Weekly Round-up on Tax and Corporate Laws | 29th April to 4th May 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from April 29^th to May 4^th, 2024, namely:

1. IFSCA allows SEBI-registered non-bank entities as FPIs to issue derivative instruments in GIFT-IFSC
2. HC stays CBIC circular on corporate guarantee; allows authority to decide case without being influenced by clarification;
3. No obligation to pay advance tax if there is no taxable income; appeal can’t be dismissed for sec. 249(4) non-compliance;
4. Civil suit for recovery of money from a sick company wasn’t hit by Section 22(1) of 1985 Act: SC;
5. HC dismissed writ challenging Notification No. 53/2023-CT, which denied the appeal in respect of demand not involving tax; and
6. Transitioning to Ind AS: Treatment of Foreign Currency Monetary Items under Ind AS 101.

1. IFSCA allows SEBI-registered non-bank entities as FPIs to issue derivative instruments in GIFT-IFSC

The 2023-24 Union Budget announced that Offshore Derivative Instruments (ODIs) issued in GIFT-IFSC would be considered valid contracts. Afterwards, Section 18A of the Securities Contracts (Regulation) Act, 1956, which deals with the contracts in derivatives, was modified to acknowledge that derivative contracts regulated by IFSCA and issued in the International Financial Services Centre (IFSC) by Foreign Portfolio Investors (FPIs) are legal and valid.

Therefore, the IFSCA had permitted IFSC Banking Units, registered with SEBI as FPIs, to issue Derivative Instruments with Indian securities as underlying in GIFT-IFSC.

Now, the IFSCA vide. Circular No. IFSCA/CMD-DMIIT/NBE-DI/2024-25/001; Dated: 02.05.2024. has extended this opportunity to ‘IFSCA-registered Non-Bank Entities’ registered with SEBI as Foreign Portfolio Investors (FPIs), allowing them to issue Derivative Instruments with Indian securities underlying GIFT-IFSC.

Till date, only the Banking Units registered with SEBI as FPIs were authorized to issue Derivative Instruments with Indian securities as underlying in GIFT-IFSC.

Further, the entity issuing such Derivative Instruments in GIFT-IFSC must ensure compliance with the requirements for issuing Offshore Derivative Instruments (ODIs) issued by SEBI and IFSCA from time to time.

Also, the entity must furnish requisite information to the Clearing Corporations in GIFT-IFSC in the format as may be prescribed by the 10th day of every month.

This regulatory shift is expected to significantly increase the issuance of Offshore Derivative Instruments (ODIs), thereby amplifying investment opportunities in the Indian securities market. Furthermore, by opening the doors for non-bank entities to issue ODIs in the GIFT-IFSC, India’s financial markets will become more accessible to international investors, potentially leading to a surge in capital flows into the country and fostering economic growth.

Read the Circular

2. HC stays CBIC circular on corporate guarantee; allows authority to decide case without being influenced by clarification

The Punjab and Haryana High Court has recently held that the Circular No. 204/16/2023-GST, dated 27-10-2023, regarding the taxability of corporate guarantee, seeks to take away the adjudicatory powers of the Assessing Authority as well as the Appellate Authority. Hence, the Court stayed the part of the Circular and directed the authority to decide the case without being influenced by the impugned clarification. This ruling is given by the Honorable High Court of Punjab and Haryana in the case of M/S Acme Cleantech Solutions Pvt Ltd v. Union of India.

Facts

The petitioner filed a writ petition to challenge the Circular No. 204/16/2023-GST issued by the CBIC, which clarified the taxability of corporate guarantees on the ground that it seeks to take away the adjudicatory powers of the Assessing Authority as well as the Appellate Authority. It was contended that a circular can’t seek to take away the adjudicatory powers by clarifying provisions in the nature of adjudication.

High Court

The Honorable High Court noted that the petitioner preferred an appeal against the demand, and the CBIC issued a clarification vide item No. 2 in the impugned Circular. The Court further noted that the impugned Circular directly impinges upon the powers of Appellate Authority, and the very purpose of filing an appeal stands negated.

Therefore, the Court held that the Appellate Authority should be free to decide the petitioner’s case without being influenced by the impugned clarification. The Court also granted the stay on the operation of the impugned Circular, which clarifies the taxability of corporate guarantees provided by companies.

Read the Ruling

GST and Income Tax on Corporate Guarantees | A Deep Dive

3. No obligation to pay advance tax if there is no taxable income; the appeal can’t be dismissed for sec. 249(4) non-compliance

The assessee made cash deposits during the demonetization period in his bank account. On enquiring by the Assessing Officer (AO), the assessee claimed that the cash deposits were sourced from his agricultural income from 33 acres of agricultural land that remained under his self-cultivation.

However, the assessee failed to substantiate his explanation regarding the source of the cash deposits based on supporting documentary evidence. Thus, the AO held the entire amount as the assessee’s unexplained money under section 69A(1).

Aggrieved by the order, the assessee preferred an appeal to the CIT(A). CIT(A) dismissed the appeal and held that the assessee failed to comply with the provisions of Section 249(4)(b) as he had not paid an amount equal to the amount of advance tax that was payable by him.

Assessee filed the instant appeal before the Tribunal.

The Tribunal held that as per section 249(4)(b), in a case where no return of income has been filed by the assessee, then his appeal shall be maintainable before the CIT(A) only if he had paid an amount equal to the amount of advance tax which was payable by him. At the same time, the Legislature had carved out an exception to the applicability of the aforesaid statutory requirement by way of a ‘proviso’ to section 249(4).

It is to be noted that the statutory requirement contemplated in clause (b) of sub-section (4) of section 249 would stand triggered only where any obligation was cast upon the assessee to pay ‘advance tax’. In the present case, the assessee had not only before the Tribunal but also in the ‘Statement of facts’ stated before the CIT(A) that he had no taxable income.

Therefore, in the absence of any obligation cast upon the assessee to compute/pay ‘advance tax’ under sections 208 and 209 for the subject year, the CIT(A) could not have held that he had failed to comply with the statutory conditions contemplated in section 249(4)(b).

Read the Ruling

4. Civil suit for recovery of money from a sick company wasn’t hit by Section 22(1) of 1985 Act: SC

The Supreme Court, in the matter of Fertilizer Corporation of India Ltd. v. Coromandal Sacks (P.) Ltd. [2024] 162 taxmann.com 20 (SC) has ruled that the civil suit for recovery of money from a sick industrial company could not be said to be a proceeding in nature of execution, distress or like. Hence, Section 22(1) of Sick Industrial Companies (Special Provisions) Act, 1985 did not hit the suit.

Brief facts of the case

In the instant case, the appellant company placed orders with the respondent company to supply High-Density Poly Ethylene (HDPE) bags, which were manufactured and supplied according to specified requirements. Purchase orders were adjusted periodically to accommodate increases in bag quantities needed by the appellant.

Disputed Supply of Additional Bags

Based on communications with the appellant, the respondent claimed that they supplied an extra 42,000 bags beyond the specified purchase order quantities to meet urgent demands. It was understood that a subsequent purchase order would be issued to cover this additional supply.

When the appellant eventually issued a formal purchase order for the extra bags supplied, the price per bag fell short of the agreed-upon price.

Institution of Civil Suit

To recover the losses incurred due to this pricing discrepancy, the respondent filed a civil suit against the appellant. The Trial Court ruled in favour of the respondent, granting interest at 12% p.a. on the delayed payment amount due to the appellant’s wrongful withholding of payment.

Subsequently, on an appeal, the High Court, considering the respondent’s status as a small-scale industrial undertaking, awarded compound interest at a higher rate of 24% from the appellant.

Appellant’s Argument of Sick Company Status

The appellant argued before the Supreme Court that they had been declared a sick company, and therefore, the suit for recovery should be suspended under Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985.

Supreme Court’s Ruling

The Court clarified that the adjudication of contractual liabilities falls under the jurisdiction of civil courts or Arbitral Tribunals, not bodies like BIFR or AAIFR. The recovery suit, a straightforward claim for money due to alleged contract breaches, did not threaten the appellant’s properties or revival scheme.

Further, while upholding the High Court’s decision to award 24% interest, the Court decided to exclude the period during which the appellant was deemed a sick company from the interest calculation.

Read the Ruling

5. HC dismissed writ challenging Notification No. 53/2023-CT, which denied an appeal in respect of demand not involving tax

The Honorable Chhattisgarh High Court has recently held that the benefit of the extension of the time period granted by Notification No. 53/2023-Central tax dated 02-11-2023 cannot be availed as no appeal under this notification is admissible in respect of a demand not involving tax. This ruling is given by the High Court of Chhattisgarh in case of Bharat Aluminium Co. Ltd. v. Union of India.

Facts

The petitioner filed refund application for unutilized ITC of GST paid on coal. The department issued show cause notice on ground that the supply of electricity to the township was a non-business activity. The order was passed, and a portion of refund was rejected. The petitioner received the order after a period of more than one year had passed.

High Court

It filed an appeal against the order but was rejected on the grounds of limitation. It filed writ petition and challenging Notification No. 53/2023-CT, which provided that no appeal under this notification shall be admissible in respect of a demand not involving tax.

The Honorable High Court noted that the petitioner filed the appeal after a delay of 1 year 1 month and no cogent reason was afforded for such an inordinate delay. The appeal filed by the petitioner was barred by limitation, and it was not in a position to avail of the benefit of the extension of the time period granted by Notification No. 53/2023-CT.

Further, the Court also noted that no cogent reason was assigned as to how clause 5 of the impugned notification was ultra vires to the Constitution of India. Therefore, the Court held that the relief sought by the petitioner to declare clause 5 of impugned notification as ultra vires shall not be accepted, and the writ petition was dismissed.

Read the Ruling

6. Transitioning to Ind AS: Treatment of Foreign Currency Monetary Items under Ind AS 101

As per the recognition and measurement criteria prescribed under Ind AS 101, First-Time Adoption of Indian Accounting Standards, an entity shall prepare and present an opening Ind AS balance sheet at the transition date to Ind AS. For this, an entity uses the same accounting policies in its opening Ind AS Balance Sheet and through all periods presented in its first Ind AS financial statements. These accounting policies shall comply with each Ind AS effective at the end of its first Ind AS reporting period, subject to “exceptions”.

Wherein, one of the exceptions is related to “Long-term foreign currency monetary items” i.e. a first-time adopter may continue the policy adopted for accounting for exchange differences arising from the translation of long-term foreign currency monetary items recognized in the financial statements for the period ending immediately before the beginning of the first Ind AS financial reporting period as per the previous GAAP. But, it is available only for those Long-term foreign currency monetary items that have been before the first Ind AS reporting period began.

For example, The company embarked on a rapid rail project for local communities in FY 2021-22, expected to be operational by December 2023, currently in the construction phase. Foreign exchange fluctuations for capital goods/services were initially accounted for under the previous GAAP, transferring them to the project’s Capital Work in Progress. In FY 2022-23, transitioning to the Ind AS framework, the company may still capitalize on exchange differences for long-term foreign currency payables if it adhered to AS 11 requirements under previous GAAP, per Ind AS 101 exceptions. However, this exemption only applies to exchange differences from long-term foreign currency monetary items preceding the adoption of Ind AS, not to items recognized thereafter.

Read the Story