Weekly Round-up on Tax and Corporate Laws | 28th November to 03rd December 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 28th November to 03rd December 2022, namely:

(a) CA is not expected to check the genuineness of documents submitted by the client for issuing Form 15CB: Madras High Court;

(b) LOB clause can’t be invoked to deny the benefit of Article 8 of DTAA to a Singapore shipping enterprise: ITAT;

(c) Proceedings initiated under GST for the claiming inadmissible Cenvat Credit under erstwhile law to be quashed: High Court;

(d) Pendency of proceedings is an essential condition for provisional attachment of property: High Court;

(e) Money disbursed to the corporate debtor as a payment to be adjusted in the sale of land wasn’t a financial debt under Section 5(8): NCLAT;

(f) Should the lease term of an entity also include the periods covered by an option to extend the lease?

1. CA is not expected to check the genuineness of documents submitted by the client for issuing Form 15CB: Madras High Court

Petitioner, a Chartered Accountant, was approached by his client for the issuance of Form 15CB. The client was required to make payments for imports. The petitioner issued Form 15CB on his client’s request after reviewing the information submitted by the client.

Subsequently, an investigation was carried out on the client and found that it was involved in money laundering. The allegations indicated opening fictitious bank accounts, forged bills of entry, parking huge funds in the bank account and transferring funds to various overseas parties. During the investigation, the Enforcement Directorate (ED) discovered the petitioner’s involvement as Form 15CB was filed in his name and overseas payments were made through bank accounts using such forms.

After the investigation, the Enforcement Directorate filed a supplementary complaint on the petitioner, contending his involvement in the generation of proceeds of crime.

Aggrieved by the order of the Enforcement Directorate, a petition was filed before the trial court but with no success. Thereafter, a petition was filed before the Madras High Court.

The Madras High Court held that the petitioner, being a Chartered Accountant, in the course of his professional duties, gave Form 15CB after reviewing the documents that his client presented. Petitioner did not have any reason to suspect the genuineness of the import transaction made by his client. He has only received the remuneration for issuance of such Form 15CB and nothing more.

Further, a Chartered Accountant is only required to examine the nature of remittance and nothing beyond that. There is no requirement to dig deep into the genuineness of the documents submitted by his clients.

Since the petitioner issued Form 15CB after scrutinising the documents furnished to him by the client, he discharged his duties following the professional behaviour expected from him. Therefore, the Court discharged the petitioner from the prosecution and enlisted him as a witness.

Read the Ruling

2. LOB clause can’t be invoked to deny the benefit of Article 8 of DTAA to a Singapore shipping enterprise: ITAT

The Rajkot Tribunal has ruled that the benefit of Article 8 of the India-Singapore DTAA cannot be denied to Singapore resident shipping enterprise by invoking Article 24 (LOB clause) of the said DTAA.

Facts

Assessee-company was incorporated in Singapore and was engaged in the business of ship owning & operating, chartering, and related business. During the assessment year, it claimed exemption of the freight income as per Article 8 of DTAA between India and Singapore.

However, the Assessing Officer (AO) held that the assessee did not qualify for tax exemption under Article 8 of DTAA because the freight income was not directly remitted to Singapore. Thus, the provision of Article 24 comes into the picture, which overrides the provisions of Article 8, and it limits the relief in case of some double non-taxation of such income.

Ruling

The Tribunal held that exemption to shipping profits under Article 8 of the India-Singapore DTAA could not be denied to Singapore resident shipping enterprise by invoking Article 24 of the said DTAA.

The moot question was whether the operation of Article 8 was ousted by Clause (1) of Article 24 (Limitation of Relief). Article 24(1) does not apply to the shipping income received by a Singapore Shipping Enterprise from Indian customers.

It has been clarified by Singapore Tax Authority (IRAS) that the shipping income is taxable in Singapore on an arising basis when the income is earned by the shipping enterprise regardless of whether the shipping income is received in or remitted to Singapore. Since Article 24(1) is not applicable, the provisions of Article 8(1) should apply without any limitation.

Since the shipping profits derived by a Singapore resident shipping enterprise from the operation of ships in international traffic, it shall be taxable only in Singapore in accordance with Article 8(1) and the same cannot be taxed in India.

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3. Proceedings initiated under GST for the claiming inadmissible Cenvat Credit under erstwhile law to be quashed: High Court

The Jharkhand High Court has held that initiation of proceedings under Section 73(1) of CGST Act, 2017 for alleged contravention of the Central Excise Act and Finance Act, 1994 read with Cenvat Credit Rules 2004 for the transition of Cenvat Credit as being inadmissible would be without jurisdiction and liable to be set aside.

Facts

The proceedings were initiated against the petitioner by issuing a show cause notice in Form GST-DRC-01 proposing recovery of transitioned Cenvat Credit in terms of Section 73(1) of the CGST Act, 2017 along with interest and penalty. It filed a writ petition and raised the question of the lack of jurisdiction of the adjudicating authority to decide upon the availment of Cenvat Credit by the petitioner.

It was contended that proceedings for wrongful availment of Cenvat Credit had been initiated by the revenue under Section 73 (1) of the CGST Act instead of relevant provisions of the Finance Act read with Rule 14 of Cenvat Credit Rules, 2004 and disallowed Cenvat Credit carried forward by the petitioner by filing TRAN-1.

High Court

The High Court noted that as per Section 73 of the CGST Act, 2017, the proceeding can be initiated for non-payment of any tax or short payments or erroneous refund or for wrongfully availing or utilising input tax credits which are available under CGST Act. However, Section 73 does not speak of Cenvat Credit as CGST Act has subsumed the term in expression input tax credit, both relating to the supply of goods or services. The assumption of jurisdiction to determine whether Cenvat Credit was admissible under existing law by invoking provisions of Section 73 of the CGST Act was not proper in the eyes of the law.

Therefore, the Court held that the initiation of proceedings under Section 73 (1) of CGST Act, 2017 against the petitioner for the transition of Cenvat Credit as being inadmissible under existing law was beyond jurisdiction.

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4. Pendency of proceedings is an essential condition for provisional attachment of property: HC

The Gujarat High Court has held that powers under Section 83(1) to provisionally attach property, including bank accounts, could be invoked only during the pendency of proceedings.

Facts

The petitioner was engaged in the business of trading products such as garments, footwear, etc. The department contended that the petitioner was found to be a part of the syndicate that claimed and availed the GST refund fraudulently without any business transactions by transferring the amount to the bank accounts. The petitioner’s bank account was provisionally attached on 06-01-2022, and he got to know about such an attachment through the bank. The department further issued summon to the petitioner on 21-02-2022 to appear before the authorities.

The petitioner filed a petition before the High Court to set aside the provisional attachment order dated 06-01-2022 as no proceeding was pending against the petitioner on the date of passing such an order.

High Court

The High Court held that the pendency of the proceedings is a sine qua non for the exercise of powers of provisional attachment. This is because the powers under Section 83 can be invoked where there is a pendency of proceedings. Since no proceedings were pending on the date of passing the order (06-01-2022), and summon was issued later, the power to provisionally attach the property could not be invoked on the said date.

Given the above, the High Court set aside the above-said order. It held that the respondent authorities may continue to proceed further pursuant to the summons and would be at liberty to impose the provisional attachment under Section 83.

Read the Ruling

5. Money disbursed to the corporate debtor as a payment to be adjusted in the sale of land wasn’t a financial debt under Section 5(8): NCLAT

A question was raised before the NCLAT would the disbursed money to the corporate debtor as payment, which was to be adjusted in the sale of land, be financial debt or not under section 5(8)?

Facts

In the instant case, the appellant filed its claim as a financial creditor to Resolution Professional (RP) for an amount advanced to the corporate debtor as earnest money to purchase surplus land of the corporate debtor.

The erstwhile RP sent an e-mail stating that the appellant had remitted funds to the corporate debtor as an interest-free advance to be adjusted against sale consideration for the proposed sale of land, which shall not fall under ‘financial debt’. Consequently, the appellant filed an application before NCLT seeking direction to RP to adjudicate the claim of the appellant and revise the list of the CoC to admit him as a member of the CoC.

Later, the NCLT dismissed said application on the ground that there was no contract between the parties for the sale of any land. Hence the earnest money advanced by the appellant could not be treated as a financial debt. Aggrieved by the NCLT order, the appellant filed an instant appeal.

During these proceedings, the RP filed an application for approval of the resolution plan, and the NCLT approved the resolution plan. Subsequently, the appellant filed an application before the NCLT praying for quashing the entire CIRP on the ground that the resolution plan had been approved without earmarking any amount. In contrast, the claim of the appellant of Rs. 7 crores was admitted as other creditors, and the CoC had not taken into account the interest of all the stakeholders. The NCLT dismissed said application.

Further, the appellant submitted that he paid the sum of Rs. 7 crores as earnest money to the corporate debtor with regard to which receipt was issued by the corporate debtor and payment had not been disputed by the corporate debtor and the RP had also admitted the payment of earnest money by the appellant as another creditor but wrongly classified the appellant as other creditor.

The appellant also referred to the annual reports for the financial years 2018-19 and 2019-20, wherein earnest money had been classified as a ‘financial debt’. Therefore the appellant’s claim deserves to be admitted as a financial debt.

The NCLAT observed that where the appellant’s claim was classified as other creditor and CoC, in its commercial decision, decided not to allocate any amount to other creditors and the appellant failed to prove any violation of provisions of IBC, the resolution plan approved by NCLT did not require any interference.

The NCLAT held that since disbursement was not in consideration for the time value of money, the essential condition for accepting a debt to be financial debt was absent. Also, merely acknowledging the liability of earnest money in annual return as financial debt was not akin to admitting the same as financial debt.

Read the Ruling

6. Should the lease term of an entity also include the periods covered by an option to extend the lease?

Ind AS 116 (Leases) states that while determining the lease term, an entity shall also include the periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option. And, to assess whether a lessee is reasonably certain to exercise an option to extend a lease, an entity shall consider all relevant facts and circumstances that create an economic incentive for the lessee to exercise the option to extend the lease.

It also states that the lessee shall depreciate the right-of-use (ROU) asset from the commencement date to the earlier of the end of the useful life of the ROU asset or the end of the lease term.

But, confusion arises at the time of depreciating the ROU asset in case there is a reasonable certainty of the lessee to exercise an option to extend a lease, i.e. whether the ROU asset is depreciated for the initial lease term or the period of an extended lease shall also be considered for depreciation.

In this regard, the Expert Advisory Committee (EAC) of ICAI has noted that when a lease agreement is entered into for a certain initial period, then that initial period is construed as a period for which the lease of asset is reasonably certain to continue, at the inception of the lease. And if, at the beginning of the lease, it is evaluated that there is a reasonable certainty that the lessee will exercise the option to extend the lease, then any such extension in the initial lease term should also be treated as ‘lease term’.

Accordingly, the lessee shall depreciate the ROU asset after taking an extended period of lease into consideration.

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