Weekly Round-up on Tax and Corporate Laws | 30th October to 4th November 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 30^th October to 4^th November 2023, namely:

(a) Govt. allows Indian Companies to list abroad directly;

(b) No Section 12AA registration to a Bar Association if it isn’t registered as a trust/institution with statutory authorities;

(c) 5% GST to be levied on job work for processing of “Barley” into “Malted Barley”;

(d) CBIC notifies the amnesty scheme for filing appeals under GST;

(e) The Mystery of two Supreme Court rulings under IBC and

(f) Impact of extension of the sale completion period on classification of non-current assets held for sale.

1. Govt. allows Indian Companies to list abroad directly

The MCA notified October 30, 2023, as the effective date for enforcement of section 5 of the Companies (Amendment) Act. Section 5 of the Companies (Amendment) Act deals with provisions related to public offers and private placement. New sub-sections have been inserted that State that a specified class of public co(s) may issue such class of securities to list on permitted stock exchanges in permissible foreign jurisdictions or other jurisdictions as prescribed.

(a) Extant norms that allow companies to issue securities

As per Section 23(1)/(2) of the Companies Act, 2013, public companies can issue securities to the public through a prospectus, private placement or rights or bonus issues, subject to compliance with the relevant regulations, including those of the SEBI Act, 1992. Further, private companies can issue securities through rights or bonus issues or using private placement, following the respective provisions outlined in this Act.

(b) Access to Global Capital for Indian Companies: A Current Overview

Presently, local listed entities opt for overseas listings through the utilization of American Depository Receipts (ADRs), Global Depository Receipts (GDRs) and foreign currency convertible bonds (FCCB) as their preferred mechanisms for accessing international capital markets. However, the recent regulatory changes carry the potential to transform the current scenario, creating fresh avenues for Indian companies to engage with foreign capital markets directly.

(c) Provisions for listing Securities in foreign jurisdictions for Public Companies:

After Section 23(2) of the Companies Act, new sub-sections 23(3) & (4) have been inserted, namely:

“(3) Such class of public companies may issue such class of securities for the purposes of listing on permitted stock exchanges in permissible foreign jurisdictions or such other jurisdictions, as may be prescribed.

(4) The Central Government may, by notification, exempt any class or classes of public companies referred to in sub-section (3) from any of the provisions of this Chapter, Chapter IV, section 89, section 90 or section 127 and a copy of every such notification shall, as soon as may be after it is issued, be laid before both Houses of Parliament.”

(d) Implications of the present notification:

In response to these recent developments, certain categories of Indian public companies have been authorized to issue securities to list them directly on foreign stock exchanges. Indian companies have to resort to GDRs as the primary mechanism for accessing foreign exchanges. However, these newly introduced provisions will eliminate the need for GDRs, streamlining the process and providing Indian companies with a more straightforward route to list their securities on foreign stock exchanges.

Read the Notification

2. No Section 12AA registration to a Bar Association if it isn’t registered as a trust/institution with statutory authorities

The assessee was a Bar Association of Income Tax consultant of Surat Bench. The assessee filed an application under section 12AA in Form No. 10A as per Rule 17A of Income Tax Rules, 1962, along with various details for its registration.

However, the CIT(E) rejected the application of the assessee by holding that the assessee failed to submit a copy of the registration certificate, evidencing the creation of a trust/institution.

The matter reached the Surat Tribunal.

The Tribunal held that the sole basis for rejection of the application under section 12AA is the want of registration with the registrar of company, registrar of firm and society, or registrar of trust, as the case may be. It is an admitted fact that the assessee had not obtained any registration either under the Gujarat Public Trust Act or under any other statutory provision.

Rule 17A, which deals with the registration under section 12AB, has been substituted with effect from 01.04.2021. As per the substituted provision, the assessee is required to furnish a certified copy of the registration with the Registrar of Companies, Registrar of Firms and Societies or Registrar of Public Trusts, as the case may be.

This was a condition precedent for making an application under Form 10A or 10AB. However, the assessee vehemently submitted that a self-certified copy of registration was required if it was so registered, and it was also argued that there was no provision that the institute should be constituted under any law. Such submission of the assessee is not acceptable, as clause-(c) of sub-rule (2) of Rule 17A is clear and unambiguous.

Income Tax Rules, 1962, amended from time to time, is framed to supplement the statutory provision under the Act and have the approval of Parliament. Thus, the assessee failed to fulfil the primary condition of registration with the Registrar of Company, Registrar of Firm and Society, or Registrar of Public Trust. In the absence of such a registered instrument, the application filed by the assessee is premature and cannot be proceeded to examine its object and activities.

Accordingly, it was held that CIT(E) rightly denied registration to the assessee.

Read the Ruling

3. 5% GST to be levied on job work for processing of “Barley” into “Malted Barley”

The CBIC has issued a circular to clarify the applicability of GST on certain services. One such clarification is that services by way of job work for the conversion of barley into malt would attract 5% GST.

As per another clarification, whenever electricity is supplied along with renting of immovable property and/or maintenance of premises, it would form a part of the composite supply, and the principal supply is renting of immovable property and/or maintenance of premise, as the case may be, and the supply of electricity is ancillary.

Even if electricity is billed separately, the supplies will constitute a composite supply. However, if electricity is supplied as a pure agent on an actual basis, then it will not be treated as part of the value of supply.

Read the Circular

4. CBIC notifies the amnesty scheme for filing appeals under GST

The CBIC has issued a notification to notify the amnesty scheme for filing an appeal against the order passed on or before 31^st March 2023. The assessee can file an appeal against such an order on or before 31^st January, 2024.

However, a sum equal to 12.5% of the amount of tax subject to a maximum of 25 crore rupees must be paid, out of which at least 20% should have been paid by debiting from the Electronic Cash Ledger. Moreover, no such appeal shall be admissible regarding a demand not involving tax.

Read the Notification

5. The Mystery of two Supreme Court rulings under IBC

The Insolvency and Bankruptcy Code (IBC) is a crucial law in India to modernize insolvency procedures. A key concern is how government statutory claims with secured creditor status will be ranked under section 53 of the IBC. Two recent Supreme Court cases, “State Tax Officer v. Rainbow Papers Ltd.” (2022) and “Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat (P.) Ltd.” (2023), have brought about uncertainty in this regard.

Let’s take note of the key highlights of the judgements:

(a) Supreme Court Ruling: ‘State’ is a secured creditor in the case of Rainbow Papers

In the Rainbow Papers Ltd. case, the Supreme Court determined that section 48 of the Gujarat VAT Act does not conflict with section 53 or any other provisions of the IBC. This means that the ‘State’ is considered a secured creditor under the Gujarat VAT Act. The term ‘secured creditor’ refers to a creditor in favour of whom security interest is created.

Therefore, if a resolution plan approved by the CoC ignores statutory payments to secured creditors, including the State under the GVAT Act or any legal authority, the NCLT is bound to reject the plan. This would lead to the corporate debtor’s liquidation, and its assets would be sold and distributed as per section 53 of the IBC.

(b) Supreme Court Ruling: Government Dues vs. Secured Creditors’ Priority in Liquidation

In the case of Raman Ispat (P.) Ltd, the Supreme Court ruled that government dues, which are meant to be paid into the Consolidated Fund of India or a State, are ranked similarly to those of secured creditors who choose not to give up their security interest.

A secured creditor must decide whether to relinquish their security interest at the beginning of the liquidation process or not. If they choose to do so, their dues are prioritized in the payment order.

(c) Apex Court Stands Firm: Rejects Rainbow Papers Review Petition

On October 31, 2023, the Apex Court rejected a review petition concerning the Rainbow Papers case. The petition was dismissed because the grounds for reviewing a judicial verdict are set in Order XLVII Rule 1 of the Code of Civil Procedure. The applicant has to demonstrate that there was an error apparent on the face of the record. The Court had considered various legal provisions for deciding priority for distributing proceeds from the sale of liquidation assets.

The Supreme Court also rejected the review petition on the ground that a co-ordinate bench cannot comment upon the discretion exercised or judgement rendered by another co-ordinate bench of the same strength.

(d) Reforming Creditor Treatment: Separate ‘Waterfall Mechanism’ proposed for CIRP Proceeds

During the Corporate Insolvency Resolution Process (CIRP), disputes over the distribution of proceeds led to concerns about unfair creditor treatment. To address this, the Ministry of Corporate Affairs (MCA) proposed amendments to the IBC in a January 18, 2023 discussion paper. These changes aim to establish a separate ‘waterfall mechanism’ for proceeds distribution in CIRP, ensuring equitable outcomes for stakeholders.

Conclusion

The current situation poses a challenging dilemma for all liquidators, as there is a lack of clarity regarding the treatment of government claims in liquidation cases. This ambiguity may have already impacted completed liquidations and distributions. It is essential to recognize that if a statute can confer secured creditor status, there is no obstacle to the government bestowing such status through statutory amendments.

Hence, lawmakers must promptly address this issue as the ongoing uncertainty disrupts both ongoing and completed liquidations, with numerous cases spanning over two years.

Read the Story

6. Impact of extension of the sale completion period on classification of non-current assets held for sale

Ind AS 105, Non-Current Assets Held for Sale and Discontinued Operations, requires that to qualify for recognition as an “Asset held for Sale”, the sale is expected to be completed within one year from the date of classification. But what happens when the sale cannot be completed within the given time of one year regardless of management’s active efforts to attract potential buyers, lower price, and intact intention of selling the asset? Whether the asset has to be re-classified to the “Property, Plant and Equipment” in the business.

The standard explains that events or circumstances may extend the period to complete the sale beyond one year. An extension of the period required to complete a sale does not preclude an asset (or disposal group) from being classified as held for sale if the delay is caused by events or circumstances beyond the entity’s control and there is sufficient evidence that the entity remains committed to its plan to sell the asset.

Whenever events or circumstances arise during the initial one-year period that was previously considered unlikely and, as a result, a non-current asset previously classified as held for sale is not sold by the end of that period, and during the initial one-year period, the entity took action necessary to respond to the change in circumstances, the non-current asset (or disposal group) is being actively marketed at a reasonable price, given the change in circumstances does not preclude an asset (or disposal group) from being classified as held for sale. However, proper disclosure of information that enables users of the financial statements to evaluate the financial effects of discontinued operations and disposals of non-current assets (or disposal groups) should be given.

For instance, an entity has classified a machine as an asset as held for sale on 31.03.20X1, but market conditions that were present when the asset was initially categorized as “held for sale” worsen, as a result of the asset remains unsold by 31.03.20X2. However, during this time frame of one year, the entity took necessary measures to adapt to the changing circumstances, including reducing the machine’s price and actively marketing the machine at a reasonable price. Also, the machine is readily available for immediate sale in its current condition, and the likelihood of its sale remains high. Due to the above provisions, the entity still classifies the machine as an “asset held for sale”.

Further, the entity shall disclose all necessary events and circumstances that have extended the period to complete the sale so that users of financial statements can evaluate its financial effects.

Read the Story