Weekly Round-up on Tax and Corporate Laws | 12th to 17th August 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from August 12 to 17, 2024, namely:

1. MCA introduces ‘Ind AS 117’ on Insurance Contracts;
2. Compensation received from Flipkart for diminution in value of ESOPs is taxable as perquisite: HC;
3. Procedural irregularity committed by assessee should not come in legitimate way of grant of export incentives: HC;
4. Order passed during the pendency of IRP proceedings was not sustainable and to be set aside: HC;
5. RBI opens doors for Non-Residents to trade Sovereign Green Bonds in IFSC; and
6. IBBI mandates Registered Valuers to provide a ‘Valuation Report Identification Number’ for each valuation

1. MCA introduces ‘Ind AS 117’ on Insurance Contracts

The Ministry of Corporate Affairs (MCA) has issued the Companies (Indian Accounting Standards) Amendment Rules, 2024, introducing important revisions to the existing accounting standards. One of the most significant changes is the introduction of a new Indian Accounting Standard, Ind AS 117, which specifically addresses ‘Insurance Contracts.‘

Ind AS 117 establishes comprehensive and detailed principles for the recognition, measurement, presentation, and disclosure of insurance contracts. The objective of this standard is to ensure that companies provide accurate, relevant, and transparent information that faithfully represents the nature and financial impact of the insurance contracts they manage. This helps stakeholders better understand the financial health and risk exposure related to these contracts.

Ind AS 117 is applicable to:

• Insurance contracts, including reinsurance contracts,  that are issued by the entity.
• Reinsurance contracts that the entity holds.
• Investment contracts with discretionary participation features, provided the entity also issues insurance contracts.

This amendment brings India’s accounting practices in line with international standards, particularly the globally adopted IFRS 17, which has been in effect since 1st January 2023. In India, Ind AS 117 will become effective from 1st April 2024, with the option for insurance companies to apply the standard earlier, but only for consolidation purposes. This alignment ensures consistency and comparability in financial reporting across borders, particularly for entities engaged in insurance activities.

Read the Notification

2. Compensation received from Flipkart for diminution in value of ESOPs is taxable as perquisite: HC

The petitioner was an employee of Flipkart Internet Private Limited (FIPL). Flipkart Private Limited Singapore (FPS) implemented the Flipkart Stock Option Scheme, 2012 (the FSOP 2012). Under the FSOP 2012, employees’ stock options (ESOPs) were granted to the petitioner as an Employee. Subsequently, FPS announced compensation in view of the divestment of its stake in the PhonePe business and described such payment as being made although there is no legal or contractual right thereto under the FSOP 2012.

Such compensation was paid to the petitioner by deducting tax at source under Section 192 of the I-T Act by treating it as falling under the head “salary”. On the basis that the amount received as compensation was a capital receipt, which is not liable to income-tax, the petitioner applied for a ‘nil’ tax deduction certificate under Section 197 of the I-T Act for financial year 2023-24. However, such application was rejected.

Aggrieved by the order, the assessee filed a writ petition before Madras High Court.

The High Court held that section 2(14) of the Act defines capital assets. It means property of any kind held by an assessee, whether or not connected with his business or profession. Further, explanation 1 specifies that “property” includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.

ESOPs, by contrast, are rights in relation to capital assets, i.e. rights to receive capital assets (shares) subject to the terms and conditions of the ESOP scheme. Since the petitioner has no rights in the Indian company of which he is an employee (other than as an employee), Explanation 1 is also not attracted. ESOPs are, therefore, contractual rights that may qualify as actionable claims or choses in action in certain circumstances.

ESOPs are not a source of revenue or profit-making apparatus for the holder because these actionable claims are intrinsically not capable of generating revenue (notional or actual) and cannot be monetised, whether by transfer or otherwise until shares are allotted. Even at the time of allotment, there is notional but not actual benefit. Actual benefit accrues only upon transfer, provided there is a capital gain.

In this case, the compensation was not towards the loss of or even sterilization of a profit-making apparatus but by way of a discretionary payment towards – potential, as regards Unvested Options, or actual, as regards Vested Options – diminution in value of contractual rights.

Therefore, ESOPs do not fall within the ambit of the expression “property of any kind held by an assessee” in Section 2(14) and are, consequently, not capital assets. As a corollary, the receipt was not a capital receipt. Since it was concluded that a capital asset was transferred, the conclusion that the compensation qualifies as a perquisite and not a capital receipt is affirmed.

Read the Ruling

3. Procedural irregularity committed by assessee should not come in legitimate way of grant of export incentives: HC

The Honorable madras High Court has recently held that procedural irregularity committed by assessee could not come in legitimate way of grant of export incentives. The Court remitted case back to pass fresh order by examining exports made by assessee for grant of refund under rule 89 of CGST Rules, 2017. This ruling is given in case of Shobikaa Impex (P.) Ltd. v. Union of India.

Facts

The petitioner is a 100% Export Oriented Unit [EOU], and it had exported goods out of the country. The department issued a show cause notice for wrongly availing the benefit of refund under Rule 96 of CGST Rules, 2017, seeking to grant a refund of input tax credit availed and utilized in discharging IGST on the exported goods.

It filed a writ petition against the demand and contended that it had wrongly claimed a refund under Rule 96 on the IGST paid on capital goods and inputs utilized for the export of goods instead of Rule 89 of the CGST Rules, 2017.

High Court

The Honorable High Court noted that the petitioner had wrongly claimed refund under Rule 96 of CGST Rules, 2017. However, the procedural irregularity committed by the petitioner should not come in the legitimate way of grant of export incentives as admittedly exports were made and the refund claims were itself based on the shipping bills.

Therefore, the Court held that the impugned order was to be set aside and the matter remanded to pass a fresh order by examining the petitioner’s exports for grant of refund under Rule 89 of the CGST Rules, 2017.

Read the Ruling

4. Order passed during pendency of IRP proceedings was not sustainable and to be set aside: HC

The Honorable Allahabad High Court has recently held that the order passed during the pendency of IRP proceedings was not sustainable since the petitioner’s request to grant time to seek permission from IRP to contest adjudication proceedings was not considered. This ruling is given in Bgr Energy Systems Ltd. v. State of U.P.

Facts

The department issued show cause notice to the petitioner, but no further notice was issued, and no date was fixed in the adjudication proceedings. Thereafter, the department passed an order under Section 73 of the GST Act, 2017. The petitioner filed a writ petition against the order and contended that it was undergoing a resolution process before an Interim Resolution Professional (IRP), but the department did not consider the same.

High Court

The Honorable High Court noted that the petitioner had submitted reply to the notice and informed the department that it was undergoing a process of resolution before Interim Resolution Professional (IRP) and requested to issue appropriate notice and to grant time to seek permission of IRP to contest adjudication proceedings.

However, the department didn’t consider the request of the petitioner and passed order during pendency of IRP proceedings which was not sustainable. Therefore, it was held that the impugned order was liable to be set aside.

Read the Ruling

5. RBI opens doors for Non-Residents to trade Sovereign Green Bonds in IFSC

In a significant move to enhance sustainable finance in India, the RBI, on August 2, 2024, notified the Foreign Exchange Management (Debt Instruments) (Third Amendment) Regulations, 2024. These new regulations offer non-residents an opportunity to participate in India’s green finance initiatives. These amended norms shall come into force from the date of their publication in the Official Gazette, i.e. August 2, 2024.

What’s New?

A key addition to Schedule 1 relating to the purchase and sale of debt instruments by a person resident outside India has been made. This allows a person resident outside India who maintains a securities account with a depository in an IFSC in India to purchase or sell Sovereign Green Bonds (SGBs) issued by the Government of India, as per the terms and conditions specified by the Reserve Bank.

How can non-residents fund their Sovereign Green Bonds?

The amount of consideration for the purchase of Sovereign Green Bonds (SGBs) issued by the Government of India by persons resident outside India must be paid out of inward remittance from abroad through banking channels or out of funds held in a foreign currency account maintained in accordance with the regulations issued by the RBI and/or the International Financial Services Centre Authority.

How can non-residents remit sale/maturity proceeds of SGBs outside India?

Also, the sale/maturity proceeds (net of taxes, as applicable) of SGBs held by persons resident outside India may be remitted outside India.

This move aims to enhance non-resident participation in India’s sustainable finance by allowing them to purchase or sell SGBs in IFSCs and promote greater international financial integration, ultimately boosting investment in India’s green projects.

Read the Notification

6. IBBI mandates Registered Valuers to provide a ‘Valuation Report Identification Number’ for each valuation

In a significant move towards enhancing transparency and authenticity in the insolvency resolution process, the IBBI has introduced a new requirement for valuation reports under the IBC. As per the Circular dated August 12, 2024, all valuation reports under the IBC must now include a unique Valuation Report Identification Number (VRIN) for each valuation conducted under the Code. The circular applies to all cases where the valuation report is dated on or after the date of this circular, i.e., August 12, 2024

Role of IBBI in Valuations

The IBBI has been designated as an Authority under the Companies (Registered Valuers and Valuation) Rules, 2017, for registering, monitoring and developing valuers registered under the Rules read with section 247 of the Companies Act, 2013. Presently, any valuation under the provisions of the IBC must be conducted only by a Registered Valuer (RV)/Register Valuers Entity (RVE).

Why Valuation Report Identification Number (VRIN)?

Currently, RV/RVEs submit valuation reports upon its completion with or without mentioning any reference number. In order to ensure authenticity and to have a unique reference number for the valuation reports, the IBBI mandates that all valuation reports under the IBC must include a unique Valuation Report Identification Number (VRIN) for each valuation conducted under the Code.  The VRIN must be mentioned on the front page of the valuation report.

Developing a New Online Module

The IBBI, in consultation with Registered Valuers Organisations, has developed a new online module that RVs/RVEs can access with login credentials already provided by the IBBI. Before submitting a valuation report, the respective RVs/RVEs must use the module to generate a unique VRIN for each valuation report.

Ensuring Compliance and Transparency

The introduction of VRIN serves multiple purposes. First, it helps ensure that every valuation report is easily verifiable by stakeholders, thereby reducing the risk of fraudulent valuations. Second, it fosters greater transparency in the insolvency resolution process. Stakeholders can verify the report’s authenticity using the VRIN on the IBBI website. IPs must not accept any valuation reports without VRIN in all such cases.

Conclusion

The IBBI’s initiative to introduce the ‘Valuation Report Identification Number’ is a significant move towards strengthening the reliability and transparency of valuation reports under the IBC. This mandatory requirement not only upholds the integrity of the valuation process but also safeguards stakeholders from fraudulent activities. As a result, the insolvency resolution process becomes more transparent, reliable and trustworthy.

Read the Circular