Weekly Round-up on Tax and Corporate Laws | 14th to 19th February 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 14th to 19th February 2022, namely:

(a) SEBI proposes strict pricing norms for IPOs by loss-making companies

(b) Gujarat High Court has ruled that stay of demand application should ordinarily be disposed of in the assessee’s favour

(c) Govt. releases Draft National Policy for MSMEs to address specific “key action areas”

(d) Refunds of unutilised ITC relating to exports can’t be curtailed based on the prospective amendment to provisions: Commissioner (Appeals)

(e) Presentation of Trade Receivables in the Financial Statements

1. SEBI proposes strict pricing norms for IPOs by loss-making companies
Introduction

The term ‘IPO’ remained a household word in the year 2021. It would not be hyperbolic to say that year 2021 was ‘the year of IPOs’ as it was packed with 65 IPOs. Most of the IPOs were successful, few were record-breaking, whereas IPOs of some loss-making tech companies left investors baffled and saddened by eroding half of their investments.

Learning from this incident, the market watchdog, the Securities and Exchange Board of India (SEBI), has proposed a stringent disclosure framework for companies coming out with Initial Public Offering (IPO). In this regard, SEBI has floated the consultation paper for public comments proposing detailed disclosure to be made. This proposal aims to cover only those companies which don’t fulfil the three-year profitability track record, while the rules remain unchanged for others.

The objective of the discussion paper is to seek public comments on SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) regarding provisions relating to disclosures for the ‘Basis of Issue Price’ section in the offer document.

SEBI observed that the existing parameters for deciding the IPO price could not be applied to the new-age tech companies as new-age start-ups listing shares is not like traditional businesses. Therefore SEBI has proposed stricter norms for IPO pricing and sought public comments by 05th March 2022.

Current regulatory framework w.r.t “Basis of Issue Price”

Whenever a company comes out with Initial Public Offering (IPO) an issuer has to make disclosures of critical accounting ratios, viz-a-viz Earnings Per Share (EPS), Price to Earnings (P/E), Return on Net Worth (RoNW), and Net Asset Value (NAV). Further comparison of such accounting ratios with its peers (companies of comparable size in the same industry) is also required. Apart from this, there are no additional requirements.

Problem in the existing regulatory framework

SEBI observed that the pricing parameters are typically descriptive of companies/issuers which are profit-making and do not relate to a company/issuer that is loss-making.

According to SEBI, the existing parameters to judge a company’s IPO offer price “may not help investors much in taking investment decisions with respect to a loss-making issuer”.

Further, it was noticed that many new companies are coming out with IPOs. The majority of companies are new-age technology companies (NATCs). NATCs generally remain loss-making for a longer period before achieving break-even as these companies in their growth phase opt for gaining scale over profits.

Present traditional methods of IPO pricing, particularly for a loss-making company, are required to be supplemented with non-traditional parameters like key performance indicators (KPIs) and disclosure of certain additional parameters such as valuation based on past transactions/fundraising by the issuer company.

The consultation papers focus on adding these requirements while deciding the IPO price for a loss-making company. It will help the investors to make a well-informed decision.

Recommendation as envisaged in the Consultation paper

The Primary Market Advisory Committee (PMAC) recommended that every issuer need to disclose its audited Key Performance Indicators (KPIs) apart from disclosing the financial ratios as required under the SEBI (ICDR) regulations. Further, the justification should be given for how the stated KPIs contribute to the basis for issue price.

The consultation paper also proposes that the Issuer Companies make disclosure on valuations. The SEBI has proposed that the issuer provide the valuation based upon the transactions executed during the 18 months before filing the Draft Red Herring Prospectus (DRHP)/ Red Herring Prospectus (RHP).

Further, the SEBI proposed that disclosure of the floor price and Cap price is to be made with respect to the weighted average cost of acquisition (WACA) of the primary issue or secondary issue, as the case may be. SEBI also specified the disclosure format in this regard.

Further, to enable the investors to have a comparative view of the KPIs and other financial ratios for the same period, the comparison of the Issuer’s KPIs and financials ratios viz. EPS, P/E Ratio, Return on net worth, Net asset value, etc., for the last two full financial years and interim period (if any) is also proposed to be included in the offer document.

Read the Consultation Paper

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2. AO shouldn’t act as a mere tax-gatherer; Stay application should ordinarily be disposed of in the assessee’s favour: HC

The Gujarat High Court held that the Assessing Officer should not act as a mere tax-gatherer while exercising his power. He should act as a quasi-judicial authority vested with the power of mitigating hardship to the assessee. The application for stay of demand under section 220(6) cannot usually be rejected, merely describing it to be against the interest of revenue if recovery is not made.

Facts

The Income-tax department conducted a search against the assessee, and, consequently, assessment orders were passed. The total demand raised of Rs. 373,20,42,319.

The assessee challenged the assessment orders passed by the assessing officer (AO) by filing appeals before the CIT(A). The assessee also preferred separate stay applications before the assessing officer with a prayer to stay the demand for the assessment years under consideration. The assessee sought a stay of demand on the ground of high-pitched assessment and pending appeal before CIT(A). However, the assessing officer rejected the stay application of the assessee.

Being dissatisfied with the order of the assessing officer, the assessee filed a writ petition before the High Court.

Ruling

The High Court allowed the writ petition of the assessee and made the following observations in its judgment:

(a) The application under Section 220(6) for a stay of demand is to be decided by AO based on 4 basic parameters; (i) prima-facie case, (ii) balance of convenience, (iii) irreparable injury to the assessee, and (iv) whether the assessee has come with clean hands;

(b) While deciding on the stay of demand application under Section 220(6), AO should divorce himself from his position as the authority who made the assessment;

(c) AO may stipulate a pre-deposit of less than 20% of demand (even 5%/10%) while granting the stay of demand under Section 220(6);

(d) AO’s discretion of not treating the assessee in default, conferred under section 220(6) should ordinarily be exercised in favour of the assessee unless the overriding and overwhelming reasons are there to reject the application;

(e) The application under Section 220(6) of the Act cannot normally be rejected merely by describing it as against the interest of revenue if recovery is not made if the tax demanded is twice or more of the declared tax liability. The very purpose of filing an appeal, which provides an effective remedy to the assessee, is likely to be frustrated if such discretion was exercised in favour of revenue rather than the assessee.

Read the Ruling

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3. Draft National Policy for MSMEs to address specific “key action areas”: An overview

In recent years, the government of India has taken several steps to strengthen the MSME sector in recent years. Despite several actions/initiatives taken in the past, there was no specific policy focusing on the development of MSMEs with a vision to steer and shape the future course of the MSME segment in India. Now, the Ministry of MSME has released the draft National Policy for MSMEs (‘Draft Policy’) in India, wherein it has recommended “specific action areas” to ensure the sector’s speedy growth. The draft policy focuses on the key action areas, which are highlighted below:

(a) Development of Intergovernmental Roles & Responsibility via a three-tier system of governance;

(b) To streamline the legislation and regulatory framework for MSMEs in India;

(c) Easy access to Finance/Financial Assistance for MSMEs by enhancing loan limits for MSMEs;

(d) Technology Upgradation/ Adaptation;

(e) Skill Development;

(f) Development of knowledge management by linking all MSMEs offices to one network;

(g) Ease of doing business by providing a better infrastructure;

(h) Development of MSME Code; and

(i) Provide a smoother exit code.

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4. Refund of unutilised ITC due to exports can’t be curtailed based on the prospective amendment to provisions

The Commissioner (Appeals) has recently held that the refund of unutilised input tax credit due to exports can’t be curtailed based on an amendment to provisions that would apply prospectively. The Commissioner Appeals of Goa give this ruling in the case of Lankhorst Euronete India (P.) Ltd.

Facts

The appellant applied for the refund claim of ITC on account of the export of goods. The date of filing of shipping bill was 1st March 2018. Prior to 1st February 2019, for the purpose of claiming a refund of accumulating ITC on account of zero-rated supply, the relevant date for the same was determined under the following two separate clauses of the definition of relevant date under Section 54 of the CGST Act, 2017:

Clause (a) – In the case of goods exported out of India by sea or air, the relevant date would be the date on which ship/aircraft on which goods are loaded leaves India, i.e. Date of Shipping bill.

Clause (e) – In the case of a refund of unutilised input tax credit under Section 54(3) of the CGST Act, the relevant date would be the end of the financial year in which such claim for refund arises.

With effect from 1st February 2019, the CGST Amendment Act, 2018 substituted clause (e) to merely cover the scenarios of Inverted Duty structure. Therefore, after the amendment, the relevant date for claiming a refund of accumulating input tax credit on account of zero rated supply would be determined as per clause (a) provided above.

Therefore, as per the amended provision, the relevant date would be 2 years from the date of filing shipping bill i.e. February 29, 2020. Whereas, in terms of the provision prior to the amendment, the relevant date could have been 2 years from the end of the financial year in which such claim of refund arises, i.e. 31st March 2020.

The appellant considering that the amendment cannot have retrospective effect, filed the refund claim on 2nd June 2020 taking into effect the extension of time limits notified by Notification No. 35/2020-Central Tax, dated 3rd April 2020 (I.e. Notification issued during Covid period for extending time limit for various compliances). The notification provided that any compliance falling between 20th March 2020 to 26th June 2020 would be considered as valid if it is done till 30th June 2020. The Department rejected the refund on the ground of time bar relying on amended provisions under the GST law.

In this regard, the appellant argued before the Commissioner Appeals of Goa GST that such an amendment could not operate retrospectively and should be applied prospectively.

Commissioner (Appeals)

The Commissioner observed that the right has accrued to the appellant before the date of amendment, and the same rights would not be curtailed by amendment. Based on various Hon’ble Supreme Court Judgements, the Commissioner held that the legislations that modified accrued rights or imposed obligations or imposed new duties or attached a new disability have to be treated as prospective unless legislation intent is clearly to give such enactment a retrospective effect. Therefore, the amended provisions would apply prospectively and not with retrospective effect unless specifically expressed. Therefore, the order of the Department to reject the refund claim has been set aside, and the appellant has been given the liberty to file a fresh refund application.

Read the Ruling

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5. Presentation of Trade Receivables in the Financial Statements

Trade Receivables is an amount that is due on account of goods sold or services rendered in the ordinary course of business, and the company has an unconditional right on such amount of consideration. A trade receivable will be treated as current if it is likely to be realised within twelve months from the date of the Balance Sheet or within the operating cycle of the business.

Ind AS Schedule III requires separate disclosure of the ageing schedule of “Trade Receivables outstanding” for both the non-current and the current portion of trade receivables.

Non-current Trade Receivables/Current Trade Receivables shall be sub-classified as:

(i) (a) Considered good – Secured;

(b) Considered good – Unsecured;

(c) Trade Receivables which have a significant increase in credit risk

(d) Trade Receivables – credit impaired

(ii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.

(iii) Debts due by directors or other officers of the company or any of them either severally or jointly with any other person or debts due by firms or private companies respectively in which any director is a partner or a director or a member should be separately stated.

Read the story

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