Subscribe to the Bombay Chartered Accountant Journal Subscribe Now!

Year: 2021

RECENT DEVELOPMENTS IN GST

I. NOTIFICATIONS
Changes in Rules – Notification No. 35/2021-Central Tax dated 24th September, 2021:
Certain changes made in the CGST Rules through the above Notification may be noted as follows:

i) Rule 10A: Rule 10A is about furnishing of bank account details. In addition to details already prescribed, the following further requirements are now prescribed:
• The bank account should be in the name of the registered person and should be based on the PAN of such person.
• In case of a proprietary concern, the PAN of the proprietor should be linked with the Aadhaar number of the proprietor.

ii) Rule 10B: Rule 10B is newly inserted. Authentication of Aadhaar is now necessary for registered persons in order to be eligible for the following functions:
• For filing application for revocation of cancellation of registration in Form GST-REG-21 under Rule 23;
• For filing refund application in Form RFD-01 under Rule 89;
• For refund under Rule 96 of the IGST paid on goods exported out of India; further, in the Rule it is mentioned that if an Aadhaar number has not been assigned to the registered person, then such person may furnish the following identification documents:
• Aadhaar Enrolment ID slip; and
• Bank passbook with photograph, or
• Voter identity card issued by the Election Commission of India; or
• Passport; or
• Driving License issued by the Licensing Authority under the Motor Vehicles Act, 1988 (59 of 1988).

In the above cases, such person must authenticate the number within 30 days of allotment of the Aadhaar number. The above changes in Rule 10A and 10B will come in force from a notified date.

iii) Rule 23(1): This Rule is regarding revocation application. In pursuance of the insertion of Rule 10B, this Rule is amended for giving reference to Rule 10B. The effect is that the application can be filed only by the authenticated person.

iv) Rule 45(3): Rule 45 is regarding conditions about ITC in relation to goods sent to a job worker. There is also a requirement of filing GST-ITC-04 giving details about goods dispatched to the job worker or received from the job worker. Before amendment such details were to be given on quarterly basis. Now, by the amendment, the quarter is replaced by specified period which is defined as below:

‘Explanation. – For the purposes of this sub-rule, the expression “specified period” shall mean – (a) the period of six consecutive months commencing on the 1st day of April and the 1st day of October in respect of a principal whose aggregate turnover during the immediately preceding financial year exceeds five crore rupees; and (b) a financial year in any other case’;

Thus, periodicity of filing Form GST-ITC-04 will now be half-yearly or yearly, based on aggregate turnover.

The above change is effective from 1st October, 2021.

v) Rule 59(6): Rule 59 is regarding filing of GSTR1. As per Rule 59(6)(b), if return in Form GSTR3B for two consecutive months were not filed, then filing of GSTR1 is prohibited. Now, by the present amendment, the period of two months is replaced by preceding month. In other words, unless return in Form GSTR3B for the preceding month is filed, GSTR1 will not be allowed to be filed for the next month. Similarly, such amendment is made in relation to quarterly return in Form GSTR3B. This amendment is applicable from 1st January, 2022.

In Rule 59(6) clause (c) is deleted since the position sought to be covered by the said clause is covered by the above amendment in Rule 59(6)(b).

vi) Rule 89: a) Rule 89(1) is regarding filing of refund application. In pursuance of newly-added Rule 10B, it is now provided that the application is to be signed by an Aadhaar authenticated person.
b) Rule 89(1A) is newly added. This Rule provides the procedure regarding filing of refund application where the tax on interstate supply is paid and refund of tax paid earlier as intra-state supply is to be claimed as refund. This Rule provides that the application for such refund should be filed in Form GST-RFD-01 before the expiry of two years from the date of payment of the tax on the interstate supply.

vii) Rule 96: a) Rule 96(1) is about filing refund application of IGST in relation to export. In pursuance of newly-added Rule 10B, by amendment in this rule it is provided that the application is to be signed by the Aadhaar authenticated person.

viii) Rule 96C is newly inserted. It is regarding credit of refund in bank account. In pursuance of the amendment in Rule 10A, by amendment in this rule it is provided that the bank account should be one which fulfils the conditions mentioned in Rule 10A.

II. EXCLUSION FROM AUTHENTICATION PROCEDURE – NOTIFICATION NO. 36/2021-CENTRAL TAX DATED 24TH SEPTEMBER, 2021

Under section 25(6D), the list of persons to whom authentication will not apply is notified vide Notification 3/2021 dated 23rd February, 2021. The said Notification is amended to bring reference of section 25(6A) in the said Notification. The effect is that the requirement of Aadhaar authentication will not apply to the persons covered by the
Notification.


III. CHANGES IN RATE OF TAX

Sl.
No.

Notification No.

Reference of Entry in which change is made

Indicative changes (changes are
made effective from
1st October, 2021)

1.

06/2021-Central Tax (Rate) dated 30th September, 2021
and 06/2021-Integrated Tax (Rate) dated 30th September, 2021. By
this Notification changes are made in the rate relating to services

Changes in Notification No.
11/2017-Central Tax (Rate) and 08/2017-Integrated Tax (Rate) both dated 28th
June, 2017

a) Entry 3(iv)(g)

In addition to benefit of this Entry available to an entity
registered u/s 12AA of Income-tax Act, by amendment the benefit is also
extended to an entity registered u/s 12AB of the Act.

b) Entry 3(iv)(g)

This Entry was relating to rate of tax on Intellectual Property
other than Information Technology software. This Entry is omitted and Entry
17(ii) is amended to consolidate the items.

c) Entry 17(ii)

Now, the Entry is replaced to incorporate
temporary or permanent transfer or permitting the use or enjoyment of
Intellectual Property (IP) right. The intention is to consolidate the Entry.
Rate of tax is 18%.

d) Item (ica) is added in Entry 26

Category of ‘services by way of job
work in relation to manufacture of alcoholic liquor for human consumption’,
having rate of tax 18% is added.

In item (id), amendment is made to add (ica). Similarly,
addition of (ica) is made in item (iv).

e) Item (i) and (ii) in Entry 27

The Entry relating to services by way of printing is omitted and
included in item (ii) which reads as under:
‘Other manufacturing services; publishing, printing and reproduction
services; materials recovery services.’
Rate of tax is 18%.

1.
 (continued)

 

f) Items (iii) and (iiia) in Entry 34 are substituted

By substitution, the service by way of
admission to casino or race clubs or any place having casino or race club or
sporting events like IPL is separated and made taxable at 28% and other
services like admission to theme parks etc. are retained at 18%.

g) Entry 38 is amended

By change in Explanation given in the
said Entry, the reference to Entry 234 of Schedule I is substituted to Entry
201A of Schedule II.

h) In Annexures: scheme of classification of service, Entries
118a and 118b are added.

By addition of Entry 118a, multi-modal transport of goods is
classified in group 99654.

By insertion of Entry 118b, further classification is made under
996541.

2.

07/2021-Central Tax (Rate) dated 30th September, 2021
and 07/2021-Integrated Tax (Rate) dated 30th September, 2021.

Changes in exemption Entries

Changes
in Notification No. 12/2017-Central Tax (Rate) and 09/2017-Integrated Tax
(Rate) both dated 28th June, 2017

 

a)
Entry 1 is amended

The exemption applicable to entity registered u/s 12AA of
Income-tax Act is extended to entity registered u/s 12AB of the Act.

b) Entry 9AA is amended

The application of Entry to FIFA is kept open and it will apply
whenever the given event is rescheduled.

c) Entry 9AB is inserted

Nil rate provided to services provided by and to Asian Football
Confederation (AFC).

d) Entry 9D and 13 are amended

The benefit of Entry is extended to entity registered u/s 12AB
of the Act.

e) Entries 19A and 19B are amended

Benefit is extended till 30th September, 2022.

f) Entry 43 is omitted

The Entry was relating to leasing of assets by IRFC to Indian
Railways.

g) Entry 61A is inserted

By this Entry, Nil rate is provided for services by way of granting
National Permit to a goods carriage to operate throughout India / contiguous
stages.

h) Entry 72 is amended

This Entry gives exemption for given
services sponsored by the Government. Previously, it was required to be 100%
sponsored. Now sponsorship of 75% or more is also allowable.

i) Entry 74A and 80 are amended

The benefit of Entry is extended to entity registered u/s 12AB
of the Act.

j) Entry 82B is inserted

Exemption is provided to services by way of right to admission
to the events organised under AFC Women’s Asia Cup, 2022.

3.

08/2021-Central Tax (Rate) dated 30th September, 2021
and 08/2021-Integrated Tax (Rate) dated 30th September, 2021.
Changes in rate of goods

a) Entries 138 to 148, 187A, 234, under Schedule I and Entries
122,127 to 132, 205A to 205H and 232 under Schedule II are omitted. The said
Entries are not given here for sake of brevity

 

3.
(continued)

 

Changes in Schedule-I (2.5%)

 

b) Entry 71A is inserted

Separate Entry is provided for tamarind seeds meant for any use
other than
sowing.

c) Entry 186A is inserted

Entry provided for biodiesel supply to specified company.

d) Entry 232 is inserted

New entry for Pembrolizumab (Keytruda) is provided.

e) In List 3, Entry B(3) is inserted

Entry provided for retro fitment kits for vehicles used by
disabled.

Schedule-II (6%)

 

f) Entry 80A is substituted

Biodiesel (other than biodiesel supplied to specified company)
is brought under this new Entry.

g) Entry 201A is inserted

Specified renewable energy devices and parts for the manufacture
of such devices are brought in this Entry.

Schedule-III (9%)

 

h) Entries 26C to 26L inserted

These new Entries cover ores of various metals like iron,
manganese, copper, cobalt, nickel, aluminium, lead, zinc, tin and chromium
and their concentrates.

i) Entry 101A is inserted

Separate Entry for waste, parings and scrap of plastic is
provided.

j) Entry 153A is inserted

Various packing items like cartons, etc., covered by Customs heading
4819 are included in this Entry.

k) Entry 157A is inserted

Various items of plans and drawings for architectural work,
etc., covered by heading 4906, are included in this Entry.

l) Entry 157B is inserted

Unused postage, revenue or similar stamps covered by heading
4907 specified in this Entry.

m) Entry 157C is inserted

Transfers covered by heading 4908 are included in this Entry.

n) Entry 157D is inserted

Printed or illustrated postcards, etc., covered by heading 4909
are included.

o) Entry 157E is inserted

Calendars of any kind covered by heading 4910 are included.

p) Entry 157F is inserted

Other printed matters covered by heading 4911 are included in
this Entry.

q) Entries 398 A to 398H are inserted

Various items related to rail locomotives, railways or tramways
covered by heading 8601 to 8608 are included in the above Entries.

3.
(continued)

 

r) Entry 447 is substituted

The scope of the Entry is widened to include various other
related items like stylograph and other pens, etc.

Schedule- IV (14%)

 

s)
In Notification No. 01/2017-Central Tax (Rate) and 01/2017-Integrated Tax
(Rate) both dated 28th June, 2017, Entry 12B is inserted

New Entry covering carbonated beverages of fruit drinks or
carbonated beverages with fruit juices is provided.

4.

09/2021-Central Tax (Rate) dated 30th September, 2021
and 09/2021-Integrated Tax (Rate) dated 30th September, 2021

a)
In Notification No. 02/2017-Central Tax (Rate) and 02/2017-Integrated Tax
(Rate) both dated 28th June, 2017, Entry 86 is amended

The Explanation is added to restrict the scope of Entry and to
provide that this Entry will not cover seeds meant for any use other than
sowing.

5.

10/2021-Central Tax (Rate) dated 30th September, 2021
and 10/2021-Integrated Tax (Rate) dated 30th September, 2021

a)
In Notification No. 04/2017-Central Tax (Rate) and 04/2017-Integrated Tax
(Rate) both dated 28th June, 2017, Entry 3A is inserted

This Notification is related to RCM. Entry 3A is inserted to
include further items of essential oils when the supplier is an unregistered
person.

6.

11/2021-Central Tax (Rate) dated 30th September, 2021
and 11/2021-Integrated Tax (Rate) dated 30th September, 2021

a)
In Notification No. 39/2017-Central Tax (Rate) and 40/2017-Integrated Tax
(Rate) both dated 18th October, 2017, Entry 1 is substituted

This Notification is related to rate of
2.5% for intra-state supplies of specified goods. By substitution, the scope
is mentioned precisely and mainly food preparations intended for free
distribution to economically weaker sections under a programme approved by
Central Government and/or State Government are covered.

7.

12/2021-Central Tax (Rate) dated 30th September, 2021
and 12/2021-Integrated Tax (Rate) dated 30th September, 2021

a) Newly inserted

This Notification is to provide exemption or concessional rate
of 5% to specified medicines used in Covid-19 up to 31st December,
2021. The items covered include Tocilizumab.

8.

01/2021-Compensation
Cess (Rate) dated 30th September, 2021

a) Entry 4B newly inserted

Rate of 12% provided on the item carbonated beverages of food
drinks or carbonated beverages of fruit juices.

CIRCULARS
1. Clarification on doubts related to scope of ‘Intermediary’; Circular No. 159/15/2021-GST dated 20th September, 2021:
The CBIC has issued the above Circular to clarify certain doubts related to the scope of ‘Intermediary’ services.

The CBIC has clarified the scope of intermediary services and primary requirements for intermediary services. It is clarified that for intermediary service to take place there should be three parties, two principals and the third who can be the intermediary. Within two parties no intermediary service can take place.

Further, if the supplies are on one’s own account, intermediary service cannot take place. Sub-contractor service, as principal to principal, also cannot be intermediary.

The CBIC has given illustrations as to how and when intermediary service takes place in different situations.

The Circular will be useful for guidance.

2. Clarification in respect of certain GST-related issues; Circular No. 160/16/2021-GST dated 20th September, 2021 r.w. Corrigendum No. 20001/8/2021-GST dated 24th September, 2021:
The CBIC has issued the above Circular to clarify certain GST-related issues. The clarifications given are as under:

* For the purpose of section 16(4), the year related to ITC in respect of debit note is delinked from the year of invoice. In other words, it is clarified that invoice and debit notes will be considered separately and the ITC claim can be taken as per the date of the respective documents. This is a beneficial clarification.
* Carrying copy of invoice during movement of goods: It is clarified that in case of E-invoice there is no need of carrying physical copy and invoice in electronic form will be sufficient compliance.
* Export of goods having Nil rate of export duty – In relation to prohibition of refund u/s 54(3), it is clarified that if there is actual levy of export duty then prohibition will apply. If there is no levy of export duty, being Nil or exempt from duty, the prohibition will not apply.

3. Clarification relating to export of services condition (v) of section 2(6) of the IGST Act, 2017; Circular No. 161/17/2021-GST dated 20th September, 2021:
By this Circular the CBIC has clarified certain issues relating to condition (v) of section 2(6) of the IGST Act which is relating to export of services.

The condition (v) in section 2(6) provides as under:
‘(6) “export of services” means the supply of any service when –
(i) the supplier of service is located in India;
(ii) the recipient of service is located outside India;
(iii) the place of supply of service is outside India;
(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange; and
(v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8;’

It is clarified that if the two offices involved in the transaction belong to same entity then the above condition (v) will be applicable. However, if the entities are separate, such as one company registered outside India and one registered in India, although in the same group, they will be separate entities and not hit by the above clause (v).

4. Clarification in relation to refund of tax specified in section 77(1) of the CGST Act and section 19(1) of the IGST Act; Circular No. 162/18/2021-GST dated 25th September, 2021:
The CBIC has issued the above Circular in which the newly-inserted Rule 89(1A) and claiming of refund is explained with examples;
This Circular will be useful in a given situation where intra-state tax was already paid and subsequently interstate tax is actually paid, or vice versa.

5. Clarification in relation to GST rates and Classification; Circular No. 163/19/2021-GST dated 6th October, 2021:
The CBIC has issued the above Circular to explain the changes made in Entries in light of decisions taken in the 45th Council Meeting. The changes are effected by the Notifications referred above and explained in this Circular along with the background for changes.

6. Clarification in relation to applicable GST rates and exemption on certain Services; Circular No. 164/20/2021-GST dated 6th October, 2021:
Similar to the above Circular 163/19/2021, this Circular is issued to clarify the amendment made to entries
relating to services in light of decisions taken in the 45th Council Meeting. The changes are explained with the background.

INSTRUCTIONS
Instruction No. 2 – 2020-2021 dated 22nd September, 2021 has been issued. By this Instruction, the Department is reminded of time limits for initiating action under sections 73 and 74 of the CGST Act and further instruction to tax and to take timely action.

ADVANCE RULING
Composite Supply
M/s SHV Energy Pvt. Ltd. [Order No. A.R. Com/27/2018; dated 6th August, 2021 and TSAAR Order No. 06/2021] (Telangana)
The applicant applied for determination of the nature of his transaction. The facts are that the applicant is a supplier of LPG to domestic and industrial users. In the application it is submitted that it enters into an LPG supply agreement with industrial users for longer periods ranging from five to ten years. They have to set up a structure called manifold at the premises of the recipient for supply of LPG. This manifold consists of LPG cylinders, regulators, primary piping, pressure regulator systems, etc. The ownership of the structure lies with the applicant. The purchaser pays rental charges at the rate of Rs. 5,000 per month for this structure.

Further, since setting up of this system involves substantial investment, the customer is obliged to purchase LPG exclusively from the applicant and the conditions of the agreement specify the minimum quantity to be lifted from SHV. In the event of the purchaser not lifting the minimum quantity, such purchaser has to pay commitment charges at the rate of Rs. 2,900 per metric ton of such shortfall in quantity, called as ‘take or pay’ charges.

Based on the facts mentioned above, the applicant sought Advance Ruling on the following issues:
a. Whether the impugned supply can be regarded as ‘composite supply’ and whether the rate of tax of the principal supply could be adopted for the whole of the supplies?
b. The applicant sought determination in respect of the following specific questions:

i. Whether sale of LPG, collection of ‘take or pay’ charges for not lifting minimum assured quantity and rental charges for supplier gas system installed at the customer premises to store the LPG, which is a condition precedent for supply of LPG, be treated as composite supply u/s 2(30) of the GST Act, 2017?
ii. Whether supply / sale of LPG be treated as principal supply for the above-mentioned transaction?

In the course of the hearing, the above issues were reiterated. Judgments / orders were relied upon to support the issue that it is composite supply.

The AAR referred to the definition of ‘composite supply’ in section 2(30) which is reproduced as under:

‘“Composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

Illustration: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.

The AAR also referred to the judgment of the Supreme Court in the case of Abbott Health Care Pvt. Ltd. (2020) 74 GSTR 37 (Kerala) – 2020-VIL-08-Ker, in which it is held that a composite supply must take into account supplies as effected at a given point in time on ‘as is where is’ basis.

He also referred to the guidelines about naturally bundled supply (as in Education Guide on Taxation of Services published by CBE & Con 20th June, 2012 at para 9.2.4) mentioned as under:
a. There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use.
b. The elements are normally advertised as a package.
c. The different elements are not available separately.
d. The different elements are integral to one overall supply – if one or more is removed, the nature of supply would be affected.

The AAR observed that as per the illustration given in the definitions, the supply of service, i.e., insurance and goods, go alongside each other. Therefore, a composite supply should be similar to a supply mentioned in the illustration to the definition in section 2(30), where two or more taxable goods or services are supplied along with each other to constitute a composite supply.

Based on the above background, the AAR observed that ‘take or pay’ charges are evidently compensation for breach of contract and a penalty stipulated to be paid to the applicant by his buyer for not purchasing the minimum quantity specified in the agreement. He therefore held that these charges come into existence only when there is no supply of LPG, meaning thereby that the supply of LPG and ‘take or pay’ charges are mutually exclusive and can never exist together. It observed that forbearance comes into existence only upon breach and hence the requirements of a composite contract as mentioned above are not fulfilled.

Accordingly, rejecting the contention of the applicant, the Learned AAR passed the following order:

Question raised

Advance ruling issued

1. Whether sale of LPG, collection of ‘take or pay’ charges for
not lifting minimum assured quantity, and rental charges for Supplier Gas
System installed at the customer’s premises to store the LPG which is a
condition precedent for supply of LPG, be treated as composite supply u/s
2(30) of the GST Act, 2017?

1. Sale of LPG, collection of ‘take or pay’ charges for not
lifting minimum assured quantity and rental charges for Supplier Gas System
installed at the customer’s premises do not form a composite supply

2. Whether supply / sale of LPG be treated as principal supply
for the above-mentioned transaction?

Does not arise in view of the above

 

GLIMPSES OF SUPREME COURT RULINGS

2 CIT vs. Mohammed Meeran Shahul Hameed Civil Appeal No. 6204 of 2021; Date of order: 7th October, 2021

Limitation for passing order in revision u/s 263(2) – As per sub-section (2) of section 263 no order u/s 263 of the Act shall be ‘made’ after the expiry of two years from the end of the financial year in which the order sought to be revised was passed – The word used is ‘made’ and not order ‘received’ by the assessee – Once it is established that the order u/s 263 was made / passed within the period of two years from the end of the financial year in which the order sought to be revised was passed, such order cannot be said to be beyond the period of limitation prescribed u/s 263(2)

The A.O. passed an assessment order u/s 143(3) for A.Y. 2008-09 vide assessment order dated 30th December, 2010.

The Commissioner of Income Tax initiated revision proceedings u/s 263 to revise the assessment order passed by the A.O. and issued a notice to the assessee on 1st February, 2012. The assessee filed written submissions on 7th and 12th March, 2012. The Commissioner then passed an order u/s 263 on 26th March, 2012 holding that the A.O. had failed to make relevant and necessary inquiries and to make correct assessment of income after due application of mind and thus the assessment order made u/s 143(3) was held to be erroneous and prejudicial to the interest of the Revenue. The Commissioner set aside the assessment order with a direction to the A.O. to make necessary inquiries on the aspects mentioned in the order u/s 263.

The order passed by the Commissioner in exercise of powers u/s 263 was challenged by the assessee before the ITAT on 29th November, 2012, submitting that it had come to know about the revision order only when it received notice dated 6th August, 2012 u/s 143(2) r/w/s 263 from the office of the A.O. Thereafter, the assessee had requested the A.O. to furnish a copy of the order passed by the Commissioner which was supplied to him on 29th November, 2012. Before the ITAT, it was the case on behalf of the assessee that the order passed by the Commissioner was beyond the period of limitation prescribed / mentioned u/s 263(2). Vide order dated 4th April, 2013, the ITAT accepted the contention on behalf of the assessee and allowed the appeal, holding that the revision order was passed by the Commissioner beyond the period of limitation.

Aggrieved and dissatisfied with the order passed by the ITAT quashing and setting aside the revisional order passed by the Commissioner u/s 263, the Revenue preferred an appeal before the High Court.

The High Court dismissed the appeal and confirmed the order passed by ITAT holding that the order passed by the Commissioner u/s 263 was barred by limitation. The High Court held that the date on which the order was received by the assessee was the relevant date for the purpose of determining the period of limitation u/s 263(2).

Feeling aggrieved and dissatisfied with the judgment and order passed by the High Court, Revenue preferred an appeal before the Supreme Court.

According to the Supreme Court, the short question of law for consideration before it was whether the High Court was right in holding that the relevant date for the purpose of considering the period of limitation u/s 263(2) would be the date on which the order passed by the Commissioner u/s 263 was received by the assessee.

On a reading of sub-section (2) of section 263, the Supreme Court observed that as mandated by this sub-section, no order u/s 263 shall be ‘made’ after the expiry of two years from the end of the financial year in which the order sought to be revised was passed. According to the Court, the word used is ‘made’ and not ‘received’ by the assessee. The word ‘dispatch’ is not even mentioned in section 263(2). The Supreme Court, therefore, held that once it is established that the order u/s 263 was made / passed within the period of two years from the end of the financial year in which the order sought to be revised was passed, such an order cannot be said to be beyond the period of limitation prescribed u/s 263(2). Receipt of such order by the assessee has no relevance for the purpose of counting the period of limitation provided u/s 263. In the present case, the order was made / passed by the Commissioner on 26th March, 2012 and according to the Department it was dispatched on 28th March, 2012. The relevant last date for the purpose of passing the order u/s 263, considering the fact that the assessment was for the financial year 2008-09, would be 31st March, 2012 and the order might have been received as per the assessee on 29th November, 2012. However, the date on which the order was received by the assessee was not relevant for the purpose of calculating / considering the period of limitation provided u/s 263(2).

The Supreme Court therefore concluded that the High Court had misconstrued and had misinterpreted the provision of sub-section (2) of section 263. If the interpretation made by the High Court and the ITAT was accepted, in that case it would be violating the provision of section 263(2) and adding something which is not there in the section. As observed hereinabove, the word used is ‘made’ and not the ‘receipt of the order’. Therefore, the High Court had erred in holding that the order u/s 263 passed by the Commissioner was barred by the period of limitation as provided under sub-section (2) of section 263.

NOTES
(i) In the above case, from the dates available in the judgment of the Supreme Court, it would appear that assessment order u/s 143(3) [which was revised u/s 263] was passed on 30th December, 2010 and the order u/s 263(3) was passed on 26th March, 2012 about which the assessee came to know on 6th August, 2012 and the copy of the same was supplied to him by the A.O. [while making the fresh assessment] on 29th November, 2012. All these dates are falling within a period of two years from the end of the financial year [i.e., 2010-11] in which the assessment order u/s 143(3) dated 30th December, 2010 was passed. As such, the limitation period in any case was 31st March, 2013. However, the limitation period ending date is, somehow, taken as 31st March, 2012. On verification of the ITAT order dated 4th April, 2013 also, it is noticed that these dates are the same and the ITAT had, somehow, taken the time-barring ending date as 31st March, 2012. It seems that on this basis it was held by the ITAT that the order u/s 263 is time-barred as the same was not communicated to the assessee by 31st March, 2012. It is difficult to understand this computation of limitation of time-barring period u/s 263(2) on these facts. Therefore, this judgment should be read ignoring these dates. However, the principle read down by the Supreme Court is very clear that for the purpose of computing period of limitation u/s 263(2), the relevant date is the date of passing the order u/s 263 and not the date of receipt of that order by the assessee. Therefore, this judgment makes this point very clear. The confusion about the dates referred to earlier may be ignored.

(ii) It may be noted that the Punjab & Haryana High Court in the case of A.A. Precision Machines Private Limited [(2016) 388 ITR 440] has also taken a view that for the purpose of computing such limitation period u/s 263(2), the date of passing the order u/s 263 is relevant and not the date of dispatch of that order by the Department.

3 Director of Income Tax, New Delhi vs. Mitsubishi Corporation Civil Appeal No. 1262 of 2016; Date of order: 17th September, 2021

Interest – Interest u/s 234B – Prior to financial year 2012-13, the amount of income-tax which is deductible or collectible at source can be reduced by the assessee while calculating advance tax, the assessee cannot be held to have defaulted in payment of its advance tax liability

The assessee, a non-resident company incorporated in Japan with operations in India, was engaged in carrying out trading activities in carbon, crude oil, LPG, ferrous products, industrial machinery, mineral, non-ferrous metal and products, textiles, automobiles, etc., through its liaison offices in India.

The A.O. rejected the contention of the respondent that it had no income which was taxable in India and passed assessment orders dated 24th March, 2006 for the A.Ys. 1998-99 to 2004-05, determining the income attributable to Indian operations and charging interest as per the provisions of the Act.

The assessment orders were challenged before the CIT(A), restricted to the imposition of interest u/s 234B.

The appeals were dismissed by the CIT(A) as being not maintainable.

The appeals filed by the assessee against the order of the CIT were disposed of by the ITAT on 16th November, 2007 by remanding the appeals for the A.Ys. 1998-99 to 2004-05 to the CIT(A) to be decided on merits.

On remand of the appeals for the aforesaid assessment years, the CIT(A) took note of the order passed by the ITAT on 8th August, 2008 in respect of the A.Y. 2005-06 in case of the assessee. In the said order, the ITAT had followed an earlier order passed in Motorola Inc. vs. Deputy CIT [2005] 95 ITD 269, in which the assessee was found to be not liable for payment of advance tax and for consequent interest u/s 234B as the entire income received by the assessee was such from which tax was deductible at source. However, while deciding the appeals filed by the assessee for the A.Ys. 1998-99 to 2004-05 on the merits of the issue, the CIT(A) came to the conclusion, independent of the ITAT’s order dated 8th August, 2008, that the assessee was liable to pay advance tax in terms of section 191 in case of no deduction by the payer where tax is deductible at source. Consequently, the assessee was held to be liable to pay interest u/s 234B for default in payment of advance tax. The CIT(A), therefore, dismissed the assessee’s appeals for A.Ys. 1998-99 to 2004-05.

In the appeals filed by the respondent against the order dated 10th February, 2009 of the CIT(A), the ITAT held that the issue was covered by its earlier decision dated 8th August, 2008 in the case of the assessee for the A.Y. 2005-06; the decision of the special bench of the ITAT in the case of Motorola Inc. (Supra); as well as decisions of the Uttarakhand High Court and the Bombay High Court. Reliance was placed by the ITAT on a judgment of the Uttarakhand High Court in Commissioner of Income Tax vs. Tide Water Marine International Inc. [2009] 309 ITR 85, whereby it was held that an individual assessee cannot be held liable to pay interest u/s 234B for default of the company, who had engaged or employed the assessee, to deduct tax at source while making payments to the assessee. In Director of Income Tax (International Taxation) vs. NGC Network Asia LLC [2009] 313 ITR 187, the Bombay High Court held that on failure of the payer to deduct tax at source, no interest can be imposed on the payee-assessee u/s 234B. The ITAT observed that in all the seven years under consideration, tax was liable to be deducted at source from payments made to the assessee and it had not been demonstrated that the assessee had a liability to pay advance tax, even after deduction of taxes at source. Therefore, the ITAT concluded that the assessee was not liable for payment of interest as the conditions of section 234B were not attracted. The assessee’s appeals were allowed.

The question of law framed by the High Court was whether the levy of interest u/s 234B for short deduction of tax at source is mandatory and is leviable automatically. The High Court referred to a judgment of the Uttarakhand High Court in the case of Commissioner of Income Tax and Anr. vs. Sedco Forex International Drilling Co. Ltd. [2003] 264 ITR 320, a judgment of the Bombay High Court in the NGC Network Asia LLC case (Supra) and a judgment of the Madras High Court in Commissioner of Income Tax, Tamil Nadu-I, Madras vs. Madras Fertilizers Ltd. [1984] 149 ITR 703, to uphold the submission of the assessee that the tax deductible at source should be excluded from consideration while the estimate of income for the payment of advance tax is submitted. On a scrutiny of the relevant provisions of the Act, the High Court observed that interest u/s 234B cannot be imposed on an assessee for failure on the part of the payer in deducting tax at source, when section 201 provides for consequences of failure to deduct tax at source or failure to pay the tax after making deduction.

The Supreme Court on perusal of the provisions of sections 209 and 234B observed that an analysis of Clauses (a) and (d) of section 209(1) would make it clear that the assessee shall estimate his current income and income tax for payment of advance tax on the basis of rates in force in the financial year. The calculation of the advance tax is to be reduced by the amount of income tax which would be deductible or collectible at source during the said financial year. In case of failure to pay advance tax u/s 208, or where the advance tax paid by the assessee as per the provision of section 210 is less than 90% of the assessed tax, the assessee shall be liable to pay interest on the amount of shortfall from the assessed tax, according to section 234B.

The main point argued on behalf of the Revenue related to the interpretation of section 209(1)(d), with stress on the words ‘deductible or collectible at source’. The contention of the Revenue was based on the fact that an assessee, who has received any payment without the payer deducting tax on such payment, cannot be permitted to escape liability in payment of advance tax and consequent interest for such non-payment under sections 191 and 234B. It was contended that as all the assessees were fully aware of the receipt of amounts without deduction of taxes at source, they should not be allowed to then rely on section 201 to reduce their advance tax liability. In this connection, it was submitted by the Revenue that the expression ‘would be deductible or collectible’ would not include amounts which had not been deducted at the time of payment and, in fact, were paid to the assessee by the payer.

The Supreme Court stated that the primary issue before it pertained to the interpretation of section 209(1)(d) and noted that a proviso was inserted to section 209(1)(d) by the Finance Act, 2012. The Court referred to the Notes to the Memorandum explaining the provisions in the Finance Bill, 2012 in this context. It observed that the proviso is in the nature of an exception to section 209(1)(d) as an assessee, who has received any income without deduction or collection of tax, is made liable to pay advance tax in respect of such income. The amendment was brought into effect from 1st April, 2012 and was made applicable to cases of advance tax payable in the F.Y. 2012-13 and thereafter. All the appeals before the Supreme Court, however, pertained to the period prior to A.Y. 2013-14.

After noting the judicial precedents holding that subsequent legislation may be looked into to fix the proper interpretation to be put on the statutory provisions as they stood earlier, the Court observed that the dispute relating to the interpretation of the words ‘would be deductible or collectible’ in section 209(1)(d) can be resolved by referring to the proviso to section 209(1)(d) which was inserted by the Finance Act, 2012. The proviso makes it clear that the assessee cannot reduce the amounts of income paid to it by the payer without tax deduction, while computing liability for advance tax. The Memorandum explaining the provisions of the Finance Bill, 2012 provides necessary context that the amendment was warranted due to the judgments of courts, interpreting section 209(1)(d) to permit computation of advance tax by the assessee by reducing the amount of income tax which is deductible or collectible during the financial year. If the construction of the words ‘would be deductible or collectible’ as placed by the Revenue is accepted, the amendment made to section 209(1)(d) by insertion of the proviso would be meaningless and an exercise in futility. The Supreme Court, therefore, held that to give the intended effect to the proviso, section 209(1)(d) has to be understood to entitle the assessee, for all assessments prior to the financial year 2012-13, to reduce the amount of income tax which would be deductible or collectible, in computation of its advance tax liability, notwithstanding the fact that the assessee has received the full amount without deduction.

The Court further held that there was no force in the contention of the Revenue that section 234B should be read in isolation without reference to the other provisions of Chapter XVII. The liability for payment of interest as provided in section 234B is for default in payment of advance tax. While the definition of ‘assessed tax’ u/s 234B pertains to tax deducted or collected at source, the pre-conditions of section 234B, viz. liability to pay advance tax and non-payment or short payment of such tax, have to be satisfied after which interest can be levied taking into account the assessed tax. Therefore, section 209 which relates to the computation of advance tax payable by the assessee cannot be ignored while construing the contents of section 234B. As already held that prior to the F.Y. 2012-13 the amount of income tax which is deductible or collectible at source can be reduced by the assessee while calculating advance tax, the assessee cannot be held to have defaulted in payment of its advance tax liability.

The Supreme Court upheld the view adopted in the impugned judgment of the Delhi High Court in Civil Appeal No. 1262 of 2016 as well as by the Madras High Court in the Madras Fertilizers case (Supra), that the Revenue is not remediless and there are provisions in the Act enabling the Revenue to proceed against the payer who has defaulted in deducting tax at source. The Court, however, clarified that there is no doubt that the position has changed since F.Y. 2012-13 in view of the proviso to section 209(1)(d), pursuant to which if the assessee receives any amount, including the tax deductible at source on such amount, the assessee cannot reduce such tax while computing its advance tax liability.

Accordingly, the Supreme Court dismissed the appeals filed by the Revenue.

FROM THE PRESIDENT

Dear BCAS Family,
It’s Diwali time and all of us are geared up for Diwali celebrations from 3rd November. Festivities are in the air. With retractment of our unwanted guest Covid who invaded our homes and caused agony for almost 18 months, there is rejuvenated vigour with which all have geared up to celebrate this year’s Diwali. The way we celebrate has undergone change and I am sure we all shall be conscious enough and will not throw caution to the wind. The best Diwali wishes this year will be to remain healthy with no further disruptions due to the pandemic. I convey my Diwali wishes with the following shloka:

Goddess Bhagwati Mahalakshmi, who gives success,
wisdom, enjoyment and salvation! I always
salute you.
To be successful one has to lay down goals with vision for tomorrow. We shall have powerful tomorrows emanating from the powerful goals set today. A goal-setting exercise enables one to come out of the comfort zone and accept the challenge of transitioning and achieve growth. My GURU Mahatria Ra has aptly described this evolution as follows:

Before change there is comfort.
After change there is again comfort.
But the transition, during the change, is never comfortable.
So, growth is your willingness to evolve from
lesser comfort to higher comfort,
through ‘NOT’ comfortable transitions.

At the start of this New Year, let us resolve to seed ambitious goals which shall be followed with conviction and courage so as to become better professionals and human beings.

On the economic front, India’s performance in exports has been phenomenal during this year. It is set to achieve the target of USD 400 bn. However, the rising crude prices are acting as a dampener which have increased the import bill and are offsetting the fast growth in export earnings, thereby affecting the balance of payments position. The stock markets have been on a roller coaster ride during the past fortnight with very high volatility and wiping out substantial gains registered earlier during the month. The major reason for volatility has been a sharp sell-off by FIIs to book profits at higher valuations due to downgrade of Indian equities by foreign brokerages. However, the underlying tone for the Indian economy and capital markets is strong. This is further endorsed by Chris Wood, Global Head of Equity Strategy, Jefferies, the author of GREED & Fear. He has stated ‘If GREED & Fear had to own one stock market globally for the next ten years and not be able to sell it during that period, that market would be India’.

The profession is passing through times when there are shifts in the expectations from professionals by the industry, regulators and policy makers. It is interesting to observe the views of two regulators on the auditing profession.

In my message last month, I had elaborately dealt with the Consultation Paper released by the National Financial Reporting Authority (NFRA) on Statutory Audit and Auditing Standards for Micro, Small and Medium Companies (MSMCs). The Consultation Paper tries to project that there is less or no utility of audits for MSMCs and audits can be discontinued for certain size of companies.

On the other hand, Mr. Shaktikanta Das, Governor RBI, while speaking on 25th October at the National Academy of Audit and Accounts, dealt with the ‘Role of Audit in Modern Financial System’ during which he stated as follows, ‘The responsibility of risk management primarily rests with the Supervised Entities themselves; however, audit too has a critical role to play at the systemic level by examining the appropriateness of existing frameworks for plugging the control gaps and providing assurance to the Board and decision-makers’.

It is beyond doubt that audit is the first external line of defence for identification of issues and risks associated with the auditee enterprise which enables timely intervention to address issues and mitigate risks.

BCAS has floated a Survey on NFRA – Consultation Paper, September, 2021, soliciting the views of companies on the utility and necessity for statutory audit. We are receiving encouraging response to the Survey. We shall be collating the responses and include the findings in the representation to be made jointly with other associations on the Consultation Paper.

At BCAS the activities of imparting knowledge continue relentlessly with workshops and seminars being conducted by various committees. Several areas of professional interest were covered during the previous month, with (i) Workshop on Taxation of Partnership Firms – Section 9B & 45 (4); (ii) Seminar on Charitable Trusts; (iii) Curtain-Raiser on Enterprise Risk Management for CAs, jointly with IRM India affiliate; (iv) FEMA Master Class on Controversial Issues, jointly with CTC; (v) Internal Audit 101 – Basics of IA; and (vi) Webinar on Covid and CSR-Related Expenses, jointly with IMC, BCCI and CTC. There was also an interactive session to guide the students for achieving success at CA exams.

BCAS has also unveiled its iconic event, the 55th Residential Refresher Course (RRC). It is to be held from 24th to 27th February, 2022 in hybrid mode. After the Virtual 54th RRC on account of the pandemic, there were requests to have a physical RRC. Though we are not completely out of the pandemic, it was decided that we shall plan a ‘Hybrid RRC’ so that we can cater to the requests of both categories of participants. The physical event will be at Radisson Blu Hotel at Nashik and will also be in virtual mode for members who want to be connected remotely. I request members to enrol immediately for their physical presence as we have restricted the attendance to 100 participants and the response has been encouraging – we may have to stop registration in the near future. It is a great mode of learning, networking and unwinding.

To conclude, I am sure that at the turn of the New Year as per the Hindu calendar, we shall all endeavour to make decisions and act upon them so as to address the issues which we encountered in the year gone by. This will enable us to face the future with renewed hope and positivity. I leave you with a quote of my GURU Mahatria Ra, to enable you to act positively:

Time does not solve problems.
Rather, time makes you comfortable with problems.
You learn to live with them.
Making decisions and acting upon them alone will solve problems.
The only way you can improve any situation is by making fresh decisions and execute them.

Best Regards,
 

Abhay Mehta
President

LETTER TO THE EDITOR

Referring to the Editorial in the BCAJ Journal of September, 2021, reader Chinmaya has sent the following mail:

Great article, Raman (WHY INDIA SHOULDN’T JUST AIM TO BE A $5 T ECONOMY) about why Indians succeed more outside of India… agree on everything you have outlined. ‘Hatred for business’ is something we really need to talk about and celebrate ‘good businesses’ as role models, including assessing their impact on the people and on society. Is it possible to do a good job, earn a fair wage and advance and can it be that simple…? Yes, it can.

How many managers and members of the C-suite are really good ‘leaders’? I do feel leadership training and leading with a human element allows for a good environment for all hardworking and talented individuals to succeed, especially Indians, who benefit from great mentorship and fair opportunity in addition to professional qualifications and hard work, the latter two of which we do have in India, too, but the first two are not always there!

I will be very proud when we can bridge this ‘small’ gap… Then we will soar!!!

– Chinmaya Thakore, Canada

SOCIETY NEWS

BOOK REVIEW

HARSH REALITIES – THE MAKING OF MARICO

Authors: Harsh Mariwala and Ram Charan

Reviewed by Raman Jokhakar, Chartered Accountant

The unique cover of the book strikes you when you first hold it in your hands. It’s a transparent plastic jacket where part of the title is printed on the plastic jacket and part on the hardbound cover. ‘Transparency. Always. The very basis of my life. My work’ writes Mr. Mariwala on the second cover. And that is what the book is really about. The wordplay of the title – mixing maker with Marico – makes the book more enticing for the reader.

I was delighted to one day receive an email from Mr. Harsh Mariwala (HM) mentioning about the release of his book and requesting my address to send it. He had graced the BCAS Annual Day celebrations as the Guest Speaker on 6th July, 2016 when my term as the President of the Society was coming to a close. In his email he described (t)his book as: ‘It encapsulates my journey, the challenges I faced, the risks I took and learnings from not only my successes but, more importantly, my failures. It is meant for entrepreneurs, business leaders, professionals & students who will relate to the Marico story, and the learnings therein.’ I was delighted to request him to sign and send the book, to make it a collectable although I would have loved to buy it and have the author sign it in person if it were not for the Covid times.

The book is divided into 21 chapters and has more than 200 pages. It tells the tale of ‘what determines success’, ‘scaling up’, ‘about failing’, ‘creating right to win on a perpetual basis’ and not only building a business but ‘impetus to give back to the society. To make a difference.’ In other words, almost everything one would dream of going through in one’s lifetime.

The book is co-authored by his coach Ram Charan, who summarises, analyses, unpacks, distils the wisdom at the end of the chapters.

Like most businesses around the world, Marico had roots in a large joint family business that was cohesive and bonded. Although HM was amongst the eight boys of his generation and eldest grandson of the senior-most Mariwala, he and other cousins felt difficulties in realising their business aspirations within the model created by the previous generations. They sat down and decided to carve out the family business of Bombay Oil Mills into subsidiaries where they could find space for their vision and aspirations. A great process to amicably split yet stay tied, and chart one’s own course…

We all know that some Marico brands are household names in India for a few generations now. Those who grew up in the 1990s know of the strong buzz Marico advertisements created, through shock, attention-gripping commercials.

Although I cannot write about everything nor summarise all chapters, I have tried to share the juice from important themes and key learnings. An important chapter that grabbed my attention was about hunting for talent. How to be a gravitational power that would attract the best, make the organisation that would survive him. HM shares how a Chief HR Officer was his first acquisition target. The chapter chronicles hiring people who knew much more than he did. He notes that this strategy paid off when Marico’s turnover grew from Rs. 80 crores to Rs. 648 crores in ten years from 1990 to 2000, giving a CAGR of 24%.

The chapter on Shared Vision and Unique Culture covers setting the tone across the organisation. HM was particularly influenced by reading stories of successful companies and biographies of well-regarded business leaders. The lessons from those stories he MARinated with his own thoughts and crafted the core beliefs of the company which eventually took shape as 3Ps – People, Products and Profits. It is fascinating that ideas of Dharma from Bharatiya ethos moved through these ideas. I remember having visited HM’s office and seeing Sanskrit verses etched on the walls of the passageway leading to his office. The author shares in detail the principles and practices of Marico and how it went on to spot the gaps between values and practices to ensure that its people walked the talk. A 5E model of continuous improvement was set up to sustain and enhance culture, which consists of Educate, Engage, Enable, Evaluate, and Evolve. In short, culture is taken as a competitive advantage and a force that drives decisions, actions and behaviour on a perpetual basis.

The middle section of the book walks you through the brass tacks of transformation, challenges… and growth. Inspiring stories one would love to read: of building brands like Parachute (the most copied) and Saffola; of agony of family separation, and Organising for Growth and Scaling (Marico’s Rs. 236-crore market cap in 1996 multiplied 190 times by 2020). The episode of Hindustan Lever (HL) wanting to take over Marico is full of movie material where Dadiseth threatened to turn Marico into history if HM didn’t sell out. This was the time when Coca Cola had bought Thums Up. But how nimbleness and strategy worked for Marico is to be read from the book (and not here) when post the war for market, Parachute came out stronger against the giant HL, gaining 4% additional market share to 52%, Marico gaining better strategic health and reputation. An important lesson that must be pointed out is about having a coach in Prof. Ram Charan at various stages. The ideas of building a brand extension in Saffola and making it suit Indian taste buds make some obvious yet innovative stories where western breakfast brands have not clicked. The overseas expansion theme has several anecdotes where Marico captures 82% market share in Bangladesh, and where the Unilever director wants to put their soaps in shops that sold Parachute although Unilever were in Dhaka since the 1800s.

The chapter on managing the capital markets is particularly ingenious. About splitting the Kaya business out, to having cartoons along with newspaper reports and keeping cheeky humour alongside reporting on performance. HM’s approach to using Board and governance as a competitive advantage where he would pre-empt practices before they were mandated by law. HM selected competencies and then selected Board members who fit the bill.

Imagine a company that reached a value of Rs. 25,000 crores in 25 years and its scrip outperforming the FMCG index had to plan for the most contentious challenge – the future leadership where the founder had to give up the ‘cocaine’. A chapter deals with how the founder had to find people who had foresight, competencies, were steeped in organisational culture and purpose and who would enhance profitability, respect and growth. A tall order! HM did step back while handing over the hot seat to a non-family professional to assume that responsibility. This, in the words of the author, was the toughest call he had to make. The last two of three chapters take one through purpose beyond profit and personal social responsibility. Of numerous initiatives and investments. The final chapter lists out Milestones and Maxims that I would like you to read in the book. A rich list coming straight out of rich, wide and deep experience.

After reading the book, which is an easy read, one feels like having gone through a live life story of a man, his endeavours and a business. As HM writes in the end about his perpetual quest to do more, BE more and make a difference. The takeaways from the book are countless like the shades in a rainbow, and enlighten every reader, no matter which station of life she is at. By the time you reach the end of the book, you will get a feeling of your mind opening a bit more, just like a parachute which works only when open!

REGULATORY REFERENCER

DIRECT TAX

1. Extension of due dates for filing various forms CBDT has extended the time limit for filing applications for registration of trusts u/s 10(23C)/11/80G, electronic filing of Form No. 15CC, Equalization Levy Statement in Form No. 1, Form No. 15CC, uploading of declaration received in Form No. 15G/15H, Form No. 10BBB, Form 3CEAC, Form 3CEAD, Form 3CEAE and Form II SWF due to difficulties faced by the assessees in electronic filing of Forms and non-availability of the utility for e-filing of Forms. [Circular 16 of 2021 dated 29th August, 2021.]

2. CBDT under Direct Tax Vivad se Vishwas Act, 2020 extended the last date of payment of the amount (without any additional amount) to 30th September, 2021. [Notification No. 94 of 2021 dated 31st August, 2021.]

3. Insertion of Rule 9D – Income-tax (25th Amendment) Rules, 2021 The Finance Act, 2021 amended section 10(11) and section 10(12) to provide that exemption shall not be available for the interest income accrued during the previous year on the recognised and statutory provident fund account of the person to the extent it relates to the contribution made by the employee in excess of Rs. 2,50,000 / Rs. 5,00,000 in the previous year.

The CBDT has inserted Rule 9D to calculate the taxable amount of interest relating to the contribution made to a statutory or a recognised provident fund in excess of the threshold limit. [Notification No. 95 of 2021 dated 31st August, 2021.]

4. Insertion of Rule 26D and Form No. 12BBA – Income-tax (26th Amendment) Rules, 2021 – A senior citizen proposing to claim benefit of section 194P shall furnish a declaration in Form No. 12BBA in paper form to the specified bank. On furnishing the declaration, the specified bank will compute the total income of such senior citizen after considering the deduction allowable under Chapter VI-A and rebate allowable u/s 87A. The specified bank will deduct income-tax on the total income so computed at the rates in force. The specified bank shall properly maintain the declaration and the evidence furnished by the senior citizen and shall make available the same to the PCCIT or CCIT as and when required. [Notification No. 99 of 2021 dated 2nd September, 2021.]

5. Insertion of Rule 14C – Income-tax (27th Amendment) Rules, 2021 To ease the process of authentication of electronic records under the Faceless Assessment Regime, CBDT has provided that the persons who are mandatorily required to authenticate electronic records by digital signature shall be deemed to have authenticated the electronic records when they submit the record through their registered account in the Income-tax Department’s portal. [Notification No. 101 of 2021 dated 6th September, 2021.]

6. Extension of due dates for filing Income tax returns and various audit reports for A.Y. 2021-22 The due date of filing return of income, Tax Audit Report, Transfer Pricing Audit Report and filing revised / belated return for A.Y. 2021-22 was extended vide Circular No. 9/2021 dated 20th May, 2021, which is now further extended. [Circular 17 of 2021 dated 9th September, 2021.]

COMPANY LAW

I. COMPANIES ACT, 2013

1. MCA amends norms relating to creation and maintenance of databank of Independent Directors (IDs) MCA has notified the Companies (Creation and Maintenance of databank of Independent Directors) Second Amendment Rules, 2021. A new Rule 6 has been inserted requiring the Institute to submit an annual report on the capacity-building of IDs within 60 days from the end of every financial year to every individual whose name is included in the databank and also to every company in which such individual is appointed as an ID in prescribed format. [Notification No. S.O. 3406(E), dated 19th August, 2021.]

2. MCA issues FAQs on various issues concerning Corporate Social Responsibility The FAQs have been broadly classified into topics such as (a) Applicability of CSR, (b) CSR Framework, (c) CSR Expenditure, (d) CSR Activities, (e) CSR Implementation, (f) Ongoing Project, (g) Treatment of Unspent CSR Amount, (h) CSR Enforcement, (i) Impact Assessment, and (j) CSR Reporting & Disclosure. [General Circular No. 14 /2021, dated 25th August, 2021.]

II. SEBI

3. SEBI revises format for disclosure of shareholding pattern of promoters and promoter group entities In the interest of transparency for investors, SEBI has revised the format for disclosure of shareholding pattern. Consequently, all listed entities shall henceforth provide shareholding, segregated into promoter(s) and promoter group. At present, the shareholdings of promoter(s) and promoter group entities are collectively disclosed showing shareholding pattern of the promoter and promoter group. [Circular No. SEBI/HO/CFD/CMD/CIR/P/2021/616, dated 13th August, 2021.]

4. SEBI asks depositories to create, host, and maintain a system using ‘Distributed Ledger Technology’ In order to strengthen the process of security creation, monitoring of security created, monitoring of asset cover and covenants of the non-convertible securities, SEBI has asked depositories to create, host, and maintain a system using the distributed ledger technology. The new system shall come into effect from 1st April, 2022. However, testing of the system shall start from 1st January, 2022. [Circular No. SEBI/HO/MIRSD/MIRSD_CRADT/CIR/P/2021/618, dated 13th August, 2021.]

5. SEBI notifies single regulations on Share-Based Employee Benefits and Sweat Equity The market regulator, SEBI, has merged SEBI (Issue of Sweat Equity) Regulations, 2002 and SEBI (Share-Based Employee Benefits) Regulations, 2014 into a single regulation called SEBI (Share-Based Employee Benefits and Sweat Equity) Regulations, 2021. The new Regulation has provided flexibility in switching the administration of their schemes from the trust route to the direct route and vice versa. [Notification No. SEBI/LAD-NRO/GN/2021/40, dated 13th August, 2021.]

6. SEBI specifies additional penalty for repeated delivery default In order to put in place a sufficient deterrent mechanism to handle instances of repeated delivery defaults, SEBI has stated that in the case of a ‘Repeated Default’ by a seller or a buyer, an extra penalty of 3% of the total value of the delivery default will be imposed. Here, the term ‘Repeated Default’ shall be defined as an event wherein a default on delivery obligations takes place three times or more during a six-month period on a rolling basis. The penalty levied on ‘Repeated Default’ shall be transferred to the Settlement Guarantee Fund (SGF) of the Clearing Corporation. However, the Circular shall be effective after one month from the date of its issuance. [Circular No. SEBI/HO/CDMRD/DRMP/CIR/P/2021/619, dated 17th August, 2021.]

7. SEBI requires depositories to use distributed ledger technology to monitor security creation SEBI has asked depositories to use blockchain technology to record and monitor security creation as well as covenants of non-convertible securities. Distributed ledger technology has the potential to provide a more resilient system than traditional centralised databases. It offers better protection against different types of cyberattacks. The move is aimed at strengthening the process of security creation and monitoring of security created, asset cover and covenants of non-convertible securities. [Press Release No. 26/2021 dated 25th August, 2021.]

8. AMCs must disclose ‘risk-o-meter’ of scheme while disclosing its performance In order to enhance the quality of disclosure w.r.t. risk and performance, SEBI has asked AMCs to disclose the ‘risk-o-meter’ of the scheme wherever the performance of the scheme is disclosed and the ‘risk-o-meter’ of the scheme and benchmark wherever the performance of the scheme vis-a-vis that of the benchmark is disclosed. The provisions of this Circular shall be applicable with effect from 1st October, 2021. However, AMCs may choose to adopt the provisions of this Circular before the effective date. [Circular No. SEBI/HO/IMD/IMD-II DOF3/P/CIR/2021/621, dated 31st August, 2021.]

9. SEBI asks investors to link PAN with Aadhaar before 30th September, 2021 SEBI has asked investors to link their PAN with Aadhaar by 30th September, 2021 for continual and smooth transactions in the securities market. As per CBDT Notification GSR 112(E) dated 13th February, 2020, the PAN of a person allotted as on 1st July, 2017 shall become inoperative if it is not linked with Aadhaar by 30th September, 2021 or any other date specified by CBDT. SEBI has also asked market intermediaries to ensure compliance of the said Notification. [Press Release 27/2021, dated 3rd September, 2021.]

FEMA

(i) Amendment in rate of interest on advance payment under export regulations Where an exporter receives advance payment with interest from a buyer / third party named in the export declaration made by the exporter, outside India, the exporter shall be under an obligation to ensure that the rate of interest payable on the advance payment does not exceed London Inter-Bank Offered Rate (LIBOR) + 100 basis points. This rate has now been amended to include any other applicable benchmark as may be directed by the RBI. No direction has yet been provided by the RBI in this matter. [Notification F. No. FEMA 23(R)/(5)/2021-RB, dated 8th September, 2021.]

MISCELLANEA

I. World News

1 US-Australia submarine deal: What are the risks?

The US decision to sell nuclear-powered submarines to Australia has put at risk longstanding but fragile global pacts to prevent the proliferation of dangerous nuclear technologies, according to experts.

The deal killed a previous French agreement to sell non-nuclear subs to Australia and radically bolsters Canberra’s ability to project military power across the Asia-Pacific region.

But will it encourage other countries to freely sell their nuclear technology, potentially expanding the number of countries who can build nuclear weapons?

Australia had originally sought conventional diesel-powered French submarines, which are more easily detected and must rise to the surface every few days to recharge their batteries.

Nuclear-powered submarines can spend weeks on end beneath the surface, travelling long distances undetected, only limited by stocks of food and water for the crew, generally a maximum of three months.

The submarines used by the US Navy, and also the British, who are part of the deal with Australia, use highly-enriched uranium, or HEU, enriched to a level of 93%. At that level the submarines can run for 30 years without new fuel.

But that is also the same level of uranium concentration necessary for a powerful nuclear weapon.

One of the key worries about nuclear proliferation is that weapons-grade HEU cold fall into the hands of a rogue state or terror group, said Alan Kuperman, coordinator of the Nuclear Proliferation Prevention Project at University of Texas at Austin.

‘The most likely path to such a bomb would be for an adversary to divert or steal one of the two required nuclear explosives, plutonium or highly-enriched uranium, from a non-weapons purpose like reactor fuel,’ Kuperman wrote on the Breaking Defense news site.

US Navy ships ‘use about 100 nuclear bombs’ worth of HEU each year, more than all of the world’s other reactors combined,’ he said.

Only six countries – the United States, Britain, France, China, India and Russia – have nuclear-powered submarines. Countries have been cautious about allowing the spread of the technology and the fuel.

For James Acton of the Carnegie Endowment for International Peace, the US sale to Australia is a disturbing precedent.

He noted that under the 1970 Nuclear Non-Proliferation Treaty, countries that do not have nuclear weapons are not prohibited from acquiring nuclear-powered submarines and, if they wanted, could remove the nuclear material from the watercraft.

‘This is a huge loophole,’ Acton wrote on Twitter.

‘I’m not particularly concerned that Australia will acquire nuclear weapons. I am concerned that other states will use this precedent to exploit a serious potential loophole in the global non-proliferation regime,’ he said.

Daryl Kimball of the Arms Control Association said the US sale ‘compromises’ Washington’s own non-proliferation principles.

’It has a corrosive effect on the rules-based international order,’ he told AFP.

White House spokeswoman Jen Psaki insisted that the United States is still committed to non-proliferation, calling the sale to Australia ‘an exceptional case, not a precedent-setting case.’

But experts call it risky.

The US-Australia deal ‘could well open a Pandora’s Box of proliferation,’ said Tariq Rauf, the former head of verification at the International Atomic Energy Agency, which helps enforce nuclear agreements.

He said it could encourage non-nuclear weapons countries like Argentina, Brazil, Canada, Saudi Arabia or South Korea to buy nuclear submarines that could give them weapons-grade fuel.

Hans Kristensen of the Federation of American Scientists worries there could be a snowball effect of proliferation.

After the US-Australia deal, he told AFP, ‘Russia could potentially increase supply of such technology to India, China could potentially provide naval reactor technology to Pakistan or others, and Brazil might see an easier way forward on its troubled domestic submarine reactor project.’

Experts say a somewhat safer alternative could be for Australia to obtain nuclear submarines that use low-enriched uranium (LEU).

LEU is enriched to a level of less than 20% uranium, a grade used in nuclear power plants.

In submarines, it has to be replaced every ten years, in a dangerous and difficult process.

That has not deterred the use of the technology by navies in France and China. The US Navy has been pressured to shift to LEU, but has yet to do so.

(Source: International Business Times – By Sylvie Lanteaume – 21st September, 2021)

II. Economy

2 OECD marginally lowers India’s F.Y.22 growth projection to 9.7%

The Organisation for Economic Co-operation and Development (OECD) has marginally lowered India’s growth projection for the on-going fiscal year to 9.7%, a reduction of 20 basis points (bps), and to 7.9% for the next financial year, down 30 bps from its May forecast, citing pandemic risks.

The inter-governmental economic organisation with 38 member nations had slashed India’s F.Y.22 growth forecast to 9.9% in May from 12.6% estimated in March, as the second Covid-19 wave impacted recovery.

‘The risk of lasting costs from the pandemic also persists. The output shortfall from the pre-pandemic path at the end of 2022 in the median G20 emerging-market economy is projected to be twice that in the median G20 advanced economy, and particularly high in India and Indonesia,’ OECD said in a report.

It pointed out that high-frequency indicators had rebounded. ‘High-frequency activity indicators, such as the Google location-based measures of retail and recreation mobility, suggest global activity continued to strengthen in recent months, helped by improvements in Europe and a marked rebound in both India and Latin America,’ it said.

The OECD projected a strong global growth of 5.7% this year and 4.5% in 2022, slightly changed from its outlook in May of 5.8% and 4.4%, respectively, on the back of continuing vaccine roll-out and a gradual resumption of economic activity, besides decisive actions by governments and central banks at the height of the crisis.

Vaccination key to recovery
The OECD report cautioned that to maintain recovery stronger international efforts were needed to provide low-income countries with the resources to vaccinate their populations, both for their own and global benefit. ‘Ensuring that the recovery is sustained and widespread requires action on a number of fronts – from effective vaccination programmes across all countries to concerted public investment strategies to build for the future,’ said OECD secretary-general Mathias Cormann.

(Source: Economic Times Bureau – 22nd September, 2021)

III. Industry

3 Will 2021 be the second-best year in a decade for Indian car market? Yes, IF it survives chip shortage

It’s always the darkest before the day dawns.

India’s carmakers, despite niggling chip shortages, are proving this year that there’s much more than a grain of truth in that age-old saying.

Last year was a washout and car sales slumped to levels not seen in a decade. But 2021 has been stellar by all yardsticks so far: The passenger vehicle market has already posted its second highest sales in a decade through August in 2021.

And that isn’t all: This calendar year may turn out to be the second best in a decade!

With sustained demand and expectations of improving chip supplies, Jato Dynamics expects the Indian passenger vehicle market to end 2021 with volumes of 3.34 million units – the second highest in a decade and just about 50,000 lower than the peak.

Sales charts would have gleamed even more had Covid two not come in the way.

Global forecasting firm IHS Markit expects India to overtake Germany as the fourth largest light vehicle maker in the world in 2021.

So far this calendar year, volumes have climbed over 70% to 2.13 million units, which is the highest growth rate in a decade. Vehicle makers produced 58% more than last year, against the highest in absolute terms at 2.29 million units.

The low base of last year, the need for personal mobility and the spike in demand for SUVs have led to a swift rebound.

Vehicle makers have posted sales of over three lakh units per month this calendar year, and despite the second wave of Covid-19, the revival has been so quick that dealer inventory has been among the lowest. For some, inventory is only for days as against weeks.

Ravi Bhatia, president of JATO Dynamics India, told ET that sales this year are running close to the best in a decade and the market is expected to close at 3.34 million units.

The Indian middle class pool of 121 million households with an income of Rs. 75,000 to Rs. 150,000 clearly wants to get back to work and they need personal mobility, which is clearly reflected in the numbers.

Year

Volumes

2012

27,70,730

2013

25,71,683

2014

25,95,185

2015

28,03,088

2016

29,93,492

2017

32,26,175

2018

33,91,094

2019

29,72,786

2020

24,47,697

2021
(estimate)

33,45,752

*Source: Jato Dynamics India

‘If vaccinations proceed and we have no severe third wave, then it could be close to one of the best. What stands out is the resilience of demand. Also, dealers have done this with lower inventory, lower incentives and higher prices,’ added Bhatia.

One of the factors hurting output recently has been the disruption in manufacturing in Malaysia due to rising Covid cases. However, the situation is gradually improving and that may help the Indian market secure better supplies than in the recent months. Vehicle makers on their part have adapted to the chip shortage with special trims.

Bhatia says Malaysia has 13% of the world’s automotive testing and packaging capacity and that the testing and packaging capacity is almost back up, boosting supplies in the coming months.

Experts believe that if not for chip shortages, the market could have crossed its peak. Over a dozen models have a waiting period of more than eight weeks. The industry still faces pending bookings of more than four lakh units and the numbers are swelling, with several more high-profile launches – of Mahindra XUV 700, Tata Punch, MG Astor and Citroen C3, for instance – coming up.

China

23.14 million

US

8.96 million

Japan

7.45 million

India LVP

3.9 million

Germany LVP

3.43 million

*Source: IHS Markit

Gaurav Vangaal, associate director at IHS Markit, says strong demand, low semi-conductor content, better product mix and proactive management have cushioned the impact of chip shortage.

‘We project India to surpass Germany in 2021 to become the fourth largest manufacturing base for Light Vehicle Production. However, Germany might regain its position once the supply scenario improves. Demand is indeed very strong; however, the recent disruption in the supply scenario is a cause of concern and it is likely to continue. How vehicle makers manage this disruption will determine the final numbers,’ Vangaal added.

(Source: ET Bureau – By Ketan Thakkar & Ashutosh R. Shyam – 22nd September, 2021)

CORPORATE LAW CORNER

1 Achintya Kumar Barua alias Manju Baruah & Ors. vs. Ranjit Barthakur & Ors. Company Appeal (AT) No. 17 of 2018 National Company Law Appellate Tribunal [2018] 143 CLA 233 Date of order: 8th February, 2018

Section 173(2) which gives right to the Directors to participate in the Board meetings through video conferencing / other audio-visual means (VC/OAVM), is mandatory and companies need to provide the facilities as per section 173(2) of the Companies Act, 2013 subject to fulfilling the requirements of Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014

FACTS
The petition was filed by Mr. R.B. and Others before the NCLT seeking the facility of attending Board meetings through video conferencing u/s 173(2) of the Companies Act, 2013.

The matter had earlier come up before the Company Law Board (‘CLB’) and, being aggrieved by certain observations, the same was carried to the High Court of Guwahati. The High Court found that the appeal did not raise any question of law and sent the matter back to the the National Company Law Tribunal (NCLT), Guwahati Bench which allowed the application and directed that the facility should be made available u/s 173(2).

An appeal was filed before the National Company Law Appellant Tribunal (‘NCLAT’) against the order passed by the NCLT, Guwahati Bench where it was submitted that when the Director participates in the meetings through video-conferencing, it would not be possible to ensure that nobody else is present at the place from which the Director would be participating.

It was averred that the Secretarial Standards on Meetings of the Board of Directors have also considered this aspect and have prescribed that such option under the provisions of the Companies Act, 2013 and Rules should be resorted to only when the facilities are provided by the company to its Directors.

It was further submitted that sub-section (2) of section 173 of the Act was not a mandatory provision and it was not compulsory for the company to provide such facility. The counsel during the course of the hearing submitted that the responsibility had been put on the Chairperson to ensure that no person other than the Director concerned was attending or having access to the proceedings of the meeting through video-conferencing mode or other audio-visual means. It was also stated that when a Director resorts to availing the facility of video conferencing, it would not be possible for the Chairperson to ensure that the Director was alone while participating from wherever the video call was made as the Chairperson would have no means to know as to who else was sitting in the room or place concerned.

HELD
The NCLAT held that section 173 of the Companies Act, 2013, as well as the Rules referred to, were introduced under the 2013 Act and, following these provisions, it would be in the interest of the companies as well as the directors. It would not be appropriate to shut out these provisions on mere apprehensions.

The word ‘may’ which has been used in sub-section (2) of section 173 only gives an option to the Director to choose whether he would be participating in person or through video-conferencing or other audio-visual means. This word ‘may’ does not give an option to the company to deny this right given to the Directors for participation through video-conferencing or other audio-visual means if they desire to do so. In this regard, the provisions of Rule 3 are material.

The NCLAT further referred to the order of NCLT, Guwahati Bench and noted that it had taken note of the fact that the company had all the necessary infrastructure available and had no reason not to provide the facility. Hence, NCLT had come to the conclusion that the provisions of section 173(2) of the Companies Act, 2013 are mandatory and the companies cannot be permitted to make any deviations therefrom.

An important observation made by the NCLAT was that the rules require that the company shall comply with the procedure prescribed for convening and conducting the Board meetings through video-conferencing or other audio-visual means. The Chairperson and Company Secretary, if any, have to take due and reasonable care as specified in Rule 3(2). The argument of the counsel for the appellant is that sub-Rule (2)(e) puts the burden on the Chairperson to ensure that no person other than the Director concerned is attending and this would not be possible for the Chairperson to ensure in video-conferencing.

NCLAT did not find force in the submission as the Rules, read as a whole, were a complete scheme. Sub-clause (4)(d) of Rule 3 also puts responsibility on the participating Director. The Chairperson was required to ensure compliance of sub-clause (e) or clause (2), and the Director would need to satisfy the Chairperson that sub-clause (d) of Clause 4 was being complied with.

The NCLAT noted that counsel for the appellants tried to rely on the Secretarial Standard on Meetings of the Board of Directors, that such participation could be done ‘if the company provides such facility’. NCLAT observed that such guidelines cannot override the provisions under the Rules. The mandate of section 173(2) read with the Rules mentioned above cannot be avoided by the companies.

The NCLT thus directed the company to provide the facilities as per section 173(2) of the Companies Act, 2013 subject to fulfilling the requirements of Rule 3(3)(e) of the Rules.

Thus, NCLAT did not find any reason to interfere with the NCLT order and observed that the order was progressive and in the right direction and therefore the admission of the appeal was denied.

2 CGI Information Systems and Management Consultants Private Limited Compounding Application CP No.: 55/2017 National Company Law Tribunal, Bengaluru Bench Source: NCLT Official Website Date of order: 27th April, 2018

If the company did not have adequate surplus in the profit and loss account but had declared interim dividend based on the belief that it indeed did have adequate profits and surplus in its profit and loss account, a compounding application on suo motu basis can be entertained even though the company had contravened the provisions of section 123(3) of the Companies Act, 2013

FACTS
The compounding application was filed by M/s CISMCPL (‘the company’) u/s 441 of the Companies Act, 2013 before the NCLT, Bengaluru Bench with a prayer for compounding of the violation committed under the provisions of section 123(3) of the Companies Act, 2013.

The submissions of the company were as follows:

The company, based on its estimates and belief that it had adequate profits and surplus in its profit and loss account, had declared an interim dividend of Rs. 96,14,14,080 pursuant to the Resolution of the Board of Directors dated 25th September, 2014 and accordingly paid the same to the eligible shareholders.

However, at the time of declaration of interim dividend the company had not finalised any method of accounting and believed that the method of accounting would not result in any deficit in the profits or in the surplus in the profit and loss account.

However, later on the company adopted the Pooling of Interest Method for accounting its amalgamation.

While declaring dividend, it had inadvertently not considered the fact that by adopting the pooling of interest method of accounting, there would be a deficit in the surplus in the profit and loss account, as a result of which the company had contravened the provisions of section 123(3) of the Companies Act, 2013.

Hence, the company and its Directors suo motu filed the application for admitting violation and had prayed for compounding.

HELD
NCLT held that the company had violated the provisions of section 123(3) of the Companies Act, 2013 and shall be punishable u/s 450 of the said Act. The company and every officer of the company who was in default, or such other person, shall be punishable with fine which may extend to Rs. 10,000, and where the contravention was a continuing one, with a further fine which may extend to Rs. 1,000 for every day after the first day during which the contravention continued.

Therefore, the compounding fee of Rs. 94,200 on the company and Rs. 94,200 on each of the Directors was levied considering the delay of 932 days.

ALLIED LAWS

1 Ramesh and Others vs. Laxmi Bai AIR 2021, Madhya Pradesh 56 Date of order: 1st March, 2021 Bench: Vivek Rusia J

Condonation of delay – Appeal cannot be decided without deciding on the application for condonation of delay in favour of the appellant [Civil Procedure Code, 1908, Ord. 41, R. 3A; Limitation Act, 1963, S. 5]

FACTS
The plaintiffs had filed a civil suit for declaration of title and partition of joint family property. By the judgment dated 24th January, 2009 it was held that they were entitled to partition through the Court. Defendant No. 1 was restrained from getting a mutation in his name. Being aggrieved by the aforesaid judgment and decree, the Defendants filed an appeal in the year 2013 along with an application for condonation of delay u/s 5 of the Limitation Act.

On 24th February, 2019, it came to the notice of the Additional District Judge that the application u/s 5 of the Limitation Act had not been decided so far. Both the parties agreed to first argue on the aforesaid application. The arguments were heard and kept for order on 27th April, 2019. By an order dated 27th April, 2019, the Additional District Judge decided that the application u/s 5 of the Limitation Act would be decided along with the first appeal on merit.

The plaintiffs filed a petition challenging this order of 27th April, 2019 on the ground that the Additional District Judge had committed an error of law while keeping the application u/s 5 for consideration along with the appeal while finally hearing the appeal on merit.

HELD
The Court referred to the decision in the case of State of M.P. vs. Pradeep Kumar 2000 (7) SCC 372. In that the Supreme Court held that the object of enacting Rule 3-A of Order 41 of the Civil Procedure Code seems to be two-fold. The first is to inform the appellant himself that appeal is time-barred and it would not be entertained unless it is accompanied by an application explaining the delay. The second is to communicate to the respondent a message that it may not be necessary for him to get ready to meet the grounds taken up in the memorandum of appeal because the Court has to deal with the application for condonation of delay as a condition precedent.

The Court also referred to the decision in S.V. Matha Prasad vs. Lalchand Meghraj and Others (2007) 14 SCC 772 wherein the Supreme Court had held that the Division Bench of the High Court had not only condoned the delay but took a decision on the merit as well and such exercise was not justified as the only issue before the Division Bench was the question of limitation; accordingly, the judgment of the High Court was set aside to the extent that it went on to the merits of the controversy but maintained it insofar as it dealt with the question of limitation.

In view of the above, the Court held that the Additional District Judge was required to decide first the application u/s 5 of the Limitation Act and if it condoned the delay then there would not be any impediment to deciding the appeal on merit. Further, the Court held that although there is no specific bar which restrains the appellate Court from hearing and deciding the appeal along with the application for condonation of delay, the provisions put a bar on the appellate Court on deciding the appeal unless the application for condonation of delay is decided in favour of the appellant. The petition was allowed.

2 Amola Saikia and Others vs. Pankajit Narayan Konwar AIR 2021, Gauhati 50 Date of order: 23rd January, 2021 Bench: Anchintya Malla Bujor Barua J

Intestate succession – Property of Hindu female – Grant of succession certificate to husband held to be proper [Indian Succession Act, 1925, S. 372; Hindu Succession Act, 1956, S. 15]

FACTS
The respondent-husband filed an application u/s 372 of the Indian Succession Act for grant of succession certificate. The respondent had succeeded in the said application vide order dated 10th June, 2015.The appellants, viz., the mother, sisters and brother of the deceased, challenged the said order of 10th June, 2015.

HELD
As per section 15(1) of the Hindu Succession Act, 1956 it is clearly provided that the property of a female Hindu dying intestate shall devolve firstly upon the sons and daughters and the husband. Thereafter, it would devolve upon the mother and father and then upon the heirs of the father, and finally upon the heirs of the mother. Hence, the grant of succession certificate was in accordance with law.

The appeals were dismissed.

3 Sozin Flora Pharma LLP vs. State of Himachal Pradesh and another AIR 2021, Himachal Pradesh 44 Date of order: 7th January, 2021 Bench: Tarlok Singh Chauhan J and Jyotsna Rewal Dua J

Stamp Duty – Conversion of partnership firm to limited liability partnership – No stamp duty or registration fee [Limited Liability Partnership Act, 2008, S. 58(1), 58(4)(b); Himachal Pradesh Tenancy and Land Reforms Act, 1974, S. 118]

FACTS
The petitioner was registered as a partnership firm on 14th December, 2005 in the office of the Deputy Registrar of Firms. With the intention of availing of the benefits of the Limited Liability Partnership Act, 2008, the petitioner firm converted itself from ‘Firm’ to ‘Limited Liability Partnership’ (LLP). The conversion was as per section 55 of the LLP Act.

The petitioner applied to the Deputy Commissioner for changing its name in the revenue record from ‘M/s Sozin Flora Pharma’ to ‘M/s Sozin Flora Pharma LLP’. The permission to change the name in the revenue record was granted on the condition that stamp duty and registration fee shall be chargeable. The petitioner submitted a representation to the respondent on 25th June, 2019 against the imposition which was rejected on 23rd August, 2019. Hence the writ petition.

HELD
Upon conversion of a registered partnership firm to an LLP under the provisions of the Limited Liability Partnership Act, all movable and immovable properties of the erstwhile registered partnership firm automatically vest in the converted LLP by operation of section 58(4)(b) of the Limited Liability Partnership Act.

The transfer of assets of the firm to the LLP is by operation of law. Being a statutory transfer, no separate conveyance / instrument is required to be executed for transfer of assets.

Since there is no instrument of transfer of assets of the erstwhile partnership firm to the limited liability partnership, the question of payment of stamp duty and registration charges does not arise as these are chargeable only on the instruments indicated in section 3 of the Indian Stamp Act and section 17 of the Indian Registration Act.

The partnership firm’s legal entity after conversion to limited liability partnership does not change. Only the identity of the firm as a legal entity changes. Such a conversion or change in the name does not amount to a change in the constitution of the partnership firm.

Therefore, stamp duty and registration fee cannot be levied upon conversion of a partnership firm to an LLP.

4 Kiran Gupta vs. State Bank of India and another AIR 2021, Gauhati 50 Date of order: 2nd November, 2020 Bench: Hima Kohli J and Subramonium Prasad J

Recovery of dues – Pendency of IRP proceeding against principal borrower – Bank can proceed against guarantor under SARFAESI Act [SARFAESI Act, 2002, S. 13; Insolvency and Bankruptcy Code, 2016, S. 14, S. 31; Contract Act, 1872, S. 128]

FACTS
The short question that arises for consideration in this writ petition is whether a bank / financial institution can institute or continue with proceedings against a guarantor under the SARFAESI Act when proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC) have been initiated against the principal borrower and the same are pending adjudication.

HELD
The view expressed by the Supreme Court in the case of State Bank of India vs. V. Ramakrishan and Another, (2018) 17 SCC 394 amply demonstrates that neither section 14 nor section 31 of the IBC place any fetters on banks / financial institutions from initiation and continuation of the proceedings against the guarantor for recovering their dues. That being the position, the plea taken by the counsel for the petitioner that all proceedings against the petitioner, who is only a guarantor, ought to be stayed under the SARFAESI Act during the continuation of the Insolvency Resolution process qua the principal borrower, is rejected as meritless. The petitioner cannot escape her liability qua the respondent / bank in such a manner. The liability of the principal borrower and the guarantor remain co-extensive and the respondent / bank is well entitled to initiate proceedings against the petitioner under the SARFAESI Act during the continuation of the Insolvency Resolution process against the principal borrower. The petition is dismissed.

Editor’s Note: The Supreme Court in the case of Lalit Kumar Jain vs. Union of India [2021] 167 SCL 1 had held that a personal guarantor is also liable under the Insolvency and Bankruptcy Code, 2016.

GOODS AND SERVICES TAX (GST)

I. SUPREME COURT
    
1 Union of India vs. Vishnu Aroma Pouching (P) Ltd. [2021 (129) taxmann.com 17 (SC)] Date of order: 29th June, 2021

The Supreme Court dismissed the SLP as barred by limitation and passed strictures on the Department regarding its lethargy and delay in filing the SLP without any cogent or plausible ground for condonation of delay, calling it a ‘certificate case’ and also imposed a cost of Rs. 25,000 for wastage of judicial time

FACTS

The Supreme Court dismissed the SLP belatedly filed by the Revenue against the order of the Gujarat High Court in the case of Vishnu Aroma Pouching (P) Ltd. vs. Union of India [2021] 129 taxmann.com 16 (Guj). In the said case, the petitioner paid GST liability for August, 2017 on 19th September, 2017 (i.e., before the due date). However, due to portal limitations, it could not file the return for August, 2017 before the due date. Further, when the return was filed on 21st September, 2017, due to technical glitches all the amounts appeared as ‘Nil’ in the said return. After a long-drawn follow-up with the Department, the petitioner was permitted to file Form GSTR3B for September, 2019 with taxes payable for August, 2017 and the same was accepted by the system. The Gujarat High Court had held that the petitioner had duly discharged the tax liability of August, 2017 within the period prescribed; however, it was only on account of technical glitches in the system that the tax amount had not been credited to the Government account, hence the petitioner would not be liable to pay any interest on the tax amount for the period from 21st September, 2017 to October, 2019.

HELD


While dismissing the SLP as barred by limitation, the Court passed strictures regarding the lethargy on the part of the Revenue Department for the delay in filing the SLP and called this case as a ‘certificate case’ filed only with the object to obtain a quietus from the Supreme Court, to complete a mere formality and to save the skin of the officers who may be at default in following the due process, or may have done it deliberately, noting that the petitioner has approached this Court without any cogent or plausible ground for condonation of delay. Referring to the decisions in the cases of State of Madhya Pradesh vs. Bheru Lal [SLP (c) Diary No. 9217 of 2020, dated 15th October, 2020]; and State of Odisha vs. Sunanda Mahakuda [SLP (c) Diary No. 22605 of 2020, dated 11th January, 2021], the Court stated that the leeway that was given to Government / public authorities on account of innate inefficiencies was the result of certain orders of this Court which came at a time when technology had not advanced and thus, greater indulgence was shown. This position is no more prevalent and the current legal position has been elucidated by the judgment of this Court in Office of Chief Post Master-General vs. Living Media India Ltd. [2012] 20 taxmann.com 347. The Supreme Court thus imposed costs on the petitioner(s) of Rs. 25,000 for wastage of judicial time.

2 Union of India & others vs. VKC Footsteps India Pvt. Ltd. [2021-TIOL-237-SC-GST] Date of order: 13th September, 2021

In case of Inverted Duty Structure, refund is allowed only of inputs and not with respect to input services

FACTS
Section 54(3) of the CGST Act, 2017 allows refund of unutilised input tax credit involving zero-rated supplies made without payment of tax and credit accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies. Writ petitions under Article 226 of the Constitution were instituted before the High Courts of Gujarat and Madras. It was submitted that refund on account of inverted duty structure should be allowed on both input as well as input services. Restricting the credit only to inputs would be unconstitutional as it would lead to discrimination between input and input services. The Division Bench of the Gujarat High Court held that ‘Explanation (a) to Rule 89(5) which denies the refund of “unutilised input tax” paid on “input services” as part of “input tax credit” accumulated on account of inverted duty structure is ultra vires the provision of Section 54(3) of the CGST Act, 2017’. The High Court therefore allowed the refund. However, the Madras High Court gave a contrary decision in the matter. The Union of India has filed the present appeal against the decision of the Gujarat High Court.

HELD
The Court noted that section 54(3) allows refund of inputs, which by no parameters can also include input services. The Court noted that with the clear language which has been adopted by the Parliament while enacting the provisions of section 54(3), the acceptance of the submission will involve a judicial re-writing of the provision which is impermissible in law. Reading the expression ‘input’ to cover input goods and input services would lead to recognising an entitlement to refund, beyond what was contemplated by Parliament. The Court stated that proviso to section 54(3) is not a condition of eligibility but a restriction provided in the law. It was also noted that a discriminatory provision under tax legislation is not invalid per se, input goods and input services are not treated as one and the same, and they are distinct species under the GST law. Therefore, the submission that goods and services must necessarily be treated at par cannot be accepted. Thus, refund is allowed only in case of inputs in case of inverted duty structure. Therefore, the Court affirmed the decision of the Madras High Court and allowed the appeal of the Revenue filed against the Gujarat High Court.

II. HIGH COURT

3 Deem Distributors (P) Ltd. vs. UOI [2021 (129) taxmann.com 134 (Tel)] Date of order: 3rd August, 2021

The provisions of the GST law do not confer any advisory jurisdiction on the respondents to issue any ‘advises’ to the taxpayers to pay tax before ascertainment of the liability as required by section 74(9) and no demands in the form of letters asking the taxpayer to pay GST along with interest and penalty can be issued or raised when the investigation is still in progress

FACTS
The petitioner is a partnership firm registered under the GST Act. They availed Input Tax Credit (ITC) based on invoices issued by certain suppliers / firms. The Department requested them to reverse the said credit on the ground that the said credit has been availed fraudulently without receiving any material as the suppliers / firms are fictitious and are issuing fake invoices with intent to pass on the ITC. Summonses were also issued in the name of the Directors of the petitioner firm; however, the investigation was not complete and the show cause notice u/s 74 was issued. The petitioner deposited certain amounts merely to avoid coercion and buy peace, but challenged the said letters before the Court on the ground that liability cannot be determined by the respondents before conducting inquiry when even the investigation is incomplete and that any advice or demand can at best be a provisional one; and the petitioner cannot be compelled coercively to pay  the amounts.

HELD
Referring to the provisions of section 74 and the affidavit in reply filed by the Department, the Court held that a conclusion that the petitioner had availed ITC and raised invoices by certain fictitious suppliers without actual receipt of goods, appears to have been drawn based on an incomplete investigation. It further held that section 74(5) gives a choice to the assessee to make any payment if he so chooses, but it does not confer any power on the respondents to make a demand as if there has been a determination of the liability of the assessee and demand tax along with interest and penalty. Hence, before ascertainment of the liability, as required by section 74(9), the Department could not have issued the letters advising the petitioner to reverse the input tax allegedly availed. The Court accordingly held that no advisory jurisdiction is conferred on the respondents to issue any ‘advises’ of the nature issued to the petitioner and no demands can be issued or raised when the investigation is still in progress. The Department cannot be allowed to put the cart before the horse and collect any tax, interest or penalty before they determine it in an inquiry. Any such action is wholly arbitrary and without jurisdiction. The Court thus directed the Department to refund the amount already deposited along with interest and proceed with their inquiry strictly in accordance with the provisions of law.

4 R.M. Dairy Products LLP vs. State of UP [2021 (129) taxmann.com 37 (All)] Date of order: 15th July, 2021

Rule 86A is not a recovery provision but only a provision to secure the interest of Revenue. It only provides, in certain situations and upon certain conditions being fulfilled, the specified amount that may be held back and be not allowed to be utilised (i.e., debited to the electronic credit ledger) by the assessee towards discharge of its liabilities on the outward tax or towards refund. Hence, if as on the date of passing the order there is no balance in the electronic credit ledger, the order would be read to create a lien up to the monetary limit mentioned in the said order in respect of future credits availed and credited in the electronic credit ledger

FACTS
The petitioner filed a writ petition challenging the order passed by the Department under Rule 86A(1)(a)(i) [i.e., not allowing debit in the electronic credit ledger of the amount equivalent to the credit of input tax that has been allegedly availed on the strength of tax invoices or debit notes issued by the registered person who has been found to be non-existent or not to be conducting any business] of the State / Central Goods and Services Tax Rules, 2017 raising the objections that the Department has no jurisdiction or authority to block any ITC over and above any amount that may have been actually available on the date of the order. The Department has to record a positive ‘reason to believe’ that credit of input tax had been fraudulently availed or the petitioner was wholly ineligible to avail the same. The adjudication proceedings in respect of the very same matter are underway in accordance with section 74 and till those proceedings are concluded, no amount would become recoverable from the petitioner u/s 78.

HELD
Referring to various provisions of the Act, the Court noted that the recovery provisions are contained in section 79 and the enabling Rules fall under Chapter XVIII being Rules 142 to 161. On the other hand, Rule 86A falls under Chapter IX of the Rules regarding payment of tax. It further held that the ambit and purpose of Rule 86A are inherently different and independent of the recovery provisions. Referring to Rule 86A, the Court held that it does not contemplate any recovery of tax due from an assessee. It only provides, in certain situations and upon certain conditions being fulfilled, the specified amount that may be held back and be not allowed to be utilised by the assessee towards discharge of its liabilities on the outward tax or towards refund. It creates a lien without actual recovery being made or attempted. The Court further clarified that Rule 86A does not allow the Revenue to reverse or appropriate any part of the credit existing in the electronic credit ledger or to adjust that credit against any outstanding demand or likely demand. It is at most a provision to secure the interest of Revenue, to be exercised in the presence of the relevant ‘reasons to believe’, as recorded and in respect of the amount equivalent to credit fraudulently taken which has to be kept unutilised. To that effect, the Legislature has chosen the words ‘not allow debit’ which is different from the word ‘appropriate’. The adjustment or appropriation may arise only upon an adjudication order attaining finality or after the lapse of three months from the date of it being passed if there is no stay granted in appeal, etc., that, too, as a consequence of the recovery provisions but not under Rule 86A of the Rules.

The Court further held that the words ‘input tax available’ used in the first part of sub-rule (1) of Rule 86A cannot be read as actual input tax available on the date of the order passed under that Rule. It would always relate back in time when the assessee allegedly availed ITC either fraudulently or which he was not eligible to avail. It does not refer to and therefore does not relate to the ITC available on the date of Rule 86A being invoked. The word ‘has been’ used in Rule 86A (1) leaves no manner of doubt in that regard. The Court also explained that the ‘ineligibility’ of the credit as mentioned in the said Rule is only for the reasons mentioned in the said Rule. The Court noted that the correctness or otherwise or the sufficiency of the ‘reason to believe’ was not the subject matter of dispute before it and the ‘reason to believe’ is based on material with the competent authority indicating the non-existence of the selling dealer which is a valid reason to invoke the said Rule.

5 Satyam Shivam Papers Pvt. Ltd. vs. Assistant Commissioner of Service Tax, Hyderabad [2021 (50) GSTL 459] Date of order: 2nd June, 2021

Section 129 of the Central Goods and Services Tax Act, 2017 – Mere expiry of E-way bill cannot lead to a presumption of intention to evade tax and invoke penalty

FACTS
The petitioner had made an intra-state supply and generated an E-way bill on 4th January, 2020. The transporter started for the delivery by an auto-trolley at 4.33 pm on the same day. On the way, there was a traffic jam on account of a political rally due to which the auto trolley could not move. This continued till 8.30 p.m. by which time the shop of the buyer was closed. Therefore, the driver took the auto trolley to his residence and planned to complete the delivery on the next working day. The next day being a Sunday, the goods were intended to be delivered on 6th January, 2020. On the way to delivery, the Respondent No. 2 (i.e., Deputy State Tax Officer, Bowenpally-II, Circle, Begumpet Division) detained the goods and a Notice for Detention in Form GST MOV-07 was issued alleging that the validity of the E-way bill had expired and proposing to impose tax and penalty.

The detained goods were unloaded at the premise of a relative of Respondent No. 2 without tendering any acknowledgement receipt for the same. The petitioner made various representations against the action of Respondent No. 2; however, all of them were ignored, stating that it was a clear case of evasion of tax. Therefore, to get the goods released, the petitioner made a payment of Rs. 69,000 towards tax and penalty on 20th January, 2020. Further, the Respondent No. 2 passed an order dated 22nd January, 2020 in Form GST MOV-09, which was signed by the Respondent No. 1 (i.e., Assistant Commissioner [ST], Osmanganj, Circle, Charminar Division, Hyderabad). It was stated in the order that the petitioner admitted the liability and it had no objection to pay the proposed tax and penalty. Aggrieved by the said order of 22nd January, 2020, the petitioner preferred the present petition.

HELD
The High Court held that there had been a blatant abuse of power by unloading the goods at a relative’s premise and by issuing an order that was signed by the Respondent No. 1. Also, no material was placed on record by the Respondent No. 2 to conclude that there was evasion of tax by the petitioner. Mere expiry of time limit mentioned on the E-way bill cannot lead to a presumption of intention to evade tax. Therefore, the order dated 22nd January, 2020 was set aside and the Respondents were directed to refund the amount of Rs. 69,000 to the petitioner along with interest @ 6% p.a. from 20th January, 2020 till the date of repayment. The Respondent No. 2 was also directed to pay a cost of Rs. 10,000 to the petitioner.

6 Anuj Mahesh Gupta vs. Asstt. Commissioner of Sales Tax, Mumbai [2021 (50) GSTL 180 (Bom)] Date of order: 12th July, 2021

Section 167(2)(a)(ii) of Code of Criminal Procedure – Assessee can be granted bail on expiry of 60 days from detention even in case of cognisable and non-bailable offences

FACTS
The petitioner is sole proprietor of M/s Savvy Fabrics and partner in M/s Shubhmangal Textile Industries LLP. It was alleged that he was actively involved in receiving tax invoices or bills without any actual supplies of goods or services or both and claiming ineligible ITC on such invoices. Thus, he had committed cognisable and non-bailable offences u/s 132(1)(b)(c) of the MGST Act by receiving fake invoices of more than Rs. 277 crores and taking ITC of at least Rs. 31 crores. As per clause (i) of section 132 of the CGST Act, in cases where the amount of tax evaded or the amount of ITC wrongly availed of or utilised or the amount of refund wrongly taken exceeds Rs. 500 lakhs, then the punishment would be imprisonment for a term which may extend to five years and with fine. As per section 167 of the Code of Criminal Procedure, 1973 where investigation could not be completed within 24 hours, the accused can be detained up to a maximum period of 60 days where the investigation relates to an offence other than those which are punishable with death, imprisonment of life or imprisonment of at least ten years and on expiry of such 60 days, the accused shall be released on bail. The petitioner was arrested on 15th January, 2021 and had completed 54 days in custody; therefore, the present petition was filed to examine the prayer for bail made by the petitioner.

HELD
The High Court applied section 167(2)(a)(ii) of the Code of Criminal Procedure, 1973 and held that the petitioner should be released on bail subject to certain conditions, viz., he should furnish case surety of Rs. 5 lakhs and within two weeks of release he should furnish solvent surety of like amount, the petitioner should co-operate in the investigation, he shall not tamper with any evidence or try to intimidate any witness, and the petitioner shall deposit his passport with the authorities.

7 Kerala Communicators Cable Ltd. vs. Addl. Dir.-General DGGI, Kochi [2021 (50) GSTL 116 (Ker)] Date of order: 24th March, 2021

Section 83 of the CGST Act, 2017 – Stay was granted to furnish the bank guarantee during pendency of writ petition filed to challenge the validity of the provisional attachment of bank accounts

FACTS
A search and inspection u/s 67 of the CGST Act was conducted at the premises of the petitioner. Based on this and to protect the interest of Revenue, the respondent had passed orders to provisionally attach the bank accounts of the petitioner. The petitioner had objected to such provisional attachment of its bank accounts and preferred a writ petition. During the pendency of the said petition, the provisional attachment order was modified and the petitioner was directed to furnish a security in the form of bank guarantee equivalent to Rs. 30 crores along with a bond. Pursuant to this direction, the petitioner furnished the bank guarantee and bond under protest reserving the right to challenge the modified order. Thus, being aggrieved by the modified provisional attachment order imposing additional condition to furnish bank guarantee and bond, the present writ petition was filed.

HELD
The High Court observed that the respondent had not disclosed reasonable apprehension that necessitated the issuance of the provisional attachment order. Also, the bank guarantee of about Rs. 30 crores would certainly block a huge amount from the business of the petitioner. Therefore, the High Court granted a stay on the direction that required the petitioner to furnish the bank guarantee till the disposal of the writ petition and directed the petitioner to execute an undertaking that it shall not sell, alienate or deal with any of its fixed assets, plant, property and equipment shown in the balance sheet dated 31st March, 2020.

8 Dhirendra Singh vs. Commissioner of CGST, Commissionerate [2021 (50) GSTL 176 (Guj)] Date of order: 4th March, 2021

Input tax credit wrongly availed in respect of goods allegedly never received by assessee – Department directed to proceed further in accordance with law – Section 70 of CGST Act, 2017

FACTS
The petitioners are the Directors of M/s Manpasand Beverages Limited (‘MBL’). They were issued multiple summonses and instructed to produce all the documentary evidence essential to verify their GST liability. However, the Directors were unable to produce the requisite documents and the final GST liability could not be arrived at. Hence, the Department was of the view that MBL had contravened the provisions of section 16 of the CGST Act inasmuch as they knowingly availed ITC and used the same in payment of GST liability. This constitutes an offence under sections 132(1)(b), 132(1)(c) and 132(1)(l) of the CGST Act and they are liable for punishment of imprisonment up to five years in terms of section 132(5) of the CGST Act. Therefore, the present writ petition was filed to evade arrest by challenging the validity of the summonses issued u/s 70 of the CGST Act.

HELD
The High Court held that there was no good or legal ground to challenge the validity of the summonses issued u/s 70 of the CGST Act. As such, the writ application becomes infructuous and the Court was not inclined to extend any further protection to the petitioners. Further, if the petitioners apprehended that they would be arrested any time, it was open for them to take recourse to the steps available to them in accordance with the law to avoid arrest.
    
III. AUTHORITY OF ADVANCE RULING

9 Eastern Coalfields Ltd., Kolkata [2021-TIOL-221-AAR-GST] Date of order: 9th August, 2021

Since the supplier has paid tax belatedly, the assessee is denied input tax credit

FACTS
The question is whether the applicant is entitled for ITC already claimed by him on the invoices raised by one of the vendors pertaining to January, February and March, 2020 for which the supplier has actually paid the tax charged in respect of such supply to the Government in the month of November, 2020 while filing the GSTR3B in November, 2020. And whether the applicant has to reverse the said ITC already availed by him where the vendor has actually paid the tax, though belatedly.

HELD
The Authority noted that section 16 of the GST law prescribes conditions and restrictions towards entitlement of ITC. Sub-section (c) allows ITC provided the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of ITC admissible in respect of the said supply. However, it is evident that while the applicant has availed ITC in the months of January, February and March, 2020, respectively, the supplier has declared such outward supplies in his respective Form GSTR1 in the month of November, 2020 and has also paid the taxes on such supply upon furnishing of return in Form GSTR3B in the month of November, 2020. The Authority also noted that Form GSTR2B has been made effective from 1st January, 2021 but at the same time the applicant cannot deny that the provisions of sub-rule (4) of Rule 36 were already in force during the period when the applicant availed of the ITC. The applicant is therefore not entitled for ITC claimed by him pertaining to the months January, February and March, 2020 for which the supplier has furnished Form GSTR1 and Form GSTR3B in the month of November, 2020 and the applicant is, therefore, required to reverse the said ITC.

Note: The Authority in the present case has denied the entire credit even though the tax is paid by the supplier. Denial of entire credit does not appear to be justified; at the most, interest could be demanded for availment of credit prior to payment by the supplier.

IV. APPELLATE AUTHORITY FOR ADVANCE RULING

10 M/s Pioneer Bakers, Odisha [2021-TIOL-29-AAAR-GST] Date of order: 27th July, 2021

Restaurant is a place where food items are prepared and served to customers. A mere outlet where ready-to-eat items are sold across the counter cannot be considered as a restaurant

FACTS
The applicant is operating under the Brand name of ‘Go-Cool’ since the year 1997. They have established it as a brand in the field of bakery items, especially cakes. Their principal business is producing and selling of bakery products, viz., cakes, artisan cakes, pastries, pizza, patties, sandwiches, self-manufactured ice-creams, handmade chocolates, cookies, beverages, etc. They also offer a number of customisation options to customers with respect to the above products. The outlets are equipped with all the facilities to dine such as tables and chairs, air conditioner, drinking water, stylish lights for providing a nice ambience which provide an overall good experience to the customers.

The question before the Authority, whether supply of food items prepared at the premises of the applicant and supplied to the customers from the counter (with the facility to consume the same in the air-conditioned premises itself) is covered under restaurant services was answered in the affirmative. Aggrieved by the order, this appeal was filed.

HELD
The Authority noted that the meaning of restaurant is provided in the Cambridge Dictionary as a place where meals are prepared and served to the customer. The serving of the items to the customers for consuming the food in the premises is done for very few customers. Therefore, the establishment cannot be considered as a restaurant. It was stated that, in the instant case, it is a bakery outlet where ready-to-eat items are sold and a mere facility is provided to eat them in the shop itself. The applicant only prepares birthday cakes as per orders for take-out service and does not prepare birthday cakes immediately on the customer’s order. For those who want to consume it within the premises, they merely supply the readily available cakes. They do not serve food on the customer’s table and in most cases the items are sold only across the counter. Therefore, the applicant should not be considered as providing Restaurant Services.

RECENT DEVELOPMENTS IN GST

NOTIFICATIONS
Changes in Rules: Notification No. 32/2021-Central Tax dated 29th August, 2021
By the above Notification, the following changes have been effected in the CGST Rules, 2017:

(i) In case of companies a facility to upload returns, etc., by EVC was valid up to 31st August, 2021. With this Notification, the said facility is extended till 31st October, 2021. The facility will not be available from 1st November, 2021.
(ii) As per rule 138E of the CGST Rules, 2017 there are restrictions on furnishing of information in Part A of Form GST-EWB-01, if there is failure to file returns for two consecutive tax periods. However, in view of the pandemic, the above restriction was made non-applicable if the failure to file return was for the period February, 2020 to August, 2020 and the relaxation was operative up to 15th October, 2020. Now, by inserting a 5th proviso in the above rule, the said restriction is relaxed for the period from 1st May, 2021 to 18th August, 2021 in case where the return in Form GSTR3B or Form GSTR1 or GST-CMP-08 has not been filed for the period March, 2021 to May, 2021.
(iii) Certain changes have been made in Form GST-ASMT-14 (i.e., notice for assessment u/s 63). The notice now provides a reference number of the order cancelling registration. This will be useful for ready reference. The second change in the above form is to remove duplication of contents. And the third change is to incorporate the address of the issuing authority. This is also a good change so that the noticee can easily locate the officer.

Extension of amnesty regarding late fees: Notification No. 33/2021-Central Tax dated 29th August, 2021
By the earlier Notification dated 1st June, 2021 (details of which are given in the BCAJ issue of July, 2021) the Government has given relaxation in late fees for delayed filing of returns. The time limit for availing the above relaxation was up to 31st August, 2021. By the above Notification, the said time limit is extended up to 30th November, 2021.

Extension for filing revocation application: Notification No. 34/2021-Central Tax dated 29th August, 2021
Upon cancellation of registration, the affected person is allowed to file revocation application whereby he can apply for revocation of cancellation of registration. Such application is required to be filed within 30 days of cancellation of the registration order. By the above Notification, relaxation is given that if such cancellation is under section 29(2)(b) or (c) and if the time limit for filing revocation application falls between 1st March, 2020 and 31st August, 2021 then, such person can file revocation application till 30th September, 2021.

Under section 29(2)(b) the registration can be cancelled if there is failure to file returns by the composition person for three consecutive tax periods.

Under section 29(2)(c) the registration can be cancelled if there is failure to file returns by any registered person for a continuous period of six months.

The benefit of relaxation is given in the above cases only.

CIRCULARS

Clarification regarding extension of limitation for filing revocation application: Circular No. 158/14/2021-GST dated 6th September, 2021
The Government has given relaxation in filing revocation application as per Notification No. 34/2021-Central Tax dated 29th August, 2021, mentioned above. In respect of the above relaxation, the CBIC has issued the above Circular in which various clarifications covering various situations are given. The intention is that the affected person should get an opportunity to get his grievance of cancellation redressed by way of a revocation application.

Clarification on doubts related to scope of ‘Intermediary’ services: Circular No. 159/15/2021-GST dated 20th September, 2021

The Government has clarified the scope of Intermediary Services through the above Circular, issued after the GST Council meeting held on 17th September, 2021.

Clarification on certain issues: Circular No. 160/16/2021-GST dated 20th September, 2021
The above Circular has been issued to clarify certain issues in respect of
1. Time limit for availment of ITC in respect of Debit Notes to be considered with reference to the date of issuance of Debit Note, w.e.f. 1st January, 2021 [section 16(4)].
2. No necessity of carrying physical copy of Tax Invoice during journey in case where invoice has been generated in prescribed mode of e-invoice. [Rule 48(4).] Production of QR code, with embedded IRN, would suffice.
3. Applicability of restrictions imposed u/s 54(3) of the CGST Act for availment of refund of accumulated ITC, in case of export of certain goods.

Clarification relating to Export of Services: Circular No. 161/17/2021-GST dated 20th September, 2021
An important aspect related to Export of Services has been clarified through the above Circular. After a detailed analysis of legal provisions, the Circular concludes that ‘a company incorporated in India and a body corporate incorporated by or under the laws of a country outside India, which is also referred to as foreign company under Companies Act, are separate persons under the CGST Act, and thus are separate legal entities. Accordingly, these two separate persons would not be considered as “merely establishments of a distinct person in accordance with Explanation 1 in section 8”.’

Therefore, supply of services by a subsidiary / sister concern / group concern, etc., of a foreign company, which is incorporated in India under the Companies Act, 2013, may qualify for being considered as export of services, as it would not be treated as supply between merely establishments of distinct persons under Explanation 1 of section 8 of the IGST Act, 2017. Similarly, the supply from a company incorporated in India to its related establishments outside India, which are incorporated under the laws outside India, would not be treated as supply to merely establishments of distinct person under Explanation 1 of section 8 of the IGST Act, 2017. Such supplies, therefore, would qualify as ‘export of services’, subject to fulfilment of other conditions as provided under sub-section (6) of section 2 of the IGST Act.

ADVANCE RULINGS
(1) ITC – Eligibility for Solar Plant
M/s KLF Nirmal Industries Pvt. Ltd. (Order No. 19/ARA/2021 dated 18th June, 2021) (Tamil Nadu)
The facts are that the applicant is in the business of edible oil and has an extracting plant in the State of Tamil Nadu. For operating the plant, the applicant has got a solar plant installed in its factory. The supplier has considered the supply / installation of the solar plant as works contract.

It is positively confirmed that the electricity generated is only used for its captive consumption in the plant and nothing is given to outside agencies. To substantiate this fact, they have produced the memo issued by the Tamil Nadu Generation and Distribution Corporation Ltd., wherein it is stated as under:

‘(13) At present, as per the Hon’ble TNERC’s Grid Connectivity and Intra-State Open Access Regulations, 2014, parallel operation charges (Rs. 15,000 per month per MW or part thereof as per TNERC Order No. 5 of 2019 dated 29th March, 2019) as fixed by the TNERC have to be paid by the generator. This charge is applicable as the generator is availing parallel operation with the grid for captive use of solar power without availing open access and it is subject to revision based on the TNERC order issued from time to time.’

The applicant also submitted that the solar plant is capitalised in their books in the category of ‘Plant and Machinery’ and also that no depreciation is claimed on the GST component.

Based on the above facts, the applicant has posed the following questions:

‘1. Whether the company is eligible to take input tax credit as inputs / capital goods or input services of the items listed in Appendix-A.
2. Whether the company is eligible to take input tax credit for inputs and services for running the solar plant.’

The AAR referred to the statutory provisions of sections 16 and 17 of the CGST Act and observed the requisites for getting ITC. He noted that the applicant fulfils the conditions of section 16 as it has tax invoice, it is for business, the goods are received, the tax charged is paid and the return is filed. There is no dispute about compliance of the above conditions.

Reference was also made to the provision of blocked credit in section 17(5)(c). The said section is also reproduced in the AR as under:

‘(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely,
(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
Explanation – For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes
(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises.’

The AAR observed that the said section will not affect the case of the applicant because although the solar plant is a works contract and it is an immovable property, but still it is in the excluded category being ‘plant and machinery’.

There were other purchases in the block of plant and machinery. However, since it was not substantiated further, the AAR did not give any further ruling on the same.

Based on the above facts, the AAR held that the applicant is eligible to take ITC on the solar plant.

(2) Exemption – Registration
M/s Sachdeva College Ltd. (Advance Ruling No. HR/HAAR/2020-21/16 dated 23rd June, 2021) (Haryana AAR)
The applicant is a limited company incorporated under the Companies Act. It provides training to selected candidates sponsored by the Directorate of Welfare of Scheduled Caste and Backward Classes Department, Haryana (referred to as Directorate of Welfare).

There is an agreement with the Directorate of Welfare and the whole expenditure is borne by the Government.

Based on the above facts, the following questions were put before the AAR:

‘2. The questions framed in advance ruling application are:
2.1 To determine the liability to pay GST / IGST tax on training to students at the behest of the Directorate of Welfare of Scheduled Caste and Backward Classes Department, Haryana by the applicant under a training programme for which the total expenditure is borne by the State Government of Haryana which implements three types of schemes, i.e., State Scheme, Sharing basis, Centrally-sponsored Scheme, especially in view of Entry No. 72 of the Haryana Government Excise & Taxation Department Notification No. 47/ST-2 dated 30th June, 2017, and whether this Entry grants exemption of GST on the training of students by the petitioner?
2.2 Whether the applicant is liable to be registered under the State of Haryana under HGST / CGST in view of the facts and circumstances of the present case?’

The applicant is claiming exemption for fees received from the Directorate of Welfare. The Excise and Taxation Commissioner, Haryana has clarified that no GST is payable on schemes related to training as per Entry No. 72 of the Haryana Department vide Notification dated 30th June, 2017.

The AAR referred to the exemption entry in the Haryana SGST and CGST as under:

‘E. Following services have been exempted by Notification No. 47-ST-2 (HGST) Entry No. 72 of HGST; 09/2017 (IGST) Entry No. 75 of IGST; and 12/2017 (CGST) Entry No. 69 of CGST:

47-ST-2 (HGST) Entry No. 72 of HGST:
“Services provided to the Central Government, State Government, Union Territory Administration under any training programme for which total expenditure is borne by the Central Government, State Government, Union Territory Administration.”

09/2017 (IGST) Entry No. 75 of IGST:
“Services provided to the Central Government, State Government, Union Territory Administration under any training programme for which total expenditure is borne by the Central Government, State Government, Union Territory Administration.”

12/2017 (CGST) Entry No. 69 of CGST:
“Services provided to the Central Government, State Government, Union Territory Administration under any training programme for which total expenditure is borne by the Central Government, State Government, Union Territory Administration”.’

The meaning of ‘coaching’ as given in the Cambridge Dictionary was referred to, which defines coaching as under:
‘the job or activity of providing training for people or helping to prepare them for something.’

The AAR relied upon the clarification given by the Excise Commissioner to the Directorate of Welfare in which, with reference to the above Entry No. 72 in Notification No. 47/HGST dated 30th June, 2017, it is clarified that no tax is payable, the transaction being exempt under the above entry.

Accordingly, the AAR opined that no tax is payable on the above transactions.

Regarding the liability for registration, the AAR observed as under:

‘Further, section 23 of the Act provides that any person engaged exclusively in the business of supplying goods and services or both that are not liable to tax or fully exempt from tax under this Act or under the Integrated Goods and Service Tax Act… So the applicant is not liable for registration till he supplies goods and services or both that are not liable to tax or fully exempt from tax under the GST Acts.’

Thus, the AR decided in favour of the applicant.

(3) Exempt supply vis-à-vis local authorities
M/s CMS Engineering Concern (Advance Ruling No. 05/WBAAR/2021-22 dated 30th July, 2021) (WB AAR)
The applicant, M/s CMS Engineering Concern, is engaged in the operation of water pumps and safeguarding pumping machinery at various pump-houses in different districts of West Bengal for supply of drinking water to the public and hospitals upon receipt of a work order from the Directorate of Public Health Engineering, Government of West Bengal (hereinafter referred to as the PHE Directorate).

The applicant is of the opinion that he provides services to local authority, i.e., Panchayat and Municipality, whose powers and duties are described in Article 243G and Article 243W of the Constitution of India. The services are described in the Eleventh and Twelfth Schedule of the Constitution attached to Article 243G (Panchayat) and Article 243W (Municipality). Both of the said Schedules contain ‘Drinking water’ and ‘Water supply for domestic, industrial and commercial purposes’.

Therefore, according to the applicant, the services provided by him are pure services which do not involve any supply of goods. Further, such services are provided to a local authority by way of activity in relation to the function entrusted to the Panchayat under Article 243G or in relation to the function entrusted to the Municipality under Article 243W and therefore the services are exempt from taxation vide entry at serial number 3 of the Notification No. 1136 F.T. dated 28th June, 2017 of the WB SGST [corresponding Central Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017 under CGST], as amended from time to time.

Based on the aforesaid nature of supply, the applicant has sought advance ruling on the question as to whether or not the services provided by him are exempt from GST.

The applicant referred to the advance ruling pronounced by the West Bengal AAR in the matter of Mahendra Roy (Case No. 35 of 2019-2019-VIL-288-AAR) where the applicant is stated to be providing conservancy / solid waste management service to the Conservancy Department of the Howrah Municipal Corporation. In this case, the AAR has held that the supply is exempt from the payment of GST under Sl. No. 3 of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017, as amended from time to time.

The Revenue objected that the services rendered by the applicant for supervision of electrical installation and operating and guarding of pumping machinery are supply of services in the form of works contract or job work. These supplies in no way are sovereign services of the Government. Therefore, it was submitted that the stated services could not be considered as services falling under the purview of Articles 243G and 243W of the Constitution.

The AAR referred to the Entry involved and reproduced the same as under:

Entry serial No. 3 of the Notification No. 1136 F.T. dated 28th June, 2017:

Sl.
No.

Chapter, Section, Heading, Group or Service Code
(Tariff)

Description
of Services

Rate
(per cent)

 

Condition

3

Chapter 99

Pure Services (excluding works

NIL

NIL

 

 

(continued)

contract service or other composite supplies involving supply of
any goods) provided to the Central Government, State Government or Union
Territory or Local Authority or a Governmental authority by way of any
activity in relation to any function entrusted to a Panchayat under Article
243G of the Constitution or in relation to any function entrusted to a
Municipality under article 243W of the Constitution

 

 

    

Based on the above entry, the issues to be decided were:
(i) whether the instant supply of services can be treated as pure services;
(ii) whether the applicant provides services to the Central Government, State Government or Union Territory or Local Authority or a Governmental authority; and
(iii) whether the said services are in relation to any function entrusted to a Panchayat under Article 243G or to a Municipality under Article 243W of the Constitution of India.

The AAR observed that pure services will mean supply of services which do not involve any supply of goods.

Although minute details of the work involved were not available, the AAR assumed that if it does not involve goods, it will not be works contract, as works contract takes place when goods are involved. Since there is no activity of treatment or process of goods, it cannot be job work also, observed the AAR.

The AAR also referred to the functions entrusted to the Panchayat and Municipality under Articles 243G / 243W by reproducing the Articles.

He found that the functions entrusted to a Panchayat or to a Municipality as listed in the Eleventh and / or Twelfth Schedule include the functions like drinking water or water supply for domestic, industrial and commercial purposes.

In view of the above, the AAR held that the services as provided by the applicant for operation of water-pump and safeguarding pumping machinery at various pump-houses in different districts for supply of drinking water is a matter listed in the Eleventh and / or Twelfth Schedule in relation to functions entrusted to a Panchayat under Article 243G and / or to a Municipality under Article 243W of the Constitution and accordingly held the supply as exempt.

(4) Maintainability of Advance Ruling application
M/s Sree Krishna Rice Mill (Advance Ruling No. 04/WBAAR/2021-22 dated 30th July, 2021) (WB AAR)
The applicant, Sree Krishna Rice Mill, has entered into agreements with State Government agencies for custom milling of paddy, i.e., production of rice on job work. In the execution of custom milling, the applicant has to collect / procure paddy from paddy storage centres (commonly known as Mandis) and thereafter transport it to its milling site. After milling of rice from the said procured paddy, the applicant delivers such milled rice from its milling site to the various delivery centres.

According to the applicant, milling charges and usage charges for packing of rice is a taxable supply on which tax is levied @ 5% (CGST @ 2.5% and SGST @ 2.5%). However, on the issue of the services of transportation of paddy / rice, the applicant is of the opinion that the transportation charges in relation to paddy / rice are exempt from payment of tax under Entry serial No. 21 of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017, being services provided by a goods transport agency by way of transport in a goods carriage of agricultural produce. The applicant further expressed his view that labour charges on procurement of paddy are not liable to tax under the GST Act.

Based on the aforesaid nature of supply, the applicant raised the following issues before the AAR:
(i) Whether transportation of raw paddy from the point of purchase to the rice mill is taxable or not;
(ii) Whether the reimbursement of Mandi labour charges is taxable or not.

The AAR discussed details of the above issues at great  length. However, he noted that at present investigation proceedings are pending related to custom milling of paddy. He referred to the 1st proviso to sub-section (2) of section 98 of the CGST Act which says that the AAR shall not admit an application where the question raised is already pending or decided in any proceedings in the case of an applicant under any of the provisions of this Act.

Although in the application uploaded on 31st March, 2021 a declaration is made that the questions raised in the application are not pending nor decided in any proceeding, the correct fact is that the applicant has been served with a notice dated 16th March, 2021 in connection with proceedings under the provisions of the GST Act and the questions raised in the instant application are related to the said proceedings.

Under the circumstances, the AAR denied any ruling on the application and disposed of it accordingly.

FROM PUBLISHED ACCOUNTS

Compiler’s Note:
In the financial sector, virtual currencies are the topic of discussion. Several companies across the world have embraced this new development and started accepting or investing in virtual currencies. Given below are illustrative disclosures in the financial statements of three companies in the US which have accepted virtual currencies as a mode of settlement of their trade transactions or are investing in the same.

MICROSTRATEGY INCORPORATED

Organisation
MicroStrategy pursues two corporate strategies in the operation of its business. One strategy is to grow our enterprise analytics software business and the other is to acquire and hold Bitcoin.

Digital assets
During the second half of 2020, the Company purchased an aggregate of $1.125 billion in digital assets, comprised solely of Bitcoin. The Company accounts for its digital assets as indefinite-lived intangible assets in accordance with Accounting Standards Codification (‘ASC’) 350, Intangibles-Goodwill and Other. The Company has ownership of and control over its Bitcoin and uses third-party custodial services at multiple locations that are geographically dispersed to store its Bitcoin. The Company’s digital assets are initially recorded at cost. Subsequently, they are measured at cost, net of any impairment losses incurred since acquisition.

The Company determines the fair value of its Bitcoin on a non-recurring basis in accordance with ASC 820, Fair Value Measurement, based on quoted (unadjusted) prices on the active exchange that the Company has determined is its principal market for Bitcoin (Level I inputs). The Company performs an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted (unadjusted) prices on the active exchange, indicate that it is more likely than not that any of the assets are impaired. In determining if an impairment has occurred, the Company considers the lowest price of one Bitcoin quoted on the active exchange at any time since acquiring the specific Bitcoin held by the Company. If the carrying value of a Bitcoin exceeds that lowest price, an impairment loss has occurred with respect to that Bitcoin in the amount equal to the difference between its carrying value and such lowest price.

Impairment losses are recognised as ‘Digital asset impairment losses’ in the Company’s Consolidated Statements of Operations in the period in which the impairment is identified. The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains (if any) are not recorded until realised upon sale, at which point they would be presented net of any impairment losses in the Company’s Consolidated Statements of Operations. In determining the gain to be recognised upon sale, the Company calculates the difference between the sales price and carrying value of the specific Bitcoins sold immediately prior to sale.

See Note 5, Digital Assets, to the Consolidated Financial Statements for further information regarding the Company’s purchases of digital assets.

Note 5: Digital Assets
During the year ended 31st December, 2020, the Company purchased approximately 70,469 Bitcoins for $1.125 billion in cash, including cash from the net proceeds related to the liquidation of short-term investments and the issuance of its convertible senior notes. During the year ended 31st December, 2020, the Company incurred $70.7 million of impairment losses on its Bitcoin. As of 31st December, 2020, the carrying value of the Company’s Bitcoin was $1.054 billion, which reflects cumulative impairments of $70.7 million. The carrying value represents the lowest fair value of the Bitcoins at any time since their acquisition. The Company did not sell any of its Bitcoins during the year ended 31st December, 2020.

SQUARE, INC.


Bitcoin Revenue
The Company offers its Cash App customers the ability to purchase Bitcoin, a cryptocurrency denominated asset, from the Company. The Company satisfies its performance obligation and records revenue when Bitcoin is transferred to the customer’s account. The Company purchases Bitcoin from private broker dealers or from Cash App customers and applies a small margin before selling it to its customers. The sale amounts received from customers are recorded as revenue on a gross basis and the associated Bitcoin cost as cost of revenues, as the Company is the principal in the Bitcoin sale transaction. The Company has concluded it is the principal because it controls the Bitcoin before delivery to the customers, it is primarily responsible for the delivery of the Bitcoin to the customers, it is exposed to risks arising from fluctuations of the market price of Bitcoin before delivery to the customers, and has discretion in setting prices charged to customers.

Investments in Bitcoin
Bitcoin is a cryptocurrency that is considered to be an indefinite lived intangible asset because Bitcoin lacks physical form and there is no limit to its useful life. Accordingly, Bitcoin is not subject to amortisation but is tested for impairment continuously to assess if it is more likely than not that it is impaired. The Company has concluded Bitcoin is traded in an active market where there are observable prices, a decline in the quoted price below cost is generally viewed as an impairment indicator, in which case the fair value is determined to assess whether an impairment loss should be recorded. If the fair value of Bitcoin decreases below the carrying value during the assessed period an impairment charge is recognised at that time. After an impairment loss is recognised, the adjusted carrying amount of Bitcoin becomes its new accounting basis. A subsequent reversal of a previously recognised impairment loss is prohibited until the sale of the asset. In the fourth quarter of 2020, the Company acquired $50 million of Bitcoin that it expects to hold as an investment for the foreseeable future. There was no impairment loss recorded on Bitcoin for the year ended 31st December, 2020.

Cost of revenue
Transaction-based costs
Transaction-based costs consist primarily of interchange and assessment fees, processing fees and bank settlement fees paid to third-party payment processors and financial institutions.

Subscription and services-based costs
Subscription and services-based costs consist primarily of caviar-related costs, which included processing fees, payments to third-party couriers for deliveries and the cost of equipment provided to sellers. Caviar-related costs for catered meals also included food costs and personnel costs. Subscriptions and services-based costs also included costs associated with Cash Card and Instant Deposit. The caviar business was sold in the fourth quarter of 2019.

Hardware costs
Hardware costs consist of all product costs associated with contactless and chip readers, chip card readers, Square Stand, Square Register, Square Terminal and third-party peripherals. Product costs consist of third-party manufacturing costs.

Bitcoin costs
Bitcoin cost of revenue comprises of the amounts the Company pays to purchase Bitcoin, which will fluctuate in line with the price of Bitcoin in the market.

Other costs
Other costs such as employee costs, rent and occupancy charges are generally not allocated to cost of revenue and are reflected in operating expenses.

TESLA, INC.
Investments
In January, 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximise returns on our cash that is not required to maintain adequate operating liquidity. As part of the policy, we may invest a portion of such cash in certain specified alternative reserve assets. Thereafter, we invested an aggregate $1.50 billion in Bitcoin under this policy. Moreover, we expect to begin accepting Bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt.

We will account for digital assets as indefinite-lived intangible assets in accordance with ASC 350, Intangibles-Goodwill and Other. The digital assets are initially recorded at cost and are subsequently re-measured on the consolidated balance sheet at cost, net of any impairment losses incurred since acquisition. We will perform an analysis each quarter to identify impairment. If the carrying value of the digital asset exceeds the fair value based on the lowest price quoted in the active exchanges during the period, we will recognise an impairment loss equal to the difference in the consolidated statement of operations.

The cost basis of the digital assets will not be adjusted upward for any subsequent increases in their quoted prices on the active exchanges. Gains (if any) will.

MISCELLANEA

I. World News

19 ‘Nobody should trust Wikipedia’, warns its co-founder; says the site is taken over by Leftists

Larry Sanger, the co-founder of Wikipedia, has said that nobody should trust the crowd-sourced online encyclopaedia as it is run by Left-leaning volunteers. The site is no longer trustworthy as it does not allow content that does not fit the agenda of Leftists, and therefore people can’t get a complete view on topics.

Sanger, who had co-founded Wikipedia along with Jimmy Wales in 2001, said that the platform has betrayed its original mission by only reflecting the views of the ‘establishment.’ In an interview with Lockdown TV, he said that he agrees with the view that there are teams of Democratic Party-leaning editors who remove content that they don’t like.

In fact, he noted, Wikipedia had lost its neutral nature way back in 2009, before which editors from all ideologies would debate equally before deciding what should be published on the platform. Articles on most recent issues, from Covid to Biden, had become partisan, particularly supporting the Biden administration on such issues and blacking out information that does not show the Democrats in positive light.

The Wikipedia co-founder gave examples of articles on Joe Biden and his son Hunter Biden in which important details about them were completely missing. The article on the US President does not mention most of the criticisms against him and it has completely whitewashed the Ukraine scandal. The paragraph on the Ukraine imbroglio ‘reads like a defence counsel’s brief’. The section concerned on the page says ‘no evidence was produced of any wrongdoing by the Bidens’ and that ‘Trump and his allies falsely accused Biden’ of involvement in Ukraine to protect Hunter Biden.

In fact, the Wikipedia page on Hunter Biden is even more shocking as it does not mention anything about the content found on his laptop. The article does say that no evidence of wrongdoing was found ‘after the seizure of a laptop purportedly belonging to Biden’, but does not mention other explosive content found in the laptop which was left by Hunter at a computer repair shop and which he forgot to pick up later.

In October last year, The New York Post had published emails retrieved from the laptop relating to Hunter’s business dealings in Ukraine and the links to his father. Twitter and Facebook, run by the same Left-leaning propagandists, had blocked The News York Post article, preventing people from sharing it. Similarly, Wikipedia is also completely blocking out any information about the contents of the laptop.

Larry Sanger said that Wikipedia’s coverage of Covid-19 is also very biased as it just reproduces the views of the World Economic Council or the World Economic Forum, the World Health Organization, the CDC and various other establishment mouthpieces like Anthony Fauci.

He also gave the example of Wikipedia articles on eastern medicine which are biased as they basically call the ancient medicine systems quackery in dismissive, quite judgmental language.

Showing how biased Wikipedia has become, Larry said that major media houses like Daily Mail and Fox News are blacklisted by it. This means that if something is covered by these published publications but not by the Leftist media houses, then that can’t be published on Wikipedia.

Wikipedia has become just like any other Left-leaning media house. ‘There are a lot of people who would be highly motivated to go in and make the article more politically neutral, but they’re not allowed to.’ Sanger added, ‘If only one version of the facts is allowed, then that gives a huge incentive to wealthy and powerful people to seize control of things like Wikipedia in order to shore up their power. And they do that.’

There are now big companies like Wiki PR that employ people to write on Wikipedia, but such writers and editors don’t reveal that they are associated with such companies. People are spending money to make changes to Wikipedia articles ‘because there’s a very big, nasty, complex game being played behind the scenes to make the article say what somebody wants them to say’.

Larry Sanger had left Wikipedia over differences with co-founder Jimmy Wales over how to run the website and has since become a staunch critic of it for its Left-leaning bias. Earlier, he had said that Wikipedia has become a huge moral hazard, saying that it has turned into a ‘monocultural establishment organ of propaganda’.

(Source: OpIndia – https://www.opindia.com/2021/07/nobody-should-trust-wikipedia-warns-its-co-founder-larry-sanger/-16th July, 2021)

II. Business

20 How can you become a space tourist?

Thrill-seekers might soon be able to get their adrenaline kicks – and envy-inducing Instagram snaps – from the final frontier, as space tourism finally lifts off. All you’ll need is a bit of patience. And a lot of money.

Here’s a rundown of where things stand.

Two companies are offering short ‘suborbital’ hops of a few minutes: Jeff Bezos’s Blue Origin and Virgin Galactic, founded by Richard Branson.

Blue Origin’s New Shepard rocket takes off vertically and the crew capsule detaches and crosses the Karman line (62 miles, or 100 kilometres, in altitude), before falling back to earth with three parachutes.

Virgin Galactic uses a massive carrier plane which takes off from a horizontal runway then drops a rocket-powered spaceplane. This, in turn, soars to over 50 miles altitude before gliding back.

In both cases, up to six passengers are able to unbuckle from their seats to experience a few minutes of weightlessness and take in the view of earth from space.

Virgin Galactic has said that regular commercial flights will begin from 2022, following two more test flights. Their waiting list is already long, with 600 tickets so far sold.

But the company predicts it will eventually run up to 400 flights per year. Two seats on one of the first flights are up for grabs in a prize draw: registrations are open until 1st September.

As for Blue Origin, no detailed calendar has been announced. ‘We’re planning for two more flights this year, then targeting many more in 2022,’ a spokesperson told AFP.

Another way to get to space is via reality television. Space Hero, an upcoming show, says it plans to send the winner of a competition to the International Space Station (ISS) in 2023.

The first tickets sold by Virgin Galactic went for between $200,000 and $250,000 each, but the company has warned that the cost for future sales will go up.

Blue Origin hasn’t announced prices. The anonymous winner of a public auction for a seat on the first crewed flight paid $28 million, but decided to defer the trip.

It’s not known what amount was bid for the seat secured by Dutch teen Oliver Daemen, who will fly in the auction winner’s place.

The more ‘budget-conscious’ might consider spending $125,000 for a seat on Space Neptune, a capsule that offers 360-degree windows and is lifted to the upper atmosphere by a balloon the size of a football stadium.

Despite the promise of spectacular views, the balloon ascends only 19 miles – far from the boundary of space and weightlessness. The 300 seats for 2024 have all been sold, but reservations are open for 2025.

No – you’re only expected to be in reasonable shape. Virgin Galactic’s training lasts just five days. And Blue Origin promises to teach you everything you need to know ‘the day before you launch,’ and its first crewed flight includes pioneering aviator Wally Funk, who at 82 will become the oldest astronaut.

The company’s requirements include being able to climb seven flights of stairs in under 90 seconds (the height of the launch tower) and being between 5’0” and 110 pounds (152 centimetres and 50 kilogrammes) and 6’4” and 223 pounds (193 cm. and 100 kg.).

Elon Musk’s company is also getting into the space tourism game, but its plans involve journeys that are far longer. The costs are also predicted to be astronomical – tens of millions of dollars.

In September, American billionaire Jared Isaacman has chartered a mission called Inspiration4 to take him and three other passengers into orbit around the earth on a SpaceX Crew Dragon, launched into space by a Falcon 9 rocket.

Then in January, 2022, three businessmen will travel to the ISS with an experienced astronaut. The mission, named Ax-1, is being organised by the company Axiom Space, which has signed up for three other future flights with SpaceX.

Elon Musk’s company is also planning a trip to orbit for four people, organised by intermediary Space Adventures – the same company in charge of the flight of the Japanese billionaire Yusaku Maezawa to the ISS in December, aboard a Russian Soyuz rocket.

Maezawa is also supposed to take a trip around the Moon in 2023, this time aboard a rocket that is still under development by SpaceX, called Starship.

He invited eight members of the public to join him – but applications are now closed.

(Source: International Business Times, 17th July, 2021 – By Lucie Aubourg)

III. Technology

21 How Web3 is overturning the Internet status quo

Today, it’s almost taken for granted that the Internet is controlled by a handful of tech behemoths that seem to amass more and more power every day. It’s easy to forget that when these titans first arrived on the scene, each one of them was considered a disrupter, a revolutionary, an upstart. Now, they are the establishment.

Since its birth in 1983, the Internet has evolved from an obscure and clunky tool used by a select few into a vast network integral to every facet of our lives. This destiny first became apparent during the dot-com boom of the 1990s. And although many naysayers were quick to self-congratulate during the ensuing bust, the downturn proved no more than a healthy pruning that readied the Internet for a new era of growth.

This next phase of Internet evolution, dubbed Web 2.0 in 2005 by Internet guru Tim O’Reilly, produced the trends that now dominate our lives: mobile-centric e-commerce, social media, user-generated content and video streaming. It also set the stage for the reign of the FAANGs: Facebook, Apple, Amazon, Netflix and Google.

Together, these giants offer us forms of connection, entertainment and instant gratification we could only have imagined a decade ago. But because their business models are based on the large-scale monetisation of data and centralised control of networks, our reliance on these services has also handed them enormous power: over our time, our wallets and our personal information.

That stranglehold may seem unbreakable at this point. But behind the scenes, away from debates about monopolies, privacy and free speech, a new incarnation of the Internet is emerging. Forces are quietly mustering for a new revolution – one whose very structure is designed to prevent such concentrations of profit and control from shaping the future.

The key to this new iteration is decentralisation. Its foundation is blockchain technology.

A quiet revolution

While the concept of blocks of information shackled together in a tamper-resistant way dates back to 1991, it wasn’t until 2009 that Satoshi Nakamoto, the pseudonym for the developer (or developers) of Bitcoin, set up the first blockchain to allow trading in the new currency. Now there are hundreds. On each blockchain, peers can exchange economic value – work, content, assets – without intermediaries.

This opens up the potential for a new kind of Internet – Web 3.0. Since blockchain transactions are anonymous and processed by a distributed network of many computers known as nodes, users no longer need to cede control of their data to a central authority. Meanwhile, the links between blocks produce a record that is resistant to hacking and manipulation.

Protocols powered by the many

There are a multitude of new ideas for how to use the power of decentralisation to offer tools and services that eschew centralised authority and are thus more affordable and accessible. And since protocols built on the distributed Internet are powered by hundreds or even thousands of computers, they are subject to neither single points of failure nor single points of control. This makes them both more stable and more secure.

As part of the Web3 community’s commitment to democratisation, many of these projects are led by Decentralised Autonomous Organisations (DAOs) – decentralised corporations governed by egalitarian communities rather than boards and executive hierarchies. Built on principles of self-sustaining growth and community governance, they are already having major real-world impacts.

Mirror, a community-run publishing protocol, puts power in writers’ hands. Since it is built on the Ethereum blockchain, the authorship and provenance of each piece of content is indelibly recorded. Writers can also collaborate on projects, turn their work into non-fungible tokens (NFTs) for auction, or even bankroll efforts by issuing their own tokens.

The user-generated music platform Playdj.tv uses decentralised infrastructure to cater to a different kind of creator at rates that enable it to be competitive with YouTube. Its platform enables DJs to set up their own live streams for their sets, which they can use to earn money and interact with fans all over the globe – a boon during the pandemic, when clubs and private party venues were forced to shut their doors.

The team behind Arweave has built a distributed hard drive that offers a permanent repository for all kinds of information and data. Then there’s The Graph, which helps make sense of all this by allowing fast, private and secure queries of its vast store of data about the Web3 universe.

New breeds of distributed financial systems are on the rise as well, including decentralised finance (DeFi) platforms where people can earn rewards by ‘staking’ assets and performing key tasks on a network. The number of decentralised cryptoasset exchanges (DEXs in industry parlance) has ballooned in the past two years, capturing some market share from their centralised counterparts (CEXs) with their promise of greater anonymity, safety and security.

Total trading volume on these platforms surged to a record $172 billion in May, more than twice the $80.2 billion record set just three months before. Protocols such as Uniswap have been at the forefront of this growth.

There are scores and scores more out there or percolating in the imaginations of developers, many of which will become the building blocks for a new Internet and a new economy. Some projects will inevitably fall by the wayside as Web3 grows to maturity, but many will survive and become foundational tools for the industries and customer bases they serve.

The difference this time is that these tools are governed and powered by their own user communities, rather than by the leaders of a small circle of massive corporations.

(Source: Opinion: International Business Times, 7th June, 2021 – By Doug Petkanis)

 

REGULATORY REFERENCER

DIRECT TAX

1. CBDT prescribes procedure for compliance check on sections 206AB and 206CCA – These two sections, effective from 1st July, 2021, provide for deduction or collection of tax at a higher rate in the case of non-filers of return of income. The CBDT has issued a new functionality, ‘Compliance Check for Sections 206AB & 206CCA’. This functionality is made available through the reporting portal of the Income-tax Department. It provides for compliance checks for single PAN or bulk verification. [Circular regarding use of functionality under sections 206AB and 206CCA. Circular 11 of 2021 dated 21st June, 2021; Notification No. 1 of 2021 dated 22nd June, 2021.]

2. Extension of time limits of certain compliances like filing of TDS returns for the last quarter of F.Y. 2020-21, issue of Form 16, filing of return of Equalisation Levy, etc., to provide relief to taxpayers in view of the pandemic. [Circular 12 of 2021 dated 25th June, 2021.]

3. CBDT issues guidelines to clarify provisions related to TDS u/s 194Q on purchase of goods – As per section 194Q, the buyer is responsible for deduction of tax from any sum paid to a resident seller for purchase of any goods, subject to certain threshold. CBDT has issued guidelines to remove the difficulties in implementation of section 194Q and in overlapping situations while implementing 194O and 206C(1H). [Circular 13 of 2021 dated 30th June, 2021.]

4. Guidelines for application of newly-inserted section 9B and amended section 45(4). [Circular 14 of 2021 dated 2nd July, 2021.]

5. Extension of various Income tax due dates including for imposition of penalty under Chapter XXI, linking of Aadhaar with PAN, for assessment or reassessment under the Income-tax Act and the time limit for completion of such action u/s 153 or u/s 153B, etc. [Notification No. 74 of 2021 dated 25th June, 2021.]

6. Last date of payment of amount under Vivad se Vishwas (without additional amount) which was earlier extended to 30th June, 2021 is further extended to 31st August, 2021. The last date of payment of amount under Vivad se Vishwas (with additional amount) has been notified as 31st October, 2021. [Notification No. 75 of 2021 dated 25th June 2021.]

7. Amendment to Rule 8AA and insertion of Rule 8AB – Income-tax (18th Amendment) Rules, 2021 – The Finance Act, 2021 inserted a new section, 9B, to provide that whenever a partner or member (specified person) receives any capital asset or stock-in-trade or both from a firm / AOP / BOI (specified entity), during the previous year in connection with the dissolution or reconstitution of such specified entity, it shall be deemed to be a transfer made by the specified entity to the specified person. Consequently, section 45(4) was amended. Section 48 was also amended to provide that the amount chargeable to income-tax as income of such specified entity u/s 45(4), which is attributable to the capital asset being transferred by the specified entity, shall be reduced from the full value of consideration while computing capital gains. CBDT notifies Rule 8AB for computation of sum attributable to capital asset u/s 48(iii). [Notification No. 76 of 2021 dated 2nd July, 2021.]

8. Insertion of Rule 8AC – Income-tax (19th Amendment) Rules, 2021 – CBDT has introduced Rule 8C to provide for computation of short-term capital gains and written down value of block of assets, where goodwill is a part of such block and depreciation has been obtained. [Notification No. 77 of 2021 dated 7th July, 2021.]

COMPANY LAW

I. COMPANIES ACT, 2013

(I) MCA clarifies that companies can conduct their EGMs via E-mode up to 31st December, 2021 – MCA has issued a clarification to allow companies to conduct their EGMs through VC / OVCM or transact items through postal ballot up to 31st December, 2021 in accordance with the framework provided in the various Circulars and subject to the conditions prescribed therein. [MCA General Circular No. 10/2021 dated 23rd June, 2021.]

(II) Companies (Accounting Standards) Rules, 2021 – The MCA notified the Companies (Accounting Standards) Rules, 2021. It applies to companies other than those preparing their financial statements using Ind AS framework. The Notification, effective 1st April, 2021, redefines a Small and Medium-Sized Company (SMC). The quantitative threshold limits to qualify as an SMC stand amended as follows: (a) turnover does not exceed Rs. 250 crores in the immediately preceding accounting year, and (b) borrowings, at any time during the immediately preceding year, do not exceed Rs. 50 crores. [MCA Notification dated 23rd June, 2021.]

(III) ICSI Guidance Note on CSR – The Institute of Company Secretaries of India has issued Guidance Note on Corporate Social Responsibilities. In this Guidance Note, provisions related to Business Responsibility Reports by Listed Companies, CSR in Insurance Companies, CSR in Banking Companies, CSR and Sustainable Development Goals, CSR and Corporate Governance, etc., have been elaborated in detail. [Published in June, 2021.]

(IV) MCA further extends due date for filing certain forms under the Companies Act and the LLP Act to 31st August, 2021 – Extension granted to companies / LLPs to file forms (other than a CHG-1 Form, CHG-4 Form and CHG-9 Form) which were / are due for filing from 1st April to 31st July, 2021 without any additional fees. [MCA General Circular No. 11/2021 dated 30th June, 2021.]

(V) MCA now allows companies to file charge-related forms without paying an additional fee up to 1st August, 2021 – In view of the Covid-19 pandemic, the MCA has decided to relax the timelines for filing of forms related to the creation / modification of charges. As a result, companies can file charge-related forms without paying an additional fee up to 1st August, 2021. [MCA General Circular No. 12/2021 dated 30th June, 2021.]

II. SEBI

(VI) SEBI introduces cross margin facility on commodity futures – In order to improve the efficiency of the use of the margin capital by market participants, SEBI has decided to introduce cross margin benefit between Commodity Index futures and futures of its underlying constituents or its variants. This shall reduce the cost of trading and may lead to enhanced liquidity in both the Commodity Index futures and its underlying constituent futures or its variants. [Circular No. SEBI/HO/CDMRD/CDMRD_DRM/P/CIR/2021/586, dated 29th June, 2021.]

(VII) SEBI issues SOP for company getting delisted through scheme of arrangement – SEBI has issued the Standard Operating Procedure (SOP) for listed subsidiary company desirous of getting delisted through a Scheme of Arrangement wherein the listed parent holding company and the listed subsidiary are in the same line of business. [Circular No. SEBI/HO/CFD/DIL1/CIR/P/2021/0585, dated 06th July, 2021.]

(VIII) Mutual Funds to provide justification to stakeholders if put option favourable to scheme is not exercised – Based on the recommendation of the Mutual Fund Advisory Committee, the SEBI has decided that, with effect from 1st October, 2021, if put option is not exercised by a Mutual Fund, and if exercising the put option would have been in favour of the scheme, then a justification for not exercising the put option shall be provided by the Mutual Fund to the Valuation Agencies (VA), Board of AMC and Trustees on or before the last date of notice period. [Circular No. SEBI/HO/IMD/DF4/P/CIR/2021/593, dated 09th July, 2021.]

(IX) SEBI reduces advance intimation timeline for modifications in commodity derivative contract – In order to bring in uniformity while giving effect to the contract modifications (so that they have the desired impact) and the modified contract represents a healthy replica of the physical market, SEBI has decided, in consultation with the stock exchanges, to reduce the number of days of advance intimation for all the three categories, i.e., non-material, material and material modifications which can be made only after approval from SEBI, to ten days. [Circular No. SEBI/HO/CDMRD_DOP/P/CIR/2021/592, dated 08th July, 2021.]

FEMA
(i) RBI has decided to collect information about LRS transactions in XBRL format instead of the Online Return Filing System (ORFS). Accordingly, AD Category – I banks shall upload the requisite information on the XBRL system on or before the fifth of the succeeding month from 1st July, 2021 onwards. [A.P. (DIR SERIES 2021-22) Circular No. 7, dated 17th June, 2021.]

(ii) Indian residents are permitted under LRS to make remittances to units set up in IFSCs in India for investment purposes since February 2021. For this purpose, Resident Individuals could also open a non-interest-bearing Foreign Currency Account (FCA) in IFSCs. The International Financial Services Centres Authority (IFSCA) has now amended regulations applicable to Banking Units in such IFSCs. Among other amendments, such Banking Units can now open accounts in a freely convertible foreign currency for individuals and corporate or institutional entities, resident in India or outside India, subject to such conditions as may be specified by the Authority. [Notification No. IFSCA/2021-22/GN/REG013, dated 5th July 2021.]

(iii) The Government had announced a hike in foreign investment limit for the Insurance Sector from 49% to 74% during the Budget on 1st February, 2021 and an appropriate Amendment Bill was passed into law (covered in the April, 2021 issue of this Journal) followed by formally notifying these amendments on 19th May, 2021 with Clarifications on the final rules for increasing the foreign direct investment limit to 74%. The FDI Policy for the same was also amended by the issuance of Press Note 2 of 2021 (covered in the July, 2021 issue of this Journal). The IRDAI has now amended regulations mandating requirement of Resident Indian Citizens at various management posts of Indian Insurance Companies having foreign investment. Further, there are disclosure and compliance requirements stated in respect of these new regulations. Full details are provided in the Notification. It should be noted that a corresponding amendment in the Non-Debt Instrument Rules, 2019 (NDI Rules) is pending after which the FDI amendments will take effect. [Notification No. F. No. IRDAI/REG/6/178/2021, dated 7th July, 2021.]

ICAI ANNOUNCEMENTS


A) Audit Quality Maturity Model – Version 1.0 (AQMM v1.0) – The ICAI has released AQMM v1.0, an evaluation matrix, as part of its capacity-building measure. The Evaluation Matrix is for sole proprietors and audit firms to help them self-evaluate their current level of audit maturity. The same would be recommendatory initially. Firms auditing the following entities are covered in AQMM v1.0: (i) a listed entity; or (ii) banks other than co-operative banks (except multi-state co-operative banks); or (iii) Insurance Companies. Firms doing only branch audits are not covered. [3rd July, 2021.]

ICAI MATERIAL
Accountancy and Audit
• Guidance Note on Accounting for Derivative Contracts (Revised, 2021) [6th July, 2021.]

Corporate Laws

  •     Technical Guide on Incorporation of Foreign Companies in India [3rd July, 2021.]

Handbooks:

  •     Resolution Plan under the Insolvency and Bankruptcy Code, 2016 [10th July, 2021.]
  •    Personal Guarantors to Corporate Debtors under the Insolvency and Bankruptcy Code, 2016 [10th July, 2021.]
  •     Corporate Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016 [10th July, 2021.]
  •     Moratorium under the Insolvency and Bankruptcy Code, 2016 [10th July, 2021.]

Valuation
Booklets:
•    Disclaimers, Limitations in a Valuation Report – Are they even Real? [3rd July, 2021.]
•    Is DCF the most Popular Method for Valuation under Companies Act? [3rd July, 2021.]
•    Is DCF the only Method for Valuation of Shares under Income-tax Act? [3rd July, 2021.]
•    Minority Holding Valuation: Often Unsatisfactory? [3rd July, 2021.]
•    Valuation Reports – Do’s and Don’ts – To what extent are they Followed? [3rd July, 2021.]
•    Valuation date, Valuation reports date and events between these dates [9th July, 2021.]
•    Valuation: Professional’s Insights (Series-6) [10th July, 2021.]

CORPORATE LAW CORNER

9 Registrar of Companies, West Bengal vs. Goouksheer Farm Fresh (P) Ltd. and Another Company Appeal (AT) No. 127 of 2020 National Company Law Appellate Tribunal [(2021) 160 CLA 317 (NCLAT)] Date of order: 19th November, 2020

There is no provision under the Companies Act, 2013 that permits the Registrar of Companies to take on record the documents sought to be registered / filed without payment of requisite filing fee and / or payment of additional fees even if company is in ‘Corporate Insolvency Resolution Process’

FACTS

The Registrar of Companies, West Bengal (ROC), had struck off the name of the company, M/s G Private Limited, after complying with all the requirements of section 248 of the Companies Act, 2013 and the Companies (Removal of Names of Companies from Register of Companies) Rules, 2016.

The ‘Financial Creditor’ (M/s P Pvt. Ltd.) had filed an application u/s 7 of the Insolvency and Bankruptcy Code, 2016 against the Corporate Debtor, M/s G Pvt. Ltd. The application to initiate Corporate Insolvency Resolution Process against the Corporate Debtor was admitted on 13th December, 2019.

The NCLT, Kolkata Bench, through its order dated 22nd January, 2020, allowed restoration of the company with a direction to the ROC not to levy any fee / penalty on the company because of the fact that the company was in Corporate Insolvency Resolution Process.

The ROC preferred an instant appeal against the NCLT order contending that pursuant to section 403 (1) of the Companies Act, 2013, any document required to be filed under the Act shall be filed within the time prescribed in the relevant provisions on payment of such fee as may be prescribed. Further, it was contended that in view of the first proviso to section 403(1) of the Act, if any document, fact or information required to be submitted, filed, registered or recorded under sections 92 or 137 is not submitted, filed, registered or recorded within the period provided in those sections, without prejudice to any other legal action or liability under this Act, it may be submitted, filed, registered or recorded after the expiry of the period so provided in those sections on payment of such additional fee as may be prescribed, which shall not be less than Rs. 100 per day and different amounts may be prescribed for different classes of companies.

HELD

The NCLAT stated in its order that the Tribunal was empowered by Rule 11 of the National Company Law Tribunal Rules, 2016 to make such orders as may be necessary for meeting the ends of justice. However, it was to be pointed out that the same cannot be pressed into service when section 403(1) of the Companies Act, 2013 deals expressly with the fee for filing, etc., coupled with Rule 12 of the Companies (Registration Offices and Fees) Rules, 2014. These provisions were regarded as in-built, self-contained and exhaustive ones, and viewed in that perspective, the invocation of Rule 11 of the NCLT Rules, 2016 was not needed.

Further, NCLAT observed that the direction issued by the NCLT to the ROC ‘not to levy any fee / penalty’ to the company because it was in Corporate Insolvency Resolution Process was legally untenable, especially in the absence of any express provisions under the Companies Act, 2013 and the relevant Rules for waiver of fees / penalty in respect of filing of documents required to be registered / filed under the Companies Act. Hence, the said direction was set aside to secure the ends of substantial justice.

10 Sandeep Agarwal and Another vs. Union of India and Another W.P. (C) 5490/2020 Source: Delhi High Court Official Website Date of order: 2nd September, 2020

The purpose and intent of the Companies Fresh Start Scheme, 2020 is to allow a fresh start for companies which have defaulted. For the Scheme to be effective, directors of these defaulting companies must be given an opportunity to avail the Scheme

FACTS

The petition was filed by Sandeep Agarwal and Muskoka Agarwal (collectively referred to as P), both of whom were directors in two companies, namely M/s KP Private Limited and M/s KPP Private Limited. The name of M/s KPP Private Limited was struck off from the Register of Companies on 30th June, 2017 due to non-filing of financial statements and annual returns. P, being directors of M/s KPP Private Limited, were also disqualified with effect from 1st November, 2016 for a period of five years till 31st October, 2021 u/s 164(2)(a) of the Companies Act, 2013. In view of their disqualification, their Director Identification Numbers (DINs) and Digital Signature Certificates (DSCs) were also cancelled. Consequently, they were unable to carry on the business and file returns, etc., in the active company, M/s KP Private Limited.

Through the present petition, the disqualification was challenged and quashing was sought of the order disqualifying the directors.

HELD

The Delhi High Court observed that the Scheme provides an opportunity to put their affairs in order for active companies that may have defaulted in filing of documents. It thus provides directors of such companies a fresh cause of action to challenge their disqualification qua the active companies. In the present case, the relief was sought by the directors of two companies, one whose name was struck off and one which was still active. In such a situation, the disqualification and cancellation of DINs was a severe impediment for them in availing remedies under the Scheme in respect of the active company. The purpose and intent of the Scheme was to allow a fresh start for companies which have defaulted. The Scheme can be effective if its directors are given an opportunity to avail of it.

It is not uncommon to see directors of one company being directors in another company. Under such circumstances, to disqualify directors permanently and not allowing them to avail their DINs and DSCs could render the Scheme itself nugatory as its launch constitutes a fresh and continuing cause of action.

Thus, in order to enable P to continue the business of the active company, M/s KP Private Limited, the Court directed MCA to set aside the disqualification of P as directors. The DINs and DSCs of P were also directed to be re-activated within a period of three working days from the date of the order.

11 Medeor Hospitals Ltd. vs. Registrar of Companies, Delhi Company Appeal No. 394 of 2018 National Company Law Appellate Tribunal [(2020) 156 CLA 129 (NCLAT)]
Date of order: 29th January, 2020

Where application for conversion of public limited company into a private limited company has complied with the requisite conditions for conversion, the application has to be approved

FACTS

M/s M Limited was incorporated on 4th August, 2004 under the Companies Act, 1956 as a public limited company and was a wholly-owned subsidiary of M/s V Private Limited, having eight equity shareholders. While the holding company M/s. V Private Limited was holding almost 100 % of the issued share capital, seven other shareholders were holding one share each on behalf of M/s V Private Limited.

A petition was filed before the NCLT for conversion of the company into a private limited company. The Delhi Bench of the NCLT by its order of 28th August, 2018, observed that the petition was filed three months after the date of passing of the Special Resolution. In the notice for the EGM, no reasons had been assigned for giving a shorter notice. It was further observed by the NCLT that on 17th October, 2016, the statutory auditor had resigned and on the same day, a new auditor M/s DY & Co. was appointed. It was noticed that the new auditor signed the balance sheet on the same day. This raised a doubt as to how the new auditor could have conducted the audit in one day. Further, two independent directors resigned after the passing of the resolution for conversion and this fact was not mentioned in the petition. It was also found that the claims of two objectors, namely, Mr. PS and Mr. RS and E&Y LLP were pending before the Arbitral Tribunal. During such pendency it would not be appropriate to permit conversion of the company from public to private limited. In view of these shortcomings, the NCLT rejected the petition. M/s M Limited, being aggrieved with this order of the NCLT, filed the present appeal.

HELD

* NCLAT considered the issue of limitation referring to Rule 68(1) of the NCLT Rules, 2016 which provide that a petition u/s 14(1) of the Companies Act, 2013 for conversion of a public company into a private company shall, not less than three months from the date of the passing of the special resolution, be filed with the Tribunal in Form No. NCLT-1. This means that such petition shall be filed after three months from the date of passing of the special resolution. Thus, the petition was well within the limitation.

* The board resolution of the holding company dated 17th June, 2017 mentioned that written consent of shareholders was obtained for shorter notice for the resolution dated 14th August, 2017. No illegality or irregularity in passing the resolution dated 14th August, 2017 was found by the NCLAT.

* M/s M Limited, vide its appointment letter dated 2nd September, 2016, appointed M/s DY & Co. tax auditor and, after the appointment, M/s DY & Co had reviewed and signed the financial statements for the  F.Y. 2015-16. In such circumstances the explanation given by M/s M Limited was satisfactory as to how M/s DY & Co. had signed the financial statements for the year
2015-16.

* NCLAT further considered the submission of M/s M Limited that it was a wholly-owned subsidiary and unlisted public company. Therefore, in view of sub-rule (1) of Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, appointment of at least two independent directors was not applicable. Hence, non-disclosure of the resignation of two independent directors would not affect the merit of the petition in any manner.

* M/s M Limited also placed on record the ‘No dues certificates’ obtained from all creditors (except the dispute between E&Y and M/s M Limited as it was pending before the Arbitral Tribunal), hence, the conversion of M/s M Limited shall not affect the responsibility and liabilities of M/s M Limited.

The NCLAT thus noted that M/s M Limited had fulfilled all the conditions for conversion and the shortcomings pointed out by the NCLT were inconsequential. Therefore, the NCLAT set aside the order and approved the special resolution dated 14th August, 2017 for conversion of M/s M Limited from public to private company.

12 R. Narayanasamy vs. The Registrar of Companies, Tamil Nadu Company Appeal (AT) No. 171 of 2020 Source: NCLAT Official Website Date of order: 19th January, 2021

Divergent views on disposal of the appeal pertaining to striking off of the name of company after following necessary procedure u/s 248 of the Companies Act, 2013

FACTS

This appeal was filed against the order dated 5th May, 2020 passed by the NCLT, Chennai dismissing the appeal u/s 252(3) of the Companies Act, 2013 for restoration of the name of the company ‘M/s Shri L S Pvt. Ltd.’ which was struck off by the ROC after following the necessary procedure u/s 248 of the Companies Act, 2013. R N, who was the Managing Director of the company, claimed that non-filing of annual returns and filing statements was due to absence of expert professional guidance. Further, the striking off was prejudicial to the interest of the company and that returns were not filed out of ignorance and inadvertence.

HELD

The members of the NCLAT Bench delivered divergent judgments on analysing the law as it was existing, on the basis of what is ‘just’ u/s 252(3) of the Companies Act. Thereafter, it was placed before a third member. This third member of the NCLAT observed that section 252 provides for relief to aggrieved parties when the Registrar notifies a company as dissolved u/s 248 of the Companies Act, 2013.

The name of the company was required to be restored if the NCLT
* was satisfied that the company, at the time of its name being struck off, carried out any business or operation,
OR
* otherwise it was ‘just’ that the name of the company be restored to the register of companies.

In the present matter, the admitted fact was that when the name of the company was struck off, it was not functional and was not carrying on business or operations for more than two years immediately preceding the financial year and thus attracted section 248(1)(c) of the Companies Act, 2013. When the question of law has neither been framed nor referred, and it appeared from the judgments that the two Hon’ble Members had divergent views, on the basis of facts the appeal should be dismissed by not interfering with the dismissal order passed by the NCLT.

13 The Canning Industries Cochin Ltd. vs. Securities and Exchange Board of India (SEBI) Company Appeal (AT) No. 115 of 2019 Source: The Securities Appellate Tribunal Official Website Date of order: 28th January, 2020

Whether the issue of unsecured fully convertible debentures (‘FCDs’) by an unlisted public company is rights offer or public offer, or an offer that violates the provisions of private placement of securities under the Companies Act, 2013

FACTS

M/s CIC Ltd., an unlisted public company, passed a special resolution under sections 62(3) and 71 of the Companies Act, 2013 to issue 1,92,900 unsecured fully convertible debentures (FCDs) to its 1,929 shareholders, with a condition that there would exist no right to renounce the offer to any other person. However, only 335 shareholders subscribed to the offering. Consequently, one disgruntled shareholder filed a complaint before SEBI and the NCLT alleging that the company had made a public issue of securities without complying with the applicable provisions of the Companies Act, 2013.

On 18th March, 2019, SEBI passed an order which held that the offer of FCDs made by the company was a ‘deemed public issue’ u/s 42(4) of the Companies Act, 2013 read with Rule 14(2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, as the offer was made to more than 200 shareholders and, hence, directed the company to comply with the prescribed provisions of ‘public issue’ in the Act.

Aggrieved by the order, M/s CIC Ltd. appealed before the Securities Appellate Tribunal (SAT) and contended that the issuance of FCDs was neither a rights issue (as the issue was not made on a proportionate basis), nor was it a private placement and that the issue falls u/s 62(3) of the Companies Act, 2013 which had not been considered by SEBI.

HELD


SAT held that a rights issue of FCDs was not a ‘private placement’ of securities as the offer of shares to the company’s shareholders cannot be termed as an offer to a ‘select group of persons’. The expression ‘select group of persons’ means ‘an offer made privately such as to friends and relatives or a selected set of customers distinguished from approaching the general public or to a section of the public by advertisement, circular or prospectus addressed to the public’. Hence, the restriction of subscription of shares to 200 persons or more in the case of private placement of securities envisaged u/s 42 of the Companies Act, 2013 was not applicable in the instant case.

Further, section 62(3) was fully applicable as M/s CIC Ltd. had duly complied with it by passing the special resolution; thus, issuance of FCDs by M/s CIC Ltd.  cannot be termed as a public issue or a private  placement. Hence, a company issuing FCDs is not mandated to comply with any additional requirement of public issue or private placement specified under sections 23 and 42 of the Companies Act, 2013, respectively.

In light of the aforesaid, the order passed by the whole-time Member cannot be sustained. The interim order as well as the order and the directions so issued were all quashed and thus the appeal was allowed.

14 Hytone Merchants Pvt. Ltd. vs. Satabadi Investment Consultants Pvt. Ltd. Company Appeal (AT) (Insolvency) No. 258 of 2021

CASE NOTE
1. NCLAT confirmed rejection of the insolvency application even when the same was complete in all respects on the ground of collusion between the applicant creditor and the respondent corporate debtor.
2. Quantum of default was very meagre in comparison to the net worth of the corporate debtor.
3. The corporate debtor had made substantial investments in companies which were under insolvency and also extended corporate guarantee.

The brief facts of the case are as follows:

(a) Corporate debtor (‘company’) had accepted loan of Rs. 3 lakhs from the financial creditor @ 15% pa.
b) The company accepted the loan default and also acknowledged the debt.
c) The company was also the guarantor for two other companies which were under insolvency and liquidation.
The application u/s 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) was filed by the financial creditor. NCLT rejected the application even after concluding that the application was complete in all respects and the default and debt existed.

The creditor argued that the NCLT has no jurisdiction to go beyond the completeness of the application. It only has to see the completeness of the application along with the existence of debt and default.

NCLAT, after going through the submissions, confirmed the NCLT order. It observed that NCLT has rightly rejected the application and is correct in lifting the corporate veil.

The corporate debtor had stood as corporate guarantor for two companies which were under insolvency and one had even gone under liquidation. The value of the corporate guarantee given by the corporate debtor amounted to Rs. 482 crores while the net worth of the company was Rs. 15 crores. It appeared to the Tribunal that the acknowledgement of debt and acceptance of default was collusive. The defaulted debt of Rs. 3 lakhs was a meagre amount in comparison to the net worth of the company.

The Tribunal also observed that the Court has to see the persons behind the company to come to a conclusion whether the insolvency is proposed to be initiated in a collusive manner. It relied on the Supreme Court judgment in Swiss Ribbons vs. Union of India wherein the Court had held that the insolvency application can be rejected and also cost can be imposed u/s 65 of the IBC. This is a safeguard against fraudulent or malicious initiation of insolvency proceedings.

This judgment has clarified that the insolvency proceedings are not mere compliance proceedings. The Tribunal has seen the real intent of the parties and the IB Code. The object of the Code is to resolve the insolvent companies and in the interest of all stakeholders.

ALLIED LAWS

18 Arun Kedia (HUF) vs. Runwal Homes (P) Ltd. Consumer Case No. 1115 of 2017 (NCDRC)(Del) Date of order: 24th June, 2021 Bench: Ram Surat Ram Maurya J. and Mr. C. Vishwanath

Consumer Protection – Builder cancels sale agreement – Without consent – Not handing over timely possession – Interest levied [Maharashtra Ownership of Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963, S. 8]

FACTS

A registered agreement for sale was executed between the complainant and the builders on 5th June, 2013. Clause 17 of the agreement provided that the builder would give possession of the premises to the purchasers by March, 2016.

The complainants received a demand letter dated 12th September, 2016 on 13th September, 2016 but as no date of delivery of possession was mentioned, they did not deposit the amount demanded in it, rather, they requested for handing over of possession of the flat allotted to them. They were not allowed to go to the site to verify the progress under construction, although 85% of the sale consideration was paid. The directors and officers of the builder assured that they need not worry and that the possession would be given to them within a short time.

When the builder neglected to give possession of the flat allotted to them, they served a registered notice on the builders on 15th March, 2017 for handing over the possession of the flat. The builders, through a letter dated 15th March, 2017 (served on 20th March, 2017) unilaterally cancelled the agreement dated 5th June, 2013, mentioning therein that in spite of the demand letter dated 12th September, 2016, they had not deposited the instalment as stated in the agreement. The complainants gave registered notices dated 23rd March, 2017 and 4th April, 2017 to the builders, asking them to withdraw their letter dated 15th March, 2017 cancelling the agreement dated 5th June, 2013, and to hand over possession of the flat allotted to them. Since the notices have not been complied with, the present complaint was filed on 18th April, 2017 by the complainants.

HELD

It is admitted by the builders and also mentioned in the agreement that the Maharashtra Ownership of Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 is applicable. According to section 8 of the said Act, if the builder is not able to hand over the possession of the building / flat within the time specified in the agreement, then the builder is liable to pay interest for the period for which the possession has not been handed over. The builders had failed to complete the construction and hand over possession of the flat in March, 2016 as agreed. Due to the latches on the part of the builders, the complainants are suffering loss. The agreement for sale has been cancelled illegally and the complainants are forced to opt for litigation. The Builders shall pay simple interest at 6% p.a. to the complainants on the amount deposited by them from the due date of possession to the offer of possession after obtaining the occupancy certificate.

19 Compack Enterprises India (P) Ltd. vs. Beant Singh (2021) 3 SCC 702 (SC) Date of order: 17th February, 2021 Bench: Mohan M. Shantanagoudar J. and Vineet Saran J.

Consent decree – No estoppel – Compromise arrived by fraud, misrepresentation or mistake [Code of Civil Procedure, 1908, Or. XII, R. 6]

FACTS
On a dispute arising on account of mesne profits, the Court had passed a consent decree directing that the petitioner shall pay to the respondent (owner of the property), by way of mesne profits, an enhanced sum of Rs.1,00,000 p.m., with a 10% increase every 12 months, i.e., from 1st October, 2009, 1st October, 2011 and so on, till the date the petitioner hands over actual possession of the suit property measuring 5,472 sq. ft. to the respondent.

The petitioner filed a review petition against the consent terms, contending that the High Court had erred in recording the terms of the consent decree agreed to by the petitioner. It contended that the judgment records that the mesne profits be increased by 10% every 12 months, instead of recording a 10% increase every 24 months and that the petitioner was in possession of only 2,200 sq. ft. The review petition was rejected.

HELD
The Court, inter alia, relied on the decision in the case of Byram Pestonji Gariwala vs. Union Bank of India & Ors., (1992) 1 SCC 31, wherein it was held that a consent decree would not serve as an estoppel where the compromise was vitiated by fraud, misrepresentation or mistake. In the exercise of its inherent powers, the Court may also unilaterally rectify a consent decree suffering from clerical or arithmetical errors, so as to make it conform to the terms of the compromise.

The Court observed that the learned Judge of the High Court, in noting that the figure of mesne profits of Rs. 1 lakh will be increased by 10% after every 12 months, i.e., from 1st October, 2009, 1st October, 2011 and so on, (emphasis supplied), has confused not only himself but also the parties to the litigation. Referring to the final decree by the Trial Court awarding a 10% increase only every alternate year and the original terms of the license agreement between the parties, the period of 12 months in the consent decree was rectified to 24 months by the Court. The plea of the petitioner that he was in possession of only 2,200 sq. ft. and not 5,472 sq. ft. was rejected.

20 Trustees of H.C. Dhanda Trust vs. State of M.P. (2020) 9 SCC 510 (SC) Date of order: 17th September, 2020 Bench: Ashok Bhushan J., R. Subhash Reddy J. and M.R. Shah J.

Stamp Act – Imposition of penalty – Ten times of duty deficit – Exercise of discretion – Cannot be imposed normally [Indian Stamp Act, 1899, Ss. 33, 35, 38, 39 and 40]

FACTS
A resolution was passed by the executors / trustees under the will of Late Shri Harish Chand Dhanda to transfer and vest the area to the beneficiaries. On 21st April, 2005, a Deed of Assent was executed between M/s H.C. Dhanda Trust, a private trust, as one part and Jogesh Dhanda and others as the other part. By this Deed of Assent, the trustees / executors gave assent to complete the title of the legatees and vest two properties absolutely and forever in their favour.

A notice was issued by the Collector of Stamps, District Indore, stating that proper stamp duty has not been paid on the Deed of Assent dated 21st April, 2005. The notice further stated that there was a deficit stamp duty on the said document and asked why ten times penalty should not be imposed. The Trust appeared before the Collector of Stamps and filed its objection. The Collector holding the Deed of Assent as a gift deed held that the deficit duty was Rs. 1,28,09,700. He imposed penalty ten times the deficit duty. The Trustees challenged the order of the Collector imposing the penalty.

HELD
The legislative intent is clear from a reading of sections 33, 35, 38 and 39 of the Indian Stamp Act, 1899. It indicates that with respect to the instrument not duly stamped, ten times penalty is not always retained and the power can be exercised u/s 39 to reduce penalty and in regard to that there is a statutory discretion with the Collector to refund the penalty.

The purpose of penalty generally is a deterrence and not retribution. When a discretion is given to a public authority, such public authority should exercise such discretion reasonably and not in an oppressive manner. The responsibility to exercise the discretion in a reasonable manner lies more in cases where discretion vested by the statute is unfettered. Imposition of the extreme penalty, i.e., ten times the duty or deficient portion thereof, cannot be based on the mere factum of evasion of duty. Reasons such as fraud or deceit in order to deprive the Revenue or undue enrichment are relevant factors to arrive at a decision as to what should be the extent of penalty u/s 40(1)(b). The penalty was reduced to five times the duty deficit.

21 Daulat Singh (D) Thr. LRS. vs. The State of Rajasthan (2021) 3 SCC 459 (SC) Date of order: 21st May, 2021 Bench: N.V. Ramana J., S. Abdul Nazeer J. and Surya Kant J.

Gift – Immovable property – Acceptance criterion [Transfer of Property Act, 1882, Ss. 122 and 123]
    
FACTS

The appellant was the owner of 254.2 bighas of land. On 19th December, 1963, he gifted away 127.1 bighas to his son. After the said transfer, the appellant was left with 17.25 standard acres of land, which was below the prescribed limit under the Ceiling Act.

Although proceedings were initiated under the Ceiling Act, the same were dropped on 15th April, 1972 by the Court of the Deputy Sub-Divisional Officer, Pali, Rajasthan. However, by a notice dated 15th March, 1982, the Revenue Ceiling Department reopened the case of the appellant.

The Court of the Additional District Collector, Pali vide order dated 28th October, 1988, declared that the mutation of the land done in favour of the son of the appellant was invalid as there was no acceptance of the gift. It was declared therein that the appellant was holding 11 standard acres of extra land over and above the ceiling limit. The Collector, therefore, directed the appellant to hand over vacant possession of the aforesaid 11 standard acres of extra land to the Tahsildar, Pali.

HELD

The Court, inter alia, on the issue of validity of the gift deed held that section 122 of the Transfer of Property Act, 1882 (TOPA) neither defines acceptance, nor does it prescribe any particular mode for accepting the gift. The word acceptance is defined as ‘is the receipt of a thing offered by another with an intention to retain it, as acceptance of a gift.’ The only requirement stipulated under TOPA is that the acceptance of the gift must be effected during the lifetime of the donor.

Gifts do not contemplate payment of any consideration or compensation. It is, however, beyond any doubt or dispute that in order to constitute a valid gift, acceptance thereof is essential. The document may be handed over to a donee, which in a given situation may also amount to a valid acceptance. The Court held that the fact that possession had been given to the donee also raises a presumption of acceptance. The Court referred to the statement made by the son – the donee – before the Court of the Additional District Magistrate stating that the land transferred to him by virtue of the gift deed was under his possession and he was cultivating the same. The gift was held to be a valid gift.

22 UOI & Ors. vs. Vishnu Aroma Pouching Pvt. Ltd. & Anr. SLP (C) Diary No. 1434 of 2021 (SC) Date of order: 29th June, 2021 Bench: Sanjay Kishan Kaul J. and Krishna Murari J.

Delay in filing appeal – Not justified – Cost imposed – SLP dismissed

FACTS

The Department filed an application for condonation of delay. It was stated in the application that the judgment was pronounced on 14th November, 2019. But the proposal for filing the Special Leave Petition was sent after almost six months, on 20th May, 2020, and it took another three months to decide whether or not to file the Special Leave Petition.

HELD


Such lethargy on the part of the Revenue Department with so much computerisation having been achieved is no longer acceptable. The application shows the casual manner in which the petitioner has approached this Court without any cogent or plausible ground for condonation of delay. In fact, other than the lethargy and incompetence of the petitioner, there is nothing which has been put on record. The leeway which was given to the Government / public authorities on account of innate inefficiencies was the result of certain orders of this Court that came at a time when technology had not advanced and, thus, greater indulgence was shown.

Cases of this kind were ‘certificate cases’ filed only with the objective to obtain a quietus from the Supreme Court on the ground that nothing could be done because the highest Court had dismissed the appeal. The objective was to complete a mere formality and save the skin of the officers who may be in default in following the due process, or may have done it deliberately. Looking to the period of delay and the casual manner in which the application had been worded, the Court considered it appropriate to impose costs on the petitioner(s) of Rs. 25,000 for wastage of judicial time which has its own value. The Special Leave Petition was dismissed as time-barred. A copy of the order was ordered to be placed before the Secretary, Ministry of Finance, Department of Revenue.

Service Tax

I. TRIBUNAL

23 Commissioner of Service Tax vs. Intas Pharmaceuticals [2021-TIOL-367-CESTAT-Mum] Date of order: 25th June, 2021

Notice pay received from the employee being in the nature of compensation for premature termination of service not liable to service tax

FACTS

The contractual agreement between the company and its employees is that the employee should not leave the employment before the prescribed period. In case of breach of this condition, he would be required to pay one month’s salary which is penal in nature. A show cause notice is issued demanding service tax on the amounts received by the company from its employees alleging toleration of act of breach of contract taxable as a declared service u/s 66E(e) of the Finance Act, 1994.

HELD

The Tribunal relied on the decision of the Madras High Court in the case of GE T&D India Pvt. Ltd. [2020] (35) GSTL 89 (Mad) where the Court categorically holds that the definition in clause (e) of section 66E is not attracted as the employer has not ‘tolerated’ any act of the employee but has permitted a sudden exit upon being compensated by the employee in this regard. Notice pay, in lieu of sudden termination, does not give rise to the rendition of service either by the employer or the employee. Accordingly, the demand was set aside.

24 M/s PVR Ltd. vs. Commissioner of Service Tax [2021-TIOL-368-CESTAT-Del] Date of order: 5th July, 2021

Booking of online tickets and charge of convenience fees is in the nature of E-commerce transaction not taxable under OIDAR services

FACTS

The issue involved in these two appeals relates to taxability of ‘convenience fee’ charged by the appellant to its customers for online booking of movie tickets under the category of ‘online information and database access retrieval system (OIDAR)’ defined u/s 65(75) of the Finance Act and taxable u/s 65(105)(zh) of the Finance Act.

HELD


The Tribunal noted that any person who visits the website of the appellant to seek information about the show timings or other information does not have to make any payment and it is only when a ticket is booked online that convenience fee is required to be paid by the user. The substance of the transaction is, therefore, to book a ticket online and thereby engage in E-commerce. Therefore, it cannot be said that convenience fee is charged for any access / retrieval of information or database as contemplated under OIDAR service. It is also noted that the Board Circular dated 9th July, 2001 also clarifies that E-commerce transactions do not fall within the ambit of OIDAR service. Thus, service tax under the category of OIDAR cannot be levied upon a user merely because he receives a code for getting a printout of the ticket from the cinema hall.

GOODS AND SERVICES TAX (GST)

I. HIGH COURT

18 M/s F1 Auto Components Pvt. Ltd. vs. The State Tax Officer [2021-TIOL-1509-HC-Mad-GST] Date of order: 9th July, 2021

Interest is payable only on the net cash liability and provisions of section 42 are attracted only in a case of mismatch in input tax credit and not in a case where a wrong credit is availed

FACTS

The challenge is to the order dated 27th January, 2021 levying interest u/s 50 of the CGST Act, 2017 relating to both interest on cash remittances as well as remittances by way of adjustment of electronic credit register.

HELD

The Tribunal noted that with respect to the second limb of the transaction, it is covered by the decision in the case of Maansarovar Motors Private Limited 2020-TIOL-1846-HC-Mad-GST wherein it is clearly held that interest can be levied only on the net cash liability. The Tribunal further held that the provisions of section 42 can only be invoked in a situation where the mismatch is on account of an error in the database of the Revenue or a mistake that has been occasioned at the end of the Revenue. In a case where the claim of input tax credit (ITC) is erroneous, then the question of applying section 42 does not arise at all, since it is not a case of mismatch but one of wrongful claim of credit. The levy of interest on belated cash remittance is compensatory and mandatory and the levy is upheld to this extent.

19 Greenwood Owners Association vs. The Union of India [2021-TIOL-1505-HC-Mad-GST] Date of order: 1st July, 2021

Maintenance charges collected from members of the Association will be taxable only to the extent contribution exceeds Rs. 7,500

FACTS

The applicants sought a ruling from the Advance Ruling Authority as to whether they are liable to pay GST only on the amount in excess of Rs. 7,500 collected as monthly maintenance charges from the members of the Association or on the entire amount. The Authority held that in the event the charges or share of contribution goes above Rs. 7,500 per month, such service will not be exempt. Since the share of contribution by members is above Rs. 7,500 per month, the exemption is not available and GST at appropriate rates is to be charged on the full amount of share of contribution.

Aggrieved by the said order, a writ petition was filed before the Madras High Court. The Bench noted that the term ‘up to’ employed in the Notification is heavily relied upon by the petitioners to contend that only the amount in excess of Rs. 7,500 is liable for the tax and not the whole amount collected. The CBIC e-flyer explaining that GST would be applicable only on the amount in excess of Rs. 5,000 (as the exemption then stood till 24th January, 2018) is relied upon. The petitioners challenge Circular No. 109/28/2019-GST dated 22nd July, 2019 wherein it was clarified that in case the maintenance charges exceeded Rs. 7,500 per month per member, the GST is payable on the entire amount and is not limited to the excess amount only.

HELD

The Court noted that Entry No. 77 of Notification 12/2017-Central Tax (Rate) uses the term ‘up to’ an amount of Rs. 7,500 which can only be interpreted to state that any contribution in excess of the same would be liable to tax. The term ‘up to’ hardly needs to be defined and connotes an upper limit. The intendment of the exemption entry in question is simply to exempt contributions till a certain specified limit. The clarification by the GST Department even as early as in 2017 has taken the correct view. Thus, the conclusion of the AAR as well as Circular No. 109/28/2019-GST dated 22nd July, 2019 to the effect that any contribution above Rs. 7,500 would disentitle the exemption, is contrary to the express language of the Entry in question and both stand quashed. Only the contribution above Rs. 7,500 will be taxable.

20 D.Y. Beathel Enterprises vs. State Tax Officer [(2021) 127 taxmann.com 80 (Mad)] Date of order: 24th February, 2021

Where assessee purchased goods through registered dealers and substantial portion of sale consideration was paid through banking channels, Revenue could not reverse ITC availed by assessee for failure of seller to deposit tax on such supply without examining seller and initiating recovery proceeding against seller

FACTS
The petitioners are traders and they had purchased goods from a supplier. A substantial portion of the sale consideration was paid only through banking channels. The payments made to the said supplier included the tax component. Based on the returns filed by the sellers, the petitioners availed ITC. Later, during inspection it came to light that the supplier did not pay any tax to the Government. The respondent issued show cause notices to the petitioners. They submitted their replies specifically taking the stand that all the amounts payable by them had been paid to the said suppliers. Unfortunately, without involving the defaulting suppliers, the impugned orders came to be passed levying the entire liability on the petitioners herein. The said orders are under challenge in these writ petitions.

HELD
The Court noted that no inquiry has been initiated against the defaulting supplier. When it has come out that the supplier has collected tax from the petitioner, the omission on the part of the supplier to remit the tax in question should have been viewed very seriously and strict action ought to have been initiated against him. Further, when there are allegations that the credit is availed without receipt of goods then it is necessary that such suppliers be confronted. Thus, the Court held that the impugned orders suffer from certain fundamental flaws and have to be quashed for more reasons than one. The Court also gave specific instructions that the supplier be examined and recovery action in parallel be initiated against the supplier as well.

21 ARS Steels & Alloy International (P) Ltd. vs. State Tax Officer [(2021) 127 taxmann.com 787 (Mad)] Date of order: 24th June, 2021

A loss that is occasioned by consumption in the process of manufacture is not covered u/s 17(5)(h) of the CGST Act warranting reversal of ITC

FACTS

The petitioners are engaged in the manufacture of MS billets and ingots. MS scrap is an input in the manufacture of MS billets and the latter, in turn, constitute an input for manufacture of TMT / CTD bars. There is a loss of a small portion of the inputs, inherent to the manufacturing process. The Department sought to reverse a portion of the credit claimed by the petitioners, proportionate to the loss of the input, referring to the provisions of section 17(5)(h) of the GST Act.

HELD

The Court held that section 17(5)(h) deals with goods lost, stolen, destroyed, written off or disposed by way of gift or free samples. Hence, the loss that is occasioned by the process of manufacture cannot be equated to any of the instances set out in clause (h). It further held that the situations as set out in clause (h) indicate loss of inputs that are quantifiable and involve external factors or compulsions.

A loss that is occasioned by consumption in the process of manufacture is one which is inherent to the process of manufacture itself. The Court also relied upon the decision in the case of Rupa & Co. Ltd. vs. CESTAT, Chennai [2015 (324) ELT 295] in support of its conclusion.

22 Bangalore Turf Club Ltd. vs. State of Karnataka [(2021) 127 taxmann.com 619 (Karn)] Date of order: 2nd June, 2021

Rule 31A(3) of the CGST Rules, insofar as it declares that the value of actionable claim in the form of chance to win in a horse race of a race club to be 100% of the face value of the bet, is beyond the scope of the Act as the totalisator does not indulge in betting, i.e., (the) business of a race club for the purposes of the Act but only earns commission, and also for the reason that activity of the petitioners being a game of skill and not a game of chance

FACTS

The petitioners challenged the legislative intent of making the petitioners liable to pay GST on the entire bet amount received by the totalisator and declare the amendments dated 25th January, 2018 which inserted Rule 31A(3) to the CGST Rules as being ultra vires the CGST Act.

HELD


Referring to the decisions of the Supreme Court in the cases of Govinda Saran vs. Commissioner of Sales Tax (1985 Supp. SCC 205), Mathuram Aggarwal vs. State of Madhya Pradesh [(1998) 8 SCC 667] and State of Rajasthan vs. Rajasthan Chemists Association [(2006) 6 SCC 773], the Court reiterated the principle that the measure to which the rate of tax is to be applied to a taxable person must have a nexus to the taxable event and not de hors it. The Court thereafter noted that the activity of the petitioners is required to be noticed to consider whether the petitioners are liable to pay tax on 100% of the face value of the bet or only on the commission that they receive out of the amount received in the totalisator. The word ‘totalisator’ ordinarily means a system of betting on horse races in which the aggregate stake, less an administration charge and tax, is paid out to winners in proportion to their stakes.

Further, referring to the decisions of English courts and the Supreme Court, the Court held that ‘totalisator’ has been interpreted to mean a fixed commission which is earned irrespective of the outcome of the race and cannot be seen to be indulging in a betting activity. Accordingly, the Court held that a totalisator does not indulge in betting, i.e., the business of a race club for the purposes of the Act. It holds the amount received in the totalisator for a brief period in its fiduciary capacity. Rule 31A(3) completely wipes out the distinction between the bookmakers and a totalisator by making the petitioners liable to pay tax on 100% of the bet value. It is the bookmakers who indulge in betting and receiving consideration depending on the outcome of the race, irrespective of the result. In contrast, the race club provides totalisator service and receives commission for providing such service. Therefore, there is no supply of goods / bets by the petitioners as defined under the Act. The Court therefore observed that the impugned Rule makes the petitioners a ‘supplier’ of bets which the petitioners do not do and are not the supplier of bets and, therefore, cannot be held liable to pay tax under the Act because the service or supply that the petitioners do is only a totalisator component.

Relying upon the decision of the Apex Court in Dr. K.R. Lakshmanan vs. State of T.N. and Another [(1996) 2 SCC 226], the Court held that activities of horse racing are not gambling but are gaming and a game of skill. Adverting to the definition of ‘consideration’ u/s 2(31) of the CGST Act, the Court further held that the consideration that the petitioners receive for supply of service of the totalisator is only the commission. Therefore, the consideration component of supply is also not specified by the impugned Rule which directs payment of tax on the whole bet amount. The Court accordingly held that sub-rule (3) declares the value of supply of actionable claim in the form of chance to win in betting, gambling or horse racing in a race club shall be at 100% face value of the bet, or the amount paid into the totalisator. Therefore, the act which deals with supply of goods, consideration, business would not apply to the function of the totalisator.

Making the entire bet amount that is received by the totalisator liable for payment of GST would take away the principle that a tax can be only based on consideration even under the CGST. The consideration that the petitioners receive is by way of commission for planting a totalisator. This can’t be different from that of a stockbroker or a travel agent, both of whom are liable to pay GST only on the income – commission that they earn and not on all the monies that pass through them. Therefore, Rule 31A(3) insofar as it declares that the value of actionable claim in the form of chance to win in a horse race of a race club to be 100% of the face value of the bet, is beyond the scope of the Act.

RECENT DEVELOPMENTS IN GST

NOTIFICATIONS
Waiver of penalty – Notification No. 28/2021-Central Tax dated 30th June, 2021
The Government has introduced the system of QR code vide Notification No. 14/2020-Central Tax dated 21st March, 2020. For non-compliance, penalty u/s 125 can be attracted. Vide the above Notification, waiver of penalty is provided if such non-compliance is in the period from 1st December, 2020 to 30th September, 2021.

CIRCULARS
Clarification in respect of applicability of Dynamic Quick Response (QR) Code on B2C invoices and compliances of Notification No. 14/2020-Central Tax dated 21st March, 2020 – Circular No. 156/12/2021-GST dated 21st June, 2021

The CBIC has issued the above Circular clarifying various aspects relating to QR code requirements. The issues clarified are about the requirement of QR code on invoices issued to a UIN holder, inclusion of bank details in QR code, QR code in respect of services provided to parties located outside India but place of supply is considered in India, QR code for sales over the counter, QR code in respect of payments received by voucher, etc.

Clarification regarding extension of limitation under GST law in terms of Supreme Court’s order dated 27th April, 2021 – Circular No. 157/13/2021-GST dated 20th July, 2021

This Circular clarifies certain issues regarding cognizance for extension of limitation in terms of the Supreme Court order dated 27th April, 2021 in Miscellaneous Application No. 665/2021 in SMW(C) No. 3/2020 under the GST law. In its detailed Circular, the CBIC has divided various actions / compliances under GST into three broad categories and stated that the extension of timelines granted by the Supreme Court is applicable in respect of any appeal which is required to be filed before the Joint / Additional Commissioner (Appeals), Commissioner (Appeals), Appellate Authority for Advance Ruling, Tribunal and various courts against any quasi-judicial order or where proceedings for revision or rectification of any order are required to be undertaken, and is not applicable to any other proceedings under GST Laws.

ADVANCE RULINGS
1. Classification – ‘Track Assembly’ for ‘Automotive Seating System’
M/s Daebu Automotive Seat India Ltd. (GST ARA-01, Application No. 5/2021/ARA dated 1st March, 2021 (TN AAR)

The issue involved in this Advance Ruling application (AR) was about classification of Track Assembly. The applicant is engaged in the business of manufacture of seat components / accessories which are used in the manufacture of four-wheelers.

The applicant has given particulars of the product, i.e., track assembly, with their views regarding classification. The same are reproduced in the AR as under:

‘3.3 On the write-up of the functions of the product, they have stated that:
(i) This track assembly is fitted on to the floor of the car. Essentially, it enables the movement forward and backward of the seat. When seats are fixed on this track assembly, they can slide back and forth with the operation of a lever for varying the positions of the seats, which is basically intended to improve the comfort and efficiency of the persons sitting thereon. This mechanism enables the passengers and drivers of the automobile to adjust seat positions for their comfort and convenience. Thus, the track assembly manufactured and supplied by them is an adjunct to the car seat.
(ii) They do not qualify to become parts of the seats as enunciated in the decision cited, viz., AAR Ruling GUJ/GAARJR/42/2020 dated 30th July, 2020 – 2021-VIL-15-AAR and the decision of the Supreme Court in the case of Commissioner C. Ex., Delhi vs. Insulation Electrical (P) Ltd. reported in 2008 (224) ELT 0512 (SC).
(iii) Car seats would be complete themselves without these mechanisms. Hence, track assembly mechanisms independently could not be called as parts of seats falling under HSN 94019000, whereas, they could at best be identified as accessories to the seats and hence would appropriately be classifiable under the heading 87089900.’

In light of the above facts, the applicant placed the following two questions for determination by AAR:
(a) What is the correct classification of goods manufactured by the applicant, viz., ‘Automotive Seating System’?
(b) Will the goods manufactured fall under CH 87089900 attracting GST @ 28% or under CH 940199990 attracting GST @ 18%?

The CGST authority have contended that HSN 94019900 covers parts of seats, i.e., those constituting specified parts such as backs, bottoms, armrests, etc., and cannot cover items like that of the applicant which is basically tied under a seat on the floor of the vehicle.

Noting the function of the track assembly, the AAR noted that when the seat is fixed on the track assembly, it can slide back and forth with the operation of a lever for varying the position of the seats. This is basically intended to improve the comfort and efficiency of the person sitting thereon. It is convenient for drivers / passengers to adjust the seat for comfort and convenience. It is a product adjacent to the car seat. The seat can be complete without such assembly.

There were two competing headings to be seen in this case, viz., 9401 and 8708. The AAR also referred to the section notes under HSN 8708 and sub-classification under 8708. Similarly, detailed reference was made to HSN 9401. He then concluded that HSN 9401 covers parts of seats of motor vehicles, whereas HSN 8708 covers parts and accessories of motor vehicles.

The meanings of ‘parts’ and ‘accessories’ in the Oxford English Lexicon were also reproduced as under:
‘8.6     CTH 8708 covers “Parts and accessories of Motor Vehicles” and CTH 9401 covers “Parts of seats of Motor vehicles”. Now it is essential to find out the definitions of “parts” and “accessories”. As per the Oxford English Lexicon, parts and accessories would be defined as under:
Parts: An amount or section which, when combined with others, makes up the whole of something.
Accessories: A thing which can be added to something else in order to make it more useful, versatile or attractive.

From the above definitions, “parts” are an amount or section which when combined with others makes up the whole of something. Hence, part is an essential component of the whole without which the whole cannot be complete or cannot function. It is an integral component of the whole. As defined above, accessories are not an essential component without which the whole cannot be complete or function, but it is a component which when added improves the utility, efficiency or appearance of the whole thing.

Based on the above, the AAR held that ‘part’ is one which is an essential component of a whole, without which the whole cannot be complete or cannot function. In contrast, accessories are not an essential component to complete the whole or to make it function but something to improve the utility, efficiency or appearance of the whole thing.

The seat is complete before fitting it on the track assembly which is useful for forward / backward movement of the seat. Hence, seats and track assembly are two independent products fixed together for comfort.

Therefore, the Learned AAR held that the track assembly is an accessory to the motor vehicle covered by heading 8708 and cannot be covered by heading 9401.

Accordingly, he held that GST rate of 28% will apply and not the lower rate.

2. EPC Contract vis-à-vis sub-contractor and Government entity
M/s URC Construction Pvt. Ltd. (Order No. 07/Odisha-AAR/2020-21/dated 9th March, 2021)
The Steel Authority of India Ltd. (SAIL) intended to get Ispat Post-Graduate Medical Institute and Super Specialty Hospital (referred to as ‘Hospital’) constructed at Rourkela Steel Plant on design, Engineering, Procurement and Construction (EPC) basis. It appointed NBCC India Ltd. (‘NBCC’), an executive agency, for getting the above work done. An MOU was entered into between SAIL and NBCC. NBCC awarded a contract to the applicant, M/s URC Construction Pvt. Ltd. (‘URC’) who is a national-level contractor.

The basic question in the AR was whether the contract to be executed by URC will be covered by Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017 as amended by Notifications 24/2017, 31/2017 dated 13th October, 2017, 46/2017 dated 14th November, 2017 and 17/2018 dated 26th July. 2018. The relevant part of the Notification is reproduced in the AR as under:

Services

CGST Rate

‘(iv) Composition Supply of Works Contract
as defined in clause (119) of section 2 of the Central Goods and Services Tax
Act, 2017, provided to the Central Government, State Government, Union
Territory, a Local authority, a Government Authority or a Government Entity
by way of construction, erection, commissioning, installation, completion,
fitting out, repair, maintenance, renovation, or alteration of –

 

(a)

a civil structure or any other original works meant
predominantly for use other than for commerce, industry, or any other
business or profession;

6

(b)

a structure meant predominantly for use as (i) an educational,
(ii) a clinical, or (iii) an art or cultural establishment; or

(viii) Construction Services other than (i), (ii), (iii), (iv), (v)
and (vi) above

9

(x) “Government Entity” means an authority or a board or any
other body including a society, trust, corporation,

(i) Set up by an Act of Parliament or State Legislature; or

(ii) Established by any Government, with 90% or more participation
by way of equity or control, to carry out a function entrusted by the Central
Government, State Government, Union Territory or a Local authority’

 

 

If it is so covered then the rate will be 12%, else there will be a higher rate. The submission was that the work is executed for SAIL, a Government entity, and that the work is predominantly for clinical establishment. It is also work covered within the definition of Works Contract as defined u/s 2(119) of the CGST Act.

It was further submitted that though services are provided to NBCC, for the purpose of exemption the constitution of the ultimate service recipient (SAIL) is required to be seen and not NBCC, which is merely an executive agency. For the above purpose, reliance was placed on Shapoorji Pallonji & Co. Pvt. Ltd. vs. C.C.C. Excise & S.T., Patna [2016 (42) STR 681 (Pat)].

It was stated that SAIL is a Government entity as defined in paragraph 4 of Notification No. 11/2017-Central Tax dated 28th June, 2017. The said definition of Government entity referred to in paragraph 3.8 is as under:

‘3.8 M/s SAIL would fall within the ambit of “Government Entity”. The term “Government Entity” is defined in Explanation (x) in paragraph 4 of the Notification No. 11/2017-Central Tax (Rate) dated 28th June, 2017 as “an authority or a board or any other body including a society, trust, corporation, (i) set up by an Act of Parliament or a State Legislature; or (ii) established by any Government with 90% or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a Local authority.’

SAIL is established by way of an Act passed by Parliament, viz., Public Sector Iron and Steel Companies (Restructuring) and Miscellaneous Provision Act, 1978.

Reliance was also placed on the AAR, Uttarakhand in the case of NHPC Ltd. [(2018)(19) GSTR 34 (AAR-GST)] in which it observed that in a number of Government entities, though initially the holding by Government is 90% or more, after establishment it is diluted for various reasons whereby it may go below 90%.

Based on the above it was submitted that there is no requirement of continuous holding of 90% and once 90% was already held, it would continue to be a Government entity.

And based on this submission, the applicant, URC, canvassed to hold its contract as covered by the above Notification attracting tax @ 12%.

The AAR referred to the history of the establishment of SAIL and observed that it had been established with the approval of Parliament. Hence it was held as a Government entity. The contract awarded is a composite contract involving pre-engineered building structure and RCC frame structure for a specialty hospital. It is works contract as per section 2(119) of the CGST Act.

It was further observed that the EPC contract gets classified in sub-entry (b) as Construction of structure predominantly meant for use as a clinical establishment. For meaning of ‘Clinical establishment’ reference was made to the meaning of the said term under Service Tax and found that since the given work contract fulfils the meaning of clinical establishment, it duly qualifies under the above entry.

Regarding the status of NBCC, the AAR observed that it is a separate limited company and not a Government company. Therefore, the AAR did not agree with the applicant that the supply to NBCC amounts to supply to ultimate recipient SAIL, which is a Government entity. However, the AAR held that the applicant is a sub-contractor and the benefit of lower rate applicable as per entry at Sl. No. 3(ix) of Notification No. 11/2017 as amended by 1/2018 can apply to it.

The contract is given by SAIL which is a Government entity. Therefore, NBCC is the main contractor and as a sub-contractor, the applicant is entitled to a concessional rate.

It was also observed by the AAR that the construction is at the initiative of the Central Government as supported by budget proposal and other documents.

In view of the above, the Learned AAR held that the rate of tax on the above contract of the applicant will be 12%.

FROM PUBLISHED ACCOUNTS

Independent Report for Sustainability Disclosures

Compilers’ Note: SEBI has mandated the top listed companies to make disclosures related to Sustainability (or ESG as popularly called). Several companies have, in their annual report (called Integrated Report) for the financial year 2020-21, included such disclosures. These disclosures are quite detailed and contain a lot of information in graphs, charts, diagrams for ease of readability and understanding. A few such companies also feel the need to have an independent verification of these disclosures and have appointed external agencies for the same. Given below is an illustration of one such independent report for sustainability disclosures.

RELIANCE INDUSTRIES LTD.  (31ST MARCH, 2021)
From Integrated Report

Independent Assurance Statement to Reliance Industries Limited on their Sustainability Disclosures in the Integrated Annual Report for Financial Year 2020-21

To the Management of
Reliance Industries Limited, 3rd Floor,
Maker Chambers IV, 222, Nariman Point,
Mumbai 400021, Maharashtra, India.

Introduction
We, _____, have been engaged for the purpose of providing assurance on the selected sustainability disclosures presented in the Integrated Annual Report (‘the Report’) of Reliance Industries Limited (‘RIL’ or ‘the Company’) for FY 2020-21. Our responsibility was to provide assurance on the selected aspects of the Report as described in the boundary, scope and limitations as mentioned below.

Reporting Criteria
RIL has developed its report based on the applicable accounting standards and has incorporated the principles of the International Integrated Reporting Framework (<IR>) published by the International Integrated Reporting Council (IIRC) into the Management’s Discussion and Analysis section of the Report.

Its sustainability performance reporting criteria have been derived from the GRI Standards of the Global Reporting Initiative, United Nations’ Sustainable Development Goals (UN SDGs), American Petroleum Institute / The International Petroleum Industry Environmental Conservation Association (API / IPIECA) Sustainability Reporting Guidelines and Business Responsibility Reporting Framework based on the principles of National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (NVG – SEE).

RIL has also referred to new and emerging frameworks such as Task Force on Climate-related Financial Disclosures (TCFD) recommendations and World Economic Forum’s WEF-IBC metrics.

Assurance Standards
We conducted the assurance in accordance with:

  •  The requirements of the International Federation of Accountants’ (IFAC) International Standard on Assurance Engagement (ISAE) 3000 (Revised) Assurance Engagements Other than Audits or Reviews of Historical Financial Information.

– Under this standard, we have reviewed the information presented in the Report against the characteristics of relevance, completeness, reliability, neutrality and understandability.
– Limited assurance consists primarily of inquiries and analytical procedures. The procedures performed in a limited assurance engagement vary in nature and timing and are less in extent than for a reasonable assurance engagement.
– Reasonable assurance is a high level of assurance, but it is not a guarantee that it will always detect a material misstatement when it exists.

Boundary, Scope and Limitations

  •  The boundary of our assurance covers the sustainability performance of RIL’s manufacturing divisions, refineries, exploration and production in India; business divisions such as chemicals; fibre intermediates; petroleum; polyester; polymers; Recron and RP Chemicals units in Malaysia; petro-retail division facilities under Reliance BP Mobility Limited (RBML), terminal operations and LPG; Reliance Jio Infocomm Limited1; Reliance Retail Ventures Limited1 and corporate office at Reliance Corporate Park, for the period 1st April, 2020 to 31st March, 2021.

(1 Limited to total number of employees, new employee hires and employee turnover, parental leave, total man-hours of training and diversity of governance bodies and employees)

The sustainability disclosures covered as part of the scope of reasonable assurance process were reduction in energy consumption, renewable energy consumption, water withdrawal, water discharge, water recycled, total number of employees at Reliance, employee turnover, diversity of governance bodies and employees, parental leave and total man-hours of training. Additionally, the disclosures subject to limited assurance process included direct (scope 1) GHG emissions, energy indirect (scope 2) GHG emissions, emissions of particulate matter, oxides of nitrogen, oxides of sulphur, markets served, scale of the organisation, mechanisms for advice and concerns about ethics, governance structure, chair of the highest governance body, requirements for product and service information and labelling and new employee hires.

The assurance scope excludes:

  •  Aspects of the report other than those mentioned above;
  •  Data and information outside the defined reporting period;
  •  The Company’s statements that describe expression of opinion, belief, aspiration, expectation, aim or future intention and assertions related to Intellectual Property Rights and other competitive issues.

Assurance Procedures
Our assurance process involved performing procedures to obtain evidence about the reliability of specified disclosures. The nature, timing and extent of procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the selected sustainability disclosures whether due to fraud or error. In making those risk assessments we have considered internal controls relevant to the preparation of the Report in order to design assurance procedures that are appropriate in the circumstances. Our assurance procedures also included:

  • Assessment of RIL’s reporting procedures regarding their consistency with the application of GRI Standards.
  •  Evaluating the appropriateness of the quantification methods used to arrive at the sustainability disclosures presented in the Report.
  •  Verification of systems and procedures used for quantification, collation, and analysis of sustainability disclosures included in the Report.
  •  Understanding the appropriateness of various assumptions, estimations and materiality thresholds used by RIL for data analysis.
  •  Discussions with the personnel responsible for the evaluation of competence required to ensure reliability of data and information presented in the Report.
  •  Discussion on sustainability aspects with senior executives at the different plant locations and at the corporate office to understand the risks and opportunities from the sustainability context and the strategy RIL is following.
  •    Assessment of data reliability and accuracy.
  •  For verifying the data and information related to RIL’s financial performance we have relied on its audited financial statements for the FY 2020-21.
  •  Review of the Company’s Business Responsibility Report section to check alignment to the nine principles of the NVG-SEE.
  •  Verification of disclosures through virtual conference meetings with manufacturing units at Barabanki, Dahej, Hazira, Hoshiarpur, Jamnagar DTA, Jamnagar SEZ, Jamnagar C2 complex, Jamnagar Pet Coke Gasification unit, Nagothane, Naroda, Patalganga, Silvassa, Vadodara; Recron (Malaysia) facilities at Nilai and Meleka; RP Chemicals Malaysia; Petro-retail division facilities under RBML, Terminal Operations and LPG; On-shore and off-shore exploration and production facilities at Gadimoga and Shahdol; Reliance Jio Infocomm Limited; Reliance Retail Ventures Limited; and Corporate office at Reliance Corporate Park, Navi Mumbai.

Appropriate documentary evidences were obtained to support our conclusions on the information and data verified. Where such documentary evidences could not be collected due to sensitive nature of the information, our team verified the same using screen-sharing tools.

Independence
The assurance was conducted by a multi-disciplinary team including professionals with suitable skills and experience in auditing environmental, social and economic information in line with the requirements of ISAE 3000 (Revised) standard. Our work was performed in compliance with the requirements of the IFAC Code of Ethics for Professional Accountants, which requires, among other requirements, that the members of the assurance team (practitioners) be independent of the assurance client, in relation to the scope of this assurance engagement, including not being involved in writing the Report. The Code also includes detailed requirements for practitioners regarding integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. ____ has systems and processes in place to monitor compliance with the Code and to prevent conflicts regarding independence. The firm applies ISQC 1 and the practitioner complies with the applicable independence and other ethical requirements of the IESBA code.

Responsibilities
RIL is responsible for developing the Report contents. RIL is also responsible for identification of material sustainability topics, establishing and maintaining appropriate performance management and internal control systems and derivation of performance data reported. This statement is made solely to the Management of RIL in accordance with the terms of our engagement and as per scope of assurance.

Our work has been undertaken so that we might state to RIL those matters for which we have been engaged to state in this statement and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than RIL for our work, for this report, or for the conclusions expressed in this independent assurance statement. The assurance engagement is based on the assumption that the data and information provided to us is complete and true. We expressly disclaim any liability or co-responsibility for any decision a person or entity would make based on this assurance statement. By reading this assurance statement, stakeholders acknowledge and agree to the limitations and disclaimers mentioned above.

Conclusions
Based on our assurance procedures and in line with the boundary, scope and limitations, we conclude that, for selected disclosures subjected to limited assurance procedures as defined under the scope of assurance, nothing has come to our attention that causes us not to believe that these are appropriately stated in all material respects, in line with the reporting principles of GRI Standards. Non-financial disclosures that have been subject to reasonable assurance procedures as defined under scope of assurance, are fairly stated, in all material respects and are in alignment with the GRI standards.

It is health that is the real wealth and not pieces of gold and silver

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.

FROM THE PRESIDENT

My dear Members,
It is said that the month of ‘March comes in like a lion’. So let me start by congratulating and complimenting our own lions, President CA Nihar Jambusaria and Vice-President CA Debashis Mitra of the Institute of Chartered Accountants of India (ICAI), our alma mater. It is a proud moment of all of us @ BCAS that President Nihar, who is based in Mumbai, was a Core Group member of the BCAS for many years. On behalf of all of us @ BCAS I wish the newly-elected team a successful and impactful tenure and also assure them of BCAS support in their endeavours to strengthen and enhance the image of the profession of chartered accountancy.
Let me also take this opportunity to congratulate the office-bearers at the WIRC of the ICAI led by Chairman CA Manish Gadia and Vice-Chairperson CA Drushti Desai. Both are BCAS members. I assure them also of BCAS support and co-operation and wish that under their capable leadership the Western Region will continue to retain its prime position amongst the five Regions of the Institute and continue to provide quality service to members and students.
The BCAS organised a special panel discussion on ‘Budget 2021 – 360-Degree View of the Indian Economy’. It was very well received and featured an excellent analysis on the economic, industry and capital market situations, thus affording a 360-degree view of Budget 2021. The panellists, Dr. Ajit Ranade, CA Dr. Niranjan Hiranandani and CA Bhagirath Merchant dealt with their respective domains. They were at their erudite best and offered a lot of insights. They shared their expertise and large experience on several relevant issues and posers raised by the moderator CA Vikas Khemani with his investment research background. The video is available on the BCAS YouTube handle for those who missed it.
March is going to offer us a very busy schedule with lots of events, starting with the International Women’s Day celebration, a lecture meeting on ‘Ethics and Code of Conduct under ICAI Guidelines’, a lecture meeting on ‘Important recent decisions on international taxation’, Workshop on Labour Laws and a few other events.
The reprint version (first edition published in January, 2013) of the BCAS publication ‘CA Firm of the Future’ is now available for subscription. It is a publication that is relevant even today, eight years later. Already, professionals are rushing to grab the fresh edition. The 15th GST RSC of the BCAS is also attracting huge response. Please remain connected with www.bcasonline.org.
We are all aware that BCAS is a voluntary organisation with 72 years of valuable contribution to the profession at large and the public in general. It’s an achievement for a voluntary body to remain relevant so long and also be adaptable and to create benchmarks in all the activities it carries out – be it ethics and governance, events and programmes, or be it publications. The chief guest at our last Founding Day, CA Deepak Parekh, Chairman, HDFC, complimented us for the same.
Becoming a member of such a reputed voluntary organisation is a proud privilege for all CA professionals.
May I remind you that membership for the year 2021-22 for both the BCAS and the BCAJ is now open. And may I request all of you to renew your membership and introduce at least two new members to this august body? You could also consider Life Membership and a new initiative, ‘GIFT A MEMBERSHIP’. This initiative is an apt proclamation of the well-known proverb,
Give a man a fish, and you feed him for a day;
Teach a man to fish, and you feed him for a lifetime.
Last year we could not celebrate the festival of Holi due to the pandemic. With the fear of a second wave of the corona virus, this year, too, it looks like we had better be cautious with our Holi celebrations. We must follow the spirit of the proverbs,
Happy Holi and a smooth financial year closure
Best Regards,
Suhas Paranjpe
President

GLIMPSES OF SUPREME COURT RULINGS

7 Commissioner of Income Tax vs. Reliance Energy Ltd. AIR 2021 SC 2151 Civil Appeal No. 1328 of 2021 Date of order: 28th April, 2021
    
Deduction – Chapter VIA – Section 80-IA r/w/s 80AB – There is no limitation on deduction admissible u/s 80-IA to income under the head ‘business’ only – Section 80AB could not be read to be curtailing the width of section 80-IA – The scope of sub-section (5) of section 80-IA is limited to determination of quantum of deduction under sub-section (1) of section 80-IA by treating ‘eligible business’ as the ‘only source of income’ – Sub-section (5) cannot be pressed into service for reading a limitation of the deduction under sub-section (1) only to ‘business income’
    
The assessee was in the business of generation of power and also dealt with purchase and distribution of power. Its power generation unit is located at Dahanu.

For the assessment year 2002-03, the assessee filed its income-tax return on 31st October, 2002 declaring total income as ‘Nil’. The return was subsequently revised on 6th December, 2002 and thereafter on 30th March, 2004.

In respect of deduction u/s 80-IA, the assessee was asked to explain why the deduction should not be restricted to business income as had been the stand of the Revenue for A.Y. 2000-01. The assessee had revised its claim u/s 80-IA to Rs. 546,26,01,224, having admitted that there was an error in calculation of income tax depreciation.

The A.O. considered the revised claim of the assessee u/s 80-IA and determined the amount eligible for deduction under it at Rs. 492,78,60,973 against the assessee’s claim of Rs. 546,26,01,224. However, the A.O. stated in the assessment order that the actual deduction allowable shall be to the extent of ‘income from business’ as per the provisions of section 80AB. The ‘business income’ of the assessee was computed at Rs. 355,74,73,451 and the ‘gross total income’ at Rs. 397,37,70,178. Inclusion of ‘income from other sources’ of Rs. 41,62,96,727 in the ‘gross total income’ and deduction claimed under Chapter VI-A against such ‘gross total income’ was not accepted by the A.O. The A.O. also rejected the claim of the assessee for allowing deduction u/s 80-IA, along with other deductions available to the assessee, to the extent of ‘gross total income’, and restricted the deduction allowed u/s 80-IA at Rs. 354,00,75,084 by limiting the aggregate of deductions under sections 80-IA and 80-IB to the ‘business income’ of the assessee.

The A.O. further rejected the contention of the assessee that section 80AB was not applicable. It was held that section 80AB makes it clear that for the purposes of deduction in respect of certain incomes, deduction had to be given on the income of the nature specified in the relevant section and allowed against income of that nature alone. Therefore, the deduction computed u/s 80-IA could not be allowed against any source other than business.

The Appellate Authority partly allowed the appeal filed by the assessee by an order dated 23rd March, 2006 and reversed the finding of the A.O. on the issue of deduction u/s 80-IA. The Appellate Authority held that section 80AB places a ceiling on the quantum of deductions in respect of incomes contained in Part C of Chapter VI-A. Such deductions are to be computed on the net eligible income, which will be deemed to be included in the gross total income. The Appellate Authority observed that section 80AB is limited to determining the quantum of deductible income included in the gross total income. It directed the A.O. not to restrict the deduction admissible u/s 80-IA to income under the head ‘business’. The A.O. was further directed to aggregate the deduction u/s 80-IA with the other deductions available to the assessee and then to allow deductions of such aggregate amount to the extent of ‘gross total income’. The order of the Appellate Authority was affirmed by the Tribunal and also the High Court. Aggrieved, the Revenue filed an appeal before the Supreme Court.

The Supreme Court observed that the controversy in this case pertained to the deduction u/s 80-IA being allowed to the extent of ‘business income’ only.

It noted that section 80AB was inserted in the year 1981 to get over a judgment of this Court in Cloth Traders (P) Ltd. vs. Additional Commissioner of Income Tax (1986) 1 SCC 43. The CBDT Circular dated 22nd September, 1980 made it clear that the reason for introduction of section 80AB was for the deductions under Part C of Chapter VI-A to be made on the net income of the eligible business and not on the total profits from the eligible business. A plain reading of section 80AB showed that the provision pertained to determination of the quantum of deductible income in the ‘gross total income’. According to the Supreme Court, section 80AB could not be read to be curtailing the width of section 80-IA. The Court noted that section 80A(1) stipulates that in the computation of the ‘total income’ of an assessee, deductions specified in section 80C to section 80U shall be allowed from his ‘gross total income’. Sub-section (2) of section 80A provides that the aggregate amount of the deductions under Chapter VI-A shall not exceed the ‘gross total income’ of the assessee.

The Supreme Court, therefore, agreed with the Appellate Authority that section 80AB which deals with determination of deductions under Part C of Chapter VI-A is with respect only to computation of deduction on the basis of ‘net income’.

After noting the provisions of sub-sections (5) and (1) of section 80-IA, the Supreme Court observed that the import of section 80-IA is that the ‘total income’ of an assessee is computed by taking into account the allowable deduction of the profits and gains derived from the ‘eligible business’. With respect to the facts of this appeal, there was no dispute that the deduction quantified u/s 80-IA was Rs. 492,78,60,973. The said amount represented the net profit made by the assessee from the ‘eligible business’ covered under sub-section (4), i.e., from its business unit involved in the generation of power. The claim of the assessee was that in computing its ‘total income’, deductions available to it have to be set-off against the ‘gross total income’, while the Revenue contended that it was only the ‘business income’ which had to be taken into account for the purpose of setting-off the deductions under sections 80-IA and 80-IB. The ‘gross total income’ of the assessee for A.Y. 2002-03 was less than the quantum of deduction determined u/s 80-IA. The assessee contended that income from all other heads including ‘income from other sources’, in addition to ‘business income’, have to be taken into account for the purpose of allowing the deductions available to it, subject to the ceiling of ‘gross total income’. The Supreme Court agreed with the view taken by the Appellate Authority that there was no limitation on deduction admissible u/s 80-IA to income under the head ‘business’ only.

The Supreme Court further observed that the other contention of the Revenue was that sub-section (5) of section 80-IA referred to computation of quantum of deduction being limited from ‘eligible business’ by taking it as the only source of income. It was contended that the language of sub-section (5) makes it clear that deduction contemplated in sub-section (1) is only with respect to the income from ‘eligible business’ which indicates that there is a cap in sub-section (1) that the deduction cannot exceed the ‘business income’. On the other hand, the Court noted, it was the case of the assessee that sub-section (5) pertains only to determination of the quantum of deduction under sub-section (1) by treating the ‘eligible business’ as the only source of income.

The Court noted that the amount of deduction from the ‘eligible business’ computed u/s 80-IA for A.Y. 2002-03 was Rs. 492,78,60,973. There was no dispute that the said amount represented income from the ‘eligible business’ u/s 80-IA and was the only source of income for the purposes of computing deduction u/s 80-IA. The question that arose further was with reference to allowing the deduction so computed to arrive at the ‘total income’ of the assessee and that could not be determined by resorting to interpretation of sub-section (5).

The Supreme Court observed that Synco Industries Ltd. vs. Assessing Officer, Income Tax, Mumbai and Anr. (2008) 4 SCC 22 was concerned with section 80-I. Section 80-I(6), which is in pari materia to section 80-IA(5) and wherein it was held that for the purpose of calculating the deduction u/s 80-I loss sustained in other divisions or units cannot be taken into account as sub-section (6) contemplates that only profits from the industrial undertaking shall be taken into account as it was the only source of income. Further, the Court concluded that section 80-I(6) dealt with actual computation of deduction, whereas section 80-I(1) dealt with the treatment to be given to such deductions in order to arrive at the total income of the assessee.

The Court further observed that in Canara Workshops (P) Ltd., Kodialball, Mangalore (1979) 3 SCC 538, the question that arose for consideration related to computation of the profits for the purpose of deduction u/s 80-E, as it then existed, after setting off the loss incurred by the assessee in the manufacture of alloy steels. Section 80-E, as it then existed, permitted deductions in respect of profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule. It was argued on behalf of the Revenue that the profits from the automobile ancillaries industry of the assessee must be reduced by the loss suffered by the assessee in the manufacture of alloy steels. The Supreme Court was not in agreement with the submissions made by the Revenue. It was held that the profits and gains by an industry entitled to benefit u/s 80-E cannot be reduced by the loss suffered by any other industry or industries owned by the assessee.

The Supreme Court noted that in the present case there was no discussion about section 80-IA(5) by the Appellate Authority, nor by the Tribunal or the High Court. However, considering the submissions on behalf of the Revenue, and as it has a bearing on the interpretation of sub-section (1) of section 80-IA, it held that the scope of sub-section (5) of section 80-IA is limited to determination of the quantum of deduction under sub-section (1) of section 80-IA by treating ‘eligible business’ as the ‘only source of income’. Sub-section (5) cannot be pressed into service for reading a limitation of the deduction under sub-section (1) only to ‘business income’.

The Supreme Court further observed that an attempt was made by the Revenue to rely on the phrase ‘derived… from’ in section 80-IA(1) in respect of his submission that the intention of the Legislature was to give the narrowest possible construction to deduction admissible under this sub-section. According to the Supreme Court, it was not necessary to deal with this submission in view of the findings recorded above.

The Court dismissed the appeal for the aforementioned reasons qua the issue of the extent of deduction u/s 80-IA.

FROM THE PRESIDENT

Dear BCAS Family,

I commence my journey to communicate with you all as President with this maiden message. I first offer my salutations at the holy feet of Lord ‘Shreeji Bawa’ for bestowing on me the choicest of blessings and making me worthy to be chosen as President of the august professional body BCAS. I take this opportunity to thank all my seniors at BCAS for honing my skills and making me worthy of leading one of the oldest voluntary associations of CAs which is in its 73rd year. If I may consider this role of President as a success, I am conscious of the fact that success should feed one’s sense of responsibility. I commence my journey for the year with a thought in mind which is conveyed to me by my GURU Mahatria Ra:

‘In the journey of success, every finishing line is the new starting line.
In your career, year after year, you have to prove once again.
You have got to challenge yourself once again.
After every accomplishment, the heartbeat of success remains,
“What next? What else? What more? How else?”’

I have accordingly drawn an elaborate plan for the year to be of relevance by addressing the above questions to move forward and make the year a memorable one for BCAS.

The Theme for the year has been devised on the acronym ESG – EMPOWERING, SCALING, GLOBALISING.

Along with the Theme, in consultation with my team of Office-Bearers, we have devised an internal goal-setting exercise for BCAS by the name LEAP:

  •  Leadership for BCAS
  •  Excellence at BCAS
  •  Accountability to BCAS members
  •  Professionalism in BCAS

I am not elaborating on the above, as the same has been dealt with in detail in my incoming speech delivered during the AGM of BCAS, which is also published in this Journal.

I would now like to delve on the professional opportunities, challenges and the coming of age of the Indian economy.

There are exciting times ahead for CA firms, as the government has permitted audit firms to transform themselves into multidisciplinary partnerships (MDPs) by notifying the regulations issued by the ICAI. The CA firms would be able to forge tie-ups with company secretaries, actuaries, cost accountants, advocates, architects and engineers, thereby enabling them in scaling up their portfolio of services. The regulations have come at an apt time when the RBI, too, has come out with common guidelines for the appointment of statutory auditors encompassing all major financial lenders. These two moves are in the direction of empowering Small and Medium-size Partnerships (SMPs) to scale up and offer a variety of services under one roof.

The Finance Ministry launched its new income tax e-filing portal in June, 2021. However, over the last 45 days there has been a deluge of emails received by the Income-tax Department, totalling more than 700, regarding complaints about issues faced on the portal. The taxpayers and professionals are facing various challenges in using the portal and there are issues which remain unaddressed. There have been representations by various stakeholders and professional associations. The Finance Ministry has informed that all the issues would be resolved and the portal would be fully functional by the first week of August. I hope that the hardships of professionals and taxpayers are mitigated and there is ease of using the portal and hopefully the new portal offers many user-friendly features to justify the upgradation.

Another landmark event has taken place in India. The listing of Zomato, the first unicorn tech company to get listed on the exchanges. With its first mover advantage as a tech Startup being listed, it has opened the doors for other tech Startups which are in the pipeline to get listed. This demonstrates that India is on the path towards matured capital markets, which are ready to lap up opportunities in unique business models. I am of the opinion that the valuation metrics will evolve on the lines of such Startups in the US and China. This will also be a great opening for professionals to critically evaluate such business models and advise their clients and become valued business advisers.

We celebrate Guru Purnima every year on Shukla Paksha Ashadha Purnima. The day is celebrated by worshipping GURU, who is an enlightened soul imparting wisdom in both spiritual and academic fields. I dedicate Guru Purnima to all who have influenced my journey as a human being by enlightening me with their knowledge and recite the following shloka:

The six Gurus to remember are the one who inspires, one who informs, one who recites, one who guides, one who teaches and the one who awakens.

We shall be entering the 74th year of Independence on 15th August, 2021. India will be launching a year-long celebration on this day to commemorate 75 years of Independence. As responsible citizens, I would narrate just a simple way to display our patriotism as narrated by my GURU Mahatria Ra:

‘A sensible display of patriotism will be….
To be the BEST in whatever you do, and thus make your country proud.’

I conclude by wishing each one of you a HAPPY INDEPENDENCE DAY.

Best Regards,

Abhay Mehta
President

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).

GLIMPSES OF SUPREME COURT RULINGS

1 South Indian Bank Ltd. vs. Commissioner of Income Tax [Appeal No. 9606 of 2011]

Civil Appeal No. 9606 of 2011; Civil Appeal No. 5610 of 2021 [Arising out of SLP (C) No. 32761 of 2018; Civil Appeal Nos. 9609, 9610, 9611, 9615, 9608, 9612, 9614, 9613, 9607 of 2011; and 3367 and 2963 of 2012

Date of order: 9th September, 2021

Disallowance of expenditure – Section 14A – Expenditure incurred in relation to incomes which are not includible in total income – Proportionate disallowance of interest is not warranted u/s 14A for investments made in tax-free bonds / securities (held as stock-in-trade) which yield tax-free dividend and interest to assessee banks in those situations where interest-free own funds available with the assessee exceeded their investments

1. The question of law that arose before the Supreme Court was on the interpretation of section 14A which reads as follows:

‘Whether proportionate disallowance of interest paid by the banks is called for under section 14A of Income-tax Act for investments made in tax-free bonds / securities which yield tax-free dividend and interest to assessee banks when the assessee had sufficient interest-free own funds which were more than the investments made?’

1.1 For convenience, the Supreme Court adverted to the facts from the Civil Appeal No. 9606 of 2011 (South Indian Bank Ltd. vs. CIT, Trichur) to decide the appeal.

The assessees were scheduled banks and in the course of their banking business they also engaged in the business of investments in bonds, securities and shares which earned them interests from such securities and bonds, as also dividend income on investments in shares of companies, and from units of UTI, etc., which were tax-free.

1.2 None of the assessee banks amongst the appellants maintained separate accounts for the investments made in bonds, securities and shares wherefrom the tax-free income is earned so that disallowances could be limited to the actual expenditure incurred by the assessee.

1.3 In the absence of separate accounts for investments which earned tax-free income, the A.O. made proportionate disallowance of interest attributable to the funds invested to earn tax-free income. The A.O. worked out proportionate disallowance by referring to the average cost of deposit for the relevant year. The CIT(A) had concurred with the A.O.’s view.
    
1.4 The ITAT in the assessee’s appeal against the CIT(A), considered the absence of separate identifiable funds utilised by the assessee for making investments in tax-free bonds and shares but found that the assessee bank was having indivisible business and considering their nature of business, the investments made in tax-free bonds and in shares would therefore be in the nature of stock-in-trade. The ITAT then noticed that the assessee bank was having surplus funds and reserves from which investments could be made. Accordingly, it accepted the assessee’s case that investments were not made out of interest- or cost-bearing funds alone. In consequence, it was held by the ITAT that disallowance u/s 14A was not warranted in the absence of the clear identity of the funds.

The decision of the ITAT was reversed by the Kerala High Court on acceptance of the contentions advanced by the Revenue in its appeal.

2. The appellants argued before the Supreme Court that the investments made in bonds and shares should be considered to have been made out of interest-free funds which were substantially more than the investment made and therefore the interest paid by the assessee on its deposits and other borrowings should not be considered to be expenditure incurred in relation to tax-free income on bonds and shares; and as a corollary, there should be no disallowance u/s 14A. On the other hand, the counsel for Revenue referred to the reasoning of the CIT(A) and of the High Court to project its case. The contention on behalf of the assessee was rejected by the CIT(A) as also by the High Court primarily on the ground that the assessee had not kept its interest-free funds in a separate account and as such had purchased the bonds / shares from a mixed account.

3. The Supreme Court noted that section 14A was introduced by the Finance Act, 2001 with retrospective effect from 1st April, 1962. The new section was inserted in the aftermath of the judgment of this Court in the case of Rajasthan State Warehousing Corporation vs. CIT [(2000) 242 ITR 450 (SC)]. The said section provided for disallowance of expenditure incurred by the assessee in relation to income which does not form part of its total income. As such, if the assessee incurs any expenditure for earning tax-free income such as interest paid for funds borrowed, for investment in any business which earns tax-free income, the assessee is disentitled to deduction of such interest or other expenditure. Although the provision was introduced retrospectively from 1st April, 1962, the retrospective effect was neutralised by a proviso introduced later by the Finance Act, 2002 with effect from 11th May, 2001 whereunder reassessment, rectification of assessment was prohibited for any assessment year up to the assessment year 2000-01 when the proviso was introduced, without making any disallowance u/s 14A. The earlier assessments were therefore permitted to attain finality. As such, the disallowance u/s 14A was intended to cover pending assessments and for the assessment years commencing from 2001-02.

3.1 The Supreme Court noted that in the present batch of appeals before it, it was concerned with disallowances made u/s 14A for the A.Ys. commencing from 2001-02 onwards or for pending assessments.

4. The Supreme Court noted several decisions wherein it was held that in a situation where the assessee has mixed funds (made up partly of interest-free funds and partly of interest-bearing funds) and payment is made out of such mixed fund, the investment must be considered to have been made out of the interest-free fund.

4.1 In Pr. CIT vs. Bombay Dyeing and Mfg. Co. Ltd. (ITA No. 1225 of 2015), the question whether the Tribunal was justified in deleting the disallowance u/s 80M on the presumption that when the funds available to the assessee were both interest-free and loans, the investments made would be out of the interest-free funds available with the assessee, provided the interest-free funds were sufficient to meet the investments, was answered in favour of the assessee. The resultant SLP of the Revenue challenging the Bombay High Court judgment was dismissed both on merit and on delay by this Court.

4.2 In Commissioner of Income Tax (Large Taxpayer Unit) vs. Reliance Industries Ltd. [(2019) 410 ITR 466 (SC)], a Division Bench of the Supreme Court held that where there is a finding of fact that interest-free funds available to assessee were sufficient to meet its investment, it will be presumed that investments were made from such interest-free funds.

4.3 In HDFC Bank Ltd. vs. Deputy Commissioner of Income Tax [(2016) 383 ITR 529 (Bom)], the assessee was a scheduled bank and the issue therein pertained to disallowance u/s 14A. In this case, the Bombay High Court, even while remanding the case back to the Tribunal for adjudicating afresh, observed (relying on its own previous judgment in the same assessee’s case for a different assessment year) that if the assessee possesses sufficient interest-free funds as against investment in tax-free securities, then there is a presumption that investment which has been made in tax-free securities has come out of interest-free funds available with the assessee. In such a situation, section 14A would not be applicable. Similar views were expressed by other High Courts in CIT vs. Suzlon Energy Ltd. [(2013) 354 ITR 630 (Guj)], CIT vs. Microlabs Ltd. [(2016) 383 ITR 490 (Karn)] and CIT vs. Max India Ltd. [(2016) 388 ITR 81 (P&H)].

4.4 On reading of these judgments, the Supreme Court was of the opinion that the High Courts had correctly interpreted the scope of section 14A in their decisions favouring the assessees.

4.4.1 According to the Supreme Court, applying the same logic, the disallowance would be legally impermissible for the investment made by the assessees in bonds / shares using interest-free funds u/s 14A. In other words, if investments in securities are made out of common funds and the assessee has available non-interest-bearing funds larger than the investments made in tax-free securities, then in such cases disallowance u/s 14A cannot be made.

4.4.2 The Supreme Court said that the decisions in S.A. Builders vs. CIT (2007) 1 SCC 781, where this Court ruled on the issue of disallowance in relation to funds lent to a sister concern out of mixed funds and which was pending consideration before the larger bench of this Court in SLP (C) No. 14729 of 2012 titled as Addl. CIT vs. Tulip Star Hotels Ltd., were distinguishable as the factual scenario was different and therefore the issue pending before the larger Bench had no bearing on the present matters. In that case, loans were extended to a sister concern, while here the assessee banks had invested in bonds / securities.

4.4.3 According to the Supreme Court, the High Court herein had endorsed the proportionate disallowance made by the A.O. u/s 14A to the extent of investments made in tax-free bonds / securities, primarily because a separate account was not maintained by the assessee. The Supreme Court in this context observed that there was no corresponding legal obligation upon the assessee to maintain separate accounts for different types of funds held by it. In the absence of any statutory provision which compels the assessee to maintain separate accounts for different types of funds, the Revenue’s contention could not be sustained.

5. The Supreme Court then adverted to Maxopp Investment Ltd. vs. CIT [(2018) 402 ITR 640 (SC)] which also dealt with the issue of disallowance u/s 14A in cases where investments were held as stock-in-trade and referred to some of its following observations:

(i) The purpose behind section 14A in not permitting deduction of the expenditure incurred in relation to income, which does not form part of total income, is to ensure that the assessee does not get double benefit. Once a particular income itself is not to be included in the total income and is exempted from tax, there is no reasonable basis for giving benefit of deduction of the expenditure incurred in earning such an income.

(ii) As per section 14A(1), deduction of that expenditure is not to be allowed which has been incurred by the assessee ‘in relation to income which does not form part of the total income under this Act’. Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in the total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such expenditure would obviously be treated as not related to the income that is exempted from tax and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income.

(iii) It is to be kept in mind that in those cases where shares are held as stock-in-trade, it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. [Maxopp Investment Ltd. vs. CIT (2012) 347 ITR 272 (Del)] where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company, that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well, and as and when such dividend income is generated, that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not necessarily be the situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits.

(iv) It will be in those cases where the assessee in his return has himself apportioned but the A.O. is not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect.

6. The Supreme Court thereafter referred to another important judgment dealing with section 14A disallowance, viz., Godrej and Boyce Manufacturing Co. Ltd. vs. DCIT [(2017) 394 ITR 449(SC)]. Here, the assessee had access to adequate interest-free funds to make investments and the issue pertained to disallowance of expenditure incurred to earn dividend income, which was not forming part of the total income of the assessee. It was observed that for disallowance of expenditure incurred in earning an income it is a condition precedent that such income should not be includible in the total income of the assessee. The Supreme Court accordingly concluded that for attracting provisions of section 14A, the proof of fact regarding such expenditure being incurred for earning exempt income is necessary.

7. The Supreme Court proceeded further to examine yet another aspect of the matter. It noted that the Central Board of Direct Taxes (CBDT) had issued Circular No. 18 of 2015 dated 2nd November, 2015 which had analysed and explained that all shares and securities held by a bank which are not bought to maintain Statutory Liquidity Ratio (SLR) are its stock-in-trade and not investments, and income arising out of those is attributable to the business of banking. This Circular came to be issued in the aftermath of CIT vs. Nawanshahar Central Co-operative Bank Ltd. [(2007) 160 Taxman 48 (SC)], wherein the Supreme Court had held that investments made by a banking concern is part of its banking business. Hence, the income earned through such investments would fall under the head Profits & Gains of business. The Punjab & Haryana High Court in the case of Pr. CIT vs. State Bank of Patiala [(2017) 393 ITR 476 (P&H)] while adverting to the CBDT Circular, concluded (correctly, according to the Supreme Court) that shares and securities held by a bank are stock-in-trade and all income received on such shares and securities must be considered to be business income. That is why section 14A would not be attracted to such income.

7.1 Reverting back to the situation, the Supreme Court observed that the Revenue in the present case was not contending that the assessee banks had held the securities for maintaining the SLR as mentioned in the Circular. In view of this position, when there was no finding that the investments of the assessee were of the related category, tax implication would not arise against the appellants from the said Circular.
    
8. The Supreme Court concluded that the proportionate disallowance of interest was not warranted u/s 14A for investments made in tax-free bonds / securities which yielded tax-free dividend and interest to the assessee banks in those situations where interest-free own funds available with the assessee exceeded their investments. The Supreme Court agreed with the view taken by the ITAT favouring the assessees.

8.1 The Supreme Court clarified that the above conclusion was arrived at because a nexus had not been established between expenditure disallowed and earning of exempt income. The respondents had failed to refer to any statutory provision which obligated the assessee to maintain separate accounts which might justify proportionate disallowance.

9. Finally, referring to the general expectations from tax policies / systems, the Supreme Court quoted the following words of Adam Smith in his seminal work, The Wealth of Nations:

‘The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid ought all to be clear and plain to the contributor and to every other person.’

9.1 In the above context, the Supreme Court observed as under:

‘Echoing what was said by the 18th century economist, it needs to be observed here that in taxation regime, there is no room for presumption and nothing can be taken to be implied. The tax an individual or a corporate is required to pay is a matter of planning for a taxpayer and the Government should endeavour to keep it convenient and simple to achieve maximisation of compliance. Just as the Government does not wish for avoidance of tax, equally it is the responsibility of the regime to design a tax system for which a subject can budget and plan. If proper balance is achieved between these, unnecessary litigation can be avoided without compromising on generation of revenue.’

10. In view of the foregoing discussion, the Supreme Court answered the issue framed in these appeals against the Revenue and in favour of the assessees. The appeals by the assessees were accordingly allowed with no order on costs.

Notes:
(i) The judgment of the Apex Court in the case of Maxopp Investments Ltd. (the Maxopps case) considered in the above case [referred to in para 5 above] was analysed in the BCAJ in the column Closements in the months of January and February, 2018.
    
(i-a) After the judgment in the Maxopps case, a debate had started as to whether in case of securities held as stock-in-trade yielding exempt income, section 14A should apply or, in view of a specific para in the Maxopps case [reproduced in our above Closements at para 7.1.1], section 14A should not apply. This para is also largely referred in the above case at para 5(iii). Post Maxopps case, the trend in the decisions largely relied on the said para to take a view that in such cases section 14A should not be invoked for making proportionate disallowance of the interest, etc. The issue generally in these cases was the interpretation / implications of the said para in such cases. The said para is now considered as the key observation in the above case [i.e., the South Indian Bank Ltd. case] in adjudicating the issue of expenditure on securities held as stock-in-trade. This issue now gets finally settled with the above judgment in the South Indian Bank Ltd. case. Of course, in case of direct expenses incurred for exempt income, different consideration may apply.
    
(ii) In the above case, a common question has been decided in a set of appeals involving a few banks. The Kerala High Court had decided this issue against the assessee and the Apex Court considered the South Indian Bank Ltd. case [unreported] as a lead case and considered the facts of that case to decide the common issue. As such, the facts of the case are taken as available in the judgment of the Apex Court. Some of the other cases in appeal are also unreported. It seems that the above cases related to A.Y. 2001-02 up to A.Y. 2007-08 and in these cases the provisions of section 14A(2) [read with Rule 8D] and section 14A(3) [introduced and becoming effectively applicable from A.Y. 2008-09] were effectively not applicable either because of the prior assessment years involved or due to non-recording of a requisite satisfaction as envisaged in section 14A(2).
    
(ii-a) In the above case, a common question [referred to in para 1 above] considered by the Apex Court was whether proportionate disallowance of interest paid by the banks is permissible u/s 14A for investments made in securities (held as stock-in-trade) yielding exempt dividend / interest income where the assessees had sufficient interest-free own funds available which were more than such investments.
    
(ii-b) In the appeals before the Apex Court, it was an admitted fact that the assessees did not maintain separate accounts for interest-free own funds and other funds [mixed funds] for making such investments and the investments were made from the mixed funds. However, in all cases the interest-free funds available with the assessee were more than such investments. In such cases, the real issue was whether a presumption can be made that such investments under such circumstances are to be considered as made out of own interest-free funds available with the assessee (Presumption Theory). A majority of the High Courts had decided the issue in favour of the assessees by accepting the Presumption Theory. However, the Kerala High Court was of a different view and hence the above cases came up before the Apex Court in the cases of certain banks.

(iii) The issue of applicability of Presumption Theory in such cases was largely settled in the context of the provisions of 36(i)(iii) [Ref: Reliance Industries Ltd. (410 ITR 466) and Hero Cycles Pvt. Ltd. (379 ITR 347-SC)]. However, in the context of section 14A this was considered, more so by the Revenue, as pending for final view. This may be due to the fact that in the Reliance Industries case before the Apex Court, the issue relating to section 14A disallowance was not raised, although it was decided by the High Court. In the context of section 36(i)(iii), it is also worth noting that now in the above case, the Apex Court has approved the view taken by the Bombay High Court in the case of the HDFC Bank Ltd. case [referred to in para 4.3 above]. In this case, the Bombay High Court followed its earlier decision in the case of the same assessee [(2014) 366 ITR 505 (Bom)] wherein the High Court had applied its earlier decision in the case of Reliance Utilities and Power Ltd. [(2009) 313 ITR 340 (Bom)] in which the Presumption Theory was applied in the context of disallowance u/s 36(1)(iii). As such, the judgment of the Bombay High Court in the Reliance Utilities case should be also treated as impliedly approved on this Theory in the above case.

(iii-a) In view of the above judgment, now the applicability of Presumption Theory in such cases in favour of the assessees gets settled in the context of disallowance u/s 14A. The Court has specifically held that in the absence of any statutory provisions requiring the assessee to maintain separate accounts for different types of funds, this Presumption Theory is applicable. Effectively, the Court has accepted the assessee’s proposition that in respect of payment made out of the mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a
particular investment is made, and it may not be permissible for the Revenue to make an estimation of a proportionate figure.

(iv) In the above case, the Apex Court was dealing with a specific issue referred to in para 1 above [and mentioned in above Note (ii-a)] and the Court has responded favourably to decide that disallowance of interest u/s 14A under such circumstances is unwarranted. The Court has also approved the interpretation of section 14A in the decisions of various High Courts taking similar view [as mentioned in paras 4.3 and 4.4 above] and disagreed with the view taken by the Kerala High Court on this issue. In the process, the Court has also made certain observations in the judgment. It is worth noting that it is settled principle of law that the judgment of the Court should be read as a whole and observations made therein should be considered in the light of the questions before the Court. The decision is binding authority only for what it actually decides and not from what may come to flow from some observations made therein [Ref: Sun Engineering Works (P) Ltd. (198 ITR 297 – SC); CIT vs. Sudhir J. Mulji (214 ITR 154 – Bombay High Court), etc.].

(v) In the above case, after concluding the question before the Court, the Court has also made certain significant general observations [referred to in paras 9 and 9.1 above] with regard to the tax system in the country and pointed out that it is the responsibility of the regime to design a system for which a subject can budget and plan to avoid unnecessary litigation. Even earlier, the Apex Court has made significant observations in such context in other cases (e.g., CIT vs. Arvind Narottam 173 ITR 479.) We only hope that one day the authority [which has the power to take remedial action] will appreciate such a desire coming from the highest court of the land and make the life of genuine taxpayers easy in this context. At the same time, to achieve this goal genuine efforts are also required by all other shareholders without which the common goal of certainty and substantial reduction in litigation does not seem to be feasible. Let us hope that this will happen in the near future with the joint efforts of all stakeholders.
    
(vi) Currently, the earlier available exemption in respect of long-term capital gain on transfer of shares as well as dividend income is done away with and major litigation for disallowance u/s 14A was due to these exemptions. In this scenario, the efficacy and impact of section 14A is substantially reduced and as such the above judgment would be of more use only in pending litigation for earlier years except for the entities like banks which continue to make such investments in tax-free securities yielding exempt interest income [and hold them as stock-in-trade] for certain reasons. As such, the practical utility of the above judgment will now be limited for the general taxpayers. Therefore, the instant euphoria created in some quarters on the implications of the judgment appears to be misplaced. In fact, this is the reason why it was thought fit by us to cover this judgment in this column instead of with a detailed analysis [like in the Maxopps case] in the column Closements.

Service Tax

I. TRIBUNAL

1 Neyveli Lignite Corporation Ltd. vs. CCE&ST [2021-128 taxmann.com-405-CESTAT-Chen] Date of order: 26th July, 2021

Liquidated damages recovered from the contractor cannot be said to be a consideration for agreeing to tolerate the act of the contractor of not completing the task within time schedule so as to attract the provisions of section 66E(e) of the Finance Act, 1994

FACTS
The issue before the Tribunal relates to the demand of service tax on liquidated damages recovered by the appellant for acts of default such as delayed or deficient supplies by various suppliers. The period involved in all the appeals is after 1st July, 2012 and the case set out by the Department is that the appellant had agreed to tolerate breach of timelines stipulated in the contract against the amount imposed as liquidated damages as consideration u/s 66E(e) of the Finance Act, 1994.

HELD
The Tribunal relied upon the decisions in the cases of South Eastern Coalfields Ltd. vs. CCE&ST [2021] 124 taxmann.com 174 (New Delhi-CESTAT) and M.P. Poorva Kshetra Vidyut Vitaran Co. Ltd. vs. Pr. Commissioner CGST & CE [2021] 126 taxmann.com 182 (New Delhi – CESTAT) and held that it is not possible to sustain the view taken by the Commissioner that since the contractor did not complete the task within the time schedule, the appellant agreed to tolerate the same for a consideration in the form of liquidated damages, which would be subjected to service tax u/s 66E(e) of the Finance Act. The appeal was accordingly allowed.

Note: A similar view is also taken by the Chennai Tribunal in the case of Steel Authority of India Ltd. vs. CCE [2021] 128 taxmann.com 400 (Chennai-CESTAT), order dated 26th July, 2021.

2 M/s Seaport Lines India Pvt. Ltd. vs. CGST&CE [2021-TIOL-574-CESTAT-Mad] Date of order: 7th September, 2021

A freight forwarder, when acting as a principal, will not be liable to pay service tax when the destination of the goods is from a place in India to a place outside India when there is a mark-up between the freight received and freight paid

FACTS
During verification of records of the assessee, it was noticed that they hire containers from different liners like Maersk and Hapag Lloyd and ‘sell’ these to their customers; that while arranging containers for shippers, the assessee collected ocean freight and local charges like terminal handling charges and documentation charges; and they also availed CENVAT credit on such charges and paid service tax on the invoice amount raised on customers. It was noticed that the assessee collected ocean freight charges higher than the actual amounts charged by shipping lines / steamer agents; however, they did not include the ocean freight charges collected in taxable value for the purpose of payment of Service Tax under business support services.

HELD
The Tribunal, relying on the decision in the case of M/s Marinetrans India Pvt. Ltd. [2020] (33) GSTL 241 (Tri-Hyd) held that buying and selling space on ships does not amount to rendering a service and any profit or income earned through such transactions is not liable to service tax. The demand was accordingly set aside.

3 M/s. Bharat Coking Coal Ltd vs. CCE&ST [2021-TIOL-551-CESTAT-Kol] Date of order: 25th August, 2021

A joint reading of section 67 of the Finance Act and Rule 3 of the Service Tax (Determination of Value) Rules, 2006 clarifies that service tax is chargeable on the value of the service provided. Any other expenses incurred and reimbursed is not includible in the value for charge of service tax

FACTS
The appellant is a PSU and a 100% subsidiary company of Coal India Limited engaged in the business of mining and selling of coal. They receive security services under a Memorandum of Understanding from the Central Industrial Security Force (CISF) and were discharging service tax under reverse charge. For the purpose of valuation, the amount paid to CISF towards cost of deployment, cost of arms and ammunition and cost of clothing items (uniforms), etc., was considered. In addition to the above, they were also providing facilities to CISF for free residential accommodation, free medical services to the CISF personnel at its premises, free vehicles / cabs to CISF personnel and reimbursement of expenditure on petty imprest expenses, medicines and telephones on actual submission of bills / invoices. The appellant has not included the value of the above facilities for payment of service tax on reverse charge basis.

HELD
The Tribunal, relying on the case of Central Industrial Security Force 2019-TIOL-3277-CESTAT-All where it has been held that expenses incurred towards medical services, vehicles, expenditure on dog squad, stationery expenses, telephone charges, expenditure incurred by service recipient for accommodation provided to CISF, are not includible as the same cannot be considered as consideration for providing security services.

FROM THE PRESIDENT

Dear BCAS Family,
The month of October commences with the 2nd day being celebrated as ‘Gandhi Jayanti’ in honour of the birth anniversary of the Father of the Nation, Mahatma Gandhiji. This year it will be his 152nd birth anniversary. He preached two major principles to be followed in life, viz., Ahimsa (non-violence) and Swaraj (freedom). To correlate these principles with our professional life, we have to be conscious of the fact that merely by not involving in physical violence and by taking our own decisions during professional commitments, do not mean that we are following the path of Ahimsa and Swaraj, respectively.

The true spirit of Ahimsa is to be aware during our professional journey of not being part of any deeds which are intended to hurt the well-being of some other person or the State. Similarly, Swaraj is attained by a professional when he advises or takes decisions without the fear of its consequences and in a thoroughly independent manner. To be on the path of these principles one has to make them the standpoints of one’s life and, more importantly, to stand by these standpoints.

For a professional who follows the path of these principles, I am reminded of the quote of my GURU Mahatria Ra:

Your work ethic is a true reflection of your character.
Hold yourself to the highest standards possible.

An eminent person and one of the most respected professionals, Padma Shri CA T.N. Manoharan, Past President of the ICAI, had once stated in an interview that he was transformed the most by reading My Experiments with Truth by Mahatma Gandhi.

Now I turn to the developments on the professional and economic fronts. Let me first discuss the good tidings of the strong rebound during the July-September quarter projected by Standard & Poors (S&P) based on the high frequency indicators after a steep contraction in activities in the previous quarter. It has retained GDP growth at 9.5% for the current fiscal. The capital markets are also exuding confidence in the future earnings of the listed corporates, by taking the Sensex past 60,000 and the Nifty almost touching 18,000. India as a preferred destination for foreign investments is also gathering steam and there is a continuous flow of FDI into the country.

On the professional front, there is the Consultation Paper released by the National Financial Reporting Authority (NFRA) on Statutory Audit and Auditing Standards for Micro, Small and Medium Companies (MSMCs). It has sought the views of all the stakeholders on four issues relating to the auditing areas of MSMCs. Two of the issues I feel may need deliberations, viz., (i) exempting MSMCs meeting certain criteria and thresholds from statutory audit under the Companies Act, 2013, and (ii) the approach for estimating standard cost of audit computed by NFRA.

With due respect to the regulatory body NFRA, it is really disturbing of them to make sweeping remarks in the Consultation Paper while dealing with issues related to audit of MSMCs, such as ‘The inference that is inescapable is that such audit is (sic) being carried out is perhaps only a sham.’ And ‘In any event it is clear that such audit as is being carried out cannot boast of any quality at all.’ I feel such statements, even though in a Consultative Paper, should be avoided by the regulator since it depicts the profession of Chartered Accountancy and its foremost quality as auditors in bad light.

The regulator has also inferred that there may be lack of adequate accounting professionals with the companies which are not filing Annual Financial Statements (AFS) and MGT-7. Only 52.48% of the total number of active companies has filed its AFS and MGT-7 for the F.Y. 2018-19 as on June, 2021. Here I would like to state that another reason may be the inefficiency / unwillingness of the promoters and management of such companies for not complying with the regulatory requirements. To cast the entire onus and responsibility on the professionals without further research into the reasons for such non-compliances would be totally unjust.

Further, I feel the estimation of standard costs to carry out an audit as tabulated by NFRA will also require a lot of inputs from professionals who are into conducting audits. The efficiency of conducting audits has increased substantially with the assistance of the various audit softwares available and adopted by the auditing firms. I urge all the professionals to come forward and share their views on the Consultation Paper. BCAS will shortly send an email to collect comments from members. Further, we will deliberate within a group of professionals and give appropriate response as sought.

BCAS through its philanthropic arm the BCAS Foundation and the HRD Committee, has for several decades been undertaking a ‘Tree Plantation and Eye Camp’ in the remote tribal areas of Dharampur, Gujarat. This year, on 25th and 26th September, an enthusiastic group of 25 volunteers visited Pindval and with the assistance of the Sarvodaya Parivar Trust carried out tree plantation. There was a visit to an NGO ARCH, which is engaged in mother and child care services for the tribals at Nagaria, Dharampur. On the next day, the volunteers visited Sant Ranchhoddas Eye Hospital which along with the Dhanvantari Trust conducts cataract operations for the tribals and needy people at Vansda, Gujarat. The BCAS Foundation donated reasonable amounts to all the three NGOs.

The zeal and dedication of the persons involved at all the three NGOs was to be seen to be believed. Their experiments with social work would seem simple, but the circumstances and conditions under which they carry out the activities make the work exemplary. I can say that if you create anything which is simple but powerful, it will have value in this world. For the efforts of such mortals who have sacrificed the comforts for the larger goal of serving deprived human kind, I would end with a quote from my GURU Mahatria Ra:

The bullet that had left the gun cannot return to the gun. It has to hit the target.
A venture begun should be a venture accomplished.
Whether something is a stepping stone or a stumbling block depends on how you use it.
Go on. Go on. Do not halt. Do not stagnate. Endeavour continuously.
Don’t stop. Rest not. Go on. Keep going on.

Best Regards,
 

Abhay Mehta
President

SOCIETY NEWS

ENHANCING AUDIT QUALITY

The BCAS organised a virtual lecture by CA P.R. Ramesh on ‘Enhancing audit quality & enhanced reporting obligations’. It was planned keeping in mind the changes in the Companies Act, 2013 on audit quality and reporting norms.

The Managing Committee, along with the Accounting and Audit Committee, organised the event on 14th July. Vice-President CA Mihir Sheth welcomed the gathering and introduced the speaker.

Mr. Ramesh took participants through the current environment of audit, audit quality expectations, new CARO amendments and their reporting and other emerging reporting obligations like integrated reporting and ESG reporting.

He explained the current environment with various quotes and media displays; he touched on the complexities in the business transactions of today; the biggest failures across the globe and the big corporate failures. He also covered the current concerns such as poor corporate governance, lack of ethical behaviour, credibility of oversight and enforcement actions, failures due to shoddy accounting and auditing, and auditors missing glaring signs of failure.

Covering audit quality aspects, he stated that the statutory audit is the sixth line of defence, the first five being higher level management, functional and process managers, risk management and compliance functions, internal audit, and board and other committees. The basic building blocks of good audit quality were various structural, environmental and output factors, oversight and evaluation and execution issues. He laid special emphasis on audit procedures, the tools and techniques used and evaluation of audit results.

He also discussed the importance of communication to those charged with governance about routine, special and other matters, including auditor’s independence, communications; form, type and format of audit report and its qualitative and quantitative factors; management letter and group audits.

Mr. Ramesh then took up the history of the evolution of CARO, the key considerations and audit procedures in relation to the recent changes in CARO such as:
* reporting on proceedings initiated or pending against the company for holding any benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and rules made thereunder;
* reporting on whether at any point of time during the year the company has been sanctioned working capital limits in excess of Rs. 5 crores in aggregate from banks or financial institutions on the basis of security of current assets; and also whether the quarterly returns or statements filed by the company with such banks or financial institutions are in agreement with the books of accounts of the company;
* reporting on whether during the year the company has made investments in, provided any guarantee or security, or granted any loans or advances in the nature of loans, secured or unsecured, to companies, firms, LLPs or any other parties;
* details of investments, any guarantee or security or advances or loans not prejudicial to the company’s interest;
* whether any transactions not recorded in the books of accounts have been surrendered or disclosed as income during the year in the tax assessments under the Income-tax Act, 1961 (43 of 1961), and if so, whether the previously unrecorded income has been properly recorded in the books of accounts during the year [Clause 3(viii)];
* whether term loans were applied for the purpose for which they were obtained; if not, the amount of loan so diverted and the purpose for which it was used may be reported;
* whether funds raised on short-term basis have been utilised for long-term purposes; if yes, the nature and amount to be indicated;
* whether any fraud by the company or any fraud on the company has been noticed or reported during the year; if yes, the nature and the amount involved is to be indicated;
* whether the auditor has considered whistle-blower complaints, if any, received during the year by the company;
* existence of any material uncertainty on the date of the audit report and various other clauses.

The amendment to Schedule III of the Companies Act, 2013 and Amendments to the Companies (Accounts) Rules, 2014 were also covered.

Mr. Ramesh took up topics related to Integrated Reporting which is a concise communication about how an organisation’s strategy, governance, performance and prospects in the context of its external environment lead to value creation over the short, medium and long terms. He pointed out that on 25th March, 2021, SEBI decided to make the Business Responsibility and Sustainability Report applicable to the top 1,000 listed entities (by market capitalisation) for reporting on a voluntary basis for F.Y. 2021-22 and on a mandatory basis from F.Y. 2022-23.

He answered all the questions raised by the participants on the chat and Q&A box.

The key takeaways from the session were:
• Increased disclosures in financial statements with respect to clauses contained in CARO 2020 with the aim of increased compliance for the matters contained therein;
• Increased role of the CFO with the focus on compliances with certain laws and regulations, sanity of financial information furnished to banks, and to take note of adverse financial positions and corrective measures;
• Increased data-sharing with auditors and coordination required for concluding prior to sign-off;
• The overall quality of reporting by the auditors expected to increase on the financial statements of the company and thereby lead to greater transparency;
• Responsibility on the management for additional disclosures in the financial statements on various aspects relating to financial discipline, ageing, end-use of funds, etc.

The vote of thanks was proposed by CA Chirag Doshi. A large number of participants attended the online meeting. Its archival video has, in a short time, garnered a few thousand views.

A video of the same is available on YouTube at link: https://www.youtube.com/watch?v=gAbYUI8hOgs

Introducing a new feature, the BCAJ invites readers to scan the following QR Code that will help them to download the meeting and glean the knowledge shared by speaker P.R. Ramesh.


A MOVIE WITH TWISTS AND TURNS

The Human Resources Development Study Circle organised the screening of a film, ‘Ek Cheez Milegi Wonderful’, on the online platform on 25th July. The screening was sponsored by CA Vijay Mehta.

It was like family time for members as they watched it in the comfort of their homes. The three valuable hours that they spent on the movie helped bring home the message that in order to live better lives, it is best to make each other more comfortable and happy within the home. This was one of the lessons that was conveyed by the movie which was appreciated by the viewers.

The movie ‘Ek Cheez Milegi Wonderful’, offered both inspiration and motivation. In a world that craves and celebrates material things in lieu of happiness, the movie leads viewers to the actual meaning and essence of being happy. It reveals how ‘knowledge’ is a unique, unparalleled characteristic of the entire bio-world. It poses the question, what differentiates us humans from the rest of the living beings? Are we really higher than all of them on the pyramid of the living world?

Like any typical film, the movie features several twists and turns that keep the viewers focused till the very end when all the characters in it agree to the ‘universal truth’.

A must-watch movie, it is available on YouTube at the link https://youtu.be/lJNSpKWHwcg.

CHANGES IN COMPANY LAW & AUDITING

The Students’ Forum under the auspices of the HRD Committee organised a training session for CA Article Students on ‘Changes in Company Law & Auditing’ via Zoom Meetings on 26th July.

The Study Circle was led by CA Shraddha Kishnadwala, an expert on the subject.

CA Dnyanesh Patade, the co-ordinator, introduced the speaker and spoke about the various activities and events conducted by the BCAS Students’ Forum and encouraged the participants to take active part in its events.

Shraddha Kishnadwala then described the various changes in the Company Law in a lucid manner. She also explained the audit and verification procedures that can be followed and their impact on reporting.

The session was divided into three parts, viz., (a) Changes in Schedule III reporting, (b) Other major changes in the Companies Act, and (c) Auditing Procedure and Changes in CARO. The speaker pointed out that the Companies’ Amendment Act had bought about many changes in reporting, format and compliance.

The programme ended with CA Dnyanesh Patade, member of the HRD Committee, proposing the vote of thanks. About 160 students participated in the interactive session and they offered a positive feedback.

The session can be viewed on the BCAS YouTube Channel at: https://www.youtube.com/watch?v=Tt76E_C8Alc

TAXATION OF INDIVIDUALS

The Direct Tax Laws Study Circle Meeting on ‘Taxation of Individuals (Including Expats) with Special Emphasis on Taxing Accretion to Employer’s PF Contribution’ was held on 30th July.

Group leader CA Deepashree Shetty gave an overview of the residency criteria applicable for individuals and the tax relief measures available on account of Covid-19. She also discussed the key consideration for tax residency and taxation of the salary income of individuals (including expats).

Thereafter, she spoke on the tax implication of social security contributions (including that for expats). She also threw light on the impact of the newly-inserted Rule 3B and took the participants through the mode for computation of taxable amount and the practical challenges in computation under Rule 3B. The session ended with Deepashree discussing the provisions related to international work (i.e., expats) and the benefits of social security agreements.

FCRA AND RECENT AMENDMENTS

The FEMA Study Circle of the BCAS and the Financial Management Service Foundation (Delhi) came together for a discussion on ‘FCRA and Recent Amendments’. The meeting was led by Dr. Manoj Fogla, Dr. Sanjay Patra, CA Suresh Kejriwal and Mr. Sandeep Sharma. It was held on 31st July.

The session started with an introduction of the Foreign Contribution Regulation Act, 2010 (FCRA), followed by an in-depth analysis of its key provisions and the recent amendments. The speakers focused on details of the FCRA provisions and addressed the queries raised by the participants. The presentation was followed by a Q&A session.

The speakers pointed out that the recent amendments in FCRA have helped the authorities regulate the flow of funds received from foreign sources. However, this has also drastically changed the manner in which projects are executed by charitable institutions. This had created a lot of anxiety amongst them as well as the professionals advising them. It was no surprise that there were more than 1,300 registrations for the event with participation from charitable institutions and professionals alike.

MISCELLANEA

I. Technology

22 Boston Dynamics’ back-flipping robot shows off new ‘parkour’ routine

Boston Dynamics has said that if a robot can develop the same movement and flexibility as the average adult, then the range of potential applications will be practically limitless.

Boston Dynamics’ humanoid robot, Atlas, has been showing off its new skill, parkour or free running atop and over obstacles.

A new video shows Atlas leaping over obstacles, doing back-flips and even falling flat on its face during practice runs.

The company says that if a robot can develop the same movement and flexibility as the average adult, then the range of potential applications will be practically limitless.

‘Parkour is a useful organising activity for our team because it highlights several challenges that we believe to be important,’ said team leader Scott Kuindersma.

‘How do we connect perception to action in a way that both captures long-term goals like getting from point A to point B, and short-term dynamic goals like adjusting footsteps and applying corrective forces to maintain balance,’ Kuindersma said.

Atlas stands 5 feet (1.52 m) tall, weighs 190 pounds (86 kg.), uses hydraulics and battery-powered electric motors for movement and has three on-board computers.

It is designed to be used as a research and development tool and its Boston Dynamics team is being encouraged to push it to the limit.

‘It can be frustrating sometimes. The robots crash a lot,’ said Benjamin Stephens, control lead on the Atlas team.

‘We learn a lot from that in terms of how to build robots that can survive falling on their face and getting back up and doing it again and we also learn a lot about the behaviour, the control, the thing that puts one foot in front of the other,’ Stephens said.

(Source: indianexpress.com, dated 18th August, 2021)

II. Economy

23 Forex reserves rise by $889 million to lifetime high of $621.464 billion

The country’s foreign exchange reserves increased by $889 million to a lifetime high of $621.464 billion in the week ended 6th August, 2021, RBI data has revealed.

In the previous week ended 30th July, 2021, the reserves had surged by $9.427 billion to reach $620.576 billion.

In the reporting week, the increase in the forex kitty was due to a rise in foreign currency assets (FCAs), a major component of the overall reserves, as per weekly data issued by RBI.

FCAs rose by $1.508 billion to $577.732 billion in the reporting week. Expressed in dollar terms, the foreign currency assets include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.

Gold reserves were down by $588 million to $37.057 billion in the reporting week, the data showed.

The special drawing rights (SDRs) with the International Monetary Fund (IMF) dipped by $1 million to $1.551 billion.

The country’s reserve position with the IMF also fell by $31 million to $5.125 billion, as per the data.

(Source: economictimes.indiatimes.com, dated 13th August, 2021)

III. Financial Reporting World

24 SEC charges Ernst & Young, three audit partners and former public company CAO with audit independence Misconduct

The Securities and Exchange Commission has charged accounting firm Ernst & Young LLP (EY), one of its partners and two of its former partners with improper professional conduct for violating auditor independence rules in connection with EY’s pursuit to serve as the independent auditor for a public company with nearly $5 billion in revenue (issuer). Separately, the Commission brought charges against the issuer’s then-Chief Accounting Officer for his role in the Misconduct. All respondents have agreed to settle the charges and will collectively pay more than $10 million in monetary relief.

The SEC’s order against the auditors finds that EY, EY partner James Herring, CPA, and former EY partners James Young, CPA and Curt Fochtmann, CPA improperly interfered with the issuer’s selection of an independent auditor by soliciting and receiving confidential competitive intelligence and confidential audit committee information from the issuer’s then-Chief Accounting Officer, William Stiehl, during the request for proposal process. EY’s misconduct in connection with the audit pursuit, the order finds, would cause a reasonable investor to conclude that EY and its partners were incapable of exercising Objectivity and Impartiality once the audit engagement began. The SEC’s separate order against Stiehl finds that, through his Misconduct during the request for proposal process, including withholding key information from the issuer’s audit committee, Stiehl caused the issuer’s reporting violations.

‘Auditor independence is not merely an obstacle to overcome, it is the bedrock foundation that supports the integrity, transparency, and reliability of financial reporting,’ said Charles Cain, Chief of the SEC Enforcement Division’s FCPA Unit. ‘Auditor independence requires auditors to analyse all of the relevant facts and circumstances from the perspective of the reasonable investor. EY and its partners lost sight of this fundamental principle in their pursuit of a new client. This action further underscores that auditors must apply heightened scrutiny when making independence determinations.’

The SEC’s order against the auditors finds that EY, Herring, Young and Fochtmann violated the auditor independence provisions of the federal securities laws and that EY, Herring, and Young caused the issuer to violate its obligation to have its financial statements audited by independent public accountants. The order also finds that all respondents engaged in improper professional conduct within the meaning of Rule 102(e) of the SEC’s Rules of Practice.

EY, Herring, Young, and Fochtmann consented to the SEC’s order without admitting or denying the findings and agreed to cease and desist from future violations. EY has agreed to a censure, to pay a civil money penalty of $10 million and to comply with a detailed set of undertakings for a period of two years. Herring, Young and Fochtmann agreed to pay civil money penalties of $50,000, $25,000, and $15,000, respectively, and to be suspended from appearing or practising before the Commission, with a right to reapply for reinstatement after three, two, and one years, respectively.

The SEC’s order against Stiehl finds that he caused and wilfully aided and abetted the issuer’s reporting obligations stemming from the auditor selection process improprieties. Stiehl, who consented to the order without admitting or denying the findings, has agreed to cease and desist from future violations of the securities laws, to pay a civil money penalty of $51,000, and to be suspended from appearing or practising before the Commission, with a right to reapply for reinstatement after two years.

The SEC’s investigation was conducted by Jim Valentino, Natalie Lentz and trial counsel Sarah Heaton Concannon. The case was supervised by Tracy L. Price and Mr. Cain.

(Source: www.sec.gov, dated 2nd August, 2021)

25 Sanctions against KPMG and former partner in relation to Silentnight

The Financial Reporting Council (‘FRC’) has announced sanctions against KPMG LLP (KPMG) and David Costley-Wood, formerly a partner and Head of KPMG Manchester Restructuring. This follows a referral from The Pensions Regulator and an investigation undertaken pursuant to the Accountancy Scheme in relation to Mr. Costley-Wood’s conduct in respect of the Silentnight group of companies in the period August, 2010 to April, 2011. An independent Disciplinary Tribunal made findings of Misconduct following a four-week hearing during November and December, 2020 and sanctions were determined following a hearing in June, 2021.
Sanctions

KPMG has been:
• fined £13 million,
• severely reprimanded, and
• ordered to appoint an independent reviewer to:

(1) Conduct a Root Cause Review to establish:
a. why threats to compliance with the fundamental principle of Objectivity were not appropriately identified and safeguarded in the period prior to the appointment of office holders in the Silentnight matter; and
b. in a sample of past cases, whether threats to compliance with the fundamental principle of Objectivity were appropriately identified and safeguarded in the period prior to the appointment of office holders and if not, the reasons for such failures; and

(2) conduct a review of various policies, procedures and training programmes relating to several of KPMG’s advisory services practices in the light of the results of the Root Cause Review.

Mr. Costley-Wood has been:
• fined £500,000,
• severely reprimanded,
• excluded from membership of the ICAEW for 13 years, and
• precluded from holding an insolvency licence for the same period.

Findings of Misconduct

The Tribunal made findings of Misconduct in respect of breaches of the fundamental principles of Objectivity and Integrity. It described the history of KPMG’s involvement with Silentnight in this case as deeply troubling as KPMG failed to act solely in its client’s interests, acted in fundamental respects contrary to those interests and in those of a party whose interests were diametrically opposed to those of Silentnight. It concluded that the lack of Objectivity in this matter went to the core of the relationship between Silentnight and KPMG.

The Tribunal also held that, in addition to the lack of Objectivity in relation to his dealings with Silentnight, Mr. Costley-Wood acted dishonestly and therefore he and KPMG acted with a lack of Integrity, including in their dealings with the Pension Protection Fund (‘PPF’) and The Pensions Regulator (‘TPR’) despite Mr. Costley-Wood acknowledging that there was an obligation to act transparently in relation to a regulator.

The Tribunal commented:

‘Breaches of the principles of Integrity and Objectivity risk seriously undermining public confidence in the standard of conduct of Members and Member Firms and in the profession generally, all the more so where, as here, the professional has acted dishonestly. Dishonesty is inimical to everything that a profession stands for and especially destructive of public confidence’.

The Tribunal found that Misconduct had been established in that:

Throughout the period 16th August, 2010 to 14th January, 2011, Mr. Costley-Wood advised and / or assisted both Silentnight and HIG in relation to a proposed acquisition of Silentnight by HIG at a time when there was a conflict of interest between the interests of Silentnight and HIG, and as a result, the respondents’ judgement was compromised and Objectivity impaired.

Mr. Costley-Wood assisted with a strategy designed to drive Silentnight into an insolvency process, or to the brink of such a process (a ‘burning platform’), with a view to passing Silentnight’s Pension Scheme to the PPF at the expense of Pension Scheme members and PPF levy payers. In this context, Mr. Costley Wood provided advice and assistance to HIG so that it could acquire Silentnight as an otherwise profitable business without the burden of the Pension Scheme liabilities.

The respondents failed, in addition, to consider the self-interest and familiarity threats which arose from their relationship with HIG and from their desire to nurture that party as a client and keep them ‘onside’. Mr. Costley-Wood was conscious of the importance of the potential relationship of HIG to KPMG throughout. The respondents’ loss of Objectivity underlay or drove much of what they did in relation to Silentnight throughout the relevant period, including assisting and advising HIG in its plan to acquire Silentnight free of the Pension Scheme liability from the summer of 2010.

Mr. Costley-Wood dishonestly advanced and associated himself with untrue and misleading and / or materially incomplete statements to the PPF, TPR, Silentnight and the Trustees of the Silentnight Pension Scheme as to the causes of Silentnight’s difficulties in order to assist HIG in its efforts to enable Silentnight to shed its liability under the Pension Scheme as cheaply as possible.

KPMG is legally liable under the Accountancy Scheme for the conduct of Mr. Costley-Wood, and accordingly the findings of Misconduct by KPMG were made by the Tribunal in respect of the same matters.

One further allegation of Misconduct made by the FRC was not upheld by the Tribunal.

In determining the sanctions, the Tribunal considered the Misconduct was very serious, noting that to a professional accountant the conflicts of interest should have been obvious and that the Misconduct risked the loss of significant sums of money. It put at risk Silentnight’s ability to survive and tens of millions of pounds of creditors’ claims, potentially exceeding £100 million as the liability to the Pension Scheme would crystallise. The Misconduct potentially adversely affected a significant number of people. The majority of the membership of the Pension Scheme comprised factory workers, many of whom had worked for Silentnight and contributed to the pension scheme for much of their working life. This was a foreseeable consequence of the plan to ‘dump’ the pension scheme into the PPF.

The Tribunal considered the respondents’ Misconduct in respect of advancing or associating themselves with untrue, misleading or incomplete statements to the PPF, TPR and the Trustees to be especially egregious given that they knew they had to be open and transparent with these parties and that they intentionally sought to mislead them in order to assist HIG in its efforts to enable Silentnight to shed its liability under the Pension Scheme as cheaply as possible.

The Tribunal further commented:

‘The standards of Integrity and Objectivity are of fundamental importance. They express the most basic requirements that society expects of professional accountants. Members of the profession have a privileged and trusted role in society. In return, they are required to live up to their own professional standards. Society expects high standards from professional persons; and the professions expect high standards from their own members.’

Subsequent to the events outlined above, Silentnight went into administration on 7th May, 2011 as a result of an entity related to HIG calling in the working capital facility. This culminated in the sale of the business out of administration to HIG, with the PPF assessing whether to assume responsibility for the Pension Scheme.

Costs

The Tribunal ordered that KPMG pay £2,450,000 towards Executive Counsel’s costs of the investigation together with the costs of the Tribunal (amounting to a further £305,814).

Elizabeth Barrett, Executive Counsel, said:

‘The scale and range of the sanctions imposed by the Tribunal mark the gravity of the Misconduct in this matter. The decision serves as an important reminder of the need for all Members of the profession to act with Integrity and Objectivity and of the serious consequences when they fail to do so.’

The report of the Tribunal is not published at this time.

The Accountancy Scheme was amended from 1st January, 2021 to remove from its jurisdiction all insolvency work (including restructuring advice, preparation for formal appointments and work consequent to formal appointments) carried out by members of the professional bodies who are licensed by those bodies as insolvency practitioners.

(Source: www.frc.org.uk, dated 5th August, 2021)

STATISTICALLY SPEAKING

RIGHT TO INFORMATION (r2i)

PART A | DECISION OF SUPREME COURT

Political parties must publish criminal antecedents of candidates within 48 hours of their selection1
 

Case name:

Brajesh Singh vs. Sunil Arora & Ors.

Citation:

Contempt Petition (Civil) No. 656 of 2020
in Contempt Petition (Civil) No. 2192 of 2018 in WP (Civil) No. 536 of 2011
with M.A. Diary No. 2680 of 2021

Court:

The Supreme Court of India

Bench:

Justice Rohinton Fali Nariman and
Justice B.R. Gavai

Decided on:

10th August, 2021

Relevant Act / sections:

Section 8 of the Right to Information Act, 2005

Decision:
• With the objective of decriminalisation of politics, the Supreme Court directed that the political parties must publish the criminal antecedents, if any, of the candidates within 48 hours of their selection.
• The Court has also directed the Election Commission of India (ECI) to create a dedicated mobile application containing information published by candidates regarding their criminal antecedents, so that at one stroke every voter gets such information on his / her mobile phone.
• Further, the Court has directed the political parties to publish information regarding the criminal antecedents of their candidates on the homepage of their websites, thus making it easier for the voter to get to the information that has to be supplied, and to have on the homepage a caption which states ‘Candidates with criminal antecedents’;
• The ECI was told to carry out an extensive awareness campaign to make every voter aware about his right to know and the availability of information regarding the criminal antecedents of all contesting candidates. The campaign will be carried out across various platforms, including social media, websites, TV ads, prime time debates, pamphlets, etc. Further, a fund must be created for this purpose within a period of four weeks into which fines for contempt of court may be directed to be paid.
• For the aforesaid purposes, the ECI was also directed to create a separate cell which will also monitor the required compliances so that the Apex Court can be apprised promptly of non-compliance by any political party of the directions contained in the Court’s orders as fleshed out by the ECI in instructions, letters and circulars issued in this behalf.

PART B | VACANCIES IN SICs AND PENDING PLEAS

The Supreme Court of India had, while hearing a matter in 2019 on pendency and vacancies in the State Information Commissions (SICs), ordered timely and transparent appointment of Information Commissioners to the respective Commissions set up under the RTI Act, 2005.

A bench of Justices S. Abdul Nazeer and Krishna Murari heard a petition on 18th August, 2021 regarding delay in appointment of Information Commissioners under the RTI Act. During the hearing, it was pointed out that despite the Court ruling, the Union of India and several States had failed to fill the vacancies in their Information Commissions, leading to a large number of pending cases and long delays in the disposal of appeals / complaints.

Information regarding vacancies in some States was provided as below through an additional affidavit:

Maharashtra
In February, 2019 the SC had directed the State to ensure that the Information Commission functions at full strength (one Chief and ten Information Commissioners) given the large backlog of appeals and complaints. However, as on date the commission was functioning with only four Commissioners even though the pendency as of 31st May, 2021 stood at more than 75,000 appeals / complaints. The bench pulled up the State of Maharashtra for not filling the vacancies on the SIC and warned that the Chief Secretary will be summoned if the State fails to fill the vacancies within three weeks.

Karnataka
In 2019, the SC had directed that the SIC should function at full strength for which the Government must sanction all posts. While the State had sanctioned all posts, however, at the hearing it was pointed out that currently three posts are vacant even though there is a backlog of more than 30,000 appeals / complaints. The SC directed the State to fill the vacancies and file a status report.

Odisha
The SC had directed the State of Odisha in 2019 to sanction three additional posts so that the Commission can function with one Chief and six Information Commissioners, given the backlog of cases. In the hearing it emerged that the State had sanctioned only two additional posts and currently the Commission was functioning with only four Commissioners. One post had fallen vacant in November, 2020 and was yet to be filled up, while the Chief had retired on 15th August, 2021. The SC directed the Government to file a status report.

Telangana
The SIC of Telangana has been functioning without a Chief for one year despite the fact that the RTI Act envisages a crucial role for the Chief as the general superintendence, direction and management of the affairs of the SIC vests in the Chief. The SC expressed disappointment at the state of affairs and directed that the appointment should be made by the next date of hearing.

Nagaland
It was highlighted that the previous SIC Chief had retired in January, 2020 and since then no new Chief had been appointed. As a result, for 19 months the Commission has been headless. The State was directed to fill the vacancy and file a status report.

West Bengal
In its February, 2019 judgment, the SC had directed the State Government to create three posts of Commissioners in addition to the sanctioned strength of three (one Chief and two Information Commissioners). During the hearing it was pointed out that currently the Commission is functioning with only two commissioners (one Chief and one Information Commissioner) although nearly 10,000 appeals / complaints are pending before it. The SC pulled up the State Government for failing to file an affidavit before the hearing and for not filling the vacancies.

Jharkhand
The Government of Jharkhand was not a respondent in the case, but it was pointed out that the condition of the Information Commission was alarming as it had been effectively rendered defunct since May, 2020 when the lone Information Commissioner retired. Since then no Information Commissioner or Chief has been appointed and the Commission has been non-functional with people seeking information from public authorities under the jurisdiction of the Jharkhand SIC having no recourse to the independent appellate mechanism prescribed under the RTI Act. The SC expressed anguish at the current state of affairs and directed the State to fill the vacancies and also file a report.

It will be worthwhile to understand the submissions made by the Union of India and the State governments regarding the vacancies and pendencies2.

PART C | PART C I INFORMATION ON AND AROUND

• RTI reveals Income-tax department, Pune, rejected 90% applications for Section 80G / 12A approval
CA M.L. Baheti moved an RTI application on 9th July, 2021 before the Income-tax Department, Pune, to identify how many 80G / 12A applications had been approved by the Department. The reply to the application revealed that around 90% of the applications filed by an NGO had been rejected for the reasons best known to the Department. Data was obtained for the period from 1st April, 2019 to 31st March, 2021 in respect of the number of applications filed and approved and shows the following alarming facts:

  

 

Applications

u/s 12A

%

Applications

u/s 80-G

%

Applications filed

4,881

100

2,070

100

Applications approved

355

7.27

379

18.30

Applications rejected

2,471

50.62

961

46.42

Unexplained applications

2,055

42.10

730

35.26

This is the situation of Pune Zone alone, leave aside the entire country. From the above it is clear that the applications for approval of a majority, i.e., 80 to 90%, of cases are being rejected. This non-transparency of the Department has become a hurdle for charitable trusts and NGOs as the whole country is moving from the Covid-19 pandemic situation where the role of NGOs and fast approval for 80-G is very important3.

• Odisha Information Commission brings major private university under RTI purview
The Odisha State Information Commission has declared Kalinga Institute of Industrial Training (KIIT), a deemed university and one of the State’s largest private institutions, as a public authority, which means the university has to furnish information under the Right To Information Act4.

• No authority can force RTI applicant to submit ID
Haryana’s State Information Commission has held that no authority in the State can force an RTI applicant to file the application in a particular format and to disclose any reason for seeking information. The Commission observed that the RTI Act, 2005 is a Central Act and section 6(2) allows an applicant to conceal his / her identity and to seek information without giving any reason5.

• Uttar Pradesh Government spent Rs. 160 crores on TV ads in one year
The Uttar Pradesh Government spent a staggering Rs. 160.31 crores on advertisements on TV news channels between April, 2020 and March, 2021, reveals a right to information reply by the State Government. The RTI divided the State’s ad expenditure into ‘national TV news channels’ and ‘regional TV news channels’. The former got Rs. 88.68 crores and the latter Rs. 71.63 crores6.

• Maharashtra Government spent Rs. 155 crores on publicity campaigns in 16 months
The Directorate-General of Information and Public Relations has informed an RTI activist that Chief Minister Uddhav Thackeray’s Mahavikas Aghadi Government has spent Rs. 155 crores on publicity campaigns in the last 16 months. About Rs. 5.99 crores has been spent on social media and Rs. 9.6 crores on publicity campaigns7 every month.

_____________________________________________________________________

1 https://www.livelaw.in/pdf_upload/criminal-antecedents-judgment ll2021sc367-398294.pdf
2    https://drive.google.com/file/d/1H-5CogZc0TejH3Zrya4wk5TzXmNI1Ux5/view https://www.counterview.net/2021/08/sc-pulls-up-state-govts-for-choking.html
3    https://taxguru.in/income-tax/rti-reveals-department-rejects-90-per-cent-applications-section-80g-12a-approval.html
4    https://www.thehindu.com/news/national/other-states/odisha-information-commission-brings-major-private-university-under-rti-purview/article36008135.ece
5    https://www.outlookindia.com/newsscroll/no-particular-format-required-to-file-rti-haryana-information-commission/2138675
6    https://www.newslaundry.com/2021/07/21/yogi-government-spent-rs-160-crore-on-tv-ads-in-one-year-network18-hits-the-jackpot
7    https://www.indiatoday.in/india/story/rti-reveals-maharashtra-government-spent-rs-155-crore-on-publicity-campaigns-in-16-months-1823805-2021-07-04

ETHICS AND U

Arjun: (Chants Shrikrishna’s bhajan) ‘Hey Bhagwan. You are so kind! Where are you today? Please come and give me your ‘darshan’.

Shrikrishna: Arrey Parth, what happened to you today? You are in such a happy mood. Did your Government give further extension of time?

Arjun: No, Lord. But they will have to give it. Their own site is not working for the last many days. The new utility has gone for a toss.

Shrikrishna: Really? But the system was working all right till recently.

Arjun: Yes, but they suddenly thought of changing the system. They engaged a new service provider for a huge amount of money. And nothing is working well. It’s totally in a mess.

Shrikrishna: Anyway, let it be. Tell me, why are you so happy today?

Arjun: I got a good audit assignment. Two directors of a big private limited company approached me today through a common friend.

Shrikrishna: Oh, I see. What for?

Arjun: They offered me the statutory and tax audit of the company. They say they are not happy with their present CA.

Shrikrishna: Why?

Arjun: He takes a long time to complete the work, charges exorbitant fees and harasses them in tax matters.

Shrikrishna: Do you know their existing CA?

Arjun: Not directly. But I have heard that firm’s name. They are quite large in size. They have a good name.

Shrikrishna: So when will you take up the work?

Arjun: Immediately. They want it urgently as they are going for a new project. The two directors are giving the appointment letter tomorrow itself.

Shrikrishna: Very good. But you will have to write to the previous auditor.

Arjun: Yes. Actually, I called one of their partners who has signed the last year’s audit.

Shrikrishna: What did he say?

Arjun: He said ‘No problem, please go ahead’. I asked for his NOC. He said not to worry. They were not very keen to retain that audit. The formalities can be done later.

Shrikrishna: So, starting the work immediately?

Arjun: Of course! Why should I leave the opportunity? They are paying a good fee and during Covid I have a liquidity crunch.

Shrikrishna: Arjun, I doubt whether you are the same Arjun to whom I narrated the Bhagwad Gita in the Mahabharata.

Arjun: Why? What makes you think that way?

Shrikrishna: That Arjun was very intelligent, brave, honest and ethical. You are behaving the exact opposite way. All my preachings on ethics have gone to waste.

Arjun: I don’t understand. I did speak with the previous auditor. Only then I decided to start the work. They need it urgently.

Shrikrishna: They may need it. But what about your ethics? How can you compromise on them?

Arjun: I will definitely write to them. Now our Institute has permitted communication by email also. Who has time to wait for registered post AD?

Shrikrishna: My dear Arjun, your intellect seems to be covered by ‘moha’. You are not able to use your discretion and are forgetting your duty.

Arjun: Why do you say that?

Shrikrishna: Firstly, you should think why such a large company would approach you at the last moment. Are the reasons given by them convincing? Did you verify the facts?

Arjun: I am aware that these so-called large CA firms do not render proper service. So, their clients are never happy.

Shrikrishna: But have they resigned? Or have they been removed?

Arjun: But the directors are giving me a regular letter of appointment. I will take a copy of the resolution if you suggest so.

Shrikrishna: Arjun, will it suffice? Please read Clause (9) of Part 1 of the First Schedule to your CA Act. You must ensure compliance with the Company Law provisions on change of auditors.

Arjun: Like what?

Shrikrishna: Their resignation, the reasons for the resignation, then calling of EGM. Its notices, minutes, attendance register… Don’t take it so lightly.

Arjun: But many people accept just an appointment letter from the directors.

Shrikrishna: Then they are sure to invite trouble for themselves. Be loyal to your profession. Clients take advantage of the lack of unity in your profession.

Arjun: Then what should I do?

Shrikrishna: Ensure all secretarial compliances, better take a certificate from a CS. Verify the papers for yourself. And what about the previous auditor’s fee? If the undisputed audit fees are pending, then you can’t accept the audit.

Arjun: But the directors are disputing the fees. They say he charged too much!

Shrikrishna: But once their fee is appearing as outstanding in the balance sheet and it is signed by the directors, it is treated as undisputed. The subsequent dispute is irrelevant.

Arjun: Where is this written?

Shrikrishna: See your Council’s Guidelines of 8th August, 2008 – Chapter VII.

Arjun: But their partners have assured me they have no objection.

Shrikrishna: This is dicey. Never accept such things just in good faith. We are in kaliyug.

Arjun: Thanks for opening my eyes. I will tell the client…

Shrikrishna: Actually, this is a very elementary thing. It is unfortunate that your ‘lobha’ (temptation) made you forget this lesson.

Arjun: But this is all unnecessary. Why do they create hurdles?

Shrikrishna: Arjun, you are mistaken. Imagine that you are in the position of the previous auditor. And some client criticises you, approaches another CA, doesn’t pay your fees…

Arjun: Agreed, agreed, agreed! I’ve understood. I remember two of my friends faced a disciplinary case in a similar situation. Good that you cautioned me. Much obliged, Lord!

Shrikrishna: Take care. I have no time to narrate to you the Gita once again!

||Om Shanti||

[This dialogue is based on Clause Nos. (8) and (9) of Part 1 of the First Schedule to the CA Act and Council General Guidelines – Chapter VII]

REGULATORY REFERENCER

DIRECT TAX

1. Extension of due dates for filing various forms – CBDT has extended the time limit for electronic filing of Form No. 15CC, Equalization Levy Statement in Form No. 1, Form No. 64D, Form No. 64C, Form No. 10BBB and Form II SWF due to difficulties faced by assessees in electronic filing of forms and non-availability of the utility for e-filing of forms. [Circular 15 of 2021 dated 3rd August, 2021.]

2. Insertion of Rules 21AI and 21AJ and Forms 10IG and 10IH – Income-tax (21st Amendment) Rules, 2021 – CBDT has inserted Rule 21AI to prescribe the method of calculating exempt income of a specified fund for the purposes of section 10(4D) and Rule 21AJ to determine the income of a specified fund attributable to units held by a non-resident taxable u/s 115AD. [Notification No. 90 of 2021 dated 9th August, 2021.]

3. Insertion of Rule 10RB and Form 3CEEA – Income-tax (23rd Amendment) Rules, 2021 – CBDT has notified new Rule 10RB prescribing the manner for computation of relief in tax payable u/s 115JB(1) due to operation of newly-inserted sub-section (2D) of section 115JB. The assessee is required to make an application in Form 3CEEA electronically to claim relief u/s 115JB(2D). [Notification No. 92 of 2021 dated 10th August, 2021.]

COMPANY LAW

I. COMPANIES ACT, 2013

(I) MCA appoints 1st September, 2021 as the effective date for section 4 of the Companies (Amendment) Act, 2020: Section 4 of the Companies (Amendment) Act, 2020 which amends section 16 of the Companies Act, 2013 shall be effective from 1st September, 2021. As per section 16(3), the Government shall allot a new name to the company as per newly-inserted Rule 33A and the Registrar shall enter the new name in the Register of Companies in place of the old name and issue a fresh certificate of incorporation with the new name which the company shall use thereafter. [Notification No. S.O. 2904(E), dated 22nd July, 2021.]

(II) MCA tweaks norms relating to change in the name of company. Inserts new Rule for allotment of a new name to existing companies u/s 16(3): The MCA has notified the Companies (Incorporation) Fifth Amendment Rules, 2021 whereby a new rule 33A relating to the allotment of a new name to an existing company u/s 16(3) of the Companies Act, 2013 has been inserted. [Notification No. G.S.R. 503(E), dated 22nd July, 2021.]

(III) Government has identified 2,38,223 shell companies between 2018 and 2021: Union Minister of State for Corporate Affairs Rao Inderjit Singh in a written reply to a question in the Rajya Sabha informed that the Government has identified a total of 2,38,223 companies as shell companies between 2018 and 2021. The Minister further stated that the Special Task Force set up to look into the issue of ‘shell companies’ has recommended use of certain red-flag indicators to identify such companies. [Press Release dated 27th July, 2021.]

II. SEBI

(IV) SEBI further extends timelines for compliance with regulatory requirements by Debenture Trustees: In view of the prevailing situation due to the Covid-19 pandemic and representations received from Debenture Trustees, SEBI has decided to further extend the timelines for compliance with the regulatory requirements by them for the quarter / half-year / year ending 31st March, 2021, up to 31st October, 2021. [Circular No. SEBI/HO/MIRSD/CRADT/CIR/P/2021/597, dated 20th July, 2021.]

(V) SEBI issues norms on Mandatory Nomination for Eligible Trading and Demat Accounts: The SEBI has issued norms on Mandatory Nomination for Eligible Trading and Demat Accounts wherein it has specified that the investors opening new trading and / or demat account(s) on or after 1st October, 2021 shall have the choice of providing nomination or opting out of the nomination. In addition, the online nomination and declaration form need to be signed using e-Sign facility. [Circular No. SEBI/HO/MIRSD/RTAMB/CIR/P/2021/601, dated 23rd July, 2021.]

(VI) Top-100 listed entities can have extra time for holding Annual General Meeting: After consideration of the request received from the Institute of Chartered Secretaries of India (ICSI), SEBI has decided to extend the timeline for conduct of AGMs by top-100 listed entities by market capitalisation. Accordingly, such entities can hold their AGMs within a period of six months from the date of closing of the financial year 2020-21. [Circular No. SEBI/HO/CFD/CMD1/P/CIR/2021/602, dated 23rd July, 2021.]

(VII) SEBI asks Registrar and Transfer Agents (RTA) to implement ‘Inter-Operable Platform’ for enhancing investors’ experience in Mutual Fund transactions: In order to make it more convenient for the existing and future investors to transact and avail services while investing in Mutual Funds, SEBI has asked RTA to implement standardised practices and system interoperability amongst themselves to jointly develop a common industry-wide platform that will deliver an integrated, harmonised, elevated experience to the investors across the industry platform. [Circular No. SEBI/HO/IMD/IMD-II DOF3/P/CIR/2021/604, dated 26th July, 2021.]

(VIII) SEBI reduces trading lot size from 100 units to 1 unit in REITs and InvITs: SEBI has notified the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 and the Securities and Exchange Board of India (Real Estate Investment Trusts) (Amendment) Regulations, 2021 wherein provisions related to minimum application value and trading lots have been amended. The minimum application value will be in the range of Rs. 10,000 to Rs. 15,000 and the trading lot will be of one unit for REITs and InvITs. [Notification No. SEBI/LAD-NRO/GN/2021/28 and No. SEBI/LAD-NRO/GN/2021/27, dated 30th July, 2021.]

(IX) SEBI allows non-scheduled Payments Banks to register as ‘Bankers to an Issue’: SEBI has permitted non-scheduled Payments Banks to register as ‘Bankers to an Issue’ (BTIs). Now, non-scheduled Payments Banks, which have prior approval from RBI, shall be eligible to act as BTIs subject to fulfilment of the conditions stipulated in the BTI Regulations. In addition, a Payment Banks registered as a BTI shall also be permitted to act as a self-certified syndicate bank. [Circular No. SEBI/HO/MIRSD/MIRSD_DOR/P/CIR/605/2021, dated 3rd August, 2021.]

(X) SEBI amends LODR norms to further strengthen independence of Independent Directors: SEBI has notified the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Third Amendment) Regulations, 2021 provision related to Independent Directors (ID) in order to further strengthen the independence of IDs. Now, the appointment, re-appointment or removal of an independent director of a listed entity shall also be subjected to the approval of shareholders by way of a special resolution. [Notification No. SEBI/LAD-NRO/GN/2021/35, dated 3rd August, 2021.]

(XI) Mutual Funds need to maintain current accounts in multiple banks for ease of doing business: SEBI: Based on the request of the Mutual Fund industry, SEBI has clarified that Mutual Funds should maintain current accounts in an appropriate number of banks for the purpose of receiving subscription amounts and for payment of redemption / dividend / brokerage / commission, etc., to facilitate financial inclusion, convenience of investors and ease of doing business. [Circular No. SEBI/HO/IMD/IMD-I/DOF5/P/CIR/2021/610, dated 4th August, 2021.]

FEMA

(i) The Government has reviewed the FDI policy on the petroleum and natural gas sector and has increased the limit of FDI in PSU oil companies from 49% to 100% under automatic route in cases where ‘in-principle’ approvals for strategic disinvestment of a PSU have been granted by the Government. The changes have been made in the Consolidated FDI Policy Circular of 2020. However, the increase will be effective once corresponding amendments are made in the NDI regulations. [Press Note No. 3 (2021 Series), dated 29th July, 2021.]

(ii) IRDAI had removed the requirement of ‘Indian-owned and controlled’ by way of an Amendment Act from 25th March, 2021. Accordingly, the IRDAI has now withdrawn the guidelines in relation to ‘Indian-owned and controlled’. [Circular No. IRDAI/F&A/CIR/MISC//211/07/2021, dated 30th July, 2021.]

(iii) Overseas investments and acquisition of immovable properties outside India by persons resident in India are still governed by FEMA Regulations 120 and 7(R), respectively. These were under review since quite some time. RBI has now put out drafts for FEM (Non-debt Instruments – Overseas Investment) Rules, 2021  and FEM (Overseas Investment) Regulations, 2021. Comments / feedback on the draft rules / regulations are invited from all stakeholders till 23rd August. There are quite a few important changes proposed in the draft regulations. [Press Release: 2021-2022/661 dated 9th August, 2021.]

ICAI ANNOUNCEMENTS

• Extension of validity of Peer Review Certificate (PRC) having original expiry date falling anytime from 1st to 31st July, 2021 has been extended till 31st August, 2021 in cases where no extension benefit has been availed as per any of the earlier ICAI announcements. [22nd July, 2021.]
• Deferred provisions of Volume-I of Revised Code of Ethics, 2019, namely, ‘Responding to Non-Compliance with Laws and Regulations’ (NOCLAR), fees – relative size and tax services to audit clients is made applicable and effective from 1st April, 2022. [26th July, 2021.]

ICAI MATERIAL

Corporate Laws
• Handbook on Claims under the Insolvency and Bankruptcy Code, 2016. [6th August, 2021.]
• Handbook on Do’s and Don’ts for IPs under the Insolvency and Bankruptcy Code, 2016. [13th August, 2021.]

Valuation
•    Booklets on valuation:

  •     Learnings from Judicial Pronouncements on Valuation – How Far the Verdicts and Findings Relevant Now? [13th August, 2021.]
  •     ESOP Valuation – Model and Issues. [13th August, 2021.]
  •     Valuation of Startups. [13th August, 2021.]
  •     Learnings from the Observations of Peer Review of Valuation Reports. [13th August, 2021.]

CORPORATE LAW CORNER

15 Chandrasekar Muruga vs. Registrar of Companies (TN) Company Appeal (AT) No. 76 of 2019 (NCLAT) [2019] 151 CLA 366 Date of order: 29th May, 2019

Where name of the Company is struck off due to non-filing of financial documents but it is found that significant accounting transactions were undertaken during the relevant period and the Company being in operation was carrying on business, the name of the Company is to be restored in the Register

FACTS
The shareholders and directors of M/s MPC India Private Limited (‘M/s MPC’) had filed an instant appeal against the order dated 20th February, 2019 by which the National Company Law Tribunal at Chennai (‘NCLT’) declined to restore the name of M/s MPC in the Register of Companies as maintained by the Office of the Registrar of Companies (‘ROC’) on the ground of failure to file its financial statements and annual returns with the ROC from the financial years 2009-10 to 2017-18.

The NCLT observed that since M/s MPC had not filed financial statements and annual returns for the F.Ys. 2009-10 to 2017-18, there was no adequate reason to restore the company’s name. Therefore, there was no scope to grant an order for restoration of the name in the Register of Companies.

However, the NCLT noted the submission made by M/s MPC that the balance sheet was prepared and Annual General Meetings were held on time and duly signed by the respective directors but for reasons unknown the officials concerned failed to upload the same. NCLT also admitted that the Income-tax Returns and bank statements submitted by M/s MPC show that there have been significant accounting transactions during the aforesaid period.

The order was challenged primarily on the ground that the ROC had improperly exercised jurisdiction u/s 248 of the Companies Act, 2013 and the NCLT failed to notice that the parameters as set out in section 252(3) of the Companies Act, 2013 had been satisfied by M/s MPC.

HELD
The NCLAT observed that M/s MPC was struck off by the ROC on the ground of non-filing of financial statements and annual returns for the financial years 2009-10 to 2017-18, though it was not disputed that it had filed Income-tax Returns and bank statements for the A.Ys. 2008-09 to 2017-18, which demonstrated significant accounting transactions during the aforesaid period.

NCLAT further observed that it was futile to address the issue of non-adherence to the procedural requirements on the part of the ROC in striking off the name of the company within the ambit of section 248 of the Companies Act, 2013 and the fact was observed in the order that the NCLT had overlooked the factum of the significant accounting transactions admittedly undertaken by M/s MPC during the relevant period justifying no conclusion other than that M/s MPC was in operation and carrying on business.

Accordingly, the NCLAT held that the findings recorded by the NCLT being erroneous cannot be supported and the same were liable to be reversed and a just ground existed for restoration of the name of the company. The appeal was accordingly allowed, the order set aside and the ROC directed to restore the name of M/s MPC subject to statutory compliances being filed together with the prescribed fees and penalties leviable thereon as mandated by law.

16 M/s Vintage Hotels Private Limited & Ors. vs. Mr. Ahamed Nizar Moideen Kunhi Kunhimahin Company Appeal (AT) No. 408 of 2018 (NCLAT) Source: NCLAT Official Website Date of order: 12th November, 2020

The discretionary power of directors to refuse ‘Transfer of Shares’ is not to be resorted to in a deliberate or arbitrary fashion but in good faith – The directors are to give due weightage to shareholder’s right to transfer his share

FACTS
Mr. K was an existing shareholder and also one of the Directors of M/s Vintage Hotels Private Limited (‘VHPL Company’). It was learnt from the contents of the affidavit of Mr. TH dated 10th April, 2015 that he was holding 20,000 equity shares of Rs. 100 each of the company and that he had transferred the aforesaid shares to Mr. K and further that the share certificates were lost and were not in his possession. The deponent (Mr. TH) had averred that he had made a request to VHPL Company to issue duplicate share certificates in lieu of the original share certificates in the name of Mr. K.

The VHPL Company, through its communication dated 30th October, 2015, had rejected the request for transfer of shares in the name of Mr. K. The company submitted that in the share transfer form SH-4 furnished by Mr. K the distinctive numbers of the shares were not mentioned, the corresponding share certificate numbers were not mentioned, the witness’s signature and name was not found and the transferee’s details were not mentioned. Further, the allotment letter or the ‘Original Share Certificate’ was not enclosed with the share transfer form.

Mr. K also contended that the board of directors had not issued the duplicate share certificates even though a request was made by him.

The NCLT Bengaluru bench via an order dated 16th October, 2018 after considering the facts and circumstances of the case and also taking into consideration the existing law, came to the conclusion that the action of VHPL Company in refusing to transfer the shares in favour of Mr. K was an arbitrary and unjustifiable one and consequently issued a direction to VHPL Company to rectify the register of shareholders by incorporating the name of Mr. K in place of Mr. T.H in respect of the 20,000 equity shares under transfer.

The VHPL Company was aggrieved by the order passed by the NCLT which directed it to register the transfer of shares in favour of Mr. K.

HELD
The NCLAT observed that the discretionary power to refuse ‘Transfer of Shares’ was not to be resorted to in a deliberate, arbitrary, fraudulent, ingenious or capricious fashion. As a matter of fact, the directors were to exercise their discretion in good faith and to act in the interest of the company. The directors were to give due weightage to the shareholder’s right to transfer his shares. When the original share certificates are lost, it is not prudent for VHPL Company to insist upon the production of the original share certificates in question to give effect to the transfer of shares. Thus, NCLAT upheld the order passed by the NCLT, Bengaluru bench and dismissed the appeal.

17 Ghanashyam Mishra & Sons (P) Ltd. vs. Edelweiss Asset Reconstruction Co. Ltd. Supreme Court of India [2021] 126 Taxmann.com 132 (SC)

CASE NOTE
Amendment to section 31 by IBC (Amendment) Act, 2019 is declaratory and clarificatory in nature Central Government, any State Government or any local authority to whom an operational debt is owed would come within ambit of ‘operational creditor’ as defined under sub-section (20) of section 5

FACTS
Insolvency proceedings were initiated by State Bank of India u/s 7 of the Insolvency and Bankruptcy Code (IBC) before the National Company Law Tribunal, Kolkata bench.

In response to the invitation made by the resolution professional for a resolution plan, three resolution plans were received, one each from Edelweiss Asset Reconstruction Company Limited (EARC), Orissa Mining Private Limited (OMPL) and Ghanashyam Mishra & Sons Private Limited (GMSPL).

The GMSL resolution plan was duly approved with the voting share right of more than 89.23%.

QUESTIONS OF LAW INVOLVED
Whether after approval of the resolution plan by the Adjudicating Authority a creditor including the Central Government, State Government or any local authority is entitled to initiate any proceedings for recovery of any of the dues from the corporate debtor which are not part of the resolution plan approved by the Adjudicating Authority.

Whether any creditor, including the Central Government, State Government or any local authority is bound by the resolution plan once it is approved by the Adjudicating Authority u/s 31(1) of the Code.

Whether the amendment to section 31 is clarificatory / declaratory or substantive in nature.

HELD BY THE SUPREME COURT
The Government is covered under the definition of creditor under the IBC. The Court, through a harmonious construction of the definition of operational creditor, operational debt and creditor, observed that even a claim in respect of the dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority would come within the ambit of operational debt.

The operational debt owed to the Central Government, any State Government or any local authority would come within the ambit of operational creditor. Similarly, a person to whom a debt is owed would be covered by the definition of creditor.

The Supreme Court further observed that the claims as mentioned in the resolution plan shall stand frozen and will be binding on the corporate debtor and its employees, members, creditors, including the Central Government, any State Government or any local authority, guarantors and other stakeholders, once a resolution plan is duly approved by the NCLT u/s 31(1) of the IBC.

Consequently, all the dues, including the statutory dues owed to the Central Government, State Government or any local authority if not part of the resolution plan, shall stand extinguished and proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval u/s 31 cannot be continued.

The Court further observed that the section 31 amendment of the IBC is clarificatory in nature and therefore will come into effect from the date on which the IB Code came into effect.

ALLIED LAWS

23 Laureate Buildwell (P) Ltd. vs. Charanjeet Singh 2021 SCC OnLine SC 479 (SC) Date of order: 22nd July, 2021 Bench: U.U. Lalit J, Hemant Gupta J and S. Ravindra Bhat J

Consumer protection – Consumer – Real estate – Subsequent purchaser from original allottee – Same rights against builder [Consumer Protection Act, 1986, S. 2]

FACTS
One Ms Madhabi Venkatraman, the original allottee, applied for allotment of a residential flat. According to the allotment letter, the possession of the flat was to be handed over within 36 months. Upon noticing the slow construction, the original allottee decided to sell the flat. The purchaser (respondent) who was in search of a residential flat was approached by the original allottee through a broker. He was assured that the possession of the flat would be delivered on time and he agreed to purchase the flat. The purchaser alleged that possession was not delivered as promised in the allotment letter. The original allottee requested the builder (appellant) to transfer the flat in favour of the respondent.

The respondent was informed that possession of the said flat could not be delivered till the end of year 2017. After this, the purchaser sought for refund of the amount paid from the builder. On refusal of the payment of instalment, the officials of the builder threatened the purchaser with cancellation and forfeiture of the amounts paid. In these circumstances, the appellant approached the National Consumer Disputes Redressal Commission (NCDRC).

The NCDRC allowed a refund with 10% interest and imposed cost on the respondent. The respondent is in appeal against the said order.

HELD
The original allottee had approached the builder, informing him that the purchaser had stepped into her shoes and would continue with the obligations and was therefore entitled to possession. Subsequently, the builder endorsed and even required the purchaser to execute the letter of undertaking, which he did. Thereby, the builder acknowledged that the rights and entitlements of the original  allottee were assumed by the purchaser and also confirmed his own obligations to the new purchaser (the consumer).

The definition of ‘consumer’ under the Act is very wide and it includes beneficiaries who can take benefit of the insurance availed by the insured. If one also considers the broad objective of the Consumer Protection Act, it is to provide for better protection of the interests of consumers. Therefore, a subsequent purchaser of a flat has the same rights as the original allottee.

24 Dena Bank vs. C. Shivakumar Reddy Civil Appeal No. 1650 of 2020 (SC) Date of order: 4th August, 2021 Bench: Indira Banerjee J and V. Ramasubramanian J

Additional documents – Insolvency application – Can be admitted later [Insolvency and Bankruptcy Code, 2016, S. 7]

FACTS
The bank sanctioned a term loan to the Corporate Debtor which was to be repaid in 24 quarterly instalments. Upon failure on the part of the Corporate Debtor to repay, the Bank initiated proceedings under Insolvency and Bankruptcy Code (IBC) before the National Company Law Tribunal (NCLT).

During the IBC proceedings, on two occasions the bank filed applications to place new documents on record. Both the applications were allowed. Pursuant thereto, the NCLT passed an order admitting the application of the bank.

The Corporate Debtor challenged the order before the NCLAT and succeeded. Aggrieved by the order of the NCLAT, the bank approached the Supreme Court.

HELD
The Supreme Court, inter alia, held that on a careful reading of the provisions of the IBC, and in particular the provisions of section 7(2) to (5) read with the 2016 Adjudicating Authority Rules, there is no bar to the filing of documents at any time until a final order either admitting or dismissing the application has been passed. The time stipulation of 14 days in section 7(4) to ascertain the existence of a default is apparently directory and not mandatory. The proviso inserted by an amendment with effect from 28th December, 2019 provides that if the Adjudicating Authority has not ascertained the default and passed an order under sub-section (5) of section 7 of the IBC within the aforesaid time, it shall record its reasons in writing for the same. No other penalty is stipulated.

Furthermore, the proviso to section 7(5)(b) of the IBC obliges the Adjudicating Authority to give notice to an applicant to rectify the defect in its application within seven days of receipt of such notice from the Adjudicating Authority, before rejecting its application under Clause (b) of sub-section (5) of section 7 of the IBC. When the Adjudicating Authority calls upon the applicant to cure some defect, that defect has to be rectified within seven days. There is no penalty prescribed for inability to cure the defects in an application within seven days from the date of receipt of notice, and in an appropriate case the Adjudicating Authority may accept the cured application even after the expiry of seven days to meet the ends of justice.

Therefore, there is no bar in law to the amendment of pleadings in an application u/s 7 of the IBC, or to the filing of additional documents, apart from those initially filed along with the application u/s 7 of the IBC in Form-1. In the absence of any express provision which either prohibits or sets a time limit for filing of additional documents, it cannot be said that the Adjudicating Authority committed any illegality or error in permitting the appellant bank to file additional documents.

25 South Eastern Coalfields Ltd. vs. S. Kumar’s Associates AKM (JV) 2021 SCC OnLine SC 486 Date of order: 23rd July, 2021 Bench: Sanjay Kishan Kaul J and  Hemant Gupta J

Letter of intent – No binding relation – Forfeit the bid security amount [Indian Contract Act, 1872, S. 3, S. 7]

FACTS
In June, 2009, South Eastern Coalfields Ltd. (the appellant) floated a tender. The respondent was the successful bidder amongst others. A Letter of Intent (LOI) was issued by the appellant awarding the contract for a total work of Rs. 387.4 lakhs.

The respondent, in pursuance of the LOI, mobilised resources at the site. The respondent apparently faced difficulties soon thereafter as the truck-mounted drill machine employed by it suffered a major breakdown. The work, thus, had to be suspended for reasons beyond the control of the respondent. The endeavour to rectify the position or arrange alternative machinery did not work out and the purchase of new machines was expected only after about three months.

The contractual relationship apparently deteriorated. The appellants issued a letter alleging breach of terms of contract and the applicable rules and regulations by the respondent. The appellant further asked the respondent to show cause as to why penal action be not initiated for – (a) termination of work; (b) blacklisting of the respondent company; and (c) award of execution of work to another contractor at the cost and risk of the respondent. Subsequently, the final termination of work was carried out vide letter dated 15th April, 2010.

The respondent filed a writ petition under Articles 226 and 227 of the Constitution of India seeking quashing of the termination letter dated 15th April, 2010. The Division Bench of the Chhattisgarh High Court opined that there was no subsisting contract inter se the parties to attract the general terms and conditions as applicable to the contract.

The appellant filed a Special Leave Petition against the said order.

HELD
None of the mandates was fulfilled except that the respondent mobilised the equipment at the site; the handing over of the site and the date of commencement of the work was also fixed. The respondent, thus, neither submitted the Performance Security Deposit nor signed the Integrity Pact. Consequently, the work order was also not issued nor was the contract executed. Thus, the moot point would be whether mobilisation at the site by the respondent would amount to a concluding contract inter se the parties. The answer to the same would be in the negative. Therefore, all that the appellants can do is to forfeit the bid security amount.

26 Edelweiss Asset Reconstruction Co. Ltd. vs.  TRO and Ors. WP(L) No. 7964 of 2021 Date of order: 28th July, 2021 Bench: S.P. Deshmukh J and Abhay Ahuja J

Recovery of dues – Priority of debtor – Secured creditor would have priority over Government dues [SARFAESI Act, 2002, S. 13(2)]

FACTS
The petitioner, as assignee of right, title and interest of the credit facilities to one Classic Diamonds (India) Ltd. (the borrower, now in liquidation) purporting to have a superior secured and prior charge in time over the attached properties, having commenced proceedings under the SARFAESI / Securitisation Act by issue of notices under sections 13(2) and 13(4) and having taken possession of one of the attached properties (as will be described hereinafter), is aggrieved by the order of attachment dated 17th January, 2013 passed by the respondent, i.e., the Tax Recovery Officer (TRO), seeking recovery of income tax dues of the borrower.

The moot issue arising herein is whether the secured debt assigned in favour of the petitioner has a priority over Government dues / tax dues.

HELD
Relying on the decision of the Supreme Court in the case of Bombay Stock Exchange vs. V.S. Kandalagaokar (2015) 2 SCC 1 and the decision in the case of State Bank of India vs. State of Maharashtra and Ors. (2020) SCC OnLine Bom 4190, the Court held that the charge of the secured creditor would have priority over the Government dues under the Income-tax Act. There is no provision in the IT Act which provides for any paramountcy of the dues of the IT Department over secured debt.

Service Tax

I. TRIBUNAL

25 Khushboo Beauty Care vs. CCE&ST, Daman [2021-TIOL-467-CESTAT-Mum] Date of order: 27th July, 2021

When it is established that the goods are received by the appellant job-worker, credit should be allowed even if the Bill of Entry is in the name of the principal supplier

FACTS
The issue involved in the present case is whether the appellant is entitled to CENVAT credit on the strength of the Bill of Entry which was in the name of the supplier of the raw material, whereas the goods were received by the appellant as a job-worker and used in the manufacture of goods on job-work basis.

HELD
The Tribunal noted that right from the show cause notice, the case of the Department is only whether the appellant is entitled for CENVAT credit on the strength of the Bill of Entry which is in the name of the principal supplier along with the declaration given by the supplier. The Tribunal finds that there is no dispute about the receipt and the use of the goods supplied under the cover of the Bill of Entry along with the declaration in favour of the appellant. Even though the Bill of Entry is in the name of the supplier, but on the basis of the declaration it is established that the material has been supplied to the appellant for job work, therefore, merely because the Bill of Entry bears the name of the supplier, CENVAT credit cannot be denied to the appellant.

26 M/s NSSL Pvt. Ltd. vs. Commissioner of Central Excise [2021-TIOL-469-CESTAT-Mum] Date of order: 3rd August, 2021

Refund of service tax paid under reverse charge after 1st July, 2017 is available in accordance with the provisions of the erstwhile statute by virtue of section 142(3) of the CGST Act

FACTS
The appellant filed a refund application claiming refund of service tax paid by it under the Reverse Charge Mechanism. The refund application was rejected on the ground that ITC can only be claimed under GST / CGST Act, 2017 and not otherwise. The Commissioner (Appeals) relied upon sub-section (8)(a) of section 142 of the CGST Act, 2017 to reject the refund application which deals with assessment and adjudication.

HELD
The Tribunal noted that the appellant is not falling within the scope and ambit of sub-section (8)(a) of section 142 inasmuch as no assessment / adjudication orders were passed by competent authorities in determining the tax liability, which the appellant was required to pay under the erstwhile statute. Actually, the case of the appellant is governed under provisions of sub-section (3) of section 142 which provides that every claim of refund filed after the appointed day shall be disposed of in accordance with the provisions of the erstwhile statute. The authorities below have not questioned the issue regarding the entitlement of the CENVAT credit under the erstwhile CENVAT statute. On careful examination of the statutory provisions, it is held that the refund claims should merit consideration under the provisions of sub-section (3) of section 142 and, as such, the appellant should be entitled to the benefit of refund of service tax paid by it.

GOODS AND SERVICES TAX (GST)

I. HIGH COURT

23 Hindustan Unilever Ltd. vs. UOI [2021 (49) GSTL 292 (Mad)] Date of order: 12th July, 2021

Petitioner cannot be denied relief merely due to technological limitations of ICES system (Customs Portal)

FACTS

The petitioner had filed 87 bills of entry before the Chennai Customs Authority for import of raw materials required for the manufacture of various toiletries / fast-moving goods. With the advent of GST, in order to facilitate the seamless flow of input tax credit (ITC) of IGST, the GSTIN was required on the bill of entry. At the time of filing the bills of entry, instead of quoting the GSTIN of Tamil Nadu, the petitioner had inadvertently quoted the GSTIN of Maharashtra, Puducherry and Karnataka. Therefore, to avoid the challenge of ITC availment of IGST and to rectify the aforesaid inadvertent errors, the petitioner had filed an application for the amendment of bills of entry u/s 149 of the Customs Act, 1961. In reply to the application, an order was passed by the Customs Authority stating that the ICES system (Customs Portal) is designed in such a way that once the data is transmitted to the GSTN portal, the details of GSTIN cannot be amended. Being aggrieved by this order, the writ petition was filed.

HELD

It was held that the petitioner cannot be denied benefit merely because of the technological limitations of the ICES system. Proper measures must be taken to resolve such technological limitations and the amendments of documents must be considered manually till such technological limitations are resolved.

24 BA Continuum India Pvt. Ltd. vs. UOI [2021 (49) GSTL 370 (Bom)] Date of order: 8th March, 2021

The opportunity of being heard cannot be substituted by telephonic conversations or email exchanges

FACTS

The petitioner was engaged in the business of providing IT and IT-enabled services to various customers located outside India. It had filed five refund applications for claiming refund of the unutilised balance of ITC on account of export of services without payment of tax. As a sequel to the aforesaid refund applications, five identical show cause notices were issued, alleging that the petitioner was facilitating the supply of services between two persons and such services are classifiable as ‘intermediary services’ whose place of supply falls in India. Therefore, the services cannot be considered as export of services. Thus, the refund was liable to be rejected. Due to technical glitches on the GST portal, initially, they (the petitioners) were unable to reply to the notice. The replies were filed through various emails and subsequently uploaded over the GST portal as well.

In the meanwhile, the respondent had called for certain documents. However, due to the pandemic, it was not possible to submit such documents and the petitioner had sought additional time via email. Subsequently, through an email dated 21st April, 2020, the respondent instructed that if documents are not submitted within three days, the matter would be decided ex parte. It also referred to MVAT Circular 3T of 2020 dated 17th March, 2020 which stated that the email reply would be treated as personal hearing. The petitioner made a detailed submission via email and requested a personal hearing before the passing of any adverse order. However, without granting any personal hearing, five identical orders were passed rejecting the refund applications of the petitioner. The petitioner then filed the present writ petition.

HELD


The High Court held that Rule 92 of the CGST Rules, 2017 specifically mandate to grant an opportunity of being heard before rejecting a refund application. Such opportunity of being heard cannot be substituted with mere email exchanges and telephonic conversations. Further, Circular 3T of 2020 dated 17th March, 2020 was issued in the context of MVAT assessment and it cannot be relied upon to dispense with the hearing procedure while rejecting the refund application.

25 Vidyut Majdoor Kalyan vs. State of Uttar Pradesh [2021 (49) GSTL 230 (All)] Date of order: 18th January, 2021

Section 30 of CGST Act, 2017 and Rule 23 of CGST, Rules 2017 – Non-compliance of an order passed by a competent Appellate Authority is neither permitted nor accepted merely because there was no facility on GST portal to restore the GST registration

FACTS
The petitioner had failed to file the monthly returns (GSTR3B) from October, 2017 to June, 2018. Therefore, a show cause notice was uploaded on the GST portal seeking cancellation of its GST registration because of failure to file returns for more than six months. The petitioner was granted seven days’ time to reply to the show cause notice. However, it failed to reply to the same. As a consequence, an order for cancellation of GST registration was passed. Being aggrieved by this order, an appeal was preferred before the Appellate Authority and a favourable order was received directing the respondent to restore the GST registration.

Even after this order, the implementation of restoration of registration was not done on the GST portal. Nothing was brought on record to show that the order passed was illegal or without jurisdiction. The only contention of the respondent for non-compliance of the Appellate Authority’s order was that there was no facility to manually restore a GST registration that was already cancelled. Hence, the present writ petition was filed.

HELD
The High Court held that non-compliance of an order passed by the Appellate Authority cannot be accepted or permitted merely because there was no facility on the GST portal for restoration of a registration that was already cancelled. The Court allowed the writ petition and directed the respondent to restore the registration forthwith.

II. AUTHORITY FOR ADVANCE RULING

26 M/s EVM Motors and Vehicles India Pvt. Ltd. [2021-TIOL-163-AAR-GST] Date of order: 25th May, 2021 (AAR-Kerala)

The transportation of passengers in a house-boat with all the facilities of accommodation and meals is covered under Chapter Heading 996415 liable for GST at 18% – Input tax credit on expenses incurred on refurbishing, maintenance and food is fully allowable

FACTS
The applicant has started a new venture and has acquired house-boats. These are to be used for cruises, both overnight and for day trips. Meals are to be provided as part of the package along with alcohol. The boats are to be furnished with state-of-the-art bedrooms, dining rooms, halls and kitchens. The fare proposed to be charged is an all-inclusive rate for transportation, accommodation, food services and other incidental services. The applicant seeks a ruling on whether the service rendered is covered under Chapter 99, Heading 9964 and Service Code 996415 and whether it is entitled to claim ITC.

HELD
The Authority noted that Heading 9964 pertains to passenger transport services and 996415 pertains to local water transport services of passengers by ferries, cruises and the like. The Explanatory Notes to the Heading 996415 state that the service code includes inland water cruises that include transportation, accommodation, food and other incidental services in an all-inclusive fare. The services rendered squarely fall under the Heading 996415 in view of the Explanatory note, liable to GST at the rate of 18%. The applicant is eligible for ITC in respect of the expenses incurred by it on refurbishing, furnishing, maintaining and repairing the vessel as the supplies are used for providing the taxable outward supply of passenger transport services specified in the exclusion clause in section 17(5)(aa)(i)(B) of the CGST Act. It is also eligible for ITC on the supply of food during the cruise as the supply is an element of the outward taxable supply of passenger transport services and hence covered by the proviso to section 17(5)(b)(i) of the CGST Act.

27 M/s Bindu Projects and Company [2021-TIOL-190-AAR-GST] Date of order: 30th July, 2021 (AAR-Bangalore)

GST rate for repairs and maintenance of residential complex for railway employees is taxable at 12% – Other repair activity for railways will attract GST rate of 18%

FACTS
The applicant has sought a ruling on the applicability of GST rates for works contract services for doing original works with South Western Railways. It submitted that as per the Notification No. 11/2017-Central Tax (Rate) – Serial No. 3(v), the GST rate applicable is 12% if ‘composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 is supplied by way of construction, erection, commissioning of original works pertaining to Railways (including monorail and metro)’. Also, as per the definition of original works provided in clause (zs) of para 2 of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017, it is submitted that they are engaged in provision of original works contract services.

HELD
The Authority noted that original works means all new constructions and additions or alterations to abandoned or damaged structures. The Railways is a Central Government Department and hence it is clear that the service provided to them if it is for a purpose other than for business, then the same would be covered under Entry 3(vi) of Notification 11/2017-Central Tax (Rate). However, since the Railways is undertaking the transportation services of goods and passengers, the services provided cannot be considered as for purposes other than business and thus cannot be covered under Entry 3(vi)(a). However, the services of repairs, maintenance, renovation and alterations of residential complex meant for use of the Railway employees are covered under Entry 3(vi) of the Notification and hence eligible for tax of 12%. Thus, new constructions will be charged at a GST rate of 12%; similarly, repairs, maintenance, renovation and alteration of residential complex will attract a GST rate of 12%, and other repair works of old constructions will be taxable at the rate of 18%.

RECENT DEVELOPMENTS IN GST

NOTIFICATIONS

Effective date for operation of sections 110 and 111 of Finance Act, 2021 – Notification No. 29/2021-Central Tax dated 30th July, 2021
The Government has issued the Notification as above whereby sections 110 and 111 of the Finance Act, 2021 (13 of 2021) have been made operative from 1st August, 2021.

Section 110 of the Finance Act was to amend section 35 of the CGST Act and to omit sub-section (5) of the said section. The said section 35(5) was regarding filing of reconciliation statements certified by a CA or Cost Accountant. Now, the said section
gets deleted from the statute and therefore the requirement of filing a reconciliation statement certified by a CA or Cost Accountant is not applicable from 1st August, 2021.

By section 111 of the Finance Act, section 44 was substituted. As per the substituted section, it is now the taxpayer who should file the annual return and self-certified reconciliation statement. This is also applicable from 1st August, 2021.

Amendment to Rules – Notification No. 30/2021-Central Tax dated 30th July, 2021
By the above Notification, the Government has amended Rule 80 of the CGST Rules which provides for filing annual return in form GSTR9, GSTR9A and GSTR9B as per the category of the taxpayer. The important change is that sub-rule (3) of Rule 80 is substituted to remove the reference to audited accounts and section 35(5), etc., since the certification by a CA or Cost Accountant is removed. This is a consequential change in light of the omission of section 35(5).

As per amended Rule 80(3), it is the taxpayer who should furnish a self-certified reconciliation statement in form 9C if his aggregate turnover in a financial year exceeds Rs. 5 crores. There are also some technical changes in forms GSTR9 and GSTR9C.

Exemption from filing Annual Return – Notification No. 31/2021-Central Tax dated 30th July, 2021
By the above Notification, the Government has exempted a registered person from filing his annual return for the F.Y, 2020-21 if his aggregate turnover in the F.Y. 2020-21 is up to Rs. 2 crores.

CIRCULARS
Clarification regarding extension of limitation under GST law vis-à-vis Supreme Court order dated 27th April, 2021 – Circular No. 157/13/2021-GST dated 20th July, 2021
The Supreme Court has issued an order in Miscellaneous Application No. 665 of 2021 in SMW(C) No. 03 of 2020 dated 27th April, 2021. By this order, the Court has extended limitation under any general or special laws in lieu of the on-going Covid-19 pandemic lockdown. The extension is to continue till further orders by the Court. The CBIC has issued the above Circular to clarify the implication of the order in relation to GST. Though the Circular is subject to independent interpretation by the stakeholder, the clarifications issued by CBIC can be noted as under:

a) Proceedings that need to be initiated or compliances that need to be done by the taxpayers: It is clarified that the extension order does not apply to this category.
b) Quasi-judicial proceedings by tax authorities: It is clarified that these proceedings can continue. These proceedings will be governed by extension of time granted by the statutes or Notifications, if any.
c) Appeal by taxpayers / tax authorities against any quasi-judicial orders: It is clarified that for appeals to be filed before any appellate authority or proceedings for revision or rectification required to be undertaken, the time lime for the same would stand extended as per the above Supreme Court order.

Others
As per the information published by GSTN:
a) GSTN has introduced a new functionality whereby the taxpayer can see the Annual Aggregate Turnover (AATO) on its dashboard. Further, it has added more utility functions.
b) The GSTN has also clarified certain issues relating to filing of annual returns by Composition taxpayers, particularly negative liability in GSTR4.

ADVANCE RULINGS
1) Classification – Alcohol-based hand sanitizer
M/s Wipro Enterprises Pvt. Ltd. order No. KAR/AAAR/07/2021 dated 30th June, 2021
This appeal before the Karnataka Appellate Authority for Advance Ruling (AAAR) was borne out of the AR dated 26th February, 2021. In the AR, the rate of tax on the above product was held to be 18%, being covered by HSN 3804.94. The contention of the applicant that it is a medicament and covered by HSN 3004 was not accepted. Aggrieved by the above ruling, this appeal was filed before the AAAR.

The appellant argued that it was holding a drug license under the Drugs & Cosmetics Act, 1940 for manufacturing and selling the above product.

It was further submitted that the product contains 95% v/v ethyl alcohol, which is within the parameters prescribed by the Indian Pharmacopoeia. The quality of the product as an anti-bacterial gel to keep hands clean and protected and having the ability to kill 99.99% of germs was highlighted and, therefore, it was contended to be covered by the category of medicament under HSN 3004. Other literature was also placed before the AAAR and a lower rate was requested.

The AAAR considered the material placed before it but did not agree with the appellant. He concurred with the AAR and confirmed the AR ruling by making observations on merits. The AAAR referred to the common understanding of the terms ‘therapeutic’ and ‘prophylactic’ and observed that ‘therapeutic’ is treatment of disease and ‘prophylactic’ means preventing disease. If the above product has any of above two qualities, it can be a medicament. But the hand sanitizer has no such quality.

It has disinfectant properties as it prevents spread and transmission of germs / bacteria / viruses. However, a sanitizer does not control diseases nor does it help develop preventive characteristics inside the human body to fight the disease caused by the viruses / bacteria. It is used for better hygiene.

Based on the above facts, the product was held to be not medicament and hence not covered under HSN 3004. Accordingly, the AAAR confirmed the AR’s ruling.

2) Construction Service vis-à-vis Works Contract Service
M/s Ashiana Housing Limited (Advance Ruling No. 13/ARA/2021 dated 28th April, 2021)
An unusual question was raised before the Tamil Nadu AAR. Here is a narration of the facts reproduced from the order.

‘The modus operandi they intend to follow in respect of Phases IV and V of the project for provision of construction services to customers is as follows;
* They will enter into a tripartite IOU with all their prospective customers wherein the customer will agree to enter into an agreement for purchase of undivided interest / share in the land (UDS) from the landowner and the applicant in its capacity of Power of Attorney (POA) holder, and subsequently a construction agreement will be executed with the applicant.
* Pursuant to the IOU, the UDS agreement will be executed between the applicant, the landowner and the customer wherein the landowner will agree to sell UDS proportionate to the residential unit sought to be owned by the customer in the real estate project and the customer will further agree to purchase such UDS from the landowner.
* Further, the customer will also enter into a ‘construction agreement’ with the applicant, appointing the applicant to construct the residential unit on the acquired UDS. The landowner will not be a party to this agreement.
* The tripartite IOU, tripartite UDS agreement and construction agreement will be executed only subject to the customer paying 10% of the total consideration for owning a residential unit in the real estate project.
* Lastly, the sale deed for the sale of the UDS by the landowner to the customer will be executed prior to handing over possession of the developed residential unit.’

Based on the above narration of proposed transactions, the applicant has posed the following question for determination by the AAR:

‘Whether the activities of construction carried out by the applicant for its customers under the construction agreement, being composite supply of works contract, are appropriately classifiable under Heading 9997 and chargeable to CGST @ 9% under S. No. 35 of Notification No. 11/2017-CT (Rate) dated 28th June, 2017?’

The main argument of the applicant was that his activity for construction of a unit as per the construction agreement is liable to tax as per SAC 9997 @ 9% CGST being works contract activity covered by para 6(a) of Schedule II and not under SAC 9954 as construction service under para 5(b) of Schedule II. The summarised arguments of the applicant are noted as under:

O Thus, in summary,
* Clause (i) to (id) deals with construction and whereas the present case is one of works contract and also the said clauses deal with construction intended for sale, whereas the present transaction is a Construction for the Customer and consequently not applicable to the present case.
* Clause (ie) and (if) again deal with mere construction and also with on-going projects which had commenced before 31st March, 2019 and accordingly not applicable to the present case.
* Clause (iii) to (ix) deal with specific works contract transaction which does not cover construction of the apartments… accordingly not applicable to the present case.
* Clause (xii) deals with mere construction service and not a works contract service and consequently this clause also does not apply.

O The service proposed to be rendered to customers in respect of Phases IV and V qualifies as a composite supply of works contract service which is classifiable under Heading 9997 and chargeable to CGST @ 9% under S. No. 35 of the Rate Notification since it is not covered in any of the clauses in S. No. 3 of the Rate Notification under 9954.

Per contra, the Revenue (Central Government) stated that the transaction of the applicant involved transfer of land or undivided share of land, as the case may be, and the value of such transfer of land or undivided share of land, as the case may be, in such supply shall be deemed to be one-third of the total amount charged for such supply. It was further highlighted that the supplies for which the applicant has sought advance ruling are squarely covered under S. No. 3 of the said Notification under Heading 9954, which is further sub-divided into different categories attracting different rates of GST depending upon the types of projects. It was submitted that the plea of the applicant to classify their services under Heading 9997 falling under S. No. 35 may not be acceded to.

The AAR, after examining all arguments, agreements and legal provisions, observed as under:

‘8.5 In the case at hand, the applicant supplies the prospective buyer the construction service of the “Unit” intended for purchase by the buyer in the RREP being developed / constructed by the applicant and the contract, i.e., the construction agreement, is entered into for construction of the said “Unit” of the project developed by them. Undoubtedly, construction involves goods such as cement, steel, mortar, etc., as stated by the applicant and for this very reason “Construction of a complex or building or a part” is specifically mentioned to be treated as “Supply of Service” under para 5(b) of Schedule II of the Act. Thus, in the facts of the case, the applicant being a promoter of the approved RREP, the construction of a “Unit” in the said RREP is an activity of construction of part of the building with the intention for sale.’

Regarding the classification of service, the AAR further observed as under:

‘Heading 9954 u/s 5 of the scheme of classification covers “Construction Services” and is a specific entry. Heading 9997 u/s 9 of the scheme of classification covers “Other services-other miscellaneous services” and in that section, SAC 999799-other services nowhere else classified would naturally hold services in relation to the main heading which is community, social or personal services. In the case at hand, the applicant develops RREP along with all the infrastructure and constructs the “Units” of the RREP, i.e., construction of single / multiple dwelling unit and as such it clearly falls under construction services and the contention of the applicant to classify the same under 9997 is thus not entertainable and not tenable under law. Further, it may be noted that even when the service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description. In the case at hand, the most specific description being construction services, the subject activity falls under the SAC 9954 and therefore, the classification of service is “Construction Service” only, for the purpose of Notification No. 11/2017-C.T. (Rate) dated 28th June, 2017 as amended.

8.7 In view of the above, we hold that the supply of service of construction of a “Unit” in the RREP-Phase IV, based on the “Construction agreement” entered into by the applicant, engaged in the development of the said RREP with the prospective buyer intended for sale to the buyer, is a “Supply of Construction Service” and the classification of the service as per the “Scheme of Classification of Service” is “Construction Service under SAC 9954” and it will not be classified under SAC 9997 as claimed by the applicant.’

In view of the above observations, the AAR held that
the proposed modus operandi of the applicant for construction of ‘Unit’ which is ‘other than affordable residential apartments’ is ‘Construction Service’ and the applicable rate of tax is CGST @ 3.75% and SGST @ 3.75% as per Entry at S. No. 3(ia) of the Notification 11/2017-Central Tax (Rate) dated 28th June, 2017 as amended.

3) Export of Service vis-à-vis Intermediary Service
M/s Teretex Trading Pvt. Ltd. (Advance Ruling No. 03/WBAAR/2021-22 dated 28th June, 2021)
The applicant has filed this application for Advance Ruling before the WBAAR. The activities of the applicant have been summarised by the AAR as under:

‘1.3 As stated by the applicant, the modus operandi of the business activities to be undertaken by him may be briefly summarised as under:
(i) To locate prospective overseas / Indian buyers and know their requirement of goods;
(ii) To arrange sales of the said goods from the foreign manufacturers / traders to the prospective buyers;
(iii) Goods are delivered to the buyers directly by the suppliers located outside the country;
(iv) No prior agreement is made by the applicant with the overseas manufacturers / traders for arranging such sales;
(v) The applicant receives consideration in the form of commission in convertible foreign exchange from the overseas suppliers.’

Based on the above facts, the applicant was canvassing that it is engaged in export service. The applicant is submitting that he is an independent service provider and supplier of services at his own risk and cost. He is not an agent of the supplier of goods or the recipient. There is no assumption of any obligation by the applicant either on behalf of the supplier or the recipient of goods.

It was submitted by the applicant that he doesn’t maintain any establishment outside India and receives payment as commission directly from the overseas seller to his bank account in India, meaning thereby the overseas seller of goods (the recipient of services in the instant case) and the applicant (the supplier of services in the instant case) cannot be termed as merely an establishment of a distinct person in accordance with Explanation 1 in section 8 of the IGST Act, 2017.

Accordingly, the applicant prayed to classify the activity as export of service.

The AAR did not concur with the submission of the applicant. He referred to the definition of ‘Export of Service’ given in section 2(6) of the IGST Act, 2017 reproduced as under:

‘Export of services’ means the supply of any service when,
(i) the supplier of service is located in India;
(ii) the recipient of service is located outside India;
(iii) the place of supply of service is outside India;
(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange or in Indian rupees whether permitted by the Reserve Bank of India; and
(v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8.’

The AAR also referred to the meaning of intermediary service given in section 2(13) of the IGST Act as below:‘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 AAR then observed as under:

‘4.6 It has been admitted by the applicant that the value of supply of services in the form of commission is determined at the rate normally prevalent in the market which is generally 1% or 2% depending on the volume of trade. It clearly establishes the fact that the supply of services as provided by the applicant is inextricably linked with the supply of goods made by the overseas supplier. We also find in the present case that the applicant can neither change the nature and value of supply of goods, nor does he hold the title of the goods at any point of time during the entire transaction. Further, the value of supply of services as provided by him is claimed to be based on an agreed percentage which is separately identifiable. Furthermore, the applicant has admitted that he is going to undertake the aforesaid business activities without assuming any obligation either on behalf of the supplier or on behalf of the recipient of the goods, meaning thereby he doesn’t supply such goods on his own account.

4.7 It therefore appears that the applicant being supplier of services by way of arranging or facilitating sales of goods for various overseas suppliers and admittedly the same is not being done on his own account, satisfies all the conditions to be an intermediary as defined in clause (13) of section 2 of the IGST Act, 2017.’

Accordingly, the AAR held that it is intermediary service liable to tax. In respect of place of supply, he referred to section 13(8) of the IGST Act and held that as per the above section the place of supply is the location of the supplier of service and that is West Bengal in the present case. The AAR therefore held the activity as not export of service.

4) ITC – Promotional Items
M/s Page Industries Limited (Advance Ruling No. KAR/AAAR/05/2021 dated 16th April, 2021)
The issue in this appeal before the Karnataka AAAR was from the AR order passed by the Karnataka AAR dated 15th December, 2020.

The appellant is engaged in manufacturing, distributing and marketing of knitted and woven garments under the brand name ‘Jockey’ and swimwear and swimming equipment under the brand name ‘Speedo’.

The appellant sells its products through franchisees and distributors / dealers. To promote the sale of its products, it procures advertisement services and also items such as display boards, uniforms for staff, gifts, etc. Such purchased items are displayed at the applicant’s showroom, retail showrooms, etc., or distributed to actual buyers at such sales points.

The following question was put before the AAR for determination:

‘Whether in the facts and circumstances of the case
the promotional products / materials and marketing items used by the appellant in promoting their brand
and marketing their products can be considered as “inputs” as defined in section 2(59) of the CGST Act, 2017 and GST paid on the same can be availed as input tax credit in terms of section 16 of the CGST Act, 2017 or not?’

The AAR classified the relevant purchases into two categories, i.e., ‘distributable’ products and non-distributable products and held as under:

‘1. The ITC on GST paid on the procurement of the “distributable” products which are distributed to the distributors, franchisees is allowed as the said distribution amount to supply to the related parties which is exigible to GST. Further the said distribution to the retailers for their use cannot be claimed as gifts to the retailers or to their customers free of cost and hence ITC of GST paid on such procurement is not allowed as per section 17(5) of the GST Acts.
2. The GST paid on the procurement of “non-distributable” products qualify as capital goods and not as “inputs” and the applicant is eligible to claim input tax credit on their procurement, but in case if they are disposed by writing off or destruction or lost, then the same needs to be reversed under section 16 of the CGST Act read with Rule 43 of the CGST Rules.’

Amongst other things in appeal, the appellant challenged the findings of the AAR that the franchisees are related persons and the transfer of promotional material is ‘supply’ by the appellant to the franchisees.

In respect of non-distributable items, the finding that they are transferred on account of the appellant and hence remain as capital goods of the appellant was also contended to be wrong. It was submitted that such purchases are booked in the accounts as expenses under the head ‘sales promotion expenses’.

On the merits of getting ITC, the nature of the products and their uses were explained. The items included stands, hangers, cupboards, ladders for displaying the brand products, etc. The appellant also provided uniforms to sales girls / boys for promoting the brands. It was stated that the above products are used for furtherance of business. Certain judgments were cited to support the above contention.

The interpretation of distribution of such product as ‘gifts’ u/s 17(5)(h) of the CGST Act was also challenged on the ground that they are not given free but with an obligation to promote the brand products. It was argued that there is a difference between disposing goods by way of gifts and using those items in promotional activity.

In ‘gift’ there is no obligation on the receiving person but in the case of the appellant there is an obligation on the part of the franchisees, distributors / dealers to use the same for promoting the brands.

The finding of the AAR that the appellant and franchisees are related parties was also contended to be erroneous on the ground that they are separate entities and independently carrying on business.

The AAAR considered the above arguments and found that there are display items like hangers, signages, posters, etc. There are also gift items like carry bags, calendars, diaries, leather bags, pens with brand names embossed on them, etc. The AAAR consolidated the submissions of the appellant as under:

‘12. The appellant is before us in appeal on the following grounds:
a) the items such as display boards, posters, etc., sent to the franchisees and distributors have not been capitalised in their books of accounts but have been treated as revenue expenditure. Hence, the ruling treating such items as capital goods and not inputs is not correct;
b) the items such as carry bags, pens, calendars, etc., which are distributed to the franchisees and distributors for giving to the customers cannot be considered as gifts but to be treated as a form of promotional / advertising activity which is eligible for input tax credit;
c) the franchisees and distributors are independent entities and are not related persons as wrongly held by the lower Authority; that the franchisees and distributors have only representational rights and have the obligation to promote and market the brands of the appellant in the specified territory but they are not related in any other way to the business of the appellant.’

The AAAR referred to the meaning of ‘input’ as per section 2(59) of the CGST Act.

So far as items of display like hangers, etc. (referred to as non-distributable goods) were concerned, the AAAR observed that they are used in the furtherance of business and the ownership of the items remains with the appellant. However, considering that they are booked as expenses by the appellant, the AAAR held that they are not capital goods as held by the AAR. The AAAR also did not agree with the AAR that the appellant and its franchisees are related parties.

The AAAR came to the conclusion that the above non-distributable items supplied to the franchisees fall in the category of ‘non-taxable supply’ defined u/s 2(78), i.e., supply of goods or services on which no tax is leviable under GST. The AAAR further applied section 17(2) to the above situation to hold that since it is non-taxable supply, it cannot be eligible to ITC. He observed that non-taxable supply is also exempt supply as referred to in section 17(2) and hence not eligible to ITC.

In respect of distributable items like carry bags, the AAAR found that there is no contractual obligation. These are also falling in the category of non-taxable supply. In addition, they are in the nature of gifts and ITC is prohibited as per section 17(5)(h) of the CGST Act.

The appellant cited the appeal order dated 22nd October, 2019 in the case of Sanofi India Ltd. given by the Maharashtra AAAR. However, the AAAR found that in the appeal the appellate authorities differed in their opinion and hence in light of section 100(3) it was deemed to be no advance ruling in respect of the question in appeal. Therefore, the said order was also found to be not useful to the appellant.

Ultimately, the learned AAAR upheld the AR but with modified reasons and findings.

FINANCIAL REPORTING DOSSIER

1. Key Recent Updates

PCAOB: Inspection / Investigation of Registered Public Accounting Firms Located in a Foreign Jurisdiction
On 13th May, 2021, the Public Company Accounting Oversight Board (PCAOB) proposed a new rule, PCAOB Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act (‘HFCAA’). The proposed rule provides a framework for the PCAOB’s determinations under the HFCAA Act (where the Board cannot inspect / investigate registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction). [https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/rulemaking/docket048/2021-001-hfcaa-proposing-release.pdf?sfvrsn=dad8edcf_6]

IASB: Proposed New Framework for Management Commentary
On 27th May, 2021, the International Accounting Standards Board (IASB) published for public comments a proposed comprehensive framework for companies preparing ‘Management Commentaries’ (or Management Discussion and Analysis). The proposed framework represents a significant overhaul of IFRS Practice Statement 1, Management Commentary. It builds on innovations in narrative reporting, thereby enabling companies to bring together in one place information to assess a company’s long-term prospects. [https://www.ifrs.org/content/dam/ifrs/project/management-commentary/ed-2021-6-management-commentary.pdf]

IAASB: New Quality Management Guides
On 14th June, 2021, the International Auditing and Assurance Standards Board (IAASB) released two Guides: a) First-time Implementation Guide for International Standard on Quality Management (ISQM) 1, Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements, and b) First-time Implementation Guide for ISQM 2, Engagement Quality Reviews aimed at helping stakeholders understand the standards and properly implement requirements in the manner intended. [https://www.iaasb.org/news-events/2021-06/new-quality-management-implementation-guides-now-available]

FASB: Leases Standard – Proposed Improvements to Discount Rate Guidance for Lessees that are not Public Business Entities
On 16th June, 2021, the Financial Accounting Standards Board (FASB) issued an Exposure Draft, Discount Rate for Lessees That Are Not Public Business Entities, proposing amendments to Topic 842. The existing USGAAP provides lessees that are not public business entities with a practical expedient that allows them to elect, as an accounting policy, to use a risk-free rate as the discount rate for all leases. The proposed amendments would enable those lessees to make the risk-free rate election by underlying asset class rather than entity-wide. Further, the proposed amendments also require that when the rate implicit in the lease is readily determinable (for any individual lease), the lessee will use that rate (rather than a risk-free rate or an incremental borrowing rate), regardless of whether it has made the risk-free rate election. [https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176176792230&acceptedDisclaimer=true]

IASB: Proposed New IFRS Standard – Reduced Disclosure Requirements for Subsidiaries
On 26th July, 2021, the IASB proposed a new IFRS standard and issued an Exposure Draft, Subsidiaries Without Public Accountability: Disclosures, that would permit eligible subsidiaries (subsidiaries without public accountability) to apply IFRS standards with a reduced set of disclosure requirements. [https://www.ifrs.org/content/dam/ifrs/project/subsidiaries-smes/ed2021-7-swpa-d.pdf]

IESBA: Proposed Quality Management-Related Conforming Amendments to the International Code of Ethics
And on 5th August, 2021, the International Ethics Standards Board for Accountants (IESBA) released for public comments an Exposure Draft, Proposed Quality Management-Related Conforming Amendments to the Code, aimed at aligning the International Code of Ethics with the IAASB’s suite of quality management standards, particularly ISQM 1 and ISQM 2. [https://www.ethicsboard.org/publications/proposed-quality-management-related-conforming-amendments-code]

International Financial Reporting Material
1. FRC: Thematic Review: Interim Reporting. [18th May, 2021]
2. FRC: Thematic Briefing: The Audit of Cash Flow Statements. [19th May, 2021]
3. FRC: Workforce Engagement and the UK Corporate Governance Code: A Review of Company Reporting and Practice. [24th May, 2021]
4. IFAC: Point of View: Greater Transparency and Accountability in the Public Sector. [19th July, 2021]
5. FRC: Research Report: Board Diversity and Effectiveness in FTSE 350 Companies. [20th July, 2021]

2. Evolution and Analysis of Accounting Concepts – Non-controlling Interests

Setting the Context
Non-controlling Interest (NCI) is the equity in a subsidiary not attributable, directly or indirectly, to a parent entity (an entity that controls one or more entities). NCI arises in the preparation and presentation of Consolidated Financial Statements when a parent has control over less than one hundred per cent of the investee subsidiary.

In general, an NCI originates in a transaction that qualifies as a ‘Business Combination’ for accounting purposes. On Day 1, upon acquisition of controlling interest in a subsidiary, the measurement and recognition of NCI are based on applying the ‘Acquisition Method’ of accounting (under IFRS, Ind AS, and USGAAP). Day 2 accounting requires using the ‘line-by-line consolidation’ method wherein, typically, the NCI picks up its share of change in net assets of the subsidiary post-acquisition.

One can see diversity across GAAPs in the Day 1 measurement of NCI, which could either be at ‘fair value’ or as a ‘proportion of the net assets of the acquiree’ resulting in recognition of either ‘full goodwill’ or ‘partial goodwill’ with attendant implications on subsequent impairment testing and accounting. The presentation of NCI on the balance sheet also varies across GAAPs – some consider it as equity. At the same time, some GAAPs treat them as a mezzanine item presenting it in between equity and liabilities.

There are various related facets to NCI accounting (e.g., situations that result in step acquisitions, changes in the proportion held by non-controlling interest, etc.). This section below delves only into, a) the Day 1 measurement of NCI, and b) the presentation of NCI in a consolidated balance sheet. It attempts to trace its historical developments, the current position under prominent GAAPs and the alternates that global accounting standards setters have considered since the accounting and presentation of NCI in group balance sheets have evolved under International GAAP.

The Position under Prominent GAAPs
US GAAP
Historical Developments
The Accounting Research Bulletin (ARB) No. 51, issued in 1959 by AICPA’s Committee on Accounting Procedure (CAP), dealt with Consolidated Financial Statements. The Bulletin, inter alia, laid down general consolidation procedures. It, however, did not delve into specifics of Day 1 accounting of NCI and presentation of the related line item in the group balance sheet. This limited guidance resulted in diversity in reporting practice. The reporting of NCI (then termed ‘minority interests’)
in consolidated balance sheets was either under liabilities or the mezzanine section (between liabilities and equity).

To eliminate the diversity in practice, in 2007 the FASB issued a Statement of Financial Accounting Standards (SFAS) No. 160, Non-controlling Interests in Consolidated Financial Statements, that amended ARB 51 establishing accounting and reporting standards for NCI. The existing USGAAP is a codification of SFAS No. 160. The new standard amended specific provisions of ARB No. 51 to make them consistent with the requirements of another related standard, SFAS No. 141 (Revised 2007), Business Combinations (a joint effort by FASB and IASB aimed at promoting international convergence of GAAPs).

Previously, the FASB had deliberated the related NCI accounting issues in two of its earlier projects, a) Consolidations Project (January, 1982): How should the NCI be displayed in the consolidated statement of financial position and the income statement? and b) Financial Instruments Project (May, 1986): to eliminate the classification of mezzanine items between the liabilities section and the equity section. The Board stated that there was no debate about whether NCI has an ownership interest in a subsidiary. The issue that required address was how to report that interest in consolidated financial statements. It considered three alternatives for presenting NCI: i) as a liability, ii) as equity, or iii) in the mezzanine between liabilities and equity.

The FASB concluded that an NCI represents the residual interest in the net assets (of a subsidiary) within the consolidated group held by owners other than the parent and therefore meets the definition of equity (as per Concept Statement CON 6). Paragraph 254 of Concepts Statement 6, Elements of Financial Statements (issued in December, 1985) stated, ‘Minority interests in net assets of consolidated subsidiaries do not represent present obligations of the enterprise to pay cash or distribute other assets to minority stockholders. Rather, those stockholders have ownership or residual interests in components of a consolidated enterprise. The definitions in this Statement do not, of course, preclude showing minority interests separately from majority interests or preclude emphasising the interests of majority stockholders for whom consolidated statements are primarily provided.’

The Board also decided that the NCI should be presented separately from the parent’s equity so that users could readily determine the equity attributable to the parent from the equity attributable to the NCI.

SFAS No. 160 aligned the reporting of NCI under USGAAP with the requirements in IAS 27 (then ‘Consolidated and Separate Financial Statements’). Previously, entities applying IFRSs (then IASs) reported NCI as equity, while entities applying USGAAP reported those interests as liabilities or in the mezzanine section between liabilities and equity.

Current Position
Non-controlling interest
Topic 810 of USGAAP that deals with Consolidation defines NCI as the ownership interests in the subsidiary that are held by owners other than the parent. [ASC 810-10-45-15]

Day 1 measurement
Topic 805 (Business Combinations) lays down the Day 1 accounting requirements for NCI: ‘The acquirer shall measure the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at their acquisition-date fair values’. [ASC 805-20-30-1]

Balance sheet reporting
The NCI in a subsidiary is part of the equity of the consolidated group.

‘The non-controlling interest shall be reported in the consolidated statement of financial position within equity (net assets), separately from the parent’s equity (or net assets). That amount shall be clearly identified and labelled, for example, as non-controlling interest in subsidiaries.’ [ASC 810-10-45-16]

IFRS
Historical Developments
Day 1 measurement of NCI
Under International Accounting Standards (now IFRS) IAS 22, Business Combinations (issued in 1983 and revised in 1998) permitted the pooling of interests method or the purchase method of accounting for business combinations. Where the acquirer was not identifiable, the technique used was the pooling of interests method. In other circumstances, business combinations were presumed acquisitions necessitating the need to apply the purchase method of accounting. Under the purchase method of accounting, the benchmark approach required minority interests’ Day 1 measurement at the pre-acquisition carrying amounts with an allowed alternate to measure at the minority’s proportion of the net fair value of the assets acquired and liabilities assumed.

IFRS 3, Business Combinations (issued 2004) replaced IAS 22. All business combinations required accounting applying the acquisition method of accounting. The allowed alternate approach (Supra) in IAS 22 was the only basis to measure NCI at the acquisition date.

A revised version of IFRS 3 issued in 2008 introduced a choice (on a transaction-by-transaction basis) to measure Day 1 NCI: at fair value or its proportionate share of the acquiree’s net identifiable assets. Providing a choice was not a preference of the IASB but a compulsion.

The IASB’s considerations in arriving at the approach to the 2008 amendments were:
a) Whether the NCI’s share of goodwill is required to be recognised or not?
b) An acquirer can directly measure the fair value of NCI (based on market prices or with the application of a valuation technique). In contrast, the other plug variable, goodwill, cannot be measured directly but only as a residual.
c) The decision-usefulness of NCI information would be improved if the revised standard specified a measurement attribute rather than merely stating the mechanics for determining that amount. The IASB concluded that, in principle, that measurement attribute should be fair value.
d) The information about acquisition date fair value of NCI helps in estimating the value of the shares of the parent company (both at the acquisition date and at future dates).

It may be noted that ‘Introducing a choice of measurement basis for non-controlling interests was not the IASB’s first preference. [IFRS 3. BC 210] The IASB reluctantly concluded that the only way the revised IFRS 3 would receive sufficient votes to be issued was if it permitted an acquirer to measure a non-controlling interest either at fair value or at its proportionate share of the acquiree’s identifiable net assets, on a transaction-by-transaction basis. [IFRS 3. BC 216]’

Presentation of NCI
The revision to IAS 27 in 2003 by the IASB required minority interests to be presented within equity, separately from the equity of shareholders of the parent. The IASB concluded that minority interest is not a group liability because it does not meet the definition of a liability in the Conceptual Framework.

Current Position
Non-controlling interest
IFRS 10, Consolidated Financial Statements, defines NCI as the equity in a subsidiary not attributable, directly or indirectly, to a parent. [IFRS 10. Appendix A]

Day 1 measurement
The Day 1 accounting requirements for NCI are laid down in IFRS 3, Business Combinations. As per the standard, ‘For each business combination, the acquirer shall measure at the acquisition date components of non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation at either: a) fair value; or b) the present ownership instruments’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets.’ [IFRS 3.19]

Balance sheet reporting
A parent shall present non-controlling interests in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent. [IFRS 10.22]

Ind AS
Indian Accounting Standards (Ind AS 103, Business Combinations | Ind AS 110, Consolidated Financial Statements) and IFRS (Supra) are aligned concerning Day 1 measurement of NCI and reporting of NCI in consolidated balance sheets.

AS
Current Position
Non-controlling interest
The definition of minority interest contained in AS 21, Consolidated Financial Statements, is as follows: ‘Minority interest is that part of the net results of operations and of the net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiary(ies), by the parent.’ [AS 21.5.7]

Day 1 measurement
Minority interests, in general, are measured at their proportion of the book values (carrying amounts) of identifiable net assets of subsidiaries. As per AS 14, Accounting for Amalgamations, under the purchase method of accounting the transferee company accounts for an amalgamation either by incorporating the assets and liabilities at their existing carrying amounts, or by allocating the consideration to individual identifiable assets and liabilities of the transferor company based on their fair values.

Balance sheet reporting
‘Minority interests in the net assets of consolidated subsidiaries should be identified and presented in the consolidated balance sheet separately from liabilities and the equity of the parent’s shareholders.’ [AS 21.13(e) | AS 21.25]

The Little GAAPs
US FRF for SMEs
As per AICPA’s US Financial Reporting Framework for Small and Medium-Sized Entities (FRF for SMEs), a self-contained framework not based on USGAAP, an entity is required to present separately the NCI component of equity in the body of the financial statements or in the notes. [Chapter 18, Equity. Para 18.8]

‘If an entity consolidates its subsidiaries, non-controlling interests should be presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent.’ [Chapter 23, Consolidated Financial Statements and Non-controlling Interests. Para 23.33]
‘For each business combination, the acquirer should measure any non-controlling interest in the acquiree at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets.’ [Chapter 28, Business Combinations. Para 28.16]

IFRS for SMEs
Section 9, Consolidated and Separate Financial Statements of IFRS for SMEs, requires an entity to present NCI in the consolidated Statement of Financial Position within equity, separately from the equity of the owners of the parent. [9.20]

Section 19, Business Combinations and Goodwill, states that ‘At the acquisition date, any non-controlling interest in the acquiree is required to be measured at the non-controlling interest’s proportionate share of the recognised amounts of the acquiree’s identifiable net assets.’ [19.14]

In January, 2020, the IASB released a Request for Information – Comprehensive Review of the IFRS for SMEs Standard (with a comment deadline of 27th October, 2020). The Objective of the RFI was to seek views on whether, and how, aligning
IFRS for SMEs Standard with the full IFRS Standards could better serve users. The IASB sought views to align Section 19, Business Combinations and Goodwill, with certain parts of IFRS 3. However, it categorically stated that it was not seeking views on aligning IFRS for SMEs with improvements in IFRS 3 (2008) that introduced the option to measure NCI at fair value.

3. Global Annual Report Extracts: ‘Part of Director’s Remuneration Report That is Subject to Audit’

Background
The UK Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations, 2008 mandate certain sections of the Director’s Remuneration Report to be audited and reported by the statutory auditors. Paragraph 411 of Part 5 of Schedule 8 (The Quoted Companies [and Traded Companies]: Director’s Remuneration Report) states that ‘The information contained in the Director’s Remuneration Report which is subject to audit is the information required by paragraphs 4 to 17 of Part 3 of this schedule.’
_______________________________________________
1 https://www.legislation.gov.uk/uksi/2008/410/schedule/8

The information in the Director’s Remuneration Report that is subject to audit includes: a total figure of remuneration for each director setting out separately salaries, taxable benefits, remuneration based on achievement of performance measures and targets, pension benefits, total fixed remuneration and total variable remuneration; total pension entitlements; scheme interests awarded during the financial year; payments to past directors; payments for loss of office; and a statement of director’s shareholdings and share interests.

Extracts from an Annual Report
Company: Anglo American PLC [FTSE 100 Constituent] (Y.E. 12/2020 Revenues – US $30.9 billion)
Extracts from Director’s Remuneration Report:

Annual Report on Director’s Remuneration
Audited Information
Under schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations, 2008, elements of this section of the report have been audited. The areas of the report subject to audit are indicated in the headings2.

• Executive director remuneration in 2020 (audited)
• Benefits in kind for 2020 (audited)
• Annual bonus outcomes for 2020 (audited)
• Annual bonus performance assessment for 2020 (audited)
• 2018 LTIP award vesting (audited)
• Pension (audited)
• Payments for past directors (audited)
• Payments for loss of office (audited)
• Other director remuneration in 2020 (audited)
• Scheme interests granted during 2020 (audited)
• Total interests in shares (audited)

Extracts from Independent Auditor’s Report:
Section: Other required reporting
Companies Act, 2006 exception reporting
Under the Companies Act, 2006 we are required to report to you if, in our opinion:
…
…
certain disclosures of directors’ remuneration specified by law are not made; or
…
We have no exceptions to report arising from this responsibility.

__________________________________________________________
2 Full contents of sections not reproduced for the purpose of this
feature. Readers may refer to:
https://www.angloamerican.com/~/media/Files/A/Anglo-American
4. Audits – Enforcement Actions by Global Regulators

The Public Company Accounting Oversight Board (PCAOB)

A. Enforcement actions
The US PCAOB imposes appropriate sanctions in settled and litigated disciplinary proceedings against audit firms and auditors. Provided herein below is a summary of a select recent order.

1. RBSM, LLP
The Case: From 2014 through 2019, the PCAOB inspection staff notified the audit firm of repeated significant audit deficiencies that raised concerns about its engagement performance. The initial instances of these deficiencies provided the firm with notice of engagement performance issues. Subsequent findings of deficiencies provided continuing notice and indicated the firm’s system of quality control had failed to adequately address the deficiencies noted in previous inspections.

PCAOB Rules / Standards Requirement: PCAOB rules require a registered public accounting firm to comply with PCAOB quality control standards. These standards require that a registered firm have a system of quality control for its accounting and auditing practice – ‘A firm’s system of quality control encompasses the firm’s organisational structure and the policies adopted and procedures established to provide the firm with reasonable assurance of complying with professional standards.’

The Order: The PCAOB censured the audit firm, imposed a monetary penalty of $50,000 and required it to engage an independent consultant for a period of three years to review and make recommendations concerning the firm’s quality control policies and procedures. [Release No. 105-2021-004 dated 9th August, 2021]

B. Deficiencies identified in audits
The PCAOB annually inspects registered audit firms that issue more than 100 audit reports (and all other firms, at least once every three years). Such inspection assesses compliance with applicable laws, rules and professional standards applicable to a firm’s audit work. Reported herein below are some audit deficiencies identified by the PCAOB from its recently released inspection reports:

1. Sassetti LLC, Illinois
Audit area: Revenue – The firm’s approach for testing revenue included selecting a sample of transactions from certain months during the year.

Audit deficiency identified: In determining the sample size, the firm did not consider the relevant factors, including the firm’s established tolerable misstatement for the population, the allowable risk of incorrect acceptance, and the characteristics of the population of sales transactions. As a result, the sample size the firm used in its test of details was too small to achieve the planned audit objective. Further, the firm’s selection of transactions for testing was confined to transactions from certain months of the year, not the entire population of net sales. Therefore, the results of these audit procedures could not be projected to the entire population. [Release No. 104-2021-102 dated 12th May, 2021]

2. Sadler, Gibb & Associates, LLC, Utah
Audit area: ICFR related to certain assets – The client held certain assets at multiple locations. The audit firm selected for testing a control related to certain assets that was being performed quarterly at all locations.

Audit deficiency identified: The audit firm did not test whether 1) the control operated consistently at all locations; 2) all such assets at each location were subject to the control; 3) variances that exceeded threshold were appropriately investigated and resolved; and 4) adjustments made by the client as a result of the control were appropriately approved and recorded. [Release No. 104-2021-101 dated 12th May, 2021]

The Securities Exchange Commission (SEC)
The US SEC institutes public administrative proceedings against audit firms and securities issuers under the Securities Exchange Act of 1934. Here is a summary of a select recent order.

1. Retail company and its former CFO | CEO charged for accounting, reporting and control failures
The Case: Tandy Leather Factory Inc. (a specialty retailer) had accounting, reporting and control failures: a) its inventory tracking system failed to properly maintain the historical cost basis for individual inventory items that resulted in every new price input of a purchased inventory item changing the historical cost for all earlier purchases, and the system could therefore not support the company’s FIFO inventory accounting methodology disclosed in public reports; b) despite knowledge of the system’s limitations, the management failed to design and maintain a system of internal accounting controls; c) the company failed to properly design, maintain and evaluate its Disclosure Control Procedures (DCP) and Internal Control over Financial Reporting (ICFR). These deficiencies resulted in a multi-year restatement in Tandy’s financial statements concerning, among other things, inventory, net income and gross profit.

The Violations: As per the SEC order, Tandy violated, and Shannon Greene (its former CFO and CEO) caused Tandy’s violations of, the reporting, record-keeping and internal controls provisions of the Securities Exchange Act of 1934 and the Rules made thereunder. The SEC found Greene to have violated the certification provisions of the Exchange Act Rules.

The Penalty: Without admitting or denying the findings, Tandy and Greene each consented to cease and desist from further committing or causing these violations and pay civil money penalties of $200,000 and $25,000, respectively. [Press Release No. 2021-133 dated 21st July, 2021]

The Financial Reporting Council (FRC)
The FRC (the competent authority for statutory audit in the UK) operates the Audit Enforcement Procedure that sets out the rules and procedures for investigation, prosecution and sanctioning of breaches of relevant requirements.

Summarised below are key adverse findings from a recent Final Decision Notice following an investigation:

1. UHY Hacker Young LLP and Julie Zhuge Wilson (Audit engagement partner)

Key adverse findings:
• Acceptance, planning and resourcing of the audit
The structure of the client’s operations meant that the audit would be potentially complex and logistically challenging. Such a structure necessitated audit planning completion in advance of the year-end. Had this been followed, it would have allowed sufficient time for the audit firm to: meet with management; understand changes to the business; assess risks; adequately resource the Audit Team; brief the Engagement Quality Control Review (EQCR); evaluate the competence of the Component Auditors; instruct the Component Auditors and participate in the risk assessment of the Component Auditors. Inadequacy in achieving all this resulted in multiple significant shortcomings in the execution of the audit work.

• EQCR
The EQCR had commenced its substantive review of the audit file only four days before the signing
deadline. There was also no evidence of related discussion on any significant matters arising on the audit; consequently, the review was largely ineffective and therefore inadequate.

• Signing of audit report
The Annual Report was approved by those charged with governance just after midnight on 29th April, 2017. The audit report was signed following that approval, with the result that the audit report was incorrectly dated 28th April, 2017.

The Sanctions:
• Severe reprimand and imposition of non-financial sanctions (requiring remedial actions to prevent recurrence of breaches) against the audit firm,
• Declaration that the F.Y. 2016 audit report did not satisfy the relevant requirements, and
• Prohibiting the audit engagement partner from acting as a statutory auditor of a PIE (Public Interest Entity) for two years.

[Final Decision Notice dated 13th May, 2021 – https://www.frc.org.uk/getattachment/6e80eb04-2193-4f34-930b-b0112d4e5b75/UHY-Hacker-Young-LLP-Decision-Notice.pdf]

FRC’s Annual Inspection and Supervision Results
On 23rd July, 2021 the FRC published its Annual Audit Quality Inspection and Supervision Results3 for 2020/21 that covered the seven largest audit firms (involving the review of 103 audits). Summarised herein below are select audit review findings and audit good practices.

______________________________________________________________
3 https://www.frc.org.uk/news/july-2021/frc-annual-audit-quality-inspection-results- 2020-2

Findings from Review of Individual Audits

BDO LLP
In an audit, the FRC observed that insufficient substantive audit procedures were performed over the valuation of pension scheme assets, in particular over unquoted assets, including equities and bonds, property and assets held in Pooled Investment Vehicles.

Deloitte LLP
In two audits, the FRC noted that the audit teams did not sufficiently evidence their consideration and challenge of the period used in goodwill impairment assessment. One of these related to where a short-term forecast period of ten years had been used (which was above the commonly-adopted five-year period). Another one related to the assumption that an extension to the useful life of a material asset to support the carrying value was appropriate.

Ernst & Young LLP
In one audit reviewed by the FRC, there was inadequate consultation and evidence of a) consideration over the use of certain assets, which were not yet under the control of the group, and b) Deferred Tax Asset (DTA) recoverability assessment. It also noted that the auditor’s analysis did not adequately evidence the connection between DTA recoverability and management’s calculations and forecasts.

Grant Thornton UK LLP
The FRC found in an audit insufficient assessment of a lender’s ability to provide funding as and when required. The working capital forecasts assumed this funding would be available to support the going concern conclusion.

KPMG LLP
In three audits reviewed by FRC, it reported non-performance of sufficient audit procedures related to the audit of expected credit losses that included the following: a) procedures relating to the assessment of significant increases in credit risk and related testing, b) individually assessed exposure credit file review procedures, and c) the testing of models and related data elements.

Mazars LLP
In one audit, the FRC found weaknesses relating to Expected Credit Losses (ECL) testing. In particular, it had concerns about the nature and extent of audit procedures performed and the sufficiency of audit evidence. These were primarily related to the Significant Increase in Credit Risk (SICR) and the appropriateness and adequacy of the audit approach over all the SICR criteria (including management judgement) and specific stage allocation. As per the FRC, the audit team performed inadequate procedures and did not retain sufficient evidence to support its testing of multiple economic scenarios.

PricewaterhouseCoopers LLP
Risk of Management Override – The FRC reported that in five audits with journal testing based on determined risk criteria, there was insufficient evidence of the audit team’s evaluation of the residual aggregated risk in the remaining untested population. These included two cases with inadequate evidence of assessment of the residual higher risk journal population after targeted testing.

b. Good Practice Observations by the FRC

BDO LLP: Assessment of going concern and viability – The audit teams clearly evidenced: challenge of going concern disclosures, assessment of management’s historical budgeting accuracy, and the use of computer-aided audit techniques to check the integrity of management’s going concern cash flow model.

Deloitte LLP: Use of bespoke data analytic procedures – The FRC saw a good example of the use of bespoke data analytic procedures to obtain audit evidence and provide assurance over unbilled revenue. This is an effective way of auditing the related estimates generated from a diverse set of data.

Ernst & Young LLP: First-year audits – Thorough first-year procedures were observed, including one audit where the audit team identified several prior year adjustments. As part of the consultation about each prior year adjustment, the audit team evidenced a thorough challenge of the root cause of each matter to understand the potential for the underlying causes to have a pervasive impact.

Grant Thornton UK: LLP Consultation on certain audit matters – In two audits, there was detailed consultation on accounting policy adoption and disclosure where alternative treatments were possible.

KPMG LLP: Challenge of management – In addition to going concern, the identified best practices included examples on three audits where there had been a robust challenge of the judgements made by management for impairment, PPE residual values and deferred revenue.

Mazars LLP: Delayed sign-off – The engagement partner delayed signing the auditor’s report to ensure that sufficient audit evidence was obtained. Furthermore, the reporting to the Audit Committee in relation to the difficulties encountered during the audit was robust.

PricewaterhouseCoopers LLP: Robust assessment of management’s going concern assumption – The FRC observed examples of good practice in two audits where there was a heightened going concern risk as a result of Covid-19. On one audit, there was detailed evidence of audit review and challenge by the firm’s technical panel in the case of a material uncertainty relating to going concern. On another audit, the audit team demonstrated enhanced professional scepticism by developing a ‘traffic light system’ to assist with the assessment of key assumptions used in management’s going concern assessment.

5. COMPLIANCE: Presentation of a Third Balance Sheet under Ind AS

Background
Under Ind AS, an entity is required to present a third balance sheet (i.e., at the beginning of the preceding period) under certain circumstances taking into consideration relevant requirements of Ind AS 1, Presentation of Financial Statements, and Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors. The same is summarised in Table A below.

Table A: Presentation requirements
(Third balance sheet)

A complete set of financial statements, inter alia,
comprises a balance sheet at the beginning of the preceding period
when an entity:

a) applies an accounting policy retrospectively, or

b) makes a retrospective restatement of items in its
financial statements, or

c) when it reclassifies items in its financial statements
as per Ind AS 1,

and such retrospective application, restatement or
reclassification has a material effect. [Ind AS 1.10 & 1.40A]

• Retrospective application is applying a new accounting
policy to transactions, other events and conditions as if that policy had
always been applied.

• Retrospective restatement is correcting the
recognition, measurement and disclosure of amounts of elements of financial
statements as if a prior period error had never occurred. [Ind AS 8.5]

An entity need not present related notes to the
opening balance sheet as at the beginning of the preceding period. [Ind AS
1.40C]

Interim Financial Reporting:

The IASB decided not to reflect in Paragraph 8 of IAS
34, Interim Financial Reporting (i.e., the minimum components of
an interim financial report) its decision to require the inclusion of a
statement of financial position as at the beginning of the earliest
comparative period in a complete set of financial statements. [IAS 1
(IFRS) Basis for Conclusions BC 33]

6. Integrated Reporting

a. Key Recent Updates

GRI: Double Materiality Crucial for Reporting Organisational Impacts
On 31st May, 2021, the Global Reporting Initiative (GRI) released a white paper, The Double Materiality Concept – Application and Issues, that investigates the application of materiality in sustainability reporting. Key findings include, a) identification of financial materiality issues is incomplete if companies do not first assess their impact on sustainable development; and b) reporting material sustainable development issues can enhance financial performance, improve stakeholder engagement and enable more robust disclosure. [https://www.globalreporting.org/media/jrbntbyv/griwhitepaper-publications.pdf]

IIRC and SASB Merger: Value Reporting Foundation
On 9th June, 2021, the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) announced their merger to form the Value Reporting Foundation (VRF). The VRF supports business and investor decision-making with three key resources: Integrated Thinking Principles, Integrated Reporting Framework and SASB Standards.

FRC: Statement of Intent on ESG Challenges
And on 7th July, 2021, the FRC published the FRC Statement of Intent on Environmental, Social and Governance Challenges. The paper sets out areas in which there are issues with ESG information if companies report in a manner that meets the demands of stakeholders; how to address such issues; and the FRC’s planned activities in this area. [https://www.frc.org.uk/getattachment/691f28fa-4af4-49d7-a4f5-49ad7a2db532/FRC-LAB-ESG-Paper_2021.pdf]

b. Reporting Sustainability Roadmap
Background:
The 2030 Agenda for Sustainable Development issued by the United Nations in 2015 is a plan of action for people, the planet and prosperity. The 17 Sustainable Development Goals (SDGs), adopted by all UN member states, provides the blueprint for a more sustainable future by tackling big-ticket and urgent global challenges that include poverty, inequality, climate change and environmental degradation. Goal 13 pertains to climate action, namely, ‘Take urgent action to combat climate change and its impacts’.

The International Federation of Accountants (IFAC) has promoted ‘Sustainable Development Goal Disclosure (SDGD) Recommendations’ that provide an opportunity for organisations to establish best practices for corporate reporting on SDGs, thereby enabling more effective reporting and transparency on social impacts. One of the recommendations on the related governance aspect includes ‘Disclose the time period over which the organisation intends to implement the SDGD Recommendations and where any SDGD Recommendation is not, or will not, be disclosed, explain why not.’ [G3 SGSD Recommendations]

Extracts from Annual Report of The Weir Group PLC (a premium mining technology group) [Y.E. 12/2020 revenue: GBP 1,965 million]
Sustainable Development Goals (SDGs)
We support the UN Sustainable Development Goals and our sustainability priority areas can meaningfully support the achievement of eight of the seventeen SDGs.

Sustainability Roadmap – Key Climate Milestones

2019

• Multi-stakeholder materiality assessment

• Roadmap design and key goals
commitment

• Weir’s first Chief Strategy &
Sustainability Officer’s role on the Group Executive

• Energy efficiency pilots across key
operations

2020

• Roadmap
launch

• Global energy use in
mining study

• Group-wide energy
efficiency and renewable supply studies

• Sustainable
solutions technology developments

• First Task Force
for Climate-related Financial Disclosures evaluation

2021

• Progress and disclosure against roadmap KPIs

• Continued focus on sustainable solutions
R&D and technology partnerships to address mining industry’s biggest
challenges

• Scope 3 study and first evaluation of
Science-Based Targets and Net Zero pathways

• Digitalisation of strategic
sustainability disclosures

2021+

• Deliver against Reducing
our Footprint goals through a combination of strategic energy efficiency
and renewable supply actions

• Deliver against Creating
Sustainable Solutions goal through both sustainable design embedded in
core products and new transformational solutions innovation

• Evaluate viable
2050 Net Zero Pathways

2024

• 30% reduction in Scope 1 & 2 CO2e

2030

• 50% reduction in
Scope 1 & 2 CO2e

2050

• Net zero

c. Integrated Reporting Material
• IFAC: Enabling Purpose Driven Organizations – PAIBs (Professional Accountants in Business) Leading Sustainability and Digital Transformation. [19th May, 2021]
• IIRC: Integrated Thinking in Action: A Spotlight on Munich Airport. [25th May, 2021]
• ACCA: Invisible Threads: Communicating Integrated Thinking. [26th May, 2021]
• GRI and SASB: Five Tips for GRI and SASB Reporters. [29th June, 2021]
• IIRC: Purpose Drives Profit: How Global Executives Understand Value Creation Today. [28th July, 2021]

7. From the Past – ‘Without professional accountants, growth in almost any country would be stymied’

Extracts from a speech by Graham Ward (the then IFAC President) at the World Congress of Accountants, 2006 held in Turkey:

‘There are not, of course, any specific statistics that demonstrate our profession’s effectiveness in generating economic growth, so I will present it to you in another light: Without professional accountants, without reliable and credible financial information that is independently reviewed and verified, growth in almost any country would be stymied. Where our profession flourishes, so, too, does the potential for real and meaningful economic growth.

Having a strong accountancy profession is a key aspect of having a strong financial infrastructure in a country and relates to the ability of that country as a whole, and also to the individual companies within that country, to raise capital at a favourable cost.

For developing nations, having a strong financial infrastructure, or, as I like to call it, an investment climate of trust, means that not only can you attract private sector capital more easily and at a better price, but you can also attract assistance from development partners. Therefore, having a strong accountancy profession is a real help in the fight against poverty, in that it can help to finance programmes for education, health, energy, clean water and food, as well as financing business and growth, thereby enabling standards of living to improve.’

FROM PUBLISHED ACCOUNTS

The following are some typical ‘Key Audit Matter’ paragraphs included in Audit Reports.

 
HERO MOTOCORP LTD. (31ST MARCH, 2021)

From Audit Report on Standalone Financial Statements

 

S. No.

The key audit matter

How the matter was
addressed in our audit

1.

Government Grants

 

[Refer Note 3.5 and 14(f) to the standalone financial
statements]

 

The Company obtains various grants from Government authorities
in connection with manufacturing and sales of two-wheelers. There are certain
specific conditions and approval requirements attached to the grants.

 

Management evaluates, at the end of each reporting period,
whether the Company has complied with the relevant conditions attached to
each grant and whether there is a reasonable assurance that the grants will
be received, in order to determine the timing and amounts of grants to be
recognised in the financial statements.

 

We identified the recognition of Government grants as a key
audit matter because of the significance of the amount of grants and due to
significant management judgement involved in assessing whether the conditions
attached to grants have been met and whether there is reasonable assurance
that grants will be received.

In view of the significance of the matter, we applied the
following audit procedures in this area, among others, to obtain sufficient
appropriate audit evidence:

 

n assessed the
appropriateness of the accounting policy for Government grants as per the
relevant accounting standard;

 

n evaluated the design and
implementation of the Company’s key internal financial controls over
recognition of Government grants and tested the operating effectiveness of
such controls on selected transactions;

 

n inspected, on a sample
basis, documents relating to the grants given by the various Government
authorities and identifying the specific conditions and approval requirements
attached to the respective grants;

 

n evaluated the basis of
management’s judgement regarding fulfilment of conditions attached to the
grants and reasonable assurance that grants will be received. This included
examining, on a sample basis, the terms of the underlying documentation,
correspondence with the

1.

 

(continued)

 

Government authorities and whether corresponding sales were made
in respect of such grants;

 

n assessed the adequacy and
appropriateness of the disclosures made in accordance with the relevant
accounting standard.

 

MRF
LTD. (31ST MARCH, 2021)

From Audit Report on Standalone Financial Statements

 

S. No.

Key audit matter

Our response

1.

Defined Benefit Obligation

 

The valuation of the retirement benefit schemes in the Company
is determined with reference to various actuarial assumptions including
discount rate, future salary increases, rate of inflation, mortality rates
and attrition rates. Due to the size of these schemes, small changes in these
assumptions can have a material impact on the estimated defined benefit
obligation

We have examined the key controls over the process involving
member data, formulation of assumptions and the financial reporting process
in arriving at the provision for retirement benefits. We tested the controls
for determining the actuarial assumptions and the approval of those
assumptions by senior management. We found these key controls were designed,
implemented and operated effectively, and therefore determined that we could
place reliance on these key controls for the purposes of our audit.

 

We tested the employee data used in calculating the obligation
and where material, we also considered the treatment of curtailments,
settlements, past service costs, re-measurements, benefits paid and any other
amendments made to obligation during the year. From the evidence obtained we
found the data and assumptions used by

1.

 

(continued)

 

management in the actuarial valuation for retirement benefit
obligations to be appropriate.

 

 

SYNGENE
INTERNATIONAL LTD. (31ST MARCH, 2021)

From Audit Report on Standalone Financial Statements

 

Key
Audit Matters

Key Audit Matters are those
matters that, in our professional judgement, were of most significance in our
audit of the standalone financial statements of the current period. These
matters were addressed in the context of our audit of the Standalone Financial
Statements as a whole and in forming our opinion thereon, and we do not provide
a separate opinion on these matters.

 

Financial
instruments – Hedge accounting

[Refer Note 2(a) and 28 to
the Standalone Financial Statements]

 

The
Key Audit Matter

The Company enters into
forward, option and interest rate swap contracts to hedge its foreign exchange
and interest rate risks. Foreign exchange risks arise from sales to customers
as significant part of its revenues are denominated in foreign currency with
most of the costs denominated in Indian Rs. (INR). Foreign exchange risks also
arise from foreign currency borrowings. The interest rate risks arise from the
variable rate of interest on its foreign currency borrowings.

 

The Company designates a
significant portion of its derivatives as cash flow hedges of highly probable
forecasted transactions. Derivative financial instruments are recognised at
their fair value as of the balance sheet date on the basis of valuation report
obtained from third party specialists. Basis such valuations, effective portion
of derivative movements are recognised within equity.

 

These matters are of
importance to our audit due to complexity in the valuation of derivative
contracts and complex accounting and documentation requirements under Ind AS
109 Financial Instruments. Covid-19 had an impact on
its operations and thereby impacted Company’s estimates relating to occurrence
of the highly probable forecasted transactions. A hedging relationship can no
longer be continued if the Company concludes forecasted transactions are not
likely to occur. Given the uncertainties relating to Covid-19, judgements and
estimates relating to hedge accounting were inherently complex.

 

How the matter was addressed in our audit

Our audit procedures in
relation to hedge accounting include the following, amongst others:

} Tested the
design and operating effectiveness of the Company’s controls around hedge
accounting;

 

} We
involved our internal valuation specialists to assess the fair value of the
derivatives by testing sample contracts;

 

} We analysed critical terms (such as nominal amount, maturity and
underlying) of the hedging instrument and the hedged item to assess they are
closely aligned;

 

} We
analysed the revised estimate of highly probable forecasted transactions and
tested the impact of ineffective hedges; and

 

} We
challenged Company’s assertion relating to its ability to meet its forecasts on
account of Covid-19, to be able to assert that hedge accounting can be
continued by analysing various scenarios to conclude there was no significant impact
on the year-end financial statements.

 

MAHINDRA
& MAHINDRA LTD.
(31ST MARCH, 2021)

From Audit Report on Consolidated Financial Statements

 

Description
of Key Audit Matter

Bankruptcy filing by a material subsidiary

 

The key audit matter

How the matter was
addressed in our audit

The Group held an investment in a material foreign subsidiary.
The Holding Company’s Board of Directors and management have concluded that
admission of this subsidiary in the rehabilitation proceedings with the Seoul
Bankruptcy Court under the Debtor Rehabilitation and Bankruptcy Act of South
Korea on 28th December, 2020 and uncertainty on outcome of the
rehabilitation proceedings impacts the Holding Company’s ability to retain
control of the subsidiary.

Our audit procedures include:

 

• Read the documents in
relation to admission of the subsidiary in the rehabilitation proceedings and
made inquiries with the Company’s management to understand the implications
of the rehabilitation proceedings;

 

• Assessed the Group’s evaluation of
degree of control / significant influence based on proceedings in the
rehabilitation process and the requirements

(continued)

 

The Holding Company’s Board of Directors and management
determined that the Holding Company lost control as defined in Ind AS 10 Consolidated
Financial Statements due to reasons which are described in the accounting
policies on the basis of consolidation. The business operations of the
erstwhile subsidiary have been classified as discontinued operations in the
consolidated financial statements.

 

On de-consolidation of the subsidiary, the Company has
de-recognised its net liability relating to the subsidiary. The Company
recognised operating losses and an impairment / provision aggregating to Rs.
3,252 crores in relation to this erstwhile subsidiary. Further, the Company
has recorded a gain on de-consolidation of the subsidiary of Rs, 1,063
crores. The impairment / provision has been determined based on best estimate
assumptions of the erstwhile subsidiary’s valuation and considering the
uncertainty of the rehabilitation process. These amounts have been reported
as results of discontinued operations in the consolidated financial
statements.

 

Refer Note 2(u) – significant accounting policy for discontinued
operation.

 

(continued)

 

of the relevant accounting standards;

 

• Obtained management’s best estimate of
the recoverable amounts and tested the key assumptions with respect to
discount rate and expectation of recovery of the assets. Performed
sensitivity analysis of the key assumptions, such as discount rates, expected
time and extent of the subsidiary’s ability to repay used in assessment of
the recoverable value of the assets;

 

• Inquired and assessed the tax impact of these matters with the
management;

 

• Evaluated the impact of the auditors’ opinion of the erstwhile
subsidiary on our audit opinion on the consolidated financial statements;

 

• Inquired with management on the
implications of events after the date of financial statements to corroborate
the impact of the developments with respect to bankruptcy proceedings with
the assessment of degree of control / significant influence and assessment of
recoverable value of the Company’s assets; and

 

• Assessed the appropriateness and adequacy
of the disclosures in the financial statements, including those relating to
discontinued operations.

 

BOSCH
LTD. (31ST MARCH, 2021)

From Audit Report on Standalone Financial Statements

Key audit matter

Auditor’s response

Provision towards various restructuring and
transformational projects – Refer Note 42

 

The Company is undergoing major transformation with regard to
structural and cyclical

Our principal audit procedures performed, among other
procedures, included the following:

 

1. We obtained an understanding of the management’s processes
for assessing the requirements

(continued)

 

changes in automotive market and emerging opportunities in the
electro mobility and mobility segment. A provision of Rs. 2,458 million is
made towards such restructuring and transformational costs (included as
exceptional item in the Statement of Profit and Loss).

 

We consider provision towards restructuring and transformational
costs to be a key area of focus for our audit due to:

• the amount involved

• the management’s assessment of the obligation which is based
on past settlements and best estimates of current expectations.

(continued)

 

of provisions.

 

2. We evaluated the design and implementation of relevant
controls and carried out testing of management’s controls over recognising
provisions including the assessment of estimate involved and the timing of
utilisation of provisions.

 

3. We evaluated the management’s plan for restructuring and
transformation projects which gives rise to a constructive obligation
resulting in recognition of provisions.

 

4. We tested the basis of provision and verified the
arithmetical accuracy of the computations.

 

5. We evaluated that the provisions made are within the
approvals obtained for the restructuring and transformational projects.

 

6. We assessed the accounting principles applied by the Company
to measure and recognise the provisions and adequacy of disclosures in
accordance with the Indian Accounting Standards, applicable regulatory
financial reporting framework and other accounting principles generally
accepted in India.

 

NATIONAL
STOCK EXCHANGE OF INDIA LTD. (31ST MARCH, 2021)

From Audit Report on Standalone Financial Statements

 

Key audit matter

How our audit addressed the
key audit matter

Appropriateness of provision
for Contribution made to Investor Protection Fund Trust (IPFT)

 

[Refer Note 49 to the Consolidated Financial Statements]

 

During the year ended 31st March, 2021, in order to
enhance the effectiveness of the 
Investor Protection Fund (IPF)

Our audit procedures related to contribution to IPFT included:

 

• Obtaining details of SEBI communication in respect of
contribution to NSE IPFT.

 

• Testing the underlying supporting documentation for
contribution made to NSE IPFT.

(continued)

 

of the Stock Exchange, SEBI has comprehensively reviewed the
existing framework in consultation with Stock Exchanges. Basis such review,
SEBI decided to augment NSE IPF’s Corpus and assessed required IPF Corpus to
be Rs. 1,500 crores. The Holding Company was directed to transfer the
requisite amount to bring the Corpus to Rs. 1,500 crores.

 

 

The Holding Company has paid Rs. 1,701 crores to NSE IPFT during
the year ended 31st March, 2021. Additionally, the Holding Company
has also provided Rs. 121.05 crores in relation to the investors’ claims
related to defaulted members, which are yet to be processed by NSE IPFT. This
provision has been estimated by applying past historical experience of claims
admitted and paid to the outstanding claims of investors through the date of
approval of these Consolidated Financial Statements, including

the maximum amount that can

(continued)

 

• Obtaining confirmation from NSE IPFT with respect to amount of
contribution made and details relating to investors’ claims.

 

• Evaluating the method used by Management in estimating the
provision to be made in the Standalone Financial Statements in respect of
investors’ claims yet to be processed and paid by the NSE IPFT.

 

• Assessing the assumptions used in estimating the above
provision such as past experience, including their potential impact on the
range of possible outcomes on the amount of provision to be recognised in the
Standalone Financial Statements.

 

• Assessed the adequacy of presentation and disclosures made in
respect of these matters in the Consolidated Financial Statements.

(continued)

 

be paid to each investor in accordance with the bye-laws of NSE
IPFT.

 

Accordingly, an amount of Rs. 1,822.05 crores has been
recognised as an exceptional expense in the statement of profit and loss for the
year ended 31st March, 2021 considering the materiality of the
amount, nature and incidence of this transaction.

 

This area is considered as a key audit matter, considering these
transactions arising from regulatory development during the current period
had a significant effect on the Consolidated Financial Statements.
Additionally, evaluation of these matters requires management judgement and
estimation to determine the measurement of provisions to be recognised,
presentation of these transactions and related disclosures to be made in the
Consolidated Financial Statements.

(continued)

 

Based on our above procedures, we considered the estimate for
provision of contribution to be made by the Holding Company to NSE IPFT and
related disclosures and presentation made in respect of these transactions in
the Consolidated Financial Statements to be reasonable.

 

GLIMPSES OF SUPREME COURT RULINGS

8 Sakthi Metal Depot vs. CIT (2021) 436 ITR 1 (SC)

Capital Gains – Depreciable assets – So long as the assessee continues business, the building forming part of the block of assets would retain its character as such, no matter one or two of the assets in one or two years not used for business purposes disentitles the assessee for depreciation for those years – There is no provision whereby a depreciable asset forming part of block of assets within the meaning of section 2(11) can cease to be part of block of assets – Gains arising from transfer of such assets are to be taxed as short-term capital gains

The assessee, a partnership firm with its principal place of business at Kochi and a branch in Mumbai, had purchased a flat at a cost of Rs. 95,000 in Mumbai for business purposes in the financial year ending 31st March, 1974. Since its purchase the flat was used as the Branch Office of the assessee and on the capitalised cost of the building (Rs. 95,000) the assessee claimed depreciation and the same was allowed until the A.Y. 1995-96. The written down value of the flat as on 31st March, 1995 was Rs. 37,175.80. However, the assessee discontinued claiming depreciation for the flat for the A.Ys. 1996-97 and 1997-98. The flat was sold during the year 1997-98, that is, in the previous year relevant to the A.Y. 1998-99 on a total sale consideration of Rs. 71 lakhs. After deducting the expenses towards brokerage and legal expenses of Rs. 3,52,000, the assessee returned profit of Rs. 67,34,210 as long-term capital gains.

However, the A.O. held that profit arising on transfer of depreciable asset is assessable as short-term capital gains u/s 50. Applying the provisions of section 50, he assessed the profit on sale of the flat as short-term capital gains. The assessee’s contention before the A.O. was that it stopped using the flat for business purposes after the A.Y. 1995-96 and thereafter the flat was treated as investment and was so shown in the balance sheet. The A.O. did not accept the assessee’s contention that the flat in Mumbai was discontinued to be used for business purposes in the two years following the A.Y. 1995-96 because, according to him, the assessee’s attempt was only to avoid payment of tax on short-term capital gains.

In the appeal filed by the assessee, the CIT (Appeals), concurred with the A.O. and held that the building being a depreciable asset and being used for business purposes, sale of the same attracts tax on short-term capital gains u/s 50.

On a second appeal filed by the assessee, the Tribunal relying solely on the entry in the balance sheet of the assessee wherein the said flat was shown as investment, held that since the item was purchased in 1974, sale of the flat is assessable as long-term capital gains.

On an appeal filed by the Revenue, the High Court reversed the order of the Tribunal holding that the building which was acquired by the assessee in 1974 and in respect of which depreciation was allowed to it as a business asset for 21 years, that is, up to the A.Y. 1995-96, still continued to be part of the business asset and depreciable asset, and the non-use would only disentitle the assessee for depreciation for two years prior to the date of sale. However, there was no provision whereby a depreciable asset forming part of the block of assets within the meaning of section 2(11) can cease to be part of the block of assets. The description of the asset by the assessee in the balance sheet as an investment asset was meaningless and was only to avoid payment of tax on short-term capital gains on the sale of the building. According to the High Court, so long as the assessee continued business, the building forming part of the block of assets would retain its character as such, no matter one or two of the assets in one or two years not being used for business purposes disentitling the assessee for depreciation for those years. Further, instead of selling the building, if the assessee started using it after two years for business purposes, the assessee could continue to claim depreciation based on the written down value available as on the date of ending of the previous year in which depreciation was allowed last.

The Supreme Court dismissed the assessee’s appeal holding that the High Court had rightly restored the findings and the addition made in the assessment order.

FROM THE PRESIDENT

Dear BCAS Family,

I am penning down my message on the auspicious day of Krishna Janmashtami. The birth of Lord Krishna is celebrated with much fanfare for His incarnation on Earth was to ensure the destruction of evil and to save humanity. Today, I also pray to Lord Krishna to eradicate the pains inflicted on humankind through Covid-19.

We have been witness to the resilience of humankind and the adaptability to take on the crisis as an opportunity to rediscover the way we carry out our activities in various spheres of life. I would like to instil confidence in all of us through an inspiring quote of my GURU Mahatria Ra:

Transitions force changes.
Changes cause transformation.
Transformation ignites growth.
The womb of transition always delivers growth.

I would also like to caution that transition is always painful for those who are averse to change. The intensity of change during the last 18 months is such that during normal circumstances such transition would have taken at least a decade. Such times require massive scale of reskilling to remain relevant. A research paper from McKinsey Global Institute, ‘The Future of Work after Covid-19’, published in February, 2021 finds that 107 million workers may need to switch occupations by 2030 – up 12 million from a pre-pandemic estimate. This provides an insight for CA professionals, too, for embracing new areas of professional interest which focus more on management advisory and technology-based consulting. The need to move up the ladder of professional deliverance is all the more necessitated with increased limits of tax audits, discontinuation of GST audits and news about exploring discontinuing corporate audits for Small Companies.

On 20th August, the Tax Profession lost one of the strongest pillars in the sad demise of Adv. Shri V.H. Patil (affectionately called by all as ‘Patilsaheb’). He relentlessly worked as a binding force for all the professional associations and for the advancement of ethical values, professional astuteness and philanthropic activities. He was very actively associated with the BCAS and its cause for about five decades. His loss is an irreparable one and very difficult to fill. We shall always cherish his association and remember his noble deeds carried out over more than six decades.

BCAS is a forward-looking professional association and to equip its members for supporting the business community through valuable services in new domains, it has entered into an MOU with the India affiliate of the Institute of Risk Management (IRM) headquartered in the UK. It is a leading professional body for Enterprise Risk Management. The objective is to arrange webinars on risk-related topics, jointly work on thought leadership articles, provide access to members in IRM online events and to offer scholarships for IRM exams. This will be a golden opportunity to sharpen understanding of Enterprise Risk Management through formal education and offer advisory services in this specialised area.

The agony of tax-paying citizens and direct tax professionals continues due to partial functioning of the new e-filing portal. BCAS made a detailed 17-page representation on the glitches in the portal and also provided suggestions on improving the functionality of the portal. A representation was also made to the GST Council on various legal and procedural issues on the provisions relating to GST registration so as to bring clarity and certainty in the law.

During this month, the 25th International Tax & Finance (ITF) RRC was successfully concluded. It had record participation of around 500 delegates. The case study papers, presentation papers and panel discussions were of the highest quality. The highlight of the Conference was the Keynote Address by Mr. N.R. Narayana Murthy, the proponent of Corporate Governance, and the Opening Address by the President of ICAI, CA Mr. Nihar Jambusaria.

We also witnessed an excellent talk on ‘Mumbai’s Covid Pandemic Management Model’ by Mr. I.S. Chahal, IAS, Municipal Commissioner. He was invited to speak at the Late Shri Narayan Varma Memorial Lecture Series organised jointly by the BCAS Foundation, DBM India and Public Concern for Governance Trust. His talk was very inspiring and he provided great insights on how resources were mobilised and innovative ideas implemented to control the pandemic situation. There was also a felicitation of three awardees for their excellent contribution in the field of social work. The awardees were Adv. Maharshi Dave (SPARSH), Mr. Ravi Singh (Khalsa Aid) and Mr. D.S. Ranga Rao (RTI Activist).

The Tokyo 2020 Paralympics is currently underway. The physically challenged sportspersons participating in it signify what can be achieved with grit and determination. India has put up an excellent performance with the current tally of two gold, four silver and one bronze medal so far. This signifies that there is no easy way to the top. I want to end with a message from my GURU Mahatria Ra which signifies that to achieve something you have to sacrifice something:

It’s stupid to search for a rose bush without the thorns.
Unless you are willing to be chiselled, you cannot become the altar that’s worthy of being worshipped.
There is always a trade-off.

Best Regards,
 

Abhay Mehta
President

BOOK REVIEW

THINK LIKE A MONK
(Published: September, 2020)

Author Jay Shetty

Reviewed by Jini Jain, Chartered Accountant

Jay Shetty is an award-winning host, motivational speaker and author who has been featured in ‘Forbes 30 under 30’1. During his teenage years, he found himself in wrong company but when offered an opportunity, he redeemed himself by grabbing it. At school one day, he happened to hear a monk deliver a talk that made him realise that he wanted to grow as a person and explore a new way of living. And he started living with monks and to like monks!

He later returned to ‘normal’ life on the advice of his mentor Gauranga Das so that he could share his experience and wisdom with the world. This book delineates the experiences that he underwent in the three years that he lived a monk’s life.

Think like a Monk is in many ways a self-help guide but more than reflecting on positivity, it makes you ponder on many other aspects that are essential to lead a happy and peaceful life in the urban set-up. Many people tend to be averse to the idea of a self-help book being a guide on how to live and feel that if they have read one, then why choose to read other such books? I would simply put it like this – while the premise of self-help books is somewhat similar, it is the art of narration and engaging the reader that makes the difference.

This book compels the reader to contemplate on certain introspective questions – Do we really know who we truly are? What do we want to become? What are we seeking? What is it that we truly value? The problem most of us face is that we do not intentionally decide on our values. In other words, we don’t pick what we deem as important. Usually, we simply accept and inherit what our society and the environment have sown and reinforced. When we live our lives trying to impress others based on values that we did not consciously choose, the result more often than not is fatigue and stress. A striking metaphor which his mentor Gauranga Das uses to illustrate what is self-identity is – ‘Your identity is a mirror covered with dust. When you first look into the mirror, the truth of who you are and what you value is obscured. Clearing it may not be pleasant but only when that dust is gone can you see your true reflection.’

The next question that comes up is why should we think like monks? Whenever we attempt a new sport or a new profession, we always look up to the masters in that field to know and adopt their thinking, habits, philosophy, etc. Similarly, monks are the experts when it is about training our minds and living a life with purpose. Jay Shetty makes a profound statement: ‘If you want to train your mind to find peace, calm and purpose, monks are the experts. Monks aren’t born monks. They are people from all sorts of backgrounds who have chosen to transform themselves. Becoming a monk is a mindset that anyone can adopt.’

Jay posits that humans have two mindsets: a monkey mind and a monk mind. These two mindsets are interchangeable. He brings out the stark contrast between the two. A monkey mind is one that overthinks and procrastinates, is distracted easily, seeks short-term gratifications, demands and feels entitled, is self-centred and is angry, worried and fearful. On the other hand, the monk mind looks for meaning and genuine solutions, controls and engages energy wisely, is enthusiastic, determined, patient, compassionate and collaborative. Controlling the monkey mind is not easy but it is possible; the author describes how to inculcate the monk mind throughout the book. The book is an effort to free you from the hypnosis of social conditioning and urge you to become the architect of your own life.

The book is divided into three sections – Letting Go, Growing and Giving – three seemingly simple fundamentals forgotten by most of us. We have to first let go of all the unwanted baggage that we probably are not even aware of hauling. Letting go creates the space to grow ourselves by training our minds. Finally, with our growth, we are better equipped to serve those around us. It would be correct to say that many concepts he touches upon are not new for us but he reminds us beautifully why we need to practice them continuously. Jay manages to move beyond abstract terms to practical wisdom with the fascinating stories from his time as a monk and the learnings that he imbibed from each episode. His book is full of anecdotes of his experiences during his years as a monk and how the principles can be applied in our modern, fast-paced society through the concepts and techniques that he has elaborated. Jay is not merely driving us into any fictional world of all things nice. He makes it relatable for the reader to identify himself in similar situations and overcome his mental roadblocks. No, the book does not promise overnight miracles. What it does promise is a sense of calm and how a change of attitude is all that it takes to have better clarity about who we are. Combining ancient wisdom with the practicalities of today, it provides essential guidance for travelling a balanced path to success and building relationships.

My favourite part of the book is when Jay talks about detachment. It is human nature to get attached to people and to material possessions. He states, ‘Detachment is not that you own nothing, but that nothing should own you. The greatest detachment is being close to everything and not letting it consume and own you. That’s real strength!’ Another great part is where he explains humility with the concept of salt. Radhanath Swami in a temple talk in London said that ‘We should be like salt – salt is so humble that when something goes wrong it takes the blame and when everything goes right, it doesn’t take credit. Nobody says that the meal had the perfect amount of salt’. An instant response to that would be ‘It’s easier said than done’. Indeed true! We all read and then try to implement, but we lack consistent efforts. In the words of James D. Wilson, a renowned author, ‘Knowledge is not power, knowledge plus action equals to power.’ Only our constant and conscious attempts can bring about a change in the way we perceive the outer events.

To conclude, Think like a Monk is a book that offers both conventional as well as unconventional wisdom in an attempt to make our lives more peaceful and purposeful which in turn can lead to more productivity. Some parts of the book seemed a little dull to me due to repetitive narration. However, considering the other great offerings of the book, it is certainly recommended to readers. Anxiety, negativity, disappointment, stress, deteriorating quality of relationships, media clutter, device overdose and inadequate sleep are ailments that bother most of us. In that sense, this book can help improve the quality of life of the twenty first century individual. Choose this book if you have not read this genre in a while, or if you need a change in your perspective of looking at the current events in your life. I leave a quote from the book by the famous poet Kalidasa as food for thought:

‘Yesterday is but a dream. Tomorrow is only a vision. But a today well lived makes every yesterday a dream of happiness and every tomorrow a vision of hope.’

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

‘GST ISSUES RELATING TO INTERMEDIARY’

The Indirect Tax Study Circle of the Bombay Chartered Accountants’ Society arranged its inaugural meeting on ‘GST Issues relating to Intermediary’ on 7th July which was addressed by Group Leader CA Yash Dhadda and Mentored by CA Udayan Chokshi.

CA Yash Dhadda made a detailed presentation on the law and issues relating to Intermediary Services under GST. The presentation broadly covered the following:

(1) Taxability under the erstwhile Service Tax regime;
(2) Definition and Place of Supply provisions under GST;
(3) Current outcome of writ petitions;
(4) Discussion on case studies covering various scenarios.

All the above issues were discussed at length. Mentor CA Udayan Chokshi explained the complexities involved in various scenarios and shared his views on the same. Important case studies and advance rulings were also discussed.

More than 150 participants benefited from the presentation shared by the duo of CA Yash and CA Udayan.

GST INTERPLAY – CUSTOMS, FTP & SEZ

The BCAS Indirect Tax Study Circle arranged a two-day meeting on ‘GST Interplay – Customs, FTP & SEZ’ on 31st July, and 10th August, 2021. It was addressed by Group Leader CA Rishabh Singhvi and Mentored by CA Prashant Deshpande.

CA Rishabh Singhvi made a detailed presentation on the concepts and parameters for differences and similarities between the various indirect tax laws, viz., Customs, GST, FTP and SEZ. Several case studies were drafted by the Group Leader and discussed at length by the participants. The following important issues were discussed:

(i)  Merchant Trade,
(ii) EOU Unit Implications,
(iii) SEZ Unit Implications,
(iv) MOOWR Implications,
(v) Dual Incidence Implications,
(vi) Rule 96(10) issues, and
(vii) FTA Benefits.

Mentor CA Prashant Deshpande guided the group discussion at various stages and shared his expert views on the multiple tax issues involved. Important case studies and advance rulings were also taken up.

CA Jayesh Gogri had mentored and guided the Group Leader in drafting the presentation and the case studies.

The active participation of more than 80 members helped them to benefit from the group discussion.

DEPARTMENTAL AUDIT & ADJUDICATION PROCEDURES

The Indirect Tax Study Circle’s meeting on ‘Case Studies on Department Audit and Adjudication Procedures and Practical Issues’, which was held on 7th August, was addressed by Group Leader CA Keval Shah with CA Rajiv Luthia as Mentor.

Group leader CA Keval Shah had drafted detailed case studies for discussion which covered the following aspects in regard to Department Audit and Adjudication:

(a) Whether the scope of Departmental GST Audit can cover the period under Service Tax;
(b) Partial submission of data within time limit u/s 65(4) of the CGST Act, 2017;
(c) Interest on ineligible input credit availed but not utilised;
(d) Eligibility of ITC claimed in GSTR3B but not reflected in GSTR2A;
(e) GST on purchases from unregistered dealers;
(f) Payment of tax and interest demanded by audit team through utilisation of ITC; and
(g) Eligibility of ITC on delayed payment of GST under the RCM.

Mentor CA Rajiv Luthia guided the group discussion and shared his expert views on the multiple tax issues involved. Important case studies and advance rulings were also discussed. More than 60 participants benefited from the presentation.

SILVER JUBILEE ITF CONFERENCE

 

The Silver Jubilee International Tax and Finance (ITF) Conference, 2021 was conducted online from 12th to 16th August with a record attendance of 474 members from around 36 locations all over India. The total number of participants, including faculties and special invitees, crossed the 500-mark.

In keeping with the tradition of past ITF Conferences, this year’s Conference, too, was designed to include various contemporary and practically relevant topics for the international tax practitioner.

Eminent personalities and experts graced the Conference and shared their invaluable thoughts and experiences on their respective areas of expertise. The five-day Conference was marked by 13 technical sessions, including three group discussion papers, five presentations, three panel discussions (spread over four sessions) and one fire-side chat.

There were a total of 32 members on the faculty, including speakers and session chairmen, 29 group leaders and 19 contributors for case studies and the background material. It clocked over 35 hours of solid study during the Conference.

Facilitating Group Discussions: This year’s ITF had three papers for group discussion written by CA Pinakin Desai, CA Padamchand Khincha and CA Yogesh Thar. The participants were split into six, each group ably led by 29 group leaders (across the three papers) who helped generate in-depth discussion of the case studies from the papers. The paper writers could undertake a virtual tour of each group to follow the discussions by the participants.

Day 1: 12th August

President CA Abhay Mehta gave his opening remarks and explained the BCAS’s activities and its new initiatives. Chairman of the International Taxation Committee Dr. CA Mayur B. Nayak welcomed the participants and made the introductory remarks.

The Conference was inaugurated by the Past Chairman of the International Taxation Committee and the Chairman of the very first ITF Conference, CA Dilip J. Thakkar, with a welcome address. The President of the ICAI, CA Nihar Jambusaria, also addressed the participants. This being the Silver Jubilee Conference, CA Rashmin Sanghvi, Founding Member of the ITF study group, also spoke.

The Keynote Address was delivered by Padma Vibhushan N.R. Narayana Murthy on a very interesting and relevant topic – ‘The role of culture in improving governance in a company’. He laid stress on three key values, namely, ethics, transparency and honesty, for building a sound organisational culture and governance in a company.

As readers would be aware, investment and business activities have substantially increased in the Gujarat International Finance Tec-City (GIFT City) and various regulatory amendments have been made to enhance the lure of GIFT City – India’s first International Financial Services Centre (IFSC). On the first day of the Conference, Advocate Siddharth Shah dealt with ‘GIFT City IFSC – Regulatory and Tax Aspects of Investments and Transactions’ in great detail and explained various complex nuances to the participants. CA Vispi Patel chaired the session and also provided his insights on the subject.

Day 2 – 13th August

The day began with a group discussion on the paper written by CA Pinakin Desai on ‘Controversial Issues Arising from Tax Treaty Interpretation’.

CA Gautam Doshi spoke on ‘Structuring of Family Trusts – FEMA & Other Regulatory Aspects’. He covered various aspects of the subject in great detail, including conceptual explanations, legal and practical points for consideration, provisions of income-tax, FEMA, SEBI and even CRS regulations. Past President CA Dilip J. Thakkar chaired the session and also provided insights on the issues involved.

CA Pinakin Desai, dealing with his paper ‘Controversial Issues Arising from Tax Treaty Interpretation’, for over two and a half hours, highlighted in a detailed but succinct manner various issues such as possibility of access to tax treaty in light of general anti-avoidance rules (GAAR); principal purpose test (PPT) driven by MLI; simplified limitation of benefits provision (SLOB) driven by MLI; and certain select issues of treaty interpretation. Interestingly, CA Pinakin Desai was also a speaker and the Chairman of the International Taxation Committee at the 1st ITF Conference held in 1997 at the Manas Resorts, Igatpuri, Maharashtra. Past President CA Kishor Karia chaired the session and also gave his views on the subject.

The last session of the day was the panel discussion on ‘Experience and Developments in Transfer Pricing’. The panel consisted of CA Vijay Iyer, Dr. CA Hasnain Shroff and CA Kunj Vaidya and was chaired and Moderated by CA T.P. Ostwal.

The panel shared its thoughts and gave insights on specific issues in transfer pricing through case studies. The case studies covered practical issues which would be of relevance in today’s scenario, such as the Covid-19 impact on TP arrangements, APAs for service entities and profit attribution to PE, section 56(2)(X) and TP valuation, impact of secondary adjustment provisions, Covid-19 impact on the manufacturing sector and so on.

Day 3: 14th August

The proceedings started with a group discussion on the paper written by CA Padamchand Khincha on ‘Recent Developments in Taxation of Digital Economy in India’.

Dr. CA Anup Shah spoke on ‘Startups – Tax, FEMA & Regulatory Aspects’ covering various relevant issues such as registration and certification, funding options, exit options and new-age structures, SPACs, Externalisation of Investments and so on. Past President CA Chetan Shah chaired the session and set the ball rolling with his opening remarks.

CA Rashmin Sanghvi, speaking on ‘Future of International Tax Practice and Global Economy’, gave his perspective on the current status of the Indian regulatory system and international tax practice in India. He then described the background of the global events impacting international tax, especially the digital tax war, and provided guidance to professionals on the future of international tax practice. Past President CA Raman Jokhakar chaired the session and offered his perspectives on the topic.

Prior to the fireside chat and panel discussion on taxation of digitised economy, Advocate Mukesh Butani spoke succinctly on Pillar 1 and Pillar 2 of the OECD proposal in the context of taxation of the digitised economy.

In the fireside chat (recorded earlier) on ‘Global Developments in Taxation of Digitised Economy’ with Advocate Mukesh Butani, Mr. Pascal Saint-Amans, Director, Centre for Tax Policy and Administration, OECD, shared his thoughts and gave participants an insight into the potential future of taxation of the digitised economy and what one can expect in the near future. The chat was widely covered by the media in India as well as abroad.

Subsequently, there was a panel discussion on ‘Global Developments in Taxation of Digitised Economy’. The panel consisted of Mr. Carlos Protto, Director of International Tax Relations, Ministry of Economy, Argentina; Mr. Rajat Bansal, a senior IRS official and CCIT; and CA Radhakishan Rawal. It was chaired and Moderated by Advocate Mukesh Butani. The panel covered some of the nuances of the 2-Pillar approach agreed upon by the Inclusive Framework and also gave its views on the future of unilateral measures and Article 12B of the UN Model.

CA Padamchand Khincha, with his paper on ‘Recent Developments in Taxation of Digital Economy in India’, highlighted the various developments in India on the subject, including Significant Economic Presence (SEP), Equalisation Levy (EL), TDS provisions u/s 194-O and taxation of software in light of the recent Supreme Court judgment. Past President CA Rajan Vora chaired the session and gave his valuable inputs on the subject.

Day 4: 15th August

The day began with a group discussion on the paper written by CA Yogesh Thar on ‘Emerging issues in Cross-Border Personal Taxation’.

The first part of the panel discussion on ‘International Taxation – Recent and Emerging Issues and Developments in Law, MCs and Jurisprudence’, was held on Day 4. The panel consisted of Mr. Kamlesh Varshney, IRS and Joint Secretary (TPL) – Finance Ministry, Senior Advocate Ajay Vohra and CA Padamchand Khincha and was chaired and Moderated by CA Pranav Sayta. It was a unique and technically-rich discussion, as the panellists discussed issues from different perspectives.

The issues discussed covered a range of topics of relevance in today’s world – issues related to tax residence of individuals, the applicability of anti-abuse provisions, i.e., GAAR and PPT, availing benefit under the MFN Clause, withholding tax aspects in Multilateral Instrument (MLI), digital currency (classification of income and related issues), Covid-19-related taxation of foreign companies in India, and the term ‘Liable to tax’ and interpretation of Article 3(2).

The frank and thorough exchange of views among the panellists, ably supplemented by the Chairman’s probing queries, made the discussion very interesting and elaborate and provided a lot of food for thought to the participants. The panel discussion was based on case studies prepared by BCAS contributors who also presented their case studies to the participants.

CA Yogesh Thar, while dealing with his paper on ‘Emerging issues in Cross-Border Personal Taxation’, raised interesting points arising from recent developments in personal taxation due to amendments in section 6 relating to residence in India, and Covid-related issues in personal taxation. Past President CA Gautam Nayak chaired the session and also gave his inputs.

The day ended with a special programme, ‘Reminiscences of ITF Journey’ wherein the role of all past Chairmen, coordinators, speakers and contributors of the previous ITF Conferences was recognised, their experiences were relived and their efforts applauded – thus creating an emotional walk down memory lane for all participants. The programme was anchored by Dr. CA Mayur B. Nayak and CA Mayur B. Desai. It was well attended by past contributors and they shared memories of every Conference. CA Jagat Mehta prepared the presentation with details of past Conferences with photographs.

Day 5: 16th August

The second part of the panel discussion on ‘International Taxation – Recent and Emerging Issues and Developments in Law, MCs and Jurisprudence’ (already explained above) was held on Day 5. The frank and thorough exchange of views continued between the panellists, Mr. Kamlesh Varshney, IRS and Joint Secretary (TPL) – Finance Ministry, Senior Advocate Ajay Vohra and CA Padamchand Khincha, ably supplemented by Chairman CA Pranav Sayta’s probing queries.

CA S. Krishnan spoke on ‘Foreign Tax Credit – Practical Aspects and Experience with Case Studies’ covering various issues related to the topic and shared his rich, practical experience. CA Dinesh Kanabar chaired the session and also provided his insights.

Concluding remarks

While the personal touch and the camaraderie amongst participants during past physical Conferences were definitely missed, the participants were hugely enthused by the various sessions. This was the second consecutive ITF Conference held online, wherein delegates participated from their respective places – but thanks to the seamless connectivity, it was one of the most engaging and successful Conferences.

The Silver Jubilee ITF was held under the guidance of the Chairman of the International Taxation Committee Dr. CA Mayur Nayak. CA Abbas Jaorawala as the Chief Conference Director, ably assisted by CA Mahesh Nayak as Joint Conference Director, minutely supervised all the sessions personally and devoted a tremendous amount of time and effort to make it the resounding success that it turned out to be.

Other members of the core team were CA Ganesh Rajgopalan, CA Rutvik Sanghvi, CA Siddharth Banwat, CA Anil Doshi, CA Jagat Mehta, CA Natwar Thakrar, CA Tarunkumar Singhal and CA Rajesh P. Shah. Several others also made laudable contributions of time and effort to make the Conference a landmark event for the BCAS. It ended on a high note and received encouraging response and feedback from the participants.

Proceedings of the Conference can be viewed on YouTube at: https://www.youtube.com/watch?v=HWR2h3f0frg and also via the following QR Code:

 

 ‘LOCAL AND GLOBAL INVESTING’

The BCAS organised a lecture meeting by Mr. Kushal Thaker on ‘Evaluation of Stocks – New Economy vs. Old Economy – Local and Global Investing’ on 18th August.

It was planned with the aim of empowering professionals in understanding evaluation techniques and equipping them with the requisite knowledge as they set out on the road to becoming efficient business advisers.

President CA Abhay Mehta welcomed the participants and offered his remarks on the subject. CA Mihir Sheth introduced the speaker, Mr. Kushal Thaker, who is an astute trader and investor in commodities, equities and currency also known as ‘Specunomist’.

 

 

The speaker explained the concepts relating to various asset classes and their analysis.

Key issues and learnings of the meeting
1. New Economy vs. Old Economy
(a) New Economy: IT sector has experienced quantum leap from .com in 2000 to an apps-based life and now moving to Artificial Intelligence,
(b) Old Economy: Cement to Metal to Mining,
(c) Now, old economy is helping new economy companies by providing raw material and other products that act as inputs for new economy stocks,
(d) To analyse Electric Vehicle Companies, it is important to study the trend of commodities like copper, lithium and nickel. This can be extended to companies undertaking mining of these commodities.

2. Local and Global Investing
(e) Look at stocks beyond the Indian border. It’s likely that India may not have companies listed in that space,
(f) For example, global copper and lithium mining. There are no lithium mining companies listed in India. To take advantage of the upward trend in lithium, investing in global lithium mining would be beneficial.
(g) Never think in terms of defensive stocks. That comes only in a bear market. A bear market scenario in India is unlikely over the next decade.

3. Crude Oil
(h) As crude prices go up, investors usually look to buy oil-producing and oil marketing companies. It will be much better to have globally diversified companies in this space, as Indian companies are either government-controlled or in the small caps space.

4. E-commerce
(i) The pandemic acted as a tailwind for e-commerce. But then there were no e-commerce companies listed in India. Now we have Zomato. So, investing in global e-commerce is profitable as these companies have given mammoth returns during the last one year.

5. Key drivers of growth for the next decade
(j) High tech, new economy, old economy stocks – all supplemented new economy stocks,
(k) Hence one cannot see any bear cycle. Of course, corrections are likely, but only of approximately 10% to 20%, but not a bear market,
(l) A bull market is always going on somewhere in world. So it is not necessary stick to the Indian market,
(m) Be bullish on commodities – gold, silver, steel, rare earth or base metals, natural gas.

6. Beginners into International equity
(n) Internationally, ETF on FAANG returns is lower than the return generated by individual stocks,
(o) Direct investment through brokerage houses – Interactive brokers or Kotak Securities

7. Cryptocurrency
(p) Crypto is an asset class by itself. Each crypto has a role to play. Top 15 cryptos are worth reading against 800 cryptos being available for trading,
(q) SWIFT code is a messaging service between international banks and Indian banks for transfer of forex. SWIFT cannot move fast. But crypto is direct transfer of funds and very fast, too. Crypto-backed services are Ripple and Stellar,
(r) Some cryptos are moving into gaming and bond markets,
(s) India has 11 Crypto platforms and each has its own Crypto (currency). If there are more miners (of Cryptocurrencies), then volatility is going to be very high.

8. IPOs
(t) New IPOs in fintech and logistics companies are good,
(u) Investors should not hesitate from investing in high-growth loss-making companies as long as they don’t foresee any competition coming up in that space,
(v) Also, look into how management is planning for future growth. Many of these new e-commerce and fintech companies have global presence,
(w) If the company has good potential of going into Artificial Intelligence or becoming a Tech Company, supporting fast-growing companies can be considered as good potential investments.

The speaker, Mr. Kushal Thaker, also addressed the queries raised by the participants and shared his thoughts on evaluation techniques for stocks and commodities.

The meeting concluded with a vote of thanks proposed by CA Anand Bathiya to Mr. Kushal Thaker, who addressed the participants from his office in Chicago, USA.

The proceedings of the meeting are available on YouTube at:https://www.youtube.com/watch?v=UDBOMkHCN2E and also on the following QR Code:

 

‘MUMBAI’S COVID PANDEMIC MANAGEMENT MODEL’

The BCAS, along with the Dharma Bharti Mission and the Public Concern for Governance Trust, organised a lecture meeting in memory of the Late Shri Narayan Varma on ‘Mumbai’s Covid Pandemic Management Model’ on 24th August. It was addressed by Mr. Iqbal Singh Chahal, IAS and Commissioner of the BMC. It was held through virtual mode on Zoom platform with live-streaming on YouTube.

 

Ms. Farheen Peshimam started the proceedings and shared a video containing fond memories of the late Shri Narayan Varma with the three associations. She also read a message from the Late Shri Narayan Varma’s Family.

Mr. Paramjeet Singh, President of the Dharma Bharti Mission, delivered the welcome address. He also welcomed the keynote speaker and the three awardees. He gave an insight into the various initiatives taken and the contributions made by the Late Shri Narayan Varma during his lifetime and the impact he made on society and the three organisations at large. Ms Farheen Peshimam then formally introduced Mr. Iqbal Singh Chahal.

Mr. Chahal started by describing the scenario under which he had taken charge of the BMC on 8th May, 2020. Since then, innumerable initiatives had been taken by him and the BMC during the pandemic; he summarised these as follows:

• Systems were created to fight the long war against Covid-19. The model that was created had 27 sub-models to fight the pandemic;
• The model was implemented by dividing Mumbai into 24 war rooms with a real-time dashboard of the Covid-19 cases;
• The approach was a combination of proactive and offensive steps to contain the pandemic at the very start;
• Containment zones were created to chase the virus;
• Sanitization drives were conducted to break the chain of the virus and prevent the multiplication of cases;
• Appointing community leaders in slum areas so as to achieve better coordination;
• Increase spending by BMC on the medical infrastructure and addition of 800 ambulances to fight the virus;
• Distribution of free PPE kits to doctors and medical practitioners;
• A Covid dashboard was created with public and private hospitals and all the reports were managed by a BMC-appointed team of doctors;

• Hospital beds were allotted on the basis of social equality, thereby avoiding a chaotic or panic situation of patients running from one hospital to another;
• Creation of seven Jumbo centres in various parts of the city which were converted into full-fledged greenfield hospitals in record time under the mentorship of top doctors;
• Private hospitals helped by agreeing to cap the rates of beds and other medical facilities which made this a successful public-private partnership;
• Pre-emptive stocking of life-saving medicines at the onset of the second wave proved to be crucial to successfully manage and control the second wave;
• Various campaigns run by BMC to fight Covid-19, like ‘My family, My responsibility’ and ‘No Mask No entry’ to create awareness among the people;
• Initiatives taken to avoid any major mishaps during the oxygen crisis in the second Covid-19 wave and the cyclone faced by Mumbai in the month of May, 2021.

Mr. Chahal shared that the speed of vaccination was quite steady and if this continued, then Mumbai would be spared any major third wave that was likely to hit in October-November, 2021. He lauded the contribution of various NGOs in distribution of food packets and other initiatives. He also responded to the questions from the participants before concluding his session.

To summarise Mr. Chahal’s address, he made some important statements:

1. Let us not be demoralised,
2. We have been chosen by God and given this opportunity to serve humanity,
3. Systems will fight the pandemic and not the individuals, and
4. We have to chase the virus in an offensive manner.

Following this excellent talk, the three Narayan Varma Memorial Awards were announced.

1. The first awardee was Advocate Maharshi Dave, Founder of Sparsh Trust. This Trust was initially founded to help stray dogs in the city, but its principles led them to expand their efforts towards helping both animals and humans.

Giving a brief talk, Mr. Dave emphasised that the foundation believed in the concept of service and empathy. It believed that the more one gave, the more one got. ‘The platform provided by this event is very important for the Trust as it helps in spreading the word about the services that we can provide to many more in need,’ he added.

2. The next awardee was Shri Ravi Singh, Founder of Khalsa Aid International. This is a UK-based humanitarian relief charity that provides aid to people affected by various natural as well as man-made disasters. Even in this pandemic, it was at the forefront and donated planeloads of oxygen cylinders and oxygen concentrators to all parts of India and the world.

3. The third and final awardee was Mr. Ranga Rao, who retired as Assistant Director in the Intelligence Bureau in January, 2010 after 39 years of service. The Late Shri Narayan Varma had encouraged Mr. Rao to learn how to use RTI. Soon, Mr. Rao had started filing RTI applications to address the grievances brought to his attention by poor citizens. The success rates of these applications encouraged his group to start a programme which focused on spreading awareness about the use of RTI to help resolve several issues. Since 2013, Mr. Rao has taught more than 2,000 students all over India the use of the RTI Act to fight corruption.

The meeting ended with a vote of thanks to Mr. Iqbal Singh Chahal proposed by BCAS President CA Abhay Mehta, who officially concluded the meeting.

The lecture is available on YouTube at https://www.youtube.com/watch?v=IgaLf8rqvZs and via QR Code

 

‘GDP & ECONOMIC ANALYSIS – PERSPECTIVE AND IMPORTANCE FOR CAS’

A lecture meeting was organised by the BCAS on ‘GDP & Economic Analysis – Perspective and Importance for CAs’. It was delivered by CA Raj Mullick on 25th August.

 

.

The lecture was designed with the aim of empowering professionals in understanding and interpreting economic data and economic indicators, to broaden the horizon for advising and enabling professionals in taking a more holistic view about the way businesses are carried out, and their overall impact on the country at large.

President CA Abhay Mehta welcomed the participants and shared his views on the topic under discussion. CA Chirag Doshi introduced the speaker.

The speaker, CA Raj Mullick, made a detailed presentation on the concepts relating to Gross Domestic Product (GDP) and its analysis. The presentation broadly covered the following:

1. Economy during the pandemic,
2. Micro- and macro-economics,
3. Economy’s income and expenditure,
4. What is GDP?
5. GDP components – (Consumption, Investment, Government spending, Net exports),
6. Real vs. nominal GDP,
7. GDP indicators,
8. Limitation of GDP as a measure of a nation’s well-being,
9. International differences in GDP and quality of life,
10. Saving and investment in national income accounts,
11. Impact of pandemic on the GDP,
12. GDP – Current India @ 2021,
13. GST indicators,
14. Role of Chartered Accountants.

CA Raj Mullick made extensive use of charts, circular flow diagrams and graphics to explain the concept of GDP and so on. He also conducted a quick check of the understanding of the participants by posing practical case studies and eliciting responses on the impact of various situations on the GDP.

The participants took active part by sharing their views on the questions and case studies posed by the speaker. More than 100 persons benefited from the presentation shared by him.

CA Mrinal Mehta proposed the vote of thanks.

The lecture is available on YouTube at https://www.youtube.com/watch?v=_bVuE73LaEk and also via QR code:

AMENDMENTS IN INCOME-TAX ACT, 1961

The Students’ Forum, under the auspices of the BCAS HRD Committee, organised a training session for CA Article Students on ‘Changes in Income-tax Forms and Corresponding Amendments in the Income-tax Act, 1961 for Individuals and HUFs’ on 30th August.

The Study Circle was led by CA Utsav Shah and CA Viren Doshi who are experts on the subject. CA Khubi Shah, the coordinator, introduced the speakers and spoke about the various activities and events conducted by the BCAS Students’ Forum. He encouraged students to actively participate in the events organised by the Forum.
The speakers covered the return-filing process right from the beginning and described in detail the filing of returns on the newly-launched portal using the new utilities introduced. They discussed in detail the section-wise and clause-wise changes and corresponding changes in the return format.

CA Utsav and CA Viren also covered the detailed process and utility walkthrough and guided the students on filing various sections of the form and precautions to be taken to avoid validation error, defective return and demand u/s 143(1). A return-filing checklist was also provided for the benefit of the students.

The session ended with CA Dnyanesh Patade, coordinator, proposing the vote of thanks both to the speakers and to the participants. Around 100 students participated in the interactive session and their feedback was very positive.

The entire session can be viewed on the BCAS YouTube channel at ‘Training Session for CA Article Students – YouTube’ and also via the following QR Code:

 

TREE PLANTATION & EYE CAMP PROJECT 2021

After a gap of one year because of the Covid-19 pandemic, it was time to continue with the decade-old legacy of contributing to the upliftment of tribals and needy persons. The current pandemic has taught us the importance of oxygen, immunity and healthcare.

The HRD Committee under the aegis of the BCAS Foundation organised a two-day visit to Dharampur and Vansda on 25th and 26th September with the objective of caring for nature by planting trees, to provide primary healthcare and quality education to the tribal population, and to help in reaching out to the hitherto neglected people and provide them with timely treatment of cataracts. Thanks to the generosity of our esteemed donors, the BCAS contributed Rs. 7,00,000 for these noble causes.

In view of the current scenario of Covid, a small group of 21 volunteers, representing BCAS on behalf of the donors, got together for the symbolic tree plantation and attended the eye camp. It also visited three NGOs active in the remote villages.

(1) Sarvodaya Parivar Trust (SPT). The group reached Pindval-Dharampur to visit the SPT centre. The trust implements the vision of Acharya Vinoba Bhave of unconditional service to tribals. It works in the fields of environment, education and water conservation and follows a holistic approach for poverty alleviation based on Gandhian principles. The BCAS group interacted with the trustees and volunteers. It also met the children studying at the centre, interacted with them and distributed sweets. The group, along with a team of local farmers, conducted symbolic tree plantation in the fields. It planted mango and bamboo saplings. The BCAS Foundation contributed Rs. 3 lakhs for the plantation of 10,000 trees. Sujataben told them about the activities being conducted by the trust in 35 nearby villages and the challenges faced by them in doing the same. She also explained the outcome of the activities which impacted the life of thousands of residents of the hilly region.

(2) ARCH – Action Research in Community Health, Nagaria. ARCH was founded by the Late Dr. Daxaben Patel to provide basic preventive, curative and maternal-child health services. The Managing Trustees are Mr. Rashmibhai and  Mr. Sudarshan Iyengar, former Vice-Chancellor of Gujarat Vidyapeeth and a leading scholar on Gandhian studies. They and their young and passionate associates took the BCAS team through various innovative teaching techniques for students and their skill development programme, as also the new water-saving techniques used in the plantation. ARCH also conducts mobile health camps in inaccessible villages. The BCAS contributed Rs. 1,50,000 for the triple purposes of tree plantation, skill development and children’s education.

(3) Dhanvantari Trust – Sant Ranchhoddas Eye Hospital Vansda. This body runs an eye hospital which provides free cataract operations and other kinds of eye care for the indigent people. Ghanshyambhai and other trustees described the contribution of the founder trustee, the Late Dr. Kanubhai, in pioneering a 100-bed hospital and that has conducted over 60,000 eye operations with the support of doctors and volunteers who identify patients and arrange for their treatment at Vansda. He explained how ignorance about eye problems because of extreme poverty, misconceptions and so on, result in blindness among the poor. The trustees also talked about the future plans of bettering the facilities, services and upgrading the equipment. The BCAS Foundation contributed Rs. 2,50,000 for the eye camp which performed 250 cataract operations.

 

 

It was a touching experience to see the devotion and selfless service by volunteers for upliftment of the tribal society. All the participants and Trustees expressed their thanks to BCAS for organising the visit to the project sites.

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.

SOCIETY NEWS

BALANCING ONE’S STATE OF MIND

The Human Resources Development Study Circle arranged an excellent discussion on one of the most important topics requiring to be explained in detail in these devastating Covid times, viz., ‘Sthitapradnya’ (a state of balanced intellect in which one is not perturbed by emotions). This is a valued part of the Bhagwad Geeta. The presentation was made by the veteran CA C.N. Vaze in the course of a virtual (online) meeting on 11th May. It was followed by a brief talk by Ms Manasi Amdekar, counselling psychologist, who dwelt on the role of prayers in achieving ‘Sthitapradnya’.

C.N. Vaze explained that ‘Sthitapradnya’ or a balanced state of mind makes it possible for us to pursue our goals irrespective of our situation. Today, because of Covid and the resultant lockdowns there is a lot of negativity and depression leading to severe mental problems. The talk was aimed at generating positivity in the participants by focusing on the following qualities of ‘Sthitapradnya’:

1. Becoming desireless: Being fully satisfied with the self.
2. Stability in every situation: Such a person is stable (not shaken by whatever condition he is in, not too ambitious but not complacent either, and will work for growth but not be perturbed by negative results).
3. Emotional stability: Neither pleased with good nor angry at bad (evil).
4. Complete self-control.
5. Tranquility: Established in calmness of the mind.
6. Established in fullness: Undisturbed by desires, just as the ocean is undisturbed by the constant flow of rivers into it.
7. Oneness with Brahman.

‘In Indian culture, we use two words, Sukh which is material comfort, and Anand which is happiness and which depends on one’s mental state,’ C.N. Vaze pointed out.

यः सरत््व रानभिस्नेहस्तत्तत्प्राप्य शुभा शुभम।्
नाभिनन्दति न द्वेष्टि तस्य प्रज्ञा प्रतिष्ठिता।।2.57।।

• His Reason is (said to be) steady whose Mind is without Attachment in all things, and who feels no exultation or aversion about the agreeable or disagreeable which befalls him.
यदा संहरते चायं कूर्मोऽङ्गानीव सर्वशः।
इन्द् रियाणीन्द् रियार्थेभ्यस्तस्य प्रज्ञा प्रतिष्ठिता।।2.58।।

• When a person draws in (his) senses from the objects of senses as the tortoise draws in its limbs (such as hands, feet, etc.) from all sides, then his Reason is (said to be) steady.The discussion then turned to Shad Ripu (the six ‘Enemies of Life’), viz.,

• Kaama – Desire
• Krodha – Anger
• Lobha – Greed
• Moha – Delusion
• Mada – Ego
• Matsara – Jealousy

C.N. Vaze concluded by quoting Swami Vivekananda who had exhorted Indians to ‘Arise, awake and do not stop until the goal is reached.’

He was followed by Ms Manasi Amdekar who focused on the role of prayers to achieve ‘Sthitapradnya’.

Among the points that she discussed were:

* The brain has different ‘phases’. It reacts to stimuli, and prayers can help in controlling it;
* Words affect water, too. Good words create ripples of good designs and bad language can create distorted designs. These affect the happenings in a person’s life; water molecules react to words and their vibrations; when we utter words of gratitude, there are beautiful, symmetrical patterns in water;
* Non-living objects also react to frequency and can change their position;
* Our brains behave differently depending on what we speak;
* Chanting religious mantras – Actively listening to what you are saying is important, they are holy words and have an effect on your mind; in fact, we dedicate time for them;
* Most people are in a chaotic state with so much noise around;
* We need to filter out other noise and give focused attention to the desired stimulus;
* Active and passive listening are crucial; we cannot move our outer ears, but we can still avoid distractions and concentrate our minds on the job we are doing.

The participants in the virtual meeting requested that both the speakers, C.N. Vaze and Ms Manasi Amdekar, be invited to speak once again as they found the sessions to be interesting and enlightening.

15TH RESIDENTIAL STUDY COURSE ON GST

When the country was grappling with the Covid pandemic and almost the whole of India came to a standstill owing to the ‘second wave’ which started in March, 2021, the BCAS organised its 15th Residential Study Course on Goods and Services Tax in an attempt to motivate people and offer them continuous study in such difficult times.

However, the course was held in virtual mode between 3rd and 6th June. It was well designed and planned. Proof of this was the fact that it was attended by 390 participants from all over India.

There were more than 45 live mega case studies. Each case study was unique in its own way and dwelt on several issues that the professionals and the taxpayers face every day. This time, a new concept, that of a MOCK group discussion, was planned in advance wherein the Group Leaders and Mentors were invited to participate in two ‘GD Papers’ and two ‘Panel Papers’. Before the actual event, selected Group Leaders were allotted the case studies which generated active participation all around and acted as a precursor to the main event. The Group Leaders presented their views first with slides on the case studies allotted to them and other members in the close group deliberated and added their viewpoints. After the Mock group discussion, a Common PPT was prepared for all the Group Leaders for the RSC group discussions. The outcome of this Mock discussion was excellent and offered a lot of value to the participants. All the Paper writers, faculties and panellists appreciated the idea of the Mock GD and the Common PPT.

On the first evening, 3rd June, the programme started at 4.45 pm. CA Sunil Gabhawalla, Chairman, Indirect Tax Committee (IDTC), welcomed the participants and shared the idea behind the RSC, the technical efforts and its design. This was followed by inaugural remarks by President CA Suhas Paranjpe, who gave a briefing on the BCAS. IDTC member CA Mrinal Mehta introduced the panellists, Advocate V. Sridharan, CA S.S. Gupta and Moderator Sunil Gabhawalla.

The panel discussion on ‘Case Studies on GST Law’ lasted about three hours. The concluding remarks were also made by Sunil Gabhawalla and the vote of thanks was proposed by CA Saurabh Shah, the IDTV Convener.

The morning of 4th June had Sunil Gabhawalla welcoming the participants for the Group discussion on ‘ITC – Myth or Reality’? The paper was written by Advocate V. Raghuraman. After the introduction of the Group Leaders and the Mentors and acknowledging their efforts, the Group discussion commenced. For every Group discussion paper, the participants were divided into ten online groups, each with a Group Leader and a Mentor. After the Group discussions, the Group Leaders and Mentors reported to the Paper Writer about the groups’ views, probable issues and challenges during the course of the discussion.

In the evening session, the opening remarks were made by IDTC senior member CA Puloma Dalal, the session chairperson. Following this, the speaker was introduced by CA Gaurav Save, IDTC member. Advocate Raghuraman, Faculty, presented his replies to the Paper that had been discussed in the morning. The participants enjoyed the free flow from the Paper presenter. The session concluded with a vote of thanks by CA Vikram Mehta, IDTC member.

The proceedings of the third day, 5th June, began with the Group discussion on ‘Corporate Restructuring & GST’, the Paper written by CA Gautam Doshi and CA Bhavna Doshi. In-depth discussions took place among all the ten groups. After the Group discussions, reporting to the Paper Writers was done as planned by all the Group Leaders and Mentors.

In the evening, the opening remarks were made by IDTC senior member and Past President, CA Govind Goyal, chairman of this technical session. CA Parth Shah, IDTC member, introduced the speakers. The Faculties then presented their replies to the Paper that had been discussed in the morning. The session was well appreciated for the simple solutions from the procedural and legal perspectives and for the practical solutions. It concluded with a vote of thanks proposed by CA Dushyant Bhatt, IDTC convener.

The concluding day, 6th June, saw two sessions. The first was chaired by CA Raman Jokhakar, Past President of the BCAS. After his opening remarks, CA Rishabh Singhvi, IDTC member, introduced CA Divyesh Lapsiwala, the speaker of the Presentation Paper ‘Tax Technology – Current and Future Trends’. The speaker explained the importance of technology adoption in GST practice and starting preparations in advance. Later, the chairman gave the concluding remarks and the vote of thanks was proposed by CA Suresh Choudhary, also an IDTC member.

After a break of five minutes, the last technical session on ‘GST Practice’ with the panellists, senior advocate Tarun Gulati and CA Sushil Solanki, commenced. The session was moderated by CA A.R. Krishnan, senior member of the IDTC. The concluding remarks were made by Sunil Gabhawalla, IDTC chairman, and the vote of thanks was proposed by CA Mandar Telang, IDTC convener.

Owing to time constraints, a few case studies could not be covered but, considering the importance of the topics concerned, the said session was carried over to 22nd June. The participants benefited from the valuable inputs, legal discussions and analysis of the GST law. Sunil Gabhawalla thanked both the panellists and the Moderator for their time and effort and also for agreeing to the extended session.

The virtual RSC concluded with acknowledgements and thanks to all those who had worked towards making the event a success, especially the Paper Writers, Group Leaders, Mentors, Panellists and others who had worked tirelessly to deliver a seamless experience. Last but not the least, thanks were expressed to the participants without whom the sessions would not have been so interactive.

Overall, it was an enriching experience and was appreciated by all the participants.

CREATING AND SUSTAINING TEAM CULTURE

The Human Resource Development Study Circle arranged a meeting on the virtual platform of BCAS on 8th June to discuss the subject ‘Creating & Sustaining a Team Culture (Introductory Session)’. It was addressed by Mr. Gopal Sehjpal.

Creating a new team culture or improving upon an existing team culture is about answering the question: ‘Do you play well with others?’

The answer to this could lead to one’s success or failure as a leader. It could be the key factor in one’s personal and family relationships. Many think that ‘plays well with others’ is a category for grading school children, not grown-ups. ‘We tell ourselves, “I’m a successful, confident adult. I shouldn’t have to constantly monitor if I’m being nice or if people like me.”’

Most people hold themselves blameless for any inter-personal friction and believe that it’s always someone else’s fault not their own fault. They say, ‘The other guy needs to change. I shouldn’t have to. In fact, I don’t need to, it’s his fault.’

Mr. Gopal Sehjpal wondered whether people are so satisfied with how far their behaviour has already taken them in life that they smugly reject any reason to change? In other words, they believe that ‘If it ain’t broke, don’t fix it.’

He narrated the story of Alan Mullaly who, when he became CEO of Ford, set to work to create an environment where the executive team, notorious for not working together, could learn to play well with each other. Through his leadership, the focus of the team, and ultimately of the entire company, became ‘How can we help one another more?’ It worked. The company survived through incredibly difficult times and returned to achieving great success again through working together. If Ford had been a schoolyard and the executives school children, they would have received the highest marks in ‘playing well with others’.

How well does your team play together?

Mr. Gopal Sehjpal said that one could answer this question about one’s team by trying the simple, four-step process which can be called ‘team-building without time-wasting.’ The steps are:

1. In a team meeting, ask each team member to rate ‘How well are we doing?’ vs. ‘How well do we need to be doing?’ in terms of teamwork. Have each member do this on paper. Have one of the members calculate the scores without identifying anyone. On a 1-10 scale, with 10 being the highest score, the average evaluation from over 1,000 teams is ‘We are a 5.8. We need to be an 8.7.’

2. Assuming that there is a gap between ‘we are’ and ‘we need to be,’ ask each team member to list two key behaviours that if every other individual team member improved, could help close the gap and improve teamwork. Do not mention people, only behaviour, such as listening better, clear goals, etc. Then list the behaviours on a flip chart and have the team pick the one that they believe will have the biggest impact.

3. Have each team member conduct a three-minute, one-on-one meeting with each of the other team members. (Do this while standing and rotate as members become available.) In these sessions, each person should ask, ‘Please suggest one or two positive changes I can make individually to help our team work together more effectively.’ Then have each person pick one behaviour to focus on improving.

4. Begin a regular monthly follow-up process in which each team member asks each other member for suggestions on how to continue their improvement based on their behaviour the previous month. The conversations should focus on the specific areas identified for improvement individually as well as general suggestions for how to be better team members.

When asking for inputs, the rules are that the person receiving the ideas cannot judge or critique the ideas. He must just listen and say ‘Thank you.’ The person giving the ideas must focus on the future, not the past.

Mr. Gopal Sehjpal said this is a quick and easy process that helps teams improve and helps team members become better team players.

‘We hope this is helpful to you and those around you. Life is good.’

For goals of the organisation to be met, he suggested: 1) Creating teams, 2) Team culture. Sustaining a team culture is an independent task with a view to ensuring that teams function to achieve the goals of the organisation.

Any defect in the system of creating teams will be harmful to the organisation. The process involves: 1) Creating teams, 2) Assessment of each team member, and 3) Overall assessment of team performance – Feedback, feedforward, differentials are also important aspects to sustain team performance and achievement of the organisation’s goal, Mr. Gopal Sehjpal added.

FOREIGN DIRECT INVESTMENT

The FEMA Study Circle conducted a virtual knowledge session on ‘Foreign Direct Investment (FDI)’ on 19th June to help provide working knowledge about FDI to members of the Study Circle. The discussion was led by Group Leader CA Mukesh Dhoot who explained key provisions of FDI along with the applicable regulatory framework on it.

Mukesh Dhoot led the discussion by comparing the current regulatory framework with the erstwhile FERA 1973 and by highlighting the differences in their objectives. Apart from this comparison, various key provisions such as capital and current transactions, pricing guidelines, sectoral caps, prohibited sectors, KYC, minimum lock-in period, etc., were also taken up. Multiple case studies based on practical aspects of FDI were also discussed. Group Leader Mukesh Dhoot also encouraged the participants to share their responses / inputs.

It was an enlightening discussion with senior members discussing practical examples and approaches in relation to the subject. Several seniors and members of the BCAS FEMA Study Circle also participated in the discussion and their participation made it more interesting.

DIRECT TAX LAWS STUDY CIRCLE

The Direct Tax Laws Study Circle organised a virtual meeting on 21st June at which ‘Key Amendments Related to TDS Provisions, Effective 1st July, 2021’ were taken up.

Group Leader CA Bhaumik Goda gave a brief overview of the changing TDS landscape. The provisions of section 194Q were discussed in depth with illustrations. The applicability of TDS on GST was taken up in light of judicial precedents and Circulars. Further, the exemptions to such TDS provisions were also highlighted.

Thereafter, the Study Circle discussed the inter-play between the TDS and TCS provisions with illustrations. Also discussed was the TDS impact on non-filers of ITR. The session ended with Bhaumik Goda sharing his thoughts on the practical challenges that will be faced during implementation of the new TDS provisions.

INTERNATIONAL DAY OF YOGA: 21ST JUNE

The Human Resource Development Committee, along with The Yoga Institute, Santacruz East, organised an online programme to mark the International Day of Yoga on 21st June from 8 am to 9.45 am. The programme was conducted by CA Manoj Alimchandani along with CA Neeta Bakshi, Ms Manju Khatri, Ms Naznin Hussein and Ms Hital Shah making up the faculty.

Chairman CA Govind Goyal welcomed the gathering which was then addressed by President Suhas Paranjpe and Vice-President CA Abhay Mehta. Ms Naznin Hussein spoke at length on food, nutrition and precautions. She captioned her presentation ‘Ahar, Vihar, Achaar, Vichar.’

She spoke about sattvik, rajasik and tamasik food with slides and suggested that one should choose sattvik food, with a gap of four hours between two meals. Breakfast must be taken within one hour of waking up. There must be a gap of four hours between meals and it would be best to eat 40% less than the actual appetite. The last meal of the day should be not later than 7 pm. She also spoke about the value of gratitude and prayer, as well as sunlight and exercise.

Ms Hital Shah demonstrated the way to perform Suryanamaskar. Ms Manju Khatri showed how to perform Talaasan, Utkatasan, Sukhasan, Vajrasan and neck and shoulder-relaxing postures. Ms Nita Bakshi explained the importance of pranayam and warm water and suggested that everyone should practice this in the current pandemic for better health.

The programme was anchored by CA Anand Kothari and the Q&A session by CA Mukesh Trivedi. About 60 participants took part in it.

CRYPTOCURRENCY: THE FUTURE OF MONEY?

The BCAS organised a lecture meeting by Mr. Nishith Desai on ‘Is cryptocurrency the future of money? Challenges and complexities’ on 23rd June. It was planned keeping in mind the current trend of money exchanges and the related challenges and complexities. Mr. Desai, along with his team comprising Mr. Suril Desai, Mr. Meyyappan Nagappan, Mr Vaibhav Parikh and Mr. Purushotham Kittane, took the participants through the entire gamut of cryptocurrency (crypto).

 

The role of Moderator was played by CA Ninad Karpe, who set the ball rolling by stating that there were many mysteries surrounding cryptocurrency and the technology used in it. He was confident that the meeting would help solve some of the mysteries regarding crypto as the future of money.

Mr. Nishith Desai introduced the topic and provided his insight on the crypto market and its development globally and in India. He also explained the history of the evolution of crypto and the legal tussle between crypto and banks. He noted that there was a Supreme Court order stating that crypto could not be banned. At the same time, it was true that some countries considered crypto as money, while some treated it as security.

Mr. Suril Desai recalled the history of crypto and noted that it was during the recession of 2008 that the concept paper for crypto came in; however, history states that the first blog on Bitcon was issued in January, 2003. The real pick-up in crypto came after the 2008 recession. Blockchain technology, on which the entire system of crypto was based, was nothing but a shared distribution ledger system which was available on multiple systems or notes and was considered to be very secure, unlike a centralised system where a single attack could bring down the entire system. Bitcoin was programmable money. Currently, the Bitcoin world was limited to 21 million coins but this limit could be changed with the approval of more than 51% of the holders.

Next, Mr. Vaibhav Parikh shared his thoughts on the Indian legal landscape and the opportunity in the technology world related to remittances. There was a big market for blockchain developers. One could not separate public blockchain and crypto, although one could separate private blockchain and crypto. He also described how blockchain will change the way the finance industry worked. In his talk, he covered the Supreme Court judgment on whether crypto was legal or not, the relevance of the FEMA Act, the Payment and Settlement Act, the Security Contract Regulation Act, 1956, FDI, the Prevention of Money Laundering Act, the Companies Act and other subjects.

For his part, Mr Meyyappan Nagappan covered the taxation aspects of crypto. He explained that from the taxation perspective its classification could be in three categories, namely, goods, property or currency. There were also issues regarding whether it was a capital asset vs. a stock-in-trade. He broadly covered the topics related to Significant Economic Presence (SEP), Income attributable to SEP taxable in India, Risk in case of non-treaty jurisdictions, Equalisation Levy (EL), tax base for levy of EL, Withholding Tax Obligation of crypto exchange and Tax Collection / Deduction at Source.

Indirect tax aspects related to crypto, such as did sale of crypto constitute supply? Is a crypto exchange an intermediary under the IGST Act? Is the sale of crypto to a resident buyer import of goods? Or is the sale of crypto to a non-resident buyer export of goods? Tax Collected at Source (TCS), registration requirements, these were some of the other areas covered by him.

Mr. Purushotham Kittane explained the RBI’s stand and its Circular related to crypto and the emphasis that RBI has put on KYC norms, prevention of money laundering laws and combatting of terrorism funding. There were several developments on the policy level by the Government of India. RBI had also proposed its own cryptocurrency as a centralised currency for the country. Ninad Karpe summarised the session by posing some very relevant questions to the speakers based on his own research and the questions asked by the participants on the chat and Q&A box.

The meeting attracted a large number of participants. It concluded with CA Mihir Sheth proposing the vote of thanks. An archival video of the meeting has, in a short time, garnered a few thousand views. It can be viewed on the following YouTube link: https://www.youtube.com/watch?v=iO1aNXusAp4&t=6s&ab

LEADERSHIP RETREAT

The last programme of the society for the year 2020-21 was organised by the Human Resource Committee on 29th June, 2021. The regular Leadership Camp was not organised owing to the lockdown; and in view of the prevailing situation an online presentation was arranged on the topic ‘Creating a High Performing Organisation’. The distinguished faculty was Prof. Dr. Zubin Mulla, who has been a regular on the BCAS platform. More than 160 participants attended the programme.

It commenced with a welcome address by Chairman CA Govind Goyal, followed by talks by President Suhas Paranjpe and Vice-President Abhay Mehta. CA Krishankumar Jhunjhunwala introduced the speaker.

Dr. Mulla discussed the following important points:

• Correct human resource practice and good leadership followed by employees, operations and customer outcome create a high-performing organisation. Employees display skills and competencies, with job satisfaction and commitment and have good behaviour to contribute. On the other hand, customer satisfaction creates loyalty and productivity brings good operational outcome.
• What are HR practices? The speaker shared an acronym ‘AMO’, for Ability-enhancing, Motivation and Opportunity.
• Ability and skill-enhancing practices should come with a comprehensive scientific recruitment policy, rigorous selection criteria and extensive training. Motivation can be enhanced with developmental performance management, competitive compensation, giving incentives and rewards and creating career prospects with job security. The opportunity can be enhanced with a flexible job design, creating right teams, information-sharing and employee involvement and psychological safety.
• How to select the appropriate candidate? The speaker emphasised that the top five drivers that the employee looks at are attractive salary, work-life balance, job security, pleasant work atmosphere and career progression. The top five resources for getting applicants were job portals, placement agencies, referrals, social media and company websites. Before recruiting, one must identify employee segments, create an employer brand and identify the appropriate channel.

There must be a robust selection process.

• Dr. Mulla emphasised that even though paying a high salary is the easiest way to get the employee, it is not the most scientific approach and in the long run it becomes counter-productive. However, performance incentive is an excellent way to attract and motivate the employees and high performers. Employers must focus on human capital as per the requirements of the organisation. Human capital is the value of the employee in the organisation.
• While discussing the concept of human capital, the speaker explained that it would pay to look at the value of the employee in the organisation irrespective of his value in the general market. Once an employee is selected on the firm’s capital value, he should be shown the path of growth within the firm and also explained what quality of behaviour is expected of him.
• The speaker advised that it was best to design the job in such a way that is inherently motivating, based on skill variety, task variety, autonomy and giving an opportunity to the employee to give feedback. The vision of the supervisor should be wider compared to the subordinate. The authority and responsibility of the manager should be commensurate.
Dr. Mulla said ‘AMO’ must work together as per the needs of the business. He also discussed a case study of one of the most valuable placement service companies, Egonzender, which has the following process:

1.    Understand client’s situation
2.    Confirm proposal and specification
3.    Conduct systematic research
4.    Interview potential candidate
5.    Present candidate and check references
6.    Assist in negotiation and follow-up.

Egonzender’s philosophy was to hire consultants who:

  •     have little interest in personal aggrandisement
  •     are team players
  •     get more pleasure from group’s success and their own advancement
  •     are collaborative
  •     eagerly share ideas and information about existing and potential clients
  •     share information about the candidate who may fit the best needs of the client
  •     wants to stay long with a company.

The reward strategy emerges from the business strategy and must be aligned with all elements of HR.

In the second part of the presentation, the discussion was on leadership.

•    Three ways of getting work done are authority, transaction and leadership.
•    Leader has to have clarity of purpose and he must walk the talk.
•    Leaders take responsibility and share success.
•    Leaders help others to find purpose at work by engaging them in the pursuit of a higher vision.

Dr. Mulla suggested two books for reading: Investing in People by Wayne F. Cascio, John W. Boudreau, Alexis A. Fink; The Servant: A Simple story about the true essence of Leadership by James C. Hunter.

After the presentation CA Mukesh Trivedi conducted the Q&A session and proposed the vote of thanks.

FOUNDING DAY LECTURE BY  AZIM PREMJI

On 6th July, the 73rd Founding Day of the BCAS,  Mr. Azim Premji addressed the members on ‘Professional Excellence and Social Responsibilities’. He complimented the BCAS for its ability to reinvent itself over 72 years and stated that professional excellence and social responsibilities were not separate but were interlinked in many ways.

Elaborating, he said, both required focus, execution and trust of the stakeholders. Considering the complexities of a country as diverse as India, bringing about social change was more difficult than running a big business. Hence, it was absolutely essential to partner with the Government institutions and build the right professional environment and execution capabilities in philanthropy. Professional excellence with good execution skills would help build the right ethos of social responsibilities that, in turn, would create a sustainable society.

After his very brief talk, Mr. Premji engaged in a conversation with CA Naushad Panjwani in the course of which he addressed several questions.

Asked about his inspiration, he said it was his mother and also Mahatma Gandhi who had inspired him to follow the concept of trusteeship of wealth. This was the driving force that made his Foundation commit more than Rs. 1,000 crores to help the people affected by Covid-19. At the same time, he pointed out, his biggest regret was that he did not start on his journey of philanthropy earlier in life. He advised the youth of the country to engage with the real world and work in the field to experience the injustice, inequity and hardship that the common man has to face. This will help them develop empathy.

Mr. Premji apprised members about the various social initiatives in the areas of education, agriculture and poultry-farming that his Foundation had been engaged in and said that these had helped generate employment for 83 lakh people.

What was his opinion about the best structure for a philanthropic organisation? His view was that no form or structure would work unless one collaborated with the Government institutions which alone had the wherewithal to ensure that the benefits percolated down to the ground level. The Government institutions have to be convinced of the intent and the capability of the organisation.

What would be the best way to take up the issue of education which had suffered the most during and after the Covid pandemic? Mr. Premji advocated mohalla classes in open spaces, proper vaccination of the teachers and also financial and infrastructure support to them.

How could the inequality in income be reduced? For that, he said, it was necessary to improve the level of public education – but the entire thrust of development should be on the common man as the beneficiary. No one could be emotionally detached from misery; after all, empathy to other human beings is the core of human existence.

Addressing the impact of Covid-19 on the IT industry,  Mr. Premji said that the IT industry was quick to ‘rethink’ and ‘reshape’ against the challenges and had adopted the hybrid model to find optimal balance. It was this ability that could help India become the IT hub of the world and also help the country reach the target of becoming a US $5 trillion economy. In fact, the IT industry had added 1,58,000 new jobs during the pandemic year.

What were the secrets behind his company’s ability to manage the ethics and values across various cultures where his business had a presence? His reply was that it had been through a process of ‘communicate’, ‘demonstrate’ and ‘enforce (when violated)’ that it had been made possible.

In the course of his personal journey and his experience after over five decades in business, Mr. Premji said his best learning experience had come from people on the ground, teachers, students, workers, etc. That had helped him to evolve.

CA Abhay Mehta proposed the vote of thanks and added that as a token of appreciation to the esteemed guest, BCAS has sponsored 101 trees to be planted across the country.

The lecture meeting can be viewed on the following YouTube link: https://www.youtube.com/watch?v=x46zwWVPZk8&t=135s

Section 23 – Annual Letting Value of house property is to be determined on the basis of municipal rateable value

4 Anand J. Jain vs. DCIT Amarjit Singh (J.M.) and Manoj Kumar Aggarwal (A.M.) ITA No.: 6716/Mum/2018 A.Y.: 2015-16 Date of order: 18th January, 2021 Counsel for Assessee / Revenue: Anuj Kishnadwala / Michael Jerald

Section 23 – Annual Letting Value of house property is to be determined on the basis of municipal rateable value

FACTS
During the previous year relevant to the assessment year under consideration, the assessee owned 19 flats at Central Garden Complex out of which seven were lying vacant whereas the remaining were let out. The assessee, in his return of income, offered an aggregate income of Rs. 1.26 lakhs on the basis of municipal rateable value (MRV). The A.O., applying the provisions of section 23(1)(a), opined that the annual letting value (ALV) shall be deemed to be the sum for which the property might reasonably be expected to be let out from year to year. Therefore, the municipal value was not to be taken as the ALV of the property. He applied the average rate per square metre at which the other 12 flats were let out by the assessee and worked out the ALV at Rs. 64.57 lakhs; after reducing municipal taxes and statutory deductions, he added a differential sum of Rs. 42.57 lakhs to the total income of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) where it relied upon a favourable decision of the Bombay High Court in the case of CIT vs. Tip Top Typography (48 taxmann.com 191) and also on the favourable orders of the Tribunal in its own case for A.Ys. 2009-10 and 2010-11 wherein the A.O. was directed to adopt the municipal rateable value as the ALV of the vacant flats held by the assessee. It was also mentioned that the predecessor CIT(A) has taken a similar view for A.Ys. 2012-13 to 2014-15. The CIT(A) distinguished the facts of the year under consideration by noticing that out of 19 flats, 12 were actually let out and that in the earlier years the A.O. did not make proper inquiry to estimate the rental income, but since this year 12 flats were actually let out, the same would give a clear indication of the rate at which the property might reasonably be expected to be let out. He confirmed the estimation made by the A.O.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noticed that the issue of determination of ALV was a subject matter of cross-appeals for A.Ys. 2013-14 and 2014-15 before the Tribunal in the assessee’s own case vide ITA No. 6836/Mum/2017 & Others, order dated 27th February, 2019 wherein the bench took note of the earlier decision of the Tribunal in A.Y. 2012-13 in ITA Nos. 3887 & 3665/Mum/2017. In the decision for A.Y. 2012-13, the co-ordinate bench after considering the relevant provisions of the Act and also following the decision of the Bombay High Court in Tip Top Typography [(2014) 368 ITR 330] and also Moni Kumar Subba [(2011) 333 ITR 38], upheld the determination of ALV on the basis of the municipal rateable value.

The Tribunal observed that it is the consistent view of the Tribunal in all the earlier years that municipal rateable value was to be taken as the annual rental value. There is nothing on record to show that any of the aforesaid adjudications has been reversed in any manner. The Tribunal held that the distinction of facts as made by the CIT(A) was not to be accepted. Following the consistent view of the Tribunal in earlier years in the assessee’s own case, the Tribunal directed the A.O. to adopt the municipal rateable value as the annual letting value. This ground of appeal filed by the assessee was allowed.

Sections 45, 48 – Extinguishment of assessee’s right in flat in a proposed building is actually extinguishment of any right in relation to capital assets and accordingly compensation received upon extinguishment of rights falls under the head ‘capital gain’

3 Shailendra Bhandari vs. ACIT Rajesh Kumar (A.M.) and Amarjit Singh (J.M.) ITA No.: 6528/Mum/2018 A.Y.: 2015-16 Date of order: 21st January, 2021 Counsel for Assessee / Revenue: Porus Kaka / T.S. Khalsa

Sections 45, 48 – Extinguishment of assessee’s right in flat in a proposed building is actually extinguishment of any right in relation to capital assets and accordingly compensation received upon extinguishment of rights falls under the head ‘capital gain’

FACTS
During the year under consideration the assessee cancelled an agreement entered into for purchase of a flat and received Rs. 2,50,00,000 as compensation along with refund of money already paid towards purchase of the flat amounting to Rs. 10,75,99,999. The said flat was booked by the assessee, as confirmed by the builder, vide a letter of intent dated 9th February, 2010 wherein the terms and conditions for the purchase of the property were duly mentioned. The letter of intent had to be cancelled as the sellers were not allowed to raise the building height up to the level on which the flats were to be constructed. The assessee, after giving various reminders and legal notices to the builders, succeeded in getting a compensation of Rs. 2,50,00,000 along with refund of money already paid, as evidenced by a letter dated 29th March, 2014.

These rights were transferred to the assessee by three persons, viz., Ms Vibha Hemant Mehta, Mrs. Anuja Badal Mittal and Mr. Sunny Ramesh Bijlani, who were shareholders in Kunal Corporation Pvt. Ltd. which was the owner of the plot and was to construct the building after obtaining necessary permissions from the Government authorities.

The A.O. held that the asset for which the letter of intent was issued in favour of the assessee did not exist on the date 9th February, 2010 when the letter of intent was issued by the assessee. The assessee has merely made a deposit with the developers which is refundable to the assessee along with compensation subject to certain terms and conditions. The A.O. also held that when an asset does not exist it is not a capital asset and therefore the assessee is not entitled to claim capital gain on the same. He rejected the claim of the assessee.

Instead of the long-term capital loss of Rs. 3,37,09,596 claimed by the assessee, the A.O. taxed Rs. 2,50,00,000 as income from other sources by holding that the said receipt is not from transfer of capital assets.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the A.O.

The aggrieved assessee preferred an appeal to the Tribunal where on behalf of the Revenue it was contended that the letter of intent issued by the builder for the purpose of allotment of flat, which was not in existence on the date of execution of the letter of intent as well as on the date of execution of the letter of intent and also not on the date of cancellation of the said letter of intent, is not an agreement. Since the seller has not followed the provisions of MOFA which are applicable in the state of Maharashtra, the letter of intent cannot be treated as having created any interest, right, or title in a capital asset in favour of the assessee.

HELD
The Tribunal held that the provisions of MOFA cannot regulate the taxability of any income in the form of long-term capital gain / loss which may arise from the cancellation of any letter of intent / agreement which is not registered. The Tribunal held that the assessee has rightly calculated the long-term capital loss upon cancellation of the letter of intent dated 9th February, 2010. It observed that the case of the assessee finds support from the decision of the jurisdictional High Court in the case of CIT vs. Vijay Flexible Containers [(1980) 48 taxman 86 (Bom)] and it is also squarely covered by the decision of the co-ordinate bench of the Tribunal in the case of ACIT vs. Ashwin S. Bhalekar ITA No. 6822/M/2016 A.Y. 2012-13 wherein the Tribunal has held that the extinguishment of the assessee’s right in a flat in a proposed building is actually extinguishment of any right in relation to capital assets and accordingly held that the compensation received upon extinguishment of a right which was held for more than three years falls under the head ‘capital gain’ u/s 45. Following these decisions, the Tribunal set aside the order of the CIT(A) and directed the A.O. to allow the claim of the assessee on account of long-term capital loss.

Extension for conducting special audit u/s 142(2A) cannot be granted by CIT, only the A.O. can grant such extension – Assessment concluded after such extended limitation period shall be considered as void ab initio

15 [2020] 82 ITR (Trib) 399 (Del) ACIT vs. Soul Space Projects Ltd. ITA Nos.: 193 & 1849/Del/2015 A.Ys.: 2007-08 & 2008-09 Date of order: 3rd June, 2020

Extension for conducting special audit u/s 142(2A) cannot be granted by CIT, only the A.O. can grant such extension – Assessment concluded after such extended limitation period shall be considered as void ab initio

FACTS
During assessment proceedings, the A.O. arrived at the conclusion that it was necessary to conduct a special audit u/s 142(2A) of the books of accounts of the assessee. The assessee raised objections to the proposed special audit and the A.O., after rejecting the objections and with the approval of the CIT, ordered a special audit in accordance with the provisions of section 142(2A). Thereafter, the Special Auditor requested for extension of time period and the A.O. forwarded this request to the CIT. The CIT granted extension of time. The assessments were completed after limitation period on account of the extension granted for special audit.

The assessment orders were challenged before the CIT(A) which provided relief to the assessee on merits. The orders of the CIT(A) were challenged by the Revenue before the Tribunal and the assessee filed cross-objections raising the issue of limitation in completing the assessment.

Before the Tribunal, the assessee argued that as per the proviso to section 142(2A) it was only the A.O. who had the power to extend the time period for conducting the audit; hence, the extension granted by the CIT was legally invalid. It was argued that the exercise of the statutory power of an authority at the discretion of another authority vitiates the proceedings.

On the other hand, the Department contended that the A.O. had applied his mind and was satisfied that the matter required extension; however, the extension application was forwarded only for the administrative approval of the CIT; even otherwise, since the CIT was the approving authority for special audit, therefore his involvement for extension of time as per the proviso was inherent. The Revenue argued that since on a substantial basis the requirement of the proviso to section 142(2A) was met, just on account of administrative approval of the CIT for sanctioning the extension, it should not vitiate the extension of time for the special audit.

HELD
The issue before the Tribunal was whether or not the action of the CIT in granting an extension for a further period u/s 142(2A) was legally valid.

The Tribunal held that the proviso to section 142(2A) clearly provides that the A.O. shall extend the said time period if the conditions as mentioned in the said proviso are satisfied. While the initial direction is to be given with the approval of the CCIT / CIT, however, for extension it is only the A.O. who has to take a decision for extension, the sole power to extend vests only with him.

There was no need for the higher authorities to be involved in the issue of extension. It may be an administrative phenomenon to inform the CIT about the extension, but statutorily that power is vested with the A.O.

The Tribunal held that the statutory powers vested with one specified authority cannot be exercised by another authority unless and until the statute provides for the same. The statute has accorded implementation of various provisions to specified authorities which cannot be interchanged. A power which has been given to a specified authority has to be discharged only by him and substitution of that authority by any other officer, even of higher rank, cannot legalise the said order / action.

Accordingly, it was held that the extension given by the CIT was beyond the powers vested as per the statute and therefore the assessment completed after the due date was void ab initio.

Section 147 – Reopening of assessment – A.O. to provide complete reasons as recorded by him to the assessee and not merely an extract of reasons

14 [2020] 82 ITR(T) 235 (Del) Wimco Seedlings Ltd. vs. Joint CIT ITA Nos.: 2755 to 2757 (Delhi) of 2002 A.Ys.: 1989-90 to 1991-92 Date of order: 22nd June, 2020

Section 147 – Reopening of assessment – A.O. to provide complete reasons as recorded by him to the assessee and not merely an extract of reasons

FACTS
The assessee was a company engaged in the business of providing consultancy services in the field of agricultural forestry plants by undertaking research and development (R&D) activities. The A.O. had initiated reassessment proceedings u/s 147 for A.Ys. 1989-90 to 1991-92 and passed the order u/s 143(3) r.w.s. 147. These orders were challenged by the assessee and the matter went up to the Delhi High Court which remanded the appeals to the ITAT for a fresh adjudication on all issues, including on the aspect of reassessment.

In the remanded appeals, the assessee had challenged the reopening of the assessment proceedings u/s 147 for A.Ys. 1989-90 to 1991-92 on various grounds wherein the first ground of appeal was that the reasons provided by the A.O. in the course of reassessment proceedings and the reasons filed by the Department before the Delhi High Court were different.

HELD
One of the disputes arising in this case was whether while initiating reassessment proceedings the A.O. is supposed to provide complete details of reasons recorded and not merely a few extracts of the said reasons so that the assessee can prepare its defence effectively against the proposed reopening of the assessment. It was held that in all circumstances the A.O. is supposed to provide the complete reasons recorded for reopening of the assessment to facilitate the assessee to raise appropriate objections to the reopening. It cannot be the case of the Revenue that it gives a few extracts of the reasons to the assessee to defend it and when cornered before the higher authorities, the Revenue comes out with the detailed reasons recorded by the A.O. The reasons produced before the High Court were quite different from the reasons provided to the assessee and hence the ITAT held the reassessment proceedings to be invalid and quashed the assessment orders.

Section 56(2)(vii) r.w.s. 2(14) – The term ‘property’ has been defined to mean capital asset, namely, immovable property being land or building or both and hence where immovable property does not fall in the definition of capital asset, it will not be subject to the provisions of section 56(2)(vii)

13 [2020] 82 ITR (T) 522 (Jai) Prem Chand Jain vs. Asst. CIT ITA No.: 98 (JP) of 2019 A.Y.: 2014-15 Date of order: 8th June, 2020

Section 56(2)(vii) r.w.s. 2(14) – The term ‘property’ has been defined to mean capital asset, namely, immovable property being land or building or both and hence where immovable property does not fall in the definition of capital asset, it will not be subject to the provisions of section 56(2)(vii)

FACTS


The assessee had purchased two plots of land during the year claiming these to be agricultural land. The sale consideration as per the respective sale deeds was Rs. 5,50,000 and their stamp duty value [SDV] as determined by the Stamp Duty Authority amounted to Rs. 8,53,636;  therefore, there was a difference to the tune of Rs. 3,03,636. The A.O. invoked the provisions of section 56(2)(vii)(b) and held that agricultural land falls within the definition of property and, thus, added the differential amount under the head other sources. The CIT(A) upheld the addition. Consequently, the assessee filed an appeal before the ITAT.

HELD
The dispute in this case was whether agricultural land was to be included in the definition of immovable property and whether it was covered by the provisions of section 56(2)(vii)(b). It was the contention of the Department that there was no express exclusion provided for agricultural land from the operation of section 56(2)(vii). But it was submitted on behalf of the assessee that vide the Finance Act, 2010 in clause (d) in the Explanation, in the opening portion, for the word ‘means—‘ the words ‘means the following capital asset of the assessee, namely:—’ were substituted with retrospective effect from 1st October, 2009. It was further submitted that the substitution of the words ‘means’ for the words ‘means the following capital asset of the assessee, namely’ made the intention of the Legislature very clear, that henceforth the deeming provision of 56(2)(vii)(b) would apply in case of those nine specified assets, if and only if they were capital assets.

The ITAT referred to the provisions of clause (d) of the Explanation to section 56(2)(vii) where the term ‘property’ was defined to mean capital asset of the assessee, namely, immovable property being land or building or both. Hence, the ITAT held that if the agricultural land purchased by the assessee did not fall in the definition of capital asset u/s 2(14), they cannot be considered as property for the purpose of section 56(2)(vii)(b). The ITAT remanded the matter to the A.O. to determine whether or not the agriculture land so acquired falls in the definition of capital asset. It was further concluded that where it is determined by the A.O. that the agricultural land so acquired doesn’t fall in the definition of capital asset, the difference in the SDV and the sales consideration cannot be brought to tax under the provisions of section 56(2)(vii)(b) and relief should be granted to the assessee.

Further, it was also held that where the assessee had objected to the adoption of SDV as against the sale consideration, the matter should be referred by the A.O. to the Departmental Valuation Officer [DVO] for determination of fair market value.

Editorial Note:
In ITO vs. Trilok Chand Sain [2019] 101 taxmann.com 391/174 ITD 729 (Jaipur-Trib), the Tribunal had upheld the applicability of section 56(2)(vii) to the purchase of agricultural land. The decision in Trilok Chand Sain was not referred to by the ITAT in the above case. However, in another decision in Yogesh Maheshwari vs. DCIT [2021] 125 taxmann.com 273 (Jaipur-Trib), the ITAT, after considering the decision of co-ordinate benches at Pune in Mubarak Gafur Korabu vs. ITO [2020] 117 taxmann.com 828 (Pune-Trib) and at Jaipur in ITO vs. Trilok Chand Sain (Supra) and this decision held that if the agricultural land purchased by the assessee is not a capital asset, the provisions of section 56(2)(vii)(b) are not applicable.

Section 56(2)(viib) – Issue of shares at face value to shareholders of amalgamating company, in pursuance of scheme is outside the ambit of section 56(2)(viib)

12 126 taxmann.com 192 DCIT Circle 3(1) vs. Ozone India Ltd. IT Appeal No. 2081 (Ahd) of 2018 A.Y.: 2013-14 Date of order: 27th January, 2021

Section 56(2)(viib) – Issue of shares at face value to shareholders of amalgamating company, in pursuance of scheme is outside the ambit of section 56(2)(viib)

FACTS
The assessee company was amalgamated with another company (KEPL) and in the process all the assets (except land) and all the liabilities of KEPL were taken in the books of the assessee at book value. Land parcels were taken at revalued price. The excess value of net assets vis-à-vis corresponding value of shares issued towards consideration for amalgamation was thus credited in the books of the assessee company as ‘capital reserve’.

The A.O. observed that the assessee received assets worth Rs. 60.26 crores and liabilities worth Rs. 6.05 crores of the amalgamating company, i.e., KEPL. Thus, the assessee received net assets worth Rs. 54.21 crores against the corresponding issue of shares having face value of Rs. 15 crores to the shareholders of KEPL. The A.O. taxed the excess net assets worth Rs. 39.21 crores received on account of amalgamation and credited as capital reserve of the amalgamated company, as being excess consideration for issue of its shares under the provisions of section 56(2)(viib). On appeal to the CIT(A), he held that the provisions of section 56(2)(viib) were not applicable and reversed the additions made by the A.O. Aggrieved, the Revenue preferred an appeal with the Tribunal.

HELD
The issue of shares at ‘face value’ by the amalgamated company (assessee) to the shareholders of the amalgamating company in pursuance of the scheme of amalgamation legally recognised in the Court of Law is outside the ambit of section 56(2)(viib). Section 56(2)(viib) creates a deeming fiction to imagine and fictionally convert a capital receipt into revenue income and its application should be restricted to the underlying purpose. Further, section 56(2)(viib), when read in conjunction with the Memorandum of Explanation to the Finance Bill, 2012 and CBDT Circular No. 3/2012 dated 12th June, 2012, is to be seen as a measure to tax hefty or excessive share premium received by private companies on issue of shares without carrying underlying value to support such premium.

Thus, the provisions of section 56(viib) would not be applicable where the assessee company has admittedly not charged any premium at all and the shares were issued at face value.

Section 28 – Loss arising on capital reduction by a subsidiary company in whose shares investment was made for purpose of business of assessee, for setting up supply chain system and manufacturing units in global market, is a business loss

11 TS-189 ITAT-2021 (Ahd) DCIT vs. GHCL ITA Nos.: 1120/Ahd/2017 & CO 29/Ahd/2018 A.Y.: 2012-13 Date of order: 5th March, 2021

Section 28 – Loss arising on capital reduction by a subsidiary company in whose shares investment was made for purpose of business of assessee, for setting up supply chain system and manufacturing units in global market, is a business loss

FACTS
The assessee invested in the share capital of its subsidiary, namely, Indian Britain BV consisting of 2,285 shares @ Euro 100 each in A.Y. 2006-07. During the year under consideration, the said subsidiary reduced its share capital due to heavy losses. Consequently, the number of shares of the assessee company was reduced to 1,85,644 from 2,21,586 shares acquired in A.Y. 2006-07. Due to the aforesaid capital reduction, the assessee company incurred a loss of Rs. 99.89 crores on investment made in the equity shares of Indian Britain BV. The assessee claimed long-term capital loss of Rs. 157,97,38,428. In the course of assessment proceedings, it revised its claim of loss to Rs. 99,89,96,245 and claimed that loss on account of capital reduction be allowed as a business loss while computing income chargeable to tax under the head ‘profits and gains from business and profession’ on the ground that investment in the subsidiary was made for the purpose of business of the assessee company for setting up of a supply chain system and manufacturing units in the global market, i.e., overseas.

The assessee submitted that it was incorporated in 1983 and started its soda ash manufacturing in Gujarat in 1988. It entered the textile business in 2001. The entire investment in the wholly-owned subsidiary Indian Britain BV was made by the assessee acquiring global units of a soda ash manufacturing and textile business chain as a measure of commercial expediency to further its business objective. In its desire for expansion in the overseas market, the assessee looked for various acquisitions of home textile businesses in the U.S. and retail chains in the U.K. In this effort at expansion, after setting up of the Vapi home textile plant it showed that Indian products can be sold in the U.S. and the U.K. and, as such, India could become the processing hub for home furnishing textile items.

The A.O. rejected the claim made by the assessee in the course of the assessment proceedings by relying on the decision of the Supreme Court in Goetze (India) Ltd. vs. CIT (157 taxman 1).

Aggrieved, the assessee preferred an appeal to the CIT(A) who adjudicated the issue in favour of the assessee.

HELD
The Tribunal observed that it has adjudicated the issue determining the nature of transaction relating to business loss of acquiring of Rosebys Retail chain in the appeal of the Revenue vide ITA No. 976/Ahd/2014 for A.Y. 2009-10 wherein business loss allowed by the DRP in favour of the assessee was sustained on the ground that the assessee had acquired Rosebys Operation Ltd. to expand its textile business operation globally based on a study carried out by KSA Tech Pak, a renowned global consultant.

The Tribunal observed that:

(i) it is an undisputed fact that the assessee acquired S.C. Bega UPSAM (renamed as GHCL UPSAM Ltd.) in Romania for soda ash manufacturing and similarly acquired Rosebys U.K. Ltd. in the U.K. and Ban River Inc. in the U.S. to expand its home textile business as the company was having plants for textile manufacturing at Madurai and Vapi. The purpose of investment in the subsidiaries was to expand its business globally. After such acquisition, the sales and export shot up substantially and international concerns started taking the company’s products even after reduction in shares and liquidation of the subsidiary Indian Britain B.V. The assessee had explained its business expansion by making investment in a subsidiary company in Netherland from a commercial angle;

(ii) before the CIT(A), the assessee made a detailed submission demonstrating that loss claimed on account of investment in shares of the wholly-owned subsidiary company was a business loss. The assessee gave a detailed submission pointing out that there was recession in Europe and the U.S. Due to continued financial difficulty and other diverse factors, its subsidiaries incurred huge losses and became sick units. The assessee submitted to the CIT(A) that due to huge loss, its subsidiary company, Indian Britain BV passed a resolution to reduce its share capital of Euro 1,85,64,400 (1,85,644 shares) to 1,85,45,835.60 (1,85,644 shares) out of 2,21,586 shares so that such amount can be set off against the accumulated deposit. This resulted in loss amounting to Rs. 99,89,96,245 due to reduction in the value of the share of its subsidiary company.

The Tribunal held that the assessee has made investments in the subsidiary company for business development out of commercial expediency and thus on reduction of capital of the said subsidiary the loss incurred in the value of shares was in the nature of business loss. In the light of the facts and findings reported in the decision of the CIT(A), the Tribunal did not find any infirmity in the decision of the CIT(A) in allowing the losses on reduction in value of shares on investment in the subsidiary company as business losses in the hand of the assessee company. This ground of the appeal of the Revenue was dismissed.

Section 115JB – Provision made for Corporate Social Responsibility, in accordance with the guidelines issued by the Department of Public Enterprises, constitutes an unascertained liability and needs to be added back while computing ‘book profits’ when how the amount is to be spent has neither been determined nor specified by the assessee

10 TS-205 ITAT-2021 Delhi Pawan Hans Ltd. vs. DCIT A.Y.: 2014-15 Date of order: 18th March, 2021

Section 115JB – Provision made for Corporate Social Responsibility, in accordance with the guidelines issued by the Department of Public Enterprises, constitutes an unascertained liability and needs to be added back while computing ‘book profits’ when how the amount is to be spent has neither been determined nor specified by the assessee

FACTS
The assessee, a public sector undertaking, filed its return of income for A.Y. 2014-15 declaring its total income to be a loss of Rs. 1,89,90,55,165 and paying taxes u/s 115JB on a declared book profit of Rs. 66,18,51,561. In the course of assessment proceedings, the A.O. noticed that the assessee has created a provision for Corporate Social Responsibility (CSR) in its books of accounts. The A.O. held that the said provision was an unascertained liability as the assessee had only created the provision but where the amount was to be spent was unascertained. He rejected the assessee’s contention that the provision had been created on the basis of the guidelines issued by the Department of Public Enterprises (DPE) which the assessee was bound to follow. The A.O. disallowed the sum of Rs. 35,09,480 being provision of CSR u/s 115JB considering it as an unascertained liability.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. who, while holding the disallowance to be justified, noted that the guidelines issued by the DPE were not the determinative factor to decide the allowability of the provisions.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The essential question before the Tribunal was whether or not the provision for CSR as made by the assessee amounting to Rs. 35,09,480 can be considered as an ascertained liability. The Tribunal noted that the assessee has made the impugned provision in terms of the calculation provided as per the DPE guidelines. However, although the amount to be provided towards meeting the liability of the CSR expenditure has been quantified in accordance with the said guidelines, how the amount is to be spent has neither been determined nor specified by the assessee. Considering the meaning of the word ‘ascertained’ as explained by dictionaries, the Tribunal held that, at best, it is just an amount which has been set aside for being spent towards CSR but without any further certainty of its end-use. Thus, it cannot be said that the liability is an ascertained liability. The decisions relied upon on behalf of the assessee were held to be distinguishable on facts as in those cases the nature / mode of expenditure ear-marked for CSR spending was very much determined and specified, i.e., the nature / mode of expenditure was ‘ascertained’. The Tribunal dismissed the ground of appeal filed by the assessee.

Section 263 – A non est order cannot be erroneous and prejudicial to the interest of the Revenue – Assessment order passed without jurisdiction is bad in law and needs to be quashed – Order passed u/s 263 revising such an order is also bad in law

9 2021 (3) TMI 1008-ITAT Delhi Shahi Exports Pvt. Ltd. vs. PCIT ITA Nos.: 2170/Del/2017 & 2171/Del/2017 A.Y.: 2008-09 Date of order: 24th March, 2021

Section 263 – A non est order cannot be erroneous and prejudicial to the interest of the Revenue – Assessment order passed without jurisdiction is bad in law and needs to be quashed – Order passed u/s 263 revising such an order is also bad in law

FACTS
In both the appeals filed by the assessee, it raised an additional ground challenging the jurisdiction of the PCIT to review and revise the order passed by the A.O. u/s 153C which assessment order itself was illegal and bad in law due to invalid assumption of jurisdiction as contemplated u/s 153A/153C.

For A.Y. 2008-09, the A.O. on 30th March, 2015 framed an order u/s 153A read with sections 153C and 143(3) wherein the additions made while assessing the total income u/s 143(3) were repeated and consequently the total income assessed was the same as that assessed earlier in an order passed u/s 143(3).

The PCIT invoked provisions of section 263 and set aside the assessment order dated 30th March, 2015 on the ground that after the merger of Sarla Fabrics Pvt. Ltd. with Shahi Exports Pvt. Ltd. whatever additions were made in the hands of Sarla Fabrics Pvt. Ltd. were to be assessed in the hands of Shahi Exports Pvt. Ltd.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that since the income assessed in an assessment framed u/s 153A read with sections 153C and 143(3) was the same as that assessed earlier in an order passed u/s 143(3), the additions made had no link with incriminating material found at the time of the search. The Tribunal noted the ratio of the decision of the Delhi High Court in the case of CIT vs. Kabul Chawla in 380 ITR 573. In view of the ratio of the decision of the Apex Court in the case of Singhad Technical Educational Society (397 ITR 344) holding that in the absence of any incriminating material no jurisdiction can be assumed by the A.O. u/s 153C, the Tribunal quashed the assessment framed u/s 153C by holding it to be without jurisdiction and, therefore, bad in law.

In view of the decision of the Supreme Court in the case of Kiran Singh & others vs. Chaman Paswan & Ors. [(1955) 1 SCR 117] holding that the decree passed by a Court without jurisdiction is a nullity, the Tribunal held that the assumption of jurisdiction u/s 263 in respect of an assessment which is non est is also bad in law as a non est order cannot be erroneous and prejudicial to the interest of the Revenue.

The Tribunal quashed the order framed u/s 263 on the principle of sublato fundamento cadit opus, meaning that in case the foundation is removed, the super structure falls. In this case, since the foundation, i.e., the order u/s 153C has been removed, the super structure, i.e., the order u/s 263, must fall.

Section 68 – Once the total turnover of the assessee is much more than the total cash deposit in the bank account, no addition is called for on account of unexplained cash deposit in said account

8. 2021 (3) TMI 1012-ITAT Delhi Virendra Kumar vs. ITO ITA No.: 9901/Del/2019
A.Y.: 2011-12 Date of order: 24th March, 2021

Section 68 – Once the total turnover of the assessee is much more than the total cash deposit in the bank account, no addition is called for on account of unexplained cash deposit in said account

FACTS
The assessee is an individual who derives his income from wholesale business. The assessment for A.Y. 2011-12 was reopened on the basis of information that he had deposited Rs. 12,07,200 in cash in his savings bank account with ICICI Bank Ltd. during the F.Y. 2010-11. In response to the said notice u/s 148, the assessee furnished his return of income on 16th October, 2018 declaring the total income at Rs. 1,57,440. In the course of reassessment proceedings, the A.O. asked the assessee to explain the source of deposit. He observed that cash from different places like Delhi, Jaipur and Narnaul was deposited in the account. In the absence of any satisfactory explanation, the A.O. held that the assessee has no valid and genuine explanation with regard to the cash deposit of Rs. 8,57,200 after giving benefit of Rs. 3,50,000.

Aggrieved, the assessee preferred an appeal to the CIT(A) where it was contended that full details were given before the A.O., stating that most of the cash deposit was from sale receipts and an amount of Rs. 3,50,000 was taken from his brother. The complete break-up of the cash deposit in the account was filed before the A.O. and, therefore, the addition made by the A.O. was not justified. The CIT(A), after considering the remand report of the A.O. and the rejoinder of the assessee to the remand report, sustained an addition of Rs. 3,62,000 being cash deposit of Rs. 3,16,000 at Jaipur, Rs. 15,000 at Jamnagar and Rs. 36,000 at Delhi, holding the same to be not out of regular sale.

The aggrieved assessee then preferred an appeal to the Tribunal where it was contended that he has declared gross receipt of Rs. 19,25,140 and has offered income u/s 44AD by applying the net profit rate of 8.16%. Therefore, once the gross receipts are accepted and not disputed and such gross receipt is much more than the total deposits in the bank accounts, no addition is called for merely by stating that the deposits are not out of sale proceeds.

HELD
The Tribunal noted that:
(i) The A.O. accepted an amount of Rs. 3,50,000 received by the assessee as gift from his brother and made an addition of Rs. 8,57,200 on the ground that the assessee could not successfully discharge his onus by providing evidence in support of the cash deposits;
(ii) Of the addition of Rs. 8,57,200 made by the CIT(A), it has already given relief to the extent of Rs. 4,90,200 and the Revenue is not in appeal before the Tribunal;
(iii) The CIT(A) sustained the addition of Rs. 3,67,000 on the ground that the assessee could not substantiate with evidence of sales the cash deposits made at Jamnagar, Delhi and Jaipur;
(iv) The assessee did furnish explanations about the deposits made at Jamnagar and Jaipur.

The Tribunal held that once the total turnover of the assessee is much more than the total cash deposit in the bank account (in this case sales is 227% of the cash deposit), no addition is called for on account of unexplained cash deposit in the bank account. The explanation of the assessee appears to be reasonable. The Tribunal held that the CIT(A) is not justified in sustaining the addition of Rs. 3,67,000, it set aside the order of the CIT(A) and directed the A.O. to delete the addition.

YOUTUBE – HOW TO USE IT AS A BRANDING TOOL

HOW YOUTUBE CAN BECOME YOUR DIGITAL BRAND

Since its launch in 2005, YouTube has emerged as a powerhouse of reach and search engine optimisation (SEO). With more than two billion users and 30 million visits a day, YouTube has moved branding from video over static content. Gone are the days when a Facebook post, a tweet or newsletters to clients would suffice. Today, YouTube is no longer regarded as an entertainment site but a portal for self-education and branding.

Let us take a simple example – Your client calls and asks for simple steps to file his GST return. You prepare a four-page document spending a full day writing the same and share it with your client. The client now has to read the document and follow the steps in it and then visit the GST portal and try them out for himself to understand each step.

Alternatively, what can be far more valuable both to you and to the client is a screen recording the steps on the GST portal, making a video and sharing it with the client. You would have spent just ten minutes on it and the client would be more comfortable watching the video.

It is a well-known fact that visuals work better than text for both the consumer and the creator. Taking advantage of the visuals, professionals can build a brand for themselves that will have global reach. And if you are still not convinced that YouTube is ‘the next thing’ that you should choose for branding your firm, the following pointers may help convince you:

* YouTube is great in improving your SEO: The YouTube channel works as a second site and offers room for you to describe yourself. Additionally, you may also describe each video with tags to optimise search results and reach maximum people. Tagging videos for SEO purposes gives an advantage of being found in general.
* Global Audience: YouTube is analogous to Google or Bing where users visit to find useful tutorials, explanation videos, product reviews and so on.
* Posting on YouTube will help people find you on Google, which ultimately does the branding for you without you using any of the pull modes.
* Videos build a brand for you: Videos help humanise your brand. They bring it to life, taking your message from flat and static to dynamic and engaging. Videos help your brand build trust and authority in a unique way. If brands really want to connect with people, videos simply have to be a part of their digital marketing plans because videos capture our attention better than text and images.

Now that we have convinced you how important it is to have a YouTube channel for your brand, let us help you get started with some tips on launching your YouTube channel.

SETTING UP A BUSINESS YOUTUBE ACCOUNT
While almost all social media requires users to create an account to access their content, YouTube does not have any such requirement. A user can view its contents without having an account, but to upload your content you need an account. Membership is only required to view videos flagged as adult content. You can follow these steps to create your business YouTube account:

(i) Sign in to your company’s Google account.
(ii) Click on your Google account’s avatar (profile picture). You’ll find this in the top right corner. It’s a small circle containing your profile picture.
(iii) Click on ‘Your channel.’ It’s the top option in the first batch of icons.
(iv) Choose ‘Use a business or other name.’ You’ll need to select this option to get started with a business YouTube account. You can then enter your company’s name.
(v) Click ‘Create’ – and you have a business YouTube account!

In the top right-hand corner of the page, there are four buttons. The first one is an icon of a video camera that directs you to the page where you upload a video. The next icon is for YouTube apps. After that there is an icon for notifications and messages; it notifies you of your account activity, such as a new like or comment. The one closest to the right-hand side, which is an icon of your profile picture, will direct you to your account information pulled from Google.

CUSTOMISING YOUR YOUTUBE PROFILE AND VERIFYING YOUR CHANNEL
Once you’ve signed up for YouTube, you’ll need to customise your profile with your business’s information. Every user is assigned a channel according to the username and you will be given a specific URL so that other people can find your channel through a direct link – but you will need to do more than the basics to stand out from the competition.

A. Customise your channel
1. Add channel art;
2. Fill in your business info;
3. Create a channel trailer: While optional, a channel trailer (a brief video that introduces viewers to the content they’ll find on your YouTube channel) is an excellent customisation option to increase YouTube viewer engagement. Once you add this trailer, it will appear on your account’s homepage when viewers visit, helping to reel them in and acquaint them with your brand.

B. Interacting with others on YouTube
There are several ways to interact with other YouTube users:
(a) Comments and replies to the comments,
(b) Likes: If the channel likes are public, it works as a playlist for the channel,
(c) Subscription: The best way to get users,
(d) Playlists: You can organise related content together using the site’s playlist feature. If you choose to publicise your playlists, they will appear on your channel’s page below your uploaded content.
(e) Sharing: The site’s social widget allows users to share videos on other social media networks such as Twitter, Facebook, Google Plus, Blogger, Reddit, Tumblr, Pinterest and LinkedIn.

C. Verifying your YouTube channel
How will you know if a channel is verified or not? There will be a small checkbox which indicates a verification badge next to the channel’s name. To apply for verification, your channel must have 100,000 subscribers.

D. YouTube Live
Just like Facebook Live, YouTube has its own live-streaming feature. Broadcasts are usually oriented around news or sports but now many speakers have started taking their sessions on YouTube Live. And, many apps like Zoom allow internal integration where you can simply do a zoom meeting and live-stream it on YouTube.

STRATEGIES FOR BRANDING ON YOUTUBE
YouTube, like almost any other social media, is a lot about how many views you generate and how active is your audience. YouTube promotes channels and videos through its own unique Machine Learning Algorithm. There are no direct hacks available to achieve that but as always there is some smart work and a few tips which you can try to generate more views and create a successful channel.

Share videos on other social media platforms:
Link back to your videos whenever possible on your website and other social media networks. But don’t stop at direct video links. Link back to your channel so that your audience can see what it looks like and have the chance to subscribe.

Just uploading a video and sharing it on social media is not enough. You should have a proper video strategy on how you want to target your audience. For example, a video explaining GST3B around the due date will give you more views than on normal days.

Use relevant keywords in a video’s title, tags and description:
Experiment with different titles and descriptions. Selecting relevant keywords to increase hits is a common SEO strategy of marketers on any social networking site. It helps audiences find content that interests them. A quick exercise would be to watch one of your company’s videos from the beginning and to create a list of relevant words and phrases as you watch it.

Engage with similar content uploaded by other users:
Like and comment on videos uploaded by other users. Not only might those users stumble upon your videos and channel, but anyone else who sees that comment or like might do so as well. Do this with videos that have a similar topic, interest or theme as yours to attract new viewers.

Display content uploaded by other users:
In addition to liking and commenting on other users’ videos, you can highlight featured channels and your liked videos on your own account. In doing so, you show that you’re active in your industry’s YouTube community and direct traffic – a much-needed internet commodity – to other YouTube users in your realm. Be sure to highlight videos that are relevant to your viewer base and not uploads from your direct competitors.

Curate playlist:
If any of your videos follow a consistent theme, organise them together. Perhaps you upload a video every Friday morning; you could compile all those videos into a ‘Friday series’ playlist. Your playlists will appear on your channel’s page, right below your uploaded videos.

Upload content regularly – MOST IMPORTANT:
Especially if you’ve developed a decent pool of subscribers, viewers will be counting on you to create, edit and upload new content. This adds relevance to your brand. This also applies to any other website where users can follow and engage with your content.

Use clickable links to reference other content:
At the end of videos, you’ll notice that many videos reference previous, relevant or even newer content with a clickable link inside the video. You can add these while editing your video in the site’s video manager. This feature can also link to any pages or sites your video covers.

Use YouTube stories:
YouTube recently created YouTube stories, which are similar to Snapchat or Instagram stories. A ‘story’ is a collection of short videos that can remain visible for a day or until they’re deleted. It gives good visibility.

PERSONAL (FIRM) BRANDING ON YOUTUBE
Creating a brand for yourself and your firm is what you should primarily look at when going to YouTube and not to get clients or monetise. In the craving for more reach and gaining clients (which at first shouldn’t be the intent), the essence of branding should not be lost. However, there are still ways in which you may have a personal brand on YouTube.

Stick to your niche:
At first, find people you want to create your brand within. Your content should definitely be curated accordingly. For example, if you wish to showcase yourself as a GST expert, it is very important to regularly post videos on that topic. Diverging topics for the sake of gaining followers will not help in any way. The audience should be relevant and engaging and not more.

Call to action:
The Code of Ethics doesn’t allow us to mention contact or personal details in the educational video. However, the video description section is something that you may use to let people know how to reach you in case they have any queries. You may also use your profile to have contact details and email id or links to your professional social media profiles. This will make it easier for the viewer to reach out to you.

Start and end page:
Having a really good start and end page is as important as the content of the video. This is your chance to brand for yourself. For the end page, you may consider giving references to other videos which makes it convenient for the viewers to know where they will find their answers.

CONCLUSION
If used with correct strategies and efforts (which we have tried and put together in this article), YouTube can do branding for you and your firm (without, of course, in any way violating the Code of Ethics). However, it is also important to note that we do not violate any of the clauses in the COE. [For example, as per Clause 2.14.1.6(iv) – Q, the educational video should not make any reference to the CA firm and should not contain contact details or website in the video. However, your channel page may have such details in the description.]

CHANGES IN PARTNERSHIP TAXATION IN CASE OF CAPITAL GAIN BY FINANCE ACT, 2021

A. INTRODUCTION
In the case of partnership, there may be transfer of capital asset by a partner to a firm or vice versa. Section 45(3) deals with transfer of a capital asset by a partner to a firm; before its substitution by the Finance Act, 2021, section 45(4) dealt with transfer by way of distribution of a capital asset by a firm to a partner on dissolution or otherwise. These provisions were inserted with effect from 1st April, 1988 to provide for full value of consideration in respect of the aforesaid transfer of capital assets between firm and partner.

While the aforesaid sections apply to even AOPs and BOIs, for the purpose of this article reference is made only to firm and partners.

When a partner’s account is settled on retirement or dissolution, he may be given one or more of the following;

(a) Cash, (b) Capital asset, (c) Stocks.

The aforesaid provisions dealt with transfer of capital asset in the limited circumstances provided thereunder.These sections generated a lot of controversies and have given rise to a number of court rulings. A prominent issue is, when a partner upon retirement or dissolution takes home more cash than his capital account balance at the time of retirement, whether he or the firm is liable to pay any tax. The courts are almost unanimous in holding that mere payment of cash would not give rise to any taxable capital gains either in the hands of the firm or in the hands of the partner. It has been held that what he gets is in settlement of his account and nothing more.

B. FINANCE ACT, 2021
The changes proposed in the Finance Bill, 2021 by way of substitution of section 45(4) and insertion of section 45(4A) were not carried through. The Finance Act, 2021 discarded the proposed changes but seeks to change the scheme of taxation of capital gain in the following manner:

(a) Existing section 45(3) is retained,
(b) Existing section 45(4) is replaced by a new sub-section,
(c) New section 9B is introduced,
(d) New clause (iii) is added to section 48.

The new scheme, through the combination of sections 45(4) and 9B, provides for taxation in the hands of the firm in the case of receipt of capital asset or stock-in-trade or cash (or a combination of two or more of them) by the partner on reconstitution or dissolution of the firm. Section 48(iii) seeks to mitigate the impact of double taxation.

Sections 9B and 45(4) apply to receipts by partner from the firm on or after 1st April, 2020 in connection with dissolution / reconstitution. A question arises as to whether these sections apply to such receipts in connection with dissolution / reconstitution which took place prior to 1st April, 2020. The literal interpretation suggests that the date of receipt being critical, the date of dissolution / reconstitution is immaterial as long as the  receipt is in connection with dissolution / reconstitution. One possible counter to this interpretation is that the erstwhile section 45(4) dealt with distribution of capital asset on dissolution or otherwise of the firm and it held the field till 31st March, 2020. Section 9B deals with receipt in connection with reconstitution or dissolution, while substituted section 45(4) deals with receipt in connection with reconstitution. One could notice some overlap between erstwhile section 45(4) and section 9B insofar as receipt of capital asset on dissolution is concerned.

On the basis of this reasoning, it is not unreasonable to expect that new provisions should be considered as applicable only when both the dissolution / reconstitution and receipt have taken place on or after 1st April, 2021. One more reason for this interpretation could be that once dissolution / reconstitution has taken place prior to 1st April, 2021, respective rights arising from such dissolution / reconstitution crystallised on the date of such dissolution / reconstitution. Any receipt thereafter is only in relation to such rights which crystallised before the effective date of the new provisions.

C. SECTION 9B
The Finance Bill, 2021 did not propose section 9B. It rather proposed a substitution of existing section 45(4) and insertion of new section 45(4A). However, while enacting the Finance Act, 2021, section 9B is introduced.

Explanation (ii) to section 9B defines ‘specified entity’ as a firm or other association of persons or body of individuals (not being a company or a co-operative society). Explanation (iii) defines ‘specified person’ as a person who is a partner of a firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any previous year. For the sake of convenience, in this article, specified entity is referred to as a firm and specified person is referred to as a partner.

Section 9B(1) provides that where a partner receives, during the previous year, any capital asset or stock-in-trade or both from a firm in connection with the dissolution or reconstitution of such firm, the firm shall be deemed to have transferred such capital asset or stock-in-trade, or both, as the case may be, to the partner in the year in which such capital asset or stock-in-trade or both are received by the partner.

Section 9B(2) provides that any profits and gains arising from such deemed transfer of capital asset or stock-in-trade, or both, as the case may be, by the firm shall be deemed to be the income of such firm of the previous year in which such capital asset or stock-in-trade or both were received by the partner. Such income shall be chargeable to income-tax as income of such firm under the head ‘Profits and gains of business or profession’ or under the head ‘Capital gains’ in accordance with the provisions of this Act.

As per section 9B(3), fair market value of the capital asset or stock-in-trade, or both, on the date of its receipt by the partner shall be deemed to be the full value of the consideration received or accruing as a result of such deemed transfer of the capital asset or stock-in-trade, or both, by the firm.

As per Explanation (i), reconstitution of the firm means, where
(a) one or more of its partners of firm ceases to be partners; or
(b) one or more new partners are admitted in such firm in such circumstances that one or more of the persons who were partners of the firm, before the change, continue as partner or partners after the change; or
(c) all the partners, as the case may be, of such firm continue with a change in their respective share or in the shares of some of them.

D. SALIENT FEATURES OF SECTION 9B
The purpose of placing section 9B outside the heads of income appears to be to avoid replication of charging and computation provisions under both heads of income, i.e., profits and gains from business or profession, and capital gains.

Section 9B would apply when a partner receives during the previous year any capital asset / stock-in-trade or both from a firm in connection with dissolution or reconstitution of firm.

Upon such receipt, the firm shall be deemed to have transferred such capital asset / stock-in-trade or both to the partner in the year of receipt of the same by the partner.

The business profits or capital gains arising from aforesaid deemed transfer shall be chargeable under the respective heads of income. Fair market value (FMV) of capital asset / stock-in-trade or both on the date of receipt shall be deemed to be the full value consideration (FVC) for determination of the business profits / capital gain.

Reconstitution would include the case of admission / retirement / change in profit-sharing ratio.

E. CERTAIN ISSUES ASSOCIATED WITH SECTION 9B
Section 9B(2) deems the profits and gains on deemed transfer of capital asset or stock-in-trade as the income of the firm in the year of receipt of asset by the partner. If receipts by one or more partners spread over to more than one year, the taxability thereof on the firm follows suit.

In the case of dissolved firm, it is interesting to note how the above fiction works when the partners receive the assets in the years subsequent to the year of dissolution. While there is a fiction to deem such receipt as a transfer by firm, there is no fiction to deem that the firm is not dissolved. In such a situation, whether the machinery provision of section 189(1) which permits the A.O. to proceed to assess the firm as if it is not dissolved, applies or not is a debatable issue.

The fair market value of the allotted asset shall be deemed to be the full value of consideration. For this purpose, the balance in the capital account of the partner is not relevant.

Section 9B does not as such provide for prescription of the rules for determination of the FMV. Therefore, recourse has to be had to section 2(22B) which defines FMV. Special provisions like sections 43CA and 50C do not apply in a case covered by section 9B.

The business profit arising u/s 9B, though chargeable under the head ‘profits and gains from business or profession’, does not fall u/s 28. Therefore, section 29 which provides that ‘the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D’ may not apply. This is for the reason that section 29 refers only to income referred to in section 28. Therefore, business profits may have to be computed on commercial principles, without recourse to the aforesaid provisions providing any allowance or disallowance.

Unlike in the case of section 29 which refers only to section 28, section 48 refers to the head ‘capital gains’. Therefore, capital gains arising from section 9B will have to be computed after considering section 48. Therefore, the cost of acquisition, cost of improvement, their indexation and incidental transfer expenditure will be available as deduction.

While section 45 is saved by sections 54 to 54GB, there is no such saving provision in section 9B. Therefore, whether a firm is eligible for exemption u/s 54EC, etc., in respect of capital gains arising u/s 9B is an open question. While on a stricter note such exemption is not available, on a liberal note one may contend that exemption should be available if related conditions are fulfilled. Proponents of a stricter interpretation may argue that exemption u/s 54EC is inconceivable as there is no inflow in terms of actual consideration for satisfying the requirement of rollover. The proponents of a liberal interpretation may counter such contention by pointing out that deeming fiction requires logical extension and rollover sections do not require rupee-to-rupee mapping. If the liberal theory is accepted, the date of receipt being deemed to be the date of transfer, is relevant for reckoning the time limit irrespective of the date of change in constitution or dissolution.

F. SECTION 45(4)
Section 45(4) as it stood before substitution by Finance Act, 2021 read as follows:
‘(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.’

The substituted section 45(4) by the Finance Act, 2021 reads as follows:
‘(4) Notwithstanding anything contained in sub-section (1), where a specified person receives during the previous year any money or capital asset or both from a specified entity in connection with the reconstitution of such specified entity, then any profits or gains arising from receipt of such money by the specified person shall be chargeable to income-tax as income of such specified entity under the head “capital gains” and shall be deemed to be the income of such specified entity of the previous year in which such money or capital asset or both were received by the specified person, and notwithstanding anything to the contrary contained in this Act, such profits or gains shall be determined in accordance with the following formula, namely:…’

The following table depicts some key differences between the two provisions:

Earlier
section 45(4)

Substituted
section 45(4)

It would apply to transfer of capital asset by a partner on
the dissolution of a firm

It would apply upon receipt of capital asset or money or both by
a partner in connection with reconstitution of a firm

Profits and gains arising from transfer are chargeable to tax as
the income of firm

Profits and gains arising from such receipt by partner are
chargeable to tax as income of the firm

Chargeable to tax in the PY in which the transfer took place

Such profits and gains chargeable to tax as income is deemed to
be the income of the firm in the PY in which money or capital asset or both
is received by partner

Capital gains are computed
u/s 48

Capital gains are computed as per the formula provided therein
notwithstanding anything to the contrary contained in the Act

FMV of the asset on the date of transfer shall be deemed to be
the FVC

Formula does not provide for any full value of consideration

 

However, aggregate of amount of money received and fair market
value of capital asset received on the date of receipt constitutes
consideration

Cost of acquisition, cost of improvement and incidental
expenditure upon transfer are reduced from FVC

Amount of capital account balance of partner in the books of
firm at the time of reconstitution is reduced from the above aggregate amount

Benefit of indexation is available

There is no element of cost of acquisition and cost of
improvement, hence no indexation

G. SALIENT FEATURES OF SECTION 45(4)
Section 45(4) would apply when a partner receives during the previous year any money or capital asset or both from a firm in connection with the reconstitution of a firm.

Any profits and gains arising from such receipt shall be chargeable in the hands of the firm under the head ‘capital gains’.

Such capital gain shall be deemed to be chargeable to tax in the previous year of receipt of such money or capital or both by the partner.

Reconstitution is defined in the same manner as is defined u/s 9B.

H. COMPUTATION OF CAPITAL GAIN U/S 45(4)
Capital gain shall be computed u/s 45(4) as per the formula provided therein, i.e., A=B+C-D.

The capital gain is computed by considering the following components:
B = Amount of cash received by the partner,
C = Amount of FMV of capital asset received by the partner,
D = Amount of capital account balance of a partner in the books of the firm at the time of its reconstitution.

The difference between capital account balance on the date of receipt and aggregate of cash received and FMV of capital asset received constitutes capital gains in the hands of the firm.

I. CORRIGENDUM TO SECTION 45(4)
On 22nd March, 2021, the Finance Ministry sent a notice of amendments to the Lok Sabha, wherein section 45(4) as proposed in the Bill was substituted completely by a new section 45(4). The newly-proposed section 45(4) had the words ‘…any profits or gains arising from receipt of such money by the specified person…’

On 23rd March, 2021, the Lok Sabha approved the Bill as amended by notice of amendments dated 22nd March, 2021. The Presidential Assent to the Bill was given on 28th March, 2021. The Finance (No. 13) Act, of 2021 was notified on 28th March, 2021. The Notified Finance (No. 13) Act, of 2021 carried Section 45(4) with the aforesaid words.

Two corrigenda were issued on 6th April, 2021 and 15th April, 2021. In the first corrigendum, for the words ‘…from receipt of such money by’, the words ‘…from such receipt by…’ were substituted. While it is not known as to the exact content of section 45(4) as approved by the Lok Sabha, on the basis of Notified Finance (No. 13) Act, of 2021 it can be inferred that the Lok Sabha has approved the Bill which carried section 45(4) as stated in the notice of amendments dated 22nd March, 2021.

The aforesaid substitution is not just correcting a clerical error, but it has substantial implications. The originally introduced words would have confined the scope of section 45(4) only to receipt of money, whereas the substituted words would extend it not only to receipt of money but also to receipt of capital asset.

Unless an Amendment Act is enacted, substituted words by a corrigendum having the effect of amending a law passed by the Parliament may be open to challenge on the ground of overreach by the executive.

J. COMPARISON BETWEEN SECTION 9B AND SECTION 45(4)
The following table compares above two provisions;

Section
9B

Section
45(4)

It would apply upon receipt of capital asset or stock-in-trade
or both by a partner from the firm on the dissolution or reconstitution of a
firm

It would apply upon receipt of capital asset or cash or both by
a partner from the firm in connection with reconstitution of the firm

Allotment of stock-in-trade is covered

Allotment of stock-in-trade is not covered

For the purpose of computation u/s 9B, FMV is deemed to be FVC
and computation would be in accordance with Chapter IV-C or D, i.e., ‘Profits
and gains of business or profession’ or ‘Capital gains’

Computation mechanism is given u/s 45(4) in the form of formula

The following table summarises the applicability of the above two sections:

  

 

Section
9B

Section
45(4)

Reconstitution

Yes

Yes

Dissolution

Yes

No

Cash to partner

No

Yes

Capital asset to partner

Yes

Yes

Stock-in-trade to partner

Yes

No

K. DOUBLE TAXATION AND ITS MITIGATION
As may be seen from a close reading of sections 9B and 45(4), in the event of receipt of capital asset by a partner from a firm in connection with its reconstitution, the firm is liable to tax under both section 9B and section 45(4).

Explanation 2 to section 45(4) clarifies that when a capital asset is received by a partner from a firm in connection with the reconstitution of such firm, the provisions of section 45(4) shall operate in addition to the provisions of section 9B and the taxation under the said provisions thereof shall be worked out independently.

Therefore, it is a clear case where double taxation is explicitly intended or provided for. Where Parliament in its wisdom chooses to explicitly provide for double taxation, it has a plenary power to do so.

In this regard, reliance is placed on the following decisions:

  •     Jain Bros vs. Union of India [1970] 77 ITR 107 (SC);
  •     Laxmipat Singhania vs. CIT [1969] 72 ITR 291 (SC);
  •     CIT vs. Manilal Dhanji [1962] 44 ITR 876 (SC);
  •     Escorts Limited vs. UOI [1993] 199 ITR 43 (SC); and
  •     Mahaveer Kumar Jain vs. CIT [2018] 404 ITR 738  (SC).

Thus, while double taxation cannot be inferred or implied, the same can be explicitly provided for.

Thus, it is a clear case of Parliament wanting to apply both sections in case of receipt of capital asset by a partner in connection with the reconstitution of a firm.

Section 48 is also amended by Finance Act, 2021 where Clause (iii) is inserted which reads as follows:
‘(iii) in case of value of any money or capital asset received by a specified person from a specified entity referred to in sub-section (4) of section 45, the amount chargeable to income-tax as income of such specified entity under that sub-section which is attributable to the capital asset being transferred by the specified entity, calculated in the prescribed manner:’

Section 48(iii) provides that the amount chargeable to tax u/s 45(4) to the extent attributable to the capital asset being transferred by a firm shall be reduced from the FVC of a capital asset being transferred by a firm. Such reduction, however, needs to be calculated in the prescribed manner. The rules in this regard are awaited. These provisions are applicable for PY 2020-21 and the rules were not out as on 1st April, 2021. Therefore, such rules when notified will have to be made retrospective so as to be applicable to PY 2020-21. If the retrospective application of rules causes prejudice to the taxpayer, the same may be open to challenge in terms of section 295(4).

As noted earlier, section 45(4) applies when a partner receives capital asset or money or both from a firm in connection with its reconstitution. If a partner receives capital asset with or without money, capital gain attributable to such receipt of capital asset will not be available for relief u/s 48(iii). This is for the obvious reason that the subject capital asset having already been given to a partner, could not be subsequently transferred by the firm to any other person. Upon allotment to a partner, the capital asset concerned ceases to exist with the firm.

However, if a firm is liable to tax on transfer of money with or without capital asset to the partner in connection with reconstitution of a firm, the capital gain on such transfer of money chargeable u/s 45(4) would be available for relief u/s 48(iii). This relief is given on the premise that when cash is paid to the retiring partner on reconstitution, the same may be attributed wholly or partly to the revaluation of one or more capital assets which are retained by the firm. Subsequently, when a firm transfers such revalued capital asset, it would be liable to pay tax on capital gain. In such a case, capital gain may include the revalued portion on which the firm would have discharged tax u/s 45(4). This will result in double taxation. In order to mitigate such double taxation, it is provided that capital gains already charged to tax u/s 45(4) to the extent attributable to the capital asset that is being transferred by a firm would be allowed as deduction u/s 48(iii).

It is interesting to note that section 48(iii) may also apply in a situation where both sections 9B and 45(4) are applied simultaneously in the same previous year.

As stated earlier, section 8 applies not only to capital gain chargeable u/s 45, but to any capital gains chargeable under the head ‘capital gain’. As section 9B provides for capital gains to be chargeable to tax under the head ‘capital gain’, section 48 is applicable to the capital gain covered u/s 9B as well.

While computing the capital gain chargeable u/s 9B read with section 48, capital gain chargeable u/s 45(4) to the extent attributable to the capital asset dealt with by section 9B would be reduced from the FVC determined u/s 9B(3). Section 48 does not provide for determination of the FVC. It only provides for deductions from the same. Therefore, there is no disharmony between section 9B(3) and deduction u/s 48(iii).

L. CERTAIN OTHER ISSUES OF SECTION 45(4)
What is the meaning of receipt of money? Whether receipt of money includes constructive receipt by way of credit to account? A mere credit to the account of the partner cannot be equated with the receipt of money. Upon reconstitution, certain sum may be credited to a partner’s account which is allowed to remain in the firm. In such case, it cannot be said that he received money from the firm upon a mere credit. However, when the amount so credited is withdrawn by him, section 45(4) is attracted. The answer could be different if the ratio of Raghav Reddy in 44 ITR 760 SC is applied to such credit unless such ratio is distinguished on the basis of Toshiku in 125 ITR 525 SC.

Whether receipt of rural agricultural land covered: As rural agricultural land is not a capital asset, section 45(4) is not attracted.

Receipt by legal heirs of deceased partner: Section 45(4) would apply to receipt by a partner from the firm. A receipt by the legal heir of the deceased partner cannot be regarded as receipt by the partner. Therefore, section 45(4) is not applicable.

Would capital balance include balances in current account and loan of partners: While the balance in current account could be appropriately called as part of capital balance, the same may not be so in the case of loan by partners.

Is proportionate share of reserves to be considered as part of capital: Credit balance in the profit and loss account or balances in the reserves should be credited to partners’ accounts before dissolution / reconstitution. In any case, payment from such credit / reserves cannot be regarded as payment in connection with dissolution / reconstitution.

How to compute if there is negative capital balance: A negative balance in the capital account represents money due by the partner to the firm. If such balance is not made good by him on dissolution / reconstitution, it amounts to a waiver which may in turn amount to payment of cash in the light of the ratio in Mahindra and Mahindra 404 ITR 1 SC.

M. WHEN GOODWILL IS TRANSFERRED
If goodwill, being a capital asset, is transferred to a partner, sections 45(4) and 9B as discussed earlier would apply. This is so irrespective of whether the goodwill is self-generated or acquired.

If goodwill is self-generated, in terms of section 55(2)(a) and section 55(1)(a) the cost of acquisition and cost of improvement shall be deemed to be nil.

If goodwill is purchased for a consideration, newly-introduced proviso to section 55(2)(a) would apply. This proviso provides that the actual cost of goodwill shall be reduced by the depreciation allowed up to A.Y. 2020-21.

Provisions of section 50 along with the newly-introduced proviso to section 50(2) may not apply in view of the fact that sections 45(4) and 9B are special provisions.

Additionally, upon such transfer, if no consideration is received or is accrued, provisions of section 50 may not operate unless the fiction of section 9B(3) is read into section 50. In any case, section 45(4) does not have any such fiction.

ACKNOWLEDGEMENTS: The author acknowledges the inputs from Mr. S. Ramasubramanian and Mr. H. Padam Chand Khincha and the support of Mrs. Sushma Ravindra for the purposes of this analysis.

PERSONAL BRANDING FOR CAs

It is always thought that being the best wins at anything. That might be true for sports but not for life and our profession. When it comes to sports, there is only one place to be – at the top. And to ace the game, you have to be the best. But when it comes to career progression and self-development, it’s different. Instead of being the best, you must strive for competency, credibility, differentiation in a unique and specialised niche.

In their book The Blue Ocean Strategy, authors W. Chan Kim and Renée Mauborgne write that ‘Blue ocean strategy challenges companies to break out of the red ocean of bloody competition by creating uncontested market space that makes the competition irrelevant instead of dividing up existing – and often shrinking – demand and benchmarking competitors. Blue ocean strategy is about growing demand and breaking away from the competition.’

The authors may be talking about businesses, although this thought if applied on a personal level makes one think, ‘But how do I break away from the competition?’ The answer is, Be different. Don’t just ask yourself, ‘What am I better at?’ Ask also, ‘How am I different?’

Anyone who tries can be different in their area of work by developing themselves, not just professionally but by getting better at one or more of the following skills:

  •  Writing – We’re all writers.
  •  Public speaking – Getting over the mental block most of us face. It helps you be a better leader.
  •  Selling – Develop a personal brand. We all have something to sell – our products, services, our ideas or even ourselves. To be able to create the right influence and impact gives an edge. Persuasion and negotiation skills matter.

What is branding? Simply put, your brand is your promise to your customer. It tells him what he can expect from your products and services, and it differentiates your offering from that of your competitors. Your brand is derived from who you are, who you want to be and who people perceive you to be. Similarly, personal branding is the practice of marketing people and their careers as brands. It is an on-going process of developing and maintaining a reputation and impression of an individual, group, or organisation. Your personal brand is how you promote yourself. It is the unique combination of skills, experience and personality that you want your followers to see. It is the telling of your story and the impression people gain from your online reputation.

PRINCIPLES FOR PERSONAL BRANDING
1. Credibility: The foundation for building credibility is trust. To boost credibility, you need to be honest. Keeping your communication open and honest not only sets an example for your co-workers but also shows others that they can trust you.
2. Competence: Building and polishing your core competence is imperative to establish yourself.
3. Values: Values help you establish a sense of purpose and direction for your personal brand. They act as guideposts that assist you in evaluating choices in your life. Values change as you change; they reflect what’s important to you at any given moment.

Strategy to build your brand through a five-step process
1. Brand clarity and strategy. To genuinely make a difference by being helpful, useful and relevant at all times with trust.
2. A website that wows. Updated at all times and within the guidelines of what the Institute regulations permit.
3. Authentic social media engagement that attracts, engages and compels people to do business with visibility and trust by sharing insightful views, dishing out wisdom or perspectives to benefit one and all.
4. Captivating and engaging content that converts, a communication plan that is purposeful and creative based on unique strengths. Communicate not to sell but to serve. Communicate not to advertise but to create meaningful conversations that enrich and enlighten.
5. Marketing to serve people with honesty, encouragement, generosity, compassion, kindness and respect, influence with integrity and transparency.

A Chartered Accountant is bound by his Code of Conduct & Ethics and cannot advertise or solicit for work. Hence, personal branding for a CA has to be done within the framework of this Code. Some guidelines prescribed by the Institute:

1. Website
Ensure that the website is on pull mode and not push mode. The details in the website should be so designed that they do not amount to soliciting clients or professional work. Be aware of the information that can be displayed on your website.

2. Publications
It is not permissible for a member to mention in a book or an article published by him, or a presentation made by him, any professional attainment(s) whether of the member or the firm of chartered accountants with which he is associated. However, he may indicate in a book, article or presentation the designation ‘Chartered Accountant’ as well as the name of the firm.

3. Public interviews
While giving interviews or otherwise furnishing details about themselves or their firms in public interviews or to the press or at any forum, the members should ensure that it should not result in publicity. Due care should be taken to ensure that such interviews or details about the members or their firms are not given in a manner highlighting their professional attainments.

4. Issue of greeting cards / invites
Issue of greeting cards or personal invitations by members indicating their professional designation, status and qualifications, etc., is not allowed. However, the designation ‘Chartered Accountant’ as well as the name of the firm may be used in greeting cards, invitations for marriages and religious ceremonies, etc., provided they are sent only to clients, relatives and friends of the members concerned.

5. Educational videos
While videos of an educational nature may be uploaded on the internet by members, no reference should be made to the chartered accountants’ firm wherein the member is a partner / proprietor. Further, it should not contain any contact details or website address.

6. Use of logo / monogram
The use of logo / monogram of any kind / form / style / design / colour, etc., whatsoever by a CA is prohibited. Members may use the common logo created for the CA profession.

A brand is a simple but complex perception in the minds of the beholder. Brands are built not by accident but by design. A great positioning statement is an opener for any conversation about your business. Know who you are, what you do, what is different about what you do and for whom you do it and how you are a good fit. It is not the client’s job to remember you. It is your job that they do not forget you. You have many options but select the one that works best for you. This is similar to a client having many options but he selects you.

* Don’t create a design without strategy – Strategise
* Don’t try to do everything on your own – Outsource
* Don’t wait for the perfect moment – Speed and agility matters with flexibility.

Have a tagline or a brand manifesto formula in three words you want to be spoken for you
* What action are you doing? Verb
* Which audience are you serving? Noun
* What are you bringing to the table, uniquely, differentiated, unlike anybody else? Noun – Verb (competition has failed to address).

Some questions you should introspect before you start building your brand
* The key messaging, positioning, unique promise or value offered by my competition;
* The gaps seen or the category that can be created or value added that is unique;
* Carving a niche, building, strengthening and dominating it to be out of bounds of competition;
* Top three mistakes / weaknesses of competition that can be leveraged to create exceptional value to be at a different level;
* Perspectives offered that are unique and radically distinct from other industry leaders;
* Key distinguishing factors in personal brand management at a global level.

Social media as a medium for personal branding
Amidst the global lockdowns as a result of the pandemic, we have found a lot more time on our hands. Many of us have actively started building an online presence. It may be the best time to do it – while the global economy is taking a massive hit which will have long-reaching implications, digital platforms are seeing higher engagement rates than ever, with more and more people looking for information and entertainment online and focusing their attention on social platforms and other apps. This could provide an opportunity to get your thoughts out there and to build your profile with a captive audience.

Using LinkedIn effectively
LinkedIn is the older, more responsible sibling of Facebook. The benefits of LinkedIn are endless. With a few clicks, you can find your dream job or your dream client. LinkedIn not only makes it easier for you to find people but also for others to discover you.

A few tips to get you started

  •  Be active on social media.
  •  Tap into your network. Networking is the key.
  • Write a simple but engaging LinkedIn summary or headline – the short, one-line description which readers will first see along with your name.
  1.  Keep your profile updated with skillsets possessed, experience, recommendations, etc.
  •  Post original content.
  •  Network not to sell and market blatantly but develop connects for creating mutual win-wins and helping each other grow and develop as better human beings. The business conducted as a result of the trust and the bonding developed is purely incidental.

A BLUEPRINT TO BUILD A PERSONAL BRAND
1. Serious soul-searching, introspection and brainstorming to find purpose, vision, to get clarity on What am I doing, why am I doing it and for whom?
2. Understanding the competitive landscape to grab opportunities in the external eco-system at play.
3. Thinking like a thought leader to focus outside in, to enrich and add value with personal mastery which no one else is doing.
4. Create your Brand Universe (Strategy) – Thought Leadership Capital – Repurposing and targeting your message to your audience. The new way of thinking is to claim and dominate your niche. Personify your topic so that no one dares to try it.
5. Define and own your Brand Intellectual Property as there is no dearth of copycats or thieves. Ring-fence and protect your idea by all means. You are the brand ambassador of your IP.
6. Define your target audience and what value you give them.
7. Building your network blueprint around those to whom you can add value. It doesn’t matter whom you know but what matters is who knows you and your personal brand. Expand your visibility across three degrees of network.
8. Design a content strategy. Your brand is as good as your content. Context is relevant for your content; know where your audience stays or is visible; have a signature style of expression.
9. Launch your brand – strategise the timing of making your completed profile public and then creating a complimentary engagement strategy to keep the brand vibrant and relevant.
10. Build your speaker brand. Craft a ‘rockstar’ speech with signature topics. Position and craft stellar speeches by presenting them brilliantly. Be awesome, full of energy and enthusiasm, don’t be boring.
11. Build your author brand. Write a book on your niche that showcases your knowledge and is useful to your target audience and helps effectively in solving their pain-points. Don’t just be visible but also relevant.
12. Build a tribe of like-minded professionals who can give quality feedback to fast-track your speed and development whilst earning their trust and love.

Branding takes time. Start now. Massive learnings happen on the way. Integrity, Transparency, Authenticity, Originality, Competency and Credibility matter. Be consistent to leave a legacy that far outlives your physical life. Stay Branded – Stay Blessed – and Serve the World.

Credit share: My Branding Guru – Tanvi Bhatt / My CA colleague – Cynora Lemos.

STRATEGY: THE HEART OF BUSINESS – PART II

Strategy is the heart of running and changing a winning business, as we saw in Part I (BCAJ, March, 2021). Crafting a good strategy is critical for an enterprise to realise its growth and value creation aspirations. This is a capability which successful organisations have in abundance, otherwise they use external experts (aka consultants). What is equally important is Strategy Deployment, i.e. executing the strategy effectively. In many contexts I would say that a higher weightage can be accorded to smart execution. Even a first mover of a strategy may lose out over time if execution does not keep pace. Ford Motor Company, for example, invented cars, but Japanese cars rule the roost in the automobile world now. In this Part II, I will share some aspects about successful execution which I have experienced over the years in running businesses.

The Vision, Mission and Values set, an enterprise typically aspires for a Strategic Target to be achieved in a defined time frame. Towards this goal, a Strategy Map is drawn out which clarifies the strategic objectives and initiatives to be deployed. We have seen how a Strategy Deployment Matrix1 is a great tool to align and integrate individual, team, department and functional goals with that of the enterprise. Now on to some detail on deployment.

LEAD AND LAG

An individual or a Function planning activities by setting goals can use two types – Lead and Lag actions or goals. A Lead action or activity is one which can be executed or influenced and which will result in an outcome or achievement in the desired direction. Lag goals are the ones which are the targeted or intended results. A typical example is the case of a person who wishes to get fitter or become healthier. A Lag goal s/he can have is to lose say five kilograms of weight. The Lead actions or goals which will result in delivering this Lag goal can be (i) eat right, say 2,000 calories per day, and (ii) be active, say walk 10,000 steps daily. The Lag measure is thus the outcome driven by the Lead measure or actions driving the process as indicated in Figure 1 below:

Therefore it is essential to have a healthy mix of Lead and Lag goals while crafting the plan for the year. The goals chosen should be spread over the four perspectives to make a Balanced Scorecard2. With this structure, it lends itself to constructive periodic reviews on how the actions are progressing towards the set goals. This is pictorially depicted in Figure 2 hereunder.

ALIGNMENT AND INTEGRATION
The goals thus planned to be executed in any organisation have to be aligned with the enterprise objectives, at every level and person all the way down. While this will be a vertical flow, it is also important that these are integrated well across functions or departments to make a synergistic impact pulling in the same direction. In all this, robust communication at every level individually or in groups is absolutely critical for the team to comprehend the collective goals and develop a collaborative and committed mind-set. This is outlined in Figure 3.



TOOLS FOR EXECUTION
Having structured and deployed the goals meaningfully, I have utilised a number of effective tools to drive and monitor execution. The purpose is to ensure a discipline in the desired actions being performed as well as to have a structured process in place to review progress. The idea is that attention is given and focused on the exceptions and escalation happens to the appropriate level in time for interventions to help delivery. These are based on two fundamental tenets:

Let us examine some tools which are helpful for the purpose.

ORGANISATIONAL REVIEWS
The strategic target broken down into executable actions on the lines mentioned above will need to be monitored for performance. A broader framework on integrating the review fora and the areas to be covered was touched upon earlier3. This can be detailed out into a review framework as illustrated in Figure 4. The purpose of structuring the review discipline across the organisation is to ensure that not only the right areas are reviewed at the appropriate levels, but also to avoid overlap and superfluous efforts. This process also clarifies the periodicity of each review, the timing, topics as well as the attendance. The team is thus clear on the forum available and the expectation of right feedback.

In these review meetings the agenda being set, it is expected that the concerned will circulate pre-read papers so that the participants can come into the discussion with preparation. That way time is not frittered away in sharing fundamental data and base information. Furthermore, the areas and items which require decision-making in the forum are highlighted. The bulk of the time is therefore focused on decision-making and the team collectively addressing exceptions or areas which record tardy progress.

Performance Review Structure

Review
Forum

Key
Measures / Objectives

Frequency

Probable
date and duration

Participation

Agenda

Board

Strategy
and Operational, Performance Measures

5 times a year

 

Board members, MD & CEO

Policies & Capabilities, Changing Org. Needs, Adherence to
strategic goals

Executive
Committee

Scorecard achievement,
Corporate, Projects, Major issues

Monthly

1st and 2nd week, 3 hrs.

Executive Committee members, MD & CEO, Invitee for specific
session

Performance, capabilities, Comp.,
Performance, Changing Org. needs, LT / ST plans, innovation

ORM (Operational review meeting)

Execution of actions planned, Decision on issues

Monthly

2nd week, full day

MD & CEO, COO, EVP Finance, VP Mfg, EVP-TBD, VP-DS, VP-IBD,
VP-HR, GMs, Mkt Heads, Identified, Functional heads, Other Invitees

Operational performance, EPM measure, KPI, real contribution,
working capital, Customer Feedback / Supplier’s Inputs, People Issues,
Environment Innovation.

Cross Functional Teams reviews     

Result of cross functional Initiatives

Monthly

3rd week, 2-3 hrs.

MD & CEO, COO, EVP-Finance, Cross Functional Team members,
Special Invitees

Operational performance, status of projects,
improvement initiatives, Capital projects, Supply chain, Fund Management

Functional review meetings (Factory / Zones)

Operational performance review

Monthly

1st week, full day

Chiefs, Factory heads, Zonal managers, Other department heads,
Special Invitee

Divisional performance, Project status,
Market / Customer Issues, Finance Issues, Safety & Env.

Dept. Review

Achievement against
projected performance

Weekly / Monthly

Specified day, 2-3 hrs

Dept. Heads & Dept. Staff as required, Cross Functional Team
members

Unit Performance, Capabilities, SHE related
Issues, Initiatives, Supply chain

COLOUR CODE TRACKING VISION (CCTV)
The CCTV is a simple yet powerful mechanism to visually comprehend the problem areas in any project or goal delivery. Equally, it also provides comfort at a glance on the projects or areas which are going well. Thus, it does not require intervention at any senior level and can be left to the person / team responsible to deliver as intended. Such a visual representation as portrayed in Figure 5 is quite helpful in any review meeting for the team to quickly pick up and focus on the areas which deserve collective attention.

As can be seen, the CCTV highlights in the traffic signal colours over a period of time the health of the various interventions. Remarks on sluggish progress where applicable are given along with the suggested actions. Discussion can be forthwith focused on the points highlighted in red as well as yellow items with the result that the meetings conclude with specific actions agreed to get the laggard items back on track.

CCTV (colour code tracking vision)

Project/
Initiative

Original
Target
Date

Status
as of

Remarks

Action
required

01-
Jan
-21

08-
Jan
-21

15-
Jan
-21

22-
Jan
-21

29-
Jan
-21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ORGANISATIONAL RESPONSIVENESS
In times of uncertainty and volatility, responsiveness in organisations has to be real-time. Often, delayed responses which occur due to blindness in information lead to lost opportunities and may even result in longer-term adverse impact, such as loss of market share. This is being experienced by entities and has been telling since early 2020 due to disruptions from the Covid pandemic.

Businesses can witness significant volatility in terms of cost escalations, supply bottlenecks, changing terms of business, disruption in external environment, etc. This necessitates a change in the way of making business decisions.

An effective way I have experienced in the past is to form a cross-functional team consisting of all key operational departments (vide Figure 6). This team keeps a weekly (even daily) track of changes in the environment and decides appropriate actions to address the changes. For example, the team could introduce a concept of pricing that is based on replacement cost. Based on inputs from the procurement department, the finance team circulates the replacement cost to all the departments, which is used for frequently reviewing pricing decisions in the organisation. This will result in protection from margin erosions in a highly volatile environment. It will also help in timely sourcing of the key materials to cater to the emerging business opportunities.

Cross-functional Action team:
A Weekly feature

Forum for discussion on changing scenario and taking appropriate actions



DRIVING EXECUTION: AGILITY INDEX
It is common to find organisational review fora having a system of making minutes of the meeting. I have found that in doing so some simple tweaks can bring in greater efficiency:
(i) at the end of the meeting, every participant shares the takeaway of his / her actions. Not only does this clarify what each person / team has understood but also instils ownership in delivering actions;
(ii) the secretary of the meeting ensures that the minutes are circulated within 24 hours of the close of the meeting; and
(iii) measuring the speed of execution in terms of ‘Agility Index’.

A score of 9 is assigned to completed actions (Colour Code: Green).
A score of 3 is assigned to actions that are yet to be completed but are in progress (Colour Code: Yellow).
And a score of 1 is assigned to actions that have not been initiated (Colour Code: Red).

The Agility Index (Figure 7) is computed by summing up the item-wise score expressed as a percentage to the total possible, which is the sum of all items times 9 which indicates completion. This, at a glance gives the efficiency of implementation of the agreed actions in an objective manner. This index can also be used to track the action implementation efficiency of Board Meetings as well.

 Agility Index

Action
Agreed

Responsibility
/Owner

Timeline

Status

Tracker
points

 

 

 

 

 

1.  xxx

ABC

15-Apr

 

9

 

 

 

 

 

2.  yyy

PQR

18-Apr

 

3

 

 

 

 

 

3.  zzz

XYZ

21-Apr

 

1

DIGITAL ENABLERS
Digital age now has pervaded all aspects of life at work and in personal domain. Digital technologies such as Cloud, Mobility, Internet of Things, Artificial Intelligence and Virtual Reality are enabling organisations to reimagine and transform businesses. A plethora of tools and information is available through the digital platform greatly enhancing execution capability. In agriculture, for example, gone are those bad old days like the protagonist in Do Bigha Zameen physically labouring away. In advanced agriculture economies such as USA and Brazil, farmers control the entire farming through electronic and mechanical processes using drones, hi-tech machines4, etc. to make the right decisions based on soil and environmental insights and practice precision farming. All this sitting in a control room away from the field! AI and predictive technologies have enabled to customise practices with understanding of future weather and pest changes. Manufacturing operations are guided today by Computer-aided Design, Big Data, Machine Learning, Robotics, etc. which significantly improve productivity and quality. All this, however, has led to an explosion of information available and it is crucial to design internal systems to process and focus these for effective execution.

EXECUTION: A DISCIPLINE
Authors Larry Bossidy and Ram Charan wrote in their remarkable book5 that ‘execution is a specific set of behaviours and techniques that companies need to master in order to have competitive advantage’. Execution is therefore a discipline which ensures that the strategy to achieve the strategic goals of the enterprise is duly deployed and implemented to have sustained competitive advantage. Therefore, we can conclude that Performance is Strategy plus EXECUTION.

This is the last article in this series by Mr. V. Shankar. For the previous five articles, please refer to the BCAJ issues of January 2020, March 2020, June 2020, August 2020 and March 2021

References
1.    Strategy: The Heart of Business – Part I, BCAJ, March, 2021, Page 13
2.     ‘The Balanced Scorecard: Translating Strategy into Action’ by David P. Norton and Robert S. Kaplan
3.     Governance & Internal Controls: The Touchstone of Sustainable Business – Part II, BCAJ, June, 2020, Page 15
4.     https://youtu.be/FNn5DB1Zen4
5.   ‘Execution: The Discipline of Getting Things Done’ by Larry Bossidy and Ram Charan

JDA STRUCTURING: A 360-DEGREE VIEW

“When a subject is multidimensional, a different approach is necessary. Instead of a series of standalone articles on the topic, a single article covering important aspects of the subject (JDA here) and have domain experts comment on each aspect of the subject was deemed worthwhile. The uniqueness of the article is in its subject coverage from the standpoint of each of the four perspectives: accounting, direct and indirect taxes and general and property law at once. This has resulted in an integrated piece where each facet is at once analysed from each of the four perspectives. Sunil Gabhawalla, CA, conceptualised the content and format of this article and shared the outline with three other domain experts. Through the medium of video calls, each one of them shared his perspectives on a number of touch-points outlined by Sunil. These were eventually compiled into this article. Ameet Hariani, advocate and solicitor, covered the Legal side; Pradip Kapasi, CA, covered the Direct tax aspects; Sudhir Soni, CA, covered Accounting aspects; and Sunil took on the Indirect taxation aspects. Thus, the article is a ‘joint development’ by all of them! – Editor”  

Joint development of real estate – A win-win for both landowner and developer?

In today’s scenario, joint development is the preferred mode of development of urban land. A joint development agreement (JDA) is beneficial for both the landowner as well as the developer. It is a win-win situation for both. Conceptually, the resources and the efforts of the landowner and the developer are combined together so as to bring out the maximum productive result post-construction.

What are the possible risk factors?

Having said so, real estate development is spread over quite a few years and is fraught with risks as diverse as price risk (the expected market price of the developed property at the end of the project not commensurate with the expectations), regulatory risk (frequent changes in development regulations at the local level), tax risk (significant lack of clarity on the tax implications of the present law as well as the risk of possible amendments therein before the project completion), business risk (inability of the landowner / developer to fulfil the commitments resulting in either substantial losses or disputes), financial risk (inability to match the regular cash outflows till the time the project becomes self-sustaining) and so on. Like many other businesses, there are risks involved in real estate development in general and joint development projects in particular.

Why this article?

It is not only the diversity of the risks but also the interplay of these risks which makes the entire subject complex and also results in varying models or transaction structures between the landowner and the developer for the joint development of the real estate project. This article attempts to draw upon the experiences of the respective domain experts to apprise the readers of the complex interplay of the risk factors which go into the structuring of the joint development agreements and provide a holistic view of this complex topic. It aims to introduce the nuances and niceties across multiple domains but is not intended to be an exhaustive treatise on the topic.

What are the possible transaction structures?
Well, there are choices galore. Each joint development agreement is customised to suit the specific needs of the stakeholders. While in most of these structures the landowner would pool in the development rights in the property already held by him, the developer would undertake development obligations and compensate the landowner either in the form of money or developed area (either fixed or variable, again either upfront or in instalments). Within this broad conceptual definition of the ‘deliverables’ by the respective stakeholders, a multitude of factors and a complex interplay between them will determine the ‘terms and conditions’ and, therefore, the essence of the joint development agreement. Without diluting the specificity of each joint development agreement, one may compartmentalise the scenarios into a few baskets as listed below:

1. Outright sale of land / grant of development rights by the landowner to the developer against a fixed monetary consideration either paid upfront or in deferred instalments over the project period.
2. Grant of development rights by the landowner to the developer against sharing of gross revenue earned by the developer from the sale of the project.
3. Grant of development rights by the landowner to the developer against sharing of net profits earned by the developer from the project.
4. Grant of development rights by the landowner to the developer against sharing of area developed by the developer in a pre-determined ratio.

How does one choose an appropriate structure?

Well, this is the million-dollar question. The experts spent a considerable amount of time brainstorming this question and identifying various parameters which will help in choosing an appropriate structure.

From the landowners’ perspective, the structure could be determined based on the fine balancing of the timing of the transfer of legal title in the property from the landowner and the timing of the flow of consideration to him. Throw in the subjective metrics of the risk-taking ability of the stakeholders and the level of comfort that the landowner and the developer have with each other in terms of the extent of trust and / or mistrust, and the entire equation starts becoming fuzzy. To add to the fizz, compliance obligations under regulations like RERA and restrictions under FEMA could also act as show-stoppers.

Ameet Hariani says, ‘For example, under RERA it is the promoter’s obligation to obtain title insurance of the real estate project. The relevant section of RERA, among other things, requires a promoter to obtain all such insurances as may be notified by the appropriate Government, including in respect of the title of the land and building forming the real estate project and in respect of the construction of the said project. Since both the landowner as well as the developer will be classified as promoters, it would be prudent for parties entering into a JDA to specify which party (among the “promoters”) will be responsible for obtaining the title insurance for the project.’

In some transaction structures, tax obligations (both direct tax as well as indirect tax – GST and, not to forget, stamp duty) could act as the final nail in the coffin. For example, the upfront exposure towards payment of stamp duty and income-tax coupled with the ab initio parting of the title may rule out the possibility of an outright sale of land by the landowner against deferred consideration from the developer. As stated by Ameet Hariani, ‘From a legal perspective, legal rights should be retained by the landowner till the performance by the developer of the developer’s obligations. Only then should legal rights be transferred.’

While stamp duty is a duty on the execution of the document and could be paid by either of the parties, Ameet Hariani has this to say, ‘So far as stamp duty implications are concerned, normally these are borne by the developer. All documents relating to immovable property should be registered and consequently the quantum of stamp duty is an important determinant to be worked out.’

The above factors are relevant from the developer’s perspective as well. However, many more aspects become relevant. While the landowner would like to protect and retain his title in the property to the last possible milestone, for the developer a restricted right in the land could present significant constraints in financing the project, especially if he is dependent on funding from banks. Ameet Hariani has a word of advice, ‘Legally speaking, agreements for development rights are significantly different from those for sale of land. Courts have held that some types of development agreements cannot be specifically enforced. The key is to ensure that the development agreements that are executed should be capable of being specifically enforced.’ More importantly, the marketability of the project to the end customer / investor depends significantly on the buyer taking a loan from the bank. Therefore, the customer’s and the customer’s lending institution’s perception of the transaction structure and the clarity of the title of land become very important factors.

Hence, Ameet Hariani warns, ‘Financial institutions normally will not give finance in respect of the development agreement unless there is a specific clause in the development agreement entitling the developer to raise finance on the property; and the developer must also have the right to also mortgage the developer’s proportionate share in the land. This often makes the landowner extremely uncomfortable, especially because the landowner’s contribution, i.e., the land comes into the “hotchpotch” almost immediately. This is a matter that is often debated strongly while financing the development agreement’. The local development regulations and restrictions may also play an important part. ‘Is the plot size economically viable? Is there some arbitrage available due to an adjacent plot of land also available for development? Does the development fit within the overall vision of the developer?’ These are some questions which occupy the mind-space of the developer.

Is there one dominant parameter determining the transaction structure?

With such a high level of subjectivity and associated complexity, the discussion amongst the panel of experts tried to focus on identifying whether there was one dominant factor for determining the transaction structure. ‘Cash, Cash and Cash’ was the vocal emphasis factor from the experts. Let’s see what Ameet Hariani has to say: ‘The essential part of the transaction is the cash flow requirement of the landowners. Based on this, all the other issues can be structured.’

Sudhir Soni concurs: ‘The commercial considerations are largely dependent on the cash flow requirements of the developer and the landowner. Grant of development rights against sharing of revenue or developed area are the more prevalent JDA structures and there is not much difference in the business context. Grant of development rights against share of net profits is rare. The commercial considerations for a landowner to select between an area share or revenue share arrangement also depend on the cash flow requirements and taxation implications.’

There is a financial facet other than cash which is equally important – the timing of revenue recognition. Says Ameet Hariani, ‘So far as the developer’s requirements are concerned, since revenues can now only be recognised effectively upon the Occupation Certificate being obtained, and keeping the RERA perspective in mind, the speed of completion of the project is of paramount importance. This is especially true so far as listed developers are concerned.’

Practically, joint development arrangements have specific performance clauses for both the parties and will not allow a mid-way exit to either party. However, the future is uncertain. What if a developer runs out of cash mid-way and needs to exit and bring in another developer? Ameet Hariani opines, ‘Normally, a landowner would be uncomfortable to have a provision whereby development rights can be transferred / assigned without the landowner’s consent. It will be a very rare case where such right is allowed to the developer. There is a high likelihood of litigation where there is a transfer of rights proposed to a third party developer by the current developer’.

The litigation risk is not only at the developer’s end but also at the landowner’s end. Ameet Hariani continues, ‘Also, in the event the landowner wants the developer to exit and wants to appoint a new developer, once again there is a high likelihood of litigation.’ But Ameet Hariani has a golden piece of advice suggesting the incorporation of an arbitration clause in the agreement. ‘Earlier, there was a debate as to whether developer agreements could be made subject to arbitration or not. Recent judgments read with the amendments to the Specific Relief Act and the Arbitration Act have now clarified the position significantly and a well-drafted arbitration clause would be key to ensure protection for both the parties’, he says.

But new transaction structures are emerging

While the discussion was around the traditional options of transaction structuring, the experts did agree that the scenario is fluid and specific situations may suggest the evolution of new transaction structures. While income-tax and stamp duty outflows act as a deterrent to the transaction structure of an outright sale of land, the grant of development rights could possibly be a subject matter of GST. There appears to be a notification which obliges the developer to pay GST on acquisition of development rights (under reverse charge) and another notification which obliges him to also pay GST on the area allotted to the landowner (under forward charge). Much to the chagrin of the developer, the valuation of such a barter transaction is far away from business reality and input tax credits (ITC) are also not allowed. Perhaps the only sigh of relief is that the substantial cash outflow on this account is deferred till the date of receipt of the completion certificate.

But wait! Weren’t transactions in immovable property expected to be outside the purview of GST? ‘Though there is a strong case to argue that such transactions should not be subjected to GST, there are conflicting interpretations on this front and the lower judicial forums are divided. One therefore has to wait for the Supreme Court to provide a final stand on this aspect,’ says Sunil Gabhawalla. Unluckily, businesses can’t wait and the stakes involved are phenomenal. The industry therefore tries to adapt and innovate newer transaction structures which are perhaps more tax-efficient.

Welcome the new concept of ‘Development Management Agreement’ wherein the developer acts as a project manager or a consultant to the landowner in developing the identified real estate. Suitable clauses are inserted to ensure that the developer and the landowner appropriate the profits of the venture in the manner desired. Essentially, this concept turns the entire relationship topsy-turvy and the key challenge is to ensure that the developer has a suitable title in the property while under development. ‘Safeguarding the developer’s rights and title in the property being developed becomes the most important aspect in this structure. Further, the brand value of the developer and past experience of other landowners with the developer is crucial for the landowner to make a choice as to which developer the landowner will go with,’ says Ameet Hariani.

It’s not really new for a tax aspect to be an important determinant for deciding a transaction structure. In case of corporate-owned properties put up for redevelopment, it is not uncommon to explore the route of demerger or slump sale and seek the associated benefits under the income-tax law. Pradip Kapasi says, ‘In case of demerger, the transfer of land by the demerged company to the resulting company would be tax-neutral provided the provisions of section 2(19AA) and sections 47(vib) and 47(vic) are complied with. No tax on transfer would be payable by the company or the shareholders. The cost of the land in the hands of the resulting company would be the same as was its cost in the hands of the demerged company’. Sunil Gabhawalla supports this approach, ‘GST is not payable on a transaction of transfer of business under a scheme of demerger’.

Well, the devil lies in the details. The provisions referred to above effectively require continuity of shareholding to the extent of at least 75%. This may not be possible in all cases. There comes up another option, of slump sale. Pradip Kapasi suggests, ‘The provisions of section 2(42C) r/w/s 2(19AA) and section 50B would apply on transfer of land as a part of the undertaking. No separate gains will be computed in respect of land. The company, however, would be taxed on the gains arising on transfer of the business undertaking in a slump sale. The amendments of 2021 in sections 2(42C) and 50B would have to be considered in computing the capital gains in the hands of the assignor company’. Effectively, income-tax becomes due on slump sale. What happens to GST? Sunil Gabhawalla opines, ‘There is an exemption from payment of GST.’

While such exotic products and arrangements may exist and appeal to many, there would always be takers for the plain vanilla example. The essential business case is that of the landowner and the developer coming together to jointly develop the property. A simple transaction structure could be to recognise the same as a joint venture, as an unincorporated association of persons. In fact, this is a risk parameter always at the back of the mind of any tax consultant. A less litigative route would be to grant such concept a legal recognition by entering into a partnership. To limit the liability of the stakeholders, the LLP / private limited company route can be considered. What could be the tax consequences of introduction of land into the entity?

Pradip Kapasi has this to say, ‘In such an event, of introduction in the partnership firm or LLP, provisions of section 45(3) of the Income-tax Act would be attracted and the landlord’s income under the head capital gains would be computed as per section 45(3) read with or without applying the provisions of section 50C. The profit / loss on subsequent development by the SPV would be computed under the head profits and gains of business and profession. In computing the income of the SPV, a deduction for the cost of land would be allowed on adoption of the value at which the account of the partner introducing the land is credited’. Would such introduction of land into the partnership have any GST implications? ‘Apparently, no, since such transactions are structured as in the nature of supply of land per se’, says Sunil Gabhawalla. He further comments, ‘If the transaction is structured as an introduction of a development right in the partnership firm, things can be different and reverse charge mechanism as explained earlier could be triggered’.

The next steps

Having dabbled with the possible transaction structures with an overall understanding of the complex factors at play in determining the possible transaction structures, we now proceed to dive into the accounting and tax issues in some of these specific structures. Since the landowner and the developer would be distinct legal entities, the discussion can be undertaken from both the perspectives separately.

Landowner’s perspective


Fundamentally different direct tax outcomes arise depending on whether the land or the development rights are contributed by the landowner as an investor or as a business venture.

Landowner as an investor
Essentially, in case the immovable property is held as an investor, it would be treated as a capital asset and the transfer of the capital asset or any rights therein would attract income-tax in the year of transfer itself under the head ‘capital gains’. While a concessional long-term capital gains tax rate and the benefits of reinvestment may be available, in order to curb the menace of tax evasion the Government prescribes that the value of consideration will be at least equivalent to the stamp duty valuation. This provision can become a spoilsport especially in situations where the ready reckoner values prescribed by the Government are not in alignment with the ground-level reality. However, Pradip Kapasi offers some consolation. While the said provisions would apply with full force to transactions of outright sale of land, the application of section 50C to grant of development rights transferred could be a matter of debate. But is the minor tax advantage (if at all) so derived really worth it? Remember the jigsaw puzzle of GST discussed above. But again, someone said that GST applies only on supplies
made in the course or furtherance of business. Did we not start this paragraph with the assumption that the landowner is an investor and is not undertaking a business venture?

Sunil Gabhawalla agrees with this thought process but at the same time cautions that the term ‘business’ is defined differently under the GST law and the income-tax law. He adds, ‘The valuation based on ready reckoner may be prescribed under income-tax law, but the same does not apply to GST where either the transaction value or equivalent market value become the key criteria’. Sudhir Soni endorses this thought from the accounting perspective as well, ‘The ready reckoner value will not necessarily be the fair value for accounting. The valuation for accounting purposes will be either based on the fair value of the entire land parcel received by the developer [or] based on the standalone selling price of constructed property given by the developer’.

In many cases, both the developer as well as the landowner wish to share the risks and rewards of the price fluctuations and also align cash flows. Accordingly, the consideration for the grant of development is both deferred as well as variable – either by way of share of gross revenue or share of profits, or sharing of area being developed. In cases where the landowner does not receive the money upfront and is keen on deferring the taxation to a future point of time, is it possible? The views of Pradip Kapasi are very clear, ‘Provision in agreement or deed for deferred payment or even possession may not help in deferring the year of taxation’. In the case of sharing of gross revenue, he further cautions that the fact of uncertainty of the quantum of ‘full value of consideration’ and its time of realisation may be impending factors but may not be conclusive for computation of capital gains, unless ‘arising’ of profits and gains on transfer itself is questioned. There could be debatable issues about the year of taxation of overflow or the underflow of consideration.

How does one really question or defer the timing of ‘arising’ of profits and gains on transfer? Without committing to the conclusiveness of the end position, which would be based on multiplicity of factors, Pradip Kapasi has a ray of hope to offer. In his words, ‘The cases where either the profit or developed area is shared could be differentiated on the ground that the landlord here has agreed to share the net profits of a business and therefore has actively joined hands to carry on a business activity for sharing of profits of such business. In such circumstances, his “share of profits” could arise as and when it accrues to the business’.

But tax law is full of caveats and provisos. Pradip Kapasi further warns, ‘There is a possibility that the landowner’s association with the developer here could be viewed as constituting an AOP and his action or treatment could activate the provisions of section 45(2) dealing with conversion of capital asset into stock-in-trade and / or the provisions of section 45(3) for introduction of capital asset into an AOP. In case of application of section 45(2) and / or 45(3), there would arise capital gains in the hands of the landlord and would be subjected to tax as per the respective provisions. The surplus, if any, could be the business profits; however, where the transactions are viewed as constituting an AOP, he would be receiving a share in the net profits of the AOP and the share of profit received from the AOP would be computed as per provisions of sections 67B, 86 and 110 of the Income-tax Act’.

Phew, that’s a barrage of cryptic sections to talk about! Let’s keep our fingers crossed and assume that the landlord survives this allegation of the transaction being treated as an AOP. The battle is then nearly won. Pradip Kapasi continues, ‘Where no profits and gains are brought to tax in the year of grant of development rights under the head “capital gains”, the capital gains can be held to have arisen in the year of receipt of the ready flats, where the gains would be computed by reducing the COA (cost of acquisition) of land from the SDV (stamp duty value) of the flats received. Further, if the transaction is structured such that no capital gains tax is levied in the year of receipt of ready flats, the capital gains may be taxed in the year of sale of the flats allotted by the developer’. He further warns about some practical difficulties in this stand being taken; ‘where the landlord on receipt of flats does not sell them but lets them out, difficulties may arise for bringing to tax the notional gains in the hands of the landlord’.

In case all this mumbo-jumbo has dumbed your senses, a landlord who is an individual or HUF may consider the possibility of entering into a ‘specified agreement’ prescribed u/s 45(5A) that involves the payment of consideration in kind, with or without cash consideration in part, for grant of development rights. Under the circumstances, the capital gains on execution of the development agreement shall stand deferred to the year of issue of the completion certificate of the project or part thereof where the full value of consideration for the purpose of computation of capital gains would be taken as the aggregate of the cash consideration and the stamp duty value of his share of area in the project in kind on the date of the issue of the completion certificate. This assumed concession is made available on compliance of the strict conditions including ensuring that the landlord does not transfer his share in the project prior to the date of issue of the completion certificate. Subsequent sale of the premises received under the agreement would be governed as per the provisions of section 45 r/w/s 48.

That’s too much of income-tax. Let’s divert our attention to GST. As a welcome change, Sunil Gabhawalla has a bit of advice for the landowners entering into joint development agreements after 1st April, 2019, ‘Sit back and relax. As stated earlier, the burden of paying the tax on supply of development rights has been transferred to the developer’. What happens when the landowner resells the developed area allotted to him under the area-sharing agreement? Sunil Gabhawalla adds, ‘If the developed area is sold after the receipt of the completion certificate, there is no tax. If the developed area is sold while the property is under construction, the landowner can argue that he is not constructing any area and therefore he is not liable for payment of GST. Remember, the GST on the area allotted to the landowner would also be paid by the developer’.

But life in GST cannot be so simple, right? Nestled in the by-lanes of a condition to a Rate Notification disentitling a developer from claiming input tax credit (ITC) for residential projects is an innocent-looking sentence which permits the landowner to claim ITC on units resold by him if he pays at least equivalent output tax on the units so resold. Sunil Gabhawalla says, ‘Well, the legal tenability of such a position can be questioned. But in tax laws, with the risk of litigation and retrospective amendments, the writing on the wall is that the boss is always right. If the landowner opts to fall in line, he would require a registration and would be paying additional GST on the difference between the tax charged to him and that which he charges to the end buyer. While this also brings commercial parity vis-à-vis the buyers for landowner’s inventory and the developer’s inventory, it could also result in some cash flow issue if not structured appropriately.’

In a nutshell, therefore, the key tax issue bothering the landowner in case of joint development agreements is not really GST but the upfront liability towards a substantial capital gains tax irrespective of actual cash realisation.

Landowner as a businessman
Will things change if the land is held as stock-in-trade? Actually, yes, and substantially. As a businessman, the landowner forfeits his entitlement of concessional long-term capital gains tax rate. But that pain comes with commensurate gain – the tax is attracted not when the transfer takes place but at a point of time when the income accrues in relation to such land. Says Pradip Kapasi, ‘The point of accrual of income is likely to arise on acquisition of an enforceable right to receive the income with reasonable certainty of realisation. The method of accounting and sections 145 and 28 may also play a vital role here. Provisions of ICDS and Guidance Note, where applicable, would apply’. Welcome to the wonderland of accounting and its impact on taxation!

Sudhir Soni says, ‘There may be alternatives. If it is treated as a capital gain, the amounts received as revenue share will be accumulated as advance and recognised at the end of the project, on giving possession. If it is treated as a business, at each reporting date apply percentage of completion to the extent of its share’. But is it really that simple? Well, the situation is fluid and the conflict is nicely summarised by Pradip Kapasi, ‘The fact that there was a “transfer” would not be a material factor in deciding the year of taxation. At the same time, the deferment of receipt may not be the sole factor for delaying the taxation where the enforceability of realisation is reasonably certain’.

Pradip Kapasi further cautions, ‘The provisions of section 43CA may play a spoilsport by introducing a deeming fiction for quantifying the revenue receipts.’ He has an additional word of advice. He suggests the preference of variable consideration models like gross revenue sharing, profit sharing or area sharing over the fixed consideration model. To quote him, ‘The case of the landlord here to defer the year of taxation could be better unless an income can be said to have accrued as per section 28 r/w/s 145, ICDS, where applicable, and Guidance Note of 2012’.

As usual, he has a few words of caution: firstly, ‘There is a possibility that the development rights held by the landlord are considered as a capital asset within the meaning of section 2(14) by treating such rights as a sub-specie of the land owned by him. In such case, a challenge may arise on the income-tax front where transfer of such
rights to the developer is subjected to taxation in the year of transfer itself. This possibility, however remote, could not be ignored though the better view is that even this sub-specie is a part of this stock-in–trade’; and secondly, ‘The possibility of treating the association with the developer as an AOP is not altogether ruled out especially in view of the amendment of 2002 for insertion of Explanation of section 2(31) dealing with the definition of “person” w.e.f. 1st April, 2002. In such an event, though remote, issues can arise in application of the provisions of section 45 to 55, particularly of sections 45(2), 45(3), 50C and 50D.’ Again, a plethora of sections to study and analyse. Well, that’s for the homework of the readers.

What happens on the GST front if the landowner is a businessman? Sunil Gabhawalla reiterates, ‘Sit back and relax if the development agreement is entered into after 1st April, 2019’. But what happens in cases where the development agreement is prior to that date? ‘I’m afraid, definitive answers are elusive. Whether transfer of development rights is liable for GST or not is itself a subject matter of debate. The issues of valuation and the timing of payment of tax are also not settled. We may need a separate article to deal with this,’ he adds.

Is Development Management Agreement a panacea for the landowner?
The concept of Development Management Agreement (DMA) has already been explained earlier. A quick sum and substance recap of the transaction structure would help us appreciate that the appointment of a development manager by the landowner vide a DMA would tantamount to the landowner donning the hat of a real estate developer and the development manager acting as a mere service provider. It will effectively mean that the landowner is the real estate developer who is developing a real estate project in his own land parcel. While this model offers significant respite in the GST outflow on development rights and also avoids the stretched interpretation of barter and consequent GST on free units allotted to existing members for self-consumption (remember, a redevelopment agreement entered into by a co-operative society is a sub-specie of a development agreement), it also helps the landowner in deferring the income-tax liability to a subsequent stage due to his becoming a businessman.

In the words of Pradip Kapasi, ‘In this case, the appointment of a Development Consultant under a DMA would itself be treated as a business decision in most of the cases. The appointment would signal the undertaking of an enterprise by the landlord on a systematic and continuous basis, constituting a business. Such an appointment would not be regarded as a “transfer” of capital asset and no capital gains tax would be payable on account of such an appointment. The first effect of such a decision would be to invite the application of section 45(2) providing for conversion or treatment of a capital asset into stock-in-trade and as a consequence lead to computation of capital gains that would be chargeable in the year of transfer of the stock-in-trade being developed. The market value of the land on such happening would be treated as the cost of the stock-in-trade and the rest would be governed by the computation of Profits and Gains of Business and Profession r/w/s 145, ICDS and Guidance Note’.

But is all hunky-dory as far as GST is concerned? Sunil Gabhawalla cautions, ‘While there is a respite in taxation for the landowner, it may be important to note that the developer relegates himself to the position of a contractor rather than a developer. This would disentitle him from claiming the concessional tax rate of 5% for developers and instead he would be liable for the general tax rate of 18% on the value of the services provided by him. However, this higher rate of tax comes with the eligibility towards claiming input tax credit.’

Developer’s perspective
Well, that was a lot of discussion from the point of view of the landowner. What happens at the developer’s end? Pradip Kapasi has a very simple and affirmative answer on this front. ‘The payment agreed to be made towards the development rights / land acquisition to the landowner would constitute a business expenditure that will be allowed to be deducted against the sale proceeds of the developed area, and if not sold by the yearend, would form the stock-in-trade and would be reflected in the books of accounts as its carrying cost’.

But what happens if the payment towards the development rights is deferred like in gross revenue sharing arrangements? ‘The net receipts subject to his method of accounting would be taxed in respective years of sale and / or realisation. The carrying cost of the stock would be represented by the amount of direct expenditure incurred by him excluding the notional cost of acquiring DR. In the alternative, the payment to be made to the landlord would constitute a business expenditure that will be allowed to be deducted against the gross sale proceeds, and if remaining to be sold by the yearend, would form part of the stock-in-trade and would be reflected in the books of accounts as its carrying cost’, says Pradip Kapasi.

In case of profit-sharing arrangements, however, he cautions about the risk of constitution of an AOP and the associated perils of sections 67B, 86 and 110. He is also afraid that the land cost may not be available as a deduction to the AOP. How does one deal with area-sharing agreements? Pradip Kapasi responds, ‘The net receipts of the balance area coming to the share of the developer would be taxed in respective years of sale and / or realisation where the cost of construction of all the flats would be allowed to be deducted as business expenditure. The carrying cost of the stock could be represented by the amount of direct expenditure incurred by him excluding the notional cost of acquiring DR. In the alternative, the payment to be made to the landlord in kind would constitute a business expenditure that will be allowed to be deducted against the gross sale proceeds, and if remaining unsold by the yearend, would form a part of the stock-in-trade and would be reflected in the books of accounts as its carrying cost.’

The clear essence of the above discussion is that the accounting treatment is important. But depending on certain criteria, enterprises are required to follow either IGAAP or Ind AS. Let us check out what Sudhir Soni has to say. ‘While there is very limited guidance available under IGAAP for accounting of joint development agreements, the cost that is incurred by the developer towards construction of the entire project is treated as cost towards earning the revenue from sale to the developer’s customers. Accordingly, in case of area share for landowner there is no separate accounting and in case of revenue share to landowner it is accounted through the balance sheet. Elaborate guidance is, however, available under Ind AS 115’.

He adds, ‘The JDA is a contract for specific performance and does not have a cancellation clause. For projects executed through joint development arrangements, it is evaluated that the arrangement with land owners are contracts with customers. The transaction is treated as if the developer is buying land from the landowner and selling the constructed area to the landowner. This results in a “grossing” of revenue and land cost, which is a difference from the accounting under Indian GAAP.’ Whether such a difference in accounting treatment will have any ramifications under the income-tax or GST law, only time will tell.

 

Having treated the transaction as a barter, there comes the issue of accounting for such a transaction. Sudhir Soni says, ‘For real estate projects executed through JDA not being jointly controlled operations, wherein the landowner provides land and the developer undertakes the development work on such land and agrees to transfer certain percentage of constructed area / revenue proceeds to the landowner, the revenue from the development and transfer of agreed share of constructed area / revenue proceeds in exchange of such development rights / land is accounted on gross basis. Revenue is recognised over time (JDA being specific performance arrangements) using input method, on the basis of the inputs to the satisfaction of a performance obligation relative to the total expected inputs to the satisfaction of that performance obligation. The gross accounting at fair value for asset in form of land inventory (subsequently recognised as land cost over time basis stage of project completion) and the corresponding liability to the landowner (subsequently recognised as revenue over time basis stage of project completion) may be accounted on signing of JDA, but in practice the accounting is done on the launch of the project, considering the time gap between the signing of the JDA and the actual launch of the project. The developer’s commitments under the JDA, which is executed and pending completion of its performance obligation, are disclosed in the financial statements.’

Further, ‘For real estate projects executed through a JDA being jointly controlled operations, which provide for joint control to the contracting parties for the relevant activities, the respective parties would be required to account for the assets, liabilities, revenues and expenses relating to their interest in such jointly controlled JDA.’

Now comes the next accounting issue of measurement of fair value for such a barter. Sudhir Soni says, ‘The fair value for the gross accounting of JDA is the market value of land received by the developer or based on the standalone selling price of the share of constructed property given by the developer. In case the same cannot be obtained reliably, the fair value is then measured at the fair value of construction services provided by the developer to the landowner’. Well, but the valuation provisions under GST are different. Sunil Gabhawalla agrees and says that each domain will have to be independently respected.

The bottom line, it seems, is that the direct tax consequences for the developer will closely follow the generally accepted accounting principles for determination of net profit for a year. But are things equally simple in GST? Not really. Sunil Gabhawalla shares his inputs. ‘Unless the developer in essence constitutes a contractor, all new residential projects attract 5% GST on the sale proceeds of the units sold while under construction. Even area allotted to the landowner attracts this 5% GST on the equivalent market value of the units allotted to the landowner. Affordable housing projects enjoy a concessional tax rate of 1%. However, no input tax credit is available to the developer’.

But wait a minute! This is not all. A plethora of reverse charge mechanism Notifications require the developer to pay tax on the expenses incurred by him. For example, the proportionate value of the development rights acquired by him from the landowner is liable to GST in the hands of the developer at the time of receipt of the occupation certificate. As Sunil Gabhawalla adds, ‘It may make sense for the developer to procure goods and services from registered dealers only since another Notification requires the developer to pay GST on reverse charge if the procurement from unregistered dealers exceeds 20%. Notably, no tolerance limit has been provided for procurement of cement, where reverse charge mechanism triggers from the first rupee of procurement from unregistered dealers.’

Summing up
This article was an attempt to apprise the readers of the nuances of this complex topic. All experts agreed that the tax efficiencies of each structure over the other would be determined largely by the available circumstances and the needs of the parties. No structure, in such an understanding, is superior to other structures, nor inferior to any.

 

PAYMENT GATEWAYS

A Payment Gateway is a service that provides a payment transaction interface between a customer and the supplier. It can be used for direct payments in-store or for e-businesses or online commercial transactions. Earlier, banks were the primary payment gateway service providers. However, today specialised Fintech organisations are the preferred providers of this service.

When a customer makes a payment using a Payment Gateway, the following tasks are performed to complete the transaction:

1. Typically, the credit / debit card number is entered online, or a credit / debit card is swiped or scanned using a contactless card-reading device. In the case of online transactions, the CVV and the name on the card is also requested.
2. The card number is encrypted as soon as it is entered and transmitted to the Card Association (Master / Visa / Amex) through the Acquiring Bank.
3. The Card Association then routes the transaction to the appropriate Card Issuing Bank.
4. The Card Issuing Bank verifies the debit or credit available on the card concerned and sends a response back to the Acquiring Bank and subsequently to the Payment Gateway with a response code, i.e., whether approved or denied.
5. The Payment Gateway then conveys the response back to the device or website from which the transaction originated.
6. The merchant will then process the transaction for goods or services based on his own internal guidelines.
7. The entire process will take not more than five to ten seconds!
8. At the end of the day, or at periodic intervals, the Issuing Bank will settle the aggregate of transactions to the Acquiring Bank after deducting its commission on the same.
9. The Acquiring Bank will pay the Payment Gateway service provider who will in turn settle all amounts received on behalf of the merchant after deducting its charges for the same.

Many payment gateways also provide tools to automatically screen orders for fraud, blocked card lookups, velocity pattern analysis, ‘black-list’ lookups, IP address lookups, etc.

Points to be considered by a seller of goods and services while choosing a good Payment Gateway:

(i) The Payment Gateway needs to be fast and secure. Speed and security are the main considerations, since without either of them the Payment Gateway would be unsuitable for use.
(ii) A good Payment Gateway also needs to provide a variety of payment options to the user. Apart from Credit Cards and Debit Cards, many Payment Gateways in India also allow use of e-wallets, Online Banking and Virtual Cards. This gives total flexibility to the client and ensures that the client can complete the transaction, irrespective of his preferred mode of payment.
(iii) If your business is global, multi-currency options would be a great advantage.
(iv) Many Payment Gateways make it extremely easy to integrate them in your website or other software platforms, which can get you up and running immediately.
(v) The settlement cycle may vary from a day to a week which will depend on the number and value of transactions.
(vi) Earlier, there used to be one-time setup charges being levied by Payment Gateways – nowadays, the one-time setup charge is waived by many providers.
(vii) The per transaction fees may vary for each Payment Gateway and for each type of transaction. This is negotiable with the Payment Gateway service. The higher the value and volume of transactions, the lower will be
the per transaction fee. Typical transaction costs may have a fixed component and a variable component. The variable component may range from 0.25% to 3% of the value of the transaction.

PayPal is one of the pioneers in the field. It has an international presence and handles a variety of currencies. It is different in the way it handles payments. You have to enter your credit card information only once and create a user-id and password. PayPal will then handle all your payments going through its gateway. The merchant never gets to access your credit card information at all, hence it is completely safe.

Amazon Pay is designed for Amazon merchants and shoppers. It facilitates easy payment through its wallet which needs to be refilled from time to time.

Square is a Payment Gateway which also has its own hardware, making it very easy to acquire payments. The hardware may be in the form of a POS terminal, contactless slide-in, magstripe squares connected to your mobile or in-Stand form.

Among the Indian Payment Gateways, the most popular are Razorpay, CCAvenue, PayUBiz, Instamojo, PayTm and Atom. Each of them has similar features with ease of use and a variety of payment options. PayTm is easiest to deploy – both for the customer and the seller for offline and online transactions. However, Razorpay and Instamojo are the easiest to integrate
into your website. A detailed comparison between the 15 popular Payment Gateway providers is available at http://bit.ly/pgcomparison.

As for the risk factors, all Payment Gateways are regulated by Reserve Bank of India and have strict reporting norms. Transactions are encrypted with 128 bit (or higher) security protocol and are therefore extremely safe and reliable. Breaches, if any, are to be instantly reported and monitored. Hence, most of the popular Payment Gateways are safe and reliable on all counts. RBI Guidelines on Regulation of Payment Aggregators and Payment Gateways are available at https://bit.ly/3tpmCwm.

In these days of growing online transactions, a Payment Gateway for your website is a must-have tool, not only for selling goods and services but also for easy and smooth collection of payments!

SAT SETS ASIDE INSIDER TRADING ORDERS

As discussed several times earlier in this column, SEBI has been investigating stock market frauds, insider trading, etc., by tracking the use of social media / messaging applications. About a year back, we also discussed certain SEBI orders where it was held that some persons shared unpublished price-sensitive information through the popular chat application WhatsApp. Stiff penalties were levied on such persons under the Insider Trading Regulations. Those who were penalised appealed to the Securities Appellate Tribunal (‘SAT’) which has now reversed those orders. SAT has held that, on the facts, there was no violation of the SEBI Regulations on insider trading.

This decision of SAT has several interesting aspects. Has SAT made any significant interpretation of the law that has far-reaching implications as suggested by some reports? When can a person, who shares unpublished price-sensitive information (‘UPSI’), be held to have violated the Regulations? Is it necessary that a link be established between the person having the UPSI and the source within a company who had leaked such information? There are also lessons generally for persons using social media applications. Let us consider this decision (Shruti Vora vs. SEBI, dated 22nd March, 2021) in greater detail.

BROAD SCHEME OF SEBI (PROHIBITION OF INSIDER TRADING) REGULATIONS, 2015 AS RELEVANT HERE
The Regulations seek to prohibit and punish insider trading. They prohibit what is commonly understood as insider trading – that is, trading by an insider who is in possession of, or has access to, UPSI. However, they also prohibit several other things like communication of UPSI except where permitted under the Regulations. The Regulations also have further requirements of disclosure of holdings and dealings by certain insiders, prohibition of trading during periods when the trading window is required to be closed, etc.

In the present case, the relevant provision is related to the sharing of UPSI. Insiders are prohibited from sharing UPSI. The reason for this prohibition is obvious. Sharing such information may result in the recipient dealing and profiting out of it. However, such recipient may also further pass on such information to others. Such sharing is also covered by the offence of ‘insider trading’.

However, as this case shows, three interesting questions arise: Is it required to show that a person who shared UPSI had received it from a particular person within the company? Is it required that he should know that such information was UPSI? Would the offence of insider trading also cover sharing of UPSI by a person who is not aware that it is UPSI?

The first question has been answered by a deeming provision in the Regulations itself. It is provided that a person would be deemed to be an insider even if he is in mere possession of UPSI. Thus, it is not required that his source of such information be traced within the company (a little more on this later). He is deemed to be an insider. If he then deals in the securities, or shares such UPSI, he would be deemed to have committed the offence of insider trading.

The second question is interesting and indeed became, as we will see, the core issue in this case. Should a person know that the information in his possession is UPSI? The Regulations have not made an express provision on this. SAT has held that a person should be aware that such information is UPSI and it is only in such a case that the person would be deemed to be an insider. However, the equally critical question is how does one establish whether a person knows that the information he possesses is UPSI? This can be tricky as this would be something in the person’s mind. This aspect will be discussed further while analysing the decision.

The third question would be answered by implication from the answer to the second question although, again, the Regulations have no express provision about it. If a person does not know that the information he possesses is UPSI, then sharing of such information would not make him guilty of the offence of insider trading.

With this brief background, let us consider the case and then discuss what SAT has held.

FACTS OF THE CASE AND SEBI’S ORDER
It appears that SEBI was alerted especially by media reports that financial results of reputed companies were being leaked and shared in advance on social media through chat applications like WhatsApp. It conducted investigations and amongst its findings was some data relating to two appellants in the present case. It was found that they worked in the industry and had forwarded financial results through WhatsApp to many persons, including clients. The financial results forwarded were eerily accurate and very closely matched the actual results published soon after. However, SEBI could not trace who had sent this information to such persons. Even the companies concerned could not find any leak that could have happened internally from within the companies themselves.

SEBI, however, held that the law was clear. Possession of UPSI made the person an insider. The law also prohibited insiders from sharing UPSI with others. Since these persons did share the UPSI, they committed the offence of insider trading. It levied stiff penalties on such persons. Since similar orders were passed separately for sharing of results for each company, the penalties cumulatively rose to an even larger amount.

The parties had argued that not only these messages but several others were also forwarded in the same manner. And these messages were forwarded to groups of numerous persons. The messages were sent almost as soon as they were received. The other messages had information which was not UPSI and in any case often did not even match with the actual financial results in those other cases. However, SEBI stuck to its position and held that they had indulged in insider trading and levied penalties.

APPEAL BEFORE SAT
In the appeal before SAT, the appellants made several arguments. It was pointed out that they were not aware that what they had was UPSI. They had received numerous such messages and those were also forwarded along with the ones under question. They had no means to verify the authenticity of any of the information. The messages / information so received could be compared to ‘heard in the street’ columns common in media and while such pieces are read by many, it was accepted that their authenticity was not assured. Indeed, some could be just rumours or informed guesses. The appellants also pointed out that the specific messages that were of concern were not differently coded while being forwarded. So the recipients could not distinguish those messages from the others.

DECISION OF SAT
SAT accepted the arguments of the appellants and set aside the orders of SEBI levying penalties. It also made some important points about the interpretation of the law.

At the outset, SAT confirmed that possession of UPSI did make a person an insider under law and sharing of such UPSI by such person would be an offence under the Regulations. SEBI did show that the person was in possession of the UPSI and hence it may appear that one part was fulfilled. The information was shared, too.

However, and this was the crucial point, did such person know the information received and shared was UPSI? And, if not, would the information still be UPSI qua such person? The law is silent on this point. However, this did matter because it is from the perspective of the person accused of insider trading. If such person did not know it was UPSI, then that person cannot be held to be in possession of UPSI and hence is not an insider. And if this was so, his sharing of the information was not insider trading.

It was apparent from the record itself that the persons had received numerous bits of information and had forwarded the same to many other persons. Neither the persons sending them nor the persons receiving them could have had any way of knowing that the information was authentic and hence UPSI. SAT observed, ‘The above definitions of the “unpublished price sensitive information” and “insider” would show that a generally available information would not be an unpublished price sensitive information… The information can be branded as an unpublished price sensitive information only when the person getting the information had a knowledge that it was unpublished price sensitive information’. Thus, the information was not UPSI. One could take the example of the numerous WhatsApp forwards many of us receive. We have become used to examine them with so much scepticism that we generally have stopped even reading most of them.

While it is true that possession of UPSI was sufficient to make a person an insider, there were sufficient circumstances to doubt that it was UPSI and thus the onus shifted back to SEBI. It was now up to SEBI to prove, even with a reasonably low benchmark of proof or of the preponderance of probability, that the persons knew it was UPSI. SEBI could not and it did not so prove.

SAT also noted that SEBI has not connected the information to any source within the companies and even the companies did not have any such findings of leakage.

The order was thus set aside.

CONCLUSION
The important legal point thus is that UPSI is from the perspective of the person who is in possession of the same. If I have a pile of stones with me and I do not know that a couple of the ‘stones’ are really diamonds, I may give the same to someone else for a low value. And even he may do the same with them.

That said, this does not mean one should be lax with the law. The law provides for serious consequences for insider traders and the benchmark of proof remains relatively low. In this particular case, the facts were peculiar and hence did not allow any wider generalisation. One should remain ever vigilant while forwarding information. The law has sufficient deeming provisions. Chartered Accountants are typically and even otherwise deemed to be insiders as auditors, advisers, CFOs, etc. They are also expected to know the importance of figures and it is even possible that information shared by them may be given more weightage by the recipient, and thereby also by SEBI while deciding guilt. Thus, this case should induce even more caution.

OCI: A FEW CHANGES, BUT LOTS OF CONFUSION

INTRODUCTION
The Overseas Citizen of India or OCI was a modified form of dual citizenship introduced by the Indian Government in 2005 for the benefit of Non-Resident Indians (NRIs) and Persons of Indian Origins (PIOs) resident abroad. India currently does not permit dual citizenship, i.e., a person cannot be the citizen of both India and a foreign country, say the USA. He must select any one. An OCI cardholder is not a full-fledged citizen but he has certain benefits at par with a citizen. As of 2020, there were over six million OCIs abroad.

This scheme has seen certain regulatory and legal developments which have caused a great deal of confusion and anxiety amongst the OCI cardholders resident abroad. The University of WhatsApp (sic!) has played a stellar role in fuelling this fire. The intent of this article is to discuss those forwards and dispel some myths.

WHAT IS REGULATORY FRAMEWORK?
An OCI card is granted by the Government of India to a person under the aegis of the Citizenship Act, 1955. Section 7A of this Act provides for the registration of OCIs. At the cost of repetition, an OCI is not a full-fledged Indian citizen under the Citizenship Act but he is only registered as an OCI. Section 7A allows the Government to register the following individuals as OCIs on an application made by them:

(a) Any person who currently is a foreign citizen but was an Indian citizen at the time of commencement of the Constitution of India, i.e., in 1950;
(b) Any person who currently is a foreign citizen but was eligible to be an Indian citizen at the time of commencement of the Constitution of India, i.e., in 1950;
(c) Any person who currently is a foreign citizen but belonged to a territory that became part of India after Independence;
(d) Any person who is a child or a grandchild of the above persons;
(e) A minor child of a person mentioned in the clause above;
(f) A minor child both of whose parents are citizens of India or one of whose parents is a citizen of India;
(g) Spouse of a citizen of India or spouse of an Overseas Citizen of India cardholder;
(h) Spouse of a person of Indian origin who is a citizen of another country and whose marriage has been registered and subsisted for a continuous period of not less than two years immediately preceding the presentation of the application under this section.

Thus, all of the above persons are eligible to be registered as OCIs. Interestingly, even a person of non-Indian origin can be registered as an OCI if he marries a citizen / an OCI cardholder. For example, a Caucasian American man marries an Indian OCI woman residing in the USA. He, too, would be eligible to be registered as an OCI along with their children. The Act further provides that the OCI card granted u/s 7A to a spouse is liable to be cancelled upon dissolution of marriage by the competent court. The special privileges can then be withdrawn.

The Bombay High Court in Lee Anne Arunoday Singh vs. Ministry of Home Affairs, WP 3443/2020 has held that the provisions of section 7 of the Act cast a duty on the Government to take necessary steps regarding cancellation of the OCI card issued on spouse basis, if the marriage is dissolved by a competent court of law.

The Government of India has recently made a submission in a similar case before the Delhi High Court that a foreigner registered as an OCI on the strength of marriage to an Indian citizen loses that status when the marriage is dissolved. Such foreigners are no longer eligible to be registered as OCIs under the Citizenship Act. Such a person could, however, continue to visit India by applying for an ordinary / long-term visa. A PIL (public interest litigation) has also been filed before the Delhi High Court in Jerome Nicholas Georges Cousin vs. Union of India, W.P. (C) 8398/2018 by a French national against this provision. In his plea he states that he would have to close down his business and go back to France since he would now not have permission to run a business in India.

WHAT ARE THE BENEFITS AVAILABLE TO AN OCI?
The OCI card is a life-long visa granted to these foreign citizens. While their passport is the primary document to enter India, the OCI card is an additional document that they receive. They can visit India as many times as they want and stay as long as they wish. They can even permanently reside in India and work and study here. Non-OCI cardholders need to get registered with the Foreigners Regional Registration Office if they want to stay for more than six months in India. These procedures are not applicable to OCIs.

Earlier, there was a concept of a Person of Indian Origin (PIO) card which was also a long-term visa. However, issuance of new PIO cards has been discontinued and all PIO cardholders are being encouraged to migrate to the OCI card.

The Government has made some changes in the benefits available to OCIs by a Notification issued in March, 2021. This Notification has caused a lot of confusion amongst the Indian diaspora. The revised list of benefits available to OCIs is as follows:

(1) It grants a multiple entry life-long visa for visiting India for any purpose. The revised Notification has added that for undertaking the following activities, the OCI cardholder shall be required to obtain a special permission or a Special Permit, as the case may be, from the competent authority or the Foreigners Regional Registration Officer or the Indian Mission concerned, namely:
(i)  to undertake research;
(ii) to undertake any missionary or tabligh or mountaineering or journalistic activities. This amendment is to overrule the Delhi High Court’s decision in the case of Dr. Christo Thomas Philip vs. Union of India, W.P. (C) 1775/2018 where an OCI card was cancelled on the ground that the person was involved in missionary activities in India. The Court held that there is no law which prevents missionary activities by an OCI and hence the cancellation was invalid. The Court had held that prima facie the rights under Article 14 (equality before law) and 19 (freedom of speech and expression) of the Constitution of India which are guaranteed to the citizen of India, also appear to be extended to an OCI card-holder;
(iii) to undertake internship in any foreign Diplomatic Missions or foreign Government organisations in India or to take up employment in any foreign Diplomatic Missions in India;
(iv) to visit any place which falls within the Protected or Restricted or prohibited areas as notified by the Central Government or competent authority.
    
(2) Exemption from registration with the Foreigners Regional Registration Officer or Foreigners Registration Officer for any length of stay in India. The revised Notification has added that the OCI cardholders who are normally resident in India shall intimate the jurisdictional Foreigners Regional Registration Officer or the Foreigners Registration Officer by email whenever there is a change in permanent residential address and in their occupation.

(3) It provides parity with NRIs in the matter of
(i)  inter-country adoption of Indian;
(ii) appearing for the all-India entrance tests to make them eligible for admission against any NRI seat. However, the OCI cardholder shall not be eligible for admission against any seat reserved exclusively for Indian citizens. This overrules the decision of the Karnataka High Court in the case of Pranav Bajpe vs. The State of Karnataka, WP 27761/2019 which held that when the parity between the OCI cardholder and Non-Resident Indians is removed, the concept of OCI cardholder cannot be given a restricted meaning as Non-Resident Indian so as to restrict such admission only to Non-Resident Indian quota in the State quota of seats and not in the institutional quota or Government quota of seats under the NEET Scheme. It had concluded that the minor children of Indian citizens born overseas must have the same status, rights and duties as Indian citizens, who are minors;
(iii) purchase or sale of immovable properties other than agricultural land or farmhouse or plantation property; and
(iv) pursuing the following professions in India as per the provisions contained in the applicable relevant statutes or Acts as the case may be, namely, doctors, dentists, nurses and pharmacists; advocates; architects; chartered accountants.

(4) In respect of all other economic, financial and educational fields not specified in this Notification or the rights and privileges not covered by the Notifications made by the Reserve Bank of India under the Foreign Exchange Management Act, 1999, the OCI cardholder shall have the same rights and privileges as a foreigner. This is a new addition by the March, 2021 Notification. Thus, if any benefit is not specifically conferred either under the Citizenship Act or under the FEMA, 1999, then the OCI would only be entitled to such privileges as are available to a foreigner.

An OCI is not entitled to vote in India, whether for a Legislative Assembly or Legislative Council, or for Parliament, and cannot hold Constitutional posts such as those of President, Vice-President, Judge of the Supreme Court or the High Courts, etc., and he / she cannot normally hold employment in the Government.

CAN AN OCI BUY PROPERTY IN INDIA?
One of the benefits of being an OCI is that such a person can buy immovable property in India other than agricultural land. The Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 deal with this aspect. Rule 21 permits an OCI to purchase any immovable property in India other than agricultural land or farmhouse or plantation property. An OCI is also allowed to get a gift of such a property from an Indian resident / NRI / OCI who is a relative as per the definition under the Companies Act, 2013. Citizens of certain countries, such as Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Hong Kong or Macau, or the Democratic People’s Republic of Korea (DPRK), cannot purchase immovable property in India without permission from the RBI but even this prohibition is not applicable to OCI cardholders. It may be noted that the above relaxations under the FEMA Rules are only for OCI cardholders and not for all persons of Indian origin. If a foreign citizen of Indian origin does not have an OCI card, then he cannot buy immovable property in India without prior permission of the RBI. This is one of the biggest benefits of having an OCI card.

In this respect, misunderstanding of a Supreme Court decision in Asha John Divianathan vs. Vikram Malhotra, CA 9546/2010 Order dated 26th February, 2021 has created great heartburn amongst the OCI community. This was a decision rendered under the erstwhile Foreign Exchange Regulation Act, 1973 (which has been superseded by the FEMA in 1999). Section 31 of the erstwhile law provided that any foreign citizen desirous of buying immovable property in India required the prior approval of the RBI. The Court held that entering into any such transaction without RBI approval was treated as an unenforceable act and prohibited by law. It further held that when penalty was imposed by law for the purpose of preventing something on the ground of public policy, the thing prohibited, if done, would be treated as void, even though the penalty if imposed was not enforceable. It is important to note that this decision is not applicable in the light of the current provisions of the FEMA Regulations. As explained above, the law now, by virtue of Rule 21 of the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 expressly provides that an OCI can purchase any immovable property in India other than agricultural land or farmhouse or plantation property.

WHAT DOES FEMA PROVIDE IN RESPECT OF OCIs?
The provisions relating to OCIs have been dealt with in great detail under the FEMA Regulations and it would be difficult to elaborate on all of them here. However, a few examples are explained here. At most places under the FEMA Regulations, the provisions available to persons of Indian origin have been replaced with OCIs. Thus, it is mandatory for the PIOs to have an OCI card. For instance, the facility of investment on a non-repatriable basis under Schedule IV of the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 is allowed only to Non-Resident Indians and OCI cardholders. Persons of Indian origin who do not have OCI cards cannot avail of this facility.

Similarly, under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 an Indian bank is allowed to lend in Indian rupees only to an NRI or an OCI cardholder.

However, in a few Regulations under FEMA, it is not mandatory to have an OCI card. For example, a Non-Resident External (NRE) Bank Account or a Non-Resident Ordinary (NRO) Bank Account can be opened by any Person of Indian origin. It is not necessary that such a person has an OCI card. Similarly, the Foreign Exchange Management (Remittance of Assets) Regulations, 2016 allows a PIO to remit up to US $1 million every year out of balances held in the NRO account and from the sales proceeds of assets.

IS THE DEEMED RESIDENCY PROVISION APPLICABLE?
Under section 6 of the Income-tax Act, any Indian citizen having total Indian income exceeding Rs. 15 lakhs during the previous year is deemed to be an Indian tax resident in that year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature. This provision is applicable only to an Indian citizen, i.e., a person holding an Indian passport. An OCI does not have an Indian passport and so he would be out of the deemed taxation net.

CONCLUSION
The law relating to OCIs is dynamic in nature. In respect of all other economic fields not expressly specified or not covered by the Notifications under the FEMA, 1999, the OCI cardholder is equated with the same rights and privileges as a foreigner. Thus, it becomes very important to understand what are the benefits and provisions for an OCI cardholder.

GSTN COMMON PORTAL: E-GOVERNANCE

Digitisation of tax administration has been a progressive step of the Government in the recent past. Understandably, the primary thrust for it came from increasing tax complexities and allegedly evasive measures adopted by business enterprises. This warranted Governments to arrest such activities through real-time and non-erasable trails of events. Now, tax administrations are increasingly harnessing the benefits of digitisation by instant identification, examination and conclusion of tax challenges.

Therefore, a robust IT infrastructure was the key to the success of the implementation of a ‘self-policing’ GST in India. The need for such infrastructure led to the birth of the GST Network (GSTN) which was entrusted with the responsibility of setting up, operating and the maintenance of IT systems. GSTN was established as a special purpose vehicle by the Ministry of Finance to provide common IT infrastructure, systems and services to the Central and State Governments, taxpayers and other stakeholders for supporting the implementation and administration of the GST in India.

Much like the GST scheme, the GST Network has also been subjected to critiques. Firstly, the structure and functioning of the GSTN with the possibility of interference by non-governmental bodies, and secondly, the privacy concerns emerging from such large-scale collection of data. That apart, the GSTN has been entrusted to operate the GST common portal under the domain and boundaries of the GST law.

LEGAL BACKGROUND
Section 146 of the CGST / SGST Act, 2017 empowers the Government to notify a common electronic portal for facilitating registration, tax payments, furnishing of returns, computation / settlement of integrated tax, electronic way-bill and such other functions as may be necessary. Notification No. 4/2017-CT dated 19th June, 2017 notified www.gst.gov.in (the website managed by GSTN) as the common portal for the purpose of facilitating ‘registration, payment of tax, furnishing of returns and computation and settlement of integrated tax’. On the GST portal, the website states that the said portal includes all its sub-domains, internal and external services serviced by the domain and mobile applications of the GST portal. Similarly, Notification No. 9/2018-CT dated 23rd January, 2018 has notified www.ewaybillgst.gov.in as the Common Goods and Services Tax Electronic Portal for furnishing of electronic way-bill.

Recently, Notification No. 69/2019-CT dated 13th December, 2019 notified www.einvoice1-10.gov.in as the portal for e-invoice preparation. Parallel Notifications were issued by States for recognising the said web-portal(s) for specific purposes. Through such provisions, legal sanctity was sought to be provided to the said portal(s) but only for limited functions as specified in the Notifications. Interestingly, transition returns, refund applications and appeals do not find mention in the enabling Notifications notifying the common portal for specific purposes and one may resort to this as a legal contention in the days to come.

LEGAL QUESTIONS
Some critical questions arising from the e-governance initiatives of the Government are:
(a) What is the scope of the common portal in administration of the law?
(b) Whether the Notification issued under the CGST / SGST on the common portal would apply to the IGST Act even though a Notification has not been issued for this purpose?
(c) Whether the frameworks / contents, conditions, restrictions in the portal are backed by legal provisions? Is the Government imposing its view of the law on the taxpayer? Are there any remedies left to the taxpayer where the GST portal does not permit one to apply the law in a particular manner?
(d) What are the consequences of a failure in the GSTN systems, especially on down-time, lack of proper response, etc.? Whether the ‘proper officer’ can cite helplessness in matters of substantive rights where the portals restrict functionalities? What is the legal sanctity of the response / lack of response of GSTN helpdesks?

SETTLED PRINCIPLES
Before going into details, it may be important to assimilate the critical concepts of law which would govern the above questions. The first one is the well-settled provision that delegated authorities would have to operate within the framework of law and the legislations or actions are subject to the vires of the governing statute. This reminds one of the decision of the Supreme Court in St. Johns Teachers Training Institute vs. Regional Director, NCTE (2003) 3 SCC 321 at page 331 which held that regulations and rules are directed towards ‘supplementing’ the law rather than ‘supplanting’ the law. The Court stated as follows: ‘What is permitted is the delegation of ancillary or subordinate legislative functions, or, what is fictionally called, a power to fill up details.’

The other principle is that ‘forms / returns’ forming part of a statute cannot drive its interpretation1. The Supreme Court in the context of adjustment of MAT credit referred to the forms and held in CIT vs. Tulsyan NEC Ltd. (330 ITR 226) as follows: ‘It is immaterial that the relevant form prescribed under the Income-tax Rules, at the relevant time (i.e., before 1st April, 2007), provided for set-off of MAT credit balance against the amount of tax plus interest, i.e., after the computation of interest under section 234-B. This was directly contrary to a plain reading of section 115-JAA(4). Further, a form prescribed under the Rules can never have any effect on the interpretation or operation of the parent statute.’

And finally, procedural laws are meant to further the object of the substantive provisions and not restrict their scope [CCE vs. Home Ashok Leyland (2007) 4 SCC 51].

RELATIONSHIP BETWEEN GSTN AND GOVERNMENT OF INDIA
GSTN was incorporated on 28th March, 2013 for the purpose of implanting e-governance and technology initiatives for the efficient rollout of the GST law. As per media reports, it can be inferred that work on the creation of the IT infrastructure commenced much before the passage of the Constitution (One Hundred and First Amendment) Act, 2016. It was during the 4th GST meeting on 3rd-4th November, 2016 that GSTN made a presentation about the status of the web development and the services being offered by GSTN on this front.

_____________________________________
1 LIC vs. Escorts Ltd. (1986) 1 SCC 264
Interestingly, the statute does not enlist the criteria for selection, operation and regulation of an IT service provider (whether Government-owned or otherwise). The GST Council in its minutes also does not formally identify / appoint the GSTN as the sole service provider for this massive task. This question is important because the 11th meeting had specifically approved a proposal of appointing GSTN for the development of the e-way bill IT infrastructure but the appointment of GSTN for the basic GST portal seems to be missing in the minutes. The legal sanctity of entrusting / delegating the IT infrastructure to GSTN through the Government of India is unclear from public domain documents and requires immediate attention.

ANALYSIS
Compliance under the erstwhile laws under Excise, Service Tax, VAT, Entry Tax was largely performed electronically. It was thus expected that the reporting and compliance under the GST law would also continue to be driven by technology. However, the level of technological complexities was relatively lower under those laws. The electronic forms under the erstwhile laws had limited functionalities and were meant for the limited purpose of capturing data. The administration then utilised the data collected at the back-end for risk management purposes.

However, the GST portal ushered in a much higher level of legal control at the data entry point itself by the taxpayers and in many instances hindered the decision-making of the taxpayer. Although the insertion of legal control might have been intended to assist taxpayers in accurate data capture, in certain cases it appears to have breached the legal framework. For a start, we should read this disclaimer of the GSTN portal for its users:

‘Though all efforts have been made to ensure the accuracy and currency of the content on this website, the same should not be construed as a statement of law or used for any legal purposes or otherwise. GSTN hereby expressly disowns and repudiates any claims or liabilities (including but not limited to any third party claim or liability, of any nature, whatsoever) in relation to the accuracy, completeness, usefulness and real-time of any information and contents available at this website, and against any intended purposes (of any kind whatsoever) by use thereof, by the user/s (whether used by user/s directly or indirectly). Users are advised to verify / check any information and contents, with the relevant Government department(s) and / or other source(s) and to obtain any appropriate professional advice before acting thereon as may be provided, from time to time, in the website.’

Thus, the GSTN portal clearly disclaims its responsibility over administering the law and states that the web functionality does not represent the interpretation of law. In fact, the portal also does not claim responsibility over the accuracy of the contents which are uploaded on it and has directed taxpayers to either approach Government officials or seek professional advice.

DAWN OF THE PORTAL
The e-governance initiative under GST commenced with the migration of registration(s) of erstwhile taxpayers into the GST regime. This involved the filling of Form REG-26 which contained checks and balances in terms of back-end validation of PAN numbers, legacy registration numbers, bank accounts, etc. This is usually done to sanitise the data at the entry point so that redundancies can be avoided. As time passed, additional functionalities were introduced on the GSTN portal. The most critically discussed of these were related to the returns in GSTR1, GSTR2, GSTR3 and their ancillary forms. Though these forms were notified in law, due to various reasons including lack of technical preparedness of the GSTN, the alternative summary form in GSTR3B was introduced. Subsequently, additional modules on transition returns, refunds, input tax credit (ITC), etc., were introduced in a phased manner. The transition module has been widely debated in legal forums since it directly impacted the eligibility of taxpayers to claim the said credit. Technical glitches in the form, lack of clarity in the transition module, coupled with the complexity of the user tabs, made the form difficult to comprehend for taxpayers resulting in non-availment of credit.

In September, 2019 the refund module was launched envisaging electronic processing of refund from application to disbursement. There have been instances where taxpayer refunds have been delayed due to internal technical glitches in the refund disbursement process and its interaction with other external databases (such as PFMS). Recently, the portal has enabled the functionality of appeals (including advance rulings) in respect of refunds, registrations, etc. The portal is progressively digitising the inter-face between the administration and taxpayers.

In the effort to digitise the process, internal controls / checkpoints have been placed at the point of data entry itself which may hinder even genuine cases. The GSTN assumes that taxpayers have uploaded accurate data at all entry points in the manner expected by the portal. Taxpayers in many cases have failed to understand the data expectations due to lack of technical guidance material or ineffective helpdesk support from the GSTN, thus resulting in incorrect data entry. Moreover, the portal has been developed based on the administration’s perspective / interpretation of law which may or may not be accurate. In an era of self-assessment (in contradistinction to officer-assessment), taxpayers should be granted the liberty to apply the law as per their own understanding without any technical hindrances. The vires of taxing statutes have been tested multiple times in higher forums and reading down or striking down of legal provisions is not unknown. With several technical restrictions (enlisted below), taxpayers have been thrust with the administration’s view of law.

The ensuing paragraphs are an attempt to list the technical challenges in the portal which appear to be either contradictory to law or hamper a taxpayer’s right to perform a self-assessment of his taxes based on his interpretation. The important pointers under each module are herewith tabulated2:

Return module

Table
Ref.

Functionality

Comments

GSTR1: Aggregate turnover

Data filed auto-populated used for various
threshold limits such as E-invoice, etc.

The functionalities use turnover for
enabling facilities of e-invoicing, etc. This causes issues where taxpayers
might have reported an incorrect turnover in the previous year(s) which may
have been rectified in annual returns / left unrectified. The system merely
aggregates the turnover and adopts this as the basis for enabling / disabling
features

GSTR1: Date of invoice and invoice No.

Date of invoice cannot be before date of
registration

A taxable person who has availed GST
registration belatedly is barred from reporting the original tax invoice even
though taxes may have been charged / paid in the said invoice to the
recipient

GSTR1: B2C and B2B

Amendment from B2C to B2B

One may view section 39(7) as being a time
limit only to rectify any particulars which have an impact on the tax liability. In cases where the particulars do not
have any tax liability such as this, the time limit provisions should not
apply, but the portal restricts such revisions

GSTR1 : SEZ

SEZ supplies liable for
CGST / SGST

Certain advance rulings have stated that
restaurant services are liable to CGST / SGST and not IGST. Return
functionalities do not permit CGST / SGST for SEZ invoices

GSTR1 : B2CL

Amendment in B2CL invoices

B2C large invoices (in excess of Rs. 2.5
lakhs) are entered at an invoice level but amendment tables in GSTR1 do not
provide any functionality to update the GSTIN of these invoices and shift
them to the B2B section – taxpayers are forced to raise credit notes to the
B2CL data and upload fresh invoices in the B2B section

GSTR1 – DNs / CNs

Linking DNs / CNs with multiple invoices

Until recently, DNs / CNs were mandatorily
required to be linked to a single invoice. The law has been amended making
the linking an open-ended feature. The GSTN portal has only recently opened
this feature by de-linking the mapping of DNs / CNs with a single invoice.
Till now, taxpayer(s) were unable to upload this data

GSTR1 – Export details

Alterations in type of exports

Alteration in invoices from ‘with payment’
to ‘without payment’ is not permissible which causes disabilities in other
refund functionalities

GSTR3B: Taxable turnover

Negative turnover is not permissible

In cases where the credit note raised in a
tax period exceeds the output turnover, the data field does not permit negative
values. CBEC Circular / Helpdesk suggest that the unadjusted credit notes are
to be reported in subsequent months. Moreover, due to zero-values being
reported in GSTR3B, there arises a variance between GSTR1 and GSTR3B and
disables certain other functionalities in other modules (such as refunds,
etc.)

GSTR3B – ITC

ITC order of set-off

GSTR3B mandatorily requires the ITC to be
utilised prior to making cash payments or performing inter-head set-offs.
Taxpayers may choose to avail ITC and refrain from utilising the same on the
grounds of ambiguity. But the utilisation is thrust upon them, consequently
opening the scope for incorrect utilisation

GSTR9 – Table 9

Details of tax paid

Annual return auto-populates details of
taxes paid in a non-editable format in GSTR9. Taxpayers who have paid taxes

GSTR9 – Table 9

 

(continued)

Details of tax paid

through DRC 03, etc., and have

included the turnover in annual return
would not be able to record this tax payment, resulting in glaring
discrepancies

GSTR9 – Table 6

Details of input tax availed

Annual return permits reversal of ITC and
accordingly directs filing of DRC 03 for such reversals but the reverse is
not permissible. Taxpayers are not permitted to avail ITC through the annual
return. In the absence of a clear GSTR1, 2 and 3 and a stop-gap GSTR3B,
taxpayers have looked at GSTR9 as the only
final return to report the tax credits / liabilities. The law neither
specifies the document of availing credit nor bars claim of credit through
GSTR9. Yet, the functionality in the tax portal does not permit availing of
such ITC in the electronic credit ledger through GSTR9

GSTR9

Table 8 – GSTR2A

Details auto-populated in Table 8
representing input invoices uploaded by suppliers does not reconcile with the
taxpayers’ GSTR2A. Until 2018-19, the taxpayers were not provided with
item-wise listing of such auto-population and in many cases taxpayers were
forced to file
the document as it was auto-populated

GSTR9

Table 9 – Auto population

Form GSTR9 keeps the data fields for this
table open to alteration by the taxpayer but the portal freezes the tax
payment details through ITC and / or cash

GSTR1/9

Exempt supplies / HSN tables

The exempt supplies / HSN tables are static
and not open to alteration. Without the functionality, the taxpayers would be
faced with questioning on classification even though it may not be admittance
by taxpayer in its strict sense

GSTR1/3B/9

Unfructified supplies

Taxpayers may have situations where
supplies are rejected
by the recipient at the doorstep. Though the law provides for cancellation of
invoice, once
the invoice is uploaded on the GSTR1 the portal does not have any feature to
mark a particular invoice as cancelled, forcing the taxpayer to raise credit
notes which is itself not permissible under law

GSTR2A & 2B module

Table
Ref.

Functionality

Comments

GSTR2B

ITC not available summary

The form provides an ‘advisory’ that
invoices which do not meet the conditions of section 16(4), or the place of
supply is different from the location of the recipient, should not be
eligible for credit. The criterion of place of supply does not seem to emerge
from any specific provision

GSTR2A / 2B time limit

Delayed reporting of invoice by
counter-party

GSTR2A/ 2B mark credit which is belatedly
reported as ineligible even though the supplier would have reported taxes
appropriately and complied with section 16 in its entirety, e.g., alteration
of an invoice from B2C table to B2B table involving updation of GSTINs

GSTR2A / 2B

DTA clearance by SEZ

Bill of entry filed by DTA on procurement
of goods by an SEZ does not appear in the GSTR2B. This throws up red flags
while filing GSTR3B as this data is not auto-populated in the said form

__________________________________________________________
2 The tables are illustrative and not exhaustive – over the period GSTN has gradually addressed many such challenges

Adjudication modules

Table
Ref.

Functionality

Comments

GST APL-01

Disputed tax

Taxes which are reported through DRC 03
challan are reported as ‘admitted tax’ even though the tax payments are made
under protest to avoid the interest / penal consequences. While filing the
appeal, the online module directs an additional 10% to be paid as pre-deposit
towards disputed liability. Effectively, the taxpayers are required to pay
110% of the tax demanded for filing the appeal online

Job work module

Table
Ref.

Functionality

Comments

ITC-04

Unit of measurement (UOM)

The form raised red flags where the UOM of
outward movement towards job work is different from inward movement from job
worker. The form does not appreciate that job work activity can result in
complete transformation of inputs resulting in difference in UOMs. The portal
attempts to map the outward dispatches with inward receipts at the same UOM

Refund modules

Table
Ref.

Functionality

Comments

RFD-01

Sequential filing

RFD-01 are mandatorily required to be filed
sequentially forcing the taxpayer to file Nil refund applications even though
he / she may want to come back and file a refund for past period (of course
within the time limit)

RFD-01

Export turnover

Incorrect reporting of export turnover in
other tables (such as B2B, etc.) of GSTR3B / GSTR1 is not reflected in the
refund form resulting in incorrect application of refund formula

RFD-01

Lower of three figures

RFD-01 restricts refunds to the lower of
(a) input tax credit at the end of the tax period; (b) refund as on date of
application; and (c) input tax credit as per formula. The refund module is
not reflective of the law as it restricts refund of ITC based on the balance
as at the end of the tax period. Taxpayers who have accumulated ITC after the
relevant tax period would still be restricted to the ITC as at the end of the
tax period

RFD-01

Input tax credit

Taxpayers may have reversed ITC pertaining
to past periods while filing GSTR3B. Though prior period reversals are not
relevant for refund computations, the online form auto-populates the net
figure from GSTR3B, causing a deviation from the statutory formula

E-way bill modules

Table
Ref.

Functionality

Comments

EWB-01

Validity of E-way bill

The E-way bill portal calculates the
validity automatically based on the PIN codes specified by the taxpayer. It
is quite possible that transporters adopt a route of their choice depending
on accessibility, convenience, etc. To freeze the validity based on pin codes
from external third party data is not specified under law

EWB-01

Back-end validation of vehicle numbers

E-way bill portal performs a back-end
validation of the vehicle numbers with the government-approved ‘vaahan’
website. Inefficiencies in those websites also creep into the GST system as
the E-way bill portal raises red flags for a vehicle number not visible in
the ‘vaahan’ website

JUDICIAL PRECEDENCE UNDER GST

The prominence of law over forms and procedures has been the hallmark of even recent decisions under GST. The Delhi High Court in Bharti Airtel Limited vs. UOI [2020 (5) TMI 169] examined the plea of the taxpayer who was restricted from rectifying the returns for a particular tax period and was directed by a CBEC Circular to rectify only in subsequent tax periods. The Court examined the limitations of the GSTN portal and held that the taxpayer had a right to rectify the very same return and claim refund of the excess taxes paid for the tax period under consideration. The Madras High Court in Sun Dyechem vs. CST 2020 TIOL-1858-HC-MAD-GST held that incorrect reporting of tax type by the supplier cannot be left unamended as it would hamper the tax credits at the customer’s end. The Court directed the jurisdictional officer to make amendments in supplier’s GSTR1 so that the correct tax type is reflected in the customer portal, thus undermining the influence of the portal over equity and law.

In another case, the Delhi High Court in Brand Equity Treaties Limited vs. UOI [2020 (5) TMI 171] recognised that technical glitches should be granted a wider scope to include even challenges faced at the taxpayer’s end (such as lack of internet connectivity, IT infrastructure, etc.). In the context of Transition Credit, Courts in many instances (such as Tara Exports [2020 (7) TMI 443]) have permitted manual filing of Tran-1 forms to avail the tax credit as an alternative to filing the same on the online portal. These decisions affirm the settled proposition that procedural laws are meant to further the substantive rights acquired under law.

However, one must also not lose sight of the decision of NELCO vs. UOI [2020 (3) TMI 1087] wherein the Bombay High Court upheld the vires of the rule defining technical glitches as being those arising at the GSTN end and cannot be interpreted to cover those difficulties prevailing at the taxpayer’s end. The Madhya Pradesh High Court in Shri Shyam Baba Edible Oils vs. CC 2020-VIL-567-MP held that the procedure prescribed in law should be strictly followed. Where the law prescribes SCNs, orders, etc., which are to be communicated through the common portal, they should necessarily be communicated only through the common portal. These decisions uphold the importance of the common portal and imply that taxpayers should take necessary steps to equip themselves with the technological upgradations warranted under the new law.

Let us now take up the question whether the GSTN portal can be described as a portal to report the numbers of the taxpayer or can be it designed to administer the law by placing checks and balances at the data entry point itself, thereby curbing the right of the taxpayer to self-assess its taxes. Going by the propositions laid down above, the portal cannot place fetters on the taxpayer’s right to fill up data as per its computation and should not be driven by pre-filled data points contained in the GST portal. Moreover, even where the data is auto-populated, the taxpayers should be granted the right to alter the auto-population and place their self-assessed values. The tax administration can without doubt examine the data at the back-end and seek clarifications to the alteration of the data plugged into the form, but that should be performed through a due process of adjudication or assessment. A website-driven automated assessment is not warranted under the GST law. Therefore, the GSTN portal should refrain from being a legislative or administrative tool and rather restrict itself to being a repository of information of all taxpayers.

A second question is to examine whether the enabling Notifications under the CGST / SGST Act of identifying the GSTN portal as a common portal would apply to the IGST Act as well. Whether separate Notifications are required to be issued under the IGST Act empowering the GSTN portal to operate as a common portal for all purposes of the IGST Act? Going by the implication of the phrase mutatis mutandis3 in section 20 of the IGST Act which links it to the CGST Act, the rules, notifications, including the prescription of the common portal, would apply equally to the IGST Act as well. The entire chapter of ‘Miscellaneous provisions’ under the CGST Act has been made applicable to the IGST Act and consequently the common portal notified in terms of section 146 of the CGST Act falling under this chapter would be operative for the IGST Act as well.

A third question, on the vires of the restrictions / controls placed in the GSTN portal, has been discussed above. The forms are aimed at capturing the self-assessed data of the taxpayers and not to regulate the taxpayer itself. The restrictions are questionable and even where the common portal is the primary forum for making necessary applications, the Court has devised an alternative approach of manual filing of the applications. The taxpayer ought to have a fit case for seeking this alternative remedy of filing manual applications. The taxpayers could face hurdles subsequently in enabling the functionalities of refund, reflection in electronic credit ledgers, etc., and hence should use this as a measure of last resort only.

_________________________________________________
3 (1983) 2 SCC 82 Ashok Service Centre vs. State of Orissa
Coming to a fourth, crucial question, proper officers have been the ‘go-to persons’ for taxpayers in case of technical difficulties. But the situation here is such that proper officers are neither equipped with legal nor technological powers and therefore claim helplessness. Taxpayers run from pillar to post between the GSTN helpdesk and the proper officer. In many cases the helpdesk directs taxpayers to reach out to the proper officer for technical snags. Without any specific direction from the Board, taxpayers are unable to enforce their right to receive a resolution to their technical problems from the proper officer. In certain cases, helpdesks also provide solutions without legal backing (for example, in one case a helpdesk directed the taxpayer to apply for cancellation and seek fresh registration due to a technical snag). The helpdesks are not proper officers under law and have no authority to decide on legal matters and it is imperative for the administration to issue binding guidelines to the field formations to accept the technical queries, seek speedy resolution at the back-end from the helpdesk and respond to the taxpayer with a solution. Until then, the taxpayers would be left on their own to comply with the law and then offer extensive explanations at the time of audits / assessments on what had transpired at the time of filing the applications on the portal and the reason for plugging the numbers as it stood therein.

In conclusion, the helpdesk does not have any legal authority to resolve taxpayer grievances and the proper officers should be directed through appropriate administrative instructions to take up these matters.

The authority to design, operate and regulate the IT infrastructure is open to questioning as the Legislature has not empowered the Government(s) or their Boards to direct the creation or regulation of the website. The involvement of GSTN as a separate entity appears to be on a questionable foundation and open to examination. Until then, taxpayers should make earnest efforts to reconcile themselves to the portal requirements and record the deviations from the data expectations suitably to enforce their legal rights of a self-assessment rather than a portal-assessment at higher forums.

IMPLEMENTATION OF Ind AS 116 ‘LEASES’ USING FULL RETROSPECTIVE APPROACH

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 all material lease contracts. Almost all companies that adopted Ind AS 116 applied the standard using the modified retrospective approach, with the cumulative effect of initially applying the standard, recognised on the date of initial application. Accordingly, there was no restatement of comparative information; instead, the cumulative effect of initially applying this standard was recognised as an adjustment to the opening balance of retained earnings on the date of initial application (refer to this column in the BCAJ of July, 2020 for illustrative disclosures on the modified retrospective approach).

Given below is an illustration of a company that has adopted the full retrospective approach by restating of previous years’ figures to make them comparable.

NESTLE INDIA LTD. (31ST DECEMBER, 2020)

From Notes forming part of Financial Statements
Leases
Effective 1st January, 2020, the Company has applied Ind AS 116 ‘Leases’ using full retrospective approach recognising the cumulative effect of adopting Ind AS 116 as an adjustment to the retained earnings as on the transition date, i.e., 1st January, 2019. Accordingly, previous year figures have been restated to make them comparable. Ind AS 116 has replaced the existing leases standard, Ind AS 17 ‘Leases’.

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.

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.

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 or 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 remeasured 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 remeasured 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 with a corresponding adjustment to the carrying value of right-of-use assets.

Lease liability and right-of-use assets have been separately presented in the Balance Sheet and lease payments have been classified as financing cash flows.

The Company’s leases mainly comprise of land, buildings and vehicles. The Company leases land and buildings primarily for offices, manufacturing facilities and warehouses.

The Company recognises lease payments as operating expense on a straight-line basis over the period of lease for certain short-term (one month or below) or low value arrangements.

From Notes forming part of Financial Statements
First time adoption, Ind AS 116 ‘Leases’
(i) The Company has adopted Ind AS 116 ‘Leases’ effective 1st January, 2020 using the full retrospective method with a transition date of 1st January, 2019. The impact of the Ind AS 116 adoption on the Balance Sheet as at 31st December, 2019 and 1st January, 2019 is as under:

As at 1st January, 2019
(Rs. in million)

Particulars

Pre-implementation
of Ind AS 116

Implementation
adjustments

Post-implementation
of Ind AS 116

Property, Plant & Equipment

24,006.2

(1,192.1)

22,814.1

Right of use assets

–

2,429.4

2,429.4

Others

56,874.6

–

56,874.6

Total assets

80,880.8

1,237.3

82,118.1

Other equity

35,773.2

(122.8)

35,650.4

Others

964.2

–

964.2

Total equity

36,737.4

(122.8)

36,614.6

Non-current lease liabilities

–

960.4

960.4

Current lease liabilities

–

440.9

440.9

Deferred tax liabilities (net)

588.2

(41.2)

547.0

Trade payables

12,403.7

–

12,403.7

Others

31,151.5

–

31,151.5

Total equity and liabilities

80,880.8

1,237.3

82,118.1

As of 1st December, 2019
(Rs. in million)

Particulars

Pre-implementation
of Ind AS 116

Implementation
adjustments

Post-implementation
of Ind AS 116

Property, Plant and Equipment

22,267.1

(1,179.0)

21,088.1

Right of use assets

–

2,326.4

2,326.4

Others

48,314.9

–

48,314.9

Total assets

70,582.0

1,147.4

71,729.4

Other equity

18,358.4

(133.9)

18,224.5

Others

964.2

–

964.2

Total equity

19,322.6

(133.9)

19,188.7

Non-current lease liabilities

–

896.0

896.0

Current lease liabilities

–

462.0

462.0

Deferred tax liabilities

179.5

(45.1)

134.4

Trade payables

14,946.9

(31.6)

14,915.3

Others

36,133.0

–

36,133.0

Total equity and liabilities

70,582.0

1,147.4

71,729.4

(i) The cumulative impact of application of the standard net of deferred taxes has been adjusted through opening equity (1st January, 2019) and previous year’s equity has been restated. Reconciliation of equity as previously reported versus the restated equity is as under:

Particulars

As
at 31st December, 2019

As
at 1st January, 2019

Equity reported in accordance with Ind AS 17

19,322.6

36,737.4

a) Recognition of ROU assets

1,147.4

1,237.3

b) Recognition of short-term and long-term lease liabilities

(1,326.4)

(1,401.3)

c) Deferred tax impact

45.1

41.2

Restated equity in accordance with Ind AS 116

19,188.7

36,614.6

(ii) Reconciliation of profit reported for 2019 to restated profit after adoption of Ind AS 116 ‘Leases’ is as under:

Particulars

Pre-implementation
of
Ind AS 116

Implementation
adjustments

Post-implementation
of Ind AS 116

Revenue of operations

123,689.0

–

123,689.0

Total income

126,157.8

–

126,157.8

Finance costs (including interest cost on
employee benefit plans)

1,198.3

92.9

1,291.2

Depreciation and amortisation

3,163.6

537.9

3,701.5

Employee benefit expenses

12,629.5

(47.8)

12,581.7

Other expenses

29,545.4

(568.0)

28,977.4

Others

52,871.1

–

52,871.1

Total expenses

99,407.9

15.0

99,422.9

Profit before tax

26,749.9

(15.0)

26,734.9

Tax expenses

7,054.4

(3.9)

7,050.5

Profit after tax

19,695.5

(11.1)

19,684.4

Other comprehensive income

(1,547.7)

–

(1,547.7)

Total comprehensive income

18,147.8

(11.1)

18,136.7

Profit from operations

25,862.5

77.9

25,940.4

(iii) Effect on the statement of cash flows for the year ended 31st December, 2019 is as under:

Particulars

Pre-implementation
of Ind AS 116

Implementation
adjustments

Post-implementation
of Ind AS 116

Profit before tax

26,749.9

(15.0)

26,734.9

Depreciation & amortisation

3,163.6

537.9

3,701.5

Interest on lease liabilities

–

92.9

92.9

Others

(7,576.8)

–

(7,576.8)

Net cash generated from operating activities

22,336.7

615.8

22,952.5

Net cash generated from investing activities

829.9

–

829.9

Interest on lease liabilities

–

(92.9)

(92.9)

Principal payment on lease liabilities

–

(522.9)

(522.9)

Others

(35,399.5)

–

(35,399.5)

Net cash used in financing activities

(35,399.5)

(615.8)

(36,015.3)

Net decrease in cash and cash equivalents

12,232.9

–

12,232.9

Total cash and cash equivalents at the
beginning of the year

35,239.0

–

35,239.0

Total cash and cash equivalents at the end of
the year

23,006.1

–

23,006.1

(iv) Impact of restatement on earnings per share (EPS) for the year ended 31st December, 2019 is not significant.

ACCOUNTING OF COMPLEX CONVERTIBLE BONDS WITH A CALL OPTION

A convertible bond instrument may have additional derivatives, such as a call or a put option. The accounting of such instruments can get very complex with regard to determining the values of and thereafter accounting for the host instrument, the equity element and the call option. The example in this article explains the concept in a very simplified manner.

EXAMPLE – MULTIPLE DERIVATIVES

Facts

• A Ltd. has issued Optionally Convertible Debentures (OCD) amounting to INR 300 crores to B Ltd. on the following terms:

  •  Tenure: 4 years
  •  Coupon: Nil
  • IRR: 15% p.a.

    
• During the tenure of the OCDs, A Ltd. can call the OCD and redeem it with the stated IRR.
• The market rate for similar debt without conversion feature is 17% p.a.
• B Ltd. can also ask for conversion at any time before maturity based on the following formula:

  •  No. of equity shares = (Investment amount + applicable IRR) divided by (Face value of equity share; i.e.,

INR 10)
• If redemption or conversion doesn’t happen before maturity, then the OCDs will be redeemed mandatorily at maturity.

How is this instrument accounted for in the books of A Ltd. in the following two scenarios?
Scenario A – If B Ltd. opts for conversion before maturity at end of year 1.
Scenario B – B doesn’t opt for conversion and OCDs are redeemed at maturity.

Response

Let us first consider the relevant provisions under the Standards before we attempt to solve the problem.

Ind AS 32 Financial Instruments: Presentation

19. If an entity does not have an unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation, the obligation meets the definition of a financial liability, except …………….

29. An entity recognises separately the components of a financial instrument that (a) creates a financial liability of the entity and (b) grants an option to the holder of the instrument to convert it into an equity instrument of the entity. For example, a bond or similar instrument convertible by the holder into a fixed number of ordinary shares of the entity is a compound financial instrument. From the perspective of the entity, such an instrument comprises two components: a financial liability (a contractual arrangement to deliver cash or another financial asset) and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert it into a fixed number of ordinary shares of the entity). The economic effect of issuing such an instrument is substantially the same as issuing simultaneously a debt instrument with an early settlement provision and warrants to purchase ordinary shares, or issuing a debt instrument with detachable share purchase warrants. Accordingly, in all cases, the entity presents the liability and equity components separately in its balance sheet.

32. Under the approach described in paragraph 31, the issuer of a bond convertible into ordinary shares first determines the carrying amount of the liability component by measuring the fair value of a similar liability (including any embedded non-equity derivative features) that does not have an associated equity component. The carrying amount of the equity instrument represented by the option to convert the instrument into ordinary shares is then determined by deducting the fair value of the financial liability from the fair value of the compound financial instrument as a whole.

Ind AS 109 Financial Instruments

B 4.3.5 (e) A call, put, or prepayment option embedded in a host debt contract or host insurance contract is not closely related to the host contract unless:

i. the option’s exercise price is approximately equal on each exercise date to the amortised cost of the host debt instrument or the carrying amount of the host insurance contract; or

ii. ………..

The assessment of whether the call or put option is closely related to the host debt contract is made before separating the equity element of a convertible debt instrument in accordance with Ind AS 32.

DAY 1 ACCOUNTING

Compound financial instrument (see paragraphs 19, 29 and 32 of Ind AS 32)
• The OCD issued by A Ltd. is a compound financial instrument. The host instrument will be classified as liability, since there is contractual obligation to pay cash toward interest (i.e., guaranteed IRR of 15% p.a.) and principal repayment that issuer A Ltd. cannot avoid. The equity conversion option is accounted as equity.
• The equity conversion option can’t be considered as closely related to the host instrument, because an equity conversion option is not a normal feature of a typical debt instrument, so it needs to be separated. The usual treatment for an instrument with these terms is to conclude that the ‘fixed for fixed’ criterion is met. This is because the number of shares is predetermined at the outset and the only variable is the passage of time. Accordingly, conversion option is classified as equity on Day 1.
• During the life of the host bond, expectations about early conversion should not be taken into account when estimating the cash flows used to apply the effective interest rate. The early conversion option is a characteristic of the equity component (the conversion option) and not of the host liability. The estimated cash flows used to apply the effective interest rate method are, therefore, the contractual cash flows based on the contractual final maturity of the host liability. The Effective Interest Rate (EIR) is 17% p.a.

Early call option to redeem OCD [see paragraph B4.3.5(e) of Ind AS 109]
• The call option’s exercise price is set at par value of OCD plus stated IRR till the date of exercise of call option. Therefore, at each exercise date the option’s exercise price is likely to be approximately equal to the amortised carrying amount of the OCDs plus the equity conversion option. Therefore, the call option is closely related to the host debt instrument. As a result, the call option is not separately accounted for but it remains part of the liability component. The assessment of whether the call option is closely related to the host debt contract is made before separating the equity element of a convertible debt instrument in accordance with Ind AS 32.

Date

Particulars

Amount
(rounded off in crores)

Day 1

Bank

300

 

 

To Equity (balancing figure representing residual interest)

 

20

 

To Debenture (future cash flows discounted at 17%)

 

280

 

(Initial recognition of the financial instrument
in the nature of a compound instrument comprising of elements of debt and
equity)

 

 

     
Subsequent accounting

Date

Particulars

Amount
(rounded off in crores)

End of Year 1

Interest on Debentures

48

 

 

To Debenture (classified under ‘Liability component of compound financial
instrument’)

 

48

 

(Interest recognised in P&L at EIR of 17%;
i.e. 280*17%)

 

 

Scenario A – If B Ltd. opts for conversion at end of Year 1
If B Ltd. opts for conversion before maturity – Since conversion was allowed under the original terms of instrument, the entity should determine the amortised cost of liability component using the original EIR till the conversion date. It will derecognise the liability component and recognise it as equity. There is no gain or loss on early conversion.    

Date

Particulars

Amount
(rounded off in crores)

End of Year 1

Debenture [280+48]

328

 

 

To Equity share capital

 

328

 

(Conversion of OCD into equity shares of the
company)

 

 

Scenario B – If B doesn’t opt for conversion and OCDs are redeemed at maturity

Date

Particulars

Amount
(rounded off in crores)

Year 1-4

Interest on debentures (cumulative interest for 4 years)

245

 

 

To Debenture

 

245

 

(Interest recognised in P&L at EIR of 17%)

 

 

 

 

 

 

End of Year 4

Debenture [280+245]

525

 

 

To Bank

 

525

 

(Being debentures redeemed)

 

 

KEY TAKEAWAYS:

  •  In the case of a compound financial instrument, the instrument has to be separated for the liability and equity component;
  • The instrument may have additional derivatives, such as a put or a call option. The accounting of such derivatives will depend upon whether those are closely related to the liability component. If the option is closely related to the liability component it is not separated from the liability component. On the other hand, if the option is not closely related to the liability component, it is separately accounted for and marked to market at each reporting date, till such time as it is finally settled;
  • On settlement of the compound financial instrument, the equity element (INR 20) recognised initially, may be transferred to retained earnings.

 

ISSUES IN TAXATION OF DIVIDEND INCOME, Part – 2

In the first of this two-part article published in April, 2021, we had analysed the various facets of the taxation of dividends from a domestic tax perspective as well as the construct of the dividend Article in the DTAAs. In this second part, we analyse some specific international tax issues related to dividends, such as applicability of DTAA to the erstwhile dividend distribution tax (‘DDT’) regime, application of the Most Favoured Nation clause in a few DTAAs, some issues relating to beneficial ownership, application of the Multilateral Instrument to dividends and some issues relating to underlying tax credit.

1. APPLICATION OF DTAA TO THE ERSTWHILE DDT REGIME
From A.Y. 2004-05 to A.Y. 2020-21, India followed the DDT system of taxation of dividends. Under that regime, the company declaring the dividends was liable to pay DDT on the dividends declared. One of the issues in the DDT regime was whether the DTAAs would restrict the application of the DDT. While this issue may no longer be relevant for future payments of dividends, with the Finance Act, 2020 reintroducing the classical system of taxation of dividends, this may be relevant for dividends paid in the past.

This controversy has gained significance because of a recent decision of the Delhi ITAT in the case of Giesecke & Devrient (India) (P) Ltd. vs. Add. CIT [2020] (120 taxmann.com 338). However, before considering the above decision, it would be important to analyse two decisions of the Supreme Court which, while not specifically on the issue, would provide some guidance in analysing the issue at hand.

The first Supreme Court decision is that of Godrej & Boyce Manufacturing Company Limited vs. DCIT (2017) (394 ITR 449) wherein the question before the Court was whether section 14A applied in the case of dividend income (under the erstwhile DDT regime). The issue to be addressed was whether dividend income was income which does not form part of the total income under the Act. In the said case, the assessee argued that DDT was tax on the dividends and, therefore, dividends being subject to tax in the form of DDT, could not be considered as an income which does not form part of the total income of the shareholder. The Supreme Court did not accept this argument and held that the provisions of section 115-O are clear in that the tax on dividends is payable by the company and not by the shareholders and by virtue of section 10(34) the dividend income received by the shareholder is not taxable. Therefore, the Apex Court held that the provisions of section 14A would apply even for dividend income in the hands of the shareholders.

Interestingly, in the case of Union of India & Ors. vs. Tata Tea Co. Ltd. & Anr. (2017) (398 ITR 260), the Supreme Court was asked to adjudicate on the constitutional validity of DDT paid by tea companies as the Constitution of India prohibits taxation of profits on agricultural income. In this case the Court held that DDT is not a tax on the profits of the company but on the dividends and therefore upheld the constitutional validity of DDT.

Now the question arises, how does one read both the above decisions of the Supreme Court, delivered in different contexts, to give effect to both the orders in respect of DDT. One of the interpretations of the application of DDT, keeping in mind the above decisions of the Supreme Court, is that while DDT is not a tax on the shareholders but the company distributing dividends, it is a tax on the dividends and not on the profits of the company distributing dividends.

One would need to evaluate whether the above principle emanating from both the above judgments could be applied in the context of a DTAA. Article 10 of the UN Model Convention reads as under:

‘(1) Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
(2) However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed:…..’ (emphasis supplied).

Therefore, the UN Model Convention as well as the DTAAs which India has entered into provide for taxation of the stream of income and do not refer to the person in whose hands such income is to be taxed. Accordingly, one may be able to take a view that a DTAA restricts the right of taxation of the country of source on dividend income and this restriction would apply irrespective of the person liable for payment of tax on the said dividend income. In other words, one may be able to argue that DTAA would restrict the application of DDT to the rates specified in the DTAA.

Interestingly, the Protocol to the India-Hungary DTAA provides as under,

‘When the company paying the dividends is a resident of India the tax on distributed profits shall be deemed to be taxed in the hands of the shareholders and it shall not exceed 10 per cent of the gross amount of dividend.’

In other words, the Protocol deems the DDT to be a tax on the shareholders and therefore restricted the DDT to 10%.

Further, as Hungary is an OECD member and the DTAA between India and Hungary was signed in 2003, one could also have applied the Most Favoured Nation clause in the Protocols in India’s DTAAs with Netherlands, France and Sweden to apply the above restriction on shareholders resident in those countries.

The Delhi ITAT in the case of Giesecke & Devrient (India) Pvt. Ltd. (Supra) also held that the DDT would be restricted to the tax rates as prescribed under the relevant DTAA. The argument that the Delhi ITAT has considered while applying the tax treaty rate for dividends is that the introduction of the DDT was a form of overriding the treaty provisions, which is not in accordance with the Vienna Convention of the Law of Treaties, 1969 and hence the DTAA rate should override the DDT rate.

Now, the question is whether one can claim a refund of the DDT paid in excess of the DTAA rate applying the above judicial precedents and, if so, which entity should claim the refund – the company which has paid the dividends or the shareholder? In respect of the second part of the question, the Supreme Court in the case of Godrej & Boyce (Supra) is clear that DDT is a tax on the company declaring the dividends and not on the shareholders. Therefore, the claim of refund, if any, for DDT paid in excess of the DTAA rates should be made by the company which has paid the dividends and not by the shareholders.

In order to evaluate whether one can claim refund of the excess DDT paid, it is important to analyse two scenarios – where the case of the taxpayer company is before the A.O. or an appellate authority, and where there is no outstanding scrutiny or appeal pending for the taxpayer company.

In the first scenario, where the taxpayer is undergoing assessment proceedings or is in appeal before an appellate authority, such a refund may be claimed by making such a claim before the A.O. or the relevant appellate authority. While the A.O. may apply the principle of the Supreme Court in the case of Goetze (India) Ltd. vs. CIT (2006) (284 ITR 323), the appellate authorities are empowered to consider such a claim even if not claimed in the return of income following various judicial precedents, including the Bombay High Court in the case of CIT vs. Pruthvi Brokers & Shareholders (P) Ltd. (2012) (349 ITR 336).

In the second scenario, the options are limited. One may evaluate whether following certain judicial precedents this could be considered as a mistake apparent from record requiring rectification u/s 154 or whether one can obtain an order from the CBDT u/s 119.

In the view of the authors, if the taxpayer falls in the category as mentioned in the first scenario, one should definitely consider filing a claim before the A.O. or the appellate authority as even if such claim is rejected or subsequently the Supreme Court rules against the taxpayer on this issue, given that the DDT has already been paid by the taxpayer company, there may not be any penal consequences.

2. ISSUE IN APPLICATION OF MFN CLAUSE IN SOME TREATIES
Another recent issue is the application of the MFN clause to lower the rate of taxation of dividends. While application of the MFN clause is not a new concept, this issue has been exacerbated with the reintroduction of the classical system of taxation.
Article 10(2) of the India-Netherlands DTAA provides for a 10% tax in the country of source. Paragraph IV(2) of the Protocol to the India-Netherlands DTAA provides as follows,

‘If after the signature of this Convention under any Convention or Agreement between India and a third State which is a member of the OECD, India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention’ (emphasis supplied).

The India-Netherlands DTAA was signed on 13th July, 1988. Pursuant to this, India entered into a DTAA with Slovenia on 13th January, 2003. Article 10(2) of the India-Slovenia DTAA provides for a lower rate of tax at 5% in case the beneficial owner is a company which holds at least 10% of the capital of the company paying the dividends.

While the DTAA between India and Slovenia was signed in 2003, Slovenia became a member of the OECD only in 2010. In other words, while the Slovenia DTAA was signed after the India-Netherlands DTAA, Slovenia became a member of the OECD after the DTAA was signed.

Therefore, the question arises whether one can apply the MFN clause in the Protocol of the India-Netherlands DTAA to restrict India from taxing dividends at a rate not exceeding 5%.

In this context, the Delhi High Court in a recent decision, Concentrix Services Netherlands BV vs. ITO (TDS) (2021) [TS-286-HC-2021(Del)] has held that one could apply the rates as provided under the India-Slovenia DTAA by applying the MFN clause in the India-Netherlands DTAA. In this case, the assessee sought to obtain a lower deduction certificate from the tax authorities u/s 197 by applying the rates under the India-Slovenia DTAA. However, the tax authorities issued the lower deduction certificate with 10% as the tax rate. Following the writ petition filed by the taxpayer, the Delhi High Court upheld the view of the taxpayer. The Delhi High Court relied on the word ‘is’ in the India-Netherlands DTAA in the term ‘….which is a
member of the OECD…’ of the Protocol. The High Court held that the said word describes a state of affairs that should exist not necessarily at the time when the subject DTAA was executed but when the DTAA provisions are to be applied.

Interestingly, the High Court also referred to the contents of the decree issued by the Netherlands in this respect wherein the India-Slovenia DTAA was made applicable to the India-Netherlands DTAA on account of the Protocol. In this regard, the Court followed the principle of ‘common interpretation’ while applying the interpretation of the issue in the treaty partner’s jurisdiction to the interpretation of the issue in India.

Therefore, one may be able to apply the lower rates under the India-Slovenia DTAA (or even the India-Colombia DTAA or India-Lithuania DTAA which also provide for a 5% rate) to the India-Netherlands DTAA by virtue of the MFN clause in the latter.

Similarly, India’s DTAAs with Sweden and France also contain a similar MFN clause and both the DTAAs are also signed before the India-Slovenia DTAA. Therefore, one can apply a similar principle even in such DTAAs.

However, it is important to consider the practical aspects such as how should one disclose the same in Form 15CB or in the TDS return filed by the payer as the TDS Centralised Processing Centre may process the TDS returns with the actual DTAA rate without considering the Protocol.

3. SOME ISSUES RELATING TO BENEFICIAL OWNER
In the first part of this article, we analysed the meaning of the term ‘beneficial owner’ in the context of DTAAs. This article seeks to identify some other peculiar issues around beneficial owner in DTAAs.

Firstly, it is important to understand that the term ‘beneficial owner’ is used in relation to ownership of income and not of the asset. Therefore, in respect of dividends one would need to evaluate whether the recipient is the beneficial owner of the income. The fact that the recipient of the dividends is a subsidiary of another company may not have any influence on the interpretation of the term. If, however, the recipient is contractually obligated to pass on the dividends received to its holding company, it may not be considered as the beneficial owner of the income.

Article 10 relating to dividends in most of India’s DTAAs requires the recipient of the dividends to be a beneficial owner of the income. For example, Article 10(2) of the India-Singapore DTAA provides as follows,

‘However, such dividends may also be taxed in the Contracting State …… but if the recipient is the beneficial owner of the dividends, the tax so charged shall not exceed….’ (emphasis supplied).

On the other hand, some of India’s DTAAs require the beneficial owner to be a resident of the Contracting State as against the recipient being the beneficial owner. For example, Article 10(2) of the India-Belgium DTAA provides as follows,

‘However, such dividends may also be taxed in the Contracting State ….. but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed….’ (emphasis supplied).
 
Now, the question arises whether the difference in the above languages would have any impact. In order to understand the same, let us consider an example wherein I Co pays dividends to A Co which is a resident of State A and A Co is obligated to transfer the dividends received to its holding company HoldCo, which is also a resident of State A. In other words, the recipient of the income is A Co and the beneficial owner of the income is HoldCo, and both are tax residents of State A.

In case the DTAA between India and State A is similar to that of the India-Singapore DTAA, the benefit of the lower rate of tax under the DTAA may not be available as the lower rate applies only if the recipient is the beneficial owner of the dividends, and in this case the recipient, i.e., A Co, is not the beneficial owner of the dividends.

On the other hand, if the DTAA between India and State A is similar to that of the India-Belgium DTAA, the benefit of the lower rate of tax under the DTAA would be available as the beneficial owner of the dividends, i.e., HoldCo, is a resident of State A. Therefore, one should also carefully consider the language in a particular DTAA before applying the same.

Another peculiar issue in respect of beneficial owner is the consequences of the recipient not being considered as the beneficial owner. The issue is further explained by way of an example.

Let us consider a situation where I Co, a resident of India, pays dividend to A Co, a resident of State A, and A Co is obligated to transfer the dividends received to its holding company B Co, a resident of State B.

In this scenario, the benefit of the DTAA between India and State A would not be available as the beneficial owner is not a resident of State A. This would be the case irrespective of whether the language is similar to the India-Singapore DTAA or the India-Belgium DTAA. Now the question is whether one can apply the DTAA between India and State B as the beneficial owner, B Co, is a resident of State B. While B Co is the beneficial owner of the income, the dividend is not ‘paid’ to B Co. Therefore, the Article on dividend of the DTAA between India and State B would not apply. Moreover, in the Indian context, the entity in whose hands the income would be subject to tax would be A Co and therefore evaluating the application of the DTAA between India and State B, wherein A Co is not a resident of either, would not be possible. Accordingly, in the view of the authors, in this scenario the benefit of the lower rate of tax on dividends in both the DTAAs would not be available.

4. APPLICATION OF THE MULTILATERAL INSTRUMENT (‘MLI’)
Pursuant to the Base Erosion and Profit Shifting Project of the OECD, India is a signatory to the MLI. The MLI modifies the existing DTAAs entered into by India. Some of the Indian DTAAs are already modified, with the MLI being effective from 1st April, 2020. We have briefly evaluated the relevant articles of the MLI which may apply in the context of dividends.

(a) Principal Purpose Test (‘PPT’) – Article 7 of the MLI
Article 7 of the MLI provides that the benefit of a Covered Tax Agreement (‘CTA’), i.e., DTAA as modified by the MLI, would not be granted if it is reasonable to conclude that obtaining the benefit of the said DTAA was one of the principal purposes of any arrangement or transaction, unless it is established that granting the benefit is in accordance with the object and purpose of the relevant provisions of the said DTAA.

In respect of dividends, therefore, the benefit under a DTAA may be denied in case it is reasonable to conclude that the transaction or arrangement was structured in a particular manner with one of the principal purposes being to obtain a benefit of that DTAA.

For example, US Co, a company resident in the US, wishes to invest in I Co, an Indian company. However, as the tax rate on dividends in the India-US DTAA is 15%, it interposes an intermediate holding company in the Netherlands, NL Co, with an objective to apply the India-Netherlands DTAA to obtain a lower rate of tax on dividends (5% after applying the MFN clause and the India-Slovenia DTAA as discussed above). In such a scenario, the tax authorities in India may deny the benefit of the dividend article in the India-Netherlands DTAA as one of the principal purposes of investment through the Netherlands was to obtain the benefit of the DTAA.

The PPT is wider in application than the General Anti-Avoidance Rules (‘GAAR’). Further, as it is a subjective test, there are various issues and challenges in the interpretation and the application of the PPT.

(b) Dividend transfer transactions – Article 8 of the MLI
Article 10(2) of some of the DTAAs India has entered into provide two rates of taxes as the maximum amount taxable in the country of source, with a lower rate applicable in case a certain holding threshold is met. For example, Article 10(2) of the India-Singapore DTAA provides for the following rates of tax as a threshold beyond which the country of source cannot tax:
(i) 10% of the gross amount of dividends in case the beneficial owner is a company which owns at least 25% of the shares of the company paying dividends; and
(ii) 15% in all other cases.

Such DTAAs provide a participation exemption by providing a lower rate of tax in case a certain holding threshold is met.

Article 8 of the MLI provides that the participation exemption which provides for a lower rate of tax in case a holding threshold is met would not apply unless the required number of shares for the threshold are held for at least 365 days, including the date of payment.

Therefore, in case of an Indian company paying dividends to its Singapore shareholder which holds more than 25% of the shares of the Indian company, the tax rate of 10% would be available only in case the Singapore company has held the shares of the Indian company for a period of at least 365 days.

One of the issues in the interpretation of Article 8 of the MLI is that the Article does not specify the manner of computing the period of holding – whether the period of 365 days should be considered for the period immediately preceding the date of payment of dividends, or can one consider the period after the dividend has been paid as well. While one may be able to take a view that as the Article does not require the holding period to be met on the date of the payment of the dividend, the period of holding after the payment of dividend may also be considered. However, there may be practical challenges, especially while undertaking withholding tax compliances for payment of such dividend.

5. ISSUES RELATED TO TAX CREDIT ON DIVIDENDS RECEIVED
Having analysed various aspects in the taxation of dividends in the country of source, we have also analysed some specific issues arising in respect of dividends in the country of residence. India follows the credit system of relieving double taxation.

One of the issues in respect of tax credit is that of conflict of interpretation between both the Contracting States. Let us take an example; F Co, a resident of State A, pays dividend on compulsorily preference shares to I Co, an Indian company. Assume that under the domestic tax law of State A such a payment is considered as interest. Assume also that the tax rate for interest and dividends is 15% and 10%, respectively, under the DTAA between India and State A.

In this scenario, State A would withhold tax at the rate of 15%. Now the question is whether India would provide a credit of 15% or would the tax credit be restricted to 10% as India considers such payment as dividends? The Commentary on Article 23 of the OECD Model Convention provides that in the case of a conflict of interpretation, the country of residence should permit credit for the tax withheld in the country of source even if the country of residence would treat this income differently. The only exception to this rule provided by the Commentary is when the country of residence believes that the country of source has not applied the provisions of a DTAA correctly, would the country of residence deny such higher tax credit.

In the present case, one may be able to contend that the country of source, State A, has correctly applied the DTAA in accordance with its domestic tax law and therefore India would need to provide tax credit of 15% subject to other rules relating to foreign tax credit.

Another peculiar aspect in respect of tax credit for dividends received from a foreign jurisdiction is that of the underlying tax credit. Some of the DTAAs India has entered into provide for an underlying tax credit.

For example, Article 25(2) of the India-Singapore DTAA, dealing with tax credit, provides as under,

‘Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Singapore, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Singapore tax paid, whether directly or by deduction. Where the income is a dividend paid by a company which is a resident of Singapore to a company which is a resident of India and which owns directly or indirectly not less than 25 per cent of the share capital of the company paying the dividend, the deduction shall take into account the Singapore tax paid in respect of the profits out of which the dividend is paid.’

Therefore, tax credit would include the corporate tax paid by the company which has declared the dividend. This is explained by way of an example. Let us consider that I Co, an Indian company, is a 50% shareholder in Sing Co, a tax resident of Singapore. Assuming that Sing Co has profits (before tax) of 100 which are distributed (after payment of taxes) as dividend to the shareholders, the tax credit calculation in the hands of I Co would be as follows:
 

 

Particulars

Amount

A

Profit of Sing Co

100

B

(-) Corporate tax of 17% in Singapore

(17)

C

Dividend payable (A-B)

83

D

Dividend paid to I Co (50% of C)

41.5

E

(-) Tax on dividends in Singapore

(0)

F

Net amount received by I Co (D-E)

41.5

G

Tax in India u/s 115BBD (15% of F)

6.2

H

(-) Tax credit for taxes paid in Singapore (=E)

0

I

(-) Underlying tax credit for taxes paid by Sing Co (50% of B)

(8.5)

J

Actual tax credit [(H + I ) subject to maximum to G]

(6.2)

K

Tax payable in India (G – J)

0

L

Net amount received in India (net of taxes) (F –
K)

41.5

6. CONCLUSION

Each DTAA may have certain peculiarities. For example, the India-Greece DTAA provides for an exclusive right of taxation of dividends to the country of source, and the country of residence is not permitted to tax the dividends. With the reintroduction of the classical system of taxation of dividends, therefore, it is important to understand and evaluate the DTAA in detail in cross-border payment of dividends.

It is also important to evaluate the tax credit article in respect of dividends received from foreign companies in order to examine whether one can apply underlying tax credit as well.

PREMIUM RECEIVED BY LANDLORD ON TRANSFER OF TENANCY RIGHTS – CAPITAL OR REVENUE?

ISSUE FOR DISCUSSION

A person acquiring the right to use an immovable property on a month-to-month basis without acquiring the ownership right is known as the tenant and the person continuing to be the owner of the property is known as the landlord. The monthly compensation paid for the use of the property is known as the rent. Various States in India have tenancy laws, whereby tenants are protected from eviction by the landlord from premises in which they are tenants. The rights so acquired by the person to use the property are known as tenancy rights. These rights may be acquired for a consideration known as salami or premium, though many States prohibit payment of such consideration.

On the other hand, many States permit the transfer of tenancy rights by the tenant for a consideration with the consent of the landlord, who may consent to the transfer on receipt of a payment or even without it. These tenancy rights are recognised by the tax laws as capital assets of the tenant and accordingly the gains if any on their transfer are taxed under the head capital gains. Section 55 provides that the cost of acquisition of the tenancy is to be taken as Nil unless paid for, in which case the cost would be the one that is paid for acquiring the tenancy. Tenancy rights when acquired for a fixed period under a written instrument are known as leasehold rights. Acquisition of a license to use the property, although similar to lease or tenancy, is not the same.

An interesting issue has arisen as to the manner of taxation of the receipt by the landlord for consenting to such transfer of tenancy – whether it is capital in nature and therefore not taxable or taxable as capital gains, or whether it is revenue in nature and taxable as income. There have been conflicting decisions of the Mumbai Bench of the Tribunal on this issue. The taxation of such receipt under the provisions of section 56(2)(x) is another aspect that requires consideration.

THE VINOD V. CHHAPIA CASE
The issue came up before the Mumbai Bench of the Tribunal in the case of Vinod V. Chhapia vs. ITO (2013) 31 taxmann.com 415.

In this case, the assessee was a HUF which owned an immovable property. Part of the property was let out to a tenant since 1962 and part of the property was occupied by the members of the HUF. The tenant expired in 1986 and the tenancy rights were inherited by her daughter.

A tripartite agreement was entered into between the daughter, new tenants and the landlord for surrender of tenancy by the daughter and grant of tenancy by the landlord in favour of the new tenants. The daughter surrendered her tenancy rights in favour of the landlord to facilitate renting of the property to the new tenants. The incoming tenants paid an amount of Rs. 14.74 lakhs to the daughter and an amount of Rs. 7.26 lakhs to the assessee-landlord simultaneously. The assessee accepted the surrender of tenancy rights and possession of the property and received the amount from the new tenants as consideration for granting the new tenants monthly tenancy of the flat.

The assessee invested the amount of Rs. 7.26 lakhs in bonds issued by NABARD, treated the amount received from the new tenants as capital gains and claimed exemption u/s 54EC.

During assessment proceedings, the assessee claimed that the amount was received towards surrender of a right, which was part of the bundle of rights owned by the assessee in respect of the property. The assessee claimed that the receipt of the consideration of Rs. 7.26 lakhs was for the extinguishment of the rights and therefore was capital gains eligible for exemption u/s 54EC. Various decisions were cited by the assessee in support of the proposition that the amount received on surrender of tenancy rights was a capital receipt, which was taxable under the head ‘capital gains’.

But the A.O. brought out the distinction between transfer of tenancy rights vis-à-vis surrender of tenancy rights. According to him, the receipt by the landlord was for consenting to a transfer of the right of residence by the existing tenant to the new tenants. He sought to support this view by the fact of payment of consideration by the new tenants to both the original tenant and the landlord. The A.O. distinguished the judgments cited before him, since all of those related to surrender of tenancy rights.

According to the A.O., the outgoing tenant (the daughter) surrendered (transferred) the tenancy rights in favour of the new tenants and not to the assessee-landlord. He held that the amount of Rs. 7.26 lakhs was received by him from the new tenants for consenting to the transfer of tenancy to the new tenants, and not for surrender of tenancy, and was therefore not a capital receipt. The A.O. therefore taxed the amount of Rs. 7.26 lakhs as income of the assessee under the head ‘income from other sources’, rejecting the claim of exemption u/s 54EC.

Before the Commissioner (Appeals), the assessee submitted that consent of the landlord was mandatory for the new tenants to enjoy the right of residence. Thus, by consenting, the assessee gave up (transferred) some of the rights out of the bundle of rights attached to the said property, a capital asset. Reliance was placed on the Supreme Court decision in the case of CIT vs. D.P. Sandu Bros. Chembur (P) Ltd. 273 ITR 1 and on the Bombay High Court decision in the case of Cadell Weaving Mill Co. (P) Limited vs. CIT 249 ITR 265, for the proposition that the amount received on surrender of tenancy rights is a capital receipt taxable under the head ‘capital gains’, and not ‘income from other sources’.

The Commissioner (Appeals) rejected the appeal, confirming the order of the A.O. and held that the assessee continued to hold the ownership rights even after the new tenants entered the house and that the outgoing tenant transferred the tenancy rights to the new tenants. The assessee merely gave its consent for such transfer, for which it received the sum of Rs. 7.26 lakhs which could not be termed as a receipt for surrender of tenancy rights. Had it amounted to a surrender of tenancy rights in favour of the landlord, the consideration would have been paid by the landlord to the outgoing tenant. Therefore, it was a case of encashment of the power of consent for transfer of the tenancy rights to the new tenants. The Commissioner (Appeals) next observed that if the new tenants further transferred the property to some other tenant, the assessee would be entitled to receive a similar amount and the ownership rights of the property would continue to vest with the assessee.

Before the Tribunal, on behalf of the assessee it was submitted that the rights attached to an immovable property constituted a bundle of rights. Exploitation of these rights gives rise to capital gains. Without the surrender of tenancy rights by the original tenant to the assessee, the assessee could not have consented to the transfer of residence in favour of the new tenant. Therefore the consideration received by the assessee was for surrender of tenancy rights, which was a capital receipt, taxable as capital gains.

Attention was drawn by the assessee to the tripartite agreement between the assessee, the original tenant and the new tenants, which mentioned that the original tenant was the sole owner of the tenancy rights and she surrendered the flat to the landlord including the tenancy rights.

On behalf of the Revenue it was argued that normally in the case of surrender of tenancy rights the tenant would receive the consideration from the landlord for surrender of the same. In the case before the Tribunal, the landlord did not pay the consideration to the original tenant, but it was the new tenants who paid the consideration to the original tenant. Further, the assessee continued to hold the right of ownership of the property and tenancy rights were transferred from the old tenant to the new tenants. It was therefore submitted that the amount was rightly taxed as ‘income from other sources.’

The Tribunal noted that all the decisions cited before it, whether by the assessee or by the Revenue, were in the context of undisputed surrender of tenancy rights and were therefore distinguishable on facts. Analysing the facts of the case, the Tribunal was of the view that the consideration paid by the new tenants was for consent of the landlord for the transfer of tenancy rights between the new and old tenants and the amount of Rs. 7.26 lakhs was the consideration for consent. According to the Tribunal, generally in matters of tenancy rights disputes it is the tenant who gets the financial benefit, which flows from the pockets of the landlord in lieu of surrender of the tenancy rights by the tenant, and the landlord does not receive any amount. Therefore, according to the Tribunal, the settled law relating to taxation of a receipt on surrender of tenancy rights would not apply in the case before it.

The Tribunal also examined whether the assessee actually received all the rights over the property, including the tenancy rights. It noted the clause in the agreement which indicated that the existing tenant surrendered the tenancy rights along with the property to the assessee. It questioned the need for the existing tenant to be a signatory to the agreement giving the property on monthly rent to the new tenants and the need for a tripartite agreement. According to the Tribunal, letting of the property to the new tenant was a matter of agreement between the landlord and the new tenant.

Noting that the monthly rental and rental advance were nominal, the Tribunal was of the view that the sum of Rs. 7.26 lakhs paid to the landlord by the new tenant was consideration for the consent. As per the Tribunal, the receipt was for the consent for transfer by the old tenant to the new tenants, for a consideration of Rs. 14.48 lakhs and there was a need for the consent of the landlord. The Tribunal accordingly held that there was no transfer of any capital asset by the landlord to the new tenants and that the sum of Rs. 7.26 lakhs was neither a capital receipt nor a rental receipt.

The Tribunal also noted that there was no time gap between the vacation of the property by the old tenant and grant of rental rights to the new tenants. There was continuity of renting of the property and there was no evidence to infer that the house was in the vacant possession of the assessee even after the alleged end of the tenancy of the old tenant. Therefore, the assessee never got the property in vacant condition. Hence the Tribunal held that the amount received was consideration for consent, it did not involve any transfer of capital rights attached to the property, and it constituted a windfall gain to the assessee, which was taxable under the head ‘income from other sources’.

NEW PIECE GOODS BAZAR CO. LTD. CASE
The issue again came up before the Mumbai Bench of the Tribunal in the case of Jt. CIT vs. New Piece Goods Bazar Co. Ltd., ITA No. 6983/Mum/2012 dated 25th May, 2016.

In this case, the assessee was the owner of several shops in the cloth market which were given on rent to different tenants. Every year, some tenants transferred the possession of shops to new tenants, with the consent of the assessee, who was the owner of the shops. In consideration of giving its consent to the transfer of possession of the shops from old tenants to the new tenants, the assessee was receiving a certain premium from the old tenants.

Earlier, the receipt of premium by the assessee was shown as income under the head ‘capital gains’. During the relevant year also, certain old tenants transferred their possessory rights of the rental shops to the new tenants with the consent of the assessee. In consideration of giving consent for such transfer of possessory rights, the assessee received a premium of Rs. 1,15,50,000 from the old tenants. The assessee treated such amount as income from ‘capital gains’ and claimed exemption from taxation of a part thereof u/s 54EC.

The A.O. held that the assessee was the owner of the shops, the old tenants had transferred the tenancy rights in favour of the new tenants along with rights of possession and the assessee remained the owner of the shops as before. Consequently, there was no transfer of the capital assets, being shops, as even after the transfer of tenancy rights the assessee continued to remain the owner of the shops. According to the A.O., while the transfer of tenancy rights indisputably resulted in capital gains, such capital gains would be taxable in the hands of the outgoing tenants and could not be taxed as the capital gains of the assessee. The A.O. therefore held that the amount received by the assessee as premium was taxable in the hands of the assessee as ‘income from other sources’ and not as ‘capital gains’, and that the assessee was therefore not entitled to exemption u/s 54EC.

In an appeal before the Commissioner (Appeals), the assessee submitted that in earlier and subsequent years also, a similar amount was offered to tax as capital gains and was accepted by the Income-tax Department. It was further argued that tenancy rights was undoubtedly a capital asset under the law and therefore any gains arising from the transfer of such rights had to be assessed under the head ‘capital gains’.

The Commissioner (Appeals) noted that a right was a bundle of benefits embedded in some asset or independent thereof. Capital asset meant property of any kind held by an assessee. Therefore, a right, whether or not attached to any asset, was also a property. The old tenant could transfer the possessory rights of the shops only with the consent of the landlord. According to the Commissioner (Appeals), such right of consent was a property in the hands of the assessee. Since that right or property was connected to the capital asset, i.e., shops, therefore such a right of consent was also a capital asset in the hands of the assessee which was more or less similar to a tenancy right, which was also a capital asset.

The Commissioner (Appeals) therefore held that on giving consent to change in the possession of rented premises from an old tenant to a new tenant, there was a transfer of capital asset. He, therefore, held that such receipt was liable to tax as capital gains and the assessee was entitled to exemption u/s 54EC.

On appeal by the Revenue, the Tribunal expressed its agreement with the observations of the Commissioner (Appeals) that the assessee acquired a bundle of rights (ownership) with respect to the shops. These rights included, inter alia, the right of grant of tenancy. The term ‘capital asset’ was defined in the widest possible manner in section 2(14) and had been curtailed only to the extent of exclusions given in the said section, including stock-in-trade and personal effects. The asset under consideration clearly did not fall within the above exclusions. The bundle of rights acquired by the assessee was undoubtedly valuable in terms of money.

On the above reasoning, the Tribunal held that the tenancy rights formed part of a capital asset in the hands of the assessee and therefore any gains arising therefrom would be assessable under the head ‘capital gains’, eligible for deduction u/s 54EC.

In Sujaysingh P. Bobade (HUF) vs. ITO (2016) 158 ITD 125 (Mum) a similar view was taken that the amount received by the landlord was a capital receipt, subject to tax as capital gains. However, in that case the appeal was against an order of revision passed u/s 263 and the landlord had received the amount from the new tenants for allotment of tenancy rights under tenancy agreements.

A similar view has also been taken by the Tribunal in the case of ITO vs. Dr. Vasant J. Rath Trust, ITA No. 844/Mum/2014 dated 29th February, 2016 wherein the old tenants had surrendered their tenancy rights to the landlord without receiving any consideration and the landlord directly entered into tenancy agreements with the six new tenants on receipt of consideration for grant of tenancy rights.

OBSERVATIONS
Any property, especially immovable property, comprises of a bundle of rights where each such right is a capital asset capable of being transferred by the owner for an independent consideration to different persons. Ownership of the land and / or building is the classic case of owning such a bundle of rights. The right to grant tenancy flows from such a bundle. The Supreme Court in the case of A.R. Krishnamurthy, 176 ITR 417, in the context of the ownership of a mine, held that the mining rights were a part of the mine and were capable of being held as an independent asset and therefore of being transferred independent of the ownership of the mine. It held that the grant of the lease to mine the asset or the mining rights resulted in the transfer of a capital asset, negating the case of the assessee that there was no transfer of capital asset on grant of the mining rights where the ownership of the mine continued with the assessee. The court also rejected the contention that there was no cost of acquisition of such rights or the cost could not be attributed to such rights.

Receipt of a salami or premium by a landlord from a tenant for grant of tenancy rights in an immovable property owned by him is a capital receipt and not a revenue receipt [Durga Das Khanna vs. CIT 72 ITR 796 followed by the Bombay and the Calcutta High Courts in CIT vs. Ratilal Tarachand Mehta 110 ITR 71 and CIT vs. Anderson Wright & Co. 200 ITR 596, respectively]. The Courts held that unless such a receipt is proved to be in the nature of rent or advance rent, it could not be taxed under the Act as revenue income.

The Supreme Court, in the case of CIT vs. Panbari Tea Co. Ltd. 57 ITR 422 held that a premium received on parting with the lessor’s interest was a capital receipt and the rent receipt was revenue in nature:

‘When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue receipt. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the court, having regard to the other circumstances, to ascertain the intention of the parties.’

The amount received for giving consent is certainly not an advance rent. Can the giving of a consent in relation to user of a capital asset amount to a revenue receipt, even where it is assumed, though not right, that there is no transfer of the capital asset itself (in this case, tenancy rights) by the landlord? The character of a receipt depends upon its relation with the capital asset. For a receipt to be considered as income, it should be a receipt that is of revenue in nature. Normally, the amount received for use of an asset, such as rent, is revenue in nature and is income. However, that logic may not apply to all receipts in relation to a capital asset. Again, for a receipt to be a capital receipt it is not necessary that there should be a transfer of a capital asset or a diminution in value of a capital asset. Transfer of a capital asset is only necessary in order to subject a capital receipt to tax as capital gains.

When a landlord gives his consent for transfer of a tenancy, in substance, he is consenting to grant of the possessory rights to a new tenant. Therefore, he is giving up his possessory rights over the premises in favour of a new tenant. This can be viewed as a right in respect of the premises being agreed to be foregone for the future as well.

Another way of examining the matter is whether the receipt is in relation to a capital asset. The right to consent to a new tenant is also a right associated with the ownership of the immovable property. It is therefore part of the bundle of rights which constitute the immovable property. The exercise of such right in favour of the incoming tenant amounts to exercise of a capital right, the compensation for which would necessarily be capital in nature.

Therefore, the better view of the matter is that the premium received by the landlord for according his consent to transfer of tenancy rights is a capital receipt, subject at best to capital gains tax, and is not a revenue income.

The connected important issue is whether there is any cost of acquiring / holding such a right in the hands of the landlord. Can a part of the cost of acquiring the immovable property be attributed to the cost of the tenancy rights and be claimed and allowed as deduction in computing the capital gains? In our considered opinion, yes, such cost though difficult to ascertain is not an impossible task and should be determined on commercial consideration and be allowed in computing the capital gains arising on grant of the consent to transfer the tenancy rights or for creation of such rights.

Once it is held that the receipt is in the nature of a capital receipt that is liable to tax in the hands of the landlord under the head capital gains, the question of applicability of section 56(2)(x) should not arise. In any case, the receipt, in our opinion, is for a lawful consideration and cannot be subjected to the provisions of this provision that should not have had any place in the Income-tax Act.

Vivad se Vishwas sections 2(1)(o) and 9(a)(ii) – Prosecution – Pending prosecution for assessment year in question on an issue unrelated to tax arrears – Holding that an assessee would not be eligible to file a declaration would defeat very purport and object of Vivad se Vishwas Act – Question No. 73 vide Circular No. 21/2020 dated 4th December, 2020 is not in consonance with section 9(a)(ii) of Vivad se Vishwas Act

3 Macrotech Developers Ltd. vs. Pr. Commissioner of Income Tax [Writ Appeal No. 79 of 2021, date of order: 25th March, 2021 (Bombay High Court)]

Vivad se Vishwas sections 2(1)(o) and 9(a)(ii) – Prosecution – Pending prosecution for assessment year in question on an issue unrelated to tax arrears – Holding that an assessee would not be eligible to file a declaration would defeat very purport and object of Vivad se Vishwas Act – Question No. 73 vide Circular No. 21/2020 dated 4th December, 2020 is not in consonance with section 9(a)(ii) of Vivad se Vishwas Act

The assessee is a public limited company engaged in the business of land development and construction of real estate properties. Initially, Shreeniwas Cotton Mills Private Limited (‘Cotton Mills’ for short) was a subsidiary of the assessee company. Subsequently, it was merged with the assessee company on the strength of the amalgamation scheme sanctioned vide order dated 7th June, 2019 passed by the National Company Law Tribunal, Mumbai Bench. The merger had taken place with effect from 1st April, 2018. However, the pending tax demand against the cotton mills under the Act continued in the name of the cotton mills since migration of the permanent account number of the cotton mills to the permanent account number of the assessee company had not taken place. Therefore, it is pleaded that the tax demand of the cotton mills should be construed to be that of the assessee company and reference to the assessee company would mean and include the assessee company as well as the cotton mills.

For the A.Y. 2015-16, the assessee had filed return of income u/s 139(1) disclosing total income of Rs. 2,05,71,01,650. The self-assessment income tax payable on the returned income as per section 115JB was Rs. 69,92,08,851. At the time of filing of the return, an amount of Rs. 27,34,77,755 was shown to have been paid by way of tax deducted at source. The balance of the self-assessment tax of Rs. 42,57,31,096 (Rs.69,92,08,851 less Rs. 27,34,77,755) with interest thereon under sections 234A, 234B and 234C aggregating to Rs. 12,36,74,855 (totalling Rs. 54,94,05,951) was paid by the assessee after the due date for filing of the return.

The Pr. CIT issued notice to the assessee on 19th September, 2017 to show cause as to why prosecution should not be initiated against it u/s 276-C(2) for alleged wilful attempt to evade tax on account of delayed payment of the balance amount of the self-assessment tax. The assessee in its reply denying the allegations, made a request to the Pr. CIT to withdraw the show cause notice. The assessee did not apply for compounding u/s 279(2).

In the meanwhile, on 17th December, 2017, the A.O. passed the assessment order for the A.Y. 2015-16 u/s 143(3). In this order, he disallowed certain expenses claimed by the assessee towards workmen’s compensation and other related expenses. After disallowing such claim, the A.O. computed the tax liability of the assessee at Rs. 61.75 crores, inclusive of interest.

When the aforesaid assessment order was challenged by the assessee, the Commissioner (Appeals) dismissed it and upheld the assessment order vide order dated 27th December, 2018.

Aggrieved by this order, the assessee preferred further appeal before the ITAT which is pending before the Tribunal for final hearing.

While the appeal of the assessee was pending before the Tribunal, the Central Government enacted the Direct Tax Vivad se Vishwas Act, 2020 which came into force on and from 17th March, 2020. The primary objective of this Act is to reduce pending tax litigations pertaining to direct taxes and in the process grant considerable relief to the eligible declarants while at the same time generating substantial revenue for the Government.

Circular No. 9 of 2020 dated 22nd April, 2020 was issued whereby certain clarifications were given in the form of questions and answers. The Central Government vide a Notification dated 18th March, 2020 has made the Vivad se Vishwas Rules.

With a view to settling the pending tax demand, the assessee submitted a declaration in terms of the Vivad se Vishwas Act on 23rd September, 2020 in the name of the cotton mills in respect of the tax dues for the A.Y. 2015-16 which is the subject matter of the appeal pending before the Tribunal.

While the assessee’s declaration dated 23rd September, 2020 was pending, it came to know that the Pr. CIT had passed an order on 3rd May, 2019 authorising the Joint Commissioner of Tax (OSD) to initiate criminal prosecution against the cotton mills and its directors by filing a complaint before the competent magistrate in respect of the delayed payment of self-assessment tax for the A.Y. 2015-16. On the basis of such sanction, the Income-tax Department filed a criminal complaint under section 276-C(2) r/w/s 278B before the 38th Metropolitan Magistrate’s Court at Ballard Pier. However, no progress has taken place in the said criminal case.

The impugned Circular No. 21/2020 dated 4th December, 2020 was issued giving further clarifications in respect of the Vivad se Vishwas Act. Question No. 73 contained therein is: when in the case of a taxpayer prosecution has been initiated for the A.Y. 2012-13 with respect to an issue which is not in appeal, would he be eligible to file declaration for issues which are in appeal for the said assessment year and in respect of which prosecution has not been launched? The answer given to this is that ineligibility to file declaration relates to an assessment year in respect of which prosecution has been instituted on or before the date of declaration. Since for the A.Y. 2012-13 prosecution has already been instituted, the taxpayer would not be eligible to file a declaration for the said assessment year even on issues not relating to prosecution.

It is the grievance of the assessee company that on the basis of the answer given to Question No. 73 its declaration would be rejected since the declaration pertains to the A.Y. 2015-16 and prosecution has been launched against it for delayed payment of self-assessment tax for the A.Y. 2015-16. It is in this context that the assessee approached the High Court by a writ petition seeking the reliefs as indicated above.

The High Court held that the exclusion referred to in section 9(a)(ii) is in respect of tax arrears relating to an assessment year in respect of which prosecution has been instituted on or before the date of filing of declaration. Thus, what section 9(a)(ii) postulates is that the provisions of the Vivad se Vishwas Act would not apply in respect of tax arrears relating to an assessment year in respect of which prosecution has been instituted on or before the date of filing of declaration. Therefore, the prosecution must be in respect of tax arrears relating to an A.Y. The Court was of the view that there is no ambiguity insofar as the intent of the provision is concerned and a statute must be construed according to the intention of the Legislature and that the Courts should act upon the true intention of the Legislature while applying and interpreting the law. Therefore, what section 9(a)(ii) stipulates is that the provisions of the Vivad se Vishwas Act shall not apply in the case of a declarant in whose case a prosecution has been instituted in respect of tax arrears relating to an assessment year on or before the date of filing of declaration. The prosecution has to be in respect of tax arrears which naturally is relatable to an assessment year.

The Court observed that a look at clauses (b) to (e) of section (9) shows that there is a clear demarcation in section 9 of the Act inasmuch as the exclusions provided under clause (a) are in respect of tax arrears, whereas in clauses (b) to (e) the thrust is on the person who is either in detention or facing prosecution under the special enactments mentioned therein. Therefore, if we read clauses (b) to (e) of section 9, it would be apparent that such categories of persons would not be eligible to file a declaration under the Vivad se Vishwas Act in view of their exclusion in terms of section 9(b) to (e).

Apart from this, the Court observed that under the scheme of the Act and the purpose of the Rules as a whole, the basic thrust is on settlement in respect of tax arrears. Under section 9 certain categories of assessees are excluded from availing the benefit of the Vivad se Vishwas Act. While those persons who are facing prosecution under serious charges or those who are in detention as mentioned in clauses (b) to (e) are excluded, the exclusion under clause (a) is in respect of tax arrears which is further circumscribed by sub-clause (ii) to the extent that if prosecution has been instituted in respect of tax arrears of the declarant relating to an A.Y. on or before the date of filing of declaration, he would not be entitled to apply under the Vivad se Vishwas Act. Now, tax arrears has a definite connotation under the Vivad se Vishwas Act in terms of section 2(1)(o) which has to be read together with sections 2(f) to 2(j).

Further, the High Court held that to say that the ineligibility u/s 9(a)(ii) relates to an assessment year and if for that assessment year a prosecution has been instituted, then the taxpayer would not be eligible to file declaration for the said A.Y. even on issues not relating to prosecution, would not only be illogical and irrational but would be in complete deviation from section 9(a)(ii) of the Act. Such an interpretation would do violence to the plain language of the statute and, therefore, cannot be accepted. On a literal interpretation or by adopting a purposive interpretation of section 9(a)(ii), the only exclusion visualised under the said provision is pendency of a prosecution in respect of tax arrears relatable to an assessment year as on the date of filing of declaration and not pendency of a prosecution in respect of an A.Y. on any issue. The debarment must be in respect of the tax arrears as defined u/s 2(1)(o) of the Vivad se Vishwas Act. Therefore, to hold that an assessee would not be eligible to file a declaration because there is a pending prosecution for the A.Y. in question on an issue unrelated to tax arrears would defeat the very purport and object of the Act. Such an interpretation which abridges the scope of settlement as contemplated under the Act cannot, therefore, be accepted.

Insofar as the prosecution against the petitioner is concerned, the same has been initiated u/s 276C(2) because of the delayed payment of the balance amount of the self-assessment tax. Such delayed payment cannot be construed to be a tax arrear within the meaning of section 2(1)(o). Therefore, such a prosecution cannot be said to be in respect of tax arrears. Since such a prosecution is pending which is relatable to the A.Y, 2015-16, it would be in complete defiance of logic to debar the petitioner from filing a declaration for settlement of tax arrears for the said A.Y. which is pending in appeal before the Tribunal.

Considering the above, the clarification given by way of answer to Question No. 73 vide Circular No. 21/2020 dated 4th December, 2020 is not in consonance with section 9(a)(ii) of the Vivad se Vishwas Act and, therefore, the same would stand to be set aside and quashed. The declaration of the petitioner dated 23rd September, 2020 was directed to be decided by the Pr. CIT in conformity with the provisions of the Vivad se Vishwas Act dehors the answer given to Question No. 73 which was set aside and quashed. The writ petition was allowed.

 

POLITICAL RESPONSE

The devastation wrought by the virus over the last few weeks has been unnerving, both psychologically and physically, for everyone. Each one of us would know or have someone in the family who has suffered or died in this wave.

However, as we are painfully aware, accountability is NOT the strength of Government, be it Central or State, or as an institution. In the time of this medical calamity wrecking death and distress, the verbal response of the political leadership has been typical – below par. Here is a succinct articulation of the tone, tenor, nature, classification, propensity and quality of responses from the political class in general and which is accentuated during this time:

1. Deflect: Not answer honestly and directly. A direct question seeks a straightforward and not just a smart, cheeky answer (the difference between and  ). But when a Cabinet Minister was asked that by attending election rallies, weren’t you spreading infection, he replied, ‘Check me now!’

2. Collecting and sharing data: Many data points are not calculated, or not calculated properly, or not made available. Data is critical. What gets measured gets changed. Someonewrote:(The numbers show that the situation is bad, the situation shows that the numbers are incomplete.)

3. Cherry-pick: A commonly shared social media (SM) post compares India with the US and China in the number of doses administered. Yes, delightful and praiseworthy, but not PACEWORTHY as India has five times the population compared to at least the US and the percentage of the total inoculated is the real KPI. What is not stated, especially by the Health Minister (HM), is the number of days it will take to inoculate the 70 to 80 crore eligible / target population. As I write this on 1st May, 2021, I referred to the Twitter timeline of the Minister, when the surge is at its all-time peak of 4,00,000 plus new cases per day: But there is no reference to this daily indicator in the last 48 hours. Posts are about vaccination, WHO meeting, condolences for well-known persons… but nothing that can be said to be challenges – deaths, positivity rate, the task ahead, etc. One wonders whether the data shared is to ‘build a narrative’ or to also share important ‘facts’. If a government believes that the entire nation is with them and they are with the people, they would share facts without hesitation. The Lancet1 Editorial called this out as ‘perpetuating a too positive spin in government communication’.

4. Congress did it – After seven years, as someone pointed out, the Central Government still thinks that Congress rule is continuing. While there are legacy issues, as soon as a challenge appears, this is the one common point in the responses. Does it implicitly suggest to 130 crore people – you all need to wait for the next 70 years!

5. Credit without debit – Single entry accounting. All credit belongs to the Government or its leader, and debits are unaccounted for. Ministers ‘hailing’ the PM each day during the crisis and communication on SM is talking about how the PM was involved, instrumental, etc. Constant self-congratulatory behaviour seems out of place when people are scrambling for oxygen to stay alive in the national capital and in the States.

6. Victory before even the battle is over: The Government constantly seeks another moment to bask in the glory. I wonder if this is due to insecurity or lack of confidence. The HM said we are in the endgame of Covid on 15th March. Announcing victory when not even 1% of the population is vaccinated with two doses and we were at least 140 crore doses away! Generally, Mantri (ministers), Tantri (administrator), Santri (yes-men, wah-wahkaars and the media) displayed posters with leaders on them, subliminally saying things are nearing an end without the critical caveat that we have a long way ahead and that it’s NOT OVER till it is OVER.

_____________________________________________________________________
1     https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)32001-8/fulltext
7. Respond in the future tense: When the question is of the immediate past or the present, the answer is about the future – how we have started doing some grand things.

8. State subject: A federation must work together and if States are underperforming or need help, they need to be pulled up or pushed and / or guided. States blame the Centre and vice versa. Democracy or Blamocracy?

9. Politicising: Sad to see politicising even in dire times. Action and words seem to have some added political motive.

10. Denial: This is the most ‘effective’ response. One very vocal CM said in April that we are fully equipped and there is no problem. In a week, he was calling for help.

(The above list of verbal responses excludes justification, excuse morphed as an explanation, wordplay, making grand announcements, conspiracy theories and other forms of responses. After observing these attributes of political response, I feel these could be a chapter of a book titled Manual for Politicians – say, Chapter 2021 on ‘Responding to Accountability Questions’!)

Government has all powers and resources at its disposal. It is Government’s job to be able to FORESEE what is coming based on data. In spite of the early March report by the national supermodel committee, which said that the second wave had already set in, the Governments didn’t do enough.

India had the maximum benefit of hindsight from all over the world. Many Governments didn’t learn the lesson of what can go wrong and what response may be required.

Take the example of vaccines: Knowing that there are no vaccines, an announcement for the 3rd age group is made for 1st May. In Mumbai, people are running from pillar to post since two weeks for a second dose. The US booked 400 million doses in August, 2020, the EU 800 million by November, 2020. India’s first order of vaccines was in January, 2021. States were not sure about how this will pan out till April. And this is despite a $30 billion pharma industry in the country with the finest minds! Now the Supreme Court is telling the administration to license vaccine-making to generate enough. Same for oxygen plants and the rest: Delhi had eight plants approved with funds from the PM Cares Fund. But it managed only one plant till April. If the planned 162 plants had been set up around the country, they could have produced 80,500 litres of medical oxygen per minute2. This translates approximately to one ton of liquid oxygen per day per plant. So, it’s not a crisis of ‘lack of funds’ or ‘lack of talent’, it’s a crisis of ‘lack of execution’, ‘lack of intent’ and ‘lack of vision’. In the words of our Rashtra Kavi Dinkarji:

Someone said, what you see now is not the crumbling of infrastructure but what was already there. Everything is exposed – from logistics to coordination, to the greed of hospitals, black marketing, wrong medication, careless disregard and casual behaviour of citizens about appropriate behaviour. The point is we have to see the difference between taking credit vs. receiving compliments from people; making claims vs. taking questions about people’s claims; complacency vs. accountability; and arrogance vs. compassion.

Please take a moment to say a mantra, a chant, a prayer every day for those in pain and those who departed in pain and / or send good vibes. Many of you would have made a tangible contribution (monetary, help, blood, etc.) towards those that need it. The crisis has taught us one thing – that we are on our own and people have to support each other.

But, we can’t ignore the many remarkable things happening. Someone sold his car to provide oxygen cylinders, or someone driving overnight 1,200 km. Delhi-Bokaro-Delhi bringing oxygen for his friend – ordinary people doing extraordinary things! Let’s take a moment to send strength and gratefulness to those who have helped, to those who will help, to those who are helping tirelessly – the medical and frontline workers, the real unsung heroes whose photographs should be on Covid vaccine certificates for taking on this unending disaster for 14 long months. They deserve our deepest respect.
____________________________________________________________________________

2     The New Indian Express, 27th April, 2021, Article by S. Gurumurthy

 

Raman Jokhakar
Editor

DUAL RESIDENT ENTITIES – ARTICLE 4 OF MLI

(This is the second article in the MLI series of articles started in April, 2021)

1. INTRODUCTION
Section 90(1) of the Income-tax Act, 1961 (the Act) read with Article 253 of the Constitution enables the Central Government to enter into Tax Treaties. Accordingly, India has entered into Tax Treaties with over 90 countries. The overarching preamble to a Tax Treaty is to eliminate double taxation and, vide the Multilateral Instruments (MLI), the same is also extended to prevent double non-taxation, or treaty abuse, or treaty-shopping arrangements.

The Tax Treaty does not impose taxes but distributes taxing rights. It provides substantive rights but relies on the domestic tax law to provide for the rules and procedures to levy tax. As per section 90(2), the beneficial provisions of the Tax Treaty shall override the specific provisions of the Act, subject to the domestic General Anti-Avoidance Rules (GAAR) and issue of Tax Resident Certificate from the tax officer in the foreign country. Thus, it is imperative to understand the treaty entitlement issues.

The taxpayer would certainly apply the Tax Treaty when its income is taxable in its resident state as well as in the source state. In other words, when it is the recipient of income taxable in more than one jurisdiction. Once applicable, its application is dependent on the following:

Scope of Application

Rules of Application

‘Taxpayer’ in Article 1

Preamble to Tax Treaty

‘Taxes’ in Article 2

Principal Purpose Tests

‘Residence’ in Article 4

Limitation of benefit clause, etc.

While the above relates to treaty entitlement, this article is focused on Article 4 of the MLI on Dual Resident Entities (non-individuals) that are usually referred to in Article 4(3) of the relevant Tax Treaty. As a pre-cursor, a Dual Resident Entity (DRE) is defined as such when an entity is deemed to be a resident of more than one jurisdiction under the domestic provisions. For example, when a  UK-incorporated entity is a tax resident of UK as per its domestic tax law (say, because of its incorporation under the UK tax law) and is also deemed to be a resident of India as per the Indian domestic tax law (say, because of the POEM rule under the Income-tax Act, 1961). The present Tax Treaty, without the effect of MLI, dealt with the conflict of dual resident entities and contained a tie-breaker rule for determination of the effective treaty residence.

2. ARTICLE 4(3) OF THE TAX TREATY
In accordance with Article 1(1) of the OECD Model Tax Convention, the Tax Treaty shall apply to persons who are residents of one or both of the Contracting States. Article 2 defines ‘persons’ to include an individual, a company and any other body of persons and defines ‘company’ to mean a body corporate or an entity that is treated as a body corporate for tax purposes, whereas Article 4 defines ‘residence’ for treaty purposes. In relevance, the Tax Treaty allocates or distributes taxing rights on the basis of the treaty residence.

The term ‘residence’ in Article 4(1) of the relevant Tax Treaty refers to the domestic definition of the residence, which, for Indian purposes, is section 6 of the Act. However, for resolving the issue of dual residency for non-individuals, the Tax Treaty refers to its own rule specified in Article 4(3) of the relevant Tax Treaty, i.e., Place of Effective Management (POEM). The OECD does not impose any restrictions or criteria for determination of residence in Article 4(1). In the case of dual residency for non-individuals, Article 4(3) refers to the POEM criterion as a single tie-breaker rule to determine ‘treaty residence’.

The term POEM is not defined in the OECD Model Tax Convention or in the relevant Tax Treaty. An analogy is drawn from the OECD Commentary which in itself does not provide sufficient and reliable guidance on its key determinants. Dual resident non-individuals are known to have abused this guidance gap. The tax authorities, as a last resort, have determined POEM on the basis of their domestic tax law vide Article 3(2) of the OECD Model Tax Convention. Under the Act, section 6 deems a foreign company to be a resident of India if it has its POEM in India. The CBDT Circular 6/2017 further provides guidance on how to determine POEM on the basis of various parameters for active business outside India and in India.

3. MULTILATERAL INSTRUMENTS
In order to curb tax abuse or evasion, article 4(1) of the Multilateral Instruments (MLI) amends the existing article 4(3) of the relevant Tax Treaty for resolving dual residency. It provides that the resolution of dual residence shall be through mutual agreement between the Contracting Jurisdictions concerned. It departs from the current treaty practice1, insofar as the POEM may no longer be the main rule to resolve the dual residence; and that the competent authorities will have the freedom to consider a number of factors to be taken into account while determining treaty residence of Dual Resident Entities (DRE). Article 4(1) of MLI also provides that the benefit of the Tax Treaty shall not be available until and unless the mutual agreement is concluded.

While Article 4(2) of MLI elucidates the manner in which the existing text of the Tax Treaty will change or modify, Article 4(3) of MLI provides an option to the Contracting States to make reservations. Article 4(4) of MLI elucidates the manner in which a Contracting Jurisdiction shall notify its partner Contracting Jurisdiction and thereby the Tax Treaty agreements to be covered under MLI.

4. DUAL RESIDENT ENTITIES – ARTICLE 4 OF MULTILATERAL INSTRUMENTS
4.1 Paragraph 1 of Article 4 of MLI states the following:
Paragraph 1. Where by reason of the provisions of a Covered Tax Agreement a person other than an individual is a resident of more than one Contracting Jurisdiction, the competent authorities of the Contracting Jurisdictions shall endeavour to determine by mutual agreement the Contracting Jurisdiction of which such person shall be deemed to be a resident for the purposes of the Covered Tax Agreement, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of such agreement, such person shall not be entitled to any relief or exemption from tax provided by the Covered Tax Agreement except to the extent and in such manner as may be agreed upon by the competent authorities of the Contracting Jurisdictions.

 

1   United Nations’ Manual for the Negotiation of
Bilateral Tax Treaties between Developed and Developing Countries 2019, page 61

The key phrases for discussion are given below:

  • ‘A person other than an individual is a resident of more than one Contracting Jurisdiction.’
  • ‘shall endeavour to determine by mutual agreement.’
  • ‘having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors.’
  • ‘shall not be entitled to any relief or exemption from tax.’
  • ‘except to the extent and in such manner as may be agreed upon by the competent authorities of the Contracting Jurisdictions.’

MLI provides for a shift in the initial determination of treaty residence, from the taxpayer / tax authority (determination using POEM) to now the Competent Authority of the Contracting Jurisdiction concerned (determination by mutual agreement).

Until its final determination by mutual agreement, the DRE is not entitled to any relief or exemption from tax under the Tax Treaty to which MLI applies. However, the last sentence also contemplates a discretionary power in the hands of the Competent Authority to grant some relief under the relevant Tax Treaty. From the perspective of the Act, with no access to the Tax Treaty, a foreign company shall be deemed to be a domestic resident if its POEM (as per domestic guidance) is in India. A foreign limited liability partnership (being a body corporate) shall be deemed to be a resident in India where the control and management of its affairs is situated wholly or partly in India. Paragraph 52 of the Explanatory Statement to MLI provides the following:

‘Existing “tie-breaker” provisions addressing the residence of persons other than individuals take a variety of forms. For example, some [such as Article 4(3) of the UN Model Tax Convention, and of the OECD Model Tax Convention prior to the BEPS Project] break the tie in favour of the place of effective management, some focus on the place of organisation, and others call for determination by mutual agreement but do not explicitly deny benefits in the absence of such a determination.’

It must be noted that the POEM, being one of the various determinants, is in itself an anti-avoidance measure. It applies the substance-over-form approach in order to determine the location where ‘key management and commercial decisions’ were made. It seems that POEM is the key criterion for Competent Authorities to determine treaty residence and thereby entitlement to the relevant Tax Treaty. MLI or its Explanatory Statement does not provide any guidance on how to determine treaty residence and how to determine POEM or which aspect to consider for ‘any other relevant factor’. It seems that the domestic guidance on determination of POEM may not be relevant for determination of treaty residence as the purpose of section 6(3) is to make a foreign company a resident in India and thereby enabling dual residency, whereas the purpose of Article 4(1) of the MLI is to resolve the conflict of dual residency.

With high discretion in the hands of the Competent Authority, there is no obligation on the Competent Authority to reach a mutually acceptable agreement. Further, the DRE may not have any say in the matter and may not have any right to appeal or arbitrate a negative decision on treaty residence.

Lastly, the CBDT has in Rule 44G of the Income-tax Rules, 1962 provided for the manner in which an Indian resident can apply to the Competent Authority in India for initiation of MAP. It also provides for a suggestive timeline (not mandatory) of 24 months for arriving at a mutually agreeable resolution of the tax dispute. However, a foreign entity is not allowed to apply to the Competent Authority in India.

4.2 Paragraph 2 of Article 4 of MLI states the following:
Paragraph 1 shall apply in place of or in the absence of provisions of a Covered Tax Agreement that provide rules for determining whether a person other than an individual shall be treated as a resident of one of the Contracting Jurisdictions in cases in which that person would otherwise be treated as a resident of more than one Contracting Jurisdiction. Paragraph 1 shall not apply, however, to provisions of a Covered Tax Agreement specifically addressing the residence of companies participating in dual-listed company arrangements.

The key phrases for discussion are given below:

  • ‘in place of or in the absence of.’
  • ‘companies participating in dual-listed company arrangements.’

This Paragraph is the compatibility clause that describes the interaction between Article 4(1) of the MLI and the existing Article 4(3) of the relevant Tax Treaty (also known as the Covered Tax Agreement). The effect of ‘in place of or in the absence of’ is as provided below:

 

4.3 Paragraph 3 to Article 4 of MLI states the following:
A party may reserve the right:
a) for the entirety of this Article not to apply to its Covered Tax Agreements;
b) for the entirety of this Article not to apply to its Covered Tax Agreements that already address cases where a person other than an individual is a resident of more than one Contracting Jurisdiction by requiring the competent authorities of the Contracting Jurisdictions to endeavour to reach mutual agreement on a single Contracting Jurisdiction of residence;
c) for the entirety of this Article not to apply to its Covered Tax Agreements that already address cases where a person other than an individual is a resident of more than one Contracting Jurisdiction by denying treaty benefits without requiring the competent authorities of the Contracting Jurisdictions to endeavour to reach mutual agreement on a single Contracting Jurisdiction of residence;
d) for the entirety of this Article not to apply to its Covered Tax Agreements that already address cases where a person other than an individual is a resident of more than one Contracting Jurisdiction by requiring the competent authorities of the Contracting Jurisdictions to endeavour to reach mutual agreement on a single Contracting Jurisdiction of residence, and that set out the treatment of that person under the Covered Tax Agreement where such an agreement cannot be reached;
e) to replace the last sentence of paragraph 1 with the following text for the purposes of its Covered Tax Agreements: ‘In the absence of such agreement, such person shall not be entitled to any relief or exemption from tax provided by the Covered Tax Agreement’;
f) for the entirety of this Article not to apply to its Covered Tax Agreements with parties that have made the reservation described in sub-paragraph e).

This Paragraph relates to the reservation which can be entirely, partially or in a modified format. The signatories are free to express their reservation and restrict the extent of the application of Article 4 of MLI. It may opt out of Article 4 of MLI in the manner stated above and continue with the existing provisions of the Tax Treaty, without giving effect of MLI.

For example, in the India-Austria Tax Treaty, Austria has reserved the right for the entirety of Article 4 of MLI not to apply to its Covered Tax Treaty. India has notified India-Austria Tax Treaty and has not provided any reservation. Accordingly, Article 4 would not apply.

Likewise, in the India-Australia Tax Treaty, Australia has reserved the right to deny treaty benefits in absence of mutual agreement in accordance with Article 4(3)(e) of MLI above. Both India and Australia have notified the relevant article in the India-Australia Tax Treaty. India has not provided any reservation [including reservation as per Article 4(3)(f)]. Accordingly, Article 4(1) of MLI shall replace the existing Article 4(3) of the India-Australia Tax Treaty, with the last sentence of Article 4(1) of MLI to be modified by Article 4(3)(e) of the MLI.

The signatory party to the MLI that has not made a reservation of this article is required to notify the Depository of its Covered Tax Treaty purported to be covered or already covered in its existing treaty. The procedure is discussed in Article 4(4) of the MLI discussed below.

4.4 Paragraph 4 to Article 4 of MLI states the following:
Each party that has not made a reservation described in sub-paragraph a) of paragraph 3 shall notify the Depository of whether each of its Covered Tax Agreements contains a provision described in Paragraph 2 that is not subject to a reservation under sub-paragraphs b) through d) of Paragraph 3, and if so, the article and paragraph number of each such provision. Where all Contracting Jurisdictions have made such a notification with respect to a provision of a Covered Tax Agreement, that provision shall be replaced by the provisions of Paragraph 1. In other cases, Paragraph 1 shall supersede the provisions of the Covered Tax Agreement only to the extent that those provisions are incompatible with Paragraph 1.

This Paragraph complements the application of Article 4(2) of MLI. Refer to the diagram illustrated in Paragraph 2 above, wherein each party has to notify the Depository of whether each of its Covered Tax Agreements contains an existing provision that is not subject to a reservation under Paragraph 3(b) through (d). Such a provision would be replaced by the provisions of Article 4(1) of MLI where all parties to the Covered Tax Agreement have made such a notification. In all other cases, 4(1) of MLI would supersede the existing provisions of the Covered Tax Agreement only to the extent that those provisions are incompatible with Article 4(1) of MLI.

Paragraph 52 of the Explanatory Statement to MLI provides that ‘Where a single provision of a Covered Tax Agreement provides for a tie-breaker rule applicable to both individuals and persons other than individuals, Paragraph 1 would apply in place of that provision only to the extent that it relates to a person other than an individual.’

5. EXCEPTION
Paragraph 2 of Article 4 of MLI provides an exception to this Article, i.e., ‘Paragraph 1 shall not apply, however, to provisions of a Covered Tax Agreement specifically addressing the residence of companies participating in dual-listed company arrangements.’

The above clause has a restricted effect from the Indian perspective as it refers to the existing treaty clause addressing the residence of companies participating in dual-listed company arrangements, e.g., the UK-Netherlands Tax Treaty. In the dual-listed company arrangement, like merger, two listed companies operating in two different countries enter into an alliance in which these companies are allowed to retain their separate legal identities and continue to be listed and traded on the stock exchanges of the two countries. It is a process that allows a company to be listed on the stock exchanges of two different countries. In a typical merger or acquisition, the merging companies become a single legal entity, with one business buying the other. However, ‘a dual-listed company arrangement’ is a corporate structure in which two corporations function as a single operating business through a legal equalisation agreement but retain separate legal identities and stock exchange listings2. The arrangement reflects a commonality of management, operations, shareholders’ rights, purpose and mission through an agreement or a series of agreements between two parent companies, operating as one business.

 

2   http://www.legalservicesindia.com/article/1580/Dual-Listing-of-Companies.html
and Explanatory Statement in respect of Article 4(2) of MLI

 

6. WAY FORWARD
MLI is seeking to replace / supersede the existing framework of the Tax Treaty. While MAP was a well-known measure present in the Tax Treaty to resolve tax conflicts, Article 4 of MLI purports to use this measure for determining the Treaty Entitlement, more particularly the issue on treaty residence. Until the coming into force of Article 4(1) of MLI, the treaty entitlement was never doubted in the existing Article 4 of the relevant Tax Treaty [except in rare cases like in article 4(3) of the Indo-USA DTAA]. However, post-amendment through MLI, the DRE would be entitled to Tax Treaty only on conclusion of MAP, the outcome of which is uncertain. The MAP pursuant to Article 4(3) of MLI should not be confused with the MAP pursuant to Article 25 of the OECD Model Tax Convention.

For example, Article 27 of the India-UK Tax Treaty provides that ‘Where a resident of a Contracting State considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with this Convention, he may, notwithstanding the remedies provided by the national laws of those States, present his case to the competent authority of the Contracting State of which he is a resident.’

Whereas Paragraph 58 of the Explanatory Statement to MLI states that where Article 4(1) of MLI denies the benefits of the Covered Tax Agreement, in the absence of the concluded MAP for treaty residence, such denial cannot be viewed as ‘taxation that is not in accordance’ with the provisions of the Covered Tax Agreement.

Accordingly, Article 27 of the India-UK Tax Treaty would not apply for two reasons: (a) by referring to ‘resident of a contracting state’, it is referring to treaty residence and not domestic residence. Since treaty residence is not yet determined, the said clause is not applicable; (b) by referring to taxation that is ‘not in accordance with this Convention’, the said clause is not applicable when Paragraph 58 of the Explanatory Statement is read along with this clause.

Furthermore, MAP concluded under one Tax Treaty (e.g. UK-India Tax Treaty) would not have any precedence when contemplating another Tax Treaty (e.g. Netherlands-India Tax Treaty) and would be time-consuming and exhaustive for the DRE, especially when the MAP discussion fails under one Tax Treaty and it might be late for the DRE to initiate MAP for past years under another Tax Treaty.

Secondly, there is no obligation on the competent authorities to actually reach an agreement. The wording used in Article 4(1) of MLI is ‘shall endeavour’ to agree in MAP, pending which the taxpayer’s treaty entitlement is at stake. The discretion afforded to the Competent Authorities under Article 4 of MLI is wider in scope than the domestic General Anti-Avoidance Rule. Possibly, it was intentional to curtail treaty abuse and provide powers in the hands of the contracting state. Further, if POEM is the key determinant for the Competent Authority, it should be based on a regulated guidance, not at the free discretion of the respective Competent Authorities who may give different relevance to a particular factor. Howsoever it may be, the lifting of corporate veil under a cross-border scenario should be avoided in genuine cases and should be used only as a tool to prevent tax abuse or tax evasion. The form and governance of DRE should be respected to the extent it is appropriate and reasonable.

Thirdly, the DRE would not be entitled to the Tax Treaty, in the absence of mutual agreement, even if MAP discussion is ongoing, where the last sentence of Article 4(1) of MLI is replaced by the specific sentence in Article 4(3)(e) of MLI, or where the DRE would not be entitled to the Tax Treaty except to the extent the Competent Authorities grant some relief to it [assuming Article 4(3)(e) is not applicable]. In the absence of guidelines, the questions that may arise are: That once the MAP is concluded, whether the outcome shall apply to the DRE retrospectively or prospectively? Whether the person who is responsible for payment (payer) to DRE is obliged to withhold taxes without considering the benefit from Tax Treaty, considering that it may not be privy to the MAP or tax conflict? Whether the right to deny treaty entitlement is for the DRE and not for the payer who is obliged to withhold taxes at the applicable Tax Treaty rate or the Act rate, whichever is more beneficial? As a way forward, in order to reduce the hardship, the Competent Authorities should suspend or defer the collection of taxes while MAP discussions are ongoing and provide rules for the taxpayer to comply with withholding tax issues in these scenarios.

Lastly, the DRE should have a right to contest the conclusions drawn under the MAP in an international court or in its resident Contracting Jurisdiction, or under a multilateral arbitration. At present, MLI assumes that the MAP would be concluded in the right manner with right determinants, giving full discretionary power to the Competent Authorities to decide which determinants would be key to determine treaty residence, as against the guidance given in the OECD Commentary for, say, POEM, wherein it has discussed various determinants with examples. As a way forward, the Contracting Jurisdictions that participated in MAP should permit DRE a legal remedy to contest MAP in its domestic forum and, if successful, to allow the court decision to become an addendum to the concluded MAP. Further, if the MAP is not concluded, the DRE is not entitled to the Tax Treaty. DRE should not suffer from permanent fracture for the rigidness of the Competent Authorities. DRE should be provided with legal remedy to resolve the impending dispute.

VIRTUAL HEARING

The other day I visited the office of a senior Chartered Accountant (hereinafter ‘the senior’) unannounced after a long time. He is indeed very ‘senior’, not less than 80, but still in practice. Age is just a number for him; he is both energetic and active. Before I entered the chamber, his driver Jaya told me, ‘Sir is about to begin a virtual hearing’. But as soon as I knocked on the door, I heard him shout, ‘Get out, Tommy!’

Tommy, for your information, is his pet dog. The senior operates from his four-bedroom flat, with the hall converted into his office. And believe me, Tommy ran out as soon as I opened the door, brushing against my leg. I was caught unawares and got scared. The senior was scanning the papers littered on his table, maybe making last-minute preparations. As he heard the sound of my footsteps, he looked up, squinted at me and hurriedly waved to me to sit down. I slowly lowered myself into the chair in front of him.

‘Herambh, you! What a pleasure!’ he greeted me, as if he had been waiting for me.

‘Sir, just a courtesy call, nothing more.’

‘Herambh, you know, today is the first-ever virtual hearing of my life,’ he stated.

‘Sir, Jaya told me that when I was entering your cabin,’ I said.

‘Jaya told you? Okay, no problem.’ But the senior seemed to be nervous, his nervousness conspicuous on his face. I thought it would be better to leave.

‘Sir, I could come some other day,’ I said politely.

‘No, no, Herambh, I have no problem, you stay till the end of the hearing; look, I am not computer-savvy and this new technology, internet blah blah… you would be a great help to me,’ he said.

‘I can understand your concern, Sir, when I began to learn computers long back, I was afraid of pressing a button on the keyboard thinking something would go wrong!’

‘Are you scaring me, Herambh?’ he asked.

‘No, Sir, not at all! I was just telling you my experience from my initial days,’ I hastily clarified.

‘Look, I have learnt the ABC of computers from my grandsons Bunty and Babli who are in the 7th and 8th standards; very smart chaps. Let me call them.’ The senior got up, went to the balcony and shouted ‘Bunty-Babli, come up immediately!’

Bunty and Babli replied in chorus ‘Yes, Grandpa, coming! Last ball!’

After a while the door behind me cracked open and Bunty with a bat and Babli with the ball, both with cricket caps on their heads, entered the hall-turned-office.

‘Relax, Bunty-Babli, relax! Sit by my side, drink a glass of water.’ I observed that two chairs were arranged for Bunty and Babli on either side of the senior’s chair. They settled down and wiped their faces that were full of sweat and dust. The senior was looking at them with great pride and hope [hope, maybe, for a successful hearing]. Then he brought out two medium-size chocolate bars from a drawer and gave these to them. I was watching the scene silently, seeing the grandpa and his love and affection for his grandsons.

‘Well, Herambh, because of on-line education, Bunty and Babli are well versed with this internet technology, they will guide me in this “virtual hearing”, the first ever in my life, you know,’ confessed the senior without being asked.

‘Hello Bunty, Babli,’ I greeted them.

They somehow managed to say ‘Hi, Uncle’, in chorus, still munching on the chocolate bars.

As soon as they finished them, they took charge of all the computer apparatus on the table – keyboard, mouse, headphone, etc.

‘Grandpa, let’s start; Babli, switch on,’ Bunty ordered.

‘Yes, Dadu,’ Babli got up and switched on the main supply.

As the computer turned on, Bunty and Babli glued their eyes to the screen, searching for the internet connection.

‘Yes! Grandpa, we got the internet connection,’ shouted Bunty. Both the senior and I became alert. Following Bunty’s declaration, the senior wore his spectacles and started to locate the hearing notice which had the log-in details.

‘Bunty beta, these are the log-in details,’ the senior handed over the paper to Bunty, looking at him with great hope and placing one hand on his shoulder. On the other side, Babli was fidgeting in his chair, waiting to contribute his bit.

‘Grandpa, you are not allowing me to do anything; only Bunty beta do this, Bunty beta do that,’ complained Babli.

‘Calm down, Babli, you find my pen and mobile,’ the senior said.

Babli moved swiftly to look for the two articles in the heap of papers and files littered on the table. He somehow succeeded in his search, messing up the papers and files even further. And he handed over the mobile and the pen to the senior.

‘Good boy, God bless you.’ the Senior said, looking at Babli.

As the time of hearing was approaching, he told Bunty to log in. Doing as told, Bunty logged in and declared, ‘Grandpa, put on your specs and headphone, we are about to start the virtual hearing session.’

Fortunately, the case was before a single-member bench. At the scheduled time, there was some movement on the screen and the Member appeared.

‘Speak, grandpa, speak,’ advised Bunty and Babli in hushed tones.

‘Good morning, Sir,’ greeted the senior.

‘How are you, Bhishmacharya?’ asked the Member. Being the senior-most in Tribunal practice, the senior was addressed as ‘Bhishmacharya’ with reverence.

‘I’m fine,’ replied the senior. Having exchanged initial pleasantries, the case references were brought on record. However, the departmental representative was still not in the loop.

On the other hand, the senior was very eager to begin his first-ever experience of a ‘virtual hearing.’ But all of a sudden, the screen went blank.

‘Bunty-Babli, see what happened,’ shouted the senior.

‘Grandpa, wait, the internet may be down on the other side,’ advised Bunty.

After a while, the Member appeared on the screen. ‘Internet trouble, connectivity dropped, I wonder the learned DR is still not on air,’ said the Member.

‘Your Honour, I emailed my paper book for your ready reference well in advance, it must have reached the learned DR also,’ said the senior.

There was a pause. The senior could hear the Member’s mobile ringing. The Member picked up his phone and the senior overheard the conversation, ‘What happened? Not possible… why… power outage plus no connectivity… Oh my God!… No alternative… adjourn… next date… wait, I will call you back…”

‘Sorry, Counsel, we will have to adjourn the hearing; the learned DR says no power, no connectivity… Counsel can we make it to 1st April, is it suitable to you?’ the Member asked.

‘No problem, Your Honour, make it to 1st April,’ said the senior with a heavy heart. The Member logged off instantly. Bunty did the same. The senior took a long breath and removed the headphone. Bunty and Babli ran away to complete their interrupted cricket match. I, too, got up and consoled the senior.

‘Better luck next time, Sir; don’t be nervous, it happens very often, you are not an exception,’ and moved towards the door. And Tommy ran in to meet his master.

Thus, the first-ever virtual hearing ended with the first-ever virtual adjournment!

THE FIRST ‘VIRTUAL’ RRC! IS IT HERE TO STAY? A REPORT ON THE 54TH BCAS RRC

THE FIRST ‘VIRTUAL’ RRC! IS IT HERE TO STAY?

A REPORT ON THE 54TH BCAS RRC

Greater attendance from more cities, the first-ever virtually hosted ‘refresher’ programme and a puppeteer-ventriloquist to boot! These are some of the highlights of the annual Gyan Ganga, also known as the Annual Residential Refresher Course (RRC) of the Bombay Chartered Accountants’ Society (BCAS), that was organised in the midst of the Covid-19 pandemic from the 7th to the 10th of January, 2021.

This was the 54th edition of the flagship event and it was attended by more than 160 participants from 39 cities and towns apart from Mumbai.

The organisers treated the difficulties, restraints and restrictions posed by the pandemic as opportunities to seek out the best in terms of the Chief Guest, the panellists, faculty, thought providers and so on. Overlapping and sometimes clashing engagements, physical locations and distances were no longer a limitation. Acknowledging the need to ‘admit rather than to restrict’, the doors of the RRC were virtually thrown open to non-members, a few of whom attended and took benefit of the landmark annual event.

From left: Uday Sathaye, Suhas Paranjpe, Narayan Pasari

Countless calls and virtual meetings resulted in drawing up a programme that promised to provoke and trigger fresh thought, debate and conversation. Of course, the time-tested mix of panel discussions, paper presentations, group discussions and talks was not neglected.

As members are aware, one of the main attractions of an RRC is the opportunity to interact with a melange of like-minded professionals and experts from diverse fields, practices and regions.

Any misgivings about the ability to attract an audience in the pandemic were washed away with the early registration of one of our senior-most Past Presidents, Pradyumna Shah, under whose aegis and Presidentship the very first RRC was held in the year 1968-69.

Invigorated by this vote of confidence, the days leading up to D-Day were spent in smoothening out technical issues, preparing videos and notes on how to log in, mock trials with panellists, paper presenters and so on to check the reception quality and also to test their bandwidths!

The first morning (7th January) was earmarked for young delegates to participate in the ice-breaking event, the ‘40s under 40’ programme led by our own youth, or Yuva Shakti, Anand Bathiya and Chirag Doshi.

President Suhas Paranjpe then went on to start the inaugural session by welcoming the participants and briefing them about the BCAS. Seminar, Public Relations and Membership Development Committee Chairman Narayan Pasari spoke about the RRC and gave details of the schedule.

Clockwise from top left: Adv Ajay Singh, Prof. Sunil Sharma, CA Sumit Seth, CA Vikram Pandya, CA Abhay Desai, CA Abhitan Mehta

In acknowledgement of the stellar contribution of our Past President under whose leadership the seed of the RRC was planted half a century ago, the BCAS felicitated Pradyumna Shah who, at the young age of 91, leads by example, proving that learning never stops. Vice-President Abhay Mehta read out the citation that was presented to him.

This was followed by the release of a book authored by another Past President, Uday Sathaye. BCAS also launched its ‘Gift A Membership Scheme’ under the benign gaze of the esteemed Guest of Honour, Mr. Dilip Piramal, Chairman, VIP Industries. In his address, Mr. Piramal spoke candidly on the subject ‘The New Normal – Doing Business in India’. An interactive session, deftly moderated by Joint Secretary Mihir Sheth and the SPRMD Committee Member Dr. Sangeeta Pandit followed.

Mr. Dilip Piramal reflected upon his life experiences and motivated the online audience with his frankness, simplicity and humility on a number of contemporary issues posed to him by the moderators.

Treasurer Chirag Doshi proposed the vote of thanks to the Chief Guest. Also present at the opening session were the Conveners of the Committee, Kinjal Bhuta, Mrinal Mehta and Preeti Cherian.

The inaugural session was followed by the much anticipated curtain-raiser Panel Discussion which saw Jayesh Sheth, Raj Mullick, Vishal Gada and Rutvik Sanghvi lay threadbare the intricacies relating to ‘Business in Digital Economy – An Overall Perspective from Direct Tax, Indirect Taxes, Accounting & FEMA’. The panel was moderated and deftly steered by Past President Chetan Shah and Treasurer Chirag Doshi.

On the second morning, 8th January, Abhitan Mehta started the Group Discussion on ‘Revenue Recognition Accounting – Direct Taxes & Indirect Taxes Aspects’. For each Group Discussion Paper, the participants were divided into four online groups with a Group Leader and an Observer in each for interactive deliberations and discussions on the subject.

Later, the participants took active interest in the Paper Presentation by Sumit Sheth on the subject ‘CARO Reporting & Other Recent Company Law Issues’. This session was chaired by Past President Ashok Dhere. In the evening, Abhitan Mehta returned in a lengthy session in which he presented his replies to the paper that had been discussed in the morning. This session was chaired by Vice-President Abhay Mehta.

Day 3 commenced with the Group Discussion on ‘Case Studies in Direct Taxes (Special Emphasis on Corporate Taxation Schemes & Issues, Penalties & Prosecutions & COVID Impact)’ by Advocate Ajay Singh. In-depth discussions took place among all the four groups. This was followed by the Paper Presentation by Abhay Desai on ‘Intricate Issues in GST, Special Emphasis on Input Tax Credit, Place of Supply, Point of Taxation & Valuation’. This session was chaired by Past President Govind Goyal.

Glimpses of the 54th BCAS RRC

The array of speakers, paper-writers, moderators and others who enriched the
proceedings of the RRC

Yet another stimulating Paper Presentation followed. This one was by Vikram Pandya on the ‘Use & Impact of Artificial Intelligence & Data Analytics for Professionals’. Dr. Sangeeta Pandit chaired this session.

And then it was time to release the much-awaited BCAS App. This was formally done by President Suhas Paranjpe and other office-bearers with much fanfare. The contribution of Joint Secretary Mihir Sheth in the making of the App was hailed and recognised.

The evening ended with a unique entertainment programme by Satyajit Padhaye, a CA and also an ace puppeteer and ventriloquist, which was enjoyed by all the participants and their families. This programme was chaired by Past President Pranay Marfatia.
Day 4 started with replies by Advocate Ajay Singh on his paper ‘Case Studies in Direct Taxes (Special Emphasis on Corporate Taxation Schemes & Issues, Penalties & Prosecutions & COVID Impact)’. This session was chaired by Past President Anil Sathe.

The pièce de résistance of the 54th RRC was the talk by Prof. Sunil Sharma, Faculty, IIM-Ahmedabad, on ‘Strategic Thinking & Organisational Alignment’ which was chaired by Past President Rajesh Muni. The occasion also marked the e-release of the e-book‘Gita for Professionals’ authored                                                                                       by Chetan Dalal.

The virtual RRC concluded with acknowledgements and thanksgiving to all those who had worked towards delivering a successful RRC, especially the ‘Tech Team’ comprising Anand Kothari, Gaurav Save, Mehul Gada, Rimple Dedhia and Ronak Rambhia who had worked tirelessly to deliver a seamless experience.

Till we meet again in 2022 at the 55th RRC!

    

 

PREFACE

‘Dear Esteemed Readers,

In the words of our dear Father of the Nation, Mahatma Gandhi, “Be the change you wish to see in the world”. This phrase aptly describes our respected vadil, our Past President, Shri Pradyumnabhai N Shah.

The seeds of the Bombay Chartered Accountants’ Society’s Residential Refresher Course (RRC) were planted under his Presidentship in the year 1968-69. Over the past five decades, countless members, nay generations, have reaped the fruits of this bountiful tree, while sheltering and prospering under its benevolent reach.

One of the early registrations at the 54th edition of the RRC this year, the first one in virtual mode, was none other than our dear Shri Pradyumnabhai himself. All of 92 years of age, his hunger for learning and his commitment to the Society and profession are truly inspirational.

The Seminar, Public Relations & Membership Development Committee (SPR&MD Committee) of the BCAS, which organises the RRC every year, was privileged to honour the contributions of our dear Shri Pradyumnabhai with a citation presented at the hands of the esteemed Chief Guest, Shri Dilip Piramal, Chairman, VIP Industries.

Pradyumnabhai, thank you for showing us the path, for being the torchbearer for the RRC. We, at the BCAS, will be eternally grateful for the legacy you have bestowed on all – the past, the current and the future generations of members – all part of this vibrant Society.’

 

Section 44AD – Eligible assessee engaged in an eligible business – Partner of firm – Not carrying on business independently – Not applicable

6. Anandkumar vs. Asst. CIT Tax, Circle-2, Salem [Tax Case Appeal No. 388 of 2019; 23rd December, 2020; Madras High Court] [‘A’ Bench, Chennai in I.T.A. No. 573/CHNY/2018; A.Y.: 2012-13; ITAT order dated 30th January, 2019]

Section 44AD – Eligible assessee engaged in an eligible business – Partner of firm – Not carrying on business independently – Not applicable

 

The assessee is an individual, a partner in M/s Kumbakonam Jewellers, M/s ANS Gupta & Sons and M/s ANS Gupta Jewellers. The assessee filed his return of income for the A.Y. under consideration admitting a total income of Rs. 43,53,066. The assessment was finalised u/s 143(3) by an order dated 3rd March, 2015 disallowing the claim made by the assessee u/s 44AD. While filing the return, the assessee had applied the presumptive rate of tax at 8% u/s 44AD and returned Rs. 4,68,240 as income from the remuneration and interest received from the partnership firm. The A.O. did not agree with the assessee and opined that section 44AD is available only for an eligible assessee engaged in an eligible business and that the assessee was not carrying on business independently but was only a partner in the firm. Further, the assessee did not have any turnover and receipts of account of remuneration and interest from the firms cannot be construed as gross receipts mentioned in section 44AD.

 

On appeal, the CIT (Appeals), Salem dismissed the same by order dated 22nd December, 2017. The Tribunal also dismissed the assessee’s appeal.

 

The Hon. High Court observed that section 44AD is a special provision for computing profits and gains of business on presumptive basis which was introduced in the Act with effect from 1993. At the outset, it needs to be noted that section 44AD is a special provision and it carves out an exception in respect of certain businesses, and from clause (b)(ii) of the Explanation u/s 44AD which prescribes the limit of Rs. 2 crores as total turnover or gross receipts, it is a clear indication that this provision is meant for small businesses. Further, section 44AD(1) commences with a non-obstante clause and states that notwithstanding anything to the contrary contained in sections 28 to 43C in the case of an eligible assessee engaged in an eligible business, a presumptive rate of tax at 8% can be adopted. One more important aspect is that 8% is computed on the basis of the total turnover or gross receipts of the assessee. Therefore, four important aspects to be noted in section 44AD are that the assessee who claims such a benefit of the presumptive rate of tax should an eligible assessee as defined in clause (a) of the Explanation to section 44AD, he should be engaged in an eligible business as defined in clause (b) of section 44AD and 8% of the presumptive rate of tax is computed on the total turnover or gross receipts. Therefore, to avail the benefit of such provision, the assessee has to necessarily satisfy the A.O. that he comes within the framework of section 44AD.

 

The assessee’s case is that he has received the remuneration and interest from the partnership firm and according to him this remuneration and interest received are gross receipts, and they being less than Rs. 1 crore arising from an eligible business, he is entitled to claim the benefit of the presumptive rate of tax. Further, the assessee’s contention is that he is an eligible assessee and the remuneration and interest received from the partnership firm being gross receipts from an eligible business, the A.O. ought to have allowed the benefit u/s 44AD.

 

The Revenue submitted that the assessee is not doing any business, but the firm is carrying on business in which the assessee is a partner and therefore the condition that it should arise from an eligible business is not satisfied. In the Statement issued by the ICAI, it has been stated that the word ‘turnover’ for the purpose of the clause may be interpreted to mean the aggregate amount for which sales are effected or services rendered by an enterprise, whereas in the case of the assessee neither has he performed any sales nor rendered any services but merely received remuneration and interest from the firm and the partnership firm has already debited the remuneration and interest in their profit and loss account, and therefore it cannot be taken as turnover or gross receipts.

 

The assessee should be able to satisfy the four main criteria mentioned in sub-section (1) of section 44AD r/w Explanations (a) and (b) in the said provision. Therefore, the assessee should establish that he is an eligible assessee engaged in an eligible business and such business should have a total turnover or a gross receipt. Admittedly, the assessee who is an individual in the instant case, is not carrying on any business. Therefore, the remuneration and interest received by the assessee from the partnership firm cannot be termed to be the turnover of the assessee (individual). Similarly, it will also not qualify for gross receipts.

 

Admittedly, the assessee has not done any sales nor rendered any services but has been receiving remuneration and interest from the partnership firms which amount has already been debited in the profit and loss account of the firms. Therefore, the Revenue was right in the contention that remuneration and interest cannot be treated as gross receipts.

 

The Court noted that the Tribunal observed that the intention of section 40(b) is that the partner should not be disentitled from claiming reasonable remuneration where he is a working partner and should not be denied reasonable interest on the capital invested by him in a firm and these changes if not made in the accounts of the firm, then the pro-rata profits of the firm would be higher resulting in higher tax for the firm. Therefore, the payments have to be construed indirectly as a type of distribution of profits of a firm or otherwise the firm would have been taxed. Therefore, the Tribunal observed that the Legislature in its wisdom chose such remuneration and interest to be a part of profits from business or profession and that can never translate into gross receipts or turnover of a business of being a partner in a firm. The Tribunal took note of the position prior to the substitution of section 44AD by the Finance (No. 2) Act, 2009 with effect from 1st April, 2011. Prior to the said substitution, this provision allowed the application of presumptive tax rate only for the business of civil construction or supply of labour for civil construction. By virtue of the substitution, the applicability of presumptive rate of tax was expanded to include any business which had turnover or gross receipts of less than Rs. 1 crore. The Tribunal noted the Explanatory notes to the provisions of the Finance (No. 2) Act, 2009 vide Circular No. 5/2010 dated 3rd June, 2010 wherein the CBDT had explained why the scope of the said provision was enlarged.

 

The Court observed that section 44ADA is a special provision for computing profits and gains of profession on presumptive basis and uses the expression ‘Total gross receipts’. As already seen in section 44AD, the words used are ‘total turnover’ or ‘gross receipts’ and it pre-supposes that it pertains to a sales turnover and no other meaning can be given to the said words and if so done, the purpose of introducing section 44AD would stand defeated. That apart, the position becomes much clearer if we take note of sub-section (2) of section 44AD which states that any deduction allowable under the provisions of sections 30 to 38 for the purpose of sub-section (1) be deemed to have been already given full effect to and no further deduction under those sections shall be allowed. Thus, conspicuously section 28(v) has not been included in sub-section (2) of section 44AD which deals with any interest, salary, bonus, commission or remuneration, by whatever name called, due to or received by a partner of a firm from such firm.

 

Thus, the Tribunal rightly rejected the plea raised by the assessee and confirmed the order passed by the CIT(A) and the A.O. The appeal filed by the assessee was accordingly dismissed.

 

It is my great hope someday, to see science and decision makers rediscover what the ancients have always known. Namely that our highest currency is respect

– Nassim Nicholas Taleb

Income from undisclosed sources – Bogus purchases – A.O. disallowing entire purchases – Estimation by Commissioner (Appeals) of profit element embedded in purchases at 17.5% affirmed by Tribunal based on facts – Justified

Housing project – Special deduction – Sections 80-IB(10) and 80-IB(10)(c) – Eligibility for deduction – Condition precedent – Single approval from local authority for development and construction of residential units more than and less than 1,500 sq. ft. in area – Development permission which includes residential units more than 1,500 sq. ft. irrelevant for deciding eligibility for deduction – Assessee entitled to deduction

39. Principal CIT vs. Pratham Developers [2020] 429 ITR 114 (Guj.) Date of order: 2nd March, 2020 A.Y.: 2010-11

 

Housing project – Special deduction – Sections 80-IB(10) and 80-IB(10)(c) – Eligibility for deduction – Condition precedent – Single approval from local authority for development and construction of residential units more than and less than 1,500 sq. ft. in area – Development permission which includes residential units more than 1,500 sq. ft. irrelevant for deciding eligibility for deduction – Assessee entitled to deduction

 

The assessee developed housing projects. It claimed deduction u/s 80-IB(10) in respect of five projects. The A.O. found that one of the projects was undertaken
on land introduced by the partners. He held that the assessee was not the sole owner of the land on which the housing project was constructed and disallowed the deduction. In respect of another project PV, the A.O. held that out of the layout plan for 158 residential units, 55 residential units were of built-up areas of 2,199 sq. ft. which exceeded the prescribed built-up area of 1,500 sq. ft. as envisaged u/s 80-IB(10)(c). Accordingly, the A.O. disallowed the deduction claimed by the assessee u/s 80-IB(10).

 

The Commissioner (Appeals) found that all the residential units developed by the assessee under the scheme PV were below the prescribed built-up area of 1,500 sq. ft., that as regards the 55 residential units the development agreement entered into between the land owners and its associate concern showed that the scheme was developed by its associate concern and that they did not form part of the housing project developed by the assessee. The Commissioner (Appeals) held, on the facts that the assessee was a separate concern which fulfilled the conditions prescribed u/s 80-IB(10), that the project which consisted of the 55 residential units was a separate project developed by another assessee, and that the assessee was entitled to deduction u/s 80-IB(10) in respect of the 103 residential units in the project which fulfilled the criteria prescribed as to the size of the plot, and the built-up area of each residential unit being of less than 1,500 sq. ft. The Tribunal affirmed the order passed by the Commissioner (Appeals).

 

On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under:

 

‘i)    The condition laid down u/s 80-IB(10)(c) was fulfilled when the assessee claimed the deduction with respect to the residential units, which had built-up area less than 1,500 sq. ft. Under section 80-IB(10) there was no provision requiring the assessee to obtain a commencement certificate from the local authority for development and construction of the residential units having more than 1,500 sq. ft. area. Therefore, whether such development permission included the area for the residential units which were more than 1,500 sq. ft. would not be relevant for deciding the eligibility for deduction u/s 80-IB(10).

 

ii)    In view of the concurrent findings of fact arrived at by the Commissioner (Appeals) and the Tribunal, there was no legal infirmity in their orders allowing the deduction u/s 80-IB(10).’

 

Export – Exemption u/s 10A – Effect of section 10A and notification of CBDT issued u/s 10A – Assessee providing human resources services – Entitled to deduction u/s 10A

38. CIT vs. NTT Data Global Advisory Services Pvt. Ltd. [2020] 429 ITR 546 (Karn.) Date of order: 12th November, 2020 A.Y.: 2007-08

Export – Exemption u/s 10A – Effect of section 10A and notification of CBDT issued u/s 10A – Assessee providing human resources services – Entitled to deduction u/s 10A

 

The assessee is a private limited company and is in the business of software development and professional services. For the A.Y. 2007-08 the assessee claimed deduction u/s 10A. The A.O. recomputed the deduction u/s 10A by reducing the recruitment fee from the export turnover.

 

The Commissioner held that income from human resource services is not eligible for deduction u/s 10A and accepted the alternative plea to tax only net income from the business of manpower supply. The Tribunal held that transmitting the data of qualified information technology personnel is human resource services and information technology-enabled services. Accordingly, the appeal preferred by the assessee was allowed.

 

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

 

‘i)    The expression “computer software” has been defined in Explanation 2 to section 10A and means even any customised electronic data or any product or service of a similar nature as may be notified by the Board. Thus, the Legislature has empowered the Board to notify the products or services of similar nature which would be covered under clause (b) and treated as “customised electronic data” and also, “any product or service of similar nature”. The Board has issued a notification dated 26th September, 2000 which admittedly contains human resources as well as information technology-enabled products or services.

 

ii)    The role of the assessee company was to create an electronic database of qualified personnel and transmit data through electronic means to the client. The Commissioner (Appeals) had found that the assessee was in the business of supply of manpower from India to its foreign clients after their recruitment in India. Thus, irrespective of whether or not the assessee provided training to its employees or to the employees who were recruited by its clients, since the assessee was engaged in providing human resource services, its case was squarely covered by notification dated 26th September, 2000. Therefore, the assessee was entitled to the benefit of deduction u/s 10A.’

 

Export – Exemption u/s 10A – (i) Conditions precedent for claiming exemption u/s 10A – Separate accounts need not be maintained – Undertaking starting manufacture on or after 1st April, 1995 must have 75% of sales attributed to export; (ii) Sub-contractors giving software support to assessee on basis of foreign inward remittance – Claim by sub-contractors would not affect assessee’s claim u/s 10A

37. CIT (LTU) vs. V. IBM Global Services India Pvt. Ltd. [2020] 429 ITR 386 (Karn.) Date of order: 3rd November, 2020 A.Y.: 2000-01

 

Export – Exemption u/s 10A – (i) Conditions precedent for claiming exemption u/s 10A – Separate accounts need not be maintained – Undertaking starting manufacture on or after 1st April, 1995 must have 75% of sales attributed to export; (ii) Sub-contractors giving software support to assessee on basis of foreign inward remittance – Claim by sub-contractors would not affect assessee’s claim u/s 10A

 

The assessee was in the business of export of software solutions and maintenance services. For the A.Y. 2000-01, the assessee claimed exemption u/s 10A. The A.O., inter alia, held that the assessee had a software technology park unit as well as other units and all overhead expenses had been charged in relation to the other unit and no expenditure was claimed in respect of the software technology park unit for which exemption u/s 10A had been claimed. He also held that the assessee had not fulfilled the stipulations laid down in the Software Technology Parks of India Scheme or the conditions laid down by the Reserve Bank of India regarding maintenance of separate accounts and other conditions and, therefore, the assessee was not entitled to exemption u/s 10A. He further held that the audit report did not exclude payment made to sub-contractors or other expenses incurred abroad. He held that the turnover brought into the country was 56.056% which was below 75% as stipulated u/s 10A. Accordingly, he disallowed the exemption u/s 10A.

 

The Commissioner (Appeals) allowed the appeal partly. The Tribunal dismissed the appeal preferred by the Revenue and allowed the appeal preferred by the assessee in part.

 

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

 

‘i)    Section 10A is a special provision in respect of newly-established undertakings in free trade zones. The exemption is dependent on fulfilment of the conditions mentioned in sub-section (2). Sub-section (2) does not contain any requirement with regard to maintenance of separate accounts. Wherever the Legislature intended to incorporate the requirement of maintenance of either separate accounts or separate books of accounts, it has expressly said so. The requirement of maintenance of separate accounts has been provided in the STPI registration scheme and no consequences for non-compliance therewith have been prescribed. Therefore, the requirement is directory.

 

ii)    From a perusal of section 10A(2)(ia) it is evident that it applies to an undertaking which begins to manufacture or produce any article or thing on or after 1st April, 1995 and whose exports of such articles or things are not less than 75% of the total sales thereof during the previous year. Thus, the total export has to be not less than 75% of the total sales.

 

iii)   The A.O. in his remand report to the Commissioner (Appeals) had stated that the assessee had been able to bifurcate the software technology park receipts, section 80HHE receipts and domestic receipts. The direct expenses relating to domestic receipts and export receipts had also been segregated and direct expenses of export turnover were apportioned on the basis of the percentage of turnover of the software technology park unit and section 80HHE receipts.

 

iv)   The Commissioner (Appeals) had concluded that since the assessee had identified the turnover relating to the software technology park units and there was a reasonable basis for quantifying direct and indirect expenses pertaining to the software technology park units, the income pertaining to the software technology park units and therefore, exemption u/s 10A could be worked out. The Tribunal had held that the assessee had units spread over various parts of the country and even abroad, and hence the only plausible method of reasonably allocating the overhead expenses was by relating them to the turnover. The Tribunal had upheld the order to the extent of Rs. 68,72,88,748 holding this to be a reasonable figure. These concurrent findings of fact were based on meticulous appreciation of evidence on record. The Tribunal had rightly held that the allocation of the overhead expenses had to be made on the basis of the turnover.

 

v)   The Commissioner (Appeals) had held that the sub-contractors had given software support activity to the assessee and not to the customers of the assessee. The employees of the sub-contractors operated from the software technology park unit itself and the sub-contractors had claimed exemption u/s 10A on the basis of the foreign inward remittance certificate, which had no bearing with regard to the assessee’s claim to exemption u/s 10A. The question of double deduction did not arise.

Disallowance of expenditure relating to exempt income – Section 14A r/w/r 8D of ITR, 1962 – Condition precedent for disallowance – Proximate relationship between expenditure and exempt income – Onus to establish such proximity on Department – A.O. must give a clear finding with reference to the assessee’s accounts how expenditure related to exempt income

36. CIT vs. Sociedade De Fomento Industrial Pvt. Ltd. (No. 2) [2020] 429 ITR 358 (Bom.) Date of order: 6th November, 2020


 

Disallowance of expenditure relating to exempt income – Section 14A r/w/r 8D of ITR, 1962 – Condition precedent for disallowance – Proximate relationship between expenditure and exempt income – Onus to establish such proximity on Department – A.O. must give a clear finding with reference to the assessee’s accounts how expenditure related to exempt income

 

The assessee was a miner and exporter of mineral ores. For the A.Y. 2009-10 the A.O. computed disallowance u/s 14A read with rule 8D at 0.5% on the average investment. He rejected the assessee’s claim that it did not incur any expenditure to earn the dividend income, that it invested the surplus funds through bankers and other financial institutions and all the forms were filled up by them, and that it only issued cheques. He was of the view that without devoting time and without analysing the nature of the investment, the assessee could not have invested in the mutual funds.

 

The Commissioner (Appeals) partly allowed the appeal. The Tribunal allowed the assessee’s appeal and deleted the disallowances.

 

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

 

‘i)    Section 14A inserted by the Finance Act, 2001 with retrospective effect from 1st April, 1962 aims to disallow expenditure incurred in relation to income which did not form part of the total income and has to be read with Rule 8D of the Income-tax Rules, 1962 which provides the method of calculation of the disallowance. Section 14A statutorily recognises the principle that tax is leviable only on the net income. The profits and gains of business or profession are taxed after deducting expenditure from income. In that regard, there is no need for the assessee to establish a one-to-one correlation between income and expenditure. Rule 8D provides the methods for determining the amount of expenditure in relation to income not includible in the total income and comes into play once an expenditure falls within the mischief of section 14A.

 

ii)    The onus is on the Revenue to establish that there is a proximate relationship between the expenditure and the exempt income. The application of section 14A and rule 8D is not automatic in each and every case, where there is income not forming part of the total income. Though the expenditure u/s 14A includes both direct and indirect expenditure, that expenditure must have a proximate relationship with the exempted income. Before rejecting the disallowance computed by the assessee, the A.O. must give a clear finding with reference to the assessee’s accounts as to how the other expenditure claimed by the assessee out of the non-exempt income is related to the exempt income. There must be a proximate relationship between the expenditure and the exempt income and only then would a disallowance have to be effected.

 

iii)   The Tribunal was right in deleting the additions made by the A.O. u/s 14A read with rule 8D. The Tribunal had found that the A.O. had only discussed the provisions of section 14A(1) but had not justified how the expenditure incurred by the assessee during the relevant year related to the income not forming part of its total income and had straightaway applied Rule 8D. There must be a proximate relationship between the expenditure and the exempt income and only then would a disallowance have to be effected. There was no valid reason to interfere with the Tribunal’s well-reasoned order.’

 

Capital gains – Sections 2(14), (42A), (47) and 45 – (i) Capital asset – Stock option is a capital asset – Gains on exercising option – Capital gains; (ii) Salary – Stock option given to consultant – No relationship of employer and employee – Gains on exercising stock option – Assessable as capital gains

35. Chittharanjan A. Dasannacharya vs. CIT [2020] 429 ITR 570 (Karn.) Date of order: 23rd October, 2020 A.Y.: 2006-07


 

Capital gains – Sections 2(14), (42A), (47) and 45 – (i) Capital asset – Stock option is a capital asset – Gains on exercising option – Capital gains; (ii) Salary – Stock option given to consultant – No relationship of employer and employee – Gains on exercising stock option – Assessable as capital gains

 

The assessee was a software engineer who was employed with a company registered in India from 1995 to 1998. He was deputed to a U.S. company in 1995 as an independent consultant. The assessee served in the US from 1995 to 1998 as an independent consultant and later as an employee of the US company from 2001 to 2004. The assessee thereafter returned to India and was employed in the Indian subsidiary. While on deputation to the US, the assessee was granted stock option by the US company whereunder he was given the right to purchase 30,000 shares at an exercise price of US $0.08 per share. The assessee also had an option of cashless exercise of stock options which was an irrevocable direction to the broker to sell the underlying shares and deliver the proceeds of the sale of the shares after deducting the exercise / option price which was to be delivered to the US company. In the cashless exercise, the underlying shares were not allotted to the assessee and he was only entitled to receive the sale proceeds less the exercise price.

 

The assessee in the A.Y. 2006-07 exercised his right under the stock option plan by way of cashless exercise and received a net consideration of US $283,606 and offered this as long-term capital gains as the stock options were held for nearly ten years. The A.O. by an order u/s 143(3) split the transaction into two and brought to tax the difference between the market value of the shares on the date of exercise and the exercise price as ‘income from salary’ and the difference between the sale price of shares and market value of shares on the date of exercise of ‘income from short-term capital gains’.

 

The Tribunal held that the assessee was to be regarded as an employee for the purposes of the plan and the benefits arising therefrom were to be treated as income in the nature of salary in the hands of the assessee.

 

The Karnataka High Court allowed the appeal filed by the assessee and held as under:

 

‘i)    The Supreme Court in Dhun Dadabhoy Kapadia and Hari Brothers (P) Ltd. held that the right to subscribe to shares of a company was treated to be a capital asset u/s 2(14). The stock option being a right to purchase the shares underlying the options is a capital asset in the hands of the assessee u/s 2(14) which is also evident from Explanation 1(e) to section 2(42A) which uses the expression “in case of a capital asset being a right to subscribe any financial asset”. The cashless exercise of option therefore is a transfer of capital asset by way of a relinquishment or extinguishment of the right in the capital asset in terms of section 2(47).

 

ii)    From a perusal of the communication dated 3rd August, 2006 sent by the US company to the assessee, it was evident that the assessee was an independent consultant and not an employee of the US company at the relevant time. Thus, there was no relationship of employer and employee between it and the assessee. The assessee never received the shares in the stock options. At the time of grant of options to the assessee in the year 1996, section 17(2)(iia) was not there in the statute. The difference between the option / exercise price of the stock option and the fair market value of the shares on the date of exercise of the stock option was assessable as capital gains.

 

iii)   The Revenue in case of several other assessees had accepted the fact that on cashless exercise of option there arises income in the nature of capital gains. However, in the case of the assessee the aforesaid stand was not taken. The Revenue could not be permitted to take a different view.’

 

TDS – Payments to contractors – Section 194C – Assessee, Department of State Government – Government directing assessee to appoint agency for construction of college buildings providing percentage of project cost for each building as service charges – Payments to agencies for construction of college buildings – Appellate authorities on facts holding that assessee not liable to deduct tax – Concurrent findings based on facts not shown to be perverse – Order need not be interfered with

19 CIT vs. Director of Technical Education [2021] 432 ITR 110 (Karn) A.Y.: 2011-12 Date of order: 10th February, 2021

TDS – Payments to contractors – Section 194C – Assessee, Department of State Government – Government directing assessee to appoint agency for construction of college buildings providing percentage of project cost for each building as service charges – Payments to agencies for construction of college buildings – Appellate authorities on facts holding that assessee not liable to deduct tax – Concurrent findings based on facts not shown to be perverse – Order need not be interfered with

The assessee was a Department of the Government of Karnataka and was in charge of the academic and administrative functions of controlling technical education in the State of Karnataka. As part of its activities, the assessee entrusted the construction of engineering and polytechnic college buildings under construction agreements to KHB and RITES. The Deputy Commissioner treated the assessee as an assessee-in-default and passed an order u/s 201(1) on the ground that the assessee had failed to deduct the tax as required u/s 194C on the payments made under the contracts with KHB and RITES. Accordingly, a demand notice was also issued.

The Commissioner (Appeals), inter alia, held that the Government of Karnataka directed the assessee to appoint a particular agency like KHB or RITES for every new building on remuneration by providing a specific percentage of the project cost for each building in the form of service charges and that the provisions of section 194C were not applicable. The Tribunal upheld the order of the Commissioner (Appeals).

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

‘The Tribunal was right in holding that the assessee was not liable to deduct tax u/s 194C on payments made to KHB and RITES for rendering of services in connection with the construction of engineering and polytechnic college buildings in the State of Karnataka. The Commissioner (Appeals) had gone into the details of the memorandum of understanding entered into with KHB and RITES and had held that the provisions of section 194C were not applicable to the assessee. The concurrent findings of fact by the appellate authorities need not be interfered with in the absence of any perversity being shown.’

TDS UNDER SECTION 195 IN POST-MLI SCENARIO

In our earlier articles of June, August and September, 2018, we had covered the various facets of TDS under section 195 of the Income-tax Act, 1961 (the Act), including some practical issues on the same. With the increase in global trade, TDS on payments to non-residents has gained importance in recent years. The year 2020 was unforgettable for various reasons – the ongoing pandemic and the lockdown that followed being one of them. However, the international tax landscape in India also underwent a significant change in 2020 with the Multilateral Instrument (MLI) coming into effect on 1st April, 2020. The MLI has modified various DTAAs. Further, the return to the classical system of taxing dividends and the abolishment of the Dividend Distribution Tax regime in the Finance Act, 2020 also extended the scope of TDS u/s 195 as dividend payments hitherto were not subject to such TDS by virtue of the exemption u/s 10(34).

Given the host of changes that the world, particularly the tax world, has undergone in 2020, this article attempts to analyse the impact of these changes on compliance u/s 195 especially for a practitioner who is certifying the taxability of foreign remittances in Form 15CB.

1. BACKGROUND

Section 195 requires tax to be deducted at the ‘rates in force’ in respect of interest or ‘other sum chargeable under the provisions of this Act’ in respect of payment to a non-resident. Further, section 2(37A), defining the term ‘rates in force’ in respect of income subject to TDS u/s 195 refers to the rate specified in the Finance Act of the relevant year, or the rate as per the respective DTAA in accordance with section 90. Therefore, TDS u/s 195 in theory results in the finality of the tax deducted on the income chargeable to tax in India in respect of a non-resident recipient as against the TDS under the other provisions of the Act, wherein TDS is only a form of collection of tax in advance and does not signify the final amount of tax payable in the hands of the deductee. This finality of the tax places a higher responsibility on a professional certifying the taxability u/s 195(6) in Form 15CB. Further, given the penal provisions for furnishing inaccurate information u/s 195, it is extremely important for a practitioner issuing Form 15CB to keep himself updated on the various changes in the international tax world. The ensuing paragraphs seek to address the practical issues arising on account of the recent changes in the international tax arena.

2. UNDERTAKING TDS COMPLIANCE BEFORE MLI

Before evaluating the impact of MLI on undertaking TDS compliances u/s 195, it may be worthwhile to briefly evaluate some of the best practices a professional would follow to avail the benefit under the DTAA before the MLI was effective.

While our earlier articles have covered most of these practices, in order to get a holistic view of the matter the same have been briefly covered below.

i. Tax Residency Certificate (TRC)
Section 90(4) provides that the benefit of a DTAA shall be available to a non-resident only in case such non-resident obtains a TRC from the tax authorities of the relevant country in which such person is a resident.

While the provision seeks to deny benefits of a DTAA to a non-resident who does not provide a valid TRC, the Ahmedabad Tribunal in the case of Skaps Industries India (P) Ltd. vs. ITO [2018] 94 taxmann.com 448 (Ahmedabad – Trib.) held that section 90(4) does not override the DTAA and, therefore, if the taxpayer can substantiate through any other document his eligibility to claim the benefit under the DTAA, the said benefit should be granted to him. One may refer to our article in the August, 2018 issue of this Journal for a detailed discussion on the ruling. In a recent decision, the Hyderabad Tribunal in the case of Sreenivasa Reddy Cheemalamarri vs. ITO [2020] TS-158-ITAT-2020 (Hyd.) has also followed the ruling of the Ahmedabad Tribunal in Skaps (Supra).

However, from the perspective of deduction u/s 195, it is always advisable to follow a conservative approach and therefore in a scenario where the recipient has not provided a valid TRC, the benefit under the DTAA may not be granted. The recipient would always have the option of filing a return of income and claiming refund and substantiating the eligibility to claim the benefit of the DTAA before the tax authorities, if required.

Further, if the TRC does not contain all the information as required in Rule 21AB of the Income-tax Rules, 1962 (Rules), one needs to also obtain a self-declaration from the recipient in Form 10F.

As TRC generally contains the residential status of the recipient as on the date of certificate or for a particular period, it is important that one obtains the TRC and Form 10F which is applicable for the period in which the transaction is undertaken.

ii. Declarations
In addition to the TRC, one generally also obtains the following declarations before certifying the taxability of the transaction u/s 195:
a.    Declaration that the recipient does not have a PE in India and if a PE exists, the income from the transaction is not attributable to such PE;
b.    Declaration that the main purpose of the transaction is not tax avoidance. However, one also needs to evaluate the transaction in detail and not merely rely on the declaration under GAAR as one needs to be fairly certain of the taxability before certifying the same;
c.    Declaration in respect of specific items of income that the recipient is the beneficial owner of the income and that it is not contractually or legally obligated to pass on the said income to any other person;
d.    Declaration that the Limitation of Benefits (LOB) clause, if any, in the DTAA has been met. Similar to the above declarations, one needs to evaluate the transaction in detail to ensure that the transaction or the recipient, as the case may be, satisfies the conditions mentioned in the LOB clause and not merely rely on the declaration.

3. IMPACT ON ACCOUNT OF MLI


i. Background of the MLI
Following the recommendations in the Base Erosion and Profit Shifting (BEPS) Project of the OECD in which discussion more than 100 countries participated, the MLI, a document which seeks to modify more than 3,000 bilateral tax treaties (modified tax treaties are called Covered Tax Agreements or CTAs), was released for ratification. India is one of the nearly 100 countries which are signatories to the MLI.

India signed the MLI on 7th June, 2017 and deposited the ratified document along with a list of its Reservations and Options on 25th June, 2019. Article 34(2) of the MLI provides that the MLI shall enter into force for a signatory on the first day of the month following the expiration of a period of three calendar months from the date of deposit of the ratified instrument. In the case of India, therefore, the MLI entered into force on 1st October, 2019.

Further, Article 35(1)(a) of the MLI provides that the MLI shall come into effect in respect of withholding taxes on the first day of the calendar year (or financial year in the case of India) that begins after the latest date on which the MLI enters into force for each of the Contracting Jurisdictions to the CTA. In other words, the MLI shall have an effect of modifying a particular DTAA on the first day of a calendar year (or financial year) beginning after the MLI has entered into force for both the countries which are signatory to the DTAA.

As the MLI has entered into force for India in October, 2019, it has come into effect and would result in the modification to the DTAA from 1st April, 2020 where the MLI has entered into force for the other signatory to the DTAA prior to 1st April, 2020 as well. The MLI had entered into force for many Indian treaty partners in 2019 or earlier and therefore the MLI has come into effect for those DTAAs from 1st April, 2020.

India has listed 93 of its existing DTAAs to be modified by the MLI. However, as the MLI works on a matching concept, the respective DTAA would be modified only if both the countries, signatories to the DTAA, have included the said DTAA in their final list of treaties to be modified. For example, while India has included the India-Germany DTAA in its final list, Germany has not and therefore the India-Germany DTAA will not be modified by the MLI. Some of the other notable Indian DTAAs which are not modified by the MLI are those with the USA, Brazil and Mauritius. Similarly, out of the 95 signatories to the MLI, as on date 59 countries have deposited the ratified document. Moreover, out of the 59 countries which have deposited the document, some of them have done so only recently and therefore it is important at the time of undertaking compliance of section 195 and dealing with a DTAA to verify whether the DTAA has been modified by the MLI and, if so, from which date. One can use the MLI Matching Database on the OECD website to know whether a particular DTAA has been modified and from which date.

Treaty
Partner

Whether
modified by MLI

Effective
date for withholding taxes from when MLI modifies DTAA 1

Albania

Yes

1st April, 2021

Armenia

No

NA

Australia

Yes

1st April, 2020

Austria

Yes

1st April, 2020

Bangladesh

No

NA

Belarus

No

NA

Belgium

Yes

1st April, 2020

Bhutan

No

NA

Botswana

No

NA

Brazil

No

NA

Bulgaria

No

NA

Canada

Yes

1st April, 2020

China (People’s Republic of)

No

NA

Colombia

No

NA

Croatia

No

NA

Cyprus

Yes

1st April, 2021

Czech Republic

Yes

1st April, 2021

Denmark

Yes

1st April, 2020

Egypt

Yes

1st April, 2021

Estonia

Yes

1st April, 2022

Ethiopia

No

NA

Fiji

No

NA

Finland

Yes

1st April, 2020

France

Yes

1st April, 2020

Georgia

Yes

1st April, 2020

Germany

No

NA

Greece

No

NA

Hong Kong (China)

No

NA

Hungary

No

NA

Iceland

Yes

1st April, 2020

Indonesia

Yes

1st April, 2021

Iran

No

NA

Ireland

Yes

1st April, 2020

Israel

Yes

1st April, 2020

Italy

No

NA

Japan

Yes

1st April, 2020

Jordan

Yes

1st April, 2021

Kazakhstan

Yes

1st April, 2021

Kenya

No

NA

Korea

Yes

1st April, 2021

Kuwait

No

NA

Kyrgyz Republic

No

NA

Latvia

Yes

1st April, 2020

Libya

No

NA

Lithuania

Yes

1st April, 2020

Luxembourg

Yes

1st April, 2020

Macedonia

No

NA

Malaysia

No

NA

Malta

Yes

1st April, 2020

Mauritius

No

NA

Mexico

No

NA

Mongolia

No

NA

Montenegro

No

NA

Morocco

No

NA

Mozambique

No

NA

Myanmar

No

NA

Namibia

No

NA

Nepal

No

NA

Netherlands

Yes

1st April, 2020

New Zealand

Yes

1st April, 2020

Norway

Yes

1st April, 2020

Oman

Yes

1st April, 2021

Philippines

No

NA

Poland

Yes

1st April, 2020

Portugal

Yes

1st April, 2021

Qatar

Yes

1st April, 2020

Romania

No

NA

Russian Federation

Yes

1st April, 2020

Saudi Arabia

Yes

1st April, 2021

Serbia

Yes

1st April, 2020

Singapore

Yes

1st April, 2020

Slovak Republic

Yes

1st April, 2020

Slovenia

Yes

1st April, 2020

South Africa

No

NA

Spain

No

NA

Sri Lanka

No

NA

Sudan

No

NA

Sweden

Yes

1st April, 2020

Switzerland

Yes

1st April, 2020

Syria

No

NA

Tajikistan

No

NA

Tanzania

No

NA

Thailand

No

NA

Trinidad & Tobago

No

NA

Turkey

No

NA

Turkmenistan

No

NA

Uganda

No

NA

Ukraine

Yes

1st April, 2020

United Arab Emirates

Yes

1st April, 2020

United Kingdom

Yes

1st April, 2020

Uruguay

Yes

1st April, 2021

USA

No

NA

Uzbekistan

No

NA

Vietnam

No

NA

Zambia

No

NA

As highlighted earlier, the above list of DTAAs modified is only as on 15th January, 2021, therefore it is advisable to review the latest list and positions as on the date of the transaction.

The MLI has introduced various measures to combat tax avoidance in DTAAs. While some of the measures are objective, there are certain subjective measures as well and can lead to some ambiguity for a payer who is required to deduct TDS as one needs to evaluate various factual aspects of the income as well as the recipient, which may not always be available with the payer to conclude on the applicability of such measures to a particular payment.

While MLI is a vast subject, the ensuing paragraphs seek to evaluate the impact of the MLI on undertaking compliance u/s 195 and the challenges thereof. Accordingly, there may be some provisions of the MLI, for example, the clause relating to method to be employed for elimination of double taxation, which would not have an impact on TDS u/s 195 and therefore have not been covered in this article. Another similar example is the modification relating to dual resident entities (other than individuals), wherein the provisions of section 195 would not apply as payment to such a dual resident entity (thereby meaning a resident of India under the Act as well as the other country under its domestic tax law) would be considered as payment to a resident and not to a non-resident under the Act.

ii. Principal Purpose Test (PPT)
Article 7 of the MLI provides that ‘Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement.’

Therefore, the PPT test acts as an anti-avoidance provision in a treaty scenario and seeks to deny a benefit under a DTAA if it is reasonable to conclude that obtaining the said benefit was one of the principal purposes of the arrangement or transaction. However, it may be highlighted that the PPT and GAAR, although having similar objectives, operate differently. Further, the PPT has a wider coverage as compared to GAAR and therefore a transaction which satisfies GAAR may not satisfy the PPT, resulting in denial of the benefit under the DTAA.

a. Issue 1: How does the PPT impact the compliance u/s 195
The first issue one needs to address is whether the PPT has any impact on the TDS u/s 195. As the PPT seeks to address the issue of eligibility of a taxpayer to obtain the benefit of a CTA, it would impact the tax to be deducted in cases where the DTAA benefit is claimed at the time of deduction.

In other words, if one is applying a DTAA (which has been modified by the MLI, thereby making it a CTA) on account of the beneficial provision under the DTAA at the time of undertaking TDS, one would need to ensure that the PPT test is satisfied to claim the benefit of the DTAA / CTA.

The second aspect that needs to be addressed in this issue is whether the payer needs to evaluate the applicability of the PPT at the time of deduction of tax u/s 195 or can one argue that the PPT needs to only be applied by the tax authorities at the time of assessment of the recipient of the income.

In order to address this aspect, one would need to refer to section 163(1)(c) which makes the payer an agent of the non-resident recipient. Moreover, as highlighted earlier, unlike the other TDS provisions in the Act, in most cases section 195 in theory results in the finality of the tax being paid to the government in the case of payment to a non-resident.

Therefore, the Act places a significant onerous responsibility on the payer to ensure that the due tax is duly deducted u/s 195 in the case of payments to a non-resident. Keeping this in mind, it is therefore necessary for the payer to apply the PPT while granting treaty benefits at the time of deduction of tax u/s 195.

b. Issue 2: How can one apply the PPT while undertaking compliances u/s 195
Once it is determined that the PPT needs to be evaluated at the time of application of section 195, the main issue which arises is that the PPT being a subjective intention-based test to determine treaty eligibility, how can one apply the same while undertaking compliance u/s 195 and what documentation should one obtain while certifying the taxability of the said transaction? As highlighted earlier, the major challenge in application of a subjective test at the time of withholding is that the payer and the professional certifying the taxability of the transaction u/s 195 are not aware of all the facts to conclude one way or another.

There are three views to address this issue.

View 1: Given the onerous responsibility tasked on the payer to collect the tax due on the transaction in the hands of the non-resident recipient and the subjective nature of the PPT, one can consider following a conservative approach by not providing any benefit under the DTAA at the time of deducting tax u/s 195 and asking the recipient to claim a refund of the excess tax deducted by filing a return of income. This would ensure that if any benefit under the DTAA is eventually claimed (by way of the recipient seeking a refund), the payer and the professional certifying the taxability are not responsible and the tax authorities can verify the subjective PPT in the hands of the recipient, who can provide the necessary information to satisfy the PPT directly to the tax authorities.

While this view is a conservative view, it may not always be practically possible as in many cases the recipient may not be willing to undertake additional compliance of filing a return of income, especially in a scenario where there is no tax payable under the DTAA.

View 2: Another conservative view is to approach the tax authorities to adjudicate on the issue by following the provisions of section 195(2) or section 197. This would eliminate any risk that the payer or the professional may undertake. However, this may not always be practically possible as there would be a delay in the remittance and this process is time-consuming, especially in scenarios where the payer makes many remittances to various parties during the year as this would entail approaching the tax authorities before every remittance.

View 3: Alternatively, as is the case with other declarations such as a ‘No PE declaration’ or a beneficial ownership declaration, one can take a declaration that obtaining the benefit under the DTAA is not one of the principal purposes of the arrangement or the transaction.

As per this view, the question arises whether such a declaration is to be obtained from the payer or from the recipient. The PPT needs to be tested qua the transaction as well as qua the arrangement. While the payer would in most cases be aware whether the principal purpose of a transaction is to avail DTAA benefits, an arrangement being a wider term may not entail the payer in necessarily being aware of all the details. Therefore, one must ensure that the declaration is to be obtained from the recipient of the income which is claiming the DTAA benefits.

This view is a practical one and follows the doctrine of impossibility, whereby in the absence of facts to the contrary it is not possible for a professional to certify that the transaction is designed to avoid tax and, therefore, the benefit of the DTAA should not be granted. While the payer would be aware whether the principal purpose of the transaction (not necessarily the arrangement) is to obtain benefit of the DTAA, in the absence of any facts provided to the professional, it is not possible for a professional to suspect otherwise.

Further, the Supreme Court in the case of GE India Technology Centre (P) Ltd. vs. CIT [2010] 193 Taxman 234 (SC) held, ‘(7)….where a person responsible for deduction is fairly certain then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof.’

Therefore, where the payer is ‘fairly certain’ having regard to the facts and circumstances about the taxability of a particular transaction, one need not approach the tax authorities.

However, it is advisable for a professional certifying the taxability of the transaction to question the nature of the transaction from an anti-avoidance perspective before taking the declaration or management representation. For example, if the transaction is towards payment of dividend by an Indian company to a Mauritian company, if such Mauritian company was set up at the time when the DDT regime was applicable, it may give credence to the fact that the investment through Mauritius was not made with the principal purpose of obtaining the DTAA rate on dividends paid.

In other words, the professional would need to question and evaluate, to the extent practically possible, as to why a particular transaction was undertaken in a particular manner and with adequate documentation to substantiate such reasoning. Such an evaluation may be required as unlike an audit report, where one provides an ‘opinion’ on a particular aspect, Form 15CB requires a professional to ‘certify’ the taxability after examination of relevant documents and books of accounts.

iii. Holding period for dividends
Article 8(1) of the MLI provides that, ‘Provisions of a Covered Tax Agreement that exempt dividends paid by a company which is a resident of a Contracting Jurisdiction from tax or that limit the rate at which such dividends may be taxed, provided that the beneficial owner or the recipient is a company which is a resident of the other Contracting Jurisdiction and which owns, holds or controls more than a certain amount of the capital, shares, stock, voting power, voting rights or similar ownership interests of the company paying the dividend, shall apply only if the ownership conditions described in those provisions are met throughout a 365-day period that includes the day of the payment of the dividends….’

Accordingly, Article 8(1) of the MLI restricts the participation exemption or benefit granted to a holding company receiving dividends to cases where the shares have been held by the holding company for at least 365 days, including the date of payment of dividends. Such provision, therefore, denies the benefit of the lower tax rate to a company shareholder who has acquired the shares for a short period only to meet the minimum holding requirement for availing such benefit.

This provision, being an objective factual test to avail the benefit of lower tax rate on dividends under the DTAA, can be examined by the professional certifying the tax u/s 195 as this information, being information regarding the shareholding of the Indian payer company, is readily available with the payer company.

However, it may be highlighted that the provision requires the holding period to be maintained for any period which includes the date on which the dividend is paid and not necessarily the period preceding the date of payment of dividend.

For example, Sing Co acquires 50% of the shares of I Co on 1st January, 2021. The dividend is declared by I Co on 30th June, 2021. In this case, while the 365-day holding period has not been met on the day of payment or declaration of dividend, the holding period requirement under Article 8(1) of the MLI would still be satisfied if Sing Co continued holding the said shares till 31st December, 2021 and would still be eligible for the lower rate of tax.

This gives rise to an issue to be addressed as to whether the lower rate of tax under Article 10(2)(a) of the India-Singapore DTAA should be considered at the time of undertaking the TDS compliance at the time of payment of dividend.

In our view, as on the date of the dividend payment the number of days threshold has not been met, the benefit of the lower rate of tax under Article 10(2)(a) of the DTAA should not be granted and TDS should be deducted in accordance with Article 10(2)(b) of the DTAA. In such a scenario, Sing Co can always file its return of income claiming a refund of the excess tax deducted once it satisfies the holding period criterion.

iv. Permanent Establishment (PE)
The MLI has extended the scope of the definition of a PE under a DTAA to include the following:
a.     A dependent agent who does not conclude contracts on behalf of the non-resident will still constitute a PE of the non-resident if such agent habitually plays a principal role in the conclusion of contracts of the non-resident.
b.     The exemption from the constitution of a PE provided to certain activities undertaken in a Source State through a fixed place of business would not be available if the activities along with activities undertaken by a closely-related enterprise in the Source State are not preparatory or auxiliary in nature.
c.     In the case of a construction or installation PE, the number of days threshold that needs to be met will include connected activities undertaken by closely-related enterprises as well.

Now the question arises, how does a professional identify the applicability of the extended scope of the definition of PE in remittances to non-residents and whether a mere declaration that a PE is not constituted would be sufficient.

With regard to point (a) above, for the extended scope of PE in respect of the transaction itself, one should be able to identify the facts of the said transaction before certifying the taxability thereof and a mere declaration on this aspect may not be sufficient.

Similarly, with regard to points (b) and (c) above, one may be able to analyse the applicability of the MLI in case of transactions undertaken by the non-resident recipient himself in India as they would relate to the transaction the taxability of which is to be certified. However, with regard to the activities undertaken by the closely-related enterprises, one may be able to follow the doctrine of impossibility and obtain a declaration from the recipient provided one has gone through all the relevant documents related to the transaction itself.

4. STEP-BY-STEP EVALUATION
Having understood the impact of the MLI on the compliances to be undertaken u/s 195, the table below provides a brief guidance on the step-by-step process that a professional needs to follow before certifying
the transaction in Form 15CB once it is determined that the DTAA is more beneficial than the taxability under the Act:

Step
number

Particulars

1

Obtain TRC from recipient (check whether TRC is a valid TRC for
the period in which the transaction is undertaken)

2

Obtain Form 10F if TRC does not contain information as required
in Rule 21AB of the Rules (check whether Form 10F is for the period in which
the transaction is undertaken)

3

Check whether GAAR provisions apply to the said transaction and
obtain suitable declaration

4

Check whether any specific LOB clause in the DTAA applies. If
so, whether the conditions for LOB have been met and obtain suitable
declaration

5

Check whether DTAA modified by MLI as on date of transaction
(follow steps 6 to 7 if MLI modifies DTAA)

6

Check whether the conditions of PPT are satisfied and obtain
suitable declaration

7

In case of dividend income earned by a company, verify if the
holding period for the shares is met as on date of transaction

8

Check if the transaction constitutes a PE for the recipient in
India or if income from the transaction can be attributable to the profits of
any PE of the recipient in India and obtain suitable declaration (in case MLI
modifies DTAA, the declaration should include the modified definition of PE)

9

In case of dividend, interest, royalty or income from fees for
technical services, check if the recipient is the beneficial owner or if the
beneficial owner is a resident of the same country in which the recipient is
a resident and obtain suitable declaration

5. CONCLUSION
The introduction of the MLI has added complexities to the process of undertaking compliance u/s 195. A professional who is certifying the taxability would now need to evaluate various other aspects in relation to the transaction to satisfy himself, with documentary evidence, that the various provisions of the MLI have been duly complied with. Further, merely obtaining declarations may not be sufficient as one needs to be fairly certain, after going through the relevant documents, of the taxability of the transaction u/s 195 before certifying the same.

 

1   The effective date for withholding taxes has been provided
from an Indian
perspective and may vary in the other jurisdiction

TAXABILITY OF MESNE PROFITS

ISSUE FOR CONSIDERATION
The term ‘mesne profits’ relates to the damages or compensation recoverable from a person who has been in wrongful possession of immovable property. It has been defined in section 2(12) of the Code of Civil Procedure, 1908 as under:

‘(12) “mesne profits” of property means those profits which the person in wrongful possession of such property actually received or might with ordinary diligence have received therefrom, together with interest on such profits, but shall not include profits due to improvements made by the person in wrongful possession.’

At times, the tenant or lessee continues to use and occupy the premises even after the termination of the lease agreement either due to efflux of time or for some other reasons. In such cases, the courts may direct the occupant of the premises to pay the mesne profits to the owner for the period for which the premises were wrongfully occupied. The taxability of the amounts received as mesne profits in the hands of the owner of the premises has become a subject matter of controversy. While the Calcutta High Court has taken the view that mesne profit is in the nature of damages for deprivation of use and occupation of the property and, therefore, it is a capital receipt not chargeable to tax, the High Courts of Madras and Delhi have taken the view that it is a recompense for deprivation of income which the owner would have enjoyed but for the interference of the persons in wrongful possession of the property and, consequently, it is a revenue receipt chargeable to tax.

LILA GHOSH’S CASE

The issue had earlier come up for consideration of the Calcutta High Court in the case of CIT vs. Smt. Lila Ghosh (1993) 205 ITR 9.

In that case, the assessee was the owner of the premises in question which were given on lease. The lease expired in 1970. However, the lessee did not give possession to the assessee. The assessee filed a suit for eviction and mesne profits. The decree was passed in favour of the assessee by the trial court and it was affirmed by the High Court as well as by the Supreme Court. The assessee then applied for the execution of the decree. The Court appointed a Commissioner to determine the claim of quantum of mesne profits. While the execution of the said decree and the determination of the quantum of the mesne profits were pending, the Government of West Bengal requisitioned the demised property on 24th December, 1979. The said requisition order was challenged by the assessee before the High Court through a writ application filed under Article 226 of the Constitution of India.

During its pendency, a settlement was arrived at between the assessee and the State of West Bengal which was recorded by the Court in its order dated 28th February, 1980. Under the terms of the settlement, the property in question was to be acquired by the State under the Land Acquisition Act, 1894 and compensation of Rs. 11 lakhs for the acquisition was to be paid to the assessee. There was no dispute relating to this compensation received. Apart from the compensation, the assessee also received a sum of Rs. 2 lakhs from the State of West Bengal against the assignment of the decree for mesne profits obtained and to be passed as a final decree against the tenant.

While making the assessment for the assessment year 1980-81, the A.O. assessed the said sum of Rs. 2 lakhs representing mesne profits as revenue receipt in the hands of the assessee under the head ‘Income from Other Sources’. It was taxed as income of the assessment year 1980-81 since it had arisen to the assessee in terms of an order of the Court dated 28th February, 1980. On appeal by the assessee before the CIT(A), it was submitted that the mesne profits were nothing but damages and, therefore, capital receipt not chargeable to tax. It was also contended that in case the assessee’s contention in this respect was to be rejected and the mesne profits of Rs. 2 lakhs be held to be revenue receipts, the same could not be taxed in one year since it related to the period from 19th May, 1970 to 24th December, 1979. However, the CIT(A) rejected all the contentions of the assessee and held that the mesne profits of Rs. 2 lakhs were revenue receipts and assessable under the head ‘Income from Other Sources’ in the A.Y. 1980-81.

On further appeal by the assessee, the Tribunal held that the mesne profits of Rs. 2 lakhs had arisen as a result of the transfer of the capital asset and the same was assessable under the head ‘capital gains’. According to the Tribunal, the assessee had received the sum of Rs. 2 lakhs for transferring her right to receive the mesne profits which was her capital asset. The contention of the assessee that no capital gain was chargeable inasmuch as no cost of acquisition was incurred for the so-called capital asset was rejected by the Tribunal. The Tribunal held that it was possible to determine the cost of acquisition of the asset in question which, according to the Tribunal, consisted of the amount spent by the assessee towards stamp duty and other legal expenses incurred for obtaining the decree. From the decision of the Tribunal, both the assessee as well as the Revenue had sought reference to the High Court.

After referring to the definition of ‘mesne profits’ as per the Code of Civil Procedure, 1908, the High Court referred to the observations of the Judicial Committee of the Privy Council in Girish Chunder Lahiri vs. Shashi Shikhareswar Roy [1900] 27 IA 110 in which it was stated that the mesne profits were in the nature of damages which the court may mould according to the justice of the case. Further, the Supreme Court’s observations in the case of Lucy Kochuvareed vs. P. Mariappa Gounder AIR [1979] SC 1214 were also referred to, which were as under:

‘Mesne profits being in the nature of damages, no invariable rule governing their award and assessment in every case can be laid down and “the Court may mould it according to the Justice of the case”.’

Accordingly, the High Court held that the mesne profits were nothing but damages for loss of property or goods. The Court further held that such damages were not in the nature of revenue receipts but in the nature of capital receipt. While holding so, the High Court relied upon the decisions in the case of CIT vs. Rani Prayag Kumari Debi [1940] 8 ITR 25 (Pat.); CIT vs. Periyar & Pareekanni Rubbers Ltd. [1973] 87 ITR 666 (Ker.); CIT vs. J.D. Italia [1983] 141 ITR 948 (AP); and CIT vs. Ashoka Marketing Ltd. [1987] 164 ITR 664 (Cal.).

The Court disagreed with the views expressed by the Madras High Court in CIT vs. P. Mariappa Gounder [1984] 147 ITR 676 wherein it was held that mesne profits awarded by the Court for wrongful possession were revenue receipts and, therefore, liable to be assessed as income. The Calcutta High Court observed that neither the decision of the Privy Council in Girish Chunder Lahiri (Supra) nor the decision of the Supreme Court in Lucy Kochuvareed (Supra) was either cited or noticed by the learned Judges of the Madras High Court. It was also observed that even the decisions of the Patna High Court in Rani Prayag Kumari Debi (Supra) and that of the Kerala High Court in Periyar & Pareekanni Rubbers Ltd. (Supra), wherein it was held that damages or compensation awarded for wrongful detention of the properties of the assessee was not a revenue receipt, were neither noticed nor considered by the Madras High Court.

As far as the Tribunal’s direction to tax the amount received as capital gains was concerned, the High Court held that there was no assignment of the decree for mesne profits. No final decree in respect of mesne profits was passed in favour of the assessee and the State Government had reserved the right to itself for getting an assignment from the assessee in respect of the final decree for mesne profits, if any, passed against the tenant for its use and occupation of the said property. Therefore, the High Court held that the assessee had not earned any capital gains on the transfer of a capital asset.

The High Court held that the mesne profits received was a capital receipt and, hence, not liable to tax.

THE SKYLAND BUILDERS (P) LTD. CASE
The issue thereafter came up for consideration before the Delhi High Court in the case of Skyland Builders (P) Ltd. vs. ITO (2020) 121 taxmann.com 251.

In this case, the assessee company had let out the property in the year 1980 for five years to Indian Overseas Bank. The parties had agreed to increase the rent by 20% after the expiry of the first three years. The lessee bank did not comply with the terms and increased the rent by 10% only. Therefore, the assessee terminated the lease agreement w.e.f. 31st January, 1990 by serving notice upon the lessee. Since the lessee failed to vacate the premises, the assessee filed a suit for damages / mesne profit and restoration of the premises to the owner. The suit of the assessee was decreed vide judgment / decree issued dated 27th July, 1998 for mesne profit and damages, including interest. In compliance with the Court’s order, the lessee Indian Overseas Bank paid Rs. 77,87,303 to the assessee company. In the original return for the A.Y. 1999-2000, mesne profits of Rs. 77,87,303 was declared as taxable income, whereas in the revised return the assessee claimed it as a capital receipt and excluded it from its taxable income.

The A.O. did not accept the contention of the assessee that it was a capital receipt and relied upon the decision of the Madras High Court in P. Mariappa Gounder (Supra) in which it was held that mesne profits were also a species of taxable income. The A.O. taxed it as ‘Income from other sources’ and allowed a deduction of legal expenses incurred in securing the mesne profits.

Before the CIT(A), apart from claiming that the mesne profits were not taxable, the assessee raised an alternative plea that even if it was treated as income in the nature of arrears of rent, even then it could not have been taxed in the year under consideration merely based on its realisation during the year and, rather, should have been taxed in the respective years to which it pertained. It was claimed that the enabling provision to tax the arrears of rent in the year of its receipt was inserted in section 25B with effect from the A.Y. 2001-02 and it was not applicable for the year under consideration. However, the CIT(A) did not accept the contentions of the assessee and held it to be a revenue receipt liable to be taxed as income. Insofar as section 25B was concerned, the CIT(A) observed that it did not bring about any change in law and it only set at rest doubts regarding taxability of income relating to earlier years in the previous year concerned in which the arrears of rent were received.

The Tribunal also rejected the assessee’s claim with regard to the non-taxability of mesne profits as income under the Act on the ground that it was a capital receipt. It followed the decisions of the Madras High Court in the cases of P. Mariappa Gounder (Supra) and S. Kempadevamma vs. CIT [2001] 251 ITR 87. It did not follow the decision of the Calcutta High Court in the case of Smt. Lila Ghosh (Supra) on the ground that the decision of the Madras High Court in the case of S. Kempadevamma (Supra) was rendered after that and it was binding in nature, being a later decision. The Tribunal also held that the sum which was granted by the Civil Court as mesne profit in respect of the tenanted property could be presumed to be a reasonably expected sum for which property could be let from year to year, and the same value could have been taken as annual letting value of the property in dispute as per section 23(1). With regard to the alternate plea of the assessee concerning the provisions of section 25B introduced subsequently, the Tribunal relied upon the decision in the case of P. Mariappa Gounder in which it was held that the mesne profit is to be taxed in the assessment year in which it was finally determined. The Tribunal’s decision has been reported at 91 ITD 392.

In further appeal before the High Court, the following arguments were made on behalf of the assessee:
•    The income falling under the specific heads enumerated in the Act as being taxable income alone was liable to tax and the income which did not fall within the specific heads was not liable to be taxed under the Act.
•    By its definition, ‘mesne profits’ were a kind of damages which the owner of the property, which was a capital asset, was entitled to receive on account of deprivation of the opportunity to use that capital asset on account of the wrongful possession thereof by another. Therefore, such damages which were awarded for deprivation of the right to use the capital asset constituted a capital receipt.
•    Section 25B introduced w.e.f. 1st April, 2001 could not be applied to bring the mesne profits and interest thereon to tax in the A.Y. 1999-2000 even though they pertained to the earlier financial years. Further, the amount received from the erstwhile tenant could not be regarded as rent under the rent agreement which ceased to exist. The assessee had received damages and not rent since there was no subsisting relationship of landlord and tenant between the assessee and the bank post the termination of their tenancy.
•    Reliance was placed on the decision of the Supreme Court in the case of CIT vs. Saurashtra Cement Ltd. 325 ITR 422 wherein it was held that the amount received towards compensation for sterilisation of the profit-earning source, not in the ordinary course of business, was a capital receipt in the hands of the assessee. In this case, the liquidated damages received from the supplier on account of the delay caused in delivery of the machinery was held to be a capital receipt not liable to tax.
•    The facts before the Madras High Court in the case of P. Mariappa Gounder were different from the facts of the present case. In that case, the assessee had entered into an agreement to purchase a property which was not conveyed by the vendor to the assessee as it was sold to another person who was put in possession. The Court decreed specific performance of the assessee’s agreement with the original owner and the assessee’s claim for mesne profits against the other purchaser who was in possession was also accepted. Thus, it was not a case of grant of mesne profits against the erstwhile tenant who continued to occupy the premises despite termination of the tenancy. But it was a case where another purchaser of the same property held on to the possession of the property and the mesne profits were awarded against him.
•    The decision of the Madras High Court in the case of P. Mariappa Gounder was not followed by the Calcutta High Court in a subsequent decision in the case of Smt. Lila Ghosh (Supra). It was the view of the Calcutta High Court which was the correct view and should be followed.
•    Reliance was also placed on the Special Bench decision of the Mumbai Bench of the Tribunal in the case of Narang Overseas (P) Ltd. vs. ACIT (2008) 111 ITD 1 wherein the view favourable to the assessee was adopted, in view of conflicting decisions of the High Courts, and mesne profits were held to be capital receipts.

The Revenue pleaded that the decision of the Madras High Court in P. Mariappa Gounder had been affirmed by the Supreme Court (232 ITR 2). It was submitted that the decision of the Calcutta High Court in Smt. Lila Ghosh was a decision rendered before the Supreme Court decided the appeal in the case of P. Mariappa Gounder. Further, the view taken by the Madras High Court in P. Mariappa Gounder was reiterated by it in the case of S. Kempadevamma (Supra). The Revenue also placed reliance on the decision of the Delhi High Court in the case of CIT vs. Uberoi Sons (Machines) Ltd. 211 Taxman 123, wherein it was held that the arrears of rent received as mesne profits are taxable in the year of receipt, and that section 25B of the Act which was introduced vide amendment in 2000 with effect from A.Y. 2001-02 was only clarificatory in nature.

In reply, the assessee submitted that the real issue in the case before the Delhi High Court in Uberoi Sons (Machines) Ltd. (Supra), was in which previous year the arrears of rent received by the assesse (as mesne profits) could be brought to tax and the issue was not whether mesne profits received by the landlord / assesse from the erstwhile tenant constituted revenue receipt or capital receipt.

The Delhi High Court held that if the test laid down by the Supreme Court in the case of Saurashtra Cement Ltd. (Supra) had been applied to the facts of the case, then the only conclusion that could be drawn was that the receipt of mesne profits and interest thereon was a revenue receipt. This was because the capital asset of the assessee had remained intact, and even the title of the assessee in respect of the capital asset had remained intact. The damages were not received for harm and injury to the capital asset, or on account of its diminution, but were received in lieu of the rent which the appellant would have otherwise derived from the tenant. Had it been a case where the capital asset would have been subjected to physical damage, or of diminution of the title to the capital asset, and damages would have been awarded for that, there would have been merit in the appellant’s claim that damages were capital receipt.

The High Court held that the issue was no longer res integra as it stood concluded not only by the decision of the Supreme Court in P. Mariappa Gounder but also by the co-ordinate Bench of the Delhi High Court itself in Uberoi Sons (Machines) Ltd. In that case, the Court not only held that section 25B was clarificatory and applied to the assessment year in question, but also held that the receipt of mesne profits constituted revenue receipt. The Court also held that the issue of invocation of section 25B was intimately linked to the issue of whether the said receipts were revenue receipts, or capital receipts, and had it not been so there would be no question of the Court upholding the applicability of section 25B. Therefore, the submission of the assessee that the ratio of the decision in Uberoi Sons (Machines) Ltd. was not that income by way of mesne profits constituted revenue receipts, was found to be misplaced by the Court.

The Delhi High Court in this case did not follow the decision of the Calcutta High Court in the case of Smt. Lila Ghosh for two reasons: due to the subsequent decision of the Supreme Court in P. Mariappa Gounder approving the Madras High Court’s view, and due to the decision of the co-ordinate Bench of the Delhi High Court in the case of Uberoi Sons (Machines) Ltd. following the Madras High Court’s view and taking note of its approval by the Supreme Court. The ratio of the decision of the Special Bench in the Narang Overseas case (Supra) of the Tribunal was also not approved by the High Court for the same reason that the jurisdictional High Court’s decision prevailed over it.

Accordingly, the High Court held that mesne profits and interest on mesne profits received under the direction of the Civil Court for unauthorised occupation of the immovable property of the assessee by Indian Overseas Bank, the erstwhile tenant of the appellant, constituted revenue receipts and were liable to tax u/s 23(1) of the Act.

OBSERVATIONS


In order to determine the tax treatment of mesne profits, it is necessary to first understand the meaning of the term ‘mesne profits’ and the reason for which the owner of the property becomes entitled to receive it. Though the term ‘mesne profits’ is not defined under the Income-tax Act, it is defined under section 2(12) of the Civil Procedure Code. (Please see the first paragraph.)

The definition makes it very clear that mesne profits represent the damages that emanate from the property, the true owner of which has been deprived of its possession by a trespasser. It is not rent for use of the property. The Supreme Court in the case of Lucy Kochuvareed vs. P. Mariappa Gounder AIR 1979 SC 1214 has considered mesne profits to be damages. The relevant observations of the Supreme Court are reproduced below:

‘Mesne profits being in the nature of damages, no invariable rule governing their award and assessment in every case can be laid down and “the Court may mould it according to the justice of the case”. Even so, one broad basic principle governing the liability for mesne profits is discernible from section 2(12) of the CPC which defines “mesne profits” to mean “those profits which the person in wrongful possession of property actually received or might with ordinary diligence have received therefrom together with interest on such profits, but shall not include profits due to improvements made by the person in wrongful possession”. From a plain reading of this definition, it is clear that wrongful possession of the defendant is the very essence of a claim for mesne profits and the very foundation of the defendant’s liability therefor. As a rule, therefore, liability to pay mesne profits goes with actual possession of the land. That is to say, generally, the person in wrongful possession and enjoyment of the immovable property is liable for mesne profits.’

The basis for quantification of mesne profits is the gain that the person in wrongful possession of the property made or might have made from his wrongful occupation and not what the owner of the property has lost on account of deprivation from the possession of the property. This aspect of the nature of the receipt has been explained by the Delhi High Court in the case of Phiraya Lal alias Piara Lal vs. Jia Rani AIR 1973 Del 18 as follows:

‘When damages are claimed in respect of wrongful occupation of immovable property on the basis of the loss caused by the wrongful possession of the trespasser to the person entitled to the possession of the immovable property, these damages are called “mesne profits”. The measure of mesne profits according to the definition in section 2(12) of the Code of Civil Procedure is “those profits which the person in wrongful possession of such property actually received or might with ordinary diligence have received there from, together with interest on such profits”. It is to be noted that though mesne profits are awarded because the rightful claimant is excluded from possession of immovable property by a trespasser, it is not what the original claimant loses by such exclusion but what the person in wrongful possession gets or ought to have got out of the property which is the measure of calculation of the mesne profits. (Rattan Lal vs. Girdhari Lal, AIR 1972 Delhi ll). This basis of damages for use and occupation of immovable property which are equivalent to mesne profits is different from that of damages for tort or breach of contract unconnected with possession of immovable property. Section 2(12) and order Xx rule 12 of the Code of Civil Procedure apply only to the claims in respect of mesne profits but not to claims for damages not connected with wrongful occupation of immovable property. The measure for the determination of the damages for use and occupation payable by the appellants to the respondent Jia Rani is, therefore, the profits which the appellants actually received or might with ordinary diligence have received from the property together with interest on such profits.’

The mesne profit cannot be viewed as compensation for the loss of income which the owner of the property would have earned but for deprivation of its possession, or as compensation for the loss of the source of income. It will be more appropriate to consider the mesne profit as compensation or damages for the loss of enjoyment of the property instead of the loss of income arising from the property. Mesne profits is for the injury or damages caused to the owner of the property due to deprivation of the possession of the property. Mesne profits become payable due to wrongful possession of the property with the trespasser, irrespective of whether or not that property before deprivation was earning any income for its owner. It might be possible that the property concerned might not be a let-out property and, therefore, yielding no income for its owner. Even in a case where the property was self-occupied by the owner which is not resulting in any income, the mesne profits become payable if that property has come in wrongful possession of the trespasser. Therefore, it is inappropriate to consider the mesne profits as compensation for loss of income which the owner would have earned otherwise. Any such compensation received due to the injury or damages caused to the assessee is required to be considered as a capital receipt not chargeable to tax, unless it is received in the ordinary course of business as held by the Supreme Court in the case of Saurashtra Cement Ltd. (Supra).

Mesne profits cannot be brought to tax as income under the head ‘Income from House Property’ as it cannot be said to be representing the annual value and that it will not come within the purview of taxation at all. Section 22 creates a charge of tax over the ‘annual value’ of the property. The ‘annual value’ is required to be determined in accordance with the provisions of section 23. As per section 23, the annual value is the sum which the property might reasonably be expected to get from year to year or the actual rent received or receivable in case of let-out property, if it is higher than that sum. The sum of mesne profits per se, which may pertain to a period of more than one year, cannot be considered as an ‘annual value’ of the property concerned for the year in which it accrued to the assessee by virtue of court order or received by the assessee. Therefore, the mesne profits cannot be held to be an annual value of the property u/s 23(1). For this reason and for the reasons stated in the next paragraph, it is respectfully submitted that part of the Delhi High Court’s decision in Skyland Builders (Supra) requires reconsideration where it held that the mesne profits were taxable u/s 23(1).

The erstwhile provisions of section 25B dealing with the taxability of arrears of rent or the corresponding provisions of section 25A, as substituted with effect from 1st April, 2017, can be pressed into play only if the receipt is in the nature of ‘rent’ in the first place. The Supreme Court in the case of UOI vs. M/s Banwari Lal & Sons (P) Ltd. AIR 2004 SC 198 has referred to the Law of Damages & Compensation by Kameshwara Rao (5th Ed., Vol. I, Page 528) and approved the learned author’s statement that right to mesne profits presupposes a wrong, whereas a right to rent proceeds on the basis that there is a contract. Therefore, the rent is the consideration for letting out of the property under a contract and there is no question of any wrongful possession of the property by the tenant. In a manner, the mesne profits and the rent are mutually exclusive.

Furthermore, the erstwhile sections 25AA and 25B and the present section 25A provide for taxation of an arrear of rent received from a tenant or unrealised rent realised subsequently, in the year of receipt under the head ‘Income from House Property’, irrespective of the ownership of the property in the year of taxation. The objective behind these provisions is to overcome the difficulties that used to arise in the past on account of the year of taxation and also in relation to the recipient not being the owner in the year of receipt. All of these provisions, for the purposes of activating the charge, require that the amount received represented (a) rent and (b) such rent was in arrears or unrealised and which rent was (c) subsequently realised. These three conditions are cumulative in nature for applying the deeming fiction of these provisions. Applying these cumulative conditions to the receipt of ‘mesne profits’, it is apparent that none of the conditions could be said to have been satisfied when a person receives damages for deprivation of the use of the property. The receipt in his case is neither for letting out the property nor does it represent the rent, whether in arrears or unrealised. It is possible that for measuring the quantum of damages and the amount of mesne profits the amount of prevailing rent is taken as a benchmark but such benchmarking cannot be a factor that has the effect of converting the damages into rent for the purposes of taxation of the receipt under the head ‘Income from House Property’. In fact, the right to receive mesne profits starts from the time where the relationship of the owner and tenant terminates and the right to receive rent ends.

The next question is whether the receipt of mesne profits could be considered as income under the head ‘Income from Other Sources’, importantly, u/s 56(2)(x). Apparently, the case of the receipt is to be tested vis-à-vis sub-clause (a) of clause (x) which brings to tax the receipt of any sum of money in excess of Rs. 50,000. Obviously, the receipt of mesne profits is on account of damages and cannot be considered to be without consideration and for this reason alone section 56(2)(x) cannot be invoked to tax such a receipt under the head ‘Income from Other Sources’. It is possible that the head is activated for charging the part of the receipt where such part represents the interest on the amount of damages for delay in payment thereof. But then that is an issue by itself.

It is, therefore, correct to hold that the Income-tax Act does not contain a specific provision to tax mesne profits under a specific head of income listed u/s 14. It is a settled position in law that for a receipt to be taxed as an income it should be fitted into a pigeon-hole of a particular head of income or the residual head and in the absence of a possibility thereof, a receipt cannot be taxed.

The next thing to assess is whether the receipt of mesne profits is an income at all or is in the nature of an income. Maybe not. For a receipt to qualify as income it perhaps is necessary that it represents the fruits of the efforts or labour made, or the risks and rewards assumed, or the funds employed. None of the above could be said to be present in the case of mesne profits where the receipt is for deprivation of the use of property. Such a receipt is not even for transfer of any property or right therein and cannot fit into the head capital gains. The receipt is for the unlawful action of the erstwhile tenant and is certainly not payment for the use of the property by him. No efforts are made by the recipient nor have any services been rendered by him. He has not employed any funds nor has he assumed any risks and the question of him being rewarded for the risks does not arise at all.

Lastly, as regards the decision of the Supreme Court in P. Mariappa Gounder confirming the ratio of the decision of the Madras High Court in the same case and the following of the said decision by the Delhi High Court in Skyland Builders (P) Ltd., it is respectfully stated that the Delhi High Court in the latter case did not concur with the view of the Calcutta High Court in the case of Smt. Lila Ghosh only for the reason that the Court noted that the Madras High Court’s view in the case of P. Mariappa Gounder that the mesne profits were revenue receipts was approved by the Supreme Court. With respect, in that case there was a complete failure on the part of the assessee to highlight the fact that the Supreme Court in deciding the case before it had considered only a limited issue concerning the year in which the mesne profits were taxable which arose from the Madras High Court’s decision. The Apex Court in that case had not considered whether the mesne profits was a capital receipt or revenue receipt and this fact of the non-consideration of the main issue by the Court was not pointed out to the Delhi High Court. Had that been highlighted, we are sure that the decision of the Delhi High Court would have been otherwise. This limited aspect of the Supreme Court’s decision becomes very clear on a perusal of the decisions of the High Court and the Supreme Court in P. Mariappa Gounder. The relevant part of both the decisions is reproduced as under:

Madras High Court – Two controversies arise in these references under the Income-tax Act, 1961 (‘the Act’). One is whether mesne profits decreed by a court of law can be held to be taxable income in the hands of the decree holder? The other question is about the relevant year in which mesne profits are to be charged to income-tax.

Supreme Court – The question which arises for consideration in this appeal is as to in which assessment year the appellant is liable to be assessed in respect of mesne profits which were awarded in his favour.

Further, the Mumbai Special Bench in the case of Narang Overseas (P) Ltd. (Supra) has extensively dealt with this aspect of the limited application of the Supreme Court’s decision at paragraphs 6 to 23 and concluded as follows:

‘The above discussion clearly reveals that the judgment of the Hon’ble Supreme Court in the case of P. Mariappa Gounder (Supra) only decides the issue regarding the year of taxability of the mesne profits. That judgment, therefore, cannot be said to be an authority for the proposition that the nature of mesne profits is revenue receipts chargeable to tax. Accordingly, the contention of Revenue that the issue regarding the nature of mesne profits is covered by the aforesaid decision of the Hon’ble Supreme Court cannot be accepted.’

This decision of the Special Bench has remained unchallenged by the Income-tax Department in an appeal before the High Court as is noted by the Bombay High Court in the case of Goodwill Theatres Pvt. Ltd. [2016] 241 Taxman 352. The appeal filed by the Income-tax Department against the decision of the Special Bench was dismissed for non-removal of the office objections.

Insofar as the reliance placed by the Delhi High Court on its earlier decision in the case of Uberoi Sons (Machines) Ltd. (Supra) is concerned, it is worth noting that the following questions of law were framed for consideration of the High Court in that case:
(i) Whether the ITAT was, in the facts and circumstances of the case, correct in law in quashing the re-assessment order passed by the Assessing Officer under section 147(1) of the Income Tax Act, 1961?
(ii) Whether the ITAT was correct in law in holding that the excess amount payable to the assessee towards mesne profits / compensation for unauthorised use and occupation of the premises accrued to the assessee only upon the passing of the decree by the Civil Court on 14th October, 1998?

It can be noticed that the question about the nature of mesne profits, whether revenue or capital, was not raised before the Delhi High Court even in the Uberoi case. Therefore, in our considered opinion the decision of the Supreme Court cannot be a precedent on the subject of the taxability or otherwise of mesne profits. The Court in that simply confirmed that the year of taxation would be the year of the order of the civil court as was decided by the Madras High Court. Any High Court decision not touching the issue of taxability of the receipt cannot be pressed into service for deciding the issue of taxability or otherwise of the receipt.

It may be noted that the question whether mesne profits were capital receipts or revenue receipts had also arisen before the Bombay High Court in the case of CIT vs. Goodwill Theatres Pvt. Ltd. [2016] 241 Taxman 352. The High Court had dismissed the appeal of the Revenue on the ground that the decision of the Special Bench in the case of Narang Overseas (P) Ltd. (Supra) had remained unchallenged, as the appeal filed against that decision before the High Court was dismissed for non-removal of office objections. The Supreme Court, however, on an appeal by the Income-tax Department challenging the order of the High Court has remanded the issue back to the High Court for its adjudication on merits which is reported at [2018] 400 ITR 566.

It is very difficult to persuade ourselves to believe that the decision of the Supreme Court in the case of Saurashtra Cement Ltd. (Supra) could be applied to the facts of the case to hold that the mesne profits was revenue receipts taxable under the Act. The Supreme Court in the said case was concerned with the facts unrelated to mesne profits. In that case, the capital asset was subjected to physical damage leading to the diminution of the title to the capital asset, and damages had been awarded for that, which damages were found to be capital receipt. It was the assessee who had relied upon the decision to contend that the mesne profits was not taxable. Instead, the Court applied the decision in holding against the assessee that applying the ratio therein the receipt could be exempted from taxation only where there was a damage or destruction to the property and diminution to title. Nothing can be stranger than this. The said decision nowhere stated that any receipt unrelated to damage to the capital asset would never be a capital receipt not liable to tax. The Supreme Court in that case of Saurashtra Cement Ltd. held that the amount received towards compensation for sterilization of the profit-earning source, not in the ordinary course of business, was a capital receipt in the hands of the assessee. In that case, the liquidated damages received from the supplier on account of delay caused in delivery of the machinery were held to be a capital receipt not liable to tax.

The facts in Skyland Builders were better than the facts in P. Mariappa Gounder where the receipt of mesne profits was from a person who was never a tenant of the assessee while in the first case the receipt was from an erstwhile tenant who deprived the owner of the possession, meaning there was a prior letting of the premises to the payer of the mesne profits and the receipt from such a person could have been better classified as mesne profits not taxable under the head ‘Income from House Property’.

The better view, in our considered opinion, therefore, is the view expressed by the Calcutta High Court that mesne profits are in the nature of capital receipts not chargeable to tax.

TDS – Commission – Scope of section 194H – Transactions between banks for benefit of credit card holders – Transactions on principal-to-principal basis – Section 194H not applicable

18 CIT vs. Corporation Bank [2021] 431 ITR 554 (Karn) A.Y.: 2011-12 Date of order: 23rd November, 2020
    
TDS – Commission – Scope of section 194H – Transactions between banks for benefit of credit card holders – Transactions on principal-to-principal basis – Section 194H not applicable

The assessee is a nationalised bank. For the A.Y. 2011-12, the A.O. made disallowance u/s 40(a)(ia) of service charges paid to National Financial Switch (NFS) on the ground that tax was not deducted at source u/s 194H.

The Commissioner of Income-tax (Appeals) and the Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the following question was farmed:

‘Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that on the payment made towards the service charges rendered by M/s NFS is neither commission nor brokerage which does not attract tax deduction at source u/s 194H of the Income-tax Act?’

The Karnataka High Court upheld the decision of the Tribunal and held as under:

‘i) In case the credit card issued by the assessee was used on the swiping machine of another bank, the customer whose credit card was used to get access to the internet gateway of acquiring bank resulting in realisation of the payment. Subsequently, the acquiring banks realise and recover the payment from the bank which had issued the credit card. The relationship between the assessee and any other bank is not of an agency but that of two independents on principal-to-principal basis. Even assuming that the transaction was being routed to National Financial Switch and Cash Tree, even then it is pertinent to mention here that the same is a consortium of banks and no commission or brokerage is paid to it. It does not act as an agent for collecting charges. Therefore, we concur with the view taken by the High Court of Delhi in CIT vs. JDS Apparels (P) Ltd. [2015] 370 ITR 454 (Delhi) and hold that the provisions of section 194H of the Act are not attracted to the fact situation of the case.

ii) In the result, the substantial question of law is answered against the Revenue and in favour of the assessee.’

Settlement of cases – Sections 245D, 245F and 245H – Powers of Settlement Commission – Application for settlement of case following search operations and notice u/s 153A – Order of penalty thereafter as consequence of search – Assessment and penalty part of same proceedings – Order of penalty not valid

17 Tahiliani Design Pvt. Ltd. vs. JCIT [2021] 432 ITR 134 (Del) A.Y.: 2018-19 Date of order: 19th January, 2021

Settlement of cases – Sections 245D, 245F and 245H – Powers of Settlement Commission – Application for settlement of case following search operations and notice u/s 153A – Order of penalty thereafter as consequence of search – Assessment and penalty part of same proceedings – Order of penalty not valid

A search and seizure operation u/s 132 as well as a survey u/s 133A were carried out on 29th May, 2018 in the case of the assessee. Thereafter, the Investigation Wing referred the case to the A.O. The Range Head of the A.O. of the assessee, after going through the seized material, presumed that the assessee had violated the provisions of section 269ST and issued a notice to it for the A.Ys. 2018-19 and 2019-20 to show cause why penalty u/s 271DA for violating the provisions of section 269ST should not be imposed on it. Meanwhile, in pursuance of the search and seizure operation, notices u/s 153A were issued to the assessee for the A.Ys. 2013-14 to 2018-19. The assessee applied for settlement of the case on 1st November, 2019 for the A.Ys. 2012-13 and 2013-14 to 2019-20 and in accordance with the provisions of the Act on 1st November, 2019 itself also informed the A.O. about the filing of the application before the Settlement Commission. The A.O., however, proceeded to pass a penalty order dated 4th November, 2019.

The Delhi High Court allowed the writ petition filed by the assessee and held as under:

‘i) Though section 245A(b) while defining “case” refers to a proceeding for assessment pending before an A.O. only and therefrom it can follow that penalties and prosecutions referred to in sections 245F and 245H are with respect to assessment of undisclosed income only, (i) section 245F vests exclusive jurisdiction in the Settlement Commission to exercise the powers and perform the functions “of an Income-tax authority under this Act in relation to the case”; and (ii) section 245H vests the Settlement Commission with the power to grant immunity from “imposition of any penalty under this Act with respect to the case covered by the settlement”. The words, “of an Income-tax authority under this Act in relation to the case” and “immunity from imposition of any penalty under this Act with respect to the case covered by the settlement”, are without any limitation of imposition of penalty and immunity with respect thereto only in the matter of undisclosed income. They would also cover penalties under other provisions of the Act, detection whereof has the same origin as the origin of undisclosed income. Not only this, the words “in relation to the case” and “with respect to the case” used in these provisions are words of wide amplitude and in the nature of a deeming provision and are intended to enlarge the meaning of a particular word or to include matters which otherwise may or may not fall within the main provisions.

ii) Both the notices u/s 153A as well as u/s 271DA for violation of section 269ST had their origin in the search, seizure and survey conducted qua the assessee as evident from a bare reading of the notice u/s 271DA. Both were part of the same case. The proceedings for violation of section 269ST according to the notice dated 30th September, 2019 were a result of what was found in the search and survey qua the assessee and were capable of being treated as part and parcel of the case taken by the assessee by way of application to the Settlement Commission.

iii) The Settlement Commission had exclusive jurisdiction to deal with the matter relating to violation of section 269ST also and the A.O., on 4th November, 2019, did not have the jurisdiction to impose penalty for violation of section 269ST on the assessee. His order was without jurisdiction and liable to be set aside and quashed.’

New industrial undertaking in free trade zone – Export-oriented undertaking – Exemption under sections 10A and 10B – Shifting of undertaking to another place with approval of authorities – Not a case of splitting up or reconstruction of business – Assessee entitled to exemption

16 CIT vs. S.R.A. Systems Ltd. [2021] 431 ITR 294 (Mad) A.Ys.: 2000-01 to 2002-03 Date of order: 19th January, 2021

New industrial undertaking in free trade zone – Export-oriented undertaking – Exemption under sections 10A and 10B – Shifting of undertaking to another place with approval of authorities – Not a case of splitting up or reconstruction of business – Assessee entitled to exemption

While completing the assessment u/s 143(3) read with section 147 for the A.Ys. 2000-01 and 2001-02, the A.O. disallowed the claim of deduction made by the assessee under sections 10A and 10B on the ground that an undertaking was formed by splitting up / reconstruction of the business already in existence. While completing the assessment u/s 143(3) read with section 263(3) for the A.Y. 2002-03, the A.O. disallowed the claim u/s 10A on the ground that an undertaking was formed by splitting up / reconstruction of the business already in existence among others.

The Commissioner of Income-tax (Appeals) allowed the appeals for the A.Ys. 2000-01 and 2001-02 by following the order of the Tribunal. The Department filed appeals before the Income-tax Appellate Tribunal and the Tribunal confirmed the order of the Commissioner of Income-tax (Appeals). The Tribunal held that this was not a case of setting up of a new business but only of transfer of existing business to a new place located in a software technology park area and, thereafter, getting the approval from the authorities.

On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:

‘On the facts and in the circumstances of the case, the assessee was entitled to deduction u/s 10A/10B.’