Weekly Round-up on Tax and Corporate Laws | 29th July to 3rd August 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from July 29 to August 03, 2024, namely:

1. Record 7.28 crore ITRs filed by July 31, 2024; 72% of taxpayers opted for New Tax Regime: FinMin;
2. No treaty shopping if revenue failed to rebut statutory evidence of TRC with cogent evidence: ITAT;
3. Uploading of SCN under heading ‘Additional Notices’ was not sufficient service in terms of Sec. 169 of CGST Act: HC;
4. HC remanded matter as ITC was denied without indicating documents to be disclosed by assessee;
5. SEBI mandates stronger anti-market abuse measures for Asset Management Company; and
6. ICAI Introduces Temporary Exception in AS 22 for Pillar Two Income Taxes.

1. Record 7.28 crore ITRs filed by July 31, 2024; 72% of taxpayers opted for New Tax Regime: FinMin

The Ministry of Finance has released a press release stating that a record 7.28 crore ITRs were filed for AY 2024-25 till 31st July 2024. This is 7.5% more than the total ITRs for AY 2023-24 filed till 31st July 2023.

Out of the total ITRs filed for AY 2024-25, 5.27 crore have been filed in the New Tax Regime compared to 2.01 crore ITRs filed in the Old Tax Regime. Thus, about 72% of taxpayers have opted for the New Tax Regime, while 28% continue to be in the Old Tax Regime.

FinMin stated that focused outreach campaigns were carried out on Social Media to encourage taxpayers to file their ITRs early. Unique creative campaigns were also carried out on different platforms. Informational Videos in 12 Vernacular languages, in addition to English and Hindi, were displayed on digital platforms. Outdoor campaigns were also carried out.  Such concerted efforts led to fruitful results with an increased number of filings.

The Department also expressed gratitude to tax professionals and taxpayers for their support and compliance in filing ITRs and Forms. Taxpayers are also requested to verify their unverified ITRs within 30 days of filing the ITR. The Department also urges taxpayers who, for any reason, missed filing their ITR within the due date to complete their filing expeditiously.

Read the Press Release

2. No treaty shopping if revenue failed to rebut statutory evidence of TRC with cogent evidence: ITAT

Assessee is a private limited company incorporated in Mauritius. The assessee claims to be a resident of Mauritius under the Mauritius Income Tax Act, 1995. The assessee held shares in Etechaces Marketing and Consulting Pvt. Ltd., a company incorporated under the laws of India and has the brand ‘Policybazar’. During the year under consideration, out of the total shares of ‘Policbazar’, the assessee sold some shares and the long-term capital gain from the sale of such shares was not offered to tax and was claimed exempt under Article 13(4) of India-Mauritius DTAA.

The Assessing Officer (AO) denied the treaty benefits on the ground that the assessee was a conduit and indulged in treaty shopping and tax avoidance practices.

On appeal, the Dispute Resolution Panel (DRP) had sustained the additions. Aggrieved by the order, the assessee filed the instant appeal before the Tribunal.

The Delhi Tribunal held that the assessee was set up in 2014, with the principal objective of acting as an investment platform for making investments located in countries in a regional grouping that includes Cayman Islands and Asia. The appellant was admittedly a resident of Mauritius and a TRC was issued in favour of the assessee by the treaty partner.

Further, the assessee furnished all the documents before the AO in support of the claim that the assessee was managed and controlled by its respective Board of Directors in Mauritius. The Directors were involved in and responsible for actions and investment/ divestment activities of the assessee.

The assessee was controlled and managed by its board of directors in Mauritius, which comprised two Mauritian resident directors and one US resident director. All meetings were physically chaired in Mauritius, and the majority of the board of directors were residents of Mauritius. The key decisions regarding the investment holding company and divestment were taken only by the Board of Directors of the assessee.

Further, the Board of Directors had the sole authority over the assessee’s affairs. The decision to invest in and ultimately sell the shares held in Policybazaar was taken by the assessee’s directors in Mauritius. The Mauritian resident directors have executed all SPAs for the sale/transfer of shares.

Tax authorities failed to rebut the TRC’s statutory evidence with cogent evidence, and merely based on suspicion and inferences, the assessee was held to be engaged in treaty shopping.

Undoubtedly, the assessee was a dropdown entity associated with entities in the Cayman Islands. However, this association does not discredit its genuine activities as an investment platform. The doctrine of ‘substance over form’ cannot be applied to suggest that merely because the assessee’s associated enterprises operate from the Cayman Islands, the investments made in a prestigious Indian company during its early growth years are tainted.

Further, the small percentage of the assessee’s fund invested in India, compared to its investments in other economies, refutes the tax authorities’ inferences questioning the substance over the form of the assessee. These inferences cannot be sustained.

Read the Ruling

3. Uploading of SCN under heading ‘Additional Notices’ was not sufficient service in terms of Sec. 169 of CGST Act: HC

The Honorable Delhi High Court has recently set aside assessment order since uploading of a notice under heading ‘Additional Notices’ of GST portal would not be sufficient service in terms of section 169 of Central Goods and Services Tax Act, 2017. It was also noted that notice uploaded on GST portal in category of ‘Additional Notices and Orders’ were not easily accessible. This ruling is given in case of Neeraj Kumar v. Proper Officer SGST Ward-19 Zone-2.

Digest

The petitioner was the sole proprietor of a concern and it filed writ petition to challenge the order passed under Section 73 of the CGST Act, 2017. It was contended that the show cause notice (SCN) was uploaded on the portal in the category of ‘Additional Notices and Orders’ which were not easily accessible.

The Honorable High Court noted that the uploading of a notice under heading ‘Additional Notices’ would not be sufficient service in terms of Section 169 of the CGST Act. However, the Court noted that the GST Authorities have since addressed issue and have redesigned portal to ensure that ‘View Notices’ tab and ‘View Additional Notices’ tab was placed under one heading.

Since, the impugned SCN was issued before GST portal was re-designed, the Court held that the impugned order was liable to be set aside. The Court also remanded the matter to adjudicating authority for consideration afresh.

Read the Ruling

4. HC remanded matter as ITC was denied without indicating documents to be disclosed by assessee

The Honorable High Court of Calcutta has recently set aside an order denying ITC without indicating documents to be disclosed by the assessee, as the order appeared to be a verbatim reproduction of observations made by the Adjudicating Authority. This ruling is given in case of Shiva Chemicals v. Assistant Commissioner of Revenue, State Tax, Jorasanko and Jorabagan Charge.

Digest

The petitioner was issued show cause notice for availing and utilizing inadmissible Input Tax Credit (ITC) and the adjudication order was passed. It filed appeal but the Appellate Authority rejected the appeal by holding that the petitioner failed to produce transport and other documents. It filed writ petition against the rejection of appeal and contended that it had produced all relevant documents.

The Honorable High Court noted that the Appellate Authority had passed the order without indicating the documents required to be disclosed by the petitioner. The Court further noted that the petitioner had discharged its initial burden of proof by placing e-way bills, tax invoices, bank statements and Form GSTR-2A. However, the Appellate Authority had returned finding that the petitioner was not eligible for ITC in absence of transport and other documents.

Therefore, the Court held that the impugned order suffered from non-application of mind and was perverse as finding returned by Appellate Authority appeared to be verbatim reproduction of observations made by Adjudicating Authority. Thus, the Court directed the Appellate Authority to reconsider the matter.

Read the Ruling

5. SEBI mandates stronger anti-market abuse measures for Asset Management Company

SEBI vide Notification dated August 1, 2024, notified the SEBI (Mutual Funds) (Second Amendment) Regulations, 2024. A new sub-regulation has been inserted into Regulation 25 of the existing regulations, relating to ‘asset management company (AMC) and its obligations’. It states that the AMC must put in place an institutional mechanism to identify and deter potential market abuse, including front-running and fraudulent transactions in securities. These amendments shall come into force upon the completion of 3 months from the date of publication in the Official Gazette i.e. August 1, 2024. Further, the term ‘market abuse’ has been defined under regulation 2(nb).

5.1 Need for this amendment

On April 30, 2024, SEBI, in its 205^th board meeting, approved a series of amendments concerning investments in REITs and InvITs, venture capital funds, mutual funds and market infrastructure institutions (MIIs). One of the amendments includes changes to the SEBI (Mutual Funds) Regulations, 1996. It requires Asset Management Companies (AMCs) to put in place an institutional mechanism for the identification and deterrence of potential market abuse, including front-running and fraudulent transactions in securities. Therefore, SEBI amends Mutual Fund Regulations.

5.2 What is the meaning of ‘market abuse’?

The term ‘market abuse’ includes manipulative, fraudulent and unfair trade practices that may contravene Section 12A of the Act or any of the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 or the SEBI (Prohibition of Insider Trading) Regulations, 2015.

5.3 Mechanism for Identification and Deterrence of potential market abuse

The asset management company (AMC) must put in place an institutional mechanism, as may be specified by the Board, to identify and deter potential market abuse, including front-running and fraudulent transactions in securities.

The mechanism must consist of enhanced surveillance systems, internal control procedures, and escalation processes to identify, monitor and address specific types of misconduct, including front running, insider trading, misuse of sensitive information, etc.

Further, the Chief Executive Officer, Managing Director or such other person of equivalent or analogous rank and Chief Compliance Officer of the asset management company must be responsible and accountable for implementing such a mechanism to deter potential market abuse, including front-running and fraudulent transactions in securities.

(i) Asset Management Company must establish, implement and maintain a documented whistle-blower policy

The asset management company must establish, implement and maintain a documented whistle-blower policy that must –

• • provide for a confidential channel for employees, directors, trustees, and other stakeholders to raise concerns about suspected fraudulent, unfair or unethical practices, violations of regulatory or legal requirements or governance vulnerability, and
  • establish procedures to ensure adequate protection of the whistle-blowers

(ii) Exemption from the requirement of recording face-to-face communication

A new proviso has been added to clause 2(b) of Part B of the Fifth Schedule relating to the Code of Conduct for the fund managers and dealers. It states that regarding the requirement of recording all communication by dealers and fund managers, an exemption is provided from the requirement of recording face-to-face communication, including out-of-office interactions, during market hours.

This exemption shall be effective upon the completion of 12 months from the date of publication in the Official Gazette i.e. August 1, 2024.

Conclusion

These amendments aim to strengthen the regulatory framework for AMCs, enhance transparency, mitigate potential market abuse, and ensure a more secure and fair investment environment. By implementing a mechanism for identifying and deterring market abuse and maintaining a documented whistle-blower policy, these amendments promote ethical practices and boost investor confidence in the mutual fund industry.

Read the Notification

6. ICAI Introduces Temporary Exception in AS 22 for Pillar Two Income Taxes

The “Pillar Two Model Rules” is issued to address the tax challenges arising from the digitalization of the economy. This model ensures that large multinational enterprises (MNEs) pay a minimum level of tax on the income arising in each jurisdiction where they operate. The “Pillar Two” of this model consist of two interlocking domestic rules viz. “Income Inclusion Rule (IIR) and “Undertaxed Payment Rule (UTPR)”. The IIR imposes a top-up tax on a parent entity in respect of the low-taxed income of a constituent entity and the UTPR denies deductions or requires an equivalent adjustment to the extent the low tax income of a constituent entity is not subject to tax under an IIR. Furthermore, the Subject to Tax Rule (STTR) allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below a minimum rate.

The enactment of “Pillar Two Model Rules” in India shall amend various tax compliances and computations and consequently, the accounting of taxes shall also be impacted. Considering the same the council of the Institute of Chartered Accountants of India (ICAI) has issued an amendments to AS 22, Accounting for Taxes on Income.

Amendments in AS 22

The para 2A, 32A-32D and para 35 are added in the AS 22. These inclusion are briefly described below:

a) Para 2A

This Standard applies to taxes on income arising from tax law enacted or substantively enacted to implement the Pillar Two model rules published by the Organisation for Economic Cooperation and Development (OECD), including tax law that implements qualified domestic minimum top-up taxes described in those rules. Such tax law, and the taxes on income arising from it, are hereafter referred to as ‘Pillar Two legislation’ and ‘Pillar Two income taxes’. As an exception to the requirements in this Standard, an enterprise should neither recognise nor disclose information about deferred tax assets and liabilities related to Pillar Two income taxes.

b) Para 32A

An enterprise should disclose that it has applied the exception to recognising and disclosing information about deferred tax assets and liabilities related to Pillar Two income taxes.

c) Para 32B

An enterprise should disclose separately its current tax expense (income) related to Pillar Two income taxes.

d) Para 32C

In periods in which Pillar Two legislation is enacted or substantively enacted but not yet in effect, an enterprise should disclose known or reasonably estimable information that helps users of financial statements understand the enterprise’s exposure to Pillar Two income taxes arising from that legislation.

e) Para 32D

To meet the disclosure objective in paragraph 32C, an enterprise should disclose qualitative and quantitative information about its exposure to Pillar Two income taxes at the end of the reporting period…..

Conclusion

Considering the challenges that the company may face in applying the principle and requirements in AS 22 for the accounting of deferred taxes related to top-up tax, the Council of the ICAI has introduced temporary exception. This exception relates to the requirements to recognise and disclose information about deferred tax assets and liabilities related to Pillar Two income taxes. These amendments are effective for annual reporting periods beginning on or after April 1, 2024.

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