Weekly Round-up on Tax and Corporate Laws | 5th to 10th June 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 05^th to 10^th June 2023, namely:

(a) Securing Digital Lending: RBI’s Ground-breaking Guidelines on the ‘Default Loss Guarantee’;

(b) ITAT Special Bench members benchmark ‘Bundle of sports broadcasting rights’ with ‘Other Method’; Vice-President disagrees;

(c) Order passed against the driver of the vehicle would not be prejudicial to the rights of the consigner or consignee to appeal: HC;

(d) Benefit of the Margin Scheme is not available on melting old gold jewellery into gold lumps or irregular shapes of gold: AAR; and

(e) Accounting treatment of the value of utilities internally generated & consumed during the trial run as per Ind AS 16.

1. Securing Digital Lending: RBI’s Ground-breaking Guidelines on the ‘Default Loss Guarantee’

The RBI unveiled the innovative contractual arrangement of the “Default Loss Guarantee” to revolutionise digital lending. This landscape may mitigate the lending risks, safeguard the lenders, and empower the borrowers. Under this ground framework, eligible entities guarantee compensation for lenders if the borrower defaults. This bolsters confidence and unlocks new opportunities for financial growth. The framework is effective from 08-06-2023. Let’s delve into the intricacies of this extraordinary development, paving the way for a more resilient and inclusive lending ecosystem.

To whom do these ‘Default Loss Guarantee (DLG) Guidelines apply?

The DLG guidelines apply to DLG arrangements entered in ‘Digital Lending’ operations undertaken by

a) All Commercial Banks (including Small Finance Banks),

b) Primary (Urban) Co-operative Banks, State Co-operative Banks, Central Co-operative Banks; and

c) Non-Banking Financial Companies (including Housing Finance Companies).

What are the eligibility criteria for DLG Providers?

DLG arrangements can be entered into with a Lending Service Provider (LSP) or another Regulated Entity (‘RE’) with which it has entered into an outsourcing arrangement. Further, the LSP providing the DLG must be incorporated as a company under the Companies Act 2013.

What are the accepted forms of DLGs for Regulated Entities?

The acceptable forms of DLG include cash deposited with the RE, fixed deposits maintained with an SCB (with a lien marked in favour of the RE) and bank guarantee in favour of the RE.

Limitations on DLG Cover for Regulated Entities

The following limitations apply to DLG Cover for Regulated Entities –

• Maximum DLG Cover for outstanding portfolio shall not exceed 5% of the amount of that loan portfolio.
• DLG Provider is not required to bear a performance risk of more than 5% of the underlying loan portfolio in implicit guarantee arrangements.

What is the maximum invocation period & tenor of DLG?

The RE is authorised to invoke the DLG within a maximum overdue period of 120 days unless the borrower makes good the default before that time. Further, the DLG agreement should remain in force for less than the longest tenor of the loan in the underlying loan portfolio.

Read the Circular

2. ITAT Special Bench members benchmark ‘Bundle of sports broadcasting rights’ with ‘Other Method’; Vice-President disagrees

The assessee company was engaged in broadcasting and distributing various satellite channels, primarily in India. It entered into a Master Rights Agreement (MRA) with ESPN Star Sports Ltd. (ESS), a US-based entity, to purchase sports event broadcasting rights. Accordingly, the assessee acquired all rights and obligations in a bundled manner that ESS had with different international sports bodies (ISBs), including various national and international sports governing bodies.

The assessee made payments with respect to said broadcasting rights to third parties under novated agreements and was compensated with a 9.5% discount by ESS under sub-licensed agreements.

The assessee disclosed that said international transaction adopted the ‘Other method’ as the Most Appropriate Method (MAM). However, the assessee later adopted CUP as MAM and used a valuation report for comparability analysis wherein the valuer adopted DCF and valued international transactions by considering finite period valuation and terminal value.

On a reference made to the Transfer Pricing Officer (TPO), TP adjustments were made based on the deficiencies found in the valuation report submitted by the assessee.

The controversy concerned selecting the most appropriate method between the CUP and Other methods. Due to the different view adopted by the predecessor Bench in the assessee’s own case, the Hon’ble President of the ITAT constituted Special Bench on a reference made by the Division Bench.

The Members of the Special Bench of the Tribunal have diversified views on the issue, which are discussed as follows:

Vice President’s Views

The Vice President ruled in favour of the assessee and held that the ALP of ‘Purchase of Bundle of Sports Broadcasting Rights’ determined by the assessee under the CUP method was correct.

However, the accountant and judicial members disagreed with the views of the Vice President.

Accountant Member’s Views

The Accountant Member held that I could not persuade myself that on the facts and circumstances of the case, ‘The Most Appropriate method’ to determine ALP is ‘CUP’.

In the instant case, the Bundle of sports broadcasting rights was transferred, which is a unique intangible asset. In such a case, the ‘Other Method’ would be more appropriate to value those rights at different points in time based on changes in economic conditions and market situations.

The introduction of the ‘other method’ is in accord with global best practices for determining ALP. It prevents the difficulty of the taxpayer and the tax administration where the transfer pricing is of complex assets such as the designated rights covered as intangible rights therein.

This method applies where traditional methods of transfer pricing fail and serve as the ‘saviour’. Thus, the ‘other method’ of determining ALP of international transactions is neither inferior nor superior to other methods but helps the assessee and taxpayers substantiate an international transaction’s ALP in certain specified situations where other traditional methods do not support the case.

The sale of a bundle of sports broadcasting rights is also a unique transaction where other traditional methods fail. Thus, the ‘other method’ is the most appropriate method in this case.

Judicial Member’s Views

The Judicial Member agreed with the Ld. Accountant Member that, in the given facts of the present case, the ‘Other Method’ and not the ‘CUP Method’ was the most appropriate method.

Undeniably, product comparability is paramount to apply CUP, and the uncontrolled price has to be ascertained based on the same or similar terms during the same time period, market conditions as prevailing during the period when the assessee transacted with the AE.

The assessee put forth no arguments regarding the manner of application of the ‘Other Method’ and the deficiencies in the valuation report as pointed out by TPO. Thus, the instant appeal is to be placed before the Division Bench on determining the ALP of the international transaction in question by adopting the ‘Other Method’.

Read the Ruling

3. Order passed against the driver of the vehicle would not be prejudicial to the rights of the consigner or consignee to appeal: HC

The Allahabad High Court has held that the right of the consignor or consignee to appeal is not prejudiced even if the order passed is against the driver, and it would not be open for the consigner or consignee to challenge such an order.

The department intercepted a vehicle during transit and verified the documents. It was found that all documents required for the transit of goods were accompanied. However, the vehicle’s number was wrongly recorded in the transit document. Therefore, an order under Section 129(3) was passed against the driver. The assessee filed a writ petition and contended that since the order was passed against the driver, it would not be open for the consigner or the consignee to challenge such an order before the appropriate forum.

The High Court noted that the consigner or the consignee can always challenge the impugned order claiming ownership of the goods on the basis of documents evidencing their ownership. The Court further noted that merely because the order had been addressed to the driver of the vehicle, it would not be prejudicial to the rights and contentions of the consigner or the consignee. Therefore, the Court held that the petition was liable to be dismissed.

Read the Ruling

4. Benefit of the Margin Scheme is not available on melting old gold jewellery into gold lumps or irregular shapes of gold: AAR

The Authority for Advance Rulings, Karnataka has held that old gold jewellery is classified under HSN Code 7113. However, after melting gold jewellery into gold lumps or irregular shapes of gold, it shall be classified under HSN Code 7108. Therefore, the benefit of the Margin Scheme is not available for melting old gold jewellery into gold lumps or irregular shapes of gold since processing would change the nature of goods.

The applicant was engaged in the business of purchase and sale of used gold. It purchases used old gold jewellery from unregistered persons and sells the same after melting. It filed an application for an advance ruling to determine whether it would be required to pay GST on the margin difference between the sale price and purchase price as stipulated in Rule 32(5) of CGST Rules, 2017.

The Authority for Advance Ruling noted that the applicant would purchase second-hand gold in the form of jewellery from unregistered individuals and supply it to registered/unregistered persons in the form of lumps after melting the same. In the instant case, the nature of goods would change in as much as the characteristics of articles.

Since the processing done by the applicant would change the nature of the goods, the second condition prescribed under Rule 32(5) would not be satisfied. Therefore, it was held that the applicant would not be eligible to pay GST on the margin difference between the sale price and purchase price.

Read the Ruling

5. Accounting treatment of the value of utilities internally generated & consumed during the trial run as per Ind AS 16

The company, engaged in the business of manufacturing fertilisers and chemicals, needs power and steam as raw materials. After evaluating several cost-saving measures, the company decides to install Gas Turbine Generators. During the trial run, these generators generated power and steam, which was later utilised in the production process. As per management, the cost incurred during the trial run phase shall be capitalised only to the extent of expenditure incurred after adjusting the proceeds of power and steam generated during the trial. The value of power and steam internally generated and captively consumed is charged to P&L, and the remaining amount is capitalised as CWIP. The company wants to affirm its accounting and thus approached the EAC of ICAI for input on the same.

After taking into account Para 16 of Ind AS 16, the EAC states that the cost of an item of property, plant and equipment includes costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Also, ‘costs of testing incurred to ensure that the asset is functioning properly’ is an element of directly attributable cost. Further recognising income in the statement of P&L with the proceeds from the value of power and steam generated during the trial run when there is no sale but only an internal consumption will lead to the booking of internally generated income by the entity, which is prohibited under the Indian Accounting Standards framework.

On the basis of the above, the Expert Advisory Committee (EAC) is of the opinion that the company is incorrect in crediting CWIP with the value of utilities generated and consumed during the trial run phase and charging off the said amount to the Statement of Profit and Loss.

Read the Story