Weekly Round-up on Tax and Corporate Laws | 22nd to 27th January 2024

(a) Govt. permits foreign investment in Indian Public Companies listed in International Exchanges;

(b) Madras HC upheld constitutional validity of Section 194N; said it is a worthy move to reduce cash transactions;

(c) Delhi HC quashes CIC’s order directing I-T Dept. to provide info. related to PM CARES Fund;

(d) GSTN issues new advisory on furnishing bank account details by registered taxpayers under Rule 10A;

(e) No interest liability if assessee deposited GST amount within due date but filed returns belatedly: HC;

(f) MCA notifies norms w.r.t listing of equity shares in IFSC by public companies; and

(g) Standby, stoppage & borrowing cost incurred during suspension of project due to force majeure isn’t exceptional item.

1. Govt. permits foreign investment in Indian Public Companies listed in International Exchanges

In a significant development, the Ministry of Finance, through Notification No. S.O. 332(E), dated 24.01.2024, has introduced a groundbreaking amendment to the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

A new Rule 34 in Chapter X has been inserted, which permits the investment by permissible holders in Equity Shares of Public Companies Incorporated in India and Listed on International Exchanges.

The key takeaways from the amendment include:

a) Introduction of new Definition: ‘International Exchange’ & ‘Listed Indian Company’

A new clause 2(aaa) defining ‘International Exchange’ has been introduced. The ‘International Exchange’ shall mean permitted stock exchange in permissible jurisdictions listed at Schedule XI of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.

The Schedule XI specifies the ‘International Financial Services Centre in India-India International Exchange’ and ‘NSE International Exchange’ as ‘International Exchanges’

A new clause 2(ag) defining ‘listed Indian company’ has been introduced. The ‘listed  Indian company’ means an  Indian company with any of its equity or debt instruments listed on a recognized stock exchange in India and on an international exchange, and the expression ‘unlisted Indian company’ shall be construed accordingly.

b) Ministry of Finance’s Amendment Revolutionizes Equity Trading for Permissible Holders

The Ministry of Finance has introduced Rule 34, i.e., investment by the permissible holder. As per the newly introduced norms, a permissible holder may purchase or sell equity shares of a public Indian company which is listed or to be listed on an International Exchange under the Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme as specified.

c) Who is the ‘Permissible Holder’?

The permissible holder means a holder of equity shares of the company which are listed on the International Exchange, including its beneficial owner. Further, the permissible holder is not a person resident in India.

It shall be noted that the citizens, entities, or beneficial owners from countries sharing a land border with India require Central Government approval to hold equity shares in a public Indian company. A permissible holder may purchase or sell equity shares of an Indian company listed on an international exchange subject to the limit specified for foreign portfolio investment.

d) Eligibility Criteria for Equity Shares on International Exchanges:

The existing holders of the public Indian company shall be eligible to offer shares, subject to compliance with the following conditions and requirements:

• The public Indian company, any of its promoters, promoter group or directors or selling shareholders are not debarred from accessing the capital market by the appropriate regulator;
• None of the promoters or directors of the public Indian company is a promoter or director of any other Indian company which is debarred from accessing the capital market by the appropriate regulator;
• The public Indian company or any of its promoters or directors is not a wilful defaulter and not under inspection/investigation under the Companies Act, 2013.
• None of the promoters/directors are fugitive economic offenders.

e) Compliance Framework for Equity Share Issuance on International Exchanges

To ensure adherence to all relevant laws and requirements, including those outlined in this Scheme, the public Indian company must comply with various acts such as the Securities Contracts (Regulation) Act, 1956, Securities and Exchange Board of India Act, 1992, Depositories Act, 1996, Foreign Exchange Management Act, 1999, Prevention of Money Laundering Act, 2002, and the Companies Act, 2013, alongside relevant rules and regulations.

The company can engage with Indian and foreign depositories. Additionally, the aggregate equity shares issued or offered in a permissible jurisdiction and those held in India by non-resident individuals must not surpass the foreign holding limit outlined.

f) Pricing Norms for Issuance of Equity Shares by Listed Companies

Equity shares listed or offered on a Recognized Stock Exchange in India must adhere to minimum pricing requirements equivalent to domestic investor standards. The initial listing of equity shares by an Indian company on an International Exchange shall follow the book-building process, ensuring pricing above fair market value as per Foreign Exchange Management Act regulations.

Conclusion

The amendment widens investment avenues for foreign investors, permitting eligible holders to acquire equity shares in Indian public companies listed or intending to list on international exchanges. This amendment ensures transparency and adherence to regulatory standards by outlining eligibility criteria and emphasizing compliance frameworks, fostering a conducive environment for international equity transactions.

Read the Notification

2. Madras HC upheld constitutional validity of Sec. 194N; said it is a worthy move to reduce cash transactions

The instant writ petition was filed before the Madras High Court seeking a declaration that Section 194N of the Income Tax Act, 1961 is unlawful, arbitrary, violates fundamental rights under Articles 14 and 19(i)(g), and is unenforceable and unconstitutional.

Petitioner contended that the deductor under Chapter XVII is required to deduct/collect from any payments made to a deductee. Such a requirement is only in cases where the receipt or some portion constitutes taxable income. Since the cash withdrawal is not taxable, the question of deduction/collection does not arise.

The High Court held that the contention that Section 194N was a charge of tax on the amount withdrawn in cash was unsustainable as there could be no charging provision other than Sections 4 or 5 of the Income Tax Act. It was pointed out that the very placement of Section 194N in Chapter XVIIB would show that it was not a charging provision, and several cases have been cited to establish that the sections under Chapter XVII B are only machinery provisions, not intended to fasten any charge.

The power of the Legislature to tax is set out under Article 265 of the Constitution, and such power is wide, subject to the conditions and tests that have been laid out over the years to provide for reasonable restrictions in this regard. Article 265 states that no tax shall be levied or collected except by ‘authority of law’. What constitutes such ‘authority’ and what vests such power in the State would depend on the levy itself.

In deciding whether the levy is intra or ultra vires, the circumstances in which such levy has been introduced, the overall features of the levy as well as the attendant circumstances leading to the same, will have to be considered.

There have been several measures over the years to discourage and limit cash transactions, both under the Income Tax Act and other enactments. The challenge is now restricted to the modus operandi that the provision follows, as one hardly questions the legitimacy of the move to discourage cash transactions. We find that the object of Section 194N, as a measure to reduce cash transactions and gravitate towards an economy which is run in a transparent and accountable fashion, is laudable.

Further, the Legislature has provided for a situation where a payee, on the ground that the receipt is not amenable to tax, could seek and obtain a certificate from the Assessing Officer under Section 197. Such a certificate may be sought only in stipulated situations. Section 194N is not part of the list.

However, an alternative method is available under Section 194N, allowing the Central Government, in consultation with the Reserve Bank of India, to issue a Gazette Notification specifying recipients exempted or subject to a reduced rate under this section. Thus, the recipient is not left remediless.

Accordingly, the writ petition was dismissed.

Read the Ruling

3. Delhi HC quashes CIC’s order directing I-T Dept. to provide info. related to PM CARES Fund

An application under the RTI Act was filed seeking the procedure followed in granting exemption under section 80G of the Income-tax Act (IT Act) to the PM CARES Fund by the Income Tax Department (I-T Dept.). It was contended that he wanted to know the exact procedure followed by the Income Tax Department in granting such a swift approval and to see whether any rules or procedures were by-passed in granting such approval.

The Central Information Commission (CIC) ordered the I-T dept. to grant information as demanded by the applicant. Aggrieved by such an order, the I-T Dept filed a writ petition before the Delhi High Court.

The High Court held that section 138(1) of the IT Act provides that when a person makes an application in the prescribed form for any information relating to an assessee, the respective authority may, if he is satisfied that it is in the public interest to do so, furnish or cause to be furnished the information asked for.

Further, sub-section (2) to section 138 contains a non-obstante clause which states that notwithstanding anything contained in sub-section (1) or any other law for the time being in force, direct that no information or document shall be furnished or produced by a public servant in respect of such matters relating to such class of assessees or except to such authorities as may be specified in the order.

The RTI Act also has a non-obstante clause in the form of Section 22, which says that the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in the Official Secrets Act, 1923 and any other law.

A reading of both Acts shows that there is an inconsistency between the provisions of the RTI Act and the IT Act. Therefore, the question which arises for consideration is which Act will prevail.

The Income Tax Act focuses on specific provisions and laws concerning income tax. At the same time, the RTI Act is a general law that addresses providing information to citizens, facilitating their Right to Information.

Ordinarily, if there are two non-obstante clauses, the latter prevails over the former. At the same time, the applicability and overriding effect of an Act over other statutes cannot be decided merely by when the concerned Act comes into force. It is for the Courts to discern and interpret which Act will prevail over the other.

Thus, the Delhi High Court held that the IT Act, which is a special Act governing all the provisions and laws relating to income tax and super-tax in the country, will prevail over the RTI Act, which is in the nature of a General Act.

Further, the petitioner sought information from the Income Tax Department, not from the PM CARES Fund. As the requested information pertains to a third party, PM CARES Fund should have been given an opportunity to be heard according to Section 11 of the RTI Act. The CIC should have followed the prescribed procedure under Section 11 before ordering the release of information.

Accordingly, the CIC lacks the authority to instruct the release of information under Section 138 of the IT Act. Even if it had such jurisdiction, the failure to notify PM CARES of the hearing would invalidate the decision.

Read the Ruling

4. GSTN issues new advisory on furnishing bank account details by registered taxpayers under Rule 10A

The GSTN has issued an advisory for taxpayers who have not provided their bank account details to avoid disruption in business activities and the subsequent suspension of GST to promptly furnish their bank account details. A new functionality is being developed with the following features and will be deployed in the near future:-

(a) Failure to furnish the bank account in the stipulated time: It would result into following:

i) Taxpayer Registration would be suspended after 30 days, and intimation in FORM REG-31 will be issued to the taxpayer.

ii) Get the taxpayer barred from filing any further GSTR-1/IFF.

(b) Revocation of Suspension: If the taxpayer updates their bank account details in response to the intimation in FORM REG-31, the suspension will be automatically revoked.

(c) Cancellation of Registration: If the bank account details are not updated even after 30 days of issuance of FORM REG-31, the registration after suspension may also be taken up for cancellation process by the Officer.

In this regard, GSTN has issued an update dated January 23rd, 2024.

Read the GSTN Advisory

5. No interest liability if assessee deposited GST amount within due date but filed returns belatedly: HC

The Honorable High Court of Madras has recently held that the assessee would not be liable to pay interest if it has deposited GST amount within the due date but filed returns belatedly. This ruling is given by the Madras High Court in case of Eicher Motors Ltd. v. Superintendent of GST and Central Excise, Range-II.

Facts

In the instant case, the petitioner could not file the monthly return in Form GSTR 3B within the prescribed time limit since the amount of transitional credit was not reflected in the Electronic Credit Ledger. However, the petitioner deposited the tax amounts in the Electronic Cash Ledger (ECL) within the due dates, discharging the GST liability from July 2017 to December 2017. Subsequently, the department demanded the payment of interest for the alleged belated payment of GST. It filed writ petition and challenged the demand.

High Court

The High Court observed that the GST amount was routinely deposited into the ECL within the due date by the petitioner. The Court further noted that once the amount is paid by generating GST PMT-06, the said amount would be initially credited to the account of the Government immediately upon deposit, at which point, the tax liability of a registered person would be discharged to the extent of the deposit made to the Government.

Thereafter, for the purpose of accounting only, it would be deemed to be credited to ECL as stated in Explanation (a) to section 49(11) of the CGST Act. Thus, the Court held that the petitioner would not be liable to pay interest on the GST amount routinely deposited into ECL within the due date, and the writ petition was allowed.

Read the Ruling

6. MCA notifies norms w.r.t listing of equity shares in IFSC by public companies

On October 30, 2023, the Government enforced Section 5 of the Companies (Amendment) Act 2020 concerning public offers and private placement. Section 5 of the Amendment Act 2020 introduced provisions allowing specified public companies to issue securities for listing on approved stock exchanges in foreign jurisdictions.

Subsequently, the MCA vide. Notification No. G.S.R. 61(E) on 24-01-2024 has notified the Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024. These rules apply to unlisted and listed public companies seeking listing on approved exchanges in permissible jurisdictions, including the IFSC. Key highlights of the present notification include:

(a) Applicability of the norms for listing equity shares in the permissible jurisdictions

The Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024, apply to unlisted public companies and listed public companies, provided they comply with regulations or directions issued by SEBI or the Authority when issuing their securities for listing on permitted stock exchanges in permissible jurisdictions.

(b) Unlisted Companies’ Prospectus Reporting Requirement

Rule 4(4) stipulates the reporting requirement requiring an unlisted public company to submit its prospectus using e-Form LEAP-1 within 7 days after finalizing and filing it with the authorized international stock exchange.

(c) Exclusions and Eligibility: Companies’ Criteria for Issuing Securities in Permissible Jurisdictions

As per the Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024, the following types of companies are not eligible to issue securities under this rule:

• • Company registered under section 8 or declared as Nidhi under section 406 of the Act;
  • Company limited by guarantee and also having a share capital;
  • Company with outstanding deposits accepted from the public;
  • Company with a negative net worth;
  • Company which has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holder or any other secured creditor. It should be noted that this clause shall not apply if the company has made good the default and a period of two years has lapsed since the date of making good the default;
  • Company that has made any application for winding-up under the Act or for resolution or winding-up under the IBC, 2016 and in case any proceedings against the company for winding-up under the Act or for resolution or winding-up under the IBC, 2016 is pending;
  • Company which has defaulted in filing of an annual return under section 92 or a financial statement under section 137 of the Act within the specified period.

An unlisted public company that does not fall under the above list and has no partly paid-up shares may issue equity shares to list on a stock exchange in a permissible jurisdiction. It is to be noted that the conditions specified under FEM (Non-Debt Instrument), Amendment Rules, 2024 are to be complied with.

Read the Notification

7. Standby, stoppage & borrowing costs incurred during suspension of project due to force majeure isn’t an exceptional item

Owing to acts of terrorism near the project site, a force majeure event was declared, leading to the suspension of in-situ development activities throughout the financial year. This force majeure situation resulted in additional expenditures to the company, including stoppage costs and standby costs, in respect of the project, amounting to Rs. 6,000 million.

The company’s accountant opted not to capitalize the expenditure related to stoppage and standby costs in the project’s cost. Instead, these costs were charged as ‘Other Expenses’ in the Statement of Profit and Loss, accompanied by an explanatory note. Additionally, in light of the force majeure situation, the accountant charged the borrowing cost related to the project to the Statement of Profit and Loss as finance costs, citing the temporary suspension of capitalizing borrowing costs amounting to Rs. 4,000 million.

The auditor raised concerns regarding the accountant’s approach and contends that the force majeure is not a regular activity in the ordinary course of any business; thus, it is required to be disclosed separately from transactions of ordinary operations. The auditor recommends presenting these costs under the ‘Exceptional Items’ category in the Statement of Profit and Loss.

To address this disagreement, the management sought the opinion of the Expert Advisory Committee (EAC) regarding the appropriate presentation of standby, stoppage, and borrowing costs incurred during the project suspension due to force majeure.

In this regard, the committee observed that the term ‘exceptional item’ is neither defined in ‘Ind AS Schedule III’, nor is it used in Ind ASs. Referring to the text of Ind AS 1, the committee inferred that exceptional items are those that meet the test of ‘materiality’ and the test of ‘frequency of occurrence or incidence’. The management asserts that Rs. 10,000 million qualifies as a material amount per Ind AS 1, and for evaluating the frequency of occurrence or incidence, the entity’s specific circumstances should be considered.

Although, in general, force majeure conditions are not frequent and therefore, the consequent costs arising due to such conditions may meet the test of ‘frequency or incidence’ for presentation as ‘exceptional items’, however, considering the specific facts and circumstances of the company, having global presence in oil and gas sector and its past experience, the test of ‘frequency or incidence’ does not appear to be met.

Therefore, the committee opined that the stoppage and standby expenditure incurred during force majeure should not be presented as exceptional items in the Statement of Profit and Loss. Further, borrowing costs (although arising during the temporary suspension of construction or development activities) are of the nature of a ‘finance cost’. Thus, it should be presented as a part of ‘Finance costs’ and not as an exceptional item in the Statement of Profit and Loss.

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