Weekly Round-up on Tax and Corporate Laws | 20th to 25th December

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 20th to 25th December 2021, namely:

(a) MCA proposes 5 key changes to IBC for time-bound resolution of stressed assets

(b) ITAT defines the meaning of ‘set aside’ to hold that AO can’t do a fresh assessment if assessment order was set aside

(c) Madras High Court allows refund applications filed after 2 years

(d) High Court holds that ITC would be available on the loss of inputs caused during the manufacturing process

(e) OECD releases Global Anti-Base Erosion Rules for implementation of 15% global minimum tax

(f) Accounting treatment of major inspections incurred on Property, Plant, and Equipment as per AS 10

1. MCA proposes 5 key changes to IBC for time-bound resolution of stressed assets

The Ministry of Corporate Affairs (MCA) vide Public Notice File No. 30/38/2021-Insolvency, dated 23-12-2021, has sought public comments on proposed changes to the Corporate Insolvency Framework. Based on the issues raised by Insolvency Law Committee, significant changes have been proposed to enable a swift admission process, streamline provisions about avoidable transactions and wrongful trading and norms relating to the period for approval of resolution plans.

“As the IBC enters the sixth year of its implementation after a year characterised by pandemic-related disruptions, efforts are continued to ensure effective outcomes under the Code,” said MCA.

The following changes have been proposed:

(a) Financial creditor to rely on Information Utilities authenticated records to establish default

To expedite the admission process and enable speedily authenticate of financial information, the MCA has proposed that financial creditors may be required to submit only ‘Information Utilities’ (IU) authenticated records to establish default for admission of a Section 7 CIRP application.

Consequently, the Adjudicating Authority would only be required to consider IU authenticated records as evidence of default for Section 7 applications filed by such financial creditors as prescribed. This will make the admission process significantly quicker and less cumbersome.

(b) Streamlining avoidable transactions and wrongful trading

Earlier in its report, the Insolvency Law Committee (ILC) recommended amendments to promote cooperation by parties with the resolution professional or liquidator for investigation of avoidable transactions and wrongful trading, allowing creditors to initiate such proceedings, clarifying the power of the liquidator to file for wrongful trading, etc.

In the light of the above, the MCA proposed that the Code may be amended to provide that the resolution plan should mandatorily specify the manner of undertaking proceedings for avoidance of transactions and wrongful trading if such proceedings are to be continued after approval of the plan. The plan may also be required to specify if the resolution professional would pursue such transactions/ trading or if any other person would do so after the approval of the plan.

Further, the resolution plan may also be required to provide the manner of distribution of expected recoveries from proceedings related to avoidance of transactions and wrongful trading.

The MCA felt that the threshold for the look-back period for avoidable transactions might be altered to cast an extended net to capture pre-filing transactions effectively. It is proposed that the look-back period in Sections 43(4), 46(1) and 50(1) may be amended as follows:

(i) the threshold for the look-back period may be changed from the date of commencement of CIRP to the date of filing of the application for initiation of CIRP in respect of the corporate debtor that has been admitted; and

(ii) the period between the date of filing and the date of commencement of CIRP may additionally be included in the suspect period for such transactions.

(c) Adjudicating Authority (AA) to get 30 days to decide on approval or rejection a resolution plan

In line with the views of the Hon’ble Supreme Court, it is envisaged that the approval of a resolution plan that the CoC has already approved should not be inordinately delayed. Thus, the MCA has proposed that the Code should provide a fixed time period for approval or rejection of a resolution plan by the AA. Consequently, the Code is proposed to be amended to provide the AA with 30 days for approving or rejecting a resolution plan under Section 31. Where the resolution plan is not approved or rejected within this time period, the AA shall record reasons in writing for the same. This timeline shall be subject to the overall time period specified for the CIRP in Section 12 of the Code.

(d) Voluntary Liquidation Process without the intervention of Adjudicating Authority

The MCA felt that since corporate persons operate in a dynamic market economy, the viability of its business may evolve after the initiation of a voluntary liquidation process. Thus, the law should provide certainty on the manner of closing a voluntary liquidation process before dissolution. Given that the process is voluntary and the corporate person is solvent, the intervention of the AA may not be warranted.

Accordingly, it has been proposed that the closure of the process may be carried out by the corporate person subject to the same requirements as for initiation of the process, i.e., by way of a special resolution or members’ resolution and approval of creditors representing two-thirds in value of the debt where the corporate person owes a debt to any person. If such approvals are made, the liquidator may be required to publicly announce the closure of the process and intimate concerned authorities such as the IBBI and the registrar.

(e) Government to prescribe a detailed framework for contribution to and utilisation of the IBC Fund.

It was felt that the current design of the IBC Fund does not incentivise contributions to it and provides limited ways of utilising the amounts contributed. Firstly, contribution to the fund is voluntary and may be made by the Central Government in the form of grants and by any person who voluntarily wants to make such a contribution. Receiving contributions voluntarily may be difficult in practice, and certain incentives or mandates may be required to enable regular contributions. Secondly, the purposes for which the IBC Fund will be utilised are limited. Section 224(3) only allows persons who have contributed to the fund to withdraw it, to the extent of their contribution. This limits the possible utilisation of the IBC Fund. Consequently, the MCA has proposed that suitable amendments be made to Section 224 to allow the Central Government to prescribe a detailed framework for contributing to and utilising the IBC Fund.

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2. ITAT defines the meaning of ‘set aside’ and holds that AO can’t do a fresh assessment if the assessment order was set aside

The Bangalore Tribunal has ruled that Assessing Officer (AO) cannot do a fresh assessment by taking advantage of observation made on the assessment order. Defining the meaning of ‘Set-aside’, the Tribunal has said that a set-aside order can be taken for fresh assessment only if there was a direction issued by Tribunal to do so.

Facts

In the instant case, the Tribunal had set aside the assessment framed by the AO based on Form 26AS. After that, the AO initiated a fresh assessment considering the Tribunal’s remarks in its order. The assessee filed appeal contended that the AO misunderstood the order of the Tribunal.

The AO believed that the disputed issue was remitted to him to do a fresh assessment. However, there was no such direction issued by the Tribunal.

Ruling

The Tribunal held that it is essential to clarify the meaning of the word ‘set aside’. As per Black’s Law Dictionary, Sixth Edition at page 1372, the words “set aside” means:

‘To reverse, vacate, cancel, annul or revoke a judgment, order, etc.’

Further, the meaning of the word ‘annul’ on page 90 of the Black’s Law Dictionary has given as under:

“To reduce to nothing; annihilate; obliterate; to make void or of no effect; to nullify; to abolish; to do away with. To cancel; destroy; abrogate. To annul a judgment or judicial proceeding is to deprive it of all force and operation, either ab initio or prospectively as to future transaction.”

Furthermore, the meaning of the word ‘annulment’ is given on page 91 as under:

“To nullify, to abolish, to make void by the competent authority. An “annulment” defers from a divorce in that a divorce terminates a legal status, whereas an annulment establishes that a marital status never existed. Whealton v. Whealton, 67 Cal. 2 d 656, 63 Cal Rptr. 291, 294, 432 P. 2 d 979. Grounds and procedures for annulment of marriage are governed by State Statutes.”

Thus, the word ‘set aside’ means that the earlier assessment order has been quashed, and there was no direction by the Tribunal to do any fresh assessment on the same issue. When there is no direction to do the fresh assessment and the earlier assessment year has been set aside, the AO cannot take advantage of passing remark/observation on the Tribunal order to frame fresh assessment on the same issue.

Read the Ruling

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3. Madras High Court allowed refund applications filed after 2 years in April 2021 for June, 2018 and August, 2018

The Madras High Court has recently held that applications for grant of refund after 2 years in April 2021 (pertaining to June 2018 and August 2018) should not have been rejected on the ground that applications were filed beyond two years qua relevant date. The Honorable High Court of Madras gives this ruling in the case of GNC Infra LLP v. Assistant Commissioner.

Facts

The assessee filed applications on 19-11-2021 for a grant of refund relating to June 2018 and August 2018. The department rejected applications because these were filed beyond two years of the relevant date. The assessee filed a writ petition against the rejection order before the High Court of Madras.

High Court

The Honorable High Court observed that two rejections orders passed regarding June 2018 (the refund elapsed in July of 2020) and August 2018 (refund elapsed in August of 2020). Admittedly, the refund applications were made only on 19-4-2021 beyond two years period. But as per suo motu order of the Supreme Court made in Cognisance for Extension of Limitation, the Apex Court extended period(s) of limitation, as prescribed under any general or special laws in respect of all judicial or quasi-judicial proceedings, whether condonable or not. Therefore, impugned orders which held that the refund applications were beyond two years qua relevant date would be liable to be set aside owing to order of the Supreme Court.

Read the Ruling

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4. ITC would be available on the invisible loss of inputs caused during the manufacturing process: HC

The Madras High Court has recently held that ITC shall be available on total quantity and value of inputs that went into the final product and reversal of ITC not required on loss by consumption of input inherent to the manufacturing process. The Honorable High Court of Madras gives this ruling in the case of R.K. Ganapathy Chettiar v. Assistant Commissioner (ST), Kangeyam.

Facts

The petitioner was engaged in the manufacturing activity. There was a loss of a small portion of the inputs inherent to the manufacturing process. The department issued the order to reverse a portion of the ITC claimed by the petitioners, proportionate to the loss of the input, referring to the provisions of Section 17(5) (h) of the GST Act. It challenged the order for a reversal of ITC and filed a writ petition.

High Court

The Honorable High Court observed that impugned assessment orders rejected a portion of ITC claimed. But the situations as set out in clause (h) of Section 17(5) indicate loss of quantifiable inputs and involve external factors or compulsions. A loss that is occasioned by consumption in the process of manufacture is inherent to the process of manufacture itself. The reversal of ITC by invoking Section 17(5) (h) by the revenue, in cases of loss by consumption of input inherent to manufacturing loss, was misconceived. Therefore, it was held that ITC would be available on the total quantity and value of inputs that went into the making of the final product, and the order was liable to be set aside.

Read the Ruling

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5. OECD releases Global Anti-Base Erosion Rules for implementation of 15% global minimum tax

The OECD has released Global Anti-Base Erosion Rules (GloBE) to assist in implementing a landmark reform to the international tax system, which will ensure Multinational Enterprises (MNEs) will be subject to a minimum of 15% tax rate from 2023.

GloBE aims to provide a precise template to Governments for taking forward the two-pillar solution to address the tax challenges arising from digitalisation agreed in October 2021 by 137 countries and jurisdictions.

The rule defines the scope and sets out the mechanism under Pillar Two, introducing a global minimum corporate tax rate set at 15%. The minimum tax will apply to MNEs with revenue above EUR 750 million and is estimated to generate around USD 150 billion in additional global tax revenues annually.

The GloBE rules will provide for a coordinated system of taxation intended to ensure large MNE groups pay the minimum level of tax on income arising in each of the jurisdictions in which they operate. The rules create a “top-up tax” to be applied on profits in any jurisdiction whenever the effective tax rate, determined on a jurisdictional basis, is below the minimum 15% rate.

In early 2022, the OECD will release the Commentary relating to the model rules and address co-existence with the US Global Intangible Low-Taxed Income (GILTI) rules.

Read the Rules

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6. Accounting treatment of major inspections incurred on Property, Plant, and Equipment as per AS 10

As per AS 10, Property, Plant, and Equipment (PPE), the cost of an item of property, plant, and equipment should be recognised as an asset if it is probable that future economic benefits associated with the item will flow to the enterprise and the cost of the item can be measured reliably. An item of PPE will be initially measured at a cost which comprises:

(a) Purchase price, including import duties, non-refundable purchase taxes, less trade discounts, and rebates.

(b) Costs that are directly attributable in bringing the asset to the location and condition necessary for it to be used in a manner intended by management.

(c) Initial estimates of the cost of dismantling/decommissioning, removing, and site restoration at present value if the entity has an obligation that it incurs on an acquisition of the asset or as a result of using the asset other than to produce inventories.

Subsequently, where a major inspection is required to be performed on an asset as a condition of continuing to operate an item of property, plant, and equipment, then the recognition of the same in the carrying amount as a replacement will be done only if the recognition criteria are satisfied. In case there is any remaining carrying amount of the cost of the previous inspection (as distinct from physical parts), then the same is derecognised.

Whereas derecognition of the carrying amount shall be done regardless of the fact that the cost of the previous part/inspection was identified in the transaction in which the item was acquired or constructed or not. Derecognition shall be done in accordance with the derecognition provisions of AS 10.

Where it is not practicable for an enterprise to determine the carrying amount of the replaced part/inspection, it may use the cost of the replacement or the estimated cost of a future similar inspection as an indication of what the cost of the replaced part/existing inspection component was when the item was acquired or constructed.

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