Weekly Round-up on Tax and Corporate Laws | 19th February to 24th February 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from February 19^th to 24^th, 2024, namely:

(a) RBI greenlights Prepaid Payment Instruments usage for public transport payments;

(b) CBDT releases order to waive off tax demand outstanding as of Jan 31, 2024

(c) Another opportunity should be provided if proper officer was of view that reply was incomplete and further details required: HC;

(d) Duty-free shops at airports are liable to pay GST on services availed from Airport Authority of India: HC;

(e) Pledger-in-default can’t claim voting rights on pledged shares; HC upholds pledgee’s right to exercise voting: HC; and

(f) NFRA sums up mandatory audit procedures under SAs for verifying revenue while penalizing & debarring auditor for lapses.

1. RBI greenlights Prepaid Payment Instruments usage for public transport payments

Imagine a world where a single pre-paid card issued by your banker can be a hassle-free ticket for enjoyable travel in buses, trains, metro, parking, toll plazas, etc. It’s like stepping into a new era of paying for transportation, where everyone can join in, and cash is a thing of the past. The RBI has turned this vision into a reality vide Circular RBI/2023-24/126 CO.DPSS.POLC.No.S1092/02-14-006/2023-2024,dated February 23, 2024 whereby it has amended ‘the Master Directions on PPIs’ allowing the authorized banks and non-bank Prepaid Payment Instruments (PPI) issuers to provide PPIs for making payments across various public transport systems.

The amendment aims to provide convenience, speed, affordability, and safety of digital modes of payment to commuters for public transit services such as metro, buses, rail, waterways, tolls and parking. Public transport systems across the country cater to a multitude of commuters on a daily basis.

Meaning of Prepaid Payment Instruments (PPIs)

Instruments that facilitate the purchase of goods and services, financial services, remittance facilities, etc., against the value stored therein. PPIs that require RBI approval/authorization prior to issuance are classified into two types, viz.

(i) Small PPIs and

(ii) Full-KYC PPIs.

• Small PPIs – issued by banks and non-banks after obtaining minimum details of the PPI holder. They shall be used only for the purchase of goods and services. Funds transfer or cash withdrawal from such PPIs shall not be permitted. Small PPIs can be used at a group of clearly identified merchant locations/establishments with a specific contract with the issuer (or contract through a payment aggregator/payment gateway) to accept the PPIs as payment instruments.
• Full-KYC PPIs – issued by banks and non-banks after completing the Know Your Customer (KYC) of the PPI holder. These PPIs shall be used to purchase goods and services, transfer funds, or withdraw cash.

Features of PPIs for Mass Transit Systems (PPI-MTS)

• Banks/non-banks are permitted to issue such PPIs.
• Such PPIs must contain the Automated Fare Collection application related to transit services, toll collection and parking.
• Such PPIs must be enabled only for payments across various modes of public transport such as metro, buses, rail, waterways, tolls and parking.
• These PPIs can be issued without the holders’ KYC verification.
• These PPI can be reloadable in nature.
• The amount outstanding in such PPIs must not exceed Rs 3000/- at any point in time.
• These PPIs can have perpetual validity, i.e. the provisions of validity and redemption as given in section 13 of master directions must not apply to such PPIs.
• Cash withdrawal, refund, or funds transfer must not be permitted in such PPIs.

Impact of the amendment

The latest RBI amendment marks a defining moment, empowering banks and non-bank PPI issuers to integrate PPIs for public transport payments seamlessly. This bold move promises to redefine the commuting landscape, offering a harmonious blend of convenience, security and efficiency via digital transactions.

This amendment goes beyond convenience. It’s a big step towards ensuring everyone can access the latest ways of paving for public transport. It also shows RBI’s commitment to pushing forward with new ideas in finance, which could lead to a huge shift towards cashless payments in public transport nationwide.

Read the Circular

2. CBDT releases order to waive off tax demand outstanding as of Jan 31, 2024

In the Union Budget 2024 speech, Finance Minister Nirmala Sitharaman announced the extinguishment of the tax demands until Assessment Year 2015-16. Subsequent to the speech, the Central Board of Direct Taxes (CBDT) has released an order to remit and extinguish the tax demands under the Income Tax Act, 1961, Wealth Tax Act, 1957 or Gift Tax Act, 1958 [“Acts”].

The order outlines various aspects of extinguishing the demands of different assessment years. It prescribes the monetary limit for outstanding tax demands and the maximum ceiling limit eligible for waiver for the assessee. The board has prescribed that demands which are outstanding as of Jan 31, 2024, shall be eligible for waiver. The following are the key takeaways from the order.

(a) Monetary limit for waiver of demand

Until AY 2010-11, demands up to Rs. 25,000 per entry are eligible for the waiver, whereas from AY 2011-12 to AY 2015-16, the waiver applies to demands entry up to Rs. 10,000.

(b) Maximum ceiling of Rs. 1 lakh

Remission and extinguishment of eligible demands are capped at Rs. 1,00,000 per assessee, regardless of the total eligible amount across assessment years.

(c) No waiver for TDS/TCS demands

The CBDT specifies that waiver of demand doesn’t apply to the demands raised against the tax deductors or collectors under the TDS or TCS provisions of the Income Tax Act, 1961. Thus, the outstanding demand for eligible assessment years will be exclusive of the demands arising from TDS/TCS provisions.

(d) Tax demand includes principal component of tax and any other interest

The outstanding demand comprises the tax principal under the Act plus interest, penalty, fees, cess, or surcharge as per Act provisions, with the ceiling limit as applicable.

(e) Interest on account of delayed payment is not to be considered

It’s clarified that interest under section 220(2) isn’t applicable for calculating the demand entry amount or the ceiling limit of Rs. 25,000, Rs. 10,000, or Rs. 1,00,000, respectively.

(f) No right to claim credit or refund

It’s clarified that remission of outstanding demands doesn’t grant the assessee the right to claim credit or refund under the Income Tax Act or any other legislation.

(g) No effect on criminal proceedings

Waiver of demand won’t impact ongoing or completed criminal proceedings against the assessee and doesn’t provide any benefit, concession, or immunity under such proceedings.

Read the Order

3. Another opportunity should be provided if the Proper officer was of view that reply was incomplete and further details required: HC

The Honorable Delhi High Court has recently held that where the department found the assessee’s reply incomplete, it can ask for further details instead of passing an adverse order without giving any reason other than ‘reply was not clear and satisfactory’. This ruling is given by the High Court of Delhi in the case of Federal Bank Ltd. v. Assistant Commissioner DGST.

Facts

In the present case, the petitioner received a show-cause notice, and it submitted a detailed reply in pursuance of the show-cause notice. However, the impugned order was passed the next day in a very cryptic manner without giving any reason and merely stated that “reply was not clear and satisfactory”. It filed writ petition against the order.

High Court

The Honorable High Court noted that a detailed reply was furnished by the petitioner giving full disclosures against the said show cause notice, but the impugned order, however, after recording the narration, stated that the reply uploaded by the taxpayer was incomplete, not duly supported by adequate documents and unable to clarify the issues.

The Court further noted that if the Proper Officer had viewed that the reply was incomplete and further details were required, the petitioner could have sought the same. However, the record did not reflect that any such opportunity was given to the petitioner to clarify its reply or furnish further documents/details. Therefore, the Court held that the impugned order was liable to be set aside, and the Proper Officer shall re-adjudicate the show cause notice within two weeks after allowing the hearing.

Read the Ruling

4. Duty-free shops at airports are liable to pay GST on services availed from the Airport Authority of India: HC

The Honorable Punjab and Haryana High Court has recently held that duty-free shops at airports are liable to pay GST on services availed from the Airport Authority of India (AAI), claim the ITC and then apply for a refund of the accumulated ITC from the relevant tax authorities. This ruling is given by the High Court of Punjab & Haryana in the case of Flemingo Duty Free Shop (P.) Ltd. v. Union of India.

Facts

The petitioner was operating duty-free shops at international airports, and it had entered into a concession agreement with the Airport Authority of India (AAI) to operate these shops. The agreement stipulated that the company would pay AAI a ‘licence fee’. It was of the opinion that it wasn’t liable to pay GST on the licence fee since it was a duty-free shop.

The department believed the petitioner was liable to pay GST on the licence fees, but it could claim a refund. The petitioner filed writ petition against it, but divergent views emerged in 2 Judges division bench, with one judge proposing modification to require tax payment by the petitioner, while another restrained the petitioner from paying GST. The matter was placed before the Hon’ble Third Judge.

High Court

The Honorable High Court relied on the decision of Sandeep Patil v. Union of India 2020 (372) E.L.T. 794 (Bom.) and CIAL Duty Free and Retail Services Limited v. Union of India in CWP (C) No.12274 of 2020 where it was held that the operators of duty-free shops were exempt from GST on the sale of goods to passengers but liable to pay GST on the input services received.

The Court also pointed out that the concession agreement between the petitioner and AAI was clear, and the petitioner was unequivocally obligated to pay GST on the services provided by AAI. Therefore, the Court directed the petitioner to reimburse AAI for the GST paid on its behalf, along with interest, as per the terms of the concession agreement. Thereafter, it can claim the ITC and then apply for a refund of the accumulated ITC from the relevant tax authorities.

Read the Ruling

5. Pledger-in-default, can’t claim voting rights on pledged shares; HC upholds pledgee’s right to exercise voting: HC

The High Court, in the matter of Rahul Dilip Shah v. Catalyst Trusteeship Ltd. [2024] 159 taxmann.com 476 (Delhi), held that where the pledger/director of a company authorized the pledgee to exercise voting rights in respect of pledged shares of the said company, in the event of default in repayment, the pledger being guilty of default for failing to redeem the pledged property by tendering repayment, couldn’t be permitted to argue that voting rights continued to vest in him. Therefore, the High Court upholds the pledgee’s right to exercise voting.

Brief facts of the case

In the instant case, the Respondent company, i.e. debenture trustee, advanced a loan to company ‘K’, and both entered into a debenture trust deed, by means of which ‘K’ issued redeemable non-convertible debentures in favour of the respondent. The appellant/managing director of ‘K’, pledged its equity shares in K in favour of the respondent as collateral for the said loan, and the appellant entered into an Unattested Share Pledge Agreement (SPA) with the respondent.

The respondent addressed a notice of event of default to ‘K’ for default committed by ‘K’ in making timely payments. Meanwhile, the appellant tendered his resignation from the managerial and directorial position of ‘K’. Thereafter, the respondent issued an invocation notice to invoke the shares pledged by the appellant over the pledged shares under the SPA.

‘K’ and the respondent entered into a term sheet for restructuring the debt under the deed and also entered into an amendment to the deed. In his capacity as a shareholder of ‘K’, the appellant received a notice for convening a meeting with equity shareholders of ‘K’ to approve a composite scheme of arrangement between ‘K’ and its subsidiary company.

Pursuant to the said notice, the NCLT ordered a fresh notice regarding the meeting to be issued. Also, on an appeal filed by the appellant, the NCLAT directed that the meeting of the equity shareholders be held after the next hearing date before the NCLAT.

The appellant filed an application seeking ex-parte ad interim orders/directions to permit him to exercise voting rights concerning his equity shares in the meeting.

However, the Single Judge vide impugned order dismissed the said application, and it was held that once an event of default had taken place, the respondent, being a debenture trustee, became entitled to exercise voting rights in respect of the share pledged by the appellant. Thereafter, the appellant filed the instant appeal before the High Court, challenging the impugned order.

Appellant submissions

The appellant submitted that due to the restructuring of the deed by the respondent, the default under the deed due to which the shares of the appellant were invoked had ceased to exist and stood cured. Hence, the respondent was debarred from exercising voting rights regarding the shares.

High Court Observations

The High Court observed that the appellant, under SPA, authorized the respondent to exercise its voting rights with respect to pledged shares in the event of default. The appellant had not made an effort to redeem the pledged property by tendering the amount advanced to the respondent, whereas the appellant had the right to redeem pledged property until the pledged property was not sold and exercised his voting rights.

High Court Ruling

The High Court held that since the appellant, being a pledger, was guilty of default as per SPA, could not be permitted to urge that voting rights continued to vest in him, the findings of the Single Judge didn’t suffer any illegality and, therefore, the instant appeal was to be dismissed.

Read the Ruling

6. NFRA sums up mandatory audit procedures under SAs for verifying revenue while penalizing & debarring auditor for lapses

After receiving the information from the Securities Exchange Board of India that the Financial Statements did not present a true and fair view of the company, NFRA initiated action under section 132 (4) of the Companies Act 2013 against the Chartered Accountant appointed as Auditor for professional or other misconduct in performing the statutory audit. Below is the analysis of the major lapses in the conduct of audits by NFRA.

• NFRA establishes essential criteria for conducting the verification of revenue and documenting procedures in accordance with the stipulations of SA 200, 240, and 315. This includes a comprehensive understanding of the business entity, its operating environment, the relevant industry, and the internal controls that govern the company’s revenue generation. It shall also include evaluating the company’s accounting policy, verifying sales through customer contracts and credit terms, reconciling cash flows to bank accounts and statutory returns, assessing periodic revenue figures, reviewing Cash Flow Statements, identifying debtors and their realization timelines, performing analytical and cut-off procedures for revenue verification, and evaluating management performance against budget expectations. The auditor is required to meticulously formulate the audit plan and procedures to encompass all specified aspects for revenue verification. It is crucial to note that these minimum requirements are not exhaustive; however, they represent a baseline that must be addressed to mitigate the risk of future investigations.
• An entity should recognize the liability of full interest cost on the borrowings, even though classified as NPA by the lenders until the borrower company is legally released from its contractual liability by the lenders. However, in this case, the auditor failed to challenge management about non-compliance with the applicable financial reporting framework and, thus, was unable to comply with SA 705 and 706.
• The auditors are responsible for performing audit procedures to understand, identify, assess and respond to the risks of material misstatement arising from the entity’s related party relationships and transactions, as fraud may easily be committed through related parties. However, NFRA didn’t find any audit documentation regarding the audit procedures performed to identify and ensure completeness of related party relationships and transactions. Therefore, the auditor was charged with false reporting under clause 3 of CARO.
• The auditor failed to obtain sufficient appropriate audit evidence to verify revenue and RPTs and solely relied upon the management representation. Thus, while framing the audit opinion on the Financial Statement, i.e. issuing an unmodified opinion despite the existence of material misstatements due to partial recognition/non-recognition of interest cost on borrowings classified as NPA and absence of sufficient appropriate audit evidence about related party transactions are clear violations of provisions of SA 700 and 705.

Section 132(4) of the Companies Act 2013 provides for penalties in a case where professional misconduct is proved. Considering the proven professional misconduct, the nature of violations, principles of proportionality and deterrence against future professional misconduct, NFRA Imposition of a monetary penalty of Rs 3,00,000/- and debarment of 2 years from being appointed as an auditor or internal auditor.

Read the Story