for a larger bench to review the Vodafone ruling.
A boost for incremental exports
In an effort to boost export of goods and thereby improve the current account deficit, the Government has extended the incremental export benefit, introduced last December for three months, for an entire financial year — that is, 2013-14. This benefit is available for incremental export, in value terms, effected during January 2013 to March 2014 (15 months) over the preceding period. It is extended to export of goods to the US, European Union, Asian countries and specified countries in Latin America and Africa.
In other words, exports to Singapore, UAE and Hong Kong are not considered for the benefit. Further, it excludes export by EOU (export-oriented units)/ STP (software technology parks)/ SEZ (special economic zone) units, deemed export, and export of services and certain specified products. The benefit is in the form of a duty credit scrip, calculated at 2 per cent of the FOB (free on board) value of incremental exports.
This scrip is freely transferable and can be utilised for payment of duties on import or domestic procurement of goods. It is believed that the timely disbursement of the incentive will help exporters compete in the global market. It will also address the looming crisis of current account deficit by earning foreign exchange for India.