Weekly Round-up on Tax and Corporate Laws | 10th to 15th July 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 10^th to 15^th July 2023, namely:

(a) Key recommendations of the 50^thGST Council Meeting, including 28% GST on online gaming;

(b) CA firm can’t invoke MSMED Act to recover the balance amount of remuneration for a special Audit: HC;

(c) HC directs the department to refund the amount collected during the search without the authority of law;

(d) India and UAE unite for UPI integration, paving the way for Cross-Border Transactions;

(e) Patent Act, 1970 shall prevail over the Competition Act, 2002 on the issue of exercise of rights by a Patentee: HC; and

(f) NFRA highlights the importance of the presence of the Statutory Auditor at stock-taking in accordance with SA 501.

1. Key recommendations of the 50th GST Council Meeting, including 28% GST on online gaming

On 11^th July 2023, the 50^th GST Council met under the Chairpersonship of Union Minister for Finance & Corporate Affairs Smt. Nirmala Sitharaman in New Delhi. The Council has taken many important decisions on long pending issues. The key recommendations made by the GST Council are as follows:

(a) Casino, Horse Racing and Online gaming are to be taxed at the uniform rate of 28%;

(b) GST rate reduced to 5% on uncooked/unfried snack pellets;

(c) GST on imitation zari thread or yarn known by any name in trade parlance reduced from 12% to 5%;

(d) GST rate reduced on fish soluble paste from 18% to 5%;

(e) Exemption from IGST on import of Dinutuximab (Quarziba) medicine & Food for Special Medical Purposes (FSMP) used in the treatment of rare diseases;

(f) GST exemption on satellite launch services extended to the services supplied by organizations in the private sector;

(g) Entry 52B has been amended in the compensation cess notification to include all utility vehicles (by whatever name called) provided they meet specified parameters;

(h) GTAs will not be required to file a declaration for paying GST under forward charge every year;

(i) Provisions of Finance Act, 2023 pertaining to GST Appellate Tribunal may be notified by the Centre with effect from 01-08-2023;

(j) Amnesty schemes for non-filers of Form GSTR-4, GSTR-9 & GSTR-10 returns, revocation of cancellation of registration, and deemed withdrawal of assessment orders issued under Section 62 of CGST Act, 2017 to be extended till 31-08-2023.

Read the Press Release

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2. CA firm can’t invoke MSMED Act to recover the balance amount of remuneration for a special Audit: HC

A CA firm, registered as a `Micro Enterprise’ under the provisions of the MSMED Act, was on the IT Department panel as a Special Auditor. After completing a Special Audit assignment and submitting the final audit reports, the CA Firm raised four invoices in respect of the said audits.

Even after raising the invoices, the full payment was not received. Accordingly, the CA firm invoked the provisions of the MSMED Act and approached the Micro & Small Enterprise Facilitation Council (MSEFC) for arbitration. Aggrieved by this, the Principal CIT filed a writ petition challenging the directions for reference to arbitration by the CA Firm.

The High Court held that a combined reading of Section 142(2A) to 142(2D) of the Income-tax Act and Rule 14B of the Income-tax Rules would show that the IT Department maintains a panel of accountants. The empanelled accountants are fully aware of the nature of the assignment when the nomination is made. Such accountants are also aware of the finality attached to the determination of the remuneration under Section 142(2D). The accountant is under no obligation to accept the nomination.

The purpose of a Special Audit is to help and assist the AO. It is also to facilitate the assessment and properly determine the tax liability after arriving at a correct taxable income. After completing the Special Audit, the Chief Commissioner or the Commissioner plays a crucial role in determining remuneration.

Rule 14B(5) stipulates that the number of hours claimed by the accountant for billing purposes has to be commensurate with the size and quality of the report submitted by the accountant. This provision clearly shows that the invoice the accountant may raise is not to be straightaway accepted.

The Chief Commissioner or the Commissioner is required to assess various factors, including:

(a) The nature of the work assigned to the accountant;

(b) The quantum of work;

(c) The duration of the work;

(d) The quality of the report;

(e) Whether the hours claimed are exaggerated or commensurate with the work.

The nature of the audit and how remuneration is to be determined would require domain expertise and knowledge that the MSEFC cannot possess.

The IT Department cannot be termed as a ‘buyer’ when it is nominating the accountant for conducting a Special Audit; neither can the CA Firm be termed as a ‘supplier’. The remuneration payable to the accountant cannot also be termed as ‘consideration’ as the Special Audit is a statutory duty being performed by the accountant for and on behalf of the AO.

The MSMED Act has no applicability to the nature of the assignment given to the CA Firm. The CA Firm may be registered as a Micro or Small enterprise and may be entitled to the invocation of the jurisdiction of the MSMED Act for other purposes.

Insofar as the assignment emanates from a statute, i.e., under Section 142(2A), the determination of the remuneration is solely the prerogative of the Commissioner or the Chief Commissioner. The same would not be liable to be called into question either in a civil court or a commercial or civil suit for recovery of money. The Special Auditor nomination for a Special Audit is governed by the Income Tax Act and Rules provisions.

Thus, the invocation of the provisions of the MSMED Act under such circumstances, in respect of Special Audit remuneration under Section 142(2D), would not be tenable.

Read the Ruling

3. HC directs the department to refund the amount collected during the search without the authority of law

The Punjab & Haryana High Court has held that the amount deposited by the petitioner during the search should be refunded since any amount collected by the authority during the search without the authority of law would amount to depriving a person of his property, which would infringe his rights under Article 300A of Constitution of India.

The petitioner was engaged in the export of Business Support Services to one recipient in Hong Kong. It applied for a refund of accumulated input tax credit which was granted by authorities. After that, a search was conducted on the premises of the petitioner, and it deposited a certain amount under protest on the assurance that it would be reverted in the input tax credit of the company.

The petitioner requested GST authorities reinstate the impugned amount, but the same was not accepted. It filed a writ petition requesting a refund of the amount deposited during the search.

The High Court noted that no proceedings under Section 74(1) of the CGST Act had been initiated by the revenue even though two years had lapsed. It is a well-settled law that an amount collected by an authority during the search without the authority of law would amount to depriving a person of his property without any authority of law and which would infringe his rights under Article 300A of the Constitution of India.

Since the department did not place any evidence explaining that the impugned amount was collected as per the authority of law, the Court allowed the petition and directed the department to refund the collected amount.

Read the Ruling

4. India and UAE unite for UPI integration, paving the way for Cross-Border Transactions

In a significant stride towards financial collaboration, the RBI and the Central Bank of the United Arab Emirates (CBUAE) signed two Memorandum of Understanding (MoUs). This historic event, which took place in Abu Dhabi on 15-07-2023, aims to promote the use of local currencies for cross-border transactions and foster cooperation in interlinking the payment and messaging systems.

The MoUs were ceremoniously signed by the Governor of the Reserve Bank of India, Shri Shaktikanta Das, and the Governor of the Central Bank of the United Arab Emirates (CBUAE), H.E. Khaled Mohamed Balama.

The esteemed presence of the Honourable Prime Minister of India, Shri Narendra Modi, and His Highness Sheikh Mohamed Bin Zayed Al Nahyan, President of the UAE, graced the occasion as the two Governors exchanged the MoUs.

Collaboration aims to develop the INR-AED foreign exchange market

The MoU aims to establish a local currency settlement system (LCSS) to promote the use of the INR and AED bilaterally. Implementing the LCSS would empower exporters and importers to issue invoices and make payments using their own domestic currencies. This significant change would effectively support the growth of an INR-AED foreign exchange market.

MoU to Enhance Payments and Messaging Systems Integration for Seamless Cross-Border Transactions

Under the MOU on ‘Payments and Messaging Systems’, the central banks of India and the UAE agreed to collaborate on three main areas. Firstly, they will connect their Fast Payment Systems (FPSs), namely the Unified Payments Interface (UPI) of India and the Instant Payment Platform (IPP) of the UAE. Secondly, they will link their respective Card Switches, which are the RuPay switch in India and the UAESWITCH in the UAE. Lastly, they will explore the possibility of connecting their payment messaging systems, specifically the Structured Financial Messaging System (SFMS) of India, with the messaging system in the UAE. This collaboration aims to enable fast, convenient, safe, and cost-effective cross-border fund transfers for users in both countries through the UPI-IPP linkage.

Thus, India and UAE’s UPI Integration revolutionizes cross-border payments, fostering economic growth and deepening financial ties.

Read the Press Release

5. Patent Act, 1970 shall prevail over the Competition Act, 2002 on the issue of exercise of rights by a Patentee: HC

A bunch of appeals were moved by multinational entities, i.e., LM Ericsson and Monsanto challenging the proceedings initiated against them by the CCI. In these appeals, the question is, when a patent is issued in India, and the patentee asserts such rights, can CCI inquire into the actions of such patentee exercising its powers under the Competition Act? The CCI also moved an appeal.

It was previously submitted on behalf of the two entities that the Patents Act is a special law dealing with patents and that issues of imposition of conditions for licensing patents were provided for under Chapter XVI, which includes anti-competitive agreements and abuse of dominant position explicitly.

Further, the CCI took a stand that the Competition Act is a special law dealing with anti-competitive agreements and abuse of dominant position and thus, some stray provisions in the Patents Act, which dealt otherwise with patents, could not be understood as overriding the Competition Act, which is a subsequent statute.

The Bench observed that the legislative intent is apparent in the Patents Act, especially as amended by the 2003 Amendment that introduced Chapter XVI after the Competition Act was enacted.

It is especially for the field pertaining to patents, unreasonable conditions in agreements of licensing, abuse of status as a patentee, inquiry in respect thereof, and relief that is to be granted are all to be governed by the Patents Act.

The High Court further observed that once there was a clear legislative intent that the Patents Act would override the Competition Act, the same could not be saved by the provisions of Section 21A of the Competition Act, which dealt with reference by the CCI to the statutory authority.

The High Court held that Chapter XVI of the Patents Act is a complete code in itself on all issues pertaining to unreasonable conditions in agreements of licensing of patents, abuse of status as a patentee, inquiry and relief that is to be granted.

The High Court further held that there is no scope beyond the pale of doubt that the Patents Act is the special statute, not the Competition Act. It is also a fact that Chapter XVI of the Patents Act is a subsequent legislation as compared to the Competition Act.

Therefore, the Patents Act must prevail over the Competition Act on the issue of the exercise of rights by a patentee under the Patents Act.

Read the Ruling

6. NFRA highlights the importance of the presence of the Statutory Auditor at stock-taking in accordance with SA 501

After receiving information from the Office of the Registrar of Companies (RoC), the National Financial Reporting Authority (NFRA) initiated the investigations on the statutory auditor. The auditor was accused of multiple audit failures, including failure to obtain the audit evidence regarding the existence and condition of inventory, failure to identify the related party and related party transactions, failure to obtain external confirmations for the Trade Receivables & Trade Payables, failure to report the non-compliance with laws & regulations, and failure to identify and communicate with TCWG, etc. After critically analyzing the replies of the auditor and reviewing the audit file, NFRA has passed the order with the following professional misconduct:

(a) Out of the total assets of the company, inventory forms a major part of total assets. Therefore, verification of inventory is crucial, as it has a considerable impact on the decision-making process of stakeholders. In order to verify the correctness and existence of inventory, the auditor is required to attend physical inventory counting at the end of the reporting period. However, the auditor failed to attend such inventory verification and contended that the inventory holding level was in line with the past inventory holding trends, and nothing unusual was found. The auditor only verified the sample stock records which were provided by the company and didn’t reconcile records with the entries of receipt and issue. The audit file does not contain any evidence of the sampling methodology, and no working papers were found, evidencing that the alternative audit procedures were performed by the auditor after he failed to perform physical inventory counting on the reporting date. The auditor displayed gross negligence in the audit of inventories which is a clear violation of SA 501.

(b) The company is obligated to identify and disclose all related party relationships and transactions, and the auditor is required to verify the accuracy of all related party transactions. Here, the company has made all of its sales to a single party which had been disclosed as a related party in an earlier year’s annual report. However, the auditor failed to identify this party as related in the current year and failed to check the accuracy of related party disclosures as per AS 18 and Ind AS 24 and compliance with SA 550.

(c) The auditor is required to obtain direct confirmation from parties having a significant and material balance of trade receivables and trade payables. The auditor failed to obtain direct confirmation from the relevant parties regarding these balances. Moreover, the auditor is required to perform alternative audit procedures if failed to obtain confirmation. No evidence was found in the Audit file regarding the performance of additional audit procedures, which clearly violates SA 505.

Thereby, NFRA imposes a monetary penalty of Rs. 2 lakhs and debarred auditor for two years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate.

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