Weekly Round-up on Tax and Corporate Laws | 12th to 17th June 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 12^th to 17^th June 2023, namely:

(a) ITAT held that the sum paid to contract teachers couldn’t be treated as a fee for professional services for Section 194J;

(b) CBIC issues new guidelines for processing applications for GST registration;

(c) ITC can’t be denied just because the registration of the supplier was cancelled with retrospective effect: HC;

(d) SEBI’s Game-Changing Amendments to empower shareholders and strengthen corporate governance; and

(e) How should the increase or decrease in the inventory of reusable scrap be classified in the Statement of Profit and Loss?

1. ITAT held that the sum paid to contract teachers couldn’t be treated as a fee for professional services for Section 194J

The assessee was an authority appointed by and working under the directions of the State Government. Its primary function was to disburse the remuneration to the teachers with whom the colleges agreed to perform the teaching work entrusted by the college committee following the curriculum of the intermediate syllabus.

During the assessment proceedings, the AO held that the payments to teachers fall within the ambit of ‘fee for professional services’ as per Section 194J. Accordingly, the AO made additions and treated the assessee as ‘assessee-in-default’ for non-deduction of tax on payment to contracted teachers under Section 194J.

The matter reached the Hyderabad Tribunal.

The Tribunal held that for Section 194J, “professional services” shall mean services rendered by a person in the course of carrying on the profession of legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, advertising or such other profession as notified by the Board.

The words ‘fee for professional services means’ left no scope for interpretation, and the categories mentioned therein as on the date are exhaustive by the explanation itself or by the notification of CBDT. Such an exhaustive definition excludes the payments to contract teachers in intermediate colleges.

Either in the Explanation to Section 194J or in the notification issued, the contract teachers referred to as teaching professionals by AO are not covered. Thus, payments made to contract teachers did not answer the ‘fee for professional services’ description to levy TDS under Section 194J.

Read the Ruling

2. CBIC issues new guidelines for processing applications for GST registration

The menace of fake registrations and issuance of bogus invoices for passing fake ITC has become a serious problem, and various modus operandi for obtaining such fake registrations have been detected by Central and State Tax administrations. To address the problem of fake registration and fake input tax credit, the CBIC has earlier issued an instruction for concerted and coordinated action in a mission mode.

Now, the CBIC has issued guidelines for strengthening the process of verification of applications for registration at the end of tax officers in a uniform manner. As per new guidelines, immediately upon receiving the application for registration in the Task List of the concerned officer on the ACES-GST application, the officer shall initiate the process of scrutiny and verification of the details filled in by the applicant in the application for registration.

The proper officer shall also carefully examine the clarification, information or documents furnished by the applicant. He shall immediately initiate the process for physical verification of the place of business where the applicant has either failed to undergo authentication of the Aadhaar number or has not opted for authentication of the Aadhaar number.

Read the Instruction

3. ITC can’t be denied just because the registration of the supplier was cancelled with retrospective effect: HC

The Calcutta High Court has held that ITC can’t be denied to the taxpayers merely because the supplier’s registration was cancelled with retrospective effect.

The petitioner claimed credit of input tax against supply made from a supplier. However, the GST department rejected the credit on the ground that the supplier from whom the petitioner purchased goods was fake and non-existing. It filed a writ petition to challenge the rejection of ITC on the basis of cancellation of registration of supplier with retrospective effect.

The department submitted that the bank accounts opened by the said supplier were on the basis of fake documents, and the petitioner had not verified the genuineness and identity of the supplier.

The High Court noted that at the time of the transaction, the name of the supplier as a registered taxable person was already available with Government records, and the petitioner had paid the amount of purchased articles and tax on the same through the bank and not in cash. Therefore, it could not be said that there was any failure on the part of the petitioner in compliance with any obligation required under the statute before entering into transactions without proper verification.

Thus, the Court held that the order rejecting the said claim of ITC was to be set aside. It directed the department to consider the petitioner’s grievance afresh by considering the documents which the petitioner would intend to rely on in support of such claim of ITC.

Read the Ruling

4. SEBI’s Game-Changing Amendments to empower shareholders and strengthen corporate governance

The SEBI has taken a significant stride by notifying the SEBI (LODR) (Second Amendment) Regulations, 2023. These amendments empower shareholders, streamline disclosure requirements, and strengthen compliance for listed entities.

Under this framework, several key provisions come into play, such as the non-permanency of directors on the Board to ensure a dynamic leadership structure and the requirement of filing KMP vacancies within 3 months to promote efficiency and continuity. The amendments are effective from 14-07-2023.

Here is a glimpse of these key amendments.

• SEBI imposes a stricter timeline to fill the vacancy of the Key Managerial Personnel (KMP) within 3 months from the date of the vacancy
• Mandatory shareholder approval is required for directors’ continuation on the Board of a listed entity at least once in every 5 years from the date of their appointment or reappointment, as the case may be.
• Introduction of threshold-based criteria for determining the materiality of events/information
• SEBI specifies shorter timelines for the disclosure of material events/information
• Mandatory disclosure of details with respect to cybersecurity incidents, breaches, or loss of data, along with quarterly compliance reports.
• A new proviso has been inserted that the top 100 listed entities (w.e.f 01-10-2023) and, subsequently, the top 250 listed entities (w.e.f 01-04-2024) are required to promptly confirm, deny or provide any clarification regarding reported events or information in the “mainstream media”.
• The listed entities shall disclose on their website the schedule of analysts or institutional investors meeting at least 2 working days in advance and presentations made by the listed entity to analysts or institutional investors.

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5. How should the increase or decrease in the inventory of reusable scrap be classified in the Statement of Profit and Loss?

According to the recent opinion provided by the Expert Advisory Committee (EAC) of the ICAI, when scrap generated during the manufacturing process is unusable and serves no purpose other than being disposed of as scrap, such scrap inventories can be categorized as “Changes in Inventory of Scrap” in the Statement of Profit and Loss.

In a practical context, the classification issue arises when the majority of scrap generated can be reused in the subsequent production process, i.e. “Whether the accretion/decretion of internally generated scrap should be classified under ‘Change in Inventories of finished goods, work-in-progress, and stock-in-trade’ or ‘Cost of Raw Material Consumption’ in the Statement of Profit and Loss”.

When scrap generation is more than the consumption for a particular period, it results in an understatement of raw material consumption if it is disclosed as ‘cost of materials consumed’ in the statement of Profit and Loss. But, no guidance is available for adequate disclosure of such accretion/decretion of scrap.

In light of the absence of any such guidance, an inquiry was made to the EAC of ICAI regarding the classification of internally generated scrap accretion/decretion in one particular case. In response, the EAC noted that, as per the guidance note issued by ICAI, the cost of intermediates or components that are internally manufactured and transferred from one department to another within the same entity should be excluded from the cost of materials consumed. Therefore, only purchased intermediates, not those internally manufactured and transferred, should be included in the “cost of materials consumed.”

The EAC further stated that internally manufactured components sold without further processing should be disclosed as “finished products,” while components sold only after further processing should be classified as “work-in-progress.”

Based on these considerations, it was determined that the company should classify internally generated scrap used in subsequent production processes as “work-in-progress,” and the accretion/decretion of internally generated scrap should be presented under “Changes in inventories of finished goods, work-in-progress, and stock-in-trade” within the “Expenses” section of the Statement of Profit and Loss, as per the requirements of Schedule III to the Companies Act, 2013. Adequate disclosures should be provided to explain the nature of the inventory.

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