Weekly Round-up on Tax and Corporate Laws | 05th to 10th September 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 05th to 10th September, namely:

(a) Refurbishment cost not includible in purchase price under margin scheme: AAAR; and

(b) Reversal of credit on the transfer of used capital goods to be done on depreciated value: SC;

(c) Export policy of broken rice is amended from ‘Free’ to ‘Prohibited’;

(d) State is a secured creditor for tax purposes under GVAT Act; Section 53 of IBC doesn’t override Section 48 of GVAT Act: SC;

(e) An assessee, a declared insolvent, is entitled to waiver of interest and penalty levied on non-payment of tax: HC;

(f) Measurement of revision in the residual value of PPE and intangible assets as a percentage of original cost or deemed cost.

1. Refurbishment cost not includible in purchase price under margin scheme: AAAR

The Rajasthan Appellate Authority for Advance Ruling has held that the cost of refurbishment of old and used cars is not includible in the purchase price for calculation of the margin of the supplier on the supply of second-hand vehicles.

Facts

The appellant planned to engage in the business of sale and purchase of old/used vehicles. The appellant would incur some expenses to bring the purchased cars to refurbished condition. The appellant would not be claiming any input tax credit and wanted to pay tax on selling old/used vehicles under the margin scheme.

Notably, the GST law provides that the value of supply under the margin scheme would be the difference between the selling price and the purchase price and where the value of such supply is negative, it shall be ignored.

The appellant contended that the refurbishment cost is part of the ‘purchase cost’. Therefore, it should be deducted while computing the margin under the scheme, considering the intention of the law to compute the margin on the sale of goods.

AAAR

The Rajasthan AAAR held that from the plain reading of the provisions, the words used are ‘purchase price’ and not the ‘purchased cost’. The purchase price means only the amount paid by the applicant at the time of purchase of used cars. Therefore, refurbishment costs incurred on the old/used cars to make them more marketable would not form part of the ‘purchase price’ to compute the margin of the supplier on the supply of second-hand vehicles.

The appellant argued that if the view of Rajasthan AAR, in this case, is applied to the sales amount, then the selling price would only be the amount charged for the sale of the old car, which would exclude the amount charged from the customer for the refurbishment expenses. This would be against the valuation provisions under the GST law, i.e. Section 15(1) of the CGST Act.

The AAAR affirmed the views of Rajasthan AAR and held refurbished cost is not allowed to be deducted. It was further held that the valuation provisions provided under Section 15(1) could not apply where the supplier is paying GST under the margin scheme as the margin scheme explicitly provides the manner of computing the value of supply.

Read the Ruling

2. Reversal of credit on the transfer of used Capital goods to be done on depreciated value: SC

The Supreme Court has held that reversal of credit on the transfer of used capital goods would be done on the depreciated value even during the period of omission of the proviso to Rule 3(5) of Cenvat Credit Rules, 2004 before its re-insertion by 2007 amendment. The amendment in 2007, by inserting a proviso to Rule 3(5) of Cenvat Credit Rules, 2004, being clarificatory would have a retrospective effect.

Facts

The appellant had cleared used capital goods to its own unit by reversing credit on depreciated value. The department sought such reversal on the full value on the ground that at the relevant time of clearance, there was no provision for such reversal on the depreciated value. The appellant lost the appeal before the CESTAT and High Court. It filed an appeal before the Supreme Court.

Supreme Court

The Supreme Court observed that Rule 57S(2) of the erstwhile Central Excise Rules, 1944 provided for reversal of credit on depreciated value in case of transfer of used capital goods. However, while framing Cenvat Credit Rules, 2004, this proviso got omitted by a legislative slip, but an amendment in 2007 was carried out to insert said proviso again.

The amendment in the year 2007 inserting a proviso to Rule 3(5) of Cenvat Credit Rules, 2004, being clarificatory, would have retrospective effect. In the instant case, undisputedly appellant had used capital goods from the year 1999 to 2004 before clearing to another self-owned unit in 2005. Since the aforesaid proviso was applicable right from 2004 itself, its benefit could not have been denied to the appellant. Hence, the appeal was allowed.

Read the Ruling

3. Export policy of broken rice is amended from ‘Free’ to ‘Prohibited’

The DGFT has issued a notification to amend the export policy of broken rice from Free to Prohibited. This notification shall be effective from September 9^th, 2022. During the period from September 9^th, 2022 till September 15^th, 2022 the following consignments of broken rice will be allowed to be exported:

(a) Where loading of broken rice on the ship has commenced before this Notification;

(b) Where the shipping bill is filed, vessels have already berthed or arrived and anchored in Indian ports, and their rotation number has been allocated before this Notification. The approval of loading in such vessels will be issued only after confirmation by the concerned Port Authorities regarding anchoring/berthing of the ship for loading of broken rice before the Notification; and

(c) Where broken rice consignment has been handed over to the Customs before this Notification and is registered in their system.

Read the Notification

4. State is a secured creditor for tax purposes under GVAT Act; Section 53 of IBC doesn’t override Section 48 of GVAT Act: SC

In the landmark ruling, the Supreme Court held that the State is a secured creditor for tax purposes under GVAT Act, and Section 53 of IBC doesn’t override Section 48 of the GVAT Act.

In the instant case, the following questions were placed before the Supreme Court:

(a) Whether State is a secured creditor under IBC for tax purposes under Gujarat VAT (GVAT Act) or not?

(b) Whether Section 53 of IBC overrides Section 48 of the Gujarat VAT (GVAT Act) or not?

The Supreme Court’s Ruling

The Apex Court held that the State is a secured creditor under the GVAT Act. Section 3(30) of the IBC defines the secured creditor as “Secured creditor means a creditor in favour of whom security interest is created”.

The Court further held that such security interest could be created by the operation of law. The definition of a secured creditor in the IBC does not exclude any Government or Governmental Authority. Therefore, the State will be treated as the secured creditor under IBC for tax purposes.

In view of the above, the Supreme Court concluded that State is a secured creditor for VAT under GVAT Act, and Section 53 of IBC doesn’t override Section 48 of the GVAT Act.

With regard to the overriding effect of Section 53 of IBC, it was held that Section 48 of the GVAT Act is not contrary to or inconsistent with Section 53 or any other provisions of the IBC. Section 53 of the IBC deals with the distributions of the asset. As per Section 53, proceeds from the sale of the liquidation assets shall be distributed in the order of priority and within such period as prescribed in the provision.

Under Section 53(1)(b)(ii), the debts owed to a secured creditor, which would include the State under the GVAT Act, shall rank equally with other specified debts, including debts on account of workman’s dues for 24 months preceding the liquidation commencement date.

The term “Secured Creditor”, as defined under the IBC, is comprehensive and wide enough to cover all types of security interests, namely, the right, title, interest or a claim to the property created in favour of or provided for a secured creditor by a transaction, which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person.

In view of the statutory charge in terms of Section 48 of the GVAT Act, the claim of the tax department of the State squarely falls within the definition of “Security Interest” under Section 3(31) of the IBC, and the State becomes a secured creditor under Section 3(30) of the Code.

Read the Ruling

5. An assessee declared insolvent is entitled to waiver of interest & penalty levied on non-payment of tax: HC

The assessee was adjudged insolvent, and an Official Assignee took charge of the estate of the assessee. The assessee categorically informed the Official Assignee that income tax liability, including capital gains tax liability, was likely to accrue when assets comprising the estate were sold. The assessee provided her PAN and requested the Official Assignee to remit tax.

Later, the Income-tax Department informed the Official Assignee that the income tax liability of the estate of the insolvent had not been discharged. Eventually, ex-parte assessment orders were issued. Upon obtaining the permission of the Court, the Official Assignee remitted the tax.

The Income-tax Department issued a demand notice claiming an interest under Sections 234A, 234B, and 234C for delayed filing/remittance of tax returns/advance tax. The assessee filed an instant petition seeking a waiver of such interest.

The Madras High Court held that there was considerable merit in the contention of the ex-insolvent/applicant that she took all reasonable measures to discharge her tax liability.

Ordinarily, the assessee would be liable to pay interest and penalty for non-payment of advance tax. However, on account of the following reasons, the assessee was entitled to a waiver of interest and penalty as regards non-payment of advance tax.

(a) The ex-insolvent/assessee was not in a position to remit income tax;

(b) She took all possible measures to procure payment of tax; and

(c) The debatable nature of and legitimate doubts regarding the tax liability of the estate of an insolvent.

Read the Ruling

6. Measurement of revision in the residual value of PPE and Intangible Assets as a percentage of original cost or deemed cost

As per Ind AS 101 (First-time adoption of Indian Accounting Standards), the entities can continue with the carrying value for all of their Property, Plant, and Equipment (PPE) and Intangible Assets in an entity’s first Ind AS financial statements. Entities can consider the written down value of such PPE and Intangible assets to be the deemed cost under the transition provision stated under Ind AS 101.

But, the ambiguity arises when the management estimates that there is a revision in the residual value of PPE and Intangible Assets after the adoption of Ind AS, i.e. whether the revision in the residual value of PPE and Intangible Assets is measured as a percentage of Original Cost or Deemed Cost.

In this regard, the Expert Advisory Committee noted that the ‘residual value’ is an absolute value (amount) and does not have any nexus to the original cost or deemed cost of the asset. It also stated that the purpose of residual value is to determine the depreciable amount of an asset to allocate that depreciable amount over the useful life of the asset in a systematic manner wherein such residual value is computed using the prices prevailing at the date of the estimate for the sale of a similar asset.

Therefore, the process of estimation of residual value is an independent exercise and should not be benchmarked with the original cost or deemed cost of the asset.

But, to comply with the requirements specified under Schedule II to the Companies Act, 2013, it becomes essential for the entities to link it with the original cost to ensure that the residual value is not more than 5% of the original cost.

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