Weekly Round-up on Tax and Corporate Laws | 16th to 21st May 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 16th to 21st May 2022, namely:

(a) AO can’t import ‘beneficial ownership’ under Article 13 of Indo Mauritius DTAA without assigning reasons: ITAT;

(b) Supreme Court upheld Gujarat High Court judgment in the case of Mohit Minerals’ wherein GST on ocean freight was held ultra vires;

(c) NOIDA isn’t a financial creditor under IBC as leasing a plot with a restrictive clause didn’t amount to a finance lease: Supreme Court;

(d) Unqualified acknowledgement of debt in the balance sheet extends the period of limitation for filing of CIRP: Supreme Court;

(e) Mere consideration of replies and submissions would not amount to affording an opportunity of hearing; and

(f) Key considerations for audit of revenue.

1. AO can’t import ‘beneficial ownership’ under Article 13 of Indo Mauritius DTAA without assigning reasons: ITAT

The Mumbai Tribunal held that the concept of beneficial ownership, which is a sine qua non to treaty benefits, cannot be inferred or assumed in the absence of the specific provision.

Unlike Article 10 or Article 11, which explicitly provides beneficial ownership of interest or dividend to be entitled to treaty protection, there is no such provision in Article 13 of the India-Mauritius tax treaty. Unless a condition is specifically set out in the treaty provision itself, it cannot possibly be inferred.

In the context of international tax treaties, respect for negotiated bargains between contracting states is fundamental to ensure tax certainty & predictability and to uphold the principle of pacta sunt servanda. Article 26 of the Vienna Convention on the Law of Treaties also provides that “Every treaty in force is binding upon the parties to it and must be performed by them in good faith”. Any violation of this approach, no matter how well-intended, can only be at a huge cost of tax unpredictability – something tax administrations can ill afford.

One must also remember that the tax treaties are replete with choices. Once two willing partners consciously make these choices, they cannot be unilaterally nullified based on perceptions about some underlying notions of what would constitute good public policy.

Thus, the Assessing Officer (AO) had fallen in error in proceeding on the basis that the concept of beneficial ownership is relevant in the context of Article 13, without assigning any specific and cogent reasons in support of this inference.

Accordingly, the matter was to be remanded back for deciding the fundamental issue as to whether the requirement of beneficial ownership can be read into the scheme of Article 13 of the India-Mauritius tax treaty.

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2. Supreme Court upheld Gujarat High Court judgment in the case of Mohit Minerals’ wherein GST on ocean freight was held ultra-vires

The Apex Court, in the case of Union of India v. Mohit Minerals (P.) Ltd., has held that the levy of IGST on ocean freight under RCM is not valid as Indian importer is liable to pay IGST on composite supply comprising of supply of goods and supply of services of transportation and insurance in CIF contract.

Facts

The assessee had challenged the IGST levy on a reverse charge basis on the Ocean Freight in respect of the import of goods under CIF contracts. It was already paying the IGST at the time of import with the value of imported coal under the Customs laws. The Gujarat High Court held that the IGST levy on ocean freight is ultra-vires the levy provisions of the IGST Act. Against the said order, the Government filed an appeal before the Apex Court.

Supreme Court

The Apex Court has observed that the ocean freight from a foreign location to a customs station in India in CIF import contracts has sufficient territorial nexus for levying IGST under reverse charge. On an interpretation of Sections 5(3) and 5(4) of the IGST Act, read with Section 2(93) of the CGST Act, it is clear that the importer can be classified as the ‘recipient’ of the services. In this interpretation, the validity of the notifications levying GST under RCM on ocean freight has to be upheld.

The Apex Court held that there is no legal fiction or power to bifurcate the composite supply into the supply of goods and supply of services and to levy reverse charge GST on the supply of services component under section 5(4) of the IGST Act. Given this, the GST on a reverse charge basis cannot be levied on ocean freight in CIF contracts as it is part of ‘composite supply’ attracting section 2(30) and section 8 of the CGST Act.

In view of the above, it was held that the impugned notifications are validly issued under Sections 5(3) and 5(4) of the IGST Act, but it would violate Section 8 of the CGST Act and the overall scheme of the GST legislation as no such power can be noticed with respect to interpreting a composite supply of goods and services as two segregable supply of goods and supply of services.

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✔️ Possibility and caution points vis-à-vis refund claims post the Mohit Minerals Judgement | [2022] 138 taxmann.com 331 (SC) [19-05-2022]
✔️ Impact of these judgments on pending litigations/assessments/refund claims
✔️ Key action points to be undertaken by business apropos deputations/secondments post the SC Judgement in Northern Operating Systems | [2022] 138 taxmann.com 359 (SC) [19-05-2022]

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3. NOIDA isn’t a financial creditor under IBC as leasing a plot with a restrictive clause didn’t amount to a finance lease: SC

In the case of New Okhla Industrial Development Authority v. Anand Sonbhadra [2022] 138 taxmann.com 293 (SC), the Apex Court held that NOIDA is not a financial creditor under IBC as leasing of a plot with a restrictive clause did not amount to finance lease

Facts

The appellant ‘NOIDA’ initially submitted Form ’B’ and claimed as an operational creditor in regard to the dues outstanding under the lease. Subsequently, the appellant filed a claim in Form ‘C’ and claimed as a financial creditor. Some correspondence revealed that the appellant insisted upon being treated as a financial creditor.

Finally, the matter was considered by the adjudicating authority (NCLT), which held that there was no financial lease in terms of the Indian Accounting Standards and there was no financial debt. By the impugned order, the NCLAT has affirmed the view taken by the NCLT.

The dispute involves the question of whether the lease executed by NOIDA (lessor) in favour of the lessee is a financial lease under Section 5 (8)(d) and 5(8)(f) of IB Code?

Supreme Court

On appeal, the Apex Court observed that where NOIDA leased out a plot of land for 90 years with a clause, the lessee builder will construct residential buildings on it within 7 years with a maximum extension of 3 years with a penalty. If the lease is cancelled due to non-fulfilment of conditions, the land with any building on it to revert to NOIDA. Further, the lessee would require to take prior permission from NOIDA to create a mortgage over it. It was clear that the lessee builder does not get substantial risks and rewards of ownership as he is not free to do whatever he likes with the plot of land. Therefore, the lease does not qualify as a financial or capital lease under section 5(8)(d) read with Paras 61 to 67 of Ind AS 116 and will not qualify as “financial debt”.

“A lease, which is not a finance or a capital lease under Section 5(8)(d), may create a financial debt within the meaning of Section 5(8)(f),if, on its terms, the Court concludes that it is a transaction, under which, any amount is raised, having the commercial effect of the borrowing. The lease in question does not fall within the ambit of Section 5(8)(f) as lessee has not raised any amount from the appellant under the lease, which is a transaction. The raising of the amount, which, according to the appellant, constitutes the financial debt, has not taken place in the form of any flow of funds from the appellant/lessor, in any manner, to the lessee. The mere permission or facility of moratorium, followed by staggered payment in easy installments, cannot lead us to the conclusion that any amount has been raised, under the lease, from the appellant, which is the most important consideration.” Said Supreme Court

In view of the above, the Court held that NOIDA is not a ‘financial creditor’ and is an ‘operational creditor’ under the provisions of IBC, 2016

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4. Unqualified acknowledgement of debt in the balance sheet extends the period of limitation for filing of CIRP: Supreme Court

In the instant case, the NCLT rejected an application filed by the State Bank of India (the ‘appellant’) under Section 7 of the IBC against the Corporate Debtor (‘the respondent’) initiating the Corporate Insolvency Resolution Process (CIRP).

The respondent had received credit facilities from the appellant, and the outstanding amount under the credit facility totalled Rs. 102.4 crores. In place of these credit facilities, the respondent (along with other persons) provided securities in favour of the appellant.

However, the respondent failed to honour the terms of credit facilities and defaulted on repayments. Hence, the respondent’s account with the appellant was classified as a Non-Performing Asset on June 10, 2014.

Then, the appellant aimed to seek recourse at various junctures to the SARFAESI Act 2002 and Recovery of Debts Due to Banks and Financial Institutions Act, 1993 while continuing to engage in negotiations with the respondent.

Thereafter, a letter was issued by the respondent to the appellant dated January 19, 2016, offering a one-time settlement of Rs 61 crores in lieu of its debts, which was conditionally accepted by the appellant. However, the respondent, by a letter dated September 18, 2017, unilaterally revised the one-time settlement to Rs 40.6 crores, which was refused by the appellant.

In addition to this, an application for initiation of the CIRP was filed by the appellant on the ground that there was a default on the part of the respondent in paying a financial debt of approximately Rs 189 crores (calculated along with interest as of June 30, 2018).

While rejecting the application under Section 7 of the IBC on the grounds of limitation, the NCLT observed that the respondent’s loan account was declared as NPA on June 10, 2014, while the proceeding under Section 7 was instituted on September 19, 2018, i.e. beyond a period of three years from the date on which the right to apply accrued.

Referring to the decision given by NCLAT in case of “V Padmakumar v. Stressed Assets Stabilisation Fund and Another”, the Appellate Tribunal held that a statement contained in the balance sheet could not be treated as an acknowledgement of liability under Section 18 of the Limitation Act 1963 and the proposal for one-time settlement which was submitted by the respondent on September 18, 2017 was also beyond three years from the date of default.

On appeal, the Supreme Court observed that an acknowledgement in a balance sheet without qualification could be relied upon for the purpose of the proceedings under the IBC.

The Supreme Court held that unqualified acknowledgement of debt in a Corporate Debtor’s balance sheet within three years from the original date of default extends the limitation for filing CIRP under Section 7 of IBC, as Section 238A of IBC makes Section 18 of Limitation Act applicable to proceedings under IBC. Therefore:

(a) the provisions of Section 18 of the Limitation Act are not alien to and are applicable to proceedings under the IBC; and

(b) An acknowledgement in a balance sheet without qualification can furnish a legitimate basis for determining whether the period of limitation would stand extended, so long as the acknowledgement was within three years from the original date of default.

With the above clarification, the Supreme Court allowed the appeal and set aside the impugned judgment and order of the NCLAT and the NCLT.

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5. Mere consideration of replies and submissions would not amount to affording an opportunity of hearing: HC

The Karnataka High Court, in the case of Unique Instruments and Mfrs. (P.) Ltd. v. State of Karnataka, has held that mere consideration of replies and submissions does not amount to affording an opportunity for a hearing and cancellation of registration without providing an opportunity for hearing is not sustainable.

Facts

The GST registration of the petitioner was cancelled. It filed a writ petition against the order of cancellation on the ground that no opportunity of hearing was afforded before passing the said order. It was also submitted that mere consideration of reply and submissions would not be sufficient, and the opportunity of a personal hearing was to be granted.

High Court

The High Court observed that as per the proviso to Section 29(2) of the CGST Act that there shall not be a cancellation without giving the person an opportunity of being heard. In the instant case, examination of reply and submissions by itself would not indicate that petitioner was present during the hearing of proceedings leading to the cancellation of registration. Since the opportunity of hearing is a statutory mandate without which there shall be no cancellation of registration, therefore, the order of cancellation was to be set aside, and the matter was to be remitted for reconsideration.

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6. Key considerations for audit of revenue

Revenue means the amount of consideration generated from sales of goods or rendering of services related to the primary business operations of an entity. Other considerations generated from activities unrelated to the entity’s primary business operations are treated as ‘Other income’. The auditor employs appropriate procedures to obtain reasonable assurance about various assertions such as occurrence, completeness, measurement, presentation, and disclosure.

The following points are to be considered while auditing the revenue of an enterprise:

a) Evaluation of the system of internal control relating to revenue to determine the nature, timing, and extent of the other audit procedures.

b) Review the following aspects related to internal control:

• • • The systems and procedures relating to the generation of revenue, including the authority to fix prices, offer discounts, and other terms of sale.
    • Accounting procedures relating to the recognition of revenue.
    • Existence of periodic reports on actual performance vis-à-vis budgets.

c) Verification of revenue to be carried out by employing the following procedures:

• • • examination of records
    • analytical review procedures

d) Checking the recognition of revenue by the entity is in accordance with the accounting principles as laid down in Accounting Standard (AS) 9, Revenue Recognition.

e) Verification, if, the entity has instituted adequate cutoff procedures in relation to sales and sale returns.

f) Examination of selected dispatch documents concerning related sale invoices and the sales journal.

g) In the case of sales return, examination of selected entries in the sales return journal with reference to the receiving reports regarding goods returned, credit notes, and entries in the customers’ accounts.

h) Verification of the following points in case of Export Sales:

• • • Considerations receivable in a foreign currency are recorded at an appropriate amount in accordance with Accounting Standard (AS) 11
    • Written representation from the management to the effect that the entity has complied with the legal and regulatory requirements relating to exports

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