Cutting Edge: Aerospace and Defence Cutting Edge: Aerospace and Defence

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Editorial 03 Select news items 05 Regulatory 29 Direct tax 32 Indirect tax 40 Transfer pricing 41 Glossary 43 Contact us 44

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Dear readers, It gives me immense pleasure to present crore INR. An area that has been a point airlines is concerned, particularly when the 35th edition of ‘Cutting Edge’, PwC of discussion and concern, which was also the government is looking to disinvest. ’s Aerospace and Defence newsletter. raised before the DAC, was the significant The 49% cap includes both direct and Over the last few months there have been delays in the issuance of industrial licences indirect investment by foreign airlines and important developments on the policy for defence manufacturing. The MoD is comes with the condition that substantial front. There has been significant progress considering establishing a system under ownership and control of shall in the implementation the SP policy. which a timeframe will be set for issuing rest in the hands of Indian nationals. The After the first approved project under security clearances by the MHA. This DGCA has released the draft guidelines for this category for six advanced stealth move will not only help Indian companies the use of UAVs/RPAS for civil usage. The Dhiraj Mathur (P-75I) at a cost of around but also foreign players who are trying to ministry has posted these guidelines on its Partner and Leader, 60,000 crore INR, an RFI has been establish manufacturing set-ups in India, website and has sought comments from Aerospace and Defence issued for: in accordance with the Government’s the industry. Further, the guidelines for ‘Make in India’ initiative. drones, which were issued last year, have • Manufacturing 1,770 FRCVs to replace yet not been finalised. These guidelines the ageing T-72 tanks used by the Policy changes have been recorded in the address issues such as drone weight, flying aviation sector too. The Union Cabinet restrictions, licensing requirements, pilot has allowed up to 49% FDI under the • Procuring 123 NMRHs training and drone traffic management government approval route in Air India—a • Procuring 111 armed NUHs systems. This is a much-awaited policy move that will allow foreign carriers change as the absence of guidelines A step that has been much appreciated to bid for national carriers but with an is resulting in complete prohibition of by the industry is the approval of a Indian partner. This is an important FDI commercial usage of drones. Moreover, the procurement project under the Buy (India change which has come into effect at promulgation of these guidelines will help – IDDM) category. The project involves the the time of the privatisation of Air India. both regulators and operators gain clarity procurement of over 260 BEL SDR sets for Further, it puts Air India at par with other on the prerequisites for operating drones. naval communication at a cost of over 490 Indian carriers as far as FDI by foreign

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In accordance with the government’s intention to privatise public sector entities, bids have been invited from both national and foreign private companies to acquire a 51% stake, along with management control, in the helicopter service operator PHL. PHL is under the administrative control of the MoCA and its remaining 49% stake is held by ONGC. This is another step towards the government’s recurrent efforts to divest from public sector entities and increase revenues to meet their fiscal targets. I invite you to review our newsletter dedicated to A&D. I thank all our esteemed clients for their continued support and trust in PwC. Your feedback, trust and support are important and we look forward to the same.

Sincerely, Dhiraj Mathur Partner and Leader Aerospace and Defence

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FDI policy further liberalized in key sectors: Cabinet India to purchase anti-tank missiles from Israel through approves amendments in FDI policy-Civil Aviation govt-to-govt deal

As per the extant policy, foreign airlines are allowed to invest under India will purchase Spike Anti-Tank Guided Missile (ATGM) from Israel Government approval route in the capital of Indian companies operating through the so-called government to government (G to G) route because scheduled and non-scheduled air transport services, up to the limit of the military wants the proven weapon, and the Defence Research and 49% of their paid-up capital. However, this provision was presently Development Organization (DRDO) has no objections to the deal as long not applicable to Air India, thereby implying that foreign airlines could as it does not involve transfer of technology (TOT). Last month after much not invest in Air India. It has now been decided to do away with this deliberations, the defence ministry withdraw the Request for Proposals restriction and allow foreign airlines to invest up to 49% under approval (RFP) for 8,000 Israeli spike missiles, a deal that would have been worth route in Air India subject to the conditions that: $500 million, after DRDO developed the indigenous ATGM with seeker software and said it was against any TOT from Rafael Advanced • Foreign investment(s) in Air India including that of foreign Airline(s) Systems, the Israeli company that makes the Spike missile. shall not exceed 49% either directly or indirectly • Substantial ownership and effective control of Air India shall continue to be vested in Indian National. Source: http://www.hindustantimes.com/india-news/india-to-purchase- anti-tank-missiles-from-israel-through-govt-to-govt-deal/story- C0TQXzxqXHqcAm8ckghPkI.html Source: http://pib.nic.in/newsite/PrintRelease.aspx?relid=175501

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Setback for : Rs 32,000 crore project to build Garden Reach Shipyard using carbon fibre to 12 scrapped, says report build warships

A Rs 32,000-crore project to indigenously build 12 minesweepers at Garden Reach Shipbuilders and Engineers (GRSE), under the Ministry the Goa Shipyard Ltd (GSL) in collaboration with South Korean firm of Defence, which recently completed major modernisation of its Kangnam Corporation has reportedly just fallen through, dealing a major infrastructure facility and has doubled its capacity, has become the first blow to the government’s Make in India mission. According to sources Indian shipyard to build warships using carbon fibre . cited by , this decision was taken by Union Minister The Kolkata-based shipyard has incorporated this technology in its for Defence Nirmala Sitharaman. “Goa Shipyard has been asked to issue ongoing project of third and fourth ASW (Anti- Warfare) a new global expression of interest for the mine counter-measure vessels being built for the Indian Navy. The carbon fibre material, (MCMVs). The fresh RFP (request for proposal) or tender will follow imported from Swedish stockyard Kockumo, is reportedly lighter than thereafter,” quoted the daily. With this, the Indian Navy’s nearly decade- stainless steel, which is traditionally used to construct warships. old quest for new minesweepers, desperately needed to beef up security along its long coastline, has been pushed back even further. Source: http://www.indiandefensenews.in/2017/10/garden-reach-shipyard-using- carbon.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29l Source: http://www.businesstoday.in/current/deals/indian-navy-rs-32000-make- in-india-12-minesweepers-scrapped/story/267526.html

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Government approves sale of 10% stake in HAL HAL looks to start production of HTT-40 in December

The government has approved the sale of 10% stake in Hindustan The HTT-40 basic trainer developed indigenously is heading for critical Aeronautics Limited (HAL), a defence Public Sector Undertaking. As part trials in October, with plans for the production line to start before the of the procedure, HAL had initiated the process of initial public offering end of this year. The indigenous HTT-40 trainer – which is critical for the with the filing of the Draft Red Herrring Prospectus (DRHP) with market air force’s pilot training program – is likely to undergo stall and spin tests regulator Securities and Exchange Board of India “This was a major shortly that will test its ability to recover from a potentially devastating milestone towards listing of the defence PSU which is slated for partial situation. The tests are critical to prove the stability and utility of the HTT- disinvestment by the . 40 to train young pilots in handling aircraft before they move on to the more advanced aircraft. The HTT-40 has already undergone wind tunnel testing in and is undergoing minor modifications to prepare it for Source: http://www.indiandefensenews.in/2017/10/government-approves- the tests. Stall and spin tests are potentially lethal for test pilots and need sale-of-10-stake-in.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29 to be programmed and planned minutely.

Source: http://www.indiandefensenews.in/2017/10/hal-looks-to-start- production-of-htt-40.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29

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DRDO hands over tech to defence firm to manufacture IAF to add 114 fighter jets to its fleet - first squadron bullet-proof jackets expected in 5 years

The Defence Research and Development Organisation (DRDO) has The has begun hunt for 114 fighter jets to enhance handed over its technology to a defence firm to manufacture bullet-proof its operational capabilities and add firepower to its depleting fleet. jackets for the armed forces. The government has decided to procure 1.86 Air Forces said a formal Request for Information (RFI) will be issued lakh bullet- proof jackets for the armed forces and majority of them will be soon to begin the process of acquisition. This will be done under the manufactured by Kanpur-based private firm MKU Ltd which was given the Strategic Partnership Model of the Narendra Modi government that DRDO-developed technology. The DRDO and MKU Ltd also exchanged aims at a synergy between foreign and Indian manufacturers to boost licence agreement and other related documents. MKU will produce bullet- indigenisation in defence manufacture. Of the 114 fighter jets, 16 will be proof jackets which will be lighter in weight than those being used by the flown from the country of origin, and the rest will be manufactured in armed forces currently. Indian production lines set up here.

Source: http://www.indiandefensenews.in/2017/10/drdo-hands-over-tech- Source: http://www.indiandefensenews.in/2017/10/iaf-to-add-114-fighter- to-defence-firm-to.html?utm_source=feedburner&utm_medium=email&utm_ jets-to-its.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29 campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29

Cochin shipyard lowest bidder for Rs 5,400 crore navy contract

Cochin Shipyard Ltd (CSL) has emerged as the lowest bidder for a project of the Indian Navy and the Rs 5,400 crore contract for eight vessels is likely to be concluded after due process. CSL has received communication from the Integrated Headquarters, Ministry of Defence (Navy) that the Company has emerged as the L1 bidder for 16 X ASW SWC Project for the Indian Navy. The order was bagged against a competitive tender issued by the ministry in which both private and public sector yards had participated.

Source: http://www.indiandefensenews.in/2017/10/cochin-shipyard-lowest-bidder-for-rs.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29

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Thales radar offered for HAL Tejas Mk-1A combat aircraft GRSE to set up diesel engines manufacturing unit for Indian Navy

The French company Thales is offering a lightweight, compact active array Cooper Corporation has entered into a strategic Memorandum of radar for India’s Tejas (LCA), dubbed Tejas Mark- Understanding (MoU) with Garden Reach Shipbuilders & Engineers Ltd. IA. Thales radar is an advanced Fire Control Radar (FCR) designed for (GRSE) for joint development and manufacturing of small and medium air-to-air superiority and strike missions, based on fully solid-state Active diesel engines for marine applications. This collaboration aims at setting Electronically Scanning Array (AESA) technology, enabling the radar to up a fully indigenous product line of marine diesel engines specifically achieve long detection ranges, high mission reliability and multi-target designed and developed for Indian Navy and Indian Coast Guard, a tracking capabilities. The firm recently completed its initial flight test. It home-grown alternative to multinational brands currently available in the is therefore ready and able to adapt to the tight schedule imposed by the market, the company said in a statement Monday. Cooper Corporation Mk1A LCA. will design & manufacture of these diesel engines for marine DG set application, ranging from 50 KW – 500 KW. GRSE will integrate these DG set at their Diesel Engine Plant (DEP) at Ranchi and subsequently Source: http://www.indiandefensenews.in/2017/10/thales-radar-offered- sell it to their prospective customers – Indian Navy, Indian Coast Guard, for-hal-tejas-mk.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29 Shipbuilders in India and abroad

Source: http://www.indiandefensenews.in/2017/10/grse-to-set-up- diesel-engines.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29

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Make in India: Government shipyards win Rs 12,000 crore Four contenders eying for Indian Navy’s project 75 (I): deal to supply 16 ASW craft to navy Here are the project details

Under Prime Minister Narendra Modi’s ‘Make in India’ program, Four contenders are now left in fray for building submarines worth government shipyards are moving ahead of their private sector rivals in USD 10.9 billion for the Indian Navy, after two Japanese and Spanish warship building as they have emerged winners in a Rs 12,000-crore deal companies opted out of the project. Naval Group-DCNS (France), to supply 16 Anti Submarine Warfare (ASW) craft to the Navy. As tenders ThyssenKrupp Marine Systems (Germany), Rosoboronexport Rubin for the Rs 12,000-crore deal were opened, the shipping ministry’s Cochin Design Bureau (Russia) and SAAB Kockums (Sweden) are the four Shipyard Limited and defence ministry’s Garden Reach Shipyard Limited submarine makers still in fray. They have responded to the initial request (GRSE) emerged as the two lowest bidders. This is the third open tender for information (RFI) issued by the Indian Navy for the project. Project 75 deal involving competitive bids in the recent past which has gone to public (India) is a long pending conventional submarine program. sector firms. Recently, the Hindustan Shipyard Limited (HSL) won the contract for building two diving support vessels (DSVs) worth Rs 2,020 crore after it emerged as the lowest bidder. Source: http://www.indiandefensenews.in/2017/10/four-contenders-vying- for-indian-navys.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29 Source: http://www.indiandefensenews.in/2017/10/make-in-india-government- shipyards-win.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29

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HAL strongly bats for FGFA project with Russia Cochin shipyard forms JV with Hooghly Dock & Port

State-run aerospace behemoth Hindustan Aeronautics Ltd (HAL) strongly Cochin Shipyard (CSL) has incorporated a JV with Hooghly Dock & Port pitched for going ahead with the fifth-generation fighter jet project with Engineering Ltd for upgradation and modernisation of shipbuilding Russia, though the Indian Air Force is understood to have reservations infrastructure at two shipyard sites in Kolkata. A Joint Venture (JV) over it. The multi-billion dollar co-development project with Russia will Company has been incorporated in the name of Hooghly Cochin Shipyard be an opportunity as no country has ever offered such critical technology Limited- Cochin Shipyard Ltd and Hooghly Dock & Port Engineers Limited to India. According to official sources, the IAF is not very keen to pursue will have 76 per cent and 24 per cent stake in the Company respectively. the project in view of the high cost. Asked about IAF’s reservations about the project, HAL did not give a direct reply and insisted that it would help India’s aerospace sector to a great extent. Source: http://www.indiandefensenews.in/2017/10/cochin-shipyard-forms- jv-with-hooghly.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29 Source: http://www.indiandefensenews.in/2017/10/hal-strongly-bats-for- fgfa-project-with.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29

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India to ink $4-B contract with Russia for four L&T built offshore patrol vessel under the ‘Made-In- missile-carrying India’ project is dedicated to the nation

Seeking to add power to the Navy’s capabilities, India will soon seal a An offshore patrol vessel (OPV), entirely developed in-house by Larsen $4-billion contract with Russia for the purchase of four missile-carrying and Toubro and the country’s first-ever such defence craft to be built in a frigates. Called Project 11356, the four warships will have gas turbine private shipyard, was handed over to the Coast Guard. The vessel named power engines and will be equipped with the BrahMos supersonic cruise “Vikram”, built at Larsen and Toubro’s Kattupalli shipyard, was handed missiles. Project 11356 has been in the offing for some years now, sources over to the Coast Guard ahead of the March 2018 delivery schedule. This said. The frigates have a displacement of about 4,000 tonnes, speed of up is the first of the seven vessels for which the Rs 1,432-crore contract had to 30 knots and endurance of 30 days. Three such ships have already been been awarded by the Ministry of Defence in March 2015. The vessel, built for the Black Sea Fleet. equipped with modern weapon and state-of- the-art radar systems, would be deployed for day and night surveillance patrol, search and rescue and in pollution response operations in exclusive economic zones of Source: http://www.indiandefensenews.in/2017/10/india-to-ink-4-b-contract- the country. with-russia.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29

Source: http://www.indiandefensenews.in/2017/10/l-built-offshore-patrol- vessel-under.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29 L&T looking at options in three states to set up Rs 500 crore missile systems plant

India’s engineering conglomerate Larsen and Toubro Ltd, which has formed a Joint venture (JV) with Frances MBDA to develop and supply missiles and missile systems to the , is looking at , Maharashtra and Gujarat to set up the plant

Source: http://www.indiandefensenews.in/2017/10/l-looking-at-options-in- three-states-to.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29 12 PwC Cutting Edge: Aerospace and Defence Cutting Edge: Aerospace and Defence

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Army finalises mega Rs 40,000 crore procurement plan to Government relaxes arms rules to bolster investment replace ageing weapons in manufacturing

The Army has finalised one of its biggest procurement plans for infantry To boost the ‘Make in India’ initiative, the Union home ministry has modernisation under which a large number of light machine guns, liberalised the Arms Rules to encourage investment in the manufacturing battle carbines and assault rifles are being purchased at a cost of nearly of arms, ammunition and weapon systems in the country. The liberalised Rs 40,000 crore to replace its ageing and obsolete weapons. The broad rules will promote employment generation in the field of manufacturing process to acquire around 7 lakh rifles, 44,000 light machine guns (LMGs) of arms and ammunition, according to an official statement here today. and nearly 44,600 carbines has been finalised and the defence ministry is Under the new rules, the licence granted for manufacturing will be valid on the same page with the Army in moving ahead with the procurement. for the life-time of the licensee company. The requirement of renewal of the licence every five years has been done away with. Similarly, the condition that small arms and light weapons produced by a manufacturer Source: http://www.indiandefensenews.in/2017/10/army-finalises-mega- should be sold to the central government or the state governments with rs-40000-crore.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29 the prior approval of the home ministry has been done away with

Source: http://www.indiandefensenews.in/2017/10/government-relaxes- arms-rules-to.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29

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Govt clears mega project to acquire 111 helicopters Indian defence companies may get customs duty relief for navy

In a major move, the defence ministry approved procurement of 111 In an effort to soothe the nerves of Indian defence firms, the Centre is utility helicopters for the Indian Navy at a cost of Rs 21,738 crore. mulling Customs duty exemption on the import of spare parts under The long-pending proposal was cleared at a meeting of the Defence programmes that were rolled out before April 1, 2017. The exemption Acquisition Council (DAC). 16 helicopters will be procured at a fly-away will be granted in order to bring the Indian firms on a par with foreign condition while 95 will be manufactured in India. The acquisition of the OEMs who are provided tax exemption on the projects they develop. helicopters will be made under the strategic partnership model. The cost The Customs duty is being paid by the Indian government on behalf of the project will be Rs 21,738 crore. of the foreign OEMs. According to current norms, while foreign original equipment manufacturers (OEMs) in the country are given tax concessions on the items they import into the country to build a certain Source: http://www.indiandefensenews.in/2017/11/govt-clears-mega-project- armament, Indian companies end up paying Customs duty. to-acquire-111.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29

Source: http://www.indiandefensenews.in/2017/11/indian-defence- companies-may-get.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29

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Ease of doing business: India jumps 30 points, ranked 100 Rafale production to start at Nagpur plant from January among 190 nations 2018, says CEO Rajesh Dhingra

India has jumped 30 places to rank 100th in the World Bank’s ‘ease Reliance Defence is gearing up for the take-off of its Rafale jets of doing business’ ranking, helped by a slew of reforms in taxation, manufacturing plans. Reliance Defence plans to start production at its licensing, investor protection and bankruptcy resolution. This is a major Dassault Reliance Aerospace (DRAL) facility in Nagpur by January 2018 shot of arm for the government which is fighting a battle of perception and DRAL can start delivering Rafale fighter jets within three years of with opposition attacking it over alleged faulty implementation of receiving an order. demonetization and GST. The World Bank praised India and the constant work done in last two and three years but acknowledged that much work still needs to be done. Implementation of GST was not incorporated while Source: http://www.indiandefensenews.in/2017/11/rafale-production-to- start-at-nagpur.html?utm_source=feedburner&utm_medium=email&utm_ compiling the report, according to World Bank. campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29

Source: http://www.indiandefensenews.in/2017/11/economy-ease-of-doing- business-india.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29 Big boost to Indian defence: DRDO successfully test-fires indigenous Smart Anti-Airfield Weapon (SAAW)

Defence Research and Development Organisation (DRDO) and the Indian Air Force (IAF) successfully tested an indigenously-built lightweight ‘glide bomb’ at the Integrated Test Range in Odisha’s Chandipur. Designated as the Smart Anti-Airfield Weapon (SAAW), the bomb released from the IAF aircraft was guided through precision navigation system.

Source: http://www.indiandefensenews.in/2017/11/big-boost-to-indian- defence-drdo.html?utm_source=feedburner&utm_medium=email&utm_ campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29

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Army issues fresh RFI for future ready combat vehicle Ministry of Defence scraps $500 million Israeli missile deal, wants DRDO to make in India

India’s Ministry of Defence (MoD) has invited responses to its global Asking the Defence Research and Development Organisation (DRDO) request for information (RFI) to develop and build 1,770 multipurpose to indigenously develop and produce a Man-Portable Anti-Tank Guided Future Ready Combat Vehicles (FRCVs) for the Indian Army (IA) to Missile (MPATGM) for the Army, the Ministry of Defence (MoD) has replace the service’s ageing fleet of T-72 main battle tanks (MBTs). The decided to cancel the $500 million deal for Spike ATGM with Israel. The RFI invites original equipment manufacturers (OEMs) to provide details deal, seen as another proof of growing Indo-Israel defence cooperation, of the proposed 50-tonne tracked FRCV, which will not only be the base was expected to be signed after price negotiations with Rafael Advanced platform for the IA’s MBT, but also for a number of other armoured Defence Systems of Israel were completed last year. In anticipation of vehicles. this deal, Rafael had entered into a joint venture with Kalyani group for missile production in India.

Source: http://www.indiandefensenews.in/2017/11/army-issues-fresh-rfi- for-future-ready.html?utm_source=feedburner&utm_medium=email&utm_ Source: http://indianexpress.com/article/india/ministry-of-defence-scraps-500- campaign=Feed%3A+indiandefensenews%2FiIJx+%28Indian+Defence+News%29 million-israeli-missile-deal-wants-drdo-to-make-in-india-4945571/

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Mahindra Defence, Shapoorji Pallonji may bid for troubled Defence Ministry approves procurement of 260 naval Bharati Defence communication sets

Mahindra Defence and Shapoorji Pallonji Group may independently bid The Defence Ministry approved procurement of 260 naval communication for the troubled Bharati Defence and Infrastructure (formerly Bharati sets at a cost of Rs 490 crore to ramp up surveillance on the high seas. Shipyard) in the first such bankruptcy resolution attempt under the The decision was taken at a meeting of the Defence Acquisition Council Insolvency and Bankruptcy Code for the security industry. The two (DAC). It will be the first batch of indigenously designed and developed companies are currently evaluating the deal that values the target “software defined” radio sets, they said, adding the gadgets will improve company at $350 million. Bharati has also seen interest from other suitors information sharing through secure voice communications and data such as German Dry Docks and other companies seeking to control transfer on board the naval ships. individual docks along India’s eastern and western water margins

Source: https://economictimes.indiatimes.com/news/defence/defence- Source: https://economictimes.indiatimes.com/news/defence/mahindra-defence- ministry-approves-procurement-of-260-naval-communication-sets/ shapoorji-pallonji-may-bid-for-troubled-bharati-defence/articleshow/61810547.cms articleshow/61853301.cms

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Godrej Aerospace delivers 100th set of Brahmos airframe HAL to float RFI seeking Indian partner to manufacture assemblies; bags additional order of 100 sets Dhruv helicopter

Barely a fortnight after India successfully test fired the air version of the Hindustan Aeronautics Limited (HAL) is likely to float a Request for BrahMos missile from the Indian Air Force’s frontline Sukhoi-30 MKI Information (RFI) soon for identifying an Indian private agency that combat jet, Godrej & Boyce received a fresh order to supply airframe can produce the civilian version of the ALH Dhruv helicopters in future. fuel management systems for the BrahMos Air-Launched . Considering the increasing need of helicopters in civil operations of BrahMos Aerospace Ltd., a 50.50:49.50, joint venture between India’s the country, this will be a mega deal from HAL which is the OEM and Defence Research Development Organisation and its Russian counterpart Licensor. Speaking during a function at HAL’s Naisik facility, T Suvarna has placed an order for an additional 100 airframes from Godrej Raju, HAL Chairman said the Company is keen to encourage private partnership in all its activities and as a major step, it would like to offer the indigenous helicopter ‘ALH Dhruv’ (Civil Version) for manufacturing Source: https://www.bloombergquint.com/business/2017/12/05/godrej-to-begin- to select Indian Private Companies through Transfer of Technology. serial-production-of-supersonic--missile-system

Source: http://www.defenseworld.net/news/21482/HAL_to_Float_RFI_ Seeking_Indian_Partner_to_Manufacture_Dhruv_Helicopter

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TATA, GE join hands to manufacture jet engine $2-Bn procurement of sea guardian drones kicks off components

The TATA Group and General Electric have entered into a partnership The Indian government has initiated the procurement of 22 naval to manufacture components for engine-maker CFM International in surveillance drones from the US for approximately $2 billion. The India. Under the partnership, TATA Advanced Systems Ltd, a unit of decision comes five months after the purchase proposal was approved by TATA Group, and GE Aviation will together handle manufacturing, the Trump administration. “A request for Information (RFI) for Predator assembling, integration and testing of the aircraft components. The parts, ‘B’ Sea Guardian was issued to the US Office of Defense Cooperation on manufactured for CFM’s LEAP engine, will be used for GE’s global supply November 14 and the response is awaited. The Minister also informed chain. CFM is an equal joint venture between GE and Safran SA of France. that the deal does not involve the transfer of critical technology to India. “Procurement of Predator ‘B’ Sea Guardian is being progressed under Buy (Global) category and no transfer of technology is envisaged. Source: https://economictimes.indiatimes.com/news/defence/tata-ge-join-hands- to-manufacture-jet-engine-components/articleshow/62069697.cms Source: http://www.business-standard.com/article/current-affairs/2-bn- procurement-of-sea-guardian-drones-kicks-off-117122100027_1.html

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IAF to ink deal for 48 new Mi-17 V5 helicopters Made-in-India Dornier-228 gets flight nod for from Russia commercial flights

India and Russia are expected to ink a deal for around US$ 1.1 billion for The 19-seater aircraft has, till now, been used by defence forces and is the 48 Mi-17V5 helicopters for the Indian Air Force (IAF) soon. Negotiations first plane to be made in the country for commercial flights. The DGCA with the Indian side have been completed, and US hopes to sign the has given type certification to this aircraft and also given certificate of contract in 2018. The company has already delivered 151 Mi-17 V5 airworthiness to HAL’s . Now, HAL can sell this plane to helicopters to India beginning with a deal for 80 machines in 2008, and airlines in India and it can be used by them for regional flights under the then another 71 under three follow-on contracts. The Defence Acquisition Modi’s government’s ambitious UDAN scheme. Some special incentives Council (DAC) of the Indian Ministry of Defence (MoD) had cleared may be given to operators using this plane. Apart from airlines in India. the purchase of fifth lot of 48 of these military transport helicopters in HAL may also look at selling this plane for civil use in neighbouring September 2015. countries such as Nepal and Sri Lanka.

Source: http://www.indiastrategic.in/2017/12/18/iaf-to-ink-deal-for-48-new-mi-17- Source: https://timesofindia.indiatimes.com/business/india-business/ v5-helicopters-from-russia/ commercial-flight-nod-for-made-in-india-plane/articleshow/62245953.cms

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Anil Ambani led Reliance Group, Hinduja in talks for Upgraded SARAS all set for maiden flight in January 2018 defence foray

Eager to participate in the government’s strategic partnership policy and National Aeronautics Laboratories (NAL), a frontline wing under Council compete with other private sector players for bagging defence production of Scientific & Industrial Research (CSIR) here, is ready to put the orders worth billions of dollars over the next year, the Anil Ambani led upgraded prototype of SARAS on its maiden flight. The SARAS PT1N Reliance Group and the Hinduja Group are looking to join forces and (New), a 14-seater passenger plane, is expected to have its first flight after forge a mega partnership in the sector. The Reliance Group and the completing one more high speed taxi trial (HSTT). Two Test Pilots and Hinduja’s are in advanced talks for a mega defence alliance which will be one Flight Test Engineer, who are empanelled to the PT1N project from spearheaded by Reliance Naval & Engineering (formerly called Reliance Indian Air Force’s Aircraft and Systems Testing Establishment (ASTE), will Defence) & Ashok Leyland. be onboard the maiden mission.

Source: https://economictimes.indiatimes.com/news/defence/anil-ambani-led- Source: http://english.mathrubhumi.com/news/india/upgraded-saras-pt1n-all- reliance-group-hindujas-in-talks-for-defence-foray/articleshow/62250551.cms set-for-maiden-flight-in-january-1.2483386

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India gets admission into Wassenaar Arrangement Government mulling time-bound mechanism for granting licences for defence production

The Ministry of External Affairs welcomed the decision of the Wassenaar To facilitate domestic defence manufacturing, the Defence Ministry Arrangement to admit India as the 42nd member of the organisation is contemplating a system that will ensure fast-tracking the issuing of which aims to regulate trade and use of dual use technology. Officials industrial licenses, which are mandatory to start production. The system said that following admission into the club, India will get access to high entails that if the Home Ministry’s security clearance has not been given technology, which will help address the demands of Indian space and within a “reasonable” timeframe for the license, then the clearance should defence sectors. It will also boost New Delhi’s chances of joining the be “deemed approved”. Nuclear Suppliers Group (NSG).

Source: https://economictimes.indiatimes.com/news/defence/government- mulling-time-bound-mechanism-for-granting-licences-for-defence-production/ Source: http://www.thehindu.com/news/national/india-gets-admission-into- articleshow/61342132.cms wassenaar-arrangement/article21347560.ece

INS Kalvari submarine affirms Make in India’s giant strides: MDL

The commissioning of the first Scorpene-class submarine - ‘INS Kalvari’ - into the Indian Navy reaffirms the giant strides taken under the ‘Make in India’ programme. The induction of Kalvari into the Indian Navy would be a game-changer in the field of underwater warfare and its commissioning has added another feather in MDL’s cap, the shipbuilder said after Prime Minister Narendra Modi commissioned the submarine at the naval dockyard.

Source: https://economictimes.indiatimes.com/news/defence/ins-kalvari- submarine-affirms-make-in--giant-strides-mdl/articleshow/62065127.cms 22 PwC Cutting Edge: Aerospace and Defence Cutting Edge: Aerospace and Defence

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Govt invites bids from pvt cos for India’s aviation ministry proposes rules for commercial disinvestment use of drones

The government has invited bids from private companies, including India’s civil aviation ministry proposed a number of regulations for the foreign ones, to buy out its entire 51 per cent stake along with use of drones in the country as it looks to legalise the use of unmanned management control in helicopter service operator Pawan Hans Ltd. The aerial systems. Used by the military for monitoring and imagery, drones Miniratna PSU is under the administrative control of the Civil Aviation have become popular worldwide in recent years, with people posting Ministry and the remaining 49 per cent stake is held by oil behemoth breath-taking videos on social media and e-commerce companies looking ONGC. In a “global invitation for expression of interest”, the government to use them for deliveries. In India, however, it is illegal for the general has asked private players to submit the bids by December 8. “The public to fly drones without the approval of government authorities, government proposes to disinvest its entire equity shareholding of 51 per because of concern over the safety of other users of airspace and people cent in Pawan Hans Ltd by way of strategic disinvestment to investors, on the ground. along with transfer of management control,” it said while inviting bids.

Source: https://in.reuters.com/article/india-drones-regulations/indias-aviation- Source: http://www.thehindubusinessline.com/economy/logistics/govt-invites- ministry-proposes-rules-for-commercial-use-of-drones-idINKBN1D14VG bids-from-pvt-cos-for-pawan-hans-disinvestment/article9902005.ece

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‘GST to hit aviation sector by ₹5,700 cr. a year’ IndiGo may induct wide-bodied planes to fly overseas as Air India sale in slow lane

The aviation industry will take an annual hit of ₹5,700 crore following IndiGo which has shown interest in buying Air India’s international the implementation of the Goods and Services Tax (GST). Under GST, operations, is actively considering alternate plans to induct at least 50 18% tax is charged on re-import of aircraft spare parts which were earlier wide-bodied planes for starting overseas flights, as the divestment of the exempted from import duty and service tax. “The GST paid on repairs state-run carrier may take a while. Right now, it’s an optimistic 50-50, carried out in India is creditable but not if it takes place abroad. With no but the processes are slow. The airline will wait for four-five months and engine repair shop in India, it is imperative to send the spares abroad. This then implement Plan B of inducting its own fleet of wide-bodied planes. will cost ₹2,000 crore per annum to the industry. IndiGo currently has a fleet of 143 A320 and A320neo planes and an order for over 400 more.

Source: http://www.thehindu.com/business/Economy/gst-to-hit-aviation-sector- by-5700-cr-a-year/article19847193.ece Source: https://economictimes.indiatimes.com/industry/transportation/airlines- /-aviation/indigo-may-induct-wide-bodied-planes-to-fly-overseas-as-air-india- sale-in-slow-lane/articleshow/61759558.cms

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Air India floats tender to raise $535 million to buy 3 Aviation turbine fuel price hiked by 6%; air travel likely to Boeing planes cost more

National carrier Air India has floated a tender to raise $535 million Aviation turbine fuel (ATF) or jet fuel price was hiked by a steep 6 per to bridge finance a loan raised to acquire three Boeing 777-300ER cent in Oct, the third consecutive monthly hike in ATF price since August. (extended range) planes. Two of the planes will be used by the However, jet fuel prices are revised every month. The government is yet to government for ferrying important officials. The planes are part of the bring petroleum products under the ambit of GST (Goods and Service Tax). historic and much-debated $15-billion 111plane order placed by the airline in 2005-06. They included 68 Boeings and 43 Airbus planes. Source: http://www.businesstoday.in/sectors/energy/airfares-jet-aviation- turbine-fuel-price-lpg-hike-atf/story/261257.html Source: https://economictimes.indiatimes.com/industry/transportation/airlines- /-aviation/air-india-floats-tender-to-raise-535-million-to-buy-3-boeing-planes/ articleshow/61523214.cms IndiGo, not Tatas, have shown interest in Air India

Union minister Jayant Sinha on Saturday clarified that there was no formal expression of interest from the Tatas as regards the stake sale of Air India. Sinha said his words as regards the Tatas’ indication of interest were in reference to comments made by N Chandrasekharan, the executive chairman of the Tata Sons Ltd, on television about the company exploring the possibilities of participating in the stake sale of Air India.

Source: https://www.ndtv.com/business/indigo-not-tatas-have-shown-interest- in-air-india-1782600

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India will soon have 150 to 200 operational airports: Udan: More airlines likely to participate in round 2 of Jayant Sinha regional connectivity scheme

More than 150 more operational airports would come up across India in More airlines may participate in the second round of the Udan regional coming few years including three airports in J&K. The Aviation industry connectivity scheme, while the government has received 141 initial in India, would soon be one of the biggest sectors in India, and it is proposals for the aviation scheme. At a press conference with civil already fetching revenue almost equal to Indian Railways and Telecom aviation minister Ashok Gajapathi Raju in the capital, Chaubey said Industry. The minister also announced that night landing facilities at “participation by airlines has doubled” in the second round of the Udan Srinagar airport will come up soon and direct flights to Dubai and Kaula scheme, routes for which will be given out next month after bidding. He Lampur would be operational with in six months. declined to provide the names of the airlines as bids are yet to be opened but added that two-three major helicopter players have also shown interest in this round. Source: https://economictimes.indiatimes.com/industry/transportation/airlines- /-aviation/india-will-soon-have-150-to-200-operational-airports-jayant-sinha/ articleshow/61976524.cms Source: http://www.livemint.com/Companies/NuEAEw5qgiFFDL3j4nC1UL/ Udan-More-airlines-likely-to-participate-in-Round-2-of-regi.html

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SpiceJet conducts seaplane trials in Mumbai Air India subsidiary AIESL inks MoU with SIAEC

SpiceJet conducted seaplane trials in association with Japan’s Setouchi Air India’s subsidiary AIESL has forged a partnership with Singapore Holdings at Mumbai’s Girgaum Chowpatty. The seaplane trials were Airlines’ engineering arm, as AIESL seeks to get a foothold in the global conducted in the presence of Nitin Gadkari, Minister of Road Transport MRO market besides tapping the local business. Under a non-binding & Highways, Shipping and Water Resources, and Ashok Gajapathi Raju, Memorandum of Understanding (MoU) signed between Air India Minister of Civil Aviation. SpiceJet and Setouchi Holdings have been Engineering Services Limited (AIESL) and SIA Engineering Company working closely for over six months to explore opportunities for small ten (SIAEC) last week, the two “will collaborate to offer line maintenance and and fourteen seater amphibious and land plane operations to provide air ancillary services at various airports in India as well as engineering training” connectivity to smaller towns and cities of India, particularly the ones that remained unconnected due to infrastructural challenges. Source: https://economictimes.indiatimes.com/industry/transportation/ airlines-/-aviation/air-india-subsidiary-aiesl-inks-mou-with-siaec/ Source: http://www.moneycontrol.com/news/business/spicejet-conducts- articleshow/60994163.cms seaplane-trials-in-mumbai-2458221.html

AirAsia India planning international flights, losses narrow

AirAsia India plans to fly international routes in the second half of next year after increasing its fleet to 20 aircraft, the minimum an airline requires to fly overseas. The airline, a joint venture between AirAsia Bhd of Malaysia and Tata Sons Ltd, its net loss had narrowed by 74% to Rs16.4 crore in the September quarter from a year ago.

Source: http://www.livemint.com/Companies/Tveid8p09OsTCynLWL459H/ AirAsia-India-planning-international-flights-losses-narrow.html

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Jet Airways likely in talks with Air France-KLM, Delta to raise capital

Jet Airways is likely in talks with Air France-KLM and Delta to raise funds via fresh share issue. The deal is still in the negotiation stage. Sources suggest the airlines’ seek to acquire 5 percent each in Jet Airways which might be done through a fresh share issue by Jet. As of now, Etihad holds 24 percent stake in Jet Airways and the acquisition of 10 percent by other airlines is unlikely to impact Etihad. The Foreign Direct Investment (FDI) norms limit holding by foreign carriers in Indian entities at 49 percent. If the deal goes through, Jet will have 34 percent FDI investment. Air France-KLM and Jet Airways have launched the first cooperation agreement of its kind on the India-Europe market.

Source: http://www.moneycontrol.com/news/business/cnbc-tv18- comments/jet-airways-likely-in-talks-with-air-france-klm-delta-to-raise-fresh- capital-2465283.html

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Time-bound mechanism for granting licences for defence production

Manufacturing in the defence sector has so far been governed by industrial ‘reasonable’ timeframe, the clearance should be deemed approved. This is a licensing under the Industries (Development and Regulation) Act, 1951 (IDRA). significant move to promote the domestic manufacturing of military platforms Before 2001, manufacturing in the defence sector was limited to public sector and equipment. The MoD is examining the reform initiative in consultation companies (OFB and DPSUs). However, in 2001, the government allowed with the MHA, which issues licences to defence manufacturers. 100% Indian private sector participation in the defence manufacturing sector, subject to licensing under the IDRA Act. After the notification of the New Arms Rules, 2016, vide its notification dated 19 May 2017 of the MHA, powers and functions under sub-section (1) of section (5), clauses (b) and (c) of section 7 and Chapter III of the Arms Act, 1959, have been delegated to the Secretary, DIPP, in respect of defence items included in the Schedule. Consequently, the power to grant manufacturing licences, in respect of the category of arms and ammunition and defence items as per columns (2) and (3) of the Schedule to the said notification, has been delegated to the Secretary, DIPP. Under the existing procedure, the Indian company has to obtain an industrial licence for defence manufacturing, unless the items which it intends to manufacture do not find mention in the defence product list. The application is then sent to the MHA for security clearance, and only after the clearance is given can the licence be issued. However, there are invariable delays in the grant of industrial licences. In order to overcome this issue, the MoD is contemplating developing a system that will ensure licence fast-tracking. This system will also have mechanisms in place that will issue industrial licences in a time-bound manner on short, medium and long-term basis. The system entails that if the MHA has not given security clearance for licences within a

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DGCA released draft regulations on the civil use of drones in India

The DGCA released draft regulations on the civil use of RPAS on are underway and within 50 km from the international border and beyond 1 November 2017. As per the draft civil aviation requirements for UAS: 500 m (horizontal) into the sea along the coastline. Drones cannot be operated within a 5 km radius from Vijay Chowk in Delhi and from a mobile • Drones have been classified as nano (less than or equal to 250 gm), micro platform such as a moving vehicle, ship or aircraft. (greater than 250 gm and less than or equal to 2 kg), mini (greater than 2 kg and less than or equal to 25 kg), small (greater than 25 kg and less than or equal to 150 kg) and large (greater than 150 kg). • All drones are proposed to be operated in the visual line of sight during the day and have to fly below 200 feet. Dropping of any substance, carriage of hazardous material or animal or human payload is not permitted. • All commercial categories of drones, except those in the nano category and those operated by government security agencies, will have to be registered by the DGCA as per the ICAO proposed policy in the form of a UIN. The mini and above categories will require an UAOP, but the model aircraft up to maximum take-off weight of 2 kg and flown below 200 feet inside an educational institution will not require UIN/UAOP. • It mandates remote pilots to undergo requisite training, except for nano and micro categories. • For the micro and above category, drones are to be equipped with RFID/SIM, return to home option and anti-collision lights. • Drones cannot be operated within an area of 5 km from an airport, within permanent or temporary prohibited, restricted and danger areas as notified by the AAI in AIP and without prior approval over densely populated areas or over or near an area affecting public safety or where emergency operations

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Disinvestment of Pawan Hans Limited (PHL)

The MoCA had invited EoI for the proposed strategic disinvestment of 51% • The EoIs will be evaluated based on the eligibility criteria and disqualification stake in PHL or company. In a meeting held on 27 October 2016, the CCEA had conditions detailed in this PIM. given an ‘in-principle’ approval for the strategic disinvestment of PHL based • Only IBs shortlisted in stage I can participate in stage II. on the recommendations of the Core Group of Secretaries on Disinvestment. The CCEA had approved the recommendation for the disinvestment of 100% Stage II: shareholding of the GoI to a strategic buyer identified through a two-stage • The shortlisted IBs will be issued a RFP. auction process. • The IBs will get access to the data room to review documents pertaining to PHL is the leader of helicopter operations in India, boasting a fleet strength of the company for conducting due diligence on the company through a CIM to 43 helicopters and a diverse fleet mix of light, medium and heavy helicopters. provide details of the company and the proposed transaction. Over the past years, contracts with ONGC and state governments have provided • The shortlisted IBs would be required to undergo a transparent bidding a steady source of income for PHL (average 40–45% revenues from the oil process for the acquisition of the entire GoI shareholding in PHL, in and gas sector and around 35–40% revenues from state governments). It accordance with the terms of the RFP. provides helicopter services for offshore operations, inter-island transportation, • The IBs may be required to deposit earnest money at stage II, if required by the connecting inaccessible areas, rescue work, tourism, etc., and provides GoI. helicopter services for offshore operations, inter-island transportation, connecting inaccessible areas, rescue work, tourism, etc. The GoI proposes • Post the submission of financial bids, the highest bidder (H1) shall undergo to disinvest its entire equity shareholding of 51% in PHL by way of strategic a security clearance process. Details of the H1 bidder, along with its board disinvestment to investor(s) along with the transfer of management control. of directors and shareholders, would be submitted to the MHA through the The company is a joint venture where the state-owned ONGC holds 49% stake. MoCA. In case the H1 bidder fails in obtaining the security clearance, the next highest bidder will be offered an option to match the bid of the H1 bidder and The process for the proposed transaction has been divided into two stages: the next highest bidder’s details shall be sent for security clearance. Stage I: • Through a PIM, the GoI will provide IBs with instructions for submitting their EoI to the GoI to be used for prequalifying IBs, in accordance with the specified criteria.

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An Indian subsidiary providing support services which enable a foreign company to render services to its client abroad cannot be considered a PE of such a foreign company in India Facts of the case Revenue’s contention • A Group Inc. and B Corporation, The Revenue contended that AB USA • The corporate office of C India and supervision of AB USA and USA (hereinafter, collectively had a fixed place PE in India in the housed an ‘international division’, two employees of AB USA were referred to as AB USA) were resident form of C India, as per Article 5(1) comprising the president’s office seconded to C India and their roles companies in the USA. AB USA was of the India-USA tax treaty basis the and a sales team servicing C India went beyond just stewardship in the business of providing ATM following: and group entities. activities. management services, electronic • Forty percent of employees of • The president’s office primarily The Revenue also contended that payment management, professional the entire group were employed oversees operations of C India and AB USA had an agency PE in India services, IT and IT-enabled services, in India. other group entities. The president’s in terms of Article 5(4) and 5(5) etc., to its customers outside India. overall reporting was to AB USA. • AB USA had call centres and of the India-USA tax treaty since • C Private Limited (C India) was software development centres • The physically located premises in AB USA was unable to furnish the a company resident in India. It in India. India was at the disposal of AB USA, information sought by the Revenue. provided various support services with the degree of permanence • AB USA was performing only Lastly, the Revenue contended that to AB USA in relation to its IT and required for the entire year. IT-enabled services. AB USA and C marketing activities in India and its the MAP resolution arrived at by • Reliance, in this regard, was India were assessed to tax on their contracts with clients were assigned AB USA for earlier years (wherein placed on the decision of the SC global income in their respective or sub-contracted to C India. the existence of PE was accepted) in the case of Formula One World jurisdiction. • The master service agreement would be binding for subsequent Championship Limited between AB USA and C India gave years as well. • The Revenue authorities contended (394 ITR 80) (SC). that the income of AB USA should complete control to AB USA over Based on the above facts, the Revenue also have been taxed in India as personnel employed by C India. further contended that AB USA they had PE in India in the form • C India functioned through the also had a service PE in India (in of C India, to which income from proprietary database and software terms of Article 5(2)(l) of the India- the provision of IT and IT-enabled of AB USA, which was provided to C USA tax treaty), as the employees services could be attributed. India free of cost. of C India were under the control

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Assessee’s contention Decision of the SC The assessee raised the following Service PE Agency PE Fixed place PE arguments with respect to the • The AO did not allege that such a • The AO never alleged an agency The SC held that the principal test to constitution of a PE in India: PE existed. It also claimed that no PE and, therefore, no factual ascertain whether an establishment Fixed place PE services were provided to customers foundation for the same has had a fixed place of business or not in India as all their customers were been laid. was that such physically located • For establishing a fixed place PE, located outside India. premises had to be ‘at the disposal’ there should have been a place at its As regards the reliance placed by of the enterprise. The place would disposal—that is, AB USA must have • Only the Indian company employed the Revenue on MAP proceedings of be treated as ‘at the disposal’ of the had the right to use the premises for personnel engaged in Indian earlier years, the assessee contended enterprise when the enterprise had their own business, which was not operations and that AB USA may that the MAP procedure availed for the right to use the said place and had made out in the facts of the case. indirectly control such employees earlier years could not be said to was only to protect their be binding for subsequent years as control over it thereupon. It was not • The TPO accepted the arm’s length own interests. they were without prejudice to the necessary for the enterprise to own pricing between AB USA and C or even rent the premises. Therefore, • The activities of C India were contention that they do not have a India. Even if a fixed place PE was there must exist a fixed place of independent business activities on PE in India. found, once the arm’s length price business in India, which was at the which taxes were levied under the was paid, AB USA goes beyond the disposal of AB USA through which Income-tax Act, 1961. dragnet of Indian taxation. they carried on their business. There • Further, the mere fact that a 100% was, in fact, no specific finding in the subsidiary could be carrying on assessment order or the appellate business in India did not mean that orders that applying the aforesaid the holding company would have tests, any fixed place of business had had a PE in India. been put at the disposal of AB USA.

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The following observations of the HC • The assignment or sub-contract to SC further held that: (tax treaty) but the said employees were upheld by the SC: C India was not a factor or rule to be should have furnished services • No part of the main business and applied to determine the existence within the contracting state. • C India provided various services revenue earning activity of AB USA or otherwise of fixed place PE. and was dependent on AB USA was carried out through a fixed • None of the customers of AB USA for its earning which was not the • Whether or not any provisions for business place in India which had had received any services in India. relevant test to determine intangible software was made or been put at their disposal. • Mere auxiliary operations that had been supplied free of cost was location PE. • C India only rendered support facilitate services rendered by AB not a relevant criteria. • C India did not bear sufficient risk services, which enabled AB USA USA to its customers was carried out and was irrelevant when deciding • C India would not become fixed to render services to their clients in India. whether a location PE exists. place PE merely because there was abroad. This outsourcing of work • Further, in respect of employees interaction or cross transactions • The close association between to India would not give rise to a seconded, it was held that: between C India and AB USA. C India and AB USA and the fixed place PE. 1. The seconded employees were • Even if foreign entities save and application of functions performed, Service PE working under the control and assets used and risk assumed reduce their expenditure by supervision of C India. The TO criteria was not a proper and transferring business or back • An enterprise must furnish did not negate this assertion appropriate test to determine the office operations to their Indian services within India through made by AB USA. subsidiaries, a fixed PE would not employees or other personnel for location PE. 2. The entire remuneration paid to be created. a service PE to be constituted. • C India was reimbursed the cost of such employees was borne by In the present case, C India only call centre operations, plus certain C India. rendered support services to percentage of cost, which was AB USA. 3. The AO had not made any not relevant for determining the findings on whether these • The presence of employees in India location or fixed place PE. employees reported to AB USA or was relevant under the Double any group company. Taxation Avoidance Agreement

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Agency PE • C India could not exercise any authority to conclude contracts on behalf of AB USA and no other clauses of the tax treaty dealing with the agency PE was applicable. Further, as the arm’s length condition was satisfied, no further profit would be attributable, even if there existed an agency PE in India. MAP The agreement entered into by AB USA under MAP pertained to disputes in earlier assessment years and could not be considered as a precedent for subsequent years.

Assistant Director of Income-tax-1, New Delhi vs. E-Funds IT Solution Inc. [2017] 86 taxmann.com 240 (SC)

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Payment for granting distribution rights of ‘Adwords program’ is taxable as ‘royalty’ under the Income-tax Act, 1961, as well as the India-Ireland tax treaty Facts of the case Tribunal’s ruling Tribunal’s ruling • The taxpayer is a wholly owned • The AO made the disallowance of Taxability as royalty Taxability as royalty subsidiary of Google International expenses for the non-deduction of • The tribunal observed that • The agreement between the LLC, US (‘Google’). The taxpayer taxes at source, which was further GIL is allowing the taxpayer to taxpayer and GIL does not merely was appointed as a non-exclusive confirmed by the first appellate access all intellectual property work by providing advertising authorised distributor of the authorities. The AO treated the and confidential information space on Google but with the Adwords program to advertisers amount as royalty under the act, which the taxpayer is using for help of various patented tools in India by Google Ireland Limited as well as under the India-Ireland activities related to the distribution and software. Further, it is not (‘GIL’). The taxpayer was appointed tax treaty. According to the AO, the agreement. merely an agreement to provide as a non-exclusive authorised ‘distribution rights’ are ‘intellectual advertisement space but one that distributor of ‘Adwords programs’ property rights’ covered by ‘similar • The taxpayer was also observed to should facilitate the display and to the advertisers in India by GIL. property’ (under the ambit of have a right over the intellectual property of Google. With the help publishing of an advertisement to • Under the Google Adwords royalty definition as per the act) of an IP address, Google gains the targeted customer. program distribution agreement, and the distribution fee payable access to information such as name, • The IP of Google vests in search the taxpayer was granted the is in relation to the transfer of sex, city, state, country, phone engine technology, associated marketing and distribution rights distribution rights. number and religion pertaining software and other features of the Adwords program. • Aggrieved by the decision of to the user of the website. Other and, hence, the use of these the AO and the first appellate • The taxpayer made a payment to than the above basic information, tools for performing various authorities, the taxpayer GIL for granting distribution rights Google also has access to the activities, including accepting approached the Income Tax of the ‘Adwords program’ without history of the users, as well as the advertisements, providing before or Appellate Tribunal (‘tribunal’). deducting tax at source. search behaviour of the persons after sale services clearly fall within using Google. the ambit of royalty.

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Initiation of TDS proceedings Clarification mechanism under • In the present case, no such application is made under section 195(2) to the AO. • With respect to TDS proceedings section 195 and tax avoidance The taxpayer, on his/her own, without under the act, the tribunal observed • With respect to the taxpayer’s having knowledge, information and that in absence of any direct stand that the withholding of tax without being privy to the accounting jurisdictional HC decision and is not required as the payment standard and accounting practice of various contrary decisions post made to GIL was not the sum GIL, has treated the said payment as amendment, the period of limitation chargeable under the provisions a business profit of GIL in its books of for the initiation of proceedings of the act, the tribunal clarifies account. A uniform policy is required to for resident as well as non-resident that this argument is not available be adopted for the deduction of taxes should be six years from the end for the payer to be raised in at source by the person responsible for of the financial year. The tribunal, the present proceedings. The paying the amount to a non-resident. In relying on the non-discrimination necessary safeguards are provided our view, whether it is business profit clause under the tax treaty, observed by the act in the form of section or royalty and so long as it concerns that it cannot be said that a non- 195(2), which clearly provides the taxpayer, he/she is duty-bound resident would be given special and that in case the assessee is having to deduct TDS unless there is an beneficial treatment in comparison any doubts about the chargeability adjudication by the AO to the contrary to the resident or treated unequally to tax of the payment, then the under section 195(2). by providing unlimited time to assessee may make an application initiate proceedings under section to the AO for the purpose of 201 of the act. If the law requires the determining whether the sum is Google India Private Limited Vs initiation of proceedings within six chargeable to tax or not and if yes, ACTT 117-(TP) A 1511 to 1518/ years from the end of the financial in what proportion. year for the resident, the same Bang/2013 treatment is required to be given to the non-resident.

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Guarantee fee paid to a foreign parent company is taxable as other income

Facts of the case Decision of the tribunal • The taxpayer was a resident • The Revenue held that the The tribunal ruled in favour of the any kind’ or ‘service fee or other of the UK and was engaged in guarantee fee did not fall within tax authority based on the following charges’, need to be understood the business of manufacturing the definition of interest under reasoning: in relation to the transaction technologically advanced Article 12 but is taxable as ‘other a. Guarantee fee accrued/arose or contract of loan. Under the chemicals known as catalysts, income’ under Article 23, which in India domestic tax law, the term ‘interest’ which are used in automobile grants taxing rights to India. is defined as any payment pursuant and other industries. The Consequently, the guarantee fee The guarantee fee accrued or arose to a loan transaction if it is made in taxpayer provides various types is subject to 40% tax under the in India since the Indian subsidiary the context of a loan and in relation of guarantees in relation to domestic tax law. received a loan from foreign banks to the contract between the parties, and the loan transaction took the business of its subsidiary • The Revenue also contended that even in the absence of a debtor- place in India. It was the act of the companies. During the year, the reimbursement received against creditor relationship. taxpayer provided guarantees to subsidiary of borrowing the funds the disbursement of salary on However, a payment made to a support credit facilities extended that resulted in income accruing to behalf of the Indian subsidiary is person not a party to the loan to its Indian subsidiaries (I. Cos) the taxpayer. taxable as FTS, relying upon the transaction or contract cannot be by banks in India and received ruling of Centrcia India Offshore b. Guarantee fee is not in the nature treated as an interest payment even guarantee commission from the I. Pvt. Ltd. 151 taxmann.com of interest though the payments are incidental Cos in this regard. The same was 386 (SC). The tribunal held that definition to the loan. The taxpayer is not offered to tax as interest taxable • Aggrieved with the Revenue, the of interest under the domestic party to the loan transaction and @15% under Article 10 of the taxpayer approached the tribunal. tax law and the treaty should be the guarantee contract is different India-UK tax treaty. interpreted in the context of the from the loan contract; accordingly, • During the year, the taxpayer usage and with reference to other a guarantee fee does not fall within had also received reimbursement words and phrases used in the the definition of interest. of salary paid to an employee definition. The words ‘claims of who was seconded to an Indian subsidiary.

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Decision of the tribunal Johnson Matthey Public Ltd. Company vs. DCIT c. Guarantee fee is not in the nature In relation to the secondment of an (International Taxation), Circle 2 (2) (1), New Delhi of business income employee to the Indian subsidiary, the tribunal recognised that the The global guarantee agreement is applicability of the ruling in case of entered into for the limited purpose Centrica (supra) is a fact-specific of enabling its subsidiaries to question to be determined with secure loans. The guarantee income reference to the functions performed is incidental in nature since the and the conduct of the duty of the taxpayer was not in the business of seconded employee with reference providing corporate/bank guarantees to the business of the assessee and to earn income on a regular basis. the Indian entity. The tribunal Accordingly, the guarantee fee cannot further held that in the absence be treated as business income which, of necessary documents such as in the absence of a PE in India, is not secondment agreement and an taxable in India under Article 7 of employment contract, it would not the treaty. be appropriate to adjudicate on As a result, the guarantee fee falls the matter. Therefore, the tribunal under the ‘other income’ article of remanded back the matter to the TO the treaty and is, consequently, fully for a fresh finding post the verification taxable in India. of necessary documents.

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Customs Notification no. 96/2017 dated 29 December 2017 • The Central Government has provided deeper tariff concessions in respect of specified goods, including balloons, gliders, helicopters and aircraft when imported from member states of ASEAN under the India-ASEAN Free Trade Agreement w.e.f. 1 January 2018.

Goods and Service Tax Notification no. 72/2017-Central Tax dated 29 December 2017 • The Central Government has extended the time limit for furnishing the Notification no. 96/2017 dated 29 December 2017Notification no. details of outward supplies in Form GSTR-1 for registered persons having 48/2017-Central Tax dated 18 October 2017 an aggregate turnover of more than 1.5 crore INR in the preceding financial • The Central Government notifies the description of supply of goods as year or the current financial year, as follows: ‘deemed export’:

Sr. no. Description of supply of goods Sr. no. Months for which the details in Time period for furnishing the details Form GSTR-1 are furnished in Form GSTR-1 1 Supply of goods by a registered person against Advance Authorisation 1 July–November 2017 10 January 2018 2 Supply of capital goods by a registered person against Export Promotion 2 December 2017 10 February 2018 Capital Goods authorisation

3 January 2018 10 March 2018 3 Supply of goods by a registered person to an export oriented unit

4 February 2018 10 April 2018 4 Supply of gold by a bank or public sector undertaking specified in notification no. 50/2017-Customs dated 30 June 2017 (as amended) against 5 March 2018 10 May 2018 Advance Authorisation

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CBDT releases final rules on CbCR and Master File requirements In keeping with India’s commitment to implement the recommendations of Action Plan 13 of BEPS, the Finance Act, 2016, introduced section 286 of the Income-tax Act, 1961 (the Act), providing for the furnishing of CbCR in respect of an international group. Section 92D of the Act, which contained provisions for preparing TP documentation, was also amended to provide for keeping and maintaining of the Master File. In continuation with the amendment, the CBDT on 31 October 2017 released the final rules and forms in relation to the manner of preparation and the furnishing of the Master File and CbCR. A snapshot of the Indian compliance requirements as per the rules are as follows:

A. Master File

Who What When Whom

A CE Part A of form no. 3CEAA By due date of furnishing RoI, except for FY 2016–17, DGIT, RA (irrespective of: which is on or before 31 March 2018 • whether the entity has entered into an international transaction • threshold applicability • whether the entity is resident or not)

A CE, having: Part B of form no. 3CEAA By due date of furnishing RoI, except for FY 2016–17, DGIT, RA a. Consolidated group revenue of more than 5 billion INR for the accounting year; and which is on or before 31 March 2018 b. Aggregate value of international transactions during the accounting year: • Exceeds 500 million INR; or • Exceeds 100 million INR in respect of the purchase, sale, transfer, lease or use of intangible property

The designated entity where there are multiple CEs resident in India • Form no. 3CEAA (part • Form no. 3CEAA (part A and part B) – by due date DGIT, RA A and part B) of furnishing RoI, except for FY 2016–17, which is • Form no. 3CEAB on or before 31 March 2018 • Form no. 3CEAB – at least 30 days before the due date of filing Form no. 3CEAA, except for FY 2016–17, which is on or before 1 March 2018

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B. CbCR

Who What When Whom

CE resident in India of an international group whose parent is a non-resident Form no. 3CEAC At least two months prior to the due date of furnishing RoI, DGIT, RA (intimation) except for FY 2016–17, which is on or before 31 January 2018

Parent entity or alternate reporting entity, which is: Form no. 3CEAD (CbCR) By the due date of furnishing RoI, except for FY 2016–17, DGIT, RA • resident in India; and which is on or before 31 March 2018 • part of an international group, the consolidated group revenue which exceeds 55 billion INR

CE of an international group resident in India, whose parent is a non-resident Form no. 3CEAD (CbCR) Filing date will be contingent to the provisions of section 286(4) DGIT, RA [and if conditions of section 286(4) of the Act are satisfied] of the Act

The designated entity, where there are multiple CEs of an international group Form no. 3CEAE Not specified, as the filing date will be contingent to the DGIT, RA resident in India, whose parent is non-resident [and if conditions of section (intimation) provisions of section 286(4) of the Act 286(4) of the Act are satisfied]

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AIESL Air India Engineering Services Limited GIL Google Ireland Limited NUH Naval utiliy helicopter

ALH Advance light helicopter GoI Government of India OEM Original equipment manufacturers

AO Assessing officer GRSE Garden Reach Shipbuilders and Engineers OFB Ordinance Factories Board

ASW Anti-submarine warfare GSL Goa Shipyard Ltd ONGC Oil and Natural Gas Corporation

BEL Limited HC High Court PE Permanent establishment

CCEA Cabinet Committee on Economic Affairs IDDM Indigenous design, development and PIM Preliminary information memorandum manufacturing CE Constituent entity PSU Public sector unit JV Joint venture CSL Cochin Shipyard Ltd RA Risk assessment LCA Light combat aircraft DAC Defence Acquisition Council RFI Request for information MBT Main battle tanks DGCA Director General of Civil Aviation RFP Request for proposal MCMV Mine counter measure vessels DGIT Director General of Income Tax SC Supreme Court MDL Mazagon Dock Shipbuilders Limited DPSU Defence public sector unit SAAW Smart anti-airfield weapon MHA Ministry of Home Affairs DRDO Defence Research and Development SIAEC SIA Engineering Company Organisation MoCA Ministry of Civil Aviation UAOP Unmanned aircraft operator permit EoI Expression of interest MoD Ministry of Defence UAVs/ Unmanned aerial vehicle/remotely piloted FDI Foreign direct investment MoU Memorandum of understanding RPAS aircraft systems

FGFA Fifth generation MPATGM Man portable anti-tank guided missile UIN Unique identification number

FRCV Future ready combat vehicle NAL National Aeronautics Laboratories

FTS Fee for technical services NMRH Naval multi-role helicopters

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Data Classification: DC0 This document does not constitute professional advice. The information in this document has been obtained or derived from sources believed by PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate or complete. Any opinions or estimates contained in this document represent the judgment of PwCPL at this time and are subject to change without notice. Readers of this publication are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this publication. PwCPL neither accepts or assumes any responsibility or liability to any reader of this publication in respect of the information contained within it or for any decisions readers may take or decide not to or fail to take. © 2018 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity. AK/January2018-11790