Weekly Round-up on Tax and Corporate Laws | 17th to 21st October 2022

In this weekly newsletter, we analytically summarise the key stories reported at taxmann.com during the previous week from 17th to 21st October, namely:

(a) ‘Solely’ in Section 10(23C)(vi) means ‘exclusively’; Profit-oriented institutions can’t claim exemption: SC;

(b) Apex Court interprets the definition of ‘Charitable Purpose’ for Section 2(15) of Income-tax Act;

(c) CCI imposes a monetary penalty of Rs. 1,337.76 crores on Google for anti-competitive practices;

(d) Limiting erstwhile area-based exemption up to 58% under GST is valid; SC asks states to consider reimbursing the remaining 42%;

(e) Bombay High Court imposed cost on Revenue for issuing an SCN and passing an order without any application of mind; and

(f) Accounting treatment of Final Mine Closure Plan (FMCP) in the books of account on a year-on-year basis.

1. ‘Solely’ in Section 10(23C)(vi) means ‘exclusively’; Profit-oriented institutions can’t claim exemption: SC

The subject matter of appeal in the instant case was the rejection of the appellant’s claim for registration as an institution/trust set up for the charitable purpose of education under the Income-tax Act. The Andhra Pradesh High Court held that the appellant was not created ‘solely’ for the purpose of education. It had other objects, which means that it ceased to be an institution existing ‘solely’ for educational purposes.

The appellant relied upon the ruling of American Hotel and Lodging Association v Central Board of Direct Taxes (2008) 170 Taxman 306 (SC) and Queen’s Education Society (2015) 55 taxmann.com 255 (SC). It was submitted that the test for determination was whether the ‘principal’ or ‘main’ activity was education or not. Whether some profits were incidentally earned?

The Supreme Court held that the interpretation adopted by the judgments in American Hotel as well as Queens Education Society as to the meaning of the expression ‘solely’ are erroneous.

The decisions in American Hotel and Queens Education Society did not explore the true meaning of the expression ‘solely’ in the context of educational institutions. The word “Solely” in Section 10(23C)(vi) means only/exclusively and not primarily.

The requirement of the charitable institution, society or trust, etc., to ‘solely’ engage itself in education or educational activities and not engage in any activity of profit means that such institutions cannot have objects unrelated to education. In other words, all objects of society, trust, etc., must relate to imparting education or be with educational activities.

Where the objective of the institution appears to be profit-oriented, such institutions would not be entitled to approval under Section 10(23C). At the same time, where surplus accrues in a given year or set of years per se, it is not a bar, provided such surplus is generated in the course of providing education or educational activities.

The seventh proviso to Section 10(23C), as well as Section 11(4A), refers to profits that may be ‘incidentally’ generated or earned by the charitable institution. The same applies only to those institutions which impart education or are engaged in activities connected to education.

The reference to ‘business’ and ‘profits’ in the seventh proviso to Section 10(23C) and Section 11(4A) merely means that the profits of a business which is ‘incidental’ to the educational activity. In relation to education, it is the sale of textbooks, providing school bus facilities, hostel facilities, etc.

Thus, a trust, university or other institution imparting education should necessarily have all its objects aimed at imparting or facilitating education. Regarding the plain and unambiguous terms of the statute and the substantive provisions which deal with exemption, there cannot be any other interpretation.

Read the Ruling

2. Apex Court interprets the definition of ‘Charitable Purpose’ used in Section 2(15) for tax exemption

The primary question before the Supreme Court was the correct interpretation of the proviso to Section 2(15), which defines ‘Charitable purpose’.

The Supreme Court has clarified that an assessee advancing general public utility cannot engage itself in any trade, commerce, or business or provide service in relation thereto for any consideration.

However, in the course of achieving the object of General Public Utility (GPU), the concerned organisation can carry on trade, commerce, or business or provide services in relation thereto for consideration, provided that:

(a) The activities of trade, commerce, or business are connected to the achievement of its objects of GPU; and

(b) The receipt from such business or commercial activity or service in relation thereto does not exceed the quantified limit of 20% of total receipts of the previous year.

Charging of any amount towards consideration for such an activity (advancing general public utility), which is on a cost-basis or nominally above cost, cannot be considered to be “trade, commerce, or business” or any services in relation thereto.

It is only when the charges are significantly above the cost incurred by the assessee, they would fall within the mischief of “cess, or fee, or any other consideration” towards “trade, commerce or business”.

Further, Section 11(4A) must be interpreted harmoniously with Section 2(15), with which there is no conflict. Carrying out activity in the nature of trade, commerce or business, or service in relation to such activities should be conducted in the course of achieving the GPU object, and the income, profit, or surplus or gains must, therefore, be incidental.

The requirement in Section 11(4A) of maintaining separate books of account is also in line with the necessity of demonstrating that the quantitative limit prescribed in the proviso to Section 2(15) has not been breached.

The assessing authorities must, every year, scrutinise the record to discern whether the nature of the assessee’s activities amounts to “trade, commerce or business” based on its receipts and income (i.e., whether the amounts charged are on a cost-basis or significantly higher).

If it is found that they are in the nature of “trade, commerce or business”, then it must be examined whether the quantified limit (as amended from time to time) in the proviso to Section 2(15), has been breached, thus disentitling them to exemption.

Read the Ruling

3. CCI imposes a monetary penalty of Rs. 1,337.76 crores on Google for anti-competitive practices

The Competition Commission of India (Commission) has imposed a penalty of Rs. 1,337.76 crores on Google for abusing its dominant position in multiple markets in the Android Mobile device ecosystem, apart from issuing cease and desist orders. The Commission also directed Google to modify its conduct within a defined timeline.

Facts

Based on its assessment, the Commission found Google to be dominant in all the below-mentioned relevant markets:

(a) Licensable OS for smart mobile devices in India;

(b) App store for Android smart mobile OS in India;

(c) General web search services in India;

(d) Non-OS specific mobile web browsers in India;

(e) Online video hosting platform in India.

Further, Google also secured a significant competitive edge over its competitors in relation to its other revenue-earning app, i.e. YouTube on Android devices. The competitors of these services could never avail of the same level of market access that Google secured and embedded for itself through a Mobile Application Distribution Agreement (MADA). Network effects, coupled with status quo bias, create significant entry barriers for competitors of Google to enter or operate in the concerned markets.

Further, the Revenue Sharing Agreements (RSAs) helped Google to secure exclusivity for its search services to the total exclusion of competitors. The combined results of these agreements guaranteed continuous access to search queries of mobile users, which helped not only in protecting the advertisement revenue but also to reap the network effects through continuous improvement of services, to the exclusion of competitors. With these agreements in place, the competitors never stood a chance to compete effectively with Google. Ultimately, these agreements resulted in foreclosing the market for them and eliminating choice for users.

CCI’s Observations

The Commission opined that the markets should be allowed to compete on merits, and the onus is on the dominant players, i.e. Google, that its conduct does not influence this competition on merits. By virtue of the agreements discussed above, Google ensured that users continued to use its search services on mobile devices, which facilitated uninterrupted growth of advertisement revenue for Google. Further, it also helped Google to further invest and improve its services to the exclusion of others. Thus, the underlying objective of Google in imposing various restrictions via MADA and RSAs was to protect and strengthen its dominant position in general search services.

CCI’s Decision

Accordingly, in terms of the provisions of Section 27 of the Act, the Commission has imposed a monetary penalty of Rs. 1,337.76 crores and issued cease and desist orders against Google from indulging in anti-competitive practices that have been found to be in contravention of provisions of Section 4 of the Act.

One important part of the CCI order is that Licensing of Play Store (including Google Play Services) to OEMs shall not be linked with the requirement of pre-installing Google search services, Chrome browser, YouTube, Google Maps, Gmail or any other application of Google.

CCI wants Google to stop the mandatory pre-installation of the entire Google Mobile Suite on smartphones under its Mobile Application Distribution Agreement (MADA) that it signs with Original Equipment Manufacturers (OEMs). The CCI noted in the press release that this placement is unfair to “device manufacturers” and anti-competitive in nature. Further, it cannot restrict users from uninstalling its apps and choosing other search engine options.

Read the Press Release

4. Limiting erstwhile area-based exemption up to 58% under GST is valid; SC asks states to consider reimbursing the remaining 42%

The Supreme Court has held that limiting erstwhile area-based exemption up to 58% by Central Government under GST is valid as a doctrine of promissory estoppel does not apply to the Central Government in the exercise of its legislative functions.

Facts

The Central Government had granted 100% Central Excise Duty exemption to units in Uttrakhand and Himachal Pradesh by issuing a Notification in 2003 in the pre-GST era. However, after the implementation of GST w.e.f. 1-7-2017 by invoking its powers under the proviso to Section 174(2)(c), it rescinded exemption notification by issuing Notification No. 21/2017-CE, dated 18th July 2017, to ensure a seamless flow of ITC credit to buyers and substituted the 100% tax exemption/refunds with budgetary support for 58% of tax. The appellant filed an appeal before the Supreme Court and contended that the Central Government was bound to give 100% tax exemption.

Supreme Court

The Supreme Court noted that when an earlier exemption is withdrawn by a subsequent notification based on a change in policy, the doctrine of promissory estoppel could not be invoked.

However, it can’t be said that the appellant’s claim based on promissory estoppel is without substance. In the deliberations of the GST Council, it was observed that the States also need to correspondingly reimburse the industrial units entitled to exemption under any existing incentive scheme out of the share of revenue received through devolution, which, as per the Finance Commission, stands at 42%.

Therefore, the Court permitted the appellant to make representations to the respective State Governments and the GST Council and requested the State Governments and the GST Council to consider such representations.

Read the Ruling

5. Bombay High Court imposed cost on Revenue for issuing an SCN and passing an order without any application of mind

The Bombay High Court has held that a show-cause notice issued under Section 73 of the CGST Act, 2017 must allow 30 days for reply/response by the assessee. The Court also imposed a fine of Rs. 10,000 to be paid by the Revenue as a donation to PM Cares Fund and asked CBIC to educate its officers on the prevailing law and rules.

Facts

An SCN was issued by the GST department under Section 73 of the Maharashtra Goods and Services Tax Act, 2017. On the 8th day, the order was passed against the petitioner. In the order, it was mentioned that the petitioner was directed to make payment within 30 days, but no payment was made within 30 days of the issue of the notice. Therefore, on the basis of documents available with the department and information furnished by you, the demand has been created. The petitioner filed a writ petition to challenge the notice and order.

High Court

The High Court noted that Section 73 allows a period of 30 days from the date of issuance of the show-cause notice to make payment of such tax along with interest payable under Section 50. If he does not wish to make payment, then within a 30-day period, he could file a reply to the show-cause notice.

However, in the show-cause notice, only 7 days were given to reply to the notice and on the 8th day, the impugned order came to be passed. Therefore, the question of not paying within 30 days of the issue of the notice would not arise. This statutory period can’t be arbitrarily reduced to 7 days by the assessing officer.

Therefore, the order was passed without application of mind, and the Court directed the Revenue to pay a sum of Rs. 10,000 as a donation to PM Cares Fund, and a copy of this order shall be forwarded to the CBIC and to the Chief Commissioner of State Tax, Maharashtra, so that they could at least hold some kind of training and/or orientation session/course, etc. to apprise and educate its officers on the prevailing law and rules.

Read the Ruling

6. Accounting treatment of Final Mine Closure Plan (FMCP) in the books of account on a year-on-year basis

Final Mine Closure Plan (FMCP) is a plan to decommission, reclamation, and rehabilitation of a mine or part thereof after the cessation of mining and mineral processing operations. This plan is prepared in the manner specified in the standard format and guidelines issued by the Indian Bureau of Mines or the Director, Atomic Minerals Directorate for Exploration and Research.

For the companies engaged in mining activities, the regulator requires the holder of a mining lease to submit an FMCP to the competent authority for approval two years prior to the proposed closure of the mine. Resulting in a legal obligation for the Company to incur decommissioning, reclamation, and rehabilitation expenditures due to mining operations or extraction activities of the Company.

This situation gives rise to the question of the accounting treatment of FMCP in the books of account. Whether the estimated expenditure to be incurred in the future at the end of mine life is discounted to present the effect of the time value of money.

In this regard, the Expert Advisory Committee of ICAI has stated that a provision is required to be recognised in respect of such costs since there exists an obligation to perform the site restoration and closure of the mine. Hence, the Company should recognise a decommissioning or restoration provision in respect of the mine closure obligation, and this obligation may arise even before any production takes place.

Further, with regard to the measurement of the provision, the Committee provided that the provision for estimated expenditure should be made at current prices at the reporting date, considering the relevant conditions and obligations. If the mine closure costs are towards the closure activities at the end of the mine life, the obligation is a long-term obligation. Therefore, if the effect of the time value of money is material, the provision should be discounted. Accordingly, the initial cost of the related asset should include the present value of the expenditure expected to be required to settle the obligation.

Read the Story