Weekly Round-up on Tax and Corporate Laws | 26th to 31st August 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from August 26^th to 31^st, 2024, namely:

1. Delhi HC overrules AAR ruling; allows capital gain exemption to ‘Tiger Global’ on sale of its stake in Flipkart;
2. Entire quantity of gold which was seized from assessee to be released on executing bonds: HC;
3. Refund rejection order passed merely due to absence of Bank Realization Certificates to be set aside: HC;
4. SC quashes HC’s denial of bail to K Kavitha, citing misapplication of proviso to Sec. 45(1) of PMLA; and
5. Tax Audit Checklist on Clause 25 of Form 3CD under the Income Tax Act, 1961.

1. Delhi HC overrules AAR ruling; allows capital gain exemption to ‘Tiger Global’ on sale of its stake in Flipkart

The Delhi Authority for Advance Ruling (AAR), in [2020] 116 taxmann.com 878 (AAR—New Delhi), denied Tiger Global the exemption on the capital gains arising from the sale of its stake in Flipkart. The AAR ruled that Tiger Global’s real management and control were not with the respective Board of Directors in Mauritius but with one US-based person, who was the beneficial owner of the entire group structure. Tiger Global was only a ‘see-through entity’ to avail itself of the benefits of the India-Mauritius DTAA.

Now, the Delhi High Court has overruled the AAR ruling and held that tax exemption under the ‘grandfathering clause’ [Article 13(3A)] cannot be denied to ‘Tiger Global’ for capital gains arising from ‘indirect transfers’ of Flipkart Singapore shares acquired by it before 01.04.2017. The High Court held that the transaction was legitimate and not intended for tax avoidance, reaffirming the company’s right to the treaty benefits under the India-Mauritius DTAA.

The Key takeaways from the ruling are as follows:

Economic Substance

The Delhi High Court held that Tiger Global had genuine economic activities and was not just a shell entity for tax avoidance. The company managed substantial investments and met the necessary economic substance criteria. It acquired Flipkart Singapore shares between October 2011 and April 2015, with the transfer occurring on August 18, 2018. They incurred USD 1,063,709 in expenses, far exceeding the required threshold (prescribed in Article 27A), and had total liabilities and equity of USD 1.76 billion.`

TRC

The issuance of a TRC by the competent authority must be considered to be sacrosanct, and due weightage must be accorded to the same as it constitutes certification of the TRC holding entity being a bona fide entity having beneficial ownership domiciled in a Contracting State to pursue a legitimate business purpose in a Contracting State.

It was emphasised that being based in Mauritius should not automatically cast doubt on a company’s activities. The company’s Tax Residency Certificate (TRC) was deemed valid, affirming that the DTAA between India and Mauritius should take precedence over Indian domestic tax laws.

Legal Precedents

The judgment referenced key cases like Azadi Bachao Andolan [2003] 132 Taxman 373 (SC) and Vodafone International Holdings [2012] 17 taxmann.com 202 (SC), indicating that treaty shopping in itself cannot be rendered abhorrent unless it was categorically established that the device was incorporated to evade tax and in a manner contrary to the intent of the Contracting States to the treaty.

AAR’s Order

The court found the AAR’s determination that the transaction was aimed at tax avoidance to be unfounded and arbitrary. The AAR’s order was overturned, and the court ruled in favour of Tiger Global, granting them the benefits of the DTAA.

Read the Ruling

2. Entire quantity of gold which was seized from assessee to be released on executing bonds: HC

The Honorable Kerala High Court has recently held that goods can be released on payment of the fine in lieu of confiscation, and considering the fact that gold ornaments were stock-in-trade of assessee, the entire quantity of gold which was seized from assessee was to be released on executing bonds. This ruling is given in the case of Velayudhan Gold LLP v. Intelligence Officer, Intelligence Unit, Kottarakara.

Facts

The petitioner was a wholesale dealer in gold jewellery. It carried gold jewellery to various jewellery shops for display. While its employees were visiting a jewellery shop, the search operation was carried out at that shop, and there was a difference in the quantity mentioned in the delivery challan and in the actual quantity of gold. The department seized gold, and the Adjudicating Authority held that a certain quantity of gold was liable to be confiscated and also imposed a penalty.

The Appellate Authority held that imposition of penalty and fine in lieu of confiscation in respect of quantity determined by Adjudicating Authority was not proper and proceedings could be continued only in respect of additional quantity which was not mentioned in delivery challan. The petitioner filed writ petition for implementation of order passed by Appellate Authority and release of seized goods

High Court

The Honorable High Court observed that it was settled that goods can be released on payment of fine in lieu of confiscation. Moreover, the gold ornaments were stock-in-trade of petitioner and therefore, the entire quantity of gold which was seized from petitioner was to be released on executing bonds in manner and form required by Adjudicating Authority. Also, the department and petitioner would be entitled to approach the Appellate Tribunal if they are in any manner aggrieved by the proceedings of the Appellate Authority.

Read the Ruling

3. Refund rejection order passed merely due to absence of Bank Realization Certificates to be set aside: HC

The Honorable High Court of Delhi has recently held that furnishing of BRCs is not mandatory for claiming a refund on exports and therefore adjudicating authority’s decision to reject refund on this ground to be set aside. This ruling is given in the case of Rajiv Sharma HUF v. Union of India.

Facts

The petitioner was engaged in business of trading and export of automotive spare parts, automobile components and other allied products. It filed application for refund of accumulated ITC but the same was rejected on ground of non-submission of BRCs and incomplete bank statements and ledger accounts of suppliers. It filed appeal against the rejection order but the appeal was also rejected. Therefore, it filed writ petition against the rejection of refund.

High Court

The Honorable High Court noted that the first reason for rejection of refund was that the petitioner had not provided Bank Realization Certificates (BRCs) for relevant period. As per Circular No. 125/44/2019-GST dated 18.11.2019, furnishing BRCs is not a necessary condition for claiming refund in case of export of goods. Therefore, the claim for refund of ITC could not be rejected by proper officer on ground of non-furnishing of BRCs.

The Court also noted that the second reason of rejection of refund was that ledger accounts provided by petitioner were incomplete and hence, payments against inward supplies could not be verified with bank statements. The Court held that this issue was required to be examined and therefore matter was remanded back to adjudicating authority for fresh decision.

Read the Ruling

4. SC quashes HC’s denial of bail to K Kavitha, citing misapplication of proviso to Sec. 45(1) of PMLA

The Supreme Court, in the matter of Kalvakuntla Kavitha v. Directorate of Enforcement [2024] 165 taxmann.com 794 (SC), set aside the order passed by the Single Judge of the Delhi High Court, whereby the Single Judge had refused to grant bail to K Kavitha (appellant) under the first proviso to Section 45(1) of the PMLA, 2002, citing that the appellant could not be equated to a ‘vulnerable woman’ as she was a highly qualified and accomplished person.

The first proviso to Section 45(1) of the PMLA, 2002 confers discretion on the Court to grant bail where the person is under the age of 16 years or is a woman or is sick or infirm, or is accused of a money-laundering case involving a sum of less than Rs 1 crore.

Brief facts of the case

In the instant case, the appellant filed an appeal before the Supreme Court challenging the order passed by the learned Single Judge of the High Court of Delhi. The Single Judge of the High Court dismissed her bail plea `under the first proviso to Section 45(1) of PMLA, 2002.

The appellant was arrested in a money laundering case. She filed an application seeking bail on the ground that she was a woman and, therefore, entitled to special treatment under the first proviso to Section 45(1) of the PMLA, 2002.

However, the Single Judge vide. the impugned order refused to grant bail to the appellant. While denying the benefit of proviso to Section 45(1) of PMLA, the Single Judge came to the ‘heartening conclusion’ that it was bound to keep in mind the observation of the Supreme Court in Saumya Chaurasia v. Directorate of Enforcement, wherein it was held that the proviso to Section 45(1) of PMLA applied only to a ‘vulnerable woman’ and since the appellant was a well-educated and accomplished woman, who had remained a Member of Parliament, Member of Legislative Council, etc., she could not be equated to a ‘vulnerable woman’.

First Proviso to Section 45(1) of PMLA read as follows:

The proviso, which confers discretion on the Court to grant bail where the appellant is a woman or belongs to any of the other categories mentioned, states that –

“Provided that a person, who, is under the age of sixteen years, or is a woman or is sick or infirm, or is accused either on his own or along with other co-accused of money-laundering a sum of less than one crore rupees, may be released on bail, if the Special Court so directs:”

Supreme Court Observations

It was noted that the Supreme Court, in the case of Saumya Chaurasia, had observed that Courts need to be more sensitive and sympathetic towards the category of persons included in the first proviso to Section 45(1) of PMLA as persons of tender age and women who were likely to be more vulnerable might sometimes be misused by unscrupulous elements and made scapegoats for committing such crime. This was vastly different from saying that the proviso to Section 45(1) of the PMLA applies only to ‘vulnerable woman’.

The Supreme Court noted that the Single Judge of the Delhi High Court had ‘totally misapplied’ the ratio laid down in the Saumya Chaurasia case.

Further, it was observed that nowadays, educated and well-placed women in society engage themselves in commercial ventures and enterprises and advertently or inadvertently engage themselves in illegal activities. The Court, therefore, cautions that Courts, while deciding such matters, should exercise discretion judiciously and use their prudence.

Moreover, the Supreme Court in the said case did not state that merely because a woman was highly educated or a Member of Parliament or the Legislative Assembly, she was not entitled to the benefits of the proviso to Section 45(1) of the PMLA.

Supreme Court Ruling

The Supreme Court held that the Single Judge had totally misdirected herself while denying the benefit of proviso to section 45(1) of PMLA. Therefore, the impugned order of the Single Judge was to be quashed, and the appellant was to be released immediately on bail, upon furnishing bail bonds in the sum of Rs.10 lakhs.

Further, the Supreme Court held that ‘bail is rule and refusal is an exception’. The fundamental right of liberty provided under Article 21 of the Constitution is superior to statutory restrictions.

The Supreme Court also directed the appellant to deposit her passport and not to make any attempt to tamper with evidence or influence the witnesses.

Read the Ruling

5. Tax Audit Checklist on Clause 25 of Form 3CD under the Income Tax Act, 1961

Clause 25 of Form 3CD requires tax auditors to report any amounts deemed to be profits and gains under various provisions of Section 41 of the Income Tax Act, 1961. If such amounts are not reflected in the profit and loss account or income and expenditure account, the auditor must disclose this in Clause (3) of Form No. 3CA or Clause (5) of Form No. 3CB. Additionally, for the company assessee, any amount mentioned in the Annual Report that is chargeable to tax under Section 41 and should be reported under Clause 25 must be disclosed, regardless of whether it has been included in the profit and loss account.

The checkpoints play a pivotal role in assisting the tax auditor in ascertaining whether the provision of clause 25 has been duly complied with or not. The given checkpoints can be helpful while validating clause 25:

General

a) Whether the auditor has obtained from a client a list of all amounts chargeable under section 41 of the Act?

b) Whether the auditor has verified the recoveries of bad debts written off, sales of PPE assets to identify deemed profits covered by section 41(2)/(3), and write-backs of liabilities in the profit and loss account? If so, report against this clause.

Section 41(1) Recovery against any allowance or deduction allowed earlier/cessation or write-back of any liability allowed as a deduction earlier

c) Have you examined whether any amount or benefit was received by the assessee during the year for loss or expenditure that was claimed as allowance or deduction in tax returns of any earlier assessment year?

Section 41(2)-Balancing Charge on sale/discarding of Fixed Assets of an undertaking engaged in Generation and/or Distribution of Power

d) Whether there have been any building, machinery, plant, or furniture that were either sold, discarded, demolished, or destroyed and whether depreciation under section 32(1)(i) is claimed on such assets?

e) Has there been any money payable in respect of fixed assets sold, discarded, demolished, or destroyed and whether such amount became due during the year under audit? If so, report against this clause.

Section 41(3)-Profit on sale of capital assets used in scientific research

f) Whether there has been any sale of capital assets used for scientific research during the year under audit and has they been sold without being used for other purposes?

g) Where the assets sold were not used for any other purposes, have you reported at least one of the following under clause 25:

• • Sum total of sale proceeds of such assets and the amount of deduction allowed under section 35 in excess of the capital expenditure
  • The amount of deduction allowed under section 35

Read the Story