Weekly Round-up on Tax and Corporate Laws | 9th to 13th September 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from September 09th to 13th, 2024, namely:

1. Govt. notifies new rules for Compounding under FEMA; specifies list of non-compoundable offences, expands pecuniary limits;
2. LLC incorporated in USA and recognized as separate existence from its members is eligible for treaty benefit: ITAT;
3. CBIC issues clarification in respect of advertising services provided to foreign clients;
4. CBIC issued clarification on the availability of input tax credit in respect of demo vehicles;
5. CBIC clarifies that data hosting services provided to overseas cloud computing service providers are not intermediary services
6. Clarification issued regarding regularisation of refund of IGST availed in contravention of rule 96(10) of CGST Rules, 2017; and
7. MCA Issues Companies (Indian Accounting Standards) Second Amendment Rules, 2024, Revising Ind AS 116.

1. Govt. notifies new rules for Compounding under FEMA; specifies list of non-compoundable offences, expands pecuniary limits

The Ministry of Finance (MoF) vide. Notification dated September 12, 2024, has issued the Foreign Exchange (Compounding Proceedings) Rules, 2024. These new rules supersede the earlier notified Foreign Exchange (Compounding Proceedings) Rules, 2000, providing more clarity on non-compoundable contraventions. The key changes are as follows:

(a) Rule 9 specifies the list of non-compoundable contraventions

The erstwhile norms did not provide a specific list of non-compoundable contraventions. Rule 9 of the newly notified rules, however, provides a list of contraventions that cannot be compounded. The following are the non-compoundable contraventions:

• where the amount involved is not quantifiable
• where the provisions of section 37A of the Act are applicable
• where the Directorate of Enforcement (ED) is of the view that the proceeding relates to a serious contravention suspected of money laundering, terror financing or affecting the sovereignty and integrity of the nation
• where the Adjudicating Authority has already passed an order imposing penalty under section 13 of the Act
• where the compounding authority is of the view that the contravention involved requires further investigation by the ED to ascertain the amount of contravention under section 13 of the Act.

(b) Increase in Pecuniary Limits of various Compounding Authorities

Rule 4 of the newly notified norms increases the pecuniary limit of the various compounding authorities. The increased pecuniary limits are as follows:

• The Assistant General Manager of RBI can compound the contravention up to Rs. 60 Lakh
• The Deputy General Manager of RBI can compound the contravention exceeding Rs. 60 Lakh and up to Rs. 2.5 Crores
• The General Manager of RBI can compound the contravention exceeding Rs. 2.5 Crores and up to Rs. 5 Crores
• The Chief General Manager of RBI can compound the contravention exceeding Rs. 5 Crores                                                                                      

(c) Simplification of Payment Process, allows payment via NEFT and other e-modes

As per the newly notified rules, the payment for the application for compounding can be made by demand draft, National Electronic Fund Transfer (NEFT), or other permissible electronic or online modes of payment in favour of the compounding authority. Earlier, only payment by demand draft was allowed.

(d) Pending Proceedings to continue as per old Compounding Proceedings Rules

Any compounding application pending before the compounding authority at the time these rules come into effect will continue to be governed by the provisions of the Foreign Exchange (Compounding Proceedings) Rules, 2000. These prior rules will apply to such cases, despite being superseded by the 2024 rules.

Read the Notification

2. LLC incorporated in USA and recognized as separate existence from its members is eligible for treaty benefit: ITAT

The assessee, a Limited Liability Company (LLC) incorporated in the USA, obtained a Tax Residency Certificate (TRC) from the US Internal Revenue Service in accordance with section 90 of the Act. During the assessment proceedings, the Assessing Officer (AO) denied the assessee the benefit of lower withholding tax rate available under the India-USA DTAA.

The AO contended that as per Article 4 of the India-USA DTAA, only the persons or entities liable to tax in their country under the laws of their country are considered residents for the purpose of DTAA. Since the assessee was not liable to tax in the USA, the benefit of DTAA was denied. The matter reached the Delhi Tribunal.

The Tribunal held that the AO considered the status of the assessee as an LLC and a fiscally transparent entity according to US Tax laws. The treaty benefit was denied because the assessee was not considered a person liable to tax in the USA. For the purpose of Paragraph 1(b) of Article 4 of India-USA DTAA, the AO concluded that the LLC did not come under the special clauses for partnerships and trusts and holding specifically that the assessee was a corporation (LLC) in the eyes of US tax laws.

It is pertinent to note that under US federal income tax law, an LLC with a single owner is disregarded as separate from its owner unless the LLC elects to be treated as a corporation for US federal income tax purposes. The ability of the LLC to elect its tax classification under US federal income tax law also supports the legal situation or aspect of the LLC being liable to tax.

Thus, the assessee being a resident under Article 4 of the Indo-US Tax Treaty by virtue of incorporation and its recognition as a separate existence from its Members qualifies as a ‘person’. The assessee is liable to tax in the resident State by virtue of US Income-tax Law as an LLC is given the option to either be taxed as a corporation or be taxed as a disregarded entity or partnership (depending on the number of members) wherein the income of the LLC is clubbed in the hands of its owner who merely discharges the tax that is assessable in the case of the LLC.

Therefore, the assessee is liable to tax under the authority of the US Income-tax law. The intent of the Indo-US Treaty has to be given precedence wherein the concept of fiscally transparent entity is the recognized way of recognizing the phrase ‘liable to tax.’

Thus, the assessee was eligible to claim the benefits of the India-US tax treaty as it satisfied all the conditions for the eligibility at benefits of the India-US tax treaty and that the assessee was eligible to claim a beneficial rate of DTAA.

Read the Ruling

3. CBIC issues clarification in respect of advertising services provided to foreign clients

The CBIC has issued a circular to clarify that the advertising company which is involved in the main supply of advertising services, including resale of media space, to the foreign client on principal-to-principal basis does not fulfil the criteria of “intermediary” under section 2(13) of the IGST Act. Also, the recipient of the advertising services provided by the advertising company in such cases is the foreign client. In this regard, Circular No. 230/24/2024-GST dated September 10th, 2024, has been issued.

Read the Circular

4. CBIC issued clarification on availability of input tax credit in respect of demo vehicles

The CBIC has issued circular to provide clarification that input tax credit in respect of demo vehicles is not blocked under clause (a) of section 17(5) of CGST Act. Also, the availability of input tax credit on demo vehicles is not affected by way of capitalization of such vehicles in the books of account of the authorised dealers, subject to other provisions of the Act. In this regard, Circular No. 231/25/2024-GST, dated September 10th, 2024, has been issued.

Read the Circular

5. CBIC clarifies that data hosting services provided to overseas cloud computing service providers are not intermediary services

The CBIC has issued circular to clarify that data hosting services provided by service providers located in India to cloud computing service providers located outside India shall not be considered as intermediary services and hence, the place of supply of the same cannot be determined as per section 13(8)(b) of IGST Act. In this regard, Circular No. 232/26/2024-GST dated September 10th, 2024 has been issued.

Read the Circular

6. Clarification issued regarding regularization of refund of IGST availed in contravention of rule 96(10) of CGST Rules, 2017

The CBIC has issued circular to clarify that where the inputs were initially imported without payment of integrated tax and compensation cess by availing exemption but subsequently, GST on such imported inputs are paid at a later date, then the IGST, paid on exports of goods, refunded to the said exporter shall not be considered to be in contravention of provisions of sub-rule (10) of rule 96 of CGST Rules. In this regard, Circular No. 233/27/2024-GST dated September 10th, 2024 has been issued.

Read the Circular

7. MCA Issues Companies (Indian Accounting Standards) Second Amendment Rules, 2024, Revising Ind AS 116

The Ministry of Corporate Affairs (MCA), through a notification dated 9th September 2024, issued the Companies (Indian Accounting Standards) Second Amendment Rules, 2024. This amendment addresses the accounting treatment for seller-lessees in sale and leaseback transactions under Ind AS 116, Leases. It introduces new paragraphs, illustrative examples, an appendix, and requirements for retrospective application to ensure consistency in financial reporting.

A key change includes the addition of new clauses pertaining to leaseback transactions under Indian Accounting Standard (Ind AS) 116, Leases. The changes ensure that gains or losses related to retained rights are not recognised unless specific requirements are met, providing seller-lessees with clearer guidelines on managing lease obligations and the right-of-use asset.

The amendment specifies that the seller-lessee shall determine “lease payments” or “revised lease payments” in a way that would not recognise the gain or loss on the sale and leaseback of an asset related to the rights of use retained by the seller-lessee.

Furthermore, illustrative examples have been provided to demonstrate the correct application of these updated rules, including the management of sale and leaseback transactions involving both variable and fixed payments. These changes simplify accounting processes while ensuring adherence to Ind AS regulations.

The above amendment will come into effect from the financial period beginning on or after April 1, 2024, impacting annual reporting periods beginning on or after that date.

Read the Notification