Weekly Round-up on Tax and Corporate Laws | 08th to 12th July 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from July 08 to 12, 2024, namely:

1. Interest payable on loan taken from State Govt. or World Bank not covered within the provision of section 43B;
2. CBIC issued guidelines for recovery of outstanding dues in cases wherein first appeal has been disposed of;
3. CBIC issued clarification on taxability and valuation of supply of services of providing corporate guarantee between related persons;
4. RBI allows Authorised Persons to facilitate remittances for all permissible purposes under LRS to IFSCs;
5. Listed entities to publish a window advertisement in newspapers referring QR code & website link for Financial Results: SEBI; and
6. Interest payable on disputed liability settlement is not considered an exceptional items.

1. Interest payable on loan taken from State Govt. or World Bank not covered within the provision of section 43B

The assessee was a public sector undertaking (PSU) engaged in electricity distribution. During the assessment proceedings, the Assessing Officer observed that the assessee paid interest to the World Bank on an instalment basis through an e-challan to the Government Treasury of Rajasthan.

He held that Section 43B was enacted to enable certain transactions to take place expeditiously; hence, payment made to the World Bank was also to be regarded as payment to a public financial institution for Section 43B. Accordingly, he disallowed the outstanding interest amount.

On appeal, the Commissioner (Appeals) observed that the State Government advanced the loan, and interest was also paid to the State Government. In fact, even the State Government did not receive funds directly from World Bank but funds were received through the Central Government. Hence payment of interest was made to the State Government treasury which was covered under section 43B. Therefore the status of World Bank being a public financial institution or otherwise was irrelevant.

Aggrieved by the order of the Commissioner (Appeals), the assessee had filed the instant appeal before the Tribunal, challenging the disallowance of unpaid interest on a loan taken from the World Bank. The assessee contended that it was erroneously presumed that the loan was provided by the State Government and that the interest was paid to the State Government. It was argued that neither the World Bank nor the State Government falls under any of the categories specified in clauses (d), (da), or (e) of Section 43B.

The Tribunal held that Clause (d), (da) or (e) of Section 43B do not cover interest payable on any loan or borrowing taken from the World Bank/Government. In these clauses, interest payable to specific financial institutions/NBFC/Schedule Banks/Co-operative Banks are only covered. The interest payable to the State Government/World Bank is not covered under these clauses. Explanation 4 to section 43B specifies the institutions covered under this section, as elaborately discussed in the written submission filed by the assessee. Therefore, from the plain reading of the definitions, it is clear that neither the State Government nor the World Bank falls under the definition of Public Financial Institution, State Financial Corporation, State Industrial Investment Corporation, Deposit-taking NBFC, Scheduled Bank and Co-operative Bank. Therefore, it is viewed that interest payable on a loan taken from the State Government/World Bank needs to be covered within the provision of section 43B. Hence, disallowance confirmed by the Commissioner (Appeals) under section 43B was not as per the provision of law and therefore, the same was directed to be deleted.

Read the Ruling

2. CBIC issued guidelines for recovery of outstanding dues in cases wherein first appeal has been disposed of

The CBIC has issued a circular to issue guidelines for recovery of outstanding dues in cases wherein the first appeal is disposed of till the Appellate Tribunal comes into operation. It is also clarified that in cases where the taxpayer decides to file an appeal against the order of the appellate authority, he can make the payment of an amount equal to the amount of pre-deposit by navigating to Services >> Ledgers>> Payment towards demand from his dashboard.

In case, the taxpayer does not make the payment of the amount equal to amount of pre-deposit or does not provide the undertaking/declaration to the proper officer, then it will be presumed that taxpayer is not willing to file appeal against the order of the appellate authority and in such cases, recovery proceedings can be initiated as per the provisions of law. In this regard, Circular No. 224/18/2024 – GST dated July 11th, 2024 has been issued.

Read the Circular

3. CBIC issued clarification on taxability and valuation of supply of services of providing corporate guarantee between related persons

The CBIC has received various representations from trade and industry seeking clarifications on various issues pertaining to the taxability and valuation of supply of services of providing corporate guarantee between related persons. Therefore, the CBIC has issued circular to provide clarity regarding the applicability of Rule 28(2) which is amended retrospectively with effect from 26th October 2023.

It is also clarified that in respect of the supply of services of providing corporate guarantee between related persons, in respect of corporate guarantee issued or renewed before 26th October 2023, the valuation of the said supply is to be done in accordance with Rule 28, as it existed during that time. However, if the corporate guarantee is issued or renewed on or after 26th October 2023, then the valuation of the said supply will be required to be done as per Rule 28(2) of CGST Rules. In this regard, Circular No. 225/19/2024 – GST dated July 11th, 2024 has been issued.

Read the Circular

4. RBI allows Authorised Persons to facilitate remittances for all permissible purposes under LRS to IFSCs

The RBI vide Circular Dated July 10, 2024, has allowed Authorised Persons to facilitate remittances for all permissible purposes under the Liberalised Remittance Scheme (LRS) to International Financial Services Centres (IFSCs). The remittance can be made to avail of financial services or financial products as per the International Financial Services Centres Authority Act, 2019, within IFSCs.

Further, remittance can be made for all current or capital account transactions in any foreign jurisdiction (other than IFSCs) through a Foreign Currency Account (FCA) held in IFSCs. Resident individuals can open Foreign Currency Accounts in IFSCs for these permissible purposes.

Prior to this amendment, remittances under the Liberalised Remittance Scheme (LRS) to International Financial Services Centres (IFSCs) could be made only for the following purposes:

(a) Making investments in IFSCs in securities except those issued by entities/companies resident in India (outside IFSC) and

(b) Payment of fees for education to foreign universities or foreign institutions in IFSCs for pursuing specific courses, as mentioned in the Gazette Notification No. S.O. 2374(E) dated May 23, 2022, issued by the Central Government.

Resident individuals were also allowed to open Foreign Currency Accounts (FCA) in IFSCs for the purposes mentioned above under points (a) & (b).

The RBI’s circular dated July 10, 2024, allowing Authorised Persons to facilitate remittances for all permissible purposes under LRS to IFSCs enables resident individuals to avail themselves of a broader range of financial services and products and carry out current and capital account transactions via FCAs held in IFSCs. This move is expected to enhance the financial flexibility and opportunities available to resident individuals.

Read the Circular

5. Listed entities to publish a window advertisement in newspapers referring QR code & website link for Financial Results: SEBI

SEBI vide Notification Dated July 8, 2024 has notified the SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2024. An amendment has been made to Regulation 52(8) relating to the publication of financial results.

As per the SEBI’s amendment, a new proviso has been inserted to Regulation 52(8), which states that listed entities may publish only a window advertisement in the newspapers that refers to a Quick Response (QR) Code and the link to the listed entity’s website and stock exchanges, where such results are available and capable of being accessed by investors, subject to certain conditions.

The conditions are as follows:

• For non-convertible securities outstanding as on July 8, 2024, the listed entity must obtain prior approval from the debenture trustee
• In the case of issuances after July 8, 2024, the listed entity must either disclose in the offer document regarding the window advertisement in the newspapers or obtain prior approval from the debenture trustee.

SEBI’s amendment aims to simplify compliance for listed entities by allowing financial results to be published via a window advertisement with a QR code and website link, reducing costs and enhancing investor access to information. This change also mandates prior approval from the debenture trustee for existing non-convertible securities and requires specific disclosures for new issuances, ensuring transparency. The amendment is effective from July 8, 2024.

Read the Notification

6. Interest payable on disputed liability settlement is not considered an exceptional items

The term “exceptional items” is not explicitly defined in Ind AS Schedule III or Ind AS. However, Ind AS 1, Presentation of Financial Statements references such items in several paragraphs.

Paragraph 85 of Ind AS 1 states that additional line items, headings, and subtotals should be included in the statement of profit and loss when relevant to understanding the entity’s financial performance. Paragraph 86 emphasizes the importance of disclosing financial performance components to aid users in understanding and projecting future performance, considering factors such as materiality and the nature and function of income and expense items. Paragraph 97 requires that material items of income or expense be disclosed separately, including their nature and amount. Paragraph 98 outlines the circumstances that necessitate the separate disclosure of these items.

Material information is defined as information that, if omitted, misstated, or obscured, could influence decisions made by users of financial statements. Materiality is assessed based on the nature or magnitude of the information, or both, in the context of the financial statements as a whole.

Additionally, the profit or loss section of the statement of profit and loss must include line items for the following amounts:

• Revenue, with the separate presentation of interest revenue calculated using the effective interest method
• Gains and losses from the derecognition of financial assets measured at amortized cost
• Finance costs

For Instance, when a company, say A Limited, develops an airport line and all initial capital expenditures are recorded as Capital Work-in-Progress (CWIP). Upon the commencement of commercial operations, the company capitalizes these expenditures on the airport line as an asset.

Subsequently, B Limited (another company) being responsible for designing, supplying, installing, and commissioning various systems for the airport line, served notice to the company to terminate their operations. A legal dispute ensued, and after years of court proceedings, the court ruled in favor of B Limited, upholding the validity of their termination notice according to their agreement. The court ordered A Limited to pay Rs. 2500 crore plus interest to B Limited as a final settlement.

Upon receiving the court order, A Limited capitalized the termination payment of Rs. 2500 crore in their books, considering it as part of the asset cost installed by B Limited. They also recognized the interest payable on the termination amount and accounted for depreciation of the asset under ‘Exceptional Items’ in the Statement of Profit and Loss for the financial year.

However, the Expert Advisory Committee (EAC) of ICAI concluded that the company’s presentation of interest payable and depreciation as “Exceptional Items” in the Statement of Profit and Loss was not appropriate. Instead, the company should have considered the size, magnitude, and frequency of the interest payable and depreciation, presenting them with disaggregated headings and subtotals under the respective heads of “finance cost” and “depreciation” in the Statement of Profit and Loss. Additionally, the company should also include appropriate disclosures in the notes to the financial statements, as required by Ind AS 1.

Read the Story