Weekly Round-up on Tax and Corporate Laws | 4th to 8th December 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from December 4th to 8th 2023, namely:

a) Explanations 6 & 7 to Section 9(1)(i) are to be given retro effect as they have to be read along with Explanation 5: HC;

b) “Group of Cos. doctrine” applies to arbitration in India and can be invoked to bind non-signatories parties: SC;

c) HC directed dept. to resolve issue of placing notice under “View Additional Notices and Orders” or “View Notices and Orders”

d) HC set aside unsigned order uploaded on portal and directed department to pass fresh order; and

e) Classification and Presentation of Lease Receivable by Ind AS compliant NBFC.

1. Explanations 6 & 7 to Sec. 9(1)(i) are to be given retro effect as they have to be read along with Expl. 5: HC

The issue before the Delhi High Court was:

“Whether Explanations 6 and 7 appended to Section 9(1)(i), which was inserted by the Finance Act 2015 with effect from 01.04.2016, can operate retrospectively?”

The Delhi High Court held that section 9(1)(i) inter alia seeks to impose tax albeit via a deeming fiction qua all income accruing or arising, whether directly or indirectly, through or from any property in India or through or from any asset or through transfer of asset situated in India, or the transfer of a capital asset situated in India.

The judgment of the Supreme Court rendered in the case of Vodafone International Holdings BV v. Union of India excluded from the scope and ambit of section 9(1)(i) gain or income arising from the transfer of shares of a company located outside India. However, the value of the shares was dependent on assets situated in India. Explanations 4 and 5 were introduced via the Finance Act 2012, which was effected from 1-4-1962 to cure this gap in the legislation.

Explanations 4 and 5 presented difficulties in that the expressions’ share and interest’ and ‘substantially’ found in the explanations were vague, resulting in undue hardship for transferors where the percentage of share or interest transferred was insignificant. Explanations 6 and 7 alone would have no meaning if they were not read along with Explanation 5. Therefore, if Explanations 6 and 7 have to be read along with Explanation 5, which concededly operates from 1-4-1962, they would have to be construed as clarificatory and curative.

Accordingly, it was concluded that although Explanations 6 and 7 were indicated in the Finance Act 2015 to take effect from 1-4-2016, they could be treated as retrospective having regard to the legislative history that led to the insertion of Explanations 6 and 7.

Accordingly, the appeal was dismissed.

Read the Ruling

2. “Group of Cos. doctrine” applies to arbitration in India and can be invoked to bind non-signatories parties: SC

In the matter of Cox and Kings Ltd. v. SAP India (P.) Ltd. [2023] 157 taxmann.com 142 (SC), the Supreme Court upheld the ‘group of companies’ doctrine in the arbitration law proceedings. The Court held that the “Group of Cos. doctrine” applies to arbitration in India & can be invoked to make arbitration agreements binding on non-signatory parties. The Court further clarified that the principle of alter ego or piercing the corporate veil cannot be the basis for applying the group of companies doctrine.

Brief facts of the case

In the instant case, certain questions were kept before the Apex Court. The Court deliberated on the following questions for consideration:

(a) Should the group of companies doctrine be incorporated into Section 8 of the Arbitration Act, or can it stand independently in Indian jurisprudence without any statutory provision?

(b) Is the continued invocation of the group of companies doctrine warranted based on the principle of ‘single economic reality’?

(c) Should the group of companies doctrine be construed as a tool for interpreting the implied consent or intent to arbitrate between the parties?

(d) Can the principles of alter ego and/or piercing the corporate veil alone justify triggering the operation of the group of companies doctrine, even in the absence of implied consent?

Court’s interpretation

Regarding the inquiry into the autonomous existence of the ‘doctrine of a group of companies,’ the Court determined that this doctrine possesses an independent status as a legal principle. This conclusion was drawn through a coherent interpretation of Section 2(1)(h) in conjunction with Section 7 of the Arbitration Act.

On the question of ‘single economic reality’, the Court held the doctrine to be applicable when there is a tight group structure or single economic reality without any reference to the parties’ intention. However, the Court ultimately relied on implied or tacit consent by the non-signatory, evidenced by its conduct, to hold that it was a party.

Legal provisioning

“The definition of “parties” under Section 2(1)(h) read with Section 7 of the Arbitration Act includes both the signatory as well as non-signatory parties; The Conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement; The requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties;

Under the Arbitration Act, the concept of a “party” is distinct and different from the concept of “persons claiming through or under” a party to the arbitration agreement;

Court’s observations

The Court observed that the foundation for invoking the group of companies doctrine lies in upholding the distinct corporate identities of the group entities while ascertaining the shared intention of the involved parties to include the non-signatory party within the scope of the arbitration agreement.

Regarding the basis of the application of ‘group of companies doctrine’, the Court held that the principle of alter ego or piercing the corporate veil could not be the basis for applying the group of companies doctrine.

Court’s Pronouncement on application of the Group of Companies Doctrine in Indian Arbitration Jurisprudence

In applying the group of companies doctrine, the courts or tribunals must evaluate all cumulative factors outlined in Discovery Enterprises. Consequently, the sole reliance on the principle of a single economic unit cannot be the exclusive justification for invoking the group of companies doctrine.

The right to assert claims in a derivative capacity is limited to those “claiming through or under”.

The Court finds fault in the approach taken in Chloro Controls, as it erroneously traces the group of companies doctrine back to the phrase “claiming through or under”. Such an approach contradicts well-established principles in contract law and corporate law.

Emphasizing the utility of the group of companies doctrine in discerning party’s intentions within the complexity of transactions involving multiple parties and agreements, the Court advocates for its retention in Indian arbitration jurisprudence.”

The Referral Court directed to let the Arbitral Tribunal decide non-signatory binding; the Court emphasized the comprehensive application of Doctrines for Arbitration Agreement Inclusion.

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3. HC directed dept. to resolve issue of placing notice under “View Additional Notices and Orders” or “View Notices and Orders”

The High Court of Madras has recently directed the department to address the issue arising from hosting information in the Menu in the Dashboard for “View Additional Notices and Orders” when there is already another drop Menu for “View Notices and Orders”. This ruling is given by the Honorable Madras High Court in case of East Coast Constructions and Industries Ltd. v. Assistant Commissioner (ST).

Facts

The petitioner was aggrieved by the assessment order passed by the GST department since the notice was uploaded in “View Additional Notices and Orders” in the GST Portal Dashboard. The petitioner filed writ petition and contended that it failed to notice the notices/communications uploaded since right from the inception of GST; all notices/communications were sent/hosted on the GST portal under “View Notices and Orders”.

High Court

The Honorable High Court noted that in the present case, the dispute was due to mismatch between details in Form GSTR-1 and Form GSTR-3B and required an explanation from the petitioner. Therefore, it would deserve fair chance to explain as there appeared to be discrepancy in turnover in Form GSTR-1 and Form GSTR-3B.

Thus, the order was directed to be set aside, and the issue was remitted back to the GST Authority to pass a fresh order on merits. The Court also directed the department to address the issue arising from hosting information in the Menu in the Dashboard for “View Additional Notices and Orders” when there is already another drop Menu for “View Notices and Orders”.

Read the Ruling

4. HC set aside unsigned order uploaded on portal and directed department to pass fresh order

The High Court of Andhra Pradesh has recently held that unsigned order could not be covered under any mistake, defect or omission therein as used in Section 160 of CGST Act, 2017 and liable to be set aside. This ruling is given by the Honorable Andhra Pradesh High Court in case of SRK Enterprises v. Assistant Commissioner (ST).

Facts

In the present case, the assessee had filed writ petition and challenged the adjudication order on ground that it was unsigned. It was also contended that the ground on which order was passed was different from one mentioned in show cause notice. However, the GST Authority contended that order was valid because it was uploaded on common portal, which could only be done by competent authority.

High Court

The Honorable High Court noted that the unsigned order could not be covered under any mistake, defect or omission therein as used in Section 160 of CGST Act, 2017. Moreover, Section 169 of CGST Act, 2017, which deals with service of orders would not apply because the issue in this case was not service of order but of signature and validity of order itself.

Therefore, the Court held that the order was invalid because it was unsigned and petition was liable to be allowed on ground that order did not contain signatures. Thus, the impugned order was set aside with direction to revenue authority to pass fresh order in accordance with law.

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5. Classification and Presentation of Lease Receivable by Ind AS compliant NBFC

Para 67 of Ind AS 116, Leases, requires that at the commencement date, a lessor shall recognize assets held under a finance lease in its balance sheet and present them as ‘receivable’ at an amount equal to the net investment in the lease. In pursuance of the above para, an NBFC engaged in leasing out assets to its customers classifies and presents ‘Lease Receivable’ under the head ‘Receivable’ in its financial statements.

However, the auditor is of another view about the classification and presentation of ‘Lease Receivables’ in the financial statement. As per the auditor, ‘Lease Receivables’ should be presented under ‘Loans’ rather than ‘Receivables’. The auditor’s contention is based upon the provisions of Division III of Schedule III to the Companies Act, 2013 which states that ‘Lease Receivables’ should be presented as ‘Loans’ rather than ‘Receivables’.

Further, the management of the company believes that presenting ‘Lease Receivable’ as part of ‘Loans’ would prima facie appear to a general investor that the Company is a loan company which is not the business of the company. The management differs from the view of the auditor because the company is engaged in leasing of assets and not providing loans.

To resolve this dilemma, the management has approached the Expert Advisory Committee (EAC) for its opinion on the correct classification of ‘Lease Receivable’ in the financial statement. The committee noted that Division III of Schedule III to the Companies Act, 2013 specifically requires presenting financial assets relating to ‘Leasing’, viz., lease receivables under ‘Loans’ under the head ‘Financial Assets’ in the Balance Sheet. Further, there is no stipulation in para 67 or any other para of Ind AS 116 as to whether lease receivable should be presented in the balance sheet under ‘Receivables’ or under ‘Loans’. Therefore, the disclosure of lease receivables under ‘Loans’ as per the requirements of Schedule III cannot be considered contradictory to or as a departure from the requirements of Ind AS.

Therefore, the committee has opined that the company should present ‘Lease Receivables’ under ‘Loans’ under the head ‘Financial Assets’ in the Balance Sheet. Further, other disclosure requirements, such as maturity analysis of lease receivables as per Ind AS 116, etc., should also be complied with.

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