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FROM PUBLISHED ACCOUNTS

DISCLOSURES
RELATED TO IMPLEMENTATION OF I
nd AS 116 – ‘LEASES’ FOR THE YEAR ENDED 31ST MARCH, 2020

 

Compiler’s Note

The Ministry of
Company Affairs on 30th March, 2019 notified Ind AS 116 –
Leases. Under Ind AS 116 lessees have to recognise a lease
liability reflecting future lease payments and a ‘right-of-use asset’ for
almost all lease contracts. This is a significant change compared to Ind AS 17,
under which lessees were required to make a distinction between a finance lease
(on balance sheet) and an operating lease (off balance sheet). Ind AS 116 also
gives lessees optional exemptions for certain short-term leases and leases of
low-value assets.

 

Given below are
disclosures by a few companies for the above.

 

TCS LTD. (consolidated)

 

From
Notes forming part of Financial Statements

LEASES

A contract is, or contains, a lease if the
contract conveys the right to control the use of an identified asset for a
period of time in exchange for consideration.

 

Group as a lessee

The Group accounts for each lease component
within the contract as a lease separately from non-lease components of the
contract and allocates the consideration in the contract to each lease
component on the basis of the relative stand-alone price of the lease component
and the aggregate stand-alone price of the non-lease components. The Group
recognises right-of-use asset representing its right to use the underlying
asset for the lease term at the lease commencement date. The cost of the
right-of-use asset measured at inception shall comprise of the amount of the
initial measurement of the lease liability adjusted for any lease payments made
at or before the commencement date less any lease incentives received, plus any
initial direct costs incurred and an estimate of costs to be incurred by the
lessee in dismantling and removing the underlying asset or restoring the
underlying asset or site on which it is located. The right-of-use asset is
subsequently measured at cost less any accumulated depreciation, accumulated
impairment losses, if any, and adjusted for any re-measurement of the lease
liability. The right-of-use asset is depreciated using the straight-line method
from the commencement date over the shorter of lease term or useful life of
right-of-use asset. The estimated useful lives of right-of-use assets are
determined on the same basis as those of property, plant and equipment.
Right-of-use assets are tested for impairment whenever there is any indication
that their carrying amounts may not be recoverable. Impairment loss, if any, is
recognised in the statement of profit and loss.

 

The Group measures the lease liability at
the present value of the lease payments that are not paid at the commencement
date of the lease. The lease payments are discounted using the interest rate
implicit in the lease, if that rate can be readily determined. If that rate
cannot be readily determined, the Group uses incremental borrowing rate. For
leases with reasonably similar characteristics, the Group, on a lease-by-lease
basis, may adopt either the incremental borrowing rate specific to the lease or
the incremental borrowing rate for the portfolio as a whole. The lease payments
shall include fixed payments, variable lease payments, residual value
guarantees, exercise price of a purchase option where the Group is reasonably
certain to exercise that option and payments of penalties for terminating the
lease, if the lease term reflects the lessee exercising an option to terminate
the lease. The lease liability is subsequently re-measured by increasing the
carrying amount to reflect interest on the lease liability, reducing the
carrying amount to reflect the lease payments made and re-measuring the
carrying amount to reflect any reassessment or lease modifications or to
reflect revised in-substance fixed lease payments.

The Group recognises the amount of the re-measurement
of lease liability due to modification as an adjustment to the right-of-use
asset and statement of profit and loss depending upon the nature of
modification. Where the carrying amount of the right-of-use asset is reduced to
zero and there is a further reduction in the measurement of the lease
liability, the Group recognises any remaining amount of the re-measurement in
statement of profit and loss. The Group has elected not to apply the
requirements of Ind AS 116 – Leases to short-term leases of all assets
that have a lease term of 12 months or less and leases for which the underlying
asset is of low value. The lease payments associated with these leases are
recognised as an expense on a straight-line basis over the lease term.

 

GROUP AS A LESSOR

At the inception of the lease the Group
classifies each of its leases as either an operating lease or a finance lease.
The Group recognises lease payments received under operating leases as income
on a straight-line basis over the lease term. In case of a finance lease,
finance income is recognised over the lease term based on a pattern reflecting
a constant periodic rate of return on the lessor’s net investment in the lease.
When the Group is an intermediate lessor, it accounts for its interests in the head
lease and the sub-lease separately. It assesses the lease classification of a
sub-lease with reference to the right-of-use asset arising from the head lease,
not with reference to the underlying asset. If a head lease is a short-term
lease to which the Group applies the exemption described above, then it
classifies the sub-lease as an operating lease. If an arrangement contains
lease and non-lease components, the Group applies Ind AS 115 – Revenue
from contracts with customers to allocate the consideration in the contract.

 

TRANSITION TO IND AS 116

The Ministry of Corporate Affairs (‘MCA’)
through the Companies (Indian Accounting Standards) Amendment Rules, 2019 and
the Companies (Indian Accounting Standards) Second Amendment Rules, has
notified Ind AS 116 – Leases which replaces the existing lease standard,
Ind AS 17 – Leases and other interpretations. Ind AS 116 sets out the
principles for the recognition, measurement, presentation and disclosure of
leases for both lessees and lessors. It introduces a single, on-balance sheet
lease accounting model for lessees. The Group has adopted Ind AS 116, effective
annual reporting period beginning 1st April, 2019 and applied the
standard to its leases retrospectively, with the cumulative effect of initially
applying the standard, recognised on the date of initial application (1st
April, 2019). Accordingly, the Group has not restated comparative information;
instead, the cumulative effect of initially applying this standard has been
recognised as an adjustment to the opening balance of retained earnings as on 1st
April, 2019. Refer Note 2(h) – Significant accounting policies – Leases in the
Annual report of the Group for the year ended 31st March, 2019, for
the policy as per Ind AS 17.

 

GROUP AS A LESSEE

 

Operating leases

For transition, the Group has elected not to
apply the requirements of Ind AS 116 to leases which are expiring within 12
months from the date of transition by class of asset and leases for which the
underlying asset is of low value on a lease-by-lease basis. The Group has also
used the practical expedient provided by the standard when applying Ind AS 116
to leases previously classified as operating leases under Ind AS 17 and
therefore, has not reassessed whether a contract, is or contains a lease, at
the date of initial application, relied on its assessment of whether leases are
onerous, applying Ind AS 37 immediately before the date of initial application
as an alternative to performing an impairment review, excluded initial direct
costs from measuring the right-of-use asset at the date of initial application
and used hindsight when determining the lease term if the contract contains
options to extend or terminate the lease. The Group has used a single discount
rate to a portfolio of leases with similar characteristics.

 

On transition,
the Group recognised a lease liability measured at the present value of the
remaining lease payments. The right-of-use asset is recognised at its carrying
amount as if the standard had been applied since the commencement of the lease,
but discounted using the lessee’s incremental borrowing rate as at 1st April,
2019. Accordingly, a right-of-use asset of Rs. 6,360 crores and lease liability
of Rs. 6,831 crores has been recognised. The cumulative effect on transition in
retained earnings net of taxes is Rs. 359 crores (including the deferred tax of
Rs. 170 crores). The principal portion of the lease payments has been disclosed
under cash flow from financing activities. The lease payments for operating
leases as per Ind AS 17 – Leases were earlier reported under cash flow
from operating activities. The weighted average incremental borrowing rate of
6.78% has been applied to lease liabilities recognised in the balance sheet at
the date of initial application. On application of Ind AS 116, the nature of
expenses has changed from lease rent in previous periods to depreciation cost
for the right-of-use asset, and finance cost for interest accrued on lease
liability. The difference between the future minimum lease rental commitments
towards non-cancellable operating leases and finance leases reported as at 31st
March, 2019 compared to the lease liability as accounted as at 1st
April, 2019 is primarily due to inclusion of present value of the lease
payments for the cancellable term of the leases, reduction due to discounting
of the lease liabilities as per the requirement of Ind AS 116 and exclusion of
the commitments for the leases to which the Group has chosen to apply the
practical expedient as per the standard.

 

Finance lease

The Group has leases that were classified as
finance leases applying Ind AS 17. For such leases, the carrying amount of the
right-of-use asset and the lease liability at the date of initial application
of Ind AS 116 is the carrying amount of the lease asset and lease liability on
the transition date as measured applying Ind AS 17. Accordingly, an amount of
Rs. 31 crores has been reclassified from property, plant and equipment to
right-of-use assets. An amount of Rs. 18 crores has been reclassified from
other current financial liabilities to lease liability – current and an amount
of Rs. 44 crores has been reclassified from borrowings – non-current to lease
liability – non-current.

 

Group as a lessor

The Group is not required to make any
adjustments on transition to Ind AS 116 for leases in which it acts as a
lessor, except for a sub-lease. The Group accounted for its leases in
accordance with Ind AS 116 from the date of initial application. The Group does
not have any significant impact on account of sub-lease on the application of
this standard.

 

Details of the right-to-use assets held by
the Group are as follows:

(Rs. crores)

Particulars

Additions for the year
ended 31st March, 2020

Net carrying amount as
at 31st March, 2020

Leasehold Land

474

690

Buildings

2,443

7,218

Leasehold Improvements

15

46

Computer Equipment

7

13

Vehicles

5

16

Office Equipment

7

11

 

2,951

7,994

 

Depreciation on right-of-use assets is as
follows:

(Rs. crores)

Particulars

Year ended 31st March,
2020

Leasehold Land

4

Buildings

1,225

Leasehold Improvements

10

Computer Equipment

17

Vehicles

10

Office Equipment

2

 

1,268

 

 

The Group incurred Rs. 392 crores for the
year ended 31st March, 2020 towards expenses relating to short-term
leases and leases of low-value assets. The total cash outflow for leases is Rs.
2,465 crores for the year ended 31st March, 2020, including cash
outflow of short-term leases and leases of low-value assets. The Group has
lease term extension options that are not reflected in the measurement of lease
liabilities. The present value of future cash outflows for such extension
periods as at
31st March, 2020 is Rs. 457 crores.

 

Lease contracts entered by the Group majorly
pertain to buildings taken on lease to conduct its business in the ordinary
course. The Group does not have any lease restrictions and commitment towards
variable rent as per the contract.

 

IMPACT OF COVID-19

The Group does not foresee any large-scale
contraction in demand which could result in significant down-sizing of its
employee base rendering the physical infrastructure redundant. The leases that
the Group has entered with lessors towards properties used as delivery centres
/ sales offices are long term in nature and no changes in terms of those leases
are expected due to Covid-19.

 

From
Auditors’ Report (consolidated)

Key Audit
Matters

 

Key
Audit Matters

How
our audit addressed the key audit matter

Adoption of Ind AS 116 – Leases

As described in Note 9 to the consolidated financial
statements, the Group has adopted Ind AS 116 – Leases (Ind AS 116) in
the current year. The application and transition to this accounting standard
is complex and is an area of focus in our audit since

Our audit procedures on adoption of Ind AS 116 include:

 

u
Assessed and tested new processes and
controls in respect of the lease accounting standard (Ind AS 116);

the Group has a large number of leases with different
contractual terms

 

Ind AS 116 introduces a new lease accounting model, wherein
lessees are required to recognise a right-of-use (ROU) asset and a lease
liability arising from a lease on the balance sheet. The lease liabilities
are initially measured by discounting future lease payments during the lease
term as per the contract / arrangement. Adoption of the standard involves
significant judgements and estimates, including determination of the discount
rates and the lease term

 

Additionally, the standard mandates detailed disclosures in
respect of transition

 

Refer Note 5(h) and Note 9 to the consolidated financial
statements

 

 

u Assessed the Group’s evaluation on the
identification of leases based on the contractual agreements and our
knowledge of the business;

 

u Involved our specialists to evaluate
the reasonableness of the discount rates applied in determining the lease
liabilities;

 

u Upon transition as at 1st
April, 2019:

 

• Evaluated the method of transition and related adjustments;

 

• Tested completeness of the lease data by reconciling the
Group’s operating lease commitments to data used in computing ROU asset and
the lease liabilities

 

u On a statistical sample, we performed
the following procedures:

 

u
assessed the key terms and conditions of
each lease with the underlying lease contracts; and

 

u evaluated computation of lease
liabilities and challenged the key estimates, such as discount rates and the
lease term

 

u Assessed and tested the presentation
and disclosures relating to Ind AS 116, including disclosures relating to
transition

 

 

HINDUSTAN UNILEVER LTD. (standalone)

 

From
Notes forming part of Financial Statements

LEASES

The Company has adopted Ind AS 116 – Leases
effective 1st April, 2019 using the modified retrospective method.
The Company has applied the standard to its leases with the cumulative impact
recognised on the date of initial application (1st April, 2019).
Accordingly, previous period information has not been restated.

 

The Company’s lease asset classes primarily
consist of leases for Land and Buildings and Plant & Machinery. The Company
assesses whether a contract is or contains a lease at inception of a contract.
A contract is, or contains, a lease if the contract conveys the right to
control the use of an identified asset for a period of time in exchange for
consideration. To assess whether a contract conveys the right to control the
use of an identified asset, the Company assesses whether:

 

(i)   the contract involves the use of an identified
asset,

(ii) the Company has substantially all of the
economic benefits from use of the asset through the period of the lease, and

(iii) the Company has the right to direct the use of
the asset.

 

At the date of commencement of the lease,
the Company recognises a right-of-use asset (‘ROU’) and a corresponding lease
liability for all lease arrangements in which it is a lessee, except for leases
with a term of twelve months or less (short-term leases) and leases of
low-value assets. For these short-term and leases of low-value assets, the
Company recognises the lease payments as an operating expense on a
straight-line basis over the term of the lease.

 

The right-of-use assets are initially
recognised at cost, which comprises the initial amount of the lease liability
adjusted for any lease payments made at or prior to the commencement date of
the lease plus any initial direct costs less any lease incentives. They are
subsequently measured at cost less accumulated depreciation and impairment
losses, if any. Right-of-use assets are depreciated from the commencement date
on a straight-line basis over the shorter of the lease term and useful life of
the underlying asset.

 

The lease liability is initially measured at
the present value of the future lease payments. The lease payments are
discounted using the interest rate implicit in the lease or, if not readily
determinable, using the incremental borrowing rates. The lease liability is
subsequently re-measured by increasing the carrying amount to reflect interest
on the lease liability, reducing the carrying amount to reflect the lease
payments made.

 

A lease liability is re-measured upon the
occurrence of certain events such as a change in the lease term or a change in
an index or rate used to determine lease payments. The re-measurement normally
also adjusts the leased assets.

 

Lease liability and ROU asset have been
separately presented in the balance sheet and lease payments have been
classified as financing cash flows.

 

Following are the lease assets of the
Company:

(Rs. crores)

Particulars

Leasehold Land

Land & Building

Plant & Equipment

Total

Movements during the year

 

 

 

 

Balance as at 31st March, 2019

27

27

Addition on account of transition to Ind AS 116 –
1st April, 2019

146

527

673

Additions

268

212

480

Disposals

(2)

(98)

(34)

(134)

Balance as at 31st March, 2020

25

316

705

1,046

Accumulated Depreciation

 

 

 

 

Additions

0

159

196

355

Disposals

(82)

(27)

(109)

Balance as at 31st March, 2020

0

77

169

246

Net Block as at 31st March, 2020

25

239

536

800

 

 

Notes:

(a) The Company has adopted Ind AS 116
effective 1st April, 2019 using the modified retrospective method.
The Company has applied the standard to its leases with the cumulative impact
recognised on the date of initial application (1st April, 2019).
Accordingly, previous period information has not been restated.

 

This has resulted in recognising a
right-of-use asset of Rs. 673 crores and a corresponding lease liability of Rs.
725 crores. The difference of Rs. 35 crores (net of deferred tax asset created
of Rs. 17 crores) has been adjusted to retained earnings as at 1st April,
2019.

 

In the statement of profit and loss for the
current year, operating lease expenses which were recognised as other expenses
in previous periods is now recognised as depreciation expense for the
right-of-use asset and finance cost for interest accrued on lease liability.
The adoption of this standard did not have any significant impact on the profit
for the year and earnings per share. The weighted average incremental borrowing
rate of 8.5% has been applied to lease liabilities recognised in the balance
sheet at the date of initial application.

 

(b) The Company incurred Rs. 102 crores for
the year ended 31st March, 2020 towards expenses relating to
short-term leases and leases of low-value assets. The total cash outflow for
leases is Rs. 528 crores for the year ended 31st March, 2020,
including cash outflow of short-term leases and leases of low-value assets.
Interest on lease liabilities is Rs. 74 crores for the year.

 

(c) The Company’s leases mainly comprise of
land and buildings and plant and equipment. The Company leases land and
buildings for manufacturing and warehouse facilities. The Company also has
leases for equipment.

 

(d) The title deeds of leasehold land, net
block aggregating Rs. 1 crore (31st March, 2019: Rs. 1 crore) are in
the process of perfection of title.

 

INFOSYS LTD. (consolidated)

 

From
Notes forming part of Financial Statements

LEASES

Ind AS 116 requires lessees to determine the
lease term as the non-cancellable period of a lease adjusted with any option to
extend or terminate the lease, if the use of such option is reasonably certain.
The Group makes an assessment on the expected lease term on a lease-by-lease
basis and thereby assesses whether it is reasonably certain that any options to
extend or terminate the contract will be exercised. In evaluating the lease
term, the Company considers factors such as any significant leasehold
improvements undertaken over the lease term, costs relating to the termination
of the lease and the importance of the underlying asset to Infosys’s operations
taking into account the location of the underlying asset and the availability
of suitable alternatives. The lease term in future periods is reassessed to
ensure that it reflects the current economic circumstances. After considering current
and future economic conditions, the Group has concluded that no changes are
required to the lease periods relating to the existing lease contracts (refer
to Note 2.19).

 

Note 2.19 Leases

 

ACCOUNTING POLICY

The Group as a lessee

The Group’s lease asset classes primarily
consist of leases for land and buildings. The Group assesses whether a contract
contains a lease at the inception of a contract. A contract is, or contains, a
lease if the contract conveys the right to control the use of an identified asset
for a period of time in exchange for consideration. To assess whether a
contract conveys the right to control the use of an identified asset, the Group
assesses whether:

 

(i)   the contract involves the use of an identified
asset;

 

(ii) the Group has substantially all of the economic
benefits from use of the asset through the period of the lease, and

 

(iii) the Group has the right to direct the use of
the asset.

 

At the date of commencement of the lease,
the Group recognises a right-of-use (ROU) asset and a corresponding lease
liability for all lease arrangements in which it is a lessee, except for leases
with a term of 12 months or less (short-term leases) and low-value leases. For
these short-term and low-value leases, the Group recognises the lease payments
as an operating expense on a straight-line basis over the term of the lease.

 

Certain lease arrangements include the
option to extend or terminate the lease before the end of the lease term. ROU
assets and lease liabilities include these options when it is reasonably
certain that they will be exercised.

 

The ROU assets are initially recognised at
cost, which comprises the initial amount of the lease liability adjusted for
any lease payments made at or prior to the commencement date of the lease plus
any initial direct costs less any lease incentives. They are subsequently
measured at cost less accumulated depreciation and impairment losses.

 

ROU assets are depreciated from the
commencement date on a straight-line basis over the shorter of the lease term
and useful life of the underlying asset. ROU assets are evaluated for
recoverability whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. For the purpose of impairment testing,
the recoverable amount (i.e. the higher of the fair value less cost to sell and
the value-in-use) is determined on an individual asset basis unless the asset
does not generate cash flows that are largely independent of those from other
assets. In such cases, the recoverable amount is determined for the CGU to
which the asset belongs.

 

The lease liability is initially measured at
amortised cost at the present value of the future lease payments. The lease
payments are discounted using the interest rate implicit in the lease or, if
not readily determinable, using the incremental borrowing rates in the country
of domicile of the leases. Lease liabilities are re-measured with a
corresponding adjustment to the related right of use asset if the Group changes
its assessment of whether it will exercise an extension or a termination
option. Lease liability and ROU asset have been separately presented in the
balance sheet and lease payments have been classified as financing cash flows.

 

The Group as a lessor

Leases for which the Group is a lessor are
classified as a finance or operating lease. Whenever the terms of the lease
transfer substantially all the risks and rewards of ownership to the lessee,
the contract is classified as a finance lease. All other leases are classified
as operating leases.

 

When the Group is an intermediate lessor, it
accounts for its interests in the head lease and the sub-lease separately. The
sub-lease is classified as a finance or operating lease by reference to the ROU
asset arising from the head lease.

 

For operating leases, rental income is
recognised on a straight-line basis over the term of the relevant lease.

 

Transition

Effective 1st April, 2019, the
Group adopted Ind AS 116 – Leases and applied the standard to all lease
contracts existing on 1st April, 2019 using the modified
retrospective method and has taken the cumulative adjustment to retained
earnings, on the date of initial application. Consequently, the Group recorded
the lease liability at the present value of the lease payments discounted at
the incremental borrowing rate and the ROU asset at its carrying amount as if
the standard had been applied since the commencement date of the lease, but
discounted at the lessee’s incremental borrowing rate at the date of initial
application. Comparatives as at and for the year ended 31st March,
2019 have not been retrospectively adjusted and therefore will continue to be
reported under the accounting policies included as part of our Annual Report
for the year ended 31st March, 2019.

 

On transition, the adoption of the new
standard resulted in recognition of ‘Right of Use’ asset of Rs. 2,907 crores,
‘Net investment in sub-lease’ of ROU asset of Rs. 430 crores and a lease
liability of Rs. 3,598 crores. The cumulative effect of applying the standard,
amounting to Rs. 40 crores was debited to retained earnings, net of taxes. The
effect of this adoption is insignificant on the profit before tax, profit for
the period and earnings per share. Ind AS 116 has resulted in an increase in
cash inflows from operating activities and an increase in cash outflows from
financing activities on account of lease payments.

 

The following is the summary of practical
expedients elected on initial application:

 

(1) Applied a single discount rate to a portfolio
of leases of similar assets in similar economic environment with a similar end
date;

(2) Applied the exemption not to recognise ROU
assets and liabilities for leases with less than 12 months of lease term on the
date of initial application;

(3) Excluded the initial direct costs from the
measurement of the right-of-use asset at the date of initial application;

(4) Applied the practical expedient to grandfather
the assessment of which transactions are leases. Accordingly, Ind AS 116 is
applied only to contracts that were previously identified as leases under Ind
AS 17.

 

The difference
between the lease obligation recorded as of 31st March, 2019 under
Ind AS 17 disclosed under Note 2.19 of the 2019 Annual Report and the value of
the lease liability as of 1st April, 2019 is primarily on account of
inclusion of extension and termination options reasonably certain to be
exercised, in measuring the lease liability in accordance with Ind AS 116 and
discounting the lease liabilities to the present value under Ind AS 116. The
weighted average incremental borrowing rate applied to lease liabilities as at
1st April, 2019 is 4.5%. The changes in the carrying value of right
of use assets for the year ended 31st March, 2020 are as follows:

(Rs. crores)

Particulars

Category
of ROU asset

Total

Land

Buildings

Vehicles

Companies

Balance as of
1st April, 2019

2,898

9

2,907

Reclassified on account of adoption of Ind AS 116

634

634

Additions (1)

1

1,064

6

49

1,120

Additions through business combination

177

10

187

Deletions

(3)

(130)

(1)

(134)

Depreciation

(6)

(540)

(9)

(8)

(563)

Translation difference

16

1

17

Balance as of 31st March, 2020

626

3,485

15

42

4,168

(1) Net
of lease incentives of Rs. 115 crores related to lease of buildings

 

The break-up of current and non-current
lease liabilities as on 31st March, 2020 is as follows:

(Rs. crores)

Particulars

Amount

Current lease liabilities

619

Non-current lease liabilities

4,014

Total

4,633

 

 

The movement in lease liabilities during the
year ended 31st March, 2020 is as follows:

(Rs. crores)

Particulars

Year ended
31st March, 2020

Balance at the beginning

3,598

Additions

1,241

Additions through business combination

224

Deletions

(145)

Finance cost accrued during the period

170

Payment of lease liabilities

(639)

Translation difference

184

Balance at the end

4,633

 

The details regarding the contractual
maturities of lease liabilities as of 31st March, 2020 on an
undiscounted basis are as follows:

 

(Rs. crores)

 

Particulars

Amount

Less than one year

796

One to five years

2,599

More than five years

2,075

Total

5,470

 

The Group does not face a significant
liquidity risk with regard to its lease liabilities as the current assets are
sufficient to meet the obligations related to lease liabilities as and when
they fall due.

 

Rental expense recorded for short-term
leases was Rs. 89 crores for the year ended 31st March, 2020.

The aggregate depreciation on ROU assets has
been included under depreciation and amortisation expense in the Consolidated
Statement of Profit and Loss.

 

The movement in
the net investment in sub-lease of ROU assets during the year ended 31st
March, 2020 is as follows:

(Rs. crores)

Particulars

Year ended
31st March, 2020

Balance at the beginning

430

Interest income accrued during the period

15

Lease receipts

(46)

Translation difference

34

Balance at the end

433

 

The details regarding the contractual
maturities of net investment in sub-lease of ROU asset as on 31st March,
2020 on an undiscounted basis are as follows:

 

(Rs. crores)

Particulars

Amount

Less than one year

50

One to five years

217

More than five years

244

Total

511

 

 

Leases not yet commenced to which Group is
committed are Rs. 655 crores for a lease term ranging from two to thirteen
years.

 

ETHICS AND U

Arjun: Hari
Om Hari! Hari Om Hari! Hey
Bhagwan, when is this lockdown going to
end? When will this Corona go away?

 

Shrikrishna:
Arjun, open your eyes. You are chanting my bhajan and murmuring
something. Hope everything is fine at home?

 

Arjun:
At home? I am fed up of this house arrest. Both Draupadi and Subhadra are
making me do all the household work. Sweeping the floor, cleaning the utensils,
helping in cooking…

 

Shrikrishna:
But you are familiar with all this!

 

Arjun:
What do you mean?

 

Shrikrishna:
You yourself keep saying – in office, you have to clean up the mess in the
clients’ accounts, you have to window-dress them and make them presentable…

 

Arjun:
Ha! Ha! True. But tell me, when are our offices going to restart functioning?

 

Shrikrishna:
Why? Do you think that you cannot function from home? You people talk of Work
from Home, don’t you?

 

Arjun:
Yes, but there is a limit to that. Work cannot be completed sitting at home.
Our staff is not available, clients’ data is not coming since their accountants
are also not attending work. Everything is paralysed.

 

Shrikrishna:
But in your management studies, you talk of converting problems into
opportunities. Now why don’t you implement those great ideas?

 

Arjun: All
that is all right in seminars in posh hotels. In practical life, it is
difficult.

 

Shrikrishna:
But have you even applied your mind to what fruitful things could be done?
There are many new things coming up in the field of ethics. Those are all very
essential for you to understand.

Arjun:
Really? How can I know them? Tell me some highlights at least.

 

Shrikrishna:
Arjun, during this lockdown, I have been meeting people almost every day and
telling them the principles of ethics.

 

Arjun: Don’t tell me! Then why
didn’t you come to my house?

 

Shrikrishna:
Arjun, on your television sets I am coming so frequently in different forms and
characters, Vishnu, Ram, Krishna, Yudhishthira, Bhishma through all those
serials. There I teach nothing but ethics.

 

Arjun: Yes.
But those serials are meant for children and retired people. Practical life
mein uska koi fayda nahi!

 

Shrikrishna:
You are mistaken, Paarth. Now, even internationally your ethics are
getting strengthened. Finance field mein paap bahut badh gaya hai. It
was you peoples’ job to control it, but instead you encouraged it. In
Mahabharata you Pandavas fought against the Kauravas; but now you are acting
hand-in-glove with them.

 

Arjun: Just
as you preached me the Geeta in the Mahabharata war, please explain to
me what is the new Geeta in our Code of Ethics.

 

Shrikrishna:
For this, you should know that your Institute has come out with three new
volumes of books on New Code of Ethics. The First Volume covers the
International Ethical Standards adapted by the Institute. It was earlier known
as Part A.

 

Arjun:
And the other two volumes?

 

Shrikrishna:
The Second Volume is the old Part B, but significantly revised. It contains
your CA Act, Rules, Regulations, ICAI pronouncements, notifications, guidelines
and so on, on ethics. And Volume 3 is the compilation of case laws.

 

Arjun:
Oh! So much new literature! But tell me any single item which is very
important.

Shrikrishna: One point
directly relevant to you is that now you can communicate with the previous
auditor on email. Earlier, only registered post was allowed or recommended.

 

Arjun:
But which email ID?

 

Shrikrishna:
The ID which is registered with the ICAI. In case you mail on his
ID known to you, but the previous auditor does not respond to your email, you
can get the ID from the ICAI.

 

Arjun:
Anything more important on this formality?

 

Shrikrishna:
This is not a mere formality. It is to protect your own interest. Further, if
the incoming auditor inquires about any negative findings in the audit, the
previous auditor is duty-bound to supply the important points to the incoming
auditor.

 

Arjun: Oh!

 

Shrikrishna:
Are you aware that during the lockdown the focus of all your
webinars has been on Ethics and Standards on Auditing (SAs). This has become
mandatory in your CPE hours.

 

Arjun:
I heard of this. But who has time to listen to all these things!

 

Shrikrishna:
Arrey!
Just now you were saying you are sitting idle at home. Then why
don’t you listen to these useful presentations? You people ‘manage’ even your
CPE hours by just joining the webinars but never seriously listening.

 

Arjun:
Yes, Lord. What you say is right. But in our next few meetings please tell me
the highlights of this new Code of Ethics.

 

Shrikrishna:
Yes, Paarth. It will be my pleasure to do so.

 

Om Shanti

This
dialogue is based on the basic idea of the New Code of Ethics which is expected
to be effective from 1st July, 2020. The next few write-ups will be
on important contents of the New Code.
 

 

CORPORATE LAW CORNER

6. Mahesh Sureka vs. Marathe Hospitality [2020] 116 taxmann.com 552 (NCLT-Mum.) C.P.(IB) No. 3603/(MB)/2018 Date of order: 20th March, 2020

 

Section 238 of the Insolvency and
Bankruptcy Code, 2016 – Assets attached by EOW were to be released in favour of
RP as non-obstante clause appearing in the later legislation would
precede the former – Transfer of assets to a partnership firm (where one of the
partners was a tax adviser of the corporate debtor) for an inadequate
consideration without prior consent of the mortgagee was a fraudulent
transaction and was set aside

 

FACTS

Insolvency
proceedings were admitted against the corporate debtor P Co on 14th
March, 2018 on an application filed by U Bank (the ‘Financial Creditor’). One
of the properties of the corporate debtor was financed by way of mortgage by U
Bank. The corporate debtor had leased the said property to MH (a partnership
firm) on a long-term basis for a sum of Rs. 25,000 per month vide lease
deed dated 18th May, 2016. Mr. AN, who was a partner in MH, was also
a tax adviser to the corporate debtor. Further, the said property was leased to
MH without obtaining the prior approval of U Bank.

 

The Resolution Professional (RP) learned
that one of the directors of the corporate debtor was in jail (in judicial
custody) and that the Economic Offences Wing (EOW) had attached several of the
properties of the corporate debtor which included its registered office. The RP
mentioned that due to the attachment of the registered office of the corporate
debtor and unavailability of the Directors and other staff members, it was
impossible to prepare essential details of the assets and liabilities of the
corporate debtor. The property mentioned above was also attached by the EOW.

 

Mr. AN contended that although it was the
duty of the corporate debtor before giving the said property on lease to seek
prior permission of U Bank, MH could not be prejudiced for the wrong-doings of
the corporate debtor. Further, as per section 46 of the Insolvency and
Bankruptcy Code, 2016 (the Code) the relevant time for avoidance of undervalued
transaction was one year prior to commencement of the Corporate Insolvency
Resolution Process (CIRP) of the corporate debtor. It was pleaded that since
the said lease agreement was entered into on 18th May, 2016, and
hence was beyond the one-year period from the CIRP commencement date, it could
not be covered u/s 46 of the Code.

 

HELD

The Tribunal heard both the parties at
length. It observed that the lease rental for a period of ten years was a
paltry sum of Rs. 25,000 per month payable by the 10th of the subsequent month
and that the lease could be renewed for a further period by the lessee as per
the said agreement. The fact that Mr. AN was a partner in MH and a tax adviser
to the corporate debtor indicated that it was a case of preferred transaction.
The fact that there was no provision for an annual increment and the extension
was only at the prerogative of the lessee, leads to the conclusion that the
transaction was a fraudulent one.

 

The Tribunal
relied on the provisions of section 65A(2)(c) of the Transfer of Property Act,
1882 which provided that no lease shall contain a covenant for ‘renewal’. It
was observed that the lease agreement of the corporate debtor with a related
party MH provided for a total rent of a sum of Rs. 25,000 per month in respect
of huge commercial property measuring about 2,310 sq. metres along with a
two-storey building structure with no increase in rental for a period of ten
years. In addition, as per the lease agreement, there was a provision for
further extension at the will of the lessee. In view of this, the lease
agreement entered into between the corporate debtor and MH was held to be
illegal as per the relevant provisions of the Transfer of Property Act, 1882.

 

Besides, the mortgage deed signed by the
corporate debtor with U Bank provided that the corporate debtor could not let
or license its interest in the said property, or part with its possession,
unless it obtained the written consent of U Bank. Since the said consent was
not obtained, the Tribunal held that the transaction of lease was invalid and mala
fide.

The NCLT observed that the attachment of the
assets of the corporate debtor by the EOW would hamper the claim of the
creditors of the corporate debtor. Thus, to protect the interest of the bank
and the present creditors, NCLT directed the EOW and other Government
Departments to release the property and assets of the corporate debtor
currently attached with them so that the CIRP of the corporate debtor could be
conducted in the substantial public interest.

 

In the context of section 238 of the Code
which has a non-obstante clause, the Tribunal relied on the decision of
the Supreme Court in the case of Solidaire India Ltd. vs. Fairgrowth
Financial Services Pvt. Ltd.
, wherein it was held that where two statutes
contain the non-obstante clause, the latest statute would prevail.

 

Thus, the lease agreement was held as null
and void and the attachment of assets by the EOW was directed to be released in
favour of the RP for carrying out the CIRP in the best interest of the
creditors of the corporate debtor.

 

7. American Road Technology & Solutions
(P) Ltd. vs. Central Government, Hyderabad
[2020] 115 taxmann.com 16 (NCL-Beng.) Date of order: 31st December,
2019

 

Where company filed application for
revision of financial statements in F.Y. 2017-18, three preceding years for
purpose of revision of financial statements would be 2016-17, 2015-16 and
2014-15 (which was one of the years in which incorrect financial reporting had
been detected and in respect of which approval for revision had been sought),
since a true and fair picture of company’s finances would not emerge for F.Y.
2014-15 unless financial statements for 2012-13 and 2013-14 were also revised –
Application for revision of financial statements for years 2012 to 2015 was to
be allowed

 

FACTS

Company A Pvt. Ltd., the applicant, was
incorporated in the year 2012 under the Companies Act, 1956 with the Registrar
of Companies, Karnataka at Bangalore. Its business was mainly carried out in
Bangalore.

 

During the year 2014-15, the majority
shareholder was informed by one of the ex-senior employees that the affairs of
A Pvt. Ltd. are not run as per the provisions of the Companies Act and the
applicable rules and regulations, and further that there were several financial
irregularities and even falsification of accounts has taken place.

 

The majority shareholder and A Pvt. Ltd.
decided to appoint an independent auditor to conduct a forensic audit of the
company. The independent auditor submitted his investigation report. This
report was examined internally and expert views were also taken in consultation
with the independent auditor and the statutory auditor.

 

The statutory auditors had opined that A
Pvt. Ltd.’s records need improvement to ensure controls which are not
commensurate with the size of the company and the nature of its business, with
regard to execution of contracts and raising invoices.

 

The findings of
the statutory auditor were incorporated in the annual returns filed for the
financial year 2014-15 and it was noted that suspicious transactions have taken
place and falsification of accounts has been done. It was noted that the annual
returns and balance sheets for the years 2012-13, 2013-14 and 2014-15 were
filed without even reconciling the bank statements with the actual activities
of the company that have taken place during the relevant period.

 

After consideration of the independent
auditor’s report, the management had lodged various criminal proceedings. The
statutory auditor has advised A Pvt. Ltd. to move u/s 131 of the Companies Act,
2013 for the accounts to be redrafted for the period and recasting of the books
for the periods 2015-16 and 2016-17 to incorporate the changes in the opening
balances, subject to ratification by members in a general meeting. Accordingly,
the present petition was filed before the Tribunal.

 

Based on above factual matrix, the Tribunal
ordered notices to be issued to the respondents, namely, the Registrar of
Companies, the Regional Director, the Income Tax Officer concerned and the
auditor of the company.

 

The regional director (RD) submitted that
the company has filed the application u/s 131 of the Companies Act, 2013 for
revision of financial statement and board reports for the Financial Years
2012-13, 2013-14 and 2014-15. The RD raised an interesting issue that the application is not made for revision of any of
the three immediately preceding financial years
but for all the earlier
years.
Hence the same does not fall under the provisions of section 131
of the Act and that, too, for revision of financial statements to reflect
suspicious transactions and falsification of accounts that had taken place in
the company.

As per the Regional Director, u/s 131(2) of
Companies Act, 2013 the revisions must be confined to – (a) The correction in
respect of which the previous financial statement or report do not comply with
the provisions of section 129 or section 134; and (b) The making of any necessary
consequential alteration. He further stated that the petitioner company has
sought blanket revision of financial statements for the years 2012-13, 2013-14
and 2014-15 without actually specifying or limiting itself to any particular
entry or disclosure. Hence the petition is not maintainable. Further, the RD
reiterated that it appears that the revision of financial statements based on
alleged fraud will not fall within the ambit of section 134 of the Companies
Act, 2013.

 

HELD

The Tribunal, after considering the
objections raised by the RD, observed as under:

(i) The petition seeks approval for
voluntary revision of financial statements and board reports for the financial
years 2012-13, 2013-14 and 2014-15.

(ii) It is the contention of A Pvt. Ltd. that
this provision permits it to voluntarily revise its accounts for any three
preceding financial years, whereas the other respondents in these proceedings
have opposed this view and stated that the same is permitted only for any of
the three immediately preceding financial years and not beyond.

 

Section 131 of the Act reads as under:

Voluntary Revision of Financial
Statements or Board’s Report:

(1) If it appears to the directors of a
company that –

(a) the financial statement of the
company; or

(b) the report of the Board

do not comply with the provisions of
section 129 or section 134 they may prepare revised financial statement or a
revised report in respect of any of the
three preceding financial years
after obtaining approval of the
Tribunal on an application made by the company in such form and manner as may
be prescribed and a copy of the order passed by the Tribunal shall be filed
with the Registrar…:’ (emphasis added).

 

The Tribunal observed that the petition is
filed on 22nd January, 2018 and falls within the F.Y. 2017-18.
Section 131, even going by the contention of the respondent that the words ‘in
respect of any of the three preceding financial years’ should mean
‘immediately’ preceding three financial years, then such preceding three
financial years would be 2016-17, 2015-16 and 2014-15. Thus, F.Y. 2014-15,
which is one of the years in which the incorrect financial reporting has been
detected and in respect of which approval for revision has been sought, is
squarely covered by section 131.

 

The Tribunal
further observed that when a balance sheet is drawn for a particular year, it
brings forward balances of the preceding year/s, and as such will necessarily
impact the balance sheet for the Y.E. 31st March, 2015, i.e., for
F.Y. 2014-15, and for this reason the years 2012-13 and 2013-14 will
necessarily have to be considered for revision of the accounts that are not
giving a true and fair picture of the accounts for these years, for the reasons
mentioned herein above. This accounting compulsion cannot be ignored.
Once this is made clear, the issue whether the accounts of the three F.Y.s
referred to in the petition could be revised or not in view of an
interpretation of section 131, becomes redundant and of mere academic interest.

 

In section 131
the term ‘immediately preceding’ is not used. Instead, the section speaks of ‘any
of the three preceding financial years
‘.

 

In order to
determine the intent of the Legislature, it is necessary to look into the 57th
Report of the Standing Committee on Finance on the Companies Bill, 2011. The
relevant portion of the said Report of the Standing Committee is extracted
below:

 

‘The change
proposes to provide procedural requirement in respect of revision in
accounts in certain cases. The present law is silent in respect of re-opening
or re-casting of accounts. In certain cases, particularly in cases relating
to fraud, there may be need to re-open / re-cast accounts to reflect true and
fair accounts.
In case of Satyam, such re-casting was ordered
by the Court. The provisions in the Bill mandate such re-opening on the order
of the Court or Tribunal. In other cases the re-opening is being permitted,
through order of Tribunal, with adequate safeguards.’ (Emphasis supplied.)

 

The Tribunal
further observed that considering that the thrust of several provisions of the
Act is either to prevent financial misdemeanour or oppression and
mismanagement, all such provisions need to be understood and interpreted in
this light.

 

Since the
instant case is prima facie that of mismanagement, misreporting and
alleged fraud, the Tribunal observed that the section has to be interpreted in
the spirit of the Act and the exercise of correcting the same cannot become a
victim of interpretation of allowable time. Such time limits can at best be considered
to be advisory and not mandatory, since the same is only a procedural
requirement, as mentioned in the Standing Committee Report.

 

Thus, the
Tribunal observed that the words ‘in respect of any of the three preceding
financial years
’ have to be read as any three previous years. It
further elaborated that even otherwise, the Tribunal is competent to initiate
reopening / revision of accounts u/s 130 in cases of the kind in hand, for
which no time limit is prescribed. It cannot be the case that if an application
is made u/s 131 where the grounds are similar to section 130, the accounts
prepared incorrectly, or when the affairs are
mismanaged, the revision of accounts would be prevented by any one view on time
limitation
. Hence, in view of the totality of facts and circumstances, all
three years, i.e. F.Y.s 2012-13, 2013-14 and 2014-15, would be covered for
revision, not only because of the accounting compulsion, since F.Y. 2014-15 is
in any case covered, and the earlier years’ accounts have a bearing on the
same, but also as per the provision contained in section 131 of the Act.

 

The Tribunal
accordingly held that in the facts and circumstances of the case, this is a fit
case for granting approval u/s 131 to prepare revised financial statements and
/ or revised reports in respect of the F.Y.s 2012-13, 2013-14 and 2014-15 in
the case of A Pvt. Ltd. and the same was accordingly granted.
 

 

Service Tax

 

I. HIGH COURT

 

15. [2020] 117 taxmann.com 46 (Mad.) MIOT Hospitals Ltd. vs. State of Tamil Nadu Date of order: 28th May, 2020

 

The medical
/ health care services that involve fitting out or implanting of prosthetics
into the physiology or the body of the patient for the alleviation of pain or
improvement of the life of the patient in the course of medical / surgical
procedure can be construed as ‘works contract’. At the same time, dispensing of
medicines to such patients while they undergo treatment as inpatients in the
hospital cannot come within the purview of the definition of ‘works contract’

 

FACTS

In this
writ petition, the issue before the High Court was whether private hospitals
are liable to pay VAT on the stents, valves, medicines, X-rays and other goods
used while treating the inhouse patients. The petitioner did not charge any
amount separately towards the cost of these items and charged a consolidated
amount to the patients towards the cost of medical treatments. The VAT
Department argued that purported deemed sale of stents, valves, hip replacement
and knee replacement, etc., in the course of the provision of medical services
by the petitioners is ‘works contract’ within the meaning of section 2(43) of
the Tamil Nadu Value Added Tax Act, 2006.

 

HELD

The High Court referred to
the 61st Law Commission Report and the decision of the Hon’ble
Supreme Court in the case of Larsen & Toubro Ltd. vs. State of
Karnataka and Ors. [2013] 65 VST 1 (SC)
to observe that the concept of
‘works contract’ contained in Article 366(29A)(b) takes within its fold all
genre of works contract and is not restricted to one species of contract to
provide for labour and service alone. Referring to the illustration in
paragraph 44 of the BSNL case, the Court held that although the
Supreme Court has held that sub-clauses of Article 366(29A) do not cover
hospital services, there is no legal basis to follow the said conclusion any
longer in the light of the subsequent decisions of the Apex Court. It further
held that a simple treatment with medicines cannot be equated with complicated
medical procedures undertaken by the petitioners involving skill and use of expensive
prosthetics and the use of laboratory testing equipment. Even if the dominant
intention of the contract was not to transfer the property in goods and rather
rendering of service, or the ultimate transaction was a transfer of movable
property, it is open to the states to levy sales tax on the materials used in
such contract if such contract otherwise has elements of a ‘works contract’.

 

In constitutional terms, it
is a transfer either in goods or in some other form. The Court distinguished
the decision in the case of the Tata Main Hospital case stating
the reason that the decision pertains to the period prior to the 46th
Constitutional Amendment and ‘dominant test’ does not survive thereafter in
respect of works contracts. The decision rendered by the full bench of the
Kerala High Court in the case of Aswini Hospital Pvt. Ltd. and Ors.
and the Allahabad High Court in the case of M/s International Hospital
Pvt. Ltd
. were disagreed with on the ground that there is no discussion
as to how the conclusions therein were arrived at when indeed the very purpose
expanding the scope of the expression ‘tax on the sale or purchase of goods’ in
Article 366(29A) by the 46th Amendment to the Constitution and the
corresponding statutory amendments to the definitions in the respective tax
enactments of the States, were to include a transaction which involves not only
sale but also deemed sale which was traditionally not considered as ‘sale’.

 

The Hon’ble Single Judge also
disagreed with the reasoning given in the decision of the Punjab & Haryana
High Court in M/s Fortis Healthcare Ltd. vs. State of Punjab on
the ground that it runs not only contrary to the express language in Article
366(29A) of the Constitution of India, but also to the ratio of the
Hon’ble Supreme Court in BSNL vs. Union of India (2003) 6 SCC 1
itself. It further held that an example / illustration in paragraphs 44 and 45
of the BSNL decision which appears to be the basis of the relief
in the four mentioned cases cannot be applied to the kind of hospital / medical
service provided by the petitioners. The Hon’ble Court also expressed a view
that in all the four judgments, these Courts have not examined the point of
view of ‘works contract’.

 

The Court accordingly held
that fitting out or implanting of prosthetics into the physiology or the body
of the patient for the alleviation of pain or improvement of the life of the
patient in the course of medical / surgical procedure can be construed as
‘works contract’. However, the Court also held that dispensing of medicines to
such patients while they undergo treatment as inpatients in the hospital cannot
come within the purview of the definition of ‘works contract’. Consequently, no
tax can be demanded on the value of such medicine.

 

Note:
At paragraph 149 of the Order, the Hon’ble Court has indicated that various
decisions relied upon by the petitioners dealing with taxability of single
economic supply, although not relevant in VAT regime due to the Constitutional
mandate of Article 366(29A), may become relevant in the GST regime. Therefore,
this decision may be distinguished while deciding the applicability of GST on
similar service.

 

II. TRIBUNAL

           

16. [2020-TIOL-870-CESTAT-Chd.] M/s DLF Project Ltd. vs. Commissioner of  Central Excise and Service Tax Date of order: 21st October, 2019

 

In absence
of consideration, no service tax is leviable on corporate guarantee given to
banks / financial institutions on behalf of holding company / associate
enterprises

 

FACTS

During the course of audit it
was found that the appellant has provided corporate guarantee to various banks
/ financial institutions on behalf of their holding companies / associate
enterprises / joint venture and other loan facilities. The Revenue alleges that
such activity is taxable under Banking and Finance Institution Services.
Further, the appellant has also collected certain charges on account of prime
location of the flats and other relevant charges from the flat owners but did
not pay service tax thereon. On pointing out by the Revenue, the entire amount
was paid with interest. Later, a show cause notice (SCN) was issued demanding
service tax on corporate guarantee and to impose penalty on account of
non-payment of service tax on preferential location charges. The demand was
confirmed and therefore the present appeal is filed.

 

HELD

The Tribunal primarily noted
that no consideration is received either from the financial institutions or
from their associates for providing corporate guarantee. It was also noted that
the demand raised in the SCN is on the basis of assumption and presumption,
presuming that their associates have received the loan facilities from the
financial institution at lower rate; therefore, the differential amount of
interest is consideration, but there is no such evidence produced by the
Revenue on service tax before or after 1st July, 2012. Further, with
reference to preferential location charges, since the tax and interest is paid
before the issuance of the SCN, section 73(3) of the Finance Act, 1994 is
applicable and the penalty is set aside.

 

17. [2020-TIOL-858-CESTAT-Bang.] Hotel Moti Mahal vs. Commissioner of Central Excise and Service
Tax Date of order: 29th May, 2020

 

Service tax
can only be levied when there is a service provider, service receiver and
consideration. It cannot be assumed that consideration is inbuilt merely on the
basis of assumptions and presumptions

           

FACTS

The appellants are a
restaurant having banquet halls. They sometimes charge only for the food served
and do not charge any rentals for the banquet halls. The argument of the
Department is that any prudent man can understand that without any function no
person can stay in the hotel for the entire day and have mid-morning tea with
biscuit, buffet lunch, evening tea with biscuit and dinner. Further, though no
separate rent was collected for the function hall, charges were recovered for
use of LCD projector, laptop, white board, mike system, podium, etc., and
service charge on the same was paid. The Revenue alleges that the organisation
of functions is evident by the usage of LCD projector, etc., and the rent for
the function hall is inbuilt in the value of the food served in the function;
and therefore service tax is liable to be paid on such rent.

           

HELD

The Tribunal primarily noted
that the demand is based on surmises and conjectures. The two major surmises
were that with the usage of LCD display, etc., it is evident that the banquet
halls were let out temporarily for a day and that the charges for the same are
inbuilt into the bill raised towards the food charges and this inbuilt value
needs to be treated as consideration towards the ‘Mandap Keeper’ services provided.

 

But the Tribunal held that it
is not open to the Revenue to decide the taxability of a new entry merely on
the basis of imagination. For any service to be held to be taxable there should
be a service provider, service recipient and consideration for the service. It
cannot be imagined that such consideration was inbuilt. It is incumbent upon
Revenue to show such consideration in quantifiable terms in order to levy
service tax, though on a discounted value. It was noted that they have
discharged VAT on the food supplied and have also discharged service tax on the
items like LCD projector, etc., allowed to be used. Revenue could not place any
proof in the form of a bill, etc., to substantiate the allegation that the
banquet halls were rented out for a consideration. Therefore, since the
Department’s stand is not substantiated, the appeal is allowed.

           

18. [2020-TIOL-824-CESTAT-Del.] Man Trucks India Pvt. Ltd. vs. CCE, C and ST Date of order: 24th February, 2020

           

Discount
extended against sales made for not providing after sales service is not a
service liable for service tax

           

FACTS

The assessee is engaged in
manufacturing heavy commercial vehicles falling under Chapter 87. It entered
into an agreement with a foreign company for supply of heavy commercial
vehicles. The transaction involved sale of heavy commercial vehicles by the
appellant to a company in Germany and thereafter by the latter to its buyers.
The agreement clearly provides that no after sales service would be provided.
Since the after sales service is to be provided by the foreign company itself,
they extended a price reduction to the foreign company on the sale of each
heavy commercial vehicle. A show cause notice was issued to the assessee,
proposing duty demand on the discounts allowed by the assessee for the relevant
period. The demand had been raised under reverse charge and on account of being
a declared service for agreeing to refrain from providing warranty services. On
adjudication, the demands were partly dropped. Hence the present appeal.

           

HELD

The Tribunal noted that the
assessee’s role is limited to the sale of trucks and spare parts thereof. The
agreement clearly provides that they would not be responsible for rendering any
after-sale services. The agreement provides that the assessee will provide a
discount in respect of any truck sold to the foreign company, it does not
entail that the foreign company is rendering after sales service on behalf of
the assessee. The after-sale service is agreed to be provided by the foreign
company on its own account. The discount offered is simply an adjustment in the
price of the goods sold and is not provision of any service. Thus the service
provided cannot be classified as business auxiliary service. The discount was
offered only because they were not providing warranty and after sales service.
Hence the demand cannot be sustained.

           

19. [2020-TIOL-807-CESTAT-Del.] M/s Shivani Textiles Ltd. vs. Commissioner of Central TaxDate of order: 13th March, 2020

           

VCES
application cannot be rejected merely on the ground of clerical errors

           

FACTS

The assessee made a clerical
error in filing the VCES application. As per the gross taxable receipts, the
gross tax payable including cess was calculated at Rs. 27,05,933. However, due
to an error, it failed to adjust or reduce the gross amount of tax payable with
the amount of tax already paid of Rs. 5,68,859 paid during the period 18th
October, 2012 to 29th March, 2013. Thus, the actual tax dues to be
reflected in Form VCES-1 should have been Rs. 27,05,933 (-) Rs. 5,68,859, or
Rs. 21,37,074. However, the appellant wrongly reflected Rs. 27,05,933.
Admittedly, it deposited Rs. 14,28,439 on or before 31st December,
2013 which is a little more than the amount of Rs. 13,52,967 required to be
deposited as per Form VCES-2, and an amount of Rs. 12,77,497 during the period
1st January, 2014 to 30th June, 2014, which is also in
compliance with the deposit of full tax as required to be paid before 30th
June, 2014. Accordingly, against the amount payable of Rs. 27,05,933, it has
deposited Rs. 27,32,038.

 

HELD

The
Tribunal noted that the benefit of VCES 2013 has been denied by Revenue for the
simple clerical error in filling Form VCES-1. The assessee has admittedly
deposited the declared amount of tax dues and it cannot be asked to deposit
more tax which will be against the provisions of service tax law, as well as
Article 265 of the Constitution of India. Accordingly, the impugned order is
set aside and the benefit of the scheme is allowed to the assessee.

 

20. [2020] 117 taxmann.com 69 (CESTAT-Bang.) Karnataka Industrial Areas Development Board vs. CCT Date of order: 9th June, 2020

 

Karnataka
Industrial Areas Development Board is a statutory body discharging the
statutory function as per the KIAD Act, 1966 and hence is not liable to pay
service tax

 

FACTS

The appellant, M/s Karnataka
Industrial Areas Development Board (KIADB) is established by the Karnataka
Industrial Areas Development Act, 1966 (KIAD Act, 1966). They were engaged in
providing various services such as renting of immovable property services,
construction of commercial and residential complexes, business support
services, management, maintenance or repair services, manpower recruitment and
supply services, works contract services, etc., to various clients. It appeared
that they did not obtain any registration under service tax for the said
services. The appellant contended that they are performing sovereign functions
and hence are not liable to pay service tax.

 

HELD

The Hon’ble Tribunal examined
various provisions contained in the KIAD Act, including the Preamble, the
provisions dealing with the establishment and incorporation, constitution,
functions, powers of the board, directions of the state government, board’s
fund and application of the board’s assets, accounts and audit, etc. On
examination of the said provisions, the Tribunal held that the appellant is a
state undertaking and the creature of a statute to exercise the power of ’eminent
domain’. The appellant is engaged in discharging statutory functions under an
act of the Legislature, viz., the KIAD Act, 1966. It is a statutory body
performing statutory functions and exercising statutory powers. Since it is
carrying out the objectives of the Act, it cannot be treated as a service
provider under the Finance Act, 1994. The appellant has undertaken various
activities and functions in the state of Karnataka as per the directions of the
State Government given from time to time under the provisions of the Act and
hence its activities cannot be considered as a taxable service and no service
tax can be levied for these activities.

 

The Tribunal relied upon the
decision of the Bombay High Court in the case of CCE, Nashik vs.
Maharashtra Industrial Development Corporation [2018 (9) GSTL 372 (Bom.)]

and the Delhi Tribunal’s decision in the case of Employee Provident Fund
Organisation vs. CST [2017 (4) GSTL 294 (Tri.)(Del.)]
to hold that
statutory authorities performing statutory functions are not liable to pay
service tax. It observed that the functions of the MIDC under the MID Act, 1961
are more or less identical with the functions of the appellant KIADB under the
KIAD Act, 1966. Hence, relying on MIDC’s case, the Tribunal held that when the
maintenance of an industrial area itself is held to be a statutory function,
then the main function of acquisition of land, development of such land into
industrial area and allotment of such land on lease-cum-sale basis by the
appellant would certainly be a statutory function and does not attract levy of
service tax. By the same analogy, other functions being incidental cannot be
brought into the tax net.

 

The Tribunal did not follow
the decision of the Allahabad High Court in the case of the Greater Noida
Industrial Development Authority
on the ground that it has been stayed
by the Hon’ble Supreme Court as reported in 2015 (40) STR J231 (SC).
The Allahabad High Court had held that if the sovereign / public authority
provides a service, which is not in the nature of the statutory activity and
the same is undertaken for consideration (not statutory fee), then in such
cases, service tax would be leviable as long as the activity undertaken falls
within the scope of taxable service as defined in the Finance Act, 1994. It
also relied upon the decision in the case of KIADB and Anr. vs. Prakash
Dal Mill and others [(2011) 6 SCC 714]
wherein the Court observed that
the amount of fees and deposits collected by the KIADB is based on principles
of rationality and reasonableness. It cannot fix prices arbitrarily. The
fixation of price by the Board is always under the authority of law.

 

Lastly, referring to the
decisions in the case of Balmer Lawrie & Co. Ltd. vs. Partha Sarathi
Sen Roy [2013 (8) SCC 345]; MD, HSIDC vs. Hari Om Enterprises [AIR 2009 SC 218]
;
and Jilubhainanbhai Khachar vs. State of Gujarat [1995 Supp (1) SCC 596],
the Hon’ble Tribunal held that the ratio of the said decisions
considering the scope of ’eminent domain’ and sovereign function are applied to
the facts of the present case, and hence the appellant is a creature of the
statute to exercise the power of ’eminent domain’ and the eminent domain is a
sovereign function not attracting service tax.

 

21. [2020-TIOL-882-CESTAT-Chd.] Wave Beverages Pvt. Ltd. vs. Commissioner of Central Excise and
Service Tax Date of order: 26th February, 2020

           

The act of
promotion of beverage leads to incidental promotion of concentrate; however,
such promotion cannot be made liable to tax under business auxiliary service

 

FACTS

The appellants are engaged in
the distribution and sale of non-alcoholic beverages under the brand name The
Coca Cola Company. As per the agreement, they are required to take steps for
advertising, marketing and promoting the sale of beverages. Show cause notices
were issued alleging that while undertaking the sales promotion programme for
the beverages, the concentrate owned by The Coca Cola Company was also getting
marketed as the same was linked to the promotion of the brand name and thus the
remuneration received from them is taxable as business auxiliary services (BAS)
of ‘promotion or marketing of goods produced or provided by or belonging to the
client’ chargeable to service tax.

 

HELD

The Tribunal noted that in
every sales promotion activity undertaken by the manufacturer of finished
products, it will amount to sales promotion of the raw material as well. This
is neither the intention nor the rationale of ‘Business Auxiliary Service’. By
stating that the goods, namely concentrate, was transferred for use by M/s Coca
Cola India Pvt. Ltd. to the appellant for consideration, a fact not in dispute,
the sale of the goods in terms of the Central Excise Act, 1944 has occurred.
Accordingly, the demand is set aside.

 

22. [2020-TIOL-881-CESTAT-Chd.] M/s Interglobe Aviation Limited  vs. CST Service Tax Date of order: 22nd October, 2019

           

Charges
recovered for excess baggage is an integral part of passenger transportation
service; cannot be taxable under transportation of goods by air service. CENVAT
credit is allowable on activities of setting up prior to 1st April,
2011. Reimbursement of expenses is not liable to service tax in view of the
decision of the Apex Court in the case of Intercontinental Consultants and
Technocrats Private Limited

 

FACTS

The issue relates to charges
levied for excess baggage carried by passengers in regular flights. The Revenue
has demanded service tax under the head transportation by air service. The
second issue relates to CENVAT credit in respect of services availed prior to
the start of their actual business operations. The last issue deals with the
service of manpower recruitment and supply agency service, where the service is
received from a foreign agency and tax is paid under reverse charge. The issue
is whether reimbursement of insurance charges for pilots is includible in
value.

 

HELD

The Tribunal, relying on the
case of Kingfisher Airlines Limited [2015-TIOL-2329-CESTAT-Mum.]
held that the charges for excess baggage is an integral part of transportation
of passengers by air and therefore cannot be taxable under the category of
transportation of goods service. In the second issue, the Tribunal, relying on
the decision in Vamona Developers Pvt. Ltd. [2015-TIOL-2705-CESTAT-Mum.],
allowed the CENVAT credit. Lastly, relying on the decision in Intercontinental
Consultants and Technocrats Pvt. Ltd. [2013 (29) STR 9 (Del)]
, the
demand on reimbursement of expenses is set aside.

RECENT DEVELOPMENTS IN GST

NOTIFICATIONS

(1) Registration of IRP / RP – Notification No. 39/2020-Central Tax,
dated 5th May, 2020

Special procedure
for registration of IRP / RP as distinct person in case of corporate debtors is
provided by the above Notification, which amends the original Notification
dated 21st March, 2020.

 

(2) Nil return
by SMS – Notification No. 44/2020-Central Tax, dated 8th June, 2020

The government has
provided facility of filing Nil returns in form 3B by SMS, for which Rule 67 is
amended by the above Notification. The facility is now effective. This is a
welcome facility for taxpayers.

 

(3) Merger of Union Territories – Notification No. 45/2020-Central
Tax, dated 9th June, 2020

Vide Notification No. 10/2020 dated 21st March, 2020 the
procedure to be followed on account of merger of the Union territories of Daman
and Diu and Dadra-Nagar Haveli till 31st May, 2020 was prescribed.
By the above Notification, the said procedure is extended till 31st July,
2020.

 

(4) Rejection of
refund applications – Notification No. 46/2020-Central Tax, dated 9th
June, 2020

Section 54(7) of
the CGST Act provides for passing of orders for rejection of refund
applications in part or full. There is a time limit for rejection of such
applications. By the above Notification, it is provided that if the time limit
for rejection, as mentioned in section 54(7), falls between 20th March,
2020 and 29th June, 2020, it shall be deemed to be extended to 15
days from the date of receipt of reply to notice or 30th June, 2020,
whichever is later. This is to overcome the lockdown effect.

 

(5) Validity of E-way bill – Notification No. 47/2020-Central Tax,
dated 9th June, 2020

By the above
Notification, the earlier Notification No. 35/2020 dated 5th May,
2020 is amended. The validity period of E-way bills generated on or before 24th
March, 2020 (whose validity expired on or after 20th March, 2020),
is extended till 30th June, 2020.

 

CIRCULARS

(i) Registration of IRP / CIRP
– Circular No. 138/08/2020-GST, dated 6th May, 2020

By the above
Circular, more clarifications and explanations are given about the registration
of IRP / CIRP in case of corporate debtors. The Circular is basically to bring
uniformity and remove difficulties.

 

(ii) ITC for the purpose of
refund – Circular No. 139/09/2020-GST, dated 10th June, 2020

The above Circular
is issued to clarify about ITC entitlement in respect of grant of refund. By a previous
Circular, No. 125/44/2019 dated 18th November, 2019, wide benefit
was given, in the sense that in addition to invoices reflected in Form 2A,
refund was also granted for non-reflected invoices if copies of non-reflected
invoices were uploaded with the application. Thus, the applicant could get full
refund, including non-reflected invoices. However, this new Circular restricts
the ITC entitlement for refund to the extent of the invoices reflected in 2A.
Thus, there is curtailment in refund. This is said to be done in view of Rule
36(4).

 

(iii) Director’s salary vis-à-vis RCM – Circular No.
140/10/2020-GST, dated 12th June, 2020

This is one of the
beneficial circulars. Due to advance rulings in different cases, it was
emerging that even in respect of salary paid to a director (who was also an
employee of the company), RCM liability was attracted. By the above Circular,
it is now clarified that no RCM liability is attracted in respect of salary
paid to a director. However, such salary should be accounted as ‘Salaries’ in
the books and which is covered by section 192 of the Income-tax Act for the
purpose of TDS. If any other amounts are paid, such as professional fees, etc.,
the RCM liability will remain. The effect of the adverse AR, particularly of
the Rajasthan AR in the case of Clay Crafts India Pvt. Ltd. (Raj
AAR/2019-20/33; date of order: 20th February, 2020)
gets
nullified.


ADVANCE RULINGS

(A) Rate of tax on ‘Gift vouchers / Gift cards’

Kalyan Jewellers India Limited (Order No. 52/ARA/2019; dated 25th
November, 2019)

The issue regarding
rate of tax on the above cards was before the learned AAR, Tamil Nadu. There
were different cards and the nature of the cards is described in the AR as
under.

 

Features of
three different pre-paid instruments

  •    Closed System of PPI:
    Transactions are between only two parties. One party, the issuer, issues PPIs
    to customers. The PPI holder / customer makes purchases only from the issuer.
    There is no cash withdrawal. These PPIs cannot be utilised for third-party
    services / sales. The PPI holder / customer can purchase jewels from the issuer
    only on redemption of the PPI; here the ‘applicant’ is an issuer of PPIs to
    customers.
  •    Semi-Closed system of
    PPIs:
    Transactions are between more than two parties. The third party issues
    PPIs to customers, who use PPIs at a group of clearly identified merchant
    locations having a third party M/s. Qwick Cilver Solution, based in Bangalore,
    (that) issues PPIs to customers who can redeem the same with the applicant or
    any other outlets identified by the applicant.
  •    Open System of PPIs:
    These PPIs are issued by banks and are used at any merchant location for
    purchase of goods and services, including facilitation of cash withdrawals at
    ATM / Point of Sales (POSs) / Business correspondents (BCs). This type of PPI
    is not applicable to the applicant.

 

The levy of Central
Excise and service tax did not apply on PPIs. The levy of octroi on ‘Sodexo
Meal Vouchers’ was not sustained by the Hon’ble Supreme Court in the case of Sodexo
vs. Maharashtra
.

 

The party submitted
a copy of a sample gift voucher which had the brand name of the applicant
‘Kalyan’, ‘Gift Voucher’ with the value of the money equivalent. In the terms
and conditions, it states the date of validity of the voucher. The voucher
cannot be exchanged for cash and no refunds will be given. It has to be
produced in original at the store. No duplicate will be issued in case of loss.
It is not a legal tender.

 

The applicant also
explained accounting entries regarding the vouchers. When a gift voucher is
sold, it is shown on the liability side in ‘Gift voucher liability account’.
When the gift voucher is redeemed, the ‘Gift voucher liability account’ is
debited and ‘sale’ account is credited. The main argument of the applicant was
that the above cards are actionable claim or equivalent to money, being
governed by the Payment and Settlement Systems Act, 2007.

 

Thus, the argument
of the applicant was that the above cards are excluded from GST vide
Entry 6 in Schedule III to the CGST Act. Citing judgments, including in the
case of Sodexo India Private Limited, it was argued that they are
not goods. Further, citing the judgment in the case of the Delhi Chit
Fund Associations (43 GST 524 SC)
it was also contended that it is not
a service.

 

The learned AAR
considered the above arguments. In relation to the argument that the cards are
actionable claim, he observed as under:

 

‘In this case, the gift voucher / gift card is an instrument squarely
covered under the definition of “payment instrument” under Payment and
Settlement Systems Act, 2007. It is not a claim to a debt nor does it give a
beneficial interest in any movable property to the bearer of the instrument. In
fact, if the holder of the gift card / voucher loses or misplaces it and is
unable to produce it before the applicant’s stores before the time limit
specified on the card / voucher, the instrument itself becomes invalid. Then
the customer cannot use it to pay for any goods. Thus, it is not an actionable
claim as defined under Transfer of Property Act. It is only an instrument
accepted as consideration / part consideration while purchasing the goods from
the issuer and the identity of the supplier is established in the PPI.’

 

Thus, the
contention about actionable claim is rejected. The AAR also made reference to
the minutes of the GST Council wherein this issue was discussed. The AAR
observed that the cards are movable property and therefore they are goods. He
held that the applicant is supplying the cards to customers directly or through
a distribution channel, against consideration.

 

Accordingly, the
AAR held that the cards are liable to GST. About the time of supply, he
observed that the cards are not against identifiable goods; therefore, the time
of supply will be the date of redemption of the card.

 

Regarding the rate
of tax, the AAR held that the cards are made from either paper or plastic and
can be read electronically. It is held that paper voucher is printed material
and covered by CTH 4911 9990 liable to tax at 12% under item at Sr. No. 132 of
Schedule II of Notification No. 1/2017 CT-Rate dated 28th June,
2017. In case of plastic cards readable electronically, the AAR held that they
are covered by CTH 8533 and liable to tax at 18% under item at Sr. No. 382 of
Schedule III of Notification No. 1/2017 CT-Rate dated 28th June,
2017.

 

Complier’s
note

In the above AR,
the rate of tax is decided as per the media on which the card is supplied, such
as plastic or paper, etc. However, the card itself has no importance. It has
intrinsic value, i.e., it confers the right to the customer to avail goods
against the cards. So the cards can be said to be intangible goods, as they are
conferring rights. Under such circumstances, only one rate should apply to both
types of cards. This aspect has not come up in the above AR and remains open
for future.

 

(B) Inclusion / exclusion from turnover

Anil Kumar Agrawal (AR No. KAR ADRG 30/2020; dated 4th
May, 2020)

This application
before the Karnataka AAR was filed by the applicant who was not registered. He
was interested in knowing as to which of the items were part of turnover and
which were not part of turnover. The items presented for determination were as
under:

 

‘a) Partner’s
salary as partner from my partnership firm

b) Salary as
director from private limited company

c) Interest
income on partner’s fixed capital credited to partner’s capital account

d) Interest
income on partner’s variable capital credited to partner’s capital account

e)  Interest
received on loan given

f)   Interest
received on advance given

g)  Interest
accumulated along with deposit / fixed deposit

h)  Interest
income received on deposit / fixed deposit

i)   Interest
received on debentures

j)   Interest
accumulated on debentures

k)  Interest
on Post Office deposits

l)   Interest income on National Savings
Certificates (NSCs)

m) Interest
income credited in PF account

n)  Accumulated
interest (along with principal) received       on
closure of PF account

o)  Interest
income on PPF

p)  Interest
income on National Pension Scheme (NPS)

q)  Receipt of
maturity proceeds of life insurance policies

r)   Dividend
on shares

s)  Rent on
commercial property

t)   Residential
rent

u)  Capital
gain / loss on sale of shares’

 

The applicant
submitted his list, saying that income received towards salary as partner of
firm and salary as director are not includible in turnover. It was also
submitted that the rent towards residential property is part of aggregate
turnover for registration.

 

The AAR referred to
the definition of ‘aggregate turnover’ in the CGST Act and also the meaning of
‘Supply’ as given in section 7 of the said Act. Applying defined criteria, the
AAR held as under in respect of the above items.

 

In respect of
interest income from different sources mentioned in (c), (d), (e), (f), (g),
(h), (i), (j), (k), (l), (m), (n), (o), (p) in the list given above, the AAR
held that the said income is out of deposits and loans extended by the
applicant. He held that giving loans, etc. is service against consideration in
the form of interest. Such interest is exempt under Entry 27(a) of the
Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017.
The AAR also held that the actual amount of loans, deposits, etc. is the value
of service and this is includible in the aggregate turnover for registration.

 

In respect of
amounts received from the firm, the AAR observed that all documents are not
provided. However, it held that if it is in the form of salary, then it will be
outside the scope of the CGST Act. Further, the share of profit from the firm
is also not includible as it is application of money.

 

The issue about
salary as director was not decided for want of documents. However, it is
observed that if the income is as a non-Executive Director, then it is part of
aggregate turnover. If the salary is as Executive Director, then it will not be
includible in the turnover. (In this respect the readers can refer to Circular
No. 140/10/2020-GST dated 12th June, 2020.)

 

In respect of
rental income for commercial property, the AAR held that it is taxable supply
and part of aggregate turnover. Regarding rental income from residential
property, though it is exempt, it is to be added for deciding the aggregate
turnover.

 

As for the income
out of dividend on shares and capital gain / loss on shares, the AAR observed
that they are related to securities and since securities are outside the
purview of GST, the above will also be outside GST. In respect of receipt of
money on maturity of insurance policies, it is return of money and there is no
element of service between the policy holder and the insurance company. Thus,
the above items were held to be not includible in the aggregate turnover.

Complier’s
note

In relation to
interest income on loans, deposits, etc., the AAR has held that the actual
value of deposit, loan, etc. will be the value of service. However, the
interest is the consideration for supply and hence such interest should be
value of supply. The above issue requires reconsideration.

 

(C) Classification of whole wheat parota and Malabar parota

ID Fresh Food (India) Pvt. Ltd. (AAR No. KAR ADRG 38/2020; dated 22nd
May, 2020)

The applicant was
involved in the preparation and supply of the above items. As per the
applicant, the above products fall in the category of ‘khakhra, plain chapatti
or roti’ covered by Entry No. 99A of Schedule I to the Notification No.
1/2017-Central Tax(Rate) dated 28th June, 2017 as amended vide
Notification No. 34/2017-Central Tax(Rate) dated 13th October, 2017
and hence liable to tax at 5%.

 

The nature of the product is described as under: ‘The product consists
(of) the ingredients of refined wheat flour (maida), RO purified water,
edible vegetable oil, edible vegetable fat and edible vegetable salt. After
adding all the ingredients, the product will be subjected to heat treatment on
a pan or tawa for making it available for consumption.’

 

The applicant
referred to classification under Custom Tariff Act, 1975 and suggested that the
above products fall under Chapter 1905.

 

However, the Karnataka AAR held that the
products will not fall in Chapter 1905 but in Chapter 2106. He also held that
Entry 99A cannot cover the above products as they do not fall within the
description given in the said Entry, i.e., ‘khakhra, plain chapatti or roti’.
The AAR held that the products are described as parota and hence they
are neither ‘khakhra, plain chapatti or roti’. The products are further
distinguished on the ground that ‘khakhra, plain chapatti or roti’ are ready
for consumption, whereas the impugned products require further processing
before consumption. Therefore, the learned AAR held that the products do not
fall in Entry 99A of Schedule I.

 

MISCELLANEA

I. Technology

 

14. Apple claims ‘half a trillion dollars’
App Store economy

 

Apple has said that more than
85% of that figure occurred via transactions from which it did not take a
commission. The announcement comes at a time when Apple and other US tech
giants are facing increased anti-competition scrutiny. A leading developer has
also called on the iPhone-maker to lower the fees it charges, ahead of its
annual developers’ conference next week.

 

The study was commissioned by
Apple but carried out by economists at the Boston-based consultancy Analysis
Group. It surveyed billings and sales related to apps running on the tech
firm’s iOS, Mac, Watch and Apple TV platforms.

 

These included:

  •     in-app advertising via
    apps such as Twitter and Pinterest,
  •     the sale of physical
    goods via apps such as Asos and Amazon,
  •     the sale of digital goods
    and services via apps including Mario Kart Tour and Tinder,
  •     travel bookings via apps
    such as Uber and British Airways,
  •     food deliveries via apps
    including Just Eat and Deliveroo,
  •     subscriptions to media
    apps including The Times newspaper and Netflix, and
  •     subscriptions to work
    apps including Zoom and Slack.

 

The report attempted to
account for spending that occurred externally but led to content being used
within an app – for example, a direct payment to Spotify, whose songs were then
listened to via its iPhone app. Likewise, it subtracted a proportion of the
charge of in-app purchases whose content was used elsewhere – for example, a
Now TV subscription taken out via Sky’s app, if most of the shows were then
watched directly on a TV’s own app.

 

In total, the economists said
$519 billion (£406 billion) had been generated via Apple’s software eco-system.
The figure excludes sales generated by the Android and Windows versions of the
same products. Physical goods and offline services accounted for the biggest
share of the sum – $413 billion. By contrast, digital goods and services, from
which Apple typically takes a 30% cut, accounted for $61 billion.

 

(Source:
bbc.com)

 

15. How Elon Musk aims to revolutionise
battery technology

 

Elon Musk has perhaps the
most exciting portfolio of businesses on the planet. There’s SpaceX with its
mission to Mars and Tesla with its super-fast hi-tech electric cars. He claims
his Hyperloop concept could revolutionise public transport. And even his Boring
Company is kind of interesting – it aims to find new ways to dig tunnels. So
which one will end up changing the world most? His battery business is also in
contention. But the compact, lightweight lithium batteries that mean you can
now stream movies on wafer-thin phones, will soon be powering much more of your
life. Yet the market certainly seems to reckon that they are the future. Just
look at the Tesla’s share price. Last week, it briefly nudged ahead of Toyota
to become the world’s most valuable car firm, even though the Japanese giant
sold 30 times as many vehicles last year.

 

One reason is that Elon Musk
has been teasing investors and rivals with the promise of ‘battery day’
sometime soon, at which he will announce a series of advancements in battery
tech. And cars are not the only vast new battery market. You might have seen a
story about how the world is slowly weaning itself off coal. Well, gigantic
batteries connected to our electricity grids are going to be central to the
great renewable energy revolution, too.

 

The first of these was
announced just last week when the Chinese battery-maker that supplies most of
the major car makers, including Tesla, revealed it had produced the first
‘million mile battery’. Contemporary Amperex Technology (CATL) says its new battery
is capable of powering a vehicle for more than a million miles (1.2 million, to
be precise – or 1.9 million km.) over a 16-year lifespan. Most car batteries
offer warranties for 60,000-150,000 miles over a three-to-eight-year period.
This is a huge improvement in battery life, but will cost just 10% more than
existing products.

 

Having a
battery you never need to change is obviously good news for the electric car
industry. But longer-lasting batteries are also essential for what’s known as
‘stationary’ storage, too. These are the batteries we can attach to wind
turbines or solar panels so that renewable energy is available when the sun
isn’t shining or the wind isn’t blowing. Fairly soon, you might even want a
stationary battery in your home to store cheap off-peak electricity, or to
collect the power your own solar panels generate.

 

(Source:
bbc.com)

 

II. World News

 

16. US
cities are losing 36 million trees a year

 

If you’re looking for a
reason to care about tree loss, this summer’s record-breaking heat waves might
be it. Trees can lower summer daytime temperatures by as much as 10 degrees
Fahrenheit, according to a recent study.

 

But tree cover in US cities
is shrinking. A study published last year by the US Forest Service found that
we lost 36 million trees annually from urban and rural communities over a
five-year period. That’s a 1% drop from 2009 to 2014.

 

If we continue on this path,
‘cities will become warmer, more polluted and generally more unhealthy for
inhabitants,’ said David Nowak, a senior US Forest Service scientist and
co-author of the study.

 

Nowak says there are many
reasons our tree canopy is declining, including hurricanes, tornadoes, fires,
insects and disease. But the one reason for tree loss that humans can control
is sensible development.

 

‘We see the tree cover being
swapped out for impervious cover, which means when we look at the photographs,
what was there is now replaced with a parking lot or a building,’ Nowak said.
More than 80% of the US population lives in urban areas, and most Americans
live in forested regions along the East and West coasts,’ Nowak says.

‘Every time we put a road
down, we put a building and we cut a tree or add a tree, it not only affects
that site, it affects the region.’ The study placed a value on tree loss based
on trees’ role in air pollution removal and energy conservation. The lost value
amounted to $96 million a year.

 

(Source:
cnn.com)

 

17. STEC
bags Rs. 1,126-crore civil contract Package 4 of Delhi-Meerut RRTS Line

 

Chinese multinational civil construction
firm Shanghai Tunnel Engineering Co. Ltd. (STEC) has emerged as the lowest
bidder among five for the construction of the 5.6 km. underground section
between New Ashok Nagar and Sahibabad of the Delhi-Meerut RRTS corridor.

 

When the National Capital
Region Transport Corporation Limited (NCRTC) opened financial bids for the
Delhi-Ghaziabad-Meerut RRTS corridor, a total of five national and
multinational bidders participated in the tender process. As per the results of
the financial bids disclosed by NCRTC, the position of the bidders is as under:

  •     Shanghai Tunnel
    Engineering Co. Ltd. (STEC): Rs. 1,126 crores (L-1);
  •     Larsen & Toubro Ltd.
    (L&T): Rs. 1,170 crores (L-2);
  •     Gulermak Agir Sanayi
    Insaatve Taahhut AS (Gulermak): Rs. 1, 326 crores (L-3);
  •     Tata Projects Ltd. – SKEC
    JV: Rs. 1.346 crores (CL-4);
  •     Afcons Infrastructure
    Ltd.: Rs. 1,400 crores (L-5).

 

NCRTC had invited global bids
for the first underground civil construction package (CDM/CN/COR-OF/086) in
November last year and the technical bids for this contract package were opened
recently.

 

The scope of work includes
design and construction of tunnels by TBM from near New Ashok Nagar DN Ramp to
Sahibabad UP Ramp and One Underground station at Anand Vihar by Cut and Cover
Method (including architectural finishing and design, supply, installation,
testing and commissioning of electrical and mechanical systems, including fire
detection and suppression systems and hydraulic systems) on the
Delhi-Ghaziabad-Meerut RRTS Corridor.

 

After issuance of the letter
of acceptance (LoA) by NCRTC, STEC has to complete the tunnelling work by TBM
through the cut-and-cover method. This is the first underground contract
package issued by the NCRTC.

(Source:
urbantransportnews.com)

 

18. 57% investors say Big-4 auditors have
no credibility: IIAS survey

 

In more trouble for the
auditing fraternity, an investor survey has found that 57% of large investors
and sell-side analysts do not have any faith in the Big-4 audit firms as they
have lost credibility.

 

According to the survey by
Institutional Investor Advisory Services of 63 large investors and sell-side
analysts numbering 89, conducted online from 13th to 21st
April, as many as 57% of each of them have found ‘the Big-4 audit firms having
lost their credibility with investors and are therefore open to move beyond
them if they were banned’.

 

Between qualified and
unqualified accounts, 73% support qualified accounts because they feel that at
least they got to hear auditor concerns and if they asked for lean accounts,
the risk was that the auditors would be muzzled. It can be noted that ever
since the Satyam Computers scandal came out in January, 2009, the audit world,
especially the Big-4, have been under fire from the regulators.

 

While market watchdog
Securities and Exchange Board had banned PwC in 2018 from auditing listed
companies for two years in the Satyam scam, the Securities Appellate Tribunal
quashed the ban and SEBI challenged it. In June, 2019 the Reserve Bank of India
barred S.R. Batliboi & Company, an affiliate of EY, from carrying out
statutory audit of commercial banks for a year after it found several lapses in
the books of Yes Bank.

 

In the CG Power fraud, the
NCLT had thrown out the report prepared by Viash Associates, terming it as
unprofessional and full of ifs and buts. On top of these, there have been
frequent resignations of auditors, creating doubts on the quality of the audits
that are being presented to investors and also many instances of divergent audit
reports.

 

This is despite 77% believing
that ‘only unqualified accounts are true and fair’ as one gets to hear auditor
concerns. Meanwhile, the survey also found that 78% of the investors, who
normally clamour for dividends, in the poll preferred companies retaining cash
and fortifying their balance sheet this year as the economy is in shambles.

 

Similarly, 57% also see
promoters subscribing to warrants as a sign of confidence in the company and
its operations. However, equity dilution remains a concern for investors with
46% being uncomfortable if dilution exceeded 5% without disclosure regarding
how funds will be used and 30% putting this threshold at 10%.

 

(Source: Economictimes.com)

LETTER TO THE EDITOR

Dear Sir,

 

The
article MAKING A WILL WHEN UNDER LOCKDOWN,
by Dr. Anup Shah (appearing under the feature LAWS AND
BUSINESS on Page 125 in the BCAJ issue of May, 2020), was timely,
informative and useful.

 

I
refer to the statement ‘It is important to note that the attesting witnesses
need not know the contents of the Will. All that they attest is the testator’s
signature and nothing more.’

 

My
request: Can the duties and liabilities of witnesses (in general for all deeds)
be covered by the author in a future issue of the BCAJ? That would be
very helpful.

 

Thanks,

Vinayak Pai 

ALLIED LAWS

14. Covid-19 – Lockdown – Banks cannot
classify firms as NPAs – RBI guidelines

 

Anant Raj Ltd.
vs. Yes Bank Ltd.; W.P.(C) Urgent 5/2020; Date of order: 6th April,
2020 (Delhi)(HC)(UR)

 

The petitioner had approached the Court
seeking a direction against Yes Bank from taking coercive / adverse steps
against it, including but not limited to declaring its account as a
Non-Performing Asset (NPA). The petitioner contended that it failed to pay the
instalment which fell due on 1st January, 2020 (the subject matter
of the present petition) because of adverse economic conditions brought about
by the effects of the Covid-19 pandemic.

 

The High Court
held that classification of the account of the petitioner as an NPA cannot be
done in view of the RBI Circular related to moratorium of loan repayments. It
held that a prima facie reading of the Statement on Development and
Regulatory Policies issued by the RBI on 27th March, 2020 along with
the Regulatory Package indicates the intention of RBI to maintain the status
quo
as on 1st March, 2020 for all accounts. The Court further
observed that before classification as NPA, an account has to be classified as
SMA-2 and any account which is classified as SMA-2 on 1st March,
2020 cannot be further downgraded to an NPA after the issuance of the
Notification. The status has to be maintained as it was on 1st
March, 2020.

 

Thus, the Court granted interim protection
from the account being declared as an NPA. However, it was clarified that the
stipulated interest and penal charges shall continue to accrue on the
outstanding payment even during the moratorium period.

 

15. Covid-19 –
Lockdown – Period of the moratorium – Will not include period of lockdown

 

Transcon Skycity Pvt. Ltd. and Ors. vs.
ICICI & Ors.; W.P. LD VC No. 28 of 2020; Date of order: 11th
April, 2020 (SC)(UR)

 

A petition was filed before the Supreme
Court as to whether the moratorium period is excluded in the computation of the
90-day period for determining NPA for amounts that fell due prior to 1st March,
2020 and which remain unpaid or in default. The Court at the outset observed
that its scope for adjudication, at that particular juncture, was restricted
only to the aspect of urgent ad interim relief and issues like
maintainability were kept open for adjudication at an appropriate time.

 

The Hon’ble Court held that the period
during which there is a lockdown will not be reckoned by ICICI Bank for the
purposes of computation of the 90-day NPA declaration period. If the lockdown
is lifted at an earlier date than 31st May, 2020, then this
protection will cease on the date of lifting of the lockdown and the computing
and reckoning of the remainder of the 90-day period will start from that
earlier lifting of the lockdown-ending date. The moratorium period of 1st
March, 2020 to 31st May, 2020 under the RBI Covid-19 regulatory
package does not per se give the petitioners any additional benefits in
regard to the prior defaults, i.e. those that occurred before 1st
March, 2020. Thus, the relief to the petitioners is co-terminus with the
lockdown period.

 

The Court also
opined that this order will not serve as a precedent for any other case in
regard to any other borrower who is in default or any other bank. Each of these
cases will have to be assessed on its own merits. The question as to whether
the petitioners are entitled to the benefit of the entire moratorium period in
respect of the prior defaults of January and February, 2020 was left open.

 

16. Employment – Ministry of Home Affairs Order – Payment of wages
during lockdown – Negotiable [Disaster Management Act, 2005, S.10; Constitution
of India, 1949, Art. 14, Art. 19, Art. 300A]

 

Ficus Pax Pvt. Ltd. vs. UOI; W.P.(C) Diary
No. 10983 of 2020; Date of order: 12th June, 2020 (SC)(UR)

 

A petition was filed by an association of
employers and a private limited company challenging the validity of the Order
of the Ministry of Home Affairs dated 29th March, 2020 stating that
all the employers, be they in the industry or in the shops and commercial
establishments, shall make payment of wages of their workers at their work
places on the due date, without any deduction for the period their
establishments are under closure during the lockdown.

 

The Hon’ble Supreme Court held that no
industry can survive without the workers. Thus, employers and employees need to
negotiate and settle among themselves. If they are not able to do so, they need
to approach the labour authorities concerned to sort out the issues.

 

17. Family Law –
Maintenance on divorce – Wife entitled to maintenance – Even if she runs a
business and earns income [Hindu Marriage Act, 1955, S.12, S.13; Code of
Criminal Procedure, 1973, S.125]

 

Sanjay Damodar Kale vs. Kalyani Sanjay Kale
(Ms); RA No. 164 of 2019; Date of order: 26th May, 2020
(Bom)(HC)(UR)

 

The couple got
married on 12th November, 1997 in accordance with Hindu religious
rites and ceremonies. According to the applicant, the wife, since the inception
of marital life the respondent husband treated her with extreme cruelty. She
was dropped at her parental home at Satara in the month of January, 1999 by her
husband. Despite repeated assurances, the respondent did not come to fetch her
back to her marital home. In April, 2007 the respondent expressed his desire to
obtain divorce from the applicant. Although the applicant claimed to have
resisted in the beginning, she signed the documents for a divorce petition by
mutual consent as the respondent assured the applicant that he would continue
to maintain the marital relationship with her despite a paper decree of
divorce.

 

Despite the decree of dissolution of
marriage, the respondent continued to visit the applicant at her apartment and
had marital relations as well. But from September, 2012 the respondent-husband
stopped visiting the applicant’s house. The applicant-wife claimed the
respondent made no provision for her maintenance and livelihood as she had no
source of income. Hence, the applicant filed an application u/s 125 of the
Criminal Procedure Code for award of maintenance at the rate of Rs. 50,000 per
month. The Family Court allowed the application holding that the respondent has
refused or neglected to maintain the applicant who is unable to maintain
herself, despite the respondent having sufficient means to maintain her.

 

The Bombay High Court held that the claim of
the applicant that she had no source of income ought to have been accepted by
the learned Judge, Family Court with a pinch of salt. The tenor of the evidence
and the material on the record suggests that the applicant was carrying on the
business of Kalyani Beauty Parlour and Training Institute to sustain her
livelihood. Further, in this inflationary economy, where the prices of
commodities and services are increasing day by day, the income from the
business of beauty parlour, which has an element of seasonality, may not be
sufficient to support the livelihood of the applicant and afford her to
maintain the same standard of living to which she was accustomed before the
decree of divorce. Thus, the Court concluded that Rs. 12,000 per month would be
a reasonable amount to support the applicant wife instead of Rs. 15,000 awarded
by the Family Court (against the original claim / prayer for Rs. 50,000)  as the applicant’s source of income was not
adequately considered by the Family Court Judge.

 

18. Interpretation of terms and conditions
of document(s) – Constitutes substantial question of law – High Court required
to exercise power – Matter remanded to the High Court [Code of Civil Procedure,
1908, S.100]

 

Rajendra Lalit Kumar Agrawal vs. Ratna
Ashok Muranjan; (2019) 3 Supreme Court Cases 378

 

The appellant is the plaintiff whereas the
respondents are the defendants. The appellant filed a civil suit against the
respondents for specific performance of the contract in relation to the suit
property. The suit was based on an agreement dated 8th August, 1984.
The trial Court passed an order dated 5th July, 2004 favouring the
appellant and passed a decree for specific performance of the contract against
the respondents. On appeal by the respondents, the District Court vide
order dated 10th November, 2016 allowed the prayer of the
respondents, thereby dismissing the suit. The appellant filed a second appeal
before the High Court. The High Court dismissed the second appeal, too, holding
that it did not involve any substantial question of law as is required to be
made out u/s 100 of the Code of Civil Procedure, 1908 (Code).

 

On an appeal before the Supreme Court, it
was held that interpretation of terms and conditions of document(s) constitutes
a substantial question of law within the meaning of section 100 of the Code,
especially when both parties admit to the document. The Apex Court also held
the High Court could have framed questions on the issues, which were material
for grant or refusal of specific performance keeping in view the requirements
of section 16 of the Specific Relief Act. Therefore, the order of the High
Court was set aside and the matter was remanded back to the High Court.

 

19. Will – Mutual Will – Effect from – Death
of either testator – The beneficiaries do not have to wait till the death of
both the executants to enforce their rights [Hindu Succession Act, 1956]

 

Vickram Bahl & Anr. vs. Siddhartha
Bahl; CS(OS) 78/2016 & IAs Nos. 2362/2016, 12095/2016, 15767/2018 and
15768/2018; Date of order: 25th April, 2020 (Delhi)(HC)

 

Late Wing
Commander N.N. Bahl and his wife Mrs. Sundri Bahl executed a Joint Will dated
31st March, 2006. As per the Will, after the demise of one spouse
the entire property will ‘rest’ in the other spouse and no one else shall have
any right or interest until the demise of both the testators. Further, as per
the Will after the demise of both the testators their eldest son,
grand-daughter (daughter of the eldest son) and younger son will have ownership
rights as per their respective shares. The eldest son along with his daughter
filed a suit seeking permanent injunction against his mother and brother from
dispossessing them from their respective share of the property under the Will.

 

The Court held that Mrs. Sundri N. Bahl
having accepted the said Will, is bound by it. Since the rights in favour of
the ultimate beneficiary under the mutual Will are crystallised on the demise
of either of the executants and during the lifetime of the executant of the
Will, i.e. Mrs. Sundri Bahl, the beneficiaries do not have to wait till the
death of both the executants to enforce their rights.

 

GLIMPSES OF SUPREME COURT RULINGS

9. Cognizant Technology Solutions India Pvt. Limited vs. Deputy
Commissioner of Income Tax
Civil Appeal No. 1992 of 2020 [Arising out of
Special Leave Petition (Civil) No. 23705 of 2019] Date of order: 4th
March, 2020

 

Dividend – Whether payments made to the
shareholders, under purchase of shares through the scheme of ‘arrangements and
compromise’, was a dividend within the meaning of section 2(22)(d)/2(22)(a) of
the Act, requiring to remit the taxes into the government account u/s 115O –
Communication merely a notice and not an order – Matter disposed of with
directions

 

The assessee, who was engaged in the business of
development of computer software and related services, approached the High
Court in the Financial Year 2016-17 with a Scheme of Arrangement and Compromise
under sections 391 to 393 of the Companies Act, 1956 to buy back its shares.
The High Court sanctioned the scheme on 18th April, 2016 in Company
Petition No. 102 of 2016, pursuant to which the assessee purchased 94,00,534
shares at a price of Rs. 20,297 per share from its four shareholders and made a
total remittance of Rs. 19,080 crores approximately. According to the
appellant, this buy-back of shares was effected in May, 2016.

 

Thereafter, the assessee made statutory filing
under Form 15 CA (under Rule 37BB of the Income Tax Rules, 1962) after
obtaining requisite certificate from a Chartered Accountant in Form 15CB
furnishing details of remittances made to non-residents.

 

The assessee received a letter from the Deputy
Commissioner of Income Tax, Large Taxpayer Unit-1, Chennai in connection with
non-payment of tax on the remittances made to the non-residents in F.Y.s
2015-16 and 2016-17.

 

According to the assessee, it was under the
impression that since its scheme of arrangement and compromise between the
shareholders and the company was in accordance with sections 391 to 393 of the
Companies Act and approved by the Court, the provisions of section 115-QA,
115-O or 2(22) of the Income-tax Act were not applicable to its case.

 

However, the Department took the view that the
payments made to the shareholders under purchase of shares through the scheme
of arrangements and compromise was a dividend within the meaning of section
2(22)(d)/2(22)(a) of the Act, requiring it to remit the taxes into the government
account u/s 115-O of the Act.

 

Since the assessee company had failed to remit the
taxes within the stipulated period, it was ‘deemed to be an assessee in
default’ u/s 115-Q of the Act. Therefore, it was required to remit the taxes
(calculated @ 15% of the total payments of Rs. 19,415,62,77,269 to the
shareholders and surcharge, etc. as per the Act) along with the interest
payable u/s 115-P.

 

The said communication dated 22nd March,
2018 was received by the assessee on or about the 26th of March,
2018 and soon thereafter its bank accounts were attached by the Department.

 

In the meantime, an application was preferred by
the assessee on 20th March, 2018 before the Authority for Advance
Ruling (AAR) u/s 245Q seeking a ruling on the issue whether the assessee was
liable to pay tax on the buy-back of its shares u/s 115QA or section 115-O or
any other provision of the Act.

 

The assessee challenged the communication dated 22nd
March, 2018 by filing a writ petition in the High Court, submitting inter
alia
that while the issue was pending before the AAR u/s 245Q, in view of
the bar provided u/s 245RR of the Act, the matter could not have been
considered. It was also submitted that the assessee was never put to notice
whether it would be liable u/s 115-O. It was further submitted that all the
while the Department was only soliciting information which the appellant had
readily furnished and at no stage was the assessee put to notice that its
liability would be determined in any manner.

 

The writ petition came up before a Single Judge of
the High Court on 3rd April, 2018 when he granted an order of
interim stay of the impugned proceedings subject to the condition that the
petitioner pays 15% of the tax demanded and furnishes a bank guarantee or security
by way of fixed deposits for the remaining taxes (only) to be paid.

 

The Single Judge by his decision dated 25th
June, 2019 dismissed the writ petition as not being maintainable and relegated
the assessee to avail the remedy before the Appellate Authority under the Act.
However, during the course of his decision, the Single Judge concluded that
there was no need for issuance of any notice before making a demand u/s 115-O
of the Act and the notice issued on 21st November, 2017 calling for
details where after meetings were convened, was quite adequate. He rejected the
submission that there would be a bar in terms of section 245RR. The Single
Judge did not find any merit in the contention that the shares purchased
pursuant to the order of the Company Court could not be treated as dividend.

 

The assessee, being aggrieved, challenged the
aforesaid view by filing a Writ Appeal. While discussing the issues that came
up for consideration, the Division Bench observed that the Single Judge after
having found the writ petition to be not maintainable, ought not to have gone
into merits. As regards the nature of the communication dated 22nd
March, 2018 and the maintainability of an appeal challenging the same, the
Division Bench noted the contention of the assessee that it was not known as to
whether the impugned order dated 22nd March, 2018 was a show cause
notice or final order. The Division Bench held that though there appeared to be
some element of contradiction in the counter affidavit filed, the said order
appeared to be a final one. Besides, the further action taken indicated that
the order under challenge was a final one. If it was only a show cause notice,
then there was no need to challenge it and instead the consequential freezing
alone required to be questioned. The Division Bench also held that the further
question as to whether the order under challenge violated the principles of
natural justice or requisite procedure contemplated under the Act was a matter
for consideration before the Appellate Authority. According to the Division
Bench, the learned Single Judge had rightly observed that the appeal could be
entertained and decided on merit.

The view taken by the Division Bench of the High
Court was challenged before the Supreme Court.

 

On the issue whether the communication dated 22nd
March, 2018 was in the nature of determination of the liability, the Supreme
Court heard both the parties at considerable length, at the end of which it was
agreed by the learned advocate for the Department that the communication dated
22nd March, 2018 could be treated as a show cause notice and the
Department permitted to conclude the issue within a reasonable time, provided
the interim order passed by the Single Judge of the High Court on 3rd April,
2018 was continued. The course suggested by the counsel for the Department was
acceptable to the senior counsel for the assessee.

 

In the peculiar facts and circumstances of the
case, the Supreme Court while disposing of this Appeal, directed as under:

 

(a)        The
communication dated 22nd March, 2018 shall be treated as a show
cause notice calling upon the assessee to respond with regard to the aspects
adverted to in it;

 

(b)       The
assessee shall be entitled to put in its reply and place such material, on
which it seeks to place reliance, within ten days;

 

(c) The assessee shall thereafter be afforded oral
hearing in the matter;

 

(d)       The
matter shall thereafter be decided on merits by the authority concerned within
two months;

 

(e)        Pending
such consideration, as also till the period to prefer an appeal from the
decision on merits is not over, the interim order passed by the Single Judge of
the High Court on 3rd April, 2018 and as affirmed by the Supreme
Court vide its interim order dated 14th October, 2019, shall
continue to be in operation; and

 

(f)        The
amount of Rs. 495,24,73,287 deposited towards payment of tax and the amount of
Rs. 2806,40,15,294 which stands deposited and invested in the form of Fixed
Deposit Receipts shall be subject to the decision to be taken by the authority
concerned on merits, or to such directions as may be issued by the Appellate
Authority.

 

However, the Supreme Court clarified that it had
stated the facts of the case only by way of narration of events and explaining
the chronology. It shall not be held to have dealt with the merits or demerits
of the rival contentions. The merits of the matter shall be gone into
independently by the authorities concerned without being influenced in any way
by any of the observations made by the High Court and the Supreme Court.

 

The Supreme Court disposed of the appeal in the
aforesaid terms.

 

10. Rajasthan State Electricity Board, Jaipur vs. The Dy. Commissioner
of Income Tax (Assessment) and Ors.
Civil Appeal No. 8590 of 2010 Date of order: 19th March, 2020

 

Additional tax – Section 143(1-A) – For invoking the provisions of
section 143(1-A) of the Act, the Revenue must prove that the assessee has
attempted to evade tax by establishing facts and circumstances from which a reasonable
inference can be drawn that the assessee has, in fact, attempted to evade tax
lawfully payable by it

 

The assessee, a Government Company as defined u/s
617 of the Companies Act, 1956, filed its return on 30th December,
1991 for the A.Y. 1991-92 showing a loss amounting to Rs. (-)4,27,39,32,972.
Due to a bona fide mistake, the assessee claimed 100% depreciation of
Rs. 3,33,77,70,317 on the written down value of assets instead of 75%
depreciation. Under the un-amended section 32(2) of the Income tax Act, 1961
the assessee was entitled to claim 100% depreciation. However, after the
amendment the depreciation could only be 75%. The assessee supported the
returns with provisional revenue account, balance sheet as on 31st
March, 1991, details of gross fixed assets, computation chart and depreciation
chart. No tax was payable on the said return by the assessee.

 

An intimation u/s 143(1)(a)
dated 12th February, 1992 was issued by the A.O. disallowing 25% of
the depreciation, restricting it to 75%. Additional tax u/s 143(1-A) amounting
to Rs. 8,63,64,827 was demanded. The assessee filed an application u/s 154
dated 18th February, 1992 praying for rectification of the demand.
The assessee also filed a petition u/s 264 against the demand of additional
tax. In the petition it was stated that even after allowing only 75% of
depreciation, the income of the assessee remained in loss to the extent of Rs.
3,43,94,90,393. The assessee prayed for quashing the demand of additional tax.

The application filed u/s 154 was rejected by the
A.O. on 28th February, 1992. The revision petition u/s 264 came to
be dismissed by the Commissioner of Income Tax by his order dated 31st
March, 1992. Rejecting the revision petition, the Commissioner of Income Tax
held that whenever adjustment is made, additional tax has to be charged @ 20%
of the tax payable on such ‘excess amount’. The ‘excess amount’ refers to the
increase in the income and by implication the reduction in loss where even
after the addition there is negative income.

 

Aggrieved by the order of the Commissioner of
Income Tax, a writ petition challenging the demand of additional tax which was
reduced to an amount of Rs. 7,67,68,717 was filed by the assessee in the High
Court. The learned Single Judge vide judgment dated 19th
January, 1993 allowed the writ petition quashing the levy of additional tax u/s
143(1-A). The Revenue was aggrieved by this judgment of the Single Judge and
filed a Special Appeal which was allowed by the Division Bench of the High
Court vide its judgment dated 13th November, 2007 upholding
the demand of additional tax. The assessee then filed an appeal before the
Supreme Court.

 

After noting the relevant provisions and amendments
thereto, the Supreme Court observed that the amendments brought by the Finance
Act, 1993 with retrospective effect, i.e., from 1st April, 1989,
were fully attracted with regard to the assessment in question (for A.Y.
1991-92). As per the substituted sub-section (1-A), where the loss declared by
an assessee has been reduced by reason of adjustments made under sub-section
(1)(a), the provisions of sub-section (1-A) would apply. The Supreme Court
noted that the Commissioner of Income Tax while rejecting the revision petition
of the petitioner had taken the view that whenever adjustment is made,
additional tax would be charged @ 20% of the tax payable on such excess amount.
The excess amount refers to the increase in the income and by implication the
reduction in loss where even after the addition there is negative income.
According to the Court, whether there should be levy of additional tax in all
circumstances and in cases where the loss is reduced, was the question to be
answered in the present case.

 

The Court noted that by the Taxation Laws (Amendment)
Act, 1991, a third proviso was inserted in section 32. Prior to the
insertion of this proviso, the depreciation was not restricted to 75% of
the amount calculated at the percentage on the written down value of such
assets. The return was filed by the assessee on 31st December, 1991,
prior to which date the Taxation Laws (Amendment) Act, 1991 had come into
operation. It was due to a bona fide mistake and oversight that the
assessee claimed 100% depreciation instead of 75%. The 100% depreciation of Rs.
3,33,77,70,317 was claimed on the written down value of the assets; 25%
depreciation was, thus, disallowed, restricting it to 75% and after reducing
25% of the depreciation the loss remained to the extent of Rs.
(-)3,43,94,90,393. Even after reduction of 25% depreciation the return of loss
of the assessee remained in the negative. In claiming 100% depreciation the
assessee claimed that there was no intention to evade tax and the said claim
was only a bona fide mistake.

 

The Supreme Court noted that by the Finance Act,
1993 section 143(1-A) was substituted with retrospective effect from 1st April,
1989 seeking to cover cases of returned income as well as returned loss.

 

In Commissioner of Income Tax, Gauhati vs.
Sati Oil Udyog Limited and Anr. (2015) 7 SCC 304,
the Supreme Court
noted that it had occasion to consider elaborately the provisions of section
143(1-A), its object and validity. There was a challenge to the retrospective
nature of the provisions of section 143(1-A) as introduced by the Finance Act,
1993. The Gauhati High Court had held that retrospective effect given to the
amendment would be arbitrary and unreasonable. An appeal was filed by the
Revenue in this Court in which the Supreme Court had occasion to examine the
Constitutional validity of the provisions. The Supreme Court in the above
judgment had held that the object of section 143(1-A) was the prevention of
evasion of tax. Relying on its earlier judgment in K.P. Varghese vs. ITO,
(1981) 4 SCC 173
, the Court in the above case held that the provisions
of section 143(1-A) should be made to apply only to tax evaders.

 

The Supreme Court observed that in the above case
it upheld the Constitutional validity of section 143(1-A), subject to holding
that the section can only be invoked where it is found on facts that the lesser
amount stated in the return filed by the assessee is a result of an attempt to
evade tax lawfully by the assessee.

 

According to the Supreme Court, applying the ratio
of the above judgment in the present case, it needed to find out whether 100%
depreciation as mentioned in the return filed by the assessee was a result of
an attempt to evade tax lawfully payable.

 

The Supreme Court, from the facts, noted that even
after disallowing 25% of the depreciation, the assessee in the return remained
in loss and the 100% depreciation was claimed in the return due to a bona
fide
mistake. By the Taxation Laws (Amendment) Act, 1991 the depreciation
in the case of a company was restricted to 75% which, due to oversight, was
missed by the assessee while filing the return. The Commissioner of Income Tax
by deciding the revision petition had also not made any observation to the
effect that the 100% depreciation claimed was with the intent to evade payment
of tax lawfully payable by the assessee; rather, the Commissioner in his order
dated 31st March, 1992 had observed that whenever adjustment is
made, additional tax has to be charged @ 20% of the tax payable on such excess amount.

 

The Court held that it is true that while
interpreting a tax legislation the consequences and hardship are not looked
into, but the purpose and object for which taxing statutes have been enacted
cannot be lost sight of. While considering the very same provision, section
143(1-A), its object and purpose and while upholding the provision, the Court
had held that the burden of proving that the assessee has attempted to evade
tax is on the Revenue which may be discharged by the Revenue by establishing
facts and circumstances from which a reasonable inference can be drawn that the
assessee has, in fact, attempted to evade tax lawfully payable by it. In the
present case, not even a whisper that the claim of 100% depreciation by the
assessee, 25% of which was disallowed, was with the intent to evade tax. The
provisions of section 143(1-A) in the facts of the present case cannot be
mechanically applied; it had made a categorical pronouncement in Commissioner
of Income Tax, Gauhati vs. Sati Oil Udyog Limited and Anr. (Supra)
,
that section 143(1-A) can only be invoked when the lesser amount stated in the
return filed by the assessee is a result of an attempt to evade tax lawfully
payable by the assessee.

 

In view of the above, the
Supreme Court held that mechanical application of section 143(1-A) in the facts
of the present case was uncalled for. It therefore allowed the appeal and set
aside the judgment of the Division Bench of the High Court as well as the
demand of additional tax dated 12th February, 1992 as amended on 28th
February, 1992.

 

11. New Delhi Television Ltd. vs. Deputy Commissioner of Income Tax Civil Appeal No. 1008 of 2020 Date of order: 3rd April, 2020

 

Re-assessment – Information which comes to the notice of the A.O. during
proceedings for subsequent assessment years can definitely form tangible
material to invoke powers vested with the A.O. u/s 147 of the Act

 

Re-assessment – The duty of the assessee is to disclose all primary
facts before the A.O. and it is not required to give any further assistance to
the A.O. by disclosure of other facts – It is for the A.O. at this stage to
decide what inference should be drawn from the facts of the case

 

Re-assessment – The assessee must be put to notice of all the provisions
on which the Revenue relies – The noticee or the assessee should not be
prejudiced or be taken by surprise

 

New Delhi Television Limited (hereinafter referred
to as the assessee), an Indian company engaged in running television channels
of various kinds, has several foreign subsidiaries one of which is based in the
United Kingdom named NDTV Network Plc, U.K. (hereinafter referred to as NNPLC).

 

The assessee submitted a return for F.Y. 2007-08,
i.e. A.Y. 2008-09, on 29th September, 2008 declaring a loss. This
return was processed u/s 143 of the Income-tax Act, 1961. The case was selected
for scrutiny and the final assessment order was passed on 3rd
August, 2012.

 

NNPLC had issued step-up coupon bonds of US $100
million which were arranged by Jeffries International and the funds were
received by NNPLC through Bank of New York. These bonds were issued in July,
2007 through the Bank of New York for a period of five years. The assessee had
agreed to furnish corporate guarantee for this transaction. These bonds were
subscribed to by various entities. They were to be redeemed at a premium of
7.5% after the expiry of the period of five years. However, these bonds were
redeemed in advance at a discounted price of US $74.2 million in November,
2009.

 

The A.O. held that NNPLC had virtually no financial
worth, it had no business worth the name and therefore it could not be believed
that it could have issued convertible bonds of US $100 million unless the
repayment along with interest was secured. This was secured only because of the
assessee agreeing to furnish a guarantee in this regard. Though the assessee
had never actually issued such guarantee, the A.O. was of the view that the
subsidiary of the assessee could not have raised such a huge amount without
having this assurance from the assessee. The transaction was of such a nature
that the assessee should be required to maintain an arm’s length from its
subsidiary, meaning that it should be treated like a guarantee issued by any
corporate guarantor in favour of some other corporate entity. The A.O. did not
doubt the validity of the transaction but imposed guarantee fee @ 4.68% by
treating it as a business transaction and added Rs. 18.72 crores to the income
of the assessee.

 

On 31st March, 2015, the Revenue sent a
notice to the assessee stating that the authority has reason to believe that
net income chargeable to tax for the A.Y. 2008-09 had escaped assessment within
the meaning of section 148 of the Act. This notice did not give any reasons.
The assessee then asked for reasons and thereafter on 4th August,
2015 the reasons were provided. The main reason given was that in the following
assessment year, i.e. A.Y. 2009-10, the A.O. had proposed a substantial
addition of Rs. 642 crores to the account of the assessee on account of monies
raised by it through its subsidiaries NDTV BV, The Netherlands, NDTV Networks
BV, The Netherlands (NNBV), NDTV Networks International Holdings BV, The
Netherlands (NNIH) and NNPLC.

 

The assessee had raised its
objection before the Dispute Resolution Panel (DRP) which came to the
conclusion that all these transactions with the subsidiary companies in the
Netherlands were sham and bogus transactions and that these transactions were
done with a view to get the undisclosed income, for which tax had not been
paid, back to India by this circuitous round-tripping. The A.O. relied upon the
order of the DRP holding that there is reason to believe that the funds
received by NNPLC were actually the funds of the assessee. It was specified
that NNPLC had a capital of only Rs. 40 lakhs. It did not have any business
activities in the United Kingdom except a postal address. Therefore, it
appeared to the A.O. that it was unnatural for anyone to make such a huge
investment of $100 million in a virtually non-functioning company and
thereafter get back only 72% of their original investment. According to the
A.O., ‘The natural inference could be that it was NDTV’s own funds introduced
in NNPLC in the garb of the impugned bonds.’ The details of the investors were
given in this communication giving reasons. Mention had also been made of
complaints received from a minority shareholder in which it is alleged that the
money introduced in NNPLC was shifted to another subsidiary of the assessee in
Mauritius from where it was taken to a subsidiary of the assessee in Mumbai and
finally to the assessee. NNPLC itself was placed under liquidation on 28th
March, 2011.

Therefore, the A.O. was of the opinion that there
were reasons to believe that the funds received by NNPLC were the funds of the
assessee under a sham transaction and that the amount of Rs. 405.09 crores
introduced into the books of NNPLC during F.Y. 2007-08 corresponding to A.Y.
2008-09 through the transaction involving the step-up coupon convertible bonds,
pertained to the assessee.

 

The assessee filed a reply to the notice and the
reasons given, and claimed that there had been no failure on its part to
disclose fully and truly all material facts necessary to make an assessment. The
assessee also claimed that the proceedings had been initiated on a mere change
of opinion and there was no reason to believe it. According to the assessee the
A.O. had accepted the genuineness of the transaction wherein NNPLC, the
subsidiary, had issued convertible bonds which had been subscribed by many
entities. It was urged that the A.O. had treated the transaction to be genuine
by levying guarantee fees and adding it back to the income of the assessee. In
the alternative, it was submitted that the notice had been issued beyond the
period of limitation of four years. According to the assessee it had not
withheld any material facts and, therefore, limitation of six years as
applicable to the first proviso to section 147 would not apply.

 

The A.O. did not accept these objections. The claim
of the assessee was disposed of by the A.O. vide order dated 23rd
November, 2015 wherein he held that there was non-disclosure of material facts
by the assessee and the notice would be within limitation since NNPLC was a
foreign entity and admittedly a subsidiary of the assessee and the income was
being derived through this foreign entity. Hence, the case of the assessee
would fall within the second proviso of section 147 of the Act and the
extended period of 16 years would be applicable. The objections were
accordingly rejected.

 

Aggrieved, the petitioner filed a writ petition in
the High Court challenging the notice. The writ petition was dismissed on 10th
August, 2017. Against this the assessee filed an appeal before the Supreme
Court.

 

According to the Supreme Court, the following
issues arose for its consideration:

 

(i)  Whether
in the facts and circumstances of the case, it can be said that the Revenue had
a valid reason to believe that undisclosed income had escaped assessment?

 

(ii) Whether
the assessee did not disclose fully and truly all material facts during the
course of original assessment which led to the finalisation of the assessment
order and undisclosed income escaping detection?

 

(iii)       Whether
the notice dated 31st March, 2015 along with reasons communicated on
4th August, 2015 could be termed to be a notice invoking the
provisions of the second proviso to section 147 of the Act?

 

Question No. 1

After consideration, the Supreme Court observed
that the main issue was whether there was sufficient material before the A.O.
to take a prima facie view that income of the assessee had escaped
assessment. It noted that the original order of assessment was passed on 3rd
August, 2012. It was thereafter, on 31st December, 2013, that the
DRP in the case of A.Y. 2009-10 raised doubts with regard to the corporate
structure of the assessee and its subsidiaries. It was noted in the order of
the DRP that certain shares of NNPLC had been acquired by Universal Studios
International B.V., Netherlands, indirectly by subscribing to the shares of
NNIH.

 

It was recorded in the reasons communicated on 4th
August, 2015 that NNPLC had no business activity in London. It had no
fixed assets and was not even paying rent. Other than the fact that NNPLC was
incorporated in the U.K., it had no other commercial business there. NNPLC had
declared a loss of Rs. 8.34 crores for the relevant year. It was also noticed
from the order of the A.O. that the assessee is the parent company of NNPLC and
it is the dictates of the assessee which were important for running NNPLC.
According to the Revenue, tax evasion petitions were filed by the minority
shareholders of the assessee company on various dates, i.e., 11th
March, 2014, 25th July, 2014, 13th October, 2014 and 11th
March, 2015, which complaints described in detail the communication between the
assessee and the subsidiaries and also allegedly showed evidence of
round-tripping of the assessee’s undisclosed income through a layer of
subsidiaries which led to the issuance of the notice in question.

 

According to the Supreme Court, the question as to
whether the facts which came to the knowledge of the A.O. after the assessment
proceedings for the relevant year were completed could be taken into
consideration for coming to the conclusion that there were reasons to believe
that income had escaped assessment, is the question that requires to be
answered. The Supreme Court, referring to its judgments in Claggett
Brachi Co. Ltd., London vs. Commissioner of Income Tax, Andhra Pradesh 1989
Supp (2) SCC 182; M/s Phool Chand Bajrang Lal and Anr. vs. Income Tax Officer
and Anr. (1993) 4 SCC 77;
and Ess Kay Engineering Co. (P) Ltd.
vs. Commissioner of Income Tax, Amritsar (2001) 10 SCC 189
, observed
that a perusal of the aforesaid judgments clearly showed that subsequent facts
which come to the knowledge of the A.O. can be taken into account to decide
whether the assessment proceedings should be re-opened or not.

 

Information which comes to the notice of the A.O.
during proceedings for subsequent assessment years can definitely form tangible
material to invoke powers vested with the A.O. u/s 147 of the Act. The material
disclosed in the assessment proceedings for the subsequent years as well as the
material placed on record by the minority shareholders form the basis for
taking action u/s 147. At the stage of issuance of notice, the A.O. is to only
form a prima facie view. In the opinion of the Supreme Court, the material
disclosed in the assessment proceedings for subsequent years was sufficient to
form such a view and it accordingly held that there were reasons to believe
that income had escaped assessment in this case. Question No. 1 was answered
accordingly.

 

Question No. 2

Coming to the second question, whether there was
failure on the part of the assessee to make a full and true disclosure of all
the relevant facts, the Supreme Court noted that the Revenue had placed
reliance on certain complaints made by the minority shareholders and it was
alleged that those complaints revealed that the assessee was indulging in
round-tripping of its funds. According to the Revenue the material disclosed in
these complaints clearly showed that the assessee was guilty of creating a
network of shell companies with a view to transfer its un-taxed income in India
to entities abroad and then bring it back to India, thereby avoiding taxation.
The Supreme Court did not go into this aspect of the matter because those
complaints were neither before the High Court nor before it and, therefore, it
would be unfair to the assessee if it relied upon such material which the
assessee was not confronted with.

 

According to the Supreme Court, the issue before it
was whether the Revenue could take the benefit of the extended period of
limitation of six years for initiating proceedings under the first proviso
of section 147. This could only be done if the Revenue could show that the
assessee had failed to disclose fully and truly all material facts necessary
for its assessment. In the opinion of the Supreme Court, the assessee had
disclosed all the facts it was bound to disclose. If the Revenue wanted to
investigate the matter further at that stage, it could have easily directed the
assessee to furnish more facts.

 

The Supreme Court held that the conclusion of the
High Court that there was no ‘true and fair disclosure’ was not correct. The
assessee had made a disclosure about having agreed to stand guarantee for the
transaction by NNPLC and it had also disclosed the factum of the
issuance of convertible bonds and their redemption. The Supreme Court noted
that the A.O. knew who were the entities who had subscribed to the convertible
bonds and in other proceedings relating to the subsidiaries the same A.O. had
knowledge of the addresses and the consideration paid by each of the
bondholders as was apparent from the assessment orders dated 3rd
August, 2012 passed in the cases of M/s NDTV Labs Ltd. and M/s NDTV Lifestyle
Ltd. Therefore, in the opinion of the Supreme Court, there was full and true
disclosure of all material facts necessary for its assessment by the assessee.

 

The Supreme Court noted that the fact that step-up
coupon bonds for US $100 million were issued by NNPLC was disclosed; who were
the entities which subscribed to the bonds was disclosed; and the fact that the
bonds were discounted at a lower rate was also disclosed before the assessment
was finalised. According to the Court, this transaction was accepted by the
A.O. and it was clearly held that the assessee was only liable to receive a
guarantee fees on the same which was added to its income. Without stating
anything further on the merits of the transaction, the Supreme Court was of the
view that it could not be said that the assessee had withheld any material
information from the Revenue.

 

As regards the contention
of the Revenue that the assessee, to avoid detection of the actual source of
funds of its subsidiaries, did not disclose the details of the subsidiaries in
its final accounts, balance sheets and profit and loss account for the relevant
period as was mandatory under the provisions of the Indian Companies Act, 1956,
the Supreme Court noted that the assessee had obtained an exemption from the
competent authority under the Companies Act, 1956 from providing such details
in its final accounts, balance sheets, etc. The assessee was therefore not
bound to disclose this to the A.O. The A.O., before finalising the assessment
of 3rd August, 2012, had never asked the assessee to furnish the
details.

 

Regarding the contention of the Revenue that the
assessee did not disclose who had subscribed what amount and what was its
relationship with the assessee, the Supreme Court observed that the first part
did not appear to be correct. It noted that there was material on record to
show that on 8th April, 2011 NNPLC had sent a communication to the
Deputy Director of Income Tax (Investigation), wherein it had not only
disclosed the names of all the bond holders but also their addresses and number
of bonds along with the total consideration received. This chart formed part of
the assessment orders dated 3rd August, 2012 in the case of M/s NDTV
Labs Ltd. and M/s NDTV Lifestyle Ltd. The said two assessment orders were
passed by the same officer who had passed the assessment order in the case of
the assessee on the same date itself. Therefore, the entire material was
available with the Revenue.

 

The Supreme Court was of the view that the assessee
had disclosed all the primary facts necessary for the assessment of its case to
the A.O. What the Revenue was urging before it was that the assessee did not
make a full and true disclosure of certain other facts. According to the Court,
the assessee had disclosed all primary facts before the A.O. and it was not
required to give him any further assistance by disclosure of other facts. It
was for the A.O. at this stage to decide what inference should be drawn from
the facts of the case. In the present case, the A.O., on the basis of the facts
disclosed to him, did not doubt the genuineness of the transaction set up by
the assessee. This the A.O. could have done even at that stage on the basis of
the facts which he already knew. The other facts relied upon by the Revenue
were the proceedings before the DRP and facts subsequent to the assessment
order, and which the Supreme Court had already dealt with while deciding
Question No. 1. However, according to the Supreme Court, that cannot lead to
the conclusion that there is non-disclosure of true and material facts by the
assessee.

 

The Court noted that whereas before it the Revenue
was strenuously urging that the assessee is guilty of non-disclosure of
material facts, but before the High Court the case of the Revenue was just the
opposite. The Revenue, in response to the writ petition filed by the assessee
before the High Court, had contended that the condition that the income should
have escaped assessment due to failure on the part of the assessee to disclose
fully and truly all material facts necessary for making assessment, was not
relevant to decide the issue before the Hon’ble Court. According to the Supreme
Court, the Revenue could not now turn around and urge that the assessee is
guilty of non-disclosure of facts.

 

The Supreme Court held that the assessee had fully
and truly disclosed all material facts necessary for its assessment and,
therefore, the Revenue could not take benefit of the extended period of
limitation of six years. Question No. 2 was answered accordingly.

 

Question No. 3

It was urged by the Revenue that in terms of the
second proviso to section 147 of the Act read with section 149(1)(c),
the limitation period would be 16 years since the assessee had derived income
from a foreign entity.

 

The Supreme Court noted that the notice dated 31st
March, 2015 was conspicuously silent with regard to the second proviso.
It did not rely upon the second proviso. Besides,, there was no case set
up in relation to the second proviso either in the notice or even in the
reasons supplied on 4th August, 2015 with regard to the notice. It
was only while rejecting the objections of the assessee that reference had been
made to the second proviso in the order of disposal of objections dated
23rd
November, 2015.

 

On behalf of the Revenue it was urged that mere
non-naming of the second proviso in the notice does not help the
assessee. It had been urged that even if the source of power to issue notice
has been wrongly mentioned but all relevant facts were mentioned, then the
notice could be said to be a notice under the provision which empowers the
Revenue to issue such notice.

 

The Supreme Court observed that there could be no
quarrel with this proposition of law. However, according to it, the noticee or
the assessee should not be prejudiced or be taken by surprise. The
uncontroverted fact was that in the notice dated 31st March, 2015
there was no mention of any foreign entity. Even after the assessee
specifically asked for reasons, the Revenue only relied upon facts to show that
there was reason to believe that income has escaped assessment and this
escapement was due to the non-disclosure of material facts. There was nothing
in the reasons to indicate that the Revenue was intending to apply the extended
period of 16 years. It was only after the assessee filed its reply to the
reasons given that in the order of rejection for the first time was reference
made to the second proviso by the Revenue.

According to the Supreme
Court this was not a fair or proper procedure. If not in the first notice, at
least at the time of furnishing the reasons the assessee should have been
informed that the Revenue relied upon the second proviso. The assessee
must be put to notice of all the provisions on which the Revenue relies. In
case the Revenue had issued a notice to the assessee stating that it relied
upon the second proviso, the assessee would have had a chance to show
that it was not deriving any income from any foreign asset or financial interest
in any foreign entity, or that the asset did not belong to it or any other
ground which may be available. The assessee could not be deprived of this
chance while replying to the notice.

 

The Court held that the Revenue cannot take a fresh
ground. The notice and reasons given thereafter do not conform to the
principles of natural justice and the assessee did not get a proper and
adequate opportunity to reply to the allegations which were now being relied
upon by the Revenue. The assessee could not be taken by surprise at the stage
of rejection of its objections or at the stage of proceedings before the High
Court that the notice is to be treated as a notice invoking provisions of the
second proviso of section 147 of the Act.

 

Accordingly, the Supreme Court answered the third
question by holding that the notice issued to the assessee and the supporting
reasons did not invoke provisions of the second proviso of section 147
and therefore the Revenue could not be permitted to take benefit of the second proviso.

 

The Supreme
Court allowed the appeal by holding that the notice issued to the assessee
showed sufficient reasons to believe on the part of the A.O. to reopen the
assessment but since the Revenue had failed to show non-disclosure of facts,
the notice having been issued after a period of four years was required to be
quashed. Having held so, it was made clear that it had not expressed any
opinion on whether on the facts of this case the Revenue could take benefit of
the second proviso or not. Therefore, the Revenue may issue fresh notice
taking benefit of the second proviso if otherwise permissible under law.
It was clarified that both the parties shall be at liberty to raise all
contentions with regard to the validity of such notice.

 

SOCIETY NEWS

FEMA REFRESHER COURSE

 

Enthused by the response to the four-day
Refresher Course followed by a panel discussion held in the month of April,
another Refresher Course was organised in June, 2020 that was far more
extensive and provided in-depth coverage of topics. The topics covered were
truly diverse, such as ‘Understanding the Structure of FEMA’, ‘Practical
Aspects of filing various Forms’, ‘Import and Export of Goods and Services’ and
‘Doing Business through Liaison Office, Project Office, Branch Office’. Also
covered were some more complex topics like joint venture, wholly-owned
subsidiary and indirect investment in India, investment on non-repatriation
basis and FDI in Limited Liability Partnerships, practical cases related to
compounding and so on.

 

Some unusual topics covered were FEMA from
an auditor’s perspective, fundamental and complex issues under the Benami Law,
Anti-Money Laundering Law and handling of offences and prosecution under FEMA.
This session also featured a panel discussion which covered all the above
topics.

 

The speakers for all the sessions were an
eclectic mix ranging from practising Chartered Accountants, Solicitors and
Consultants to members of the Income Tax Department and Advocates of the
Supreme Court of India. This gave participants a holistic view of FEMA which
will hone their skills and take them a long way in their professional careers.

 

The response to the Refresher Course was
overwhelming, with 298 participants registering from various cities across the
country, including Chennai, Indore and Gurugram. The participants appreciated
the fact that speakers not only explained the topics satisfactorily and
supplemented it with real-life situations, but also answered their queries and
concerns even if it meant going well beyond the time allotted for the session.
In a nutshell, it was a very enriching course for the participants, speakers
and conveners alike.


SEVEN SPIRITUAL LAWS OF SUCCESS

 

An online meeting of the Study Circle of the
Human Resource Development Committee was held on 12th May. The
speaker was Vinod Kumar Jain, who offered learnings from the book ‘Seven
Spiritual Laws of Success
’ by the eminent author and spiritual ‘guru’ Deepak
Chopra
.

 

The speaker started by asking the question,
how does one define the term ‘Success’? He answered by stating that in addition
to material wealth it will generally include good health, energy, enthusiasm
for life, fulfilling relationship, creative freedom, emotional and
psychological stability, sense of well-being and peace of mind. But ‘True
Success’ is the experience of a miracle of divinity unfolding within us which
is possible through understanding of the seven spiritual laws. The speaker then
explained each of the seven spiritual laws with examples from his own life.
After explaining the law, he described how the same can be applied in our daily
lives.

 

FIRST. The Law of Pure Potentiality. Our true self is one of pure
potentiality; we align with the power that manifests everything in the
universe. Practice: Meditation,
silence, non-judgement and being with nature.

SECOND. The
Law of Giving
. The universe operates through dynamic exchange of giving and
receiving. Practice: Learn to give
what you want.

THIRD. The
Law of Karma
. Every action generates a force of energy that returns to us
in like kind; what we sow is what we reap. Practice:
Witness the choice you make.

FOURTH. The
Law of Least Effort
. Nature functions with effortless ease. When we harness
the forces of harmony, joy and love, we easily create success and good fortune.
Practice: Accept, respond and no
defence.

FIFTH. The
Law of Intention and Desire
. Inherent in every intention and desire is the
mechanics for its fulfilment. Practice:
Make a list of desires, see it regularly and surrender.

SIXTH. The
Law of Detachment
. In order to acquire anything in the physical universe,
one has to relinquish one’s attachment to it. Practice:
Step infield of all possibilities.

SEVENTH. The
Law of Dharma or Purpose in Life
. Everyone
has a purpose in life… a unique gift or special talent to give to others. Practice: Use unique talent to serve.

There were over 175 participants and they
raised several questions. The speaker responded to all of them in detail.

The presentation on YouTube is available on
the Society’s link (http://youtu.be/1pw2XHC8wRA).

 

THE MAN OF THE CENTURY

 

Another meeting of the Study Circle of the
Human Resource Development Committee was held online on 9th June on
the topic ‘Values: Bapu@150’ . The speaker was Mukesh Trivedi. This talk
was in continuation of the celebration of the 150th birthday of
Mahatma Gandhi (fondly called Bapu) on 2nd October, 2019 by BCAS.

 

Initially, the speaker touched on how
different sections of the community perceived Bapu’s values today. He opined
that the new generation needed to know more about Bapu. In fact, Bapu was the
most respectful leader of the country who truthfully walked the values which he
talked about. He was the man of the century, a true Yug Purush. Each and
every citizen should recall his values for the holistic growth of the nation.

 

Next, the speaker discussed the Ekadash
Vrat
, i.e. the ‘11 Values’ or guiding principles on which Bapu lived his
life. He appealed to and encouraged participants to pick any value of Bapu and
imbibe it in their lives. If they did that, it would be a fitting tribute and
respectful celebration of the 150th year of Bapu’s birth
anniversary.

 

Speaker Mukesh Trivedi listed Bapu’s
Eleven Values as: Ahimsa, satya, asteya, brahmacharya, asangraha,
sharirshram, aswad, sarvatrabhayvarjan, swadeshi, sparsh, bhavana
. Of these
eleven, the values that he chose to focus on were three core values, Brahmacharya,
Ahimsa and Satya.

 

Discussing these, he shared the Vedantic
principles and Bapu’s views through his presentation. He also shared anecdotes
quoting from Bapu’s life described in his autobiography ‘My Experiments with
Truth’.

 

Mukesh Trivedi explained the three core values as under:

Brahmacharya
is living the life of moderation in ‘sense enjoyments’ and control over
‘indulgence’.

 

Ahimsa is
non-injury or non-violence which ought to be practised at the level of emotions
in the mind.

 

Satya is truthfulness lived with a strong conviction
of values. It must be followed at the level of intellect in the mind.

 

The speaker also replied to the questions
posed to him by participants, some of whom had logged in from Australia, UK,
New Zealand, Gujarat and from Mumbai.

 

This presentation is available on the
Society’s link at: https://youtu.be/fgoTUSL8Wtc).

 

WEBINAR ON MSME

 

The Seminar, Public Relations and Membership
Development  Committee organised a
webinar on Micro, Small and Medium Enterprises (‘MSME’) jointly with the
Association of Chartered Accountants, Chennai; the Hindustan Chamber of
Commerce; Jain International Trade Organisation; and Southern India Rajasthani
Chamber of Commerce & Industry. The session was conducted online on 13th
June.

 

It started with an introductory speech by BCAS
President Manish Sampat who shared details about BCAS, its motto
and its activities. He also introduced the subject and its relevance in the
current times.

 

The first speaker was Anand Bathiya
who explained the context, scope and benefits of registration as an MSME. He
described the revised definition of MSME, the registration process, the
benefits and details of the various schemes for MSMEs, and key initiatives such
as the Atmanirbhar Scheme and the TReDS platform.

 

Chirag Doshi,
the second speaker, dwelt on Standard Operating Procedures for MSMEs and
explained the plan of action for revival of small enterprises post-opening
after lockdown due to Covid-19.

 

Taking up the third session, Mrinal Mehta
explained the tax provisions applicable to MSMEs. He discussed the various
tax incentives and schemes available under the direct and indirect tax regime
for MSMEs, including the reliefs in the statutory due dates announced by the
government due to Covid-19.

 

The panel of Coordinators posed the
questions asked by the participants and the speakers answered all of them in
detail.

 

The session was attended by more than 650
participants from all over the country. They were unanimous in stating that
they had benefited immensely from the knowledge and practical experience shared
by the speakers.

 

‘VIRTUAL’ STUDENTS STUDY CIRCLE

 

The Students Forum under the auspices of the
HRD Committee organised the second ‘Virtual’ Students Study Circle meeting on ‘Direct
Tax Annual Compliance-Revised Income Tax Return Forms
’ on 19th
June via Zoom Meetings.

 

The Study Circle was led by Utsav Shah
and Samarth Patil who are experts on the subject. Azvi Khalid,
the student Coordinator, introduced the speakers and spoke about the
forthcoming student events. Raj Khona addressed the students and
encouraged them to actively participate in the events of the Students Forum.

 

Utsav Shah
briefed students about the basics of ITR and shared the revised due dates. He
presented latest amendments in the applicability of tax audit in a lucid manner
and explained various additions and deletions in the revised ITR Forms 1, 2, 3
and 4 in relation to income for ease of understanding.

 

Samarth Patil,
on the other hand, shared his insights on ITR Forms 5, 6 and 7. He also briefly
discussed the new tax regime, pass-through income, verification process,
transfer pricing and Form 26AS. He provided the students with an easy checklist
for selecting the correct ITR forms.

 

The interactive session ended with Vedant
Satya
, Student Coordinator, proposing the vote of thanks to the speakers.

 

The session can be viewed on the BCAS YouTube Channel at:
https://youtu.be/1e7jKQ2DIK0.

 

WEBINAR ON
‘KEY FCRA AND TAX CHALLENGES…’

 

The Bombay Chartered Accountants’ Society
organised a webinar on ‘Key FCRA & Tax Challenges for NGOs & Public
Trusts’
jointly with DevelopAid, Mahavan and Save The Children, India. It
was conducted online on 20th June.

BCAS
President Manish Sampat set the ball rolling by sharing details of the Society.
He also introduced the subject and its relevance in contemporary times.

 

Speaker Sanjay Agarwal started by
describing the key challenges under the Foreign Contributions Regulations Act
(FCRA) with respect to Prior Permission, Registration, Cancellation, Renewal,
Affidavit, Fund-Raising, Board, Covid-19 and FC issues, filing Covid-19 forms,
separate books of accounts and refund of unspent funds. He explained all the
rules and regulations concerned in detail and answered the questions posed to
him.

 

In the second
part of the session, the speaker covered the issues under Income Tax relevant
to the NGOs and Trusts. He explained the reasons for cancellation of 12A
registration, grant or service contracts, limits of remuneration to trustees,
section 115TD – Penal Tax and payments, TDS issues for trusts, anonymous or
cash donations, issues in filing tax returns for trusts and so on.

 

The third part of the webinar focused on
issues under GST to be taken care of by trusts. The speaker covered the
registration limits, scope of taxable supply and so on.

 

Every presentation by Sanjay Agarwal
was followed by a detailed question-answer session.

 

This webinar was attended by more than 500
participants, including Trustees and Finance Managers of renowned trusts and
foundations, from all over the country who said they had benefited immensely
from the knowledge and practical experience shared by the speaker.

 

MOTIVATIONAL
MUSIC VIDEO

 

In these unprecedented times, each of us has
been dealing in our own ways with the challenges that life has been throwing at
us. But to boost the indomitable spirit lying dormant within one each of us, a
motivational music video has been released by our Yuva Shakti and Jyeshta
Shakti
for the benefit of all. The intention was to give our performing
artists
a platform to express their josh and motivate members to
defeat the pandemic through sheer determination of mind. The idea of making the
video germinated in the minds of President Manish Sampat and the
Chairman of the SPMRD Committee, Narayan Pasari.

 

While BCAS has been a trail-blazer
over the last seven decades, be it the residential refresher courses, the
workshops, the lecture meetings, the expert talks, etc., a music video is a
novelty and has never been done before.

 

But with the blessings of the Almighty,
things started falling in place and soon the song started taking shape… Vijay
Bhatt
, a passionate musician, was roped in to lead the project. The need
for a Sutradhar was recognised early and the choice unanimously fell on
the Hon. Joint Secretary, Mihir Sheth, who enthusiastically penned the
lines and delivered them in his inimitable baritone.

 

The lyrics were penned by Past President Mayur
Nayak
over the span of an evening and the inspirational words were set to
music by Vijay Bhatt and others. The singers included our Yuva Shakti
members – Aditya Phadke, Devansh Doshi, Kartik Srinivasan,
Parita Shah, Ryan Fernandes, Tej Bhatt and the winner of
the singing competition at Tarang 2019, Vani Srinivasan;
they were ably supported by Vijay Bhatt and Mayur Nayak.

 

The Office-Bearers of the BCAS and
the Committee torch-bearers also enthusiastically participated in the music
video in colourful traditional attire. Over the next three weeks the video was
shot with the support of family members / colleagues as the location for the
shoot was either their homes or offices; social distancing norms were
maintained while learning and recording the assigned lines – some in the dead
of the night when the little one finally fell asleep, others at the crack of
dawn when all was quiet! In the capable hands of the video editor, ACCA Anirudh
Parthasarthy
, the video came to life, interspersed with visuals from the
many social events organised by BCAS over the years.

 

After a teaser was put out to announce the
impending release of the video, on 29th June, 2020 history was made
with BCAS releasing its first-ever motivational music video.

 

The Chairman of the SPRMD Committee, Narayan
Pasari
welcomed the participants, while President Manish Sampat and
Vice-President Suhas Paranjpe shared their thoughts on the video and the
work done by the Committee over the past one year.

 

Chairman Narayan
Pasari
revealed the idea behind the video, while Vijay Bhatt shed
light on the idea and the efforts that went into making it. The video was then
officially released by the President. Manmohan Sharma, Convener of the
SPRMD Committee, proposed the vote of thanks to all who were involved in the
making of the video.

 

A lot of efforts were put in by all the
performers for the video which was made under lockdown conditions and with the
help of personal devices. They did all this because of their passion for music.
A big applause for their efforts.

 

Given the lockdown restrictions still in
place, the entire proceedings were held online… and while all sat in their
respective homes / offices, the song and the journey behind it wove a magical
spell around the participants, bringing them (virtually) close to one another.

REGULATORY REFERENCER

DIRECT TAX

 

1.   Income-tax (9th Amendment) Rules,
2020
– Amendment to Rules 10TD and 10TE – the ‘Safe
Harbour Rules for International Transactions
’ shall apply for A.Y. 2020-21.
[Notification No. 25 of 2020 dated 20th May, 2020.]

 

2.   Clarifications in respect of prescribed
electronic modes u/s 269SU of the Act.
Provisions
of section 269SU shall not be applicable to a specified person having only B2B
transactions (i.e.. no transaction with retail customer / consumer) if at least
95% of aggregate of all amounts received during the previous year, including
amount received for sales, turnover or gross receipts, are by any mode other
than cash. [Circular No. 12/2020 dated 20th May, 2020.]

 

3.   Income-tax (11th Amendment) Rules,
2020
– Insertion of Rule 114I – Format and
procedure for uploading of Annual Information Statement prescribed.
[Notification No. 30 of 2020 dated 28th May, 2020.]

 

4.   Income-tax (12th Amendment) Rules,
2020
– Rule 12 amended – Form ITR-1 (SAHAJ), ITR-2,
ITR-3, ITR-4 (SUGAM), ITR-5, ITR-7 for A.Y. 2020-21 prescribed. [Notification
No. 31 of 2020 dated 29th May, 2020.]

 

5.   Cost Inflation Index for
F.Y. 2020-21 is 301.
[Notification No. 32 of 2020 dated 12th
June, 2020.]

 

ACCOUNTS AND AUDIT

 

A. Subsequent Events – Key Audit Considerations
amid Covid-19
– ICAI’s Guidance related to the
auditor’s responsibilities in relation to obtaining sufficient appropriate
audit evidence about subsequent events that is impacted by the Covid-19
pandemic, and how the results of the auditor’s procedures on subsequent events
impact the auditor’s report. The Guidance also provides examples of events or
conditions that may be relevant in the current environment. [ICAI’s Auditing
Guidance dated 23rd May, 2020.]

 

B. Advisory for CAs – CSR Provisions (section 135
of the Companies Act)
– Companies that undertake
CSR activities through a third party (trust / society / section 8 Company /
NGO) are advised to obtain an Independent Practitioner’s Report on funds
utilisation from the auditor / CA in practice of such third party to whom funds
are provided. The advisory includes a draft format of the Independent
Practitioner’s Report. [ICAI’s Advisory dated 29th May, 2020.]

 

FEMA

 

(I) Foreign
Portfolio Investors (FPIs) have been permitted to invest under the Voluntary
Retention Route (VRR) in Debt Instruments.
Investments under VRR are long-term in nature and
stable. Under the VRR, FPIs are required to invest at least 75% of their
Committed Portfolio Size (CPS) within three months from the date of allotment.
In view of the pandemic, it has been decided to allow FPIs that have been
allotted investment limits between 24th January, 2020 (the date of
reopening of allotment of investment limits) and 30th April, 2020 an
additional time of three months to invest 75% of their CPS. For FPIs
availing the additional time, the retention period for the investments would be
reset to start from the date that the FPI invests 75% of its CPS. [A.P. (DIR
Series 2019-20) Circular No. 32, dated 22nd May, 2020.]

 

(II) In view of the pandemic, it
has been decided to extend the time period for completion of remittances
against normal imports
(except in cases where amounts are withheld towards
guarantee of performance, etc.) from the existing period of six months to 12
months from the date of shipment for such imports made on or before 31st July,
2020. Normal imports would not cover import of gold or diamonds and precious
stones or jewellery. [A.P. (DIR Series 2019-20) Circular No. 33, dated 22nd
May, 2020.]

 

(III) RBI has enacted regulations for ‘mode of payment’ in case of
investment by various foreign investors. FPIs and FVCIs have been permitted to
open foreign currency account and SNRR account for investments in India. It
provides that the foreign currency account and SNRR account can be used only
for transactions under ‘this schedule’. The regulations on ‘mode of payment’ do
not have any Schedule. It was meant to refer to Schedules under the Non-Debt
Instruments Rules. This was an anomaly. RBI has now amended the Foreign
Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments)
Regulations to specify that a foreign currency or SNRR account used by FPIs
or FVCIs
can be used only for transactions under their respective schedules
(Schedules II and VII, respectively, of Non-Debt Instrument Rules). Further, an
FPI and FVCI can pay the consideration for trading in units of an Investment
Vehicle, listed or to be listed on the stock exchanges in India, out of their
SNRR account. [Notification No. FEMA, 395(1)/2020-RB dated 15th
June, 2020.]

 

GOODS AND SERVICEs TAX (GST)

III. AUTHORITY
OF ADVANCE RULING (AAR AND AAAR)

 

25. [2020 (5) TMI 603] M/s Homeable Constructions and Estates Private Limited [AAR, Karnataka] Date of order: 20th May, 2020

 

National
Centre for Biological Sciences (NCBS) is not a government entity and therefore
GST is leviable @ 18% on works contract services provided to it

 

FACTS

The applicant had entered
into a works contract agreement with the National Centre for Biological
Sciences (NCBS) for construction of a hostel building. The Council
administering the institute had only four members appointed by the government.
As per Notification No. 24/2017-CT(R) dated 21st September, 2017,
the GST rate for composite supply of works contract service is 18% and in case
such services are provided to Central Government, State Government, Union
Territory, a local authority, a Government Authority or a Government Entity,
the GST rate is 12%. The question was about GST rate for works contract service
provided by the applicant to NCBS.

 

HELD

It was held that NCBS was not
a government entity as it was not an authority set up by Parliament or State
Legislature and government did not have 90% participation. Further, the service
procured by NCBS was not in relation to work entrusted by government in view of
clause (vi) of Notification No. 11/2017 – Central Tax (Rate) dated 28th
June, 2017. Thus, works contract service provided by the applicant was held to
be liable to 9% CGST and 9% KGST vide serial No. 3(xii) of Notification
No. 11/2017-CT (Rate) dated 28th June, 2017.

 

26. [2020 (5) TMI 581] LSquare Eco Products Pvt. Ltd. [AAR, Karnataka] Date of order: 20th May, 2020

 

Kraft paper
honeycomb board is classified under HSN Code 4808 90 00

 

FACTS

The applicant was a
manufacturer of kraft paper honeycomb board which by structure is similar to
corrugated paper board classified under HSN Code 48081000. Such paper honeycomb
board consists of 80 to 90% of kraft paper and the rest is paper to paper
adhesive which is used in primary packing of goods as a cushioning material,
separators or edge protector, for making shipping cartons of goods and as
pallets and pallet boxes. Advance ruling was sought on the HSN code of kraft
paper-made honeycomb boards as HSN Code 48081000 read as ‘corrugated paper and
paper board, whether or not perforated’ which did not specifically mention
‘paper honeycomb board’.

 

HELD

Considering the submissions
made by the applicant, the Authority verified the structure and purpose for
which kraft paper honeycomb board or paper honeycomb board was used and held
that these were similar to corrugated paper board classified under 48081000.
The only difference was that paper honeycomb board consisted of honeycomb-like
structure core material at the centre and on either side of this one or more
layer of kraft paper was glued by using adhesive with fluting, direction being
perpendicular to corrugated boards. Hence, honeycomb paper board was held to be
classified under HSN code 48089000, i.e., under the category ‘other’.

 

27. [2020 (5) TMI 602] Mahalakshmi Mahila Sangha [AAR, Karnataka] Date of order: 21st May, 2020

 

TDS u/s 51
is not applicable to supply of exempt services

 

FACTS

The applicant was engaged in
providing catering services to educational institutions as per Sarva Shikshana
Abhiyana e-tendering sponsored by state / Central / Union Territory. The claim
of the applicant was that the service provided by it was exempt vide
entry No. 66 of Exemption Notification No. 12/2017-CT(R) dated 28th
June, 2017 and therefore sought advance ruling on liability to deduct tax.

 

HELD

The Advance Ruling Authority
held that the statutory provision of tax deduction at source u/s 51 of the CGST
Act is applicable on the payment made to a supplier of taxable services. Since
it was a case of exempt services, the amount received was held as not liable to
tax deduction at source.

 

28. [2020-TIOL-112-AAR-GST] Penna Cement Industries Limited [Telangana State Authority] Date of order: 2nd March, 2020

 

In case of
ex-factory sales, though the sale terminates at the factory gate, but if the
goods are taken by the recipient to another state, it is an inter-state sale
liable for IGST

 

FACTS

The applicant is a
manufacturer of cement. It occasionally undertakes inter-state sale on
ex-factory basis. When it makes an ex-factory sale, delivery terminates at its
factory gate but the further movement is carried on by the recipient or
transporter of goods up to the billing address state. The question before the
Authority is whether it should charge IGST in respect of such supplies.

 

HELD

The Authority noted that IGST
is chargeable on ex-factory inter-state supplies since the goods are made
available by the supplier to the recipient at the factory gate. However, this
is not the point where the movement terminates since the recipient subsequently
assumes the charge for transportation of goods up to the destination in another
state where the goods are destined. This is the place of supply in terms of
section 10(1)(a) of the IGST Act. Thus, since the location of the supplier and
the place of supply fall under different states, the supply qualifies as an
inter-state supply liable for IGST.

 

29. [2020-TIOL-111-AAR-GST] M/s Sri Venkateshwara Agencies [Telangana State Authority] Date of order: 2nd March, 2020

 

Supply of ice-cream with or without service activities in the premises
is covered by Notification 11/2017-Central Tax (Rate). Ice-cream supplied in
bulk quantity to caterers / push-cart vendors is a supply of goods since there
is no element of service

 

FACTS

The applicant is a
distributor of Scoops brand ice-cream and ice-cream products are supplied by it
to sub-distributors, hotels, for party orders and to retail outlets. The
question before the Authority is the taxability of ice-cream and allied
products, milk shakes served in the parlour with or without adding any
ingredients like fruits or topping sauces; sold in the parlour as such, i.e.,
in cups, cones, bars, sticks, novelties, 1/2 litre packs, party packs and bulk
packs, etc.; party orders, i.e., sale of bulk ice-cream to caterers as
take-away; serving of ice-cream with ingredients like fruits or toppings as per
guests’ requirements or taste; ice-cream products in cups, cones, bars, sticks,
novelties, etc., sold to push-cart vendors who in turn sell it to their
customers.

 

HELD

The Authority noted that an
ice-cream parlour would fall within the term ‘eating joint’ and supply of
ice-cream along with or without service activities would fall within the
definition of restaurant service, attracting GST @ 5% as per serial No. 7(ii)
of Notification 11/2017-Central Tax (Rate) without Input Tax Credit. Sale of
bulk ice-creams to caterers as take-away (party orders) does not involve any
service and, therefore, is to be reckoned as supply of goods, hence 11/2017 is
not applicable. Further, supply / serving of ice-creams with ingredients like
fruits or toppings as per guest requirements at customers’ premises is covered
by Notification 11/2017 and attracts GST @ 5%. Ice-cream and allied products
sold to push-cart vendors do not involve any element of service, hence 11/2017
is inapplicable.

 

 

 

 

VAT

4. Commercial Tax Officer vs. M/s Bombay Machinery Stores Civil Appeal No. 2217 of 2011 Date of order: 7th April, 2011 (Supreme Court)

Constructive
delivery u/s 6(2) of the CST Act, 2002

 

FACTS

The Supreme Court in its
judgment in this case, overruled the Delhi High Court judgment in the case of Arjan
Das Gupta vs. The Commissioner, Delhi Administration (1980) 45 STC 52
.
In that judgment, the Delhi High Court had developed a principle akin to constructive
delivery qua the termination of movement of goods as contemplated under
Explanation 1 to section 3 of the CST Act, 1956.

 

The High Court had said, ‘
Normally, when the goods are carried by a carrier from one State to another,
the delivery is taken by the importer immediately after the goods land in the
importing State. Thus, normally, the landing of the goods in the importing
State and the delivery of the goods are almost simultaneous acts, although
technically there will be some hiatus between the two. Considering these
commercial facts, it is difficult to accede to the retailer’s contention that
the movement of goods continues even if the goods have landed in Delhi only
because the importer has transferred the documents of title to the purchasing
retailers and such retailers take delivery from the Railways at a subsequent
time. If taking delivery is the test of termination of movement and not the
landing of the goods in an importing State, Explanation 1 to section 3(b) of
the Central Sales Tax Act, 1956 would lead to anomalous results. If, after the
landing of the goods in Delhi, the Railway receipts are endorsed one after
another to ten persons and the delivery is taken by the tenth person, say after
3 months, the movement of goods would on the dealer’s interpretation
artificially continue for three months after the landing of the goods in Delhi.

 

This decision of the Delhi
High Court, which held that Explanation 1 to section 3(b) of the CST Act, 1956
did not permit the dealers to expand the movement of goods beyond the time of
physical landing of the goods in the Union Territory of Delhi, was thereafter
followed in many other states. The assessing authorities in Maharashtra have
also followed this decision, more particularly in the case of yarn dealers and
such second sales (popularly known as in-transit sales) have been disallowed if
such sales in this state were not effected by such dealers immediately after
the landing of the goods in the state. In fact, some A.O.s held the view that
such second sales should be effected even before the landing of the goods in
the state.

 

The Commercial Tax Department
of the state of Rajasthan had issued two Circulars based on the said Delhi High
Court judgment. The first one was issued on 16th September, 1997
informing the trade that the reasonable time for effecting such second sale u/s
6(2) of the Act would be ten days after the goods land in their state, i.e. the
destination state. In the opinion of the said Department, normally the
transporters impose a condition of delivery of the goods at the destination
within ten days. Therefore, the Circular stated that if the carrier retained
the goods for a period beyond ten days, then there was a clear inference that
the consignee was aware of the arrival of the goods and the transporter was
holding the goods on his behalf as a bailee for the consignee. Any such second sale
effected after ten days was thus treated as local sale. Aggrieved by such
unreasonable limitation laid down by the Circular, the representatives of the
trade approached the authority and the authority was pleased to increase the
period from ten to 30 days by another Circular dated 15th April,
1998.

 

In this particular case, the
Bombay Machinery Store had purchased electric motors and their parts in the
year 1995-96 out of the state of Rajasthan and sold them to purchasers within
the Kota region of the same state. For such sales, they obtained the benefit of
exemption u/s 6(2) of the 1956 Act. These goods had remained with the transport
company upon arrival in Kota for more than a month. But this claim of sales u/s
6(2) was disallowed by the assessing authority for the reason that after
importing these goods into Rajasthan, sale was effected through transport
receipt on obtaining separate orders. Such sales, in the opinion of the
assessing authority, constituted sales within the state and hence were taxable
at 12% per annum under the Rajasthan Sales Tax Act, 1954. Even though the
second sales effected by the Bombay Machinery Stores u/s 6(2) of the CST Act,
1956 were prior to the issuance of the Circulars, the assessing authority had
disallowed such sales being beyond the period of 30 days. However, the appeal
against the assessment order was allowed by the Deputy Commissioner, Appeals.
And the Rajasthan Tax Board confirmed this order. The Rajasthan High Court
upheld the orders passed by the Rajasthan Tax Board. The impugned Circulars
were also quashed by the Rajasthan High Court. The Revenue then filed an appeal
to the Supreme Court.

 

HELD

The Apex Court rejected the
appeal of the Revenue with the following observations:

 

Para
12:
‘In this set of appeals we have already indicated that transfer
of documents of title were effected subsequent to the goods reaching the
location within destination State. But when the goods are delivered to a
carrier for transmission, first Explanation to section 3 of the 1956 Act
specifies that movement of the goods would be deemed to commence at the time
when goods are delivered to a carrier and shall terminate at the time when
delivery is taken from such carrier. The said provision does not qualify the
term “delivery” with any timeframe within which such delivery shall have to
take place. In such circumstances fixing of time frame by order of the Tax
Administration of the State in our opinion would be impermissible.’

 

The Revenue had relied on
section 51 of the Sale of Goods Act, 1930 before the High Court. In appeal, the
Supreme Court stated that section 51 was of no assistance since there was no
material available on the record which would indicate that the transporter had
informed the consignee that he was holding the goods as a bailee.

 

The Court also stated that
the Delhi High Court did not lay down a correct proposition of law in its
judgment in Arjan Das Gupta (Supra)

 

The Court observed that on a
plain reading of the statute, the movement of the goods for the purposes of
clause (b) of section 3 of the 1956 Act would terminate only when delivery is
taken, having regard to the first Explanation to that section. There is no
scope of incorporating any further word to qualify the nature and scope of the
expression ‘delivery’ within the said section. The Legislature had eschewed
from giving the said word an expansive meaning. The High Court rightly held
that there is no place for any intendment in taxing statutes. The Court further
stated that in the event the authorities felt that any assessee or dealer was
taking unintended benefit under the aforesaid provision of the 1956 Act, then
the proper course would be Legislative amendment. It also said that the tax
administration authorities could not give their own interpretation to
Legislative provisions on the basis of their own perception of trade practice.
This administrative exercise, in effect, would result in supplying words to
Legislative provisions, as if to cure omissions of the Legislature. The appeals
were allowed.

 

The Supreme Court, in this
judgment, has not laid down any new principle of law. In fact, the Constitution
Bench of the Supreme Court in the year 1978 itself had said that in the taxing
statute there is no room for intendment and effect should be given to the clear
meaning of the words. [See Hemraj Gordhandas vs. H.H. Dave, 1978 (2) ELT
J350.]

FROM THE PRESIDENT

My dear Members,
As I started gathering my thoughts to pen down my last President’s Page, I felt humbled as I realized the honour and privilege bestowed upon me to lead this great voluntary society and communicate with all of you for the last 12 months. It was a rare and valuable opportunity to contribute to the profession and the public at large and one had to take it as gracefully as possible.

My memories go back to my early years as a volunteer at BCAS in various capacities. It was an unbelievably satisfying journey with reasonably smooth sailing. In the course of this journey, I was the beneficiary of the mentorship of several seniors and past presidents, and often even learning from juniors and youngsters, and the consequential personal development.

As President of the Society, I had occasion to interact with many senior professionals and experts, government officials, members, students, etc. The common thread in the different interactions was the respect that I could feel for BCAS. The selfless dedication of all of us, the volunteers, was truly a humbling experience.

I could correlate this to the santwani (an extract) by Tukaram Maharaj dedicated to Lord Vitthal and sung by none other than the Maestro Bhimsen Joshi:

The year started on a rather cautious note with a slightly negative bias. How will we remain relevant without physical events? How will we cover the fixed cost of running the BCAS? There were many unanswered questions. But at the back of our minds, the intrinsic superpower of brand BCAS, its dedicated and committed volunteers and the ‘never say die’ spirit engendered by the founders and forebears, kept me, my office-bearers and managing committee members motivated, all of it leading up to the point of satisfaction now and consigning all those unknown fears to the past.

The BCAS motto,

The theme of BCAS for the year Tradition – Transition – Transformation kept on reminding us that this year will be the year of new directions, a new way of life and new opportunities. The BCAS platform provided us with the power to perform at every stage. It was an opportunity to increase visibility for the BCAS with higher reach – territorially and with faculties from different parts of the world, joining hands with sister and regional organisations for events and representations to government and statutory bodies, and with publications on various live and relevant subjects. All the chairmen and members of the different comm.ittees took the opportunity to its fullest. I would like to thank all of them and also the speakers, authors, compilers, conveners, course coordinators and numerous well-wishers for their sincere efforts to take BCAS to the next level.

In the history of BCAS, the current year is a pioneering one, one that turned this managing committee into the first-ever virtual MC with almost all events, meetings and programmes being conducted on a digital platform. ZOOM, TEAMS, MEETS and so on became the lifeline of our events and meetings. Of course, all of us missed personal interactions, fellowship and bonding. To compensate for the lack of physical action caused by the pandemic, I planned three initiatives at the beginning of the year to create some permanent physical and long-term benchmarks by the otherwise virtual committee. The new initiatives were as under:

(1) ‘Project BCAS Chowk’: The ‘naming’ of the area of the BCAS office in Mumbai is getting visibility now; it will soon achieve reality and become a permanent physical landmark of the city and for the BCAS. This would be a dream-come-true for the BCAS family and its well-wishers.

(2) Formation of the ‘Project Management Committee of the BCAS Foundation’ with the help of Trustees and to fast-forward the execution of social initiatives undertaken by the Foundation and actual implementation of certain projects jointly with like-minded organisations.
(3) Fellowship, joint programmes and representations with sister organisations, regional CA associations, all due to the ease facilitated by the digitalisation of almost everything.

All the office-bearers actively participated in all these and other initiatives. Words are not enough to thank Abhay, Mihir, Samir and Chirag who stood by me, guided me and motivated me to do more. I wish the new team under the leadership of Abhay and Mihir an enriching and fulfilling term with the gradual commencement of physical activity. Team BCAS is the backbone and permanent resource for every President. I can’t thank them enough for their contribution. My family, partners and staff members stood behind me throughout the year with rock-solid support which I acknowledge and appreciate.

In all the good things that have happened, we should not forget the scars of the pandemic – the shocking and painful loss of some seniors and colleagues in the CA profession, including some very young members. This is a permanent loss to their families and the BCAS family which has created a deep void. BCAS will miss them forever. I take this opportunity to record our heartfelt condolences to the bereaved families in this hour of extreme distress to them.

The road ahead for BCAS is long and winding, with several challenges to the role of Chartered Accountants with, among others, the introduction of a special portal by the Income-tax Department, the fast-changing ways of accounting with Artificial Intelligence-aided digitalisation, the emphasis placed by SEBI with the introduction of Risk Management focus in corporates, and the efforts of the Government to lead the economy to $5 trillion GDP.

At this point of expectation of profound changes, I am taking my leave with great satisfaction and confidence that BCAS with its glorious tradition of adapting to all changes in its journey of the last 72 years, will stand up and hold its flag high and flying while marching towards the diamond jubilee mark – 75 years of uninterrupted voluntary service.

I thank all of you once again for your love, affection and respect and for giving me the opportunity to serve you to the best of my ability.

I can only say

Take care and stay safe.

Best Regards,

Suhas Paranjpe
President

RECENT DEVELOPMENTS IN GST

NOTIFICATIONS
1. Effective date of amendment to section 50 – Notification No. 16/2021-Central Tax dated 1st June, 2021
As reported in the March, 2021 issue of the BCAJ (paragraph 5 in the Budget Proposals), a proviso is added to make the amended position in section 50(1) effective from 1st July, 2017. Section 50(1) relates to the levy of interest and the amendment has been carried out to clarify that the interest will be applicable on the cash portion involved in the discharge of the liability as per the return. The proviso was added in Budget 2021 to make the amended position effective from 1st July, 2017. By the issue of the above Notification, the said proviso is made operational from 1st June, 2021. The effect is that after 1st June, 2021 the authorities can levy interest only on the cash portion involved in the discharge of the liability, as per the return, starting the period from 1st July, 2017.

2. Extension of due date for filing GSTR1 – Notification No. 17/2021-Central Tax dated 1st June, 2021
By the above Notification the Government has extended the date of furnishing details of outward supplies in form GSTR1 for the period May, 2021 till 26th June, 2021.

3. Relaxation in interest / late fees – Notification No. 18/2021-Central Tax dated 1st June, 2021 and No. 19/2021-Central Tax dated 1st June, 2021
The Government has issued these Notifications under the powers conferred upon it under sections 50(1) and 128 of the CGST Act, respectively. Earlier, the relaxation in interest and late fees was granted for the months of March and April, 2021 in view of the pandemic situation. The earlier Notifications are substituted and the relaxation is extended to the month of May, 2021; apart from this, some further relaxation in interest is also provided.

The effect of the above Notifications is summarised in the following table:

Sr. No.

Class of registered person

Returns for tax periods

Concession in rate of interest

Concession in late fees

1.

Regular taxpayers having an aggregate turnover of more than Rs.
5 crores in the preceding financial year

March, April and May, 2021

Delay of first 15 days from due date – 9%;

after 15 days – 18%

No late fees for delay of 15 days from due date

2.

Regular taxpayers having an aggregate turnover up to Rs. 5
crores in the preceding financial year who are liable to furnish the return
as specified u/s 39(1), i.e., taxpayers other than ISD / non-resident
taxpayers / Composition taxpayers and taxpayers liable to TDS / TCS

March, 2021

April, 2021

May, 2021

Delay of first 15 days from due date – Nil;

next 45 days – 9%;

afterwards
– 18%

Delay of first 15 days from due date – Nil;

next 30 days – 9%;

afterwards
– 18%

 

 

Delay of first 15 days from due date – Nil;

next 15 days – 9%;

afterwards – 18%

No
late fees for delay of 60 days from due date

No late fees for delay of 45 days from due date

No late fees for delay of 30 days from due date

3.

Taxpayers covered by proviso to section 39(1), i.e.,
covered by QRMP Scheme

March, 2021

April, 2021

Delay of first 15 days from due date – Nil;

next 45 days – 9%;

afterwards – 18%

Delay of first 15 days from due date – Nil;

next 30 days – 9%;

afterwards – 18%

No late fees for delay of 60 days from due date of return for
the quarter January-March, 2021

3.

(Continued)

May, 2021

Delay of first 15 days from due date – Nil;

next 15 days – 9%;

afterwards –18%

 

4.

Payment of tax by taxpayers under the Composition scheme

Quarter ending March, 2021

Delay of first 15 days from due date – Nil;

next 45 days – 9%;

afterwards –18%

 

 

Similar relief is extended on payment of IGST or UTGST by Notifications bearing Nos. 02/2021-Integrated Tax and 02/2021-Union Territory Tax, both dated 1st June, 2021.

Further waiver of late fees for past and subsequent periods by Notification No. 19/2021
By insertion of provisos in the above Notification, the following waiver scheme is provided in relation to late fees:

i. For returns in form GSTR3B for period up to April, 2021
For defaulting registered persons furnishing returns in form GSTR3B for the months / quarter of July, 2017 to April, 2021 and furnishing returns during the period 1st day of June, 2021 to the 31st day of August, 2021, the total late fees will be Rs. 500 and if the total Central Tax payable is Nil in the said returns, then the total late fees will be Rs. 250 instead of Rs. 500.
ii. For returns in form GSTR3B for period from June, 2021 onwards
For defaulting registered persons furnishing returns in form GSTR3B for tax period June, 2021 or quarter ending June, 2021 and onwards, the total late fees will be as under:

Sr. No.

Registered persons

Total amount of late fees

1.

Registered persons whose total amount of Central Tax payable in
the said return is Nil

Rs. 250

2.

Registered persons having an aggregate turnover up to Rs. 1.5
crores in the preceding financial year, other than those covered under S. No.
1

Rs. 1,000

3.

Taxpayers having an aggregate turnover of more than Rs. 1.5
crores and up to Rs. 5 crores in the preceding financial year, other than
those covered under S. No. 1

Rs. 2,500

4. Rationalisation of late fees for delay in filing GSTR1 – Notification No. 20/2021-Central Tax dated 1st June, 2021
Like the concession given in relation to GSTR3B, similar concession is also provided in relation to GSTR1. For defaulting registered persons furnishing returns in form GSTR1 for tax period/s June, 2021 or quarter ending June, 2021 and onwards, the total late fees will be as under:

Sr. No.

Registered persons

Total amount of late fees

1.

Registered persons who have nil outward supplies in the tax
period

Rs. 250

2.

Registered persons having an aggregate turnover of up to Rs. 1.5
crores in the preceding financial year, other than those covered under S. No.
1

Rs. 1,000

3.

Registered persons having an aggregate turnover of more than
Rs. 1.5 crores and up to Rs. 5 crores in the preceding financial year, other
than those covered under S. No. 1

Rs. 2,500

5. Rationalisation of late fees for delay in filing GSTR4 – Notification No. 21/2021-Central Tax dated 1st June, 2021

The Government has also rationalised the late fees for delay in filing return in form GSTR4. From F.Y. 2021-22 and onwards, defaulting registered persons furnishing return in form GSTR4 will be liable for total late fees of Rs. 250 where the total Central Tax payable is Nil and Rs. 1,000 in other cases.

6. Rationalisation of late fees for delay in filing GSTR7 – Notification No. 22/2021-Central Tax dated 1st June, 2021

The Government has rationalised the late fees for delay in filing return in form GSTR7. From the tax period June, 2021 and onwards, the late fees will be Rs. 25 per day, subject to a maximum of Rs. 1,000.

7. Exclusion from E-invoicing – Notification No. 23/2021-Central Tax dated 1st June, 2021

The Government has issued the above Notification by which Government Departments and local authorities are excluded from the requirement of issuing E-invoice.

8. Extension of time for compliance – Notification No. 24/2021-Central Tax dated 1st June, 2021

The Government has power to issue instructions and directions u/s 168A of the CGST Act. Using such power, it has issued a Notification to extend the time limits for different compliances considering the present pandemic situation. The extension was already granted vide Notification No. 14/2021 dated 1st May, 2021, details of which have been given in the BCAJ issue of May, 2021. By the above Notification, in general, the dates are extended up to 30th June, 2021 where they were expiring on 31st May, 2021 as per the earlier Notification. Where they were expiring on 15th June, 2021 as per the earlier Notification, the date is extended up to 15th July, 2021.

9. Extension of due date for filing GSTR4 – Notification No. 25/2021-Central Tax dated 1st June, 2021

By the above Notification, the Government has extended the due date of filing returns for the year ended 31st March, 2021 in form GSTR4 from 31st May, 2021 to 31st July, 2021.

10. Extension of due date for filing ITC-04 – Notification No. 26/2021-Central Tax dated 1st June, 2021

By this Notification, the Government has extended the date of filing declaration in form GST ITC-04 for the period from 1st January, 2021 to 31st March, 2021 till 30th June, 2021, which was earlier 31st May, 2021.

11. Cumulative calculation under Rule 36(4) and other amendments in Rules – Notification No. 27/2021-Central Tax dated 1st June, 2021

(i) Filing of returns through EVC
This Notification has amended the fourth proviso in Rule 26(1) of the CGST Rules, 2017 whereby the companies registered under the Companies Act, 2013 are allowed to file return in form GSTR3B and details of outward supplies in form GSTR1 through electronic verification code (EVC) during the period from 27th April, 2021 to 31st August, 2021. This is an extension of the facility originally given up to May, 2021.

(ii) Cumulative calculation under Rule 36(4)
As per Rule 36(4), the taxpayer can take ITC for matched amount further enhanced by 5%. By the earlier Notification No. 13/2021 dated 1st May, 2021, the above adjustment under Rule 36(4) was allowed to be done cumulatively for April and May, 2021. But through this Notification, the said facility of cumulative adjustment is widened and along with the months of April and May, 2021, June, 2021 is also included for cumulative adjustment.

(iii) Extension for IFF
By the above Notification, Rule 59(2) is amended and the person furnishing details using IFF for the month of May, 2021 can furnish the same up to 28th June, 2021.

12. Changes in Rate of Tax

Sr. No.

Notification No.

Reference of entry in which change is made

Particulars of change in Rate or other changes

1.

01/2021-Central Tax (Rate) dated 2nd June, 2021; and
01/2021 – Integrated Tax (Rate) dated 2nd June, 2021

(a)
In Entry 259A in Schedule-I (2.5%) under CGST Act and (5%) under IGST Act,
the mention of two headings, namely, 4016 and 9503, is substituted by one
heading, i.e., 9503, effective from 2nd June, 2021.

(b)
In List 1 for drugs in Schedule 1 (2.5%) under CGST Act and (5%) under IGST
Act, new item ‘Diethylcarbamazine’ is added at Serial No. 231 from 2nd
June, 2021

No change in rate.

 

Rate becomes 2.5% for given item under CGST Act and 5% under
IGST Act

2.

02/2021-Central Tax (Rate) dated 2nd June, 2021; and
02/2021 – Integrated Tax (Rate) dated 2nd June, 2021

(a) In Entry 3 in
Notification No. 11/2017-Central Tax (Rate) and Notification No.
08/2017-Inegrated Tax (Rate) relating to developers, in Explanation under
fourth proviso in conditions, clause (iii) is inserted, effective from
2nd June, 2021

(b)
Entry (ib) is inserted in Entry at Serial No. 25 in above Notification No.
11/2017-Central Tax (Rate) and Notification No. 08/2017- Integrated Tax
(Rate), effective from 2nd June, 2021

By
the above clause, the landowner-promoter is made eligible to utilise the
credit of tax charged by the developer-promoter, for payment of tax on
apartments supplied by him in such project both under CGST and IGST Act

 

By the above Entry the rate of 2.5% (CGST Act)
and 5% (IGST Act) is provided for maintenance, repair or overhaul services in
respect of ships and other vessels, their engines and other components or
parts

3.

03/2021-Central Tax (Rate) dated 2nd June, 2021; and
03/2021- Integrated Tax (Rate) dated 2nd June, 2021

In Notification No.
06/2019-Central Tax (Rate) and 06/2019-Integrated Tax (Rate), both dated 29th
March, 2019, two changes are made, effective from 2nd June, 2021

(a)
The above Notification is about developers. The promoters are required to pay
tax on FSI, etc. As per original Notification, such liability was to arise
upon issuance of completion certificate or first occupation, whichever is
earlier. Now, by the amendment, the provision is made that promoters shall
pay tax on the occurrence of the above event of completion certification or
first occupation, whichever is earlier.

(b)
Further, the timing of payment of tax on FSI, etc., is also modified.
Originally, it was to be payable on the date of issuance of completion
certificate or first occupation, whichever was earlier. Now, by the
amendment, the tax on FSI, etc., can also be paid earlier – but latest by the
tax period in which date of issuance of completion certificate or first occupation
falls. By this change, the recipient can utilise his credit as and when tax
is paid by the promoter. The promoter can pay tax earlier to  completion certificate or first occupation
and as per the tax paid by him, tax credit will be available to the recipient

4.

04/2021-Central Tax (Rate) dated 14th June, 2021; and
04/2021- Integrated Tax

In Notification No. 11/2017 – Central Tax (Rate) and 08/2017-

The above Entry (f) is relating to tax on structure meant for
funeral, burial or cremation of

4.

(Continued)

(Rate) dated
14th June, 2021

 

 

 

Integrated Tax (Rate), both dated 28th June, 2017,
changes are made in Entry 3(iv)(f)

 deceased. The original
rate is 6% CGST. By the above Notification, the rate is reduced to 2.5% CGST
for the period from 14th June, 2021 to 30th September,
2021

5.

05/2021 Central Tax (Rate) dated 14th June, 2021; and
05/2021- Integrated Tax (Rate) dated 14th June, 2021 read with
corrigenda dated 15th June, 2021

A new Notification giving exemption of whole of tax or partial
tax

By this Notification, concessional rate of CGST / IGST on
Covid-19 relief supplies is provided. There are 18 items. The list is not
reproduced here for sake of brevity

Similar changes in Entries are also effected in the Union Territory Goods and Services Tax Act, 2017.

CIRCULARS AND PRESS RELEASES

1. Guidelines regarding cancellation of registration under rule 22(3) of the CGST Act – Instruction No. CBEC-20/16/34/2019-GST/802 dated 24th May, 2021
By the above guidelines the CBEC has reiterated to follow the guidelines given in Board Circular No. 69/43 2018 GST dated 26th October, 2018 about the time limit for cancellation of registration where an application for cancellation is filed by the registered person. In other words, the CBEC has instructed that the proper officer should act as per legal process and accordingly pass the cancellation order within 30 days from the date of application.

2. Press release dated 28th May, 2021

The GST department has issued the above press release whereby the modified scheme about mandatory mentioning of HSN code on invoices is explained.

3. Press release relating to 43rd GST Council meeting dated 28th May, 2021

By this press release, the GST department has given information about decisions taken at the 43rd GST Council meeting held on 28th May, 2021. The decisions are mainly relating to GST Rates on goods and services, and more particularly about Covid-19-related supplies.

4. Press note relating to relief in late fees dated 5th June, 2021

The GST department has, through the above press release, explained the effect of the recent Notifications on the relief in late fees.

5. GST on supply of food in Anganwadis and schools: Circular No. 149/05/2021-GST dated 17th June 2021

It is clarified that the supply of food in Anganwadis and schools is exempt vide clause (b)(ii) of Entry 66 Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017. It is also clarified that Anganwadis are educational institutions (pre-school).

6. GST on activity of construction of road (annuity): Circular No. 150/05/2021-GST dated 17th June, 2021

It is clarified by this Circular that the annuity received in respect of road construction is not exempt under Entry 23A of Notification No. 12/2017-CT(R).

7. GST on supply of services by Boards: Circular No. 151/05/2021-GST dated 17th June, 2021

This Circular has given Clarifications about exempt services by various Central and State Boards (such as National Board of Examination). Specific services are described which will be exempt.

8. GST on construction services provided to Government entity: Circular No. 152/05/2021-GST dated 17th June, 2021


By the above Circular, a clarification is given about GST liability on works contract service provided by way of construction, such as of ropeway, to a Government entity. It is clarified that the service will fall under Entry at Sl. No. 3(xii) of Notification No. 11/2017-(CTR) and attract GST at the rate of 18% and it will not fall under 12% category.

9. GST on supplies to Government under PDS: Circular No. 153/05/2021-GST dated 17th June, 2021
In this Circular, a clarification is given about the applicable rate of tax for various supplies to Government, such as milling of wheat into flour or paddy into rice for distribution under PDS. The clarification is given about different services involved in the above activity.

10. GST on supplies to PSUs by Government: Circular No. 154/05/2021-GST dated 17th June, 2021
By the above Circular, a clarification is given about GST on services supplied by State Governments to their undertakings or PSUs by way of guaranteeing loans taken by them. It is clarified that such services are exempt under specific Entry 34A of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017.

11. GST on drip irrigation items: Circular No. 155/05/2021-GST dated 17th June, 2021
By this Circular, clarification is given about the Rate of Tax on laterals (pipes to be used solely with sprinklers / drip irrigation system) and parts. It is clarified that if such items are to be used solely or principally with sprinklers or a drip irrigation system, which are classifiable under heading 8424, they would attract GST @ 12%. But on all other items the applicable Rate for such items will apply.

FROM PUBLISHED ACCOUNTS

Disclosures related to investment property

TATA CHEMICALS LTD. (31ST MARCH, 2021)

From Notes to financial results
(consolidated)

 Rs. in crores

 

Land

Building

Total

Gross Block

 

 

 

Balance as at 1st April, 2019

3.58

26.52

30.10

Disposals

*

(3.22)

(3.22)

Reclassified to assets held for sale (Note 26)

(2.45)

(2.45)

Balance as at 31st March, 2020

1.13

23.30

24.43

Transferred from Property, Plant and Equipment (Note 4)

15.47

24.34

39.81

Balance as at 31st March,
2021

16.60

47.64

64.24

Accumulated depreciation

 

 

 

Balance as at 1st April, 2019

2.89

2.89

Depreciation for the year

0.66

0.66

Disposals

(0.36)

(0.36)

Balance as at 31st March, 2020

3.19

3.19

Depreciation for the year

0.61

0.61

Transferred from Property, Plant and Equipment (Note 4)

5.58

5.58

Balance as at 31st March,
2021

9.38

9.38

Net Block as at 31st March, 2020

1.13

20.11

21.24

Net Block as at 31st
March, 2021

16.60

38.26

54.86

* value below Rs, 50,000

 

 

 

Footnotes:
a) Disclosures relating to fair valuation of investment property
Fair value of the above investment property as at 31st March, 2021 is Rs. 279.74 crores (2020: Rs. 139.00 crores) based on external valuation.

Fair value hierarchy
The fair value of investment property has been determined by external independent property valuers, having appropriate recognised professional qualification and recent experience in the location and category of the property being valued.

The fair value measurement for all of the investment property has been categorised as a level 3 fair value based on the inputs to the valuation techniques used.

Description of valuation technique used
The Group obtains independent valuations of its investment property after every three years. The fair value of the investment property has been derived using the Direct Comparison Method. The direct comparison approach involves a comparison of the investment property to similar properties that have actually been sold at arm’s length distance from investment property or are offered for sale in the same region. This approach demonstrates what buyers have historically been willing to pay (and sellers willing to accept) for similar properties in an open and competitive market, and is particularly useful in estimating the value of the land and properties that are typically traded on a unit basis. This approach leads to a reasonable estimation of the prevailing price. Given that the comparable instances are located in close proximity to the investment property, these instances have been assessed for their locational comparative advantages and disadvantages while arriving at the indicative price assessment for investment property.

b) The Group has not earned any material rental income on the above properties.

TATA CONSUMER PRODUCTS LTD. (31ST MARCH, 2021)


From Notes to financial results (consolidated)

4. Investment property
Investment properties of the Group comprise of land, commercial and residential property.

 Rs.
in crores

 

2021

2020

Cost

Opening balance

Disposal

Transfer


55.04

(17.97)


56.06

(1.02)

Closing balance

37.07

55.04

Accumulated depreciation

Opening balance

Depreciation for the year

Deductions / Adjustments


5.00

0.89

(1.99)


4.46

0.91

(0.37)

Closing balance

3.90

5.00

Net Carrying Value

33.17

50.04

Amount recognised in the statement of profit and loss for investment property

 

 Rs. in
crores

 

2021

2020

Rental income

Direct operating expenses

Profit from investment property before depreciation

Depreciation for the year

Profit / (loss) from investment property

3.81

(0.60)

3.21


(0.89)

2.32

3.14

(0.34)

2.80


(0.91)

1.89

Fair value
Fair valuation of the land is Rs. 96.14 crores and of the buildings is Rs. 32.03 crores based on valuation (sales comparable approach – level 2) by recognised independent valuers.

Leasing arrangements
For investment property leased to tenants under long-term operating lease, the minimum lease payment receivable under non-cancellable operating leases is:

Rs. in crores

 

2021

2020

Within one year

Later than one year but not later than five years

2.48

5.44

3.93

8.26

ALLIED LAWS

13 Dhanjibhai Hirjibhai Nasit vs. State of Gujarat & Ors. AIR (2020) Gujarat 70 Date of order: 20th February, 2020 Bench: Vikram Nath CJ, Vipul M. Pancholi J. and Ashutosh J. Shastri J.

Co-operative society – Tenure of members appointed by State Government [Gujarat Co-operative Societies Act, 1962, S. 80]

FACTS

The petitioner is a member of the Una Taluka Khand Vechan Sangh Ltd. (union). The union is a specified co-operative society as defined u/s 74C of the Gujarat Co-operative Societies Act, 1961 (Act). The elections of specified co-operative societies are required to be held and conducted as provided u/s 74C read with Chapter XI-A of the Act as well as the Rules framed thereunder. It is further stated that the respondent State Government, in purported exercise of the powers conferred upon it u/s 80(2) of the Act, on 4th January, 1999 appointed three government nominees on the Board of Directors of the Union.

The grievance of the petitioner is that the nominee directors, for reasons best known to them, insisted on continuing on the Board of Directors of the Union. The petitioner had, therefore, prayed that the nominee directors be restrained from taking part in the meeting of the Board of Directors which was scheduled to be held on 10th May, 2007.

HELD

The Committee means ‘Managing Committee’ or other governing body of a society to which the direction and control of the management of the affairs of a society are entrusted. The term of the elected members of the Managing Committee shall be five years from the date of election as provided in section 74C(2) of the Act. It is further clear that where the State Government has subscribed to the share capital of the society directly or through another society, or as per the circumstances enumerated in section 80(1) of the Act, the State Government is empowered to nominate three prescribed representatives on the Committee of the society and such members so nominated shall hold office during the pleasure of the State Government, or for such period as may be specified in the order by which they are appointed. Similarly, section 80(2) of the Act empowers the State to appoint the representatives having regard to the public interest involved in the operation of a society as if the State Government had subscribed to the share capital of the society and the provisions contained in section 80(1) of the Act will be applicable to such nomination.

The petition was disposed of accordingly.

14 Benedict Denis Kinny vs. Tulip Brian Miranda & Ors. AIR 2020 Supreme Court 3050 Date of order: 19th March, 2020 Bench: Ashok Bhushan J. and Navin Sinha J.

Right to judicial review – Citizen has the right against any order of a statutory authority [Constitution of India, Art. 226]

FACTS
The respondent as well as the appellant contested the election for the seat of Councillor in the Mumbai Municipal Corporation reserved for backward class citizens. On 23rd February, 2017, the respondent No. 1 was declared elected. Section 5B of the Mumbai Municipal Corporation Act, 1888 (Act) requires the candidate to submit his caste validity certificate on the date of filing the nomination papers. A candidate who has applied to the Scrutiny Committee for the verification of his caste certificate before the date of filing of nomination but who has not received the said certificate on the date of filing the nomination, has to submit an undertaking that he shall submit within a period of six months from the date of election the validity certificate issued by the Scrutiny Committee.

It is further provided that if a person fails to produce the validity certificate within the period of six months from the date of election, that election shall be deemed to have been terminated retrospectively and he shall be disqualified from being a Councillor. The period of six months was amended to 12 months by the Amendment Act, 2018.

The Scrutiny Committee, vide its order dated 14th August, 2017, held that respondent No. 1 does not belong to the East Indian category. Therefore, it refused to grant caste validity certificate in favour of the respondent. Writ Petition No. 2269 of 2017 was filed by the respondent challenging the above order of the Caste Scrutiny Committee.

The High Court, vide order dated 18th August, 2017, passed an interim order in favour of respondent No. 1. The High Court, vide its judgment and order dated 2nd April, 2019, allowed the writ petition filed by respondent No. 1 and quashed the order of the Scrutiny Committee dated 14th August, 2017 and remanded the matter to the Scrutiny Committee for fresh consideration.

By the judgment dated 2nd April, 2019, the High Court also directed that the respondent No. 1 is entitled to continue in her seat, since the effect of disqualification was postponed by the interim order and the impugned order of the Caste Scrutiny Committee had been set aside.

Aggrieved by the judgment and order dated 2nd April, 2019, Review Petition (L) No. 20 of 2019 was filed by the appellant which, too, was rejected by the High Court by an order dated 2nd May, 2019. Both the orders, dated 2nd April and 2nd May, 2019, have been challenged by the appellant in this appeal.

HELD
The Court, inter alia, on the question of whether the High Court in exercise of jurisdiction under Article 226 can interdict the above consequences envisaged by section 5B of the Act by passing an interim or final judgment, held as under:

An interim direction can be passed by the High Court under Article 226, which could have helped or aided the Court in granting the main relief sought in the writ petition. In the present case, the decision of the Caste Scrutiny Committee having been challenged by the writ petitioners and the High Court finding prima facie substance in the submissions, granted interim order which ultimately fructified in the final order setting aside the decision of the Caste Scrutiny Committee. Thus, the interim order passed by the High Court was in aid of the main relief, which was granted by the High Court.

The interim order passed by the High Court was in exercise of judicial review by the High Court to protect the rights of the respondents. The appeal was dismissed.

15 Suo motu Public Interest Litigation No. 01 of 2021 Date of order: 11th June, 2021 Bench: Dipankar Datta CJI, A.A. Sayed J., S.S. Shinde J. and Prasanna B. Varale J.

Covid-19 – Extension of interim orders

FACTS
The Court On its Own Motion addressed matters wherein interim orders have been passed by the High Court of Bombay at its Principal Seat, and the Benches at Nagpur and Aurangabad, the High Court of Bombay at Goa, and the Courts / Tribunals subordinate to it, including the Courts / Tribunals in the Union Territory of Dadra and Nagar Haveli, and Daman and Diu, during the second wave of the Covid pandemic and for extending protection to those who are unable to access justice because of the restricted functioning of Courts / Tribunals.

HELD
Taking an overall view of the matter, which tends to suggest that resumption of physical hearings in all the Courts across Maharashtra is still at some distance, the protection granted by the interim orders passed on this PIL stand extended till 9th July, 2021 or until further orders, whichever is earlier, on the same terms.

Further, the Court held that the media has reported incidents of building collapses leading to loss of precious lives. Therefore, if indeed there are buildings / structures which are either dilapidated or dangerous / unsafe requiring immediate demolition and vacation thereof by their inhabitants, the particular Municipal Corporation / Municipal Council / Panchayat / Local Body within whose territorial limits such buildings / structures are located, may, considering the imminent need to have such buildings / structures vacated and demolished, bring the particular instance to the notice of the relevant Division Bench in seisin of suo motu Public Interest Litigation No. 1 of 2020 (High Court On its Own Motion vs. Bhiwandi Nizampur Municipal Corporation & Ors.) and seek appropriate orders for proceeding with the demolition process to take it to its logical conclusion.

16 Lalit Kumar Jain vs. UOI & Ors. Transferred case (Civil) No. 245 of 2020 Date of order: 21st May, 2021 Bench: L. Nageswara Rao J. and S. Ravindra Bhat J.
    
Personal guarantor – Liable under IBC Code [Constitution of India, Article 32; Insolvency and Bankruptcy Code, 2016, S. 2(e), 31, 60, 78, 79, 239, 240, 249]
    
FACTS

The petition was preferred under Article 32 as well as transferred cases under Article 139A of the Constitution of India. The common question which arises in all these cases concerns the vires and validity of a Notification dated 15th November, 2019 issued by the Central Government (impugned notification). The petitioners contend that the power conferred upon the Union u/s 1(3) of the Insolvency and Bankruptcy Code, 2016 (Code) could not have been resorted to in a manner so as to extend the provisions of the Code only as far as they relate to personal guarantors of corporate debtors.

HELD
It is quite evident that the method adopted by the Central Government to bring into force different provisions of the Act had a specific design: to fulfil the objectives underlying the Code.

The Amendment of 2018 also altered section 60 of the Code in that insolvency and bankruptcy processes relating to liquidation and bankruptcy in respect of three categories, i.e., corporate debtors, corporate guarantors of corporate debtors and personal guarantors to corporate debtors, were to be considered by the same forum, i.e., the NCLT.

It is, therefore, clear that the sanction of a resolution plan and finality imparted to it by section 31 of the Code does not per se operate as a discharge of the guarantor’s liability. As to the nature and extent of the liability, much would depend on the terms of the guarantee itself.

Therefore, it is held that approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of her or his liabilities under the contract of guarantee.

The writ petitions were dismissed.

17 Urmila Devi & Ors. vs. Branch Manager, National Insurance Company Limited & Anr. (2020) 11 SCC 316 Date of order: 30th January, 2020 Bench: S.A. Bobde CJI, B.R. Gavai J. and Surya Kant J.

Scope of cross-objection – Even if appeal is withdrawn or dismissed – Cross-objection would survive [Civil Procedure Code, 1908, Or. 41. R. 22]

FACTS
On 2nd May, 2008, Sanjay Tanti, husband of appellant No. 1, father of appellant Nos. 2 to 4 and son of appellant No. 5, met with an accident while he was travelling from Ladma to Goradih by a Tata Maxi vehicle. The appellants filed a claim petition u/s 166 of the Motor Vehicles Act, 1988 (the M.V. Act). The owner of the vehicle was joined as Opponent No. 1; the driver of the vehicle was joined as Opponent No. 2; whereas, the National Insurance Company Limited (hereinafter referred to as ‘the Insurance Company’) was joined as Opponent.

The claim of the Insurance Company was that the driver and the owner of the vehicle had breached the terms and conditions of the insurance policy and, as such, they are not liable for payment of compensation.

The Motor Vehicle Accidental Claim Tribunal (Tribunal) vide judgment and order dated 29th January, 2011, rejected the contention of the Insurance Company that the driver and owner of the vehicle had breached the terms and conditions, and while allowing the claim petition directed the Insurance Company to pay compensation of Rs. 2,47,500 to the claimants.

Being aggrieved by the judgment and award passed by the Tribunal, the Insurance Company preferred Misc. Appeal No. 521 of 2011 before the High Court at Patna contending that the Tribunal had erroneously fastened the liability on it. In the said appeal, a cross-objection came to be filed by the appellants.

When the appeal came up for hearing, it was noticed that the appeal was dismissed for want of office objections and the counsel for the appellants (the Insurance Company) stated that they were not interested in reviving the appeal. The appeal was, as such, disposed of by the High Court. Insofar as the cross-objection of the appellants (the claimants) was concerned, the High Court held that when the appeal filed by the Insurance Company is only restricted to denial of its liability to make the payment of compensation, then in such case the cross-objection at the behest of the claimants in the shape of appeal would not be tenable. It, however, held that if the Insurance Company in the appeal challenges the quantum of compensation, in such a case the claimant(s) will have a right to file an objection.

Being aggrieved, the appellants filed the present appeal by special leave.
HELD
A conjoint reading of the provisions of section 173 of the M.V. Act; Rule 249 of the Bihar Motor Vehicle Rules, 1992; and Order XLI Rule 22 of the CPC, would reveal that there is no restriction on the right to appeal of any of the parties. It is clear that any party aggrieved by any part of the award would be entitled to prefer an appeal. It is also clear that any respondent, though he may not have appealed from any part of the decree, apart from supporting the finding in his favour, is also entitled to take any cross-objection to the decree which he could have taken by way of appeal. When in an appeal the appellant could have raised any of the grounds against which he is aggrieved, a respondent cannot be denied the right to file cross-objection in an appeal filed by the other side challenging that part of the award with which he was aggrieved. The said distinction as sought to be drawn by the High Court is not in tune with a conjoint reading of the provisions of section 173 of the M.V. Act; Rule 249 of the Bihar Motor Vehicle Rules, 1992; and Order XLI Rule 22 of the CPC.
Therefore, even if the appeal of the Insurance Company was dismissed in default and the Insurance Company had submitted that it was not interested to revive the appeal, still the High Court was required to decide the cross-objection of the appellants herein on merits and in accordance with law.

Service Tax

I. HIGH COURT

18 Anjappar Chettinad A/c Restaurant vs. Joint Commissioner [2021-TIOL-1270-HC-Mad-ST] Date of order: 20th May, 2021
    
Takeaway and food parcels by restaurants tantamount to sale of food and drinks and does not attract levy of service tax

FACTS
The petitioners provide restaurant services, outdoor catering services and mandap keeper services. An audit was undertaken and service tax was demanded on the takeaway / parcel services. Accordingly, a petition is filed regarding taxability of food taken away or collected from restaurants in parcels.

HELD
The Court noted that not all services rendered by restaurants are taxable and the tax gets attracted only in certain specified situations. Sale of food and drink simpliciter, services of selection and purchase of ingredients, preparation of ingredients for cooking and the actual preparation of the food and drink would not attract the levy of tax. Only those services commencing from the point where the food and drinks are collected for service at the table till the raising of the bill, are covered. This would include a gamut of services including arrangements for seating, decor, music and dance, the service of waiters, the use of fine crockery and cutlery, among others. In the case of takeaway or food parcels, the aforesaid attributes are conspicuous by their absence. In many cases, there is a separate counter for collection of the takeaway and is generally positioned away from the main dining area which may or may not be air-conditioned. In any event, since the consumption of the food and drink is not in the premises of the restaurant, the same does not attract service tax.
    
19 Qualcomm India Pvt. Ltd. vs. Union of India and Others [2021-TIOL-1170-HC-Mum-ST] Date of order: 21st May, 2021

Interest is payable on delay in processing the refund claim beyond a period of three months from the date of receipt of application u/s 11BB of the Central Excise Act, 1944

FACTS
The petitioner is engaged in the export of services and receives various input services and avails input tax credit (ITC) of service tax paid on various input services. It filed a refund claim for the accumulated ITC under Rule 5 of the CENVAT Credit Rules, 2004. The refund was sought to be rejected on the ground that the input services did not have any nexus with the output services and thus were not eligible for refund. A part of the refund amount was sanctioned and a part was rejected. On appeal, the appellate authority allowed the refund claim. However, since the refund amounts were sanctioned beyond three months from the date of filing of refund applications, the petitioner claimed that it was entitled to interest on delayed payment of refund u/s 11BB of the Central Excise Act, 1944 made applicable to service tax vide section 83 of the Finance Act, 1994. Accordingly, the present writ application is filed to claim the interest on the refund amount.

HELD
The Court primarily noted that the orders granting refund were issued after the expiry of three months from the date of receipt of the refund application which resulted in a delay in granting the refund. Section 11BB clearly provides that if any duty ordered to be refunded is not refunded within three months from the date of receipt of an application, there shall be paid to that applicant interest at such rate as may be prescribed. Thus, irrespective of the fact that the delay was intentional or unintentional, interest ought to be granted. Non-granting of interest in such a case would amount to failure to discharge statutory duty / obligation by the refund sanctioning authority for which the aggrieved claimant can seek a writ of mandamus from the Writ Court under Article 226 of the Constitution of India.

20 M/s TV Sundram Iyengar and Sons Pvt. Ltd. vs. Commissioner of CGST & CE[2021-TIOL-1025-HC-Mad-ST] Date of order: 30th March, 2021

Relationship between the buyer and seller being on a principal-to-principal basis, trade discount received by way of credit note is not liable to service tax

FACTS
The petitioner is a dealer in motor vehicle parts and motor vehicle chassis. It entered into dealership agreements with various manufacturing entities. The case of the petitioner is that the relationship between it and the manufacturer is on a principal-to-principal basis. It purchases chassis from the manufacturer and resells the same in its own name and on its own account. A show cause notice was issued proposing levy of service tax with interest and penalty on the trade discount received from the manufacturers by way of credit notes.

HELD
The Court states that a mere reading of the dealership agreement between the assessee and the manufacturers would clearly indicate that the petitioner purchases the goods from the manufacturers by way of sale. It is also pointed out that the adjudicating
authority has not read the document as a whole but instead given undue emphasis to certain individual clauses mentioned in the agreement, thereby misinterpreting the transaction and relationship between the parties. The Court accordingly allowed the writ.

21 Commissioner of GST & CE vs. Sutherland Global Services Pvt. Ltd. [2021 (47) GSTL 454 (Mad)] Date of order: 24th February, 2021

Refund under Rule 5 shall be granted in case of export of exempted services

FACTS
The respondent was a 100% export-oriented unit and Software Technology Park of India (STPI) registered for service tax under ‘Business Auxiliary Services’ providing call centre services and technical support service. The appeal was filed by the Revenue against the order passed by the Tribunal approving the refund of CENVAT credit on input services used for exporting services which are otherwise exempt under servicetax laws. The Department contended that CENVAT credit cannot be availed of inputs, input services or capital goods used for output services, whether provided domestically or exported, if the same are exempted unconditionally.

HELD
The Court referred to the decision of Repro India Limited [2009 (235) ELT 614 (Bom)] and various other rulings wherein the scheme of CENVAT Credit Rules was elaborately discussed and distinction was drawn between Rules 5 and 6 of the CENVAT Credit Rules, 2004. The Tribunal had rightly held that Rule 6 uses the words ‘exempted goods / services’ and Rule 5 uses the words ‘final product / output service’. Further, exemption is applicable within Indian territory and therefore, goods as well as services whether taxable or exempted can be exported. Besides, the intention of the Legislature was to avoid export of duties or taxes. Therefore, the case was decided in favour of the assessee.

II. TRIBUNAL

22 Schlumberger Asia Services Ltd. [2021-TIOL-313-CESTAT-Chd] Date of order: 24th May, 2021

Credit of Education Cess, Secondary and Higher Education Cess and Krishi Kalyan Cess was eligible to be carried forward to the GST regime as on 1st July, 2017 – The amendment of bar in transition was made in section 140 on 30th August, 2018 effective from 1st July, 2017 – The refund claim filed within one year from the amendment is not time-barred

FACTS
The CENVAT credit of Education Cess, Secondary and Higher Education Cess, Krishi Kalyan Cess was lying unutilised and the appellant could not utilise the same till 30th June, 2017. On 1st July, 2017, the GST regime came into force and the credit lying in the account was allowed to be transferred under the GST regime. The credit was accordingly transited. Later, section 140 of the GST law was amended on 30th August, 2018 retrospectively, stating that the credit of cess cannot be carried forward to the GST regime. The appellant accordingly reversed the credit and filed a refund claim. The refund was rejected on the ground of time bar. Accordingly, the present appeal is filed.

HELD
The Tribunal noted that on 1st July, 2017 there was no bar on carry forward of the CENVAT credit of Education Cess, Secondary and Higher Education Cess and Krishi Kalyan Cess to the GST regime. The amendment to section 140 came after one year of the switch to the GST regime on 30th August, 2018 which was applicable retrospectively. In these circumstances, how could the appellant have filed the refund claim within one year from 1st July, 2017 to 30th August, 2018? Therefore, the relevant date of filing the refund claim shall be 30th August, 2018 and within one year of the said date, the refund claim has been filed. Thus, the refund claim is not barred by limitation and should be allowed.

SOCIETY NEWS

BOOK REVIEW

ATOMIC HABITS Author James Clear

Reviewed by Veena D’Souza, Chartered Accountant

This book is jam-packed with philosophy, psychology and practicality. I learned just as much about the brain, genes and identity as I did about habits. There are many things that you know at the back of your mind, but once you see it in writing, something inside you clicks and you have that very satisfying ‘Aha! It’s magical!’ moment.

I simply love how James Clear in his book Atomic Habits explains the workings of human behaviour, discussing ground-breaking topics on human behavioural psychology and neurology. He explains precisely how and why it is that we form certain habits and patterns in our lives. The book breaks down the process of habit-formation and provides an extremely practical framework to implement small improvements to your already existing routine, cultivating it for greater efficiency and growth.

A few things that really stuck with me while reading the book:


1. Identity change first, the rest will follow
The ultimate form of intrinsic motivation is when a habit becomes a part of your identity. It’s one thing to say I’m the type of person who wants this. It’s something very different to say I’m the type of person who is this – James Clear

I used to tell myself, ‘I want to start reading books!’ I used to always try but stop mid-way. After struggling for almost eight years, I successfully finished reading the book Atomic Habits by James Clear. However, it was ironic that my first book taught me how not to make it my last and implement the reading habit with simple strategies.

The simple cues that the book teaches helped to shape my habits as a reader.

So if a non-reader like me could do this, after implementing some simple tricks which Clear has beautifully articulated in the book, it proves that it can be applied to many different facets of life to implement good habits and slowly phase out the bad ones.

Today, I would call myself a reader and this identity change helps me to continue reading other books.

2. The 1% rule
It is so easy to overestimate the importance of one defining moment and underestimate the value of making small improvements on a daily basis – James Clear

The 1% improvement says that first, you need to understand everything about your work, break it down into small easily achievable tasks and improve it by just 1% every day. This can give significantly better results in the long run.

3. The 1st Law of Behavioural Change is to make it obvious, and the two most common Cues are Time and Location. The Implementation Intention is: I will (Behaviour) at (Time) in (Location) – James Clear

Clarity > Motivation: Many people think they lack motivation when what they really lack is clarity. It is not always obvious when and where to take action.

We often tend to procrastinate on some easy but important tasks. I am no different. My habit of procrastination even led to financial losses at times which further increased the baggage of tasks leading to the vicious cycle of further procrastination.

However, the implementation intention formula helps to realistically perform the behaviour. The difference is that the behaviour that was previously decided to be performed is now given the precision of when and where it is going to be performed.

4. Valley of disappointment
We often feel that progress should come quickly to us, that a task we begin should soon yield benefits for us. In reality, the results of our efforts are often delayed, not by a few days, but months, maybe even years, until we realise the true value of the previous work we have done.

In ‘Clear’ terms, the level of disappointment faced by us when we don’t get results is the ‘Valley of disappointment’.

5. Environment is the invisible hand that shapes human behaviour
In this way, the most common form of change is not internal, but external: we are changed by the world around us. Every habit is context dependent – James Clear

We drink more water if we keep a bottle of water handy around us while we study / work, etc. This is because we create an environment around us that helps us to develop a habit of drinking water regularly.

6. Focus on systems
Clear says that instead of focusing on goals, focus on systems. Goals are your end results. For example, I want to be fit and healthy; whereas a system is a process of how to achieve the goal more systematically and smartly.

Systems > Goals: ‘My results had very little to do with the goals I set and nearly everything to do with the systems I followed.’

When you fall in love with the process rather than the result, you don’t have to wait to give yourself permission to be happy. You can be satisfied anytime your system is running.

7. Focus on taking action, not being in motion. You don’t want to merely be planning. You want to be practising – James Clear

I used to plan to work out every day. Before 2020, I never acted much on my plans, it was only motion and didn’t include actions, the progress thus being very static.

I realised it was easy to be in motion and convince myself that I am making progress but in reality, I wasn’t. In 2020, I converted my motions into actions, starting with little cues like shopping for sportswear which tempted me to use them and eventually leading me to diligently work out which now has become part of my everyday life.

On reading this chapter of the book that says ‘Walk slowly, but never backwards’, it dawned on me to pick habits that I polished and acted on to make my plans of working out real.

8. If you want to master a habit, the key is to start with repetition and not perfection – James Clear

Frequency > Time: There is nothing magical about time passing with regard to habit formation. It doesn’t matter if it’s been twenty-one days or thirty days or three hundred days. What matters is the rate at which you perform the behaviour.

I am currently learning to play a musical instrument. I often used to wonder how effortlessly people play an instrument, some learn it within months, while others take years of practice. This is where the key of repetition got stuck with me and made me realise that I need to practise to excel and learn the instrument. It’s not about the amount of time I have been performing a habit, but the number of times I have been performing it.

There are many further wisdom-filled one-liners, habit-formation formulae that Clear has mentioned in the book which clearly provide a lot of self-help tips that one can inculcate in one’s life.

The book is smooth and easy-flowing. The concepts of each chapter tie together beautifully and compound in such a way that the entire reading experience is seamless. The author is able to deduce seemingly complex, scientific and psychological jargon into easily understandable and relatable terminology for the layman.

The book teaches HOW TO
* Make time for new habits (even when life gets crazy),
* Design your environment to make good habits easier and attractive to implement and bad habits unattractive to get rid of,
* Environments that affect habit formation and how to overcome frictions… and much more.

I would recommend this book to anyone wanting to change certain aspects of their current lifestyle, inculcating some new habits or getting rid of a few others. Reading it will effectively convey how a daily improvement of just 1% can yield extraordinary results in your life.

MISCELLANEA

I. Technology

14 Drone food deliveries to take off soon? Swiggy and ANRA Technologies to launch trials

Swiggy may soon deliver food using drones, with trials to begin for both food and medical packages. Swiggy’s drone delivery partner, ANRA Technologies, has got final clearances from the Ministry of Defence, the Ministry of Civil Aviation and the Directorate-General of Civil Aviation to commence drone trials for delivering food. ANRA Technologies has got the clearances for Beyond Visual Line of Sight (BVLOS) operations. After a lot of planning, air traffic control integration and readying equipment, ANRA launched its first sortie on 16th June, 2021. For the next several weeks, its team will conduct BVLOS food and medical package delivery trials in Etah and Rupnagar districts in Uttar Pradesh and Punjab, respectively.

Apart from partnering Swiggy for food delivery, the integrated airspace management firm is also engaged in a similar project for which it has partnered with IIT, Ropar, and will focus on medical deliveries.

Amit Ganjoo, the founder and CEO of ANRA, said that the motivating factor for him and his team comes from knowing that ‘our technology may soon help deliver food and medical packages to underserved populations’.

In a test flight video, the ANRA team showed how the deliveries are likely to take place. A drone is seen in the almost-three-minute video picking a small food package, flying out to a certain distance, before returning to the ground and delivering the package.

A few weeks ago, Dunzo, the Google-backed delivery startup, had announced that it was set to pilot drone delivery of medicines under the ‘Medicine from the Sky’ project launched by the Telangana Government in collaboration with the World Economic Forum. The project is aimed to enable emergency medical deliveries that could include Covid-19 vaccines and other essentials. Dunzo is amongst the entities that were recently allowed by the Central Government to attempt BVLOS experimental flights using drones.

(Source: ndtv.com, dated 14th June, 2021)

15 Hyderabad market turns 10 tons of waste into biogas every day; powers 170 shops

When you think of vegetable and fruit markets in India, you ‘see’ messy visuals of vegetable shavings trampled on the ground, bustling crowds and bargaining vendors. The foul smell of leftover and damaged produce lying on the floor is not only unpleasant but also results in tonnes of waste at the end of the day.

But at the Bowenpally fruit and vegetable market in Hyderabad, the vegetable waste generated is used to power streetlights and shops. ‘Over the last six months, ten tonnes of waste that is generated daily is being converted into 500 units of electricity. It is used to power 120 streetlights, 170 shops and a cold storage unit,’ says Lokini Srinivas, Selection Grade Secretary, Bowenpally market.

‘Using the same waste, 30 kg. of biogas is produced through this process and is replacing LPG cooking gas in the canteen at the market,’ he explains, adding that the market uses 800 to 900 units of electricity every day and now 80% of the power supply is fulfilled with the biogas.

On the days when Bowenpally market does not generate ten tonnes of waste, neighbouring vegetable markets and supermarkets pitch in.

So how do they do it?

Converting waste into a resource
In an allocated space of 30 m x 40 m in the market, Hyderabad-based Ahuja Engineering Services Pvt Ltd., an organisation that has been involved in setting up biogas plants across India, has set up a unit that can process the ten tonnes of waste every day.

‘Though we have set up many plants across India, this is the first one with such a high capacity. The plant was set up under the guidance of Chief Scientist Dr. A. Gangagni Rao of the CSIR-IICT (Council of Scientific and Industrial Research – Indian Institute of Chemical Technology). Using his patented technology, we could set up a unit that could work at such a high rate capacity,’ says Sruthi Ahuja, Director of Ahuja Engineering.

She adds that the research using this technology has been going on since 2012.

Apart from producing electricity and biogas, the plant is also generating organic manure that can be used in farming.

Earlier, a model using the same technology but with a lower capacity of 250 kg. was installed at a poultry farm in Hyderabad where farm waste was converted into energy. Its success prompted Dr. Gangagni to engineer a system that could convert ten tonnes of waste every day into biogas.

‘The research at CSIR-IICT began in 2006 to find ways to produce biogas from vegetable, fruit and food waste. By 2011, we had developed a patented technology which was tested on a small scale at various farms and kitchens across India. We then re-engineered the method to make it more efficient so that it could handle the higher capacity of waste and produce more energy,’ says Dr. Gangagni.

The Department of Biotechnology picked up this project and provided capital investment to set up the plant. The Department of Agriculture Marketing also lent support and carried out the necessary civil work.

Every day, the waste is collected from across the Hyderabad market by a designated team hired on contract. This is brought to the plant located in the same premises and goes through a bio-methanation process.

First, the waste is shredded and then it is soaked in a feed preparation tank to be converted into slurry. This undergoes an anaerobic bio-methanation process using a special culture (bacteria consortium). Finally, the biogas is collected in separate tanks and directed to the kitchen for cooking. The biofuel is also supplied to a 100% biogas generator which is used to power water pumps, cold storage rooms, and street and shop lights.

Dr. Gangagni adds, ‘There are other markets where more biogas plants will be installed in future.’

(Source: betterindia.com, dated 15th June, 2021)

II. Health

16 More than half of the cosmetics sold in the US, Canada are full of toxins, finds study

Researchers at the University of Notre Dame tested more than 230 commonly used cosmetics and found that 56% of foundations and eye products, 48% of lip products and 47% of mascaras contained fluorine – an indicator of PFAS, or so-called ‘forever chemicals’ that are used in non-stick frying pans, rugs and countless other consumer products.

‘The Environmental Protection Agency is moving to collect industry data on PFAS chemical uses and health risks as it considers regulations to reduce potential risks caused by the chemicals.’

Some of the highest PFAS levels were found in waterproof mascara (82%) and long-lasting lipstick (62%), according to the study published in the journal Environmental Science & Technology Letters. Twenty-nine products with higher fluorine concentrations were tested further and found to contain between four and 13 specific PFAS chemicals, the study found. Only one item listed PFAS, or perfluoroalkyl and polyfluoroalkyl substances, as an ingredient on the label.

A spokeswoman for the US Food and Drug Administration, which regulates cosmetics, said the agency does not comment on specific studies. It said on its website that there have been few studies of the presence of the chemicals in cosmetics and the ones published generally found the concentration to be at very low levels not likely to harm people, in the parts per billion level to the 100s of parts per million.

A factsheet posted on the agency’s website says that ‘As the science on PFAS in cosmetics continues to advance, the FDA will continue to monitor’ voluntary data submitted by industry as well as published research.

But PFAS chemicals are an issue of increasing concern for lawmakers who are working to regulate their use in consumer products. The study results were announced as a bipartisan group of Senators introduced a bill to ban the use of PFAS in cosmetics and other beauty products.

The move to ban PFAS comes as Congress considers wide-ranging legislation to set a national drinking water standard for certain PFAS chemicals and clean up contaminated sites across the country, including military bases where high rates of PFAS have been discovered.

‘There is nothing safe and nothing good about PFAS,’’ said Senator Richard Blumenthal, D-Conn., who introduced the cosmetics bill with Sen. Susan Collins, R-Maine. ‘These chemicals are a menace hidden in plain sight that people literally display on their faces every day.’

Representative Debbie Dingell, D-Mich., who has sponsored several PFAS-related bills in the House, said she has looked for PFAS in her own makeup and lipstick, but could not see if they were present because the products were not properly labelled.

‘How do I know it doesn’t have PFAS?’ she asked at a news conference, referring to the eye makeup, foundation and lipstick she was wearing.

The Environmental Protection Agency is also moving to collect industry data on PFAS chemical uses and health risks as it considers regulations to reduce potential risks caused by the chemicals.

The Personal Care Products Council, a trade association representing the cosmetics industry, said in a statement that a small number of PFAS chemicals may be found as ingredients or at trace levels in products such as lotion, nail polish, eye makeup and foundation. The chemicals are used for product consistency and texture and are subject to safety requirements by the FDA, said Alexandra Kowcz, the Council’s Chief Scientist.

‘Our member companies take their responsibility for product safety and the trust families put in those products very seriously,’ she said, adding that the group supports prohibition of certain PFAS from use in cosmetics. ‘Science and safety are the foundation for everything we do.’

But Graham Peaslee, a Physics Professor at Notre Dame and the principal investigator of the study, said the cosmetics pose an immediate and long-term risk. ‘PFAS is a persistent chemical. When it gets into the bloodstream, it stays there and accumulates,’ he said.

Blumenthal, a former State Attorney-General and self-described ‘crusader’ on behalf of consumers, said he does not use cosmetics. But speaking on behalf of millions of cosmetics users, he said they have a message for the industry: ‘We’ve trusted you and you betrayed us.’

Brands that want to avoid likely government regulation should voluntarily go PFAS-free, Blumenthal said. ‘Aware and angry consumers are the most effective advocate for change’, he added.

(Source: firstpost.com, dated 18th June, 2021)

17 Should world stop shaking hands after Covid? What experts say

Banished at the start of the pandemic, the handshake is making something of a comeback, thanks to vaccinations and the lifting of social restrictions – but ‘pressing the flesh’ faces an uncertain future.

More than speeches or communiqués, one of the most striking takeaways from the Vladimir Putin and Joe Biden summit in Geneva was their fulsome handshake in front of the world’s cameras – a rare moment of physical human contact. A few days earlier, at the G7 summit in Cornwall, Biden and his fellow leaders were still elbow-bumping away at outdoor events spaced six feet apart.

Back in the US, most Covid-19 restrictions have been lifted and vaccinated citizens have been told they don’t need masks – even indoors. Social distancing is largely a thing of the past and unlimited domestic travel is back on. But many Americans are still treading carefully – mask-wearing is still encouraged in many shops and offices, friends often greet each other with a brief wave and handshakes are treated warily.

New York telephone technician Jesse Green declines to shake hands with customers, but does with people he knows and who have been vaccinated. ‘Because of the pandemic, people are more aware about the way they use their hands,’ he said. For William Martin, a 68-year-old lawyer, shaking hands with anyone, vaccinated or not, is out of the question. He won’t do so ‘until it is safe,’ he said, adding ‘and “safe” will not be determined by some government.’

Some US companies and organisations are using coloured bracelets to allow employees, customers or visitors to signal their openness to contact: red, yellow or green, from the most cautious to the most comfortable.

Hugging is generally out of bounds and kissing to greet someone – never common in the US – is almost unimaginable for most.

Unscientific?
Jack Caravanos, a Professor at New York University’s School of Global Public Health, said wariness of handshakes does not exactly match the evidence. Covid-19 ‘is poorly transmitted by surface contact and is essentially an airborne virus, (so) the scientific basis for no skin contact is moot,’ he says.

‘However, the common cold, influenza and a host of other infectious diseases are transmitted by touch, therefore eliminating handshaking will overall have a positive public health impact.’ Tapping into the wider health benefits, many experts would not mourn the death of the handshake.

‘I don’t think we should ever shake hands ever again, to be honest with you,’ White House pandemic adviser Anthony Fauci said last year as the virus took hold worldwide. Allen Furr, Professor of Sociology at Auburn University, said ‘We’ve always had germophobes, people who don’t like to touch people because they see everything as a contagion. We may have some more of those, because of the psychological effect that safety is equated with not coming close to people – that may stick in some people’s minds.’

A human ritual
Shaking hands is a ritual taught to children by adults, but after 16 traumatic months it is one that could weaken if it is not passed down to the next generation, he said.

Other forms of greeting such as fist-bumping, a brief wave, or alternatives such as an Indian-style ‘Namaste’ could become increasingly popular compared with the hearty grip of a ‘manly’ handshake. But ‘so much will be lost if we didn’t shake hands,’ mourns Patricia Napier-Fitzpatrick, founder of The Etiquette School of New York.

‘You can tell a lot about a person by their handshake. It’s part of body language – people have lost jobs in the past because of bad handshakes. When you touch someone, you’re showing you trust them, you’re saying “I’m not going to harm you”.’

As with everything, handshaking today has ‘become a political thing’, suggests New York paramedic Andy McCorkle, with some people shaking hands as a sign of defiance against the government and Covid restrictions. ‘I feel like it’ll be solidified psychologically, to keep one’s distance,’ he said.

The pandemic has upended many things about everyday life and the handshake is just one of them – the test will be to see if humans need it back. Furr, for his part, expects the handshake to endure. ‘It’s just kind of too important a ritual in our culture,’ he adds.

(Source: ndtv.com, dated 16th June, 2021)

III. World news

18 Taxing Amazon is like squeezing rice pudding

Around 100 years ago, the UK fumed as the wealthy Vestey brothers shifted their family business to Argentina to escape the long arm of London tax collectors. As the multinational used ever-more-elaborate schemes to shuffle profits, including creating a trust in Paris, the authorities likened attempts to tax the Vesteys to ‘trying to squeeze a rice pudding.’ The relevant loophole, which outraged the public, wasn’t closed until the 1990s.

Today’s rice-pudding squeezers have a new breed of multinationals in sight: Tech companies such as Amazon.com Inc. and Facebook Inc. that sell their services to consumers around the world yet pay little or nothing in tax.

Part of the problem is a global system rife with low-tax jurisdictions and smart advisers helping firms to devise ingenious Vestey-esque ways to pay as little as possible. But it’s also about the system’s failure to adapt to the digital age.

Corporate tax rules requiring a physical presence make it harder to tax businesses in the virtual world. The European Union recently estimated a 14-percentage-point gap in the tax rate between digital companies and bricks-and-mortar rivals.

Hence why, from a historical perspective, the G7 tax deal struck recently is such a big deal. Its minimum effective tax rate of 15% puts tax havens on notice. And its accompanying measure promises to tax the biggest multinationals above a certain threshold and reallocate the proceeds fairly around the world. This would supersede existing rules and allow countries a crack at collecting tax where they couldn’t before.

It’s taken decades of pressure, a financial crisis and a pandemic to get to a point where globalisation means tax convergence and not competition. Big countries found it relatively easy to ignore low-tax rivals when profits were on the up, but they now have little time for a race to the bottom on tax rates with climate change, inequality and pandemic management calling for more investment.

The playing field needs levelling: A country like Ireland (headline rate 12.5%) would stand to lose around two billion euros ($2.4 billion) in tax revenue, while France (headline rate 26.5%) would gain around five billion euros, according to national estimates.

As the G7 shops its initiative farther afield, not everyone is going to be happy. Ireland has made clear it intends to defend its way of doing things. Successive Irish governments have backed corporate tax as one of the few areas where Ireland can compete globally. U2 singer Bono has crooned that it gave his homeland ‘the only prosperity it’s ever known.’

Yet there’s real political momentum here and palpable public outrage. It’s one thing to build a national identity around a 12.5% tax rate. But last week, The Guardian reported that an Irish subsidiary of Microsoft Corp. paid zero corporation tax thanks to its residency in Bermuda. In 2014, Apple Inc. was estimated by the European Union to have paid a 0.005% tax rate. This is increasingly about corporate, not national, sovereignty.

The real risk is of future loopholes to come. Enforcement and tax collection will be a big part of making this deal stick: Listen hard and you can almost hear the cogs of wonkish brains whirring to spot new gaps in a system that’s already insanely complex. Simplification and clarity are both needed to avoid the global tax system collapsing under its own weight.

Still, getting to this stage is a victory in itself. No doubt the spirit of the Vesteys will live on, and new creative ways to dodge taxes will be found – but if the current revamp lasts another 100 years, it will be worth it.

(Source: bloomberg.com, dated 7th June, 2021)

STATISTICALLY SPEAKING

ETHICS AND U

Arjun: Oh, Lord! Oh, Lord! Please save me!

Shrikrishna (smiling): Yes, Paarth. What’s the matter? Everything is alright no?

Arjun: Bhagwan, You know everything. And You are Yourself asking this? Are You teasing me? It is Your habit to make fun of others.

Shrikrishna: No, Arjun. I am always there to protect those who have faith in me.

Arjun: I know You!

Shrikrishna: It is not enough that you know Me. In Kaliyug, you must know everybody you come across.

Arjun: This is one more cause of worry. See, You started with demonetisation, then GST, then RERA, corona – and lockdown. All monsters coming one after the other! They are killing our economy.

Shrikrishna: The only answer is, Know Me and Worship Me! Know everyone you meet. Sixty years ago, you did not know China and they invaded you. Again they are attacking the world.

Arjun: China is another demon.

Shrikrishna: Correct! So Know Your China! KYC!

Arjun: Oh! This KYC is another monster! Very irritating. I am a customer of my bank for over 50 years. Still every year, they trouble me.

Shrikrishna: But you never know when a closely known person will land you in trouble.

Arjun: But they have gone to the extent of stopping my account operations. I was very upset.

Shrikrishna: It is not the fault of your bank. The Reserve Bank insists on strict compliance. Your bankers also find it difficult to monitor it.

Arjun: That reminds me. Last month was the height! I did the tax audit of a CA firm. And they delayed the payment of my fees – for want of my KYC. Disgusting!

Shrikrishna: Are you not aware that your Institute also has issued specific guidelines for KYC? It is mandatory for all CAs.

Arjun: Oh! Is that so?

Shrikrishna: And your Institute is right in insisting on it. There were many disciplinary cases because of the misbehaviour of clients.

Arjun: But I am not a client of that CA firm. I am their tax auditor.

Shrikrishna: Agreed. KYC is just an acronym for convenience. It is wide enough to cover all persons. Arjun, please try to understand the spirit behind it. Don’t just treat it as compliance.

Arjun: I appreciate your point.

Shrikrishna: And keep in mind that it is your Institute’s guideline. Non-compliance with ICAI guidelines is a professional misconduct.

Arjun: Oh, really?

Shrikrishna: Of course! See the first clause of the second part of the second schedule of your CA Act.

Arjun: Oh, my God! I have never taken any KYC details of my clients.

Shrikrishna: Those details are prescribed in the guideline. Do it at least for audit clients in the first phase. But it will be better if you extend it to all your clients, vendors, service providers. I suggest that you should take it from your staff, too.

Arjun: I never knew this. So KYC does not merely mean ‘Know Your Customer’, but it also means ‘Know Your Compliance!’

Shrikrishna: You said it! So, Paarth, please wake up. Have a KYC drive. At least make a beginning. There will be some trouble in the beginning. But slowly, it will become a habit.

Arjun: Bhagwan, good that I know You. You opened my eyes by telling me about our ICAI KYC! I am obliged to you, as always! Please bless me.

Shrikrishna: Tathaastu!

|| Om Shanti ||

(This dialogue is based on the KYC Guidelines of the ICAI)

REGULATORY REFERENCER

DIRECT TAX

1. Insertion of Rule 11UAE – Income-tax (16th Amendment) Rules, 2021 – The Finance Act, 2021 has amended section 50B to provide that in case of slump sale, the Fair Market Value (FMV) of the undertaking or division transferred shall be deemed as the full value of the consideration received or accruing as a result of the transfer of such capital asset. Rule 11UAE is now prescribed providing the formula for computation of the FMV of capital assets for the purposes of section 50B. [Notification No. 68 of 2021 dated 24th May, 2021.]

2. Procedure for exercise of option under 245M(1) and intimation thereof by furnishing and upload of Form No. 34BB under Rule 44DA(1) explained. [Notification No. 5 of 2021 dated 24th May, 2021.]

3. Clarification regarding the limitation time for filing of appeals before the CIT (Appeals) – CBDT has issued Circular No. 8 of 2021 providing various relaxations till 31st May, 2021, including extending the time for filing appeals before CIT (Appeals). At the same time, the Supreme Court, vide order dated 27th April, 2021 in suo motu Writ Petition (Civil) No. 3 of 2020, restored the order dated 23rd March, 2020 and in continuation of the order dated 8th March, 2021, directed that the period(s) of limitation, as prescribed under any General or Special Laws in respect of all judicial or quasi-judicial proceedings, whether condonable or not, shall stand extended till further orders. CBDT clarifies that if different relaxations are available to the taxpayers for a particular compliance, the taxpayer is entitled to the relaxation which is more beneficial to her. Hence, limitation for filing of appeals before the CIT (Appeals) under the Act stands extended till further orders as ordered by the Supreme Court. [Circular No. 10 of 2021 dated 25th May, 2021.]

4. Income-tax Rules – Income-tax (17th Amendment) Rules, 2021 – CBDT amends Rule 31A for furnishing particulars of amounts on which tax is not deducted under sections 194A, 194, 196D and 194Q. It has also prescribed a new Annexure under Form 26Q. [Notification No. 71 of 2021 dated 8th June, 2021.]

5. Cost Inflation Index (CII) notified as 317 for F.Y. 2021-22. [Notification No. 73 of 2021 dated 15th June, 2021.]

COMPANY LAW

I. COMPANIES ACT, 2013

(I) MCA brings in new e-form AGILE-PRO-S for effortless incorporation of companies along with various other registrations – The MCA has notified the Companies (Incorporation) Fourth Amendment Rules, 2021 wherein a new e-form AGILE-PRO-S (Application for Registration of GSTIN, ESIC, EPFO, Profession tax registration, opening of bank account, and Shops and Establishment Registration) is introduced. On filing the AGILE-PRO-S form together with the SPICE incorporation form, companies would be enrolled automatically for GST, EPFO, ESIC, Profession tax registration, opening of bank account, and Shops and Establishment Registration in one go. [MCA Notification No. G.S.R. 392(E) F. No. 1/13/2013 CL-V, Vol. IV Dated 7th June, 2021.]

(II) MCA notifies manner of transfer of shares to IEPF – The MCA has notified the Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund) Amendment Rules, 2021. This amendment has inserted Rule 6A providing the manner of transfer of shares to the IEPF authority in a case where a company does not receive information regarding significant beneficial ownership, or the information received is incomplete. [MCA Notification No. G.S.R. 396 (E) F. No. 05/4/2020-IEPF dated 9th June, 2021.]

(III) MCA removes restrictions on matters not to be dealt with in meetings conducted via video conferencing – The MCA has notified the Companies (Meetings of Board and its Powers) Amendment Rules, 2021 which seeks to amend the Companies (Meetings of Board and its Powers) Rules, 2014 wherein restriction on matters not to be dealt with in a meeting through video conferencing as specified in the Act has been dispensed with. As a result, Companies are free to discuss any matter in meetings conducted through video conferencing. [MCA Notification No. G.S.R. 409 dated 15th June, 2021.]

(IV) Companies (Indian Accounting Standards) Amendment Rules, 2021 – The MCA has notified limited amendments to Ind AS 101, Ind AS 102, Ind AS 103, Ind AS 104, Ind AS 105, Ind AS 106, Ind AS 107, Ind AS 109, Ind AS 111, Ind AS 114, Ind AS 115, Ind AS 116, Ind AS 1, Ind AS 8, Ind AS 12, Ind AS 16, Ind AS 27, Ind AS 28, Ind AS 34, Ind AS 37, Ind AS 38 and Ind AS 40. [MCA Notification dated 18th June, 2021.]

II. SEBI

(V) SEBI grants relaxation in compliance with requirements pertaining to AIFS and VCFS – Due to the on-going second wave of the Covid-19 pandemic and restrictions imposed by various state governments, SEBI has decided to extend the due dates for regulatory filings by AIFs and VCFs during the period ending March, 2021 to July, 2021. As a result, AIFs and VCFs may submit regulatory filings for the aforesaid periods, as applicable, on or before 30th September, 2021. [Circular No. SEBI/HO/IMD/IMD-I/DOF6/CIR/2021/568, dated 31st May, 2021.]

(VI) Enhancement of overseas investment limits for Mutual Funds – SEBI has enhanced overseas investments for Mutual Funds. As a result, they can now make overseas investments subject to a maximum of US $1 billion per Mutual Fund, within the overall industry limit of US $7 billion. In addition, Mutual Funds can make investments in overseas Exchange Traded Fund/s subject to a maximum of US $300 million per Mutual Fund, within the overall industry limit of US $1 billion. [Circular No. SEBI/HO/IMD/IMD-II/DOF3/P/CIR/2021/571 dated 3rd June, 2021.]

(VII) SEBI allows Mutual Funds to enter into plain vanilla Interest Rate Swaps (IRS) for hedging purpose – Based on the feedback received from the industry, SEBI has decided to modify the norms for investment and disclosure by Mutual Funds in Derivatives wherein it has specified that Mutual Funds may enter into plain vanilla IRS for hedging purposes. The value of the notional principal in such cases must not exceed the value of the respective existing assets being hedged by the scheme. [Circular No. SEBI/HO/IMD/IMD-I DOF2/P/CIR/2021/580 dated 18th June, 2021.]

FEMA

(i) The Government had announced a hike in foreign investment limit for the insurance sector from 49% to 74% during the Budget announced on 1st February, 2021 and the appropriate Amendment Bill was passed into law (covered in the April, 2021 issue of the BCAJ). The Finance Ministry formally notified these amendments to the Indian Insurance Companies (Foreign Investment) Rules, 2015 on 19th May, 2021 and clarified on the final rules for increasing the foreign direct investment limit to 74%. The FDI Policy for the same has also now been amended by issuance of Press Note 2 of 2021. Certain conditions in relation to management by Resident Indian Citizens have been added. A corresponding amendment in the Non-Debt Instrument Rules, 2019 (NDI Rules) is pending after which the amendments will take effect. [Notification No. G.S.R. 337(E) dated 19th May, 2021 and Press Note No. 2 (2021 Series) dated 14th June, 2021.]

(ii) All transactions in government securities concluded outside the recognised stock exchanges are settled on a guaranteed basis by the Clearing Corporation of India Ltd. (CCIL) which acts as the central counter party. Based on requests received, RBI has decided to allow banks in India having an Authorised Dealer Category-1 licence to lend to Foreign Portfolio Investors (FPIs) in accordance with their credit risk management frameworks for the purpose of placing margins with CCIL in respect of settlement of transactions involving Government Securities (including Treasury Bills and State Development Loans). Changes have also been made by way of Notification to Regulation 7 of FEM (Borrowing and Lending) Regulations. [Notification No. FEMA. 3(R)2/2021-RB, dated 24th May, 2021 and A.P. (DIR SERIES 2021-22) Circular No. 6 dated 4th June, 2021.]

(iii) Certain banks had cautioned their customers against dealing in virtual currencies by making a reference to an RBI circular which was later set aside by the Supreme Court on 4th March, 2020. RBI has clarified that reference made by banks to this Circular is not in order. However, it has pointed out that banks and other entities may continue to carry out customer due diligence processes in line with regulations governing standards for KYC, Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and other obligations under PMLA, in addition to ensuring compliance with relevant provisions under FEMA for overseas remittances. [Circular No. DOR. AML.REC 18/14.01.001/2021-22 dated 31st May, 2021.]

(iv) Limits for FPIs to invest in Government Securities have remained unchanged for F.Y. 2021-22. Details are provided in the Circular. [A.P. (DIR SERIES 2021-22) Circular No. 5 dated 31st May, 2021.]

RBI

Accounts and Audit

(A) Risk-Based Internal Audit (RBIA) Framework for HFCs – The RBI had earlier issued a Notification (No. RBI/2020-21/88 Ref. No. DoS.CO.PPG./SEC.05/11.01.005/2020-21 dated 3rd February, 2021) mandating an RBIA Framework for specified NBFCs and UCBs. The aforesaid Circular has now been made applicable to all deposit-taking housing finance companies (HFCs) and non-deposit-taking HFCs with asset size of Rs. 5,000 crores and above. Such HFCs need to put in place an RBIA Framework by 30th June, 2022. [Notification No. RBI/2021-22/53 Ref. No. DoS.CO.PPG.SEC/03/11.01.005/2021-22 dated 11th June, 2021.]

ICAI MATERIAL

Accounts and Audit

  •  Accounting Standards: Quick Referencer for Micro Non-Company Entities. [25th May, 2021.]

CORPORATE LAW CORNER

5 Muthu Kumar G. vs. Registrar of Companies [127 taxmann.com 550 (Mad)] Date of order: 2nd March, 2021

Where no notice was given to the director before disqualifying him as director of company, order passed by Registrar of Companies disqualifying such individual u/s 164(2)(a) of the Companies Act, 2013 was illegal and was to be set aside

FACTS

This writ petition has been filed challenging the disqualification of the petitioner as director u/s 164(2)(a) of the Companies Act, 2013 on the ground that he has not submitted financial statements for three consecutive financial years. The petitioner has challenged the order dated 17th December, 2018 passed by the Registrar of Companies on the ground that it was passed without affording him an opportunity of a hearing.

HELD

The High Court observed that the ratio laid down by the Division Bench of the Court in the matter of Meethelaveetil Kaitheri Muralidharan vs. Union of India [2020] 120 Taxmann 152 applies to the facts of the instant case also. In the instant case, too, no notice was given to the petitioner director before disqualifying him.

The Court held that since no notice was given to the petitioner director, the order passed by the Registrar of Companies disqualifying him u/s 164(2)(a) was illegal and was to be set aside.

6 Regional Director, Southern Region, MCA and Registrar of Companies, Chennai vs. Real Image LLP (NCLAT) [Company Appeal (at) No. 352 of 2018; Source: NCLAT Official Website] Date of order: 4th December, 2019

If an Indian Limited Liability Partnership (‘LLP’) is proposed to be merged into an Indian Company u/s 232 of the Companies Act, 2013 then the LLP has first to apply for registration / conversion u/s 366 of the Companies Act, 2013

FACTS

The National Company Law Tribunal (NCLT), Chennai Bench vide its order dated 11th June, 2018 allowed the amalgamation of an LLP into a private limited company.

M/s Real Image LLP (referred to as transferor LLP) with M/s Qube Cinema Technologies Private Limited (referred to as transferee company) and their respective partners, shareholders and creditors moved a joint company petition under sections 230 to 232 of the Companies Act, 2013 before the NCLT, Chennai. The NCLT, after considering the scheme, found that all the statutory compliances have been made under sections 230 to 232 of the Companies Act, 2013.

NCLT further found that as per the earlier section 394(4)(b) of the Companies Act, 1956, an LLP could be merged into a company but there is no such provision in the Companies Act, 2013. However, an explanation to sub-section (2) of section 234 of the Act, 2013 permits a foreign LLP to merge with an Indian company; hence it would be wrong to presume that the Companies Act, 2013 prohibits the merger of an Indian LLP with an Indian company.

The NCLT observed that there was no legal bar to allow the merger of an Indian LLP with an Indian company. Therefore, applying the principle of casus omissus (a situation not provided by statute and hence governed by common law), NCLT by an order allowed the amalgamation of the transferor LLP with the transferee company.

The appellants preferred an appeal u/s 421 of the Companies Act, 2013 with a question for consideration before the National Company Law Appellant Tribunal (NCLAT) whether by applying the principle of casus omissus an Indian LLP incorporated under the LLP Act, 2008 can be allowed to merge into an Indian company incorporated under the Companies Act, 2013?

HELD

The NCLAT in its order stated that it is undisputed that the transferor LLP is incorporated under the provisions of the LLP Act, 2008 and the transferee company is incorporated under the Companies Act, 2013. Thus, these corporate bodies were governed by the respective Acts and not by the earlier Companies Act, 1956.

As per section 232 of the Companies Act, 2013 a company or companies can be merged or amalgamated into another company or companies.

It was observed that the Companies Act, 2013 has taken care of the merger of an LLP into a company. In this regard section 366 of the Companies Act, 2013 for Companies Capable of Being Registered provides that for the purpose of Part I of Chapter XXI (for Companies Authorised to Register Under this Act) the word company includes any partnership firm, limited liability partnership, co-operative society, society or any other business entity which can apply for registration under this part.

It means that under this part LLP will be treated as a company and it can apply for registration, and once the LLP is registered as a company, then the company can be merged in another company as per section 232 of the Companies Act, 2013.

The NCLAT concluded in its order that on reading the provisions of the Companies Act, 2013 as a whole in reference to the conversion of an Indian LLP into an Indian company, there is no ambiguity or anomalous results which could not have been intended by the Legislature. The principle of casus omissus cannot be supplied by the Court except in the case of clear necessity, and when a reason for it is found within the four corners of the statute itself, then there is no need to apply the principle of casus omissus.

The NCLAT held that the order passed by the NCLT, Chennai Bench is not sustainable in law, hence it set aside the order which sought to allow the merger of an Indian LLP with an Indian Company without registration / conversion of the LLP into a company u/s 366 of the Companies Act, 2013.

7 Joint Commissioner of Income Tax (OSD), Circle (3)(3)-1, Mumbai and Income Tax Officer, Ward 3(3)-1, Mumbai vs. Reliance Jio Infocomm Ltd. and M/s Reliance Jio Infratel Pvt. Ltd. Company Appeal (at) No. 113 of 2019 [National Company Law Appellate Tribunal (NCLAT), New Delhi; Source: NCLAT Official Website] Date of order: 20th December, 2019

Mere fact that a Scheme of Compromise or Arrangement may result in reduction of tax liability does not furnish a basis for challenging the validity of the same

FACTS


A joint petition under sections 230 to 232 of the Companies Act, 2013 was filed seeking sanction of the Composite Scheme of Arrangement amongst Reliance Jio Infocomm Limited, Jio Digital Fibre Private Limited and Reliance Jio Infratel Private Limited and their respective shareholders and creditors before the National Company Law Tribunal (NCLT), Ahmedabad Bench.

The NCLT, Ahmedabad Bench, by its order dated 11th January, 2019 directed the Regional Director, North-Western Region to make a representation u/s 230(5) of the Companies Act, 2013 and the Income-tax Department to file a representation.

According to the appellants, the NCLT has not adjudicated upon the objections raised by the appellants that the NCLT has not dealt with the specific objection that conversion of preference shares by cancelling them and converting them into loan would substantially reduce the profitability of the de-merged company / Reliance Jio Infocomm Limited which would act as a tool to avoid and evade taxes.

Under the Scheme of Arrangement, the transferor company has sought to convert the redeemable preference shares into loans, i.e., conversion of equity into debt which would reduce the profitability or the net total income of the transferor company causing a huge loss of revenue to the Income-tax Department.

According to the appellants, the scheme seeks to do indirectly what it could not have done directly under the law. By way of the composite scheme, there is an indirect release of assets by the de-merged company to its shareholders which is used to avoid dividend distribution tax which would have otherwise been attracted in the light of section 2(22)(a) of the Income-tax Act.

Further, when preference shares are converted into loan, the shareholders turn into creditors of the company. There are two consequences of this. Firstly, the shareholders who are now creditors can seek payment of the loan irrespective of whether or not there are accumulated profits, and secondly, the company would be liable to pay interest on the loans to its creditors, which it otherwise would not have had to do to its shareholders. Payment of interest on such huge amounts of loans would lead to reducing the total income of the company in an artificial manner which is not permissible in law.

It was also alleged that the proposed scheme does not identify the interest rate payable on the loan which will be a charge on the profits of the company. Even if 10% interest rate is considered as per section 186 of the Companies Act, 2013, this would amount to interest of approximately Rs. 782 crores per annum which would reduce the profitability of the company as this interest would reduce tax by Rs. 258 crores (approximately) each year. The reduction in the profitability is clearly resulting in tax evasion.

HELD
The NCLAT held that it was not open to the Income-tax Department to hold that the Composite Scheme of Arrangement amongst the petitioner companies and their respective shareholders and creditors is giving undue favour to the shareholders of the company and also the overall Scheme of Arrangement results in tax avoidance. The mere fact that a scheme may result in reduction of tax liability does not furnish a basis for challenging the validity of the same.

The NCLT, Ahmedabad bench, while approving the Composite Scheme of Arrangement, has granted liberty to the Income-tax Department to inquire into the matter, whether any part of the Composite Scheme of Arrangement amounts to tax avoidance or is against the provisions of the Income Tax, and to let it take appropriate steps if so required.

Thus, NCLAT upheld the decision of the NCLT, Ahmedabad bench and in view of the liberty given to the Income-tax Department, decided not to interfere with the Scheme of Arrangement as approved by the Tribunal and dismissed the appeals filed.

8 Lalit Kumar Jain vs. Union of India & Ors. Transferred Civil case No. 245 of 2020 [2021 127 Taxmann.com 368 (SC)] Date of order: 21st May, 2021

CASE NOTE
1. Central Government has power to notify different sections on different dates and also to special species of individuals, i.e., personal guarantors
2. Approval of resolution plan of the corporate debtor shall not ipso facto absolve the personal guarantors of their liability

FACTS OF CASE
The case deals with various writ petitions which challenged the constitutional validity of Part III of the IBC, which deals with insolvency resolution for individuals and partnership firms. The Supreme Court transferred all writ petitions from the High Courts to itself to take up interpretation of the impugned provisions of the IBC.

QUESTIONS OF LAW INVOLVED IN THE CASE
(1) Whether executive government could have selectively brought into force the Code, and applied some of its provisions to one sub-category of individuals, i.e., personal guarantors to corporate creditors?

HELD BY THE SUPREME COURT
• The intimate connection between such individuals and corporate entities to whom they stood guarantee, as well as the possibility of two separate processes being carried on in different forums, with its attendant uncertain outcomes, led to carving out personal guarantors as a separate species of individuals for whom the Adjudicating Authority was common with the corporate debtor to whom they had stood guarantee.

• The Court held that there is no compulsion in the Code that it should, at the same time, be made applicable to all individuals (including personal guarantors), or not at all. There is sufficient indication in the Code, by section 2(e), section 5(22), section 60 and section 179, indicating that personal guarantors, though forming part of the larger grouping of individuals, were to be, in view of their intrinsic connection with corporate debtors, dealt with differently through the same adjudicatory process and by the same forum (though not insolvency provisions) as such corporate debtors. The notifications under section 1(3), (issued before the impugned notification was issued) disclose that the Code was brought into force in stages, regard being given to the categories of persons to whom its provisions were to be applied. The exercise of power in issuing the impugned notification under section 1(3), therefore, is held not ultra vires and the notification valid.

(2) Whether the impugned notification, by applying the Code to personal guarantors only, takes away the protection afforded by law as once a resolution plan is accepted, the corporate debtor is discharged of liability?

• Approval of a resolution plan does not ipso facto discharge a personal guarantor (of a corporate debtor) of his or her liabilities under the contract of guarantee. As held by this Court, the release or discharge of a principal borrower from the debt owed by it to its creditor, by an involuntary process, i.e., by operation of law, or due to liquidation or insolvency proceedings, does not absolve the surety / guarantor of his or her liability, which arises out of an independent contract.

• The Court referred to provisions of sections 128, 133, 134 and 140 of the Contract Act, 1872 and rejected the argument of extinguishment of liability on the ground of variance of contract and held that the operation of law shall not be at variance. It was held that in view of the unequivocal guarantee, such liability of the guarantor continues and the creditor can realise the same from the guarantor in view of section 128 of the Contract Act as there is no discharge u/s 134 of that Act.

• It held that the impugned notification is legal and valid. It also held that approval of a resolution plan relating to a corporate debtor does not operate so as to discharge the liabilities of personal guarantors (to corporate debtors).

GOODS AND SERVICES TAX (GST)

I. HIGH COURT

13 Dharmendra M. Jani vs. Union of India and Others [2021-TIOL-1297-HC-Mum-GST] Date of order: 9th June, 2021

Section 13(8)(b) of the Integrated Goods and Services Tax Act is held to be unconstitutional – However, there is a difference of opinion between the judges and the dissenting judge is yet to pronounce his judgment

FACTS

The petitioner is engaged in marketing and promotion services to customers located outside India. The Indian purchaser, i.e., the importer, directly places a purchase order on the overseas customer for supply of the goods which are then shipped by the overseas customer to the Indian purchaser. The overseas customer raises sales invoice in the name of the Indian purchaser. Upon receipt of payment, the overseas customer pays commission to the petitioner in convertible foreign exchange. Essentially, the transaction is one of export of service. Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 provides that the place of supply in case of an intermediary is the location of the service provider. Sub-section (2) of section 8 of the said Act says that in case of supply of services where the location of the supplier and the place of supply are in the same state or union territory, it would be treated as an intra-state supply. Therefore, the export of service by the petitioner as intermediary would be treated as intra-state supply of services u/s 13(8)(b) read with section 8(2) liable to payment of CGST and SGST. The tax was paid under protest and the present writ is filed questioning the constitutional validity of section 13(8)(b).

HELD


The Court noted Articles 246A and 269A of the Constitution of India. While Article 246A deals with special provisions with respect to GST, Article 269A provides for levy and collection of GST in the course of inter-state trade or commerce. From a careful and conjoint reading of the two Articles, it is quite evident that the Constitution has only empowered Parliament to frame laws for the levy and collection of GST in the course of inter-state trade or commerce, besides laying down principles for determining place of supply and when such supply of goods or services, or both, takes place in the course of inter-state trade or commerce. Thus, the Constitution does not empower imposition of tax on export of services out of the territory of India by treating the same as a local supply. There is an express bar under clause (1) of Article 286 that no law of a state shall impose or authorise imposition of a tax on the supply of goods or services, or both, where such supply takes place in the course of import into or export out of the territory of India.

In the present case, the Court accepts the fact that the recipient of the service is the overseas customer and therefore it is an export of service as defined u/s 2(6) of the IGST Act read with section 13(2) thereof. However, section 13(8)(b) of the IGST Act read with section 8(2) has created a fiction deeming export of service by an intermediary to be a local supply, i.e., an inter-state supply. This is definitely an artificial device created to overcome a constitutional embargo. The Court categorically mentioned that it is unable to accept the view of the Gujarat High Court in the case of Material Recycling Association of India (2020-TIOL-1274-HC-Ahm-GST) where section 13(8)(b) of the IGST Act is held to be constitutional. Accordingly, it was held that section 13(8)(b) of the IGST Act, 2017 is ultra vires the said Act, besides being unconstitutional. However, there was a difference of opinion in the decision of the judges and the dissenting judge is yet to pronounce his judgment.

14 M/s Aryan Tradelink vs. Union of India [2021-TIOL-1283-HC-Kar-GST] Date of order: 21st April, 2021

The blockage of credit in the electronic credit ledger beyond a period of one year is impermissible in law

FACTS

The petitioner challenges the act of blocking of the credit ledger and its continuance beyond one year. It is submitted that in light of the mandate under Rule 86-A(3) of the CGST Rules, 2017, blocking of the electronic credit ledger shall cease to have effect after the expiry of a period of one year from the date of imposing such restriction.

HELD
Without entering into the merits of the order blocking the electronic credit ledger, in light of Rule 86-A(3), restriction in blocking of the electronic credit ledger cannot be extended beyond the period of one year from the date of imposing such restriction and, accordingly, in light of the blocking having been done on 21st January, 2020, its continuance in the present instance is impermissible in law. It is therefore declared that the action of the respondents in continuing the blocking of the electronic credit ledger is set aside.

15 Suman Kumar vs. The State of Bihar and Ors. [2021(47) GSTL 449 (Patna)] Date of order: 3rd March, 2021

Best judgement assessment order cannot be passed without granting an opportunity of being heard or without assigning any reason

FACTS
An ex parte order was issued on the basis of best judgement assessment in Form ASMT-13. The petition was filed praying to recall the best judgement assessment made u/s 62(1) of the CGST Act, 2017 and to consider GSTR3B filed by the petitioner for the assessment.

HELD
The order was passed in violation of the principles of natural justice since neither adequate opportunity of being heard was granted, nor any reason assigned for passing such order which would entail civil consequences seriously prejudicing the petitioner. Therefore, the order was quashed without expressing any opinion on the merits of the case with the direction that the proceedings may be conducted digitally considering the current pandemic if required, but the authority shall decide the case on merits preferably by 31st March, 2021, at least within two months from the date of this order.

II. ADVANCE RULING

16 Gujarat Narmada Valley Fertilizers & Chemicals Ltd. [2021 (48) GSTL 172 (AAR-Gujarat)] Date of order: 17th September, 2020

Section 15 of CGST Act and Rule 33 of CGST Rules – Electricity charges collected by landlord at actuals as per agreement would be a case of pure agent and would not form part of value of supply

FACTS
The applicant has entered into a lease agreement with the President of India on behalf of the Commissioner of Central Excise, Audit-I, Ahmedabad (the lessee) to provide a building on rent along with interior infrastructure on 1st December, 2015. The applicant charges rent along with electricity charges and in view of the terms of the agreement, the lessee was liable to pay all charges in respect of electric power, air-conditioning charges, light and water along with applicable taxes. The applicant receives the electricity bill in its name, charges proportionate electricity charges from different tenants and collects GST on such electricity charges from other tenants.

The applicant sought Advance Ruling on whether when the landlord charges electricity or incidental charges in addition to rent as per the lease agreement, was the landlord liable to pay and recover GST from the tenant on such electricity or incidental charges? Can electricity charges paid by the landlord to Torrent Power Ltd. (the supplier of electricity) for the electricity connection in the name of the landlord and recovered based on sub-meters from different tenants be considered as amount recovered as pure agent of the tenant when the legal liability to pay the electricity bill was that of the landlord?

HELD
The question relating to ‘recovery’ of GST from the tenant on electricity or incidental charges was outside the scheme of advance ruling. Such a question being a civil matter, shall be decided in terms of the agreement entered into between both the parties. In view of the terms of the agreement, it was inferred that the applicant was charging a fixed sum as rent and there were no other incidental expenses or charges. The charges in respect of electric power were to be paid on actual basis. One of the clauses of the agreement stipulated that the Government shall pay all charges in respect of electric power, light, etc., along with the applicable taxes thereon. However, the words ‘to whom’ the payment was to be made were missing in the agreement. By applying linguistic principles, it was observed that the lessee was required to pay the charges directly to the electricity company in respect of electric power used by it. The clauses relating to rent and charges for electric power were independent of each other. Thus, electricity charges would not form part of the value of supply.

In respect of the second question, the applicant had not obtained separate meters from the electricity company but had installed sub-meters. Therefore, although the lessee had to pay electricity charges directly to the company as per actual usage in terms of the agreement, in the absence of infrastructure, i.e., separate electric meter, there was a silent agreement that the applicant shall collect electricity charges on actual basis and pay the same to the company. Since this arrangement has been going on for a long time, there was a mutual understanding which can be called as an ‘agreement’ in view of the Indian Contract Act, 1982. Thus, it was held to be a case of pure agent.

17 Manoj Mittal [MANU/AR/0035/2021 (AAR-WB)] Date of order: 22nd March, 2021

If there are two separate sections, one for takeaways and another as restaurant, and if separate books of accounts, records, etc., are maintained, both such sections shall be treated as independent sections – Section for only takeaways can be considered as supply of goods

FACTS
The applicant has a place of business with two sections. One section has a sweets parlour to sell sweetmeats, namkeens and bakery items off the counter in the form of takeaways. In the other section, fast food snacks and beverage items were prepared and served which could either be consumed at the premises or allowed as takeaways. Catering services were also provided to an educational institution which provides education up to secondary level. The two sections were separated through separate billing counters, registers and books of accounts. Based on these facts, the applicant sought advance ruling in respect of classification of supply either as supply of service or of goods, the rate of tax to be applied, exemption to catering services provided to the educational institution, availment of ITC and reversal of common ITC.

HELD
Since there was no direct or indirect nexus between the sweetmeats parlour and the restaurant, it was held that goods supplied from the sweetmeats parlour as takeaways without any element of supply of services shall be treated as supply of goods. Input tax credit shall be available in respect of such supply of goods.

The supply of food and beverage items in the restaurant or as takeaway from the restaurant counter has an element of supply of service. This being composite supply and principal supply being restaurant services, GST shall be levied @ 5% subject to non-availment of input tax credit. Based on the agreement entered into for supply of catering services to the educational institution (i.e., its students and staff) and auditor, guests / parents on programme days, supply only to the extent of catering services provided to the educational institute would be exempt. The supply of food and beverages to the auditor, guests / parents on programme days shall be treated as ‘outdoor catering’ liable to GST @ 5% subject to non-availment of input tax credit. For common input tax credit, sections 17(1) and (2) of the CGST Act read with Rule 42 and 43 of the CGST / WBGST Rules, 2017 shall be followed.

GLIMPSES OF SUPREME COURT RULINGS

6 DCIT vs. Pepsi Foods Ltd. (2021) 433 ITR 295 (SC)

Stay – Stay of recovery of demand pending disposal of appeal by the Income Tax Appellate Tribunal – The third proviso to section 254(2A) of the Income-tax Act, introduced by the Finance Act, 2008, is both arbitrary and discriminatory and therefore liable to be struck down as offending Article 14 of the Constitution of India – Consequently, the third proviso to section 254(2A) will now be read without the word ‘even’ and the words ‘is not’ after the words ‘delay in disposing of the appeal’ – Any order of stay shall stand vacated after the expiry of the period or periods mentioned in the section only if the delay in disposing of the appeal is attributable to the assessee

The respondent-assessee, an Indian company incorporated on 24th February, 1989, was engaged in the business of manufacture and sale of concentrates, fruit juices, processing of rice and trading of goods for exports. The assessee was a group company of the multinational Pepsico Inc., a company incorporated and registered in the USA. It merged with Pepsico India Holdings Pvt. Ltd. w.e.f. 1st April, 2010 in terms of a scheme of arrangement duly approved by the Punjab and Haryana High Court. On 30th September, 2008, a return of income was filed for the assessment year 2008-2009 declaring a total income of Rs. 92,54,89,822. A final assessment order was passed on 19th October, 2012 which was adverse to the assessee.

Aggrieved by this order, the assessee filed an appeal before the Income Tax Appellate Tribunal on 29th April, 2013. On 31st May, 2013 a stay of the operation of the order of the A.O. was granted by the Tribunal for a period of six months. This stay was extended till 8th January, 2014 and continued being extended until 28th May, 2014. Since the period of 365 days as provided in section 254(2A) was to end on 30th May, 2014 beyond which no further extension could be granted, the assessee, apprehending coercive action from Revenue, filed a writ petition before the Delhi High Court on 21st May, 2014 challenging the constitutional validity of the third proviso to section 254(2A). By a judgment dated 19th May, 2015, the Delhi High Court struck down that part of the third proviso to section 254(2A) which did not permit the extension of a stay order beyond 365 days even if the assessee was not responsible for delay in hearing the appeal.

The Supreme Court noted that the genesis of the stay provision contained in section 254 was in the celebrated judgment of this Court in Income Tax Officer vs. M.K. Mohammed Kunhi (1969) 2 SCR 65. In this judgment, section 254, as originally enacted, came up for consideration before this Court. After setting out section 254(1), the Supreme Court referred to Sutherland, Statutory Construction (3rd Edn., Articles 5401 and 5402) and then held that the power which has been conferred by the said section on the Appellate Tribunal with the widest possible amplitude must carry with it, by necessary implication, all powers incidental and necessary to make the exercise of such power fully effective. The Supreme Court recognised that orders of stay prevent the appeal, if ultimately successful, from being rendered nugatory or futile, and are granted only in deserving and appropriate cases.

The Supreme Court further noted that this judgment was followed for many decades, the Appellate Tribunal granting stay without being constrained by any time limit.

However, by Finance Act, 2001 (w.e.f. 1st June, 2001), two provisos were introduced to section 254(2A) to provide that where, in an appeal filed by the assessee, the Appellate Tribunal passes an order granting stay, the Tribunal shall hear and decide such appeal within 180 days from the date of passing such order granting stay, failing which the stay granted shall be vacated after the expiry of the aforesaid period.

Realising that a hard and fast provision which was directory so far as the disposal of appeal was concerned, but mandatory so far as vacation of the stay order was concerned, would lead to great hardship, the Legislature stepped in again and amended section 254(2A) vide Finance Act, 2007 (w.e.f. 1st June, 2007), to further provide that where such an appeal is not disposed of within the aforesaid period of stay, the Appellate Tribunal may extend the period of stay or pass an order of stay for a further period or periods as it thinks fit where the delay in disposing the appeal is not attributable to the assessee; however, the aggregate period of the stay originally allowed and the period or periods subsequently extended in any case shall not exceed 365 days.

The Supreme Court noted that the aforementioned provision (as amended by the Finance Act, 2007) became the subject matter of challenge before the Bombay High Court in Narang Overseas Pvt. Ltd. vs. ITAT (2007) 295 ITR 22. The Bombay High Court, after referring to the judgment in Mohammed Kunhi (Supra), held that Parliament clearly intended that such appeals should be disposed of at the earliest. However, the object was not to defeat the vested right of appeal in an assessee, whose appeal could not be disposed of not on account of any omission or failure on his part, but either the failure of the Tribunal or the acts of Revenue resulting in non-disposal of the appeal within the extended period as provided. The High Court then referred to the judgment of this Court in Commissioner of Customs & Central Excise vs. Kumar Cotton Mills (2005) 13 SCC 296, which dealt with a similar provision contained in the Central Excise Act, 1944, namely, section 35C(2A), and then held that the third proviso has to be read as a limitation on the power of the Tribunal to continue interim relief in a case where the hearing of the appeal has been delayed for acts attributable to the assessee.

Further, the Court pointed out that close on the heels of this judgment, section 254(2A) was again amended, this time by the Finance Act, 2008 (w.e.f. 1st October, 2008), to provide that the aggregate period originally allowed and the period or periods so extended or allowed shall not, in any case, exceed 365 days even if the delay in disposing of the appeal is not attributable to the assessee.

The Supreme Court also noted that the amended provision came to be considered by a Division Bench of the Delhi High Court in Commissioner of Income Tax vs. M/s Maruti Suzuki (India) Ltd. (2014) 362 ITR 215. The constitutional validity of the said provision had not been challenged, as a result of which the Delhi High Court interpreted the third proviso to section 254(2A) as follows:
(i) In view of the third proviso to section 254(2A) of the Act substituted by the Finance Act, 2008 with effect from 1st October, 2008, the Tribunal cannot extend stay beyond the period of 365 days from the date of the first order of stay.
(ii) In case default and delay is due to a lapse on the part of the Revenue, the Tribunal is at liberty to conclude hearing and decide the appeal, if there is likelihood that the third proviso to section 254(2A) would come into operation.
(iii) The third proviso to section 254(2A) does not bar or prohibit the Revenue or Departmental representative from making a statement that they would not take coercive steps to recover the impugned demand and, on such statement being made, it will be open to the Tribunal to adjourn the matter at the request of the Revenue.
(iv) An assessee can file a writ petition in the High Court pleading and asking for stay and the High Court has power and jurisdiction to grant stay and issue directions to the Tribunal as may be required. Section 254(2A) does not prohibit / bar the High Court from issuing appropriate directions, including granting stay of recovery.

The Supreme Court further noted that close upon the heels of the judgment in Maruti Suzuki (Supra), the Gujarat High Court in DCIT vs. Vodafone Essar Gujarat Ltd. (2015) 376 ITR 23, while disagreeing with the view taken in Maruti Suzuki (Supra), interpreted the third proviso to section 254(2A) and held that the extension of stay beyond the total period of 365 days from the date of grant of initial stay would always be subject to the subjective satisfaction of the learned Appellate Tribunal and on an application made by the assessee-appellant to extend stay and on being satisfied that the delay in disposing of the appeal within a period of 365 days from the date of grant of initial stay is not attributable to the appellant-assessee.

Coming to the impugned judgment in M/s Pepsi Foods Ltd. vs. ACIT (2015) 376 ITR 87, the Supreme Court noted that it dealt with the challenge to the constitutional validity of the third proviso to section 254(2A) as amended by the Finance Act, 2008. The Delhi High Court, after setting out the Bombay High Court judgment in Narang Overseas (Supra), and then referring to the previous judgment of the Delhi High Court in Maruti Suzuki (Supra), held that the assessees who, after having obtained stay orders and by their conduct delay the appeal proceedings, have been treated in the same manner in which assessees who have not, in any way, delayed the proceedings in the appeal. The two classes of assessees are distinct and cannot be clubbed together. This clubbing together has led to hostile discrimination against the assessees to whom the delay is not attributable. Therefore, the insertion of the expression – ‘even if the delay in disposing of the appeal is not attributable to the assessee’ – by virtue of the Finance Act, 2008 violates the non-discrimination Clause of Article 14 of the Constitution of India.

The object that appeals should be heard expeditiously and that assessees should not misuse the stay orders granted in their favour by adopting delaying tactics is not at all achieved by the provision as it stands. On the contrary, the clubbing together of ‘well-behaved’ assessees and those who cause delay in the appeal proceedings is itself violative of Article 14 of the Constitution and has no nexus or connection with the object sought to be achieved. The said expression introduced by the Finance Act, 2008 is, therefore, struck down as being violative of Article 14 of the Constitution of India. This would revert us to the position of law as interpreted by the Bombay High Court in Narang Overseas (Supra). Consequently, it was held that where the delay in disposing of the appeal is not attributable to the assessee, the Tribunal has the power to grant extension of stay beyond 365 days in deserving cases.

The Supreme Court, after referring to a plethora of judgments, held that there can be no doubt that the third proviso to section 254(2A), introduced by the Finance Act, 2008, would be both arbitrary and discriminatory and, therefore, liable to be struck down as offending Article 14 of the Constitution of India. First and foremost, as has correctly been held in the impugned judgment, unequals are treated equally in that no differentiation is made by the third proviso between the assessees who are responsible for delaying the proceedings and those who are not so responsible. This is a little peculiar in that the Legislature itself has made the aforesaid differentiation in the second proviso to section 254(2A), making it clear that a stay order may be extended up to a period of 365 days upon satisfaction that the delay in disposing of the appeal is not attributable to the assessee. Ordinarily, the Appellate Tribunal, where possible, is to hear and decide appeals within a period of four years from the end of the financial year in which such appeal is filed. It is only when a stay of the impugned order before the Appellate Tribunal is granted that the appeal is required to be disposed of within 365 days.

So far as the disposal of an appeal by the Appellate Tribunal is concerned, this is a directory provision. However, so far as vacation of stay on expiry of the said period is concerned, this condition becomes mandatory as far as the assessee is concerned. The object sought to be achieved by the third proviso to section 254(2A) is without doubt the speedy disposal of appeals in cases in which a stay has been granted in favour of the assessee. But such object cannot itself be discriminatory or arbitrary. Since the object of the third proviso is the automatic vacation of a stay that has been granted on the completion of 365 days, whether or not the assessee is responsible for the delay caused in hearing the appeal, such object being itself discriminatory, is liable to be struck down as violating Article 14 of the Constitution of India. Besides, the said proviso would result in the automatic vacation of a stay upon the expiry of 365 days even if the Appellate Tribunal could not take up the appeal in time for no fault of the assessee. Further, vacation of stay in favour of the Revenue would ensue even if the Revenue is itself responsible for the delay in hearing the appeal. In this sense, the said proviso is also manifestly arbitrary being a provision which is capricious, irrational and disproportionate so far as the assessee is concerned.

The Supreme Court concluded that the law laid down by the impugned judgment of the Delhi High Court in M/s Pepsi Foods Ltd. (Supra) was correct. As a consequence, the judgments of the various High Courts which followed the aforesaid declaration of law are also correct. Consequently, the third proviso to section 254(2A) will now be read without the word ‘even’ and the words ‘is not’ after the words ‘delay in disposing of the appeal’. Any order of stay shall stand vacated after the expiry of the period or periods mentioned in the section only if the delay in disposing of the appeal is attributable to the assessee.

SOCIETY NEWS

HUMAN RESOURCES DEVELOPMENT STUDY CIRCLE MEETING – “IMPORTANCE OF PRAYERS – SCIENTIFIC ASPECTS”
This meeting was presented by CA C N Vaze and Ms. Manasi Amdekar on Tuesday, 10th May, 2022 at Bombay Chartered Accountant Society, Mumbai-400020.

In our Indian culture, we are taught by our parents and ancestors to give God first place in our life.

This has led everyone to believe in regular prayer in addition to prayer in times of distress, disaster or some other discomfort during our life’s journey.

‘Prayer’ is an integral part of a common man’s life. Prayers are at different levels.

We pray to the King, to the Judge, to our Boss or Superiors, to our parents, to the people at large. We write ‘Prayers’ in any petition to the Court or Government Authority.

During the ensuing event, we discussed the meaning and importance of prayers in a spiritual or philosophical sense. It is a prayer to God, Almighty or Super-Power.

A Lot of research has gone into analysing the effect of prayers on our minds and lives.

Ms. Manasi Amdekar is a psychological counsellor. She explained the scientific aspect of the effect of prayers on our brains and minds.

Ms. Manasi Amdekar presented her study about prayers with the help of a PPT and enlightened us with many examples, applications, images of human brain scanned using ultrasound etc. According to her, prayers in the form of Stotras and Mantras are like coding systems and unique combinations of words put together to regulate the breathing patterns of an individual in a certain frequency while chanting them. This has helped people overcome stressful events, traumas and also heal the internal damage to the brain.

We instruct our minds to calm down, focus on the deity, be submissive and offer our utmost attention to the prayer or the words we chant. Prayers give us a sense of unity when offered in masses. It makes us believe in the positive side of everything, and a sense of confidence, that if “we pray for something together, then everything is possible to achieve”. It is also nonetheless a means of cultural and religious identity of an individual and a factor of identification with the members of the community, which surely increases the feeling of belongingness for an individual.

She also emphasized the importance of a regular practice of positive talk and positive psychology. She responded to the questions from participants after her talk. It was indeed a thought-provoking session.

9TH YRRC HELD ON SATURDAY, 21ST MAY, 2022 AT BCAS HALL

 

The 9th YRRC was held on 21st May 2022 in a hybrid mode. This year the event was open to all professionals.

The event was aimed at having different and unique topics and also networking activities and games. The topics were designed to cover technical, strategic and networking aspects.

The Opening Remarks were shared by CA Mihir Sheth, VP – BCAS and CA Anand Kothari, Convenor of the HRD Committee at BCAS. CA K K Jhunjhunwala – Co-Chairman of the HRD Committee had also graced the event. CA Naushad Panjwani mentored the event.

The sessions were taken by:

• Metaverse in a Professional’s Life – Ms. Filisha Shah

• Design Thinking – Dr. Guruprasad Rao

• Blue Ocean Strategy – Er. Sharad Ashani

• Panel Discussion – Dr. Radhakrishnan Pillai

The attendees had amazing feedback to share in person and also on social media. The session by Dr. Radhakrishnan Pillai was moderated by the youth team, which gave them the confidence to take up more such sessions in the future and encouraged the youth.

We had more than 10,000 interactions on Twitter, LinkedIn, Instagram and Facebook on our posts on YRRC. We had about five to eight new memberships at BCAS during and after the event of YRRC.

FEMA STUDY CIRCLE MEETING HELD ON SATURDAY, 28TH MAY, 2022.

CA (Dr.) Suresh Surana, RSM Astute Consulting India Private Limited, led the FEMA Study Circle of BCAS on the topic of Non-Resident Indians (NRI): Investment in India – Immovable Properties, Shares and Deposits on 28th May, 2022. He is widely acclaimed amongst professionals and corporate honchos alike.  

Mr. Surana started off by giving an overview of India’s inward remittances and the country-wise inward remittances from NRIs. Then, he delved into the basics of FEMA by explaining the definitions of NRI/OCI/PIO as well as explaining the difference between residency provisions under FEMA and The Income Tax Act, 1961. Having laid the foundation, he moved on to explaining complex topics like Permissible Bank Accounts, Investments in Immovable Properties, Shares/ Securities, Debt Instruments and Business Entities before wrapping it up by explaining the compliances required to be fulfilled upon a change in status from ‘Resident’ to ‘Non-Resident’. He explained the nuances of each of these topics in great detail and ensured that the participants understood the concepts very well by supporting them with case studies that were indeed very insightful and thought-provoking. Needless to say, the presentation was a reflection of his granular style of thinking and attention to detail.   

Mr. Surana kept the participants engaged by answering questions as and when they arose. His ability to answer questions from any corner, coupled with interesting questions based on real-life situations encountered by professionals, made the presentation very lively and interesting. The highlight of Mr. Surana’s presentation was a fine balance between the range of topics covered within such a short span of time without being too overwhelming and the attention to detail.

SUBURBAN STUDY CIRCLE MEETING

“Recent Amendments to Schedule III of Companies Act, 2013 & The Companies Rules And Companies (Auditor’s Report) Order, 2020” Part I on Saturday, 14th May, 2022 and Part II on Friday, 3rd June 2022 at Bathiya & Associates LLP, Andheri (E)

The Suburban Study Circle had organized a meeting on “Recent Amendments to Schedule III of Companies Act, 2013 & The Companies Rules And Companies (Auditor’s Report) Order, 2020” in two parts which was addressed by CA Amit Purohit as a Group Leader in both the sessions.

Group Leader CA Amit Purohit made an insightful presentation and shared his views on the following:

• Amendments to Schedule III to the Companies Act 2013 (Effective from 1st April, 2021)

• Amendments to The Companies (Audit and Auditors) Rules, 2014 (Effective from 1st April, 2021)

• Amendments to The Companies (Accounts) Rules, 2014 (Effective from 1st April, 2021)

• Amendments to Rules effective from 1st April, 2022

• Companies (Auditor’s Report) Order, 2020

• Guidance note by the ICAI

The participants benefited from the presentation shared by the group leader.

IESG MEETING ON 7TH JUNE, 2022 – INFLATION, FOOD CRISIS & SURGING DOLLAR

Summary of the meeting:
The group discussed the cause & effect of rising inflation globally & in India is creating issues for Governments, Central Banks & Poor people as Ukraine War & Chinese lockdown induced supply chain disruption pushes up prices for energy, industrial raw materials, food grains & essentials. While Central Banks have increased interest rates but elevated inflation is causing negative real interest rates creating problems for people dependent on interest income. Global GDP growth is also being downgraded by Institutions. Members expressed that this phenomenan is comparable to similar major events like WW II, 9/11 & Global Financial Crisis (2008-2009) when inflation had shot up but the same came down with steps taken by governments and base effect. The food crisis is worsening with supply disruptions due to war & sanctions. Experts are labeling this as “Weaponising food” as globally, we are experiencing food shortages and very high food prices threatening hunger crisis in many poor nations. India has taken steps to restrict exports of a few key items to enable fulfilling their Food Security obligations. American Dollar has surged to 20 year high with Euro nearing Dollar parity. This is also causing a problem of importing inflation in many countries as their currencies are getting adversely impacted.

Speaker: CA Harshad Shah presented points for deliberations, and many group members also expressed their views.

STATISTICALLY SPEAKING

MISCELLANEA

I. TECHNOLOGY

8 Apple battery lawsuit: Millions of iPhone users could get payouts in legal action

Millions of iPhone users could be eligible for payouts, following the launch of a legal claim accusing Apple of secretly slowing the performance of older phones.

Justin Gutmann alleges the company misled users over an upgrade that it said would enhance performance but, in fact, slowed phones down. He is seeking damages of around £768m for up to 25 million UK iPhone users. Apple says it has “never” intentionally shortened the life of its products.

The claim, which has been filed with the Competition Appeal Tribunal, alleges Apple slowed down the performance of older iPhones, in a process known as “throttling”, in order to avoid expensive recalls or repairs. It relates to the introduction of a power management tool released in a software update to iPhone users in January 2017, to combat performance issues and stop older devices from abruptly shutting down.

Mr. Gutmann, a consumer champion, says the information about the tool was not included in the software update download description at the time, and that the company failed to make clear that it would slow down devices.

He claims that Apple introduced this tool to hide the fact that iPhone batteries may have struggled to run the latest iOS software, and that rather than recalling products or offering replacement batteries, the firm instead pushed users to download the software updates.

Mr. Gutmann said, “Instead of doing the honourable and legal thing by their customers and offering a free replacement, repair service or compensation, Apple instead misled people by concealing a tool in software updates that slowed their devices by up to 58%.”

The models covered by the claim are the iPhone 6, 6 Plus, 6S, 6S Plus, SE, 7, 7 Plus, 8, 8 Plus and iPhone X models. It is an opt-out claim, which means customers will not need to actively join the case to seek damages.

In a statement, Apple said: “We have never, and would never, do anything to intentionally shorten the life of any Apple product, or degrade the user experience to drive customer upgrades. Our goal has always been to create products that our customers love, and making iPhones last as long as possible is an important part of that.”

The claim by Mr. Gutmann comes two years after a similar case was settled in the United States. In 2020, Apple agreed to pay $113m to settle allegations that it slowed down older iPhones. Thirty-three US states claimed that Apple had done this to drive users into buying new devices. Millions of people were affected when the models of iPhone 6 and 7 and SE were slowed down in 2016 in a scandal that was dubbed batterygate.

At the time, Apple declined to comment, however, it had previously said the phones were slowed to preserve ageing battery life. Claire Holubowskyj, an analyst at the research firm Enders Analysis, said issues like this may continue to crop up, given the technical limitations of ageing batteries. “Technology in newer devices improves in leaps and bounds, not as a steady crawl, creating issues when releasing software updates which have to work on devices with often wildly different capabilities,” Ms. Holubowskyj said.

“Apple generates 84% of its revenue from selling new devices, making them reluctant to hold back updates to ensure older models keep working smoothly.” “Until problems of devices and software updates outlasting and exceeding the capabilities of aging batteries are resolved, this challenge will recur.”

[Source: www.bbc.com dated 17th June, 2022.]

9 Amazon to begin drone deliveries in Lockeford, California this year

Amazon says it will begin delivering parcels to shoppers by drone for the first time later this year, pending final regulatory approval.

Users in the Californian town of Lockeford will be able to sign up to have thousands of goods delivered by air to their homes, it said. The shopping giant has promised drone delivery for years but has faced delays and reported setbacks. But it said it planned to roll out the service more widely after Lockeford. “The promise of drone delivery has often felt like science fiction,” it said in a blog post. “[But] later this year, Amazon customers living in Lockeford, California, will become among the first to receive Prime Air deliveries.”

“Their feedback about Prime Air will help us create a service that will safely scale to meet the needs of customers everywhere.” “Their feedback about Prime Air will help us create a service that will safely scale to meet the needs of customers everywhere.”

Amazon said the drones will be programmed to drop parcels in the backyards of customers in Lockeford, which has a population of about 4,000 people.

They will be able to fly “beyond-line-of-sight”, meaning they don’t have to be controlled by a visual observer and instead use sensors to avoid other aircraft, people, pets and obstacles. The aim is to get packages to customers safely in less than an hour, the retailer said.

In the past, Amazon has been accused of using the promise of drone delivery as a headline-grabber to push its publicity around its Prime membership service. In 2013, former boss and founder Jeff Bezos pledged to fill the skies with a fleet of delivery drones within five years. And in 2019, Amazon said it would be delivering by drone to customers “within months”.

In April, a report by news site Bloomberg alleged safety concerns over its drones – although the retailer said it “rigorously” tested its flights in compliance with “all applicable regulations”

In December 2016, the company ran an apparently successful trial in Cambridge, UK. A package was delivered, by drone, in 13 minutes. Explaining how Prime Air deliveries would work, Amazon said: “Once onboarded, customers in Lockeford will see Prime Air-eligible items on Amazon. They will place an order as they normally would and receive an estimated arrival time with a status tracker for their order.

“For these deliveries, the drone will fly to the designated delivery location, descend to the customer’s backyard, and hover at a safe height. It will then safely release the package and rise back up to altitude.”

[Source: www.bbc.com dated 14th June, 2022]

II. WORLD NEWS

10 How the Ukraine war is triggering a food crisis

Breadbasket of the world

Russia and Ukraine together export nearly a third of the world’s wheat and barley, more than 70% of its sunflower oil and are big suppliers of corn. Now, Russia’s hostilities in Ukraine are preventing grain from leaving the “breadbasket of the world”.

Food more expensive

The Ukraine war is making food more expensive across the globe. And it’s threatening to worsen shortages, hunger and political instability in developing countries.

Parts of Africa, Asia hit

The war is preventing some 20 million tons of Ukrainian grain from getting to the Middle East, North Africa and parts of Asia.

181 million may face crisis

Experts say 400 million people worldwide rely on Ukrainian food supplies. The Food and Agriculture Organization warns that up to 181 million people in 41 countries could face a food crisis or worse levels of hunger this year.

Blockaded ports

Weeks of negotiations on safe corridors to get grain out of Ukraine’s Black Sea ports have made little progress. 90% of wheat and other grain from Ukraine are shipped to world markets by sea.

Transport by rail

Some grain is being rerouted through Europe by rail and road, but that quantity is just a fraction. This mode of transport is also increasing prices.

Western sanctions

Russian grain isn’t getting out, either. Moscow argues that Western sanctions on its banking and shipping industries make it impossible for Russia to export food and fertilizer.

[Source: www.economictimes.com dated 20th June, 2022]

III. ENVIRONMENT

11 Melting ice in Arctic ocean could transform international shipping routes

With climate change making an adverse impact on the environment, especially on oceans across the world, the fate of the Arctic Ocean looks horrid. Climate models have shown that parts of the Arctic that were once canvassed in ice all year are warming so quickly that they will be reliably ice-free for quite a long time in as not many as twenty years. Scientists say that the Arctic’s changing climate will imperil countless species that flourish in freezing temperatures.

According to researchers, another consequence of the melting ice in the Arctic Ocean could affect the regulation of shipping routes over the next few decades.

For the study, a couple of climate scientists at Brown University worked with a legal scholar at the University Of Maine School Of Law. They projected that by 2065, the Arctic’s traversability will increase so enormously that it could yield new shipping routes in worldwide waters — diminishing the shipping industry’s carbon footprints as well as weakening Russia’s control over trade in the Arctic.

This study’s lead author and a professor of Earth, environmental and planetary sciences at Brown, Amanda Lynch, said, “There’s no scenario in which melting ice in the Arctic is good news. But the unfortunate reality is that the ice is already retreating, these routes are opening up, and we need to start thinking critically about the legal, environmental and geopolitical implications.”

Lynch, who has studied climate change in the Arctic for almost 30 years, expressed that as an initial step, she worked with Xueke Li who is a postdoctoral research associate at the Institute at Brown for Environment and Society, to model four navigation route situations based on four likely results of global actions to halt climate change in the coming years. Their projections showed that unless global leaders effectively successfully constrain warming to 1.5 degrees Celsius over the course of the next 43 years, climate change will probably open up a few new routes through international waters by the middle of this century.

According to Charles Norchi, who is the director of the Center for Oceans and Coastal Law at Maine Law and a visiting scholar at Brown’s Watson Institute for International and Public Affairs, these changes could have significant ramifications for world trade and global politics.

Norchi explained that since 1982, the United Nations Convention on the Law of the Sea has given Arctic coastal states enhanced authority over primary shipping routes. Article 234 of the convention clearly states that in the name of “the prevention, reduction and control of marine pollution from vessels,” countries whose coastlines are near-Arctic shipping routes have the ability to regulate the route’s maritime traffic, so long as the area remains ice-covered for the majority of the year.

And for decades Russia has used Article 234 for its own economic and geopolitical interests. One Russian law requires all vessels passing through the Northern Sea Route to be piloted by Russians. The country also requires that passing vessels pay tolls and provide advance notice of their plans to use the route. The heavy regulation is one among many reasons why major shipping companies often bypass the route’s heavy regulations and high costs and instead use the Suez and Panama canals — longer, but cheaper and easier, trade routes.

But as the ice near Russia’s northern coast begins to melt, Norchi said, so will the country’s grip on shipping through the Arctic Ocean.

According to Lynch, previous studies have shown that Arctic routes are 30% to 50% shorter than the Suez Canal and Panama Canal routes, with transit time reduced by an estimated 14 to 20 days. That means that if international Arctic waters warm enough to open up new pathways, shipping companies could reduce their greenhouse gas emissions by about 24% while also saving money and time.

Lynch concluded by saying that it’s better to ask questions about the future of shipping now, rather than later, given how long it can take to establish international laws. She hopes that kicking off the conversation on the Arctic’s trade future with a well-researched scholarship might help world leaders make informed decisions about protecting the Earth’s climate from future harm.

[Source: www.phys.org dated 20th June, 2022]

IV. ETHICS

12 Ernst & Young to Pay $100 Million Fine After Auditors Cheated on Exams

The S.E.C. said the cheating involved hundreds of the firm’s auditors from 2017 to 2021.
 
Ernst & Young, one of the world’s largest auditing firms, has agreed to pay a $100 million fine after U.S. securities regulators found that some of its auditors had cheated on ethics exams — and that the firm had done nothing to stop the practice.

The penalty is the largest ever imposed by the Securities and Exchange Commission against an auditing firm. An administrative civil order filed by regulators said Ernst — also known as EY — had misled investigators, withheld evidence and violated public accounting rules designed to maintain the integrity of the profession.

“It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things,” said Gurbir S. Grewal, the commission’s director of enforcement, in announcing the settlement on Tuesday.

The penalty is twice the sum that KPMG, another big audit firm, paid in 2019 to resolve an investigation into similar allegations of cheating by auditors on internal training exams.

Ernst, which admitted in the order that its conduct was wrong, said in a statement that “nothing is more important than our integrity and our ethics.” The firm also said that “sharing answers on any assessment or exam is a violation of our Code of Conduct and is not tolerated” and said it would take efforts to enforce compliance with ethical rules.

The ethics exams that Ernst auditors cheated on were part of a continuing education program offered by most states for accountants to keep their professional licenses, according to the commission. The S.E.C. said the cheating involved hundreds of the firm’s auditors from 2017 to 2021.

Forty-nine auditors at Ernst received the “answer key” to an ethics exam that is part of the initial process of becoming a certified public accountant, according to the S.E.C.’s administrative order.

Regulators said this was not the first time that there had been widespread cheating on ethics exams by Ernst employees. The S.E.C. said a somewhat similar cheating scandal, which the firm handled internally, took place from 2012 to 2015.

As part of the settlement, the S.E.C. has required Ernst to hire two independent consultants. One will review the firm’s policies on ethics procedures, and the other will review its failure to properly disclose the cheating.

Mr. Grewal said the settlement “should serve as a clear message that the S.E.C. will not tolerate integrity failures by independent auditors.”

(Source: NYT, By Matthew Goldstein, dated 28th June, 2022)

ALLIED LAWS

16 Kanhu Pradhan alias Pradhan alias Kanhu Charan Pradhan and others vs. Pitambara Padhan alias Pradhan AIR 2022 Orissa 67 Date of order: 25th January, 2022 Bench: Arindam Sinha, J.

Adverse possession – Unregistered document – Cannot be relied on as evidence. [S. 17; Registration Act (16 of 1908)]

FACTS
Plaintiffs filed suit for declaration of right, title, interest and injunction in respect of the suit property. The trial Court dismissed the suit on the ground that the defendants had adverse possession on the basis of an unregistered sale document dated 29th September, 1960. They had tendered the document as an ancient document and accordingly the trial Court found in favour of the defendants, to have perfected their title by adverse possession. The first appellate Court relied on Section 17 of the Registration Act, 1908, to hold that a document of sale of immovable property valued at more than Rs. 100 was compulsorily registerable. A compulsorily registerable document, not registered, could not be relied upon in evidence.

HELD
It was held by the High Court that finding by the Trial Court on adverse possession was clearly wrong. Adverse possession can be claimed only on the evidence adduced of possession, openly and hostile to the real owner. There cannot be a finding on adverse possession, when the claim is based on a document, inadmissible in evidence.

17 Mrs. Umadevi Nambiar vs. Thamarsseri  AIR 2022 SUPREME COURT 1640 Date of order: 1st April, 2022 Bench: Hemant Gupta and V. Ramasubramanian, JJ.

Transfer of Property – Power of Attorney – No clause empowering to sell property – The title cannot be transferred.

FACTS
The suit property originally belonged to one Ullattukandiyil Sankunni. After his death, the property devolved upon his two daughters. One of the daughters i.e., Umadevi Nambiar (appellant) executed a general Power of Attorney on 21.07.1971 in favour of her sister Smt. Ranee Sidhan and registered it. The said power was cancelled on 31.01.1985. But in the meantime, the sister was found to have executed four different documents in favour of certain third parties, assigning/releasing some properties. The assignees/releasees had further sold the property. The purchaser of the property from the assignees/releasees is the Respondents herein. The appellant filed a suit for partition of her share in the property. The trial Court granted a preliminary decree in favour of the appellant. However, the regular appeal filed by the Respondent was allowed by a Division Bench of the High Court holding that though the power of attorney did not contain power to sell but the Respondent was a bona fide purchaser as the appellant had constructive notice of sale through Power of Attorney. Therefore, the appellant has come up with the above appeal.

HELD
The Supreme Court, held that there remains a plain and simple fact that the deed of Power of Attorney executed by the appellant on 21.07.1971 in favour of her sister contained provisions empowering the agent: (i) to grant leases under Clause 15; (ii) to make borrowals if and when necessary with or without security, and to execute and if necessary, register all documents in connection therewith under Clause 20; and (iii) to sign in her own name, documents for and on behalf of the appellant and present them for registration, under Clause 22. But there was no Clause in the deed authorizing and empowering the agent to sell the property. Thus, the draftsman has chosen to include, (i) an express power to lease out the property; and (ii) an express power to execute any document offering the property as security for any borrowal, but not an express power to sell the property. Therefore, the draftsman appears to have had clear instructions and he carried out those instructions faithfully. The power to sell is not to be inferred from a document of Power of Attorney. Unfortunately, after finding (i) that the Power of Attorney did not contain authorization to sell; and (ii) that the Respondent cannot claim the benefit of Section 41 of the Transfer of Property Act, 1882 (Bonafide Purchase), the High Court fell into an error in attributing constructive notice to the appellant in terms of Section 3 of the Transfer of Property Act, 1882. The High Court failed to appreciate that the possession of an agent under a deed of Power of Attorney is also the possession of the principal and that any unauthorized sale made by the agent will not tantamount to the principal parting with the possession. It is not always necessary for a Plaintiff in a suit for partition to seek the cancellation of the alienations. It is a fundamental principle of the law of transfer of property that “no one can confer a better title than what he himself has” (Nemo dat quod non habet). The appellant’s sister did not have the power to sell the property to the vendors of the Respondent. Therefore, the vendors of the Respondent could not have derived any valid title to the property. If the vendors of the Respondent themselves did not have any title, they had nothing to convey to the Respondent, except perhaps the litigation.

18 Abhimanyu Jayesh Jhaveri vs. Nirmala Dharmadas Jhaveri and another  AIR 2022 Bombay 132  Date of order: 17th December, 2021 G.S. Kulkarni, J.

Maintenance of senior citizen – harassed by son & grandson for property – Will of Husband not probated – property with grandmother – son and grandson to be vacated [Ss. 4, 5, 23, Maintenance and Welfare of Parents and Senior Citizens Act (56 of 2007)]

FACTS
Claim of eviction from flat in question was made by Nirmala Dharmadas Jhaveri who was 89 years of age, against her son and her grandson, before the Senior Citizen’s Tribunal, Mumbai under the Maintenance and Welfare of Parents and Senior Citizens Act (56 of 2007). The son and grandson were financially well off and well placed but were torturing grandmother with greedy and acquisitive intention to grab here flat. The grandson on the basis of the will in his favour by his grandfather was claiming right over the flat. The grandmother denied the claim of the grandson based on the will as said will was not probated and contended that she was the sole owner of the flat.

HELD
It was held that both the son and the grandson have not only failed to maintain their grandmother, but also have caused mental and physical harassment and depravement to her material needs to extreme extent that she was thrown out of her own house, only with intention to grab said flat. Further, the share certificate with respect to the flat was in the name of the grandmother and the flat was shown in her Income tax returns. As the will under which grandson was claiming the rights was not probated, his claim to the flat could not be entertained. Hence, the son and the grandson were directed to vacate the flat in question.

19 U.P.S.E.B. Hathras vs. Hindustan Metal Works Hathras  AIR 2022 ALLAHABAD 132   Date of order: 11th February, 2022 Bench: Sunita Agarwal and Krishan Pahal, JJ.

Appointment of arbitrator – Death of sole arbitrator initially appointed–case of appointment of new arbitrator and not of supply of vacancy. [Ss. 8, 9(b); Arbitration Act, 1940 (10 of 1940)]
 
FACTS

An agreement was entered into between the appellant and the respondent no. 2 on 9th May, 1964, whereby the appellant had agreed to supply power to the Mill. Pursuant to a dispute, the respondent no. 2 served the notice dated 9.9.1970 upon the appellant asking to agree for appointment of a sole arbitrator in terms of the first part of the arbitration clause 18 in the agreement. The appellant agreed to the said proposal and on 29.9.1970, Mr. Justice T.P. Mukherji, a retired Judge of the Allahabad High Court was appointed as the sole arbitrator. However, before the arbitrator could enter upon the reference, unfortunately, he died. A notice dated 6.7.1982/3.8.1982 under Section 8 of the Arbitration Act, 1940 (the Act) was then served upon the appellant proposing Shri A.C. Bansal, a retired District & Sessions Judge to be the sole arbitrator. This Notice was not objected to by the appellant. On 10th February, 1983, the arbitrator put both the parties to notice intimating that he had entered into the reference and that 7th March,1983 was the date fixed for striking of issues and preliminary hearing. The appellant did not participate in the Arbitral Proceedings on the ground that the appointment was illegal and the proceedings were void ab initio. To challenge the validity of the arbitral award, it was submitted that it was a case of supplying the vacancy on account of death of the appointed arbitrator which would fall within the scope of Section 8(1)(b) of the Arbitration Act, 1940. In that case, in the event of failure of the appellant to appoint the arbitrator by supplying the vacancy after service of notice, only option before the respondent no. 2 was to approach the Court by moving the application seeking for appointment of arbitrator.

HELD
In the instant case, the sole arbitrator who was appointed in accordance with the arbitration clause 18 of the agreement with the consent of the parties could not even enter into the reference. The proceedings of arbitration had not begun. It, therefore, became a case of appointment of a new arbitrator and not of supplying the vacancy. A new arbitrator was to be appointed by the parties in terms of the arbitration clause 18, which contained two options; firstly, that a single arbitrator could be appointed by agreement between the parties or else the dispute could be referred to two arbitrators, one appointed by each party.

The failure on the part of the appellant to appoint one more arbitrator for 15 clear days after the notice had given right to the respondent to invoke Section 9(b) to appoint arbitrator nominated by it to act as sole arbitrator in the reference. It cannot be successfully argued that since the appellant had kept silent, it should be presumed as its non-concurrence to the proposal for the appointment of the sole arbitrator and the respondent had the only option to approach the Court under Section 8 of the Act, 1940. The option available to the appellant to appoint its own arbitrator, as per clause 18 of the arbitration agreement, in case of disagreement to the proposal of sole arbitrator was never exercised. In case argument of the appellant is accepted, the provision of Section 9(b) giving power to the party to appoint sole arbitrator would become redundant. The present is a case which would fall within the scope of Section 9(b) where the award passed by the sole arbitrator on account of failure on the part of one of the parties to appoint another arbitrator, was binding on both the parties as if the sole arbitrator had been appointed by consent. The silence on the part of the appellant in such a case would be treated as its consent.

20 B.V. Subbaiah vs. Andhra Bank, Hyderabad and others  AIR 2022 Telangana 78  Date of order: 31st January, 2022  Bench: P. Naveen Rao and G. Radha Rani, JJ.

Money suit – Limitation – Plaintiff practicing advocate handling several matters of defendant Bank before various Courts, Tribunals, Forums etc. – Bank failed to pay his fees and expenses – Payment to professional person like Advocate and CA is described as “fee” and not “price – ‘Price of work done’ cannot be made applicable to professions where professionals merely provide services for fee – Article 18 of Limitation Act not applicable to claim of plaintiff – Article 113 would be applicable. [Article 18, Limitation Act, 1963]

FACTS
Appellant/plaintiff filed a suit for recovery of amount of Rs. 19,46,701.31 with subsequent interest at the rate of 18% p.a. against the defendant bank for recovery of his legal fees. The defendant bank, though a nationalized bank, had not chosen to pay his fees, not even the expenses incurred, in spite of several requests made by him. The defendants contended that the suit is barred by limitation as it was instituted nearly eight years after the judgment in O.S. No. 1211 of 1991 and nearly 10 or more years after the results of other cases. The fee was claimed beyond three years after the result of the cases. Further, the suit was not filed within three years of the termination of his services in the respective cases and thus as per Article 18 of the Limitation Act, suit has to be instituted within three years on completion of work and when payment was due. The trial court dismissed the suit without costs holding that the suit was barred by time and that the plaintiff was not entitled for recovery of suit amount.

HELD
It is apparent from the reading of both Articles 18 and 113 of the Limitation Act that though the period of limitation is three years, but under Article 18 it begins to run when the “work is done” and under Article 113 it begins to run when the “right to sue” accrues. A professional activity cannot be considered as a commercial activity and the term ‘price’ is not synonymous with the term ‘fee’. In M.P. Electricity Board and others vs. Shiv Narayan and others (2005) 7 SCC 283, the Hon’ble Apex Court held that there is a fundamental distinction, therefore, between a professional activity and an activity of a commercial character. In Dharmarth Trust, Jammu and Kashmir, Jammu and others vs. Dinesh Chander Nanda 2010 (10) SCC 331, the Hon’ble Apex Court held that the term ‘Price’ does not cover the services provided by the professionals such as Architect, Lawyer, Doctor, etc., as professionals charge a ‘fee’. Also, the term ‘work done’ will not be applicable to professionals such as Architect, Lawyer, Doctor, etc. as these professionals render services to their clients. The remuneration of a professional is in the form of a ‘fee’ and therefore, it cannot be said that the professional earns a ‘price’.

It was thus held that the price of work done is not applicable to professionals and therefore Article 18 of the Limitation Act is not attracted to the claim of the plaintiff.

It was further held that an advocate was entitled to be paid his full fee and a change of advocate could not be made without the permission of the court and the right to fee of a counsel was not dependent on the quantum of work that he actually did in the court. It was also held that the conduct of the defendants, a Nationalized Bank, towards their standing counsels of adopting dilatory tactics and raising technical pleas to avoid payments and making him to take recourse to prolonged litigation by wasting the time not only in terms of money but also the valuable time of the counsel and the court is highly reprehensible. The Trial Court order was set aside.

Service Tax

I. HIGH COURT
 
12 Ashwini Builders and Developers (P.) Ltd vs. Assistant Commissioner, Central Excise and Service Tax  [2022] 139 taxmann.com 102 (Bombay) Date of order: 8th February, 2022

The application filed by the petitioner under SVLDRS continues to be under the “litigation category” and not as “arrears category” even if the petitioner has not filed an appeal against the Order-in-Original but against the rectification application sought against such order-in-Original and pending as on 30th June, 2019

FACTS
The department issued a show-cause notice to the petitioner for recovery of refund of the service tax followed by the Order-in-Original (OIO). The petitioner filed a rectification application under section 74 which was rejected by the department. The petitioner, therefore, preferred an appeal before the Commissioner (Appeals) in respect of such a rejection order. In the meantime, the petitioner filed an Application/Declaration under section 125 of the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 (‘scheme’) under “Litigation Category” in respect of the said pending appeal. The petitioner received notice in form SVLDRS-2 stating that the case was confirmed under the “Arrears Category”. The petitioner submitted form SVLDRS-2A explaining the reason why it could not be treated as a case under the “arrears category” but under a “litigation case”. The Designated Committee (DC) issued a notice/statement in form SVLDRS-3 requiring the petitioner to pay an amount computed treating the application under the “arrears category”. The pending appeal also came to be dismissed. Therefore, the petitioner filed a writ praying direction to set aside the notice/statement issued by DC in form SVLDRS-3 and sought order and direction to allow/accept the application filed by him under the scheme. The department contended that the petitioner has admittedly not challenged the OIO and that the pendency of appeal against the Order of assessing Officer refusing to rectify the mistake on the application filed under section 74, does not fall under the said Scheme.

HELD
Referring to the provision of Section 74 of the Finance Act, 1994, the Hon’ble Court held that it is clear beyond reasonable doubt that any Order allowing the application for rectification partly or fully would modify the Order-in-Original passed by the Assessing Officer in pursuance of show-cause notice issued by the Assessing Officer. Such Order of rectification has to be read with the Order-in-Original and hence the said Order is also appealable under section 85 of Finance Act, 1994. The Court thereafter referred to the definition of ‘order’ under section 121(o) of the said Scheme and held that Order-in-Original duly modified/rectified under section 74 would be also an order within the meaning of Section 121(o) of the said scheme. Thus rejecting the contention of the department, the Hon. Court held that there is no merit in the contention of the department that the declaration form filed by the petitioner could only fall under “arrears category” within the meaning of Section 121(c) on the ground that the petitioner had not filed any appeal against the Order-in-Original. Such a view being contrary to the objects and intent of the scheme for the benefit of the assessee and to bring them out of litigation forever pending under the pre-GST regime. The Hon’ble Court accordingly quashed the order passed by the designated authority treating the application under the “arrears category” and directed the revenue to process the declaration under “litigation category”.

13 Vice Chairman Settlement Commission vs. Zyeta Interiors (P.) Ltd  [2022] 139 taxmann.com 225 (Karnataka) Date of order: 7th April, 2022

Although Section 68(2) and the Notifications issued thereunder prescribed specified percentages of service tax to be paid by the service receiver and the provider, once the fact is not disputed that the entire 100% tax is deposited combined by the service provider and service receiver, merely because the service receiver deposited tax in the lower ratio cannot be the ground for recovery of service tax from such service recipient for it would amount to double taxation

FACTS
The assessee requested the Settlement Commission for modification of its final order which came to be rejected. In terms of Section 68(2) of the Finance Act and amendments to the Notifications issued thereunder, the assessee being the recipient of the services, was liable to pay service tax in the ratio of 75% the balance being payable by the provider. Instead, tax was paid by both in the ratio of 50:50 as per the pre-amended provision which was not accepted by the settlement commission in its order. Being aggrieved, the assessee filed a writ petition before High Court which was allowed by Ld. Single Judge, and the matter was remitted to the Settlement Commissioner for consideration afresh. Aggrieved by the same, the department filed an appeal contending that the assessee was strictly required to adhere to the provisions of Section 68(2) of the Act and also advanced the reason that the photocopies of invoices produced by the assessee cannot be considered as required documents to award CENVAT credit prescribed under Rule 9 of the CENVAT Credit Rules, 2004 and hence the order of Single Judge remanding the matter for consideration afresh is incorrect.

HELD
As regards the issue of double taxation, the Court held that whatever the ratio, the tax in its entirety has reached the hands of the ex-chequer. Merely for the reason that there was no strict adherence to the ratio as envisaged during the relevant point of time for payment of tax by the assessee and the service provider, the assessee cannot be made liable to pay the double tax. What is significant to note is that the discharge of the entire tax amount is not disputed. Thus, the reverse charge mechanism would not lead to double taxation. As regards the remand issue, the Hon’ble Court noted that the Learned Single Judge has remanded the matter for fresh consideration mainly on the ground that the assessee is ready and willing to produce the original invoices. The Court accordingly disposed of the appeal by confirming the order of remand.

14 Way2Wealth Brokers Pvt. Ltd vs. Comm of C.T. Bengaluru [2022 (61) GSTL 349 (Kol)]  Date of order: 16th September, 2021

Refund not hit by limitation of service tax is paid mistakenly on exempted services
 
FACTS

Appellant-assessee inter alia provided a stock broking service, collected late payment charges when customers delayed payment beyond stipulated time for stocks brought and paid service on the same during April 01, 2009 to March, 2011. Pursuant to a clarification circular dated 3rd August, 2011 by Central Board of Excise and Customs that service tax was not attracted on the LPC by the brokers, appellant filed a refund claim being service tax paid inadvertently which was not due as per the law. Out of the total claim, the claim period 2009-10 was held limitation and also rejected by Tribunal by upholding order of Commissioner (Appeals). Hence this appeal.
 
HELD
Tribunal’s reliance on the Supreme Court’s judgment in Asst. Commissioner vs. Annam Electric Manufacturing Co. 1997 (90) ELT 260 (SC) was distinguished because refund did not pertain to illegal levy collected but service tax paid by the assessee voluntarily under self-assessment under mistaken belief. Hence, reliance was placed on Commissioner vs. K.V.R. Construction 2012 (26) STR 195 (Kar) by Supreme Court dismissing Revenue’s appeal wherein it was held that Section 11B does not apply as mistaken notion does not come within realm of duty and hence limitation under section 11B of the Central Excise Act is not applicable. Hence appeal was held as deserved to be allowed.

[Note: Here contrary to the above, Madras High Court in 2022 (61) GSTL 355 (Mad) in Quest Global Engineering Services P. Ltd vs. Dy. Commr. GST & C.Ex, Chennai South around the same time for mistaken payment of GST on 20th December, 2017 (on account of the system picking up irrelevant invoices of earlier period) and the refund claims filed on 30th May, 2020 (beyond two years from the date of payment) thus delayed by about five months was held as “long after expiry of limitation” prescribed under section 54 of CGST Act, 2017 and hence the petition of the assessee was dismissed.]

RECENT DEVELOPMENTS IN GST

I. NOTIFICATIONS

1.    Waiver of Late fees for the F.Y. 2021-2022 for the delay in furnishing form GSTR-4-Notification No. 07/2022 – Central Tax dated 26th May, 2022:

The Govt. of India has issued the above notification whereby late fees payable for delay in furnishing of form GSTR-4 for the F.Y. 2021-2022 is waived for the period from 1st May, 2022 till 30th June, 2022.

2.    Waiver of interest for specified Electronic Commerce operators – Notification No. 08/2022 – Central Tax dated 7th June, 2022:

The Govt. of India has issued the above notification whereby specified E-Commerce operators are exempted from interest for the specified months for specified period.

3.    Instruction No. 01/2022-23 (GST-Investigation), dated 25th May, 2022 – Deposit of tax during search, inspection or investigation

The CBIC has issued the above instruction in which the manner and method of depositing tax during search/inspection is clarified. Inter alia it is clarified that if any complaint received from tax payer it should be enquired earliest and disciplinary action may be taken wherever necessary.     

II. ADVANCE RULINGS

13 M/s. Adani Green Energy Ltd [Order No. GUJ/GAAR/R/2022/26 dated 11th May, 2022]

Intermediary

The facts, in this case, are that M/s Adani Green Energy Ltd (AGEL) wanted to raise working capital. Therefore, they issued Senior secured Notes (Notes). For the said purpose, they appoint managers who are registered out of India. The role of managers as noted by the learned AAR is as under:-

“i.    Manager arranges & facilitates coordination between the AGEL who issues the Notes and the (potential) Investors subscribing to the Notes. Manager solicits and arranges investors for subscribing to Notes issued by AEG.

ii.    Manager initiates the process of book building by informing potential investors about the coupon rate at which the AGEL intends to offer the Notes. For this purpose, Managers undertake a gamut of activities viz.

a.    scheduling meetings/liasoning between the AEG and the investors,

b.    arrange road-shows for prospective investors.

c.    Manager also solicits counter offers from investors who are willing to invest in the issue. The offers and counter-offers are recorded in Bloomberg and then aggregated and negotiated by the Manager between AGEL and investors. Then after, AGEL communicates the final coupon rate, after which, the Manager seeks the final offer from potential investors. The Manager proceeds to confirm the subscription amount on basis of the confirmations from the investors. Manager is required to secure a requisite number of investors to subscribe to the Notes at a broadly agreed coupon rate, then after the Subscription Agreement would be executed and Issue be launched.

d.    communicate with investors; collect proceeds of the subscription and transfer the same to the Note Trustee for payment to the AGEL.

iii.    Manager distributes the disclosure documents prepared by AGEL in connection with the offering and sale of Notes.

iv.    In case the Manager is unable to arrange for the requisite number of subscribers at the agreed coupon rate, AGEL may choose not to launch the issue for subscription. In such a situation, the Manager would not be entitled to any fee whatsoever.”

The issue before the ld. AAR was whether the managers can be considered to be intermediary. For said purpose Ld. AAR referred to meaning of ‘intermediary’ in Section 2(13) of IGST Act which reads as under:-

 “2(13) “intermediary” means a broker, an agent or any other person, by

whatever name called, who arranges or facilitates the supply of goods or

services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account;”

The learned AAR also referred to meanings of facilitate/arrange in Merriam Webster Dictionary which are reproduced in AR as under:-

“Facilitate: to make (something) easier, to help cause (something); to help

(something) run smoothly and effectively.

Arrange: to bring about an agreement or understanding concerning; to make

preparations, to move and organise (things) into a particular order or position, to organise the details of something before it happens, to plan (something).”

Based on the above background, the Ld. AAR came to the conclusion that the Managers are like agents bringing the AGEL and investors together. Therefore, they are intermediaries.

The further issue was whether any GST liability attracted on service charges paid to intermediaries.

In this respect, the ld. AAR referred to the definition of ‘import of services’ in section 2(11) of IGST Act and ‘place of supply’ in section 13(8)(b) of IGST Act. The Managers are in non-taxable territory, the place of supply also falls in such territory and thus, the intermediary services fall in the not-taxable territory. Ld. AAR held that there is no liability on service charges paid to Managers under GST Act.

14 M/s. Indian Society of Critical Care Medicine [Order No. GUJ/GAAR/R/2022/28 dated 11th May, 2022]

Composite Supply/ITC

The applicant, Indian Society of Critical Care Medicine (ISCCM), herein is engaged in providing educational training by developing and running post-graduate fellowship courses and diplomas in the field of critical care medicines and providing basic training in intensive care for non-specialists.

The applicant intends to organize and manage conferences and exhibition in Ahmedabad, which will be attended by delegates, vendors, exhibitors from India and outside.

ISCCM will offer following facilities to the delegates at an all inclusive registration fees:

a. Technical Theme – based Seminars

b. Access to exhibition

c. Interactive workshop and scientific session

d. Hotel Room Accommodation

e. Cultural programs, lunch & dinner

f. Airport Pickup & Drop.

ISCCM also submitted that the interested local, national & international vendors will be offered to participate in the trade fair to showcase and exhibit their products against certain participation charges.

Further, various brand promotion packages will be offered to local, national & international vendors in the course of the event.

The applicant has sought to categorize delegate fees as composite supply, to be covered by service code 998596 attracting 18% tax.

In relation to exhibition fees, it has sought to categorize it in same service code 998596 liable to at the rate of 18%. The said service code 998596 is reproduced in AR as under:-

“444

Group 99859

Other Support Service

450

 

998596

Events,
exhibitions, conventions and trade shows organisation and assistance
services.

 

 

998599

Other support services nowhere else
classified.”

In relation to brand promotion packages it is submitted that said services will be offered in following way:-

“13. Those categories of brand promotion packages will be offered in the following ways:

(i)    Branding on Stage Backdrop, Standby Taxi, E-Rickshaw, Chair Head, Rest Cover, Itinerary, Bottle Wrapper, Logo in media Stationery,

(ii)    Display of their brand in a souvenir for the event (space will be allotted in the souvenier),

(iii)    Presentation (for a specific time slot) and DVD Display.”

It is sought to be classified under Service code 998397 as “sponsorship and brand promotion services”, liable to tax at 18%. The heading 998397 is reproduced in AR as under:-

“356

Group 99839

Other professional, technical and
business services

363

 

998397

Sponsorship
services and brand promotion services.” 

In respect of the inward supply, the applicant has submitted that mainly, it will be accommodation facility, taxi facility, catering for food and beverages and other related services.

Based on the above following questions were raised before the Ld. AAR.

“1. What shall be the nature of service and classification in accordance with

Notification No. 11/2017- CT(R), dated 28th June, 2017 read with annexure attached to it in relation the following services:
a. Service provided by ISCCM to the delegates;
b. Service provided by ISCCM to the exhibitors.

2. In relation to the brand promotion packages offered by ISCCM in the course of the event,
a. What shall be the nature of service and classification in accordance with Notification No. 11/2017-CT(R), dated 28th June, 2017 read with annexure attached to it?
b. Whether ISCCM is liable to pay tax on services provided to the brand promoters or the liability to pay tax on such services falls on recipient under reverse charge according to Notification No. 13/2017 -Central Tax (Rate)?

3. Whether Input Tax Credit is admissible for ISCCM in respect of tax paid on the following:
a. Services provided by the hotel including accommodation, food & beverages;
b. Supply of food and beverages by outside caterers;
c. Services provided by event manager like pickup & drop, exhibition stall setup, tenting, etc.”

The ld. AAR scrutinized the application and noted findings as under:-

“i. As per the brochure submitted, this Conference is for researchers, professors and doctors on topics of intensive care and the workshops will be revisiting the clinical practices, new technologies and drugs as well as the current initiatives to deal with pandemic and post pandemic scenario of critical care. The conference to be attended by physicians and Intensivist features the following workshops:

(i)    Comprehensive Critical Care Course
(ii)    CAM-ICU: Comprehensive Airway Management in ICU
(iii)    Intensive Care Ultrasound
(iv)    Essentials and Fundamentals of Mechanical Ventilation
(v)    Essentials and Fundamentals of Mechanical Ventilation
(vi)    Advanced Neuro Trauma & Critical care Support
(vii) Multiorgan (Extra Corporeal) Support & Therapy
(viii) Mechanical & Extracorporeal Cardiac Support & Therapy
(ix) Critical Communication & Soft Science
(x) Research & Statistical Methodology
(xi) Critical Learning Evaluation & Training Methodology
(xii) Basics of Resuscitation & Trauma Response
(xiii) Safety, Quality, Accreditation & Prevention of Errors
(xiv) Nursing.”

The Ld. AAR also noted that the ISCCM supplies a composite package to its delegates at an all-inclusive registration fees, comprising of the following services: Technical Seminars, Access to exhibition, Hotel Room Accommodation, Cultural program, lunch & dinner, Airport Pick Up & Drop. Therefore, Ld. AAR upheld contention of applicant that it is composite supply. The Ld. AAR held that the Professional Service Supply is principal supply.

Regarding Exhibition receipts the Ld. AAR held that ISCCM is organizing trade fair and exhibition. The exhibitors showcase and exhibit their products/ services. Therefore, the Ld. AAR held that the participation fees charged by ISCCM from these exhibitors is for the services of organizing exhibition for the exhibitors, which falls under entry at SAC 998596 under ‘events, exhibitions, conventions and trade shows organization and assistance services’ and accordingly concurred with classification suggested by the applicant.

In respect of brand promotion the Ld. AAR held that it is Sponsorship Service and not brand promotion. The Ld. AAR observed that a suitable place for any entity to promote itself is at sponsorship events such as trade fairs, exhibitions and events and hence it is sponsorship and not brand promotion. It is further noted that in relation to sponsorship services the tax is payable under RCM as per notification no.13/2017- CT(R) dated 28th June, 2017 and no tax on applicant.

Regarding ITC, the Ld. AAR concurred with submission of applicant that the inward supply of accommodation, catering etc., though otherwise in blocked credit u/s.17(5), applicant will be eligible as the inward is for further outward supply.

Ld. AAR gave ruling on given questions as under:-

“1(a)    ISCCM supplies Composite Supply to its delegates, the principal supply being Professional Service supply. SAC is 998399.

1(b)    ISCCM supplies ‘Exhibition, Trade show organization and assistance services’ to the exhibitors. SAC is 9985 96.

2(a)    ISCCM supplies Sponsorship Services to its sponsors. SAC is 9983 97.

2(b)    GST liability on sponsorship service is on the service recipient (if the recipient is a body corporate or partnership firm) if the recipient is in taxable territory. If the service recipient is not a body corporate/ firm, then GST is liable to be paid by ISCCM on forward charge.

3 ITC, as per Question 3 of the Application, is admissible to ISCCM.”

15 M/s. Naimunnisha Nadeals Saiyed (Legal Name), Star Enterprise (Trade Name)
[Order No. GUJ/GAAR/R/2022/32 dated 13th May, 2022]

Classification of Air Circulation Fans

The applicant desired to know rate of tax on its product namely Air Circulation Fans supplied mainly to Poultry House for the purpose of providing ventilation to live stock and that few fans are supplied in Industry.

The Ld. AAR, in short AR order, referred to the brochure submitted by the applicant and found that the applicant supplies Industrial grade fans. From the specifications submitted, the Ld. AAR noted that the electric motors of these fans have an output exceeding 125 W and these fans are Industrial fans, attracting HSN 84145930. Accordingly it is ruled that with effect from 15th November, 2017, these industrial fans are liable to CGST at 9% vide Sr no. 317B in Schedule III of Notification no. 1/2017-CT(R) dated 28th June, 2017 and therefore taxable at 18%.

16 Royal Carbon Black Pvt. Ltd [Order No. MAH/AAAR/AM-RM/06/2022-32 dated 2nd May, 2022]

Restoration of AR for deciding on merits

The appellant filed AR application to know classification of its production namely “Tyre Pyrolysis”.

The Ld. AAR, after admission, returned the application observing that the Test Report for chemical composition and manufacturing process not given.

Against above rejection order this appeal filed before the Ld. AAAR on appeal order the contentions from both sides are noted. Appellant submitted that the test report and manufacturing process have been submitted before AAR. Considering contradictory contentions and also finding that appellant ready to submit said material, Ld. AAAR remanded matter back to Ld. AAR for deciding on merits.  

FROM PUBLISHED ACCOUNTS

Compilers’ Note: For the financial year ended 31st March 2022 onwards, there are several disclosure-related amendments in Schedule III to the Companies Act, 2013. One important disclosure is related to Corporate Social Responsibility (CSR). Clause (xx) of the Companies (Auditor’s Report) Order, 2020 (CARO 2020) also requires auditors to comment on CSR.

Given below are few instances of such disclosures regarding spending under CSR and the corresponding reporting under CARO 2020 for the F.Y. 2021-22.

HINDUSTAN UNILEVER LTD

From Notes to Financial Statements on Standalone Financial Statements

(a) The details of Corporate Social Responsibility as prescribed under section 135 of the Companies Act, 2013 is as follows:

   

 

 

Year Ended

31st March, 2022

Year Ended

31st March, 2021

I.

Amount required   to be spent by the company during the year

185

162

II.

Amount spent during the year on:

 

 

 

i) 
Construction/ acquisition of any asset

 

ii) For purposes other than (i) above

186

165

III.

Shortfall at the end of the year

IV.

Total of previous years shortfall

V.

Reason for shortfall

Not
Applicable

Not
Applicable

VI.  Nature of CSR activities include promoting education, including special education and employment enhancing vocation skills, ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water, rural development projects and disaster management, including relief, rehabilitation and reconstruction activities.

VII. Above includes a contribution of Rs. 11 crores (2020-21: Rs. 18 crores) to subsidiary Hindustan Unilever Foundation which is a Section 8 registered Company under Companies Act, 2013. The objectives of Hindustan Unilever Foundation includes working in areas of social, economic and environmental issues such as water harvesting, health and hygiene awareness, women empowerment and enhancing capabilities of the underprivileged segments of society to meet emerging opportunities thus improving their livelihood.

VIII. Above includes Rs. 28 crores of Corporate Social Responsibility (CSR) expense related to ongoing projects as at 31st March, 2022 (31st March, 2021: Not Applicable). The same was transferred to a special account designated as “Unspent Corporate Social Responsibility Account for the Financial Year 21-22” (“UCSRA – F.Y. 2021-22”) of the Company within 30 days from end of financial year.

IX. The Company does not wish to carry forward any excess amount spent during the year.

X. The Company does not carry any provisions for Corporate social responsibility expenses for current year and previous year.

From CARO report

(xx) (a) In our opinion and according to the information and explanations given to us, there is no unspent amount under sub-section (5) of Section 135 of the Act pursuant to any project other than ongoing projects. Accordingly, clause 3(xx)(a) of the Order is not applicable.

(b) In respect of ongoing projects, the Company has transferred the unspent amount to a Special Account within a period of 30 days from the end of the financial year in compliance with Section 135(6) of the Act.

HDFC LTD

From Notes to Financial Statements on Standalone Financial Statements

33.4 As per Section 135 of the Companies Act, 2013, the Corporation is required to spent an amount of Rs. 190.41 Crore on Corporate Social Responsibility (CSR) activities during the year (Previous Year Rs. 169.21 Crore).

33.5 The Board of Directors of the Corporation has approved Rs. 194.03 Crore towards CSR (Previous Year Rs. 189.82 Crore, including brought forward CSR obligation of F.Y. 2015-16 Rs. 20.06 Crore), which was spent during the year.

33.6 The details of amount spent towards CSR are as under:

(Rin crore)

Particulars

For the

year ended March 31, 2022

For the

year ended March 31, 2021

a) Construction/acquisition of any asset*

79.57

44.41

b) On purposes other than (a) above

114.46

145.41

*Includes capital assets amounting to Rs. 16.36 Crore (Previous Year R39.46 Crore) under construction.

33.7 The Corporation has paid Rs. 163.01 Crore (Previous Year Rs 112.73 Crore) for CSR expenditure to H. T. Parekh Foundation, a section 8 company under Companies Act, 2013, controlled by the Corporation.

33.8 The Corporation does not have any unspent amount as on March 31, 2022.

33.9 Excess amount spent as per Section 135 (5) of the Companies Act, 2013.
 

Particulars

For the

year ended March 31, 2022

For the

year ended March 31, 2021

Opening Balance*

20.06

Amount required to be spent during the year

190.53

169.21

Amount spent during the year **

194.03

189.82

Closing balance – excess amount spent

3.50

0.55

*brought forward CSR obligation of F.Y. 2015-16 Rs. 20.06 Crore in Previous Year.
**Includes surplus arising out of the CSR projects or programmes or activities of Rs. 0.12 Crore (Previous Year RNil).

33.10 Details of ongoing projects for financial year 2021-22
(Rin crore)

Particulars

With Corporation

In Separate CSR Unspent A/c

Opening Balance

Amount required to be spent during the year

58.61

Amount spent during the year

58.61

Closing balance

33.11 Details of ongoing projects for financial year 2020-21
(Rin crore)

Particulars

With Corporation

In Separate CSR Unspent A/c

Opening Balance

Amount required to be spent during the year

87.38

Amount spent during the year

87.38

Closing balance

From CARO report

(xx) (a) In respect of other than ongoing projects, there are no unspent amounts that are required to be transferred to a fund specified in Schedule VII of the Act, in compliance with second proviso to sub section 5 of section 135 of the Act. This matter has been disclosed in note 33.8 to the standalone financial statements.
    
(b) There are no unspent amounts that are required to be transferred to a special account in compliance of provision of sub section (6) of section 135 of the Act. This matter has been disclosed in note 33.8 to the standalone financial statements.

ASIAN PAINTS LTD

From Notes to Financial Statements on Standalone Financial Statements

Note 44: CORPORATE SOCIAL RESPONSIBILITY EXPENSES
(Rin crore)

A. Gross amount required to
be spent by the Company during the year 2021-22 –
R70.77
crores (2020-21 –
R62.95 crores)

B. Amount spent during the
year on:

 

2021-22

2020-21

 

In cash*

Yet to be Paid in cash

Total

In cash*

Yet to be Paid in cash

Total

i

Construction /Acquisition of any assets

ii

Purposes other
than (i) above

61.30

9.71

71.01

42.48

20.50

62.98

 

 

61.30

9.71

71.01

42.48

20.50

62.98

C

Related party
transactions in relation to Corporate Social Responsibility

 

 

2.46

 

 

2.60

D

Provision movement during the year:

 

 

 

 

 

 

 

Opening
provision

 

 

0.39

 

 

1.35

 

Addition during the year

 

 

0.03

 

 

0.39

 

Utilised during
the year

 

 

(0.39)

 

 

(1.35)

 

Closing Provision

 

 

0.03

 

 

0.39

E. Amount earmarked for ongoing project:    (Rin crore)
   

 

2021-22

2020-21

 

With Company

In separate

 CSR Unspent A/c

Total

With Company

In separate

 CSR Unspent A/c

Total

 

Opening Balance

14.78

14.78

 

Amount required
to be spent during the year

14.78

14.78

 

Transfer to Separate CSR Unspent A/c

(14.78)

14.78

 

Amount spent
during the year

(5.72)

(5.72)

 

Closing Balance

9.06

9.06

14.78

14.78

*Represents actual outflow during the year

There is no unspent amount at the end of the year to be deposited in specified fund of Schedule VII under section 135(5) of the Companies Act, 2013.
F. Details of excess amount spent    (Rin crore)
   

 

Opening Balance

Amount required to be spent during the year

Amount spent during the year**

Closing Balance

Details of excess amount spent

0.03

70.77

71.01

0.27

G. Nature of CSR activities undertaken by the Company

The CSR initiatives of the Company aim towards inclusive development of the communities largely around the vicinity of its plants and registered office and at the same time ensure environmental protection through a range of structured interventions in the areas of:

(i) creating employability & enhancing the dignity of the painter/ carpenter/ plumber community

(ii) focus on water conservation, replenishment and recharge

(iii) enabling access to quality primary health care services

(iv) Disaster relief measures.

From CARO report

(xx) The Company has fully spent the required amount towards Corporate Social Responsibility (CSR), and there are no unspent CSR amount for the year requiring a transfer to a Fund specified in Schedule VII to the Companies Act or special account in compliance with the provision of sub-section (6) of section 135 of the said Act. Accordingly, reporting under clause (xx) of the Order is not applicable for the year.

BRITANNIA INDUSTRIES LTD

From Notes to Financial Statements on Standalone Financial Statements

Corporate Social Responsibility

During the year, the amount required to be spent on corpo rate social responsibility activities amounted to R38.58
(31st March 2021: R32.44) in accordance with Section 135 of the Act. The following amounts were actually spent during the current & previous year:

   

 

For the year ended

31st March, 2022

31st March, 2021

(i)

Amount required to be spent by the company
during the year

38.58

32.44

(ii)

Amount of expenditure incurred

38.58

32.44

(iii)

Shortfall at the end of the year

(iv)

Nature of CSR activities:

Promoting
Healthcare Growth,

Development
of Children, preventive health care for women and community development

Promoting
Healthcare Growth and Development of Children

From CARO report

(xx) According to the information and explanations given to us, the Company does not have any unspent amount in respect of any ongoing or other than ongoing project as at the expiry of the financial year. Accordingly, reporting under clause 3(xx) of the Order is not applicable to the Company.

TCS LTD

From Notes to Financial Statements on Standalone Financial Statements

(c) Corporate Social Responsibility (CSR) expenditure
                                             (Rin crore)
     

 

 

Year ended
March 31, 2022

Year ended
March 31, 2021

1.

Amount required to be spent by the company
during the year

716

663

2.

Amount of expenditure incurred on:

(i) Construction/acquisition of any asset

(ii) On purposes other than (i) above

 

727

 

674

3.

Shortfall at end of the year

4.

Total of previous years shortfall

5.

Reason for shortfall

NA

NA

6.

Nature of CSR activities

Disaster
Relief, Education, Skilling, Employment, Entrepreneurship,
Health, Wellness and Water, Sanitation
and Hygiene, Heritage

7.

Details of related party transactions in
relation to CSR expenditure as per relevant Accounting Standard:

Contribution to TCS Foundation in relation
to CSR expenditure.

680

351

From CARO report

(xx) In our opinion and according to the information and explanations given to us, there is no unspent amount under sub-section (5) of Section 135 of the Companies Act, 2013 pursuant to any project. Accordingly, clauses 3(xx)(a) and 3(xx)(b) of the Order are not applicable.

TATA STEEL LTD

From Notes to Financial Statements on Standalone Financial Statements

As per the Companies Act, 2013, amount required to be spent by the Company on Corporate Social Responsibility (CSR) activities during the year was Rs. 266.57 crore (2020-21: Rs. 189.85 crore).

During the year ended 31st March, 2022 amount approved by the Board to be spent on CSR activities was Rs. 526.00 crore (2020-21: Rs. 270.17 crore).

During the year ended 31st March, 2022, in respect of CSR activities, revenue expenditure incurred by the Company amounted to Rs 405.97 crore [Rs 398.11 crore has been paid in cash and Rs 7.86 crore is yet to be paid]. The amount spent relates to purpose other than construction or acquisition of any asset and out of the above, Rs 167.21 crore was spent on ongoing projects during the year. There was no amount unspent for the year ended 31st March, 2022 and the Company does not propose to carry forward any amount spent beyond the statutory requirement.

During the year ended 31st March, 2021, revenue expenditure incurred by the Company amounted to Rs 229.97 crore [Rs 225.22 crore has been paid in cash and Rs 4.75 crore was yet to be paid], which included Rs 87.34 crore spent on ongoing projects. There was no amount unspent for year ended 31st March, 2021.

During the year ended 31st March, 2022, amount spent on CSR activities through related parties was Rs 309.42 crore (2020-21: Rs 104.80 crore)

From CARO report

(xx) The Company has during the year spent the amount of Corporate Social Responsibility as required under sub-section (5) of Section 135 of the Act. Accordingly, reporting under clause 3(xx) of the Order is not applicable to the Company.

GLIMPSES OF SUPREME COURT RULINGS

5 Yogesh Rashanlal Gupta vs. CBDT(2022)  442 ITR 31 (SC)  Date of Order: 4th February, 2022

Income Declaration Scheme, 2016 – Declarant paying two of the three instalments on time – Application for extension of time for payments of third instalment rejected – On peculiar facts, directions issued to adjust the amounts deposited towards first two instalments while reckoning tax liability of assessee after revised assessment.

The assessee made an application under the Income Declaration Scheme, 2016 (the scheme) on 16th September, 2016 of an undisclosed income of Rs. 5,98,20,219 divided into three years, namely, 2011, 2015 and 2016. The Principal Commissioner of Income-tax by his order dated 13th October, 2016, called upon the assessee to pay Rs. 1,79,46,066 by way of tax, Rs. 44,86,517 by way of surcharge and an equivalent sum of Rs. 44,86,517 by way of penalty, in three instalments, on specified dates. The assessee deposited the amount towards the first and second instalments before due dates on 23rd November, 2016 and 31st March, 2017. The third instalment was due on 30th September, 2017. However, in the meantime, the assessee came to be arrested in a criminal case on 14th July, 2017 at Kanchipuran, Tamil Nadu. He was granted bail on 16th August, 2017 with a condition of a bond of Rs. 50 lakhs and daily appearance at 10:00 am till further orders. On 30th October, 2017, the Magistrate relaxed the condition of appearance before the court. The assessee made an application for extension of time for payment of the last instalment on 4th October, 2017 to the Department and to CBDT. The CIT, by his order dated 18th October, 2017, conveyed that he had no authority to grant any such extension of time. No reply was issued by CBDT.

The assessee challenged the order dated 18th October, 2017 passed by the Commissioner of Income-tax before the High Court by way of a writ petition. The Hon’ble Gujarat High Court, by its order dated 19th February, 2018 (403 ITR 12), requested CBDT to consider the application of the assessee for extension of time for payment of third/ last instalment.

The CBDT by its order dated 28th December, 2018 rejected the application for extension of time for payment of third instalment holding that on the facts it could not be stated that the situation was completely beyond the control of the assessee declarant.

The assessee challenged the aforesaid order dated 28th December, 2018 passed by the CBDT before the High Court by way of writ petition. The assessee, however, confined his case only to the extent of adjusting the amount already deposited by him for the relevant assessment year. The Hon’ble Gujarat High Court dismissed the petition holding that the scheme, more particularly, Section 191 thereof specifically provides that any amount of tax paid under Section 184 in pursuance of a declaration made under Section 183 shall not be refundable (432 ITR 91).

On an appeal to the Supreme Court by the assessee, the Supreme Court, on the peculiar facts and circumstances of the case, directed that the assessee declarant be given the benefit of the amounts deposited towards the first two instalments while reckoning the liability of the assessee after revised assessment. The petition was disposed of accordingly.

REGULATORY REFERENCER

DIRECT TAX

1.    Circular regarding use of functionality under section 206AB and 206CCA: Finance Act, 2021 had inserted two new sections 206AB and 206CCA w.e.f 1st July, 2021. These sections mandated tax deduction or tax collection at a higher rate for certain non-filers. The Income-tax Department came out with the functionality ‘Compliance Check for Section 206AB & 206CCA’, made available through its reporting portal. Finance Act 2022 brought certain changes in the above mentioned provisions. Accordingly, the logic of the functionality has been amended and circular is issued to explain the amendments made in the functionality. [Circular No. 10/2022 dated 17th May, 2022 and Notification No. 1/2022 dated 9th June, 2022.]

2.    Faceless Penalty (Amendment) Scheme, 2022 notified. [Notification No. 54/ 2022 dated 27th May, 2022.]

3.    Income-tax (16th Amendment) Rules, 2022: Rule 44FA was inserted to provide Form and manner of filing an appeal to the High Court on a ruling pronounced or order passed by the Board for Advance Rulings under sub-section (1) of section 245W. [Notification No. 57/ 2022 dated 31st May, 2022.]

4.    Clarification regarding Form No 10AC issued till the date of Circular: CBDT has clarified that where due to technical glitches, Form No. 10AC has been issued during F.Y. 2021-2022 with the heading ‘Order for provisional registration’ or ‘Order for provisional approval’ instead of ‘Order for registration’ or ‘Order for approval’, then all such Form No. 10AC shall be considered as an ‘Order for registration or approval’ and row no. 5 of Form No. 10AC (issued for all section codes) shall be read as ‘Unique Registration Number’ instead of ‘Provisional Approval/Approval Number’ or ‘Provisional Registration/ Registration Number’. [Circular No. 11/2022 dated 3rd June, 2022.]

5.    Cost Inflation Index (CII) for F.Y. 2022-23 notified as 331. [Notification No. 62/2022 dated 14th June, 2022.]

6.    Guidelines for removing difficulties under sub-section (2) of Section 194R: Finance Act 2022 inserted a new section 194R w.e.f 1st July 2022. The said section requires a person responsible for providing any benefit or perquisite to a resident, to deduct tax at source at 10% of the value or aggregate of the value of such benefit or perquisite. CBDT has issued guidelines for deduction of tax under the said section. [Circular No. 12/2022 dated 16th June, 2022.]

7.    TDS under section 194I from lease rental for an aircraft: No deduction of tax shall be made under section 194-I of the Act by a lessee from lease rent or supplemental lease rent to a lessor, being a Unit located in International Financial Services Center for the lease of an aircraft subject to certain conditions. [Notification No. 65/2022 dated 16th June, 2022.]

8.    Income-tax (18th Amendment) Rule, 2022:
Safe Margins prescribed under Rule 10 TD for A.Y. 2020-21 and 2021-22 shall also apply for A.Y. 2022-23. [Notification No. 66/2022, dated 17th June, 2022.]

COMPANY LAW

I. COMPANIES ACT

1.    LLPs allowed to file their Annual Returns (Form 11) without any additional fee up to 30th June, 2022: Considering the transition from version 2 of MCA-21 to version 3, the MCA has extended timelines for filing of the Annual Return (Form 11) by LLPs without paying additional fee from 30th May, 2022 till 30th June, 2022. [General Circular No. 04/2022, dated 27th May, 2022.]

2.    Body corporates from border-sharing countries cannot enter into a compromise/ arrangement/ merger/ demerger without Govt.’s nod: The MCA has notified the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2022. Now, a company/body corporate incorporated in a country sharing a land border with India must submit a declaration in Form CAA-16 when making an application for compromise or arrangement. Also, the company/body corporate is required to state whether they need to obtain prior approval under FEM (Non-Debt Instruments) Rules, 2019 or not. [Notification No. G.S.R. 401(E), dated 30th May, 2022.]

3.    MCA cautions Section 8 companies not to carry out any microfinance activity as prohibited by law:
MCA has observed that various Section 8 companies are altering their object clause for carrying out the business of microfinance activities. Earlier, MCA vide direction letter No. 05/33/20 dated 10th February, 2020 prohibited the inclusion of microfinance activities in the object clause of Section-8 company unless the Net Owned Fund (NOF) and other requirements as laid down by RBI are complied with. Now, ROCs are immediately directed to prevent such companies from carrying out microfinance activities. [General Circular No. 05/2022, dated 30th May, 2022.]

4.    MCA further extends the due date for filing CSR-2 for F.Y. 2020-21 till 30th June, 2022: MCA has notified the Companies (Accounts) Third Amendment Rules, 2022. As per the amended rules, the CSR-2 for F.Y. 2020-21 can be now filed till 30th June, 2022. Earlier, the MCA had provided the extension till 31st May, 2022. Further, Form CSR-2 shall be filed separately for F.Y. 2021-22 on or before 31st March, 2023 after filing Form AOC-4 /AOC-4 XBRL or AOC-4 NBFC (Ind AS), as the case may be. [Notification No. G.S.R. 407(E), dated 31st May, 2022.]

5.    Relaxation to pay an additional fee for delayed filing of all event-based LLP E-forms till 30th June, 2022:
Considering the transition from version-2 of MCA-21 to version-3, the MCA has extended timelines for filing of the all event-based LLP E-forms without paying an additional fee till 30th June, 2022. The extension is provided for all those forms which are/were due for filing on and after 25th February, 2022 to 31st May, 2022. [General Circular No. 06/2022, dated 31st May, 2022.]

6.    Government tweaks norms relating to the removal of names of companies from the registrar of Cos.: MCA has notified the Companies (Removal of Names of Companies from the Register of Companies) Amendment Rules, 2022. Amended norms allow the Registrar (if he finds it necessary after examining the application made in form STK-2) to call for further information or direct the applicant to remove the defects and re-submit the complete form within 15 days from the date of such information, failing which the Registrar shall treat the form as invalid in the e-record, and shall inform the applicant. [Notification No. G.S.R. 436(E), dated 9th June, 2022.]

7.    Government tweaks norms regarding the appointment of directors; allows restoration of name of independent directors in databank: MCA has notified the Companies (Appointment and Qualification of Directors) Second Amendment, Rules, 2022. As per amended norms, any individual whose name has been removed from the databank may apply for restoration of his name on payment of fees of R1,000, and the institute shall allow such restoration subject to riders. In case he fails to pass the online proficiency self-assessment test within one year from the date of restoration, his name shall be removed from the data bank. [Notification No. G.S.R. 439(E), dated 10th June, 2022.]

II. SEBI

8.    Procedure and documentation requirements for the issuance of duplicate securities simplified: SEBI has further simplified the procedure and documentation requirements for issuing duplicate securities. The modified norms include that there shall be no requirement for submission of surety for issuance of duplicate securities. Further, the defaced certificate must be kept in the custody of the Company/RTA and disposed of in the manner as authorised by the Board of the Company. The circular shall come into force with immediate effect. [Circular No. SEBI/HO/MIRSD/MIRSD_RTAMB/P/CIR/2022/70, dated 25th May, 2022.]

9.    Standard Operating Procedure leading to default in repayment of funds to clients by TM/CM modified: SEBI has modified the Standard Operating Procedure in the cases of Trading and Clearing Member leading to default. As per modified norms, the unencumbered deposits available after adjusting the dues of the SE/CC and maintaining the BMC (Base Minimum Capital), shall be utilised for settling the investor’s credit balance. The credit balance up to R25 lakhs shall be paid in full to all investors subject to funds availability. [Circular No. SEBI/HO/MIRSD/DPIEA/P/CIR/2022/72, dated 27th May, 2022.]

10.    Detailed norms regarding SOP for dispute resolution under Exchange’s arbitration mechanism prescribed: SEBI has prescribed detailed arbitration mechanisms norms regarding Standard Operating Procedure (SOP) for operationalising the resolution of all disputes pertaining to investor services. Accordingly, the arbitration mechanism shall be initiated after exhausting all actions to resolve complaints, including the SCORES Portal. Further, the norms w.r.t arbitration, appellate arbitration, arbitration award and reporting have also been provided. The circular shall be effective from 1st June, 2022. [Circular No. SEBI/HO/MIRSD/MIRSD_RTAMB/P/CIR/2022/76, dated 30th May, 2022.]

11.    ASBA applications shall be processed only after the application monies are blocked: SEBI has notified that ASBA applications in public issues shall be processed only after the application monies are blocked in the investor’s bank accounts. Accordingly, all intermediaries are advised to ensure appropriate arrangements are made within three months from the date of the circular. Further, it will apply for public issues opening on or after 1st September, 2022. [Circular No. SEBI/HO/CFD/DIL2/P/CIR/2022/75, dated 30th May, 2022.]

12.    Facility to conduct annual meetings of unit holders of InvITs/REITs via audio-visual means extended till 31st December, 2022: SEBI has decided to extend the facility to conduct annual meetings of unitholders in terms of Regulation 22(3) of SEBI (REIT) Regulations, 2014 and Regulation 22(3)(a) of SEBI (InvIT) Regulations, 2014 and meetings other than annual meeting, through Video Conferencing (VC) or through Other Audio-Visual Means (OAVM) till 31st December, 2022. Earlier, the VC/OAVM facility for conducting annual and other meetings was extended till 30th June, 2022. [Circular No. SEBI/HO/DDHS/DDHS_DIV2/P/CIR/2022/079, dated 3rd June, 2022.]

FEMA

1.    RBI issues guidelines on importing gold by Qualified Jewellers under IFSCA: The Central Government has amended the import policy conditions for gold by Qualified Jewellers (QJ) as notified by the International Financial Services Centers Authority (IFSCA). QJs will be permitted to import gold under specific ITC (HS) Codes through India International Bullion Exchange IFSC Ltd. (IIBX).  To enable resident QJs to import gold, directions under FEMA have been issued, including responsibilities on AD Banks, QJs and IFSCA. Guidelines are available in the circular issued by RBI. [A.P. (DIR Series) Circular No. 4, dated 25th May, 2022.]

2.    Discontinuation of ‘Guarantee Return’:
Regulations Review Authority (RRA 2.0) had proposed discontinuation of the return ‘Details of guarantee availed and invoked from non-resident entities’ in February 2022. The date of discontinuation was to be notified. RBI has now notified that this return would be discontinued with effect from the quarter ending June 2022. [A.P. (DIR Series 2022-23) Circular No. 5, dated 9th June, 2022.]

RBI

1.    Reporting of ‘Reverse Repos’ on bank balance sheets: RBI has directed commercial banks that: a) all type of reverse repos with RBI (including those under Liquidity Adjustment Facility) shall be presented under sub-item (ii) ‘In Other Accounts’ of item (II) ‘Balances with Reserve Bank of India’ under Schedule 6 ‘Cash and balances with RBI’; b) Reverse repos with banks and other institutions having original tenors up to and inclusive of 14 days shall be classified under item (ii) ‘Money at call and short notice’ under Schedule 7 ‘Balances with banks and money at call and short notice’; and (c) Reverse repos with banks and other institutions having original tenors more than 14 days shall be classified under Schedule 9 – ‘Advances’. [Notification No. RBI/2022-23/55 DOR.ACC.REC.No.37/21.04.018/2022-23 dated 19th May, 2022.]

2.    Provisioning for standard assets by NBFCs-UL:
RBI has prescribed the provisions to be maintained in respect of ‘standard assets’ by NBFCs classified as NBFC-UL (Upper Layer). The rates of provision are as follows: individual housing loans and loans to SMEs – 0.25%; housing loans extended at teaser rates – 2.00%; advances to commercial real estate (0.75%/1.00%); and all other loans and advances – 0.40%. The guidelines are effective from 1st October, 2022. [Notification No. RBI/2022-23/61 DOR.STR.REC.40/21.04.048/2022-23 dated 6th June, 2022.]

ICAI MATERIAL

Accounts and Audit
1.    Technical Guide on Financial Statements of Non-Corporate Entities. [2nd June, 2022.]


Nothing in the world
is more dangerous than sincere ignorance and conscientious stupidity.

Martin Luther King Jr.

FROM THE PRESIDENT

Dear BCAS Family,
When I am penning down my last communication with you all as the President of this august and largest voluntary Society of Chartered Accountants there are mixed feelings of joy, satisfaction and hollowness. The joy is for the celebration which has been throughout this journey. The satisfaction is the end of the old beginning (being my term as President) for commencing a new beginning towards a new end (as a Past President). The hollowness will be felt as I shall not be multi-tasking the work as President along with my professional and personal commitments. During the term I can say from my heart that the experience has been overwhelming with the kind of recognition which is showered from various circles of influence just being the torch bearer of such a vibrant and selfless Society. When I started my journey as President, I had one thing always uppermost in my mind, “Do not try to demystify each and everything brought before you. There may be times when you have answers. There may be times you have questions, when you should simply drop the questions and move ahead.” Frankly this approach has brought mental peace to me and I have been able to enjoy the journey and been able to live the moments with zest and energy. I had been totally guided by my GURU Mahatria Ra’s following quote:

There is no ‘there’ to reach,
No end. No beginning.
Life is a perennial flow…
Live every moment, usefully.

I would share that the thought process during the year was to have new beginnings for which newer things will have to be done. Accordingly we embarked on some of the initiatives for the smooth functioning of the Society as well as planned events on topics of professional interest which would meet the objectives set at the start of the year through the theme for the year i.e. ESG – Empowering, Scaling and Globalising. I will leave the critical evaluation of the year gone by to the wisdom of the members of this Society.

On the economic front there has been an increase in the repo rate by 50 basis points to 4.90% by RBI to control the inflationary pressures which is predicted to average 7.5% in the quarter April-June, 2022. This is much beyond the upper tolerance level. However, subsequent to the rate hike, things are brightening a bit with prices of staples and edible oil moderating and accordingly supply side shocks are receding to a certain extent.

According to Christopher Wood, internationally renowned investment strategist, India is the best structural growth story in Asia and emerging market equities for the next 10-15 years. His confidence is based on the fact that there are very few major economies where residential property prices have lagged nominal incomes to the extent experienced by India in the past seven years or more. The residential property price to household income ratio has declined from 6.1x in F.Y. 2013 to 4.4x in F.Y. 2020-F.Y. 2022. Another reason is that the gross NPL ratio of the Indian banking has also declined from 11% in F.Y. 2018 to 7% in F.Y. 2022. I hope that the predicament of such an influential investor which is based on hard facts comes true and India is able to continue its journey of becoming a major economic power at the global level.

This message is being written at the end of a very satisfying week when we were witness to the “Josh” of very young talented CA students who performed at the 14th Jal Eruch Dastur CA Students’ Annual Day “TARANG 2022”. This event enables CA students to show case their hidden talent other than at exceling in studies. The students performed with full enthusiasm and their organizational capabilities too came to the fore. I am really amazed at the latent skills of the students. I am very much convinced that the profession will have many emerging stalwarts with multi-faceted talent. I congratulate the Human Resources and Development Committee for the untiring efforts in making this event a resounding success.

The other event during the week which concluded was the 11th IndAS RSC at Daman which was organized by the Accounting & Auditing Committee. Again it also left the indelible mark of excellence through excellent topics covering not just IndAS but also current reporting requirements and the upcoming non-financial reporting requirements. The faculties were excellent imparting substantial value to the participating delegates.

During the month the other two memorable events were also held physically. One was the Indirect Tax Committee’s 16th GST RSC at Goa. This RSC was rich on technical content, had excellent faculties, very effective group discussions and great networking. Another was by the Internal Audit Committee, Internal Audit Conclave. The Conclave was very well received by the participants with sessions dealing with technology led novel approaches to internal audit as well as other upcoming areas to specialize for professionals.

All these four annual events were held in physical mode after a lapse of two years due to pandemic. The participation and the enthusiasm at all the events proved that participants were eager to meet in person at such events and share their knowledge with a dose of camaraderie to instil confidence that all is back to normal.

There will be change of guard at BCAS on 6th July and I am sure the ensuing year under the leadership of the incoming President, Mr. Mihir Sheth will definitely achieve greater heights for BCAS. I convey my heartiest congratulations to the team of Office Bearers for the year 2022-23.

At the time I am concluding my message, I would like to convey my gratitude to the Chairmen, Co-Chairpersons of the ten committees through which BCAS’ activities are carried out throughout the year. It is their dedication and guidance which enabled us to provide very relevant and critical events and publications throughout the year. Under their able leadership, the conveners of each committee left no stone unturned to leave a mark of excellence and ensure smooth functioning. I would like to thank all the Past Presidents who have been pillars of strength and a source of inspiration throughout the year. The BCAS staff has also dedicatedly performed their duties and co-operated for new initiatives embarked during the year for the effective functioning and serving the members of the Society. The year has been made memorable by my Office Bearer colleagues who spearheaded various goals set at the start of the year. Lastly, the kind of affection which I have received from the members of BCAS as feedback for my messages as well as for the events and lecture meetings held throughout the year has been really humbling.

Frankly, I had commenced the year by setting goals which I was sure would not be achieved fully, but I am of the firm belief that to climb up the ladder and to fulfill your goals there should be strong willingness to pursue the goals. May be all of them will not be achieved, but there will always be a sense of satisfaction of putting in the efforts to the extent of your potential.

Lastly, as has been throughout the year of my communication, I would again end my message with a quote from my GURU Mahatria Ra:

Set goals big enough,
that makes you wonder,
“I don’t know how?”.
Let your beliefs be strong enough,
that makes you say,
“I know I will”.

I bid adieu,

Regards,

 

Abhay Mehta
President

Recent Developments in GST

A. NOTIFICATIONS

1.    Notification No.11/2023-Central Tax dated 24th May, 2023

The above notification seeks to extend the due date, for furnishing return in Form GSTR-1 for the month April 2023, to 31st May, 2023 for registered persons whose principal place of business is in the State of Manipur.

2.     Notification No.12/2023-Central Tax dated 24th May, 2023

The above notification seeks to extend the due date, for furnishing return in Form GSTR-3B for the month April 2023, to 31st May, 2023 for registered persons whose principal place of business is in the State of Manipur.

 

3.     Notification No.13/2023-Central Tax dated 24th May, 2023

The above notification seeks to extend the due date, for furnishing return in Form GSTR-7 for the month April 2023, to 31st May, 2023 for registered persons whose principal place of business is in the State of Manipur.

B. INSTRUCTIONS

i)    Instruction No.2/2023-24 (GST) dated 26th May, 2023
By above instruction, guidelines about Standard Operating Procedure for Scrutiny of Returns, for F.Y. 2019-2020 onwards, are made available on the ACES-GST application.

C. ADVANCE RULINGS

24 Gandour India Food Processing Pvt Ltd
(A. R. Com/03/2022 dated 14th September, 2022)
TSAAR  No.53/2022 (Telangana)

Classification via-a-vis Service Code

M/s Gandour India Food Processing Pvt Ltd in Cherlapalli, Rangareddy, Hyderabad is a top player in the category of Chocolate Manufacturers established in the year 1987. It is known to provide top services in the categories of Chocolate Manufacturing, Confectionery Manufacturing, Food Product Retailing, Sugar Coated Chocolate Manufacturing, etc. It also provides job work services wherein from the materials supplied by principals it manufactures chocolates for them and delivers back to them. Thus, it is a “Job Work provider” doing job work of manufacturers of chocolates (food product falling under Chapter 19 of customs tariff Act) with inputs provided by the “job work receiver”. Its services come under SAC Code 9988 with applicable tax rate of 5 per cent.

The issue raised was in light of requirement of mentioning SAC code on invoices vis-à-vis rate of tax.

By notification 78/2020, applicant is required to mention a six-digit SAC on their service invoices w.e.f. 1st April, 2021. Accordingly, the SAC code applicable on invoices is 998816. But the applicant could not find separate tax rate for this six-digit code in the service code classification. Therefore, this AR application.

To arrive at a conclusion about the given issue the ld. AAR analysed basic position. The ld. AAR decided as to whether the applicant falls under supply of services or not?

The ld. AAR made reference to Para 3 of the Schedule II of the CGST Act, which specifies certain activities to be treated as supply of goods or supply of services. Para 3 provides that “Any treatment or process which is applied to another person’s goods is a supply of services”.

Accordingly, the ld. AAR held that the supply of the applicant is that of ‘supply of Service’.

The ld. AAR than made reference to Service Code 9988 and reproduced Explanation note there to as under:

“9988 Manufacturing services on physical inputs (goods) owned by others

The services included under Heading 9988 are performed on physical inputs owned by units other than the units providing the service. As such, they are characterized as outsourced portions of a manufacturing process or a complete outsourced manufacturing process. Since this Heading covers manufacturing services, the output is not owned by the unit providing this service. Therefore, the value of the services in this Heading is based on the service fee paid, not the value of the goods manufactured.”

The ld. AAR held that this heading covers those services characterised as outsourced portions of a manufacturing process. Since in the case at hand, the job work done by the applicant is a portion of manufacturing process
of the customer of the applicant, the ld. AAR held that the activity of the applicant is covered under SAC 9988.

The ld. AAR also referred to definition of “Job-work” in Section 2(68) which is as below:

“Section 2(68) of CGST Act defines “Job work means any treatment or process undertaken by a person on goods belonging to another registered person and the expression” job worker’ shall be construed accordingly.”

The ld. AAR accordingly held that the activity of undertaking manufacturing services by a registered person on the physical inputs owned by another registered person is a Job work. In the case at hand, the applicant is a registered person and when he undertakes work on the goods belonging to another registered person, then, the nature of work of the applicant is job work, observed the ld. AAR.

Thereafter, the ld. AAR referred to Sl.No.26 in Notification no.11/2017-CT(R) dated 28th June, 2017 along with various amendments there in from time to time in which rate of tax for heading 9988 is provided.

The ld. AAR also referred to Notification no.78/2020-CT dated 15th October, 2020 and further amendment there in from the 1st April, 2021 by which the requirement of mentioning code is made six digits, if aggregate turnover is more than Rs 5 crores.

The ld. AAR also referred to Annexure to Scheme of Classification of Services and SAC code at Sr. No. 498 there in, where the heading of said service is as under:

“Annexure: Scheme
of Classification of Services

Sr. no.

Chapter, Section,
Heading or Group

Service Code
(Tariff)

Service
Description

(1)

(2)

(3)

(4)

498

Heading 9988

 

Manufacturing services on physical Inputs (goods) owned
by others

499

Group 99881

 

Food, beverage and tobacco manufacturing services.

500

 

998811

Meat processing services

501

 

998812

Fish processing services

502

 

998813

Fruit and vegetables processing services

503

 

998814

Vegetable and animal oil and fat manufacturing services.

504

 

998815

Dairy product manufacturing services

505

 

998816

Other food product manufacturing services”

Based on combined reading of the above notifications, explanation and SAC codes, the ld. AAR held that the SAC code of the Service Offered by applicant is “998816” i.e., “Other food product manufacturing services” and the rate of tax as seen from the above entry is 2.5 per cent CGST and 2.5 per cent SGST.The ld. AAR accordingly passed order as under:

“Questions

Ruling

1. GST Tax rate on Service Accounting Code 998816.

2.5% CGST and 2.5% SGST “

 
25 Accurex Biomedical Pvt Ltd
Order No. MAH/AAAR/AM-RM/12/2022-23
Dated 30th September, 2022) (Mah)

Classification of productsThe facts are that M/s Accurex Biomedical Pvt Ltd, is, inter-alia, engaged in the business of supply of various diagnostic reagents.

Out of the various range of products, the appellant sought ruling in respect of the classification of the following two products:

(A) Turbilatex CRP Infinite

(B) HbA1c Infinite

Infinite Turbilatex CRP (hereinafter referred to as “CRP Test Kit”) is supplied by the appellant under the brand name “Infinite”. This product is meant for in-vitro diagnostic use only.

CRP Test Kit is used for the quantitative determination of C-Reactive Protein (CRP) in human serum for medical diagnosis of inflammation and infections.

It contains following components:

Components

Description

R1

Buffer Reagent

R2

Latex Reagent

R3

Calibrator Lyoph Serum Vial

Further the principle on which the product is based is stated in appeal order are as under:“(i)    CRP Test Kit is based on agglutination principle between latex particles coated with specific anti-human CRP to determine CRP in the sample. To a naked eye, it is impossible to detect the process of agglutination. That is why, to facilitate easy detection of agglutination, “carriers” were chosen on which the specific antibodies could be coated.

(ii)    R2 contains latex particles coated with specific anti human CRP which reacts with CRP in the sample resulting in agglutination. Agglutination causes change in absorbance, measured at 540 nm (530 – 550 nm) & is proportional to the concentration of CRP in the sample.

(iii)    The affinity purified polyclonal antibodies are coated on the latex particles, these latex beads act as carrier for the spectrophotometric detection of antigen CRP in human serum/plasma via reaction with agglutination sera coated onto the latex reagent.

(iv) The essential component of the CRP Test Kit is R2 since it contains the antiserum. In fact, around 85% of the total cost of the CRP Test Kit is attributable to component R2.”

The further details about preparation of work solution are also given.

Similarly details are given in respect of Infinite HbA1c – This product is used for the quantitative determination of hemoglobin A1c (HbA1c) in human blood and monitoring of glycemic control in diabetic patients.

It has following components:

Components

Description

R1

Latex reagent

R2

Buffered antibody reagent

R3

Hemolysis Reagent

R4

Optional-Calibrator made from human blood

The principles on which the product is based as well as preparation for working solution are also given.The principles on which the product is based as well as preparation for working solution are also given.

Based on above facts the appellant had filed an application for Advance Ruling before Maharashtra AAR seeking an advance ruling on the question about classification of CRP Test Kit & Hb1Ac Test Kit. Questions are reproduced as under:

“(a)    Under HSN Code 30.02 at Entry No.125 of List 1 of Sr. No 180 under Schedule-I of the Notification No.1/2017-Central Tax (Rate), dated 28.6.2017 as “Agglutinating Sera”; or

(b)    Under HSN Code 38.22 at Sr. No 80 under Schedule-II of the Notification No.1/2017-Central Tax (Rate), dated 28.6.2017 as “diagnostic kits and reagents”.”

The ld. AAR gave ruling No.GST-ARA-98/2019-20/B-72 dated.11th October, 2021 and held that CRP kit and Hb1Ac kit do not fall under HSN code 3002, and the same are covered by HSN Code 3822.

Therefore, this appeal was filed before ld. Appellate Authority for Advance Ruling (AAAR) and various contentions were raised in support of appeal.

The ld. AAAR heard both sides and observed that AAR has held CRP kit and Hb1Ac kit as not falling under HSN code 3002 and held as covered by HSN Code 3822, on the ground that Entry No.125 of List 1 of Sr. No. 180 of Schedule I of Notification No. 1/2017-Central Tax (Rate), dated 28th June, 2017, mentions the word “Agglutinating Sera”, and it is not followed by the word ‘diagnostic kits’, whereas, there are other entries in the same List 1 wherein there is a specific mention of diagnostic kit. The AAR has further observed that “Agglutinating Sera” listed under Sr. No. 125 of List 1 of Schedule I covers agglutinating sera as an individual product, and not as a diagnostic kit which works on the principle of “Agglutinating Sera”.

The ld. AAAR made a detailed reference to material submitted before it by both parties and also referred to judgment of Hon. Supreme Court in case of Span Diagnostics Ltd. vs. CCE, Surat-2007(211) ELT 521 (SC).

The Ld. AAAR applied ratio of the aforesaid judgment of the Hon’ble Supreme Court and observed that CRP Test Kit, whose principal component is the latex particles coated with the anti-human CRP antibody obtained from the mice antisera, will aptly be construed as antisera. Accordingly, the ld. AAAR held that it will be classified under the Chapter Heading 30.02, and not under the Chapter Heading 38.22 owing to its description wherein it is categorically mentioned that a diagnostic or laboratory reagents which are not falling under the Chapter Heading 30.02 will be covered under the Chapter Heading 38.22. Accordingly, it is held that, the product under question is aptly classifiable under the Chapter Heading 30.02 and therefore, the said impugned product, i.e., CRP Test Kit, will not be classifiable under the Chapter Heading 38.22.

Regarding the issue as to whether the impugned product, i.e., CRP Test Kit, can be construed as “agglutinating sera” mentioned at Sl. No. 125 of the List I appended to the Schedule I to the Notification No. 01/2017-C.T. (Rate) dated 28th June, 2017 or not, the ld. AAAR observed that the said impugned product works on the principle of agglutination where the latex beads coated with the antisera reacts with the CRP of the human blood sample resulting into agglutination, which ultimately leads to diagnosis of inflammation or infection in the human body with the help of spectrophotometer. In view of this, it is held by the ld. AAAR held that the impugned product, i.e., CRP Test kit, which has been held as antisera, and which works on the principle of agglutination for the medical diagnosis of infection and inflammation in the human body, is construed as agglutinating sera.

Accordingly the ld. AAAR held that the impugned product will fall under entry “agglutinating sera” at Sl. No. 125 of the list I appended to the Schedule I to the Notification No 01/2017-C.T. (Rate) dated 28th June, 2017 and the said product, CRP Test Kit, will attract GST at the rate of 5 per cent (CGST @ 2.5 per cent + SGST @ 2.5 per cent) in terms of the entry at Sl. No. 180 of Schedule I to the Notification No. 01/2017-C.T. (Rate) dated 28th June, 2017.

The ld. AAAR classified the other product viz: Hb1Ac Test Kit, also in same category of CRP Test Kit and held the same liable to GST @ 5 per cent.

Thus, the appeal filed by the appellant is allowed.

26 Gurjinder Singh Sandhu
(Prop. M/s New Jai Hind Transport Service)
(Ruling No.10/2022-23 in Appl.no.06/2022-23 dated 26th September, 2022) (Uttarakhand)

Valuation – Fuel Cost

The applicant is in the process of discussion for providing transport of goods service by road to a recipient which is not a related person and for which the consignment note will be issued by the applicant. As per the draft agreement, the applicant will have to transport the goods from the factory of the recipient of service to the destination specified by the recipient by deploying vehicle with driver/staff to run/operate, for exclusive transport of their goods. The applicant will charge recipient for transport and GST thereon on forward charge basis. However, the applicant will charge for transportation. The fuel required to transport the goods shall not be within the scope of work of the applicant and it will be borne by the recipient. Since the fuel (diesel) is not in the scope of the applicant as per draft agreement, while charging GST at the applicable rate, the applicant will not include cost of the fuel consumed/ used for transport of the goods.

In view of the above facts, the applicant sought an advance ruling as to “Whether the value of free diesel filled by service recipient under the accepted terms of contractual agreement in the fleet(s) placed by GTA service provider will be subject to the charge of GST by adding this free value diesel in the value of GTA service, under the Central Goods and Services Tax Act, 2017, Uttarakhand Goods and Service Tax Act, 2017?”

During the hearing, the applicant contended that GST is tax on consumption and not on business. Hence, in present case, what is being consumed by the service recipient will be the activity carried by the Applicant i.e., GTA service & consequently freight charges. The FOC fuel, being a liability of the service recipient on its own, cannot be said to be a value addition brought forth by the Applicant. Hence, such free fuel cannot be made leviable to GST.

It was further contended that in the facts of present case, the FOC fuel does not constitute a “supply” as there is neither transfer of property nor there is any consideration involved in respect of fuel. Since the fuel will be directly filled in the fuel tank of the goods carriage only for the purpose of transporting goods belonging to service recipient, the fuel cannot be construed to be supplied to the applicant.

Ruling of AAR Karnataka in M/s. Hical Technologies Pvt Ltd, 2019 (10) TMI 571 – 2019-VIL-305-AAR cited in which it is held that the value of the goods provided by recipient would not form the part of the value of the supply and must be excluded while valuing the supply. The rulings of AAAR of Karnataka in M/s Nash Industries (I) Pvt Ltd -2019 (3) TMI 435 – 2019-VIL-08 and Maharashtra AAR in M/s Lear Automotive India Pvt Ltd- 2018 (12) TMI 766 – 2018-VIL-318-AAR were also cited in which similar view is taken.

The ld. AAR made reference to Section 15 of the CGST Act, 2017 and reproduced the same in full.

The ld. AAR observed that the section provides that the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

The ld. AAR analysed section 15 and further observed that there is a specific mandate that the value of supply shall include (a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier; and (b) any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both.

Accordingly, the ld. AAR held that Section 15 of the CGST Act, 2017 unambiguously mandates that the value of supply shall include, among others things, any other amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both.

Referring to section 7 of the CGST Act, 2017 and relevant provisions, the ld. AAR held that all forms of supply of goods or agreed to be made for a consideration, is a part of supply. Reference also made to term “consideration” defined in Section 2(31) of the CGST Act, 2017. The ld. AAR held that the said definition mandates that consideration includes any payment whether in money or otherwise, made or to be made or monetary value of any act or forbearance for the inducement of the supply of goods. The usage of the terms “or otherwise” and “or forbearance for the inducement of the supply of goods or services or both, whether by the recipient”, in the statute leaves no doubt about the spirit and essence of the Act, observed the ld. AAR.

The ld. AAR observed that in normal business transaction applicant is required to include the cost of fuel, but by putting terms and conditions in agreement which apparently suites themselves, the applicant is trying to circumvent the statute, which appears to be not the intent of the Parliament.

The ld. AAR observed that without the fuel, the vehicle does not run and without running i.e. moving from one place to another, the act of transportation of goods by road cannot take place. The ld. AAR opined that to prove claim of providing the services of transporting the goods, actual transportation has to take place and without fuel this cannot happen and if there is no transportation of goods due to absence of fuel or any other reason the same cannot be termed as “GTA service”. In such a case, the same can be termed as rental or leasing service.

The ld. AAR held that by merely issuing consignment notes, the service cannot be termed and classified as “GTA service”, as the ingredient of transport of goods comes into play, when and only when the vehicle in running condition along with operator have been provided by the service provider. The running condition implies that all the upkeep, maintenance, operation including that of fuel is the liability of the service provider and the “Price/freight charges” as referred to by the applicant are insufficient for supply of “GTA Services”, observed the ld. AAR. The contention of the applicant that Contract price cannot be rejected as it will tantamount to undermining “freedom of contract” and “sanctity of contract” between the parties held as not sacrosanct being against the essence and spirit of the GST Act enacted by the Parliament.

The ld. AAR rejected to rely on other decision and that of M/s Bhayana Builders Pvt Ltd. The ld. AAR referred to Hon’ble Supreme Court judgment in the case of M/s ABL Infrastructure Pvt Ltd, vs. CCE in civil appeal No. 41950/2018 dated 03rd December, 2018 wherein the appeal filed by M/s ABL Infrastructure Pvt Ltd, against the CESTAT Order dated 28th September, 2017 favoring the Service Tax Department for inclusion of value of free goods and material into the “gross amount charged”, is dismissed.

The other arguments like, revenue neutral, difficulty in finding price of fuel etc., rejected by Ld. AAR.

The ld. AAR held that “The value of free diesel filled by the service recipient in the vehicle(s) provided by the applicant will subject to the charge of GST by adding the free value of diesel to arrive at the transaction value of GTA service.”

27. Innovative Nutrichem Pvt. Ltd. (Adv. Ruling No. KAR ADRG 37/2022 dt.27.10.2022) (Karnataka) RCM vis-à-vis Exempted Outward Supply.

The applicant is in the business of manufacture and supply of animal feeds, which are exempted goods under GST. The applicant utilizes the GTA / Security Services that are covered under Reverse Charge Mechanism (RCM).

The applicant has sought advance ruling in respect of the following question:

“Whether they are liable to pay GST under RCM for the services procured from the respective service providers being the manufacturer and supplier of exempted goods falling under HSN 23099020.”

The applicant’s products are classifiable under HSN 23099020, and they are exempted from GST vide entry No. 102 of the Notification No.02/2017-Central Tax (Rate) dated 28th June, 2017; Applicant uses the services of Goods Transport Agencies (GTA) to transport their products/ goods and pay the freight/transportation charges to the transport operators. GTA services fall under Reverse Charge Mechanism (RCM) vide entry No.01 of the Notification No. 13/2017- Central Tax (Rate) dated 28th June, 2017. Similarly they also use the security services, which also fall under RCM vide entry No. 14 of the Notification No. 13/2017-Central Tax (Rate) dated 28th June, 2017, as amended vide notification No.29/2018-Central Tax (Rate) dated 31st December, 2018.

Applicant’s contention was that they supply animal feeds (exempted goods) and hence the Reverse Charge Mechanism Notification No. 13/2017 dated 28th June, 2017 is not applicable to them.

The ld. AAR made reference to section 9 which is for levy and collection. The said section is reproduced in AR as under:

“(1) Subject to the provisions of sub-section (2), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.

(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.”

The ld. AAR also reproduced notification issued under section 9(3) about RCM.

The ld. AAR on analysing the above provisions held as under:

“11. The applicant, admittedly is a registered person under GST Act and located in the taxable territory. They are the recipients of the services of the Goods Transport Agency and Security services, which are squarely covered under the category of supplies attracting GST liabilities on reverse charge basis, in terms of the Notification supra. Further Section 9(3) of the CGST Act 2017 stipulates that all the provisions of the CGST Act 2017 shall apply to the recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both, where the tax shall be paid on reverse charge basis by the recipient. Thus the recipient of service is liable to pay GST in respect of the services notified under Section 9(3) of the Act, ibid read with Notification 13/2017-Central Tax (Rate). It is pertinent to mention that GST is levied on the supply of service and liability is fastened independently for each of the supplies. Levy of tax or otherwise on a particular supply does not have a bearing on the taxability of other supplies received or provided by a taxpayer. Thus the exemption provided to the outward supplies of the applicant does not have a bearing on the GST liabilities under reverse charge basis on the supplies received by the applicant.”

The ld. AAR confirmed liability to RCM in spite of appellant’s outward supply is exempt.

Miscellanea

I. TECHNOLOGY

1. Twitter sued by music publishers for $250 million

A group of 17 music publishers in the US has sued Twitter, claiming the platform enabled copyright violations involving nearly 1,700 songs. The National Music Publishers’ Association (NMPA) is seeking more than $250 million (£197.7 million) in damages.

In a lawsuit filed at the Federal District Court in Nashville, the NMPA claimed Twitter “permits and encourages infringement” for profit. It says the situation has not improved since Elon Musk bought the company.

The NMPA, which represents firms – including Sony Music Publishing, BMG Rights Management and Universal Music Publishing Group – alleged that Twitter continues to “reap huge profits from the availability of unlicensed music without paying the necessary licensing fees for it”. It added that the infringements have given Twitter an “unfair advantage” over competitors – including TikTok, Facebook, Instagram, YouTube and Snapchat – which pay for music licences.

Twitter “stands alone as the largest social media platform that has completely refused to license the millions of songs on its service,” NMPA President David Israelite said in a statement. Twitter did not directly respond to a BBC request for comment.

Mr Musk, who recently reclaimed the title of the world’s richest person, bought Twitter last year for $44 billion. The NMPA also said: “Twitter’s change in ownership in October 2022 has not led to improvements in how it acts with respect to copyright.”

“On the contrary, Twitter’s internal affairs regarding matters pertinent to this case are in disarray,” it added. NMPA cited Twitter’s downsizing of “critical departments involved with content review and policing terms of service violations”, and the resignations of trust and safety chiefs Yoel Roth and Ella Irwin. The NMPA also alleged that Twitter “routinely ignores known repeat infringers and known infringements”.

Earlier this month, Linda Yaccarino, the former head of advertising at media giant NBC Universal, became the new boss of the troubled social media firm. Ms. Yaccarino oversees business operations at the platform, which has been struggling to make money. Since buying Twitter, Mr Musk has cut 75 per cent of its workforce, including teams charged with tracking abuse, and changed how the company verifies accounts.

(Source: www.bbc.com dated 15th June, 2023)

2 Artificial intelligence to destroy humanity in 5 years: Top CEOs alarmed by AI’s catastrophic potential

Top business leaders have expressed deep concerns over the potential threat posed by artificial intelligence (AI) to humanity in the near future. According to a survey conducted at the Yale CEO Summit, 42 per cent of CEOs believe that AI could potentially destroy humanity within the next five to 10 years.

The survey, which gathered responses from 119 CEOs representing various industries, revealed a lack of consensus regarding the risks and opportunities associated with AI. While 34% of CEOs expressed the view that AI could be destructive within a decade, and 8% believed it could happen within five years, 58 per cent of CEOs stated they were not worried and believed that such a scenario would never materialise.

Similarly, 42 per cent of the CEOs surveyed argued that concerns about the catastrophic potential of AI were exaggerated, while 58 per cent believed they were not overstated, CNN reported. These findings emerged shortly after a statement signed by numerous AI industry leaders, academics and public figures highlighted the risks of an “extinction” event resulting from AI development.

The statement, signed by individuals such as OpenAI CEO Sam Altman and Geoffrey Hinton, a prominent figure in the field, emphasised the need for society to take proactive measures to mitigate the dangers associated with AI. While opinions among business leaders vary, the CEOs surveyed by Yale generally agreed on the transformative impact of AI in certain industries. Healthcare was identified as the sector expected to experience the most significant changes by 48 per cent of the CEOs, followed by professional services/IT at 35 per cent and media/digital at 11 per cent.

As experts debate the implications of AI, the Yale survey identified five distinct groups among business leaders. These include “curious creators” who embrace AI without fully considering the consequences, “euphoric true believers” who are optimistic about the technology and “commercial profiteers” who are eagerly capitalising on AI without a comprehensive understanding of its risks.

Additionally, there are two camps advocating for different approaches: alarmist activists and global governance advocates. These groups exhibit divergent perspectives, resulting in a lack of consensus on how to navigate the complex landscape of AI, as per the publication.

(Source: www.livemint.com dated 16th June, 2023)

II. ENVIRONMENT

1. El Nino: How the climate pattern may prolong food inflation

The latest El Nino climate phenomenon has arrived, threatening floods in some areas of the world and droughts in others. Previous disruptive weather patterns cost the global economy trillions and stoked inflation.

El Nino, a natural climate phenomenon that alters global weather patterns, has officially returned after four years, threatening to exacerbate already elevated food inflation. Last week, the US National Oceanic and Atmospheric Administration’s (NOAA’s) Climate Prediction Centre said that El Nino conditions are already present and are expected to “gradually strengthen” over the next six to nine months, bringing a new period of extreme weather to much of the planet.

It fuels flooding to the Americas, tropical storms to the Pacific and brings droughts to many other parts of the world, including southern Africa. These effects cause severe disruption to fishing, agriculture and other sectors of the economy and are also known to be exacerbating the effects of climate change.

In 2016, El Nino contributed to the hottest year ever recorded and scientists are concerned it could cause new record-high global temperatures. Earlier this month, researchers at the EU’s Copernicus earth observation unit saw global surface air temperatures rise 1.5 degrees Celsius (2.7 degrees Fahrenheit) above pre-industrial levels for the first time.

This is the limit that world leaders agreed to put on global warming at the 2015 Paris climate summit. “It is quite unusual to approach the 1.5-degree Celsius temperature limit in June,” Kunstmann said. “It is therefore likely that we will soon exceed this limit, not only for a few weeks but for a longer period of time.”

Following El Nino in 1982-83, the financial effects were felt for another half decade, totaling some $4.1 trillion (€3.7 trillion), according to research from Dartmouth College in the United States. In a paper for the US journal Science, researchers said after the 1997-98 El Nino season, the damage to global economic growth was $5.7 trillion.

The Dartmouth researchers found that the 1982-83 and 1997-98 El Nino events steered US gross domestic product (GDP) lower by some 3 per cent in 1988 and 2003. Countries like Peru and Indonesia, where agriculture is responsible for up to 15% of GDP, bled by more than 10% in 2003.

The Dartmouth researchers estimated the negative economic effects from the latest El Nino season could reach $3 trillion between now and 2029. “The economic impact starts with the fishing industry, which suffers tremendously because of the higher ocean temperatures,” Kunstmann told DW. “Then it hits the big agricultural regions of Africa, South America and even several regions of North America. Then, if harvests are poor and infrastructure is damaged by storms, the insurance sector will also suffer.”

The peak of post-COVID, post-stimulus price rises may have passed, but it could be several years until the return of the 2 per cent inflation target set by the US and European central banks.

Growing warnings about El Nino have already helped coffee, sugar and cocoa prices to rise sharply in recent weeks, Germany’s biggest private lender, Deutsche Bank, said in a research note last week. Other food commodities are expected to follow as harvests get impacted by severe weather events.

In India, where agriculture is a cornerstone of the economy and the annual monsoon is crucial to food output, policymakers have spoken of the need to stay vigilant. “Close and continued vigil is absolutely necessary, especially as the monsoon outlook and the impact of El Nino remain uncertain,” Reserve Bank of India chief Shaktikanta Das said recently.

(Source: indianexpress.com dated 17th June, 2023)

2. Out-of-the-box sustainability ideas: From gelatinised marine waste to seaweed straws

A new generation of talented and sustainability-focused tech entrepreneurs are already dreaming up innovative ideas to shift our daily habits and tackle climate change. From making glue out of gelatinised marine waste to edible seaweed-based straws, here are a few of the weird and wonderful winning solutions that have sprung from the program so far:

Bio plastic as alternative packaging

Reports estimate that UK households throw away a staggering 100 billion pieces of plastic packaging a year, averaging 66 items per household every week. The government plans to place a complete ban on single-use plastic from October 2023 including plastic plates, trays, bowls, cutlery, balloon sticks, and certain types of polystyrene cups and food containers.

With this in mind, UK-based Team Flex Sea created proprietary technology that forms a bio plastic derived from seaweed. At the 2022 edition of Battle of the Minds, they explained that this could be used in packaging a wide range of products without reducing their quality or competitiveness. This idea earned Flex Sea the winning position and a £50,000 investment to help get the solution to market.

Reusable food packs

In 2021, Mexico City banned single-use plastic in a bid to make the city more sustainable. As citizens adjusted to the changes, Team Erre created a reusable mug system that allows users to take away their food and drinks without generating single-use waste.

This solution was both environmentally friendly and encouraged return customers to the participating cafés. This earned Team Erre the second runner-up spot with £25,000 in funding.

Edible seaweed straws

In 2021, the top spot on the Battle of the Minds was awarded to Team Ijo from Indonesia, which developed eco-friendly, edible straws made of seaweed that still maintained the look and feel of a regular straw.

In Indonesia, where 4.9 million tons of plastic waste ends up uncollected or dumped in open sites, each step we can take in replacing everyday items with sustainable, non-plastic alternatives will help in the country’s transition. The winning team received £50,000 to bring the idea to life.

Putting marine waste to good use

Egypt is said to be responsible for one third of all plastic that enters the Mediterranean, with levels of marine waste estimated to double by 2025.

It was against this backdrop that Team Egypt created a high-quality gelatine out of marine waste, to be used in the production of glue, photographic emulsions, and more. They clinched one of the runner-up positions in 2021, with a £25,000 investment.

Composting with cigarettes

Since October 2020, many parts of Eastern Africa have been experiencing long periods of drought, with intervals of short intense rainfall which often results in flash flooding.

To enhance plant growth in these volatile weather conditions, Team Kenya designed a system for recycling cigarette butts to make planters for urban farming and manure for cultivation. This also gained a runner-up position and a £25,000 fund.

(Source: thenextweb.com dated 16th June, 2023)

III. SCIENCE

1. A supermassive black hole orbiting a bigger one revealed itself with a flash

A monstrously massive black hole in a distant galaxy probably has a smaller companion that orbits it every 12 years. But that tiny partner has never been detected. Now, astronomers claim to have seen a flash of light coming directly from the smaller black hole for the first time.

“We’ve never seen anything like this before,” said astronomer Mauri Valtonen on 7th June, 2023 at a meeting of the American Astronomical Society in Albuquerque.

Astronomers have been watching this object since the 1880s, when it showed up in a survey of asteroids as a brilliant point of light. That point of light, now dubbed OJ287, is a blazar. Among the brightest-looking objects in the universe, blazars are supermassive black holes that launch bright jets of radiation into space, and those jets happen to point almost directly at Earth. This one sits about 3.5 billion light-years away. Sometimes, OJ287 shines even brighter than usual. For the past 40 years or so, astronomers have noticed that the object has a dramatic jump in brightness every 11 to 12 years.

In 1996, Valtonen and his colleague Harry Lehto, both of the University of Turku in Finland, suggested that the outbursts could be due to one supermassive black hole orbiting an even more massive black hole. Both black holes are probably behemoths, the astronomers calculated: The smaller is around 150 million times the mass of the sun, and the bigger is around 18 billion solar masses. For perspective, the black hole in the centre of the Milky Way is about 4 million solar masses.

The bigger black hole is thought to be surrounded by a disk of white-hot gas and dust, which glows at many wavelengths of light. If the smaller black hole exists, then every time it plunges through that disk, it would trigger a flash of light, thus explaining the recurring outbursts.

But until now, no light had been detected from the second black hole itself. Its presence was merely inferred from those regular flares. Valtonen and his colleagues predicted that the most recent flare should arrive in January or February 2022 and arranged to monitor OJ287 every day using telescopes on Earth and in space. The team saw flares like the ones they had seen before, but there was a new flare that was different. It was bright and quick, fading after one night.

The team proposed that this flare came from a jet created by the smaller black hole pulling material out of the disk as it approached, before the collision.

Some researchers have suggested other ways for a single black hole to give off the same pattern of light. If the team’s interpretation is correct, then it marks the first time the second black hole has been seen directly, Valtonen says.

Unfortunately, it may be difficult to test. The short flares come only once a decade, so astronomers need to be ready the next time. To resolve the two black holes directly, Valtonen says, might take a radio telescope in space.

(Source: www.sciencenews.org dated 15th June, 2023)

Statistically Speaking

1. TIME TAKEN FOR PROCESSING INCOME-TAX RETURNS HAS SIGNIFICANTLY REDUCED
2. NCLT APPROVALS ON PEAK
 
 
3. UPI TRANSACTIONS ON A RISE
 
 
 
4. MOST EXPENSIVE CITIES FOR EXPATS
 

Regulatory Referencer

FEMA AND IFSCA REGULATIONS

 

1. International Credit Card usage brought under LRS:

 

Rule 5 of the FEM (Current Account Transactions) Rules, 2000 allows for payments to be made for specified purposes as mentioned in Schedule III but within prescribed limits. Liberalised Remittance Scheme of the RBI allows remittance by resident individuals for transactions specified under this Schedule III up to USD 250,000 per financial year. Rule 7 of the FEM (Current Account Transactions) Rules, 2000 exempted payments made through international credit cards while on a visit outside India from Rule 5 and hence effectively they were outside the LRS limits too. However, Rule 7 now stands omitted resulting in transactions made through such use of ICCs to be covered under LRS. Purpose was to bring transactions made through ICCs under the Tax Collected at Source (TCS) net. Immediately, thereafter FAQs were released for both LRS and TCS on LRS through tweets providing clarifications and explanations on LRS and TCS on LRS. Some reliefs are also proposed. Then, a day later, another tweet clarified that payments by an individual using ICC or International Debit Card upto Rs. 7 lakhs per financial year would be excluded from LRS and hence TCS also. Necessary changes to the CAT Rules are proposed to this effect but as of now only tweets are available.

 

[G.S.R 369(E) dated 16th May, 2023 and tweets by handle @FinMinIndia dated 18th and 19th May, 2023.]

 

2. NDDCs allowed for trading by resident non-retail users at IFSC IBUs:
 

AD Cat-I banks operating International Financial Services Centre (IFSC) Banking Units (IBUs) are permitted so far to offer non-deliverable derivative contracts (NDDCs) to persons resident outside India. Such derivatives are cash-settled in foreign currency. With a view to developing the onshore INR NDDC market and providing residents the flexibility to efficiently design their hedging programmes, it has been decided to permit:(a) AD Cat-I banks operating IBUs to offer NDDCs involving INR to resident non-retail users for the purpose of hedging. Such transactions shall be cash settled in INR; and

(b) The flexibility of cash settlement of NDDCs transactions between two AD Cat-I banks, and between an AD Cat-I bank and a person resident outside India in INR or any foreign currency.

[A.P. (DIR series) circular no. 5, dated 6th June, 2023]

3. RBI’s Statement on Development and Regulatory policies:

The Statement sets out various developmental and regulatory policy measures relating to (i) Financial Markets; (ii) Regulation; and (iii) Payment Systems relevant under FEMA is the policy regarding licensing framework for Authorised Persons (APs). This was last reviewed in March 2006. Keeping in view the progressive liberalisation under FEMA over the last two decades, RBI has decided to rationalise and simplify the licensing framework for APs. The objective is to achieve operational efficiency in the delivery of foreign exchange facilities to common persons, tourists and businesses, while maintaining appropriate safeguards. A draft of the revised authorisation framework would be issued for public feedback.

[Press Release No. 2023-2024/365 dated 8th June, 2023]

Allied Laws

15 Rasool Mohammed (Dead) Thru. LRs. vs. Anees Khan and others
AIR 2023 (NOC) 315 (MP)
Date of order: 24th March, 2023

Power of Attorney – Legal Heir appointed – Permission to lead evidence – [Code of Civil Procedure, 1908, Order 3, Rule 2]

FACTS

The original Plaintiff filed a civil suit for declaration and permanent injunction before the Trial Court. During the pendency of the civil suit, the original Plaintiff Rasool Mohammad expired, and a legal representative, i.e., wife, was added as the legal heir. The Plaintiff petitioner executed a Power of Attorney on 1st September, 2016 and authorised Zaheer Qureshi to proceed on behalf of her in the said civil suit. The Trial Court allowed the objection of the Respondents that the Power of Attorney holder was not competent to exhibit the documents on his behalf and therefore was not allowed to lead evidence.

Hence, the appeal.

HELD      

The Court held that after perusal of the provisions of Order 3 Rule 2 of the Code of Civil Procedure, it is evident that there is no provision for permitting the Power of Attorney holder to depose in place of the original plaintiff. The Petitioner being a lady aged about 55 years is duly competent to appear before the Court for deposition. In such circumstances, it is clear that the Power of Attorney holder cannot be permitted to depose if the Plaintiff is in a position to appear before the Court for deposition.

Even if it is ascertained that the Power of Attorney holder is aware of the facts and circumstances of the case, even then the Power of Attorney holder can only be permitted in exceptional circumstances.

The appeal was dismissed.

16 Shrimati Geeta Bai and Others vs. Ramavatar Agrawal
AIR 2023 (NOC) 325 (CHH)
Date of order: 3rd August, 2022

Gift – Gift deed – Unilateral cancellation deed by the donor is void and non-est. [Transfer of Property Act, 1882, S. 122]

FACTS

The Defendant is the original Plaintiff. It was the case of the Defendant that the property had been transferred by way of gift and possession had been handed over by the appellant. After the execution of the gift deed, the name of the donee was recorded in the revenue records. Thereafter, it was found that a cancellation deed had been unilaterally effected without notifying the donee. Therefore, an injunction was sought, praying that the defendant be declared the owner of the land and that his peaceful possession and enjoyment of the property shall not be disturbed. The trial Court decreed the suit.

Hence, the present appeal.

HELD

The Court held that the gift was valid in accordance with section 122 of the Transfer of Property Act, 1882. The gift was accepted by the donee, and after the execution of the gift, the name of the donee was recorded in the revenue records. The documents having been registered will have a presumptive value of correctness unless proven otherwise. Once the gift deed is executed in terms of Sections 122 and 123 of the Transfer of Property Act, then the unilateral cancellation of the deed by the donor is void and non-est. Such a cancellation deed could be ignored as invalid.

The Appeal was dismissed.

17 V. R. S. V. N. Sambasiva Rao vs. V. Rama Krishna
AIR 2023 (NOC) 259 (AP)
Date of order: 18th January, 2023

Civil Contempt – Wilful Disobedience of order – Regularisation – Tactics by Authorities – Action would amount to contempt of Court [Contempt of Courts Act, 1971, Ss. 2(b), 10, 12]

FACTS

The petitioner had filed a writ petition against the action of the respondents in not regularising his services, and the Court has passed an order directing the respondents to regularise the services. Despite the petitioner submitting several representations before the respondents seeking regularisation, the respondents neither passed any orders nor complied with the Orders of the Court in true spirit.

Hence, the present case.

HELD

The order of the Court is not complied with on the grounds that the writ appeal and review petition is pending. The Court held that this type of tactic by the respondents to avoid implementing the orders of the Court cannot be tolerated and that the action of the respondents would amount to contempt of court. Under these circumstances, the apology tendered by the respondents was found unacceptable and in the opinion of the court it was not bonafide.

Non-compliance with the Court’s order would amount to contempt of Court. The respondents in the present appeal had sought adjournments several times for compliance, and taking advantage of adjourning the cases, they preferred appeal and, after the dismissal of the appeal by the Division Bench, again sought time for compliance and again filed a review petition.

The Contempt Case is allowed, and the Contemnors are sentenced.

18 Amrik Singh (Dead) Through L.Rs. and another vs. Charan Singh (Dead) Through L.Rs. and others
AIR Online 2023 P&H 140
Date of order: 2nd February, 2023

Wills – Attesting witnesses – Ancestral and self-acquired land – Suspicious circumstances [Specific Relief Act, 1963, S.34; Indian Succession Act, 1925, S. 63]
    
FACTS

The first Will was executed by Kishan Singh on 18th July, 1980. This registered Will was in favor of the defendant-appellants (Amrik Singh and Mewa Singh). This was proved in Court by the attesting witnesses. The second Will was allegedly executed by Kishan Singh on 20th February, 1981. This Will is in favor of all the four sons of Kishan Singh, and they were to inherit in equal shares. The Trial Court dismissed the suit of the plaintiff-respondents and disbelieved the will dated 18th July, 1980. The lower Appellate Court declared that both the wills stood rejected and hence property would devolve by way of natural succession; therefore, partly decreed the suit for joint possession to the extent of 1/7th share each in the suit land as well as the compensation.

Hence the present appeal.

HELD

The Court held that it had no  doubt that the Will executed by Kishan Singh, which is a duly registered document, is not surrounded by any suspicious circumstances of any kind and is proved to have been duly and properly executed. Mere deprivation of some of the natural heirs by itself is not a suspicious circumstance to discard a Will. Divesting of close relations being the purpose of execution of a Will, this is normally not a suspicious circumstance.

A Will has to be proved like any other document except as to the special requirements of attestation prescribed by Section 63 of the Indian Succession Act. The test to be applied would be the usual test of the satisfaction of the prudent mind in such matters.

The appeal is allowed.

19 Adityaraj Builders vs. State of Maharashtra
WP Nos. 4575 of 2022 dated 17th February, 2023 (Bom)(HC)

Stamp Duty – Redevelopment – Endorsement of instruments on which duty has been paid – Reference to re-development and homes are to be read to include garages, galas, commercial and industrial use and every form of society re-development – No stamp duty on permanent alternate accommodation agreement. [Maharashtra Stamp Act, 1958, Section 4]

FACTS

The petitioners raised a common question of law under the Maharashtra Stamp Act, 1958. It relates to Stamp Duty sought to be levied on what is called Permanent Alternate Accommodation Agreements (“PAAA”). The challenge was against two circulars issued by the Inspector General of Registration & Controller of Stamps, Maharashtra under the authority of the Chief Controlling Revenue Authority and the State Government of Maharashtra, dated 23rd June, 2015 and 30th March, 2017.

The first circular directed that any PAAAs between the society members and the developer is different from the (DA) between the society and the developer. The second circular which came out as a clarificatory circular specifies compliance and the criteria for such compliance to the PAAAs with individual society members. The Stamp authorities contended that on contentions of the payment of stamp duty in incidents where there is an increase of additional area or square footage after redevelopment and the question of members having to pay stamp duty on the acquisition of additional built-up area or carpet area derived from fungible FSI.

The question before the High Court was whether the demand by the Stamp Authority that the individual PAAAs for members must be stamped on a value reckoned at the cost of construction and a question of validity regarding the two circulars dated 23rd June, 2015 and 30th March, 2017?

HELD

Impugned Circulars dated 23rd June, 2015 and 30th March, 2017 were held to be beyond the jurisdictional remit of revenue authorities to dictate instruments what form the instruments should take. The court held as under:

a)    A Development Agreement between a cooperative housing society and a developer for the development of the society’s property (land, building, apartments, flats, garages, godowns, galas) requires to be stamped.

b)    The Development Agreement need not be signed by individual members of the society. That is optional Even if individual members do not sign, the DA controls the re-development and the rights of society members.

(c)    A Permanent Alternative Accommodation Agreement between a developer and an individual society member does not require to be signed on behalf of the society. That, too, is optional, with the society as a confirming party.

d)    Once the Development Agreement is stamped, the PAAA cannot be separately assessed to stamp beyond the Rs. 100 requirement of Section 4(1) if it relates to and only to rebuilt or reconstructed premises in lieu of the old premises used/occupied by the member, and even if the PAAA includes additional area available free to the member because it is not a purchase or a transfer but is in lieu of the member’s old premises. The stamp on the Development Agreement includes the reconstruction of every unit in the society building. The stamp cannot be levied twice.

e)    To the extent that the PAAA is limited to the rebuilt premises without the actual purchase for consideration of any additional area, the PAAA is an incidental document within the meaning of Section 4(1) of the Stamp Act.

f)    A PAAA between a developer and a society member is to be additionally stamped only to the extent that it provides for the purchase by the member for actually stated consideration and a purchase price of an additional area over and above any area that is made available to the member in lieu of the earlier premises.

g)    The provision or stipulation for assessing stamp on the PAAA on the cost of construction of the new premises in lieu of the old premises cannot be sustained. Further, held that reference to re-development and homes is to be read to include garages, galas, commercial and industrial use and every form of society re-development.

The Court also held that these findings are not limited to the facts of the present cases before the court.

Service Tax

TRIBUNAL

6. Commissioner of Central Excise & Service Tax, Goa vs. Goa Golf Club Pvt Ltd
Date of order: 9th February, 2023

Share of Profit received by co-venturer under a joint venture agreement was not liable to service tax.

FACTS

Respondent M/s Goa Golf Club Pvt Ltd (GGCPL) had entered into a joint venture agreement with M/s Britto Amusement Pvt Ltd (BAPL) to run and operate a casino at the premise of M/s BAPL, on a mutually agreed profit-sharing ratio. SCN was issued demanding service tax on the distribution of share of profit. The respondent submitted the response and the adjudicating authority dropped the demand of service tax. Aggrieved by the same, an appeal was filed by the department contesting the dropping of service tax demand.

HELD

Tribunal after relying upon Circular No. 109/03/2009 dated 23rd February, 2023 held that there was no relationship of the service provider and service receiver with the parties to joint venture agreement. Also, no consideration was received by GGCPL for rendering any service. Consequently, the appeal was decided in the favor of respondent.

7. M/s Lakshmi Electrical Driver Ltd. vs. CCE & ST (Appeals)
2023-TIOL-462-CESTAT-MAD

Whether RCM is applicable under section 66A when the foreign service provider has a 100 per cent subsidiary in India.

FACTS

Appellant, a manufacturer, availed services of technical inspection and certification for which payment was made in foreign currency to a company in Canada who had also issued inspection certificate. However, the said service was performed by a 100 per cent subsidiary of the Canadian company in India. During departmental audit, the revenue raised the issue of non-payment of service tax under Reverse Charge Mechanism (RCM) for payment made to the foreign party who had also issued the certificate of inspection. It was the Revenue’s contention that in terms of sub-section (2) of section 66A, when a person is carrying only business through a permanent establishment in a country other than India, such permanent establishments shall be treated as separate persons for the purpose of this section. On the other hand, as per the appellant, relying on Explanation 1 it was argued that a person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country, and since the Canadian company had 100 per cent subsidiary in India which had performed the service, RCM was not applicable to them. The appellant in support of their contention, submitted factory inspection reports which were signed by the representatives from the Indian subsidiary company to evidence that services were performed in India by the subsidiary company.

HELD

It was observed that at the relevant time (period of 2009-2010) there was no condition attached for RCM that the Foreign Service provider should not have an office in India. The reports indicate that the inspection service was performed in India though the certificate was issued by the Canadian company. Hence, invoking section 66A of the Finance Act and fastening tax liability on appellant on RCM basis is not legally sustainable. Accordingly, the appeal was allowed.

8. M/s Max Life Insurance Company Ltd. vs. CCE-ST
2023-TIOL-426-CESTAT-DEL
Date of order: 12th April, 2023

Service Tax on interest for reviving a lapsed insurance policy not liable to be paid.

FACTS

The issue in the appeal relates to leviability of service tax on the amount of interest charged by the appellant insurance company on the reinstatement of a lapsed policy. The Service Tax was confirmed for the reasons of lapsed interest charged for revival of the lapsed policy. According to the Revenue, interest was not chargeable when the policy got terminated on account of the failure to make premium payment. Interest was not charged at a uniform rate and according to the revenue, it must be recovered periodically and whereas it was neither charged at a uniform rate nor periodically. It was alleged that it was not interest, and was in the nature of administration charge or a processing fee and hence liable for service tax.

In the said context, the basic concepts of a life policy were examined and more specifically the relevant aspect was that the policy contract allows a policy holder to revive a lapsed policy within a specified period of non-payment of the last premium and subject to payment of overdue premium, along with charges as per terms and conditions specified in the policy. In the instant case, the policy specified the payment of overdue premium along with interest. Thus, a policy does not terminate on non-payment of premium due.

HELD

The order of the Commissioner was held unsustainable as the contract provided for interest only and not for any processing fee or administration charge.

9. M/s. SEW Infrastructure Ltd vs. CCE
2023-TIOL-470-CESTAT-DEL
Date of order: 2nd May, 2023

Composite contracts involving both good and services are necessarily works contracts and were not liable for service tax prior to the introduction of specific entry on 1st June, 2007.
 
FACTS

Appellant, an infrastructure construction company executed turnkey contracts such as irrigation, power projects, etc. An electric supply company awarded a contract for setting up a power plant to Bharat Heavy Electricals Ltd (BHEL) who in turn sub-contracted a portion of the work to the appellant. The job required the appellant to perform land development involving earth work, excavation, back filling, site levelling, grading and disposal. The Revenue alleged that it was an activity that would be categorised as “site formation and clearance excavation and earthmoving and demolition” as contained in section 65(97a) of the Finance Act, 1994 and hence taxable under section 65(105)(zzza) of the Act. Further, the payment made through CENVAT credit was also rejected on the grounds that invoices on which the credit was availed were not issued to the Bhilai premises of the appellant. However, the credit availed was already reversed by the appellant. The period involved in the case was up to September, 2006.

HELD

a) The work order is a composite contract consisting of goods and services. The contract specified that earth work was to be done by using borrowed good earth and which had to be arranged by the contractor at its own cost. Relying upon Larsen & Toubro’s case 2015-TIOL-187-SC-ST, it was observed that in that case a distinction was drawn between service contracts simplicitor and composite works contracts which would involve both services and goods. It was held in that case that it was a composite contract involving both goods and services as the work order so specified and hence, the service performed was a works contract and not one of “site formation” service. However, only after 1st June, 2007, this service was subjected to service tax. Hence prior to this date, no service tax was payable.

b) As regards availment of CENVAT credit, it was held that since the order finds that no service tax was liable to be paid prior to 1st June, 2007, the appellant cannot avail CENVAT credit. However, interest was not chargeable as the credit was already reversed by the appellant. Thus, penalty and interest were also set aside.

Goods and Services Tax

I. SUPREME COURT

26. VVF India Ltd. vs. State of Maharashtra
2023 (72) GSTL 444 (S.C.)
Date of order: 3rd December, 2021

Amount paid under protest before passing of assessment order can be adjusted against amount of mandatory pre-deposit for filing an appeal as per section 26(6A) of MVAT Act, 2002.

FACTS

The petitioner was issued a SCN notice demanding payment of tax along with interest. It submitted a reply contesting the said demand. During the course of personal hearing, an amount was deposited comprising of tax and interest under protest. Later, an assessment order was passed by respondent imposing tax along with penalty after adjusting the amount paid under protest. The petitioner filed an appeal against the order of assessment which was rejected by the appellate authority on the ground that payment made under protest could not be considered towards mandatory pre-deposit as per section 26(6A) of MVAT Act, 2002. Further, the Hon’ble High Court also dismissed the petition contending that petitioner was duty bound to deposit 10 per cent of total tax liability after adjusting the amount already paid under protest, prior to the said order. Being aggrieved, petitioner preferred this petition before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court held that section 26(6A) of MVAT Act, 2002 does not specifically exclude amount deposited under protest for calculation of mandatory pre deposit. Also, taxing statute should be strictly construed as it stands, by adopting the plain and grammatical meaning of the words used which was deviated by the Hon’ble High Court. The appeal was allowed to be restored, subject to depositing 10 per cent of tax disputed amount by the petitioner. The petition was allowed in favor of the petitioner.

II. HIGH COURT

27. Brij Mohan Mangla vs. Union of India
2023 (72) G.S.T.L. 511 (Del.)
Date of order: 23rd February, 2023

Refund cannot be withheld by the department merely because it has decided to file an appeal against order granting refund passed by the appellate authority.

FACTS

The petitioner had filed a refund claim of accumulated ITC. Thereafter, SCN was issued stating why the claimed refund should not be rejected due to non-existence of premises on physical verification and cancellation of GSTIN registration. The petitioner’s explanation was not accepted since he was no longer a registered person. Subsequently, an order rejecting refund claim was passed by respondent. Further, an appeal was filed by the petitioner against order rejecting refund and the same was decided in favor of petitioner by Appellate Authority since it was registered at the time of application of refund. However, the respondent did not process the petitioner’s claim for refund on the grounds that it was decided that an appeal was to be filed against the order passed by the Appellate Authority. Aggrieved by the same, the petitioner preferred this petition before Hon’ble High Court.

HELD

It was held that the Respondent cannot refuse to follow the order granting a refund passed by the Appellate Authority even if department intended to file an appeal. It would debilitate the rule of law if respondents were permitted to withhold implementation of orders passed by the authority. The Respondent was directed to process the petitioner’s claim for refund along with interest and petition was allowed.

28 Y.B. Constructions Pvt Ltd vs Union Of India
2023 (72) G.S.T.L. 332 (Ori.)
Date of order: 22nd February, 2023

Rectification of error while filing GSTR -1 after the time limit was allowed since tax was already deposited with the Government and recipient was entitled to ITC.

FACTS

The petitioner had wrongly shown supplies under B2C instead of B2B while filing outward supply return in GSTR-1 for a period of two years. As a result, recipient was not able to avail ITC. This error was noticed subsequently after the time limit for rectification of returns filed had passed. Thereafter, the petitioner requested the respondent to permit correction in GSTR-1 forms but the same was denied by the respondent stating that deadline for rectification of forms was over and hence permission for the same could not be granted to the petitioner. Being aggrieved by such denial, this petition was filed before Hon’ble High Court.

HELD

Hon’ble High Court relied upon the decision made in the M/s Sun Dye Chem. vs. Assistant Commissioner (ST) [2021 (44) G.S.T.L. 358 (Mad.)] case wherein the petitioner was permitted to file the corrected form. Further, it was held that allowing the petitioner to rectify the mistake would not result in any loss to the respondent, as there was no escapement of tax. The petitioner was thus allowed to resubmit the corrected GSTR-1 manually to respondent and enable their uploading on the GST portal. Consequently, a petition was disposed of in favor of the petitioner.

29 Siddharth Associates vs. State Tax Officer, Ghatak 103 (Gandhidham)
2023 (72) GSTL 299 (Guj.)
Date of order: 11th January, 2023

Registration cancelled by passing a non-speaking order is violative of principle of natural justice, it ought to be restored.

FACTS

The petitioner was a registered person engaged in the business of civil construction work. Registration of the petitioner was suspended by issuing SCN. Subsequently, an order cancelling his registration was passed. Thereafter, an appeal was filed 75 days after expiry of time of three months and hence it got rejected on the grounds of time bar. Hence, no opportunity was granted for personal hearing. Being aggrieved by the order cancelling the registration and not mentioning the reason for such an order, the petitioner preferred a writ petition before this Hon’ble High Court.

HELD

The hon’ble High Court squarely relied upon the decision in Aggarwal Dyeing & Printing Works (Supra) vs. State of Gujarat [2022 (66) GSTL 348 (Guj.)] wherein it was held that it is a settled law that assigning reasons in speaking order are heart and soul of the order and non-communication of the same itself amounts to denial of reasonable opportunity of being heard which results in miscarriage of justice. Accordingly, order cancelling the registration was set aside with a direction to issue fresh notice and pass a speaking order after providing opportunity of personal hearing.

30 Marjit Basumatary vs. The Union of India and Others (Gauhati High Court)
Date of order:7th June, 2023 in WP(C)/2620/2023

“Reasons to believe” examined in lease mining.

FACTS

Petitioner, a works contractor of construction of roads and bridges is also engaged in undertaking mining of sand, stone etc. under license from the forest department of the State of Assam Government against payment of royalty. Consequent upon investigation by DGGI under section 67 of CGST Act triggered based on alleged intelligence for GST payable under reverse charge mechanism on the royalty, audit was conducted under section 65 of the CGST Act and issued a Show Cause Notice proposing demand of GST on various grounds including mismatch of credit, delayed filing of returns, etc. The petitioner challenged legality and validity of the Show Cause Notice as well as the letter issued by DGGI’s office at Gauhati.

The petitioner produced books of account and records before the authorities and submitted that the issue of GST on royalty and/or mining lease was the subject matter of decision by a larger bench of Supreme Court of India and in support, they cited inter alia, the order dated 19th September, 2018 of Gujarat High Court in the case of Gujmin Industry Association vs. UOI R / Special Civil Appl. No.8167/2017 and others and order dated 04th October, 2021 passed by the Supreme Court of India in the case of Lakhwinder Singh vs. UOI W.P.(C) 1076/2021. However, according to the petitioner they did not receive the relied upon documents which they had demanded from the department and hence they were prevented from making exhaustive reply to the Show Cause Notice. Per revenue, the relied upon documents are listed in the Show Cause Notice annexure and the department is not liable to disclose the material giving them “reasons to believe”.

HELD

The department is directed to produce record relating to the Show Cause Notice for the perusal of the Court and copies would not be provided to the petitioner and as an interim measure, the department was directed to defer the proceeding.

31. Instakart Services (P.) Ltd. vs. Sales Tax Officer
[2023] 151 taxmann.com 192 (Delhi)
Date of order: 31st May, 2023

If there is an inadvertent or typographical error that has crept in any returns, the taxpayer cannot be mulcted with the tax liability in excess of what is due and payable.

FACTS

The petitioner had inadvertently typed its CGST liability in GSTR-3B of September 2017 as Rs.32,33,36,855 instead of Rs.3,23,36,855. It discharged its liability by using the available balance of Input Tax Credit (ITC) in the electronic credit register; an ITC of Rs.29,10,00,000 was used for discharging the said liability, which the petitioner claims as an apparent error. The petitioner immediately reversed the said ITC that was used for discharging the overstated liability and reported the same in its returns filed for the month of October, 2017. Thereafter, the petitioner filed its GSTR-1 for the month of September, 2017 and correctly stated the tax liability at Rs. 3,23,36,855 instead of Rs.32,33,36,855 as reported earlier. Notwithstanding the fact that the petitioner had rectified the apparent mistake, the department issued a letter informing the petitioner as to the mismatch in the FORM GSTR-2A and FORM GSTR-3B for the relevant financial year. The petitioner clarified the same, however, it appears that the said clarification was not considered and SCN was issued to the petitioner.

HELD

The Hon’ble Court held that if there is an inadvertent or typographical error that has crept in any returns, the taxpayer cannot be mulcted with the tax liability in excess of what is due and payable. It is apparent that the explanation provided by the petitioner has not been considered. The Court, therefore, directed the concerned authority to pass an appropriate order pursuant to the show cause notice considering the petitioner’s responses to the show cause notice.

32 Samyak Metals (P.) Ltd vs. UOI[2023]
151 taxmann.com 225 (Punjab & Haryana)
Date of order: 24th May, 2023

When the assessee makes the payment through DRC-03 during the investigation and the department neither issued acknowledgment in DRC-04 nor the show cause notice under sections 73 or 74 of the CGST Act, even after the significant lapse of time, the High Court directed the department to refund the said amount with interest.

FACTS

The business premises of the petitioner were searched. During the course of the search, the department examined the purchase ledger of one party, and the petitioner was forced to deposit tax against the Input Tax Credit claimed by it on the purchases made from the said party along with interest and penalty vide DRC-03. The grievance of the petitioner was that even after depositing the said amount, no GST DRC-04 has been issued by the department and amounts have been recovered from them without passing any adjudicating order or following any procedure under sections 73/74 of the Act.

HELD

The Hon’ble Court observed that the petitioner has deposited the tax in terms of provisions of section 74(5) of the CGST Act. As per Rule 142(2) of the CGST Rules, when a payment is made in FORM GST DRC-03, the proper officer has to issue acknowledgment, accepting the payment made by the said person in FORM GST DRC-04. The Court observed that although payment was made long back, no DRC-04 or notice under section 74(1) was issued to the petitioner. The Court also observed that the department has faulted with the Government’s instruction No.01/2022-23 dated 25th May, 2022 in which it is clarified that there is no bar on the taxpayers for voluntarily making the payments based on ascertainment of their liability on non-payment/short payment of taxes before or at any stage of such proceedings. Since in the present case, the officer did not follow the provisions of Rule 142(2) of the CGST Act nor did he issue any notice under section 74 (1) of the CGST Act, the Court directed the department to return the amount in question to the petitioner along with simple interest at the rate of 6 per cent per annum from the date of deposit till the payment is made

33 Naarjuna Agro Chemicals (P.) Ltd vs. State of UP
[2023] 151 taxmann.com 112 (Allahabad)
Date of order: 20th April, 2023

The scrutiny proceedings of return as well as proceeding under section 74 are two separate and distinct exigencies and issuance of notice under section 61(3), therefore, cannot be construed as a condition precedent to initiation of action under section 74 of the Act.

FACTS

The issue raised before the Court was whether the department is enjoined to issue a notice under section 61(3) of the CGST Act once returns have been submitted by the assessee before initiating action under section 74 of the Act.

HELD

The Hon’ble Court held that section 61 regulates the scrutiny of returns. In the process of scrutiny of such returns, the proper officer has been vested the jurisdiction to examine the return. In case any discrepancies are noticed therein, the proper officer can intimate such discrepancy to the assessee with the object of conferring an opportunity upon the assessee to rectify such discrepancy. The exigency, which is dealt with under section 61 is, therefore, quite distinct and is confined to the scrutiny of returns. In case where no discrepancies in the returns are found but at the later stage of the proceedings the department concludes that tax is not paid properly, it is permissible for the department to take recourse to section 73 or 74 directly. The argument that unless deficiency in return is pointed out to the assessee and an opportunity is given to rectify such deficiency, that the department can proceed under section 74 is not borne out from the statutory scheme and the argument in that regard therefore, must fail.

34 Electro Steel Corporation vs. State of Jharkhand
[2023] 150 taxmann.com 407 (Jharkhand)
Date of order: 31st March, 2023

Whether the assessee’s registration is cancelled on the grounds of excess ITC availment in GSTR-3B as compared to GSTR2A/2B as the petitioner’s vendor did not file GSTR-1/GSTR-3B, the department was directed to verify the facts and revoke the cancellation if no fault lies with the assessee.

FACTS

The petitioner was issued a show cause notice alleging wrongful availment of ITC in respect of inward supplies against invoices raised by one party who had not filed GSTR-1 nor submitted GSTR-3B. The petitioner’s registration was also cancelled on the grounds that the petitioner was availing excess ITC in GSTR-3B than ITC accrued in GSTR2A/2B in violation of section 16 of the JGST Act for the period 01st June, 2020 to 31st October, 2020. The petitioner challenged the said cancellation contending that cancellation on the said grounds cannot be done as the said grounds was introduced by the amendment to Rule 21 which came into force from 22nd December, 2020 i.e. prospectively. The party who did not file GST returns was also made the respondent in this petition.

HELD

After going through the affidavit of the said party, the Hon’ble Court observed that although the said party completed the work, the petitioner did not make the full payment to it and there was a billing dispute between them. The Court stated that the gist of the stand of the respective parties noted herein above creates an impression that taxes were paid by the petitioner purchaser to the said party against the invoices raised in respect of which the petitioner is making a claim for rightful availment of ITC for the said tax period but whether the entire payments were made against those invoices, is something which needs verification at the end of the respondent authorities. The Court therefore held that such a verification be done by the authorities and in case the fault lay with the said party in not depositing taxes, it would be open for authorities to take the decision for revocation of cancellation of registration of the petitioner subject to such conditions it deems fit.

From Published Accounts

COMPILERS’ NOTE
Transactions between Related Parties (RP) and whether the same are at “Arms’ Length” have always been a contentious issue for regulators. Of late, identification of such RP and Related Party Transactions (RPT) has attained a high level of regulatory scrutiny by SEBI, Income Tax and Goods and Service Tax authorities. Auditors have also started closely looking at the identification process of RP and disclosure of RPT by companies. Given below is a Qualified Opinion for transactions with certain parties for which sufficient and appropriate evidence was not available to the satisfaction of the auditors to confirm whether these parties were RP and whether the disclosures for the RPT was as per requirements.

ADANI PORTS AND SPECIAL ECONOMIC ZONE LTD

From Independent Auditor’s Report on audit of annual standalone financial results and review of Quarterly financial results for the year and quarter ended 31st March, 2023

QUALIFIED OPINION AND CONCLUSION

We have (a) audited the Standalone Financial Results for the year ended March 31, 2023 and (b) reviewed the Standalone Financial Results for the quarter ended March 31, 2023 (refer ‘Other Matters’ section below) which were subject to limited review by us, both included in the accompanying “Statement of Standalone Financial Results for the Quarter and Year Ended March 31, 2023 of Adani Ports And Special Economic Zone Limited (“the Company”) being submitted by the Company pursuant to the requirements of Regulation 33 and Regulation 52 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“the Listing Regulations”).

(a) QUALIFIED OPINION ON ANNUAL STANDALONE FINANCIAL RESULTS

In our opinion and to the best of our information and according to the explanations given to us and except for the possible effects of the matter described in Basis for Qualified Opinion / Conclusion section below, the Standalone Financial Results for the year ended March 31, 2023:

is presented in accordance with the requirements of Regulation 33, Regulation 52 and Regulation 54 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended; and

gives a true and fair view in conformity with the recognition and measurement principles laid down in the Indian Accounting Standards and other accounting principles generally accepted in India of the net loss and total comprehensive loss and other financial information of the Company for the year then ended.

(b) QUALIFIED CONCLUSION ON UNAUDITED STANDALONE FINANCIAL RESULTS FOR THE QUARTER ENDED 31ST MARCH, 2023

With respect to the Standalone Financial Results for the quarter ended March 31, 2023, based on our review conducted as stated in paragraph (b) of Auditor’s Responsibilities section below and except for the possible effects of the matter described in Basis for Qualified Opinion / Conclusion section below, nothing has come to our attention that causes us to believe that the Standalone Financial Results for the quarter ended March 31, 2023, has not been prepared in accordance with the recognition and measurement principles laid down in the Indian Accounting Standards and other accounting principles generally accepted in India and has not disclosed the information required to be disclosed in terms of Regulation 33, Regulation 52 and Regulation 54 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended, including the manner in which it is to be disclosed, or that it contains any material misstatement.

BASIS FOR QUALIFIED OPINION / CONCLUSION

The Company has entered into Engineering, Procurement and Construction (EPC) purchase contracts substantially with a fellow subsidiary (contractor) of a party identified in the allegations made in the Short Seller Report. As at 31st March, 2023, a net balance of Rs. 2,457.05 crores is recoverable from this contractor, of which Rs.713.63 crores relate to security deposits paid to the contractor and Rs. 1,501.50 crores in respect of capital advances. The security deposits carry an interest of approximately 8 per cent per annum and are refundable by the contractor either on completion or termination of the project against which the security deposit was given by the Company. Security deposits totaling Rs.713.63 crores have been given prior to 1st April, 2022, of which security deposits amounting to Rs.253.63 crores relate to projects which have not commenced as on 31st March, 2023. The Company has represented to us that the contractor is not a related party.

Additionally, there were financing transactions (including equity) with/by certain other parties identified in the allegations made in the Short Seller Report, which the Company has represented to us were not related parties. As on 31st March, 2023, all receivable and payable amounts were settled including interest and there were no outstanding balances.

Subsequent to the year-end, the Company re-negotiated the terms of sale of its container terminal under construction in Myanmar (held through a subsidiary audited by other auditors) with Solar Energy Ltd, a company incorporated in Anguilla. The Company has represented to us that the buyer is not a related party. The carrying amount of the assets (classified as held for sale) was Rs. 1,752.92 crores. The sale consideration was revised from Rs. 2,015 crores (USD 260 million) to Rs. 246.51 crores (USD 30 million), which has been received, and an impairment loss of Rs. 1,558.16 crores has been recognised as an expense in the Profit & Loss Account.

The Company has represented to us that there is no effect of the allegations made in the Short Seller Report on the Statement based on their evaluation and after consideration of a memorandum prepared by an external law firm on the responses to the allegations in the Short Seller Report issued by the Adani group. The Company did not consider it necessary to have an independent external examination of these allegations because of their evaluation and the ongoing investigation by the Securities and Exchange Board of India as directed by the Hon’ble Supreme Court. The evaluation performed by the Company, as stated in Note 11 to the Statement, does not constitute sufficient appropriate audit evidence for the purposes of our audit. In the absence of an independent external examination by the Company and pending completion of investigation, including matters referred to in the Report of the Expert Committee constituted by the Hon’ble Supreme Court of India as described in Note 11 to the Statement, by the Securities and Exchange Board of India of these allegations, and in respect of the sale of asset described in the immediately preceding paragraph, we are unable to comment whether these transactions or any other transactions may result in possible adjustments and/or disclosures in the Statement in respect of related parties, and whether the Company should have complied with the applicable laws and regulations.

We conducted our audit in accordance with the Standards on Auditing (“SAs”) specified under section 143(10) of the Companies Act, 2013 (“the Act”). Our responsibilities under those Standards are further described in paragraph (a) of Auditor’s Responsibilities section below. We are independent of the Company in accordance with the Code of Ethics issued by the Institute of Chartered Accountants of India (“the ICAI”) together with the ethical requirements that are relevant to our audit of the Standalone Financial Results for the year ended March 31, 2023 under the provisions of the Act and the Rules thereunder, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the ICAI’s Code of Ethics. Except for the matter described in the Basis for Qualified Opinion/Conclusion section above, we believe that the audit evidence obtained by us is sufficient and appropriate to provide a basis for our qualified audit opinion.

FROM NOTES BELOW STANDALONE FINANCIAL RESULTS FOR THE QUARTER AND YEAR ENDED 31ST MARCH, 2023 (EXTRACTS)

11. During the quarter ended March 31, 2023, a short seller report was published in which certain allegations were made involving Adani Group Companies, including the Company and its subsidiaries. A writ petition was filed in the matter with the Hon’ble Supreme Court (“SC”), and during hearing the Securities and Exchange Board of India (“SEBI”) has represented to the SC that it is investigating the allegations made in the short seller report for any violations of the various SEBI Regulations. The SC had constituted an expert committee for assessment of the extant regulatory framework and share recommendations. The SC had constituted an expert committee for assessment of the extant of regulatory framework including volatility assessment on Adani stocks, investigate whether there have been contraventions / regulatory failures on minimum shareholding and related party transactions pertaining to Adani group.

The expert committee, post the reporting date, issued its report on the given remit, wherein no regulatory failures are observed, while SEBI continues its investigations.

Separately, to uphold the principles of good governance, Adani Group has undertaken review of transactions (including those for the Company and its subsidiaries) with parties referred in the short seller’s report including relationships amongst other matters and obtained opinions from independent law firms. These opinions confirm that the Company and its subsidiaries are in compliance with the requirements of applicable laws and regulations. Considering the matter is sub-judice at SC, no additional action is considered appropriate and pending outcome of the SEBI investigations as mentioned above, financial results do not carry any adjustments.

14. The company has been working with the contractor for its capital projects over a decade. The payment terms have been negotiated to secure contractor capacity, reduced cost / overruns and improved operational efficiency of the projects. The contractor has successfully delivered the projects without defaults and with highest operating credentials. The net balance outstanding on such contracts as on reporting date stood at Rs. 2,457.05 crore, which includes purchase contracts worth Rs. 1,501.50 crore and security deposits of’ Rs. 713.63 crore carrying interest @ 8% p.a. and other receivables of’ Rs. 241.92 crore. The security deposits approximate to about 20% of the cost of projects under execution. Of the security deposits, deposits for which projects are in progress amount Rs. 460 crore and the balance are for projects under engineering and design stage. The security deposits are refundable either on completion or termination of the project against which the said security deposit was given and in every instance the deposits were returned when due along with interest. The company has also obtained an independent opinion from a reputed law firm that the contractor is an unrelated party.

Glimpses of Supreme Court Rulings

Tax deducted at source (TDS) – Belated payment of TDS – Section 271C(1)(a) is applicable in case of a failure on the part of the concerned person / Assessee to “deduct” the whole of any part of the tax as required by or under the provisions of Chapter XVII-B and failure to pay the whole or any part of the tax is dealt by Section 271C(1)(b) but it does not speak about belated remittance of TDS – No penalty is leviable on belated remittance of TDS – In such cases, prosecution can be launched in appropriate cases in terms of Section 276B.

40. US Technologies International Pvt Ltd vs. CIT
(2023) 453 ITR 644 (SC)

From 1st January, 2002 to February, 2003, the Appellant – Assessee, engaged in a software development business at Techno Park, Trivandrum which employed about 700 employees, deducted tax at source (TDS) in respect of salaries, contract payments, etc., totalling Rs.1,10,41,898 for A.Y. 2003-04. In March, the Assessee remitted part of the TDS being R38,94,687 and balance of Rs.71,47,211 was remitted later. Thus, the period of delay ranged from 05 days to 10 months.

On 10th March, 2003, a survey conducted by the Revenue at Assessee’s premises noted that TDS was not deposited within the prescribed dates under Income Tax Rules (IT Rules).

On 2nd June, 2003, Income Tax Officer (ITO) vide order under section 201(1A) of the Act levied penal interest of Rs. 4,97,920 for the period of delay in remittance of TDS.

On 9th October, 2003, the ACIT issued a show cause notice proposing to levy penalty under section 271C of the amount equal to TDS. The Assessee replied to the said show cause notice vide reply dated 28th October, 2003.

On 6th November, 2003, another order under section 201(1A) was passed levying the penal interest of Rs. 22,015.  On 10th November, 2003, the ACIT vide order under section 271C levied a penalty of Rs. 1,10,41,898 equivalent to the amount of TDS deducted for A.Y. 2003-04. That order of the ACIT levying the penalty under section 271C came to be confirmed by the High Court. The High Court vide impugned judgment and order dismissed the appeal preferred by the Assessee by holding that failure to deduct/remit the TDS would attract penalty under section 271C of the Act, 1961.

Further, by order(s) dated 26th September, 2013, the ACIT by way of orders under section 271C levied penalty equivalent to the amount of TDS deducted for A.Ys. 2010-11, 2011-12 and 2012-13 on the grounds that there was no good and sufficient reason for not levying the penalty.

The CIT (Appeals) dismissed the Assessees’ appeals. By common order dated 1st June, 2016, the ITAT allowed the Assessees’ appeals by holding that imposition of penalty under section 271C was unjustified and reasonable causes were established by the Assessee for remitting the TDS belatedly. By the common judgment and order the High Court allowed the Revenue’s appeals relying upon its earlier judgment.

According to the Supreme Court, the questions posed for its consideration were of belated remittance of the TDS after deducting the TDS, whether such an Assessee is liable to pay penalty under section 271C of the Act, 1961? And, as to what is the meaning and scope of the words “fails to deduct” occurring in Section 271C(1)(a) and whether an Assessee who caused delay in remittance of TDS deducted by him, can be said a person who “fails to deduct TDS”?

The Supreme Court noted that all these cases were with respect to the belated remittance of the TDS though deducted by the Assessee.

According to the Supreme Court, this was, therefore, a case of belated remittance of the TDS though deducted by the Assessee and not a case of non-deduction of TDS at all.

The Supreme Court observed that as per Section 271C(1)(a), if any person fails to deduct the whole or any part of the tax as required by or under the provisions of Chapter XVIIB then such a person shall be liable to pay by way of penalty a sum equal to the amount of tax which such person failed to deduct or pay as aforesaid.

So far as failure to pay the whole or any part of the tax is concerned, the same would be with respect to Section 271C(1)(b), which was also not the case here.

Therefore, Section 271C(1)(a) is applicable in case of a failure on the part of the concerned person/Assessee to “deduct” the whole of any part of the tax as required by or under the provisions of Chapter XVII-B. The words used in Section 271C(1)(a) are very clear and the relevant words used are “fails to deduct.” It does not speak about belated remittance of the TDS.

Therefore, on plain reading of Section 271C of the Act, 1961, the Supreme Court held that no penalty is leviable on belated remittance of the TDS after the same is deducted by the Assessee.

The Supreme Court observed that wherever the Parliament wanted to have the consequences of non-payment and/or belated remittance/payment of the TDS, the Parliament/Legislature has provided the same like in Section 201(1A) and Section 276B of the Act.

So far as the reliance placed upon the CBDT’s Circular No. 551 dated 23rd January, 1998 by Revenue, the Supreme Court observed that the said circular as such favoured the Assessee. According to the Supreme Court, on fair reading of said CBDT’s circular, it talks about the levy of penalty on failure to deduct tax at source. It also takes note of the fact that if there is any delay in remitting the tax, it will attract payment of interest under section 201(1A) of the Act and because of the gravity of the mischief involved, it may involve prosecution proceedings as well, under section 276B of the Act. If there is any omission to deduct the tax at source, it may lead to loss of Revenue and hence remedial measures have been provided by incorporating the provision to ensure that tax liability to the said extent would stand shifted to the shoulders of the party who failed to effect deduction, in the form of penalty. On deduction of tax, if there is delay in remitting the amount to Revenue, it has to be satisfied with interest as payable under section 201(1A) of the Act, besides the liability to face the prosecution proceedings, if launched in appropriate cases, in terms of Section 276B of the Act. According to the Supreme Court, even the CBDT has taken note of the fact that no penalty is envisaged under section 271C for belated remittance/payment/deposit of the TDS.

The Supreme Court quashed and set aside the order of the High Court and the question of law on interpretation of Section 271C of the Income Tax Act was answered in favour of the Assessee and against the Revenue. It was specifically observed and held that on mere belated remitting the TDS after deducting the same by the concerned person/Assessee, no penalty shall be leviable under section 271C of the Income Tax Act.

SOCIETY NEWS

CAs PERFORM ‘Zumba’ exercises

The BCAS decided on a unique theme for the monthly HRD Study Circle meeting with the idea of giving members a break from their strenuous routine of managing office and work from home. A ‘Zumba’ class was the choice. This is an exercise fitness programme that combines international music with dance moves. Zumba routines incorporate interval training – alternating fast and slow rhythms to help cardiovascular fitness.

Organised on 8th December, 2020, the event featured faculty and trainer Mr. Burzin Engineer, who is a professional dancer and a fitness coach with over a decade’s experience. He started the class with light warm-up exercises to get everybody ready for a fun workout. The Zumba moves he picked were easy and the movements had a flow which the 50-plus participants thoroughly enjoyed. Amongst the participants were members of the Committee and BCAS members from Mumbai, Pune, Ahmedabad, Indore, Chennai, Delhi, Kolkata, Jodhpur and even Chicago.

Regular physical exercise / activity keeps the body fit and the mind refreshed. It was motivating to see some of the senior members participate with great enthusiasm. This session also offered some quality family time to members. Many children were seen enjoying exercising and moving to the beats of the music along with their parents.

‘RESIDENTIAL REFRESHER COURSE’

One of the most awaited events of the year, the ‘Youth Residential Refresher Course’, organised by the HRD Committee of the BCAS, saw its 8th run from 16th to 18th April, 2021.

The event was held under the aegis of the BCAS with support from President CA Suhas Paranjpe, HRD Committee Chairman CA Govind Goyal, mentor CA Naushad Panjwani and HRD Convener CA Anand Kothari. On account of the second wave of Covid-19, the event was conducted online but over 100 participants joined from 24 cities all over India.

A vast range of topics was covered over 12 sessions extending to 16 hours over a three-day virtual refresher course.

Going by the YRCC theme of ‘Re-Align | Re-Energize | Re-Connect’, the event had thought-provoking sessions by some excellent international guest speakers who gave meaningful and fascinating insights into the changing work culture, the new emerging technologies, the intricacies of the professional world and how one must adapt to them.

The technical sessions were followed by networking sessions wherein some special online networking activities were organised for the participants.

Part I – Speaker Sessions

The first day covered interesting topics ranging from ‘Journey of an Entrepreneur’, ‘Professional Social Responsibility – A Tool for Networking’ to ‘Why Indian Professionals are a Darling of Global Corporates’. An interesting fireside chat with young ‘technopreneurs’  came with the key takeaway of understanding one’s strengths and weaknesses and then tackling all obstacles on the road to achieving our dreams.

In the next session, Mr. Shailesh Haribhakti shared insights about life experiences, the importance of reading books and giving back to the society as a professional. The final topic had the speaker sharing success stories of Indian professionals abroad and their attitude and approach towards work, their talents, and the ‘Do’s and Don’ts’ that we should adopt in our professional journey.

The second day began with an early morning session on ‘Work Culture: Friendships at Workplace’. The speaker dwelt on the necessity of maintaining cordial and friendly relations at the workplace and threw light on where to draw the line. She answered multiple questions on work-life balance. The following session was a dialogue ‘Acing Appraisals’ with industry veterans where the participants learned the importance of timely appraisals and the key elements to use in their next appraisal meet.

Later during the day, there was an engaging session on ‘Building Social Media Presence within the ICAI Guidelines’. ‘Social Media’ is a wide spectrum of networking opportunities. The speaker guided the participants on the ethics to be followed when building a social media presence and seeking new opportunities. (What, how, when and related questions arising in our everyday life.)

The next panel on ‘Emerging Trends in the Financial World’ brought new thoughts on how blockchain, cryptocurrency and Artificial Intelligence will revolutionise the practice around us. Their impact on our work culture and strategies and our professional approach were also mentioned. The day ended with some fun, relaxation and rejuvenation for the family through a stand-up comedy session.

The final day at YRRC began with the interesting and relevant topic, ‘Kya WFH mein koi locha hai?’. It was one of the most relatable sessions for the participants, dealing with the importance of mental health in a world of increasing technology and diminishing human interface. The next topic, ‘Upgrading to a Global Outlook and Approach’, made the participants ponder over whether they need to change their traditional approach to meet global standards. If yes, then to what level, extent and with what mindset, was highlighted by the speaker. This was followed by an interesting panel discussion by the YRRC conveners and coordinators about their intriguing journey and success stories providing guidance on how to build a successful career while reminiscing old memories.

The final session could not have been more perfect. There was an excellent motivating and persuasive address by ICAI President CA Nihar Jambusaria to the youth, enlightening them about different aspects of the profession.

Part II – Networking Sessions

All the participants belonging to different areas and regions had connected over Zoom meetings to be part of our ‘Networking sessions’ which were held after the speaker sessions ended. The participants were divided into six different teams to compete over the team-building activities organised by the YRRC team along with another fraternity member, CA Hrudyesh Pankhania.

To begin with, the participants were given multiple group tasks to perform and were then required to send the screenshot of the tasks performed. This gave them a chance to display their swiftness and coordination by sending their screenshots at the earliest.

One of the most creative activities given was composing your own song or modifying an existing song to accommodate the names of your team members in the lyrics. Not just that, the participants were even required to give a live performance. The final results were mind-blowing with fantastic innovation and compositions by the teams.

The participants also got a chance to display their artistic skills when they had to virtually draw a painting together (team spirit) and make it as realistic as possible. And how about shuffling the team members and asking them to choose their favourite celebrities (from the list given) whom they would save from a fire, and also come up with some hilarious reasons for the same? The choices had to be as unique as possible, because, after all, success lies in being different.

The final event of the ‘Networking Session’ was the ‘Networking People’s Tambola’ which required all the participants to network within cross-teams and make Tambola tickets. Of course, the best part was creating ‘Memes’ – for the YRCC, of the YRCC and by the YRCC. Kudos to all the participants who came up with some splendid and creative memes which left each and every one of them in splits.

Our Wall of Fame – Our Valued Speakers


Behind the Scenes – The YRRC Team

 

YRRC Participants at the Networking Sessions

 

ITF STUDY CIRCLE MEETING

The International Taxation Committee conducted a virtual meeting on ‘Residence of Individual under Income-tax Act – Recap on interpretation issues dealt by Courts and impact of new amendments’ on 24th May. It was led by Group Leader CA Hardik Mehta who explained the concepts with respect to residence of an Individual under the Indian Income-tax Act along with recent developments and interpretations made by Courts.

Determining an Individual’s residence status is one of the most important factors based on which taxability is decided. In view of this, the Group Leader walked the audience through the Income-tax Act, its amendments and various court rulings in relation to the residence of an Individual. With the help of several simplified illustrations, the speakers lucidly explained the various concepts. They also dealt with and resolved queries raised by the participants. The meeting was interactive and the participants benefited enormously from the discussions and insights provided.

A SWOT ANALYSIS OF CHINA

The International Economics Study Group held its meeting on 9th June to take up a ‘SWOT Analysis of China in the context of likely Cold War II’. CAs Harshad Shah and Deepak Karanth led the discussion and presented their views on the subject.

The participating experts warned that the two world powers were entering dangerous territory. Tensions are mounting by the day between the United States and China, leading to possibilities of a new Cold War. It resembles the US-Soviet ‘Cold War’ in certain respects and the group analysed this through a SWOT analysis. They said that what’s at stake is the future of the 21st century global order.

China’s strengths are economics, military firepower (it is the third largest defence power in the world), its own Google, Facebook, WhatsApp, Amazon – and thus technologically it is not dependent on the US.

China’s opportunities are a huge population with rising per capita income, a huge consumer base, lower dependence on exports, healthcare and education.

China’s weaknesses are dwindling cheap labour, demographic crisis (birthrate @ 1.3), Communism, governance issues, suppression of Uyghur Muslims, lack of innovation and basic research, a ‘Hungry for Money’ attitude, its military’s lack of actual war experience for 42 years, the brain-drain problem, extreme rural poverty, few English-speaking people and a huge pollution problem.

China’s threats are no protection of IPRs and blatant violations, Taiwan becoming the ‘Berlin’ of the Sino-American Cold War, China’s serious border disputes with most of its neighbours, South China Sea dispute (this can spark the next global conflict), looming debt crisis, not all of China’s investment decisions having been successful, China could be facing a food crisis and also a water crisis, possibility of civil war, a foreign policy that is in the gutter and its post-pandemic reputation crisis.

Later, CA Milan Sangani presented his views on the ‘State of the Indian Economy in relation to the second wave of Covid-19’. Compared to the GDP hit in F.Y. 2021, the impact of the second wave of lockdowns is expected to be less. And there was light at the end of the tunnel as the number of new cases was now lower than the number of recoveries. Vaccinations needed ramping up and real interest rates had turned negative, hurting fixed income investors with increasing inflation. He noted that historically, global non-financial disruptions like pandemics and World Wars are followed by periods of economic boom.

Learning Events at BCAS

1. Direct Tax Laws Study Circle meeting on recent SC Rulings

The Direct Tax Laws Committee of the Society organised a virtual meeting on 9th June, 2023 to discuss the recent Supreme Court Rulings. Chaired by Speaker, Natwar G. Thakrar, the meeting discussed the following rulings:

i.    US Technology Intl Pvt Ltd vs. CIT [2023]

ii.    CIT vs. Mansukh Dyeing & Printing Mills [2021]

iii.    Singapore Airlines Ltd vs. CIT [2022]

iv.    New Noble Education Society vs. CIT & Ors [2022]

The speaker explained the rulings to the attendees in a simplistic yet detailed manner. He began the explanation with Facts of the Case followed by Issue before the Supreme Court and concluded by ruling of the Apex Court.

The speaker then took up questions from the attendees wherein possible arguments to the rulings, other judicial precedents were discussed. The session concluded with a vote of thanks.

2. Seminar on ESG by the Internal Audit Commitee

A full-day ESG seminar was conducted by the BCAS Internal Audit Committee on 9th June, 2023. Titled ‘Decoding ESG through an Internal Auditor’s lens, the meeting was organised in a hybrid mode by the Internal Audit Committee of the Society. It aimed to enable the current and future generation of internal auditors to capitalise on the next-wave of ESG. A total of 87 participants attended this seminar, with a good mix of experienced professionals, new CAs and young aspiring CA students.

The seminar featured a unique blend of speakers from the industry, practice and consultancy who showcased their in-depth knowledge and insights on the subject. Each session was thoughtfully curated to include practical illustrations, real-life case scenarios and interactive communication with all participants. The seminar covered the following key topics:

  •     ESG and the pivotal role of Internal auditors in today’s scenario

 

  •     Basic principles, challenges faced and reporting requirements under ESG framework in India

 

  •     Practical guide on driving and implementing the ESG agenda

 

  •     Adding value to ESG ecosystem as Internal auditors

The speakers at the seminar included CA Nawshir Mirza, CA Mukundan KV, Ms. Chaitanya Kommukuri, CA Abhay Mehta, CA Raj Mullick, CA Vijayalakshmi S, CA Ashutosh Pednekar

The seminar was very well received by all the participants as was evident from their enthusiastic participation during Q&A sessions.

3. Lecture Meeting on Succession Planning and Drafting of Wills

BCAS organised a lecture meeting on ‘Succession Planning and Drafting of Wills’ on 2nd June, 2023. The meeting was organised with an aim to serve the members residing in the western suburbs. It began with an insightful presentation by CA Anup Shah on the following important aspects of wills and succession planning:

  •     Scope of succession planning

 

  •     Assets to be consider

 

  •     Legal implications in case where a person dies intestate and what if he had a prepared a will under all personal law in general and Hindu Succession Act (HSA) in specific

 

  •     Daughter’s right under HSA – prior to and post 2005 amendments

 

  •     Creation, Partition and dissolution of HUF under HSA and under the Income Tax Act

 

  •     Estate planning options through-Trust, Wills and Joint nomination

 

  •     Effect of nomination for immovable property and shares

 

  •     Rights of Joint Holder vs. Nominee

 

  •     Wills – What is a will, Who can make, How to make a will, concept of beneficiary, administrator

 

  •     Some Myths about the Wills

 

  •     Registration of Wills and Probate

 

  •     Recent developments on the methodology of preparing the wills – Video will, digital will, social custom will, organ donation

 

  •     Tax implications on wills and inheritance

 

  •     Private trust

 

  •     Gift/ release deed/ revocation of gift

The speaker addressed the queries raised by the members. The meeting was attended by more than 125 participants.

4. Release of BCAS publication – FAQs on Charitable Trust

The eagerly-awaited BCAS publication – FAQ on Charitable Trust was launched at the lecture meeting held on 2nd June 2023 in Mumbai. Released under the Shailesh Kapadia Memorial Publication fund, the publicationn covers FAQs on various important topics under Bombay Public Trust Act, Direct Tax, Indirect Tax, FCRA and CSR.Drafted in the form of Frequently Asked Questions (FAQs), the publication helps readers find the information they need. The questions have been carefully selected from a wide range of topics to provide in-depth knowledge on each subject. Their answers have been written in simple and easy to understand language making it accessible to everyone regardless of their legal background. Besides the Charitable Trust, the publication is likely to benefit professionals like lawyers, chartered accountants and consultants who advise charitable trust on legal and regulatory compliances.

Conceptualised by Late CA Tushar Doctor, the publication is authored by CA (Dr) Gautam Shah covering the topic of direct tax and other laws, and CA Naresh Sheth on the topic of indirect tax. It is reviewed by CA Anil Sathe, CA Himanshu Kishnadwala, CA Sunil Gabhawala, CA Gautam Nayak and Mr Nasir Dadrawala.

5. TDS and TCS Provisions – A 360° Perspective

IMC Chamber of Commerce and Industry teamed up with the Bombay Chartered Accountants Society, and Chamber of Tax Consultants to organise a full day seminar on “TDS and TCS Provisions – a 360° Perspective” at its premises.Held on 2nd June, 2023, the inaugural session of the seminar was managed by Anant Singhania, President, IMC; CA Chirag Doshi, Vice President, BCAS; CA Parag Ved, President, Chamber of Tax Consultant with a welcome address by CA Rajan Vora, Chairman, Direct-tax Committee, IMC.

Hosted in a hybrid mode, the seminar was attended by more than 300 participants. Before initiating the sessions, Rajan Vora, Chairman, Direct Taxation Committee, IMC, highlighted the need to streamline and simplify the TDS and TCS provisions as well as the related compliances to enable Ease of Doing Business in the true sense.

The seminar also included an interactive session with the attendees to highlight key topics like Domestic TDS & TCS provisions, Penalty, Prosecution and Compounding procedures under TDS/ TCS regime, TDS from payments to non-residents, etc.

Sangam Shrivastava, erstwhile Pr. CCIT (IT & TP), West Zone delivered the keynote address where he explained that even after amendment to section 115A by FA 2023, benefit of lower rate as per DTAA will be available to taxpayer instead of 20 per cent. (SC+EC). He also emphasised on reducing of litigation and increase dialogue between taxpayer and tax department.

Brajesh Kumar Singh, CCIT (TDS), Mumbai urged professionals to act as guide to taxpayers to undertake TDS compliances. He advised them to caution taxpayer that delay in TDS payment is tracked centrally and flagged by system thereby leaving no scope for department to not to initiate prosecution even in smallest of cases.

Moderated by Samir Kanabar from EY, the first session discussed issues under Domestic TDS & TCS provisions. The issues discussed on TDS included those under section, 193, 194-O, 194R, 194-Q, 194 BA, etc, TCS provisions under section 206C particular 206C(1G) and 206C(1H) were also discussed. The panelists for this session included Vikas Aggarwal from Novartis and Yogesh Thar from BSM

The second session was moderated by CA Atul Suraiya. It discussed issues pertaining to Penalty, Prosecution and Compounding procedures under TDS/ TCS regime

Other issues like penal and prosecution provision and compounding of offences; belated filing of returns/ belated payment of taxes; interest under section 201 and 201(1A), etc were also discussed.

Moderated by CA Shabbir Motorwala, the third session discussed issues related to TDS under section 195 from payments to non-residents

Other practical issues discussed at the session included: Non-filers checking, Lower deduction of tax; Rectifications of returns filed; Excess deduction – refund; Penal provision and compounding of offences; Belated filing of returns/belated payment of taxes; Interest under section 201 and 201(1A); Mechanism for Clarifications; etc.

The session also discussed issues arising on account of increase in rate of royalty/FTS taxation under Act, by FA 2023 and issues arising for filing of form 10F.

The conference was graced by eminent tax experts from the corporate and professional sectors as well as from the revenue department. who as panelists provided a comprehensive perspective and a blend of theoretical and practical solutions to the questions posed.

Comprising panel discussions and presentation sessions on relevant TDS and TCS issue, the seminar ended on a high note.

6. Recent PMLA notification and its impact on professional service firms

The Society organised a virtual panel discussion on 30th May, 2023 on the impact of the recent PMLA notification on professional service firms. The Panelist for the session were R N Dash, IRS and Adv Ashwani Taneja while the moderator was CA Anand Bathiya.

In his opening remarks, the moderator noted that the recent PMLA notification has brought about a sense of anxiety amongst CAs and certain other professionals due to increasing reporting obligations and greater responsibilities. He referred to it as the “fear of the unknown” and hoped that the discussion would clarify a lot of such fears and doubts.

Thereafter, both the panelists Dash and Adv Ashwani Taneja outlined the rationale behind the notifications dated 3rd May, 2023 and 9th May, 2023, which primarily stemmed from the FATF guidelines. Further, they indicated that
the notification expects the Professional Accountants to focus on the KYC and beneficial ownership status of their clients and to maintain complete details of their transactions.

The summary of the amendments covering the following matters were also touched upon:

  •     The obligations of Reporting Entities.

 

  •     Manner of verification of the identity of the clients by the Reporting Entity.

 

  •     Record maintenance in respect of specified transactions (covering buying and selling of investments and properties, managing client money, managing bank and security accounts etc.) undertaken or attempted to be undertaken.

 

  •     Timelines for maintenance of records.

 

  •     Enhanced due diligence to be undertaken in respect of all specified transactions by the reporting entities.

Powers of the Enforcement Directors and FIU-Ind

The discussion covered various questions put forth by the moderator and also by the participants which were comprehensively answered by the speakers. Some of the major points covered are as under:

  •     Services like internal audit undertaken as an employee of the Company are not covered.

 

  •     Services like virtual CFO in the capacity of a consultant are covered.

 

  •     In respect of tax related services it is better to avoid collection and reimbursement on behalf of clients.

 

  •     Currently, statutory audit services are not covered.

 

  •     Professionals should not adopt a casual attitude going forward, since the cost of non-compliance could be very high in many situations.

 

  •     Providing assistance in writing of the books of accounts of entities involved in suspicious transactions are not covered.

 

  •     Whilst undertaking transactions and assignments on behalf of clients the arm’s length principle should be adopted.

 

  •     Not to get associated with Benami Transactions.

 

  •     No clarity on whether a CA in his individual capacity or a firm of CAs would be considered as a Reporting Entity.

 

  •     Whilst independent directors appointed in their individual capacity are not covered. If they are nominees or representatives of the specified entities who undertake suspicious transactions, they would be covered. Similar considerations would also apply to trustees appointed.

 

  •     Entities providing space for use as a Registered Office and indulging in suspicious transactions are also covered.

 

  •     Pending the notification of the rules on certain matters it is important for Reporting Entities to maintain proper record for all specified transactions.

YouTube links: https://www.youtube.com/watch?v=hYXfaTEReog

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7. Serious threat to the US Banking System and US Dollar- International Economics Study Group meeting

The International Economics Study Group organised a virtual meeting on 29th May, 2023 to discuss the serious threat being faced by the US’ banking system currently. Chaired by CA Harshad Shah, the meeting noted, currently all US mid-cap banks are ‘full of’ bad commercial property loans worth $5.6 trillion. Confidence in the world’s largest banking system (American) is shaken and this could spread as there are concerns about Asset Liability mismatch, holding securities which have lost value since interest rates have risen at a sharp clip with brutal 450 basis points rise in interest rate in just 1 year from a near zero levels. Banks are sitting on $1.7 trillion in unrealized losses. Many U.S. banks have $7 trillion in uninsured bank deposits lying with them, which if withdrawn can create sudden rush.Further, the meeting discussed the serious challenges being faced by the Petro Dollar as many oil exporting countries (like Saudi Arabia, UAE, Iran, Venezuela, Russia) are looking at dealing in local currencies and avoiding Dollar due to threats of US sanctions and misuse of SWIFT.

Dedollarisation is fast catching up as many countries are entering and negotiating alternative to Dollar like bilateral currencies due to threats of blocking in SWIFT & other sanctions.

CA Milan Sanghani shared his views on current state of markets.

8. Internal Audit Mumbai Pune Express # 1

The inaugural edition of Internal Audit Mumbai Pune Express was held at MCCIA Trade Tower, Pune on 26th May, 2023. The event was jointly organized by the Internal Audit Committee of Bombay Chartered Accountants’ Society and IIA Pune Audit Club.

This was the first event held by the IA Committee of the Bombay Chartered Accountants’ Society in Pune.

The keynote address was delivered by Satish Shenoy who shared his views on “The focus – leveraging external events to deliver exceptional value”.

Dr. Milind Watve, a data scientist, presented his thoughts on “Data Analytics & Statistics in IA – a scientific view.”

A panel discussion ensued thereafter, whereby the panelists included Milind Limaye, Sanjay Deodhar and Satish Shenoy. The session was moderated by Madhavi Bhalerao. The topic for the panel discussion was “IA Standards – Mandatory or Recommendatory?”

Sameer Maheshwari delivered his session on “Auditing when the going is good”.

The last technical session for the day was by Arnob Choudhuri, who presented on the topic “IA Role in Business Responsibility & Sustainability Reporting”.

A total of 38 participants attended the day-long event which recorded a positive feedback.

The next edition of the Internal Audit Mumbai Pune Express series would be announced in due course.

9. Indirect Tax Laws Study Circle Meeting Specific issues in Customs laws, SEZ

The Indirect Tax Laws Committee of the Society organised a virtual study circle meeting on 25th May, 2023 under the leadership of CA. Prerana Shah. Ms. Shah had prepared six case studies regarding interplay of Customs and GST laws. The presentation and discussion broadly covered the intricacies on the following topics:

1.    HSN classification and rates of custom duty on import of goods in India

2.    Anti-dumping duties and import under advance authorisation

3.    Related Party Transactions under Customs Laws in regard to valuation,

4.    Value of export of goods under customs Law and GST Law

5.    Special Economic Zones – Refund

6.    Duty drawback, manufacturing under bond and FTWZ

More than 80 participants from across India participated in the meeting. The meeting was mentored by CA Udayan Chokshi

 

10. Direct Tax Home Refresher Course – 4

The Taxation Committee organised the Direct Tax Home Refresher Course 4 with eight other sister organizations i.e. All India Federation of Tax Practitioners (CZ), Association of Chartered Accountants, Chennai; Chartered Accountants Association, Ahmedabad; CA Association of Jalandhar; The Chartered Accountants Study Circle, Chennai; Hyderabad Chartered Accountants Society; Karnataka State Chartered Accountants’ Association and Lucknow Chartered Accountants’ Society.Held from 15th May, 2023 to 27th May, 2023, the virtual refresher course consisted of 12 sessions covering varied topics of income tax. The topics covered were

1)    Charitable Trust Taxation including recent amendments

2)    Taxation of various Financial products including AIFs, REITs, INVITs etc, Recent amendments and issues (IFSC)

3)    Taxation and Regulatory Aspects of various perquisites under Salaries including ESOPs

4)    Recent Developments in Sec 195 covering issues in 15CA & 15CB

5)    Taxation of Partnership Firms and LLPs on conversion incl. Issues on Amalgamation of LLPs

6)    Taxation and Regulatory aspects of Start-ups

7)    56 (2) (x) – An Evolving Deeming Fiction along with 56(2)(viib), 50CA, 50B r.w.r. 11UAE

8)    Taxation aspects of Redevelopment of Societies both from developer and the flat owner’s perspective (50C/43CA etc.)

9)    Valuation Under Income Tax Law vis-à-vis other laws – How to solve this game

10)    Case Studies on certain important aspects of Business Organisation & Reorganisation including M&A and Demergers

11)    Notice & Assessments related to Foreign Assets vis-a-vis Black Money Act and it’s Interplay with PMLA and other Economic Offences Laws

12)    Law of Evidence vis-à-vis Tax proceedings incl  Examination and Cross Examination / Do’s & Dont’s of rendering Tax Advice  ( special  reference to handle  arrest in such cases)

All the distinguished speakers shared their thoughts on the subject and their views on the practical issues arising out of them. They also engaged in a QnA with the participants and provided their insights. There was an overwhelming participation to the course with more than 650 registrations from across India.

11. Case Study based discussion on MLI

The International Taxation Committee of the Society conducted a hybrid meeting on 11th May, 2023. Titled, ‘:Case Study based discussion on MLI,’ the meeting was led by Group Leader CA. Ganesh Rajgopalan who discussed various case studies that were a part of the BCAS ITF conference held at Gandhinagar.The group leader also discussed issues arising out of the amendment to the treaties on account of signing of the MLI by various countries (including India). He highlighted the nuances under select treaties and the compared the change in language thereof on account signing of MLI. During the meeting, the group leader also encouraged a discussion on various aspects besides addressing queries by the participants. The discussion provided great insights provided to the participants.

12. HRD Study Circle Meeting -”Narmada Parikrama”

The HRD Committee of the Society organised a hybrid Study Circle meeting on 9th May, 2023 to discuss the below-mentioned Flash Points/Glimpses from the Experience Shared at the above Meeting:

  •     The Speaker, CA Prasad shared his experience of the Narmada Parikrama during the four months of November 2019 to March 2020. The walk was through the terrain of approximately 3,500 Kilometres in the state of Madhya Pradesh and Gujarat.

 

  •     “NARMADE HAR” This is a Staple word used during the Narmada Parikrama. The speaker related the mixed emotions he experienced the Parikrama. He related his entire journey for the benefit of the Young Professionals. He said, today’s youth, whether CA’s or not, have a lot to learn about the decision making process. Practical decision to take a walk along with Maa Narmada Maiyya. It is the food for thought if one decides to walk the stretch of Ma Narmada and understand India.

 

  •     There is great difference between qualification and enrichment. If one wants to enrich his or her experience with life, then, Narmada Parikrima is the Best Solution.

 

  •     Narmada River is like a mother, walking around it is like being in the lap of mother Narmada River.

 

  •     The walk teaches humility, patience, compassion and tolerance.

 

  •     The walk teaches how the poor are very generous and always willing to give. The villagers around the Narmada will ensure that every pilgrim is well fed, though they have to go in the neighborhood far away to bring ingredients like flour to make chapatis. The villagers sometimes are so poor that they do not have both ends to meet, yet they think of the Pilgrims before themselves or their family members. Can we try to think of others in the world around us? This was first glimpse of “param artha”.

 

  •     On being asked, whether one feels Homesick during the parikrama, the speaker answered that, there are so many interesting things in the nature and the atmosphere, that, one never feels homesick at all. In fact, sometimes, the persons feel that they should remain on the banks of Maa Narmada and not go back home.

 

  •     Some of the questions raised by the audience included about reading books on Parikrama or see any movies. However, the speaker advised the participants to talk to less people and concentrate and work. Over study and over thinking leads to failure whether in exam or during this pilgrimage. The speaker gave examples of over study and failures in the CA exams which some might have experienced.

The session ended with a Pranam by the speaker to all the offline and online participants.

YouTube Link : https://www.youtube.com/watch?v=Iv4tdY-mKEE

QR Code:
 

13. Bringing hope when there is none left.

 

  •     The HRD committee of the Society organised a meeting on 18th April, 2023 to spread awareness about Noble Social cause work carried on by Respected Mittal Maulik Patel, Founder  and Managing Trustee, Vicharta Samuday Samarthan Manch(VSSM) who has been Honoured with Nari Shakti Award at National Level for most significant work in the field of women empowerment by the hands of His Excellency President Ram Nath Kovind and also awarded Nari Shakti Award at State Level for most significant work in the field of women empowerment by the hands of Honourable Governor of Gujarat O.P. Kohli.

 

  •     She made detail presentation about VSSM, which is a non-profit organisation whose mission is to ensure and enable holistic development of the people belonging to the Nomadic, De-Notified Tribes and other marginalised section of the society addressing the interdependence and co evolution of human economies and biodiversity.

 

  •     VSSM is working to empower the nomadic and de-notified communities while striving to create an inclusive society as well as government policies for these extremely marginalised sections of our society. Actively working for the welfare of the most downtrodden Nomadic and De-Notified tribes on several socio-economic problem related to education, livelihood, health, human rights, environment, water management, empowerment, building hostel for school children, etc.

 

  •     The meeting ended with a heart-felt gratitude expressed by Mittalben, to the participants and prospective donors for their whole-hearted support to the organisation.

 

  •     She made a further appeal to the members present to spread awareness about VSSM to support and contribute towards the noble work carried on by VSSM. Donation to VSSM is eligible under CSR.

14. Human Resources Development Committee – “Graphology-Handwriting Analysis”.

The HRD Committee of the Society organised a hybrid meeting on 11th April, 2023 at its premises. Led by Bhupesh Singh Dhundele, Graphologist, the meeting imparted the below teachings:

1.    The participants were guided as to how they can analyse their own handwriting and those of others who they would like to know better.

2.    Our Handwriting records our accurate picture of our real self because it is the end result of our brain in action. When we write we think. Handwriting reveals our personality, presence, authority.

3.    Handwriting Analysis helps choose career.

4.    Discussed how to explore the secrets of an individual hidden in their handwriting.

5.    You are what you write. (Writing reflects your personal image)

6.    Your nature lies in your signature. (Signature reflects your personal image)

7.    Your writing is as unique as your thumb print.

8.    It represents your personality. It is instant pen picture/mental X-ray of your total personality of that moment.

9.    It is mind writing. People lost their hand in accidents/war, start writing with leg/mouth, achieve same handwriting after practice.

10.    Graphology is a subject dealing with Graphs.

Presented by Mr. Bhupesh Singh Dhundele (Graphologist)

YouTube Link: https://www.youtube.com/watch?v=24_eFjxBjMs

QR Code:

 

Corporate Law Corner : Part A | Company Law

7 M/s Assam Company India Ltd & Ors
vs. Union of India & Ors
The Gauhati High Court
High Court of Assam, Nagaland, Mizoram and Arunachal Pradesh
Case No. : WP(C) 2572/2018
Date of Order: 07th March, 2019The expression “Shell Company” had not been defined under any law in India. Therefore, before declaring any Company as a Shell Company, a notice or an opportunity of being heard shall be given having regard to its negative implications and serious consequences. FACTS

M/s ACIL was incorporated on 15th March, 1977 having its Registered Office at Assam, involved in the business of cultivation and manufacture of tea having several tea estates in the State of Assam.

M/s ACIL learned that respondent No.2, i.e., Securities and Exchange Board of India (‘SEBI’) had initiated proceedings against M/s ACIL by instructing the Bombay Stock Exchange, National Stock Exchange and Metropolitan Stock Exchange (collectively referred to as ‘Stock Exchanges’) to restrict and/or to suspend trading of shares of M/s ACIL. Further learned that, SEBI had initiated such proceedings on the basis of a letter dated 09th June, 2017 received from Government of India by the Ministry of Corporate Affairs (‘MCA’) forwarding the database of 331 listed shell companies for initiating necessary action. In the said list of 331 shell companies, M/s ACIL was listed at Serial No.2 with the source indicated as Income Tax Department.

M/s ACIL represented before SEBI on 07th August, 2017 contending that it was an on-going company and could not be included in the list of shell companies. It was pointed out that M/s. ACIL produces 11 million KGS of tea and employs about 20 thousand workers across the Tea Estates.

According to M/s ACIL, no steps were taken by SEBI on the representation by M/s ACIL. Therefore, an appeal was filed before the Securities Appellate Tribunal (‘SAT’), Mumbai which was registered as Appeal No.196/2017. The appeal was disposed of vide order dated 21st August, 2017 by directing the stock exchanges to reverse their decision expeditiously, while granting liberty to M/s ACIL to make a representation to SEBI, which was directed to be disposed of by SEBI in accordance with the law. It was further observed that the aforesaid order of appeal would not come in the way of SEBI as well as the stock exchanges from investigating the case of M/s ACIL and to initiate proceedings if deemed fit.

In compliance with the order of the SAT, M/s ACIL submitted several representations before SEBI and also sought for copies of documents on the basis of which M/s ACIL was declared as a shell company, which were handed over by SEBI on 25th January, 2018.

According to M/s. ACIL, based on the documents handed over, it was found that the aforesaid letter dated 09th June, 2017 was received from the Serious Fraud Investigation Office of Government of India, Ministry of Corporate Affairs (SFIO). The same included the database of 124 listed companies along with a Compact Disc received from the Income Tax Department, having been identified during various search/seizures.

From the database (Compact Disc) of the letter, it appeared that M/s ACIL was shown as a company controlled by Mr VKG against whom several Income Tax Proceedings were pending. A nexus was drawn between Mr VKG and M/s ACIL through Mr SK who was one of the Independent Directors of M/s ACIL and also a Director in one of such companies controlled by Mr VKG.

M/s. ACIL contended that the mere presence of Mr. SK as an Independent Director of M/s ACIL, who was also a Director in the companies controlled by Mr VKG, cannot be construed as there being any relationship between M/s ACIL and Mr VKG. Furthermore, Mr VKG had filed an affidavit before SEBI stating that he had no association with M/s ACIL in any manner.

In the meanwhile, SEBI passed an interim order dated 08th December, 2017. By the said order trading in securities of M/s ACIL was reverted to the status as it stood prior to issuance of the letter dated 07th August, 2017. It was ordered that Stock Exchanges would appoint Independent Auditors to verify misrepresentation of finance and business of M/s ACIL as well as misuse of funds/books of accounts. Also, the Promoters and Directors of M/s ACIL were permitted only to buy securities of M/s ACIL, prohibiting them from transferring the shares held by them.

Aggrieved by the order, present writ petition was been filed by M/s ACIL seeking the relief that passing of such order by SEBI was not justified and stated that M/s ACIL cannot be treated as a Shell Company.

The expression “Shell Company” had not been defined under any law in India. Therefore, there was no statutory definition of a Shell Company, be it in fiscal statutes or in penal statues. In addition, neither the Companies Act, 1956 nor the Companies Act, 2013 defines the expression shell company. In the interim order passed on 12th July, 2018, the Court observed that in the Concise Oxford English Dictionary, 11th Revised Edition, a Shell Company had been defined as a non-trading company used as a vehicle for various financial manoeuvres.

In popular parlance, a Shell Company was understood as having only a nominal existence; it exists only on paper without having any office and employee. It may be used as a deliberate financial arrangement providing service as a tool or vehicle of others without itself having any significant assets or operations i.e., acting as a front. Popularly Shell Companies are identified as companies that are used for tax evasion or money laundering, i.e., channelising crime tainted money or proceeds of crime into the formal economy.

The Organisation for Economic Cooperation and Development (OECD) has prepared a glossary of foreign direct investment terms and definitions. In the said glossary, a Shell Company has been defined as a company which is formally registered, incorporated or otherwise legally organised in an economy, but which does not conduct any operations in that economy other than in a pass-through capacity. Shell companies tend to be conduits or holding companies and are generally included in the description of special purpose entities.

Mr AB, Assistant Professor in Law, Nirma University, Ahmedabad had carried out a study and published an article on the subject ‘Tackling the Menace of Shell Companies in India’. He had stated that there had been a spurt in economic crimes, such as, money laundering, benami transactions, tax evasion, generation of black money, round tripping of black money, etc. which not only causes revenue and foreign exchange loss to the Government, but also creates economic inequality in the society. It may compromise economic sovereignty of the State. According to him, such illegal activities are committed through the incorporation of companies which have neither any asset nor liability nor any operational businesses. These companies exist only on paper to facilitate illegal financial transactions, such as, money laundering and tax evasion. According to him, these kinds of companies are called shell companies.

However, it is no offence to be a shell company per se. A corporate entity may be set up in such a fashion with the objective of carrying out corporate activities in future. That would not make it an illegal entity. The Registrar of Companies can strike off the name of such a company from the register of companies. But, if such Shell Company is/was involved in money laundering or tax evasion or for other illegal purposes, then relevant provisions of laws under the Prevention of Money Laundering Act, 2002, Prohibition of Benami Transactions Act, 2016, Income-tax Act, 1961 and the Companies Act, 2013 would be attracted.

As per the study, SEBI had proposed to the Government of India that there should be a legal definition of Shell Company as there was no law in India which defines a Shell Company. Such definition besides giving legal clarity, would also enable the investigative agencies to carry out investigation more swiftly and in a structured manner. The Committee was of the view that all Shell Companies may not have fraudulent intention. Therefore, the expression shell company needs to be defined as having fraudulent intent as one of the characteristic features of such a company.

HELD

The Honourable Judge based on the above, deduced that though Shell Company was defined in other jurisdictions, in India there was no statutory definition of the term. However, the general perception was that with presence of shell companies there can be a potential use for such Companies for illegal activities that threatens the very economic foundation of the country and severely compromises its economic foundation and ultimately sovereignty.Thus, there was a prima facie view that since declaration of M/s ACIL as a Shell Company by itself would entail adverse consequences, M/s. ACIL should have been at least served a notice before being branded as a Shell Company. It was recorded that M/s ACIL was an old and reputed company owning 14 tea estates in the State of Assam producing 11 million KGS of tea every year and having a labour force of 20 thousand of its own. Therefore, branding such a company as a Shell Company was not justified.

Principles of natural justice would require that before such branding, M/s ACIL should have been put on notice and being provided a reasonable opportunity of hearing as to why and on what grounds it was being suspected to be a Shell Company. Only if the response was found to be not satisfactory, then such a finding could have been recorded. Besides, initiating proceedings after branding M/s ACIL as a Shell Company virtually amounted to giving a finding first and thereafter initiating a proceeding to justify the finding like a post-decisional hearing. One cannot be declared guilty first and thereafter subjected to a trial to justify or uphold finding of such guilt. The letter dated 09th June, 2017 was very clear that M/s ACIL was a Shell company and not a suspected Shell company.

Therefore, upon thorough consideration of the matter, writ petition was not only maintainable but also deserved to be allowed.

Impugned letter dated 09th June, 2017 in respect of M/s ACIL was accordingly interfered with and was set aside.

8 M/s. Oscar FX Pvt Ltd
U72900TG2014PTC094237/Telangana/152 of 2013/2023/4139 to 4141
Adjudication Order
Registrar of Companies, Hyderabad
Date of Order: 24th January, 2023.

Order under section 454 read with Section 159 of the Companies Act, 2013 for the violation of section 152(3) of the Companies Act, 2013 i.e. in case of appointment of any person as director in the company who does not have a valid director identification number (DIN) at the time of his/her appointment.

FACTS

M/s OFPL (hereinafter referred as ‘Company’) is registered in the State of Telangana on 29th May, 2014, having its registered office in Telangana. M/s OFPL had filed an application in Form GNL-1 dated 16th January, 2023 along with its officers in default under section 159 for adjudication of violation of Section 152(3) read with Section 454 of the Companies Act, 2013 (the Act) seeking necessary orders.It was submitted that erstwhile Board of Directors of the Company comprising Mr. KKP (Managing Director) and Mr. RPK (Director) at its Board Meeting held on 30th March, 2021 had appointed Ms. VBP as an Additional Director with effect from 30th March, 2021. However, Ms. VBP did not have a valid Director Identification Number (DIN) at the time of appointment to become the director on the Board of the company, which was a violation of the provisions of Section 152(3) of the Companies Act, 2013; and liable for penalty under Section 159 of the Companies Act, 2013.

It was further submitted that such appointment of Ms. VBP was unintentional and inadvertent due to lack of knowledge of provisions of the Companies Act, 2013.. Immediately upon realisation, Ms VBP, had applied to the Ministry of Corporate Affairs (“MCA”) for allotment of DIN on 15th September, 2021 and was allotted DIN on the same day by MCA. Immediately upon allotment of DIN to Ms. VBP, M/s OFPL had filed e-form DIR-12 with the Registrar of Companies dated 28th September, 2021 to give effect to her appointment as additional director. Section 152(3) of the Companies Act, 2013 states the following:

(3) No person shall be appointed as a director of a company unless he has been allotted the Director Identification Number under section 154:”

Section 159 of the Companies Act, 2013 contemplates the following:

“If any individual or director of a company makes any default in complying with any of the provisions of section 152, section 155 and section 156 such individual or director of the company shall be liable to a penalty which may extend to fifty thousand rupees and where the default is a continuing one, with a further penalty which may extend to five hundred rupee for each day after the first during which such default continues “.

HELD

After considering the submissions made in the application made by M/s OFPL and the facts of the case it is proved beyond doubt that M/s OFPL and the officers of the company have defaulted in complying the provisions under Section 155(3) of the Act. In this regard, M/s OFPL being a small company, and its officers in default (within the meaning of section 2(60) of the Companies Act, 2013) are hereby directed to pay the following penalty from their own sources.

Name of the Company

Penalty under section 159 r/w s. 446B of the Act.

 

On default

On continuous
default, with a further penalty which may extend to
R 500 for 169 days
(date of allotment of DIN).

Total penalty

Oscar FX Private
Limited

Rs. 25,000/-

169 @ 100 = 16,900/-

Rs. 41,900/- (Rupees
Forty-One Thousand Nine Hundred only)

Officer in Default

Penalty as per Act.

 

On default

On continuous
default, with a further penalty which may extend to five hundred rupees for
169 days (date of allotment of DIN).

Total penalty

Mr. KKP (MD)

Rs. 25,000/

Rs. 169 @ 100 =
Rs. 16,900/-

Rs. 41,900/- (Rupees
Forty-One Thousand Nine Hundred only)

It was directed that the penalty be paid within 30 days from the date of issue of the order.

Audit Trail – Key Considerations for Auditors and Companies

INTRODUCTION

 

Section 143(3) of the Companies Act, 2013 provides various matters on which auditors are required to report in their auditor’s report. Clause (j) of Section 143(3) states that auditor’s report shall also state such other matters as may be prescribed. Rule 11 of the Companies (Audit and Auditors) Rules, 2014 specifies such other matters that are to be reported by the auditor.The requirement with respect to audit trail was contained in Rule 11(g) with regard to auditor’s reporting requirements. The requirement was initially made applicable for the financial year commencing on or after the 1st April, 2021 vide notification G.S.R. 206(E) dated 24th March, 2021. However, the applicability was deferred to financial year commencing on or after 1st April, 2022, vide MCA notification G.S.R. 248(E) dated 1st April, 2021.

The corresponding requirement for companies has been prescribed under the proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 requiring companies, which use accounting software for maintaining their books of account, to use only such accounting software which has audit trail feature. This requirement for companies was initially made applicable for financial year commencing on or after 1st April, 2021. However, its applicability has been deferred two times and this requirement is finally applicable from financial year commencing on or after 1st April, 2023.

The respective requirement for companies under Rule 3(1) of Companies (Accounts) Rules, 2014 and for auditors under Rule 11(g) of Companies (Audit and Auditors) Rules, 2014 are given below.

Text of Proviso to Rule 3(1) of Companies (Accounts)
Rules, 2014

Text of Rule 11(g) of Companies (Audit and Auditors)
Rules, 2014

Provided that for the
financial year commencing on or after the 1st April, 2023, every
Company which uses accounting software
for maintaining its books of account, shall use only such accounting

Whether the company,
in respect
of financial years commencing on or after the 1st April, 2022, has
used such accounting software
for maintaining its books of
account which has a feature of recording

software which has a
feature of recording audit trail of each and every transaction, creating an
edit log of each change made in the books of account along with the date when
such changes were made and ensuring that the audit trail cannot be disabled.

audit trail (edit
log) facility and the same has been operated throughout the year for all
transactions recorded in the software and the audit trail feature has not
been tampered with and it has been preserved by the company as per the
statutory requirements for record retention.

The ICAI has issued an Implementation Guide on Reporting under Rule 11(g) of Companies (Audit and Auditors) Rules, 2014 (IG) to enable the auditors to comply with the reporting requirements of Rule 11(g). The author provides additional insights through Q&As on the subject.

WHAT IS MEANT BY BOOKS OF ACCOUNTS FOR THE PURPOSES OF RULE 3(1) AND RULE 11(G) PRESENTED ABOVE?

The definitions are included in Section 2 of the Companies Act, 2013. These are given below.

(12) “book and paper” and “book or paper” include books of account, deeds, vouchers, writings, documents, minutes and registers maintained on paper or in electronic form;

(13) “books of account” includes records maintained in respect of—

i.    all sums of money received and expended by a company and matters in relation to which the receipts and expenditure take place;

ii.    all sales and purchases of goods and services by the company;

iii.    the assets and liabilities of the company; and

iv.    the items of cost as may be prescribed under section 148 in the case of a company which belongs to any class of companies specified under that section;

WHAT IS MEANT BY AUDIT TRAIL?

This is defined in the IG as follow: Audit Trail (or Edit Log) is a visible trail of evidence enabling one to trace information contained in statements or reports back to the original input source. Audit trails are a chronological record of the changes that have been made to the data. Any change to data including creating new data, updating or deleting data that must be recorded. Records maintained as audit trail may include the following information:

  •  when changes were made i.e., date and time (time stamp)

 

  • who made the change i.e., User Id/Internet protocol (IP)

 

  • what data was changed i.e., data/transaction reference; success/failure

Audit trails may be enabled at the accounting software level depending on the features available in such software or the same may be captured directly in the database underlying such accounting software.

The requirement for companies applies for financial year commencing on or after 1st April, 2023. On the other hand, the requirement to report on audit trail applies to auditors only w.e.f. financial years commencing on or after 1st April, 2022. For the financial year ended 31st March, 2023, should the auditor report on the audit trail?

For the year ended 31st March, 2023, it may not be appropriate for the auditor to comment on whether audit trail is maintained or not by the company, since the requirement for companies applies only in the following year. The auditor shall state in his report this fact and not make any other observations on whether the company has complied with the requirement of audit trail or not.

WHETHER THE AUDIT TRAIL REQUIREMENT APPLIES TO BOOKS OF ACCOUNT PREPARED MANUALLY?

The requirement applies only to books of account prepared electronically using an accounting software. It does not apply where the books of account are entirely maintained manually. In such a case, as the assessment and reporting responsibility under Rule 11(g) will not be applicable, the same would need to be reported as a statement of fact by the auditor against this clause. Wherever, some books of account are maintained manually, whereas other are maintained electronically, the requirement would apply to books of accounts maintained electronically.

WHETHER AUDIT TRAIL REQUIREMENT FOR BOOKS OF ACCOUNTS INCLUDE COST RECORDS?

Yes, it will include cost records because as per Section 2(13)(iv) of the Companies Act, 2013, books of accounts include cost records if it belongs to any class of companies specified under section 148 of the Companies Act, 2013. It may also apply to cost records of other companies, if the information generated by those cost records is used in some manner for the purposes of preparing the company’s trial balance or financial statements or is otherwise integrated with the financial records used for preparing financial statements.

WHETHER AUDIT TRAIL REQUIREMENT WOULD APPLY TO THINGS SUCH AS RENTAL AGREEMENTS OR CASH VOUCHERS, ETC?

The audit trail requirement applies to books of accounts and not books and papers. Therefore, the audit trail requirement would not apply to papers such as rental agreements or cash vouchers. In other words, if changes are made to the underlying cash voucher that was prepared digitally, there is no need to maintain an edit log for the same. However, from an internal control point of view, it is important that the authentication of the persons preparing and approving the voucher is appropriately documented on the cash voucher.

FOR AUDITOR REPORTING UNDER RULE 11(G), DOES THE REQUIREMENT APPLY TO STANDALONE FINANCIAL STATEMENTS (SFS) ONLY OR SHALL APPLY TO CONSOLIDATED FINANCIAL STATEMENTS (CFS)?

Section 129(4) of the Act specifically states that the provisions of the Act that apply to SFS with respect to financial statements, shall, mutatis mutandis, apply to the CFS. Therefore, the requirements apply both to SFS and CFS. However, while reporting on CFS, the auditor shall exclude certain components included in the CFS which are (a) either not companies under the Act, or (b) are incorporated outside India. The auditors of such components are not required to report on these matters since the provisions of the Act do not apply to them.The reporting on compliance with Rule 11(g) would be on the basis of the reports of the statutory auditors of subsidiaries, associates and joint ventures that are companies defined under the Companies Act, 2013. The auditors of the parent company should apply professional judgment and comply with applicable Standards on Auditing, in particular, SA 600, “Using the Work of Another Auditor” while assessing the matters reported by the auditors of subsidiaries, associates and joint ventures that are Indian companies.

WHICH ACCOUNTING SOFTWARE IS COVERED UNDER RULE 3(1)?

Any software that maintains records or transactions that fall under the definition of books of account as per section 2(13) of the Companies Act will be considered as accounting software for this purpose. For e.g., if sales are recorded in a standalone software and only consolidated entries are recorded monthly into the software used to maintain the general ledger, the sales software should also have the audit trail feature because it is part of the financial records.

WHETHER ENVIRONMENTAL, SOCIAL, GOVERNANCE (ESG) SOFTWARE AND ESG RECORDS ARE COVERED UNDER RULE 3(1)?

No, since ESG records do not constitute books of accounts as defined under Section 2(13) of the Companies Act, 2013.

WHETHER EDIT LOG NEEDS TO BE MAINTAINED FOR CREATION OF A USER IN THE ACCOUNTING SOFTWARE?

No, because creating a user account in the accounting software does not change the books of accounts. Nonetheless, from the perspective of internal controls, it would be necessary to have edit logs for creation of a user in the accounting software.

 

DOES TALLY PRIME LATEST VERSION HAVE EDIT LOG FEATURES?

Tally has made two different product releases, ‘TallyPrime Edit Log Release 2.1’ and the regular ‘TallyPrime release 2.1’. As per Tally, TallyPrime Edit Log Release 2.1 comes with an edit log feature enabled all the time, without an option to disable it. While TallyPrime Release 2.1 gives an option to enable/disable the edit log when required.It will be inappropriate to compare Tally to a sophisticated ERP such as SAP. Can the auditor rely on Tally as a tool on which reliance could be placed to review the inbuilt or digital controls relating to audit trail or should it be looked at as a black box? Tally’s representation that the edit log cannot be disabled or tampered with and that the inbuilt digital controls can be relied upon needs to be tested and validated by the auditor before drawing that conclusion.

Is the accounting software required to be hosted on a physical server located in India?

It should be noted that the accounting software may be hosted and maintained in or outside India or may be on-premises or on cloud or subscribed to as Software as a Service (SaaS) software. Further, a company may be using a software maintained at a service organisation. For example, the company may have outsourced its payroll processing with a shared service centre that may use its own software to process payroll for the company. On the other hand, back-up of books and papers are required to be maintained on a physical server located in India only.

IF COMPANIES (ACCOUNTS) RULES ARE NOT FOLLOWED, WILL IT TANTAMOUNT TO NON-COMPLIANCE WITH REGULATIONS AS PER SA 250 CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS?

Yes, it will be a non-compliance with laws and regulations, but no additional qualification is required on this account alone if the penalty amount is likely to be insignificant. However, auditors need to consider the likelihood of frauds and conduct appropriate procedures. Also, the Audit Committee needs to be properly briefed.

DOES NON AVAILABILITY OF EDIT-LOGS IMPLY FAILURE OF INTERNAL CONTROL SYSTEM, AND WOULD AUDITOR NEED TO QUALIFY THE INTERNAL CONTROL REPORT?

The answer to this question would depend upon detailed facts and circumstances of the case. Sometimes mere non-availability of audit trail does not necessarily imply failure or material weakness in the operating effectiveness of internal financial controls over financial reporting. For e.g., due to some temporary glitch the audit trail may have not worked, that does not mean that the internal financial control system would deserve a negative reporting from the auditor. An important point to note is that the requirement of the audit trail applies throughout the financial year; however, as regards the internal financial control, any weaknesses if resolved prior to the end of the financial year would not attract any qualification or reservation from the auditor.

Food Co runs several restaurants, and the revenue includes a sizable portion collected in cash from the customers. The company does not have any system of edit logs associated with the cash collection process or with respect to the accounting in the sales ledger and general ledger. How should the auditor approach this situation?

This is a serious issue, and the auditor needs to consider several aspects, a few of which are listed below:1.    Should the auditor accept such a client and when already accepted, should the auditor continue doing an audit of such a client? This assessment needs to be carried out by the auditor.

2.    The auditor shall perform an assessment of risk of material misstatements due to fraud and would consider both qualitative and quantitative factors in assessing a deficiency or combination of deficiencies as a significant deficiency or material weakness. This audit procedure would accordingly require application of professional judgement while linking the reporting against Rule 11(g) and the internal control reporting requirements.

3.    The auditor may need to disclaim several clauses of CARO, such as with respect to reporting on the clause relating to fraud. The auditor would have to state that the occurrence of an error or fraud could not be established due to lack of maintenance, availability or retrievability of audit trails.

Ze Co maintains edit logs for each and every transaction; however, for a particular day during the financial year Ze could not produce any edit logs, as that system was down. What would be the auditor’s responsibility in such cases?

Audit report under Rule 11(g) is a factual reporting. The auditor will have to report the non-availability of edit logs for the particular day for reporting under Rule 11(g). The auditor will have to state in the report that edit logs were available throughout the financial year except for a particular day and provide the reason why the edits logs were not available for that day. Additionally, the auditor will also have to carry out detail procedures to validate if the absence of edit logs was or was not related to any fraud as well as evaluate the implications on the reporting on internal financial controls.

A company has outsourced its payroll processing to an external party. In such a case, whether the requirements of audit trail are applicable, and how does the auditor verify the same?

As per the requirements, the accounting software should be capable of creating an edit log of “each change made in books of account” and the audit trail feature has not been tampered with. In case of accounting software supported by service providers, the company’s management and the auditor may consider using independent auditor’s report of service organisation (e.g., Service Organisation Control Type 2 (SOC 2)/SAE 3402, “Assurance Reports on Controls at a Service Organisation”) for compliance with audit trail requirements. The independent auditor’s report should specifically cover the maintenance of audit trail in line with the requirements of the Act.

A company did not preserve audit trail for a few of its in-house application such as the payroll processing system for earlier years, though edit logs are fully preserved for the financial year commencing on and after 1st April, 2023. Whether any reporting is required by the auditor under Rule 11(g)?

The auditor is required to comment whether ‘the audit trail has been preserved by the company as per the statutory requirements for record retention’. Considering the requirement of Section 128(5) of the Act, which requires books of account to be preserved by companies for a minimum period of eight years, the company would need to retain audit trail for a minimum period of eight years, i.e., effective from the date of applicability of the Account Rules (i.e., currently 1st April, 2023, onwards). Therefore, if audit trail has not been preserved for earlier years, no reporting is required by the auditor under Rule 11(g).

As per Rule 3(1), the accounting software shall have a feature of recording audit trail of each and every transaction, creating an edit log of each change made in the books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled. Would the software ensure that the audit trail feature cannot be disabled or management has to ensure that the audit trail feature is not disabled?

Most of the commonly used accounting software, including Enterprise Resource Planning (ERP) software, has an audit trail feature that can be enabled or disabled at the discretion of the company. The management of the company may have put in place certain controls such as restricting access to the administrators and monitoring changes to configurations that may impact the audit trail. Auditors are accordingly expected to evaluate management’s policies in this regard and test such controls to determine whether the feature of audit trails has been implemented and operating effectively throughout the reporting period.

The requirement should not be interpreted to conclude that if the software has the feature to disable audit trail, it should be automatically treated as non-compliant with Rule 3(1). Most advanced business applications have many features that can be enabled and disabled as per client’s business requirements. This by itself, does not create a compliance issue.

In order to demonstrate that the audit trail feature was functional, operated and was not disabled, a company would have to design and implement specific internal controls (predominantly IT controls) which in turn, would be evaluated by the auditors, as appropriate. For e.g., these could relate to

  •     Controls to ensure that the audit trail feature has not been disabled or deactivated.

 

  •     Controls to ensure that User IDs are assigned to each individual and that User IDs are not shared.

 

  •     Controls to ensure that changes to the configurations of the audit trail are authorised and logs of such changes are maintained.

 

  •     Controls to ensure that access to the audit trail (and backups) is disabled or restricted and access logs, whenever the audit trails have been accessed are maintained.

 

  •     Controls to ensure that administrative access to the audit trail is restricted to authorised representatives.

 

  •     Periodic testing of controls relating to audit trail configuration by management or internal auditors.

HOW DOES AN AUDITOR, AUDIT THE AUDIT TRAIL?

There are many direct and indirect evidences that an auditor needs to collect / review to ascertain compliance with the requirements. This includes but not limited to management representation, review, on a sample basis, the audit trail records maintained by management for each applicable year and evaluate management controls for maintenance of such records without any alteration and retrievability of logs maintained for the required period of retention.The management should ensure that an internal control system is implemented and operates effectively throughout the year. A combination of prevent and detect controls, ITGC’s, ITAC’s, should be used, supported also by Entity Level Controls (ELC’s). The management should conduct proper tests to ensure that controls are operating effectively throughout the year and take quick remedial actions in case of defects and auditors should test those controls.

Some examples of how the auditor can verify controls relating to audit trail are given below:

Controls over changes in configuration of audit trails whether those are authorised and whether logs of such changes are maintained can be verified by applying the following steps

Obtain a log of changes made to audit trail configuration made during the year.

Select sample changes made.

Ask for approvals or authorizations for such changes made.

Controls to ensure that the audit trail feature has not been disabled or deactivated; the auditor can check this from change management log in SAP.

The management should ensure that every user is assigned a User ID; auditor can take a sample of new joiners and verify if they are allotted an ID; the auditor can also verify for every User ID if there is an employee identified and that there are no dummy IDs.

Controls to ensure that User ID’s and Passwords are not shared; e.g., auditor can check for instances where multiple users log-in from the same machine (IP).

CONCLUSION

The intent of the audit trail seems to be to prevent fabrication of books through overwriting the books of accounts. The trail is expected to easily track the changes made to the books of accounts,and would require the company to explain the reasons thereof. Globally, no similar reporting obligation exists for the auditors.In the past, several instances have come to notice, where senior executives of companies have tampered with the books of accounts, without leaving any footsteps on the changes made, and who made those and at what time. Hopefully, with these changes, such instances would be significantly curtailed or exposed.

UAE’s Corporate Tax Law – An Update

In the earlier article published in BCAJ February, 2023, authors had provided an overview of the United Arab Emirates’ [UAE] newly introduced Corporate Tax Law [CT Law].

In this article, the authors endeavor to cover further developments in this respect of the CT Law since the issue of Federal Decree Law No. 27 of 2022 on 9th December, 2022. Since the CT Law has become effective for financial years starting on or after 1st June, 2023, these developments assume lot of significance.

A. RECENT DEVELOPMENTS RELATED TO CT LAW

The Federal Decree Law No. 27 of 2022 on Taxation of Corporations and Businesses was signed on 3rd October, 2022 and was published in Issue #737 of the Official Gazette of the UAE on 10th October, 2022. The UAE CT Law can be found at the link https://mof.gov.ae/corporate-tax/.

FAQs

The law has been supplemented with FAQs originally released on 9th December, 2022 comprising of 158 questions and answers, by the Ministry of Finance [Ministry]. The FAQs have been updated and the current Corporate Tax FAQs contain 209 questions and answers that provide guidance on the UAE CT Decree-Law. The FAQs on the CT Law can be found at the link https://mof.gov.ae/corporate-tax-faq/.

‘EXPLANATORY GUIDE’ ON CT LAW

The UAE’s Ministry has on 11th May, 2023 issued the ‘Explanatory Guide on Federal Decree-Law No. 47 of 2022 on the ‘Taxation of Corporations and Businesses’.The CT Law provides the legislative basis for imposing a federal tax on corporations and business profits in the UAE. It comprises of 20 Chapters and 70 Articles, covering, inter alia, the scope of Corporate Tax, its application, rules pertaining to compliance and the administration of the Corporate Tax regime etc.

The Explanatory Guide has been prepared by the Ministry, and provides an explanation of the meaning and intended effect of each Article of the CT Law. It may be used in interpreting the CT Law and how particular provisions of the CT Law may need to be applied.

The Explanatory Guide has to be read in conjunction with the CT Law and the relevant decisions issued by the Cabinet, the Ministry and the Federal Tax Authority [FTA] (The information on the Corporate Tax topics can be found at the link https://tax.gov.ae/en/taxes/corporate.tax/corporate.tax.topics.aspx) for the implementation of certain provisions of the CT Law. It is not, and is not meant to be, a comprehensive description of the CT Law and its implementing decisions. The Explanatory Guide on the CT Law can be found at the link https://mof.gov.ae/explanatory-guide-for-federal-decree-law/.

CABINET DECISIONS

The CT Law in 18 of the total 70 articles, contains enabling powers to prescribe various conditions, determine persons, list entities, prescribe relevant dates, etc. in a decision issued by the Cabinet at the suggestion of the Minister.Accordingly, the following Cabinet decisions for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses have been issued by the Prime Minister of the UAE:

Sr. No. Cabinet Decision No. Cabinet Decision regarding Issued on Relevant Article of CT Law
1. 37 of 2023 Regarding the Qualifying Public Benefit Entities 7th April,2023 Article 9 – Qualifying Public Benefit Entity
2. 49 of 2023 On Specifying the Categories of Businesses or Business Activities Conducted by a Resident or Non-Resident Natural Person subject to Corporate Tax 8th May, 2023 Article 11 – Taxable Person
3. 55 of 2023 Determining Qualifying Income for the Qualifying Free Zone Person 30th May, 2023 Article 18 – Qualifying Free Zone Person
4. 56 of 2023 Determination of a Non-Resident Person’s Nexus in the State 30th May, 2023 Article 11 – Taxable Person

The Cabinet Decisions contain a Standard Article ‘Implementing Decisions’ which provides that ‘The Minister shall issue the necessary decisions to implement the provisions of this Decision.’ Accordingly, necessary Ministerial Decisions are issued for implementation of the Cabinet Decisions, in addition to other Ministerial decisions prescribing, determining, specifying, etc under various articles of the CT Law.

MINISTERIAL DECISIONS

The Office of the Minister, Ministry of Finance of the UAE, for the purposes of Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses, has issued the undermentioned Ministerial Decisions:

Sr. No. Ministerial Decision No. Ministerial Decision regarding Issued on
1. 43 of 2023 Concerning Exception from Tax Registration 10th March, 2023
2. 68 of 2023 On the treatment of all businesses and business activities of a government entity as a single taxable person 29th March, 2023
3. 73 of 2023 Small Business Relief 03rd April, 2023
4. 82 of 2023 On the Determination of Categories of Taxable Persons required to prepare and maintain audited Financial Statements 10th April, 2023
5. 83 of 2023 On the Determination of the Conditions under which the presence of a Natural Person 10th April, 2023
in the state would not create a PE for a Non-Resident Person
6. 97 of 2023 On requirements for maintaining TP Documentation 27th April, 2023
7. 105 of 2023 On the Determination of the Conditions under which a person continue to be deemed as an Exempt Person  4th May, 2023
8. 114 of 2023 On Accounting Standards and Methods 9th May, 2023
9. 115 of 2023 On Private Pension Funds and Private Social Security Funds 10th May, 2023
10. 116 of 2023 On Participation Exemption 10th May, 2023
11. 120 of 2023 On the adjustments under the transitional rules 16th May, 2023
12. 125 of 2023 On tax group 22th May, 2023
13. 126 of 2023 On the general interest deduction limitation rule 23rd May, 2023
14. 127 of 2023 On unincorporated partnership foreign partnership and family foundation 24th May, 2023
15. 132 of 2023 On transfers within a qualifying group for corporate tax purposes 25th May, 2023
16. 133 of 2023 On business restructuring relief for corporate tax purposes 25th May, 2023
17. 134 of 2023 On the general rules for determining taxable income for corporate tax purposes 29th May, 2023
18. 139 of 2023 Regarding qualifying activities and excluded activities 1st June, 2023

The Cabinet and Ministerial Decisions on the CT Law can be found at the link https://mof.gov.ae/tax-legislation/.

B. FREE ZONE CORPORATE TAX REGIME [FZCT REGIME]

In this Article, we have analysed and focused on the Cabinet Decision No. 55 of 2023 on ‘Determining Qualifying Income’ and on 1st June, 2023 issued Ministerial Decision No. 139 of 2023 on ‘Qualifying Activities and Excluded Activities’ related to FZCT Regime.The FZCT Regime is a form of UAE Corporate Tax relief which enables Free Zone companies and branches that meet certain conditions to benefit from a preferential 0 per cent Corporate Tax rate on income from qualifying activities and transactions.

Free zones are an integral part of the UAE economy that continue to play a critical role in driving economic growth and transformation both in the UAE and internationally. In recognition of their continued importance and the tax-related commitments that were made at the time the Free Zones were established, Free Zone companies and branches that meet certain conditions can continue to benefit from 0% corporate taxation on income from qualifying activities and transactions.

Natural persons, unincorporated partnerships and sole establishments cannot benefit from the FZCT Regime. Only juridical persons can benefit from the FZCT Regime. This includes any public or private joint stock company, a limited liability company, limited liability partnership and other types of incorporated entities that are established under the rules and regulations of the Free Zone. A branch of a foreign or domestic juridical person that is registered in a Free Zone would also be considered a Free Zone Person [FZP].

A foreign company can become a FZP by transferring its place of incorporation to a UAE Free Zone and continue to exist as an entity incorporated or established in a Free Zone.

The FZCT Regime does not impose any limitations or restrictions with regards to who can establish or own a FZP.

The FZCT Regime does not restrict or prohibit a Qualifying Free Zone Person [QFZP] from operating outside of a Free Zone either in the mainland UAE or in a foreign jurisdiction. However, the income attributable to a domestic or foreign branch or Permanent Establishment [PE] of the QFZP, outside the Free Zone, will be subject to the regular UAE Corporate Tax rate of 9 per cent.

In the case of a foreign PE, the QFZP can claim relief from any double taxation suffered under the Corporate Tax Law or the applicable double tax treaty.

FREE ZONE PERSON

Chapter 5 of the CT Law comprising of Articles 18 and 19 contains relevant provisions relating to FZP.A FZP is a legal entity incorporated or established under the rules and regulations of a Free Zone, or a branch of a mainland UAE or foreign legal entity registered in a Free Zone. A foreign company that transfers its place of incorporation to a Free Zone in the UAE would also be considered a FZP.

The FZCT Regime is available only to FZPs, and this term is also used to determine what income can benefit from the regime by treating income from transactions with other FZPs as Qualifying Income.

QUALIFYING FREE ZONE PERSON [QFZP]

Article 18(1) of the CT Law provides that a QFZP is a FZP that meets all the five conditions mentioned therein i.e.
a) maintains adequate substance in a Free Zone;
b) derives Qualifying Income;
c) has not made an election to be subject to the regular UAE Corporate Tax regime;
d) comply with arm’s length principle and transfer pricing rules and documentation requirements;
e) Prepare and maintain audited financial statements.

Failure to meet any of the conditions results in a QFZP losing its qualifying status and not being able to benefit from the FZCT Regime for five (5) Tax Periods.

On 30th May, 2023, the UAE Ministry of Finance issued Cabinet Decision No. 55 of 2023 on ‘Determining Qualifying Income’ and on 1st June, 2023 issued Ministerial Decision No. 139 of 2023 on ‘Qualifying Activities and Excluded Activities’. These two decisions seek to clarify the application of the UAE corporate tax framework to UAE Free Zone businesses, and whether a taxable person qualifies to be treated as a QFZP under Article 18 of the UAE CT law.

Where a taxpayer is classified as a QFZP, Article 3(2) of the UAE CT law states that the QFZP would be subject to tax at 0 per cent on its Qualifying Income, and at a 9 per cent rate on non-Qualifying Income that it receives.

The FZCT Regime apply automatically. A QFZP that continues to meet all relevant conditions will automatically benefit from the FZCT Regime. There is no need to make an election or submit an application to the FTA.

A QFZP that does not want to benefit from the FZCT Regime can elect to apply the standard UAE Corporate Tax regime instead.

A QFZP will need to maintain documents to evidence compliance with the conditions of the FZCT Regime. In addition to maintaining audited financial statements and adequate transfer pricing documentation, a QFZP will need to maintain all relevant documents and records to evidence its compliance with the conditions to be considered a QFZP. This includes documentation in relation to the substance maintained in a Free Zone and the types of activities performed and income earned.

A QFZP is responsible for ensuring that it continues to meet all the conditions to benefit from the FZCT Regime and for filing its Corporate Tax return on this basis.

The FTA is responsible for the administration and enforcement of UAE Corporate Tax. In this capacity, the FTA can verify and make a final determination of whether a QFZP has complied with all the conditions of the FZCT Regime.

QUALIFYING INCOME

Article (3)(1) of the Cabinet Decision 55 provides that for the purposes of application of Article 18 of the CT law, ‘Qualifying Income’ of the QFZP shall include income derived from transactions with:

1. Other FZPs (except income derived from Excluded Activities);
2. A Non-Free Zone person, only in respect of ‘Qualifying activities’ that are NOT Excluded Activities;
3. Any other income (i.e. income from Excluded Activities) provided that it is below the de minimis threshold.
However, such qualifying income should not be attributable to a Domestic PE or a Foreign PE or to the ownership or exploitation of immovable property in accordance with the Article (5) and (6), respectively, of the Cabinet Decision 55.

INCOME DERIVED FROM TRANSACTIONS WITH OTHER FZPS

Income will be considered as derived from transactions with a FZP where that FZP is the ‘Beneficial Recipient’ i.e. a person who has the right to use and enjoy the service or the goods and does not have a contractual or legal obligation to pass such service or goods to another person.

QUALIFYING ACTIVITIES

Article (2)(1) of the Ministerial Decision 139 states that the following activities conducted by a QFZP shall be considered as Qualifying Activities:
(a) Manufacturing of goods or materials.
(b) Processing of goods or materials.
(c) Holding of shares and other securities.
(d) Ownership, management and operation of Ships.
(e) Reinsurance services that are subject to the regulatory oversight of the competent authority in the State.
(f) Fund management services that are subject to the regulatory oversight of the competent authority in the State.
(g) Wealth and investment management services that are subject to the regulatory oversight of the competent authority in the State.
(h) Headquarter services to Related Parties.
(i) Treasury and financing services to Related Parties.
(j) Financing and leasing of Aircraft, including engines and rotable components.
(k)Distribution of goods or materials in or from a Designated Zone to a customer that resells such goods or materials, or parts thereof or processes or alters such goods or materials or parts thereof for the purposes of sale or resale.
(l) Logistics services.
(m) Any activities that are ancillary to the activities listed in paragraphs (a) to (l) of this Clause.

EXCLUDED ACTIVITIES

Excluded Activities are defined in Article (3)(1) of the Ministerial Decision 139 which states that the following activities shall be considered as Excluded Activities:

(a) Any transactions with natural persons, except transactions in relation to the Qualifying Activities specified under paragraphs (d), (f), (g) and (j) of Clause (1) of Article (2) of the Decision.
(b) Banking activities subject to the regulatory oversight of the competent authority in the State.
(c) Insurance activities subject to the regulatory oversight of the competent authority in the State, other than the activity specified under paragraph (e) of Clause (1) of Article (2) of the Decision.
(d) Finance and leasing activities subject to the regulatory oversight of the competent authority in the State, other than those specified under paragraphs (i) and (j) of Clause (1) of Article (2) of the Decision.
(e) Ownership or exploitation of immovable property, other than Commercial Property located in a Free Zone where the transaction in respect of such Commercial Property is conducted with other FZPs.
(f) Ownership or exploitation of intellectual property assets.
(g) Any activities that are ancillary to the activities listed in paragraphs (a) to (f) above.

An activity shall be considered ancillary where it serves no independent function but is necessary for the performance of the main Excluded Activity.

The activities referenced in Clause (1) of the Article shall have the meaning provided under the respective laws regulating these activities.

Where income falls within Excluded Activities this will not be treated as Qualifying Income (irrespective of where this income is derived from).

DE MINIMIS THRESHOLD

Article (4) of the Ministerial Decision 139, contains provisions related to De Minimis Requirements.A QFZP can earn Non-qualifying income from (i) Excluded Activities or (ii) activities that are non-Qualifying Activities where the other party is a Non-Free Zone Person, provided that this does not exceed the De Minimis threshold, being the lower of either (i) 5 per cent of total revenue of the QFZP in the tax period or (ii) United Arab Emirates Dirham [AED] 5 million.

Certain revenue shall not be included in the calculation of non-qualifying Revenue and total Revenue. This includes revenue attributable to certain immovable property located in a Free Zone (non-commercial property, and commercial property where transactions are with Non-Free Zone Persons). It also includes revenue attributable to a Domestic PE (e.g., a UAE mainland branch) or a Foreign PE.

OTHER CONDITIONS

Where the De Minimis threshold is breached or the QFZP does not satisfy the eligibility conditions of Article 18 of the UAE CT law or any other conditions prescribed, then the FZP shall cease to be a QFZP for the current tax period and then the subsequent four (4) tax periods i.e. they will be treated as a Taxable Person subject to 9 per cent CT rate for a minimum of five years.The implication of the FZP ceasing to be a QFZP is that all of the Taxable Income of the FZP would be subject to 9 per cent (on the Taxable Income that exceeds AED 375,000).

DOMESTIC PE

The Decisions introduce the concept of a Domestic PE where a QFZP has a place of business or other form of presence outside the Free Zone in the State.Income attributable to a Domestic PE should be calculated as if the establishment was a separate and independent person and shall be subject to CT at 9 per cent. However, it will not disqualify the FZP from benefitting from a 0 per cent CT rate on Qualifying Income, or be factored into the de minimis test (as above).

For the purposes of determining whether a QFZP has a Domestic PE, the normal PE rules of Article 14 of the CT Law shall apply. A mainland branch of a QFZP will therefore generally constitute a Domestic PE and be subject to CT at 9 per cent.

REQUIREMENT TO MAINTAIN ADEQUATE SUBSTANCE

Article 18(1)(a) of the UAE CT law requires that, in order to be treated as a QFZP, the FZP has to have adequate substance in the UAE.

Article (7) of Cabinet Decision No. 55 provides that a QFZP is required to undertake its core income-generating activities in a Free Zone and having regard to the level of activities carried out, have adequate assets and an adequate number of qualifying employees, and incur an adequate amount of operating expenditures.

It is possible for this substance requirement to be outsourced to a related party in a Free Zone or a third party in a Free Zone, provided that there is adequate supervision of the outsourced activity by the QFZP. Therefore, it would not be possible for these activities to be outsourced to a UAE mainland party.

The FZCT Regime does not prescribe any minimum investment, job creation or business expansion requirements. However, a QFZP must have adequate staff and assets and incur adequate operating expenditure in a Free Zone relative to the Qualifying Income it earns.

This requirement is in line with the existing UAE economic substance regulations.

AUDITED FINANCIAL STATEMENTS

Article (5)(1)(b) of Ministerial Decision No. 139 confirms the requirement that if a FZP is seeking to be treated as a QFZP it is required to prepare audited financial statements for the tax year in accordance with any decision issued by the Minister on the requirements to prepare and maintain audited financial statements for the purposes of the CT law.Article 54(2) of the CT Law dealing with Financial Statements provides that the Minister may issue a decision requiring categories of taxable persons to prepare and maintain audited or certified financial statements.

Ministerial Decision No. 82 of 2023 on the Determination of Categories of Taxable Persons required to prepare and maintain audited Financial Statements, provides that the following categories of taxable persons shall prepare and maintain audited Financial Statements:
A Taxable Person deriving Revenue exceeding AED 50,000,000 (fifty million United Arab Emirates dirhams) during the relevant Tax Period.
1. A Qualifying Free Zone Person.
2. Thus, each QFZP is to prepare and maintain audited Financial Statements.

CONCLUSION

The release of Cabinet Decision No. 55 on Determining Qualifying Income and Ministerial Decision No. 139 on Qualifying Activities and Excluded Activities provide some clarity on the nature of a Free Zone Person’s income that will be taxed at 0 per cent, as well as the income that would disqualify the FZP (completely) from claiming the 0 per cent tax rate.The released Decisions present a huge shift in understanding of the Free Zone regime within the UAE CT framework. Notably, the introduction of a de minimis threshold will have an impact on Free Zone entities as they could be fully taxable under the new rules.

The definition of ‘Qualifying Activity’ captures a large number of domestic business activities and the provision of services to entities that are located outside of a Free Zone, as well as preserves a beneficial tax regime for the UAE headquarters functions (with headquarters and treasury services falling within the definition).

For Free Zone entities that earn income from individuals (such as earnings from e-commerce sales to individuals, retail businesses, restaurants, hotels, and to an extent professional service/consultancy firms) and UAE businesses that hold or exploit intellectual property (e.g., royalty and license fees from copyrights, trademarks), these income streams are included in the definition of ‘Excluded Activity’ income. This will result in the businesses needing to assess if this income falls within the De Minimis exclusion (being the lower of (i) 5per cent of total revenue or (ii) AED 5 million).

The regulations suggest that if the level of the Excluded Activity income falls outside the De Minimis threshold, then the entity affected would not be eligible to be treated as a QFZP and all of its income would be subject to tax at 9 per cent (under the UAE mainland tax regime). Furthermore, such a business would also be excluded from seeking to be treated as QFZP (i.e., claiming the 0 per cent rate) for the following four (4) tax periods.

It is, therefore, critical that a FZP assesses whether and the extent to which their income streams can be viewed as Qualifying Activity income (i.e., including if their Excluded Activity income falls within the De Minimis exclusion).

Free Zone businesses should ensure that they satisfy all of the requirements of Article 18 of the UAE CT law (which also includes the preparation of audited financial statements) to ensure that they continue to satisfy the conditions to be viewed as a QFZP.

With the release of these Cabinet and Ministerial decisions, and with UAE CT law now effective (accounting periods starting on or after 1 June 2023), businesses that are yet to assess the impact of UAE CT should commence this assessment, at the earliest. With the clarity now available on CT law for Free Zone, time is of essence for Companies to assess their readiness to register and comply with the new regime.

Novel 80-20 Rule for Residential Real Estate Projects (RREP)

Real estate development sector was criticised over the non-percolation of input tax credit benefit to end consumers as well as the prevalence of low cash output. The GST council took cognizance and devised a Composition scheme for residential and mixeduse projects in 2019. Though the legal process for implementing the scheme was complex, the math behind the introduction of this scheme was to augment taxes by restricting input tax credit and collecting output taxes in cash. All aspects of taxation (classification, valuation, input tax credit, reverse charge provisions, tax payment methodology, etc.) were meticulously taken up and a series of notifications were introduced. There was a concoction of multiple provisions integrated into a single notification. Among the various tax aspects introduced into the said scheme, was the novel 80-20 rule which restricted the source of procurements by real estate developers from persons not registered under GST. The said rule mandates the minimum ratio of procurements to be maintained by developers from registered (RPs) and unregistered (URPs) persons. In cases where the procurement from RPs falls short of the 80 per cent ratio (or URPs exceeds 20 per cent), a shortfall value is ascertained and tax is payable on such amounts under reverse charge basis by the Developer (can be termed as excess URP tax). Naturally, this rule was aimed to encourage procurements from RPs so that the net tax collections from residential development do not fall below the 18 per cent threshold.

ELABORATION OF RELEVANT NOTIFICATIONS

Real estate developers/ promoters (RE Promoters) engaged in the construction of residential / commercial apartments in real estate projects (RE project) were directed to comply with a composition scheme devised through a series of rate / exemption notifications1. The list of the relevant rate notifications introduced in 2019 and their specification of the 80/20 rule has been tabulated:


  1. The difference between a rate and exemption notification seems to be obscure since the Central Government is currently empowered with both the powers (i.e. rate specification and exemptions) and has issued notifications combining both the powers.

RCM Notification (N-7/2019) has been issued under section 9(4) imposing a liability on procurement of goods and services from specified categories of persons to the extent of excess URP procurements. The said notification has been linked to the RE construction services notifications (discussed below) which specifies the 80/20 rule as a condition for availing the benefit of lower rate. Though the liability is fixed under this notification, the manner of computation is with reference to RE Construction Services Notification.

RE Construction services rate/exemption Notification (11/2017 r/w 3/2019) is the master notification which specifies the rates for construction services of residential apartments. Different rates have been prescribed based on the nature of the residential project and its affordability (size and value). Five taxing entries have been introduced with the rate being subjected to certain conditions – in the current context the 80/20 rule. As tabulated above, the RCM obligation has been introduced as a ‘condition’ to the rate/ exemption entry i.e. RE promoter is required to comply with the 80/20 while availing the benefit of the lower rate of 5 per cent / 1 per cent on residential apartments. The source of this notification assumes some significance. It can be observed that the notification derives powers from multiple provisions:

Section Nature of Delegated prescription
Section-9(1) Power of fixation of rate of goods/ services (absolute power)
Section-9(3) Power to prescribe RCM tax on ‘specified categories’ of goods or services
Section-9(4) Power to prescribe a ‘class of registered persons’ who would be liable to pay RCM tax on ‘specified categories’ of goods or services
Section-11(1) Power to grant absolute or conditional exemptions
Section-15(5) Power w.r.t. determination of value of supply
Section-16(1) Power to impose conditions and restrictions for availment of input tax credit
Section-148 Special procedures for certain class of registered persons

The subject notification has derived powers from multiple statutory provisions including the provisions of section 9(3)/ 9(4) which impose RCM tax on taxable persons. While the said notification appears to have comprehensive provisions for RCM assessment (identification, valuation and rate of tax) on excess URP procurements, it should be appreciated that the RE construction services notification by itself does not impose RCM liability on URP procurements. The said notification merely provides the mechanism to comply with the RCM liability, while the liability is fastened only by virtue of the RCM notification (7/2019).

 

Goods Rate Notification (N-1/2017 r/w 3/2019) – A new entry 452P has been inserted specifying a 18 per cent rate for all goods (other than capital goods and cement) excessively procured from URPs. An explanation has been appended to entry 452P which attempts to override other entries and fixes the rate of 18 per cent on all goods excessively procured from URPs even though they may be covered by a more specific description or HSN heading. The purpose of this notification is to specify a standard rate of 18 per cent for the entire excessive procurement irrespective of the nature/ HSN of goods. An imposition of a default rate of 18 per cent for all goods on excess procurements obviates the requirement of identification of the HSN of goods which comprise the URP basket under the 80/20 rule.

 

Services Rate/Exemption Notification (N-11/2017 r/w 8/2019) – The services rate notification has also been amended with a new entry 39 specifying 18 per cent rate for all services excessively procured from URPs irrespective of their classification under the SAC schedule. Like the goods rate notification, an explanation has been appended to Entry 39 which imposes tax on excess procurement even though they may be covered by a more specific description or HSN heading. Again, the purpose of this notification is to specify a standard rate of 18 per cent irrespective of the nature/ HSN of services.

SUMMARY OF 80-20 RULE (EXCESS URP TAX)

A summary of the notifications leads to the following conclusions:

–   RE promoters availing the benefit of lower rate are permitted to procure their inputs and input services from URPs subject to a threshold cap of 20 per cent;

–   Any excess procurements from URPs (or shortfall procurements from RPs) would result in an RCM tax liability on the RE promoter to the extent of the excess/ shortfall i.e. minimum ratio of 80-20 (RP:URP) is to be maintained;

–   Any input or input service on which tax is already paid on RCM basis would be treated as part of the 80 per cent basket from registered persons;

–   Goods & Services rate notifications carve out a special entry pegging the rate at 18 per cent on the value of excess procurement;

–   Computation would have to be performed on a ‘project level’ for each financial year from commencement until the completion of the project;

–   Prescribed form (DRC-03) on the common portal would be available for reporting the shortfall of 80-20 rule tax;

–   Capital Goods and Cements must necessarily be procured from RPs and any procurement from URPs would be liable at the rate of 18 per cent / 28 per cent respectively;

–   The excess procurement tax would be payable in the month of June following the relevant financial year(s) – RCM tax on cement and capital goods would be payable on the month of receipt itself;

–   Value of input or input services in the form of grant of development rights, long term lease of land, floor space index, or the value of electricity, high speed diesel, motor spirit and natural gas used in construction of residential apartments in a project shall be excluded.

PROCEDURE FOR 80/20 RULE COMPUTATION

The 80/20 Rule specified in the construction services entry has provided for certain enumerations for imposition of RCM liability. The following flowchart provides the manner of computation of the value which would be subjected to RCM:

Step 1 – Identification of inputs and input services

The first step in the said process would be ascertain the inputs and input services. The said terms are well defined as follows:

 

“(59) “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business;

(60) “input service” means any service used or intended to be used by a supplier in the course or furtherance of business;

Therefore, all goods (other than capitalised items) purchased by the RE promoter in respect of the business activity would be inputs. Even though cement procurements would be considered as inputs, they have been delineated for URP-RCM calculation in view of the higher rate applicable at 28 per cent. Capital goods (being goods which are capitalised) would be excluded from the calculation and liable to RCM irrespective of the quantum. Similarly, all services (irrespective of being capitalised or not) availed by the RE promoter would qualify as input services.

The scope of the term’s inputs and input service needs consideration. The definition seems to be very simple to include all goods and services used in the business activity to be included in the 80/20 formula. The definition of goods (under section 2(52)) and services (under section 2(102) would be applicable to this formula. Consequently, items which are neither goods nor services would fall outside the phrase inputs/ input service. Take for example salary and wages paid to URPs by the RE promoter in respect of the construction of the project. In terms of Schedule III, the said costs are neither supply or goods or services in view of the ‘employee-employer’ relationship. Cases which are outside the defined scope of good/ services would not fall for consideration in the 80/20 rule. The Government FAQ on this aspect also affirms this conceptual understanding –

 

FAQ – 15. The condition in Notification No. 3/2019 specifies that 80% of inputs and input services should be procured from registered person. What about expenditure such as salaries, wages, etc. These are not supplies under GST [Sl. 1 of Schedule III]. Now, my question is, whether such services will be included under input services for considering 80% criteria?

Services by an employee to the employer in the course of or in relation to his employment are neither a goods nor a service as per clause 1 of the Schedule III of CGST Act, 2017. Therefore, salaries and wages paid by promoter to his employees will not be relevant for the minimum purchase requirement of 80%.

 

Step 2 – Identification of supplier of such inputs / input services

This step requires identification of the registration status of the supplier of inputs / input services. A supplier could be unregistered under GST on account of (a) turnover falling below the taxable threshold (b) not engaged in any supply/ business activity (c) exclusively engaged in exempt activity (d) exclusively engaged in RCM activity where recipient is liable to pay tax (e) compulsory de-registration on account of non-compliance or fraudulent activity. All such suppliers would qualify as unregistered persons and supplies therefrom would fall within the 20 per cent basket. Certain challenges arise while identifying the registration status of a supplier.

 

Retrospective Cancellation – Logically speaking, the status of registration of a supplier would have to be ascertained on the date of the transaction. Now, let’s take a case where a RE promoter avails supplies from a supplier having valid registration but is subjected to retrospective cancellation under section 29(2). The RE promoter would have naturally aggregated the supplies from such person(s) in the RP basket and established compliance with the 80/20 rule. After the computation and payment of the RCM, it has come to the knowledge of the RP that the registration of the supplier has been retrospectively cancelled. Generally, the RP would have also charged taxes on such inputs/ input services.

One of the objectives of imposing the URP-RCM is to augment revenue by balancing the tax on inputs as well as output taxes. URPs would have not levied tax on their supplies and hence an obligation has been placed on the RE promoter as a recipient of URP supplies to discharge tax and balance the loss of revenue under the reduced rate. Where the cancelled RPs have charged the tax on their supplies (having registration at the relevant point of time), a view can be adopted that retrospective cancellation does not alter the tax status of the transaction and hence the condition of the notification has stands complied. Moreover, the notification lacks any provision to perform a ‘true-up adjustment’ akin to Rule 42 based on change in registration status. In the absence of any specific provision for consequential reworking of retrospective cancellation, it appears that retrospective cancellation may not warrant a re-working of the 80/20 rule.

 

Filtration of supplies which are from RPs and URPs – The recent experience from revenue audits suggest that officers have the tendency to take gross expenditure reported in the Profit & Loss account of the RE promoter (exclude the salary costs and depreciation) and compare the composition of RPs and URPs with reference to the input/ input services reported in GSTR-2A. Take for example the table below:

Particular Amount Ratio
Total Expense in P&L a/c 100
Less: Payroll Cost (20)
Less: Depreciation (10)
Less: Non-supply costs/ accounting provisions (20)
Input/ Input services of project 50 100 per cent
GSTR-2A inputs/ input services 30 60 per cent
Balance deemed as URPs 20 40 per cent

The revenue authorities are adopting a summary approach to ascertain the compliance with 80/20 rule. They believe that the only a credible source of information for RP procurements is the GSTR-2A. The balance is deemed to be obtained from URPs. This approach fails to appreciate that in many cases the suppliers report their invoices in B2C column and hence they do not reflect in the GSTR-2A. There is a burden placed on the RE promoter to prepare the expense register with corresponding GSTINs of suppliers involved. Since the burden of proof to establish compliance with an exemption notification is on the tax-payer, the cumbersome process would necessarily have to be followed by the tax-payers.

 

Step 3 – Identification of inputs or input services ‘used for supplying the service’

This is the most critical step and ambiguous leg in ascertainment of the GST liability under RCM. The said provision states that RCM liability would be imposed only on such inputs or input services which are ‘used for supplying the service’. This phrase is relatively ambiguous and leaves us with the question of whether RCM is imposable on the entire gamut of input or input services which are received the RE promoter. The specific questions in this regard are (a) whether all business related inputs/ input services are amenable to RCM or only such inputs/ input services which are having a nexus with the construction services of flats amenable to RCM (Nexus vis-à-vis construction activity or business activity); (b) what is the extent of nexus required with construction activity, whether indirect costs / apportioned costs would fall into consideration (Direct and/ or indirect nexus with construction activity); (c) whether there should also be a nexus with the exemption entry itself (Nexus with exemption entry);

 

Issue A – Nexus Issue vis-à-vis entire business activity: The rule provides for imposition of RCM on inputs/ input services used in supplying the service. On the other hand, the terms input and input services have been defined with reference to the ‘overall business activity’ of a taxable person. The business activity of a taxable person is wide enough to include all streams of supplies (construction services, other taxable or non-leviable supplies, etc.). Take for example a promoter who is engaged in construction activity of residential flats as well as engaged in sale of residential plots (which is a non-leviable activity) and residential project maintenance activity (a completely taxable activity). Though all business costs would form part of the definition of inputs/input services, only those inputs/ input services which are used for supplying the construction services
would fall into the 80/20 pool. To reiterate, only those inputs and input services which are ‘used in supplying the construction service of residential flats’ are to be considered. In the said example, inputs/ input services exclusively pertaining to the plotted development and the maintenance activity would fall outside consideration. Reference can also be made to the explanation to the proviso which mandates the promoter to maintain ‘project wise accounts’ for the RE project and RCM is to be discharge on a yearly basis for the relevant project only.

 

Issue B – Direct or indirect nexus with Construction costs – The RCM notification, which is the primary notification imposing RCM liability, makes a reference to the excess procurements from URPs for the purpose of ‘construction of the project’. Thus, reading the rate/ exemption notification and the RCM notification in tandem appears to lead to the conclusion that RCM liability is imposable only on such costs which meet both the criteria’s – i.e.

– Used for supplying the construction services; and

– Used for construction of the project.

Therefore, the expenses should not only be used for providing the construction service, it shall also be related to the cost of construction of the RE project. Inputs and input services exclusively related to other business activities or undertaken at the management or corporate level operations may not fall into the 80/20 pool. A tabulation of certain typical costs incurred
by a Promoter during his business activity may be analysed:

Nature of Costs Extent of Nexus Includability
CONSTRUCTION SERVICE RELATED COSTS
Civil construction costs Direct Nexus – exclusive to Construction costs Yes
Common amenities costs Direct nexus – exclusive to construction costs Yes
Goodwill for land Direct Nexus – Debate on being input services Debatable if in nature of development rights
Post OC Finishing costs Direct Nexus – exclusive to construction services Debatable since RCM is imposable only upto Project OC date
Marketing costs Having indirect nexus with construction costs but used for construction services May be
Government related costs Direct nexus with construction costs Yes
Rental accommodation for existing redevelopment projects Direct nexus with construction services but strictly not a construction cost May be
CORPORATE BUSINESS/ ENTITY LEVEL COSTS
Director Sitting Fees Common Excludible
Interest costs Common Excludible
Corporate office Rentals Common Excludible
Corporate administrative Costs Common Excludible
Brand promotion/ Marketing Common Debatable

The criteria for inclusion of the procurements are its linkage to the construction services and the ascertainment of whether they are ‘construction costs’. Evidently, the notification does not specify whether such nexus should be direct or indirect and exclusive or common. Moreover, where common costs are incurred for multiple projects/ business segments, the notification does not provide for an apportionment mechanism for such costs. The Government FAQ (extracted below) indicates that common costs should be apportioned among the various projects on a carpet area basis.

“FAQ – 5. In case of a Real Estate Project, comprising of Residential as well as Commercial portion (more than 15%), how is the minimum procurement limit of 80% to be tested, evaluated and complied with where the Project has single RERA Registration and a single GST Registration and it is not practically feasible to get separate registrations due to peculiar nature of building(s)?

 

The promoter shall apportion and account for the procurements for residential and commercial portion on the basis of the ratio of the carpet area of the residential and commercial apartments in the project.”

It is here where a decisive tax position may have to be taken by promoters to implement the rule. A conservative view would be to identify all direct project-related costs in terms of commercial principles (cost centre accounting). To this direct cost a reasonable apportionment of common costs (either based on carpet area or turnover etc.) may be adopted and such costs may be loaded onto the direct project costs. In the above table, if a RE promoter incurs common marketing costs for multiple projects, it may apportion the yearly marketing costs to each project on carpet area basis and then apply the rule against each project independently.

 

Issue C –Nexus Issue vis-à-vis construction services activity: One may recall that the 80/20 rule has been introduced as a condition to an exemption entry w.r.t construction services rendered by a promoter in a residential real estate project. The RCM notification parallelly imposes the tax liability on the promoter who avails the benefit of the exemption entry under the rate notification. This leads to a pressing conclusion that 80/20 rule is applicable only to such supplies which are availing the benefit of the exemption entry. Therefore, the question which may require consideration is whether the input and input service must have a nexus with the supply of construction service. Can one infer that only such supply activities taxable under the construction service entry of the rate/ exemption notification would be subjected to the 80/20 rule?

We are all aware that only under-construction booked flats are liable to tax by virtue of Schedule II – on the converse, flats which are un-booked/ in stock until issuance of OC and / or are sold after issuance of the OC are not considered as supply in terms of Schedule II read with Schedule III. Accordingly, these flats do not require the cover of an exemption entry.

The RE promoter would incur common costs for all flats comprised in the RE project. The exemption entry would operate only once the levy is attracted i.e. receipt of sums of money for under-construction flats. Consequently, the 80/20 rule should operate only to the limited extent of the residential flats which were booked/ sold by the RE promoter prior to OC date. If the exemption entry is said to operate only to the extent the project is booked, then inputs and input services pertaining to the flats which were lying unbooked or sold after OC would stand excluded from the RCM liability. Let’s understand this by way of an example – the progression of the flats booked by the end-customer in the RE project and the implication of the 80/20 Rule could be interpreted as follows:

Year % of flats booked Applicability of Exemption entry & 80/20 rule Remarks
Y1 Project Launch – 10 per cent On 10 per cent 10 per cent flats taxable
Y2 Under construction – 40 per cent On 40 per cent 40 per cent flats are taxable
Y3 Upto Occupancy Certificate – 80 per cent On 70 per cent 70 per cent flats are taxable
Y4 Post OC Sale/ Unbooked Flats – 20 per cent On 70 per cent Balance 30 per cent flats are not supplied

The above table depicts that the Company would be incurring common costs (in form of inputs and input services) for the entire project tenure from Y1 to Y4 for all the residential flats comprising the project. The simple reading of the proviso to the exemption entry implies that the 80/20 rule operates on the entire project costs. But one should also not lose sight of the fact that the 80/20 rule is a condition for an exemption entry. The RCM entry is also linked to such exemption entry. Therefore, in Y1 it appears that only 10 per cent of the project cost would be amenable to the 80/20 Rule; in Y2 only 40 per cent of the project cost would be amenable to the said rule and in Y3 70 per cent of the project cost would be subjected to this rule. Flats which remain unbooked or sold post OC do not require the shelter of the exemption entry and hence need not be subjected to the 80/20 rule.

Though this interpretation and its consequential apportionment is not explicit in the proviso or RCM notification, the fact that the RCM liability is tagged to the exemption entry gives legal credibility to this interpretation. A reasonable / rational approach would be to compute the RCM liability for the entire project under the 80/20 rule and then apportion them to the extent of the percentage of flats booked in the project. This approach would certainly face resistance from the revenue authorities who believe that RCM is an independent / stand-alone provision for taxation and hence the entire project is subjected to 80/20 rule.

Similar issue arises where certain RE promoters are offering the land owner’s share of flats as a works contract service rather than construction service and discharging tax at the head line rate of 18 per cent instead of 5 per cent. While RE promoters have a legal rationale for fixing the tax at 18 per cent, a connected complication emerges on the front of the 80/20 rule. Re-iterating the principle stated above, the RE promoter is discharging tax to the extent of land owner’s share as a contractor under works contract service category and is not availing the benefit of the exemption entry. Therefore, the 80/20 rule cannot be said to extend its domain of operations on other taxing/ exemption entries. 80/20 rule would have to be trimmed to this extent in such scenarios. The Government FAQ in this context may be relied for this purpose. It clearly excludes the applicability of 80/20 rule where the tax is being paid under a different entry of the rate/ exemption notification.

 

FAQ 17. – Whether the condition of receiving 80% of inputs and input services from the registered person shall be applicable if the developer opts to continue to pay tax at the old rates of 12%/8% in respect of an ongoing project?

 

No, if the developer opts to continue to pay tax at the old rates of 12%/8% in respect of an ongoing project, the condition of receiving 80% of inputs and input services from the registered person doesn’t apply.

 

POST OC COSTS/ COMPUTATION OF 80-20 RULE

RE promoters incur costs even after issuance of occupancy certificate. The said costs could be in the nature finishing costs (housekeeping, fittings, etc.), post OC receipt of invoices from contractor, etc. 80/20 rule provides that the RE promoter would have to compute the RCM liability for each financial year until the issuance of the OC. The literal wordings limit the operation of the rule only for inputs and input services received upto to OC. This is despite that the RE promoter is in the process of handing over possession/ registration of pre-booked flats during the construction stage and is yet to offer the said dues for taxation under the construction services entry. We reach a situation where the RE promoter would be availing the benefit of the exemption entry for Post OC receipts of under-construction pre-booked flats but is not under the obligation to discharge the RCM under the 80/20 rule. This is primarily because the time frame of applicability of the 80/20 rule is from the date of commencement of the project until issuance of the occupancy certificate. We may recall that the provisions of 13(3) which fix the time of supply on RCM activity at the time of making payments or sixty days from the date of issuance of the invoice by the supplier. Going by the time of supply provisions, all payments made to URPs after the OC would be outside the scope of the 80/20 rule.

Step 4 – Discharge of Tax / Rate and Value

Exemption entry under Exemption Notification vis-à-vis Rate notification

The other aspect is the inclusion of taxable and exempt supplies of goods and/or services. By taxable supplies we refer to those supplies which are leviable to specific rate under the rate/ exemption notification (say 5 per cent, 12 per cent, etc.). Exempt supplies are those which are wholly exempt under the exemption notification (NIL rate). The current structure of the notifications is framed as follows:

– Rates for goods are notified in N-1/2017

– Wholly exempt goods are notified in N-2/2017

– Rate for services / partially exempt services are notified in N-11/2017

– Wholly exempt services are notified in N-12/2017

The point for consideration is whether the RCM liability can be fixed at the headline rate of 18 per cent on all goods/ services including those which are partially / wholly exempt. Take for example, purchase of water (which is wholly exempt goods) and interest on borrowings (which is wholly exempt service). In literal terms the said goods / services would qualify as ‘inputs’ / ‘input services’ and hence form part of 80-20 rule computation. The supplier while supplying the goods would have claimed exemption under the goods / services exemption notification respectively. But by virtue of special entry (452Q of the goods rate notification and 39 of the services notification), the very same transaction at the recipient’s end appears to be subjected to imposition of a 18 per cent tax rate to the extent such costs along with other costs cross the 20 per cent URP threshold. Two concerns arise here (a) the transaction is being viewed differently at the supplier’s end (by grant of exemption) and differently at the recipient’s end (by imposing a 18 per cent liability). Moreover, the Government is taking away the benefit granted at the supplier’s end (which ultimately benefits the recipient) by imposing a tax at the recipient’s end. Is this permissible or legally intended? The Government FAQ in this context is below”

“FAQ – 18. Whether the inward supplies of exempted goods/services shall be included in the value of supplies from unregistered persons while calculating 80% threshold?

 

Yes. Inward supplies of exempted goods/services shall be included in the value of supplies from unregistered persons while calculating 80% threshold.”

We take a step forward to understand the operation of the rate/exemption notification vis-à-vis RCM notification. The source of the rate/exemption notifications assumes significance. Section 9(1) imposes the liability of GST supplies at the rates notified by the Government. Section 9(1) is a charging provision which specifies the subject-matter of tax, its taxable value, its taxable rate and the taxable person. Section 11(1) is an extension of the said provision which provides for a partial or a full exemption to specified categories of goods/ services. By application of these sections, one ascertains the tax payable on supply transactions.

Sections 9(3)/ 9(4), on the other hand, are merely collection provisions whereby the recipient has been fastened with the last aspect of levy i.e. the person by whom tax is payable. These sections operate vis-à-vis the discharge of tax liability and not with respect fixation of the levy (i.e. fixation of rates / value on which tax is payable). To address this, the policy makers have inserted specific entries i.e. Entry 452Q in goods rate schedule and Entry 39 in services rate schedule. The said entries specifically state that despite goods/services being specifically classifiable elsewhere, in respect of the value representing the excess procurement from URPs, the said entry would prevail over all other specific entries. Therefore, there are conflicting rates in the rate schedule – one being the rate under which the goods/ services are classifiable and the other being the special entry introduced by virtue of the 80/20 rule. Going by the explanations to the special entry, the said special entry would prevail over default entry.

But it is important to carefully note that this overriding implication extends only to the rate schedule (i.e. Notification 1/2017 for goods or 11/2017 for services). The extract of the overriding explanation is worth noting:

 

“Explanation. – This entry is to be taken to apply to all services which satisfy the conditions prescribed herein, even though they may be covered by a more specific chapter, section or heading elsewhere in this notification.”

Emphasis should be placed on the phrase ‘this notification’ which clearly implies that the explanation does not extend its operations to other notifications (including the exemption notification 2/2017 for goods and 12/2017 for services). Keeping this inference in mind, we should apply the provisions of section 9(1) r/w 11(1). Now let’s go back to the water/ interest example which is specified as wholly exempt by virtue of 11(1). The baseline rate in the rate schedule would typically fall under the residuary category of 18 per cent. The special entry for RCM also imposes tax at 18 per cent and the said special entry could prevail over the default entry specified in the rate notification. But on the other hand, the exemption notification grants a complete exemption to water/ interest. Can these conflicting conclusions be reconciled? The possible answer would be that the special entry prescribed for imposition of tax at 18 per cent on all goods/services would extend only to the rates notification and cannot override the exemption notification. Though tax is payable at 18 per cent, by virtue of an exemption notification, the said goods would stand to be completely exempt in terms of section 11(1). Hence, RCM may not be payable on such exempt goods despite the special entry introduced for RCM purposes. The repercussion of this conclusion would give rise to the question of what is comprised in the excess value of URPs. The table below depicts the challenge:

Goods Rate Composition to Total Cost
Sand Taxable 5 per cent
Wood Taxable 10 per cent
Water Exempt 5 per cent
Jelly Taxable 5 per cent
Total URP composition 25 per cent
Excess URP purchase 5 per cent

The question here would be on the attribution of the 5 per cent excess URP purchase to a particular commodity to decide its taxability/ exemption. The law is clearly silent on this aspect and one reaches a dead-end to implementation of the Rule. While one may claim absence of a machinery mechanism, a conservative taxpayer would discharge the tax assuming that all taxable and exempt activities are includible in the 80/20 rule and subjected to the 18 per cent headline rate.

OTHER ISSUES IN IMPLEMENTATION OF 80/20 RULE

Interplay of section 9(3) – specified list of RCMs and 9(4) – RCM on URP procurements

 

The other interesting issue arises in the inter-play of RCM liability emerging from notification issued u/s 9(3) as well as 9(4). Take the table below as an example:

 

Services/ Goods Covered under notification 9(3) Covered under Notification 9(4)
Lawyer services Yes Yes, if the supplier unregistered
Goods transport services Yes Yes, if the supplier unregistered
Sponsorship services Yes Yes, if the supplier unregistered
Services from the Central/ State Government Yes Yes, if the supplier unregistered
Services of renting of motor cab in specific instances Yes Yes, if the supplier unregistered

 

Therefore, certain services are due for RCM liability under both notifications. One would simply believe that the consequence would be neutral as RCM is payable in either scenario. But such a belief is not true. Take for instance a case where these services are procured from unregistered suppliers but fall below the 20 per cent threshold. In such a scenario, the RE construction services notification read with the RCM notification issued under section 9(4) would not obligate the RE promoter to discharge the tax to the extent it falls below the 20 per cent threshold. We may also note that RE construction services notification contains a provision which reads as follows:

“Provided also that inputs and input services on which tax is paid on reverse charge basis shall be deemed to have been purchased from registered person”;

Curiously, the said proviso only states that once tax is paid under RCM basis on certain inputs/ input services, they shall be deemed to have been purchased from registered persons even-though they have been actually purchased from URPs. The proviso operates only on such inputs/ input services where the tax is paid and does not conclude on whether tax is payable at all on such overlapping RCM provisions. The purpose of this proviso is two-fold (a) to avoid consequence of double taxation of RCM under section 9(3) and 9(4); (b) to treat the RCM tax paid on excess procurements as part of the 80 per cent pool and make an otherwise non-compliant service provider, a compliant service provider after payment of the RCM tax, thereby protecting the exemption. But the proviso no-where breaks the conflict arising from simultaneous operation of both section – 9(3) and 9(4).

A conservative view would be to hold that section 9(3) RCM liability would continue to be payable (being a specific entry and applicable to all persons without any exception). Moreover, the RCM notification is not intended to grant any exemption of RCM liability to inputs/inputs services which were previously taxable – the situation is status quo as regards lawyer/ GTA, etc. activities. RCM notification under section 9(4) was introduced to place a new liability on input/input services which are not previously taxable. Therefore, RCM would still be payable in terms of 9(3) and once the RCM liability is paid, the said amounts would fall within the RP basket by virtue of the proviso extracted above. Alternatively, an aggressive view would be that both notifications operate in tandem, but the notification 9(4) is more specific for RE promoters. Moreover, since such notification entry is subsequent to the introduction of entry in notification 9(3), the entry in Notification 9(4) would have overriding effect. Consequently, such lawyer and other specified services falling with the 20% threshold would not be liable for RCM to such extent.

INTER-PLAY OF INPUTS/ INPUT SERVICES WITH PLACE OF SUPPLY PROVISIONS

The basic tenets of imposition of GST liability involve ascertainment of the inter-state or intra-state character of a supply. Once this is decided, the supply transaction is to be legally examined within the confines of the respective statute and notification (i.e. intra-state supply would be subjected to CGST/SGST notifications and inter-state supply would be subjected to IGST notifications). Even in the context of RCM, the recipient has to assess the inter-state/ intra-state character of a supply and discharge its liability accordingly. Curiously the 80/20 rule does not lay down any guideline on this aspect. All RE promoters would charge CGST/SGST taxes on their output supplies on account of the POS provisions. Hence, they avail the benefit of the CGST/ SGST notification and do not have to draw any reference to the corresponding IGST rate/exemption notification.

But they may be availing inter-state inputs and services from both RPs as well as URPs2. Two challenges emerge herein: (A) Whether inputs and services specified under the RCM notifications include only those which meet the CGST/ SGST provisions (i.e. intra-state inputs/ input services) or even those which meet the IGST provisions (i.e. inter-state inputs/ input services); and (B) Can an intra-state notification impose RCM liability for an inter-state input/ input service? The RCM notification can be referred herein. While CGST is properly worded, the IGST notification and the corresponding RCM notification apply only when IGST exemption is being availed under the IGST Act:

Sl. No. Category of supply of goods and services Recipient of goods and services
(1) (2) (3)
1 Supply of such goods and services or both [other than services by way of grant of development rights, long term lease of land (against upfront payment in the form of premium, salami, development charges, etc.) or FSI (including additional FSI)] which constitute the shortfall from the minimum value of goods or services or both required to be purchased by a promoter for construction of project, in a financial year (or part of the financial year till the date of issuance of completion certificate or first occupation, whichever is earlier) as prescribed in notification No. 8/2017-Integrated Tax (Rate), dated 28th June, 2017, at Items (i), (ia), (ib), (ic) and (id) against Serial No. (3), published in Gazette of India vide G.S.R. No. 683(E), dated 28th June, 2017, as amended. Promoter

2. Section 24 provides compulsory registration where the inter-state supply is a taxable supply and possibly exempt suppliers would not have availed compulsory registration despite inter-state supplies

A decisive answer to both the questions may be slightly elusive. One may interpret the IGST entry as having reference to inputs and input services only on application of the IGST statute and the IGST rate/exemption notification. Where the RE promoter is discharging tax under the CGST statute and CGST rate/ exemption notification, the input and inputs services having an inter-state character would stand excluded. This is apparent from the reading of the IGST-RCM notification (7/2019-IGST(R)) which imposes IGST-RCM liability only with reference to the prescription/ quantification as per the IGST exemption notification and falls short from referring to the CGST/SGST exemption entry. There is no apparent cross-linkage among the IGST and CGST/SGST act and their RCM and the rate/ exemption notifications. Thus, literal wordings lead to the pressing interpretation that IGST-RCM may not be payable when applying the CGST/SGST rate/ exemption entry. RE promoters would not be liable to include inter-state inputs/ input services while ascertaining the CGST/SGST liability under the 80/20 rule.

 

CONCLUSION

The fiscal benefits of a complicated rule such as this should be ascertained by policy makers from the revenue collection statistics. Where the tax collections are insignificant in comparison to the legal complexities and administrative burden, an attempt should be made to simplify the rate notification and ease the business enterprise from the burden of the 80/20 rule. This apart, the initial concerns of stakeholders that the RE notification is complicated and challenging to comprehend seems to have dwindled over the years and the RE promoters have accepted the composition scheme as the norm for the future thereby re-working their project costs with much more certainty. The RE promoters opting for this notification have experienced significant drop in their compliance burden in terms of ITC availment, 2A matching, vendor followup and most importantly project economics. The only urge of the industry is that since the industry is now following main-stream economy, it is time to reduce the overall impact of transaction taxes on this sector.

Future of Audit: The Transformation Agenda

 
BACKGROUND
The audit profession is as old as civilisation itself, but its relevance is being questioned today, perhaps more strongly than ever before. This article is an attempt to identify the root causes for the erosion of confidence in the audit function and actions required to transform this profession particularly in the context of India’s growth and the aspiration of the Indian Auditing Profession to be the world leader.

 

Having been part of the audit profession for over four decades my views may be somewhat biased in favor of the profession though I have tried to be impartial in my assessment of the state of the profession and the actions required to transform the audit function.

 

Auditing limited companies, made mandatory around a hundred years before, was always a check on the so-called ‘principal/agent problem’ inherent in the corporate form of business. As Adam Smith once pointed out, “managers of other people’s money could not be trusted to be as prudent with it as they were with their own”.

 

After more than seven decades of statutory recognition in India, the auditing profession is in the twilight zone transitioning from one era to another. There is a general feeling of concern, angst and helplessness. Critics of the profession believe there has been a significant delay, while hardcore loyalists passionately believe that its past glory is intact, if not enhanced and spoken glowingly about the profession’s contribution to nation building. The loyalists allege that a lot of criticism (including from its members) is biased and incorrect. I personally believe the condition of the audit profession world over and in our country is not as bad as the critics point it, nor is it as sparkling as loyalists profess it to be.

 

Whatever be the reality, it is time for introspection and taking corrective steps to make the audit function “fit for the future”. To determine the appropriate steps, we begin by:

 

  • Understanding the present situation, i.e., the current state
  • Analysing the trends, challenges, headwinds and tailwinds, and
  • Evaluating and considering the impact of external and internal factors.

 

CURRENT STATE
Ever since the dawn of the 21st century, the world has been plagued by several corporate failures, from Enron, Worldcom, etc., to the more recent Carillion in UK and Wirecard in Germany. In many of these, there are allegations of governance failures, frauds and audit failures.

 

Closer home in our country, too, we have witnessed failures and frauds in financial services entities and other companies in the business of technology, steel, jewellery, real estate, construction, etc.

 

Whilst laying the blame at the feet of the audit profession for what could be business failures and not necessarily audit failures may be inappropriate, it cannot be denied that in some cases, the auditors have failed to detect large craters in the balance sheet and not just holes in the balance sheet. A senior Indian Government official rightly remarked: “we don’t expect auditors to find a needle in a haystack, but surely their duty extends to finding the elephant in the room!”

Some concerns arising out of these failures are:

 

  • World’s most prominent companies with the best systems, reputed auditors, high profile boards collapsing suddenly overnight under the weight of shoddy accounting and auditing with no warning signals
  • Poor corporate governance
  • Lack of ethical behavior
  • Savings and retirement plans evaporating – in many cases, overnight
  • Investors experiencing complete erosion of the value of their investments
  • Erosion of credibility of oversight and enforcement actions
  • Auditors missing glaring signs

 

Tim Steer, in his book titled “The Signs Were There” states “….the dives in share prices and the company disasters that resulted in bankruptcy could have been predicted by a little more than a browse through the annual reports if you know where to look….the warning signs are regularly there in the form of accounting shenanigans or other clear signs that the business is changing direction for the worse, or that excellent results are being reported only because of one-off and non-recurring items. Often these red flags are either not seen or are ignored by investors and other stakeholders.

 

Tim Steer further states in the context of the failure of Carillion in the UK, “the collapse in January 2018 of Carillion, which had received enormous amounts of public money as one of the UK government’s favourite construction and support service companies, is just one in a long line of corporate disasters where even a cursory look at the balance sheet by anyone with a smattering of financial training would have evoked a feeling of dejavu and the realisation that the company was heading for a fall”.

 

In his Review Report on quality and effectiveness of audit, Sir Donald Brydon stated: “The quality and effectiveness of audit has become an increasingly contested issue …….Audit is not broken, but it has lost its way and all the actors in the audit process bear some measure of responsibility.

 

Regulators, too, have expressed similar sentiments. These statements correctly reflect the state of the auditing function in India and the rest of the world.

 

What are the causes? What should be done to fix it? What is the future? I will deal with these later in the article, as we must first also consider the trends, challenges, headwinds and tailwinds, if any, impacting the audit function.

 

TRENDS, CHALLENGES AND HEADWINDS
The future of auditing, if done the way it is presently, is indeed bleak, given the developments in technology and other changes in regulations, headwinds, etc. The audit function was designed in another century. Built to last, as the saying goes. It was not built to withstand rapid, radical change. A twentieth-century system cannot function forever and effectively in the 21st century.

 

So what is the conclusion? Has our audit function, which I was a part of for over four decades, suddenly decayed or have the audit professionals become cowboys or toxic? The answer is a firm ‘NO’. We are transitioning from another era and are undergoing the labor pains of a new birth. It will involve a lot of transformation effort with changes in mindset, skillset and toolset.

 

No one can predict the future. We are not soothsayers. Of course, one thing is certain and that is “change”. We can no longer function as in 1949 or in the way we have been doing so far. Disruption of the audit function is a certainty. It is not about ‘whether’, but ‘when’. Unfortunately, it can happen faster than we can expect or anticipate as it is not just ‘change’ which is happening but “exponential change”.

 

The Auditing profession is in a remarkable state of flux. In less than two decades, the way in which audit professionals work and what they will do will change radically. We saw auditors adapt during the pandemic, which for the first time demolished many myths. We are already witnessing many challenges, some of which we never imagined would happen after 73 years. Some examples are:

  • Disappearance of branch audits
  •  Remote physical verification
  • “Audit from home”
  • Same services being provided by other professionals
  • Moves to eliminate audits of smaller entities
  • Audits of sustainability reports and integrated reporting

Although everyone would be impacted, the unfortunate part is that the changes will impact the audit function earliest.

 

Even if we cannot predict the future, we need to be able to observe, understand trends, read the tea leaves correctly and smell the coffee brewing. No purpose will be served by criticizing or ignoring or resisting some of the developments. We need to understand the principles which are driving them.

 

As the saying goes, “We cannot direct the wind, but we can adjust the sails”

 

Some of the drivers of this change are:

  • Technology
  • Liberalisation
  • Exclusivity
  • Convergence
  • Corporatisation of professions
 I will briefly explain each of these.

 

Technology

 

We are told the average desktop computer will have the same processing power as the human brain which neuroscientists tell us is 1016 calculations per second.

 

By 2050, according to Ray Kurzweil, the average desktop machine will have more processing power than all of humanity combined.

 

Technology is growing exponentially in that it more than doubles in power while dropping in price on a regular basis. Moore’s Law is a classic example.

 

The developments in storage, speed of processing, connectivity, IOT, Big Data, Analytics, Robotics, Artificial Intelligence, etc. will undoubtedly disrupt what services are required, how services will be rendered, who will deliver the services, where services will be rendered and how services will be priced. The audit function cannot be immune to the disruption and will need to transform and adapt if it has to remain relevant and effective.

 

 
Liberalisation

 

As our country continues to liberalise and dismantle bottlenecks in doing business, we will witness decreases in attest requirements and more reliance on self-certification. The audit profession cannot seek legislations which are akin to ‘employment guarantee programmes’. The profession should earn its existence by creating a compelling need for audit services and delivering quality similar to other businesses or professions that have more number of persons dependant and operate in highly competitive environments where price, value and quality of service are some of the criteria which determines who succeeds.

 

Exclusivity

 

Alongside liberalisation we will witness actions to eliminate monopolies and eliminate exclusivity. This will further be facilitated by developments in technology which obviate the need for dependence on external professionals but will also shape environments functioning on sophisticated technologies where the traditional professional trained in a significantly manual environment would become extinct. If audit continues to be a relevant function and is expected to use technology and operate in complex technology environments designed by tech professionals questions would be asked as to why technology companies which designed such systems should not be eligible to audit those systems with the help of “techies” and other professionals proficient in accounting. After all, audit is about verifying data, exercising judgements and drawing conclusions. We may not wish that this happens but audit professionals who, perhaps, number 150,000+ in a population of 1.4 billion should justify their exclusivity to provide audit services.

 

Convergence

 

Increasingly we are witnessing a thirst for bundled services like a departmental store or a shopping centre. We have already discussed the impact of technology on the audit function and if we consider the increasing need for involvement of specialists in forensic, tax, valuations, technology, etc. in rendering audit services will mean that audit service providers will not only have to partner with other service providers but perhaps will have to house those skill sets under their roof. What will then be the identity of the audit firm? What changes are required in the regulations?

Corporatisation of professions

We have seen how audit services cannot be provided without the involvement of other service providers and the rapidly changing identity of an audit firm. Further, the need to invest in technology to render audit services and to house the specialists who will be involved will require huge investments. When I began my career more than four decades ago, the audit partner who attested the financial statements was a well-versed individual who was not only a specialist in audit but in corporate laws, taxation, valuation, etc. and there seldom was a need for involving anybody else. The changes we
are witnessing in other professions, for example, the medical profession where the delivery of medical services has shifted from individuals to multi-speciality institutions, and the investment required in building state-of-the-art facilities has resulted in the creation of a corporate form of organisations with the investors/financiers not being exclusively from the medical profession. The audit profession needs to introspect about this and seriously consider allowing financial and other strategic partners in audit firms.
FUTURE OF AUDIT: THE ESSENTIAL BUILDING BLOCKS

Let us come back to what needs to be done. We need to address and change:

  • The why and what of audit
  • Who does the audit
  • How audit is done and, finally
  • The output of the audit

We will need to address the perception of audit quality as well as the substance of audit quality

To succeed in this, we must:

  • Be willing to accept the present state instead of being in a denial mode.
  • Introspect and identify the root causes.
  • Identify possible actions with a clearly visualised end.
  • Be willing to transform (which is the most difficult of all) and, above all,
  • Develop the ability to implement and swiftly embrace change.

I would classify my suggestions into seven buckets or silos:

  • Purpose
  • Structural factors
  • Environmental factors
  • Execution of audit
  • Output factors
  • Oversight and evaluation
  • Other factors – frequency, timelines, fees, etc.

 

Purpose
Too long has the audit profession taken shelter behind the words “True and Fair” and the auditing standards which it wrote for itself and about which the users have little knowledge or care about. Any extra “asks” by the users have been rebuffed and rationalized as “Expectation Gap”.
If this rationalisation were to continue the ‘gap’ would widen and the audit profession and its users would be so far apart that audit services would become unnecessary and irrelevant. If the users’ expectation is that audit should address fraud, the profession must take appropriate steps to incorporate this in their audit approach. If the users’ expectation is that the audit should provide some form of assurance of the continuance of the entity in future, the auditor (who is the expert) should be willing to advance a few steps in this direction to meet the expectation.
Sir Donald Brydon, in his Review Report states: “the purpose of an audit is to help establish and maintain deserved confidence in a company, in its directors and in the information for which they have responsibility to report, including the financial statements”.
Our honourable Prime Minister, Shri Narendra Modi, in November 2019, said: “We must challenge the frauds. Both internal and external auditors need to find innovative methods to catch frauds. We need to encourage the core values of auditors for the same”.
Clearly, there is a case for revisiting the purpose of the audit. The sooner the profession addresses this, the faster it will prevent further erosion of confidence in the audit function.
Root causes
A survey conducted by IFIAR some time ago identified a number of causes for poor quality. Some of these are:
  • Failure to maintain/monitor independence.
  • Failure to evaluate non-audit services.
  • Deficiencies in auditing accounting estimates, internal control testing, audit sampling, revenue recognition, group audits, etc.
  • Inadequate training and learning of audit professionals.
  • Audit quality is not considered in performance assessment.
  • No timely supervision and review.
  • Insufficient depth of Engagement Quality Control Review (EQCR).

Inspections by regulators have frequently pointed out the above as root causes of audit failures.

Besides poor audit quality, there is an allegation that the audit profession has put ‘self interest’ above ‘public interest’.
The Building Blocks
The essential building blocks for the transformation of the Audit function are summarised in the table below:

Structural Factors

Environmental
Factors 

Execution of Audit

   Profile of the Profession

   Audit Market Profile

   Choice and Concentration

   Size of the Firms

   Auditor Appointment

   Auditor Compensation

   Auditor Independence

   Multi-disciplinary firms

   Corporate Financial Reporting Eco-system

   Internal Audit System

   Independent Directors, Audit Committee,
Boards

   Proxy Advisors, Credit Rating Agencies

   Regulators and Regulations

   Responsibility

   Audit Procedures

   Tools & Technology used

   Evaluation of Audit test Results

 

Output Factors

Oversight & Evaluation

Other Factors

   Mandatory Communication to Audit Committee

   Audit Report

   Form

   Type

   Reporting to Regulator

   Enhancements

   Management Letter

   Group Audit

   EQCR

   Evaluation of Auditor’s performance by
Audit Committee

   Inspection of Audit engagements by
Regulators

   Peer Reviews, Quality Review Board reviews,
etc.

   Frequency

   Timelines

   Transparency

Due to constraints of space, I will deal with some of the elements in the building blocks.w

STRUCTURAL FACTORS


Profile of the Profession and Audit Market profile
Every profession should have a profile consistent with the constituency it serves. Our country’s rapid expansion since liberalisation has created a situation where the audit market profile is inconsistent with the size of businesses and industries. There are a large number of sole proprietorships and very small firms involved in rendering audit service. With increasing complexity and investments required in technology and audit tools, these firms will find it exceedingly difficult to render audit service and pass regulators’ scrutiny of their work. Size enables strength and resilience. There is an urgent need for consolidation.
Choice and Concentration
Although the concentration in the Indian Audit Market is not as high as it is in many countries in the western world, yet it is not low enough to provide clients with a sufficiently wide choice. A number of suggestions have been made to address this, including auditor rotation, joint audits, etc., but these do not solve the problem. Rotation does not solve the problem, for the audits would continue to be rotated within the select few, And in some cases, the rotation would be a disincentive for an audit firm to invest in specialised resources required for a particular industry.
A joint audit is also proposed as a solution to widening professional opportunities and address concentration. In some banks, there are more than six joint auditors. The reality is that this only fragments the audit market and does not build firms of the size required to address concentration. Also, divided responsibility leads to divided accountability and impairs audit quality. If this argument is extended it means that appointing a hundred auditors for a large business would deliver better quality than a single firm carrying out the audit. Imagine if we were to have a law which mandatorily requires joint surgeries (by more than one surgeon) to enhance the quality of the surgeries and also provide opportunities for all practising surgeons!
 
Auditor appointment and Auditor independence
Appointment of auditors by an independent authority is often promoted as the panacea for the audit failures. This is on the mistaken belief that addressing auditor independence will miraculously enhance audit quality as it proceeds on the assumption that auditors are more likely to be compromised if appointed by the company they audit. If true, this is a sad reflection of the members of the audit profession. I do not believe that the manner of appointments have been the cause for audit failures including the recent failures in India and that we should amend the appointment process merely to deal with a few toxic professionals. In reality, besides independence and absence of nexus with the auditee, audit quality depends on a number of factors including size or the firm, quality and experience of audit professionals, ability to deploy the resources required to do a high-quality audit, audit methodology, auditor’s toolkit, etc.
There have been other proposals like (1) prohibiting auditors from providing non-attest services to their audit clients and (2) requiring audit firms to separate their non-audit businesses to create an “audit only” firm. While there is some merit in the former proposal as the audit firm has the rest of the market to render non-attest services, creating ‘audit only’ firms considerably weakens the audit firm and impairs delivery of quality audits.
Auditor’s compensation
If audits are to be carried out effectively by deploying experienced professionals using state-of-the-art tools and involving specialists then auditors have to be well compensated. Audit fees are presently very low in our country and this is further split into fragments by dividing amongst several joint auditors. Fixing of the audit fees by a regulator is not the solution. Entities vary by size, complexity, geographical spread, level of technology, nature of businesses, etc. and fees cannot be fixed or vary with reference to the results or any component of the financial statements. Equally, the audit profession must recognize that fixing fees on an ‘hourly rate’ model is flawed in a digital age when millions of transactions can be analysed by a mere press of a button using digital tools. Increasingly buyers of audit services will look for ‘value delivered’ rather than pay for the cost of input. Too often we have witnessed auditors seeking fee increases based on cost increases without delivering ‘incremental value’ or making efforts to reduce their input costs by using technology. Unfortunately, audit is not considered a ‘premium’ service and the enthusiasm to pay high fees is limited.
Multi-disciplinary firms

Audit in today’s complex and technology dominated environment requires a multi-disciplinary approach. This would be more efficient if the resources and capabilities are under one roof. The future, in my view, is multi-disciplinary firms and the profession should allow unlimited sharing of resources with non CAs even if it means that the CA firm is dominated or led by a non-CA. The bogey of difficulty in taking action when audit failures happen is often cited as an argument against multi-disciplinary firms whereas regulations can be shaped to take action against erring firms or erring professionals, whatever be their profession.

ENVIRONMENTAL FACTORS


Corporate Financial Reporting and Audit Ecosystem

 

The audit function cannot alone deliver quality audit. It is influenced and facilitated by the entire Corporate Financial Reporting System. The Financial Reporting and Audit Ecosystem comprise of many participants, each having a very distinct role in ensuring the veracity of financial information and ultimately the efficient functioning of the capital markets. These participants (see graphic below) include:

 

1. Preparers of financial information – Management, including key managerial personnel

 

2. Internal monitoring mechanism – internal auditors
3. Corporate governance – audit committee, independent directors, board of directors

 

4. External auditors

 

5. Other stakeholders – credit rating agencies, analysts, proxy advisors, specialists such as valuers and actuaries

 

6. Regulators

 

7. And last but not least, the users of financial reports – shareholders, lenders, other stakeholders, potential investors, etc.

 

Any deficiencies in the role played by any one or more of these participants could lead to sub-optimal functioning of the entire ecosystem.

 

In addition to the components and participants in the financial reporting ecosystem, there are also influences on the financial reporting ecosystem, which have an effect, both positive and negative, as they drive the behaviour of the participants. These, too, need to be reviewed and, if necessary, re-calibrated to produce the desired effect. Some of these are:

 

  • Provisions of various laws which deal with the roles, responsibilities and accountability of the participants in the ecosystem.
  • Penalty and prosecution provisions in the various laws.
  • Role and process of investigative agencies.
  • Multiplicity and overlapping investigative/regulatory agencies.
  • Whistleblower mechanisms.
  • Standards – accounting standards, auditing standards, secretarial standards, internal audit standards, etc.

 

Internal Audit System

 

The internal audit function plays an important role in assisting the board in providing assurance on the effectiveness and efficiency of the risk management, internal control and governance process in the company. It also plays a complementary role in facilitating external audit quality.

 

In order to improve the internal audit function:
  • Internal audit should be subject to regulation and oversight just as the statutory audit.
  • Minimum qualifications for the internal auditor should be prescribed, including membership of a professional body or the Institute of Internal Auditors.
  • Internal auditors, too, should be accountable for their work.
  • Education and training needs of internal auditors should be addressed, including continuing professional education requirements, as well as focus on skills of the future.

Other environmental factors

Some of the other suggestions to improve the reporting environment and supporting the audit function are discussed below:

 

CEOs and CFOs play a very critical role in financial reporting. Not only are they signatories to the financial system, but also acknowledge and confirm their responsibility for the financial statements being free of fraud and error. They are, in effect, the architects of all business transactions and reporting. Currently, there are term limits and rotation requirements for external auditors and Independent Directors but no term limits for internal auditors, CEOs and CFOs. We must critically examine if term limits and reappointment rules should be extended to these individuals too.

 

MCA, SEBI or NFRA should set up a data science department that will focus its efforts on the review of the financial statements and filings to detect reporting, disclosure and audit failures. The principal goal of the department should be the detection and prosecution of violations involving false or misleading financial statements and disclosures. The department should also focus on identifying and exploring areas susceptible to fraudulent financial reporting and should include the ongoing review of financial information and the use of data analytics.

 

A practical public document should be brought out detailing the various deficiencies, frauds, and misstatements noticed by ROC, SFIO, NFRA, etc. This would help corporates, auditors, regulators and other users.

 

EXECUTION OF AUDIT
 

Let me first begin with ‘who’ does the audit as audit quality is also influenced by who performs the audit. I believe the current model is flawed.Audit procedures are significantly carried out by trainees or fresh graduates. To expect them to discover frauds or interpret visible signals of misreporting or failure is similar to a medical student carrying out a surgery and the busy eminent surgeon coming in at the end when the sutures are to be done. Our experienced and qualified auditors spend disproportionately less time compared to that of trainees either because they are too busy or that spending more hours increases the cost of audit and erodes audit profitability. A first step towards correcting this is to ensure that articleship with specific focus on specialisation should begin only after passing the CA exam.

 

Having briefly dealt with who does the audit, I will touch upon the “how” of audit.

 

The audit has, over the years, moved away from a “thinking audit” to an “inking audit”. The focus has shifted to documenting the processes rather than effectively carrying out the processes.

 

 
Auditors seem to have lost their sense of smell. The focus on testing and reliance on internal controls through walk-throughs, etc., has diluted the effectiveness of audit. There is more emphasis on the correctness of the accounting and the disclosures rather than the propriety and genuineness of the transactions. With this and the sampling methods where a speck of the entire population is tested to form conclusions, the auditors seem to be losing their sight or vision too. Sampling methods, howsoever scientific, dilute audit quality. With the use of technology, it is today possible to scan the entire population, focus on outliers, identify questionable patterns, etc. It is time the auditing standard on “Sampling” is revised. It is also time the audit profession uses technology extensively. Additionally, disclosure in the audit report of the sampling methodology used may be considered.

 

Sir Donald Brydon, in his Review Report, recommended that auditors be required to undergo initial and ongoing periodic training in forensic accounting and fraud awareness. In my view, every audit team should include a forensic specialist.

 

Yet another issue is the focus of audit. Auditors today are rarely able to walk into a client’s office with an expectation of what they should be seeing. Instead, audit today is about verifying what is presented rather than confirming expectations. I am reminded about the Sherlock Holmes story about “the dog that did not bark”. The analytical review procedures carried out by auditors generally analyse the information presented to them. That too, the focus is on analysing variances beyond certain predetermined thresholds and documenting the reasons. The absence of changes in expenses or income when there should be a change is happily ignored. A case of not probing why “the dog did not bark”!

 

OUTPUT FACTORS
 
The Auditor’s Report

I read with interest the dipstick survey carried out by BCAJ in May 2021, seeking views on the format, size, utility, components and other contents of the Statutory Auditors’ Report. I was alarmed and disappointed when 83.6% of auditors responded ‘Yes’ to the question – “In your opinion, will additional reporting requirements prescribed in CARO 2020 be onerous and will increase responsibilities for the auditors (evergreening of loans, going concern, reporting on defaults, etc.)?” Are we so concerned about the increase in responsibilities? Isn’t this what is expected of an auditor? Should we not focus on these matters in our audit and report our findings for the benefit of users, including regulators? It would appear that getting an auditor to do more work to bridge the ‘expectation gap’ is more difficult than getting a tooth extracted by a dentist!Another shocking response to the survey is by 59% of auditors having > 5 years’ experience who responded “Somewhat, but needs improvement” to the question “Do you believe there is adequate, emphatic and clear guidance covering situations for auditors on preparing/issuing Audit Report? This response should have woken up the professional body and resulted in swift corrective action. 

I, personally believe, “sunshine is the best disinfectant”. Over the years, I have witnessed the profession resisting any changes to the bland, template-driven audit report. This is strange as the only visible output of the audit to the users is the audit report and if anything can influence the perception of audit quality, it is the audit report. Most audit reports are similar, if not identical, barring minor differences due to the recent inclusion of Key Audit Matters. Does this mean audit quality in all cases is uniform? It is time we brought out into the open the information on what and how the auditor has performed the audit, when the audit commenced, when it ended, the number of hours spent by each category of audit personnel, the number of qualified professionals involved in the audit, the time spent by the audit partner, the use of audit tools, the sampling methodology and the number of items tested, independent external confirmations obtained and the results thereof, experts consulted, errors the auditors found, materiality, etc. rather than the bland statements that the audit has been done in accordance with the auditing standards (written by the auditors themselves only known to and understood by only them)!
 

Audit reports contain lengthy statements pointing out the roles and responsibilities of management and boards, limitations of the audit and clearly describing the auditor’s responsibility. Has these deterred regulators and investigative agencies? Have auditors been absolved of the blame? Users of audit reports see these cautionary statements with the same disdain as smokers see the statutory warnings in cigarette packs which state “cigarette smoking is injurious to health”!

 

CONCLUSION

 


The future of “audit” is bleak, and there are dark clouds on the horizon. I have great respect for the audit profession and sympathy for they are being attacked from all sides – intense competition, unremunerative prices for their services, inability to attract talent to the audit function, demanding clients and society, disruptions due to technology, intense regulatory scrutiny, pursued by multiple investigative agencies for the same work, etc. I am confident that this, too, shall pass but that depends on how the profession addresses some of the matters highlighted in this Article.

 

The need for a thorough overhaul and transformation is urgent. The issues need to be brought out into the open, for discussion and debate and should not be only within the walls of the Council Hall of ICAI. Wisdom also resides outside the hallowed Council Hall! We cannot forever continue to be in denial mode and hope the present glory (or distrust) would continue. Regulators like NFRA, RBI, SEBI, IRDA, etc. provide a useful role and show us the mirror. We may not like the reflection but let us not throw stones at the mirror. Instead, let us address the image reflected. I have just written a few thoughts in view of space limitations. I have many more thoughts, which are for another time.

 

We must not attempt any quick fixes or band-aids, or address the issues on piecemeal basis. Code of Ethics, AQMM, UDIN, etc. are some examples of positive actions which are piecemeal and do not move the needle. Such fixes are like changing the dress on a mannequin and hoping it transforms into a live human being!

 

The future of audit is in our hands only, and I am confident the Audit Profession will reshape itself to be one of the premier professions in our country’s journey to be the third largest economy. We can hardly claim to the partners in nation-building without rebuilding the Audit Profession. Perhaps, what we need is a Review similar to one by Sir Donald Brydon in UK. Let me list some of the questions for debate:
Need for economies of scale – the importance of consolidation of SMPs.
  • Declining interest in an accounting career and its effect on the future of auditing.
  • Trend of questioning authority by the lay public. Experts are no longer thought to be beyond criticism or scrutiny.
  • The rise of NFRA and the end of disciplining by peers – some of NFRA’s orders indicate that the auditors did not know the accounting or auditing standards.
  • The days of government-mandated work are over – need to justify the value of work.
  • Recent developments in law enforcement e.g., tax fraud, shell companies and rising demands on accountants and auditors.
  • How should education change – curriculum, selection of students, exams, training, lifelong learning.
  • Audit reports in a language that a reasonably intelligent and earnest user can understand.
  • What kind of competition would the audit face?

It is said that people change, not when they see light, but when they feel the heat. I am hopeful my fellow professionals effect the changes swiftly without measuring the transformation action on the ‘popularity’ scale.

CA Profession and BCAS @ 75

Congratulations to all my esteemed professional colleagues in the Chartered Accountancy profession and members of the Bombay Chartered Accountants’ Society (BCAS) for completing 74 years and entering the 75th year. It is heartening to see the profession, and BCAS grow from strength to strength in these 75 years. We must salute the wisdom of our forefathers for having established the voluntary body of CAs, namely, BCAS, within just five days (i.e., 6th July, 1949) of setting up of the Regulatory Body, ICAI, on 1st July, 1949. BCAS has the unique distinction of being the oldest and also the largest (with over 8500 members pan India) voluntary body of Chartered Accountants in India pursuing academic activities for the benefit of the CA community at this scale and in diverse fields. BCAS has rendered yeoman services to the profession since its inception. Today it is rightly considered as the “think tank and the torch bearer” of the profession. Seventy-five years is a long-time span in the life of an individual, as also for a voluntary body of professionals.

The uniqueness of BCAS is the selfless services of its volunteers spread across the country and through generations. It is an amalgam of the wisdom of seniors and the enthusiasm of youth, where a generation nurtures and blossoms talents and then passes on the baton to the next generation. It is a place where the “Profession First” is practised by its committed members in letter and spirit. This has created a unique “BCAS Culture” over the years. Truly, BCAS is working relentlessly for its vision of harnessing talent, disseminating knowledge, building skills, and networking amongst its members and encouraging them to adhere to the highest ethical standards and professional integrity. Many other voluntary bodies of CAs are being motivated and inspired by the precedents set by BCAS.

Incidentally, the Nation completed 75 years of independence on 15th August 2022, and the BCA Journal carried a distinctive feature, “India @ 75”, in which past presidents who completed 75 years of their life shared their experiences of India @ 75. The articles by past presidents were accompanied by QR code-enabled recordings by a team of volunteers, which helped members to listen to the same, also in addition to reading them. This novel experience was well received by the journal subscribers and hence is repeated in this Issue also. Three patriotic poems in Hindi were the highlights of this special feature in the August 2022 issue of the BCAJ, which also happened to be the 750th Issue of BCAJ.

It is interes ting to note that the emblem of ICAI carries a Sanskrit verse  (Ya Esa Supteshu Jagarti) from a shloka from the Kathopanishad (Also known as “Katha Upanishad”). It literally means “A person who is awake in those that sleep.” This quote/verse was given by Sri Aurobindo at the time of the formation of ICAI in the year 1949.

When we look at the emblem of BCAS, we find yet another interesting Sanskrit verse, namely,  (Na Bhayam Chasti Jagratah) The literal meaning of this verse is “if you are alert, you will not have any fear.”

Both these quotes are apt in that a CA is expected to be more vigilant and aware of the latest developments in the laws and regulations to protect the interest of all stakeholders. In February 2022, while speaking at one of the ICAI’s award functions, the Union Minister Dr Jitendra Singh said that “Chartered Accountants are the conscience keepers of the nation’s account. Therefore, the integrity of their own conscience is vital for the health of a nation in general and the financial health of a nation in particular.” It reflects the trust that this profession enjoys from the various stakeholders, as also their expectations. Naturally, professionals, in turn, shoulder huge responsibility to meet these expectations.

Much has changed in the last 75 years in the CA profession. From handwritten notes, we have moved to smart writing pads; from manual counting to calculators and computers; from the manual filing of returns to electronic filings; from in-person assessments to virtual and faceless; and so on. Technology Transformation/disruption has been the biggest impactor in the last 75 years, more so in the last decade or so. The pace of technological developments is changing the face of the CA profession very fast. Auditing today without the aid of technology is unthinkable. Implementation of GST would not have been possible without the use of information technology. The income-tax portal is used not only for disseminating knowledge but also for rendering a variety of services to taxpayers. The advent of “Artificial Intelligence” has taken transformation/disruption to the next level. It will completely change human life and so also our profession in times to come. The profession will have to reinvent itself. New practice areas will emerge and are emerging, and traditional areas of practice will fade away or get extinct. Only those who will accept, adapt, and use technology will survive.

At BCAJ also, we have adopted and adapted to technology swiftly. After the initial cyclostyled ‘Bulletin’, the first printed issue of the “Bulletin” was published in December 1962. Thereafter the Bulletin was printed intermittently, owing to some difficulties. The first issue of the Journal was published in July 1967. However, the first monthly issue was published in January 1969  and since then, it has been regularly published till date. From the cyclostyled Bulletin, BCAJ has moved to modern printing and has also become digital.

Today India is one of the fastest-growing economies in the world. The scale and pace of growth is enormous. Today India is the 5th largest economy in the world and is expected to occupy the 3rd place latest by the turn of the decade, i.e., 2030. Both our country and CA profession are in the Amrut Kaal, and therefore, this year’s theme for the Special Issue of July 2023 is selected as “Economic Development”. Four eminent authors have contributed articles on the impact of four different areas, namely, Audit, Direct Tax, Alternative Dispute Resolution (Legal) and Technology, on the economic development of India. Besides these interesting articles, the special issue also carries a transcript of an interview with Dr Brinda Jagirdar, Economist. One can listen to these articles by scanning the respective QR code printed along with them.

All authors and interviewees have emphasised the role of technology in the economic development of the country.

As our PM Shri Narendra Modi said, truly, we have entered a “Techade” (A decade dedicated to technology), which will rule the world. However, a word of caution here is that along with the increasing use and impact of technology, let us not forget ‘humanity’. We will have to learn certain soft skills, such as the right attitude towards life, compassion, communication, human relations and most importantly, work-life balance. It is good to use technology, but we should not allow technology to use us. Before AI masters us, let us master ourselves!

Shareeramadyam Khalu Dharmasadhanam!

This is one of the most important messages for every human being. It underlines the importance of physical fitness. Health is wealth. We Chartered Accountants should take special note of this and implement it religiously. All of us merely say that ‘Health is Wealth’ but seldom follow it in our lives.

They say, one sacrifices one’s health to acquire wealth, but when the time comes to enjoy the wealth, he has to spend heavily to ‘regain’ or ‘maintain’ the health. Often, it is too late.

The quote is from the play ‘Kumara-Sambhavam’ (5:33) written by Kavi Kalidasa. All of us know the story that Parvati, the daughter of Himalaya, fell in love with Lord Shiva (Mahadev Shankar). Actually, her father, Himalaya, wanted to get her married to Lord Vishnu. So Parvati secretly went to a forest and did very rigorous Tapashcharya (Penance). She fasted so strictly that she did not eat anything – not even fruit or leaves! That is why Parvati is also called ‘Aparna’. Parna means a leaf. She didn’t consume even a leaf, hence ‘Aparna’.

Lord Shiva appeared before her in the guise of a Brahmin. He enquired about her health.
Meaning – whether the samidha (small wooden sticks used in Pooja) are easily available for ‘havan’ (i.e., fire, sacrifice) and whether enough water is there for your bath and cleanliness. Whether you are putting your efforts only within your physical limits (strength), or are you doing something excessive? After all, your body is the main instrument for achieving everything!

There are four purusharthas  Dharma, Artha, Kama and Moksha. These are the ‘tasks’ to be achieved by every man. Dharma is duty; and not religion as we commonly unders tand. Artha is money and resources. Kama means all desires. And Moksha is ultimate salvation. For achieving all these, your physical fitness is a prime ins trument.

Lokmanya Tilak realised it since his school days. He was very pale, weak and feeble. So, after his schooling, he sacrificed one full year to acquire physical strength through good exercise, a good diet, discipline, etc. Later, he performed magnificently in life and in my opinion, he was one of the most versatile persons India has ever produced.

Today, we find our children and youth obsessed with computers, mobile phones, social media and so-called careers. They hardly go on the ground to play, swim or do exercise. Yoga can give us not only physical fitness but also mental strength. Unfortunately, we realise this too late in our lives. Almost everyone is consuming some tablet or the other every day – be it for blood pressure or for diabetes! There is a pain in knees therefore, they can’t even walk easily. They are forced to restrict their diet! They cannot enjoy tasty food; they have to think twice before going on a tour. Often, they are prone to neurological diseases due to their present lifestyle.

There are premature deaths among professionals. Therefore, one needs to think very seriously in early life as to how one wants to shape one’s career and future. This mantra needs to be inculcated in early childhood, but we can do it only if we are convinced for ourselves.

Sir Salamat To Pagdi Pachaas!

So friends, let us follow this mantra without any delay to change our priorities.

Letter to the Editor

Dear Sir,

“Auditor – Whether a Watchdog or a Bloodhound “

I am in agreement with the views expressed in your Editorial of June, 2023 issue of BCAJ, entitled, “CA- From a Watchdog to a Bloodhound” and the penultimate paragraph of “ Namaskar” column by  Shri C. N. Vaze.

The responsibilities cast on a CA as the Statutory Auditor of a Company are very extensive and excessive, and ever increasing, enough to deter a CA from undertaking the vast and excessive responsibilities  cast on the Statutory Auditor under the Companies Act, 2013.

All the Regulators and Enforcement Agencies should understand that the Auditor’s Responsibility ends with making appropriate disclosures in the Audit Report and it’s Annexures. It is upto various Stakeholders to read, understand and take the necessary remedial action(s).

The Auditor should not be made a scapegoat for the lack of knowledge, understanding and necessary timely action on the part of the Management and various other Stakeholders.

Further, requiring the Auditor to Report on every contravention  of various Laws or Regulations  to various Law Enforcement Agencies is neither feasible nor practical.

An Auditor is not a Bloodhound.

And now, on top of everything, comes the latest Notification under the PMLA. One really wonders why the legal profession has not been brought under the ambit of the said PMLA Notification, as the lawyers also render many of the services which come under the purview of PMLA.

In view of ever increasing responsibilities cast on a CA under the Companies Act, PMLA and various other Financial Regulations by various Regulators, and  looking at the increasing tendency of the Enforcement Agencies to arrest the Chartered Accountants for the financial irregularities committed by their Clients,  it is hightime that we, the Practising CAs, should not get entangled in the financial transactions and business dealings/ activities of our Clients and instead, should keep ourselves restricted to our advisory / attest functions .

The time has come for the Finance Ministry to issue elaborate instructions and Guidelines to the Field Officials which need to be scrupulously followed before a CA/ Auditor is arrested or prosecution proceedings are launched against him, to ensure that innocent professionals are not threatened or harrassed in the quest for catching the real culprits who are generally very rich and powerful and politically well connected.

An unnecessary and premature arrest of a CA under PMLA or any other law tends to irreparably destroy and damage the personal, social and professional life and career of a professional.

Various Government Agencies and Regulators need to call a halt on further extension on reporting requirements/responsibilities of the Statutory Auditors. In fact, there is an urgent need to review the existing requirements with a view to weed out the unnecessary requirements.

Yours Sincerely,
CA. Tarunkumar G. Singhal

Disciplinary Proceedings – When They Start?

Arjun: O’Lord! There are problems, problems and problems! No solutions anywhere.

Shri Krishna: That’s life, Parth! Even as a God, I also have problems – very complex ones.

Arjun: Ah! How can you have problems, Krishna?

Shri Krishna: Don’t you remember? I was born in a jail when my parents were in prison of the tyrant Kaunsa. Immediately after my birth, during heavy rains, I was taken to Gokul, on the opposite bank of river Jamuna. And in my early childhood, many demons came to kill me. Even after I grew up and became a king, there were disputes among my community of Yadavas. In my family, there was friction between my wives!

Arjun: Yes, and we, as your cousins, also fought amongst ourselves. You had to mediate between us.

Shri Krishna: True. But tell me, what is your problem now?

Arjun: We CAs need to fill up forms for empanelment so that we can get audit assignments from Government authorities, banks and so on.

Shri Krishna: It has to be so!

Arjun: Even for private sector companies, we need to give a declaration every year for appointment or renewal.

Shri Krishna: Then what is wrong with that? What is your problem?

Arjun: In those forms and declarations, we need to write whether any of the partners have been held guilty of professional or other misconduct. We also need to write whether there are any disciplinary proceedings pending against any partner.

Shri Krishna: It is a factual thing. You have to write Yes or No.

Arjun: Agreed. But against a few of my friends, some people have filed complaints to the Institute for misconduct. At this stage, they don’t know what to write – whether proceedings are pending or not.

Shri Krishna: (smiles). This is a common problem, Arjun. The answer is simple. You know that after the complaint is received, you have to file your explanation.

Arjun: Written Statement (WS).

Shri Krishna: Correct. Your WS goes back to the complainant. On that, he sends his rejoinder.

Arjun: Yes.

Shri Krishna: Now, after scrutinising these papers, Director Discipline arrives at a Prima Facie Opinion, whether you are prima facie guilty on any of the allegations.

Arjun: I know. A few of my friends have received such Prima Facie Opinion (PFO).

Shri Krishna: Director has to place the PFO before the Board of Discipline, if the offence pertains to the First Schedule item. If it is from Second Schedule, he places it before Disciplinary Committee, right?

Arjun: Yes. Bhagwan.

Shri Krishna: Now, when BOD or DC concurs with DD’s PFO that a member is prima facie guilty, that is the point of time when they say disciplinary proceedings are pending. Understood?

Arjun: Okay. You mean, when merely a complaint is filed, or WS is submitted, that is not considered as pending disciplinary proceedings. Am I right/

Shri Krishna: Absolutely.

Arjun: But what it implies?

Shri Krishna: The appointing authority or the client company can then take a call on whether, despite such pendency of disciplinary proceedings, they want to appoint your firm as Statutory Auditors.

Arjun: Obviously, they will not!

Shri Krishna: Yes. But there is no rule of law to that effect. It is their discretion. But as a policy or practice, they may not appoint such a firm.

Arjun: Then what will the firm do? They may lose revenue.

Shri Krishna: Naturally. If he is a proprietor, he will suffer more. If it is a firm, that particular partner who is held prima facie guilty, may withdraw from the firm so that the firm does not suffer.

Arjun: And what will he do?

Shri Krishna: He continues to be a member. He can continue in practice. It is only when he is finally punished and his membership is suspended, he has to stop practising.

Arjun: Can a membership be restored?

Shri Krishna: Yes. But at that time, your seniority is Zero! You can’t take articles.

Arjun: So, he can sign audits even when he is prima facie guilty; but not yet punished. Right?

Shri Krishna: Yes. Once you are held prima facie guilty, it is referred to ‘enquiry’ before BOD or DC.

Arjun: It is logical. Otherwise, anybody can just file a complaint against a member and make him disqualified for the appointment. That would be disastrous. Now there is a comfort that until you receive PFO, you won’t have to bother. Big relief, Lord, to my friends.

Shri Krishna: But wisdom lies in doing the practice diligently, following all standards and norms.

Arjun: Agreed. But Lord, we are human beings. And now the Regulators are numerous, and Regulations so complicated, that even for Gods, it will difficult to escape disciplinary proceedings. Auditors are expected to be ‘Super Gods”

! Om Shanti !        

(This dialogue seeks to clarify the expression ‘pendency of disciplinary proceedings)

How to Spot and Avoid Fake News

These days, there is a plethora of News and Information bombarding us from all sides – be it Whatsapp, Facebook, Twitter, Instagram, TV Channels, News Websites, Newspapers or even Radio! Very often we come to know after a few days / months that an earlier report was false. Sometimes, we may not even come to know of this, until it is too late. Hence, an average layperson is perplexed over what is true and what is not. In this brief writeup, we will try and understand how to spot and avoid Fake News.

TYPES OF FAKE NEWS

Fake News can be of three types:

a)    An honest mistake – where the propagator genuinely believes something to be true and announces it or forwards it without verifying. This can be rectified easily by a simple, sincere apology

b)    Pranks – in this case, the propagator deliberately states something he knows to be false, just for the fun of it, to create mischief. He may even propagate it anonymously, since he knows the repercussions, but the purpose is solely to play a prank

c)    Fake News – this is an intentional propagation of something, knowing it to be false, with the intention to cause benefit or hurt – religious, political or commercial. Of late, the number of cases in this category has been steadily rising.

SO HOW DO WE SPOT AND COMBAT FAKE NEWS?

  • Apply Common Sense: There were several fake photos and videos circulating during the recent Biparjoy Cyclone news. Some even showed massive destruction even before the Cyclone had reached the land! Simple application of mind would be sufficient to call out such fakes!
  • Avoid Confirmation Bias – Not everything about someone who you admire, has to be true. So, when you read something about someone whom you adore, you automatically tend to believe it. Try and avoid the confirmation bias at all times.
  • Look for evidence / source – Always look for links to credible news portals or information websites. Never forward or like stuff if no evidence is provided by the sender. We often find Whatsapp forwards which mention “Forwarded as Received” This is a very strong indicator that the news is unverified and most likely to be false. So, when you get such a message, always ask the sender to quote a reliable source for the same – if a reliable, independently verifiable source cannot be identified, you can most certainly disbelieve the news item. In such cases, please do not forward it further and stop propagation of such false items.

Further, if the author is a known rabble rouser or propagator of fake news in the past, be wary to believe the same person, even if his name is quoted as authentic.

  • Beware of Websites with no physical contact details or the people or group behind them – When the source of the news is a website, please visit the About Us or Contact Page of the website. If you do not see a proper address (not just an email id) it is a red flag! Websites with no physical address and / or the names of people or organisation behind them, are most likely to be misleading and liable to be distrustful.
  • Google Baba to the Rescue – one easy way to fact-check a news item is to search for its title in Google. If it is true, you will find multiple stories around the same topic. If not, you may even find a story which mentions it to be false!
  • Google Reverse Image Search – if you find a horrifying or unbelievable image, just do a Reverse Image Search on Google – Go to Google.com and click on this icon.  It will allow you to copy paste an image and search for the image online. Just try it and you will be surprised at the results!
  • Fake News Debunker Extension – if you would like to frequently check news for its veracity, install the Fake News Debunker Extension in Chrome. Once installed, when you right click on any news item, it will confirm whether it is fake or not.
  • Poynter.org – and if you are concerned on the spread of Fake News, visit this website which offers a free course on identifying Fake News. The key points to consider are:
  • Is this important enough?
  • Is this fact-checkable?
  • Is this original?
  •  Is this reliable?

 

  • There are many sites which help you identify whether any news items are genuine or not. Some important of these are as under:
  • Altnews.in
  •  Boomlive.in
  • smhoaxslayer.com
  • https://timesofindia.indiatimes.com/times-fact-check
  • https://www.thequint.com/news/webqoof
  • https://fssai.gov.in/cms/myth-buster.php
  • Snopes.com
  • www.factcheck.org/
  • https://factly.in/
  • https://www.factchecker.in/

Most importantly

  • Question Everything
  • Ask the sender to provide evidence
  •  Do not forward if not credible
  • Educate Others – Schools, Colleges and Whatsapp Groups

DO NOT BECOME A FOOL / TOOL IN THE SPREADING OF FAKE NEWS!

Updated FAQS on Insider Trading Throw Light on Many Complex Issues

BACKGROUND

The Securities and Exchange Board of India (SEBI) has recently issued (on 31st March, 2023) comprehensive Frequently Asked Questions (FAQs) on its regulations relating to insider trading – the SEBI (Prohibition of Insider Trading) Regulations, 2015 (the Regulations). It is good to see this practice continuing whereby, not just clarifications, even if not binding, are given on important and repetitive issues, but they are all updated and provided at one place. The Regulations are fairly complex with a series of deeming provisions. Insider trading violations are regularly caught through a fairly sophisticated data surveillance, coupled with good investigation and quick orders. Of course, some orders are found wanting on evidence or principles of law applied and do not stand up on appeal, but the fact that such Regulations exist and there is a close watch acts as a deterrent. Insider trading reduces the credibility of markets since investors would feel demoralised if, whether in purchase or in sale, the insiders are able to illegally profit from information they are entrusted with as fiduciaries.

The Regulations are also distinct, in the sense that many of the provisions have a note attached to them which explain the intention of the particular provision. The FAQs add further to this by explaining and clarifying many provisions.

BINDING NATURE OF FAQS

It would be axiomatic to say that the Act and the Regulations and even certain notifications/circulars have a binding effect but not the FAQs. Indeed, they bind not even the regulator, i.e., SEBI, as the FAQs themselves take pains to emphasise. Paragraph 4 of the FAQs, says that the FAQs “…are in the nature of providing guidance on the SEBI (PIT) Regulations, 2015 and any explanation/clarification provided herein should neither be regarded as an interpretation of law nor be treated as a binding opinion/decision of the Securities and Exchange Board of India”.

That said, the FAQs do reveal the mind of the regulator on certain provisions. They explain many concepts useful to the student, the compliance officer and practitioner. Often, the question may not be of technical interpretation but of understanding what a particular provision means to say. Importantly, the cautious compliance officer and companies may prefer to toe the line by following the interpretation given in the FAQs, since it is likely that SEBI may initiate proceedings. The appellate authorities, however, may not give more than a passing view to the FAQs, if at all.

There are 59 frequently raised questions that are answered in the FAQs. While it would not be possible to cover all of them, some of the important ones can be highlighted.

PLEDGE OF SHARES – THEIR CREATION, INVOCATION AND RELEASE

The concept of pledge of shares has to be seen, in context of the Regulations, from at least three perspectives. Firstly, what is pledge of shares and how it is created, invoked and released? Secondly, why is it relevant for these Regulations? Thirdly, who are the persons who have obligations when they pledge their shares or get the pledge released, etc?

Pledge of shares, as a concept is well understood. Shareholders may want to raise finance against the security of shares held by them. Such security may be in the form of hypothecation or pledge, with the latter being more preferred by lenders. Pledge is generally governed by the Indian Contract Act, 1872 but a detailed discussion on this would be beyond the scope of this article. Unlike earlier times when physical shares with duly executed transfer deeds were deposited with the lenders, the depository system requires a different method. The pledge has to be registered with the depository. Invocation of such pledge is easier. Some lenders may still want to go all the way and ask the borrower to actually transfer the shares to the lender’s DEMAT account. The implications of such a ‘pledge’ is a complex issue by itself and deserves a separate detailed discussion.

The Regulations deal with insider trading and the first reaction would be that pledge is not trading as commonly understood. However, the Regulations have learnt from history. A shareholder may pledge while being in possession of unpublished price sensitive information (UPSI) and realise a higher value of shares. Thus, the scope of the terms has been widened to include pledge, and therefore also their invocation and release. Note though that the Regulations provide for this widened meaning by way of a note to the definition of ‘trading’.

Thus, the Regulations require specified insiders not to carry out a pledge while being in possession of UPSI. In other words, the restrictions on trading also apply to the creation of a pledge.

DEALING IN SECURITIES OTHER THAN SHARES/CONTRA TRADES

Do the Regulations apply only to dealings in shares or do they apply to dealings in futures and options too? Do they apply to exercise of ESOPs and also to sale of shares arising on exercise of ESOPs?

To begin with, the Regulations make it clear that they apply to ‘securities’, the definition of which is wide enough to include futures and options. Since ESOPs are a form of options, it is clear that the Regulations apply to ESOPs too. The FAQs specifically deal with this issue to put this issue beyond any doubt.

The question then comes of contra trades. As a matter of principle, the Regulations prohibit trading while in possession of UPSI. However, in case of close insiders (i.e., ‘Designated Persons’ as identified by the company), a stricter rule is adopted. Trading by them at a short intervals, called contra trades, is banned altogether since such trading would typically be done only on basis of UPSI. But several questions arise.

Firstly, futures and options get reversed within a short period. The Regulations do not provide how to deal with this. The FAQs have provided a view as follows. If a person buys futures/options and then sells them (or vice versa) within the maturity period of less than six months, then it would be deemed to be a contra trade and hence prohibited. However, if such trades mature by physical settlement, then they will not be deemed to be contra trades and hence not banned.

Even entitlements to rights shares are treated as securities and hence trading in them would attract the contra trade ban.

As far as ESOPs are concerned, the view expressed is as follows. The first part relates to grant of ESOPs. These are not treated as ‘trading’ and hence grants can be made even when the trading window is closed. Similarly, exercise of ESOPs is also not treated, the FAQs say, as trading. Hence, the acquisition of shares on exercise of ESOPs can be done even while in possession of UPSI. There is yet another concession regarding ESOPs. If shares are acquired on exercise of ESOPs, they do not invite the six-month ban of contra trades and hence such shares can be sold within six months of acquiring the shares.

CHARTERED ACCOUNTANTS AND OTHER FIDUCIARIES AND THE REGULATIONS

Firms of Chartered Accountants render services to listed companies in many ways. They may act as auditors (statutory or internal or tax), they may act as advisors for many services. This is so also for other professionals such as company secretaries, lawyers, etc. They are very likely to have access to UPSI and hence would generally be deemed to be insiders.

However, they have a further and more elaborate role. They are required to frame a code of conduct which should contain at least the minimum requirements specified in the Model Code. This includes pre-clearance of trading in specified securities, ban on contra trades therein, etc.

Moreover, they are also required to maintain a structured database. Essentially, this is maintenance of prescribed details of persons to whom UPSI is shared with. And maintain such records for at least the minimum specified period. Such database “shall not be outsourced” and “shall be maintained internally”. On the question of keeping such a database on third party servers such as Amazon, Google, etc. which are also maintained outside India, the FAQs give a cryptic answer, instead of a clear ‘yes’ or ‘no’. The answer given merely reiterates the responsibilities of the Board and the Compliance Officer to ensure that all Regulations, laws, etc. are complied with. However, on the question whether the company can use the software provided by third party vendors, the FAQs state that such software and services are provided on a login basis. The vendor may have access to the data and this would be contrary to the requirements of the Regulations.

Professionals rendering services to listed companies and having access to UPSI may range from small proprietorship to a large multi-partner firm, but the requirements are the same.

The FAQs confirm that these requirements are to be complied with by all professionals who have an access to the UPSI.

RELATIVES OF INSIDERS

There is often a confusion on the extent to which persons connected with the insider are also covered by the Regulations. The FAQs speak about this on some aspects.

The term ‘insider’ is broadly defined to cover several groups of persons who may have access to the UPSI. However, apart from persons directly connected to the company, there may be persons who have connection with them. For example, there may be a CFO of a company. The question is whether the family members of such a CFO would also be deemed to be insiders. The Regulations have sought to strike a fair balance but in the process has created confusion. Apart from relatives, several entities connected with such persons are also covered as insiders unless proven otherwise. But we could focus on one term that creates some confusion and practical difficulties too.

‘Immediate relatives’ of specified insiders are also deemed to be insiders, unless proven otherwise. The term ‘immediate relatives’ is defined in a curious manner. It includes not only the spouse, but also parents, siblings and children of such a person or their spouse, but they should be either financially dependent on such a person or should consult such persons in taking decisions relating to trading in securities. On first part, identifying such relatives should be easy enough. The question is applying the two alternate conditions.

Firstly, the question is whether the relative is financially dependent on such a person. This should be generally easy in many circumstances such as a minor child or a non-working spouse, etc. However, there may be grey areas such as a relative who earns and contributes to the household. Whether such persons can be said to be financially dependent?

The other condition is easier to explain but difficult to prove. Does such a relative consult the insider for their decisions on trading in securities? Financial discussions in families are very likely to happen and it would be difficult to prove otherwise. This makes things particularly difficult when the relatives actually take an independent decision. Let us say one person is a partner in a firm of Chartered Accountants acting as statutory auditor and also an advisor to several listed companies. The spouse works in another company and manages their own investments without consulting or even informing the other spouse. If by chance, trading is done by such a spouse in securities of a company where the spouse has access to UPSI, it will be difficult to prove that there was no violation of the Regulations. Now take the matter further where the spouse is a lawyer rendering services to various listed companies. Now the difficulty becomes compounded.

CONCLUSION

The FAQs are welcome generally as they not only clarify several concepts but give a good starting point for taking a view. Many of the difficulties expressed above arise in spite of these FAQs and not because of them. And the Regulations are also complicated because insider trading is not only common, but is often done by while collar educated persons who can use many sophisticated methods including technology to evade the law. Caution then becomes the rule and applying the interpretation given by the FAQs can give a higher level of assurance that one is within the law, even if the clear fact is that they are not binding, not even on SEBI itself.

What’s In a Name? Immovable or Movable Could Be the Same

INTRODUCTION
Immovable property is the most ancient form of an asset which mankind has ever known. Its law and practice are multi-faceted, both from a legal and tax perspective.Different laws have defined the term ‘immovable property’ differently. These definitions are very relevant in determining whether or not a particular asset can be classified as an immovable property. For example, there is a difference in the rates of stamp duty on conveyance of a movable property and an immovable property. Similarly, GST is payable only in respect of sale of goods which are movable property and not on a completed immovable property. Recently, the Supreme Court in the case of the Sub Registrar, Amudalavalasa versus M/s Dankuni Steels Ltd., CA No. 3134-3135 of 2023, order dated 26th April, 2023 had an occasion to consider this issue in great detail. The Court analysed various definitions and propounded the settled principle that anything which is permanently affixed to land would also be immovable property. Let us examine this important proposition.

FACTS OF THE CASE

In the case of Dankuni (supra), under an auction, the assets of a company which consisted of land, building, civil works, plant and machinery and current assets, were declared to be sold to the highest bidder for a consideration of Rs. 8.35 cr. A sale deed was executed for this amount. Subsequent to the sale deed, a conveyance was executed for conveying the land, building and civil works. In the conveyance, the fact of the sale deed was mentioned and it was also stated that the market value of the land and building was Rs. 1.01 cr.Accordingly, the buyer tried to pay stamp duty on this amount of Rs.1.01 cr. and register the conveyance deed. The Sub-Registrar of Assurances did not agree with this value and held that the market value of the plant and machinery should also be included since it was immovable in nature. The matter reached the Division Bench of the Andhra Pradesh High Court, which held that the when the conveyance was only for the land and building, the Sub-Registrar could not force the buyer to pay stamp duty on the value of the plant when he does not seek its registration. The Court directed the registration of the conveyance deed as it stood and for the value recorded therein. Aggrieved by this decision, the Revenue appealed to the Supreme Court.

DEFINITIONS

The Registration Act, 1908 defines the term in an inclusive manner to include land, buildings, hereditary allowances, rights of ways, lights, ferries, fisheries or any other benefits to arise out of land, and things attached to earth or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops and grass.The General Clauses Act, 1897 defines the term to include land, benefits to arise out of land and things attached to the earth, or permanently fastened to anything attached to the earth.

The Transfer of Property Act, 1882, is the primary law dealing with immovable property. The Act merely defines immovable property as not including standing timber, growing crops and grass. However, it defines the phrase attached to the earth to mean-

“(i)      rooted in the earth, as in the case of trees and shrubs;

(ii)    imbedded in the earth, as in the case of walls or buildings; or

(iii)     attached to what is so imbedded for the permanent beneficial enjoyment of that to which it is attached”.

Section2(ja) of the Maharashtra Stamp Act, 1958, defines the term immovable property as follows:

“Immovable property includes land, benefits to arise out of land, and things attached to the earth or permanently fastened to anything attached to the earth.”

The Goods and Services Tax Act, 2017 does not contain any definition of the term immovable property or land. However, the definition of the crucial term “goods” states that it not only includes every kind of movable property other than money and securities but also actionable claims, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.  Thus, in this case the definition under the Transfer of Property Act would come in useful.

From the above definitions, it would be evident that the main issue whether an asset is an immovable property or not would arise in respect of plant and machinery, power transmission towers, cellular towers, and similar assets.

JUDICIAL HISTORY

Various landmark decisions of the Supreme Court and High Courts have dealt with what is an immovable property. Key decisions are discussed below.The Supreme Court in Sirpur Paper Mills (1998) 1 SCC 400 while examining whether or not a paper plant was an immovable property, held that the whole purpose behind attaching the machine to a concrete base was to prevent wobbling of the machine and to secure maximum operational efficiency and also for safety. It further held that paper-making machine was saleable as such by simply removing the machinery from its base. Hence, the machinery assembled and erected at its factory site was not an immovable property because it was not something attached to the earth like a building or a tree.  The test laid down was, whether the machine can be sold in the market. Just because the plant and machinery is fixed in the earth for better functioning, it would not automatically become an immovable property.

Further, the decision of the Supreme Court in the case of Duncan’s Industries Ltd vs. State Of U. P. (2000) 1 SCC 633, dealing with a fertiliser plant, is also relevant in determining what is movable and what is immovable. In this case, the Supreme Court distinguished Sirpur’s case and held that whether machinery which is embedded in the earth is a movable property or an immovable property, depends upon the facts and circumstances of each case. Primarily, the court will have to take into consideration the intention of the party when it decided to embed the machinery: the key question is, whether such embedment was intended to be temporary or permanent?  If the machineries which have been embedded in the earth permanently with a view to utilising the same as a plant, e.g., to operate a fertiliser plant, and the same was not embedded to be dismantled and removed for the purpose of sale as a machinery at any point of time, then it should be treated as an immovable property.  In this case, a transfer took place on “as is where is” basis and “as a going concern” of a fertiliser business. This was preceded by an agreement which involved also expressly the transfer of plant and machinery. The Collector levied a stamp duty and penalty on the basis that since the transfer contemplated the sale of the unit as a going concern, the intention of the vendor was to transfer all properties in the fertiliser business in question.

Applying the above principles, the Apex Court agreed with the demand of the Collector. It was held that when the buyer contended that the possession of the plant and machinery were handed over separately to by the vendor, the machineries were not dismantled and given to the buyer, nor was it possible to visualise from the nature of the plant that such a possession de hors the land could be given by the buyer. Thus, it was an attempt to reduce the market value of the property the document by drafting it as a conveyance deed regarding the land only. The buyer had purported to transfer the possession of the plant and machinery separately and was contending now that this handing over possession of the machinery was de hors the conveyance deed. The Court relied on the conveyance deed itself to hold that what was conveyed was not only the land but the entire fertiliser business including plant and machinery.

In the case of Triveni Engineering & Indus. Ltd., 2000 (120) ELT 273 (SC), the Supreme Court held that generating sets consisting of the generator and its prime base mover are mounted together as one unit on a common base. Floors, concrete bases, walls, partitions, ceilings etc., even if specially fitted out to accommodate machines or appliances, cannot be regarded as a common base joining such machines or appliances to form a whole. The installation or erection of the turbo alternator on the concrete base specially constructed on the land could not be treated as a common base and, therefore, it followed that the installation or erection of turbo alternator on the platform constructed on the land would be immovable property.

The decision in the case of Mittal Engineering Works Pvt. Ltd. vs. CCE Meerut, 1996(88) ELT622 (SC) was on similar lines where it held that a mono vertical crystalliser, which had to be assembled, erected and attached to the earth by a foundation at the site of the sugar factory was not capable of being sold as it is, without anything more. Hence, the plant was not a movable property.

In Quality Steel Tubes (P) Ltd vs Collector of Central Excise, 1995 SCC (2) 372 it was held that goods which were attached to the earth became immovable, and did not satisfy the test of being goods within the meaning of the Excise Act nor could be said to be capable of being brought to the market for being bought or sold, fall within the definition of immovable. Therefore, a plant of tube mill and welding head was regarded as immovable.

The Delhi High Court in Inox Air Products Ltd vs. Rathi Ispat Ltd (2007) 136 DLT 101 (DB) dealt with machineries which have been embedded in the earth, to constitute Cryogenic Air Separation Plants for the production of oxygen and nitrogen to be used in the production of steel. The machinery was erected with civil and structural works, viz., foundation, piling, structural support and pipe support, etc. for the installation of the plant, and the same could not be shifted without first dismantling it and then re-erecting it at another site. These were held to be immovable in nature. On erection, the machinery, ceased to be movable property. The Court held the machinery did not answer the description of “goods” or “movable property”, which by its very nature envisaged mobility and marketability on an “as it is, where it is basis”. Even though, the plant and machinery after dismantling could have been sold as scrap, but that was also the case with steel recovered from the rubble of an edifice.

The Karnataka High Court in Shree Arcee Steel P Ltd vs. Bharat Overseas Bank Ltd, AIR 2005 Kant 287, held that the meaning of the word “immovable” means permanent, fixed, not liable to be removed. In other words, for a chattel to become immovable property, it must be attached to the immovable property permanently as a building or as a tree attached to earth. Though a moveable property was attached to earth permanently for beneficial use and enjoyment, it remained a movable property. The Court gave an illustration that though a sugar cane machine/or an oil engine was attached to earth, it was moveable property. The degree, manner, extent and strength of attachment of the chattel to the earth or building were the main features to be recorded. Thus, the Court concluded that a centerless bar turning machine measuring 80’ in length and 10’ in width and 5’ height embedded to the earth by mounting the same on a cement base and fastened to it with bolts and nuts could not be called as immovable property.

The Central Board of Excise and Customs had, under the erstwhile, Central Excise Act 1944, after considering several Court decisions (including some of those mentioned above), clarified vide Order No. 58/1/2002 – CX that:

(A)    If items assembled or erected at site and attached by foundation to the earth cannot be dismantled without substantial damages to components and thus cannot be reassembled, then the items would not be considered as movables.

(B)    If any goods installed at site (e.g., paper-making machine) are capable of being sold or shifted as such after removal from the base and without dismantling into its components/parts, the goods would be considered to be movable. If the goods, though capable of being sold or shifted without dismantling, are actually dismantled into their components/parts for ease of transportation etc., they will not cease to be movable merely because they are transported in dismantled condition.

(C)    The intention of the party is also a factor to be taken into consideration to ascertain whether the embedment of machinery in the earth was to be temporary or permanent. This, in case of doubt, may help determine whether the goods are moveable or immovable.

The CBEC also issued clarifications for specific items:

(i)    Turn key projects like Steel Plants, Cement plants, Power plants, etc. involving supply of large number of components, machinery, equipments, pipes and tubes, etc. for their assembly/installation/erection/integration/inter-connectivity on foundation/civil structure etc. at site, will not be considered as excisable goods.

(ii)    Huge tanks made of metal for storage of petroleum products in oil refineries or installations: These tanks, though not embedded in the earth, are erected at site, stage by stage, and after completion they cannot be physically moved. On sale/disposal they have necessarily to be dismantled and sold as metal sheets/scrap. It is not possible to assemble the tank all over again. Such tanks are therefore not moveable.

(iii)    Refrigeration/Air conditioning plants: These are basically systems comprising of compressors, ducting, pipings, insulators and sometimes cooling towers, etc. They are in the nature of systems and not machines as a whole. They come into existence only by assembly and connection of various components and parts. The refrigeration/air conditioning system as a whole cannot be considered to be goods.

(iv)    Lifts and escalators: Lifts and escalators which are installed in buildings and permanently fitted into the civil structure cannot be considered to be goods.

DECISION IN DANKUNI’S CASE

The Supreme Court considered the various statutory definitions of the term immovable property as well as its own decision in Duncans (supra). It also considered the sale deed in the present case. Accordingly, it was clear from the sale deed itself, that the total sale consideration was Rs. 8.35 cr., for the land, building, civil works, plant and machinery and current assets, etc. However, what had been done was that an amount of Rs.1.01 cr. had been taken as the value of the land, building and civil works. The Court held that what was purported to be conveyed, was, the land as defined in the Sale Deed and land was immovable property. However, Immovable property was defined in the General Clauses Act, 1897 as ‘including land, benefits to arrive out of land and things attached to the earth or permanently fastened to anything attached to the earth’. When it came to the definition of ‘immovable property’ in the Transfer of Property Act, it is defined as ‘not including standing timber, growing crops or grass’. In the Registration Act, 1908, immovable property included, apart from land and buildings, things attached to the earth or permanently fastened to anything attached to the earth but not including standing timber, growing crops or grass. In this respect, the Supreme Court made a useful reference to section 8 of the Transfer of Property Act which declared that in the absence of an express or implied indication, a transfer of property passed to the transferee all the interests, which the transferor was capable of passing in the property and in the legal incidents thereof. Such incidents included, inter alia, where the property was land, all things attached to the earth. Accordingly, the Apex Court laid down a very important principle, that when the property was machinery attached to the earth, the movable parts thereof also were comprehended in the transfer.A proper reading of the Sale Deed, indicated that what was conveyed was rights over the scheduled property, which, no doubt, was the land but it also included all the rights, easements, interests, etc., i.e., the rights which ordinarily passed on such sale over the land. The Court held that it was from a reading of this deed in conjunction with section 8 of the Transfer of Property Act that the intention of the parties become self-evident that the vendor intended to convey, all things, which inter alia stood attached to the earth. The mere fact that there was no express reference to plant and machinery in the Sale Deed did not mean that the interest in the plant and machinery which stood attached to the land was not conveyed. It held that the buyer had only considered value of the land, building and civil works and this was done to tide over the liability to stamp duty for what was actually, in law, conveyed. Thus, the Court concluded that it was clear that the sale deed operated to convey the rights over the plant and machinery as well, which were comprised in the land mentioned in the sale deed. However, it added that as far as plant and machinery was concerned, it would be only that which was permanently embedded to the earth and answering the description of the immovable property as defined above. Accordingly, the stamp duty valuation should be recomputed on that basis.

EPILOGUE

Apparently, the quote “What’s in a Name?” would hold true in this case. Even if an asset is called movable property, if it answers the description of immovable property, then instruments dealing with it would be subject to stamp duty accordingly. In this case, a “Rose by any other name would smell as sweet!” Although one may hasten to add that here, the smell would be far from sweet due to the higher stamp duty incidence.

Section 147 r.w.s 148 – Reopening of assessment – Based on TPO report – Reference to the Transfer Pricing Officer to determine Arms’ Length Price cannot be initiated, in the absence of any proceeding pending before the AO – Reference for determination of Arms’ Length Price cannot precede the initiation of assessment proceedings.

9. PCIT – 6 vs. Kimberly Clark Lever Pvt Ltd
[ITA No. 123 Of 2018,
Dated: 7th June, 2023. (Bom.) (HC).]

Section 147 r.w.s 148 – Reopening of assessment – Based on TPO report – Reference to the Transfer Pricing Officer to determine Arms’ Length Price cannot be initiated, in the absence of any proceeding pending before the AO – Reference for determination of Arms’ Length Price cannot precede the initiation of assessment proceedings.

The assessee is engaged in the business of manufacturing diapers and sanitary napkins. It also markets consumer tissue products and had filed a return of income declaring total income at Rs.30,01,43,006 on 31st October, 2007 for the A.Y. 2007-08.

The return of income was processed under section 143(1) of the Income Tax Act, 1961 (the Act). The AO made reference under section 92CA of the Act to the Transfer Pricing Officer (TPO) on 26th October, 2009. The TPO passed an order under section 92CA(3) of the Act on 29th October, 2010 making an adjustment on account of arms’ length price of the international transaction at Rs.12,17,43,370. The AO recorded reasons for re-opening the assessment and issued notice under section 148 of the Act on 14th January, 2011. The assessee vide its letter dated 28th January 2011 objected to the notice. It was the case of the assessee that the reasons to believe income had escaped assessment was based on an invalid transfer pricing order, and hence there was no reason for re-opening the assessment on the basis of the said order of TPO. The reason why the assessee took this stand was because respondent’s return of income was processed under section 143(1) of the Act and there was no assessment proceeding pending under section 143(3) of the Act during which a reference could be made to the TPO under section 92CA of the Act. Hence, such a reference to TPO itself was invalid and any order passed by the TPO would be invalid and such an invalid order of the TPO cannot be the reason for re-opening the assessment. Admittedly, no notice under Section 143(2) of the Act had also been issued. The AO has in fact admitted that the case was not selected for scrutiny and no notice under section 143(2) of the Act was issued but in view of the findings of the TPO he has re-opened the case for the A.Y. 2007-08.

The assessee contented that where against the return of income filed by the assessee in time, no proceedings were initiated by issuing notice under section 143(2) of the Act, the reference made to the TPO by the AO under section 92CA(1) of the Act was invalid. Consequently, the order passed by the TPO under section 92CA(3) of the Act could not be the basis for recording the reasons for re-opening the assessment, i.e., initiating re-assessment proceedings. Where the AO had re-opened the assessment by merely making a reference to the order of the TPO which admittedly was passed without any jurisdiction, then there was no independent application of mind by the AO to commence the re-assessment proceedings. In the absence of the same, the assessment proceedings could not be re-opened.

The Honourable Court observed that it is judicially well settled that the belief of the AO that there has been escapement of income must be based on some material on record. There must be some material on record to enable the AO to entertain a belief that certain income chargeable to tax has escaped assessment for the relevant Assessment Year. In this case, the only material relied upon is the order of the TPO.

The issue which arose for consideration is the validity of the assessment proceedings initiated under section 147/148 of the Act. As noted earlier, admittedly reference was made to the TPO for determining the arms’ length price of the international transaction and no notice under section 143(2) of the Act was issued before making the said reference to the TPO. When no assessment proceedings were pending in relation to the relevant assessment year, the AO was precluded from making a reference to the TPO under section 92CA(1) of the Act for the purpose of computing arms’ length price in relation to the international transaction.

The entire scheme and mechanism to compute any income arising from an international transaction entered between associated enterprises is contained in Sections 92 to 92F of the Act. Section 92CA of the Act provides that where the AO considers it necessary or expedient so to do, he may refer the computation of arm’s length price in relation to an international transaction to the TPO. In such a situation, the TPO, after taking into account the material before him, pass an order in writing under section 92CA(3) of the Act determining the arms’ length price in relation to an international transaction. On receipt of this order, Section 92CA(4) of the Act requires the AO to compute the total income of the assessee in conformity with the arms’ length price so determined by the TPO. This means that the determination of the arm’s length price wherever a reference is made to him is done by the TPO under section 92CA(3) of the Act but the computation of total income having regard to the arm’s length price so determined by the TPO is required to be done by the AO under section 92CA(4) r.w.s. 92C(4) of the Act.

Therefore, the process of determination of arm’s length price is to be carried out during the course of assessment proceedings, may it be, under Sub Section (3) of Section 92C of the Act where the AO determines the arm’s length price or under Sub Sections (1) to (3) of Section 92CA of the Act, where the AO refers the determination of arm’s length price to the TPO. Reference may also be made to the provisions of section 143(3) of the Act dealing with assessment of income. In terms of clause (ii) of Sub Section 3 of Section 143 of the Act, it is prescribed that the AO shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund on any amount due to him on the basis of such assessment. It is only in the course of such assessment of total income, that the AO is obligated to compute any income arising from an international transaction of an assessee with associated enterprises, having regard to the arm’s length price.

The occasion which requires the AO to compute income from an international transaction arises only during the assessment proceedings, wherein he is determining the total income of the assessee. The Central Board of Direct Taxes (CBDT) in Instructions No. 3 dated 20th May, 2003 has also stated that a case is to be selected for scrutiny assessment before the AO may refer the computation of arm’s length price in relation to an international transaction to the TPO under Section 92CA of the Act.

Therefore, the Honourable Court upheld the proposition that an AO can make reference to the TPO under section 92CA of the Act only after selecting the case for scrutiny assessment. The instructions of CBDT are also a pointer to the legislative import that the reference to the TPO for determining the arm’s length price in relation to an international transaction is envisaged only in the course of the assessment proceedings, which is the only process known to the Act, whereby the assessment of total income is done. Therefore, the Tribunal was correct to hold that when reference was made to the TPO by the AO for determination of arm’s length price in relation to the international transaction, when no assessment proceedings were pending, was an invalid reference. Consequently, the subsequent order passed by the TPO determining the assessment to the international transaction was a nullity in law and void ab initio. In view thereof, the AO could not have relied upon an order of the TPO which is a nullity to form a belief that certain income chargeable to tax has escaped the assessment for the relevant Assessment Year.

In view of the above, the revenue’s Appeal was dismissed.

Section 263 – Revision – interest under section 244A on excess refund – where two views are possible – Order cannot be stated to be erroneous or prejudicial to interest of revenue.

8 Pr. CIT – 2 vs. Bank of Baroda
[ITA NO. 100 OF 2018,
Dated: 07/06/2023, (Bom.) (HC)]
[Arising from ITA No 3432/MUM/2014,
Bench: E Mumbai; dated: 9th November, 2016; A.Year: 2007-08 ]

Section 263 – Revision – interest under section 244A on excess refund – where two views are possible – Order cannot be stated to be erroneous or prejudicial to interest of revenue.

The Assessee had filed return of income on 30th October, 2007 for A.Y. 2007-08 declaring total income of Rs. 997,10,30,681. Subsequently, a revised return declaring an income of Rs. 615,19,97,000 was filed on 19th March, 2009. The assessment was completed under section 143(3) of the Income Tax Act, 1961 (the Act) on 23rd March, 2009 assessing total income at Rs.1904,69,88,000. The Assessee preferred an appeal and the CIT(A) vide an order dated 15th June, 2011 decided some issues in the favor of the assessee. An effect to the CIT(A) order has been given by the AO on 7th March, 2012 resulting in revised income being accepted at Rs. 968,38,10,000. This resulted in a refund of Rs. 377,95,44,631.

On verification of the records, the PCIT noticed that the AO had failed to conduct proper enquiries and examine the issues in an appropriate manner. This gave rise to an erroneous assumption in as much as in the original return the assessee had claimed a refund of Rs. 21,19,54,764 as against the claim of refund of Rs. 337,74,22,347 in the revised return. The PCIT felt that the delay in claiming enhanced refund was attributable to the assessee and accordingly interest under section 244(A) of the Act was not allowable on the refund of Rs. 125,54,67,583 for 11 months, i.e., from 1st April, 2008 to 19th March, 2009. According to the PCIT, this resulted in an excess allowance of interest of Rs. 9,81,31,689. Consequently, a notice under section 263 of the Act was issued. The Assessee appeared, made submissions and PCIT passed an order which was impugned by assessee before the ITAT. The ITAT allowed the appeal vide order dated 9th November, 2016. It followed the coordinate Bench decision on the issue in case of State Bank of India vs. DCIT (ITA No 6817&6823/M/2012, A.Y. 2001-02 and ITA No 6818 & 6824, A.Y. 2002-2003)

Sub Section (2) of Section 244(A) of the Act reads as under:

(2) If the proceedings resulting in the refund are delayed for reasons attributable to the assessee, whether wholly or in part, the period of the delay so attributable to him shall be excluded from the period for which interest is payable, and where any question arises as to the period to be excluded, it shall be decided by the Chief Commissioner or Commissioner whose decision thereon shall be final.

The Honourable Court observed that as per the provision if the proceedings resulting in the refund are delayed for the reasons attributable to the assessee, the period of delay so attributable to the assessee shall be excluded from the period for which interest is payable. The Court noted that there were no findings of the PCIT as to how the assessee delayed the proceedings that resulted in the refund or what reasons could be attributable to the assessee. It was true that assessee had initially filed return of income on 30th October, 2007, declaring total income of Rs. 997,10,30,681, and subsequently on 19th March, 2009 a revised return declaring an income of Rs. 615,19,97,000 was filed. The assessment was completed under section 143(3) of the Act on 23rd March, 2009 assessing the total income at Rs. 1904,69,88,000. Against the assessment order, the assessee preferred an appeal and the CIT(A) vide an order dated 15th June, 2011 decided some issues in favour of the assesse. In giving effect to CIT(A)’s order, the AO on 7th March, 2012 granted a refund of Rs. 377,95,44,631. Therefore it cannot be stated that proceedings resulting in the refund were delayed for reasons attributable to assessee wholly or in part.

The Court observed that, the ITAT has also, relied on a judgment in the State Bank of India vs. DCIT-2 (supra) case and come to a conclusion that the order passed by the AO was neither erroneous nor prejudicial to the interest of revenue, and the AO has allowed the amount of interest in question taking one of the possible views. The Tribunal had held that where two views are possible and the AO takes one of the possible views, the PCIT could not have exercised revisional jurisdiction under section 263 of the Act.

The Honourable Court after perusal of the ITAT order held that the entire issue is fact-based. The Tribunal having come to the factual conclusion on the basis of materials on record, decided that no question of law arises. In view of the same, the revenue’s Appeal was dismissed.

Search and seizure — Assessment in search cases — General principles — No incriminating material found during search — Assessment completed on date of search — No additions can be made in assessment pursuant to search

27. S. M. Kamal Pasha vs. Dy. CIT
[2023] 454 ITR 157 (Kar.)
Date of order: 2nd September, 2022
Sections: 132 and 153A of ITA 1961

Search and seizure — Assessment in search cases — General principles — No incriminating material found during search — Assessment completed on date of search — No additions can be made in assessment pursuant to search.

Pursuant to a search and seizure conducted under section 132 of the Income-tax Act, 1961 in the residential premises of the assessee, the AO issued notice under section 153A. The assessee declared a total income of Rs. 99,33,890 in his return filed in response to the notice. Thereafter, the AO passed an order assessing the total income at Rs.7,92,57,600.

The Commissioner(Appeals) set aside the order passed under section 153A. The Tribunal allowed the Department’s appeal.

The Karnataka High Court allowed the appeal filed by the assessee and held as under:

“The Tribunal was not justified in reversing the order of the Commissioner (Appeals) setting aside the order u/s. 153A when there did not exist any incriminating material found during the search u/s. 132 for issuing notice u/s. 153A. Hence the order of the Tribunal was set aside and the order of the Commissioner (Appeals) was restored.”

Search and Seizure — Assessment of third person — Income-tax survey — Statement of assessee during survey not conclusive evidence — Author of diary based on which addition made had expired on date of search and entries not used in case of person against whom search conducted — Addition as unexplained investment in assessee’s case — Erroneous and unsustainable.

26 Dinakara Suvarna vs. DCIT
[2023] 454 ITR 21 (Kar.)
A.Ys.: 2005-06 to 2007-08
Date of order: 08th July 2022
Sections: 69B, 132, 147 and 153C of ITA 1961

Search and Seizure — Assessment of third person — Income-tax survey — Statement of assessee during survey not conclusive evidence — Author of diary based on which addition made had expired on date of search and entries not used in case of person against whom search conducted — Addition as unexplained investment in assessee’s case — Erroneous and unsustainable.

The assessee was a contractor. A search was conducted under section 132 of the Income-tax Act, 1961 in the residential premises of one AK and a diary was seized. The diary contained details of payments made by AK to the assessee. Thereafter, on 21st April, 2009, a survey action under section 133A was conducted in the business premises of the assessee, and his statement was recorded wherein the assessee agreed to offer 8 per cent additional receipts as income. However, the assessee did not file his revised return offering additional income.

On 26th March, 2010, the AO issued a notice under section 148 of the Act and called upon the assessee to show cause as to why the amount agreed to be offered to tax was not declared in the return of income. On 12th April, 2010, the assessee filed his return of income and declared the same income as filed in the original return of income. The assessee vide letter dated 30th May, 2010 objected to the reopening on the grounds that there was no reason to believe that the income chargeable to tax had escaped assessment. On 24th December, 2010, the AO passed assessment orders for the A.Ys. 2005-06 to 2007-08 making the additions.

The CIT(Appeals) partly allowed the appeals. The assessee and the Revenue preferred appeals against the said order before the Tribunal. Against the appeal preferred by the Revenue, the assessee preferred cross-objections. The Tribunal partly allowed the appeals and cross-objections filed by the assessee. The appeal preferred by the Revenue for the A.Y. 2007-08 was partly allowed and dismissed the appeals for other years.

The following questions were framed by the Karnataka High Court in the appeal filed by the assessee:

“a)    Whether the Tribunal is correct in law in upholding the action of the Assessing Officer in reopening the assessment u/s. 147 of the Act for the A.Ys. 2005-06, 2006-07 and 2007-08 on the facts and circumstances of the case?

b)    Whether the Tribunal erred in law in not holding that there was no reason to believe that income escaped assessment and all mandatory conditions to reopen the assessment u/s. 147 of the Act were not satisfied on the facts and circumstances of the case?

c)    Whether the Tribunal was correct in law in reversing the deletion made by the Commissioner of Income-tax (Appeals) of the addition u/s. 69B in respect of alleged unexplained investments made in properties of Rs. 28,75,500 for the A.Y. 2007-08 on the facts and circumstances of the case?”

The High Court allowed the appeal and held as follows:

“i) The Tribunal had erred in upholding the reopening of the assessment u/s. 147 for the A.Ys. 2005-06, 2006-07 and 2007-08 and in holding that there was reason to believe that income had escaped assessment and all mandatory conditions to reopen the assessment were satisfied. No proceedings were initiated u/s. 153C. Thus, there was patent non-application of mind. The Assessing Officer had not recorded his satisfaction with regard to escapement of income. The assessee’s admission
during the survey u/s. 133A could not be a conclusive evidence.

ii) The Tribunal had erred in reversing the deletion made by the Commissioner (Appeals) of the addition made u/s. 69B for the A.Y. 2007-08. We have perused the order passed by the Commissioner of Income-tax (Appeals) and Income-tax Appellate Tribunal. It is held therein that the entries in the seized diary could not be relied upon because Smt. Soumya Shetty had passed away and there was no corroborating evidence. The Commissioner of Income-tax (Appeals) has held that it was travesty of justice that the relevant entry has not been used in Shri Ashok Chowta’s case but it has been used in the assessee’s case who is a third party to the proceedings. The Tribunal while reversing the finding of Commissioner of Income-tax (Appeals) has relied upon the signature of the assessee in the seized diary. Admittedly, the author of the diary had passed away. The addition has been made in the case of the assessee based on the entries in the diary but the said entries have not been used in the case of Shri Chowta. As recorded hereinabove, the Hon’ble Supreme Court in the case of Pullangode Rubber Produce Co. Ltd. has held that admission is an important piece of evidence but it cannot be said to be conclusive. Shri Chandrashekar also placed reliance on CIT v. S. Khader Khan Son [2008] 300 ITR 157 (Mad) and contended that a statement recorded u/s. 133A of the Act is not given any evidentiary value because the officer is not authorised to administer oath and to take any sworn statement. Therefore, in view of the fact that the author of the diary had passed away and relevant entry has not been used in the case of Shri Chowta himself, reversing the findings of the Commissioner of Income-tax (Appeals) by the Income-tax Appellate Tribunal is not sustainable.”

Search and seizure — Assessment in search cases — Effect of insertion of section 153D by Finance Act, 2007 — CBDT circular dated 12th March, 2008 and Manual of Office Procedure laying down the condition of approval of draft order of Commissioner — Circular and Manual binding on Income-tax authorities — Approval granted without application of mind — Order of assessment — Not valid.

25. ACIT Vs. Serajuddin and Co.
[2023] 454 ITR 312 (Orissa)
A. Ys.: 2009-10
Date of order: 15th March, 2023
Sections: 153A and 153D of ITA 1961.

Search and seizure — Assessment in search cases — Effect of insertion of section 153D by Finance Act, 2007 — CBDT circular dated 12th March, 2008 and Manual of Office Procedure laying down the condition of approval of draft order of Commissioner — Circular and Manual binding on Income-tax authorities — Approval granted without application of mind — Order of assessment — Not valid.

The search and seizure operation was carried out in the case of assessee and various other persons and concerns of the assessee. Subsequently, assessments were completed and orders were passed under section 143(3)/144/153A after making various additions/disallowances.

The assessment orders were challenged in appeal. One of the grounds for challenge was in respect of non-compliance with section 153D which required prior approval of the Additional Commissioner (Addl. CIT). Further, the approval had been granted in a mechanical manner without application of mind. The CIT(A) observed that a consolidated approval order given by the Addl. CIT for A.Ys. 2003-04 to 2009-10 and therefore held, partly allowing the appeal, that it was not necessary for the AO to mention the fact of approval in the body of the assessment order. The Tribunal concluded that the approval was granted without application of mind and the assessment orders were accordingly set aside.

The Orissa High Court dismissed the appeal filed by the Department and held as under:

“i)    Among the changes brought about by the Finance Act, 2007 was the insertion of section 153D of the Income-tax Act, 1961. The CBDT circular dated March 12, 2008 ([2008] 299 ITR (St.) 8) refers to the various changes and, inter alia, also to the insertion of a new section 153D. Even prior to the introduction of section 153D in the Act, there was a requirement u/s. 158BG of the Act, which was substituted by the Finance Act of 1997 with retrospective effect from January 1, 1997, of the Assessing Officer having to obtain previous approval of the Joint Commissioner/Additional Commissioner by submitting a draft assessment order following a search and seizure operation.

ii)    The requirement of prior approval u/s. 153D of the Act is comparable with a similar requirement u/s. 158BG of the Act. The only difference is that the latter provision occurs in Chapter XIV-B relating to “Special procedure for assessment of search cases” whereas section 153D is part of Chapter XIV. A plain reading of section 153D itself makes it abundantly clear that the legislative intent was for the Assessing Officer when he is below the rank of a Joint Commissioner, to obtain “prior approval” before he passes an assessment order or reassessment order u/s. 153A(1)(b) or 153B(2)(b) of the Act.

iii)    An approval of a superior officer cannot be a mechanical exercise. While elaborate reasons need not be given, there has to be some indication that the approving authority has examined the draft orders and finds that it meets the requirement of the law. The mere repeating of the words of the statute, or mere “rubber stamping” of the letter seeking sanction by using similar words like “seen” or “approved” will not satisfy the requirement of the law. This is where the Technical Manual of Office Procedure becomes important. Although, it was in the context of section 158BG of the Act, it would equally apply to section 153D of the Act. There are three or four requirements that are mandated therein: (i) the Assessing Officer should submit the draft assessment order “well in time”; (ii) the final approval must be in writing; and (iii) the fact that approval has been obtained, should be mentioned in the body of the assessment order. The Manual is meant as a guideline to Assessing Officers. Since it was issued by the Central Board of Direct Taxes, the powers for issuing such guidelines can be traced to section 119 of the Act. The instructions under section 119 of the Act are binding on the Department.

iv)    It was an admitted position that the assessment orders were totally silent about the Assessing Officer having written to the Additional Commissioner seeking his approval or of the Additional Commissioner having granted such approval. Interestingly, the assessment orders were passed on December 30, 2010 without mentioning this fact. These two orders were therefore not in compliance with the requirement spelt out in para 9 of the Manual of Official Procedure. The requirement of prior approval of the superior officer before an order of assessment or reassessment is passed pursuant to a search operation is a mandatory requirement of section 153D of the Act and such approval is not meant to be given mechanically. In the present cases such approval was granted mechanically without application of mind by the Additional Commissioner resulting in vitiating the assessment orders themselves.”

Offences and prosecution — Sanction for prosecution — Failure to deposit tax deducted at source — Failure due to inadvertence of assessee’s official — Assessee depositing tax deducted at source with interest though after delay — Effect of Circular issued by CBDT — Prosecution orders quashed.

24. Dev Multicom Pvt Ltd & Ors vs. State of Jharkhand
[2023] 454 ITR 48 (Jharkhand):
A. Y. 2017-18
Date of order: 28th February, 2022
Sections 276B, 278B and 279(1) of ITA 1961

Offences and prosecution — Sanction for prosecution — Failure to deposit tax deducted at source — Failure due to inadvertence of assessee’s official — Assessee depositing tax deducted at source with interest though after delay — Effect of Circular issued by CBDT — Prosecution orders quashed.

The assessee had deducted tax at source. However, this tax deducted at source had been deposited with delay. The assessee paid an interest on the delay in depositing of tax deducted at source. Prosecution notices were served on the assesses and complaint was lodged stating that the assessee and its principal officer had deducted tax but failed to credit the same to the account of Central Government and therefore committed offence punishable u/s. 276B of the Income-tax Act, 1961.

The assessee filed petition to quash the complaint. The Jharkhand High Court allowed the petition and held as under:

“i)    Instruction F. No. 255/339/79-IT(Inv.) dated May 28, 1980, issued by the CBDT that prosecution u/s. 276B of the Income-tax Act, 1961 shall not normally be proposed when the amount of tax deducted at source involved or the period of default is not substantial and the amount in default has also been deposited in the meantime to the credit of the Government. But no such consideration will apply to levy of interest u/s. 201(1A).

ii)    The tax deducted at source in all the cases was deposited with interest by the assessees and there was no reason to proceed with the criminal proceeding after receiving the amount with interest though a delay had occurred in depositing the amount. The continuation of the proceedings would amount to an abuse of the process of the court.

iii)    Apart from one or two cases, the deducted amount was not more than Rs. 50,000. While passing the sanction u/s. 279(1) the sanctioning authority had not considered the Instruction dated May 28, 1980 issued in this regard by the CBDT. Accordingly, the entire criminal proceedings and the cognizance orders in the respective cases passed by the Special Economic Offices whereby cognizance had been taken against the assessees for the offences u/s. 276B and 278B were quashed.”

Industrial undertaking — Special deduction under section 80-IB — Condition precedent — Manufacture of article — Making of poultry feed amounts to manufacture — Assessee entitled to special deduction under section 80-IB.

23. Principal CIT vs. Shalimar Pellet Feeds Ltd
[2023] 453 ITR 547 (Cal)
A. Y. 2008-09 to 2013-14
Date of order: 22nd February, 2022
Section 80-IB of ITA 1961

Industrial undertaking — Special deduction under section 80-IB — Condition precedent — Manufacture of article — Making of poultry feed amounts to manufacture — Assessee entitled to special deduction under section 80-IB.

For the A.Y. 2008-09 to 2013-14, the assessee claimed a deduction under section 80-IB(5) of the Income-tax Act, 1961 on the grounds that the activity of manufacturing poultry feed in their factory was a manufacturing activity. The AO was of the view that there was no manufacturing done and that the assessee only mixed various products, that each one of them had an individual identity and could not be construed to be an input for manufacturing of poultry feed. The AO rejected the asessee’s claim.

The CIT (Appeals) allowed the assessee’s claim and granted deduction. The Tribunal, on the facts and on the grounds that the Central Government had notified the poultry feed industry under section 80-IB(4) affirmed the order of the CIT (Appeals).

The Calcutta High Court dismissed the appeals filed by the Revenue and held as under:

“i)    For the A.Ys. 2008-09, 2009-10 and 2010-11 the appeals were covered by the circular issued by the CBDT and therefore were not maintainable since they involved low tax effect.

ii)    The process undertaken by the assessee in producing the poultry feed amounted to manufacture. The simple test which could be applied was to examine as to whether the individual ingredients which were mixed together to form the poultry feed could be recovered and brought back to their original position. After the process was completed, if such reversal was not possible then the final product had a distinct and separate character and identity. Though the individual ingredients were capable of being consumed by human beings, the end product, namely, the poultry feed could not be consumed by human beings. Therefore, the individual ingredients would lose their identity and get merged with the final product which was a separate product having its own identity and characteristics. Nothing contrary was shown by the Department against the factual findings recorded by the Commissioner (Appeals) after examining the process undertaken by the assessee as affirmed by the Tribunal. The Tribunal was right in confirming the order of the Commissioner (Appeals) granting deduction u/s. 80-IB for the A.Ys. 2011-12, 2012-13 and 2013-14.”

Income — Capital or revenue receipt — Interest — Funds received for project from capital subsidy, debt and equity — Funds placed with banks during period of construction of project — Interest earned thereon capital in nature.

22. Principal CIT vs. Brahmaputra Cracker & Polymer Ltd
[2023] 454 ITR 202 (Gau):
A. Ys. 2011-12, 2014-15 and 2015-16
 Date of order: 12th April, 2023
Section 4 of ITA 1961

Income — Capital or revenue receipt — Interest — Funds received for project from capital subsidy, debt and equity — Funds placed with banks during period of construction of project — Interest earned thereon capital in nature.

The assessee received a capital subsidy from the Ministry of Chemicals and Fertilizers for setting up Integrated a Petro-Chemical Complex. The assessee maintained a separate bank account for such capital subsidy and any excess amount not being utilised was temporarily parked in short-term deposits in banks and interest was earned thereupon. The assessee made these deposits in accordance with the guidelines of the Department of the Public Enterprises. Clarifications were received from the Ministry of Chemicals and Fertilizers indicating that the interest earned on the aforesaid deposits shall be treated as a part of the capital subsidy and will reduce the part of capital subsidy sought from the Government. The assessee claimed these receipts as capital receipts in the return of income. The AO treated these receipts as revenue receipts chargeable to tax.

The CIT(A) allowed the appeal of the assessee. The Tribunal dismissed the appeal of the Department.

The Gauhati High Court dismissed the appeal filed by the Department and held as under:

“Interest received by the assessee from short-term deposits made out of unutilized capital subsidy, unutilized debt funds, and unutilized equity funds received as capital during the formative years till the project was completed was rightly claimed by the assessee as capital receipts. No question of law arose.”

Assessment — Validity — Amalgamation of companies — Fact of amalgamation intimated to Income-tax authorities — Notice and order of assessment in the name of company which had ceased to exist — Not valid.

21. Inox Wind Energy Ltd vs. Addl./Joint/Deputy/Asst. CIT/ITO
[2023] 454 ITR 162 (Guj.)
A. Y. 2018-19
Date of order: 31st January, 2023
Section: 143 of ITA 1961

Assessment — Validity — Amalgamation of companies — Fact of amalgamation intimated to Income-tax authorities — Notice and order of assessment in the name of company which had ceased to exist — Not valid.

IR was incorporated on 11th October, 2010 under the Companies Act. For the A.Y. 2018-19 the return of income was filed declaring the total income at nil. The case was selected for scrutiny and the notice under section 143(2) of the Income-tax Act, 1961, was issued on 23rd September, 2019. Pending this assessment, on 25th January, 2021, the composite scheme of arrangement between IR and GFL and the assessee-company was approved by the National Company Law Tribunal and the appointed date for the merger of IR and GFL was fixed on 1st April, 2010 and demerger of the energy business to the assessee-company was from 1st July, 2020. The scheme since came into operation from 9th February, 2021, and the jurisdictional AO received the intimation through e-mail on 10th March, 2021. The assessee informed the respondent about the sanction of the composite scheme on 31st August, 2021 and on 19th September, 2021. Notices continued to be issued in the name of erstwhile company IR, which no longer existed from 1st April, 2020. The show-cause notice-cum-draft assessment order was also issued on 23rd September, 2021. Therefore, on 25th September, 2021, once again the assessee intimated and objected to the notice. However, an order was passed under section 143(3) r.w.s.144B of the Act, assessing the income in the name of IR for the A. Y. 2018-19.

The Gujarat High Court allowed the writ petition challenging the validity of the assessment order and held as under:

i)    The assessment in the name of a company which has been amalgamated and has been dissolved is null and void and framing of assessment in the name of such companies is not merely a procedural difficulty, which can be cured.

ii)    The amalgamated company had already brought the facts of amalgamation to the notice of the AO and yet he chose not to substitute the name of the amalgamated company and proceeded to make the assessment in the name of a non-existing company thereby rendering it void. The assessment framed in the name of the non-existing company requires to be quashed.

iii)    While disposing of this petition, as a parting note, it is being observed that this order of quashment against the non-existing company will not preclude the authorities to initiate actions, if permitted under the law against the amalgamated company.

Section 32 read with section 263 – Where the subsidiary of the assessee company was amalgamated with it by following the purchase method, then the excess consideration paid by the assessee amalgamated company over and above the net-asset value of transferor/amalgamating company was to be treated as goodwill arising on amalgamation and same could be amortised in books of accounts of transferee company and was eligible for depreciation under section 32 (1).

18 Trivitron Healthcare (P.) Ltd. vs. PCIT
[2022] 98 ITR(T) 105 (Chennai – Trib.)
ITA No.:97 (CHNY.) OF 2021
A.Y.: 2015-16
Date of order: 24th June, 2022

Section 32 read with section 263 – Where the subsidiary of the assessee company was amalgamated with it by following the purchase method, then the excess consideration paid by the assessee amalgamated company over and above the net-asset value of transferor/amalgamating company was to be treated as goodwill arising on amalgamation and same could be amortised in books of accounts of transferee company and was eligible for depreciation under section 32 (1).

FACTS

The assessee company was engaged in the business of manufacturing  diagnostic equipment. During the year, Kiran Medical System Pvt Ltd (KMSPL), which was a wholly-owned subsidiary of the assessee, had amalgamated with the assessee company and the entire assets of the amalgamating company were taken over by the assessee company. The assessee company treated the difference between net-value of assets of the amalgamating company and the value of investments in the shares of the amalgamating company, as goodwill arising on amalgamation and claimed depreciation on same as applicable to intangible assets.

The AO accepted depreciation on goodwill claimed by the assessee. Subsequently, the case was taken up for revision proceedings by the PCIT on the grounds that the AO had allowed depreciation on goodwill even though 5th proviso to section 32(1) had very clearly restricted claim of depreciation to successor company on amalgamation, as if such succession had not taken place.

Aggrieved by the order of PCIT, the assessee filed further appeal before the ITAT.

HELD

The Tribunal observed that the fifth proviso to section 32(1) was inserted by the Finance Act, 1996, to restrict the claim of aggregate deduction which was evident from memorandum of the Finance Bill of 1996. As per the same, in case of succession in business and amalgamation of companies, the predecessor of business and successor or amalgamating company and amalgamated company, as the case may be, are entitled to depreciation allowance on same assets which in aggregate cannot exceed depreciation allowance in any previous year at prescribed rates. Therefore, it was proposed to restrict aggregate deduction in respect of depreciation during a year at the prescribed rate and apportion the same allowance in the ratio of number of days for which said assets were used by them. From the memorandum explaining Finance Bill, and purpose of introduction of fifth proviso to section 32(1), it was very clear, as per which predecessor and successor in a scheme of amalgamation should not claim depreciation over and above normal depreciation allowable on a particular asset. In other words, in a scheme of amalgamation where existing assets of amalgamating company were acquired by amalgamated company, then while claiming depreciation after amalgamation, the amalgamated company can claim depreciation only on the basis of the number of days a particular asset were used by them. Therefore, the said proviso only determines the amount of depreciation to be claimed in the hands of predecessor/amalgamating company and in the hands of successor or amalgamated company only in the year of amalgamation based on date of such amalgamation. However, it did not in any way restrict claim of depreciation on assets acquired after amalgamation or during the course of amalgamation. Therefore, it was very clear from fifth proviso to section 32(1), that effectively, scope of the said proviso was narrow as could be culled out for the purpose for which said proviso was inserted in the statute as reflected in the Memorandum to the Finance Bill. To further clarify, fifth proviso to section 32(1)  was restricted to assets which belong to the amalgamating company and its application would not be extended to the assets which arise in the course of amalgamation to the amalgamated company.

The intention of law was to extend the benefit available to the amalgamated company on succession and not to restrict depreciation on assets generated in the course of succession. It was very clear from the proviso that it referred to depreciation allowable to the predecessor and successor in the case of succession, and this should be understood as a reference to the assets that belong both to the predecessor and successor, and which  once belonged to the predecessor company. It did not apply to the assets generated in the hands of amalgamated company for the first time, as a result of amalgamation as approved by the High Court. In considered view, the fifthproviso applied only to those assets which commonly exist between predecessor and successor, however, it did not apply to an asset which has been created or acquired after amalgamation. The creation of the new asset by virtue of amalgamation like goodwill completely go out of reckoning of said proviso and thus, basis of PCIT to invoke his jurisdiction under section 263 was incorrect.

In the instant case, there was no dispute with regards to the fact that goodwill does not exist in the books of account of the amalgamating company. Further, depreciation on goodwill claimed by assessee was first time recognised in the books of account of amalgamated company in a scheme of amalgamation approved by the High Court. As per said scheme of amalgamation, accounting treatment in the books of transferee company has been specified as per which transferee company shall account for merger in its books of account as per ‘purchase method’ of accounting prescribed under Accounting Standard-14 issued by Institute of Chartered Accountants of India (ICAI). As per AS-14 issued by the ICAI, all assets and liabilities recorded in the books of account of transferor company shall stand transferred and vested in the transferee company pursuant to scheme and shall be recorded by the transferee company at their book value. The excess of or deficit in the net-asset value of the transferee company, after reducing the aggregate face value of shares issued by the transferee company to the members of the transferor company, pursuant to the scheme and cost of investment in the books of the transferee company for the shares of transferor company held by it on the effective date, is to be either credited to the capital reserve or debited to the goodwill account, as the case may be in the books of transferee company. Such resultant goodwill, if any shall be amortised in the books of transferee company as per principles laid down in Accounting Standard-14. Therefore, from the scheme of amalgamation and Accounting Standard-14 issued by the ICAI, it is very clear that once amalgamation is in the nature of ‘purchase method’, then excess consideration paid over and above net-asset value of transferor company shall be treated as goodwill and can be amortized in the books of account of the transferee company.

In this case, net asset value of the transferor company (amalgamating company) was at Rs. 42.66 crores. Further, value of investments of transferee company i.e., in the instant case, the value investment of the assessee company in the shares of transferor company (in the present case amalgamating company) was at Rs. 114.30 crores. The value of investments held by the assessee company in the shares of amalgamating company extinguishes after amalgamation and consequently difference between the net-asset value of amalgamating company and the value of investment held by amalgamated company would become goodwill in the books of account of the transferee company. In the instant case, the difference between net-value of assets of amalgamating company and the value of investments held by amalgamated company was at Rs. 71.63 crores and the same would become goodwill in the books of account of amalgamated company. Therefore, accounting of goodwill and consequent depreciation claim on such goodwill in the books of account of the assessee company was nothing but the purchase of goodwill and, thus, the assessee had rightly claimed depreciation on said goodwill in terms of section 32(1).

In this view of the matter and considering facts and circumstances of the case, the assessment order passed by the AO under section 143(3) was neither erroneous nor prejudicial to the interest of the revenue. The PCIT had assumed jurisdiction under section 263 on the sole basis of application of 5th proviso to section 32(1), towards depreciation on goodwill. In view of the factual matrix and non-applicability of the fifth proviso to section 32(1), to the facts of the instant case, there cannot be an error in relation to the view taken by the AO while framing the original assessment. Therefore, in absence of any such error in the assessment order, assumption of jurisdiction under section 263 by the PCIT should be reckoned as invalid. Hence, the order passed by him under section 263 was quashed.

Loan – Whether A Capital Asset?

ISSUE FOR CONSIDERATION

Lending of money on interest or otherwise to other persons, on request or otherwise, in the course of business or as an investment, is normal. Some of the money so lent at times becomes bad and irrecoverable, besides inability of recovery of interest.

In such circumstances, the issue that arises for consideration is whether the loan is a capital asset within the meaning of section 2(14) of the Income tax Act. The definition includes property of any kind including the right, title and interest in property. Is loan not a property and a capital asset? Is it not an asset even under popular parlance? The case of the lender to hold it as a capital asset seems better.

The additional issue that arises is whether on recovery of loan becoming bad, whether there arises a transfer within the meaning of the term under section 2(47) of the Act. Can it be said that on write-off of the loan, there is a relinquishment or extinguishment of the asset or the right therein? Is it possible to hold that there is a transfer even where legal steps are not taken or where taken but not concluded against the lender? Will the claim of the tax payer for loss and its set-off be better in cases where a loan or a deposit or advance is exchanged for another asset or similar product or where it is assigned or transferred in the course of an amalgamation?

Is the amount invested in financial small savings instruments such as Kisan Vikas Patra a capital asset and whether on its redemption or maturity a transfer happens, entitling the investor to claim the benefit of indexation of the cost of investment?

The issues definitely are interesting and of importance, and have been presented before the courts for adjudication, resulting in conflicting views. A decade ago, the Bombay High Court held that the loss arising on the loans turning irrecoverable was not allowable under the head capital gains. A later decision of the same Court however has held that such a loss arising on assignment was allowable under the head capital gains.

CROMPTON GREAVES LTD.’S CASE

The issue had first come up for consideration of the Bombay High Court in the case of Crompton Greaves Ltd. vs. DCIT [2019] [2014] 50 taxmann.com 88.

In this case, the assessee was a company carrying on the business of manufacturing transformers, switch gears, electrical products, home appliances, etc. It was to receive amounts of Rs.17,87,31,508 and Rs. 17,25,46,484 from M/s Bharat Starch Industries Ltd and M/s JCT Ltd, respectively. Against the said dues, it had received shares worth of Rs. 60,00,000 only from M/s Bharat Starch Industries Ltd. Therefore, during the previous year relevant to the assessment year 2002-03, it had written off balance of Rs. 34,52,77,992, and claimed it as a capital loss, carried forward for set-off in subsequent years. The said write-off was in the course of schemes of arrangement, which were subsequently sanctioned by the Gujarat and Punjab and Haryana High Courts, respectively.

The AO rejected the claim of the assessee, by holding that in order to be eligible to carry forward of the capital loss, there should be a capital asset as defined in section 2(14) and the same should have been transferred in the manner as defined in section 2(47). Since, in his view, the deposits or advances given to M/s JCT Ltd. and M/s Bharat Starch Industries Ltd. written off were not capital assets nor was there any transfer, no capital loss was allowed to be carried forward to the subsequent year.

The CIT (Appeals) also held that the loss incurred by the appellant-assessee was not a capital loss in relation to the transfer of an asset. He agreed with the AO and held that the loss has been rightly determined as a capital loss.

Upon further appeal, the Tribunal concluded that it was clear that the loans were not given in the ordinary course of business. The assessee’s claim that the loan was in the form of an inter-corporate deposit, which was a case of capital asset and had been transferred, was also rejected by the Tribunal. The Tribunal found that there was no evidence to show that it was a case of an inter-corporate deposit, because before the AO, it was claimed that the loss was on account of writing off of the advances given to M/s Bharat Starch Industries Ltd and M/s JCT Ltd. There was no material to show that a case of intercorporate deposit had been made out. The loans, therefore, could not be termed or construed as capital assets.

Agreeing with the finding of the Tribunal, the High Court held that the said findings of fact rendered in the peculiar factual backdrop did not give rise to any substantial question of law. Thus, the High Court did not entertain the appeal filed by the assessee.

However, in fairness, the High Court dealt with the judgment cited before it in support of the argument that the definition of “capital asset” in section 2(14) of the Income-tax Act, 1961, was wide enough to include even an advance of money. The Bombay High Court held that the judgment of the Supreme Court in the case of Ahmed G.H. Ariff vs. CWT [1970] 76 ITR 471 (SC), was in the context of the provisions in the Wealth-tax Act, 1957. The question raised before the Supreme Court was that the right of the assessee to receive a specified share of the net income from the estate in respect of which wakf-alal-aulad has been created, was an asset assessable to wealth-tax. It was in that context that the definition of the term “asset” as defined in section 2(e) of the Wealth-tax Act, 1957, and section 6(dd) of the Transfer of Property Act were referred to. All conclusions which had been rendered by the Supreme Court, must be, therefore, read in the peculiar factual situation and circumstances. In dealing with the argument that the right claimed of the nature could not be termed as property, the Supreme Court had held that “property” was a term of the widest import and subject to any limitation which in the context was required. It signified every possible interest which a person could clearly hold and enjoy. On this basis, the High Court held that this decision of the Supreme Court was not relevant for the assessee’s case.

With respect to the decision of the Gujarat High Court in the case of CIT vs. Minor Bababhai [1981] 128 ITR 1 (Guj) which was cited before the Bombay High Court, it was held that it could not assist the assessee, because in the said case, there was no controversy that what was before the authorities was a claim in relation to capital asset. Further, it was also observed by the Court that what was argued before the lower authorities was that the loss of advance was a capital loss in relation to transfer of capital asset, and now what had been argued was that the advances were not as such but intercorporate deposits (ICDs). It was in relation to this alternative argument that the judgment of the Gujarat High Court was cited before the Court. In view of this, it was held that the said judgment was of no assistance as the issue advanced did not arise for determination and consideration of the lower authorities.

On this basis, the High Court dismissed the appeal of the assessee, by holding that it did not give rise to any substantial question of law.

SIEMENS NIXDORF INFORMATION SYSTEMSE GMBH’S CASE

The issue, thereafter, came up for consideration once again before the Bombay High Court in the case of CIT vs. Siemens Nixdorf Information Systemse GmbH [2020] 114 taxmann.com 531.

In this case, under an agreement dated 21st September, 2000, the assessee company had lent an amount of €90 lakhs to its subsidiary, Siemens Nixdorf Information Systems Ltd (SNISL). SNISL ran into serious financial troubles and it was likely to be wound up. Therefore, the assessee sold its debt of €90 lakhs receivable from SNISL to one Siemens AG. The difference between the amount which was lent to SNISL and the consideration received upon its assignment to Siemens AG was claimed as a short-term capital loss in assessment year 2002-03.

The AO disallowed the said short-term capital loss on the grounds that the amount of €90 lakhs lent by the assessee to its subsidiary SNISL was not a capital asset under section 2(14) and also that no transfer in terms of Section 2(47) had taken place on its assignment. Upon further appeal, the CIT (A) held that, although the assignment of a debt was a transfer under section 2(47) of the Act, but it was of no avail, as the loan being assigned/transferred, was not a capital asset. Thus, he confirmed the disallowance made by the AO.

On further appeal, the Tribunal held that in the absence of loan being specifically excluded from the definition of capital assets under the Act, the loan of €90 lakhs would stand covered by the meaning of the word ‘capital asset’ as defined under section 2(14) of the Act. The term ‘capital asset’ was defined under section 2(14) to mean ‘property of any kind held by an assessee, whether or not connected with his business or profession’, except those which were specifically excluded in the said section. The word ‘property’ had a wide connotation to include interest of any kind. The Tribunal placed reliance upon the decision of the Bombay High Court in the case of CWT vs. Vidur V. Patel [1995] 79 Taxman 288/215 ITR 301 rendered in the context of Wealth Tax Act, 1957 which, while considering the definition of ‘asset’, had occasion to construe the meaning of the word ‘property’. It held the word ‘property’ to include interest of every kind. In view of this, the Tribunal held that the assessee was entitled to claim short-term capital loss on assignment/transfer of the SNISL loan to Siemens AG.


1   In this case, it was held that the amount standing to the credit of the assessee in the compulsory deposit account was an 'asset' within the meaning of section 2(e) of the Wealth-tax Act.

Before the High Court, the revenue contended that the loan of €90 lakhs was not a capital asset in terms of Section 2(14) of the Act. Further, it was submitted that reliance placed upon the decision in the case of Vidur V. Patel (supra) was not proper for the reason it was rendered in the context of a different Act i.e. the Wealth Tax Act, 1957. Thus, it could not have application while dealing with the Income-tax Act.

The High Court held that section 2(14) of the Act has defined the word ‘capital asset’ very widely to mean property of any kind. Though it specifically excluded certain properties from the definition of ‘capital asset’, the revenue had not been able to point out any of the exclusion clauses being applicable to advancement of a loan. It was also not the case of the revenue that the said amount of €90 lakhs was a loan/advance in the nature of trading activity.

In so far as the reliance placed by the tribunal on the decision of Vidur V. Patel (supra) was concerned, the High Court noted that the revenue had not been able to point out any reason to understand meaning of the word ‘property’ as given in section 2(14) of the Act differently from the meaning given to it under section 2(e) of the Wealth Tax Act, 1957. The High Court disagreed with the contention of the revenue that the said decision should not be considered as relevant, merely because it was under a different Act, when both the Acts were cognate.

Further, the High Court referred to the decision in the case of Bafna Charitable Trust vs. CIT [1998] 101 Taxman 244/230 ITR 864 (Bom.)2  which was rendered in the context of capital assets as defined in section 2(14) of the Act and it was held that property was a word of widest import and signifies every possible interest which a person can hold or enjoy except those specifically excluded. On this basis, the High Court held that loan given to SNISL would be covered by the meaning of ‘capital asset’ as given under section 2(14) of the Act. The High Court declined to entertain the question of law framed in the appeal before it, on the grounds that it did not give rise to any substantial question of law.


2.  In this case, it was held that advancing of money on English mortgage could be regarded as utilisation for acquisition of another capital asset within the meaning of section 11(1A).

OBSERVATIONS

A loan or a deposit or an advance or an investment is a case of an asset for finance personnel and so it is for an accountant. It was also an asset for the purpose of the levy of wealth tax till such time it was leviable. The dictionary meaning of an asset includes any one or all of them, and so it is in popular parlance.

Capital Asset under the Income-tax Act, 1961 is defined under section 2(14) of the Act. While expressly excluding many items, it is inclusively defined to include property of any kind. Section 2(14) surely does not exclude a loan or a deposit or such other assets from its domain. In the above understanding, is it possible to contend that a loan is an asset but is not a capital asset? We think not. The term “capital” is perhaps used to isolate a trading asset from the other assets. It would not be possible to exclude an asset from section 2(14) once it is a property of any kind, unless it is one of the assets that are specifically excluded.

A loan, like many other assets or properties, is transferable or assignable; it is an actionable claim under the Transfer of Property Act; a lender can relinquish or release his rights to recover the same. All in all, it has all the characters of a capital asset.

A gain or loss arises under the Act only where a capital asset is transferred. The term “transfer” is inclusively defined in section 2(47) of the Act. An act of assignment of a loan is a transfer. In some cases, the loan becoming irrecoverable may be regarded as extinguishment or relinquishment. For this, support can be drawn from the decision of the Supreme Court in the case of CIT vs Grace Collis 248 ITR 323 (SC), where the Supreme Court, in the context of extinguishment of shares, held:

“The definition of ‘transfer’ in section 2(47) clearly contemplates the extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereof. One should not approve the limitation of the expression ‘extinguishment of any rights therein’ to such extinguishment on account of transfers, nor can one approve the view that the expression ‘extinguishment of any rights therein’ cannot be extended to mean extinguishment of rights independent of or otherwise than on account of transfer. To so read, the expression is to render it ineffective and its use meaningless. Therefore, the expression does include the extinguishment of rights in a capital asset independent of and otherwise than on account of transfer.”

A loan can be exchanged for any other asset, including the shares of company or a promissory note and even a new loan. A contract to exchange is governed by the Indian Contract Act or the Transfer of Property Act or other relevant statutes.

In the above understanding and settled position in law, it is appropriate to hold that a gain or loss arising on transfer of a loan, is taxable under the head capital gains and likewise, a loss arising on its transfer will be eligible for the prescribed treatment under sections 70 to 79 of the Act.

In fact, the Mumbai Tribunal, in the dissenting case of Crompton Greaves Ltd. (supra), agreed that the company could not establish that the asset in question was not an inter-corporate deposit; had the company done so, the decision may have been different. The Tribunal also observed that the treatment could have been different for a loan advanced in the course of business. Importantly, the case of the company for a claim under sections 70 to 79 was better, in as much as the assets in question (loans) were extinguished and in lieu thereof, shares of the amalgamated company were issued in the course of amalgamation of the companies under the Court’s order.

In our considered opinion, there at least was a substantial question of law that required the High Court’s consideration. It seems that the later decision of the same Court has settled the controversy in favour of the allowance of the loss on transfer of the loan or such investments.

Section 69 read with section 44AD – Where the assessee furnished bank statements for relevant assessment year which showed that there were deposits and withdrawals of almost equal amounts from the bank account of assessee and the AO failed to give any findings regarding said withdrawals, then the assessee deserved to get benefit of telescoping and addition of entire deposits as unexplained was unjustified.

17. Smt. Sanjeet Kanwar vs. Income-tax Officer
[2022] 98 ITR(T) 12 (Amritsar – Trib.)
ITA No.:67 (ASR.) of 2019
A.Y.: 2015-16
Date of order: 30th June, 2022

Section 69 read with section 44AD – Where the assessee furnished bank statements for relevant assessment year which showed that there were deposits and withdrawals of almost equal amounts from the bank account of assessee and the AO failed to give any findings regarding said withdrawals, then the assessee deserved to get benefit of telescoping and addition of entire deposits as unexplained was unjustified.

FACTS

The return of income was filed on 3rd December, 2015 declaring a total income of Rs. 2,69,600. Subsequently, the case was selected for limited scrutiny under CASS for cash deposits in bank accounts being more than the turnover. The assessee and her husband appeared before the AO and submitted that the cash sales during the year was Rs. 8,31,625 and profit shown under section 44AD was Rs. 66,531. All the cash sales and purchases were first accounted in business cash account by the assessee and out of which the cash was deposited in the bank. The total cash deposits during the year were Rs. 8,57,000 out of which cash sales were Rs. 8,31,625. The excess amount of Rs. 25,375 was deposited out of profits earned by the assessee during the year. The Assessee submitted that the AO cannot blow hot and cold because at one hand he had accepted assessee’s returned income and on the other hand he had made addition of Rs. 8,57,000. The said amount had arisen out of cash sales of Rs. 8,31,625 and balance cash of Rs. 25,375 out of total profit shown amounting to Rs. 66,531.

The AO thereafter proceeded to frame the assessment under section 143(3) of the Act. Thereby, he made addition of Rs. 8,57,000 being the cash deposited in the bank account of the assessee.

Aggrieved against this, the assessee preferred appeal before CIT (A) who after considering the submissions and perusing the material available on record dismissed the appeal of the assessee and sustained the impugned addition.  Aggrieved by the order of CIT(A), the assessee filed further appeal before the ITAT.

HELD

The Tribunal observed that the authorities ought to have given a clear finding regarding withdrawals made by the assessee during the year under consideration. Since there were debit entries in the bank statement of the assessee then the addition of entire deposits as unexplained was not justified. The assessee deserved to get the benefit of telescoping and the entire addition would not survive. The AO was directed to delete the addition.

Section 68 – Where deposit had been made from cash balance available in the books of accounts, and the AO had not rejected the books of accounts, there was no question of treating the same as unexplained cash deposit and hence, its addition made to the assessee’s income was not justified

16. R. S. Diamonds India (P) Ltd  vs. ACIT
[2022] 98 ITR(T) 505 (Mumbai – Trib.)
ITA No.: 2017 (MUM.) OF 2021
A.Y.: 2017-18
Date of order: 26th July, 2022

Section 68 – Where deposit had been made from cash balance available in the books of accounts, and the AO had not rejected the books of accounts, there was no question of treating the same as unexplained cash deposit and hence, its addition made to the assessee’s income was not justified.

FACTS

The assessee was engaged in the business of trading in diamonds. The AO noticed that the assessee had deposited a sum of Rs. 45 lakhs into its bank account during demonetisation period. In respect of the said amount, the assessee had furnished an explanation that the said amount represented cash balance available in its books of accounts which included advance received from the customers towards sale over the counter. The AO asked the assessee to provide details of customers who had given these advances. It was explained that each sale made to the customer was less than Rs. 2 lakh, and hence it had not collected complete details of the customers. The AO took the view that the assessee had failed to prove cash deposits made by it during the demonetisation period. Accordingly, he treated the cash deposits of R45 lakhs as unexplained cash deposits and assessed the same as income of the assessee under section 68 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”].

Aggrieved the assessee preferred an appeal to the Ld. CIT (A), who also confirmed the order of the AO.

Aggrieved by the order of CIT (A), the assessee filed further appeal before the ITAT.

HELD

The Tribunal observed that deposit made into the bank account was from out of the books of accounts and the said deposits had been duly recorded in the books of accounts which were not disputed. Reliance was placed on the judgment in the case of Lakshmi Rice Mills vs. CIT [1974] 97 ITR 258 (Patna) wherein it was held that when the books of accounts of the assessee were accepted by the revenue as genuine and cash balance shown therein was sufficient to cover high denomination notes held by the assessee then the assessee was not required to prove the source of receipt of said high denomination notes which were legal tender at that time. Reliance was also placed on the judgment in the case of ACIT vs. Hirapanna Jewellers [2021] 189 ITD 608 (Visakhapatnam – Trib.) wherein it was held that when the cash receipts represented the sales been duly offered for taxation then there was no scope for making addition under section 68 of the Act in respect of deposits made into the bank account.

Accordingly, it was held that the addition of Rs. 45 lakhs made in the hands of the assessee was not justified since the said deposits had been made from the cash balance available in the books of accounts. Consequently, the order passed by the CIT (A) on this issue was set aside and the AO was directed to delete the addition of Rs. 45 lakhs.

In result the appeal filed by the assessee was allowed.

Impact of Technology on Economic Growth of India

A year ago, I was travelling in the US with a friend of mine. At one of the airports, we had to produce our Covid vaccination certificates. My American friend took out a soiled folded paper and produced it to the medical officer with a lot of disgust; while I just got my e-copy of the certificate, and both of them were quite impressed by India’s use of technology, something that developed country like the USA has not managed to achieve. Right from healthcare to EVMs, we seem to have used technology successfully not only for elites but also for 1.4 billion of the masses. I can say today proudly that India is known today for the use of technology for the masses. JAM1 is the classic buzzword around the globe to underline India’s use of technology for the economic upliftment of people. When we talk about technology, it’s not just Information Technology, but we are talking about Biotechnology, Nano Technology, Robotics, AI, ML, Block Chain, Augmented Reality, 3D printing and so on. It is a known fact that in the current era of knowledge economy, the only factor that will push the economy is the correct use of technology, not only for the select groups, but for masses of the country. In this article, we will see the amazing impact technology had on the Indian economy in the past decade. We will also discuss emerging technologies and their impact on our economy and our lives. We will see the impact on the Service sector, Manufacturing and Agriculture sectors, which together make our Gross Domestic Product (GDP). Economic growth is measured today mainly in terms of GDP growth. Yet there are a number of social and ESG (Environment, Social and Governance) factors that determine economic growth. Economic growth is sought to be achieved with balanced growth. Balance in terms of geographies, different classes of masses, employment generation ability of economy, spending on education and healthcare etc. If a country has imbalanced geographic growth, it may create social issues. Growth with increased unemployment is not considered healthy. An increase in GDP should enable governments to spend more on the education and healthcare of citizens to enable them to enjoy the fruits of the growth. Thus, it’s not merely the numbers of GDP growth that decide economic growth but carries a much wider perspective.

1. 1. JAM (abbreviation for Jan Dhan-Aadhaar-Mobile) trinity is the initiative by the Government of India to link Jan Dhan accounts, Mobile numbers and Aadhar cards of Indians to directly transfer subsidies to intended beneficiaries and eliminate intermediaries and leakages.

Last hundred years, there is tremendous growth in the application of innovations and technologies for the betterment of people and in improving the economic growth of countries. A million years back, ‘fire’ was considered as a revolution of technology, and humans started ‘cooking’ food on fire and used it for protection. We still use fire to cook our food and rely on the same age-old technology, though the sources of fire have changed. During the Neolithic Period, around 15000 years ago, several key technologies arose together. We moved from getting our food by foraging to getting it through agriculture. People came together in larger groups. Clay was used for pottery and bricks. Clothing began to be made of woven fabrics. The wheel was also likely invented at this time. In 950 AD, windmills got into use; in 1044 AD, compass navigated us, and in 1455 AD, Printing technology made a substantial revolution and then came the steam engine in 1765 AD. In 1876, the invention of Telephones changed our communication world, and today with cell phones and broadband and satellite connectivity, geography has become history. The world has come so close that the economies of most countries got interwoven for good and sometimes for bad. In 1937 Computers and in 1947, Transistors changed the world forever and had a deep impact on the economies. The Internet came in 1974, and the term Artificial intelligence (AI) was coined in 2017. Each one of these has impacted the economic growth of countries that adopted these technologies. Rather the difference between developed, developing, and underdeveloped countries depended on the speed and ease at which they adapted the technologies.

And then came the COVID pandemic. It dramatically affected the world economies and changed the way we live and work, and it has forced us to rapidly adopt new technologies to survive the economic effects of the pandemic. Many of them will last long after Covid has passed. We have increased remote working, advanced online learning, and adopted telemedicine to a greater degree, increased e-commerce, contactless payments and entertainment streaming in significant ways.

Technology innovation has advanced significantly in the past two years. To name a few,

  • Artificial Intelligence: AI has continued to advance rapidly, with major breakthroughs in natural language processing, computer vision, and autonomous systems.
  • 5G Technology: The fifth generation of wireless technology promises to be much faster and more reliable than its predecessor, 4G.
  • Internet of Things (IoT): The IoT has continued to expand, with more devices and systems connected to the Internet, allowing for greater automation and control.
  • Cloud Computing: Cloud computing has continued to grow in popularity, providing businesses and individuals with scalable and cost-effective computing power.
  • Blockchain: Blockchain technology has continued to gain traction, with new use cases emerging in areas such as supply chain management, finance, and healthcare.
  • Quantum Computing: Quantum computing has continued to advance, with new breakthroughs in quantum computing hardware and software.

INDIAN ADAPTATION OF TECHNOLOGIES

In India, we had a peculiar situation. When knowledge was applied to products, Europe got in too quickly. We call it the Industrial Revolution and it impacted economies of entire Europe. The manufacturing industry flourished and mass-scale production created economies of scale. This allowed them to export manufactured goods and got a real economic boost. India was under British rule and clearly missed the bus. Instead, Britishers procured raw materials from India, took them to their country and exported the finished goods to India and their other colonies. In fact, this time, technology had an inverse impact on the Indian economy.

Then came the era when knowledge was applied to processes and quality and ‘Total Quality’ became the buzzword. Countries like Germany and Japan got this era right and emphasised on quality production. This time, technologies gave tremendous impetus to these economies and German goods like engineering goods and automobiles became the world’s best products by quality. India missed this bus again as we were in a closed Nehruvian economy era. We had manufacturing with complete protection and Indian manufacturers ignored the quality aspect of production. Indian masses suffered from low-quality local products with short supplies. With protection from imported products and the ‘license raj’ that prevented global manufacturers to enter India, quality took a back seat. Remember those days of the 70s and 80s, when we had a choice between two cars and used to wait for months to get a telephone line? The world used knowledge of products and processes and applied new technologies, but India lagged behind, and its economy suffered heavily, which led to the 1991 situation. It forced India to get into globalisation and free entry for global industries with their technical know-how. The rate at which Indian industry adopted the new technologies benefitted consumers, industries and certainly the economy.

Then came the era when technology started getting applied to knowledge. This happened in the mid-90s. India, by then, was a globalised economy, a free democratic country and a large number of English-speaking technically qualified resources. Information Technology (IT) and Information Technology Enabled Services (ITES) grew remarkably in India. The growth was mainly export-oriented. Two fiber optic cables reaching the east and west coasts of India connected the world, and India saw this service sector, which was completely based on technology, flourished. This industry led the contribution of the Service sector to the total GDP. India is a unique example in the global economy, where manufacturing followed the service sector growth. Since the year 1998, one of the major factors that have given rise to the growing value contributed by the services sector to the GDP is the IT/ITES sector. Overall, India’s tech industry is estimated to touch $245 billion in the 2022-23 financial year, with an incremental revenue addition of $19 billion during the same period. Furthermore, the IT industry accounted for 7.4% of India’s GDP in FY22, and it is expected to contribute 10% to India’s GDP by 2025. As innovative digital applications permeate sector after sector, India is now prepared for the next phase of growth in its IT revolution. On the other hand, the IT industry has timely moved to remote working settings. Currently, India is one of the largest data generators, with an increasingly young and tech-savvy population. Therefore, emerging technology in economic development in India is playing a huge role.

ROLE OF EMERGING TECHNOLOGIES

Key Technologies Shaping the “Digital Transformation of India”

The new technology is codified knowledge in the form of routines and protocols. Technology helps to get enough knowledge about the use of economic resources to manufacture goods and render services more efficiently and effectively. Economic growth has increased and is becoming efficient due to the advancement of technologies. In business, starting from production to profits got enhanced due to technologies. It has also helped Government machinery as they are the enablers of economic growth. Indian Government is adopting technology in the form of e-Governance, which has brought in speed and transparency to a larger extent.

India is a good adapter of new technologies. In the past decade, especially during and after COVID, the growth in e-commerce and electronic payments has been phenomenal. The number of Fintech companies that have come up and grown in India has shown the world that India, too, has a local market and appetite for using the current technologies. The cloud services market’s growth in India is driven by the growing adoption of big data, Artificial Intelligence (AI), Machine Learning (ML) and the Internet of Things (IoT). IoT links multiple devices or appliances that need to be connected to the internet. This includes automation and real-time device control. IoT-connected devices such as connected cars, household appliances, and electronics use a cloud-based backend to interact and record information. This has given a significant boost to the manufacturing sector too.

Artificial intelligence (AI) refers to the field of computer science that focuses on creating intelligent machines capable of performing tasks that typically require human intelligence. AI involves developing algorithms and systems that can process information, learn from it, reason, and make decisions or take actions. AI systems aim to replicate human cognitive abilities, such as understanding natural language, recognizing objects and patterns, solving problems, and adapting to new situations. These systems can be designed to operate in various domains, including image and speech recognition, natural language processing, robotics, recommendation systems, and autonomous vehicles, among others. The growth of AI not only boosts the IT industry but also helps all three sectors of the economy, namely, the Agriculture, Manufacturing and Service Sector.

Emerging technology in India has influenced the Indian Economy to a larger degree. Emerging technologies and their adoption have escalated quickly with time and have contributed considerably to the Economy. Furthermore, several government policies and initiatives have driven technology adoption across various verticals. According to a recent report by the World Bank, Indian economy is expected to expand by 6.5 per cent. The economic impact of the COVID-19 pandemic in India has been quite disruptive. The digital era has caused an unparalleled change in technology, business, and society. Moreover, the situation is starting to break the inertia of digital adoption and the cloud and AI will continue to be significant as part of the transformation. Emerging technologies are influencing several sectors in India propelling its faster economic development. Businesses across verticals have been impacted by the worldwide crisis, but certain industries are standing out to change the game for the economy in the coming future.

Industries like Banking, Financial Services and Insurance (BFSI), healthcare and pharmaceuticals, e-commerce, retail, and manufacturing are adopting emerging technologies. Companies in these industries have reacted to difficulties presented by the pandemic and are aiming heavily on creating strategies in the new setup to change their game in the next five years. The string that ties together all these industries is modern technology. Also, the cloud plays an important role to help all these industries propel into a game changer for the Indian economy. New-age technologies will be offering India the possibility to carve itself a unique identity as a global hub for cloud solutions.

Industry 4.0, digital supply chain, digital assistance, digital payments systems and many more are some of the technologies that will aid economic development by 2025. Emerging technology on economic development in India is beginning to allow industries to rebuild the country’s economic status in a post-Covid world. Organisations relevant to these verticals are boarding on their journeys. The smarter organisations are taking advantage of the huge capability of emerging technologies to their benefit. Once the economy bounces back, these organisations will be the leaders and will capture a larger percentage of the market.

TECHNOLOGY TOUCHING ALL SECTORS

1. Natural Resources: Modern technology helps human beings in utilising the natural resources that are hidden in seas, lands, and mountains, like oil, gas, and metals. It also allows us to find water resources beneath the soil, as water is an important element for economic growth.

2. Agricultural: The technology has helped to introduce fertilizers for plants and agricultural land, tractors, the invention of High Yield and genetically modified seeds, threshers, and pesticides. The revolution resulted in the cultivation of good crops and became a profitable profession and helped in putting an end to the shortage of food and grains. The weather forecasts, which are so crucial to this sector, have improved predictability and have helped the economy by getting better agro-produce. Technologies in storage and preservation, too, have helped farmers and markets to keep stability in the prices.

3. Healthcare: Healthcare Industry has gained maximum benefits in terms of value delivery by adapting to new technologies. Biotechnology, Biochemistry, Molecular Biology and fields like that are constantly on the move with innovations. The speed at which we could get the COVID vaccination is a classic example of this. New medicines, new drug delivery systems, drug discovery simulations, and the use of robotics have truly helped doctors and patients. While it adds to the value of GDP, the healthy population of India contributes more to the economy.

4. Entertainment: Technology has completely changed this industry. Right from production to distribution, there is a revolutionary change in the way this industry was and now is. I have no doubts, this industry will be a different economic ball game in the next five years.

5. Manufacturing: Globally, manufacturing is going to be deeply impacted by the innovations and new technologies coming into the market. Robotics will bring a lot of precision and improved productivity, lesser rejections and so on. What will bring revolution in manufacturing is 3D printing technology. This will probably make large factories redundant, and manufacturing will be on mass-scale personalised manufacturing. 3D printing is currently used to create prototypes, and many start-ups have come up in India with 3D printing utilities to help large companies to create prototypes for their new products.

6. Logistics: During covid, Flexport (logistics startup, now huge) was able to share live data and tech support with LA port authority to resolve shipping traffic – they were able to help the mayor of LA to take real-time decisions. This is just a one-off example. In India, we require huge improvement in our logistic services. We have seen in the past few years, technology such as AI, and IoT are helping warehousing and transport companies to improve the efficiency of their services. Delivery for the last mile was always facing challenges in locating addresses when they started delivering couriers. To solve this, they added location tagging to their courier agent apps. The agent had to mark delivery at the delivery address – this captured the latitude-longitude of the address. Now they have built a database of addresses in India with very high accuracy. They do have apps that aggregate deliveries at the same locality to make the service time effective.

7. Efficient operations: Technology can optimise the operations of the industry. Technology plays an important role in the generation of efficient processes. It can help the industry to reduce or eliminate duplications, errors, and delays in the workflow, as well as accelerate the automation of specific tasks. Inventory technologies allow business owners to efficiently manage production, distribution and marketing processes. With the right technology in place, businesses can save time and money and make them more productive and competitive.

8. Expansion of Markets: Technology in business made it possible to achieve a greater reach in the global market. Globalization has been carried out thanks to the wonders of technology. Anyone can now do business anywhere in the world. Technology has driven the development of electronic commerce, which has brought new dynamics to the globalisation of companies. The diffusion of information technology has made production networks cheaper and easier and has been fundamental for economic globalisation. The adaption of technology affects both the quality and cost of manufactured goods in India and makes it more competitive in the global market.

PAYMENT, FINANCIAL AND CAPITAL MARKETS IN INDIA & TECHNOLOGY

In the last few years, we have seen various new and faster payment modes emerge and establish their presence in the Indian digital payment space. This has largely been possible due to regulators introducing new initiatives and products to push digital payments, and industry stakeholders encouraging customers to shift from paper-based to digital payment modes. The benefits of shifting towards digital payments are visible in India. These benefits will witness an upward trend, marking a significant change in how the Government, corporates and citizens adopt new technologies for their transactions. RBI is planning to introduce a “Lightweight Payment and Settlement System” (LPSS) that can operate from anywhere with minimal staff. The LPSS will be activated on a need basis and will operate independently of existing payment systems, such as RTGS, NEFT, and UPI. The Indian digital payment space has seen extraordinary growth in the last few years, with the volume of transactions increasing at an average compound annual growth rate (CAGR) of 23%. The launch of new and innovative payment products like Unified Payments Interface (UPI), National Electronic Toll Collection (NETC) and Bharat Bill Pay Service (BBPS) have firmly placed the digital payment industry on an upward growth trajectory.

Apart from UPI, BBPS and NETC have also grown at a similar pace. Both BBPS and NETC are growing at a CAGR of 500% and 123%, respectively, since 2018 with the help of a government and regulatory push. Banks and non-banking financial companies are now more focused on providing integrated solutions. Digital payments have evolved from being viewed as a cost centre for banks to a revenue centre and a key lever for customer acquisition. Financial companies have stepped up their efforts to strengthen their payment infrastructure and have started offering other adjacent services such as lending, wealth management, micro insurance, and the use of data analytics to offer more customised solutions for customers.

We witness today various Fintech platforms emerging for equity and fixed income securities. One latest that I have seen is www.harmoney.in funded by ‘y combinator’ and providing a platform for fixed income security trading. We have seen multiple platforms for equity trading, and NSE, with the help of technology, is one of the hi-tech exchanges in the world. Any economy needs matured capital and financial markets, and India has witnessed how technology has helped these markets to improve in quality and volumes of transactions.

GOING FORWARD

Millions of Indians hope for a better future, with well-paying jobs and a decent standard of living. To meet these aspirations, the country needs broad-based economic growth and more effective public services. Technology would play an important role in enabling the economic growth that India needs. The spread of digital technologies, as well as advances in Nano and biotechnology, can raise the productivity of the Manufacturing, Services and Agriculture sectors of the Indian economy. It will redraw how services such as healthcare and education are delivered and contribute to higher living standards for millions of Indians by raising education levels and improving healthcare outcomes.

The Indian government’s non-profit open e-commerce network, ONDC, has grown to 236 cities while bringing on 36,000 merchants to its platform in the past year. The platform, which enhances the digital commerce process for small business and retail shops in India, is slowly recording an uptick in transactions. India is now looking forward to newer platforms like ONDC, a new commerce-commerce platform where the consumer will have a seamless choice between various e-commerce sites. The Open Credit Enablement Network (OCEN) is an open network which codifies the flow of credit between borrowers, lenders, and credit distributors under a common set of standards. Technologies like blockchain will bring a revolution in banking and other services and make many old companies and maybe banks redundant.

However, like every change, humans and societies are apprehensive of adopting these new technologies. The fear of unemployment with AI coming in is one such fear. I saw this happening in the 90s when computers started getting into banks and offices. There were union strikes resisting computerisation. Looking back today, we would laugh at it. What we need to adapt is retraining ourselves with new technology. I firmly believe new technologies cannot eliminate the need for humans. What will change is the nature of the work and the workforce adequately trained to create and handle these new technologies. India has the youngest population, and hence I feel, India is most eligible to have newly trained resources to create and handle these new technologies not only in India but globally. I don’t believe it is a threat to the economy but an opportunity for Indian Economy to grow faster.

Impact of the Alternative Dispute Resolution Mechanism on the Economic Growth of India

INTRODUCTION
On
a recent trip back to Copenhagen, I was keen to revisit Christiania, a
social experiment where hippies squatted and rejected state control.
Originally set up in 1971 in a former military complex in Denmark’s
capital, it had continued in its existence and the population had grown,
but this hippie utopia was not thriving. Accommodation was in disrepair
and members of the community could not afford its repair costs. Rising
rents meant many were forced to leave the community and return to the
main state, one with law and order, whose economic prosperity could feed
them and their families.This is the impact that a state and its legal system can have on economic growth.

 

TYPES OF LEGAL SYSTEMS
I
am called to the bar in India, England & Wales and the DIFC in
Dubai. All three are common law jurisdictions where court judgments
become precedents binding on future judges of lower courts or hold
persuasive value for judges of courts having an equal ranking. The
common law system permits incremental advancement in law where every
judgment slowly builds on and adds to a nation’s body of law.Dubai,
however, is a bit of a mixed bag. The DIFC Court is a common law oasis
in what is otherwise a civil law system. The ‘on shore’ Dubai courts
outside the DIFC follow a civil law system and apply Sharia law, as
legislated by the UAE. Most of Europe and many countries around the
world that are not part of the commonwealth (previous British colonies)
also follow a civil law system.In civil law jurisdictions, there
is not much scope for advocacy and historic judgments do not hold
precedent value. In these countries, the letter of the law is closely
followed. This works too, but rather differently from common law systems
as there is less opportunity for a judge to tailor his / her ruling to
the specific facts and circumstances of a case.There are also
alternate dispute resolution systems such as arbitration and mediation. I
dare say arbitration has become rather mainstream and an integral part
of the legal system in India and other countries such as Singapore,
England, Nigeria, Kenya etc. Arbitration allows tremendous flexibility.
An arbitrator / arbitral tribunal derives its power from the consent of
parties. In the circumstances, if the parties want the arbitrator to
hear and rule on only one part of a dispute between them, they can
direct the arbitrator to do so. They can remove powers from an
arbitrator or add to them. Large volumes of civil procedure code that
one must follow if their case is before a court are replaced with a thin
booklet of arbitration rules (if the arbitration is governed by an
institution) or replaced with the simple procedure laid down in the
Indian Arbitration Act 1996 (if the arbitration is an ‘ad hoc’
arbitration).

 

THE BENEFITS OF ARBITRATION
What
is marvellous about arbitration is that one can appoint an arbitrator
truly suited to their needs. For example, in a cement arbitration seated
in London between an Indian and Spanish party that I had undertaken
some years ago, the clause required a cement expert to be appointed as
an arbitrator. Some commodities exchanges, such as the Refined Sugar
Association and GAFTA in the UK, only appoint industry experts as
arbitrators. Even if such arbitrators could be out of depth in terms of
the law, they can appoint a lawyer as an advisor to the tribunal.
Appointing experts such as accountants, engineers etc., as arbitrators
is a power that more Indian parties should be encouraged to adopt for an
award tailored to their needs.Likewise, the appointment of
younger arbitrators, if Indian parties can stomach the idea, could
revolutionise arbitration. I began to get arbitrator appointments at age
40 and my co-author, Kunal Katariya, began to get them at an even
younger age. Younger arbitrators are keen to establish their reputation
as arbitrators, are willing to take on disputes of smaller value and
since they are mid-career and extremely busy, they are far more likely
to hold fewer hearings and pronounce arbitration awards more quickly.Appointing
more women as arbitrators can also restore a balance. A study that was
undertaken in the US following the collapse of Lehman Brothers in 2008
revealed that a lot of major financial institutions that went under, or
nearly went under, had all-male boards. Those companies that had women
on their boards of directors were more resilient to risks and changes in
the economic climate. This is because ideas were challenged, and not
everyone in the boardroom held exactly the same view, which is healthy.Presently,
one of Western India’s best arbitration institutions, the Mumbai Centre
for International Arbitration (MCIA), has managed to appoint about 30%
women as arbitrators. This is one of the best ratios in India and ought
to increase. The Indian Arbitration and Mediation Centre, Hyderabad
(IAMC), another fabulously run institution, has, in the last year,
appointed over 80% women as mediators.Mediations, if popularised
as a method to resolve commercial disputes, can dramatically reduce
costs for parties. Mediations also diminish the time spent in resolving a
dispute to a couple of months. Mediations, however, require both sides
to compromise and come to a mediation leaving ego to one side. In my
experience, several private equity/shareholder disputes tend to stem
from ego clashes or the siphoning of funds, and such cases are less
likely to be resolved by way of mediation. When appointing a mediator,
one must not be shy of asking what percentage of previous mediations
undertaken by that individual has resulted in success.
 
THE LATEST CHANGES TO INDIA’S ARBITRATION LAWS
Since
arbitration only emerges out of contract, the starting position is that
only signatories to an agreement containing an arbitration clause can
be made parties to an arbitration. India has, however, taken a liberal
approach historically by allowing group companies to be brought into the
fold of an arbitration, and thereby be bound by an arbitration ruling,
even if the group companies were not signatories to the original
contract that contained an arbitration clause. The Supreme Court is
currently reviewing this group of companies’ doctrine1. Several ongoing
arbitrations are waiting for the outcome of this review. By comparison,
England takes a strict approach to the joinder of non-parties to an
arbitration agreement and Switzerland and other European civil law
countries have taken the more liberal view.Meanwhile, the NN
Global case2 has recently held that a court cannot appoint an arbitrator
or send parties off to arbitration even if an arbitration clause is
contained in their contract in circumstances where the underlying
contract is insufficiently stamped. One of the authors, Mr Katariya,
whose view is shared by the majority of arbitration practitioners in
India, believes this judgment has dealt a significant blow to India’s
pro-arbitration stance because it is a wriggle-out method and affects
the enforceability of an arbitration clause contained in an unstamped /
under-stamped agreement. The other author, Karishma Vora, holds the view
that the law on impounding/staying the enforcement of any under-stamped
agreement should be followed in the case of an arbitration agreement
too. If this needs to change, the legislature will need to amend laws to
carve out an exception for the stamping of arbitration agreements.Arbitration
law in India has also been evolving rapidly and much-needed reforms
were brought in by the 2015 and 2019 amendments, which added strict
timelines for completion of proceedings.

1 Cox and Kings v. SAP India 2022 SCC OnLine SC 570

2 N. N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. & Ors. 2023 SCC Online SC 495

 

WHAT DOES THE FUTURE HOLD?
Last
month, I was in court in London. It was a virtual hearing and
announcements were made at the beginning in the usual course that it was
being recorded by the court and that no one else could record the
hearing without the court’s permission. No permission had been sought
and we went about the hearing in the usual course. The following
morning, I received a frantic call from my instructing solicitors
informing me that a full transcript of the hearing had been circulated
to everyone who attended the hearing, including the judge.We
rang the client, who is a successful co-founder of a private equity fund
that specialises in investing in tech businesses. He explained that he
subscribes to an AI app called Firefly that automatically allows itself
into every zoom, Teams or other meeting on his calendar, transcribes it
and circulates it to all who were on the calendar invite. Quite
efficient but not so when one is in contempt of court.Although
the contempt was purged, the humorous judge asked the only pertinent
question that ought to have been asked – how accurate was the
transcription?International arbitrations and litigation that
take place in London, Dubai, Singapore etc. often engage expensive live
transcribers. The sums at stake justify the few lakhs spent per week for
live transcription. All parties, counsel, solicitors and the judge or
arbitrator have immediate access to every word that was spoken or
argued. Sometimes, to reduce costs, parties subscribe to transcription
that is not live and is circulated only at the end of the day.Bringing
this to an Indian context, arbitrations tend to be conducted only in
two-hour slots 5-7 pm, after court. Counsel asks his / her
cross-examination question, the witness responds, and both the question
and the response are dictated by the arbitrator to steno. Even the
quickest steno in the world slows down the process, and often, the punch
of cross-examination is lost in translation, even when it is English to
English.If technology-assisted transcription was brought into
the fold, Indian arbitrations (and court proceedings, if courts were
open to allowing live transcription) would see a dramatic improvement in
the efficiency with which cross-examination is conducted, judgments are
dictated etc. It would ensure all submissions made by advocates are
recorded, which can be rather useful at the stage of appeal.And
this is just for transcription. Technology and AI can have a
significant impact on India’s legal system, and thereby on India’s
economy. Take small claims, for example. There are hundreds of thousands
of people who probably, on a yearly basis, forgo money owed to them by
others. These could be resolved by replacing the judge with technology.
Let us take a leaf out of eBay’s book. ‘eBay’, a platform where one can,
for example, sell their old sofa, resolves 60 million disputes per
year. Most of these are low value, often under Rs. 2000 ($25) in
dispute.This is an example of how online dispute resolution
(ODR) can and should be the future of our struggling civil justice
system. ODR can provide access to justice for lakhs of Indian citizens
who may not otherwise have the means or the time to partake in the
nation’s court system at an incredibly fast pace.A vision of
the future of India’s justice system should also include smart
contracts. In basic terms, a smart contract is a self-executing
contract. Think about your order on a food app such as Swiggy. You place
an order, and Swiggy blocks the money on your card. Although the
restaurant has not received the money, it begins to prepare your order
on the faith that it will receive payment automatically once it carries
out its end of the bargain. At the time of execution, being the delivery
of the food, the payment is automatically released to the restaurant
and the delivery person, with a small cut being retained by Swiggy.
Although this is not exactly a smart contract, it is a good example of
the beginnings of what a legal system could look like in the future.
Traders could enter into self-executing contracts once the technology
associated with smart contracts and blockchain becomes more prevalent.When
making such technology an integral part of the legal system,
legislators need to think about the level of detail going into the
legislation. I find that a broad-brush approach enables a tech-related
law to remain relevant for a longer period of time. France is
legislating technology with a tedious level of detail. This carries the
risk of its laws becoming outdated soon. The UK, on the other hand, is
modernising old laws by setting out only a basic framework, in the hope
that the framework will not need to be changed even if underlying
technology changes.

For example, the UK has just drafted a bill
for electronic bills of exchange. It is called the Electronic Trade
Documents Bill and is presently going through its second reading in the
House of Commons (the equivalent of the Lok Sabha). The bill will reduce
the estimated 28.5 billion paper trade documents printed and flown
around the world daily3. Presently, bills of lading and bills of
exchange are required to be paper based. If this bill is passed,
paperless versions of these documents will be legally recognised in the
UK, allowing British businesses to trade faster and cheaper and reduce
employee time on needless paperwork and bureaucracy.


3 https://www.gov.uk/government/news/paperless-trade-for-uk-businesses-toboost-growth

 

This Electronic Trade Documents Bill4 has
only seven sections and says that if reliable technology is used to
secure that only one person can exercise control over / alter an
electronic document at any one point in time, then it would be accepted
in the manner that the older paper trade documents (e.g., bills of
exchange) were legally recognised. That’s it. No further detailed
definitions or complications. In other words, no matter what technology
is used, so long as an individual can demonstrate they are the only ones
in control of the electronic document, akin to a trader having physical
possession of, say, a paper bill of lading, the electronic document
would be legally recognised.Like France and the UK, India needs
to give some thought to how it wants to prepare itself for the enormous
digitisation of trade, which is inevitable. The Indian legal system must
start preparing itself now to ensure it meets the progress of the
economy step by step. Modernising laws or introducing new ones are in
the hands of the legislature and bureaucrats and may take some time, but
the enormous advantage of India’s common law judicial system is that
its judges can apply existing laws and adapt them to the changing
circumstances of the economy.A good example of this is when
courts began to allow service of court proceedings via WhatsApp when
other methods were not acknowledged, and the recipient’s chat showed a
double blue tick.5 Another issue that the Indian judiciary can think
about is permitting litigants who are victims of online fraud
perpetrated by faceless individuals to file cases against ‘persons
unknown6. The concept of bringing a case against someone whose name and
address the plaintiff does not know is alien, but this is one of the
many ways that the existing legal system, and the judiciary in
particular, can assist the economy.As for non-litigation work,
such as drafting documents, the use of artificial intelligence can be
pathbreaking. The drafting of property documents, hire purchase
contracts, franchise agreements, trademark agreements, shareholder
agreements etc., already have a revolutionary app in ChatGPT, and it is
only getting better. Once legal software companies build on the open AI
network of ChatGPT and enable lawyers to feed in historic drafts to
train the AI, very many young associates in law firms could lose their
jobs; but the drafting could easily be of an international standard and
enable lawyers to improve their efficiency.Presently, one
spends a few hours a day on administrative tasks, delegation of work,
reviewing work, team discussions etc. This will change as practitioners
will be able to spend less time on non-legal tasks and more time on the
law.A family court in Australia replaced its mediator with an AI
machine whose outcomes matched those of the family court judge by over
80% during a pilot that was conducted to test the AI. Parties were
positively influenced by this percentage, and many settled along the
lines of what the AI predicted in order to avoid the costs of a
full-blown dispute in the family court. This is the potential of AI
crossing paths with mediation.

4 https://publications.parliament.uk/pa/bills/cbill/58-03/0280/220280.pdf

5 Tata Sons v John Do CS (Comm) 1601/2016, order dated 27.04.17, Delhi HC. Kross Television v Vikhyat Chitra Productions 2017 SCC Online Bom 1433

6 CMOC Sales & Marketing limited v Persons Unknown & 30 others [2018] EWHC 2230 (Comm)

 

CONCLUSION
Contracts
are the foundation of commerce and nearly every Rupee that goes in and
out of a household or company is governed by a contract. From a bus
ticket to a large investment agreement, parties fall back on the terms
of their contract for interpretation and look to a breach of those terms
to bring cases against each other. A World Bank study revealed that
while it takes 165 days to enforce a contract in Singapore, it takes
about four years on average in India. I should admit that I find the
four years also astonishingly speedy. India has about 1.09 crore civil
cases pending, and this would be in addition to arbitrations. The Indian
legal system needs a serious shake-up if it needs to assist economic
growth.In addition to the tech-based solutions set out above,
other simple solutions can also be implemented. Senior counsels in every
court could be mandated to sit as judges for a minimum of, say, three
weeks per year, or for a minimum term of, say, three years at a stretch.
This would reduce the backlog. Every adjournment should have a large
cost associated with it, payable within one week of the adjourned
hearing.Statistics could be published revealing how many
adjournments were granted by every judge in the country per term, or how
many hearings were before a judge that did not result in disposing off
the matter.Presently, most Bar Councils around India have a
one-time enrolment. If an advocate was enrolled by the Bar Council of
Maharashtra and Goa in 2006, he/she would not need to renew their Sanad
for the rest of their lives. This should be changed to periodic
renewals, say every five years, and advocates should be mandated to pay a
small percentage of their last year’s earnings in order to renew. This
money could be re-invested in providing advocacy training to younger
advocates, which would, in turn, assist judges because the quality of
submissions being received by judges would improve. In December 2022,
the Bombay High Court taught senior juniors, including one of the
authors of this article, to impart advocacy training. Even though this
training was focussed on training the teachers, the very young students
who participated in this training showed a dramatic improvement in their
advocacy skills over the course of just one weekend. Another rule that
Indian Bar Councils may want to consider promulgating is no double
booking. In other words, if an advocate has accepted a brief to argue
one case on a day, he/she cannot accept a brief to argue any other case
on that day. Alternatively, they could accept a maximum of three briefs
per day. This will dramatically reduce adjournments and far more
advocates will get an opportunity to argue cases than the present system
where most briefs are concentrated in the hands of a few.With the hope of a better tomorrow, the authors now sign off.

Economic Growth – Role Of Direct Tax

1. Let me delineate the scope of this article
The
title “Economic Growth – Role of Direct Tax” has two different facets.
An economist will read this as nexus between economic growth and direct
tax by adverting to economic areas such as – what should be the tax
policy of India; how to ensure horizontal and vertical equity; how to
ensure buoyancy in tax revenue commensurate with GDP growth; relative
composition of direct and indirect tax; whether agricultural income
should continue to remain exempt; should income tax be supplemented by
other taxes like Gift Tax or Wealth Tax to address wealth disparity,
etc. etc.The brief from the organisation does, however,
surround the alternative facet of nexus. The brief is to analyse the
impact which currently applicable direct tax laws and their
administration have on the economic growth of the country or on the
morale of taxpaying community. The mandate is to examine legitimate
expectations which taxpaying community contributing fair share of tax
may have from the framers and administrators of direct tax laws as
enacted. Indeed, this is a highly significant area of discussion
inasmuch as the reasonableness, fairness and ease with which laws are
implemented will, in the long run, cultivate greater loyalty and a high
happiness index.

 

2. Realisation of legitimate expectations of taxpaying community – ever a dream?

The
realisation of legitimate expectations can contribute to the
enterprising spirit and strength of Indian Taxpayers in the competitive
global world. It is also an important factor to attract FDI.
Some
legitimate expectations could be the enacted law as also tax
administration should treat taxpayers with respect which inspires
loyalty and patronage to the system; ensure certainty, predictability,
stability, and simplicity of law; smoothen/streamline process and
procedure of compliance, assessment, and collection; usher in
transparency and accountability of high standard. Some of these
parameters are commented further in this article.

 

3. Sermons of Kautilya: A Utopian World!!
The
Income tax Department’s website refers to the principles of taxation
laid down in Kautilya’s Arthasastra. These were cited by former Finance
Minister and President of India, Late Shri Pranab Mukherjee, in his
Budget Speech of 2010-11 as follows: –“Thus, a wise Collector
General shall conduct the work of revenue collection…. in a manner
that production and consumption should not be injuriously affected….
financial prosperity depends on public prosperity, abundance of harvest
and prosperity of commerce among other things.”
There are
many other metaphors provided by learned economists on how tax should be
collected from the subjects. Say, like, how a honeybee collects nectar
from flowers without injuring it, how the Sun draws moisture from the
earth to give it back a thousand times, how a calf draws milk from a cow
and so on.On timing of taxation, Kautilya’s Arthasastra
recommends plucking the ripe fruits from garden and avoiding unripe
fruits. The ancient text wisely recommends accountability for the tax
collectors and the prevention of corruption.

 

4. Impact analysis of tax incentives
The
primary aim of a tax law and administration of tax law is to generate
revenue. But one of the variables of tax policy which influences overall
tax collection is a package of tax incentives offered to the taxpayers
to meet specific fiscal objectives like make-in-India or environment
protection. These incentives reduce effective tax rate payable by the
taxpayers.Much can be said about virtues and vices associated
with the basket of incentives. For long many years, corporate India was
subject to a tax model of relatively high rates of tax with a regime of
multiple incentives but tempered by Minimum Alternative Tax (MAT)
liability which partly neutralised the advantages of tax incentives. To
say the least, it was not at all easy to resolve intricacies of
incentives; it was as highly difficult to interpret MAT provisions with
added complexity of convergence to Ind AS. Taxpayer’s life today is far
more easier with a shift in policy which favours fewer incentives along
with moderate rate of tax and dispensation of MAT. This policy is
funnelled by global initiative insisting on minimum tax levy in each
jurisdiction, on profits accruing in that jurisdiction. This aims not
only to prevent race to the bottom but also relieves pressure of
offering “wasteful” tax incentives by developing countries1Frankly,
not all incentives are introduced with the prime object of relieving
tax liability. Many of them have different economic rationale and have
been retained in the selfish (though, noble) interest of the Government.
By grant of incentives, the attempt is to lure taxpayers to undertake
certain activities/investments which, in turn, relieve the pressure of
economic upliftment from the Government. The target sectors which
supplement the Government agenda are : growth of exports; realisation of
infrastructural development; generation of employment, development of
backward areas, encouragement of start-up eco-systems, research, and
development etc. These incentives are substitutes for subsidies which
may otherwise have been imperative to disburse. Amidst the trend of
withdrawal of incentives, those incentives which attract overseas
investments are still popular2.One submission to the tax
administration could be that once an incentive is agreed to be offered,
it may be implemented with grace. As one illustrative example, an
incentive such as an incentive in respect of expenditure on medical
relief to persons with disability should be formulated, perceived, and
implemented with compassion rather than by making it compliance heavy
with difficult conditions.

1. OECD’s report of October 2022 titled ‘Tax incentives and the Global Minimum Corporate Tax – Reconsidering Tax Incentives after the GloBE’s Rules’

2 Many of these incentives may be phased out at policy level after implementation of Pillar 2 initiative of OECD leading to implementation of Global Anti-Base Erosion Rules

 

5. Retrospective amendments can be counterproductive to economic growth
The
Legislature has power of using the magic stick of creating a law with
retrospectivity. It can create a fiction – say for example, it can
introduce a new law from a back date. A law may be introduced today but
the Legislature can mandate us to believe as if the law was always
legislated much before. On principles, this is a perfectly permissible
exercise – though, at times, the taxpayers may consider this to be an
unfair/avoidable exercise of power.In the celebrated case of
Vodafone International Holding BV [2012] (341 ITR 1), on the 20th
January2012, a 3-judge bench of the Supreme Court pronounced that a
non-resident taxpayer is not chargeable to tax on capital gains from
transfer outside India of shares of a non-resident overseas company,
even if such company (whose shares are transferred) may be deriving
value from its underlying operating subsidiaries in India. On the 16th
March 2012, the Legislature carried out a retrospective amendment to
nullify the impact of Supreme Court decision by offering a justification
that the amendment was carried out to clarify the law and for removal
of the doubts. It was not a convincing justification to offer after
the SC had laid down the law. No wonder that the amendment puzzled most
non-resident investors; and almost undermined their faith in the tax
system of the country. There was a scare among the investors whether
investment in the country was as safe.

The country paid the
price and lost some reputation when, under the shelter of BIPAs
(Bilateral Investment Promotion and Protection Agreements), the
International arbitral tribunals ordered the Government of India to pay
damages by way of compensation (including towards interest and legal
cost) pursuant to petitions filed by Vodafone International and Cairn
Group. Their grievance was that the action of Indian Legislature was in
breach of legitimate expectations of fair and equitable treatment, which
the investor from that country had from India. In reaching to the
conclusion, the arbitral tribunals noted the recommendation of Shome
Committee that retrospective amendments should occur in exceptional
circumstances, such as (i) to correct apparent mistakes/anomalies in the
statute (ii) to remove technical defects, particularly in the
procedure, which had vitiated the substantive law or (iii) to protect
the tax base if it is eroded through highly abusive tax planning schemes
that have the main purpose of avoiding tax.The arbitral
tribunals concluded that investors (Vodafone/Cairn) were not treated
fairly and there was violation of fair and equitable treatment promised
under the BIPA.

 

6. Resolve of new Government to stay away from retrospectivity
Upon
its installation in 2014, the new Government was quick enough to
promise to the people that it will refrain from any retrospective
amendment to the prejudice of taxpayers. To its credit, it has largely
lived up to its promise subject to some aberrations viz. that, of late,
every February, the Government has been introducing some amendments in
the budget which hit the transactions which may have taken during the
year up to the month of January basis the law in force up to the date of
budget. Clinically, such amendments are also retrospective in nature.
One would desire that this is avoided.

 

7. Why should an amendment be introduced as a surprise?
A more desirable approach may be to introduce an amendment after proper debate. There
have often been suggestions that the amendments could be de-linked from
the annual budget exercise and be enacted after examining the overall
impact, including the burden of compliance on the taxpayers. So long as,
however, the new practice is not introduced, the least which is
expected is to ensure that there are no surprise amendments directly at
the enactment stage without reference thereof in the Finance Bill.

For example, provisions relating to a controversial levy, viz.
equalisation levy on e-commerce transactions having significant impact
on non-residents and consequential impact on residents was introduced at
the enactment stage in 2020 to be effective from 1 April 2020 amidst
COVID-19 nation-wide lockdown. Interpreting these provisions was a
challenge even with the professionals. The software integration of
taxpayers was obviously not ready as well. Such surprises do certainly
belie expectations of taxpayers.What is also most desirable to
ensure is that each important and significant adverse amendment
introduced as part of the Finance Bill is referred and explained in the
budget speech. A taxpayer feels aggrieved when he finds that while the
budget speech appeared to offer favourable tax proposals like lowering
of tax rate, the fine print has a number of unpleasant surprises for him
in the form of criminalisation of TDS non-deduction default or
expansion in the scope of withholding of tax refunds.

 

8. Taxpayers’ charter
Every
organisation has a statement on its commitment to the stakeholders,
apart from its motto and mission statement. Taxpayers’ charter of the
Income tax department enlists multiple commitments to the taxpayers. In
terms of caption headings, the commitments extend to:1. Provide fair, courteous, and reasonable treatment2. Treat taxpayer as honest3. Provide mechanism for appeal and review4. Provide complete and accurate information5. Provide timely decisions6. Collect the correct amount of tax7. Respect privacy of taxpayer8. Maintain confidentiality9. Hold its authorities accountable10. Enable representative of choice11. Provide mechanism to lodge complaint12. Provide a fair & just system13. Publish service standards and report periodically14. Reduce cost of compliance

Text-wise,
the statement is impressive as also fairly broad. Taxpayers will truly
regard themselves as fortunate if they are able to enjoy the spirit of
commitments. But, very likely, the perception and belief of many – if
not most or all, may be to the contrary on some of the above captions
when viewed in terms of real-life experience. The taxpayers in a high
scale, may have a lot to lament on the performance of administration. It
is not uncommon to hear of grievances of high-pitched assessments,
hasty disposals in defiance of natural justice, re-opening notices being
issued without making base papers available to taxpayers, withholding
of refunds, increased cost of compliance, visible lack of accountability
etc.

While on this, the statistics may often be misleading.
Refunds being granted in less than a month in >95% of the cases is
not reflective of the challenges faced by taxpayers in relatively high
tax brackets. Multiple writs filed in high courts merely to obtain
refunds may not be a good sign to cherish. Pending rectifications for
multiple past years and adjustment of refunds against erroneous demands
are commonly heard grievances of taxpayers. And, while on refunds, a
disappointing development (which can potentially cover up denial of a
valid refund due to the taxpayer) is a recent insertion in S.245 of
Income-tax Act which permits tax authority to withhold refund on the
basis that the authority is anticipating some demand to arise in future
upon conclusion of pending proceedings
. The status of such a
taxpayer may remain vulnerable, in terms of his ability to secure
refund, if pendency of one or the other proceedings is a regular feature
of his tax life.

A recommendation to the tax administration
may be to entrust, in each year, to a professional agency the
responsibility of soliciting responses on the success of taxpayer
charter (on a scale of 1 to 10) from stakeholders on a no- name basis
through the medium of a survey.
The agency may seek evaluation from
2500 randomly selected samples of stakeholders such as – HNIs, large
corporates, medium to high range income/turnover taxpayers, tax
professionals, non-residents, tax judges before whom appeals travel,
officials of tax department etc. The tax administration should endeavour
to make such independent evaluation public.

9. A recent trend which can potentially be worrisome

In some sections of Income-tax Act, introduced in the recent past, one finds following provisions by way of two sub-sections:

“If
any difficulty arises in giving effect to the provisions of this
section, the Board may, with the approval of the Central Government,
issue guidelines for the purposes of removing the difficulty.

Every
guideline issued by the Board under sub-section (4) shall, as soon as
may be after it is issued, be laid before each House of Parliament, and
shall be binding on the income-tax authorities and on the assessee”

As
part of Income-tax Act, the first such text was found in S.115BAB
introduced w.e.f. 1 April 2020. The language has been replicated in
sections 206C(1G/H), 194-O, 194Q, 194R, 194S, etc. The trend appears to
be on the path of becoming regular.

The newly introduced
innovation is far different from provisions found earlier. For example,
provisions in sections 294A & 298 of Income-tax Act were far more
graceful. While they conferred power to issue Guidelines, there was a
clear warning that the action/order of the Central Government should
never be inconsistent with provisions of the Act. Therefore, there
seemed to be an express guarantee that none of the actions of tax
administration can operate in deviation of law.

Per contrast, the
new style of delegated legislation has the ill of tax administration
imposing its own interpretation of a provision in the name of binding
guidelines. There is no assurance that the power conferred by law will
be so delicately exercised that the impact of guidelines is necessarily
restricted to removal of administrative difficulty to redress taxpayer’s
grievance or concerns.
For example, FAQ 4 of Circular 12/2022
issued in the context of S.194R states that cost of free medicine sample
given by a pharma company to a doctor with a narration ‘Not for Sale’
can be considered as a ‘benefit’/’perquisite’ provided to the doctor and
hence the pharma company providing free samples needs to deduct TDS
under s.194R. Even assuming that the tax administration may have that
view, it is unfair to presume that an alternative view has no basis. In
fact, most people in the industry subscribe to the alternative view.
There is room for another view. Yet, read with innovated text of S.194R,
the departmental view as expressed in the guidelines will unfairly
become binding on the taxpayers and carry the risk of prosecution if not
compiled. It would be a hard battle for the taxpayers to contend that
imposition of such interpretation through the medium of guidelines is in
excess of the power vested in the authority (Refer Madeva Upendra Sinai
[1975] 98 ITR 209 (SC). One hopes that the trend of such legislation is
reversed sooner than later.

In the same breadth, the
Legislature may also need to be judicious in conferring power to
prescribe rules or to issue notifications. Keeping a check over the
correct use of such actions is far more difficult.

10. Remarkable adaptation to technological innovations

All
the organs of the country connected with direct tax have recorded
enormous progress on the front of adaptation of technology in the last 5
to 10 years. The way all three organs (viz., tax administration,
taxpayers, and judiciary) responded to the challenges posed during the
COVID period is truly remarkable.The finance minister has done
away with the British-era style of bringing budget papers in a
briefcase. For some years now, the finance minister has been presenting
the budget in paperless format by using tablet of India make.To
the full credit of tax administration, the administrators have built up
huge digital infrastructure which can effectively collect, collate, and
handle data capacity, which is mind-boggling.
It has made good
progress since the days of June 2021 when its new e-filing portal was
reported to have faced glitches from day one due to which statutory due
dates of returns had to be extended. It is, as of now, much better
equipped to receive and process the returns/transfer pricing data; can
handle e-hearings and e-assessments/appeals; has in-built AI, which can
handle selection of cases for scrutiny. It is claimed to have achieved a
peak processing capacity of 22.94 Lakhs returns in a single day on July
28, 2022. There are multiple cases where refunds are sanctioned in less
than a week, or a show cause notice requiring an explanation on the
mismatch of some data is received within a week. The continuing scaling
up of networking of IT infrastructure with other Ministries or other
countries will make the infrastructure all the more versatile and should
be a very effective check on tax avoidance or tax evasion. The youth of
the country has voted completely in favour of transition.The
judiciary, too, has kept pace with changes. There is live streaming of
court hearings. Time may not be far that we may have transcripts of
hearings as well on a concurrent basis. In an interesting example, the
Supreme Court reacted very sharply to NCLT when one NCLT member required
of a petitioner to make physical filing in addition to e-filing. The
Supreme Court, speaking through Chief Justice Dr D.Y Chandrachud (who is
himself a crusader favouring technology) observed as under:“The
judiciary has to modernize and adapt to technology. The tribunals can
be no exception. This can no longer be a matter of choice. If some
judges are uncomfortable with e-files, the answer is to provide training
to them and not to continue with old and outmoded ways of working.

If a lawyer or litigant is compelled to file physical copies in addition
to e-filed documents, then they will not resort to e-filing.
It
is utterly incomprehensible why NCLAT should insist on physical filing
in addition to e-filing. This unnecessarily burdens litigants and the
Bar and is a disincentive for e-filing. This duplication of effort is
time consuming. It adds to expense. It leaves behind a carbon footprint
which is difficult to efface. The judicial process has traditionally
been guzzling paper. This model is not environmentally sustainable.”
(Emphasis supplied)
The message will be as relevant to
Income-tax Appellate Tribunals and other authorities functioning under
the Income-tax Act. In turn, this message underscores that the tax
administration will need to impart training to its own personnel, while
the professional bodies may equip professionals across age groups.Indeed,
while the progress made on technology front is commendable, it is not
as if that there are no hiccups which are still present. For example, we
continue to hear of delays in disposal of rectification applications;
helplessness in securing TDS credits; also, the difficulty is envisaged
in locating the stage at which applications for processing of refunds
are pending. The goal may be to so design the platforms that it has an
in-built tracking mechanism with regard to each petition or each
assessment. Let the taxpayers verify for themselves where exactly is the
hold up.

 

11. Trends in direct taxation: Some positives to cherish – some negatives to remedy
There
are some positive trends which can have noticeable impact on economic
growth. One must appreciate the commitment of the Government to optimise
rates of tax. The corporate tax rate has been virtually brought down to
22% plus surcharge. There is no overbear of wealth tax nor any sign of
imposing any new form of tax. The impact on buoyancy of economy and
enthusiasm of taxpayers is visible.What is also noticeable is
that, at the Governmental level, there is a growing thrust on voluntary
compliance; a desire to ease the norms of doing business in India;
thrust on digitalisation which encourages data mining in a faceless and
transparent manner. As a result of digitalisation coupled with warnings
from the Government, tax evasion is becoming far more expensive day by
day, and the compliance is improving. Further, by actively participating
in OECD and other forums, the Government is privy to supporting
measures which would discourage storage of wealth or earning of income
in tax heavens.Amidst all the sincerities, there are some
negatives to be taken care of. We are almost reaching a stage of
excessive compliance. The stress of compliance is evident on taxpayers
and professionals. Despite his best efforts, there is no guarantee that
the honest taxpayer will be able to establish himself to be honest
without the drudgery of litigation. This ironical imbalance impacting
taxpayers can be somewhat mitigated with equal thrust on accountability
of the administration.
The appraisal of accountability should be
self-driven with the use of technology rather than being assessed on the
basis of number of complaints received. It would be an incorrect
proposition to suggest that, absent a complaint, an administrator can be
presumed to be meritorious.One draconian provision of law,
in the context of prosecution, is that a taxpayer who has committed a
default is unfortunately (and unjustifiably) presumed to have defaulted
consciously or intentionally.
The burden is on taxpayer to convince
the court that the default was innocent and was neither deliberate nor
with intent to avoid tax. On a parity of reasoning, an administrator
should be deemed to be accountable on the basis of some objectively set
benchmark standards. Just as one example, on the basis of technology, if
it appears that there has been a default in granting the refund as
directed by law, the presumption should be that the non-grant is
influenced by an intentional move. Could such be the parity of
standards?

 

12. Legislating for outliers? Is simplicity a dream?
More
than a majority will likely agree that, as of now, the direct tax law
is highly complex. Ironically, every attempt at simplification results
in it becoming more complex for people in business and high brackets.An
impression which is getting consolidated every year is that, on a
consistent basis, the law is legislated, keeping in view the
probabilities of outliers. Compliance expectation is built up to rope in
the outliers; in the process, the large community of honest taxpayers
has the suffering of compliance
. This is a paradox in as much as
that, in the days of vigilance/presence of GAAR and technological
advancement, one would expect Government to spot and deal with outliers
as the responsibility of the Government.As one example, after
decades of litigation, the courts had provided clarity on the onus cast
on borrowers to explain the nature and source of cash credit. It was
working quite well. To the surprise, however, of taxpayers, the law
was recently amended to provide that the borrower has the onus of
explaining source of the source as well – a requirement or onus which is
impractical to fulfil in the commercial world. What is more, the
statutory provision as legislated expects that even a borrower from a
scheduled bank like SBI has to explain the source of source. The failure
to comply has the consequence of attracting punitive rate of tax of 60%
as increased by surcharge of 25%!
Given the environment of
accumulated litigation, such unfair provisions can only lead to heavier
pile up of litigation. One wonders whether life may be easier if the
Legislature shifts the emphasis from an outlier to an honest taxpayer
and reconcile itself to some small loss of revenue. Balancing of
strength may justify that the Government may absorb some loss to itself
should it appear to a reasonable mind that the proposed remedy is likely
to cause injury or agony to multiple honest taxpayers.It may
be interesting and rewarding to study the opportunity cost of complex
legislation. The cost is invisible but enormous. The best of the
resources of the country (in and outside the Government) are drawn into
the understanding, implementing, resolving, and litigating the
intricacies – and dare say, not by choice. Life may be a lot more better
if talent is diverted for better national use. All this is apart from
the consumption of paper, which is associated with the publications and
administration of tax laws.

 

13. Maze of the TDS/TCS regime
Over
the years, a wide range of TDS/TCS provisions has overtaken the tax
world. The provisions are reflective of the responsibility vested in the
tax deductors to act as collection agents on a free-of-cost basis. If I
am right,
almost around 85% of tax is collected through these
provisions. The deductors run the risk of disallowance of expense,
interest burden, risk of prosecution – all this, on the occurrence of
some defaults, at the root of which may be the inability to interpret
the complexities accurately. Not only the taxpayers themselves, but the
principal officers also carry the burden of stress. It is an area which
demands some correction. Firstly, it is time that the multiple rates
of tax are converted into some standardised rates of tax. Secondly, the
law relating to disallowance of expenditure and/or prosecution needs to
be humanised. Thirdly, there is a need to clarify some regular
controversies through the medium of FAQs, which are published by the
CBDT in consultation with external experts (may be, also the retired
judges) to provide guidance of practicality to the taxpayers.
And
such guidance may be considered as binding on the tax authority while
conducting penal actions, even if the court were to eventually opine to
the contrary.

 

14. Some learnings of wisdom have eternal value
Resonating
with the ancient philosophy of collecting taxes without hurting the
citizens, the current Finance Minister Smt. Nirmala ji Sitharaman in her
maiden Budget Speech of 2019 cited Pisirandaiyaar’s advice to the King
Pandian Arivudai Nambi to the following effect – a few mounds of rice
from paddy that is harvested from a small piece of land would suffice
for an elephant. But what if the elephant itself enters the field and
starts eating? What it eats would be far lesser than what it would
trample over!I may only end this with a sense of optimism
that, in action and in deeds, the philosophy remains translated into a
perceptible reality.
Let us all hope and pray that crop of paddy is
well protected as a collective responsibility and that paddy field is
not unknowingly run over either by the greed or apathy of taxpayers
themselves, or by the excessive compliances, maze of litigation with no
solution in sight or lack of accountability.

India Knows Where To Go, And Takes Everyone Along

 
 

BCAS and the CA profession are entering into 75th year of their existence. In order to commemorate this special occasion, the BCAJ brings a series of interviews with people of eminence from different walks of life, the distinct ones whom we can look up to, as professionals. Readers will have an opportunity to learn from their expertise and experience as well as get inspired by their personal stories.

The first interview is with Dr Brinda Jagirdar. She is an independent consulting economist with a specialisation in areas relating to Banking and Economics, including Agriculture Economics. She is an independent director on the boards of many companies and a scheduled bank. She retired as General Manager and Head of Economic Research at the State Bank of India, based at its Corporate Office in Mumbai. As part of the Bank’s Top Management team, her work at SBI involved leading the Department of Economic Research to track developments in the Indian and global economy and analyse policy implications for business. She has a brilliant academic record, with a PhD in Economics from the Department of Economics, University of Mumbai, M.S. in Economics from the University of California at Davis, USA, M.A. in Economics from Gokhale Institute of Politics and Economics, Pune and B.A. in Economics from Fergusson College, Pune. She has attended an Executive Programme at the Kennedy School of Government, Harvard University, USA and a leadership programme at IIM Lucknow.

In this interview, Dr Jagirdar talks to BCAJ Editor Mayur Nayak and the past editors Gautam Nayak and Raman Jokhakar about her career at SBI as Chief Economist, the Indian economy, her perspectives on the key factors which changed the Indian banking sector and drove economic growth in India, her advice to youths of India and much more…

Q: (Mayur Nayak): Can you tell us a bit about your childhood? What were your formative years like?

A: (Brinda Jagirdar): My father was in the army, so I am an army daughter. I was born in Punjab, though we belong to Tamil Nadu, and I spent most of my childhood in North India, Jammu & Kashmir, UP, Himachal, and then Delhi. The first language that I learned was Hindi. Initially, my schooling was at different places; however, later on, it was at Kendriya Vidyalaya. I joined Lady Sriram College, Delhi, for the Honours course in Economics, but then we moved to Pune, and I got a degree in Economics from Fergusson College and then did my MA from Gokhale Institute, Pune. After that, I joined the State Bank of India (SBI) in Mumbai.

Then I saw an ad in the newspaper from the Rotary Foundation for a one-year fellowship to study in the US. I applied and got selected. It took me to the University of California at Davis. As I was also a cultural ambassador, I got invited to speak at many Rotary Clubs and was happy to show them that there’s more to India than the Taj Mahal.

My entire career was with SBI. I was at their Nariman Point office, and I retired from there as Chief Economist. Post-retirement, I serve on a few Boards. I also like to talk to students mainly because I feel that they must know what’s happening in the real world, especially today when India is changing so much, and there are so many opportunities for them.

Q: (Mayur Nayak): You also did a Ph.D. in Economics, from Mumbai University.

A: Yes, that was mid-career. I had put in about 17 years of service in the Bank, and then there was always this restlessness – what next? Sometime in the mid-90s, the Bank came out with a scheme that allowed mid-career employees to take a 3-year sabbatical to do their PhD. I registered at Mumbai University under Dr Dilip Nachane. My topic was “Reforms in the Banking Sector”.

Q: (Raman Jokhakar): When you look at the first 10-12 years and the last 10-12 years in SBI, how do you see the landscape evolved during your career?

A: It has been a remarkably interesting journey, and I could see the way the banking sector in the country has changed and evolved. We started off with nationalisation. Then we went through a phase, where nationalisation did not seem to deliver the desired results, and there was a clamour for privatisation. Now we have a healthy mix of both, along with new institutions, new players and new regulations. There is a greater emphasis on efficiency, competition and performance. Initially, there were very few women officers in banking; now, there are so many.

Q: (Gautam Nayak): During your career with SBI, what exactly was your role and the things that you used to look out for from an Economist’s perspective for the banking sector? Any specific experiences from your banking experience of 35 years?

A: As an Economist, my role was to track changes in the financial landscape, including policies, budgets and regulations, prepare forecasts and highlight the implications for the Bank. We had to keep track of what is happening in the global economy, in the domestic economy, and in the banking sector. That is what economists are expected to do. Being in SBI, the Government and RBI would consult the Bank, and in this context, I had to interact with different departments, get their suggestions, and put them all together. That helped me learn about what is happening in other areas, including credit, treasury, forex, and agriculture. I was very fortunate to be guided by the best banking brains in the country and got to learn a lot from my seniors and colleagues. Interestingly, even after interest rates were deregulated, there was a lot of debate about deregulating savings bank interest rates. I think this was to prepare banks for the new competitive environment that was unfolding. The banking landscape was changing very rapidly – global norms for capital adequacy, asset classification, provisioning, and accounting were introduced. Bank mergers were happening, and banks were being allowed to move into new areas like capital markets, mutual funds, and insurance.

Q: (Raman Jokhakar): In the US these days, we are seeing well-ranked banks fail overnight. Why, in your view, are these banks failing? Anything that you see sitting here and looking at, say, the US, especially because you were in the US as well?

A: In my view, this shows that there is a weakness in their regulation and oversight. Also, the revolving door policy in the US has a conflict of interest – today, you are in the Treasury, and tomorrow you are in Wall Street. This doesn’t happen in India. US banks also put great pressure on making profits here and now, even at the cost of the banking system’s stability and safety. For example, in the 2008 financial crisis, they knew that something was happening. There was a lot of bubble and froth in the system, but nobody paid attention. Thanks to Dr Y. V. Reddy’s foresight, the RBI quickly ring-fenced the banking system. It was being said that there is so much opportunity in the booming capital market and real estate sector, and banks should be allowed to get into this space in a big way. But RBI saw the risks and laid down strict norms for bank exposure to capital markets and real estate. So, from a risk management perspective, we did an excellent job, which the US failed to do. Because we were prudent, the Indian banking system was not affected. I think it is wrongly called the global financial crisis because we didn’t have a financial crisis in India.

Our regulators have always been extremely prudent and cautious. And at the same time, they let the banks have their freedom but with risk management and all systems in place. Thanks to technology, now banks can also monitor their businesses in real-time and immediately know what is happening. The regulators, too, are in constant touch with all players, so supervision has become very ongoing. Now it’s not just an annual inspection, but there’s a lot of dialogue which happens between the banks and RBI all the time, which is the reason our system is so much more stable as compared to what we see abroad. Undoubtedly, it is RBI’s regulation and supervision, along with prudent policies, that has made the commercial banks so resilient and strong.

Q: (Raman Jokhakar): Despite all the knowledge, experience, and ways of the West, the Indian regulator hasn’t gotten swayed by the wave from the West. Do you think the regulator is still holding on to its prudent ways that are appropriate to our situation?

A: You are absolutely right – We must be thankful the regulator has remained focused and not gotten swayed by the West. They want India to open up our markets and open up our banking system rapidly. This pressure is there. But we need to build on our strengths and acquire the skills and size to compete globally. We move slowly, but I think there is some sense in moving at this pace, rather than rushing into anything. Also, doing what India needs should be our priority. That is how today we have the highest level of digital banking. We know where to go, and we take everyone along.

Q: (Raman Jokhakar): Did you ever imagine, 20 or 30 years ago, such a UPI, QR code, kind of revolution, will result in massive inclusion and formalisation? Did you imagine that a Shing/Chanawala, who would earlier collect cash, put it in his pocket, and go home in the evening, will directly get his day’s earnings in the banking system?

A: This is something truly phenomenal, and there were many like me, who did not imagine that a disruption like this would be so rapid, so widespread and universally accepted. Today, everyone has embraced digital payments, including small businesses and street vendors. They realise that banks are secure, and their money is safe in the bank. And for this assurance, I think we must give credit to the Prime Minister, his vision and the economic policies.

Q: (Mayur Nayak): Internationalisation of the Indian rupee: Rupee is accepted in other countries today. Do you see the Indian rupee becoming a global currency soon with the diminishing importance of the US dollar as the reserve currency?

A: De-dollarisation is what everybody is talking about, and I think that is already beginning to happen for sure. While the US Dollar will remain a very important currency, because it is traded and accepted in such a large number of countries, its importance is slowly diminishing. One reason is geopolitics and the rise of economies outside the Western sphere. When you are growing, you want your share of the pie, and also, you want your place at the high table. So, the Indian Rupee is certainly finding more acceptance, because a lot of countries are trading with India in rupee terms. That bilateral trade is already happening, and India’s role is growing. A lot of countries are looking to India because there is a trust factor, and they know that India will share the technology with them and help them. Already, many countries have reached out to India for UPI, and India has said we are ready to share the technology. So, the time has come for this hegemony of one power or one currency to be challenged.

Q: (Gautam Nayak): Being a director on a Bank Board, how do you see the role of auditors in the whole system? Do you feel that the audit system needs to change? Do auditors need to be more vigilant? Should the role of auditors change? Should it be more towards fraud detection? Should you have separate audits for separate purposes the way it is today – you have separate forensic audit, separate security audit, etc? So, what do you see happening in banks?

A: The regulators, RBI, SEBI, look at independent directors as the first line of defence. In turn, the independent directors look at the auditors as their first line of defence. So, the role of auditors, including internal audit, statutory audit, and secretarial audit is very, very important. Besides these, there are specialised audits like forensic audit and cybersecurity audit. Auditors are completely independent and report directly to the Chairman of the Audit Committee, who is always an independent director. Auditors have to ensure that the processes which are laid down and the policies adopted by the company are followed and confirm that these are followed. I think they have a very important role to play, and that role is only going to increase and expand into more and more areas, as we see the economy growing and the banks growing. I believe it is very important for auditors to be independent, and unbiased. Ethics and corporate governance in auditors are crucial.

Q: (Raman Jokhakar): The role of the PSBs over the years: At some point, they were all taken over and converted to the public sector, and now we are coming back to a lot more private sector participation. That whole private flavour that you get when you step into a private bank versus a public bank– going forward, how do you see the role of the public sector banks in the whole landscape of banking? Would that role shrink, or would it stay up to a point where we can overcome, say, poverty issues or certain other issues are overcome, and then maybe that role would probably shrink? Or would the character of the public sector bank itself change?

A: I would agree with bits of what you’re saying, but when you talk about flavour, just step into SBI or Bank of Baroda or, for that matter, any public sector bank, and you will find that the ambience, service, and products are no different from private banks. The public sector banks are also becoming more and more customer friendly and more inviting. Look at their branches – the way they are set up and look at the signage. In services, too, I think the difference is shrinking a lot, and that is mainly because of technology. So today, you are a customer of a bank rather than of a particular branch due to core banking – you can be anywhere, and you can do your banking transactions. Thus, the difference is shrinking between the public sector and the private sector.

Having said that, I think the public sector still has a lot of trust of the public, and they still have a big role in inclusive development. It was public sector banks that opened Jan Dhan Accounts and took them to the last mile with the help of business correspondents. They are also involved in each and every segment of the economy, however small or however far away. I think that role will still continue to be with the public sector banks, which is a good thing, because that’s what will help the economy to grow. We need that big push and support, and I believe only public sector banks can take on that role.

I agree that today we’ve come almost 180 degrees from nationalisation to now having banks in both the public and private sectors. In public sector banks, mergers have also helped to conserve capital and expand size. Today there are about 11 or 12 public sector banks from about 25-27 a few years ago. First, the subsidiaries of the State Bank got merged, and then some other bank mergers happened. So now we have a strong banking sector, and that’s what the Narasimhan Committee also recommended – we must have some strong large Indian banks, because if the economy is going to grow, then it must be supported by a strong and sound banking system. Indian banks must be able to support the movement of Indian businesses abroad and facilitate their growth.

Q: (Raman Jokhakar): If we were to become the third largest economy, which seems like the next or the closest goal, what are the changes that you feel should be brought about where 5-10 Indian banks will enter the top 100?

A: Banks need capital to grow. The FT’s Banker magazine brings out every year a list of the top 100 banks in the world based on capital size. This list is currently dominated by Chinese banks in the top 10 places, and only one Indian bank, SBI, figures somewhere in the middle. The Economic Survey for 2019-20 pointed out that being the fifth largest economy, India should have at least six banks in the top 100 global list, and at least eight would be required for a country having a $ 5 trillion economy. As we know, capital is brought in by the owner, and in public sector banks, the owner is the government. This is why the government is willing to reduce its shareholding. Because banks need capital to grow, they must have that intrinsic strength, and be able to raise money from domestic markets as well as international markets.

After the capital, it is risk management. Banks should have very strong risk management systems and very, very sound ethics, and that’s where there is role of auditors. It is very important to make sure that all the laid down policies of the bank are followed, laid down procedures and systems, which the board has mandated are followed – that will give confidence to investors, domestic and abroad, and they will bring in their capital and investment into the bank. Then the bank will also be able to attract that high-quality talent in terms of manpower.

The IBC and the changes that have happened have helped banks to recover their loans and improve their asset quality. NPAs have come down now because of the support from the legal system. But we need strong contract enforcement. The enforcement of contracts today in India is not so quick. We need judicial reforms. Some cases are taken overseas to adjudicate in those courts. That confidence should be there, that our courts will not take 10 or 20 years to decide on a case. And therefore, we need more legal reforms.

Q: (Mayur Nayak): When you talk about IBC, banks are getting some money back, but by and large, we see that banks are the major loser, in terms of higher haircuts. Are there any loopholes in IBC? How can it be plugged and how can banks’ interests be protected?

A: I would agree with you, but this was not the intention when it was started. They said it should be completed within 240 days or 240 + 90 days. So, cases must be settled speedily. This continued delay means something is wrong somewhere. There are some loopholes. Every time the borrower runs to the courts and that should be avoided completely. I don’t know whether we need more courts or whether we need more tribunals, but whatever it is, the enforcement of contracts is very important. If the lender has not been able to recover his money, then the system should support him to get it back from the borrower. However, there is no denying that because of IBC, NPAs have come down, and bank balance sheets are clean. In fact, the borrowers are saying take the principal, take the interest, but leave us. That fear is there; that’s very good for the system. But unfortunately, banks have been able to recover only a very small amount, but that was not the intention. The loopholes need to be plugged in quickly.

Q: (Raman Jokhakar): If you look at some best practices overseas, because top banks outside India have grown to such a massive scale, what would be some of those practices, which facilitate this recovery process – make it faster and more effective?

A: What comes to my mind is the speed of resolution. You go there, you declare bankruptcy, and it’s all very set and happens quickly. It doesn’t drag on, and it’s not an appeal after appeal. It doesn’t go that way. It’s finished very fast. I think that is what we need to do as well.

Q: (Mayur Nayak): Being in SBI you were a witness to 40 crores plus bank accounts being opened in record time. Everything you saw and felt happening in front of your eyes, because we, as lay readers, just read it in newspapers as statistics. You were probably right inside the truck that was driving it.

A: The biggest change was the small man felt that he could walk into the bank branch. Earlier, he would be somewhat diffident about how he will be treated. But now he can just walk in, show his Aadhar card, open an account, get his money, and walk out with his head held high. If he can’t go to the bank, there’s a business correspondent, who would come to him with the handheld machine, and he can do his transaction. You will be surprised to see how readily the common man has embraced technology and is comfortable doing his banking transactions on his mobile. I think that is the biggest change in the banking sector – the common man and also women feel empowered. And I think this is the perfect example of inclusive growth. This kind of revolution, I don’t think, has happened anywhere in the world. Jandhan-Aadhar-Mobile, the JAM trinity, has enabled the Direct Benefit Scheme. People have confidence in the banking system, especially now when they are able to get all their money, whether it’s a pension, whether it’s a fertiliser subsidy or a scholarship, they get it directly into their account, and it comes on time. It comes without any cut, and they are able to access their account and do their transactions anytime, anywhere. The Jan Dhan zero balance accounts have mobilised Rs. 1,97,082 crores as on 31st May 2023 in 49.12 crore bank accounts. People are keeping money in the bank, which was lying outside the formal banking system.

Q: (Gautam Nayak): When we talk about the future of the Indian economy, we talk about a $5 trillion economy. Going forward, what largest trends do you see, and how fast can India develop?

A: Today, India is the fastest growing economy among the G20 countries, it is the only country with zero prospect of recession and India’s growth is being seen as not only healthy for India but also positive in a world where growth slowdown is a major problem. So, let’s see what kind of economy we have today. In terms of PPP, we are the third largest economy, and in GDP terms, we are the 5th largest. Germany may go into recession, and soon we could become the 4th largest economy. It took us 60 years after independence to become a $1 trillion economy in 2008. Growth gained traction and doubling was much faster. In the next 6 years, we became $2 trillion, and it would have doubled in the next six years and become $4 trillion, but for the disruption caused by COVID. Today we are at about $3.8 trillion, so $5 trillion is not so far away. In fact, today, nobody is focusing on $5 trillion. We’re talking about $10 trillion, and we have the scope to become that. Why? Internally, we have all the resources. In terms of food, we are completely self-sufficient. We have the capability in space technology; we are the 4th nation with ASAT technology, we are the fifth country to launch its own GPS (NAVIC), soon we will be the fifth country to manufacture jet engines, we have our own indigenously designed and manufactured modern high-speed trains, we have the 3rd largest tech start-up base, India is 3rd largest in automobile production, and is an exporter in the defence sector. India has also demonstrated its capability in the manufacturing of pharmaceutical products with the production and export of indigenous COVID vaccines.

Do you remember PL 480? There was a time in 1965 when India didn’t have sufficient wheat and was at the mercy of big powers. There was a famine-like situation after the war. This is when India decided to be self-sufficient in food grains and we had the green revolution. After that, there’s been no looking back. We are the second-largest producer of rice and wheat, the largest producer of sugar, and the largest producer of milk, fruits and vegetables. Look at the variety we have. We are also making significant progress in terms of literacy, skilled manpower, and space research. We are taking commercial satellites to space. When India joined the space club, with satellites and rockets totally made in India and on such a small budget, there was a cartoon in the New York Times – the fellow peeping into that window with the cow. The fat people sitting there, no place inside. So, that is the kind of mindset which we broke through.

We are exporting defence products, but we can become big players when we make, say, missiles, and aircraft fully. In electronics, for instance, smartphones are now being made in India. iPhone already has one plant and is going to set up another plant. Tatas and Cisco, I think, are starting to manufacture iPhone 15. We are now an exporter of electronics and mobiles. We were a strong manufacturing country. But slowly, we allowed China to take over. Many companies closed down because it became cheaper to import. Somewhere we lost sight of what was needed for the country, and we allowed China to take that space. Now with the PLI scheme, logistics and infrastructure development, inflow of foreign investment and technology, ease of doing business and other initiatives, we are moving seamlessly into the global supply chain.

Q: (Gautam Nayak): As an economist, if you look back at the last 75 years, what do you think has been the decision which has impacted the economy the most positively and the decision which has impacted the economy most negatively?

A: Positively, I would say the 1991 deregulation and liberalisation have had the biggest impact on the economy. Earlier, when you were manufacturing two-wheelers, you could do only two-wheelers. There was a capacity you could manufacture and sell at a certain price. All that has gone now! I think the freedom, and openness that has been given to the industrialists, along with incentives and government support, have helped the manufacturing sector. That has created more opportunities not just in manufacturing – each manufacturing job will create about five or six other secondary jobs not only in manufacturing but also in audit and accounts, design, planning, transportation, etc. I think, deregulation certainly helped the economy to grow.

The hindrance, I would say, is that you want the small to remain small. Why not let them grow? There will always be a role for MSMEs, but incentivising them to remain small will stunt their growth. In China, for example, the average textile unit would employ 500 people. In India, it would be 50. When industries are allowed to expand, they can take advantage of the economies of scale and economies of scope, create more jobs and overall is good for the industry and good for the economy.

Q: (Mayur Nayak): What would you advise to youngsters?

A: I would tell them, first of all, have confidence in yourself. Have confidence in the country and its policies. Don’t get swayed by hearsay. What you see in front of you is the full truth. So first, have confidence; second, skill yourself. And even if you’re a chartered accountant, learn about other areas. Learn about economics. Learn about technology. Make yourself a little broad-minded and broaden your vision. See what’s happening in other countries, and what new developments are taking place in India and abroad. Stay abreast, read a lot, and read outside your work. Prepare yourself. And then, of course, have a balanced life. Work-life balance should be there. Don’t spend too much time on WhatsApp, Facebook, or gaming. Don’t waste your time on all that. See how you can use technology to increase your productivity. The future of work is going to change, and there will be a lot of disruption caused by AI.

 

From The President

Dear BCAS Family,

On 6th July, 2023, I will complete my term as President of this esteemed institution. My heart is overwhelmed with emotions while I am writing this last communication. It looks as if just yesterday, I assumed the august office of the President of the BCAS. On the one hand, there is an emotion of joy that I could give my best to fulfill the promises made to the best extent possible, on the other hand, there is a hollowness on realising that I will miss out on the energy effervescing out of the 24X7 commitment to the BCAS. It was this energy that kept pumping adrenalin to my brain, driving it to work harder, longer and smarter. There is also an emotion of gratitude for having received so much love, affection and support from such a large community of seniors, stalwarts, colleagues, staff and members. As I look back, I realise that this was a journey of joy, learning, giving and, above all, self-discovery.

Having spent more than fifteen years with the BCAS in different positions, when I became President, I felt that there was a need to make certain things ‘easy’ for the members to help achieve the BCAS vision better. That is how I happened to choose the theme for the year 2022-23 as “EASE”, which promised to bring about required systemic changes. The idea behind this theme was to empower the members to have easy access to knowledge, emerging opportunities, as also ease of networking and reskilling. I am happy to say that I bid farewell to all of you with a great sense of satisfaction that I could fulfill most of the promises made. During the year gone by, we took a number of initiatives, various committees organised excellent events that aligned well with the theme. The events like Income Tax ki Paathshala, Online 5th Long Duration Course on the GST, Workshop on Practical Aspects of Audit for SME Practitioners, M&A Masterclass, Lecture Meeting on “Inflation Dynamics – India v/s USA Approach” and many such events were aligned to give easy access to the knowledge. Many bespoke events were also organised on emerging areas like ChatGPT, Process Automation under GST, Use of Technology in Audit, ‘Value Investing’ etc., for members to embrace the emerging opportunities. For providing ease for networking and reskilling, several residential conferences were organised. Also, for the new members, felicitation and mentoring sessions were organised to help them in their careers and expand their networks.

In addition, numerous initiatives were also taken to achieve the desired goal. During the year gone by, BCAS was certified as an ISO 9001:2015 compliant organisation, hybrid facilities were made available for meetings, engagement with existing and new organisations with a similar vision as BCAS was enhanced, social media presence increased with calibrated strategy and the beta version of the new website and mobile app was launched. Entire journal archives were digitized, and focus was given on making past premium events available to members at a reasonable cost. Under the auspices of the BCAS Foundation, we could carry on good humanitarian work by equipping some schools in backward areas with the facility of digital education through pre-loaded software on the television screens. Tree plantation and blood donation drives were also carried out with great zeal, matched by an equally enthusiastic response. This year BCAS published its long-awaited publication on ‘FAQs on Charitable Trust’, which was very well received by the readers.

Focus was also put on improving the administration by continuous monitoring and training of the staff. You may find the complete details of the activities and the initiatives in the Annual Report which can be downloaded from the site. To summarise, we did find fruition with ‘EASE’.

You will agree that we are at a very exciting time in the history of our institution. BCAS is entering the 75th year of its foundation and this historical feat holds a special place in the heart of all its members. The sheer fact of our society’s meaningful existence for more than seven decades and its successful transformation into a modern, progressive and digital institution speaks a lot about it. Appreciating the importance of the milestone, great plans are on anvil to celebrate the Platinum Jubilee with programmes befitting the occasion. Several events are planned on the bespoke themes throughout the year, culminating with a Mega Event in the month of January 2024. There will also be a special entertainment programme for the members to participate on this joyful occasion. We are surely looking at the exciting year ahead.

Just as I conclude my message, I convey my gratitude to the Chairmen and Co-Chairpersons of the ten committees through which BCAS’s activities were carried out throughout the year. Their dedication and guidance enabled us to provide very relevant and critical events and publications throughout the year. Under their able leadership, the conveners of each committee left no stone unturned to leave a mark of excellence and ensure smooth functioning. I would like to thank all the Past Presidents who have been pillars of strength and a source of inspiration throughout the year. A big thank you to the BCAS staff who have dedicatedly performed their duties and co-operated for new initiatives embarked on during the year for the effective functioning and serving the members of the Society. The year has been made memorable by my Office Bearer colleagues, who spearheaded various goals set at the start of the year. I thank all members and readers of the President’s message, who have, from time to time, showered their compliments, expressed their disagreement, pointed out anomalies and gave their suggestions to make it more effective. I have no hesitation in admitting that without their feedback, I would not have been inspired to do better. Lastly, I thank Almighty to have put me in this privileged position to know and interact with some of the best minds in the country. I hope I have been able to meet their expectations.

There will be a change of guard on the 6th July which also happens to be the 75th Founding Day. I wish incoming President Chirag and his new team all the very best for the coming year. I am sure under his able leadership and creative visualisation, backed up by the youthful energy and mature experience of his team, BCAS will achieve greater heights.

Goodbye to you all, and a big THANK YOU for your support and affection.

Thank You!
Best Regards,

CA Mihir Sheth
President

RIGHT TO INFORMATION (r2i)

In loving Memory of Narayan Varma

PART A | DECISION OF HIGH COURT

State Vigilance Department not completely exempted from operation of RTI Act1
 

Case name:

Subash Mohapatra & Ors. vs.
State of Odisha & Anr.

Citation:

W.P.(C) No. 14286 of
2016

Court:

Hon’ble High Court, Orissa

Bench:

Hon’ble Chief Justice Dr. S.
Muralidhar and Hon’ble Justice Radha Krishna Pattnaik

Decided on:

20th June, 2022

Relevant Act / sections:

Section 24 and 28 of the Right to
Information Act, 2005

Brief facts
• The notification dated 11th August, 2016, stating that Nothing in the RTI Act shall apply to the General Administration (Vigilance) Department of the Government of Odisha and its organization, issued by the Commissioner/Secretary of the Information and Public Relations Department of the Government of Odisha in accordance with Section 24(4) of the Right to Information Act, 2005, was the subject of three writ petitions, each of which was submitted as a Public Interest Litigation (PIL).

 

1   https://theleaflet.in/vigilance-department-cannot-claim-blanket-immunity-from-rti-act-says-orissa-high-court/

Contentions of the Petitioners:
• Violation of Article 19(1)(a) of the Constitution of India which guarantees all citizens the fundamental right to information.

• Exemption provided under Section 24(4) of the Right to Information Act, 2005 is not available to intelligence and security organizations where the allegations pertain to corruption and human rights violations. Therefore, inasmuch as the impugned notification seeks to exempt the entire Vigilance Department in Odisha from the purview of the RTI Act, irrespective of the proviso to Section 24(4), it is ultra vires Section 24(4).
    
Decision:
“For all of the aforementioned reasons, this Court issues a declaratory writ to the effect that the impugned notification dated 11th August, 2016 issued by the Information and Public Relations Department, Government of Odisha under Section 24 (4) of the RTI Act, will not permit the Government to deny information pertaining to the Vigilance Department involving allegations of corruption and human rights violations, and other information that does not touch upon any of the sensitive and confidential activities undertaken by the Vigilance Department. A further clarificatory notification to the above effect be issued by the Government of Odisha within four weeks.”

PART B |  DECODING RTI (SECTION-WISE), PART 2

In Part 1, we understood about the background and basic understanding, objective of the Right to Information Act what is Information and what is a Public Authority?

In Part 2, we will understand about some more basic definitions under the Act.

Record:
Includes
(a) any document, manuscript and file;
(b) any microfilm, microfiche and facsimile copy of a document;
(c) any reproduction of image or images embodied in such microfilm (whether enlarged or not); and
(d) any other material produced by a computer or any other device.

Right to Information
means the right to information accessible under this Act which is held by or under the control of any public authority and includes the right to—
(i) inspection of work, documents, records;
(ii) taking notes, extracts or certified copies of documents or records;
(iii) taking certified samples of material;
(iv) obtaining information in the form of diskettes, floppies, tapes, video cassettes or in any other electronic mode or through printouts where such information is stored in a computer or in any other device;

Third Party
means a person other than the citizen making a request for information and includes a public authority.

In part 1, we understood who a Public Authority is, now we shall understand its obligations and duties, the same is provided under Section 4 of the Act.

Section 4(1) of the RTI Act defines the obligations of public authorities. Every public authority must maintain all its records. They must be duly catalogued and indexed in a manner that facilitates easy dispersal of information under the right to information under this Act. It is to ensure that all appropriate records are computerised and connected through a network all over the country on different systems for easy access.

The authority must publish information pertaining to its organisation, functions, and duties. It must explain publicly the powers and duties of its officers and employees. Further, it must enunciate the procedure followed in its decision-making process, and the norms and rules followed by it in discharging its functions. It must issue a statement of the categories of documents that are held by it or are under its control.

It must also publish a directory of its officers and the system of remuneration for their services. It must make public details of its Public Information Officer such as name, designation and contact details. Information relating to avenues and channels for obtaining information from the authority must be made public in an easy and accessible way. It must publish all relevant facts that were taken into consideration in policy formulation. It must also provide reasons for its administrative and quasi-judicial decision to persons affected by its decisions.

Details of its financial plans and budget allocations must be made public. Further, it must illustrate the execution of subsidy programmes and provide details of the expenditures incurred. If any concessions and permits have been granted by it then details of the recipients of these must be included. It must clearly state the details of arrangements made for consultation in relation to policymaking. Details of board or councils or committees must be furnished along with minutes of their meetings.

All information must be disseminated widely and in a manner that is easily accessible to the public. The authority must also on its own volition make all such information public instead of waiting for citizens to file RTIs seeking such information. The dissemination must be conducted in a cost-effective manner.

PART C | INFORMATION ON & AROUND

Delhi HC Dismisses Students’ Plea Requiring GGSIP Universit y To Provide Certified Copies Of Answer Scripts As Per Fee Prescribed Under RTI Rules2

The Delhi High Court has dismissed a plea filed by two final year law students seeking directions on Guru Gobind Singh Indraprastha University for providing certified copies of answer-scripts to students as per the fee prescribed under the RTI Rules, 2012 at candidate’s request. A division bench comprising of Acting Chief Justice Vipin Sanghi and Justice Sachin Datta however clarified that the Court has not examined the issue as to whether the charges or fee prescribed by the University of Rs. 1,500 per examination answer sheet is excessive, or could be said to defeat the right to obtain information, as no challenge was raised to the prescription of the said fee under its Rules.
_________________________________________

2   https://www.livelaw.in/news-updates/delhi-high-court-ggsip-university-certified-copies-answer-scripts-rti-rules-200014

CIC Slams UGC for Forwarding an RTI Application 16 Times from One Deptartment to Another! 3
Slamming the University Grants Commission (UGC) for making the right to information (RTI) applicant wait for two years during which time it pushed his RTI application from one department to another, 16 times over, the central information commissioner (CIC) observed this delay “as a blatant error and wilful violation of the provision of the RTI Act and that of the public authority.”

Rajiv Khatri, the RTI applicant, sought certified copies under RTI, as follows: 1) Mechanism of grievance redressal for faculty members of affiliated private self-financing colleges of universities under the list of universities of UGC. 2) Standard operating procedure (SOP) of processing of a complaint. And; 3) Name and address of the authority to forward the complaint in case of non-action of the complaint.

____________________________________________________

3   https://www.moneylife.in/article/cic-slams-ugc-for-forwarding-an-rti-application-16-times-from-one-dept-to-another/67426.html

RTI Act | Penalty under section 20(2) For Destruction Of Information Sought Not Attracted In Absence Of Malafide: Gujarat High Court4
The Gujarat High Court has held that where any information sought under the Right to Information Act is destroyed and it is not the case of malafide destruction of information, penalty under Section 20(2) of RTI Act shall not be attracted. Section 20 stipulates disciplinary action against a Public Information Officer where information sought is not supplied within the time specified, or is malafidely denied or incorrect information is knowingly given or information is destroyed.
______________________________________________________

4   https://www.livelaw.in/news-updates/gujarat-high-court-rti-act-section-202-destruction-or-non-preservation-of-record-article-226-201897

 

SOME INTERESTING CHROME EXTENSIONS

In this article, we discuss a few extensions that can help us do our job and excel in other
areas of life, made especially for the Google Chrome web browser.

Chrome has been one of the most popular browsers for a while and the major reason for its popularity is its ability to accept extensions. Extensions are small programs which add to the versatility of the browser and Chrome is one of the browsers which embraces extensions with open arms since the last several years.

Adding an extension in Chrome is super easy. Just head to https://chrome.google.com/webstore/category/extensions. In the search box, search for the extension name. Once you land on the extension home page, you will see the title and a brief description of what the extension does. You will also find an option to add it to Chrome. Just click on the Install button and it will get added to Chrome instantly. Once installed, most extensions line up on the top right of your browser. Some others behave slightly differently, and you may have to make a small effort to find and get used to them. But once you get used to it, you will save loads of time and improve your productivity many times over.

In this issue, we will explore a few Chrome Extensions which are extremely useful to boost our productivity in our day-to-day operations

INSERTING TABLES IN GMAIL


 
I am sure we have all faced difficulties in inserting Tables in Gmail. So clumsy and unpredictable! Here is an extension which allows you to insert Tables seamlessly into Gmail. It is an extension called (you guessed it right) Gmail Tables by CloudHQ.

Installation of the extension is a breeze – just search Google for Gmail Tables Chrome Extension, and install it. Once installed, it will sit as a small tiny icon next to your send button in your Compose Window. Click on it and a menu to create a Table will pop up, allowing you to create tables of all sizes, create headers, padding and much more.

Apart from the ability to create tables, the extension also allows you to add Buttons which can direct the recipient to links of your choice – maybe your website. This is really cool and can be used in a variety of business and personal mails.

So go ahead and create Tables in Gmail – have fun!

EMI CALCULATOR

This EMI calculator by Abhishek Kumar will be loved by all and sundry in the financial sector. If you need to calculate EMI often, you can install this extension in your Chrome Browser.

Installation of the extension is simple, as usual – just search Google for EMI Calculator Chrome Extension, and install it. Once installed, it will sit as an extension on your top toolbar to the right, along with your other extensions.

Now, whenever you need to do an EMI Calculation, just click on it and it will popup the options and instantly give you a report on the Equated Monthly Instalment, the total principal amount and interest amount to be paid and the bifurcation for the same.

A very useful tool for those who wish to calculate EMI over and over!

GRAMMARLY


 

This is a free Chrome Extension. It is a marvellous tool which makes a huge difference to the quality of your communication.

Whatever you type in Gmail or on Messenger or in Google Doc, or social media, on Chrome, Grammarly will automatically check your grammar, point out mistakes and offer suggestions for the correct grammatical syntax. You may accept what is suggested or just ignore it and move ahead. It will even suggest reframing of sentences based on the context and what you wish to convey. Grammarly is totally AI-based.

From grammar and spelling to style and tone, Grammarly helps you eliminate errors and find the perfect words to express yourself.

Recommended for anyone and everyone regardless of where they work or what they do!

STRETCHCLOCK
 

This simple extension reminds you to stretch from time to time. The timer runs in your browser and is configurable. When the countdown timer reaches zero, StretchClock shows easy no-sweat exercises that you can do at your desk in business attire. It includes some easy Office Yoga poses as well.

You can change the settings to match your work style. Easy to pause when you don’t need it and easy to unpause so that the pain doesn’t come back. You can browse through the different exercises during your break and use the ones you need.

It’s a professional break reminder for desk warriors. Take a break and follow the simple no-sweat exercises to avoid pain and stay fit.

The easy way to feel better and be more productive!

TOUCAN
 


 

Toucan is a free Chrome Extension that helps you learn a language without even trying. Once you install the extension, choose the language that you wish to learn – current options are Spanish, French, German, Portuguese and Italian. You also choose the topics that you are interested in.

After that, just browse the web normally. When you point to any word on your webpage, it will show you the translation in the language of your choice. This will help you learn as you browse. You will pick up the vocabulary faster when you see it in context. There are even quizzes and games which help you sharpen your language skills as you move along. You can measure your daily progress and earn achievements that measure your skill level on the go.

Learn efficiently and productively – just install for free and start learning a new language in seconds!

https://jointoucan.com/

PERMISSIBLE AND NON-PERMISSIBLE SERVICES

Shrikrishna: Arjun, we have been meeting regularly over the past many years. We discussed many aspects of Code of Ethics like the meaning of misconduct, disciplinary procedure, principles of disciplinary proceedings, a few live cases and so on.

Arjun: Yes, Lord. It was all interesting but quite often frightening. I lost my sleep many times.

Shrikrishna: True! But your motto says you are not supposed to sleep at all! Ya Esha Supteshu Jagarti…

Arjun: Ha! Ha!! Ha!!!

Shrikrishna: After all, eternal vigilance is the cost of independence.    

Arjun: Agreed. But Bhagwan, today tell me something new. Something latest.

Shrikrishna: Professional Ethics are age-old principles. There can be hardly anything new in that sense. Still, over time, the outlook changes, circumstances change, emphasis changes. In short, its implementation undergoes changes over time.

Arjun: Yes. Kaalaya Tasmai Namah!

Shrikrishna: In the good old days, the impact of good preachings (sanskaaras) was quite strong. Ethical behaviour came out in its natural course. And life was simpler.

Arjun: Technology has totally transformed human behaviour. Business is also becoming more and more complex.

Shrikrishna: And financial expertise is becoming a synonym for financial manipulation! CAs are supposed to be financial police. Hence, there’s more and more expectation from CAs.

Arjun: That means more and more regulations! Bhagwan, we don’t mind regulations, complex rules and other things. But the client does not see any value in it. Therefore, there’s no commensurate remuneration.

Shrikrishna: I agree, Paarth. It is a reality. What you cannot cure should be endured.

Arjun: But why can’t you, as Omnipotent Bhagwan, change the situation? Nothing is impossible for you.

Shrikrishna: Yes, I want to change it. But I will help only those who help themselves. You need to take the first step towards improvement. I will take care of the rest!

Arjun: Anyway. Tell me something about the new restrictions on the services that can be         
rendered by us.

Shrikrishna: Yes. Actually, as you know, the new Code of Ethics has become applicable. And your new Company Law is also putting restrictions on your services.

Arjun: Oh! You mean Section 144?

Shrikrishna: Yes. It states what services you cannot render to an audit client.

Arjun: But many of our audit clients request us to look after taxation, company law compliances, and so many things.

Shrikrishna: Now, you need to be cautious. The section clearly says that you can render only those services which are approved by the Board of Directors or by the Audit Committee!

Arjun: Really? We never see the minutes and secretarial records.

Shrikrishna: This section clearly specifies what services you cannot render. Like internal auditing, outsourced financial services like management of account receivable/payable, investment banking services such as mergers and acquisition, asset management factorial services, etc.

Arjun: I need to know much more about this. Otherwise, I will land myself in trouble. Just now I am busy. July ITR work has started.

Shrikrishna: As you wish!

“Om Shanti”

DONATIO MORTIS CAUSA – GIFTS IN CONTEMPLATION OF DEATH

INTRODUCTION
Death or rather the fear of it makes people do things they might normally not have done. One such act is known as donatio mortis causa or the giving of gifts in contemplation of death. A person on his deathbed gives certain gifts because he does not want to leave to inheritance under his Will or succession. The law deals with such gifts and the Income-tax Act also deals with the taxation of these gifts.

LEGAL PROVISIONS
Black’s Law Dictionary, 6th Edition, defines the Latin maxim “donatio mortis causa” as a gift made in contemplation of the donor’s imminent death.

Section 191 of the Indian Succession Act, 1925 deals with the requirements of gifts made in contemplation of death. It reads as follows:

“191. Property transferable by gift made in contemplation of death. — (1) A man may dispose, by gift made in contemplation of death, of any movable property which he could dispose of by will.

(2) A gift said to be made in contemplation of death where a man, who is ill and expects to die shortly of his illness, delivers, to another the possession of any movable property to keep as a gift in case the donor shall die of that illness.

(3) Such a gift may be resumed by the giver; and shall not take effect if he recovers from the illness during which it was made; nor if he survives the person to whom it was made.”

Thus, the requirements of a gift in contemplation of death as laid down by Section 191 are:

(i)    the gift must be of movable property ~ this is a matter of fact;

(ii)    it must be made in contemplation of death ~ the donor must be in contemplation of his death. He must be fearful that he is likely to die shortly;

(iii)     the donor must be ill and he expects to die shortly of the illness – an illness which is the cause of the fear is a must. A mere statement that the donor was old is not adequate. Medical evidence to prove that he was suffering from an ailment would be helpful in this respect;

(iv) the possession of the property should be delivered to the donee ~ possession should be physical/ actual. It should be clearly demonstrated that the donee has been put in possession of the asset/ money; and

(v)     the gift does not take effect if the donor recovers from the illness or if the donee predeceases the donor ~ this is the most important aspect. Such gifts are conditional upon the donor dying. If he survives, the gift is revoked and returns to him.

For instance, a person is suffering from terminal cancer and is not given much hope to live. He makes gifts to his friends/ relatives/ employees of his money, jewellery, precious watches, securities, etc. Such gifts of movables could be treated as gifts in contemplation of death. However, if he miraculously survives, then the gifts would revert back to him. Thus they are conditional gifts.

However, merely because the ‘gift’ is given at the time of illness, or ‘occasioned’ by the donor undergoing medical treatment, it would not by itself make it a gift in contemplation of death.

In CGT vs. Abdul Karim Mohd., [1991] 57 Taxman 238 (SC), the Supreme Court has held that for an effectual donatio mortis causa, three elements must combine:

(i)    firstly, the gift or donation must have been made in contemplation, though not necessarily in expectation of death, i.e., the person must have a reasonable apprehension that he would die soon;

(ii)    secondly, there must have been delivery to the donee of the subject matter of the gift; and

(iii) thirdly, the gift must be made under such circumstances as showed that the thing was to revert to the donor in case he should recover. The Court held that this last requirement was sometimes put somewhat differently and it was said that the gift must be made under circumstances which showed that it was to take effect only if the death of donor followed.

In the above mentioned case under the Gift-tax Act, a question arose whether the gift deed needed to contain an express clause that the gift would revert to the donor in case, he should recover from the illness? The Supreme Court negated this proposition. It held that the recitals in the deed of the gift were not conclusive to determine the nature and validity of the gift. The party may produce evidence to prove that the donor gifted the property when he was seriously ill and contemplating his death with no hope of recovery. These factors in conjunction with the factum of death of the donor, may be sufficient to infer that the gift was made in contemplation of death. It was implicit in such circumstances that the donee became the owner of the gifted property only if the donor died of the illness and if the donor recovered from the illness, the recovery itself operated as a revocation of the gift. It was not necessary to state in the gift deed that the donee became the owner of the property only upon the death of the donor. Nor it was necessary to specify that the gift was liable to be revoked upon the donor’s recovery from the illness. The law acknowledged these conditions from the circumstances under which the gift was made. The Apex Court cited with approval the following passage from Jerman on Wills (8th edn., Vol. 1, pp. 46-47):

“The conditional nature of the gift need not be expressed: It is implied in the absence of evidence to the contrary. And even if the transaction is such as would in the case of a gift inter vivos confers a complete legal title, if the circumstances authorise the supposition that the gift was made in contemplation of death, mortis causa is presumed. It is immaterial that the donor in that dies from some disorder not contemplated by him at the time he made the gift.”

It also referred to Williams on Executors and Administrators (14th edn., p. 315):

542. Conditional on death:

‘The gift must be conditioned to take effect only on the death of the donor.But it is not essential that the donor should expressly attach this condition to the gift; for if a gift is made during the donor’s last illness and in contemplation of death, the law infers the condition that the donee is to hold the donation only in case the donor dies’.”

In the case of CGT vs. Late C.V. Ct. Thevanai Achi (2006) 202 CTR 566 (Mad ) a lady was 90 years old and ill. Her great-grandson was taken to her and she placed in her hands the key to her safe. She died within seven days. The Gift-tax Department rejected the plea that it was a gift in contemplation of death as it was of the view that old age of 90 years and death within a week of the gift will not establish the ingredient of expectation to die shortly of her illness, which was so essentially an ingredient to establish a gift in contemplation of death. The Madras High Court negated this view. It held that a person of 90 years old would always be in the belief that he/ she will shortly die of illness caused by old age. There may be exceptional cases where persons of 90 years hoped to live long. But the generality was otherwise. In this case, the fact of 90 years of age led to the conclusion that the donor expected to die shortly. All the more so where the donor actually died a week later and it was a natural death caused by old age.

TAX TREATMENT
Section 56(2)(x) of the Income-tax Act, 1961 taxes gifts received without/ or for inadequate consideration. In such cases, the donee becomes liable to tax on the receipt of the gift of money/ property. It also contains several exceptions under which this section does not apply. One such exception is a gift made in contemplation of death. There are no conditions attached to this exception. Hence, one possible view is that all gifts made in contemplation of death are exempt. The gift could also be of immovable property and the gift need not comply with the conditions laid down under the Indian Succession Act since there is no express reference to that section. Such gifts could even be made to non-relatives and yet remain exempt in the hands of the donees. The erstwhile Gift-tax Act, 1958 also contained a similar exemption from gift tax on the donor.

However, the Chennai ITAT in the case of F. Susai Raju vs. ITO [2017] 78 taxmann.com 81 (Chennai – Trib.), has taken a contrary view. It referred to the Apex Court’s decision in Abdul Karim (supra) and held that the conditions specified under Section 191 of the Indian Succession Act had to be complied with to claim exemption under Section 56(2)(x).

It further held that in the present case, the gift was made eight months in advance. Though it did raise some doubts as to whether it was indeed given in contemplation of death, the matter was to be considered in view of the attending circumstances; rather, the totality of the facts and circumstances. The ITAT held that if a person was, as claimed, sick, with little hope of recovery at the time of gift/s, it would matter little that he survived for eight months thereafter. Though there was no finding in the matter, nor any material on record (except the affidavit by the donor stating that he is being treated for the kidney failure), it was held to be inferable from the circumstances that he was ill at the relevant time.

The ITAT also considered the fact that the gift was not been made per a registered document; rather, not even per a deed of gift, but by an affidavit. This objection of the AO (assessing officer) was set aside as the gift, being of money, i.e., movable property, could be legally valid even if oral when accompanied by delivery of possession. The affidavit clearly reflected the alienation of the money in favour of the assessee and hence, operated as a valid gift. The transfer of movable property was only on its delivery. The fact of acceptance was borne out both by the assessee’s conduct (in utilizing the amount for his purposes) as well as of the money having been transferred to his bank account and, thus, in his possession. The ITAT held that it was not a gift simpliciter, but a gift in contemplation of death, which took place only in the event of the ‘donor’ predeceasing the ‘donee’ and, further, was liable to be revoked where the circumstances changed, as, for example, where the donor recovered from the illness, i.e., the condition under which the disposition was made. It was conditional and took place only on the death of the ‘donor’, so that it assumed the nature of a ‘Will’. A will, was not required to be registered.

CIVIL DEATH OR ACTUAL DEATH? An interesting question arose in the case of JCGT vs. Shreyans Shah, [2005] 95 ITD 179 (Mum.)(TM). A lady renounced the world and became a saint. Before taking up sainthood, she gifted all her movable assets to her relatives. The issue was whether such gifts could be treated as gifts in contemplation of death and hence, exempt from gift tax? It was contended that sainthood was akin to civil death and hence, the exemption was available.

The ITAT held that the law was clear that in order to be treated as a gift in contemplation of death, one of the important conditions was that the donor must be ill and should be expected to die shortly of the illness. The finding about the donor being ill was thus sine qua non for applicability of Gift-tax exemption. Sanyas being civil death will not, therefore, suffice. The ITAT held that one also had to proceed on the basis that planning to take up sanyas was to be treated as an illness, and perhaps terminal illness. That according to the bench, was too far-fetched a proposition to meet judicial approval. Gifts in contemplation of death implied reference to natural death alone. There was nothing to suggest that the gift-tax exemption also takes care of gifts in contemplation of a civil death. The very scheme of gifts in contemplation of death took into account only natural death, as was evident from the specific reference to ‘illness’. An illness was only relevant to natural death and not a civil death.

CONCLUSION
Deathbed gifts have gained popularity in the recent pandemic. Many people have resorted to them when they saw no hope of recovering from COVID. However, a word of caution of their potential misuse would not be out of place. That is probably why the Indian lawmakers did not extend such gifts to immovable properties.

CORPORATE LAW CORNER

ADJUDICATION MECHANISM UNDER THE COMPANIES ACT, 2013
Adjudication mechanism is covered under the Jurisdiction of Regulator to impose penalty on the defaulting Companies and its officers for non-compliance with the provisions of the Companies Act, 2013.

The reason for the introduction of the in-house Adjudication Mechanism is to promote ease of doing business, to reduce the burden of National Company Law Tribunal (NCLT) and Special Court. Since adjudication mechanism is handled by the bureaucrats, the Central Government (CG) has delegated its power to respective Registrar of Companies (RoC) who are acting as Adjudication Officers (AO).

The provisions of Section 454 of the Companies Act, 2013 read with Companies (Adjudication of Penalties) Amendment Rules, 2019 provide for adjudication mechanism.

Companies (Amendment) Act, 2019 and 2020, has recategorized various sections/ provisions which were punishable with “Fines” with “Penalties”.

The  Difference between “Fine” and “Penalty” is as under:-

Fine

Penalty

As per the definition
provided in Oxford Dictionary: “Fine” is a sum of money exacted as a
penalty by a court of law or other authority.

As per the definition
provided in Oxford Dictionary “Penalty is “a punishment imposed for
breaking a law, rule, or contract.”

Fine is the amount of
the money that a court can order to pay for an offence after a successful
prosecution in a matter.

Penalties do not
require court proceedings and are imposed on failing to comply with a
provision/s of an Act.

Where any offence is punishable
with;

i. “Fine or imprisonment or both”
or

ii. “Fine or imprisonment”

iii. Only Fine

are compoundable offences under
Section 441
of the Companies Act, 2013 by
filing application before NCLT/ RD /any officer authorised by Central
Government.

Whereas offences
which are Non-Compoundable offences under the Companies Act, 2013, are
punishable with Penalties

Hence, Adjudication Order can be
issued/imposed by the Respective 
Registrar of Companies (RoC).

An appeal against such an order
can be preferred before office of the Respective Regional Director (RD).

Hence, for various non-compliances, a Company may need not go to NCLT with compounding applications and can settle such offences through an in-house mechanism, where a penalty could be levied on violations of the provisions of the Companies Act, 2013.

If one has a look at the recent Adjudication Orders passed by various offices of Registrar of Companies (RoC), one will observe and experience that massive Penalties are levied even on Private Limited Companies. Hence, it is very useful to circulate such orders amongst our esteemed readers, especially amongst professionals and small and medium-sized firms who will be well equipped to advise their clients regarding such matters.   

Accordingly, we intend to cover Adjudication Orders on a regular basis henceforth.

PART A | COMPANY LAW


5 Central Cottage Industries Corporation of India Limited RoC Adjudication Order ROC/D/ADJ/92&137/Central Cottage/185 Date of Order: 13th January, 2022

RoC, Delhi order for violation of Section 92 (4) (Annual Return e-form MGT-7) & 137(3) (e-form AOC-4 XBRL) of Companies Act, 2013

FACTS
M/s CCICIL is a Government Company incorporated under the relevant provisions of the Companies Act, 1956 ( The Act).

M/s CCICIL, along with its Managing Director (MD) and Company Secretary (CS) had suo-moto filed application vide e-form GNL-1 for adjudication of penalty under the provisions of Section 454 of the Act and rules thereunder and stated therein inter alia that:

a. M/s CCICIL could not file its e-form AOC-4 XBRL (Financial Statements) and e-form MGT-7 (Annual Return) for the Financial Year ended on 31st March, 2020 as its Annual General Meeting could not be held in time.

b. After holding the Annual General Meeting on 16th June, 2021, M/s CCICIL had filed e-form MGT-7 (Annual Return) for the Financial Year ended 31st March, 2020 on 28th June, 2021 and e-form AOC-4 XBRL (Financial Statement) for the Financial Year ended 31st March, 2020 on 20th July, 2021 and made good the default.

c. M/s CCICIL had prayed to pass an order for adjudicating the penalty for such violations of the provisions of the Sections 92 & 137 of the Act.

d. M/s CCICIL had complied with the provisions of Section 92(4) and 137(1) of the Act by filing its due annual return and financial statement for the Financial Year 2019-20 on 28th June, 2021 and 20th July, 2021 respectively as stated above.

e. Since the proviso in sub-section (3) of Section 454 of the Act had been inserted by the Companies (Amendment) Act, 2020 which had come into force w.e.f. 22nd January, 2021, the Authorized Representative contended that no penalty for such violation of Sections 92(4) & 137(1) of the Act should be imposed on the applicants and all proceedings under this section in respect of such default shall be deemed to be concluded.

HELD
Adjudicating Office took into consideration the insertion of proviso of sub-section (3) of Section 454 of the Companies Act, 2013 which inter alia provides that no penalty shall be imposed in this regard and all proceedings under this section in respect of such default shall be deemed to be concluded in case the default relates to non-compliance of sub-section (4) of Section 92 and sub-section (1) of Section 137 of the Act and such default has already been rectified either prior to, or within thirty days of the issue of the notice by the adjudicating officer.

a) In this case, M/s CCICIL and its Director(s) had suo-moto filed an application for adjudication of penalties under section 454 of the Companies Act, 2013 on 23rd November, 2021. Accordingly, in the interest of natural justice, a reasonable opportunity of being heard under section 454(4) of the Companies Act had been given to the M/s CCICIL before passing the relevant order under section 454(5) of the Act taking into consideration the amendment by the Companies (Amendment) Act, 2020 No. 29 of 2020 in Companies Act, 2013 which was inserted and, later on, came into force w.e.f. 22nd January, 2021 vide Notification No. 1/3/2020-CL.I dated 22nd January, 2021.

b) In exercise of the powers conferred on the Adjudication Officer vide Notification dated 24th March, 2015 and after considering the facts and circumstances of the case besides oral submissions made by the representative of applicants at the time of the hearing and after taking into account the factors mentioned in the relevant Rules followed by amendments in Section 454(3) of the Companies Act, 2013, Adjudication Officer was of the opinion that no penalty shall be imposed for the default which relates to non-compliance of Section 92(4) & 137 of the Act as the said default had been rectified by filing the annual return and financial statement for the financial year 2019-20 on 28nd June, 2021 and 20th July, 2021, repectively, i.e. prior to the issue of notice by adjudicating officer.

c) The order was passed in terms of the provisions of sub-rule (9) of Rule 3 of Companies (Adjudication of Penalties) Rules, 2014 as amended by Companies (Adjudication of Penalties), Amendment Rules, 2019.

6 Tangenttech Infosoft Private Limited RoC Adjudication Order No. RoC-GJ/ADJ. ORDER-2/ Tangenttech/ Section 12(3)(c)/ 201-22 Registrar of Companies, Gujarat, Dadra & Nagar Haveli Date of Order: 6th April, 2022

RoC, Gujarat, Dadra & Nagar Haveli order for violation of Section 12(3)(c) of Companies Act, 2013 – Not mentioning CIN and Registered Office Address on its Letterhead

FACTS
a) Company had filed a certified true copy of Board’s resolution dated 28th December, 2017 as well as letter dated 28th December, 2017 addressed to M/s Himanshu Patel and Company. The said documents were attached with ADT-1 filed on 1st January, 2018 on the MCA21 portal. It was further observed that the company has not mentioned CIN and Registered Office Address on its Letter Head as required under the provisions of Section 12(3)(c) of the companies Act, 2013, which is a violation attracting penal provisions of Section 12(8) of the Companies Act, 2013.

b) Similarly, it was also observed that CIN & Registered Office address of the company have been not mentioned on letter dated 23rd February, 2021, attached with ADT-2  filed on 24th February, 2021 on the MCA, 2l portal.

c) The Ld. Regional Director, NWR, Ahmedabad vide order dated 5th October, 2021 had issued direction to ROC, Ahmedabad to take necessary action and submit action taken report.

d) An adjudication notice was issued to the Company and its officers for aforementioned violations.   

e) In reply and at the time of personal hearing company submitted as under :

“Company is an abiding corporate body and has no motive to disregard any of the compliances. The absence of the CIN and Registered office Address was absolutely unintentional and due to the mistake done by one of employee of the company while scanning the document. ClN and Registered address of the company was mentioned on the letter head but while scanning the documents employee hastily did not take that part which created misinterpretation of that letter.”

The authorised representative further submitted that the “company has also filed various documents to Registrar of Companies (ROC) where company has also mentioned CIN and registered office address as required for Section 12(1) of the Companies Act, 2013.”

It was further requested that before passing any adjudication order, the authorities may take into consideration financial position etc. as the company had incurred heavy financial losses and also the Company’s business suffered due to Covid-19 outbreak and lockdown around the country during the financial year 2020-21.  

f) It was further observed that MGT-7 was filed on 23rd October, 2019, Company had mentioned CIN and Registered Office Address on the Shareholders’ List attached thereto. Thus, it revealed that the Company has failed to comply with the relevant provisions occasionally.   
 
HELD
a) It was observed from the Balance Sheet of the Company as at 31st March, 2021, that the paid-up capital of the Company was Rs 1 Lakh and Turnover was Rs 95.68 Lakhs. Hence, Company was a small Company. Therefore, the provisions of imposing lesser penalty as per the provisions of Section 446B of the Companies Act, 2013 apply to the company.

b) Considering the facts and circumstances, submissions made and further considering number of defaults, a Penalty of an amount of Rs 6000 was imposed on Company and its Directors. (Penalty of Rs 1000 on Company and Rs 1000 on each of 5 directors)

c) Company was directed to pay the penalty within 90 days of the receipt of the order.   

FEW NOTES:
1.  Appeal lies against the order and is required to be filed within 60 days from the date of receipt of the order.

2. If penalty is not paid within 90 days from the date of receipt of the order, Company shall be punishable with fine which shall not be less than Rs 25000 but may extend to Rs 5,00,000.

3. If officer in default does not pay penalty within 90 days from the receipt of the order, such officer shall be punishable with imprisonment which may extend to 6 months or with a fine which shall not be less than Rs 25000 but may extend to Rs 1,00,000 or with both.

4. Non-Compliance of the order including non-payment of penalty entails prosecution under section454(8) of the Companies Act, 2013.

PART B |  INSOLVENCY AND BANKRUPTCY LAW

4 Vallal RCK vs. M/s Siva Industries and Holdings Ltd and others Civil Appeal Nos. 1811-1812 of 2022 Date of Order: 3rd June, 2022

FACTS
In relation to the Corporate Debtor, IDBI Bank Ltd submitted an application under section 7 of the IBC to initiate CIRP. The NCLT granted the application on 4th July, 2019. M/s Royal Partners Investment Fund Ltd had submitted a Resolution Plan to the RP, which was approved by the CoC. The stated plan, however, could not be accepted because it obtained just 60.90% of the CoC’s votes, falling short of the required 66%. On 8th May, 2020, the RP filed an application under Section 33(1)(a) of the IBC, requesting that the Corporate Debtor’s liquidation procedure be started. The promoter of the Corporate Debtor, the appellant, submitted a settlement application with the NCLT under Section 60(5) of the IBC, indicating his willingness to offer a onetime settlement plan. The RP filed an application before the learned NCLT seeking required directions based on the request of IARCL (one of the Financial Creditors, namely International Assets Reconstruction Co. Ltd. (“IARCL”), which has a voting share of 23.60% and opted to adopt the aforementioned Settlement Plan). The NCLT rejected the application for withdrawal of CIRP and adoption of the Settlement Plan in an order dated 12th August, 2021, holding that the aforementioned Settlement Plan was not a settlement simpliciter under Section 12A of the IBC but a “Business Restructuring Plan.” The NCLT began the liquidation procedure of the Corporate Debtor as well, pursuant to another ruling dated the same day. As a result of this, the appellant filed two appeals with the learned NCLAT. The same was dismissed pursuant to the common impugned judgment dated 28th January, 2022.

ISSUE RAISED
Whether AA/Appellate Authority can sit in appeal over commercial wisdom of CoC? When 90% or more of the creditors, after careful consideration, determine that allowing settlement and withdrawing CIRP is in the best interests of all stakeholders, the adjudicating authority or the appellate authority cannot sit in an appeal over CoC’s commercial wisdom. This Court has consistently concluded that the CoC’s commercial judgment has been given precedence over any judicial involvement in ensuring that the stipulated processes are completed within the IBC’s timeframes. The premise that financial creditors are adequately informed about the viability of the corporate debtor and the feasibility of the proposed resolution plan has been upheld. They act based on a thorough review and assessment of the suggested settlement plan by their team of experts. Only where the adjudicating authority or the appellate authority judges the CoC’s judgement to be entirely capricious, arbitrary, irrational, and in violation of the statute or the Rules would interference be justified.

HELD
In this case, the CoC made its decision after deliberating over the benefits and drawbacks of the Settlement Plan and using their commercial judgment. The Court is of the considered opinion that neither the learned NCLT nor the learned NCLAT were justified in not assigning due weight to CoC’s commercial wisdom, according to the Court. The Court has often highlighted the importance of minimal judicial interference by the NCLAT and NCLT in the context of the IBC. The Court allowed the appeals, the NCLAT’s challenged judgment of 28th January, 2022, and the NCLT’s directives of 12th August, 2021, are quashed and set aside and the Resolution Professional’s application to withdraw CIRP before the learned NCLT was granted.

SUPREME COURT ON PLEDGE OF DEMATERIALIZED SHARES

BACKGROUND
Recently, on 12th May 2022, the Supreme Court of India, gave a detailed judgement on issues relating to the pledge of dematerialized shares and its invocation. Apart from minutely going into the process of the pledge of shares in such form, and making certain rulings on it, it also highlighted that dematerialized shares (“demat shares”) have raised several other issues which SEBI and other regulators will need to clarify or regulate. These include issues of accounting, taxation, Takeover Regulations, etc. Importantly, the Court has taken a harmonious view of the Indian Contract Act, 1872, and the Depositories Act/ Regulations and, for this purpose, overrules certain decisions of the High Court. This decision is in the case of PTC India Financial Services Limited vs. Venkateswarlu Kari & Another ((2022) 138 taxmann.com 248 (SC)).

PECULIARITIES OF PLEDGE OF DEMAT SHARES AND ISSUES THE NEW FORMAT AND PROCESS RAISE
Barring very few exceptions, shares (and even other securities) of listed companies (and even some unlisted companies) are held in dematerialized form. A pledge of such shares is quite common and carried out by many shareholders. In the simplest form of a pledge, a shareholder may want to borrow monies against such shares and would thus pledge them to the lender. Promoters typically pledge their shares for borrowings by the listed company they have promoted or even for their own borrowings. When shares were in paper form, the pledge could be carried out in different ways with each having their own implications. However, the process of pledge of dematerialized shares has its own benefits and challenges.

Briefly stated, the Depositories Act/Regulations provide for a specific procedure in which the pledge (or hypothecation) needs to be carried out. The shareholder intimates the depository participant (“the DP”) of his desire to create a pledge in favour of the pledgee. The depository participant then records the pledge and intimates the pledgor and the pledgee.

If the purpose for which the pledge was created is satisfied, the record of the pledge can be removed with the concurrence of the pledgee. If, however, the pledge is required to be invoked (say, due to default in repayment of the loan), the pledgee intimates the DP who then transfers the shares in the name of the pledgee after, of course, removing the record of the pledge. The pledgee is then free to sell the shares or transfer the shares back to the pledgor in case he complies with the purpose for which the pledge was carried out (e.g., typically by repaying the loan with interest and other charges as per the terms of the loan). However, as this case also illustrates, this is where the complications arise and this is why the matter went all the way to the Supreme Court.

The primary issue arises from the fact that on invocation of the pledge, the shares are transferred to the name of the pledgee. Does this mean that the pledgee has become the clear owner of the shares with its risks and rewards? Or does this mean that the pledgee continues to retain the same merely as security? Can the pledgor argue that the amount of loan should be reduced to the extent of the value of the shares on the day of such invocation/transfer? Should the pledgee account for the shares in its books as owned by it? Does such transfer (and the re-transfer) have tax implications? Would the transfer (or the re-transfer) amount to an acquisition under the SEBI Takeover Regulations (and other applicable Regulations of SEBI) and thus possibly result in an open offer and/or disclosures? The Supreme Court answered some questions but, on other issues, placed the issues on record and referred the matters to the appropriate regulators to deal with them.

BRIEF FACTS AND ISSUES
The facts of the case, simplified and summarized, were as follows. In respect of a loan taken by a group company, another group company pledged shares of an unlisted company, held in dematerialized form, with the lender. There was a default on the loan. After due notice, the lender invoked the pledge. The DP transferred the shares in the name of the lender.

The lender claimed that the full amount of the loan, interest, etc. remained unpaid and sought the payment of the amount while stating that the shares transferred to its name were being retained as security in accordance with the Indian Contract Act. The borrower, however, claimed that on account of the transfer of shares, the amount of loan got reduced to the extent of the value of the shares as on the date of invocation of the pledge/transfer. Further, it claimed to have stepped into the shoes of the lender and thus itself had claims to that extent from the original borrower. There were disputes also as to the value of the shares also and this was not unexpected since the shares were unlisted and thus not having regular quotes/transactions on a stock exchange.

The lender could not persuade any of the authorities up to the National Company Law Appellate Tribunal (the matter under the Insolvency and Bankruptcy Code) that its stand was correct. Hence, it appealed to the Supreme Court.

The Supreme Court had several legal issues before it, the primary being whether the Depositories Act/Regulations effectively replaced the Indian Contract Act and thus the provisions of the latter Act did not apply to pledge of demat shares? Or could they be read in a harmonized manner with both the laws being applicable? Was the 150-year-old Contract Act obsolete to modern digital times or the principles so wisely drafted to be nearly timeless? Having decided on that, some other issues became redundant but then some other fresh issues cropped up.

SUMMARY OF THE RELEVANT PROVISIONS OF THE INDIAN CONTRACT ACT
The Indian Contract Act provides for, in great detail, the pledge of goods, invocation of pledge and related aspects. Pledge is considered a form of bailment. Simplified and summarized, the provisions are as follows. A person can pledge goods to another by delivering the same to the pawnee/pledgee. When the purpose of the pledge is satisfied, the pledgee returns the goods. Till that time, generally, the goods remain with the pledgee but at the risk and reward of the pledgor. To take examples, in the context of shares, this means that rise and fall in the value of the shares pledged is for the benefit/loss of the pledgor. So are usually accretions to it, say, in the form of bonus shares or dividends. The pledgee, however, has only certain specific and limited rights with regard to such pledged goods, unlike, say, a mortgage.

If the pledge has to be invoked, the goods continue to remain with the pledgee. However, after giving due notice, the pledgee can sell the goods and adjust the proceeds against the loan amount. If the proceeds are higher than the amount of loan, interest, etc., the excess is to be paid to the pledgor. If there is a deficit, he can claim the same from the pledgor. The pledgor is generally entitled, right till the time the goods are actually sold, to repay the loan and get the goods back.

RULING OF THE SUPREME COURT
As discussed above, the primary issue arose about the implications of the transfer of the shares from the name of the pledgor to the pledgee. Did this amount to a purchase/acquisition of the shares by the pledgee whereby, firstly, the loan got reduced to the extent of the value of the shares? Secondly, the shares were then at the risk and reward of the pledgee? Furthermore, the pledgor could not thereafter repay the loan and claim back the shares?

The Hon’ble Court minutely analysed the provisions of the Indian Contract Act and the Depositories Act/Regulations and several rulings in this regard. It noted the peculiarities arising out of shares being held in demat form and also how provisions were made under the relevant law to deal with pledge of such shares. However, it held that this did not negate/override the general principles of the Depositories Act and the two laws need to be read in a harmonized manner. The Court also held as incorrect the view of the Bombay High Court (in JRY Investments (P.) Ltd vs. Deccan Leafine Services Ltd (2004) 56 SCL 339) that demat securities cannot be pledged under the Contract Act as it is not possible to transfer physical possession. However, the view in this decision that the pledge of demat shares requires compliance of the procedure laid down in Depositories Act/Regulations was endorsed as correct, though to be read in light of the present decision.

The Court further held that when the shares were transferred to the pledgee on invocation of the pledge, it continued to hold them as a pledgee and not as an owner. Indeed, it would be a violation of the law if the pledgee transferred the shares to himself as full owner. The loan thus did not get reduced on the day of such invocation/transfer to the extent of the value of the shares. The pledgee could continue to retain such shares and yet claim the full amount of its dues. If it desires to transfer the shares, the provisions requiring giving of due notice under the Indian Contract Act before the sale continue to apply. The right of the pledgor/borrower to pay the dues and seek transfer of the shares back to it continues till the shares are actually sold.

Thus, it ruled in favour of the pledgor/lender and set aside the order of NCLAT.

PECULIARITIES ARISING OUT OF PLEDGE OF DEMAT SHARES, PARTICULARLY AFTER INVOCATION
As discussed above, the Supreme Court noted that holding shares in demat form resulted in peculiarities that, while it did not rule on since these questions were not before the court for ruling, it asked the relevant regulators to consider and provide on.

The issues arise because of certain steps involved in the pledge process. First is the transfer of the shares in the name of the pledgee on invocation of the pledge. The second is when the shares are sold by it after due notice. The third situation is that before the sale, the pledgor pays the dues and this requires transfer of the shares from the pledgee to the pledgor.

Firstly, how should the pledgee account for such shares that were now in their name in its books? This perhaps is an easier question to answer but a little more difficult is the tax implications of the transfer and retransfer/sale. Even more difficult is the answer under the SEBI Takeover Regulations which though deal with pledge to an extent does not cover all situations and all pledgors/pledgees. The Hon’ble Court asked the relevant regulators to ponder and provide for these.

CONCLUSIONS
It is almost amusing to note that a 150-year-old law does not require any change or even any major crease to be ironed out but more recent laws such as the Takeover Regulations and other laws are found to be wanting.

The implications, or at least the issues raised and the approach of how they were solved, of this decision could possibly apply even to other forms of digital assets whose number and variety are fast growing. These could include cryptocurrency, non-fungible tokens, etc. many of which do not as of now even have basic laws specifically dealing with them. Laws governing them thus will have to be well thought out and comprehensive and deal with the issues that arose before the Court in the present matter.
 

GOODS AND SERVICES TAX (GST)

I. HIGH COURT

21 Sleevco Traders vs. Additional Commissioner, Commercial Tax  [2022] 138 taxmann.com 424 (Allahabad)  Date of order: 17th May, 2022

In a “bill to purchaser – ship to consignee” transaction, once the validity of the e-way bill is generated by the sender (i.e. supplier of the supplier), the fact that the supplier has not taken delivery of the goods during transit and that the goods mentioned on the tax invoice issued by the supplier to the ultimate customer and the goods being transported under the e-way bill are not disputed, there cannot be said to be a contravention of the law on the ground that the tax invoice issued by the supplier is not covered by another e-way bill

FACTS
The petitioner is in the business of purchase and sale of PVC Resin. The petitioner received a purchase order from a customer in U.P. In turn, the petitioner placed its purchase order on a vendor in Maharashtra. The vendor shipped the goods directly to the said customer in U.P. under the cover of a tax invoice which was billed to the petitioner as the buyer and consigned to the customer in U.P. Further, the e-way bill was also generated where the sender’s name was mentioned as that of the vendor in Maharashtra and as purchaser, the name of petitioner was mentioned and under the “ship to” column, the U.P. customer’s name was mentioned. While the said consignment was thus transported from Maharashtra to U.P., it was detained and SCN under section 129 was issued on the ground that the tax invoice issued by the petitioner to the customer at U.P. was not supported by E-Way Bill.

HELD
The Hon’ble Court observed that the goods were being sent directly from the petitioner’s vendor’s place in Maharashtra to the petitioner’s customer’s place in U.P. and that they were supported by the tax invoice issued by the vendor and e-way bill prepared by him, which specifically mentioned the name of the petitioner and it was also provided that the goods transported to U.P. while in transit, on entering U.P., without taking delivery of the goods, the petitioner handed over the tax invoice after charging C.G.S.T. and S.G.S.T. The Court further noted that it is not the case of the department that the goods which were coming in pursuance of the purchase order of the petitioner from Maharashtra which was to be delivered to the buyer of the petitioner in U.P. are different than the goods mentioned in the tax invoice given by the petitioner. The Court, therefore, held that once before starting the journey, the e-way bill was generated from Maharashtra and ending at U.P. at the place of the ultimate purchaser was mentioned and once the fact that petitioner has not taken delivery of the goods during transit is not disputed by the department, it cannot be said that there was any contravention of the provisions of the
Act. The Court decided the matter in favour of the petitioner and also imposed a cost of Rs. 5,000.

22 Aathi Hotel vs. AC (ST) (FAC) Nagapattinam  [2022 (61) GSTL 343 (Mad)] Date of order: 8th December, 2021

When credit is wrongly transitioned not utilized and is reversed, penalty under section 74 of Tamil Nadu GST Act not imposed. Only token penalty was to be imposed

FACTS
Though the petitioner filed TRAN-I and claimed credit of Rs. 3,86,271, it was never utilized. Hence, though the petitioner failed to respond to the show-cause notice, the entire credit was reversed in the monthly returns in January 2020.

According to the revenue, interest was consequential and the penalty in terms of Section 74 of TNGST Act, 2017 was also consequential.

HELD
Distinguishing the Hon. Supreme Court in Union of India vs. Ind Swift Laboratories Ltd 2011 (265) ELT 3 (SC), it was held that the fact is that in the instant case, the credit was not utilized. Further, the Court observed that if the show cause notice issued was to be considered a notice under section 74 of the TNGST Act, 2017 (the Act), it should have specifically invoked Section 74(1) of the Act. Mere statement that due to unavailability of documents to prove admissibility of the ITC does not meet the requirement of Section 74(9) of the said Act. The proper officer had to ascertain whether the credit was wrongly availed and wrongly utilized. It was specifically held that though proceedings can be initiated under section 73(1) and Section 74(1) of the Act for mere wrong availing of ITC, followed by the imposition of interest and penalty under section 73 or under section 74, they stand attracted only when such credit availed is also utilized for discharging tax liability. Hence, the petitioner is not liable for penalty. Since the attempt was made to wrongly avail credit, a token penalty of Rs.10,000 is imposed and thus, the order is partly quashed.

OCEAN FREIGHT – HITS & MISSES

The Hon’ble Supreme court in a recent case of UOI vs. Mohit Minerals Private Limited (CA 1390/2022) (Mohit Mineral’s case) examined the validity of imposition of IGST under Reverse charge provisions (RCM) on ocean freight incurred during importation of goods into India. The appeals were filed by the Revenue pursuant to Gujarat High Court’s decision to strike down an entry in the RCM notification on the grounds of being ultra-vires the parent enactment. The limited issue for consideration before the Courts is whether the RCM is imposable on the Indian importer in respect of ocean freight paid by the overseas supplier to foreign liner for transportation of goods (CIF arrangements).

ECONOMIC BACKGROUND
Prior to 1st June, 2016 (Budget 2016-17), the services of transportation of goods in a vessel from a place outside India up to the customs station of clearance in India was excludible from service tax. As a result, the Indian shipping lines were unable to avail input tax credit (ITC) paid on the input goods and services and such tax formed a part of their transportation costs. Government’s objective was to create a level playing field between Indian liner and foreign liner. In addition, the Government also believed that freight element ought to be ‘taxable as a service’ despite the same being included as a component of the overall value of imported goods for customs duty purposes. Hence, necessary legal changes were attempted under the service tax law which carried forward into the GST law as well.

SERVICE TAX HISTORY
Originally, services of transportation of goods from a place outside India up to customs port to India was included in a ‘negative list’. This disentitled Indian liners from claiming CENVAT credit of input services resulting in tax cascading. In 2016, the Finance Act omitted the entry under the negative list and included the same in the exemption notification, thereby expressing its intent to expand the scope of its levy. Service tax was imposed for the first time in 20171 on international ocean freight up to customs clearance in India. Consequential amendments were made in RCM notification and service tax rules for collection of taxes from the ‘importer on record2’ in all scenarios of international ocean freight. Therefore, even in cases where the importer had not engaged/ received the services directly from the foreign liner, the literal wordings of law mandated the said person to discharge the service tax on RCM, being the ultimate beneficiary of such ocean freight. Initially the RCM was imposed on the vessel owner/ shipping agent but was quickly amended and fastened onto the Indian importer. This is despite that fact that the importer in CIF consignments would not be privy to the price of ocean freight charged on a particular consignment. To remove this anomaly, law incorporated an option to discharge service tax on a notional value of the consignment (1.4%) as RCM. The challenge to these notifications, in the context of CIF contracts, were made before Gujarat High Court3. Such challenge by tax-payers was upheld as follows:

Extra-territoriality – Overseas supplier has appointed the foreign liner for transportation up to Indian customs station and the said service is rendered by the liner to the overseas supplier prior to reaching of goods to the Indian land mass and hence entirely consumed outside India;

Delegated legislation – Parent enactment can take shelter of extra-territoriality operation of law but the delegated legislation cannot seek to impose tax on such extra-territorial services without the authorization of the parent enactment and hence ultra-vires;

Person liable to tax – Indian importers are not the persons receiving “sea transportation service”, because they receive only the “goods” contracted by them, and they have no privity of contract with the shipping line nor make any payment to them; hence liability cannot be fastened onto such importers. The law envisages tax to be either collected from the service provider or the recipient and not any other person;

Charging provisions – Strict interpretation ought to be given to the charging provisions and one cannot extend the taxation to ‘indirect receipt of services’ or ‘beneficiary of services’;

Valuation – Section 67 does not permit rules to supplant notional values. Charging provisions fail since machinery provisions under parent enactment do not provide for deemed valuation in hands of a third person;

The Revenue has appealed against the above decision before the Supreme Court and the matters are currently pending.

___________________________________________________________

1   Notification 1/2017-ST dated 12th
January, 2017

2   Notification 2/2017-ST, 3/2017 dated 12th
January, 2017 originally on the shipping agent of vessel owner/ Indian liners
and later amended to importer on record vide Notification 15/2017 dated 13th
April, 2017

3   Sal steel ltd. vs. Union of India 2020 (37)
G.S.T.L. 3 (Guj.)

GOODS & SERVICE TAX PROVISIONS
During this challenge, the saga continued under the GST regime as well. Article 286 entrust the IGST law to tag transactions as either ‘inter-state’ or ‘intra-state’. GST laws were to operate to the whole of India. Section 5(1) of the IGST Act levied tax on all the inter-state supplies of goods or services or both. GST on goods imported into India is being levied and collected in accordance with the provisions of Section 5(1) r/w Section 3 of the Customs Tariff Act, 1975, on the value as determined under the said Act at the point when the duties of customs are levied on the said goods under section 12 of the Customs Act, 1962. Section 7(4) of the IGST Act provides that supply of services imported into the territory of India shall be treated to be a supply of services in the course of the inter-state trade or commerce.

Section 13(9) of IGST Act states that the place of supply of services of transportation of goods other than by way of mail or courier, shall be the place of destination of such goods. The said law characterised the international ocean freight services under the place of supply provisions as follows:

• Services by an Indian liner to an Indian importer are considered as domestic services (Section 12), and hence treated as ‘inter-state’ or ‘intra-state’ depending on the location of the supplier and recipient – FOB contract

• Services by an overseas liner to the Indian importer are considered as international services (Section 13) and treated as import of services and hence assigned an inter-state character and governed by the IGST levy itself – FOB contract

• No specific provision was inserted to address classification of services by an overseas liner to an overseas supplier (extra-territorial services) – CIF Contract

Notification 10/2017-IGST(R) dated 28th June, 2017 imposed tax on the importer under RCM provisions. This was on the premise that the service qualifies as an import of service under section 2(11) of IGST Act, specifying the following cumulative conditions:

• Service provider is located outside India

• Service recipient is located in India

• Place of supply of service is in India

Testing the above requirements for import of services in the context of CIF contracts, the prima-facie conclusion which emerged was as follows:

Test 1 – Location of service provider

Service provider is the one who is ‘supplying the service’ i.e. – contractually liable to render the ocean freight services right from the loading port to the destination port. In simple words, the foreign liner who is consigned with the goods and issues the bill of lading for having received the goods for transportation would be the supplier of services. In terms of Section 2(15) of the IGST law, the foreign liner having its fixed establishment outside India, from where the booking was made, would be located outside India. This condition was satisfied.

Test 2 – Location of service recipient

Service recipient is generally understood as the person receiving the service – contractually seeking the service from the service provider. Section 2(93) of CGST Act r.w 20 of IGST Act would treat a person who is ‘liable to pay the consideration’ as the service recipient. In other words, the person who is contractually obligated to make the payment of consideration for the ocean freight services would be treated as the service recipient. After identification of the person, the location of such recipient would be understood with reference to Section 2(14) of the IGST Act to be the location of the fixed establishment. In the subject scenario of CIF contracts, the overseas supplier would strictly be termed as the ‘service recipient’ of the ocean freight service from the foreign liner and hence treated as located outside India. Hence this condition was not satisfied.

Test 3 – Place of Supply

Place of supply is critical to ascertain the inter-state/intra-state character of a supply. In simple terminology, it is a proxy for the economic consumption of goods/services in a VAT chain. Section 13 fixed the place of supply of ocean freight services as the destination of goods, which in the current facts, is destination port in India. This condition was satisfied.

Combining the above three tests, once reached the conclusion that the ocean freight services rendered by the foreign liner to the overseas supplier is not an ‘import of services’ into India. Consequently one needn’t have to examine the relevant RCM/ rate notifications.

Delegated Provisions

Yet dispute arose on account notifications4 were introduced to impose a levy of GST on ocean freight services. Entry 9(ii) of the GST Rate notification read as follows:

9.
Heading 9965 (Goods transport services)

(ii)
Transport of goods in a vessel including services provided or agreed to be
provided by a person located in non-taxable territory to a person located in
non-taxable territory by way of transportation of goods by a vessel from a
place outside India up to the customs station of clearance in India.

Provided
that credit of input tax charged on goods (other than on ships, vessels
including bulk carriers and tankers) used in supplying the service has not
been taken

 

Explanation:
This condition will not apply where the supplier of service is located in
non-taxable territory.

 

Please
refer to Explanation no. (iv)

Explanation 4. Where the value of taxable service provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India is not available with the person liable for paying integrated tax, the same shall be deemed to be 10 % of the CIF value (sum of cost, insurance and freight) of imported goods.

_____________________________________________________________

4   Notification No. 8/2017-Integrated Tax
(Rate), dated 28th June, 2017 and Entry 10 of the Notification No.
10/2017-Integrated Tax (Rate), dated 28th June, 2017

Gujarat High Court’s decision

The Gujarat High Court in Mohit Minerals case5 laid down the following legal propositions:

Vivisection – importation of goods on CIF basis encompasses the freight, insurance etc which are bundled into the said importation. It would be impermissible to artificially vivisect the same into separate components and tax them once again as an independent element;

Person liable to pay tax – Section 5(3) unequivocally states that only the recipient of goods or services are liable to pay tax on reverse charge basis. Section 2(98) r.w 2(24) which defines reverse charge and recipient also recognizes this fundamental GST principle. Notification attempting to tax a third person (importer) on the ground of being a beneficiary or indirect recipient bearing the burden of ocean freight is not in consonance with the legal provisions;

Extra-territoriality – The provision of ocean freight services between foreign supplier and foreign liner is neither inter-state supply, intra-state supply nor import of services (under section 7(5)(a)) in terms of the literal provisions. Section 7(5)(c) cannot be interpreted as a residual basket to tax anything and everything and should operate within the confines of the territoriality. Express wordings are required in 7(5)(c) to tax a supply after satisfying the condition that it takes place in India. Place of supply principles are artificial provisions fixing the legal situs of supply and must be used only where the law directs on to identify the place of supply. Section 7(5)(c) does not make any such reference to such place of supply provisions. The phrase ‘supply of goods or services or both in the taxable territory’ shall mean a supply, all the aspects, or majority of the aspects, of which takes place in the taxable territory and which cannot be covered under the rest of the provisions of Section 7 or Section 8 of the IGST Act. In any case, there is no provision for determining the place of supply where both the location of the supplier and the location of the recipient is outside India. The scheme of the IGST Act only contemplates transactions of intra-state supply, inter-state supply and exports & imports;

_______________________________

5   2020 (33) G.S.T.L. 321 (Guj.)

Chargeability vs. Exemption – The exemption granted to exclude services provided from non-taxable territory to person in a non-taxable territory is on the misbelief that tax is imposable on such transactions;

Machinery provisions – The machinery provisions (time of supply, valuation, input tax credit, etc.) would fail if the contention of the revenue that persons other than the direct recipient can also be fastened with the RCM liability;

Scope of Supply – From the importers perspective, the ocean freight supply is neither an inward supply nor an outward supply. Hence tax cannot be fastened onto the importer.

PREFACE TO SUPREME COURT’S DECISION
It would be important to understand the backdrop of the core issue emerging from the above sequence of events. Multiple perspectives were presented before the Supreme Court (analysed below) and the core issue rested on the identification of ‘recipient’ of ocean freight services. In contradistinction to the service tax legislation, CGST law has defined the same in clear terminology as follows:

“(93) “recipient” of supply of goods or services or both, means–

(a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;

(b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and

(c) where no consideration is payable for the supply of a service, the person to whom the service is rendered,

and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied;”

The said definition identifies the person ‘who is liable to pay the consideration’ for the services as the ‘recipient of services’. The liability to pay consideration emerges from the contract for rendition of services. Generally, the person at whose behest the service is rendered takes up the liability to pay the consideration to the service provider, and such person has been termed as the legal recipient of service. In many circumstances, the service may actually be delivered/ rendered to third person identified by the contracting parties. Yet the clear wordings direct that the contracting party who is ‘liable to pay the consideration’ would be the legal recipient.

Separately, the definition also identifies cases in which no consideration may be payable. In the absence of a consideration, the law mandates that the person to whom the service is delivered/ rendered would be termed as the ‘recipient of service’ i.e. it is only in the absence of a consideration would one have to find out the person to whom the service is rendered. The distinction in the approach of identifying the recipient in a case where consideration is payable with a case where the consideration is absent should not be lost sight off while examining SC’s observation.

It would be pertinent to mention that the law is not alien to the concept of ‘receipt of service’ and ‘recipient of service’. Section 16(2) acknowledges that a service could be said to be ‘received’ by a person even though it is directly delivered/ rendered to a third person on the direction of the first mentioned person. Similar provisions are also contained in “Bill to Ship to” for goods under the place of supply as well the input tax credit provisions. While the immediate benefits of a service (so called receipt of service) may be to the third person, the law only recognizes the person who is liable to pay the consideration as the ‘recipient’ of service.

One may also appreciate that even during the erstwhile service tax regime where recipient was not specifically defined under law, Tribunals6 in multiple cases have identified the contractual recipient as the person recipient and barred the revenue from extending it to the ultimate beneficiary of the services. Therefore, the position in law has been consistent on the identification of the recipient and this appeared to be a fairly straight forward issue to be addressed by the Apex Court.

SUPREME COURT’S DECISION
Yet, the Court unravelled certain unexpected interpretations to this settled concept having far reaching implications on the subject matter. The entire decision can be examined under specific heads as follows:

_______________________________________________________________________

6   Paul merchants ltd. V. CCE 2013 (29) S.T.R.
257 (Tri. – Del.) & Vodafone Mobile Services Limited vs. CST Delhi 2019
(29) G.S.T.L. 314 (Tri-Del)

Constitutional Framework & GST Council’s Recommendations

Revenues’ contention

Taxpayer’s defence

Court’s observations

Recommendations of the
GST Council are binding on the legislature and the executive

The GST Council’s
recommendation need to be implemented by either amending the CGST Act or the
IGST Act or by issuing a notification. However, notifications issued cannot
be ultra vires the parent legislation

Article 279A does not
make recommendations mandatory on the Legislature. Only delegated
legislations are bound by GST council’s recommendations

Functions and role of
the GST Council are unique and incomparable to other constitutional bodies –
Power of the Parliament and the State Legislature under Article 246A and the
power of the GST Council under Article 279A must be balanced and harmonised,
such that neither overrides the other

The principles of
cooperative federalism are not relevant in this case as they were not
adjudicated before the High Court. The appeal must test the correctness of
the impugned judgment without expanding its scope. Interpretation of Article
279A of the Constitution was not an issue before the High Court and the present
appeal should be restricted to the validity of the impugned notification

Unlike the Concurrent
list where repugnancy in Central & State laws would tilt in favour
Central Laws, GST is legislated through a simultaneous exercise of power. Recommendations
of the GST Council must be interpreted with reference to the purpose of the
enactment i.e. create a uniform taxation system

Extra-Territoriality

Revenues’ contention

Taxpayer’s defence

Court’s observations

There is sufficient territorial
nexus for the purpose of taxation since the importer is the final beneficiary
of a service provided by a foreign shipping line by way of transportation up
to the customs station of clearance in India

No provision for
deeming the said service as taking place in India. Only nexus with India is
that the service results in the import of goods into India. This activity is
already subject to IGST under the Customs Act

A two-fold connection
is present – destination of the goods is India; and beneficiary of services
in India. An Indian importer could also be considered as an importer of the
transportation service, if the activity falls within the definition of
“import of service” for the IGST Act


Charge of Tax – Taxable event vis-à-vis Composite Supply

Revenues’ contention

Taxpayer’s defence

Court’s observations

GST and customs duties
are not mutually exclusive. GST is a destination-based tax – IGST is imposed
on the ‘supply of service’ and not on the goods. Customs is an anterior
taxation – separate aspect are being taxed, hence it cannot be termed as
overlapping

Freight component
embedded in the IGST taxation as part of proviso to Section 5(1) of IGST Act
r/w Customs Act

In CIF, fact that
consideration is paid by the foreign exporter to the foreign shipping line
would not stand in the way of it being considered as a “supply of service”.

CIF transaction and
IGST on ocean freight are two independent transactions, entitled to suffer
independent levies and do not qualify as a composite supply

Freight is part of the
importation of goods and no contractual service provider-recipient
relationship – taxable as supply of goods and not service

Composite supply play
a specific role i.e. ensure that various elements not dissected and the levy
is imposed on the bundle of supplies altogether. Intent of the Parliament was
that a transaction which includes different aspects of supply of goods or
services and which are naturally bundled together, must be taxed as a
composite supply

Charge of Tax – Taxable Person vs. Recipient

Revenues’ contention

Taxpayer’s defence

Court’s observations

Reverse charge is
applicable on recipient, and he becomes person liable to tax and 5(3)/ 5(4)
are applicable to Importers – RCM notification specifically identifies the
taxable

Section 5(3) only
permits specification of the categories of supply of goods or services or
both on which RCM is applicable. – Government cannot specify the person
liable

Neither Section 2(107)
nor Section 24 of the CGST Act qualify the imposition of reverse charge on a
“recipient of service” and broadly impose it on “the persons who are required
to

(continued)

 

person and Section
2(107) includes a taxable person who is liable to be registered on account of
RCM applicability

 

Statute has not
identified the person liable

to tax and hence
impugned notification identifying such person is legitimate exercise

(continued)

 

to pay service tax on
a reverse charge basis or define a recipient in a notification

(continued)

 

pay tax under reverse
charge”. Since the

impugned notification
10/2017 identifies the importer as the recipient liable to pay tax on a
reverse charge basis under Section 5(3) of the IGST Act, the argument of the
failure to identify a specific person who is liable to pay tax does not stand

 

If Parliament’s
intention were to designate certain persons for reverse charge, irrespective
of them being the recipient of such goods and services, it must make a
suitable amendment to confer such power for exercise of delegated legislation

RCM does not make two independent
contracts as a composite contract. The contract between the foreign shipping
line and the foreign exporter is distinct and independent of the contract
between the foreign exporter and the Indian importer

Supply of service is
an ‘inter-state supply’ under Section 7(3) or ‘intra-state supply’ under
Section 8(2) of the IGST Act depends on the location of the supplier and the
place of supply. In case two recipients are identified for a single supply,
it would lead to absurdity in a transaction being treated as inter-state as
well as intra-state supply.

The deeming fiction of
treating the importer as a recipient must be found in the IGST Act. As it
currently stands, Section 5(3) of the IGST Act enables the delegated
legislation to create a deeming fiction on categories of supply of
goods/services alone.

Importer is recipient in CIF
because

– Ultimate beneficiary of service

– Contextual interpretation to
include beneficiary in recipient definition

– A supply can be made to ‘a
person’, ‘a registered person’ and ‘a taxable person’ and such a supply shall
be construed to be a supply to a recipient (2(93)).

– Notifications under section 5(4)
permits specification of class of registered persons on whom RCM could apply

– Though Time of Supply specific
provisions are directed towards the person making payment but residual
provision factor other recipient’s case

The only place where a
person other than a supplier or recipient is made liable to pay tax is under
section 5(5) of the IGST Act, where an electronic commerce operator through
whom supply is made is taxed – In case the Parliament desired the tax to be
collected from a person other than a supplier or recipient, it would have
expressly provided so in the legislation.

 

Question of who the
beneficiary of the supply is or who has received the supply are irrelevant in
determining the ‘recipient’ under Section 2(93) of the CGST Act;

RCM would be
applicable to all recipients liable for reverse charge under Sections 5(3)
and 5(4) of the IGST Act. Ineffectiveness of a tax collection mechanism under
Section 24(iii) of the CGST Act cannot be argued to obfuscate the concept of
a “recipient” of a good or service

 

Therefore, both the
IGST and CGST Act clearly define reverse charge, recipient and taxable
persons. Thus, the essential legislative functions vis-à-vis reverse charge
have not been delegated

 

Two recipient theory
only creates
absurdity in domestic transactions but in
the case on hand in international transactions this does not annihilate the
concept of recipient

 

The ultimate
benefactor of the shipping service is also the importer in India who will
finally receive the goods at a destination which is within the taxable
territory of
India. Thus, the meaning of the term “recipient” in the IGST Act will have to
be understood within the context laid down
in the taxing statute (IGST and CGST Act) and not by a strict application of
commercial principle

 

This conclusion is in
line with the philosophy of the GST to be a consumption and destinated based
tax. The services of shipping are imported into India for the purpose of
consumption that is routed through the import of goods.

Charge of Tax – Valuation

Revenues’ contention

Taxpayer’s defence

Court’s observations

Deemed valuation is
permitted through delegated legislation under section 15(4)/15(5)

Section 15 does not
permit a deemed valuation in the hands of a third person who is not privy to
the contract

Necessary statutory
framework is available for valuation under Rule 31 of the CGST Rules which
are consistent with the principles Section 15

 

Impugned notification
8/2017 cannot be struck down for excessive delegation when it prescribes 10%
of the CIF value as the mechanism for imposing tax on a reverse charge basis

In summary, the key takeaways from the decision are as follows:

(i) The recommendations of the GST Council are not binding on the Union and States and only recommendary in nature:

(ii) Import of goods by a CIF contract constitutes an “inter-state” supply which can be subject to IGST where the importer of such goods would be the recipient of shipping service;

(iii) Specification of the recipient in notification is only clarificatory. The Government did not specify a taxable person different from the recipient prescribed in Section 5(3) of the IGST Act for the purposes of reverse charge;

(iv) Section 5(4) of the IGST Act enables the Central Government to specify a class of registered persons as the recipients, thereby conferring the power of creating a deeming fiction on the delegated legislation;

(v) The impugned levy imposed on the ‘service’ aspect of the composite supply is in violation of Section 2(30) r/w Section 8 of the CGST Act.

ANALYSIS
Though the decision was on the narrow point of applicability of RCM on CIF contracts, the conclusions of the Court could have extensive implications. The same could be analysed herewith:

Beneficiary vs. Recipient – The case revolved around the three phrases ‘recipient’, ‘reverse charge’ and ‘taxable person’. Recipient definition has been examined previously. Reverse charge (under section 2(98)) has been defined as a liability to tax on the recipient of services instead of the supplier of services under section 5(3)/5(4) of IGST Act. Taxable person (under section 2(107)) has been defined as person who is registered or liable to be registered on account of a tax liability under section 22 or 24. The logical sequence of interpretation would be to first identify the ‘recipient of a service’ and then examine whether the ‘reverse charge liability’ could be fastened on such recipient thereby creating a ‘taxable person’ in the eyes of law. In the context of ocean freight services, the contractual recipient would be the overseas supplier who is liable to pay the consideration and by corollary the reverse charge provisions would be applicable only on such foreign supplier and not on the Indian importer. Thereby, the notification could not have fixed the Indian importer as the taxable person on such a sequential interpretation.

The court seemed to have taken a circuitous route against logical flow of terminology. In para 91 the court stated that since the notification has identified the importer as the ‘recipient’ of service, it makes such person a ‘taxable person’ in law and hence the reverse charge provisions are triggered on account of such tax liability. Further in para 102 r/w 106, the court has invoked a very extreme interpretation to hold that the phrase ‘consideration’ recognises payment of consideration from ‘any other person’ and not merely the recipient. Attributing a narrow meaning to recipient as being the ‘only person’ who is liable to pay consideration would obstruct the scope of the definition of consideration and hence a wider meaning is to be granted to the phrase ‘recipient’ rather than a narrow construct as is being proposed in the arguments.

This appears to be contradictory to para 115 where court has stated that merely because Section 24 mandates a person to seek registration in case of reverse charge liability does not extend the concept of recipient to every person specified in the notification. Reverse charge liability arises from 5(3)/5(4) and not from registration provisions under section 24. The following observation clearly overturns its previous observations:

“Section 2(98) of the CGST Act, which defines “reverse charge” reiterates that it means the “liability to pay tax by the recipient of supply of goods or services or both instead of the supplier…”. It cannot be construed to imply that any taxable person identified for payment of reverse charge would automatically become the recipient of such goods or service. The deeming fiction of treating the importer as a recipient must be found in the IGST Act. As it currently stands, Section 5(3) of the IGST Act enables the delegated legislation to create a deeming fiction on categories of supply of goods/services alone.

116 Interpreting the term “by the recipient” vis-à-vis the categories of goods and services identified in Section 5(3) of the IGST Act should necessarily be governed by the principles governing the definition of “recipient” under section 2(93) of the CGST Act.” Contrary to the arguments of the Union Government, such an interpretation would not annihilate the mandate of compulsory registration under Section 24(iii) of the CGST Act ……..

After having clearly appreciated the issue in the aforesaid paragraph, the court observed that this interpretation would be relevant only in case of inter-state supplies within the territory of India. Accordingly, cross border services could take a deviation in view of the place of supply provisions. Section 13(9) of IGST Act r/w 2(93)(c) of the CGST Act enable identification of recipient different from the contracting parties. Section 13(9) fixes the place of supply of transportation of services as the destination of goods in India. To give effect to this provision, recipient under section 2(93) is to be expanded to include a person in India who is benefitting from the transportation of goods to India and not merely the contractual recipient of transportation services.

Curiously the court has invoked clause (c) of Section 2(93) of the CGST Act which applies only in cases of an absence of consideration. The court appears to have missed that consideration is in fact payable, albeit by overseas supplier to the foreign liner. Possibly the court invoked this clause to overturn the argument of taxpayers that no consideration is payable by the Indian importer to the foreign liner. By invoking Section 2(93)(c), court implied that an Indian importer, who is not privy to the ocean freight activity, falls into the clutches of 2(93)(c) on account of being the person to whom transportation services is rendered. This overlooks the fact that an absence of consideration obliterates the very charge of GST on supply under section 7(1)(a) r/w 7(1)(b)7. Section 2(93)(c) is applicable only to limited cases where the charge of tax on supply survives despite the absence of consideration (say Schedule I transactions). Invocation of clause 2(93)(c) in this context appears to respectfully erroneous and subject matter of review before the said court. The court ultimately held that recipient could also include a beneficiary of services ascertained from the destination based consumption principle and not necessarily by contractual/ commercial obligations.

From a macro perspective, the contextual meaning attributed to the phrase ‘recipient’ to include a beneficiary of service, fails to consider that GST is levy on a transaction-based VAT chain. The transacting parties are the person who drive the value addition of goods or services right up to the point of consumption. Any artificial deviation at an intermittent stage would impact this VAT chain since a beneficiary of service may not carry forward the subsequent value-added activity and hence fall foul to the fundamental VAT principle. In simpler words, certain training services rendered to employees (beneficiaries) of the company (contractual recipient) does not make the employees the taxable recipient of the service. It is the company which consumes this service for a subsequent commercial activity that should be termed as the recipient. Presuming that the service is consumed by the employees and there is no further economic activity would lead to tax cascading and a distorted picture about the consumption of goods/ services.

Composite Supply – The Supreme Court was not impressed with the grievance of the assesse of a dual burden of GST on freight component (as customs duty and as import of service). It is intriguing that the Supreme Court acknowledged the argument of the revenue that there would not be any economic disparity since credit would be available. Though detailed observations were not made, the proviso to Section 5(1) ought to have been analysed in its literal sense to remove this duality. The silver lining however has been that the court barred the revenue from vivisecting elements at different stages of taxation even though there is a single contractual flow of activities between the supplier and recipient. The court fairly observed that the phrase ‘composite supply’ under section 8 directed one to only examine the principal supply and ignore the rest of the elements of supply for purpose of taxation. Ocean freight being admittedly a part of the composite supply cannot be artificially vivisected and taxed as a service once again under RCM provisions. However, this observation was itself overturned by the court in para 144 by creating two leg for a single transaction and viewing them separately (one as an import of goods and two as a supply of transportation of service). The court stated that both are independent transactions and the second leg of the transaction ought to be taxed as a supply of service. The see-saw continues in para 144 where the court states that the Union cannot treat the transactions as ‘connected’ while examining import of goods and treat them as ‘independent’ while examining import of services. The climax however ends at Section 8 where the court observed that the liability to tax has to be ascertained on the plank of principal supply of goods and not otherwise. Yet the court stops shy of reading down the notification extending itself to importers by stating that it is merely clarificatory and would operate when the importer is otherwise recipient of service.

____________________________________________________

7   Supply of goods or services (including import
of services) is said to take place only in cases where there is a consideration

GST Council’s Recommendations – The court categorically upheld the federal principles and the independence of the Centre and State Legislatures to legislate laws and not bound by GST Council’s recommendations. While stating this, the court also held that the Centre and the State are now operating under a cooperative federalism under which both are enforcing their powers simultaneously. This implies that while the GST council’s recommendations cannot bind the legislative function, the function ought to be exercised by the Centre and State in a harmonious manner. It would not be permissible for the Centre or State to single out and deviate from the GST structure when the others have toed a particular line. This important observation may still continue to bind State legislatures to reach out to the GST Council for any State specific exception/ deviation from the overall GST structure and restrain them from taking a unilateral action.

Extra-territoriality – The Court validated the notification on extra-territoriality by holding that the importer is an ultimate beneficiary of the service. That would be far-fetched as it would enable the revenue authorities to tax overseas transaction merely on the surmise that benefit is accruing to a person in India. Take for example a global brand campaign conducted a multinational enterprise (MNE) would have indirect benefits to the sales of the brand in India. The MNE may not have conducted this activity for India exclusively but the revenue may claim that India has been a beneficiary of the service and even in the absence of a transaction of supply between the MNE and its Indian counterpart, GST may stand imposed on such global activities. This theory may open a pandora’s box of issues to the Indian trade. Taking this feature ahead, States may also claim territorial nexus that the beneficiary resides in their state even-though the contractual recipient would be present in other States. Ideally, court ought to have attached additional weightage to Article 286 and place of supply provisions before reaching this conclusion.

Valuation – Section 15 clearly mandates that tax ought to be levied on transaction price except in areas susceptible to under-valuation (such as related parties, side arrangements, etc.). The court has validated the contentious issue of whether notional valuations could be adopted by completely disregarding the contractual price and the threshold tests specified in Section 15. This would empower governments to issue notifications fixing notional values and which may not reflect the true value of the economic activity. Revenue is certainly going to cite this decision when the matters on notional valuation, as decided by the Gujarat High Court in case of Munjaal Manishbhai Bhatt8, is examined by the Supreme Court.

In summary, the decision certainly has some hits and misses for the assesse. The court’s observations would certainly influence the course of the law in days to come. The revenue is certainly pondering over expanding the scope of the RCM provisions to recipients and other third persons for tax collections. We could see certain amendments to Section 5(3)/5(4) empowering the scope of delegation for RCM purposes. Governments should acknowledge that RCM results in a credit chain distortion and should be resorted to as an exception rather than as a rule.

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8   2022-TIOL-663-HC-AHM-GST

S. 263 – Revision – Notice – the opportunity of hearing – distinguished Apex court decision in case of “CIT v/s. Amitabh Bachchan [2016] 384 ITR 200 (SC)”

6 Pr. Commissioner of Income Tax – 16 vs. M/s. Universal Music India Pvt. Ltd  [Income Tax Appeal No. 238 OF 2018; Date of order: 19th April, 2022  (Bombay High Court)]

S. 263 – Revision – Notice – the opportunity of hearing – distinguished Apex court decision in case of “CIT v/s. Amitabh Bachchan [2016] 384 ITR 200 (SC)”

The Respondent had filed a return of income on 27th October, 2010 declaring income of ‘Nil’ for A.Y. 2009-2010. Subsequently, an assessment was completed under section 143(3) of the Act. Thereafter, notice under section 263 was issued by CIT on two issues, namely,

(a) disallowance of Fringe Benefit Tax (FBT) paid of Rs. 10,72,532/- included in miscellaneous expenses and not allowed by the Assessing Officer and

(b) provision of Rs. 1,40,98,685/- in respect of slow moving and obsolete inventories.

The CIT directed Assessing Officer by an order dated 20th March, 2013 to make enquiry and examine the two issues and a third issue being particulars of payments made to persons specified under Section 40A(2)(b) of the Act of Rs. 7,00,22,680 allowed in the assessment order. The assessment order was set aside on this issue and to be examined afresh.

Aggrieved by the order dated 20th March, 2013 passed by CIT, Assessee filed an Appeal before ITAT. ITAT by an order dated 27th April, 2016 allowed the Appeal of the Assessee.

On the issue of payments made to persons specified under Section 40A(2)(b) of the Act, the ITAT gave a finding of fact that no such issue was ever raised by CIT in the notice served upon the assessee and the assessee was not even confronted by the CIT before passing the Order dated 20th March, 2013. ITAT concluded that the said ground therefore cannot form the basis for revision of the assessment order under Section 263 of the Act. It is only this finding of ITAT which is impugned in the Appeal. On the other two points, revenue has accepted the findings of ITAT that the Order under Section 263 was not warranted.

The Dept. submitted that Apex Court in its judgment dated 11th May, 2016 (after the impugned order was pronounced by ITAT) in Commissioner of Income-Tax, Mumbai vs. Amitabh Bachchan [2016] 384 ITR 200 (SC), has held that the provisions of Section 263 does not warrant any notice to be issued and what is required is only to give the assessee an opportunity of being heard before reaching his decision and not before commencing the enquiry. Therefore it was submitted that, the ITAT has erred in setting aside the Order of CIT on this issue.

The Hon. High Court observed that it is true that the Apex Court in Amitabh Bachchan (supra) has held, all that CIT is required to do before reaching his decision and not before commencing the enquiry, CIT must give the assessee an opportunity of being heard. It is true that the judgment also says no notice is required to be issued. But in the case at hand, there is a finding of fact by the ITAT that no show cause notice was issued and no issue was ever raised by the CIT regarding payments made to persons specified under Section 40A(2)(b) of the Act before reaching his decision in the Order dated 20th March, 2013. If that was not correct, certainly the Order of the CIT would have mentioned that an opportunity was given and in any case, if there were any minutes or notings in the file, revenue would have produced those details before the ITAT.

In Amitabh Bachchan (supra), the Apex Court came to a finding that ITAT had not even recorded any findings that in the course of the suo motu revisional proceedings opportunity of hearing was not offered to the assessee and that the assessee was denied an opportunity to contest the facts on the basis of which the CIT had come to its conclusions as recorded in his Order under Section 263 of the Act.

In the present case, there is a finding by the Tribunal, as noted earlier, that no issue was raised by the CIT in respect of particulars of payment made to persons specified under Section 40A(2)(b) of the Act and even the show cause notice is silent about that.

In view of the same, the Hon. Court dismissed the appeal of the Department.

Section 264 – Revision Application – Re-computation of capital gain due to subsequent event – Duty of the revenue to compute the correct income and grant the refund of taxes erroneously paid by an assessee

5 Dinesh Vazirani vs. The Principal Commissioner of Income Tax-7 [Writ Petition No. 2475 Of 2015; Date of order: 8th April, 2022  (Bombay High Court)]

Section 264 – Revision Application – Re-computation of capital gain due to subsequent event – Duty of the revenue to compute the correct income and grant the refund of taxes erroneously paid by an assessee

The Petitioner is an individual and resident of India. The Petitioner, along with two other individuals, and one company (collectively referred to as Promoters) was the promoter of a company by the name WMI Cranes Ltd (the Company). Petitioner held 2,35,900 equity shares out of 9,99,920 issued and paid up share capital of the company of Rs.10 each. Promoters entered into Share Subscription and Purchase Agreement (SPA) dated 11th October, 2010 with M/s Kone cranes Finance Corporation (Purchasers). Under the agreement, promoters agreed to sell 51% of the paid up and issued equity share capital of the company to the purchasers. Between the promoters, they held collectively 100% issued and paid up share capital of the company.

Simultaneously with SPA, the promoters and purchasers entered into second share purchase agreement (Second SPA) for the transfer of the remaining equity shares held by the promoters upon satisfaction of certain conditions under Second SPA so that at a future point of time, purchasers will hold 100% of the issued and paid up equity share capital of the company. SPA provided for a value of Rs. 155,00,00,000 as consideration to be paid to the promoters which effectively was working out to about Rs. 3212.31 per share. SPA also provided that out of Rs. 155,00,00,000 that was payable as sale consideration, a sum of Rs. 30,00,00,000 would be kept in escrow, based on which a separate escrow agreement was entered into between promoters, purchasers and the escrow agent. At the time of closure of the deal, promoters received Rs. 125,00,00,000 as sale consideration and the shares were transferred. Balance Rs. 30,00,00,000 was kept in escrow account. SPA provided for specific promoter indemnification obligations and it provides that if there is no liability as contemplated under the specific promoter indemnification obligations within a particular period, this amount of Rs. 30,00,00,000 would be released by the escrow agent to the promoters. SPA provides for escrow arrangement. The escrow account was to be in force for two years from the closing date.

Petitioner/Assessee filed his return of income for A.Y. 2011-2012 on 29th July, 2011 declaring income of Rs. 22,51,60,130. The return of income included Rs. 20,98,08,685 as long term capital gains on the sale of shares of the company. The capital gains was computed by Petitioner taking into account the proportion of the total consideration of Rs. 155,00,00,000, including the escrow amount of Rs. 30,00,00,000, which had not, by the time returns were filed, received by the promoters but still parked in the escrow account. The assessment was completed under section 143(3) of the Act and an order dated 15th January, 2014 was passed accepting total income as declared by the Petitioner.

It is Petitioner’s case and which has not been disputed that subsequent to the sale of the shares of the company, certain statutory and other liabilities arose in the company which was about Rs. 9,17,04,240, for the period prior to the sale of the shares. As per the agreement, this amount was withdrawn from the escrow account and promoters, therefore, did not receive this amount of Rs. 9,17,04,240.

As assessment had already been completed taxing the capital gains at higher amount on the basis of sale consideration of Rs. 155,00,00,000 and without reducing the consideration by Rs. 9,17,04,240, Petitioner/Assessee made an application to PCIT under section 264 of the Act. Petitioner submitted that the amount of Rs. 9,17,04,240 has been withdrawn by the company from the escrow account and, therefore, what petitioner received was lesser than what was mentioned in the return of income and, therefore, the capital gains needs to be recomputed reducing the proportionate amount from the amount deducted from the escrow account. Petitioner also pointed out that the application was being made under Section 264 of the Act because the withdrawal of the amount from the escrow account happened after the assessment proceedings for A.Y. 2011-2012 was completed and it was not possible for Petitioner to make such a claim before the assessing officer or even file revised returns. Petitioner, therefore, requested respondent no. 1 to reduce the long-term capital gains by Rs. 1,31,44,274 and further prayed for directions to the assessing officer to refund the excess tax paid. Petitioner also explained that the amount from the escrow account was never going to be recovered by the promoters under any circumstances and this resulted in reduction in the total realisation towards sale of company.

The PCIT by an order dated 13th February, 2015 passed under section 264 of the Act rejected Petitioner’s application holding:

(a) The Petitioner was entitled to receive consideration at Rs. 3,213.31 per share as per the purchase price defined in the agreement. From the said amount, only cost of acquisition, cost of improvement or expenditure incurred exclusively in connection with the transfer can be reduced to compute capital gains. The agreement between the seller and buyer for meeting certain contingent liability which may arise subsequent to the transfer cannot be considered for reduction from the consideration received i.e, at the rate of Rs. 3,213.31 per share in computing capital gains under Section 48 of the Act.

(b further held that in the absence of specific provision by which an assessee can reduce returned income filed by it voluntarily, the same cannot be permitted indirectly by resorting to provisions of Section 264 of the Act. PCIT further relied on the proviso to Section 240 of the Act which states that if an assessment is annulled the refund will not be granted to the extent of tax paid on the returned income. PCIT held that this shows that income returned by an assessee is sacrosanct and cannot be disturbed and even annulment of the assessment would not have impacted the suo motu tax paid on the return income.

(c) The contingent liability paid out of escrow account does not have the effect on “amount receivable” by the promoters as per the agreement which remains at Rs. 3,213.31 per share.

Aggrieved by the order the Petitioner filed Writ Petition before Hon. High Court.

The Hon. High Court held that the PCIT had erred in holding that the proportionate amount of Rs.9,17,04,240 withdrawn from the escrow account should not be reduced in computing capital gains of the petitioner. Capital gains is computed under Section 48 of the Act by reducing from the full value of consideration received or accrued as a result of transfer of capital asset, cost of acquisition, cost of improvement and cost of transfer. PCIT has erred in stating that only the cost of acquisition, cost of improvement and cost of transfer can be deducted from full consideration and, therefore, Petitioner is not entitled to the proportionate reduction. PCIT has failed to understand that the amount of Rs. 9,17,04,240 was neither received by the promoters nor accrued to the promoters, as the said amount was transferred directly to the escrow account and was withdrawn from the escrow account. When the amount has not been received or accrued to the promoters, the same cannot be taken as full value of consideration in computing capital gains from the transfer of the shares of the company.

The Hon. Court observed that PCIT had not understood the true intent and the content of the SPA. PCIT had not appreciated that the purchase price as defined in the agreement was not an absolute amount as the same was subject to certain liabilities which might arise to the promoters on account of certain subsequent events. The full value of consideration for computing capital gains, will be the amount which was ultimately received by the promoters after the adjustments on account of the liabilities from the escrow account as mentioned in the agreement.

PCIT had gone wrong in not appreciating that income or gain is chargeable to tax under the Act on the basis of the real income earned by an assessee, unless specific provisions provide to the contrary.

In the present case, the real income (capital gain) can be computed only by taking into account the real sale consideration, i.e., sale consideration after reducing the amount withdrawn from the escrow account. PCIT had proceeded on an erroneous understanding that the arrangement between the seller and buyer which results in some contingent liability that arises subsequently to the transfer, cannot be reduced from the sale consideration as per Section 48 of the Act. This is because the liability is contemplated in SPA itself and certainly the same should be taken into account to determine the full value of consideration. Therefore, if sale consideration specified in the agreement is along with certain liability, then the full value of consideration for the purpose of computing capital gains under Section 48 of the Act is the consideration specified in the agreement as reduced by the liability. PCIT observation that from the sale consideration only cost of acquisition, cost of improvement and cost of transfer can be reduced and the subsequent contingent liability does not come within any of the items of the reduction and the same cannot be reduced, is erroneous because full value of consideration under Section 48 would be the amount arrived at after reducing the liabilities from the purchase price mentioned in the agreement. Even if the contingent liability is to be regarded as subsequent event, then also the same ought to be taken into consideration in determining capital gain chargeable under Section 45 of the Act.

The Hon. Court did not agree with the findings of PCIT that the contingent liability paid out of escrow account does not affect the amount receivable as per the agreement for the purpose of computation of capital gains under Section 48 of the Act. Such reduced amount should be taken as full value of consideration for computing capital gains under Section 48 of the Act.

The Hon. Court further held that the assessee could file revised return of income within the prescribed period, to reduce the returned income or increase the returned income. Petitioner filed an application under Section 264 because the assessment under Section 143 had been completed by the time the amount of Rs. 9,17,04,240 was deducted from the escrow account. Section 264 of the Act, has been introduced to factor in such situation because if income does not result at all, there cannot be a tax, even though in book keeping, an entry is made about hypothetical income which does not materialize. Section 264 of the Act does not restrict the scope of power of respondent no. 1 to restrict a relief to an assessee only up to the returned income. Where the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income even though an entry that might, in certain circumstances, have been made in the books of account. Therefore, PCIT ought to have directed the Assessing Officer to recompute income as per the provisions of the Act, irrespective of whether the computation results in income being less than returned income. It is the obligation of the revenue to tax an assessee on the income chargeable to tax under the Act and if higher income is offered to tax, then it is the duty of the revenue to compute the correct income and grant the refund of taxes erroneously paid by an assessee.

The court further observed that reliance by PCIT on the provisions of Section 240 of the Act to hold that there is no power on respondent no.1 to reduce the returned income, is fraught with error because the circumstances provided in the provisio to Section 240 indisputably do not exist in the present case. Provisio to Section 240 provides that in case of annulment of assessment, refund of tax paid by the assessee as per the return of income cannot be granted to the assessee, which is not the case at hand. There is no provision in the Act which provides, if ultimately assessed income is less than the returned income, the refund of the excess tax paid by the assessee would not be granted to such assessee. As regards the stand of PCIT that the income returned by petitioner is sacrosanct and cannot be disturbed, the only thing that is sacrosanct is that an assessee can be asked to pay only such amount of tax which is legally due under the Act and nothing more. If returned income shows a higher tax liability than what is actually chargeable under the Act, then the assessee is entitled to a refund of excess tax paid by it.

The order dated 13th February, 2015 passed by PCIT was quashed and set aside. The petitioner be entitled to refund of excess tax paid on the excess capital gains shown earlier. The Assessing Officer was directed to pass fresh assessment order on the basis that the capital gains on the transfer of the shares of the company should be computed after reducing proportionate amount withdrawn from the escrow account from the full value of the consideration and allow the refund of additional tax paid with interest.

TDS — Certificate for non-deduction — Non-resident — DTAA —Lease of aircraft under agreement entered into in year 2016 — Assessee granted certificate for nil withholding tax for five years on the basis of agreement — Direction to withhold tax at 10 per cent On the basis of survey in case of group company for F.Y. 2021-22 — Unsustainable

28 Celestial Aviation Trading 64 Ltd vs. ITO(International Taxation) [2022] 443 ITR 441 (Del) A. Y.: 2021-22 Date of order: 12th November, 2021 S. 197 of ITA 1961: R. 28AA of IT Rules, 1962: Arts. 8 and 12 of DTAA between India and Ireland

TDS — Certificate for non-deduction — Non-resident — DTAA —Lease of aircraft under agreement entered into in year 2016 — Assessee granted certificate for nil withholding tax for five years on the basis of agreement — Direction to withhold tax at 10 per cent On the basis of survey in case of group company for F.Y. 2021-22 — Unsustainable

The assessee was a tax resident of Ireland and was in the business of aircraft leasing. On 21st October, 2016, the assessee entered into an agreement with a company AIL for lease of an aircraft for a period of 12 years. For the F.Ys. 2016-17 to 2020-21, the assessee made applications u/s. 197 of the Income-tax Act, 1961 for “nil” rate of withholding tax in respect of the lease rentals on the ground that under articles 8 and 12 of the DTAA between India and Ireland they were liable to pay tax only in Ireland. The Assessing Officer allowed the assessee to receive considerations from AIL without any tax deducted at source. For the F.Y. 2021-22, the assessee filed an application before the Income-tax Officer (International Taxation) requesting for issuance of “nil” withholding tax certificate or order in respect of the estimated consideration receivable from AIL under the agreement on a similar basis as before. However, the ITO issued an order prescribing 10 per cent as the withholding tax rate.

The assessee filed a writ petition and challenged the order. The Delhi High Court allowed the writ petition and held as under:

“i) The aspects which the Assessing Officer was obliged to take into consideration, while considering an application u/s. 197 had not been adverted to. The reasons proceeded only on the basis of any liability of another company IGL in the group on which survey was carried out and which was alleged to have evaded tax which might or might not be fastened upon the assessee. That by itself could not be a justification for denying the “nil” rate certificates to the assessee. The order was unsustainable and accordingly, quashed and set aside. The matter was remanded back to the Assessing Officer.

ii) In the interim period, the assessee was entitled to avail of the “nil” rate of withholding tax, as had been the position in the past several years consistently. Since the aircraft in question was leased to AIL for a period of 12 years, the interests of the Revenue was sufficiently protected in any eventuality of the assessee being found liable to payment of taxes, interest or penalty.”

Revision — Limitation — Assessee filing and pursuing appeal mistakenly under section 248 resulting in delay in filing revision petition — Revision petition in time if the period spent in prosecuting appeal excluded — Matter remanded to Commissioner

27 KLJ Organic Ltd vs. CIT (IT) [2022] 444 ITR 62 (Del) A.Y.: 2018-19 Date of order: 18th February, 2022 Ss. 248 and 264 of ITA 1961 and S. 14 of Limitation Act, 1963

Revision — Limitation — Assessee filing and pursuing appeal mistakenly under section 248 resulting in delay in filing revision petition — Revision petition in time if the period spent in prosecuting appeal excluded — Matter remanded to Commissioner

For the A.Y. 2018-19, the Commissioner (International Taxation) rejected the revision petition filed by the assessee under section 264 of the Income-tax Act, 1961 due to the delay in filing the petition.

The assessee filed a writ petition submitting that under a bona fide mistake of law and relying on the earlier orders passed by the Income-tax Officer and the Commissioner (Appeals) in its favour on the similar issue, it had filed and pursued an appeal u/s. 248 under the belief that the order was appealable and hence the delay.

The Delhi High Court allowed the writ petition and held as under:

“If the time spent by the assessee in prosecuting the appeal u/s. 248 was excluded, the revision petition filed u/s. 264 would be within the limitation period. On the facts section 14 of the Limitation Act, 1963, was attracted and the assessee was entitled to exclusion of time spent in prosecuting the proceeding bona fide in a court without jurisdiction. The matter was remanded to the Commissioner (International Transactions) to decide on the merits.”

Reassessment — Notice — Limitation — Exception where reassessment to give effect to order of Tribunal — Assessment not made for giving effect to any appellate order — No finding or recording of reason that income has escaped assessment on account of failure of assessee to disclose truly and fully all material facts — Notice and order rejecting objections unsustainable

26 Sea Sagar Construction Co. vs. ITO [2022] 444 ITR 385 (Bom) A.Ys.: 2001-02 to 2003-04 Date of order: 6th May, 2022 Ss. 147, 148, 149 and 150 of ITA, 1961

Reassessment — Notice — Limitation — Exception where reassessment to give effect to order of Tribunal — Assessment not made for giving effect to any appellate order — No finding or recording of reason that income has escaped assessment on account of failure of assessee to disclose truly and fully all material facts — Notice and order rejecting objections unsustainable

The assessee was in the construction business. The contractor from whom the assessee took over two projects followed the completed contract method of accounting. The Assessing Officer was of the view that a part of the income from the project should be assessed to tax based on the percentage completion method and reopened the assessments for the A.Ys. 2001-02, 2002-03 and 2003-04 u/s. 147 of the Income-tax Act, 1961 by issue of notice u/s. 148 dated 19th January, 2012. The objections filed by the assessee were rejected.

The Bombay High Court allowed the writ petition filed by the assessee and held as under:

“i) There was no specific finding that income chargeable to tax had escaped assessment for the A.Ys. 2001-02, 2002-03 and 2003-04 nor was there a direction to the Assessing Officer to initiate reassessment proceedings u/s. 147 by issuing notices u/s. 148. On the contrary, the Tribunal had recorded specific findings that following the project completion method the assessee had offered income in respect of the project in the A.Y. 2003-04 which had been accepted by the Department. Once income was taxed in the A.Y. 2003-04 on the completion of the project, there could not be any question of taxing the same amount in the earlier years by applying a particular percentage on the amount of work-in-progress shown in the balance-sheet. Even assuming that the observations of the Tribunal could be stated to be a finding or a direction u/s. 150, still in view of the proviso to section 147, the reopening was not valid.

ii) From the observations of the Tribunal in its order there was some confusion with respect to whether the project completed in the A.Y. 2003-04 was the same project which was shown as work-in-progress in the A.Y. 2000-01 and thereafter, restoring the matter to the Assessing Officer for the limited purpose of ascertaining whether the two projects referred to in the assessment order of the A.Y. 2000-01 were part of the project completed in the A.Y. 2003-04 and offered for taxation in that year. This could not be stated to be either a finding or a direction as contemplated u/s. 150.

iii) There was nothing in the reasons recorded for reopening of the assessments to indicate that there was any escapement of income due to failure on the part of the assessee to truly and fully disclose material facts. Even otherwise after the order of the Tribunal was passed in the first round of litigation the Assessing Officer had passed a fresh assessment order making certain additions. An appeal was filed against the such order, which had been allowed during the pendency of these petitions. The Commissioner (Appeals) had held that considering the purpose for which the matter had been remanded by the Tribunal to the Assessing Officer, and the assessee’s explanation to the confusion in figures over which the matter was set aside and also the assessee’s proving the fact that there was no other project under work-in-progress in any of these assessment years except assignment of the development of sale to the societies, there was no justification in going beyond the directions of the Tribunal. The Tribunal had held that the Department had failed to bring on record any cogent incriminating material to controvert the contention of the assesse and had confirmed the order of the Commissioner (Appeals).

iv) Therefore, on the facts and circumstances, the notices issued u/s. 148 for the A.Ys. years 2001-02, 2002-03 and 2003-04 and the orders rejecting the objections raised by the assessee were unsustainable and hence quashed.”

Reassessment — Notice — Limitation — Effect of sections 149, 282 and 282A — Date of issue of notice — Date when digitally signed notice is entered in computer

25 Daujee Abhushan Bhandar Pvt. Ltd vs. UOI [2022] 444 ITR 41 (All) A. Y.: 2013-14 Date of order: 10th March, 2022 Ss. 148, 149, 282 and 282A of ITA, 1961

Reassessment — Notice — Limitation — Effect of sections 149, 282 and 282A — Date of issue of notice — Date when digitally signed notice is entered in computer

The petitioner is a regular assessee. For the A.Y. 2013-14, the assessment was completed. Subsequently, the assessment was sought to be reopened. For this purpose, a notice under section 148 of the Income-tax Act, 1961 was digitally signed by the assessing authority on 31st March, 2021. It was sent to the assessee through e-mail and the e-mail was received by the petitioner on his registered e-mail id on 6th April, 2021. The petitioner filed objections before the assessing authority. One of the objections raised by the petitioner was that the notice is time-barred and thus without jurisdiction as it was issued on 6th April, 2021 whereas the limitation for issuing notice under Section 148 read with Section 149 of the Act, 1961 expired on 31st March, 2021. The objection was rejected by the assessing authority holding that since the notice was digitally signed on 31st March, 2021, therefore, it shall be deemed to have been issued within time, i.e., on 31st March, 2021.

The Allahabad High Court allowed the writ petition filed by the assessee and held as under:

“i) Sub-section (1) of section 149 of the Income-tax Act, 1961, starts with a prohibitory words that “no notice u/s. 148 shall be issued for the relevant assessment year after expiry of the period as provided in sub-clauses (a), (b) and (c)”, section 282 of the Act provides for mode of service of notices. Section 282A provides for authentication of notices and other documents by signing it. Sub-section (1) of section 282A uses the word “signed” and “issued in paper form” or “communicated in electronic form by that authority in accordance with such procedure as may be prescribed”. Thus, signing of notice and issuance or communication thereof have been recognised as different acts. The issuance of notice and other documents would take place when the e-mail is issued from the designated e-mail address of the concerned Income-tax authority. Therefore after a notice is digitally signed and when it is entered by the Income-tax authority in the computer resource outside his control, i.e., the control of the originator then that point of time would be the time of issuance of notice.

ii) Thus, considering the provisions of sections 282 and 282A of the Act, 1961 and the provisions of section 13 of the Information Technology Act, 2000 and the meaning of the word “issue” firstly the notice shall be signed by the assessing authority and then it has to be issued either in paper form or be communicated in electronic form by delivering or transmitting the copy thereof to the person therein named by the modes provided in section 282 which includes transmitting in the form of electronic record. Section 13(1) of the 2000 Act provides that unless otherwise agreed, the dispatch of an electronic record occurs when it enters into computer resources outside the control of the originator. Thus, the point of time when a digitally signed notice in the form of electronic record is entered in computer resources outside the control of the originator, i. e., the assessing authority that shall be the date and time of issuance of notice u/s. 148 read with section 149.

iii) The notice u/s. 148 of the Act for the A.Y. 2013-14 was digitally signed by the assessing authority on 31st March, 2021. It was sent to the assessee through e-mail and the e-mail was undisputedly received by the assessee on its registered e-mail id on 6th April, 2021. The limitation for issuing notice u/s. 148 read with section 149 of the Act, 1961 was up to 31st March, 2021 for the A.Y. 2013-14. Since, the notice u/s. 148 of the Act, 1961 was issued to the assessee on April 6, 2021 the notice u/s. 148 of the Act, 1961 was time barred. Consequently, the impugned notice is quashed.”

ACCOUNTING OF WARRANTS ISSUED BY SUBSIDIARY TO PARENT

This article deals with accounting of a derivative instrument issued by a Subsidiary to a Parent, in the separate financial statements of the Parent and the Subsidiary.

FACTS

•    A Ltd holds a 51% stake in B Ltd and has the ability to control all the relevant activities of B Ltd.
•    B Ltd (‘Issuer’ or ‘Subsidiary’) issues 1,000 warrants to A Ltd (‘Holder’ or ‘Parent’) on a preferential basis. Each warrant is issued at a price of INR 100. Each warrant is convertible into 1 equity share of B Ltd (i.e., the fixed conversion ratio of 1:1).
•    An amount equivalent to 5% of the warrant Issue Price shall be payable at the time of subscription /allotment of each warrant and the balance of 95% shall be payable by the Warrant holder on the exercise of the warrant.
•    The warrant is gross settled (i.e., the warrant cannot be net settled). The issuer doesn’t have any contractual or constructive obligation to redeem /buy back warrants. Gross settled means that the contract will be settled by transfer of the underlying and the consideration; whereas, net settled means that the contract will be settled by settling the difference in cash, for example, a warrant to buy a share at INR 100, will be settled by receiving/paying INR 10 in cash, if the value of the share on the date of settlement is INR 110.
•    The Holder is entitled to exercise the warrants, in one or more tranches, within a period of 18 (Eighteen) months from the date of allotment of the Warrants.
•    In case the Holder does not exercise the warrants within a period of 18 (Eighteen) months from the date of allotment of such warrants, the unexercised warrants shall lapse, and the amount paid by the Holders on such Warrants shall stand forfeited by Issuer.
•    The holder of warrants until the exercise of the conversion option and allotment of Equity Shares does not give the warrant Holder thereof any rights (e.g., voting right, right to dividend, etc.,) akin to that of ordinary shareholder(s) of the B Ltd.
•    The warrant issued by B Ltd is at the money and the Parent intends to eventually exercise all the warrants.
•    The warrants do not currently give the present access to returns associated with an underlying ownership interest, for example, ownership interest akin to a share.
•    As per the accounting policy followed by the Parent, it accounts for investment in the subsidiary at cost as per Ind AS 27 less impairment (if any).

ISSUE

How are these warrants, in nature of derivative, be accounted for, in the Standalone Financial Statements (SFS) of A Ltd and B Ltd?

RESPONSE

Accounting Standard References

“Ind AS 27 Separate Financial Statements

Paragraph 10

When an entity prepares separate financial statements, it shall account for investments in subsidiaries, joint ventures and associates either:

(a) at cost, or
(b) in accordance with Ind AS 109………….

Ind AS 109 Financial Instruments

Paragraph 2.1

This Standard shall be applied by all entities to all types of financial instruments except:
(a) those interests in subsidiaries, associates and joint ventures that are accounted for in accordance with Ind AS 110 Consolidated Financial Statements, Ind AS 27 Separate Financial Statements or Ind AS 28 Investments in Associates and Joint Ventures. However, in some cases, Ind AS 110, Ind AS 27 or Ind AS 28 require or permit an entity to account for an interest in a subsidiary, associate or joint venture in accordance with some or all of the requirements of this Standard. Entities shall also apply this Standard to derivatives on an interest in a subsidiary, associate or joint venture unless the derivative meets the definition of an equity instrument of the entity in Ind AS 32 Financial Instruments: Presentation.

Appendix A

Definition of derivative
A financial instrument or other contract within the scope of this Standard with all three of the following characteristics.
(a) its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the ‘underlying’).
(b) it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.
(c) it is settled at a future date.

Ind AS 32 Financial Instruments: Presentation
AG 27 The following examples illustrate how to classify different types of contracts on an entity’s own equity instruments:
(a) A contract that will be settled by the entity receiving or delivering a fixed number of its own shares for no future consideration, or exchanging a fixed number of its own shares for a fixed amount of cash or another financial asset, is an equity instrument………..”

This is generally referred to as meeting the fixed for fixed test.

ANALYSIS

•    The warrant meets the definition of a derivative in accordance with Appendix A of Ind AS 109.
•    The warrant is classified as Equity as per AG 27 of Ind AS 32 by B Ltd/Issuer in its separate financial statements because it meets the fixed for fixed test.
•    From A Ltd’s perspective, because the warrant meets the definition of Equity from the perspective of B Ltd, it would meet the definition of Equity from the perspective of A Ltd also. Consequently, in the separate financial statements of A Ltd, the warrants will be treated as an investment in the equity instrument of the Subsidiary B Ltd.
•    As per paragraph 2.1 of Ind AS 109, derivatives that provide interest in a subsidiary and meet the test of equity classification are accounted for in accordance with Ind AS 27, rather than Ind AS 109.
•    If the instrument either “meets the definitions of equity as per Ind AS 32 from the issuer’s perspective (i.e., subsidiary)” or “currently gives the present access to returns associated with an underlying ownership interest”, then it can be said to be part of the holder’s investment in subsidiary and therefore accounted for under Ind AS 27. However, where the instrument fails to meet the definition of equity from the issuer’s perspective (i.e., a liability of the subsidiary), it shall be classified as financial assets by the Parent and accounted for under Ind AS 109.
•    The warrant meets the definition of equity from a subsidiary’s perspective and hence the warrant is accounted as per Ind AS 27 by parent.

CONCLUSION

The warrant is accounted for as an equity instrument in the separate financial statements of the subsidiary. The warrant, therefore, from the parent’s perspective, is an investment in equity of the subsidiary, which will be accounted for either in accordance with Ind AS 27 or Ind AS 109 (see paragraph 10 of Ind AS 27). The Parent has an accounting policy of applying Ind AS 27 to investments made in the subsidiary in the separate financial statements. Therefore, the warrant is accounted by the Parent as per Ind AS 27, at cost being consideration of 5% paid on initial subscription/allotment till the time warrant are exercised, less impairment if any. On exercise of the warrant, the cost of equity share allocated shall be the total consideration paid for a warrant (i.e., 5% paid on initial subscription/allotment plus 95% paid on exercise of warrant). This is in accordance with the accounting policy followed by the Parent. However, the Parent can also choose to follow an accounting policy of accounting for the equity investment in a subsidiary as per Ind AS 109.

HRA EXEMPTION FOR RENT PAID TO WIFE OR MOTHER

ISSUE FOR CONSIDERATION
An employee who is in receipt of House Rent Allowance (HRA) from his employer, and who incurs expenditure by way of rent on residential accommodation occupied by him, is entitled to claim an exemption of the HRA to the extent prescribed by rule 2A. By virtue of the explanation to Section 10(13A), the assessee is not entitled to such exemption if:

(a) the residential accommodation so occupied is owned by the assessee himself, or

(b) the assessee has not actually incurred any expenditure by way of rent on such accommodation occupied by him.

At times, it may so happen that the accommodation in which the employee is residing is owned by a close relative, either wife or a parent, who also resides in the same accommodation along with the assessee. The issue has arisen before the Tribunals as to whether the assessee is entitled to exemption for HRA under section 10(13A) in such circumstances, more so when the expenditure on rent is not adequately evidenced.

While the Ahmedabad and Delhi benches of the Tribunal has taken the view that an assessee cannot be denied the exemption under such circumstances, the Mumbai bench of the Tribunal has taken a contrary view, holding that the assessee was not entitled to the benefit of the exemption in such a case.

BAJRANG PRASAD RAMDHARANI’S CASE
The issue first came up before the Ahmedabad bench of the Tribunal in the case of Bajrang Prasad Ramdharani vs. ACIT 60 SOT 66 (Ahd)(URO).

In this case, the assessee had paid rent to his wife during the year, and claimed exemption under section 10(13A) of Rs 1,11,168 for House Rent Allowance. The Assessing Officer disallowed the assessee’s claim for exemption on the ground that the assessee had not given details of payment and evidences, and also on the basis that the assessee and his wife were living together. According to the Assessing Officer, the claim of payment of rent was just to avoid taxes, and to reduce the tax liability.

In first appeal, the assessee filed the requisite details and evidence before the Commissioner (Appeals). In the remand report sought by the Commissioner (Appeals) from the Assessing Officer, the Assessing Officer had commented that it was not ascertainable whether the assessee stayed at his wife’s house or at his own house, owned by him, which he had claimed exempt as self-occupied under Section 24. The Commissioner (Appeals) noted that the rent was paid by the assessee as a tenant to his wife, who was the landlord, and that the landlord and tenant were living together in the same house property. According to the Commissioner (Appeals), the very fact that they were staying together indicated that the whole arrangement was in the nature of a colourable device. The Commissioner (Appeals) therefore confirmed the disallowance of the HRA exemption.

Before the Tribunal, on behalf of the assessee, it was argued that a bare reading of the provision would make it amply clear that the assessee was entitled to exemption under Section 10(13A). It was pointed out that requisite details and evidences had been filed before the Commissioner (Appeals), who had called for a remand report from the Assessing Officer. It was submitted that the reasoning given by the Assessing Officer and the Commissioner (Appeals) in disallowing the exemption were different. Therefore, it was claimed that the authorities below grossly erred in not allowing the exemption.

On behalf of the revenue, reliance was placed on the orders of the lower authorities. It was pointed out that the Assessing Officer, in the remand report, had submitted that the assessee had claimed the house owned by him as self-occupied, and therefore disallowance of the assessee’s claim was justified.

The Tribunal noted that the Assessing Officer and the Commissioner (Appeals) had disallowed the claim of the assessee on the ground that the assessee and his wife were living together, and not on the ground that in the return of income, the house owned by the assessee was declared as self-occupied. There was only a mention of it in the remand report, where the Assessing Officer had commented that it was not ascertainable whether the assessee stayed at his wife’s house or at his own house which he claimed as self-occupied. Under these circumstances, according to the Tribunal, it only had to examine whether the assessee was entitled to the exemption under section 10(13A) or not.

The Tribunal analysed the provisions of section 10(13A). It pointed out that the exemption was not allowable in case the residential accommodation was owned by the assessee, or the assessee had not actually incurred expenditure on payment of rent in respect of the residential accommodation occupied by him.

It noted that the Assessing Officer had given a finding of fact that the assessee and his wife were living together as a family. Therefore, it could be inferred that the house owned by the assessee’s wife was occupied by the assessee also. The assessee had submitted rent receipts showing payments made by way of bank transfer.

Therefore, according to the Tribunal, the assessee had fulfilled the twin requirements of the provision; i.e. occupation of the house and payment of rent. The Tribunal therefore held that the assessee was entitled to the exemption under section 10(13A).

A similar case had come up recently before the Delhi bench of the Tribunal in the case of Abhay Kumar Mittal vs. DCIT 136 taxmann.com 78, where the Assessing officer had clubbed the rent paid by the assessee to his wife with the income of the assessee, on the ground that the property was purchased by the wife mainly out of funds borrowed from the assessee. The Commissioner (Appeals), besides confirming the addition, also disallowed exemption on HRA on such rent paid by the assessee to his wife. The facts were that the wife was a qualified medical practitioner, who had repaid the loan later by liquidating her investments.

The Tribunal noted in that case, that the assessee had paid house rent, and the wife had declared such income under the head “Income from House Property” in her returns of income. There was no bar on the assessee extending a loan to his wife from his known sources of income. The Tribunal expressly held that that the Commissioner (Appeals)’s contention that the husband cannot pay rent to his wife was devoid of any legal implication supporting any such contention, and therefore allowed HRA exemption to the assessee.

MEENA VASWANI’S CASE
The issue came up again before the Mumbai bench of the Tribunal in the case of Meena Vaswani vs. ACIT 164 ITD 120.

In this case, the assessee was a Chartered Accountant, working as a Senior Finance and Accounts Executive with a listed company. She had claimed exemption for HRA received from her employer under section 10(13A) of Rs 2,52,040 for A.Y. 2010-11 towards rent paid to her mother for a flat in Neha Apartments, owned by her mother. She also had a self-occupied property, a flat in Tropicana, in respect of which she claimed a loss on account of interest on housing loan of Rs 13,888, and deduction under section 80C for repayment of housing loan.

During the course of assessment proceedings under section 143(3), in October 2012, the Assessing Officer asked the assessee to show cause as to why HRA claimed as exempt should not be added to her income, and brought to tax.

The assessee submitted that she had paid a rent of Rs 31,500 per month to her mother in cash for her house in Neha Apartments, and was therefore entitled to the exemption.

The Assessing Officer observed that in her return of income, the assessee had shown her residential address as Tropicana. The same address appeared on her ration card as well as her bank account. The Assessing Officer noted that the assessee was claiming loss from self-occupied property, as well as claiming exemption under section 10(13A). The assessee was asked to furnish leave and licence agreement with respect to the Neha Apartments property taken on rent, and to explain the need for hiring a house property when another house property owned by the assessee was claimed as self-occupied.

The assessee submitted that while she had a self-occupied property at Tropicana jointly held with her husband, she had to live in her mother’s house at Neha Apartments, and pay her rent for her day-to-day living cost. She had no option but to live with her mother at Neha Apartments as her mother was a sick and single old lady. She paid rent so that none of the other siblings would raise any objection on her staying in Neha Apartments. It was claimed that her living in a rented premises was a purely family matter. Since the transaction was between daughter and mother, no formal agreement was executed. Rent receipts were however collected as evidence of payment of rent for income tax purposes. The assessee therefore claimed that she was entitled to the exemption under section 10(13A) for the HRA.

An inspector was deputed to make an enquiry to verify the assessee’s claim that she was living with her mother at Neha Apartments, and paying rent to her. The Inspector visited the Neha Apartments premises, and issued a summons to the mother, who was present there.

In his report, the Inspector noted that:

1. The mother was staying in the 1 Bedroom-Hall-Kitchen premises at Neha Apartments.

2. She had 3 daughters, of whom one daughter Vimla, who was unmarried, was staying in the flat with her mother.

3. Another daughter, the assessee, was staying with her husband and daughter at Tropicana.

4. The third daughter, Kamla, was staying at Thane.

The Inspector also visited the Tropicana premises, which was a walk of just five minutes away from Neha Apartments, and confirmed that the assessee was living there for the last many years with her husband and daughter. These facts were also confirmed with the watchmen and secretaries of the two societies.

The Assessing Officer observed that:

1. The assessee had herself submitted that she was living with her husband, who was also a Chartered Accountant, and a daughter, and that most of her household expenses were taken care of by her husband. There were not many withdrawals for household expenses, except payment of mobile bills.

2. The mother lived with her unmarried daughter in Neha Apartments, and not with the assessee.

3. The assessee could not produce the mother for examination before him, nor did the mother file any further details subsequent to the summons.

4. The mother had not filed any returns of income for the last six assessment years. In March 2013, subsequent to the enquiries made, a return of income of the mother was filed for the relevant year under assessment.

5. The mother was in receipt of pension income, and rental income ought to have been offered to tax by her, which was not done till enquiries were made.

6. There was no leave and licence agreement, or any other proof of stay by the assessee with her mother, and hence genuineness of payment of rent was not established.

The Assessing Officer therefore concluded that the assessee was neither staying in her mother’s flat, nor paying any rent to her, and therefore disallowed the assessee’s claim of exemption of HRA under section 10(13A).

Before the Commissioner (Appeals), the assessee submitted that:

1. Her unmarried sister, Vimla, did not stay with her mother, since she had her own ownership flat in another suburb.

2. The assessee had shifted to Tropicana during the previous year relevant to A.Y. 2013-14, from which year no HRA exemption was claimed.

3. The payment of rent pertained to A.Y. 2010-11, whereas the Inspector visited the premises in March 2013.

4. The statement of the watchman could not be relied upon, since the watchman changed every month.

5. The statement of the Secretaries of the two societies could not be treated as evidence, since the secretaries were neither authorized to keep constant watch on the movements of any members residing in or moving out, nor could their statements for past events be considered as evidence.

6. Even the Inspector did not record the statement of the mother during his visit.

It was therefore argued that the conclusions drawn by the Inspector were based on conjectures and surmise, and that no adverse inference could be drawn against the assessee without any supporting documentary evidence. It was claimed that the rent receipts were valid documentary evidence in support of the assessee’s claim for exemption of HRA under section 10(13A).

The Commissioner (Appeals) rejected the assessee’s claim that her unmarried sister was not staying with her mother as she had her own flat in another suburb, and that the assessee shifted to Tropicana in A.Y. 2013-14, on the ground that these were self-serving statements not supported by any evidence on record. The Commissioner (Appeals) placed reliance on the Inspector’s Report and the statements of Secretaries and Watchmen on the two societies, since they could not be rebutted by the assessee. Noting that no pressing need was shown by the assessee for living in a small flat with her mother while leaving her bigger flat (which was just five minutes walk away) with her family, the Commissioner (Appeals) held that the assessee failed to establish that she was staying with her mother and paying rent to her, and dismissed the assesee’s appeal.

Before the Tribunal, on behalf of the assessee, affidavits of the assessee and her mother were filed, stating the whole facts. Reiterating the facts as stated at the lower levels, and that the assessee’s mother was an old and sick lady, it was claimed that the assessee stayed with her mother, and had genuinely paid her rent.

On behalf of the Department, it was argued that the rent of Rs 31,500 per month being paid to mother was shown only to take exemption of HRA under section 10(13A). Rents were stated to have been paid in cash, and drawings from the bank account were minimal, as it was admitted that the household expenses were met by the husband. No leave and licence agreement was produced. There was no independent evidence of the assessee’s staying with her mother, and no intimation was given to the society about such stay. The mother had not filed her returns of income, and filed one return only after enquiries were made. The ration cards, bank statements and return of income showed Tropicana as the assessee’s place of residence, and not Neha Apartments. The Tropicana premises was shown as self-occupied property in the return of income. There was no evidence to support the fact that the unmarried sister Vimla was residing in her flat in another suburb. The mother did not respond to summons served on her, but had now filed an affidavit before the Tribunal. It was urged that such affidavit filed after four years should be rejected as it was filed before the Tribunal for the first time.

In the assessee’s rejoinder to the Tribunal, it was pointed out that there was no bar to payment of rent in cash. There was no requirement in law to inform the society about the assessee’s staying with her mother. Further, it was argued that even with the meagre pension and rent, the mother’s income was below the taxable limit, and she had no obligation to file her return of income. Further, no evidence had been asked for by the lower authorities to prove that the unmarried sister lived in her own property in another suburb.

The Tribunal analysed the facts of the case before it, including the Inspector’s Report. It noted that the assessee could not produce proof of cash withdrawals from her bank account to substantiate payments of rent made to her mother in cash. It observed that the affidavits filed by the assessee and her mother before it constituted additional evidences, for which no application was made for admission under rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963. The facts stated in the affidavits had already been stated before the lower authorities.

The Tribunal observed that the rent receipts prepared by the assessee’s mother did not inspire confidence, as the assessee was not able to substantiate the source of the cash payments. According to the Tribunal, there were no other evidences available which related to the period when the transaction of hiring of the premises in the normal course was progressing. The Tribunal observed that the evidences at the time of transactions which are normal are relevant and cogent evidence to substantiate the assessee’s contentions. These facts are especially in the knowledge of the assessee, and the burden was on the assessee to bring out these evidences to substantiate her contentions that the rent paid was genuine.

The Tribunal noted that the assessee did not come forward with any evidence to substantiate her contentions, except rent receipts, which were not backed by any known sources of cash, as cash was not withdrawn from the bank. The Tribunal referred to Section 106 of The Indian Evidence Act, 1872, which provides that when any fact is especially within the knowledge of any person, the burden of proving that fact is upon him. Further, Section 6 of that Act provides that facts which, though not in issue, are so connected with a fact in issue so as to form part of the same transaction, are relevant, whether they occurred at the same time and place or at different times and places.

According to the Tribunal, the doctrine of res gestae would set in. The assessee could not produce any evidence arising in the normal course of happening of transaction of hiring of premises to prove that transaction of hiring of premises was genuine and was happening during the period. According to the Tribunal, no cogent evidence was brought on record which could substantiate that the assessee had taken the Neha Apartments premises on rent from her mother, as no evidence of her actually staying at the premises were brought on record. According to the Tribunal, the assessee was actually staying in her own flat in Tropicana, as per various evidences, which was also in consonance with normal human conduct of married Indian woman living with her husband and daughter in their own house.

The Tribunal noted that, even on the touchstone of preponderance of human probabilities, it was quite improbable that the assessee, a married lady, would leave her husband and daughter and start living with her mother at another flat just five minutes walk away, and pay a huge rent per month. According to the Tribunal, it was a different matter that the assessee may look after her sick and old mother by frequent visits, but this theory of rent as set out by the assessee did not inspire confidence, keeping in view the evidence produced before the Tribunal. The Tribunal observed that it was also probable that the assessee may have contributed towards looking after her old and ailing mother out of her salary, but that was not sufficient to claim exemption under section 10(13A).

Looking at the factual matrix, the Tribunal was of the considered view that the whole arrangement of rent payment by the assessee to her mother was a sham transaction, which was undertaken by the assessee with sole intention to claim exemption of HRA under section 10(13A) in order to reduce her tax liability. The Tribunal therefore held that exemption under section 10(13A) could not be allowed to the assessee.

OBSERVATIONS
If one examines the language of the explanation to Section 10(13A), it is clear that so long as the assessee has actually paid rent in respect of the premises occupied by him, and so long as the premises does not belong to the assessee himself, the benefit of exemption for HRA under section 10(13A) cannot be denied to him. There is no express prohibition on the premises being owned by a close relative, so long as rent is genuinely paid to that relative. As rightly pointed out by the Delhi bench of the Tribunal, there was no prohibition in law prohibiting payment of rent to the wife (or a close relative).

There is also no express prohibition on such landlord also occupying the premises along with the assessee, as his close relative. It is only that the assessee necessarily has to occupy the premises for his residence.

If one looks at the facts of Meena Vaswani’s case, the decision of the Tribunal was based on two important facts which the assessee was unable to prove with the help of contemporaneous evidence – the fact that she actually occupied the premises, and the fact that she had actually paid rent. Therefore, clause (b) of the explanation to Section 10(13A) was clearly attracted in that case, leading to the loss of exemption.

Therefore, the view taken by the Ahmedabad and Delhi benches of the Tribunal seems to be the better view, and that exemption for HRA would be available under section 10(13A) even if rent is paid to the wife or a close relative, who stays along with the assessee.

In any case, in case the property belongs to the wife or other close relative, who continues to reside therein along with the assessee who pays the rent, one needs to keep in mind that the matter may certainly invite closer inspection by the tax authorities as to whether such letting on rent is genuine, or just a sham, as in the case before the Mumbai bench of the Tribunal.

Offences and prosecution — Condition precedent for prosecution — Wilful attempt to evade tax — Prosecution for failure to file the return of income — Payment of tax with interest by assessee acknowledged by Deputy Commissioner — No willful evasion of tax — Prosecution quashed

24 Inland Builders Pvt. Ltd vs. Dy. CIT [2022] 443 ITR 270 (Mad) A.Y.: 2014-15 Date of order: 25th August, 2021 Ss. 276C(2) and 276CC of ITA, 1961

Offences and prosecution — Condition precedent for prosecution — Wilful attempt to evade tax — Prosecution for failure to file the return of income — Payment of tax with interest by assessee acknowledged by Deputy Commissioner — No willful evasion of tax — Prosecution quashed

A complaint was filed against the assessee under section 276CC and 276C(2) of the Income-tax Act, 1961 on 5th October, 2017 on the ground that the assessee’s return for the A.Y. 2014-15 was defective for non-payment of self-assessment tax under section 140A before furnishing the return of income. The assessee submitted that the entire dues were paid with interest and furnished the details of payments. The final payment was made on 19th March, 2018.

The assessee filed a criminal writ petition for quashing the criminal proceedings and pointed out the entire tax dues have been paid with interest. The Madras High court allowed the petition and held as under:

“The offences alleged were only technical offences and there was no material to show that there was any deliberate and conscious evasion of tax on the part of the assessee. It had paid the entire amount of tax with interest and this was confirmed by the Deputy Commissioner. Therefore, the criminal proceedings were quashed.”

Charitable purpose — Exemption — Disqualification where property of assessee made available for benefit of specified persons for inadequate consideration — Valuation of rent — Property of assessee let on rent in lieu of corpus donations — Burden to prove inadequacy of rent is on Department — Finding by Tribunal that rent received by assessee exceeded valuation adopted by Municipal Corporation for purpose of levying house tax — Deletion of addition by Tribunal not perverse

23 CIT(Exemption) vs. Hamdard National Foundation (India) [2022] 443 ITR 348 (Del) A.Ys.: 2007-08 to 2010-11 Date of order: 16th February, 2022 Ss. 11, 12, 13(2)(b) and 13(3) of ITA, 1961

Charitable purpose — Exemption — Disqualification where property of assessee made available for benefit of specified persons for inadequate consideration — Valuation of rent — Property of assessee let on rent in lieu of corpus donations — Burden to prove inadequacy of rent is on Department — Finding by Tribunal that rent received by assessee exceeded valuation adopted by Municipal Corporation for purpose of levying house tax — Deletion of addition by Tribunal not perverse

For the A.Y. 2007-08, the AO felt that the assessee had offered substantial concession in rent to the wakf and had let out two properties at a much lower rate as compared to the market rate in lieu of voluntary and corpus donations and therefore, invoked Section 13(2)(b) and Section 13(3) of the Income-tax Act, 1961 and denied exemption under section 11 and 12.

The Commissioner (Appeals) allowed the appeals of the assessee for the A.Ys. 2008-09 and 2010-11 but rejected the appeal for the assessment year 2009-10. For all the assessment years the Tribunal held that there was no justification for invoking the provisions of Section 13(2)(b) read with Section 13(3) by the Assessing Officer and allowed the assessee’s appeals.

On appeals by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) Though strictly speaking res judicata does not apply to Income-tax proceedings as each assessment year is a separate unit, in the absence of any material change justifying the Department to take a different view of the matter, the position of fact accepted by the Department over a period of time should not be allowed to be reopened unless the Department is able to establish compelling reasons for a departure from the settled position.

ii) U/s. 13(2)(b) of the Income-tax Act, 1961 the burden of showing that the consideration or rent charged by the assessee was not “adequate” is on the Department. Unless the price or rent was such as to shock the conscience of the court and to hold that it cannot be the reasonable consideration at all, it would not be possible to hold that the transaction is otherwise bereft of adequate consideration. It is necessary for the Assessing Officer to show that the property has been made available for the use of any person referred to in sub-section (3) of section 13 otherwise than for adequate consideration. In order to determine the consideration or rent, the context of the facts of the particular case need to be appreciated. For determining adequate consideration or rent, however, market rent or rate is not the sole yardstick but other circumstances also need to be considered.

iii) There was no perversity in the findings of the Tribunal that the Department had failed to bring on record any cogent evidence to show that the rent received by the assessee, in the facts of the case, was inadequate, that the material collected from the internet and the estate agents could not be termed as a corroborative piece of evidence and that the rent received by the assessee had exceeded the valuation adopted by the Municipal Corporation for the purpose of levying house tax.

iv) The contention of the Department that the Tribunal had failed to disclose the basis on which it arrived at the quantum of the standard rent could not be accepted in the absence of any determination to the contrary being even pleaded by the Department. Security deposit may be one of the factors to be taken into consideration by the Assessing Officer for coming to a conclusion if the rent was “adequate”, but it cannot be a sole determinative factor. The Assessing Officer except for relying upon the opinion as to rent from property broker firms and websites had not made any independent inquiry on the adequacy of the rent being charged by the assessee from the wakf and on the age and condition of the building of the assessee. It was not denied by the Department that the other property was not even ready during the A.Y. 2008-09 and was lying vacant. In the absence of any such inquiry by the Assessing Officer, the invocation of section 13(2)(b) was rightly rejected by the Tribunal. No question of law arose.

v) The Tribunal while considering appeals for various assessment years had concurred with the view taken by the Commissioner (Appeals) for the A.Y. 2008-09 and had placed reliance on that order taking reasoning therefrom. Therefore, the Tribunal had not erred in adopting the approach while considering the appeal for the A.Y. 2007-08.”

Charitable purposes — Charitable trust — Exemption under section 11 — Meaning of education in section 2(15) — Dissemination of knowledge through museum or science parks constitutes education — Company formed by Government of India for establishing museum and science parks — Company setting up a museum for Reserve Bank of India and Municipal Corporation — Not activities for profit — Company entitled to exemption under section 11

22 Creative Museum Designers vs. ITO(Exemption) [2022] 443 ITR 173 (Cal) A.Ys.: 2013-14 to 2015-16  Date of order: 10th February, 2022 Ss. 2(15) and 11 of ITA, 1961

Charitable purposes — Charitable trust — Exemption under section 11 — Meaning of education in section 2(15) — Dissemination of knowledge through museum or science parks constitutes education — Company formed by Government of India for establishing museum and science parks — Company setting up a museum for Reserve Bank of India and Municipal Corporation — Not activities for profit — Company entitled to exemption under section 11

The assessee was a company registered under section 25 of the Companies Act, 1956 and was formed by the National Council of Science Museum, Ministry of Culture, GOI. The Council was formed by the Government of India for the dissemination of science and development of scientific temperament to the public and to ensure development of society and the country as well. The council established the assessee-company under section 25 of the Companies Act, 1956 whose very nature was charitable and its purpose is dissemination of knowledge to the Indian society. The assessee was engaged in the design and development of knowledge centres like science museums, planetariums, and other knowledge dissemination centres. The Reserve Bank of India proposed to establish a museum and financial literary centre in Kolkata to explain the development of the monetary system and to exhibit its collection of “artefacts’. There was a similar project conceived by the Surat Municipal Corporation. The RBI museums and financial literacy centre, were completed by the assessee with state-of-the-art facilities interactive galleries, trained professionals and handed over to the Reserve Bank of India on 17th September, 2018. On similar lines, Surat Municipal Corporation had awarded the task of establishing five galleries on textiles, astronomy, space, polar science and children learning activities, to educate the general public about the history of the development of textiles, study of astronomy through the ages, understanding space travel, understanding Earth’s poles and children’s interactive gallery. The assessee completed the project and handed it over to the Surat Municipal Corporation which threw it open to the public.

For the A.Ys. 2013-14, 2014-15, and 2015-16 the assessee claimed exemption under section 11 of the Income-tax Act, 1961 on the surplus which had been generated from these activities. The exemption was denied by the Assessing Officer, Commissioner (Appeals) and the Tribunal.

The Calcutta High Court allowed the appeal filed by the assessee and held as under:

“i) The term “education” occurring of section 2(15) of the Income-tax Act, 1961, cannot be restricted to formal school or college education. The dissemination of knowledge through a museum or science park would undoubtedly fall within the meaning of “education”. Museums function as places for conservation research, education and entertainment for the general public. Thus, indisputably a museum is a place of informal and free choice education and learning. Museums offer educational experience in diverse fields, to be cherished and enjoyed. To reduce a “Master” curator to a contractor, is to belittle their role in preserving heritage. A museum is not constructed but conceived and developed. The object behind establishing a science centre is undoubtedly in public interest to educate the general public in an easy and attractive manner. To develop in young minds a love towards science, history, astronomy and various subjects also to educate the general public who might not have had formal education owing to circumstances beyond their control. To conceptualise a museum is a serious matter.

ii) The assessee had disseminated knowledge in the process of establishing the facilities for the RBI and the Surat Municipal Corporation. The assessee was a not-for-profit organisation but public utility company and the activities of the company for which it had been established would undoubtedly show that the company by establishing knowledge parks, engaged in imparting education and also undertook advancement of other aspects of general public utility to fall within the definition of charitable purpose as defined u/s. 2(15). The assessee was entitled to exemption u/s. 11.”

Article 13 of India-Mauritius DTAA – Where Article of DTAA does not include beneficial ownership condition, reading such condition in the Article will amount to rewriting DTAA provision; hence, in absence of such condition in Article 13, capital gain exemption cannot be denied

7 Blackstone FP Capital Partners Mauritius V Ltd vs. DCIT [[2022] 138 taxmann.com 328 (Mumbai – Trib.)] ITA No: 981/1725/Mum/2021 A.Ys.: 2016-17; Date of order: 17th May, 2022

Article 13 of India-Mauritius DTAA – Where Article of DTAA does not include beneficial ownership condition, reading such condition in the Article will amount to rewriting DTAA provision; hence, in absence of such condition in Article 13, capital gain exemption cannot be denied

FACTS

 

Assessee, a Mauritius company, was a member-company of Cayman Island based ‘Blackstone’ group and a wholly-owned subsidiary of Cayman Islands Co. It held TRC issued by the Mauritian Tax Authority. Assessee was also issued a Category 1 Global Business License (GBL). Assessee had sold equity shares of an Indian Company (I Co) and had claimed exemption under Article 13(4) of India-Mauritius DTAA. AO denied the benefit of capital gains exemption on following grounds:
• Basis the information obtained EOI exchange mechanism from Cayman Island and Mauritius, AO concluded as under:

• effective ownership and administrative control of assessee was with certain Cayman Island-based entities,

• the remittances from Cayman Island entities was the source for funds for acquiring shares of I Co,

• trail of transactions of sale and purchase showed dominant involvement of these Cayman Island-based entities

• directions to carry out the transactions in question were issued by the Cayman Island-based entities, which owned shares of assessee.

• The application form for Category 1 GBL stated that assessee’s ownership was with Blackstone group (Cayman Island), which, prima facie, established that investment in above shares were not made by assessee, but by the Blackstone’s entities in Cayman Island. Accordingly, there was a good case for lifting of the corporate veil.

DRP upheld the decision of AO. Being aggrieved, the assessee appealed to ITAT.

HELD
• In order to determine whether the assessee is a beneficial owner of capital gains income, one needs to first determine whether the concept of beneficial ownership can be read into Article 13 of India- Mauritius DTAA. AO erroneously proceeded on the fundamental assumption of applicability of beneficial ownership condition to Article 13 of India-Mauritius DTAA.

• Unlike Article 10 and Article 11 of DTAA, which specifically include beneficial ownership conditions, Article 13 does not have any such provision . In absence of a specific provision in Article 13 of I-M DTAA, concept of beneficial ownership being a sine qua non to entitlement of treaty benefits, cannot be inferred or assumed.

• Reading beneficial ownership test in a treaty provision which does not include such test specifically, would amount to rewriting the treaty provision itself, rather than be a permissible interpretation.

• Tribunal remanded the matter back to Tax Authority for deciding both the fundamental issues, viz. (a) whether requirement of beneficial ownership can be read into the scheme of Article 13 of India-Mauritius DTAA; and (b) what are the connotations of beneficial ownership in facts of the case.  

________________________________________________________________

1   Dow Jones &
Company Inc. vs. ACIT (2022) 135 taxamann.com 270 (Del ITAT); Dun and Bradstreet
Espana S.A., IN RE (AAR) (2005) 272 ITR 99 (AAR) and confirmed by Hon’ble
Bombay High Court cited as (2011) 338 ITR 95 (Bom HC); American Chemical
Society vs. DCIT (IT) (2019) 106 taxmann.com 253 (Mum ITAT)

Article 13 of India-UK DTAA – Payments received from subscribers for access of news database was not royalty under India-UK DTAA

6 Factiva vs. DCIT [TS-462-ITAT-2022(Mum)] ITA No: 6455/Mum/2018 A.Ys.: 2015-16; Date of order: 31st May, 2022

Article 13 of India-UK DTAA – Payments received from subscribers for access of news database was not royalty under India-UK DTAA

FACTS
Assessee is in the business of providing global business news and information services to organizations worldwide by employing content delivery tools and services through a suite of products and services under the name Factiva. It granted the rights to distribute the Factiva product in the Indian market to D on principal-to-principal basis. Assessee claimed that the amount received by it was business income which was not taxable in India. However, AO treated the same as royalty under section 9(1)(vi), read with Article 13 of India-UK DTAA. On appeal, DRP upheld order of AO.

Being aggrieved, assessee appealed to ITAT.

HELD
• Assessee collected the information available in the public domain, created a database of news, article/information and provided advanced search capabilities to its subscribers. Subscribers of Factiva product could access the database, raise query and related news articles/ other information were displayed on the screen.

• Subscribers did not make payment for any information qua industrial, scientific or commercial experience. They made the payment for accessing a searchable database based on information already available in the public domain in the form of news, articles etc.

• The payment was made for the use of database and not for the use or right to use any equipment as the subscriber and D did not have any access, right or control over data storage devices or the server maintained by the assessee.

• Copyright in the news article/blog never belonged to the assessee but belonged to the publisher or author. Subscriber could only search and view the displayed information.

• ITAT relied upon undernoted decisions and held that payment received was not royalty in terms of Article 13 of India UK DTAA.

Section 9(1)(i) of the Act – Commission received for overseas distribution of Indian mutual fund was not taxable in India

5 DCIT vs. Credit Suisse (Singapore) Ltd [[2022] 139 taxmann.com 145 (Mumbai – Trib.)] ITA No: 6098/7262/Mum/2019 A.Ys.: 2013-14 to 2015-16; Date of order: 6th June, 2022

Section 9(1)(i) of the Act – Commission received for overseas distribution of Indian mutual fund was not taxable in India

FACTS
Assessee, a tax resident of Singapore, was a SEBI registered FII. It entered into an offshore distribution agreement with H, an Indian company, to distribute mutual fund schemes. Assessee created awareness about the schemes of funds, identified investors and procured subscriptions. As consideration, H paid commission which was received by assessee outside India. AO noted that the mutual fund of H was controlled and regulated by SEBI and RBI in India. Therefore, its location control and management were situated in India. This constituted a business connection with India and resulted in offshore distribution income having nexus with India. Accordingly, AO taxed commission in India.

On appeal, CIT(A) held that offshore distribution income earned by the assessee was in the nature of business income. In the absence of permanent establishment, income was not taxable in accordance with Article 7 of India – Singapore DTAA.

Being aggrieved, revenue appealed to ITAT.

HELD
• As per Explanation 1(a) to section 9(1)(i) of the Act, only that portion of the income which is ‹reasonably attributable› to the operations carried out in India is deemed to accrue or arise in India for the purpose of taxation under the Act.

• Assessee earns offshore commission income by distributing Mutual Fund schemes with a view to procuring subscriptions for such schemes from investors outside India.

• Assessee does not carry out any operation within India for the purpose of earning offshore distribution commission income.

• Since all the operations of the assessee were carried out outside India, offshore distribution commission income cannot be treated as being ‹reasonably attributable› to any operation carried out in India.