Weekly Round-up on Tax and Corporate Laws | 03rd to 8th July 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 03^rd to 8^th July 2023, namely:

(a) Empowering Sustainable Decision-Making: SEBI introduces Revolutionary ESG Rating Norms;

(b) Tax authorities cannot ignore valid TRC issued by Singapore Govt.; HC allows DTAA benefit to Alibaba; 

(c) Penalty can’t be levied if the dept. can’t challenge the genuineness of documents produced by the assessee: HC;

(d) HC directed the department to refund the amount recovered from the recipient since the supplier filed the wrong GSTR-1;

(e) SEBI promotes investor confidence in the private placement of Non-Convertible Securities; and

(f) Classification of PPE under refurbishment and depreciation thereon.

1. Empowering Sustainable Decision-Making: SEBI introduces Revolutionary ESG Rating Norms

The SEBI introduced the SEBI (Credit Rating Agencies) Regulations, requiring agencies to disclose their rating criteria, methodology, default recognition policy, and more. On July 3, 2023, the SEBI notified the SEBI (Credit Rating Agencies) (Amendment) Regulations, 2023. The amendment includes a new chapter called “ESG Rating Providers” which outlines provisions for the applicability, registration requirements, and eligibility criteria for ESG rating providers. The key highlights of the amendments include:

1.1 Meaning of ESG Rating Provider

ESG (Environmental, Social, & Governance) Rating Provider is a person who is engaged in the business of issuing ESG ratings.

1.2 Eligibility criteria

SEBI has prescribed various eligibility criteria for entities to obtain a certificate of registration to act as an ESG Rating Provider. Some of such criteria include net worth, necessary infrastructure, adequate office space, technology, equipment, and manpower. Further,  the applicant should not be a credit rating agency or any other intermediary and should be incorporated as a company under the Companies Act, 2013.

1.3 Registration requirements

As per the amended norms, ESG service providers shall register with the SEBI as ESG Service Providers. An application for the grant of a certificate to act as an ESG rating provider shall be made to the Board in Form A of the Fifth Schedule. Additionally, applicants are required to pay a non-refundable application fee as prescribed.

1.4 Conditions for obtaining a certificate

The certificate granted to ESG Rating Provider shall be subject to certain conditions, namely:

• The ESG Rating Provider shall comply with the provisions of the Act, the regulations, guidelines, directives, circulars and instructions as may be issued by the Board;
• The ESG Rating Provider shall inform the Board, in writing, if any information or particulars earlier furnished to the Board is found to be false or misleading;
• The ESG Rating Provider shall at all times maintain the minimum liquid net worth; and
• The ESG Rating Provider shall pay the required registration fees.

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2. Tax authorities cannot ignore valid TRC issued by Singapore Govt.; HC allows DTAA benefit to Alibaba

The assessee (Alibaba Singapore) was a non-resident company incorporated in Singapore. During relevant assessment years, the assessee was availing of web hosting services from Alibaba.com, Hong Kong. The assessee provided said website facilities to Indian suppliers to do online business through a global trade marketplace for which the assessee charged a subscription fee.

During the scrutiny proceedings, the AO contended that the assessee was merely an intermediary between the Indian subscribers and Alibaba.com Hong Kong Limited. The AO did not accept the certificate of incorporation and the Tax Residency Certificate (TRC) issued to the assessee by the authorities in Singapore. It was held that alibaba.com was the trademark of Alibaba Hong Kong, and the website was also registered in Hong Kong, not Singapore.

Accordingly, AO held that the assessee would not be eligible for India-Singapore DTAA benefits because Alibaba.com Hong Kong owned the website. Since India and Hong Kong had no DTAA, subscription income would be partly taxable as royalty, FTS and business receipts.

The Dispute Resolution Panel (DRP) reversed the order of AO, which the Tribunal subsequently confirmed. The matter then reached the Bombay High Court.

The Court held that the entire focus of the AO is that the website www.alibaba.com is registered in Hong Kong and is the trademark of Alibaba Hong Kong. AO has completely denied the existence of the assessee as an independent entity, as if the assessee was only a front or a shadow entity of Alibaba Hong Kong.

Considering various documentary evidence, including the Tax Residency Certificate of the assessee, it cannot be held that the assessee is either a non-existent entity or a conduit of Alibaba Hong Kong, which is not even the parent company. A group structure of Alibaba.com was produced, and the conclusion was drawn that Alibaba.com Hong Kong is a separate entity from the assessee.

The tax residency certificate is sufficient to determine the proof of residency. The income-tax authorities cannot ignore the valid tax residency certificate issued by the governing authority of the other contracting state, Singapore. Thus, the assessee was entitled to avail the benefit of India-Singapore DTAA.

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3. Penalty can’t be levied if the dept. can’t challenge the genuineness of documents produced by the assessee: HC

The Allahabad High Court has held that a penalty can’t be levied if the GST authority fails to challenge the genuineness of the tax invoice and E-way bill produced by the assessee.

The assessee was a registered scrap trader. It dispatched certain goods from Kanpur to Ludhiana against its regular tax invoice and E-way bill. During such transportation, the GST authority detained goods and recorded the statement of the truck driver.

The tax invoice and E-way bill were produced at the time of first interception, but the authority entertained doubt as to the genuineness of the consignee and issued an order and levied a penalty under Section 129(1)(b) of CGST Act, 2017. The petitioner filed a writ petition and challenged the order levying a penalty.

The High Court noted that the documents were found present on the vehicle in question at the time of its first detention, and the department did not dispute this fact. However, the GST authority had not formed any opinion to falsify the genuineness of the tax invoice and e-way bill claimed by the petitioner.

It was further not in dispute that the petitioner claimed to be the owner of the goods. Thus, at most, security could have been demanded in terms of Section 129(1)(a) but not under Section 129(1)(b) of the CGST Act. Therefore, the Court held that the impugned order was liable to be set aside.

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4. HC directed the department to refund the amount recovered from the recipient since the supplier filed the wrong GSTR-1

The Madhya Pradesh High Court has held that the recipient can’t be made to suffer for the fault of the supplier since the supplier admitted that payment for such purchase, including GST value, is received, but GSTR-1 is wrongly filed.

The assessee participated in a bid and purchased scrap on e-auction. Later, the supplier committed a default by not reporting the auction sales invoice in GSTR-1. Therefore, the ITC was not reflected in the assessee’s GSTR-2A, and it sent several representations to the supplier, and it was certified by the supplier that the auction sale was made to the assessee acknowledging full payment in respect of the auction sale value, including GST.

The department issued a demand notice, and to avoid cancellation of GSTIN due to non-payment of GST charges, the assessee agreed to repay the requisite GST under protest. Thereafter, it filed a writ petition seeking a refund of the amount paid under protest.

The High Court noted that in the present case, the supplier admitted that the amount of GST was deposited inadvertently and reflected in the wrong GSTIN instead of the assessee’s GSTIN. The Court further noted that it is a settled law that no one can’t be made to suffer for the fault of another. Therefore, it was held that the assessee would be entitled to get a refund.

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5. SEBI promotes investor confidence in the private placement of Non-Convertible Securities

The SEBI unveiled the SEBI (Issue and Listing of Non-Convertible Securities) (Second Amendment) Regulations, 2023. These amendments aim to enhance transparency, accountability and investor protection in the securities market. Effective from July 3, 2023, these amendments bring significant changes by streamlining company roles, simplifying issuer requirements, and promoting comprehensive disclosures.

Prepare for a more transparent and investor-friendly landscape as SEBI defines “Key Managerial Personnel” and “Senior Management,” ensuring clear-cut responsibilities for all. That’s not all! SEBI has taken a step by merging disclosure requirements for public issues and private placements, simplifying the process for issuers. The key highlights of the amendment are as follows:

1.1 Newly inserted definitions

The SEBI has inserted definitions of “Key Managerial Personnel” and “Senior Management” under Regulation 2 of the existing regulations.

1.2 SEBI merges disclosure requirements

The SEBI has notified a new Schedule I, merging both the existing schedules (i.e., Schedule I and II) of the NCS Regulations. As a result, an issuer making a public issue of debt securities, non-convertible redeemable preference shares and private placement of non-convertible securities is required to make disclosures as specified in Schedule I of the Regulations.

1.3 SEBI mandates the filing of general information document

SEBI has introduced a new Chapter VA for issuing and listing non-convertible securities (NCS) issued on a private placement basis. Under this chapter, issuers must submit a general information document to the stock exchanges containing disclosures outlined in Schedule I.

1.4 SEBI notifies the requirements for ‘Large Corporates’

SEBI has introduced Chapter VB specifying the requirements for ‘Large Corporates’. A listed entity, fulfilling the criteria specified by the Board, shall be considered as a ‘Large Corporate’.

1.5 SEBI prescribes separate formats for disclosure

The SEBI has prescribed separate formats for standalone financials and consolidated financials both for financial and non-financial entities. Further, the formats have been changed in order to align them with Schedule III of the Companies Act, 2013.

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6. Classification of PPE under refurbishment and depreciation thereon

According to Ind AS 16 (Property Plant and Equipment), the carrying amount of an item of property, plant, and equipment shall be derecognised either on disposal or when no future economic benefits are expected from its use or disposal. Therefore, it is crucial to ascertain the expected future economic benefits of a particular property, plant, and equipment to determine its derecognition.

The Expert Advisory Committee (EAC) of the ICAI deliberated on a similar case where the company’s management, during a Board meeting, resolved to refurbish plants that had been non-operational for over 15 years due to technical issues, lack of raw materials, and a shortage of manpower. Additionally, these plants were not currently in a usable condition due to technical obsolescence resulting from changes in the production process. As a result, the company reclassified these assets from Property Plant & Equipment (PPE) to Capital Work in Progress (CWIP) in its financial statements for the current year. Furthermore, depreciation charges on these plants were also discontinued from the beginning of the year.

Regarding this, EAC observed that since the company has expressed its intention to reintroduce the refurbished plants, indicating the anticipation of future economic benefits from these PPE, it cannot be concluded that no future economic benefits are expected from these assets. Furthermore, the situation does not qualify it as disposal of PPE as no external recipient is acquiring control over these PPE. Instead, the same company will retain control over the PPE assets after refurbishment.

Thus, EAC opined that such PPE could not be derecognised and should continue to be recognised as PPE in the financial statements.

Regarding the discontinuation of depreciation on such PPE, Ind AS 16 (Property, Plant and Equipment), states that depreciation does not stop solely upon the asset becoming idle or retired from active use. Hence, depreciation should only cease on the date when the plants are derecognised.

On the basis of the above, the EAC concluded that the accounting treatment followed by the company with regard to the classification of PPE under refurbishment as CWIP and cessation of depreciation upon such PPE is incorrect.

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