When documents such as birth certificates, judgments, notorial attestations (acknowledgement of signatures) and other public documents from one country for use in another country, it needs to be legalized. Traditionally it involves a complex process and officials of the country where the document was issued as well as the foreign embassy or consulate of the country where the document to be used have to put their seal. In order to avoid this complex process apostle convention was formed. A large number of countries have joined a treaty called Hague convention of  5th October 1961 abolishing the recruitment of legislation of foreign public documents. It is commonly known as apostle convention. The list of countries  who are members to this convention is listed in http://www.hcch.net/index_en.php?act=conventions.status&cid=41. By this treaty by a single formality of issuance of an authenticating certificate by a competent authority, designated by the country where the document was issued, the document will become an authenticated document in every member country. This authentication certificate is called Apostille.

India is a member of this convention from 2005. The competent authority in  India is  Joint Secretary, Ministry of External Affairs. Please see the address at http://www.hcch.net/index_en.php?act=authorities.details&aid=643. Hence any public documents from India  could apostlle. India being a federal system documents originated  from different states requiring apostilles should be first authenticated by the designated officer of the state government. To know the details of the competent officers please  read  http://www.mea.gov.in/legalization-of-documents.htm. There after the ministry of external affairs legalize the documents. In earlier days the ministry of external affairs had a special counter to accept documents for apostle. Recently, MEA has outsourced document collection work to some private agencies. These private agencies have offices in many cities.  Details of those agencies are in the above link.

The apostle is required for use of certificates abroad like birth, marriage and death certificates, documents emanating from various courts, commissions, commercial registers, notorial act, university certificates etc.  An apostille does not certify the content of the document it merely authenticate the signature of the person issued the certificate.

 By:  Rajesh Vellakkat

Transfer Pricing- Safe Harbour Rule notified

Transfer pricing disputes are increasing these days. To avoid legal disputes between companies and tax department,  the Finance Act, 2009 had introduced the concept called safe harbour rules. This gives certainty in determination of arms length price for international transactions. Section 92 CB of the income tax act empowers the central board of direct taxes the power to make such safe harbour rules. Safe harbour means circumstances in which income tax authorities shall accept a transfer prize (arms length prize decided by the assessee). However, till recently the safe harbour rules were not notified by the Government.  Some time back Government appointed a committee headed by Mr. N. Rangachari to address the concerns of industry in this regard and suggest appropriate policy.  The committee made its recommendation and based on which the government of India on 18th September 2013 notified safe harbour rules. This rule is applicable from assessment year 2013-2014  onwards and is applicable for the next five assessment years.

An assesses can opt for safe harbour regime for a period of his choice but not exceeding five years. This option can be exercised filing of form 3CEFA. As per this rules for IT and IT enabled companies if  the aggregate transactions entered in to during the provisions year if doesn’t exceed a sum of 500 crores the safe Harbour declared  is (operating profit margin) not less than 20%  and  similarly  if the transaction value is above 500 crores then the operating profit margin ( safe harbour margin ) is not less than 22%. If a company declares profit margin as above, those transaction will be considered as arms length transaction. Similarly for knowledge process outsourcing industry margin stipulated is 25%. Depending on the kind of corporate guarantee given to the associate enterprise, if the commission of fee in relation to the guarantee is in the range of 1.75% – 2% of the amount guaranteed, such transactions are considered at arms length. Incase of contract research and development services relating to the software development the margin required is 30% and for research and development services relating to pharmaceutical process it is 29%.

On receipt of form 3CEFA the assessing officers shall verify whether the assesses exercising the options is an eligible assessee and whether the international transaction is an eligible transaction. Transfer pricing officer has the right to ask for more information and evidence and transfer pricing officer has the authority to declare that transfer pricing position declared by the assessee as invalid.

The new initiative of the income tax department would definitely help to reduce the transfer pricing litigation in future. It is worthwhile to mention here that total transfer pricing litigation is valued NR 60000 crores, according to some sources (not verified by the author). It would be appropriate if associated enterprises make use of the benefits of this new provision to avoid future tax litigation.

By: Rajesh Vellakkat

A Discussion on Stamping of Arbitral Award

Arbitration is increasingly used as tool for dispute resolution. Hence, any provision relating to arbitral award is of intense scrutiny. Karnataka Stamp Act 1957 and the other similar stamp acts applicable in other states consider an arbitral award as an instrument chargeable with duty.

Schedule 1 Article 11 of Karnataka Stamp Act says

Award:- that is to say, any decision in writing by an arbitrator or umpire, not being an award directing a partition, on a reference made otherwise than by an order of the Court in the course of a suit :

The same duty as a conveyance ( under Article no 20 (1) on the  amount or market value of the property (which is subject matter of the award) which ever is higher

Similar such provisions are available in stamp acts of other states as well.

From this it is very clear that Arbitration award  relating to certain types of issues mentioned  above attracts stamp duty. However, it is not very clear who is bound to pay stamp duty on an arbitral award relating to an arbitral award in relation to a contractual dispute.

Section 30 of the Karnataka Stamp Act  provides Stamp Duty  by whom payable:  “In the absence of an agreement to the contrary, the expenses of providing the proper stamp shall be borne:

(a)   in the case of any instrument described in any of the following articles of the schedule namely No. 2( administration bond, No.6 Agreement relating to deposit of tiled deeds pawn or pledge) No 12( Bond) , No 13 ( bottomry bond) No 23( customs bond) , No 27 (Further charge), No 29 ( indemnity bond) , No 34 Mortgage deed) , No 45 ( release) , No 46 (Respondential Bond) , N0 47 Security Bond or Mortgage deed), No 48 Settlement, No 52 (a) transfer of debentures, being marketable securities, whether the debenture is liable to duty or not) No 52 (b) transfer  of any interest secured by a bond, mortgage deed or policy of insurance) by the person daring , making or executing such instrument,

(b)   in the case of a conveyance (including a re-conveyance of mortgaged property) by the grantee; in the case of a lease or agreement to lease-by the lessee or intended lessee;

(c)    in the case of a counterpart of lease__by the lessor;

[ca) in the case of power of attorney - by the principal.]

(d)   din the case of an instrument of exchange __ by the parties in equal shares;

[(dd) in the case of a certificate of enrolment in the roll of Advocates maintained by the State Bar Council __ by the Advocate enrolled)];

(e)    in the case of a certificate of sale__by the purchaser of the property to which such certificate relates; and

(f)     in the case of an instrument of partition by the parties thereto in proportion to their respective shares in the whole property partitioned, or, when the partition is made in execution of an order passed by a Revenue authority or Civil Court or Arbitrator, in such proportion as such authority, Court or Arbitrator direct

From the  above it is not very clear whether for arbitral awards other than awards relating to partition of property stamp duty is payable by whom.

Another question is whether the court should look in to the aspects of payment of stamp duty on the arbitral award while admitting petitions for setting aside such arbitration awards is  highly debated.

Section 31 (5) of the Arbitration  Act award merely says that arbitrator should provide a signed copy of the award to each party. The Arbitration Act does not mention anything about the stamp duty and the person responsible to pay the stamp duty. On the other hand section 34 of the Arbitration Act is very clear that an aggrieved party to an arbitral award has a resource to file an application to setting aside the arbitral award. The copy of the arbitral award received from the arbitrator if provided in a court of law with a petition to setting aside the said award whether courts in such instances should look in and confirm that the stamp duty is paid on the arbitral award ?

Supreme court of India’s judgement in M. Anasooyadevi Vs M. Manik Reddy (2003) 8 SCC 565 considered this question. This case was a case against the order of the Andhra Pradesh high court.  The Andhra Pradesh high court took a view that since the award was not stamped and registered,  it was there fore invalid. The Supreme Court on the other hand opined that the question as to whether the award is required to be relevant only when the parties filed the award for enforcement under section 36 of the Arbitration Act. The question whether an award requires stamping and registration should be considered only at the execution stage and not  in a proceedings to set aside the arbitral award.

By: Rajesh Vellakkat

One Person Company; a new Business Structure

Companies Act 2013, which was passed by the parliament recently and notified in the gazette, contains a new business structure called One Person Company. The said structure is intended to give the facility to create limited liability one person owned business entity.  Currently sole proprietorship business can have limited liability status. Enabling Limited liability one proprietor business enterprises give advantages in many respects. This kind of one person owned limited liability business entities are prevalent in U.S.A, Singapore, and some countries in Europe.

Section 2(62) of the new Companies Act defines One Person Company. It says a company which has only one person as a member.  From the definition of section 2(68) and section 3 it can be inferred that One Person Company is a category of private limited company. Section 3 of the Act, says that to form a One Person Company, the person who is forming the company should sign a memorandum and the said memorandum should nominate another person in case of subscribers death or incapacity to contract, to take charge of the One Person Company. The concerned letter from the nominee should also be filed before the registrar. The rules regarding administration of One Person Company is not very clear as the rules are yet to be formulated. The provisions of the Companies Act state that a One Person Company should have minimum one director. However, it can go up to 15. In a One Person Company a meeting of the Board of Directors in every quarter is not required. Section 173(5) says that one meeting in each half of the calendar year is sufficient. Section 122  of the Act says that provisions relating to the power of the company law tribunal to call for meeting, provision relating to extra ordinary general meeting, notice of the meeting, quorum, proxies, voting, poll, postal ballet etc are not applicable to One Person Company.

Section 122(3) of the act says that incase of One Person Company the resolution of the person is communicated to the company and entered in the minutes book and sign and dated by the member shall be treated as a valid meeting. As per Section 92 of the act the Annual return of a One Person Company can be either signed by the company secretary or by the director of the company. For other companies signature of both the director as well as company secretary is mandatory.

We need to wait for the final notification of the Company Rules to know more about One Person Company and the compliances and resolutions to be followed by such kinds of companies. However, one thing is sure this will help India’s unorganized proprietary businesses to move in to a new structured regime. This will also help a) individuals to venture in to high risk businesses, as the liability of the promoter is limited to the share capital provided b) separate ownership and management of proprietary business.

By Rajesh Vellakkat

COMPANIES ACT 2013- Highlights

The Companies Act, 2013 is passed by the Parliament  recently has received the assent of the President of India on 29th August, 2013. The Companies Act, 2013 has been notified in the Official Gazette on 30th August, 2013 but the provisions of this Act shall come into force on such date(s) as the Central Government may notify in the Official Gazette.

Ministry of Corporate affairs by a recent notification,  certain provisions of the Companies Act 2013 brought into force.  Some 55 sections of the new companies Act came into force from September 12, 2013. Remaining sections will be  notified later.

Here is the highlights of this new legislation:

  • A single person can form a company 
  • Maximum number of shareholders allowed in a private company is now 200
  • Mandatory requirement of women directors in notified category of companies
  • Atleast one director should be resident in India
  • Maximum number of directors is now 15
  • A person can hold directorship maximum in 20 companies
  • In listed companies auditors to change in every five years
  • Atleast 2% of the profit should be used to meet corproate social responsibility
  • Treasury stock is banned
  • National company law tribunal will be established and National company Law appellate tribunal
  • Appeals from the orders of the appellate tribunal will be directly to supreme court
  • Special courts ( criminal courts ) to deal with company law related crimes
  • Specific office to deal with corporate fraud ( Serious Fraud Investigation office)



When two related parties (parent & subsidiary, group companies or companies under the same management) located in two different countries transact with each other, they are expected that those transaction be at an arm’s length price. The intent of this rule is to prevent companies from siphoning the profits from one territory at the cost of the other related entities and using this as a tool to reduce the tax burden by inflating the profits of the company located in a country where tax rates are less.The documentation that companies have to do, the method and manner of transaction with related enterprise are made by organisation for Organisation for Economic Co-operation and Development. (OECD). OECD is an organisation mainly dominated by developed economies. Brazil, India China and South Africa and other developing economies are not the part of this organisation. OECD guidelines on transfer pricing is thus more developed countries-focused. The developing countries including India were not comfortable with the same. Recently, Department of Economic and Social Affairs of the United Nations issued a practical manual on transfer pricing for developing nations. Chapter X of the said manual outlines individual countries point of view. India has expressed its point and same is the part of this manual. The following are the main view points of India.

Indian transfer pricing regulations are based on arm’s length principle, thus income arising from international transaction between associated enterprises shall be computed based on arm’s length price. For determination of arm’s length price few methods are prescribed:

  • Comparable price control method
  • Re-sale price method
  • Cost Plus price method
  • Transaction price method
  • Profit-split method

Indian transfer pricing regulations do not provide any hierarchy of methods and do not recommend any most appropriate method. Indian transfer pricing regulations prescribe mandatory annual audit and maintenance of documentation by a tax payer who is doing international transaction. The onus of proving arm’s length price of the transaction lies with the tax payer. The Income Tax department has a specialised directorate of transfer pricing to administer transfer pricing rules.

In recent years the tax litigation related to transfer pricing has increased manifold. The primary issue on all these tax litigation is the appropriateness of the method used for achieving arm’s length price. The uniqueness of every international transaction, increased market volatility, lack of comparable data are some of the challenges for determination of arm’s length price. Indian transfer pricing stipulates that data to be used in analysing the comparability of an uncontrolled transaction with an international transaction should be the data related to financial year in which an international transaction has been entered into. However, this rule has created many practical issues. Availability of comparable data when audit is to be conducted is a real challenge.

While determining the arm’s length price, the risk taken by the entity is the major factor. Multi-national entities while dealing with transfer pricing issues have a practice to argue that the risk of the business is with the foreign entity. Hence, it is justified in having a higher margin in relevant transaction to that of the foreign entity. But the Indian tax department believes that the risk of a multi-national enterprise is a by-product of ownership and is not an independent element. Therefore, an argument of multi-national enterprise that their contract research and development center in India is a risk-free entity and entitled to only low cost plus remuneration is not favoured by the tax department.

Indian tax department believes that if the core functions of research and development service are located in India, then, the Indian entity is exercising control on the operations and associated risk. Hence, allocation of risk to parent company is illogical and not accepted. Indian tax authorities believe that returns filed by Indian entities based on cost plus method will not reflect the true arm’s length price of the transaction.

As stated earlier, the onus of proving the accurate comparability of the price is on the tax payer. Therefore, mere claim of risk adjustment in favour of foreign entity without sufficient documentary support would not suffice. Indian tax department believe that locational saving is one of the factors to be considered for comparability analysis. The operational advantages, low labour cost, material cost, rent, infrastructure cost, tax incentives, etc. gives an incremental profit to the multi-national enterprises. This incremental profit is in short referred as location rents. Indian tax department consider that location savings and rents should also be considered to arrive arms length price. The transfer pricing administration believes that it is appropriate to have profit-split method to determine arm’s length allocation of location savings and rent. It says that arm’s length compensation for location savings should be distributed to benefit both the parties of the transaction and there must be an appropriate split of cost saving between the parties.

Indian tax department’s point of view on intangibles have a huge relevance in present day context as the world royalty and world licensing receipts are over $200 billion. The arm’s length price of the royalty allocation, cost of development of market, branding in a new country, remuneration for marketing, research and development of intangibles and co-branding cost are the factors in considering the arm’s length price.

With regard to payment of royalties for use of trademark, design and technology between parent and subsidiary, the rate of royalty is a challenge in determination of arm’s length price. Indian tax department’s view is that it is impossible to find comparable arm’s length price for such transactions. Income tax department believe that if a subsidiary has borne the cost of developing the market and made expenses on marketing and enhancement of brand value in its territory, then the subsidiary should get compensation on arms length on such cost.

Income tax department will also consider the value of Indian entity’s research and development efforts while determining arm’s length price of royalty for use of technical knowledge. When an Indian subsidiary is established for research and development on contract basis and uses cost plus mark up method for arriving arm’s length price stating that risk associated are with the parent company, at the same time if claim of controlling risk of core function of research and development with the parent entity are not documented and such claims are not justified. On most occasions monitoring the research and development activities were also carried out by Indian subsidiaries. So, mere reason that the funds for research and development activities are transferred from multi-national enterprises will not solely justify a higher allocation of margin favoring parent entity.

Income tax department believes that the assets of a business include capital and technically skilled manpower, know-how, etc., and capital contribution should not get a higher relevance. According to income tax department, risks are distributed between the enterprises and therefore, a cost plus method is not an appropriate method. Income tax department’s view is that transfer of legal ownership of intangibles under a contract by an Indian entity in favour of a parent company are in most cases without any appropriate compensation and an additional arm’s length compensation to be determined in such instances. Similarly, the effort of an Indian entity in marketing the intangible like brand, trademark in Indian market, creating product royalty in minds of the customer, creation of effective supply chain, distribution network, after sale service, etc., to be quantified while arriving arm’s length price. The normal practice of cost plus method is not favoured in such instances. Advertising, marketing and promotion expenditure if borne by Indian entity, while the ownership of those brands and trademark are with the parent entity, then in such cases reimbursement cost of excess arm’s length price along with mark up should be considered. While calculating arm’s length price or profit-split method should be adopted in these cases.

Increase of intra-group services between associated enterprises such as technical support is required have an arm’s length price computation. Income tax department have noticed that parent entities generally do not allow any profit mark-up on services rendered by Indian companies to them. On the other hand, where Indian companies receive intra-group services from the parent company, it often charges mark-up on all these services. It is also noticed that in many such claims of rendering services to be found incorrect, income tax department consider this as a high risk area and discourage all such malpractices.

Inter-company loans and terms of such loan is another transfer pricing issue that the income tax department is not favoring along with the practice of Indian parent company advancing loans to its foreign entities at LIBOR and EURIBOR rates. Indian transfer pricing authorities’ believe all should be at prime lending rates of Indian banks. Similarly, guarantees extended to foreign entities abroad where the Indian parent company is a guarantor. In such cases, income tax department says an arm’s length price to be determined on such guarantees.

These are some of the views of income tax department on transfer pricing issues reflected in the UN manual. While critically looking into the views, the effort of Indian tax administration to determine an appropriate arm’s length price at location rents and other territorial advantages should be applauded in the perspective of the state treasury. However, this would certainly nullify the investment attractiveness of India and I am worried that it would result in less foreign investment in this country.

We advise to all multi-national enterprises to consider all these view points while doing documentation on transfer pricing so that disputes can be avoided.


In India the conditions of employment in an industry is regulated by THE INDUSTRIAL EMPLOYMENT (STANDING ORDERS) ACT, 1946. As per this enactment the management of an industry is mandated to define with sufficient precision the conditions of employment under them and to make the said conditions known to workmen employed by them. It is mandated that every industry wherein one hundred or more workmen are employed, should comply with this law. However, IT industry in Karnataka was exempted from the provisions of this legislation. Recently the Karnataka Labour Department has decided not to renew exemption from the Act..

The law mandates that the employer should define work conditions relating to working hours and shifts, wages, leave attendance etc (the document defining the work conditions are called Standing Orders). The declared standing orders have to be approved by the Labour Department. -

IT and IT-enabled service (ITeS) companies in the State have been asked to submit drafts of their Industrial Employment Standing Orders by December 31,2012 according to a government notification. The notification, however, extends the exemption for IT and biotechnology companies from the general provisions of labour legislation that govern workplaces employing more than 50 workers, to March 31, 2013.

Employers covered under this Act must create Standing Order around these issues and share the same with workers and obtain approval by the Labour Commissioner. ( this process is called Certification). Once certified, the certified standing orders should govern the employee employer relationship. The law mandates that the text of the standing orders as finally certified shall be prominently posted by the employer in English and in the language understood by the majority of his workmen on special boards to be maintained for the purpose at or near the entrance through which the majority of the workmen enter and in all departments thereof where the workmen are employed.

The law says where any workman is suspended by the employer pending investigation or inquiry into complaints or charges of misconduct against him, the employer shall pay to such workman subsistence allowance (a) at the rate of fifty per cent. of the wages which the workman was entitled to immediately preceding the date of such suspensions, for the first ninety days of suspension; and (b) at the rate of seventy- five per cent of such wages for the remaining period of suspension if the delay in the completion of disciplinary proceedings against such workman is not directly attributable to the conduct of such workman.

As per the law, an employer who fails to submit draft standing orders as required shall be punishable with fine which may extend to five thousand rupees, and in the case of a continuing offence with a further fine which may extend to two hundred rupees for every day during which the offence continues.

Matters to be provided in standing orders are briefly the following:

1. Classification of workmen, e.g., whether permanent, temporary, apprentices, probationers, or badlis.
2. Manner of intimating to workmen periods and hours of work, holidays, pay-days and wage rates.
3. Shift working.
4. Attendance and late coming.
5. Conditions of, procedure in applying for, and the authority which may grant leave and holidays.
6. Requirement to enter premises by certain gates, and liability to search.
7. Closing and reopening of sections of the industrial establishment, temporary stoppages of work and the rights and liabilities of the employer and workmen arising there from.
8. Termination of employment, and the notice thereof to be given by employer and workmen.
9. Suspension or dismissal for misconduct, and acts or omissions which constitute misconduct. .
10. Means of redress for workmen against unfair treatment or wrongful exactions by the employer or his agents or servants.

Though, IT industry employees are paid better in comparison to employees in other industry, their long work hours, night shifts etc., are negatively impacting their health and personal life; resulting in increased occupational deceases and family disputes among them. A good work-life balance is important from a social perspective. It is expected now that IT companies will follow this Government notification with a positive mindset.