Weekly Round-up on Tax and Corporate Laws | 8th to 13th January 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 08^th to 13^th January 2024, namely:

(a) Demanding bank guarantee from assessee to grant GST refund is contrary to law: HC;

(b) SEBI proposes major regulatory changes for Indian-listed entities for a dynamic market and board effectiveness;

(c) SC issued notice in SLP filed against HC’s ruling that TRC is sufficient evidence to claim treaty benefits;

(d) Delhi HC quashes cancellation order passed by AO solely on basis of a letter received from another authority and

(e) NFRA debars & fines CA for not evaluating going-concern despite indications exist and for inappropriate audit reporting.

1. Demanding bank guarantee from assessee to grant GST refund is contrary to law: HC

The Honorable Rajasthan High Court has recently held that an order seeking bank guarantee from the assessee through solvent security to grant a refund is illegal and cannot be sustained. This ruling is given by the Honorable High Court of Rajasthan Raj Kamal Cargo Movers v. Assistant Commissioner, Jaipur.

Facts

In the present case, the petitioner filed a writ petition to challenge the order passed by the Assistant Commissioner demanding bank guarantee from the petitioner before allowing the refund. It was submitted that the Assistant Commissioner passed the original order, which was set aside by the Appellate Authority and directed to provide solvent security. However, the Assistant Commissioner again demanded bank guarantee from the petitioner.

High Court

The Honorable High Court noted that the Assistant Commissioner, who had passed the original order and ordered a refund, had somehow been trying to block the refund to the petitioner. The Court further noted that once solvent security was provided by the petitioner, the Assistant Commissioner again, apparently not willing to refund the amount, had demanded bank guarantee from the petitioner.

The Court also noted that the indication that the bank guarantee needs to be taken from the petitioner by way of solvent security by itself is contradictory since the term ‘solvent security’ essentially means that the person providing the security should not have been declared bankrupt by the Court. He has to produce documents to indicate that he owns some movable/immovable property equivalent to the amount for which the security is being provided.

However, the ‘bank guarantee’ is a guarantee given by the bank on behalf of the applicant to cover the payment obligation to a third party. Therefore, the Court held that the action of seeking bank guarantee from the petitioner was ex facie contrary to the directions of the Appellate Authority, and the same was liable to be set aside.

Read the Ruling

2. SEBI proposes major regulatory changes for Indian-listed entities for a dynamic market and board effectiveness

On 11.01.2024, the SEBI notified a consultation paper seeking comments from the stakeholders on interim recommendations of the Expert Committee for facilitating ease of doing business for listed entities in India & harmonization of the provisions of the ICDR and LODR norms.

The key highlights of the Consultation Paper include:

(a) Significant changes to Market Capitalisation norms for Listed Entities

Under current norms, regulations based on market capitalization for a listed entity persist even if its market cap falls below the threshold. It has been proposed that the regulations’ applicability should not be based on a single day’s market capitalization (currently calculated as of 31st March). There should be a sunset clause to reduce the burden on companies whose market capitalization falls and remains below the threshold.

(b) Extension of Timeframe for Filling Key Managerial Personnel Vacancies under LODR Regulations

The present regulation stipulates that any vacancy in the office of Key Managerial Personnel (KMP) of a listed entity must be filled as soon as possible and in no case later than three months from the date of such vacancy. In a proposed amendment, the Committee recommends extending the time limit for filling KMP vacancies that necessitate regulatory or government approvals. The suggested amendment seeks to extend this timeframe from 3 to a maximum of 6 months under LODR Regulations 26A(1) & (2) of LODR Regulations.

(c) ICDR Amendment proposes inclusion of Convertible Securities in Promoters’ Contribution

Existing norms under ICDR Regulations mandate a 20% promoters’ contribution for post-offer paid-up equity share capital. Regulation 15 currently excludes equity shares from convertible securities converted within a year before DRHP filing from the minimum promoters’ contribution. Regulation 8 allows an offer for the sale of equity shares converted from fully paid-up convertible securities held for at least one year before DRHP filing.

The proposed amendment suggests that equity shares resulting from converting fully paid-up, compulsorily convertible securities held for a minimum of one year before DRHP filing should qualify for the minimum promoters’ contribution.

(d) Proposal for adaptive ICDR amendments in ‘Unforeseen Circumstances’

Existing ICDR norms allow issuer companies to extend the bidding period for at least three working days due to force majeure events, banking strikes, or similar circumstances. The proposed amendment suggests reconsidering the mandatory three-day extension, citing concerns about tying up significant funds for an extended period. Accordingly, it has been recommended that issuer companies shall be to extend the bidding period for a minimum of one working day due to force majeure events.

Conclusion

In conclusion, the proposed regulatory changes by SEBI, based on the interim recommendations of the Expert Committee, reflect a comprehensive effort to enhance the ease of doing business for listed entities in India. The amendments target various aspects, including market capitalization regulations, directorial norms, timelines for key managerial personnel appointments, and flexibility in promoters’ contributions. These proposed changes demonstrate a commitment to adapt and streamline regulations, fostering a dynamic market environment while ensuring effective corporate governance.

Read the Consultation Paper

3. SC issued notice in SLP filed against HC’s ruling that TRC is sufficient evidence to claim treaty benefits

ACIT v. Blackstone Capital Partners (Singapore) VI FDI Three (P.) Ltd. [2024] 158 taxmann.com 261 (SC)

The Supreme Court of India has issued notice in the Special Leave Petition (SLP) filed against the ruling delivered by the Delhi High Court on the grant of treaty benefits based on the Tax Residency Certificate (TRC).

The Delhi High Court held that the TRC is the only evidence required to be eligible for the benefit under the DTAA. AO cannot question it as it would be wholly contrary to the Government of India’s consistent policy and repeated assurances to Foreign Investors. AO cannot go behind the TRC issued by the other tax jurisdiction as the same is sufficient evidence to claim treaty eligibility, residence status, and legal ownership.

Accordingly, AO was not right in issuing reassessment notice to deny the benefit of India-Singapore DTAA to the assessee.

Read the Ruling

4. Delhi HC quashes cancellation order passed by AO solely on basis of a letter received from another authority

The Delhi High Court has recently set aside the GST registration cancellation order, which is issued solely on the basis of a letter received from another authority. This ruling is given by the Honorable High Court of Delhi in case of Sant Ram v. Delhi State GST.

Facts

The petitioner was engaged in the trading of goods. A show cause notice was issued to the petitioner proposing to cancel its GST registration on ground of receipt of a letter from another authority. Thereafter, the GST registration was cancelled and the petitioner filed application for revocation of GST registration cancellation order which was also rejected. It writ petition against the cancellation order.

High Court

The Honorable High Court noted that the impugned order was issued solely on the basis of a letter received from another authority, and said letter was neither attached to impugned SCN nor did the impugned SCN refer to any contents thereon.

The Court also noted that the impugned order did not indicate how the proper officer was satisfied to fulfil conditions mentioned in section 29(1) or 29(2) of CGST Act, 2017 for cancellation of registration. Therefore, it was held that the impugned order cancelling GST registration was to be set aside.

Read the Ruling

5. NFRA debars & fines CA for not evaluating going-concern despite indications exist and for inappropriate audit reporting

Pursuant to information received from the Serious Fraud Investigation Office (SFIO), NFRA initiated action under section 132 (4) of the Companies Act 2013 against the Auditors of a listed company for professional or other misconduct. On a detailed analysis of submissions and audit documentation received from the auditors, NFRA held Chartered Accountant (CA) guilty of the following misconduct –

• Failure to evaluate management’s assessment of the company’s ability to continue as a going concern as required under SA 570. NFRA observed multiple indications contrary to the company’s going concern assumption, including defaults in repayments of dues to banks, uncertainties relating to recovery of trade receivables (which form 31.76% of total assets), impairment of the company’s investments in subsidiaries and associates, increasing losses of the company, application filed by creditors under Insolvency and Bankruptcy Code (IBC) and a negative operating cash flows. NFRA does not merit in the contention of CA that evaluation of Going Concern Assumption was not required under SA 570 when the audit report was signed 12 months after the Balance Sheet Date and stated that if indications casting doubt on going concern are present, the auditor is required to evaluate the validity of going concern assumption as per SA 570 in every case.
• The failure to adequately document evidence in the audit documentation file related to substantive and analytical procedures, including the re-computation of revenue from the business segment, assessment of evidence regarding recognized revenue such as party-wise and project-wise details, examination of agreements or sale deeds with relevant parties, scrutiny of company-generated invoices, and assessment of the risk of revenue recognition fraud as mandated by SA 240. The Chartered Accountant’s argument that evidence was unavailable due to the Economic Offence Wing’s (EOW) raid, justifying the issuance of a qualified opinion rather than a Disclaimer of Opinion, was not accepted by the NFRA.
• The auditor did not successfully acquire adequate and appropriate audit evidence concerning the presence and state of the inventory, particularly when the inventory constituted a substantial portion, accounting for 13.56% of the company’s total assets. The auditors claim that their inability to participate in stock-taking was due to the sealing of premises by the Economic Offence Wing (EOW), and the Income-Tax Department cannot be deemed valid.

Considering the proven professional misconducts and keeping in mind the nature of violations, principles of proportionality and deterrence against future professional misconduct, NFRA, in the exercise of powers under section 132(4)(c) of the Companies Act, 2013, hereby orders imposition of monetary penalty of Rs. 3,00,000 (Rupees Three Lakhs) upon CA. In addition, CA is debarred for 3 (Three) years from being appointed as an auditor or internal auditor or from undertaking any audit in respect of Financial Statements or internal audit of the functions and activities of any company or body corporate.

Read the Story