Weekly Round-up on Tax and Corporate Laws | 19th to 24th September 2022

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

(a) Supreme Court held that CIRP proceedings could be initiated against both corporate co-borrowers, but the recovery of the same amount could not be made from both parties;

(b) OLA isn’t liable to deduct tax under Section 194C while making payments to cab drivers: ITAT

(c) Introduction of new fee structure by the IBBI – A step towards ‘Aatmanirbhar’ Board!

(d) Power of confiscation under GST can be invoked only after invoking the power of detention: High Court

(e) Goods in transit can’t be detained on expiry of the e-way bill if there is no intention to evade tax: High Court

(f) Accounting treatment of incentives given to wallet users in accordance with Ind AS 115

1. Supreme Court held that CIRP proceedings could be initiated against both corporate co-borrowers, but the recovery of the same amount could not be made from both parties

The Supreme Court held that CIRP proceedings under Section 7 could be initiated against both corporate co-borrowers, but there can be no double recovery of the same amount from both parties.

Facts

In the Instant case, an appeal was filed before the Supreme Court against the order of the NCLAT, whereby the NCLAT ordered that CIRP proceedings under Section 7 could be initiated against both corporate co-borrowers.

The respondent was an NBFC (a Financial Creditor) that disbursed a loan to Premier Limited (“Premier”) under three separate Loan-cum-Pledge Agreements. According to the appellant (a director in Premier & Doshi Holdings), Doshi Holdings pledged shares held by it in Premier, in favour of the Financial Creditor, by way of security for the loan.

The Premier failed to make repayments in terms of the Loan-cum-Pledge Agreements. The Financial Creditor filed a petition under Section 7 of the IBC for initiation of CIRP against Premier for default in repayment of the loan. The Financial Creditor also filed a petition against Doshi Holdings, under Section 7 of the IBC, for initiation of CIRP in respect of the same claim based on the same loan documents.

The NCLT admitted both CIRP applications. An appeal lied against the order of the NCLT admitting the CIRP application initiated against the Doshi holdings. The NCLAT dismissed the appeal and upheld the order of admission of the petition under Section 7 of the IBC. Thereafter, the appellant filed an appeal to the Supreme Court against the order of the NCLAT.

Appellant’s submissions

The appellant submitted that no amount under the Loan-cum-Pledge Agreements was disbursed by the Financial Creditor to Doshi Holdings. The loans were disbursed to Premier, and Doshi Holdings did not utilise any part of the money disbursed. Doshi holding did not fit in the definition of a corporate debtor; therefore, no CIRP can be initiated against Doshi holdings, as the definition of ‘financial debt’ in Section 5(8) of the IBC does not include a pledge.

The counsel appearing on behalf of the respondent submitted as follows:

(a) Doshi Holdings was party to the Loan-cum-Pledge Agreements in its dual capacity as co-borrower and pledgor, which had pledged its shares in Premier in favour of the Financial Creditor.

(b) The appellant had signed documents on behalf of Doshi Holdings in its capacity as co-borrower. The Appellant was Director of both, Premier and Doshi Holdings.

(c) The Premier and Doshi Holdings have been described as borrowers in the Loan-cum-Pledge Agreements.

(d) The definition of Corporate Debtor does not require as a pre-condition that monies should have been disbursed to the Corporate Debtor. The sine qua non for an entity to be considered a Corporate Debtor is that such person/entity should owe a debt to any person and not that a disbursal has to be made to such a person/entity.

Supreme Court

After hearing both the parties, the Supreme Court dismissed the appellant’s plea and upheld the order as passed by the NCLAT. The Court held that if two borrowers or two corporate bodies fall within the ambit of corporate debtors, then CIRP can be initiated against both the Corporate Debtors. However, the same amount cannot be realised from both the Corporate Debtors. If the dues are partly realised from one Corporate Debtor, the balance may be realised from the other Corporate Debtor being the co-borrower.

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2. OLA isn’t liable to deduct tax under Section 194C while making payments to cab drivers: ITAT

The Chandigarh Tribunal, relying upon Uber ruling, has ruled that Cab aggregator-OLA is not liable to deduct tax at source on payments made to cab drivers. The Tribunal ruled that OLA is a mere intermediary, and the rider is the “person responsible for paying” to the driver for the purpose of deduction of tax at source under Section 194C.

Facts

The assessee was a leading technology service provider in the cab-hailing market in India. It has established mobility for the Indian masses and provides internet and mobile technology platforms for cab hailing by the passengers. The assessee operates under the brand name of “OLA”.

The assessee had paid the cab drivers for “carrying out work” relating to the carriage of passengers. The Assessing Officer (AO) treated the assessee as assessee-in-default as it failed to deduct tax at source (TDS) under Section 194C while making the payments to the cab drivers.

Ruling

The Tribunal held that prima facie, the case of the assessee was covered in its favour by order of the Mumbai Bench of the ITAT in the case of Uber India Systems (P.) Ltd. [2021] 125 taxmann.com 185 (Mumbai – Trib.). The Mumbai Tribunal had held that Section 194C was not applicable on such payments collected from customers and forwarded to drivers for the transportation services provided by the drivers to the users.

In the instant case, much like Uber B.V. / Uber India, the assessee only provides the mobile app “OLA”, on which the driver lists himself to provide transportation services to the rider.

The terms of the agreements of the assessee clearly show that the driver will provide transportation service to the rider and not the assessee. Even the invoices raised on the rider demarcate this distinction. Therefore, the person responsible under Section 204(iii) to invoke the provisions of Section 194C is the rider and not the assessee.

The rider is entitled to use the assessee’s platform or avail of transportation services only for personal use, as per the User Terms and Subscription Agreement. Since such personal use by the rider is exempt from liability to deduct tax, as per Section 194C(4) no liability can be fastened on the assessee.

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3. Introduction of new fee structure by the IBBI – A step towards ‘Aatmanirbhar’ Board!

On 24-06-2022, the IBBI issued a discussion paper on the financial self-sufficiency of the insolvency and bankruptcy board of India, wherein it proposed to increase the fees charged from service providers, professionals appointed by Insolvency Professionals and fees on the processes under the Code. The Board justified that there was a need to review the fees/ charges levied by the Board to ensure the adequacy of internal receipts to meet its fund requirements in the forthcoming years and gradually reduce its reliance on Government aid.

Subsequently, vide Notification No. IBBI/2022-23/GN/REG 96, 97 & 98 dated 20-09-2022, the Board hiked the fees as follows.

(a) The application fee for enrolment of IPs with ‘Insolvency Professional Agency’ increased from Rs. 10,000 to Rs. 20,000;

(b) The fee for the retention of the registration certificate increased from Rs. 10,000 to Rs. 20,000 in case the insolvency professional is an individual;

(c) Fee for the retention of the registration certificate increased from Rs. 10,000 to Rs. 2,00,000 in case the insolvency professional is an insolvency professional entity.;

(d) Increase in % of professional fees payable by Insolvency Professionals to IBBI from 0.25% to 1%.

(e) Introduction of the regulatory fees to be paid to the Board calculated at the rate of 0.25% of the realisable value to creditors shall be payable to the Board, in the case where the realisable value is more than the liquidation value.

(f) Application fees for recognition as an ‘Insolvency Professional Entity’ increased from Rs. 50,000 to Rs. 2 Lakhs.

(g) Fees for retaining a certificate of recognition by the Insolvency Professional Entity increased from 0.25% to 1%.

(h) Application fee for registration/renewal of information utility increased from Rs. 5 Lakhs to Rs. 10 Lakhs.

(i) Fee for registration/renewal of ‘Information Utilities’ increased from Rs. 50 Lakhs to Rs. 1 Crore.

(j) Payment of the turnover-based fee to be paid by the information utility at the rate of 10% of the annual turnover.

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4. Power of confiscation under GST can be invoked only after invoking the power of detention: HC

The Karnataka High Court has held that the power of confiscation under Section 130 of CGST Act, 2017 can be invoked only after invoking the power of detention under Section 129 if applicable tax and penalty were not paid within 14 days.

Facts

The goods and vehicles of the petitioner were detained on the ground that the e-way bill was not generated. However, the goods were accompanied by a tax invoice which indicated payment of tax. The proper officer didn’t issue notice demanding tax and penalty but directly initiated confiscation proceedings.

The petitioner filed a writ petition against the confiscation proceedings and contended that the proper officer was required to issue a notice specifying the tax and penalty payable and, after that, pass the order for payment of tax and penalty. If the amount would not be paid, then the officer will initiate the confiscation proceedings.

The Proper Officer submitted that on noticing the intent to evade payment of tax, he decided to invoke his power under Section 130 of CGST Act, 2017 and confiscated the goods and conveyances.

High Court

The High Court observed that as per Section 129, the proper officer shall be bound to release goods and conveyances if the penalty prescribed and applicable tax under Section 129 was paid. However, the power of confiscation of detained goods and conveyances shall be available only if applicable tax and penalty were not paid within 14 days despite the order being passed in that regard. In the instant case, the officer directly initiated confiscation proceedings.

Thus, the Court held that the entire procedure adopted by the proper officer for converting detention proceedings into the confiscatory proceeding, which ultimately led to the order of confiscation, was wholly illegal.

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5. Goods in transit can’t be detained on expiry of the e-way bill if there is no intention to evade tax: HC

The Calcutta High Court has held that goods in transit can’t be detained on account of the expiry of the e-way bill when there is no intention to evade tax, and a penalty can’t be imposed.

Facts

The petitioner was engaged in the business of executing hydro and other renewable energy-related projects across India. The goods and vehicles of the petitioner were detained on the ground that the validity of the e-way bill stood expired, and the penalty was imposed. It filed an appeal, but the appellate authority rejected the appeal. Thereafter, it filed a writ petition against the order.

High Court

The High Court observed that the period between the expiry of the validity period of the e-way bill and the time of interception and consequent detention of such vehicle was not substantial. In the instant case, the movement of goods could not be completed within the specified time on account of the heavy nature of goods and the length of the vehicle. There was no dispute that the proper e-way bill was generated, but it expired some hours before the time of interception.

The GST authorities had not returned finding in the impugned orders that there was any deliberate and wilful attempt to evade payment of tax. Thus, it was held that the penalty was not imposable in the instant case as there was no tax evasion.

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6. Accounting treatment of incentives given to wallet users in accordance with Ind AS 115

Entities that enter into contracts with various e-commerce websites and merchants to provide a facility for paying bills including mobile recharge, broadband, TV, electricity, gas, credit card, etc., spending on e-Commerce websites/apps, shopping at physical retailers, availing credit facilities, and transferring money to banks, usually provide incentives in the form of cashback and super-cash to the users.

Such incentives are credited to the user’s wallet that can be used in any future transaction at the entity’s platform or can also be transferred to the user’s bank account. Now, the difference in opinion arises in the accounting treatment of such incentives, i.e. whether the same shall be considered as consideration payable to a customer and is to be reduced from revenue charged from merchants or treated as an expense.

In this regard, the Expert Advisory Committee (EAC) of ICAI provided that only merchant vendors should qualify as customers of the entity and not wallet users, as in the case of wallet users, there is no consideration attached.

It, further, provided that if the incentive provided to the user’s wallet is not dependent upon the entity receiving payment from the merchants and the differential commission is not charged from the merchants whose users are incentivised versus those whose users are not incentivised, then the commission received from the merchants should not be linked with the incentive paid under the other transaction with the end users.

Therefore, the cashback or supercash given to the end users cannot be considered as consideration payable to a customer and cannot be reduced from revenue. Hence, the same shall be treated as an expense.

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