Weekly Round-up on Tax and Corporate Laws | 18th to 23rd July 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 18^th to 23^rd July 2022, namely:

(a) RBI allows international trade settlement in Indian Rupees;

(b) Supreme Court directs GSTN to open the portal for filing of TRAN-1 by all taxpayers from 01-09-2022 to 31-10-2022;

(c) Sale of property reported by Mahesh Bhupathi in ITR does not absolve the buyer’s liability to deduct tax under Section 195: ITAT;

(d) Amount invested by a “promoter” for the development of a real estate project under a JV agreement isn’t a financial debt: NCLAT;

(e) Sovereign Gold Bonds 2017 – 18 (Series II) can be redeemed prematurely at Rs. 5,054 per unit: RBI;

(f) GSTIN cancelled due to non-filing of returns to be restored after fulfilling conditions: HC; and

(g) Significant lapses in an audit of financial statements w.r.t materiality identified by NFRA.

1. RBI allows international trade settlement in Indian Rupees

To promote the growth of global trade with emphasis on exports from India and to support the increasing interest of the international trading community in INR, the RBI has decided to put in place an additional arrangement for invoicing, payment, and settlement of exports/imports in INR. Accordingly, for settlement of trade transactions with any country, AD bank in India may open “Special Rupee Vostro Accounts” of correspondent bank/s of the partner trading country.

In order to allow settlement of international trade transactions through this arrangement, the RBI has decided that:

(a) Indian importers undertaking imports through this mechanism shall make payment in INR, which shall be credited into the Special Vostro Account of the correspondent bank of the partner country against the invoices for the supply of goods or services from the overseas seller/supplier.

(b) Indian exporters undertaking exports of goods and services through this mechanism shall be paid the export proceeds in INR from the balances in the designated Special Vostro Account of the correspondent bank of the partner country.

Further, concerning the advance against export, the RBI has clarified that Indian exporters may receive advance payment against exports from overseas importers in Indian Rupees through the above Rupee Payment Mechanism. RBI advised that before allowing any such receipt of advance payment against exports, Indian Banks shall ensure that available funds in these accounts are first used towards payment obligations arising from already executed export orders/export payments in the pipeline.

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2. Supreme Court directs GSTN to open the portal for filing of TRAN-1 for all taxpayers from 01-09-2022 to 31-10-2022

The Supreme Court has directed Goods and Service Tax Network (GSTN) to open the common portal for availing Transitional Credit through TRAN-1 and TRAN-2 for two months, from 01-09-2022 to 31-10-2022 for all taxpayers.

Facts

The Revenue filed an SLP before the Supreme Court as various High Courts had allowed writ petitions filed by the registered taxpayers seeking directions to avail Transitional Credit beyond the statutory time limit.

Supreme Court

The Apex Court has issued the following Tran-1 directions:

(a) GSTN to open the common portal for all assesses to claim transitional credit for two months, from 01-09-2022 to 31-10-2022;

(b) All assesses can claim benefit whether they have filed a writ or not;

(c) GSTN to make sure no technical glitch arises during this time;

(d) The concerned officers are given 90 days to verify the claim of credit on merits and pass an appropriate order after granting an opportunity to be heard;

(e) After that, the credit to be reflected in Electronic Credit Ledger;

(f) If required, the GST Council may issue directions to field officers.

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3. Sale of property reported by Mahesh Bhupathi in ITR does not absolve the buyer’s liability to deduct tax under Section 195: ITAT

The Bangalore Tribunal has held for deduction of tax under Section 195 it is not relevant whether the non-resident payee has reported income in ITR or does not have positive income under consideration. If the payment made to him is chargeable to tax, then the person making the payment is obliged to deduct tax at source.

Facts

The assessee was engaged in the business of real estate. It had sold one apartment in a residential complex to Mr. Mahesh Bhupathi. Later, Mahesh Bhupathi offered to sell the same apartment back to the assessee. The assessee made payment to Mahesh Bhupathi without deducting tax at source (TDS).

The Assessing Officer (AO) held that Mahesh Bhupathi was a non-resident. Thus, the assessee was liable to deduct tax on the capital gains arising from the payment made to him. The AO held the assessee to be in default and levied tax and interest liability.

The assessee contended that it was not aware of the fact that Mahesh Bhupathi was a non-resident. Further, Mahesh Bhupathi had duly reported the transaction relating to the sale of the apartment in his return of income. Thus, the assessee cannot be considered an assessee in default.

Ruling

The Tribunal held that the assessee’s claim that it was unaware of the residential status of Mahesh Bhupathi could not be accepted as he was associated with the assessee for a long time. Facts on record show that the assessee was well aware of the residential status of Mahesh Bhupathi, and thus it was liable to deduct tax as per the provisions of Section 195.

Section 195 casts obligations upon the payer to deduct tax at source on the sum paid to the non-resident payee. The legislature incorporated provisions like Section 195 to prevent NRIs from taking away the entire money abroad without paying the due tax. The Indian tax authorities will have no control once this money is thrashed away.

Further, as per Section 195, it is not relevant whether NR-payee has reported income in ITR or does not have positive income under consideration. If the payment in question is chargeable to tax, then the person making the payment is obliged to deduct tax at source.

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4. Amount invested by a “promoter” for the development of a real estate project under a JV agreement isn’t a financial debt: NCLAT

In the instant case, the NCLAT held that an amount invested by the appellant as a promoter/investor for the development of a real estate project under a joint venture agreement would not fall within the ambit of definition of ‘financial debt’ as defined under Section 5(8) of the IBC.

Facts

The appellant had entered into a memorandum of understanding (MoU) and joint venture agreement with the respondent. In terms of which, the appellant paid a certain amount to the respondent for the development of the residential complex.

Thereafter, the appellant, alleging default on the part of the respondent, filed an application under Section 7 of the IBC to initiate the corporate insolvency resolution process against the respondent. The Adjudicating Authority (NCLT) dismissed the said application, holding that the appellant was not a financial creditor. Thereafter, an appeal was made to the NCLAT against the order passed by the National Company Law Tribunal.

NCLAT’s Ruling

The NCLAT stated that as per Section 5(7) of the IBC, the term “financial creditor” means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to. Further, Clause 15 of the Memorandum of Understanding specified that the promoter shall be entitled to raise loans in its own name from banks/financial institutions for the project. Thus, the developer shall not be liable to repay the loans or interest.

The NCLAT held that from the MoU entered into between parties, it was crystal clear that the appellant was classified as a promoter who would be entitled to raise loans in its own name from bank/financial institution for the project, and there would be no liability on the developer for repayment of loan or interest.

The NCLAT further held that since the relationship between the appellant and the respondent was that of land owner and developer, an amount invested in the joint venture project by the appellant in the capacity of a promoter/Investor didn’t fall within the ambit of definition of ‘financial debt’. Therefore, the appeal was to be dismissed.

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5. Sovereign Gold Bonds 2017 – 18 (Series II) can be redeemed prematurely at Rs. 5,054 per unit: RBI

The RBI had specified that the premature redemption of specified Sovereign Gold Bond (SGB) may be permitted after the fifth year from the date of issue of such Gold Bond on the date on which interest is payable.

The first tranche of the gold bond was issued on July 28, 2017. Accordingly, the first due date of premature redemption of the (Series II of SGB 2017-18) tranche shall be July 28, 2022.

Now the RBI has specified that the redemption price of SGB shall be based on the simple average closing gold price of 999 purity of the week  (Monday-Friday) preceding the redemption date as published by the India Bullion and Jewellers Association Ltd (IBJA). Accordingly, the redemption price for the premature redemption due on July 28, 2022, shall be Rs. 5,054 per unit of SGB based on the simple average of the closing gold price for the week of July 18-22, 2022.

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6. GSTIN cancelled due to non-filing of returns to be restored after fulfilling conditions: HC

The Madras High Court has held that if the registration was cancelled for failure to file returns for six months, the same should be restored upon fulfilment of conditions as it would not be in the interest of Revenue to keep the assessee outside the GST regime.

Facts

The department issued notice to the petitioner to show cause as to why the GST registration of the petitioner should not be cancelled as the petitioner had failed to file returns continuously for six months. It did not file a reply to the notice, and the department cancelled the GST registration of the petitioner. Thereafter, the petitioner applied for revocation of the cancellation of a registration which was rejected as time-barred. The petitioner approached the Court seeking relief.

High Court Held

The High Court observed that where registration was cancelled for failure to file returns for six months, it should be restored upon fulfilment of conditions as it would not be in the interest of the Revenue to keep the assessee outside the GST regime. Since no purpose will be served by keeping the assessee out of the GST regime, as such assessee would still continue to do business and supply goods/services. Thus, the petition was admitted, and the petitioner was also directed to file GST returns for the period before the cancellation of registration if such returns have not been already filed.

Read the Ruling

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7. Significant lapses in an audit of financial statements with respect to materiality identified by NFRA

The concept of materiality is applied by the auditor in planning and performing the audit to evaluate the effect of identified misstatements, uncorrected misstatements, and forming the opinion of the auditor’s report.

To develop the overall audit strategy, the auditor shall determine the materiality of the financial statements as a whole. Also, the auditor shall determine the materiality level to be applied to those transactions, account balances, or disclosures, where misstatements of lesser amounts than the materiality level are reasonably expected to influence the economic decisions for the financial statements as a whole.

Along with the determination of materiality, maintaining documentation related to the same is also equally important. Hence, the auditor shall include the following amounts and the factors considered in their determination:

(a) Materiality for the financial statements as a whole;

(b) Where applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures;

(c) Performance materiality.

During the examination of the audit documentation of the auditor, the following instances of lapses were found by NFRA:

(a) Failure to review the materiality of working papers as per the requirements of SA 220;

(b) Failure of engagement partner to document his review of the materiality;

(c) No evidence to prove that adequate audit procedures were followed to comply with the requirements of SA 320;

(d) Casual documentation practices followed by the auditor that is in contravention of Para 8 read with Para A10 of SA 230; and

(e) Working Papers do not document the name of the person who reviewed it along with date of the review.

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