Weekly Round-up on Tax and Corporate Laws | 13th to 18th November 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from November 13^th to 18^th, 2023, namely:

(a) HC discards ‘travel back in time’ theory propounded by revenue relying upon Ashish Agarwal case;

(b) CBDT prescribes monetary limit of Rs. 10 lakh or more to withhold refund under Section 245(2);

(c) RBI enhances the risk weights with respect to consumer credit exposure of commercial banks;

(d) GSTN Advisory on Amnesty Scheme for filing appeal before Appellate Authority;

(e) Biometric-based Aadhaar authentication and risk-based physical verification introduced in Andhra Pradesh;

(f) Tax Research Unit has no power to issue instructions or directions to central tax officers: HC

(g) Recognition and Accounting for Warranties under Ind AS 37 

1. HC discards ‘travel back in time’ theory propounded by revenue relying upon Ashish Agarwal case

The issue before the Delhi High Court was:

“Whether order passed under Section 148A(d) and the consequent notice issued under Section 148 of the amended 1961 Act [as obtaining with the enactment of FA 2021], falls foul of the limitation prescribed in Section 149(1)(a)?”

Assessee contended that the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 [TOLA] does not delegate any power to revenue to postpone the applicability of the new regime enacted by the Legislature.

The Delhi High Court held that the revenue’s argument that actions taken before the extended time limit of 30-06-2021 are valid by virtue of the Notifications issued under Section 3(1) of TOLA is flawed for these reasons:

• There was no power invested under TOLA, and that too via Notifications, to amend the statute, which had the imprimatur of the Legislature. Since, with effect from 01.04.2021, when FA 2021 came into force, the Notifications dated 31.03.2021 and 27.04.2021, which are sought to be portrayed by the revenue as extending the period of limitation, were contrary to the provisions of Section 149(1)(a).
• The extension of the end date for completion of proceedings and compliances, a power which was conferred on the Central Government under Section 3(1) of TOLA, cannot be construed as one which could extend the period of limitation provided under Section 149(1)(a).
• A careful perusal of the judgment of the Supreme Court rendered in Ashish Agrawal’s case [2022] 138 taxmann.com 64 (SC) and the provisions of TOLA would show that neither the said judgment nor TOLA allowed for any such modality to be taken recourse to by the revenue, i.e., that extended reassessment notice would “travel back in time” to their original date when such notices were to be issued and thereupon the provisions of amended Section 149 would apply.
• Furthermore, the judgment would show that it did not rule on the provisions contained in TOLA or the impact they could have on the reassessment proceedings. In any event, TOLA conferred no such power on the CBDT.

Thus, orders passed under Section 148A(d) and the consequent notices issued under Section 148 concerning AY 2016-17 and AY 2017-18 cannot be sustained.

Read the Ruling

2. CBDT prescribes monetary limit of Rs. 10 lakh or more to withhold refund under Section 245(2)

Section 245(2) empowers the Assessing Officer (AO) to withhold the income tax refund. The AO can pass such an order if the proceedings for assessment or reassessment are pending in the case of such person, and he believes that the refund grant is likely to adversely affect the revenue. After recording the reasons in writing and with the previous approval of the Principal Commissioner or the Commissioner, as the case may be, AO may pass an order to withhold the refund up to the date on which such assessment or reassessment is made.

The Central Board of Direct Taxes (CBDT) has released instructions prescribing the monetary limit of refund to attract provisions of section 245(2). The board has said that the monetary limit for applying provisions of said section will be where the refund value is Rs. 10 lakhs or more.

The board also prescribed the procedure to withhold refunds.

Upon receiving communication from CPC, the Faceless Assessing Officer (FAO) shall inform the Jurisdictional Assessing Officer (JAO) of the demand likely to be raised in the pending assessments. Based on such information, the JAO shall record in writing and seek approval of the jurisdictional Principal Commissioner of Income-tax.

The reasons recorded should reflect the factual analysis of the case by the JAO. The JAO will communicate the final decision regarding withholding/releasing the refund to the CPC.

To finish the above process, the time limit is revised to 20 days for the Faceless Assessment Unit and 30 days for JAO.

Read the Instruction

3. RBI enhances the risk weights with respect to consumer credit exposure of commercial banks

In a statement dated October 6, 2023, the Governor flagged the high growth in certain components of consumer credit. He advised banks and non-banking financial companies (NBFCs) to strengthen their internal surveillance mechanisms, address any build-up of risks and institute suitable safeguards in their interest. The Governor also highlighted the noteworthy surge in consumer credit growth and the increasing reliance of NBFCs on bank borrowings.

In this context, the Reserve Bank of India (RBI) vide Circular No. RBI/2023-24/85 DOR.STR.REC.57/21.06.001/2023-24, dated November 16, 2023 has decided to implement the following measures:

(a) Increase the risk weights with respect to consumer credit exposure of commercial banks/NBFCs

As per extant instructions applicable to commercial banks, consumer credit attracts a risk weight of 100%. On a review, it has been decided to increase the risk weights in respect of consumer credit exposure of commercial banks (outstanding as well as new), including personal loans. However, the housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery are to be excluded. The risk is increased by 25 percentage points to 125%. Similarly, Consumer credit exposure of NBFCs has also been raised to 125% instead of 100%.

(b) Increase the risk weights with respect to Credit card receivables

As per extant instructions, credit card receivables of scheduled commercial banks (SCBs) attract a risk weight of 125%, while those of NBFCs attract a risk weight of 100%. Upon review, it has been decided to increase the risk weights on such exposures by 25% points to 150% and 125% for SCBs and NBFCs, respectively.

(c) Increase the risk weights on exposures of SCBs to NBFCs

In terms of extant norms, exposures of SCBs to NBFCs, excluding core investment companies, are risk-weighted as per the ratings assigned by accredited external credit assessment institutions (ECAI). On a review, it has been decided to increase the risk weights on such exposures of SCBs by 25% points (over and above the risk weight associated with the given external rating) in all cases where the extant risk weight as per external rating of NBFCs is below 100%.

(d) Strengthening credit standards

The REs must review their extant sectoral exposure limits for consumer credit. They must put in place, if not already there, board-approved limits with respect to various sub-segments under consumer credit as may be considered necessary by the boards as part of prudent risk management. In particular, limits must be prescribed for all unsecured consumer credit exposures. The fixed limits must be strictly adhered to and monitored continuously by the Risk Management Committee.

Further, all top-up loans extended by REs against movable assets that are inherently depreciating in nature, such as vehicles, must be treated as unsecured loans for credit appraisal, prudential limits and exposure purposes.

Impact

The recent measures announced by the RBI to increase risk weights on consumer credit exposure, credit card receivables, and exposures of scheduled commercial banks (SCBs) to NBFCs signal a proactive response to the observed high growth and potential risks in the financial sector. These adjustments such as the 25% increase in risk weights for consumer credit aim to enhance the resilience of the banking and NBFC sectors by mitigating the risks associated with these portfolios. Additionally, the call for REs to strengthen credit standards, review sectoral exposure limits and implement board-approved limits underscores a commitment to prudent risk management practices, promoting stability in the financial system while addressing the specific challenges posed by the increasing dependency of NBFCs on bank borrowings.

Read the Circular

4. GSTN Advisory on Amnesty Scheme for filing appeal before Appellate Authority

The Government has issued an amnesty scheme vide Notification No. 53/2023-Central Tax, dated 02-11-2023, for taxable persons who were either unable to file an appeal before the Appellate Authority or whose appeal was rejected solely on the grounds of expiry of limitation. It has been provided that the scheme would apply to the orders passed up to 31-03-2023 under Section 73 or Section 74 of the CGST Act.

GSTIN has issued an advisory on the same, providing that the appeal under the amnesty scheme can be filed in Form GST APL-01 on the common portal up to 31-01-2024. It is further stated that the appeal must be filed upon payment of the required amount of pre-deposit. The manner of payment of such pre-deposit, from cash ledger and from credit ledger, is required to be correctly chosen by the taxpayer. It also provides that the Appellate Authority would first verify the correctness of the pre-deposit amount and thereafter entertain the appeal.

The taxpayers who already filed the appeal and want to avail themselves of the benefit of amnesty are first required to make differential payment against demand by navigating to Login >> Services >> Ledgers >> Payment towards Demand.

Read the Update

5. Biometric-based Aadhaar authentication and risk-based physical verification introduced in Andhra Pradesh

The State of Andhra Pradesh has been notified for Biometric-based Aadhaar authentication and risk-based physical verification in terms of Rule 8(4B) of the CGST Rules. Notably, earlier, the given functionality was made available on a pilot test basis in the State of Gujarat and Union Territory of Puducherry.

The existing procedure of processing the registration application would continue to follow for the applications pending in the States/UT other than Andhra Pradesh, Gujarat and Puducherry.

Read the Notification

6. Tax Research Unit has no power to issue instructions or directions to central tax officers: HC

The Delhi High Court held that as per Section 168, the power to issue instructions or directions to Central tax officers is vested exclusively in the Central Board of Indirect Taxes and Customs (‘CBIC’), and the Tax Research Unit (‘TRU’) does not have authority or jurisdiction to issue such clarifications independently. Therefore, the High Court held that TRU issued Circular No. 80/54/2018-GST clarifying the classification of polypropylene woven and non-woven bags was to be set aside.

Facts

The petitioners include the Association of Technical Textile Manufacturers, and a member of said association. The writ petition was filed to seek relief against Circular No. 80/54/2018-GST dated 31-12-2018, issued by TRU, regarding the classification of polypropylene woven and non-woven bags under the Customs Tariff Act.

The TRU clarified that polypropylene bags fall under Tariff Heading 3923. The petitioners argue that polypropylene non-woven fabric is a textile, and bags should not be classified as plastics but should be classified under Chapter 56 (Textiles and Textile Articles), specifically Tariff Heading 5603. The petitioners question the TRU’s authority to issue such clarifications, contending that only the CBIC has the power under Section 168 of the CGST Act to issue directives.

High Court

The High Court held that the TRU lacks the authority to issue the challenged clarification. The High Court further examined the classification issue and emphasized excluding textiles from Chapter 39. However, the court refrains from giving a definitive opinion on the classification issue due to inadequate material and industry-wide ramifications. It stresses the importance of avoiding classification rulings based on tenuous and inadequate material. The court quashes the impugned circular and leaves the classification issue open for consideration by the competent authority in appropriate proceedings.

Read the Ruling

7. Recognition and Accounting for Warranties under Ind AS 37

Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets states that a provision shall be recognized only when an entity has a present obligation as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation.

However, no provision is recorded if there is a potential outflow of resources in settling a potential obligation from past events or a present obligation that may require a resource outflow but is not highly probable. In such cases, disclosures regarding contingent liabilities are necessary.

The standard also notes that in case of a number of similar obligations (e.g. product warranties or similar contracts), the probability that an outflow will be required in settlement is determined by considering the class of obligations as a whole. Even if the chance of an outflow for individual items is minimal, it might be probable that resources will be needed to settle the entire class of obligations. A provision is recognized if the other recognition criteria are met in such cases.

For Example: A company gives warranties at the time of sale to purchasers of its product. Under the terms of the contract for sale, the company undertakes to make good, by repair or replacement, manufacturing defects that become apparent within three years from the date of sale. Based on past experience, it is probable (i.e., more likely than not) that there will be some claims under the warranties.

Then, in such cases, the company shall be considered to have a present obligation due to a past event. And, with the sale contract, the condition that probable outflow of future economic benefits will be required to settle the class of obligations as a whole is also fulfilled. Hence, the company should recognize a provision based on the best estimate of the amount of sales to settle the present obligation as of the reporting date, along with the relevant disclosures.

Read the Story