Weekly Round-up on Tax and Corporate Laws | 16th to 21st October 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 16^th  to 21^st October 2023, namely:

(a) Notification is needed to apply MFN clause; No benefit if country joins OECD post signing of first treaty: SC;

(b) No GST on services provided to a Governmental Authority by way of water supply, public health etc.;

(c) Supply of services by Indian Railways to be taxable under Forward Charge Mechanism;

(d) Refund of accumulated ITC to be allowed on construction of civil structures, bridges, roads, etc. not intended for sale to a buyer;

(e) Bus-operator Companies providing services through ECOs shall pay tax under FCM;

(f) Allottee doesn’t cease to be a ‘home buyer’ u/s 5(8)(f)(Expln) of IBC merely because he got a refund order from RERA; and

(g) NFRA orders bring clarity on the period of its jurisdiction.

1. Notification is needed to apply MFN clause; No benefit if country joins OECD post signing of first treaty: SC

A significant development has unfolded as the Supreme Court ruled in favour of the revenue regarding the applicability of the Most Favoured Nation (MFN) clause contained in various Indian treaties. The Supreme Court’s decision effectively overruled the judgment of the Delhi High Court in the case of Steria India and Concentrix Services Netherlands BV.

The central issues at hand pertain to the invocation of the MFN clause in cases where the third country, with which India has entered into a Double Tax Avoidance Agreement (DTAA), was not a member of the OECD at the time of entering into the DTAA but subsequently became an OECD member. Additionally, the question arises whether the MFN clause can be triggered automatically or is contingent on issuing a notification.

The Supreme Court held as under:

The word ‘is’ appearing in Clause IV(2) of the India-Netherlands DTAA need to be interpreted correctly. The clause is quoted below:

“If after the signature of this convention under any Convention or Agreement between India and a third

State which is a member of the OECD, India should…………….”

The expression “is” has a present signification and derives meaning from the context. The conclusion is that when a third-party country enters into DTAA with India, it should be a member of the OECD for the earlier treaty beneficiary to claim parity.

The treaty practices of Switzerland, Netherlands, and France are influenced by their unique constitutional and legal systems. In India, when a third state joins the OECD after signing a Double Taxation Avoidance Agreement (DTAA), India must communicate and accept the beneficial effect through a notification under Section 90, with prior negotiation and communication.

Therefore, the essential requirement of a notification under Section 90 of the consequences of the trigger (or causative) event cannot be undermined.

If a DTAA or Protocol provision with one nation mandates equal treatment for a specific matter, even after another nation (part of OECD) receives preferential treatment. In that case, it doesn’t automatically apply the same benefit to the DTAA of the first nation that has an agreement with India. In this case, the terms of the earlier DTAA need a separate amendment through a notification under Section 90.

Accordingly, for a court, authority, or tribunal to enforce a DTAA or any protocol that alters existing legal provisions, a notification under Section 90(1) is essential and obligatory.

Read the Ruling

Read the Article

2. No GST on services provided to a Governmental Authority by way of water supply, public health etc.

The CBIC has notified that no GST shall be levied on services provided to a Governmental Authority by way of water supply, public health, sanitation conservancy, solid waste management and slum improvement and upgradation.

It may be noted that the term’ Governmental Authority is defined as an authority or a board or any other body—

• Set up by an Act of Parliament or a State Legislature; or
• Established by any Government,

with 90% or more participation by way of equity or control to carry out any function entrusted to a Municipality under article 243W of the Constitution or to a Panchayat under Article 243G of the Constitution. In this regard, Notification No. 13/2023 dated October 19th, 2023 has been issued.

Read the Notification

3. Supply of services by Indian Railways to be taxable under Forward Charge Mechanism

The CBIC has issued a notification to provide that services supplied by the Indian Railways be taxed under the Forward Charge Mechanism to enable them to avail of the ITC. This would result in the utilization of ITC by railways, leading to cost reduction. In this regard, Notification No. 13/2023 dated October 19th, 2023 has been issued. In this regard, Notification No. 14/2023 dated October 19th, 2023 has been issued.

Read the Notification

4. Refund of accumulated ITC to be allowed on construction of civil structures, bridges, roads, etc., not intended for sale to a buyer

The CBIC has issued a notification to provide that refund of accumulated ITC shall be allowed on construction of civil structures, like bridges, roads, etc., which are not intended for sale to a buyer. Earlier, the refund was restricted, and this notification will be applicable prospectively. In this regard, Notification No. 15/2023 dated October 19th, 2023 has been issued.

Read the Notification

5. Bus-operator Companies providing services through ECOs shall pay tax under FCM

The CBIC has issued a notification to provide that bus operators who are supplying services through E-Commerce Operators (ECOs) and who are organized as a company would not be covered under the scope of Section 9(5). Hence, such companies will be liable to pay tax on their supplies.

This would strike a balance, as, on one hand, the small operators would be saved from the compliance burden. On the other hand, the bus operator companies would be able to avail the benefit of ITC. In this regard, Notification No. 16/2023 dated October 19th, 2023 has been issued.

Read the Notification

6. Allottee doesn’t cease to be a ‘home buyer’ u/s 5(8)(f)(Expln) of IBC merely because he got a refund order from RERA

In the matter of Vishal Chelani v. Debashis Nanda [2023] 155 taxmann.com 273 (SC), the Supreme Court held that homebuyers cannot be treated differently from other financial creditors under the IBC just because they have secured refund orders from the authority under the Real Estate (Regulation and Development) Act, 2016.

(a) Brief facts of the case:

In the present case, the appellants filed an appeal against the order passed by the NCLAT, which held that home buyers who were beneficiaries of the refund order issued by the UP RERA must be treated differently from other home buyer allottees.

The appellants (i.e. home buyers) had opted for allotment in a real estate project of the respondent company. Due to a delay in the completion of the project, the appellants approached the Uttar Pradesh Real Estate Regulatory Authority (‘UPRERA’). They received a refund decree and an interest in their favour. Meanwhile, proceedings under the IBC were initiated.

During the proceedings, a resolution plan was presented to the Adjudicating Authority. In that plan, a distinction was made between home buyers who opted or elected for other remedies, such as applying before RERA and securing orders in their favour and those who had not done so. Home buyers who did not approach authorities under RERA were given the benefit of 50% better terms than those who approached RERA or decree holders.

As a result, the RP treated the appellants as unsecured financial creditors. Thus, the appellants felt aggrieved and their applications were rejected by the Adjudicating Authority. Their appeals, too, were rejected. Consequently, they approached the Supreme Court.

(b) Appellant contentions:

The appellant argued that with regard to the definition of financial debt under section 5(8)(f) of IBC, which was amended in the year 2018, home buyer allottees in real estate projects were also included in the description of financial creditors. Therefore, a distinction cannot be made between one set of home buyer allottees and another.

On the other hand, the Resolution Professional (RP) contended that having approached the UPRERA, the appellants fell into a different sub-class of home buyers and, therefore, were unsecured creditors compared to allottees who had not invoked RERA remedies. The RP also relied on Section 18 of the RERA to claim that the appellant had relinquished their rights.

(c) Supreme Court observations:

The Supreme Court noted that, from a plain reading of Section 5(8)(f) of the IBC, no distinction can be per se made between different classes of financial creditors to draw a resolution plan.

Further, with regard to Section 18 of the RERA Act, the Supreme Court observed that the RP’s view appeared to be that once an allottee seeks remedies under RERA and opts for a refund of money in terms of the order made in her favour, it is not open for her to be treated in the class of home buyer. The Court expressed disagreement with this view.

(d) Supreme Court Ruling:

The Supreme Court considered the judgement delivered by the NCLT, Mumbai Bench in the case of Mr Natwar Agarwal (HUF) v. Ms Ssakash Developers & Builders Pvt. Ltd., CP(IB) No.21/MB-IV/2023 dated 02.08.2023, where it was held that an allottee in a Real Estate Project, who subsequently becomes a decree holder under the RERA Act, continues to be a creditor in the class of home buyers.

The Supreme Court held that section 238 of the IBC contains a non-obstante clause, which gives an overriding effect to its provisions. Consequently, its provisions acquire primacy and cannot be read as subordinate to the RERA Act. Thus, the appellants are declared as financial creditors within the meaning of section 5(8)(f) explanation and are entitled to be treated as such, along with other home buyers/financial creditors.

Read the Ruling

7. NFRA orders bring clarity on the period of its jurisdiction

The National Financial Reporting Authority (NFRA) has taken action against a Chartered Accountant who was the Engagement Partner (EP) in charge of auditing a public listed real estate company. The action was initiated because the Chartered Accountant was found to have engaged in professional misconduct during the audit. This action was taken based on information received from the Securities and Exchange Board of India.

The real estate company is required to prepare its financial statements in accordance with specific accounting standards known as Indian Accounting Standards (Ind AS) set by the Ministry of Corporate Affairs. Additionally, the company falls under the regulatory authority of NFRA in accordance with section 132 of the Companies Act, 2013. Below are the observations from the NFRA’s latest order:

1. NFRA has cleared its jurisdiction to address misconduct by auditors even for audits conducted before its establishment, as the Standards on Auditing were legally required regardless of NFRA’s existence. NFRA evaluates auditors’ work based on existing standards.
2. NFRA charged the auditor for failing to report non-provisioning against long-standing advances given for land acquisition. While examining, NFRA found multiple shortcomings in the audit, including inadequate confirmations, incorrect calculation of audit coverage, etc. NFRA criticized the auditor for not evaluating and considering a modified opinion on internal controls related to land advances and held that the auditor failed to apply professional skepticism in various instances.
3. NFRA charged the auditor for failing to report non-provisioning for a customer’s outstanding debt of over three years. NFRA found inconsistencies in the audit documentation, indicating a contradiction in the approval process documented under IFC reporting and statutory audit.
4. The Engagement Partner (EP) was charged with inadequately documenting the analysis for provisions for refundable security deposits to landowners under a Joint Development Agreement, leading to a failure to meet audit standards.

Considering the proven professional misconduct, the nature of violations, principles of proportionality, and deterrence against future professional misconduct, we, in the exercise of powers under section 132(4)(c) of the Companies Act, 2013, hereby order the imposition of a monetary penalty of Rs. 5,00,000 (Rupees Five Lakh) upon Engagement Partner.

Read the Story