Weekly Round-up on Tax and Corporate Laws | 30th September to 5th October 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from September 30^th  to October 5^th, 2024, namely:

1. Reassessment notices issued under new provisions within time limit extended by TOLA are valid: SC;
2. Construction of immovable property may be considered as “plant” for claiming ITC if it is critical to business operation: SC;
3. SEBI’s tightened controls for trading in equity index derivatives;
4. GSTN Advisory: GSTN e-Services App to replace e-Invoice QR Code Verifier App;
5. Parcel Management System (PMS) of Indian Railways is integrated with the E-Way Bill (EWB) system; and
6. Temporary extension for insurance cos. to apply Ind AS 104 in consolidated financial statements.

1. Reassessment notices issued under new provisions within time limit extended by TOLA are valid: SC

In the case of Ashish Agarwal [2022] 138 taxmann.com 64 (SC), the Supreme Court addressed whether reassessment notices issued under the old regime were valid after the new, more favourable reassessment regime came into effect. The Court ruled that all reassessment notices post 01-04-2021 should comply with the new reassessment regime. However, notices under Section 148 of the old regime were deemed to be under Section 148A(b) of the new regime.

In the Ashish Agarwal ruling, the Supreme Court did not address whether or not the reassessment notices were issued within the time limits prescribed under the provisions of the Income Tax Act, read with the relaxations provided under TOLA.

This was the primary issue for consideration before the Supreme Court in the instant appeal. The Supreme Court held that as under:

• TOLA extended the deadlines for certain actions under specified Acts that were due during the COVID-19 period. Section 3(1) of TOLA uses “any” to indicate that the relaxation applies to all actions due between 20-03-2020 and 31-03-2021. This section is concerned with the completion of actions under the specified Acts, and any amendment or substitution of provisions does not impact TOLA’s application as long as the action falls within the specified period.
• Section 2(1)(b)(ii) of TOLA defines a ‘specified Act’ as including the Income Tax Act, and after 1 April 2021, it must be read as the Act amended by the Finance Act 2021. The substitution of Sections 147 to 151 does not impact TOLA’s purpose, which is to relax time limits for actions due between 20-03-2020 and 31-03-2021. TOLA remains applicable to the Income Tax Act after April 01, 2021 if actions under the substituted provisions fall within this period.
• Section 3(1) of TOLA applies to the issuance of reassessment notices under Section 148 of the Income Tax Act. While TOLA did not amend the four- and six-year time limits under the Act, it provided a relaxation for issuing reassessment notices during the COVID-19 period.
• TOLA does not apply if the time limit under Section 149 expires before 20-03-2020. When issuing a reassessment notice, the Revenue must check both Section 149 time limit and TOLA’s relaxation period. For example, the six-year limit for AY 2013-14 expired on 31-03-2020, but TOLA extended it to 30-06-2021.
• Accordingly, after April 01, 2021, the Income Tax Act has to be read along with the substituted provisions. TOLA will continue to apply to the Income Tax Act after April 01, 2021, if any action or proceeding specified under the substituted provisions of the Income Tax Act falls for completion between 20-03-2020 and 31-03-2021.
• TOLA will extend the time limit for the grant of sanction by the authority specified under Section 151. The test to determine whether TOLA will apply to Section 151 of the new regime is this: if the time limit of three years from the end of an assessment year falls between 20-03-2020 and 31-03-2021, then the specified authority under Section 151(i) has extended time till 30-06-2021 to grant approval.
• In the case of Section 151 of the old regime, the test is: if the time limit of four years from the end of an assessment year falls between 20-03-2020 and 31-03-2021, then the specified authority under Section 151(2) has extended time till 31-03-2021 to grant approval;
• Thus, Assessing Officers were required to issue the reassessment notice under Section 148 of the new regime within the time limit surviving under the Income Tax Act read with TOLA. All notices issued beyond the surviving period are time-barred and liable to be set aside.

Read the Ruling

Read the Article

2. Construction of immovable property may be considered as “plant” for claiming ITC if it is critical to business operation: SC

The Supreme Court has held that if the construction of the immovable property is critical to the business’s operation, then it may be considered as a plant for the purposes of claiming input tax credit under the CGST Act.

In this case, the petitioner had constructed a shopping mall where huge quantities of materials were purchased, and CGST and SGST were paid on such purchases. The petitioner let out different units of the mall on a rental basis and claimed the benefit of the input tax credit of GST paid by it on purchases of input materials and services that had been used in the construction of the shopping mall for set-off against GST payable on rent received from tenants. The authorities denied the benefit of ITC in view of Section 17(5)(d).

The Orissa High Court read down Section 17(5)(d) to give the taxpayer the benefit of ITC on goods and services consumed in building a shopping mall against GST payable on rentals received from mall tenants. However, the department filed an SLP against the order before the Apex Court.

The Supreme Court noted that the expression “plant or machinery” used in Section 17(5)(d) cannot be equated with the term “plant and machinery” as defined by the Explanation to Section 17 of the CGST Act. These terms must be interpreted distinctly in the context of their specific use under the law.

Moreover, a “functionality test” is necessary to determine whether a building qualifies as a “plant” under clause (d) of Section 17(5). This test involves assessing the specific facts of each case in light of the building’s purpose and utility in the registered person’s business. Thus, the Court held that if the construction of the immovable property is critical to the business’s operation, it may be considered a plant for the purposes of input tax credit under the CGST Act.

Read the Ruling

3. SEBI’s tightened controls for trading in equity index derivatives

The derivatives market aids in price discovery, improves liquidity, and helps investors manage risk. Stock Exchanges and Clearing Corporations provide the platform for trading while ensuring real-time risk management, surveillance, and smooth settlement. Their role in product offering and risk management is vital, especially with recent changes in market dynamics, such as increased retail participation, short-tenure index options, and high speculative trading on expiry days.

Earlier, the SEBI formed an Expert Working Group (EWG) to review regulatory measures for investor protection and development of the equity derivatives market. After considering feedback and further discussions with stock exchanges and clearing corporations, SEBI has decided to implement measures to strengthen the equity index derivatives framework for better investor protection and market stability. Some of the measures are as follows:

3.1 Upfront collection of options premium and margin verification

Option prices exhibit non-linear movements and carry significant leverage, with the potential for rapid price fluctuations. SEBI has mandated that Trading Members (TM) and Clearing Members (CM) collect the options premium upfront from option buyers to prevent undue intraday leverage for clients and discourage holding positions beyond available collateral. This requirement will take effect for the equity derivatives segment starting February 1, 2025.

3.2 Intraday monitoring of position limits

Stock Exchanges and Clearing Corporations monitor the position limits for index derivatives contracts set by SEBI at the end of each trading day. However, due to high trading volumes on expiry days, intraday positions exceeding permissible limits may go unnoticed. To mitigate this risk, SEBI has decided that exchanges will monitor position limits for equity index derivatives on an intraday basis.

To facilitate, Stock Exchanges will capture at least 4 position snapshots throughout the trading day. This measure will take effect for equity index derivatives contracts from April 1, 2025.

3.3 Minimum contract size for index derivatives

Chapter 5 of the SEBI Master Circular for Stock Exchanges and Clearing Corporations, dated October 16, 2023, outlines the contract size for index futures and index options. Currently, these contracts must be between Rs 5 lakhs and Rs 10 lakhs. This limit was last set in 2015. Given that broad market values and prices have increased approximately threefold since then, SEBI has now decided that the value of derivative contracts should not be less than Rs 15 lakhs at the time of its introduction in the market. Further, the lot size will be determined to ensure that the contract value of the derivative falls between Rs 15 lakhs and Rs 20 lakhs during the review period. This measure will take effect for all new index derivatives contracts introduced after November 20, 2024.

3.4 Margin measures for expiry days

Top of FormTrading activity, open positions, and volatility tend to surge around expiry. However, this increase is not reflected in the margin requirements. As a result, there is an insufficient adjustment to account for the heightened risk, which fails to deter excessive speculation or build additional buffers to absorb sudden price shocks or unpredictable black swan events affecting asset markets. The Extreme Loss Margin (ELM) is implemented to address tail risk beyond the standard scanning risk.

On options contract expiry days, due to the heightened speculative activity associated with options positions, SEBI has decided to enhance tail risk coverage by imposing an additional ELM of 2% on short options contracts. This measure shall be effective from November 20, 2024.

Read the Circular

4. GSTN Advisory: GSTN e-Services App to replace e-Invoice QR Code Verifier App

The GSTN has issued an update to inform the launch of the new GSTN e-Services app, which replaces the old e-Invoice QR Code Verifier App. The app will soon be available on the Google Play Store and App Store, and no login is required to use the app.

This app offers the following features:

• Verify e-Invoices: Scan the QR code to verify the B2B e-Invoices QR code and check the live status of the Invoice Reference Number (IRN).
• GSTIN Search: Search for GSTIN details using the GSTIN or PAN.
• Return Filing History: View the return filing history for a GSTIN.
• Multiple Input Methods: Input search details using text, voice, or scan functions.
• Result Sharing: Share search results via the app.

In this regard, a GSTN Update dated October 1st, 2024, has been issued.

Read the GSTN Update

5. Parcel Management System (PMS) of Indian Railways is integrated with the E-Way Bill (EWB) system

The GSTN has issued an update to inform that the Parcel Management System (PMS) of Indian Railways has now been integrated with the E-Way Bill (EWB) system via Application Programming Interfaces (APIs).

This integration facilitates the seamless transfer of RR No./Parcel Way Bill (PWB) data from railways to the e-way bill portal, ensuring better traceability and compliance. It is also important that taxpayers follow the correct process for entering PWB numbers into the EWB system. In this regard, GSTN Update dated October 4^th, 2024 has been issued.

Read the GSTN Update

6. Temporary extension for insurance cos. to apply Ind AS 104 in consolidated financial statements

The Ministry of Corporate Affairs (MCA) has issued a notification under the Companies (Indian Accounting Standards) Third Amendment Rules, 2024, allowing insurance companies to continue reporting under Ind AS 104 (IFRS 4), Insurance Contracts, until the Insurance Regulatory and Development Authority of India (IRDAI) specifies the application date for Ind AS 117 (IFRS 17), Insurance Contracts. This extension provides crucial time for insurers to transition smoothly to Ind AS 117, which will necessitate significant adjustments to their financial data calculation and reporting processes.

The notification amends the Companies (Indian Accounting Standards) Rules, 2015. Specifically, it permits insurance companies to continue using Ind AS 104 for consolidated financial statements of their parent, investor, or venturer until the IRDAI notifies them regarding Ind AS 117. Additionally, a new proviso has been added to Rule 5, requiring insurers to temporarily comply with Ind AS 104 as outlined in the newly added schedule accompanying this notification.

While the MCA’s decision to defer the implementation of Ind AS 117 offers immediate relief from complex revenue recognition requirements, it also means that India’s insurance sector will remain non-compliant with IFRS 17, a standard adopted by over 140 countries. This delay could result in inconsistencies in global reporting standards, potentially affecting investor confidence and comparability.

Read the Notification