ctconline.org...October 2020 | The Chamber's Journal | 3 | Editorial Vipul B. Joshi...

RELATED PARTY

TRANSACTIONS

Vol. IX | No. 01 | October 2020

No. MCS/149/2019-21 / R.N.I. No. MAHENG/2012/47041 - Total Pages: 168

Chamber's CADRE

Domestic Tax Law

Companies Act

Transaction IBC

Indirect Tax

October 2020 | The Chamber's Journal | 3 |

Editorial Vipul B. Joshi ............................................................... 5

From the President Anish Thacker ............................................................... 7

SPECIAL STORY

RELATED PARTY TRANSACTIONS

Regulatory Architecture for Related Party Transactions - Is it still Work-in-Progress? — Bharat Vasani & S. R. Patnaik ...........................11

Transfer Pricing – Key Issues and Experience under Income-tax Regulations — Bhavesh Dedhia & Anjul Mota .........................20

RPT under Domestic Tax Law (except TP) — Himanshu Mandavia, Payal Thakur & Sanjay Chauhan ..................................................33

Contemporaneous ALP determination under Companies Act in current times — Prasanna Bharatan .............................................45

Special Valuation Branch & Related Party Transactions — K Vaitheeswaran ..........................51

Interplay between Customs and Transfer Price — Smita Roy & Partho Dasgupta ......................................................58

GST & Related Party – Levy and Valuation — Suyog Bhave .......................................................63

Accounting and Auditing Considerations for Related Parties’ Transactions — Khushroo Panthaky & Jatin Kalra .....................70

Regulatory and compliance mechanism of Related Party Transactions — Sudhakar Saraswatula ......................................78

Contents

Vol. IX | No. 1 | OctOber – 2020

Related Party Transaction under IBC: Concept and Evolution — Rajeev Vidhani, Vishnu Shriram & Ashwij Ramaiah ......................................................89

Direct Taxes

Supreme Court — Keshav Bhujle .............................99

High Court — Paras S. Savla, Jitendra Singh & Nishit Gandhi ...............................................................104

Tribunal — Neelam Jadhav, Neha Paranjpe & Tanmay Phadke .....................................................112

International Taxation

Case Law Update — Tarunkumar Singhal & Dr. Sunil Moti Lala ...117

Indirect Taxes

GST Gyaan - Motor Vehicle – Blocking is from the perspective of design or usage — Shilpi Jain ........................124

GST – Recent Judgments & Advance Rulings — Naresh Sheth & Jinesh Shah ...........................127

Service Tax – Case Law Update — Rajiv Luthia & Keval Shah ..............................145

Corporate Laws

Case Law Update — Makrand Joshi ...................153

Other Laws

Best of The Rest — Rahul Sarda .........................160

The Chamber News — Haresh Kenia & Neha Gada .............................164

i

THE CHAMBER OF TAX CONSULTANTS3, Rewa Chambers, Ground Floor, 31, New Marine Lines, Mumbai – 400 020 Phone : 2200 1787/2209 0423/2200 2455 E-Mail: [email protected] • Website : http://www.ctconline.org.

THE CHAMBER'S JOURNAL

MEMBERSHIP FEES & JOURNAL SUBSCRIPTION — FOR THE F.Y. 2020-21

Sr. No.

Membership Type Fees GST 18%

Total

1. Life Membership Fees ` 15,000 2,700 17,7002 Ordinary Membership Fees -

Yearly (April to March)` 2,500 450 2,950

3. Admission Fees – Ordinary Membership

` 750 135 885

4. Associate Membership Fee Yearly (April to March)

` 7,500 1,350 8,850

5. Admission Fees – Associate Membership

` 1,000 180 1,180

6. Student Membership including E-Journal (April to March)

` 500 90 590

7. Journal Subscription Life Members

` 1,350 0 1,350

8. Journal Subscription Non-Members

` 2,500 0 2,500

9. Journal Subscription Student Members

` 1,000 0 1,000

READER'S SUGGESTIONS AND VIEWS: We invite the suggestions and views from readers for improvement of The Chamber's Journal. Kindly send your suggestions on [email protected].

No part of this publication may be reproduced or transmitted in any form or by any means without the permission in writing from The Chamber of Tax Consultants.

No part of the contents of the Journal should be used as, or be regarded as a substitute for, professional advice.

Non-receipt of the Journal must be notified within one month from the date of publication, which is 12th of every month.

CHAMBER'S E-JOURNAL SUBSCRIPTION

FOR THE F.Y. 2020-21Membership Type Fees GST

18%Total

E-Journal Subscription - Life Members (Yearly)

700 126 826

E-Journal Subscription - Non-Members (Yearly)

1,000 180 1180

E-Journal Subscription - Single Journal

200 36 236

ADVERTISEMENT RATESPer Insertion

Fourth Cover Page (Colour) ` 15,000Second & Third Cover Page (Colour) ` 13,500Ordinary Full Page (B&W) ` 7,500Ordinary Half Page (B&W) ` 3,500Ordinary Quarter Page (B&W) ` 1,750(Special discount on bulk inside colour pages)

Exclusive of GSTFull advertisement charges should be

paid in advance.

D I S C O U N T25% fo r 12 i nse r t i ons15% fo r 6 i n se r t i ons 5% fo r 3 i n se r t i ons

D I S C L A I M E ROpinions, views, statements, results, replies, etc., published in the Journal are of the respective authors/contributors.

Neither The Chamber of Tax Consultants nor the authors/contributors are responsible in any way whatsoever for any personal or professional liability arising out of the same.

Editor – Vipul JoshiEDITORIAL BOARD JOURNAL COMMITTEE MANAGING COUNCIL

Convenor Vipul Joshi (Editor)

Members A. S. Merchant

K. Gopal Keshav Bhujle Kishor Vanjara Pradip Kapasi

Assistant Editors Ajay Singh

Ameya Kunte Haresh Chheda

Manoj Shah Nishit Gandhi

Kumarmanglam Vijay Rakesh Upadhyay Sanjay R. Parikh

Vikram Mehta Yatin Vyavaharkar

Chairman Paras K. SavlaVice Chairmen

Mandar Telang • Jiger SaiyaConvenors

Bhavik B. Shah • Toral Shah Advisor Past Presidents K. Gopal Vipin Batavia • Vipul Choksi Office Bearer Editor Neha Gada Vipul Joshi

Members Ankoosh Mehta Anup Shah Atul Bheda Bharat Vasani Dinkle Hariya Himanshu Mandavia Jagruti Sheth Janak Vaghani Kiran Nisar Kush Vora Mitesh Majethia Naresh Ajwani Nikita Badheka Ninad Karpe Pankaj Majithia Rajkamal Shah Sachin Maher Sanjay Gajra Sanjeev Lalan Vinita Krishnan Viraj Mehta

Ex Officio Anish Thacker Ketan Vajani (President) (Vice President)

President Anish ThackerVice President

Ketan VajaniHon.Secretaries

Haresh Kenia • Neha GadaHon. Treasurer

Parag Ved Imm. Past President Editor Vipul Choksi Vipul Joshi

Members Ashok L. Sharma Atul Mehta Dharan Gandhi Dinesh Poddar Heneel Patel Hinesh Doshi Hitesh R. Shah K. Gopal Kishor Vanjara Mahendra Sanghvi Maitri Savla Mehul Sheth Nilesh Vikamsey Nishtha Pandya Paras Savla Paresh Shah Rajesh L. Shah Rajesh P. Shah Varsha Galvankar

THE CHAMBER'S JOURNAL

| 4 | The Chamber's Journal | October 2020 ii

THE NEW ‘NORMAL’

We are happy to be back to communicate with you ‘physically’ – in print form, that is – after the gap of six months! When we had to switch over to the ‘e version’ of the Journal in March, we had thought that the print version of this Journal would start again in no time as the situation would become normal soon once this tiny thing is conquered / eradicated in no time. This was under the belief that this tiny thing is a small and temporary phenomenon that does not stand a chance against the mighty humankind and cannot withstand the super advancements in the medical filed made by the most powerful living being of the earth – the conqueror of much more dreaded living beings and organisms of the planet. However, the fact of the matter is, as of today, not only the situation is not normal and this tiny thing has remained supreme and dominating over mankind since last over eight months but, in fact, mankind has now come to accept the inevitable ‘peaceful’ co-existence with it! Whether this 'truce' is temporary and strategic before the final assault by mankind or not, only time will tell. It’s like the classic battle between David and Goliath. The only small hitch is, it is not clear, as of today, who is David and who is Goliath!

Consequently, reverting to the print version is not under the normal situation, as envisaged, but under not-so-normal situation. Or should it be said, under new normal?

This forced acceptance of truce (temporarily, hopefully) has given birth to a very interesting phrase, rather, a phenomenon, called ‘the new normal’. This phrase has different many shades depending upon the context in which it is used. The pessimists will obviously see this phenomenon with gloomy and doomsday future scenario, with the prediction that the things are not going to be the same anymore – at least till considerable time to come. One of the major departure from the normal times would be that the free mingling with one’s near and dear, not to mention in public, is going to be like the things of distant past era – with a mix of hazy memory and a little bit of fairy tale. On the top of that, one will have to live with the constant lurking fear that this tiny thing may knock your door anytime! In other words, the snatching away of the normal life - the deprivation of such normal freedoms – is now the new ‘normal’. Such a fine of way of putting up a brave front, with

Editorial

October 2020 | The Chamber's Journal | 5 | iii

reconciliation! On the other hand, the ever optimists and positive thinkers will obviously see this phenomenon as an instrumentality to usher a new era of ‘the new normal’ where the mankind presses the 'restart' / 'reset' key to make a fresh and rejuvenating start and approach concerning almost all facets of life – individually, philosophically & spiritually, as a society, as responsible inhabitants of this planet, to name few!

Meanwhile, the country is grappling with multiple issues. As if the catastrophic consequences on account of this tiny thing were not enough, it is embroiled with many confrontations, domestically and at the international level. One of the crucial – and rather disturbing – issues that has emerged is the issue of freedom of expression vis – a – vis responsibility/the right of State to put restrictions on such right. Though this tussle is age-old, what is worrisome is the fact that, in the present scenario, none of the sides has come with clean hands and both the sides have their hidden agenda – personal score to settle. Neither party is really interested in the real / the larger cause but their motives are tainted with extraneous considerations. But either way, in the ultimate analysis, the casualty is the right of freedom of expression – one of the most crucial and fine rights so essential for a democracy.

That also brings to forefront another – but more dangerous – phenomenon in the form of spreading misinformation. We are now living in the era where the 'fourth estate' – the news media - which is supposed to be the watchdog for the three pillars of the democracy, viz; the legislature, the executive and the judiciary – is alarmingly shedding its role of impartial and upright guardian of spreading truth and higher values. Instead, it is besieged with feeding biased, motived, and false information or, to use the present buzzword, the false narratives. This is so scary, as it is the news media – and the only one – through which the information about the happenings all around is disseminated to the public, on which basis opinions are formed and decisions / actions are taken. The media has become the most potent and dangerous double-edged weapon; alas, now it is being used for dubious purposes, keeping the audience / readers always puzzling what to believe and whom to believe. And mind well, such unfortunate developments are not confined to our country.

Talking about other countries, one needs to just observe what is happening in the 'United’ States of America! The way the confrontation between the defending President and the contender has degenerated into pettiness is really a pity! The dignity, the grace, and the statesmanship one expect from the most powerful person – the present one and the contender – have gone for a toss and what the world is getting to see is a squabble between two school-going children! Democracy and its process have touched a new low! Certainly, it does not auger well for the future of democracy.

As regards the tax laws, the recent decision in arbitration in the case of Vodafone has put the Government in a tight spot! The dilemma is whether to accept it or challenge it. Either way, the repercussions are going to be far and wide, in the long term perspective.

| 6 | The Chamber's Journal | October 2020 iv

At another front, it always puzzles me why, in the matter concerning genuine requests for extension of various time limits under fiscal laws, either no decision is taken till the last moment – thereby putting everybody on edge and keep on guessing till last – or the relief is given reluctantly / piecemeal as if the Government is obliging the citizens by throwing a charity. As it is rightly said: “Waiting is worse than knowing. ….” Granted, there may be many serious considerations that the Government needs to weigh before taking such a decision. However, such a process and the method defy logic and are inexplicable. Is it that we have to always knock the doors of the judiciary – which is already overburdened otherwise – and the Government acts only when the judiciary intervenes?

This month’s Special Story is on a very interesting – but relevant – topic: “Related Party Transactions”. It is quite puzzling to note how Indians shower so much love and affection to their relatives / near and dear ones, in the form of passing them so much economic help and benefits! The recent developments highlighting the frauds being played under related party transactions perhaps answer this puzzle. With the increasing efforts of the Government to tighten the noose over such attempts, it is very essential that the professionals and also other stakeholders not only be aware of the provisions concerning related party transactions but also take serious note of that. For, the cost of ignoring / non–complying such provisions are very high – in all respect! Hope the readers feel well informed. Or should I say, well warned?

Vipul B. Joshi Editor

October 2020 | The Chamber's Journal | 7 | v

“The measure of a leader is not the number of people who serve him, but the number of people he serves” – John C Maxwell

Brothers and Sisters at the Chamber,

Being a leader is complicated. You need to take decisions, and take decisions quickly at times,

you need to take along people of different thought processes, different cultural backgrounds

and different traits with you. Yet, it is never about the role and is always about the goal, the

ultimate objective. A quarter has swiftly flown by, from the time I have assumed office, and this

has been a very unusual period for all of us. We all had hoped and prayed that the pandemic

would be beyond us by this time but at this point, we have no visibility as to what the future

heralds. Truly, the year 2020 will be a year to remember in mankind’s history.

I therefore, under these circumstances, take great pride in presenting the first printed issue of

“The Chamber’s Journal” for the year 2020-21, i.e. this issue, before you. This is the first issue

we have printed for the year and all going well, we hope to continue sending you printed issues

for the months to come as well. The printed issues will be available only to those who have

renewed their ordinary membership subscription, and to those life members and subscribers

who have specifically opted for the receipt of the printed copy. This month, a complimentary e

copy is being sent to all members. From the next issue onwards, the distribution shall only be

to those who are members / subscribers. I therefore urge everyone reading this communication

to renew their membership/subscription to the Journal. To those non-members who are reading

this, I sincerely urge you to become the Chamber’s members.

The scheme of faceless appeals is released on 25th September 2020. The intention and the

raison d’ etre of the scheme need to be appreciated and the endeavour to reduce corruption

by eliminating the interface between the taxpayer and tax authorities may be regarded to be

From the President

| 8 | The Chamber's Journal | October 2020 vi

laudable. At the same time, the scheme has several areas that need representation. Our Law and

Representation Committee, under the sage leadership of Past President, CA Mahendra Sanghvi

continues to do great work in making incisive and insightful representations. The Committee

is under the process of preparing another comprehensive representation on the faceless appeal

scheme and the Chamber will file the same with the Hon. Finance Minister, shortly. A special

issue of the Journal ofn the subject of Faceless Assessments and Faceless Appeals is in the

process of being designed for the readers’ benefit.

On 1st October 2020, the Membership and Public Relations Committee had organised a splendid

lecture meeting on ‘How to be an Intentional Leader’ by Major General Neeraj Bali, a retired

army veteran who has seen more adversities than us, very closely. The lecture was a treat to

attend, and I personally have taken some lessons home to learn and to practice as frequently as

I can. Major General Bali has just agreed to permit sharing of the recording of the lecture with

the Chamber’s members and this will be shared with you appropriately. I request all of you to

watch his presentation which is simple yet very powerful.

The Hyderabad Study Circle and Delhi Chapter, along with the Foundation of Tax and

Accounting Professionals (FTAP), have organised an online long duration course on Real Estate.

The course has again received very good participation and I am grateful to professionals who

despite the challenges of not being able to fully attend the office and working from home,

have enrolled for the course. This is a comprehensive course covering various facets relevant

to advising real estate players and will be very useful for the professionals at large. My

compliments to the Hyderabad Study Circle and the Delhi Chapter and sincere thanks to Past

president, CA Hinesh Doshi for mentoring the Hyderabad Study Circle and the Delhi Chapter

for this initiative.

The Student Committee has planned a unique law students orientation course, ‘From Classroom

to Courtroom’ on the zoom platform. The course is very well designed and will help law

students get a practical insight into how the legal practice works. I request all our members to

spread the word and to help us get as many enrolments for this course as possible.

As we are now in the busy season, of work for most of us, I would not like to take up too much

of your time and attention. My greetings to all of you for the upcoming Navratri festival. May

the festive season light up our lives with better news on the economic and health fronts.

This issue of the Journal is on a very pertinent and timely subject namely, ‘Related Parties

under various laws.’ Transactions with related parties present unique disclosure as well as

tax related issues, particularly given the heightened scrutiny around these transactions and

October 2020 | The Chamber's Journal | 9 | vii

the compliance required both in accounting as well as in income-tax, GST, IBC etc in relation

thereto. This issue has a very good coverage of these. I compliment the Journal Committee for

coming up with this issue and also thank each of the contributing authors and coordinators for

their contribution to this issue.

We just saw a further easing of restrictions of the lockdown announced. We are hopeful that

we soon will see further easing. As the world as well as the Chamber take measured steps in

rebuilding from the disruption caused by the pandemic, I am reminded of the following quote

by Saint Francis of Assisi: “Start by doing what's necessary; then do what's possible; and suddenly

you are doing the impossible.”

We all have done the necessary by staying safe during the lockdown. Let’s now start doing

whatever we can to help our clients comply with their tax audit, transfer pricing and income-

tax and GST return filing requirements.

Yours sincerely,

ANISH THACKER President

| 10 | The Chamber's Journal | October 2020 viii

Special Story — Regulatory Architecture for Related Party Transactions - Is it still Work-in-Progress?

SS-I-1 October 2020 | The Chamber's Journal | 11 |

Bharat Vasani & S. R. Patnaik, Advocates

Regulatory Architecture for Related Party Transactions - Is it still Work-in-Progress?

BackgroundHistorically, the Companies Act, 1956, did not have specific provisions governing related party transactions (“RPT”). However, restrictions were imposed on certain kinds of transactions with certain related parties by way of Sections 294, 294A, 294AA, 297 and 314 of the Companies Act, 1956. The J.J. Irani Expert Committee Report on Company Law, 2005, had recommended a ‘shareholder approval and disclosure-based regime’ over the ‘government approval-based regime’ for RPT. It was recommended that RPTs crossing a certain threshold limit would mandate shareholder approval by a special resolution. RPT as a concept was introduced by the enactment of Section 188 of the Companies Act, 2013 (“the Act”).

The Ministry of Corporate Affairs (“MCA”) regulates transactions between two unlisted companies, while SEBI looks at transactions when at least one of the parties to the transaction is a listed entity.

However, it appears that both the regulators are still struggling to find a right balance that satisfies two apparently contradictory objectives of any RPT regulations:-

- Protection of stakeholder interest from abusive RPTs.

- Facilitating “ease of doing business” by not disproportionately increasing compliance burden of companies.

In principle, one may agree with the SEBI’s stand that since it regulates transactions of listed entities in which there is substantial public interest, it is entitled to prescribe a more stringent set of regulations than those provided under the Act. Listed companies are required to follow stricter rules because public money is at play. However, the fact remains that there are large unlisted companies with significant public interest at stake, as these unlisted companies are systemically important and have significant borrowings from banks and other public institutions.

Flip-flops in Regulatory ArchitectureSection 188 of the Act came into force on April 1, 2014. The MCA has been diluting the rigors of RPT provisions ever since by issuing various clarificatory circulars and also amendments to the Act and the Rules. It changed the special resolution requirement to an ordinary resolution (2015 Amendment). Further, the MCA circular dated July 17, 2014, clarified that only concerned related parties could not vote on the resolution for approval of RPT. It also clarified that the schemes of arrangement under Sections 230-


SS-I-2| 12 | The Chamber's Journal | October 2020

directors who are promoters or members of the promoter group, and to non-executive directors individually.

However, again in 2019, SEBI constituted a working group to re-examine the provisions of RPTs under LODR. The SEBI Working Group Report on RPT (“SEBI Report”) dated January 27, 2020, recommended several amendments to the provisions of LODR, governing RPTs, including amendments in the definition of related party and RPTs. The SEBI Report proposed an amendment in the definition of “related party” under Regulation 2(1)(zb) of the LODR to include within its scope any person or entity belonging to the promoter or promoter group of the listed entity, irrespective of its shareholding. The amendment would significantly enlarge the scope of the definition of related party under Regulation 2(1)(zb) of the LODR. Another major amendment proposed is regarding the definition of “RPTs” under Regulation 2(1)(zc) of the LODR by:

i. Covering transactions between the listed entity or any of its subsidiaries on the one hand and a related party of the listed entity or any of its subsidiaries on the other.

ii. The listed entity or any of its subsidiaries on the one hand, and any other person or entity on the other hand, the purpose and effect of which is to benefit a related party of the listed entity or any of its subsidiary.

This is a ‘catch all’ provision, borrowed from the UK Premium Listing Rules. In the Indian context, companies may encounter many practical challenges in identifying such transactions and forming an opinion that the purpose and effect of such transaction is to benefit a related party. It would also make the task of the Audit Committee very onerous. The SEBI Report has also recommended that

234 of the Act need not comply with Section 188 of the Act. This circular goes against the scheme of Section 188 and its legal validity is doubtful. Moreover, Section 188 of the Act exempts transactions in the “ordinary course of business” and at “arm’s length” without adequately defining those terms. Many transactions are therefore escaping shareholder scrutiny. Companies have been seeking “convenient legal opinions” to treat certain transactions as being in the ordinary course and at arm’s length to avoid shareholder scrutiny.

The MCA last year amended the Rules and removed the Rs 100-crore threshold for approval of RPT by shareholders. The Companies (Amendments) Act, 2020, recently passed by the Parliament has decriminalised the offence under Section 188 of the Act, and has proposed only monetary penalty of ` 25 lakh for listed companies and ` 5 lakh for unlisted companies.

SEBI, too, had substantially amended RPT provisions in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”), in 2018, on the basis of the recommendations made in the Kotak Committee Report, to include all promoter related entities holding 20% or more in the listed entity as related parties, and accordingly transactions with these entities will have to be in compliance with Regulation 23 of the LODR. Disclosure of all transactions with promoter/ promoter group entities (whether related parties or not) holding 10% or more shareholding will also be required.

Greater scrutiny by shareholders of certain RPTs was also introduced, by introducing the requirement to obtain shareholder approval, in case of brand/ royalty payments to related parties (exceeding 5% of consolidated turnover of the listed entity), remuneration (above the specified thresholds) payable to executive



the revised RPT definition should exclude certain corporate actions like payment of dividend, issue of securities on a preferential basis, rights issue, bonus issue, buyback of securities, etc. The SEBI Report has also proposed a very important change in the materiality threshold. As against the current prescription of 10% of annual consolidated turnover, it is now proposed to lower the threshold to Rs 1,000 crore or 5% of annual total revenue, total assets or net worth (on a consolidated basis) of the listed entity, whichever is lower. This revised lower threshold is in line with what is prescribed in other jurisdictions like the UK, Singapore, etc.

Analysing related party and RPT under corporate lawsThe term “related party” has been defined under Section 2(76) of the Act. It enumerates the various categories of ‘related party’ with reference to a company. Further, the term “relative” has been defined under Section 2(77) of the Act as anyone who is related to another, if:

i. they are members of a Hindu Undivided Family;

ii. they are husband and wife; or

iii. one person is related to the other in such manner as may be prescribed.

Additionally, the Companies (Specification of Definitions Details) Rules, 2014, provides that a director other than independent director or key managerial personnel of the holding company or his relative with reference to a company shall also be deemed to be a related party. The said rules also provide a list of more “relatives” in terms of Section 2(77) of the Act. The definition of ‘related party’ under Regulation 2(1)(zb) of the LODR is broader when compared to the definition under Section 2(76) of the Act as it defines a related

party as related party defined under Section 2(76) of the Act or under the applicable accounting standards. Indian Accounting Standard Ind AS-24 requires disclosures to be made by a parent entity regarding its transactions with associates, joint ventures or subsidiaries, collectively referred to as related party. Under Indian Accounting Standard Ind AS-24, “related party” is a person or entity that is related to the entity that is preparing its financial statements (in this standard referred to as the reporting entity). Accounting Standard-18 defines “related party” as parties are considered to be related if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions.

Section 188 of the Act specifies certain transactions which if conducted between related parties would fall within the purview of the said section. The provisions of Section 188 of the Act would be applicable if:

a. a contract or arrangement is entered into by a company with a related party as defined under Section 2(76) of the Act;

b. such a contract or arrangement falls under any of the categories specified under sub-clause (a) to (g) of Section 188(1) of the Act, in which case approval of the board of directors will be required prior to entering into such transaction; and

c. such transaction exceeds the monetary thresholds prescribed under Rule 15(3) of the Companies (Meeting of Board and its Powers) Rules, 2014, in which case prior approval of the shareholders is also required by way of an ordinary resolution.

The term “contract or arrangement” implies that it shall also include unwritten



arrangements under Section 188 of the Act. In the case of Bank of India vs. Ahmedabad Manufacturing & Calio Printing1, it was held that the word ‘arrangement’ under Section 390 of the Companies Act, 1956, shall mean any agreement or understanding between the parties concerned. The fourth proviso to Section 188(1) of the Act provides an exemption from these requirements for transactions entered into by the company in the “ordinary course of business” and on an “arm’s length basis”. However, the requirement of Section 177 of the Act, which mandates the approval of the Audit Committee for all transactions with related parties (subject to the exception of transactions with wholly owned subsidiaries), would continue to apply. Further, if the transaction is between a holding company and its wholly owned subsidiary, irrespective of the value of the transaction, shareholder approval is not necessary.

Regulation 2(1)(zc) of the LODR defines “RPT” as a transfer of resources, services or obligations between a listed entity and a related party, regardless of whether a price is charged and a ‘transaction’ with a related party shall be construed to include a single transaction or a group of transactions in a contract. However, this definition is not applicable for the units issued by mutual funds, which are listed on a recognised stock exchange. The definition of “RPTs” is wider than the categories of transactions provided under Section 188 of the Act.

Regulation 23 of the LODR requires a company to formulate a policy on materiality of RPTs for dealing with RPTs, including clear threshold limits duly approved by the board of directors. All material RPTs require shareholders’ approval through an ordinary

resolution and no related party shall vote to approve such resolutions, whether the entity is a related party to the particular transaction or not. However, all RPTs, whether material or not, require approval of the audit committee. A transaction with a related party is considered material if the transaction to be entered into individually or taken together with previous transactions during a financial year, exceeds 10% of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity. In case of a transaction involving payments made to a related party, with respect to brand usage or royalty, shall be considered material if the transaction during a financial year, exceeds 5% of the annual consolidated turnover of the listed entity.

The term “RPT” is also defined under Indian Accounting Standard Ind AS-24 as a transfer of resources, services or obligations between a reporting entity and a related party, regardless of whether a price is charged. This definition is similar to the definition provided under the LODR. Accounting Standard-18 defines “RPT” as a transfer of resources or obligations between related parties, regardless of whether or not a price is charged.

Arm’s length transaction & ordinary course of businessThe fourth proviso to Section 188(1) of the Act provides that “nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis.” However, this exemption has not been expressly provided for listed entities under the LODR. The term “ordinary course of business” has been a matter of

1. (1972) 42 Comp. Cases 211 (Bom).



discussion in various judicial precedents1 and following factors are established in determining whether an act is in the ordinary course of business:

a. Whether the transaction is permitted in the main objects in the memorandum of association of the company? In the event it is not, whether the company intends to carry out such transaction in its ordinary course under the memorandum of association. This has to be factually ascertained;

b. Whether the company will receive the revenue from the transaction as income from its business and not as a capital receipt?;

c. The historical practices of the company and the frequency of past transactions of such nature; and

d. Industry practice with respect to such transaction.

Explanation (b) to Section 188(1) of the Act defines the expression “arm’s length transaction” as “a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest”. However, apart from the generic definition, there is no further guidance by way of rules or explanation or illustration, which actually sets out the method of computing “arm’s length transaction” to determine whether a RPT will need to abide by Section 188(1) of the Act or not. Regulation 23(3) of the LODR provides the conditions for granting omnibus approval by the Audit Committee, including specifying the indicative base price/

current contracted price and the formula for variation in the price, if any. However, the LODR does not have any reference to the arm’s length price principles.

Related Parties under the Income-tax Act, 1961Under the Income-tax Act, 1961 (“IT Act”), relations between parties are relevant for various determinations. The concept of related party has been in existence for a long time and the provisions of the IT Act have been framed to ensure that a taxpayer does not take advantage of its relationship with another entity to enter into commercially unviable or unjustifiable transactions. However, at the same time, the IT Act has also not been able to target/question all RPTs. Some of the provisions of the IT Act governing RPTs are as under:

a) Charitable organisations transacting with related parties [section 13(3)];

b) Commercial organisations making payment for certain expenses to related parties [section 40A(2)(b)];

c) Transactions in the nature of gift between related parties [section 47(3)];

d) Transactions between associated enterprises [under Chapter X]; and

e) Transactions being regarded as impermissible transactions under General Anti Avoidance Rules [under Chapter X-A].

a) Charitable organisations are not allowed to transfer funds to associated concerns

2. Somanath Baraman vs. S. V. Jagannatha (AIR 1973 AP 144); Herbertsons Ltd. vs. Deputy Commissioner of Income Tax (2004 87 TTJ (Mumbai) 840); State of M.P. vs. Bengal Nagpur Cotton Mills Ltd. (1960 12 STC 333 MP); Countrywide Bank Corporation Limited vs. Brian Norman Dean (1998) A.C. 338); Commissioner of Income Tax vs. Birla Brothers P Ltd (1970 2 SCC 88); Seksaria Bawan Sugar Factory v. Commissioner of Income Tax (AIR 1950 Bom 200).



and claim the same as an application of funds for charitable purposes3. All such payments shall have to pass the muster of Section 11 of the IT Act to be considered as genuine expenses. If the charitable organisation is unable to satisfy such tests, then such payments may not be regarded as application of funds. It is pertinent to note that this provision not only monitors payments towards expenses, but also ensures that no funds are diverted without justification to any related party. It may also be noted that what would be regarded as reasonable, has not been prescribed under law and hence, it gives significant flexibility to the tax authorities to consider whether the payment can be regarded as legitimate or reasonable in light of the commercial objectives of the charitable organisation.

b) Similarly, payment for expenses incurred by any commercial entity, for payments made to any related party can be claimed as tax -deductible expenditure only to the extent such expenses are considered as reasonable4. Any amount paid by the taxpayer, in excess of what is regarded as reasonable, may be disallowed. Similar to the payments discussed under (a) above, the IT Act does not prescribe criteria as to the reasonability of such expenditure, and therefore the scope for discretion of the tax authorities is wide.

c) It is commonly understood that all gifts provided to relatives arise out of natural love and affection. By this understanding, corporate entities should

not be allowed to grant any asset or any other asset by way of a gift. However, in the course of today’s business transactions, it may become necessary in certain cases to coerce corporate entities to transfer certain assets without any consideration, i.e., as a gift. It may be noted that in certain cases, it is imperative for one taxpayer entity to transfer some of its assets to another without any incidence of tax, so that the commercial understanding between the entities can be implemented. While it may sound illogical, courts have permitted corporate entities gifting their assets to another entity without consideration, since it is not prohibited under law. Here also, the tax authorities have been provided with adequate amount of flexibility to challenge a transaction if they are not convinced.

Some other anti-evasion measures have been announced from time to time which render such transactions taxable under the IT Act. Further, certain transactions with relatives,6 in the nature of gift, are exempt from tax, in cases of individuals. These exemptions have been retained even under the anti-evasion provisions.

In this regard, it may be noted that though the term ‘relative’ has been defined exhaustively, nephews, nieces, cousins and their descendants are excluded from the ambit, therefore, gifts made to uncles, aunts and cousins could be subject to tax under these anti-evasion measures. Further, it must be appreciated that gifts by the HUF from

3. Section 13(3), IT Act.4. Section 40A(2), IT Act.5. Orient Green Power Pte. Ltd., In re, AAR No. 973 of 2010, order dated August 14, 2012 (AAR - New Delhi);

DCIT vs. KDA Enterprises (P.) Ltd., ITA No. 2662/Mum/2013, order dated March 11, 2015 (Mumbai ITAT).6. Proviso (I) under Section 56(2)(x), IT Act.



its members are exempt, however, the reverse is not true, i.e., gifts by the HUF to its members, or transfers at below FMV, shall be taxable. Courts have generally taken a harmonious approach to reading the provision, holding that the underlying principle in the concept of HUFs is the reciprocity, i.e., that the members expect a share in the property of the HUF and, therefore, any sum or property received by a member during the sustenance of the HUF or upon its dissolution, could not be considered as a gift without consideration, and hence, may not be taxable7. Another interesting point in this regard is that although gifts received by HUFs from individuals is not explicitly exempt from tax, courts have held that an HUF constitutes all persons lineally descended from a common ancestor, i.e., all qualifying as ‘relatives’ in respect of the person making the gift, and therefore, such a transfer made to a group of relatives should be exempt from tax8.

d) In case of an international transaction undertaken between associated enterprises, it is imperative that such transaction is undertaken by the transacting parties having regard to the arm’s length price (“ALP”), as mandated under Chapter X of the IT Act. It is important to note that the watchword here is an ‘associated enterprise’ and not a ‘related party’. The IT Act defines ‘associated enterprise’ as one which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise and covers within its ambit a few other subjective criteria

such as shareholding of one entity in the other, directly or indirectly of at least 26%, significant loans, right to appoint directors, dependence of one entity’s business on the other’s intellectual property, etc.

Where the entities are associated enterprises and the transactions enacted between them meet the other relevant criteria, then the pricing of the transaction has to be determined as per the ALP. Under the IT Act, ALP can be determined by any of the following methods, being the most appropriate method (“MAM”), having regard to the nature of the transaction:

I) Comparable uncontrolled price (“CUP”) method

II) Resale price method (“RPM”)

III) Cost plus method (“CPM”)

IV) Profit split method (“PSM”)

V) Transactional net margin method (“TNNM”) and

VI) Such other method as may be prescribed.

It must be noted that for the first time, there has been effort to scientifically compute the price at which the requisite transactions may be carried out, unlike earlier, where the IT Act only made vague references to justify what can be regarded as the ALP in respect of related party transactions. The CUP method compares price in a controlled transaction to the price in a comparable uncontrolled transaction in comparable circumstances. RPM analyses the

7. Pankil Garg vs. PCIT, ITA No. 773/Chd/2018, order dated July 17, 2019 (Chandigarh ITAT); per contra see Gyanchand M. Bardia vs. ITO, 1072/Ahd./2016, order dated February 21, 2018 (Ahmedabad ITAT).

8. Vineetkumar Raghavjibhai Bhalodia vs. ITO, ITA No. 583/Rjt/2007, order dated May 17, 2011 (Rajkot ITAT).



price that a company charges to an unrelated customer to compute the arm’s length gross margin. CPM adds an appropriate cost mark-up to costs incurred by a supplier in a controlled transaction. PSM applied when both sides of a controlled transaction contribute significant intangible property and the profit is to be divided such as is expected in a joint venture relationship. TNMM compares the net profit margin that an entity earns in controlled transactions to the same net profit margins earned by the entity in comparable uncontrolled transactions or alternatively by independent comparable companies. To decide the MAM, the taxpayer should consider the type of transaction, the functional analysis, comparability factors, availability of comparable transactions and possibility of making adjustments to the data to improve comparability.

e) The General Anti-Avoidance Rules (“GAAR”) have come into effect from April 1, 2017 and would be applicable to all transactions entered from that date. These rules require that all arrangements/ transactions must have commercial substance, i.e., a commercial objective besides merely tax avoidance9. Failing to satisfy the taxman regarding the commercial substance of the transaction may result in denial of tax treaty benefits10, recharacterization of debt into equity and vice versa11, etc.

Invocation of the GAAR also permits the tax authorities to deem persons who are ‘connected persons’ as one and the same entity for the purpose

of determining tax treatment of any amount12. ‘Connected person’ means any person who is connected directly or indirectly to another person and includes the categories set out below:

I) For individuals: relatives

II) For companies: directors and their relatives

III) For firms/associations of persons (“AOP”) or bodies of individuals (“BOI”): partners or member and their relatives

IV) For HUFs: members of the HUF and their relatives

V) For any entity:

i. any individual who has a substantial interest in the business of the entity or any relative of such individual

ii. a company, firm, AOP, BOI or HUF having a substantial interest in the business of the person; any director, partner, or member thereof and their relatives or

iii. a company, firm AOP, BOI or HUF whose director, partner, or member has a substantial interest in the business of the person and their relatives

VI) any other person who carries on a business, if:

i. the person being an individual, or any relative of such person, has a substantial interest in the business of that

9. See section 96(1), IT Act.10. Section 98(1), IT Act.11. Section 98(2)(i), IT Act.12. Sections 98(1)(d), 99(i), IT Act.



other person or

ii. the person being a company, firm, AOP, BOI or HUF, or any director, partner or member thereof, or any relative of such director, partner or member, has a substantial interest in the business of that other person.

The 2012 Final Report on GAAR had in fact noted a recommendation to clarify that ‘connected person’ being too broad and ambiguous, should be clarified to subsume any entity considered as ‘associated enterprise’ for transfer pricing purposes, ‘relative’ under section 56 and ‘persons’ covered under section 40A. However, the definition of ‘connected person’ has intentionally been left loose enough to allow wide leeway to the tax authorities to club multiple entities working in tandem or connected to each other under the GAAR lens, even if they do not meet the specified criteria.

Concluding ThoughtsMCA and SEBI are not aligned and at times travel in the opposite directions when it comes to devising regulatory architecture for RPT. The regulatory architecture is unstable and frequent changes are made in the rules every time a new corporate scandal involving RPT comes to surface. Unfortunately, even after so many amendments, the concepts of “ordinary course of business” and “arm’s length price” are undefined/ inadequately defined in the Act. Neither the Act nor the LODR prescribes any methodology for determining an arm’s length price, making the job of the Audit Committee, which is tasked to approve such transactions, very challenging. Till the MCA prescribes a more comprehensive and contextual legal framework for arriving at an arm’s length price, the methods prescribed under Section 92C of the Income Tax Act, 1961, to arrive at an arm’s length price for the

purpose of transfer pricing regulations, could be adopted as an interim arrangement.

Over the years, burden on the Audit Committee has significantly increased. Four Audit Committee meetings every year get consumed by quarterly results. Most Audit Committees are complaining about onerous responsibilities and increased workload. In addition to duties cast under the Act and LODR, Audit Committees are also required to monitor the whistle-blower mechanism and compliance related to Insider Trading Regulations.

The composition of Audit Committees is heavily loaded in favour of Chartered Accountants and financial experts. Many transactions require domain knowledge of the industry in which the companies are operating. It is important that the composition of an Audit Committee is suitably altered to provide for appointment of industry experts.

The recent unfortunate episodes related to the use of “subsidiary route” to undertake RPTs, which are not in the best interests of minority shareholders of listed entities, may have led the SEBI Working Group to recommend changes in the LODR to provide for examination of RPT of unlisted subsidiaries of listed entities. The proposed LODR changes have several legal, constitutional and tax implications, when it comes to transactions of overseas subsidiaries, which need closer examination. Apart from significantly increasing the compliance burden of listed entities, some recommendations are just not practical to implement, particularly for a large corporate with several subsidiaries. Hence, it is hoped that the SEBI Report (on which the Regulators seems to have hit a “pause” button due to the ongoing pandemic) is more closely examined to prevent any unintended tax and other consequences on listed entities and their unlisted overseas subsidiaries.

Special Story — Transfer Pricing – Key Issues and Experience under Income-tax regulations

| 20 | The Chamber's Journal | October 2020

CA Bhavesh Dedhia & CA Anjul Mota

Transfer Pricing – Key Issues and Experience under Income-tax regulations

Related party transactions (RPTs) are a normal feature in any business. There would hardly be any group having nil to negligible related party transactions. However, such transactions are always viewed differently by the shareholders, lenders and tax authorities. Despite multiple regulations and requirements, the controversy about the related party transactions does not seem to subside.

In the context of Indian tax regulations over the years, cross border and domestic RPT sare governed by specific anti-abuse transfer pricing (TP) and other similar provisions. Across the globe, there is a substantial increase in TP disputes and in India the same has hogged the limelight on account of high-pitched litigation, complex provisions unique to India vis-à-vis global regulations and various dispute resolution programs.

The factors that have contributed to this phenomenon are: (i) Mounting fiscal deficit for Governments; (ii) Need to preserve tax base in recessionary economic environment; (iii) Constant competitive pressures to structure efficient business operations; and (iv) Unprecedented collaboration between various Revenue authorities.

A TP analysis begins with the delineation of transactions i.e. assessing actual behavior of

the parties vis-à-vis contractual framework.Assessing the actual behavior involves understanding the transaction nature and more importantly, functional and risk profiles of the transacting entities. Thereafter, the analysis involves the drawing a comparison between RPT and independent transaction available in the public domain to ascertain the arm’s length nature of such RPT.

In this article, we have endeavored to discuss certain key issues and the experience in dealing with such issues, from TP regulation contained within the Income-tax, 1961 (the Act):

Key issues

1 Associated Enterprise relationships – Interplay of Section 92A(1) vs. Section 92A(2) of the Act

The Indian transfer pricing provisions incorporate a very wide definition of associated enterprises (AE) to include direct and indirect participation in the management or control or capital [clauses (a) and (b) of Section 92A(1)] as well as certain conditions wherein two enterprises are ‘deemed’ to be AE [clauses (a) to (m) of Section 92A(2)].

Section 92A(1) does not specifically explain what is meant by participation in

SS-I-10



interpreting Sections 92(A)(1) and (2), one should interpret them in a manner so as to make both sections workable rather than any of them redundant.

In the case of Veer Gems2, the Hon’ble Ahmedabad bench held that where any of the sub-clauses of Section 92A(2) are not satisfied; then even if an enterprise has de facto participation in the capital of the other enterprise, or exercises management or control over the other enterprise, the two enterprises cannot be said to be AEs. This decision was upheld by Hon’ble Gujarat High Court3 and the SLP4 filed by the Revenue authorities in this case was dismissed by the Hon’ble Supreme Court.

Recently, the Hon’ble Mumbai bench placing a reliance on the Explanatory Memorandum in the case of Kaybee Private Limited5, held that Section 92A(1) cannot be applied on a standalone basis and has to be considered in conjunction with Section 92A(2) for the purposes of determining an AE relationship.

ViewThe decisions in the case of Kaybee and Veer Gems (supra) appear to reflect the intent of the statute as expressed by the Memorandum to the Finance Bill, 2002. Considering, the qualitative parameters i.e. participation in the management, control or capital, the taxpayers would be subject to extreme difficulty to determine AE relationship independently based on section 92 A(1). Thus, the view that the section 92A(1) cannot be applied on a standalone basis and has to be considered in conjunction with section 92A(2) for the

management, control or capital, and how these criteria should be judged. On the other hand, Section 92A(2) lays down specific situations to identify AE relationship.

There is ambiguity on the interpretive interplay of these two sections – in terms of whether Section 92A(2) effectively restricts the scope of Section 92A(1) to only the situations provided in Section 92A(2) or whether Section 92A(1) operates independently of Section 92A(2).

In this regard, it would be pertinent to note that Section 92A(2) was amended by the Finance Act, 2002 and the words “For the purposes of sub-section (1)” were inserted with effect from April 1, 2002. The Explanatory Memorandum clarifies that the mere fact of participation by one enterprise in the management or control or capital of the other enterprise, or the participation of one or more persons in the management or control or capital of both the enterprises, shall not make them associated enterprises, unless they fit into any of the scenarios specifically provided under Section 92A(2).

However, post 2002, there are several conflicting rulings of various benches of the Income-tax Appellate Tribunal on this issue, which did not refer the said Explanatory Memorandum and held that the provisions of Section 92A(2) are to be read independent of Section 92A(1).

In the case of Diageo India1, the Hon’ble Mumbai bench held that Section 92A(1) can independently operate without recourse to Section 92A(2). It is necessary that while

1. Diageo India (P.) Ltd. [TS-507-ITAT-2011(Mum)-TP].2. Veer Gems [TS-7-ITAT-2017(Ahd)-TP].3. Veer Gems [TS-545-HC-2017(GUJ)-TP].4. Veer Gems [TS-2-SC-2018-TP].5. Kaybee Private Limited [TS-161-ITAT-2020(Mum)-TP].

SS-I-11



purposes of determining an AE relationship seems reasonable and appropriate.

2 Deemed international transactionsAs per section 92B(2) of the Act, a transaction between an Indian taxpayer with an unrelated party could be regarded to be deemed international transaction in case it is influenced by a prior agreement between the associated enterprise (AE) of Indian taxpayer with such third party or the terms of relevant transaction are agreed between the associated enterprise of Indian taxpayer with such third party. The Finance Act, 2014 amended section 92B(2) to include transactions with resident entities.

Thus, a transaction where Indian taxpayer enters into with a resident unrelated party which has prior agreement or terms agreed with such Indian taxpayer’s AE will get covered within the ambit of Transfer Pricing provisions.

Further, a transaction where Indian taxpayer enters into with a resident unrelated party, the related party of whom has prior agreement or terms agreed with such Indian taxpayer’s AE, may get covered within the ambit of Transfer Pricing provisions. E.g. central procurement, referrals, restructuring arrangements could get covered within the ambit of deemed international transactions.

The intention of this section was that taxpayers should not escape the rigors of transfer pricing in cases where the transaction when viewed in isolation appears to be between independent parties, but the same is influenced by a AE.

In the case of Kodak India6, the Hon’ble Mumbai bench held that that even though the taxpayer entered into transaction of sale of imaging business segment in India as a consequence of global agreement between overseas holding companies, as there was no prior agreement and/or terms and conditions for sales were not dictated by global agreement, thus the transaction does not fall within ambit of deemed international transaction.

In the case of Novo Nordisk7, the Hon’ble Bangalore bench observed that the concept of transaction between two residents who are AEs, being regarded as international transaction, was implicit in the scheme of TP provisions in India, if it impacted or eroded tax base in India. Amendment to Section 92B(2) of the Act by Finance Act 2014 was inserted only by way of abundant precaution. It is made with a view to clarify the position that by entering into series of transactions with third parties who are not associated enterprises or non-residents, one cannot claim that TP regulations were not applicable, if in reality and in substance transactions were with related parties - one or both of whom might be non-residents.

ViewThe actual conduct of the parties and the economic circumstances surrounding the transaction are the cornerstones of analysis of deemed international transaction. In situations where the taxpayer enters into a transaction with unrelated party as per directions of the AE,evaluation of deemed international transaction becomes critical. However, if the

6. Kodak India Pvt. Ltd vs. ACIT (ITA No. 7349/Mum/2012).7. Novo Nordisk India Pvt Ltd vs. DCIT [TS-249-ITAT-2015(Bang)-TP].

SS-I-12



taxpayer can demonstrate that such transaction was independently negotiated, entered without any influence of AE and no benefit has flown to the AE then a view can be taken that such transaction should not fall within ambit of deemed international transaction provisions.

3 Valuation dispute in transactions relating to transfer of intangible assets

The ownership and pricing of valuable and unique intangibles are areas which have garnered growing interest and are facing considerable challenges. Increasingly, complicated business structures and policies being adopted by Multinational Entities (‘MNEs’) in order to efficiently manage their global businesses has contributed in fair measure to this trend.

In emerging markets such as India, the issue assumes relevance as many MNEs have set up their manufacturing base, captive research and development centers and sales and distribution entities to reap benefits of the location saving vast pool of skilled workforce and huge consumer base.

Several difficulties arise while dealing with intangibles. The retrospective amendment made in the Indian transfer pricing regulation to incorporate exhaustive definition of intangible was a significant step. Further, the guidance contained in the BEPS Action Plan 8 to 10 supports the historic view adopted by Indian revenue authorities i.e. to lay emphasis on substance and functions rather than contractual allocation of risks and rewards.

Some of the key issues revolve around determination of the arm’s length price for the transfer and use of intangibles, ownership of intangibles, remuneration for development of

intangibles, transfer pricing of cobranding etc.

The Action Plan 8-10 – ‘Aligning transfer pricing outcomes with value creations’, released by the OECD under BEPS project in October 2015, has inter alia provided guidance on applying ‘arm’s length principle’ on intangibles, focusing on economic substance, risks/control and corresponding rewards,rather than merely focusing on the legal ownership.

As per DEMPE framework, each respective entity which is engaged in Development, Enhancement, Maintenance, Protection and Exploitation of intangible(s) is entitled to the arm’s length remuneration (after compensating other MNE Group entities for the activity performed by them) from the overall revenue generated from intangible instead of the erstwhile practice wherein only the legal owner of intangible(s) was entitled to the residual returns.

In the case of Sun Pharmaceutical Industries8, the Hon’ble Ahmedabad bench accepted assessee’s Transactional Net Margin Method (TNMM) and rejected the application of Profit Split Method (PSM)by tax authorities in respect of a contract manufacturing function undertaken by tax payer post transfer of Intellectual Property Rights (“IPRs”) to its AE. The ITAT held that key risks relating to IPRs such as risk of loss, litigation/infringement risks etc., were borne by the AE. The assessee performed only one function i.e. manufacturing and for such simple functions and therefore transaction profit split method typically would not be appropriate;

In the case of DQ International9, the Hon’ble Hyderabad bench deleted TP-adjustment in respect of sale of IPR of ‘Jungle Book

8. Sun Pharmaceutical Industries Ltd vs. ACIT [TS-596-ITAT-2017 (Ahd)-TP]. 9. DQ International Ltd. (ITA No. 151/HYD/2015).

SS-I-13



Animation Series’ at development stage to AE. It observed that the assessee had arrived at sale consideration after considering independent valuation from two valuers while TPO had replaced the projected cash flows with actual total revenues of AE and proposed a TP-adjustment. The ITAT held that value at the time of making the business decision is important,when the values are replaced subsequently, it is not valuation but evaluation i.e. moving the post of result determined out of projections. The ITAT further mentioned for valuation of an intangible asset, only the future projections alone can be adopted, and such valuation cannot be reviewed with actuals after 3 or 4 years down the line.

In the case of Tally Solutions, the Bangalore bench held that once IPR is sold and arm's length price is determined, IPR becomes property of AE and any subsequent transaction between AE with outsiders or outside the jurisdiction of the Indian territory does not give rise to international transaction between assessee and AE.

ViewThe BEPS action plan 8 lays emphasis on substance and functions rather than contractual allocation of risks and rewards. Further, allows deviation between the financial projections and actual outcomes up to 20%.

In this regard, it would be crucial for MNE groups to map the FAR of entities operating in India in terms of the overall value chain to demonstrate that a fair remuneration is earned by Indian entity commensurate with its activities. This exercise is equally relevant for an Indian arm of any MNE operating as a captive service provider, distributor, license manufacturer or franchise, as well as for

an Indian headquartered MNE group with overseas affiliates.

While it remains to be seen whether the courts would permit the Indian Revenue authorities to rewrite intra-group transactions/arrangements in the absence of General Anti Avoidance Rules, it is clear that tax authorities worldwide will give more credence to the economic substance rather than legal form, and it would be advisable to plan accordingly.

4 Marketing intangibles“Marketing intangibles”, in the form of advertisement, marketing and sales promotion (AMP) expenses is one of the key areas of dispute between the Indian tax authorities and taxpayers.

In emerging markets such as India, the issue assumes relevance as many MNEs have set up their sales and distribution entities to reap benefits of huge consumer base. Several difficulties arise while dealing with marketing intangibles i.e. conflicting rulings from courts, evolving and disruptive business models and retrospective amendment made in the Indian transfer pricing regulations to incorporate exhaustive definition of intangibles.

The main dispute has been in the area of excessive expenditure incurred on advertising, marketing and sales promotion activities and whether such expenses are of routine or non-routine nature. If the expenses are non-routine nature, the Indian entity should be adequately compensated with arm’s length remuneration so that there is no creation of marketing intangibles.

The Hon’ble Special Bench at Delhi delivered a controversial ruling on this vexed issue in the case of LG Electronics10, by upholding TP

10. LG Electronics India Pvt Ltd [TS-11-ITAT-2013(DEL)-TP].

SS-I-14



adjustment in relation to AMP expenditure on the basis of the Bright Line Test (‘BLT’).

The controversy, to some extent, was put to rest by the Hon’ble Delhi High Court in the landmark cases of Sony Ericsson and Maruti Suzuki11, which laid down some important principles on the concept of marketing intangibles. The Hon’ble Delhi High Court, in the case of Sony Ericsson, concluded that AMP expenses is an international transaction, however, rejected the applicability of BLT to determine ALP. Subsequently, in the case of Maruti Suzuki, the HC held that AMP expenses incurred by the assessee could not be categorized as an international transaction u/s 92B of the Act.

Post the Delhi HC rulings in Sony Ericsson and Maruti Suzuki, there have been a spate of High Court and Tribunal decisions wherein the earlier judgments have been analyzed, discussed or simply been followed. The controversy has reached the doors of the Apex Court and only time will tell as to which way the pendulum will swing.

ViewThese rulings lay down important guiding principles in connection with marketing intangibles. Although there have been several High Court and Tribunal judgments on this matter, but unfortunately these have not been able to provide finality on the issue with both taxpayers and the tax authorities now knocking at the doors of the Supreme Court to resolve the issue

It seems that the AMP matter itself being dependent on various business models

adopted by the taxpayers, the Supreme Court rulings on marketing intangible may be highly fact-specific, which both taxpayers and tax authorities will not be able to uniformly follow in other cases. Hence, prolonged litigation seems inevitable.

Each taxpayer would, therefore, need to find its own resolution to the marketing intangible controversy. Besides pursuing normal litigation route, alternate modes for seeking resolutions could be explored such as Advanced Pricing Agreements (for future years) and Mutual Agreement Process (for existing disputes).

5 Specified Domestic Transactions (‘SDT’) SDT provisions was introduced vide the Finance Act 2012, pursuant to a suggestion made by the Hon’ble Supreme Court in the case of Glaxo Smithkline12 for a need to extend TP regulations even to domestic transactions.

The SDT provisions caused considerable challenge to the taxpayer, in establishing the ALP of certain transactions such as director remuneration, intra-group services, renting of immovable properties,etc. The tax arbitrage in such cases was negligible leading to unnecessary compliance burden on the taxpayers.

The Government increased the threshold for applicability of SDT vide Finance Act, 2015 to INR 20 crore vis-à-vis INR 5 crore as prevalent earlier. Thereafter, the Finance Act, 2017 amended section 92BA to omit clause (i) i.e. the expenditure/payments referred to in section 40A(2)(b) of the Act, which was a welcome move for several taxpayers.

11. Sony Ericsson Mobile Communications India Pvt Ltd [TS-96-HC-2015(DEL)-TP] and Maruti Suzuki India Ltd [TS-595-HC-2015(DEL)-TP].

12. CIT vs. Glaxo Smithkline Asia (P) Ltd [TS-47-SC-2010-TP].

SS-I-15



For period of 5 years from FY 2011-12 to FY 2016-17, taxpayers had undertaken compliances in relation to payments referred u/s. 40A(2)(b) covered under SDT. Some taxpayers have faced adjustments during the transfer pricing assessments and are currently in the appellate forums.

In the case of Texport13, the Hon’ble Bangalore bench held that the omission of clause (i) of section 92BA by the Finance Act, 2017 related payments referred u/s 40A(2)(b) of the Act without any saving clause in favor of pending proceedings, would mean that the clause (i) was never on the statute and consequently, proceedings initiated or action taken under that clause is not maintainable. The normal effect of repealing a statute or deleting a provision is to obliterate it from the statute book as if it had never been passed, and the statute must be considered as a law that never existed.

ViewThe ruling in Texport’s case challenges the legal validity of clause (i) of 92BA of the Act and could therefore serve as an important precedent for other taxpayers who are facing similar disputes pursuant to an order from TPO. Considering the strong legal argument, the taxpayer can expect this matter to be resolved in their favor.

It is pertinent to note that the expenditure/payments referred to in section 40A(2)(b) of the Act could still be challenged by the AO, as was the situation prior to introduction of section 92BA of the Act.

6 Overdue receivable/payable Vide Finance Act, 2012, section 92B of the Act was amended to widen the definition of ‘international transaction’, with retrospective effect from 1st April 2002, to include the following amongst various others:

“capital financing, including any type of long term or short term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business”

While Memorandum contains generic reference as regards the purpose of inclusion of various items in the definition, there is no specific mention of ‘capital financing’ and the purpose/implication of its inclusion within the definition of ‘international transaction’.

While the above clause is inclusive in nature, the various components of ‘capital financing’ mentioned in the said clause broadly cover all the transactions that would be covered under the general definitions of ‘capital’ and/or ‘financing’.

We have discussed below one such item of overdue receivable/payable since the same has been a matter of debate over past few years.

As per OECD14, ‘Trade Credits and Advances’ are defined as follows:

“Trade credits and advances are trade credit for goods and services extended directly to corporations, to government, to non-profit institutions, to households

13. Texport Overseas Private Limited IT(TP)A No.2213/Bang/2018.14. As per the OECD Glossary of Statistical Terms.

SS-I-16



and to the rest of the world and also advances for work that is in progress (if classified as such under inventories) or is to be undertaken”.

The issue to be considered is whether the trade advances/trade receivables/similar deferred payments should be treated as:

• Trade debts in the ordinary course of the business of the tax payer and hence would not constitute a separate “international transaction” (the impact of the interest loss on account of the credit period would get offset by the higher profits earned on account of the increase in sales/pricing as a result of extending such credit terms to customers); OR

• Separate lending/borrowing transactions wherein a separate interest charge needs to be computed/imputed.

In absence of specific guidelines in this regard under the Indian Transfer Pricing regulations or the OECD commentary, reliance could be placed on certain Indian judgments, discussed below:

In the case of M/s. Indo American Jewellery, Nimbus Communication and Tech Mahindra15, the Hon’ble Mumbai ITAT bench held that an outstanding debit balance on account of services rendered to the Group companies does not qualify as an international transaction since the same is not an independent transaction, but merely the result of a commercial transaction. The charging of interest is applicable only with the lending

or borrowing of funds and not in the case of commercial over dues. In case the assessee has not charged any interest on overdue receivables to external parties, following the internal CUP method, the rate of interest should be NIL. For repayment of dues reasonable period may be provided as interest free period and interest to be computed only for the period greater than the reasonable time limit. The said position is also confirmed by Hon’ble Bombay High Court16.

There are few adverse decisions notably by the Hon’ble Bombay High Court17, wherein it was held that extension beyond normal credit period would amount to granting loan to AE.

ViewConsidering the same and post the amendment to section 92B, it would be imperative to assess whether interest should be charged/paid on overdue amounts especially those beyond reasonable period.

Another pertinent issue is how should one benchmark these transactions. Usually, in a commercial situation, the terms of credit are generally co-related with the price of goods, considering that the same has a direct bearing on the funding cost of the seller and receiver entities. The entities operating as captives/limited risk units tend to bear lesser risks and have low levels of working capital as compared to entrepreneurial/higher risk-taking entities. Having regard to the facts of the situation, one may look at undertaking working capital adjustment to adjust the

15. Deputy Commissioner of Income-tax, Circle 9(2) vs. Indo American Jewellary Ltd. [ 50 SOT 528(2010]), Nimbus Communications Ltd. vs ACIT, Mumbai [28 SOT 246(2010)], Tech Mahindra Limited vs. DCIT [46 SOT 141 (2011)].

16. Indo-American Jewellery (2014 223 Taxmann 8)(Bom).17. Technimont Pvt Ltd (ITA no. 56 of 2016) (Bom).

SS-I-17



margins to reflect the appropriate level of comparability.

7 Limitation on deductibility of interestThe concept of “Thin Cap” refers to those ‘thinly capitalized’ companies, whose greater proportion of 'capital-structure' is made up of 'debt' instead of 'equity'.Traditionally, revenue authorities have been viewing high interest-bearing loans as one of the instruments used by the MNEs to shift profits from high tax jurisdictions to low tax jurisdictions and thereby, local entities especially in the developing countries paying taxes on a lower income base.

In Action Plan 4 of OECD under BEPS Project, the issue of 'Limiting Base Erosion involving Interest Deduction and Other Financial Payments', has been discussed with view to recommend countries to introduce provisions in the respective domestic tax laws to limit such deductions for interest expenditures.

In line with the above recommendation, India has introduced Section 94B vide Finance Act, 2017.

A section 94B is inserted in the Act, with effect from FY 2017-18 onwards, to restrict the interest deductions in respect of the loan/debt borrowed from the AE. This section provides that interest paid by an Indian company or a permanent establishment of a foreign company, to its non-resident AE or to non-AE (based on explicit or implicit guarantee from an AE)exceeding INR 1 crore, shall not be deductible to the extent it qualifies as “excess interest”.

The term “excess interest is defined as:

• Amount of total interest which is in excess of 30% of earnings before interest, tax and depreciation (EBIDTA); or

• Actual amount of interest paid to the AE,

whichever is less.

As per section 94B, a taxpayer which is making interest payments to AE or to non-AE (based on explicit or implicit guarantee from an AE) is allowed deduction to the extent of total amount of interest paid over and above 30% of the EBITDA; or the actual amount of interest paid to the AE, whichever is lower. Any excess therefrom shall be disallowed and shall be carried forward for a period of 8 years.

While the objective is to provide framework for limiting the deduction for interest, there are several areas likely to be debated. We have discussed two pertinent issues below:

• Definition of EBITDA as per accounting standards or as per the Act

While Action Plan 4 allows local country to prescribe EBITDA as per tax law or as per accounting standard or a blended approach, India has not specifically pronounced the same.

Considering the same, it needs to be borne in mind that the term is defined by and methodology of determination of EBITDA is based on accounting principles and standards, whereas there is no such definition or methodology in Income-tax Act, hence, one can argue that while the option is open to the taxpayer to adopt the EBITDA, the definition as per accounting standards is more better to be adopted.

At the same time, there can be an argument that since the limitation deals with Income-tax Act, EBITDA computation in line with Income-tax principles would be more appropriate considering that there are several instances such as in case of a company having book

SS-I-18



loss but still required to pay Minimum Alternate Tax, several deductions allowed on book profits only subject to withholding, capitalization, indexation of costs, etc. Hence, an argument that EBITDA as per tax principles may also hold good. This is further supported by approach discussed in Action Plan 4 as well.

EBITDA definition as per accounting principles appears to be reasonable, balanced, administratively easier and can be consistently applied.

• Arm’s length price determination under TP vs. 94B deduction

As an illustration, let’s consider an overseas parent providing loan to its Indian subsidiary at an effective interest rate of 10%; where arm’s length rate has been determined at 6%. In the given case, what would the disallowance for:

• Adjustment under TP rules of 4% i.e. 10% minus 6%;

• Restriction on total interest under Section 94B in excess of 30% of EBITDA; or

• Both amounts

In this regards, one can observe that section 94B and TP provisions operate independently and with different objectives, thus, disallowance could be made under both the provisions.

Additionally, no sector specific limits are prescribed, thus putting capital intensive industries and NBFCs to a disadvantage and increasing their tax outflows.

ViewThe intention behind introducing section 94 B is to curb the loophole and restrict excessive/

undue benefits, if any, available based on existing law. However, the same has created unintended hardship for taxpayers due to lack of clarity and differing interpretation arising from ambiguous drafting of the said provision. In the above section, we have covered merely two issues. However, there are multiple issues such as what constitutes excess interest, adjustment of past years interest etc. Having said so, a dispute cannot be ruled out on this front till the time it is clarified by the tax authorities. A position should be adopted by taxpayers after are thorough analysis and should be applied consistently.

Considering the current economic situation where businesses need capital impetus to survive and thrive, it needs to be seen whether the Government would be willing to go easy on the implementation of section 94B and clarify on various outstanding points.

8 Comparability adjustmentsUnder uncertain economic environment and with the extant pandemic situation, various businesses are evaluating change in supply chain and re-negotiation of terms not only with third parties but also with related parties. Thus, it would be critical to proactively plan for the impacted and post impact periods.

For impact period, it would be important to work out differential margins for differences in working capital cycles, idle capacity, extra-ordinary costs like relocation, extra precautionary costs, increase in logistical and warehousing costs, discounting of prices and contraction of volumes from customers. It would also be important to evaluate using different comparability mechanism such as change in tested party, usage of net level margin with suitable adjustments, gross profit level margins, different profit level indicators

SS-I-19



such return on capital assets, berry ratio, cost to cost reimbursement of certain items or for certain period, certain items being considered as non-operating/extra-ordinary, etc.

One of the bones of contention between the Revenue authorities and taxpayers is to make reasonably accurate adjustments for material difference in the functional and risk profile of taxpayer and selected comparable companies (‘comparability adjustments’).

We have outlined below comparability adjustments in specific situations, as claimed by the taxpayer and stand adopted by the Revenue authorities in such cases:

1) Adjustment for fixed overheadsIt is a common phenomenon for an entity to earn lower profit or incur loss on account of high fixed overheads, start-up inefficiencies and inadequate revenue. In the pandemic phase, an entity focuses its efforts in revamping its operations, building alternate sales and distribution network and framing market strategies. Also, to attract customers and clear old stock, an entity may have to give additional incentive, offer discounts, float schemes etc.

In past it is observed that the Revenue authorities generally do not give adequate weightage to the same and allege that low profit or loss is on account of under/over-pricing of international transactions. Typically, they reject the claim of adjustment stating that an adjustment should be made to the margins of the comparable companies and not to the margin of the taxpayer. Further, as most

of the arguments raised by the taxpayer are qualitative,it is stated that the taxpayer failed to justify its claim with adequate documentary evidence.

In the case of Global Vantege18, the Hon’ble Delhi bench allowed the adjustment of 33.33 % of the installed capacity as the adjustment in the profitability of comparable companies for idle capacity of assessee in the start-up phase based on the industry standards.

In the case of Visteon Engineering Center19, Hon’ble Pune bench allowed the adjustment on account of capacity utilization based on the reasoning that although the global meltdown affected the entire auto industry worldwide, the bankruptcy of the parent company was an event that was particular to the Assessee. The TPO was directed to consider the issue de-novo comparing the approved billable hours in the two years under consideration, after examining the documentary evidences filed by the Assessee to contend that the business of the Assessee had substantially reduced.

However, in an another case20, the Hon’ble Delhi bench disallowed the assessee’s claim for adjustment citing that the assessee is a software service provider to its AE and the AE had initiated such expansion; hence, the costs towards the same should be borne by the AE. Further, it was stated that the assessee did not submit material to establish an objective basis on which its claim was supported.

At the same time, there are few decisions21 which mention that if the differences between the companies or transactions are so material

18. Global Vantege (2010-TIOL-24-ITAT-DEL).19. Visteon Engineering Center (India) Private Limited [TS-462-ITAT-2018(PUN)-TP].20. ION Trading India Private Ltd. vs. ITO [TS-643-ITAT-2015(DEL)-TP].21. Mentor Graphics (Noida) (P.) Ltd. vs. DCIT [2007] 109 ITD 101 (DELHI) / 112 TTJ 408, Egain Communication

(P.) Ltd. vs. Income-tax Officer [2008] 23 SOT 385.

SS-I-20



that it is not possible to perform a reasonably accurate adjustment, then the comparable should be rejected.

2) Adjustment for non-recurring and exceptional items of income and expenses

Another adjustment which has always been on the forefront is the adjustment for non-recurring and exceptional items. The Indian TP rules requires that material effect of differences in comparable vis-à-vis the taxpayer to be eliminated by carrying out adjustments in reasonably accurate manner. The taxpayer may earn lower profit on account of exceptional/non-recurring expenses E.g. increase in bad debt provisions due to change in accounting policy. Similarly, comparable companies may earn higher profit on account of exceptional income.

The Revenue authorities generally adopt stringent approach while evaluating non-recurring/exceptional items and allow adjustment for the same, in the instances where such items are specifically disclosed as exceptional/non-recurring in the financial statements.

In the case of Honeywell Automation India and HCL Technologies BPO Services22, the Hon’ble benches of the Tribunal held that abnormal costs should be excluded while calculating normalized profit for the purpose of undertaking benchmarking analysis.

3) Adjustment for difference in depreciation policy

Few taxpayers charge higher depreciation on assets as per the group policy or due to

peculiarities of the products e.g. following Straight Line Method and at a higher rate, they deal with which impacts their profits. However, comparable companies could be charging depreciation as per the rates prescribed in the Companies Act e.g. following Written Down Value Method and at a lower rate. In such cases, the difference in the depreciation methodology warrants an adjustment.

The taxpayer contends that either profit before depreciation charge should be considered for evaluation or an appropriate adjustment for differences in depreciation rates/methodologies should be made to the margin of the taxpayer/comparables.

The Revenue typically rejects the taxpayer’s contentions stating that the TP rules do not permit the evaluation based on profits before depreciation. Further, the term net profit margin has not been defined under the Act and the Rules, thus the same has to be construed and given a meaning which is generally understood in the commercial parlance.

In the case of Schefenacker Motherson23, the Hon’ble Delhi bench held that no standard test exists for deciding what constitutes operational income or profit. A receipt or expenditure would constitute operational income depending upon the facts and circumstances of the case and nature of business involved. Thus, the Revenue's conclusion that operating profit or manufacturing cost must include “depreciation” irrespective of peculiar facts of case cannot be accepted as correct. Further, the Rules do not compulsorily require use of post-

22. Honeywell Automation India Ltd [2009] TIOL-104-ITAT-PUNE ITA No. 4/PN/08, HCL Technologies BPO Services Ltd (ITA No. 3547/Del/2010)].

23. Schefenacker Motherson Ltd [2009] 123 TTJ 509 (Del)/(2009) ITA No. 4459/DEL/07 (Del)].

SS-I-21



depreciation net profit. On this basis, Hon’ble Tribunal accepted the use of pre-depreciation net profit for the purposes of arm’s length price computation.

In the case of Sabic Research and Technology Pvt Ltd24, Hon’ble Ahmedabad bench held that depreciation cost be excluded from operating cost for computing PLI.

ViewThe Indian TP rules have outlined certain factors for judging comparability, but it does not provide adequate guidance on quantitative adjustments. This challenge is further compounded due to lack of quality comparable data in public domain leaving room for subjectivity in any transfer pricing analysis.

A practical problem also arises at the time of preparing the TP documentation by the taxpayer, as at that point of time the relevant financial year data may not be available. In this backdrop, taxpayers may need to consider performing comparability adjustments based on certain financial and economic models.

The need for carrying out suitable comparability adjustments is supported by the joint publication of IMF, OECD, UN, World Bank group namely ‘A Toolkit for Addressing Difficulties in Accessing Comparables Data

for Transfer Pricing Analyses’, OECD TP guidelines as well as under the guidance note on Transfer Pricing issued by the ICAI.

It would be useful if Government provides following:

• Option of benchmarking margin based on single year comparable data during pandemic phase

• Guidelines on the methodology to perform quantitative adjustments along with practical examples

Adequate guidance on this front will go in the long way to reduce disputes and protracted litigations between the tax payer and revenue authorities.

ConclusionDespite being in prevalence of two decades in Indian tax legislations, Transfer Pricing remains an intruiging and sensitive topic for MNEs to constantly evolve and adapt to. While the Revenue authorities are trying to align the Indian tax legislations with global principles, a more detailed and robust guidance would help the businesses for implementation and monitoring the laid out principles effectively as well as will help field officers to tackle the issues more pragmatically especially with the advent of the era of faceless assessments and appeals.

24. Sabic Research and Technology Pvt Ltd TS-327-ITAT-2017(Ahd)-TP ITANo.1065.

SS-I-22

Special Story — RPT under Domestic Tax Law (except TP)


CA Himanshu Mandavia, CA Payal Thakur & CA Sanjay Chauhan

RPT under Domestic Tax Law (except TP)

IntroductionA transaction between parties who have a pre-existing relationship is generally regarded as a related party transaction. Provisions for monitoring transactions between related parties have existed in the tax world for long, primarily to ensure that parties with close nexus do not intentionally manipulate profits and tax liability in the garb of commercial transactions.

Transfer pricing provisions have been formulated to curb tax evasion or profit shifting outside India. The focus of this article, is to highlight the tax implications in respect of domestic transactions with related parties:

• Payment for expenses to related parties;

• Payment to the partners of a partnership firm/limited liability partnership (henceforth referred to as Firm);

• Clubbing of income on transfer of asset or income to related parties;

• Loan or advance to specified shareholders (deemed dividend provisions);

• Benefit or perquisite flowing from a company to its directors or certain shareholders or their relatives;

• Recovery of tax from relatives in certain cases;

• Exceptions provided to transactions between related parties from deemed gift tax provisions;

• Impact on valuation methodology to determine whether a foreign company derives value from India in relation to the transfer of shares of a foreign company to a connected person.

A. Disallowance of expenses while computing income under the head ‘Profits and gains of business or profession’

To curb the shifting of profits from one business or profession to that of a related party by means of excessive payments for goods or services, section 40A(2) of the Income Tax Act, 1961 (Act) empowers Income-tax Authorities (ITAs) to disallow any extra commercial consideration paid to a related party, while computing the profits and gains from the business or profession of an assessee.

Disallowance under section 40A(2) of the Act is attracted when the following three conditions are satisfied:

• Payment made/to be made pertains to any expenditure of the business or profession;



held that where a person sells goods or provides services at a discount on the selling price to a specified person, such discount does not amount to an “expenditure”, as the person charges only the net price to the purchaser. Accordingly, there was no expenditure charged to the Profit & Loss Account that could be disallowed under section 40A(2) of the Act.

Based on the above, it can be inferred that expenditure incurred by the assessee for business or profession should be charged to the Profit & Loss Account and claimed as deduction while computing taxable income, to attract the provisions of section 40A(2) of the Act.

• Payment should be made to a specified person

It is important to understand who can be considered as a specified person for section 40A of the Act. The section provides the list of persons who can be considered as ‘specified person’ in relation to the assessee:

• such payment is to a specified person; and

• such expenditure is excessive or unreasonable in the opinion of the ITAs.

We have briefly discussed these three conditions below:

• Payment made/to be made should pertain to any expenditure of the business or profession

Section 40A of the Act provides for the disallowance of expenses while computing profits and gains of business or profession. It is pertinent to note that no similar provisions are provided under the Act for computing income under other heads of income.

For disallowance of expenditure under section 40A(2) of the Act, it is required that the same should have been first claimed as deduction while computing the taxable income of the assessee. The Madras High Court, in the case of CIT vs. A.K. Subbaraya Chetty & Sons [1980] 123 ITR 592 (Madras),

Sr. No.

Assessee Specified persons

1 Individual Relative of such individual

2 Company Director and its relative

3 Firm Partner and its relative

4 Association of Persons (AOP)/Hindu Undivided Family (HUF)

Member and its relative

5 Any assessee • Any company, Firm, AOP, or HUF having substantial interest# in the business or profession of the assessee;

• the directors, partners, members of such company, Firm, AOP and HUF and their relatives; and



The relative of an individual is defined under section 2(41) of the Act as the spouse, sibling and any lineal ascendant or descendant of that individual. It is pertinent to note that the relatives of the spouse of the individual are not considered; only the relatives of that person himself/herself are considered. In the case of CIT vs. Dhannalal Devilal [1956] 29 ITR 165 (Rajasthan), the following was held:

“When the law speaks of ‘lineal descendant’, the intention is that a person must be descended in a right line without any deviation as from father to son, grandson, great grandson and so on. Similarly, the ‘descent’ is lineal if it goes from mother to daughter, and grand-

daughter, and great grand-daughter, because here also it is in a right line without any deviation.”

In view of this, a son or grandson can be said to be a lineal descendant of his mother or grandmother, respectively.

Further, ambiguity exists as to whether the lineal ascendant includes only paternal ascendants or maternal ascendants as well. ‘Lineal ascendant’, when interpreted in its ordinary sense, not only includes ‘patrilineal descendant’ but also ‘matrilineal descendant’. Additionally, considering that descendants are normally assumed to include the female descendants of an individual (e.g. daughter, granddaughter) as well, the possibility of including the

Sr. No.

Assessee Specified persons

• Any other company in which such company has substantial interest

6 Any assessee • Any company, Firm, AOP and HUF whose director, partner or member holds substantial interest in the assessee; and

• Any other director, partner, or member of such company, Firm, AOP and HUF and their relatives

7 Any assessee A person in whose business the assessee holds substantial interest

• For an individual, the term ‘assessee’ will also include its relative

• For a company, Firm, AOP or HUF, the term ‘assessee’ will also include its directors, partners or members, and their relatives

8 Any assessee An individual who has substantial interest in the business or profession of the assessee, or any relative of such individual

#Substantial interest is deemed to exist when a person, in the case of a company, holds shares as a beneficial owner carrying 20% or more of the voting power and in any other case, is entitled to 20% or more of the profits.



female lineal ascendants (e.g. mother, grandmother, maternal grandparents) of an individual cannot be ruled out.

Additionally, with respect to determining the substantial interest held by a company in another company, the interest directly held by the company is required to be considered. For example, Company A holds 15% stake in Company Y and holds 100% stake in Company B. Further, Company B holds 10% stake in Company Y. In such a scenario, the transaction between Company A and Company Y should not be covered within the ambit of section 40A(2) of the Act since, while Company A indirectly holds more than 20% in Company Y, Company A does not directly hold more than 20% in Company Y [HDFC Bank Ltd. v. ACIT [2018] 410 ITR 247 (Bombay)].

• Expenditure is excessive or unreasonable in the opinion of ITAs

ITAs must determine the excessiveness or unreasonableness of the expenditure by examining any of the below:

o fair market value (FMV) of the goods, services or facilities leading to such payment;

o the legitimate needs of the business or profession of the assessee; or

o the benefit derived by or accruing to the assessee.

It is important to note that it is not required to comply with all the above three requirements to determine the excessiveness or unreasonableness of an expenditure. If any one condition is shown to be satisfied by ITAs, the provisions of section 40A(2) of the Act can be invoked and applied, if the facts so warrant [Coronation Flour Mills

vs. ACIT [2010] 314 ITR 1 Gujarat]. For example, while the transaction may have been undertaken at the FMV, ITA may still disallow an expenditure under section 40A(2) of the Act, if such expenditure does not meet the legitimate needs of the business of the assessee.

ITAs are expected to exercise their judgment reasonably and fairly. The opinion about the expenditure being excessive or unreasonable should be formed by ITAs based on well-founded reasons that are judiciously acceptable.

No pricing criteria have been specifically prescribed under the provisions of section 40A of the Act. However, comparable prices can be looked at for arriving at the reasonableness of the expenditure. Further, the onus is on ITAs to bring the FMV of the goods purchased by bringing in comparable cases and record that the payment for purchases has resulted in some benefit being derived by the other person to whom the payment has been made. [Divakar Solar System Ltd. vs. DCIT [2017] 53 ITR(T) 516 (Kolkata Tribunal)].

While such unreasonable or excessive expenditure may be disallowed under section 40A(2) of the Act in the hands of an assessee, it may be noted that the Act does not have any corresponding provision to reduce such income in the hands of the related party. However, in case the assessee can prove that the related party has paid taxes on the corresponding income at an equivalent rate, and thereby, that there was no loss to the exchequer, it can be argued that the provisions of section 40A(2) of the Act should not apply [CIT vs. Indo Saudi Services (Travel) (P.) Ltd [2008] 219 CTR 562 (Bombay); PCIT v. Gujarat Gas Financial Services Ltd [2015] 233 Taxman 532 (Gujarat)].



From a compliance perspective, a chartered accountant appointed as the tax auditor is responsible for disclosing the details of payment made to specified persons as covered under section 40A(2) of the Act (i.e. related parties) in Form 3CD (i.e. the tax audit report). In case the chartered accountant has not provided/provided incorrect information in the tax audit report, he/she may be liable to penalty of INR 10,000 under section 271J of the Act.

Further, in case ITAs disallow expenses under section 40(A)(2) of the Act, they may also invoke penal provisions under section 270A of the Act and thereby, levy penalty of 50% or 200% of the amount of tax payable on under-reported or misreported income, respectively.

B. Disallowance of amounts paid to partners in case of a Firm

Section 40(b) of the Act stipulates the following conditions to allow deduction of payments of remuneration and interest made to the partners by its Firm:

• Remuneration should be paid only to a working partner, and the total remuneration paid to all working partners should not exceed:

o on the first INR 300,000 of the book-profit or in case of a loss – INR 150,000 or 90% of the book-profit, whichever is higher;

o on the balance book-profit in excess of INR 300,000 – 60% of the book-profit;

• Interest paid to any partner should not be in excess of 12% per annum;

• Such payments should be authorised by the partnership deed and not relate to any period falling before the date of such partnership deed.

While payments of remuneration and interest made by a Firm to its partners would also get covered within the ambit of section 40A(2) of the Act, section 40(b) of the Act, which is a specific provision governing payments of remuneration and interest to the partners, should override the provisions of the former. Thus, if the amount payable to partners is within the limits provided under section 40(b) of the Act, no disallowance can be made under section 40A(2) of the Act on account of the same being excessive or unreasonable. In this regard, reliance can be placed on the following judicial precedents:

• CIT vs. Great City Mfg. Co. [2013] 351 ITR 156 (Allahabad); and

• Chhajed Steel Corpn. vs. Asstt. CIT [2001] 77 ITD 419 (Ahmedabad Trib.)

Further, it should be noted that where the partnership deed clearly provides the manner of fixing or quantifying the remuneration to be paid to the partners, such payment should be considered to be authorised by the partnership deed, and accordingly, be allowed as a deduction under section 40(b) of the Act [CIT vs. Anil Hardware Store [2010] 323 ITR 368 (Himachal Pradesh); Unitec Marketing Services vs. ACIT [2019] 175 ITD 90 (Mumbai - Trib.)]

However, if the determination of remuneration is left upto the partners at the end of the accounting period, it cannot be said to be authorised by the partnership deed and cannot be allowed as a deduction under this section [Sood Bhandari & Co. vs. CBDT [2012] 246 CTR 89 (Punj. & Har.)].

From a compliance perspective, the tax audit report mandates disclosing the amount that is inadmissible under section 40(b) of the Act. However, in practice, most chartered accountants disclose the details of the payment of remuneration and interest to the partners (even though admissible) in the tax



audit report by way of an annexure. In case the chartered accountant has not provided/has provided incorrect information in the tax audit report, they may be liable to penalty of INR 10,000 under section 271J of the Act. Further, the partner is also required to disclose the details of all Firms in which he/she is a partner and the remuneration received from such Firms.

In case ITAs disallow expenses under section 40(b) of the Act, they may invoke penal provisions under section 270A of the Act, and thereby, levy a penalty of 50% or 200% of the amount of tax payable on under-reported or misreported income, respectively.

C. Clubbing of IncomeOrdinarily, a person is taxed in respect of income earned by him/her only. The Act has specified certain cases where the income of one person is statutorily required to be considered as the income of another person subject to the satisfaction of certain conditions. The clubbing provisions are generally applicable with respect to the transaction between related parties.

Clubbing of income means including the income of another person in one’s total income and making such person liable for tax on his/her income as well as on the clubbed income. The below table covers clubbing of income provisions on account of transfer of assets/income to a related party:

Nature of transaction Income clubbed in the hands of:

Conditions

Salary, commission, fees or any other form of remuneration (in cash or kind) to the spouse from concern wherein individual has substantial interest

Individual (where the total income is greater than that of the spouse)

Clubbing not applicable if:

• Spouse possesses technical or professional qualifications, and the payments made are solely for the application of their knowledge and expertise.

• The relationship of husband and wife is no longer subsisting at the time of accrual of the income (Philip John Plasket Thomas vs. CIT [1963] 49 ITR 97 (SC)).

Income other than salary, commission, fees or remuneration is not clubbed

Income from assets transferred to the spouse

Transferor Individual • Such transfer is either direct or indirect;

• Such transfer is for inadequate consideration;

• Such transfer is not in connection with an agreement to live apart.



Where any property is transferred to a spouse, son’s wife or HUF, any income from such transferred asset is required to be clubbed in the income of the assessee under section 64 of the Act. However, the said provisions cannot be stretched to include second-generation income, i.e. income from the invested income from the transferred asset [CIT vs. M.S.S. Rajan [2001] 252 ITR 126 (Madras)].

While evaluating various provisions of the Act such as the requirement of filing of income tax return, and determining the applicable rate of taxes, income that is to be clubbed in the hands of the assessee must also be considered.

An individual in whose hands income is being clubbed is required to disclose the details of the income clubbed in his/her hands while filing his/her income tax return. However, the person who had actually earned the income is not required to disclose such income in the return of income (RoI).

In case an individual does not club the income of another person as per the clubbing provisions, ITAs may invoke penal provisions under section 270A of the Act, and thereby, levy a penalty of 50% or 200% of the amount of tax payable on under-reported or misreported income, respectively.

Nature of transaction Income clubbed in the hands of:

Conditions

Income from assets transferred to son’s spouse

Transferor Individual • Such transfer is either direct or indirect;

• Such transfer is for inadequate consideration.

Income from assets transferred to any person for the immediate or deferred benefit of his/her spouse or son’s spouse

Transferor Individual • Clubbing applicable only on such income from the assets that is for the immediate or deferred benefit of his/her spouse or son’s spouse.

Income accruing or arising to a minor child

The parent of the child whose total income is greater if the marriage subsists. If not, then clubbing in the income of the parent who maintains the child in the previous year.

Clubbing not applicable if:

• Minor child suffering from disability of the nature specified in section 80U of the Act;

• Income earned on account of any manual work done by the child;

• Income earned on account of the application of his/her skill, talent or specialised knowledge and experience.

Income of HUF from property converted by the individual into HUF property

Transferor Individual • Such transfer is for inadequate consideration.



D. Taxability on loan and advances given to specified shareholders by a closely held company

The provisions as covered in section 2(22)(e) of the Act were introduced to bring within the tax ambit the distributions to certain shareholders in the form of loans and advances made by closely held companies to avoid payment of taxes. The dividend under this provision is referred to as deemed dividend and is not a real dividend, since such a dividend is assumed to be disguised as a loan or advance.

Payments are considered as deemed dividend under section 2(22)(e) of the Act on the satisfaction of the following conditions:

• Loan or advance is provided by a closely held company to:

o A shareholder beneficially owning 10% or more of the voting power in the company (Covered Shareholder), excluding shareholder holding shares with a fixed rate of dividend;

o An entity wherein such Covered Shareholder is a member or partner of such entity and holds substantial interest (i.e. 20% or more at any time during the relevant year);

• Any payment by a closely held company on behalf of or for the individual benefit of the Covered Shareholder;

• Transaction of loan or advance is not in the ordinary course of business of the closely held company;

• The closely held company has accumulated profits.

Pursuant to the amendments in the Finance Act 2020, the dividend distribution tax has been abolished with effect from 1 April 2020 and the taxability on the dividend has been

moved to the hands of recipient shareholders at the tax rates applicable to such recipient shareholders.

Some of the key aspects with regards to the deemed dividend provisions are listed below:

• Relaxation from deemed dividend provisions is provided to any advance or loan made to a shareholder by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company.

• The provisions of section 2(22)(e) of the Act cover not only advances and loans to shareholder but any other payments by the company on behalf of or for the individual shareholder, such as payments of shareholder’s personal expenses, income-tax dues, and insurance premia, to the extent of the accumulated profits of the company.

• Even if the loan or advance is squared off before the end of the previous year, it can still be considered as ‘deemed dividend’.

• The word ‘advance’ used along with the word ‘loan’ means such advance that has an obligation of repayment. Trade advance, being in the nature of a commercial transaction, should not be covered within the ambit of the provision of section 2(22)(e) of the Act [CIT vs. Raj Kumar [2009] 181 Taxman 155 (Delhi)].

In case provisions of section 2(22)(e) are triggered, the Indian company would be required to withhold tax under section 194 of the Act at the rate of 10% on the amount of loan or advance provided. Further, such a company is required to file a withholding tax (WHT) return within the applicable due dates disclosing the requisite details of tax withheld.



In case of failure to withhold tax by the Indian company, the Indian company could be liable to pay penalty of 100% of the WHT amount. Further, a fee at the rate of INR 200 per day of delay in filing the WHT return is applicable in case of a delay in filing such a return. However, it should be noted that such fees cannot exceed the amount of tax to be withheld.

E. Benefit or perquisite flowing from a company to its directors, certain shareholders or their relatives

Section 2(24) of the Act defines the term ‘income’. Section 2(24)(iv) of the Act provides for the inclusion of any benefit or perquisite as income if the same is provided by a company to its director, substantial shareholder, or their relatives. The main objective of section 2(24)(iv) of the Act is to prevent abuse/misuse of official position by the directors, certain shareholders, or their relatives, to their advantage.

As per section 2(24)(iv) of the Act, the income of the director or person holding substantial interest in the company, or their relatives has to be increased by the following:

• value of the benefit or perquisite given by the company and enjoyed by the individual being director, shareholder holding substantial interest, or their relative; or

• any payment by the company to a third person that was an obligation of the director or shareholder holding a substantial interest in the company, thereby providing benefit to the director or the shareholder.

For the term ‘relative’, one would need to refer to section 2(41) of the Act, which has been discussed above in the paragraphs on this section.

Some key aspects pertaining to the provisions of this section are enlisted below:

• As per the basic principles of taxation, a revenue receipt is always taxable, unless specifically exempted. Conversely, a capital receipt is exempt, unless specifically taxable. However, for the purposes of section 2(24)(iv) of the Act, income/benefit, whether in the nature of revenue or capital, is taxable in the hands of the beneficiary [CIT vs. S. Varadarajan, [1996] 224 ITR 9 (Madras)].

• Where the benefit/income is received by the relative, the income is taxable in the hands of the recipient of benefit/income and not in the hands of the director or person having substantial interest [CIT vs. Shri Ramnath A. Porlar, [1978] 112 ITR 436 (Bombay)].

• Benefits received indirectly by the director by re-routing of the funds through multiple channels are held to be taxable in the hands of the director [Ravi Prakash Khema vs. CIT [2008] 295 ITR 33 (Madras)].

The Act casts no additional compliances in the hands of the recipient, on account of receipt of such benefit/income from the company other than disclosing such income in the RoI. In case the director or person having substantial interest in a company or their relatives do not include the receipts from the Company as referred to in section 2(24)(iv) of the Act in their income, ITAs may invoke penal provisions under section 270A of the Act, and thereby, levy a penalty of 50% or 200% of the amount of tax payable on under-reported or misreported income, respectively.

F. Recovery from relatives in certain caseSection 222 of the Act, prescribes the modes of recovery at the disposal of ITAs in case of default in tax payment. Under this section, powers have been granted to the Tax Recovery



Officer (TRO) for attaching the movable as well as immovable properties of the tax defaulter. Further, the TRO can also attach the properties of such defaulter’s spouse, daughter-in-law, his/her minor child or son’s minor child if:

• such property was transferred by the defaulter to such specified relatives for an inadequate consideration; and

• such property continues to be held by such specified relatives.

The objective of the above is to ensure that no property belonging to the defaulter escapes attachment while recovering taxes, merely because such property has been transferred to specified relatives without consideration (even if the transfer was undertaken years ago but post 1 June 1973).

Section 281 of the Act empowers ITAs to treat the transfer of an asset as void where any tax demands are outstanding or in cases where the transfer was undertaken during the pendency of any assessment proceedings. However, no such condition of outstanding demand/pending tax proceedings is relevant while applying section 222 of the Act. This section empowers the TRO to attach the assets transferred by the assessee to specified relatives at any point in time for an inadequate consideration, if such asset is still held by that specified relative.

It is important to note that there should be a transfer of property to the specified relative. Direct purchase of property in the name of the specified relative cannot be attached by the TRO under the provisions of section 222 of the Act [Samson John vs. TRO [2008] 300 ITR 188 (Bombay)].

G. Exemption from the applicability of deemed gift tax provisions

The provisions discussed till now in this article were enacted to curb tax evasion and profit shifting. However, the Act also has

provisions for the benefit of the taxpayers, by providing relaxation to certain genuine related party transaction from the ambit of tax.

Section 56(2)(x) of the Act brings within the ambit of taxation the transactions that are without consideration or for an inadequate consideration. As per the provisions of section 56(2)(x) of the Act, receipt of any sum of money or any property without consideration or for inadequate consideration (in excess of the specified limit of INR 50,000) by an assessee is chargeable to income-tax under the head ‘Income from other sources’. The term ‘property’ is defined for this section to include immovable property, shares, securities, jewellery, bullion and artistic works such as drawings and paintings. Provisions of section 56(2)(x) of the Act are generally referred to as ‘deemed gift tax provisions’.

While the provisions of section 56(2)(x) of the Act are intended to curb the passage of undue and illegitimate benefits, leading to manipulation of profits and tax liability, it also provides for certain relaxations and exemptions to genuine transactions such as transactions with relatives.

The term ‘relative’ has been defined in relation to an individual for the purposes of section 56(2)(x) of the Act to mean:

• Spouse of an individual

• Siblings of the individual, of the Spouse of the individual and of the parents of the individual; and spouse of such siblings;

• Any lineal ascendant or descendant of the individual or of the Spouse of the individual; and spouse of such ascendant or descendant.

In case of an individual, the benefit under the deemed gift tax provisions has been given only to the receipts from individual relatives. However, the definition of relative



as applicable for section 56(2)(x) of the Act is wider than that provided under section 2(41) of the Act, thereby widening the benefit of the provision.

It is worth noting that while receipt of any sum of money or property from uncle/aunt without consideration would fall within the exception provided under provisions of section 56(2)(x) of the Act, the vice versa transaction, i.e. receipt of money or property by uncle/aunt from the nephew, would trigger the provisions of section 56(2)(x) of the Act.

Currently, there are no specific reporting requirements in the RoI to disclose receipt of any sum of money or property without consideration/inadequate consideration from a relative.

H. Section 9(1)(i) of the Act covering overseas transfer tax

The Supreme Court of India, in the case of Vodafone International Holdings B.V., held that the transfer of shares of a foreign company holding an Indian subsidiary company between two non-residents does not amount to the transfer of any capital asset situated in India. Accordingly, the gains arising from the said transaction were not liable to tax in India. Subsequently, the Finance Act, 2012 amended section 9 of the Act to cover taxability of the income deemed to be accruing or arising to non-residents directly or indirectly through the transfer of a capital asset situated in India with retrospective effect from 1 April 1962.

As per the amendment to section 9(1)(i) of the Act, gains of transfer of any share of or

interest in a foreign company or entity that is deriving its value substantially from the assets located in India are taxable in India.

To determine the income attributable to tax in India, Rule 11UC of the Income-tax Rules, 1961 (Rules) provides the following formula:

Income attributable to tax in India = A × B/C,

where

A = Income from indirect transfer of assets;

B = FMV of the Indian assets on the specified date;

C = FMV of all the assets of the foreign entity on the specified date.

For computing C (i.e. FMV of all the assets of a foreign entity), if the transfer of shares is between unconnected persons, the FMV of all the assets of the foreign entity is the sum of:

• market capitalisation of the foreign entity based on sale consideration; and

• book value of liabilities of the foreign entity.

However, in the case the transfer of shares is between connected persons, FMV of all assets of the foreign entity is to be determined based on the valuation report obtained from a merchant banker or accountant.

Connected persons for the purposes of Rule 11UB is defined under section 102 of the Act, to mean any person connected directly and indirectly to another person and includes the following:

If the person is Connected person includes

An Individual Relative of such individual

Company Director and its relative



The term ‘relative’ mentioned in the definition of connected person has been assigned the meaning as covered in section 56(2) of the Act (discussed above).

Further, an exception is provided from the applicability of the overseas transfer tax, if the transferor is holding neither the right of management or control nor shares/voting power/interest of more than 5% in the foreign company. However, holding by an associated enterprise (as defined under the transfer pricing provisions) of the transferor is also included while determining the applicability of the above exception to the transferor.

While there are several compliances for reporting the overseas transfer such as filing of Form 3CT and Form 49D, no additional


Any assessee Any individual holding substantial interest in the business and their relative

Any person • Any company, Firm, AOP, BOI, or a HUF having a substantial interest in the business of the person; and

• A director, partner, or member of such company, Firm, AOP, BOI, or a HUF, and their relative

Any person • Directors, partners and members holding substantial interest in the person and their relative

Any person Any person who has substantial interest in the business of the other person

• For an individual, the term ‘person’ will also include its relative

• For a company, Firm, AOP or HUF, the term ‘person’ will also include its directors, partners or members, and their relatives


Firm or AOP or BOI or HUF Partner or member and its relative

compliance is required to be undertaken in case the overseas transfer is between connected persons, except for obtaining a valuation report from the merchant banker or accountant for valuing the foreign entity.

Conclusion As can be seen from the above, there are multiple provisions in the Act to report/restrict related party transactions. With the increased scrutiny of transactions across the globe with an intention to minimise tax leakages, the monitoring of such related party transactions is only likely to increase, and taxpayers will need to remain updated of these regulations to ensure appropriate compliance and reporting.

Special Story — Contemporaneous ALP determination under Companies Act in current times


CA Prasanna Bharatan

Contemporaneous ALP determination under Companies Act in current times

IntroductionThe rise and spread of multinational business enterprises over the last 5 decades fired by increasing globalisation and liberal market policies of nation states opened up enormous economic and business opportunities for enterprises to serve the un met customer needs globally for goods and services. The positive fallout of the phenomenon saw increased movement of wealth from the rich developed nations to the developing and capital deprived nation states which seized the opportunity to liberalise their economies and lift millions out of economic and social deprivation.

As businesses crossed multiple geographical boundaries, they had to grapple with multiple business and taxation laws some liberal, some very restrictive to the no so stringent ones. Managing transnational business environments necessitated complex organisation structures to ensure businesses protected their capital, business assets and increase wealth effectively by leveraging differential financial and tax regimes in the geographies they operated.

The ensuing period also witnessed increased participation of larger households in common stock of companies, through increased participation in IPOs. Growth of Asset Management Companies increased stock market participation and consequent

shareholder activism. Legislatures became busy enacting regulators. The pressure on companies to increase shareholders wealth saw increase in large enterprises resorting to planned transaction structuring to become more tax efficient. Zero tax to low tax companies flourished taking shelter of appropriate provisions under low tax geographies and cross border tax treaties. Complex web of holding structures front companies and associated enterprises gave rise to several inter group transactions moving profits to low tax regimes, The clamour of increasing tax divides between the rich and low tax companies and the others brought upon new legislations including those of related parties. India was no different and we enacted provisions in our taxation and company’s law for related parties.

Before the pandemic, the world trade was witnessing crosswinds of nationalism, Trade wars, increasing emphasis on import substitution and ever increasing challenges to corporate governance due to increasing fraud perpetrated by business houses.

In Indian environment all these aspects were also faced with the daunting paradox of bettering the ease of doing business!

The pandemic drew a slew of actions from the Government to safeguard the population and keep the economy afloat.

SS-I-35



obtained undue benefit Attributed to the relationship between related parties.

Related PartiesRelated parties are defined under the act u/s 2(76):

‘related party’, with reference to a company, means – “(i) a director or his relative; (ii) a key managerial personnel or his relative; (iii) A Firm, in which a director, manager or his relative is a partner (iv) a private company in which a director or manager or his relative is a member or director; (v) a public company in which a director or manager is a director and holds along with his relatives, more than two per cent of its paid-up share capital; (vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager; (vii) any person on whose advice, directions or instructions a director or manager is accustomed to act: Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity; (viii) any body corporate which is — (A) a holding, subsidiary or an associate company of such company; (B) a subsidiary of a holding company to which it is also a subsidiary; or (C) an investing company or the venturer of the company; – For the purpose of this clause, “the investing company or the venturer of a company” means a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate. (ix) such other person as may be prescribed.” a director other than an independent director or key managerial personnel of the holding company or his relative with reference to a company shall also be deemed to be a related party. As per sub-section (77) of Section 2 of the Act, relative with reference to any person, means anyone who is related to another, if— (i) they are members of a Hindu Undivided

In this article we seek to explore the issues that the current Pandemic has brought about in relation to related party transactions under the Companies Act 2013.

Why legislate Related parties under Companies Act?The primary objective is to protect interests of ordinary shareholders, financial institutions; Related Party transactions could be an effective conduit to siphon off monies, assets, profits from the company to the advantage of any individual or group of individuals at the detriment of shareholders, lenders, etc. Apart from opportunities for fraud, conflict of interest arises for key personnel who may render transactions with related parties favouring the interested parties, moving profits or losses within the network of related parties to serve various needs benefitting the interested parties at the cost of ordinary shareholders.

Key aspects of Related party transactions1. Related parties

2. Transactions flowing between related parties (in ordinary course of business)

3. The economic value assigned to these transactions

4. Whether such transactions were at arm’s length

5. The consequent impact of such transactions on the financial reporting

Arm’s Length Principle U/s 188 (1) of the act, Arm’s length represents transactions between related parties conducted as if they were between completely unrelated parties.

ALPs are necessary to be established to provide necessary assurance that transactions were above aboard and no party or parties

SS-I-36



Family; (ii) they are husband and wife; or (iii) one person is related to the other in such manner as may be prescribed under the Act. persons who shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely:- (1) Father: the term ‘Father’ includes step-father. (2) Mother: the term ‘Mother’ includes the step-mother. (3) Son: the term ‘Son’ includes the step-son. (4) Son’s wife. (5) Daughter. (6) Daughter’s husband. (7) Brother: the term ‘Brother’ includes the step-brother; (8) Sister: the term ‘Sister’ includes the step-sister.

As per the Listing Regulations Regulation 2(1)(zb) of the listing regulations defines the term 'related party' as follows; A related party means a related party as defined under section 2(76) of the Act or under the applicable accounting standards. Provided that any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of shareholding in the listed entity shall be deemed to be a related party.”

Approvals and disclosure of related party TransactionsU/s Section 188 of the Act for approval of all transactions with related parties except with respect to transactions with a wholly owned subsidiary. Approval by the Board is necessary if the transaction with a related party is covered under Section 188(1) of the Act but does not exceed the thresholds under Rule 15(3) of the Companies (Meetings of the Board and its Powers) Rules, 2014. However, approval of the shareholders is required in all cases where the transaction exceeds the thresholds referred to above. For all transactions in the ordinary course of business under arm’s length basis then approval of the Audit committee will be necessary (under section 177(4)(iv) of the Act) but approval of the Board is not necessary to be obtained. The Listing Regulations provide

for an approval mechanism – approval of the Audit Committee is necessary in all cases except with respect to transactions between a listed company and its wholly owned subsidiary. Approval of the shareholders is necessary to be obtained in case of a material related party transaction (Regulation 23). All related parties (irrespective of whether they are related parties in the transaction proposed to be considered or not) are not entitled to vote on such a resolution. The Act requires disclosure of related party transactions in the Directors’ Report. The Accounting Standards mandate disclosure of the amount of the transactions with related parties. The Listing Regulations require multiple disclosures on a quarterly basis in the Corporate Governance Report as provided under Regulation 27; in the Corporate Governance Report which is part of the Annual Report as required under Regulation 34; and stock exchanges (Regulation 23).

According to the provisions of the Act, the following require shareholders’ approval:

1. Sale, purchase or supply of any goods or materials, directly or through appointment of agent Transaction value 10% of annual turnover or Rs. 100 crore, whichever is lower

2. Selling or otherwise disposing of, or buying, property of any kind, directly or through appointment of agen.t Transaction value 10% of net worth or Rs. 100 crore, whichever is lower

3. Leasing of property of any kind. Transaction value 10% of net worth or 10% of annual turnover or ` 100 crore, whichever is lower

4. Availing or rendering of any services, directly or through appointment of agent. Transaction value 10% of annual turnover or Rs.50 crore, whichever is lower

SS-I-37



5. Appointment to any office or subsidiary company or associate company Monthly remuneration > ` 2.50 lakh

6. Remuneration for underwriting the subscription of any securities or derivatives thereof Transaction value > 1% of net worth for a listed entity,

Under the Listing Regulations: a threshold of 10% of the annual consolidated turnover for determining material related party transaction. w.e.f. 1st April, 2019, a transaction involving payments made to a related party with respect to brand usage or royalty shall be considered

Illustrative commonly observed Related party Transactions1. Sale of Goods and services to

subsidiaries

2. Intercorporate deposits and borrowings

3. Investments in financial instruments of group companies

4. Purchase or sale of current/non- Current investments

5. Renting of assets or leasing of assets

6. Management charges, Administrative charges

7. Reimbursement of expenses

Process for Compliance with related partiesEvery organisation has to evolve its own process, procedures, policies for defining, identifying, measuring reporting related party transactions. Information systems where ever possible should have adequate capability to reliably identify and capture such transactions.

These policies and procedures should ideally be approved by the audit committee and the Board of directors. Annual review and approval would ensure they remain updated and compliant at all times.

In order to effectively operationalise a verifiable and reliable process, proper documentation is of extreme importance. Documents so identified should be legally valid to stand the test of compliance. These could include internal documents, emails, independent third party certificates, multiple third party rates for similar or like goods or services for the same period. These are essential to demonstrate ALP.

Important parameters that effect related party transactionsDepending on the nature of transactions, most parameters which go to determine the ALP are guided by economic sentiments or factors. Let us take some examples:

1. Borrowing or Lending rates – Mostly determined by central banks and subject to revisions based on Economic factors

2. Foreign currency Exchange rates – Market influenced with central bank intervention

3. Pricing of financial instruments and coupon rates of debt instruments- largely factor of Economy, demand and supply of Money, interest rates etc

4. Real estate rentals: Factor of Real estate market in that area and underlying economic sentiments driving real estate.

Most common factor is the mid- term to long term stability of these factors with minor range of volatility and underlying assumption of stable government policies..

Pandemic and its associated disruptionsAs is common knowledge the effect of pandemic slowed business activities and in some cases caused a complete stop to the business.

The Government considered several measures to reduce the effect of the pandemic on

SS-I-38



business. Some of the measures included moratorium on loans, changing the norms for admitting Insolvency proceedings, RBI changed the monetary policies impacting lending rates, support for MSMEs etc. Several industry specific measures were also announced. Financial reporting timelines were extended for corporates amongst many other relaxations for compliances.

Enterprises had to change business practices to cope with the pandemic coupled with the effect of policy announcements specifically aimed at providing relief to businesses created an unintended situate don’t ion for many enterprises in so far as related party transactions are concerned.

Government of India specially and governments of various countries have in order to protect local economies, businesses, employment etc have taken a series of measures, including subsidies, soft loans, relaxation in reporting requirements, extended timeline for financial reporting etc.

These significant government actions have additionally contributed to impacting business transactions in a manner that makes availability of comparative data challenging.

To establish ALP, its important to compare “apple to Apple ‘Information. In most scenarios under pandemic, contemporaneous comparable information to establish transfer pricing is difficult to establish.

LiquidityOne of the critical aspects of the business vastly affected due to pandemic is Liquidity, which was fast drying up due to sharp drop in revenue generation. Recovery of outstanding credit got difficult as all stake holders were conserving cash.

To overcome liquidity issues cash rich companies may have lent money to cash

strapped subsidiaries or parent or associate company at very low rates

At the same time companies may have obtained moratorium over Re Payments of loans to lending institutions or may have been provided with reduced interest rates on fresh borrowings. Some lenders may have refused to lend to companies in the current situation fearing potential NPA

How then is ALP to be established in this environment? Terms and conditions of lending may not be strictly benchmarked as each case has its own unique business compulsion, what data on lending can be treated as contemporaneous to establish ALP? How do companies provide their Auditors and audit committee adequate comfort that these transactions undertaken followed ALP.

In such circumstances it’s important to document the position and conditions triggering such underlying transactions. The swift deterioration of liquidity in the borrowing company, hence need to borrow, a detailed consideration of the situation by the lending company, the terms of inter corporate lending considering the lending rates, the terms and conditions of lending, the cost of capital for the lending company, the credit rating for both the lending and the borrowing companies and the prevailing rates of interest ( can be varying rates) during the times of lending may comprehensively be documented to ensure any lending /borrowing decision are alp. Enterprises may rely on external reports of consultants which may be well researched to collect such information, its important such reports are free from conflict of interests in any form, and are contemporary.

Re negotiated pricingCommercial pricing of goods and services between related parties are likely to be revised due to conditions caused by Pandemic. Business may feel the need to revise price

SS-I-39



either to revive demand or to pass on price changes inflicted upon by vendors primarily supplying raw materials.

Such price changes in intercompany transactions amongst related parties presents a challenge in establishing ALP. Obtaining contemporaneous data to establish ALP may not be easy, there may be considerable changes to the associated conditions accompanying the price changes, these could be changes to:

1. the credit period

2. The quantity discount/trade discount

3. The volume involved in the transaction

4. Relaxations to payment methods (EMI, staggered payments, …)

5. Change in long term suppliers to new suppliers with better terms

IT may not be possible to obtain information to establish contemporaneous data to establish transactions were ALP.

What would be of significant importance to establish is that these transactions have been of continuous in nature over a prolonged period of time and the transactions are in the regular course of business,

DocumentationIf compliance to related parties provisions under Companies Act are to be met under the present circumstances, affected organisations will have to lay out their options. Certain steps include:

1. Reviewing the affected related parties transaction and impact

2. Reviewing the current policy and procedures in respect of Related party transaction and ALP

3. Preparing detailed pre pandemic and under pandemic comparative positions of transactions and the variance in rates

4. Detailed description of circumstances resulting in change in the value of transactions

5. Demonstrated effort in obtaining reliable contemporaneous data/information for establishing ALP

6. Relevance of method chosen for establishing ALP

7. The effect of current transfer pricing on the financial results

ConclusionThe route chosen has an impact in the future and can be questioned. Therefore, these choices need to be carefully considered and documented. companies should anticipate and review their transfer pricing models, if needed amend intercompany agreements and substantiate the positions taken and amendments implemented through proper documentation.

A transfer pricing analysis should be made substantiating why certain group companies might end up with a profitability lower than expected and the impact of changes in intercompany financing to improve cashflow. Past benchmark studies based on financials of past years are likely not appropriate. The new guidance on financial transactions, issued by the OECD in February 2020, it appears that it may be reasonable to renegotiate more favourable terms for financial transactions like delay interest payments on a temporary basis, or re-negotiation of short-term loans as long-term loans etc.

SS-I-40

Special Story — Special Valuation Branch & Related Party Transactions


K. Vaitheeswaran Advocate

Special Valuation Branch & Related Party Transactions

Related party transactions are generally subjected to special provisions in both direct and indirect tax laws. While VAT laws did not contain any specific procedure, excise, customs and now GST contemplate transactions with related parties and special provision from a tax law perspective.

CustomsAn ancient custom of merchant offering goods as gifts to the king at the time of entering into his kingdom, evolved over a period of time to a levy at the point of entry of goods into the Country. Import by sea was governed by the Sea Customs Act, 1878; Land Customs Act, 1924; and through Rules under the Indian Aircraft Act, 1911. Post-independence, Customs Act, 1962 was passed to consolidate all other legislations. The levy of customs duty is in terms of Entry 83, Union List, Seventh Schedule which covers ‘duties of customs including export duties’.

In terms of Section 12(1) of the Customs Act, 1962 the levy of customs duty shall be at the rates specified in the Customs Tariff Act, 1975 on the goods imported into or exported from India.

ValuationGATT was formed in order to provide a platform to discuss and determine trade policies and remove trade barriers. A common

valuation code was created under Article VII of the GATT and India agreed to implement this. This agreement was implemented in 1988 through amendments in Section 14 and through the Valuation Rules, 1988. Finance Act, 2007 has completely recast Section 14 and consequently the Government has introduced Valuation Rules separately for imports and exports in 2007.

Section 14 of the Customs Act, 1962 deals with valuation of goods and the provisions indicate the following:

(i) Section 14 deals with both valuation for import as well as export.

(ii) Value is the transaction value, which is the price actually paid or payable when the buyer and seller are not related and the price is the sole consideration. However, this is subject to conditions specified in the Rules.

(iii) In respect of imports in addition to price, value shall include amounts payable for various costs and services, commission and brokerage, engineering, design work, royalty and license fee, cost of transportation to place of importation, insurance, loading, unloading and handling charges. These shall be to the extent and in the manner specified in the Rules.



(iv) The buyer and seller are not related or where the buyer and seller are related, transaction value is acceptable for customs purposes provided

• That the examination of the circumstances of the sale of the imported goods indicate that the relationship did not influence the price.

• Whenever the importer demonstrates that the declared value of the goods being valued closely approximates to one of the following values ascertained at or about the same time namely, (a) The transaction value of identical goods or of similar goods in sales to unrelated buyers in India; (b) The deductive value for identical goods or similar goods; (c) The computed value for identical goods or similar goods

Related Party Rule 2(2) defines persons deemed to be related only if

(i) they are the officers or directors of one another’s businesses;

(ii) they are legally recognised partners in business;

(iii) they are employer and employee;

(iv) any person directly or indirectly owns, controls or holds five per cent or more of the outstanding voting stock or shares of both of them;

(v) one of them directly or indirectly controls the other;

(vi) both of them are directly or indirectly controlled by a third person;

(vii) together they directly or indirectly control a third person;

(iv) The Rules shall also provide as to when the parties can be considered as related, method for determination of value when there is no sale or when the seller and buyer are related or when the price is not the sole consideration as well as other cases. The Rules shall also provide for the manner of acceptance or rejection of the declared value.

(v) The proviso to Section 14(1) provides that such price shall be calculated with reference to rate of exchange as in force on the date on which a bill of entry is presented under Section 46 or a bill of export or shipping bill is presented under Section 50. Rate of exchange means, the rate of exchange determined by the Board or ascertained in the manner as directed by the Board for conversion of Indian currency into foreign currency or foreign currency into Indian currency.

The transaction value is adopted provided that

(i) there are no restrictions as to the disposition or use of the goods by the buyer other than restrictions which are imposed or required by law or by the public authorities in India or limit the geographical area in which the goods may be resold or do not substantially effect the value of the goods.

(ii) the sale or price is not subject to some condition or consideration for which a value cannot be determined in respect of the goods being valued.

(iii) no part of the proceeds of any subsequent resale, disposal or use of the goods by the buyer will accrue directly or indirectly to the seller unless an appropriate adjustment can be made in accordance with the provisions of Rule 10.



(viii) they are members of the same family.

The term also includes legal persons and according to the Explanation provided for in the Section, persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, however so described, of the other shall be deemed to be related for the purpose of these rules, if they fall within the criteria of this sub-rule.

The JourneyIn a related party transaction of import of goods, where Rule 3 of the Customs Valuation fails, the next course of action is to adopt Rule 4 of the Customs Valuation Rules which requires the determination of ‘goods’ identical to the imported goods and adopting of the transaction value of such identical goods with adjustments for commercial levels, quantity, transportation, differences on account of distance and means of transport.

Identical GoodsIdentical Goods is also defined to mean goods being same in all aspects including physical characteristics, quality and reputation of the goods being valued except for minor differences in appearance that do not affect the value. They must also be produced in the same country in which the goods being valued were produced. Items which are made to order as per specifications such as engineering or design are not generally considered as identical. Under the customs law, it may be possible for the authorities to identify an import of an identical commodity by a third party from the foreign supplier or an import by a third party from another third-party

supplier could also fall within the ambit of ‘identical goods’.

Goods should be imported from the same country. Value of goods imported from another country cannot be considered Commissioner of Customs vs. Shri Sales Corporation1.

The Rule has an inbuilt safety mechanism wherein if more than one identical goods is available, the lowest of such value should be taken.

Similar Goods Where there are no identical goods in existence or there is no transaction value for such identical goods, on account of the sequential mandate, Rule 5 will come into play which requires the adoption of transaction value of similar goods. Similar goods is defined as imported goods which although not alike in all respects, have like characteristics and like component materials which enable them to perform the same functions and to be commercially interchangeable with the goods being valued having regard to the quality, reputation and the existence of trademark. They must also be produced in the same country in which the goods being valued were produced. Items which are made to order as per specifications such as engineering or design are not generally considered as similar. In contrast, there is no specific method in transfer pricing which directly mirrors the concept of similar goods, though the CUP method to some extent can resonate with this method.

Goods produced in Japan and goods produced in France cannot be considered as similar goods - Nitisodya Diamond Tools vs. CC2.

1. (2003) 153 ELT 152 (CESTAT Mumbai)2. (1994) 74 ELT 49 (CESTAT Delhi)



Deductive ValueWhere the value cannot be determined under Rule 3 and value cannot be determined under the method for identical goods or similar goods, then Rule 7 contemplates arriving at the value by deducting certain items from the sale price of the imported goods.

Where the goods being valued or identical goods or similar imported goods are sold in India, in the condition as imported at or about the time at which the declaration for determination of value is presented, the value of imported goods shall be based on the unit price at which the imported goods or identical goods or similar imported goods are sold in the greatest aggregate quantity to persons who are not related to the sellers in India and subject to the following deductions –

(a) commission

(b) profits

(c) general expenses in connection with the sales in India of imported goods of the same class or kind

(d) transport and insurance and associated cost incurred within India.

(e) Customs duties and other taxes payable in India by reason of importation or sale of the goods.

Where such imported goods/identical goods/similar imported goods are not sold at or about the same time of importation of the goods being valued, the value of imported goods shall subject otherwise to the provisions of sub-rule (i) be based on the unit price at which imported goods or identical goods or similar imported goods are sold in India at the earliest date after importation but before expiry of 90 days after such importation.

Where the imported goods, identical goods or similar imported goods are not sold in India in the condition as imported, the value shall be

based on the unit price at which the imported goods after further processing are sold in the greatest aggregate quantity to persons who are not related to the seller in India. While calculating due deduction shall be given for value added by processing apart from the other deductions such as commission etc.

In other words, the journey is to retrace the steps and arrive at the possible imported value. Adequate safeguards have been provided to ensure the time factor and the requirement of a non-related transaction.

Computed ValueSubject to Rule 3 the value of imported goods shall be based on a computed value, which shall consist of the sum of —

(a) Cost or value of materials and fabrication or other processing employed in producing the imported goods.

(b) An amount for profit and general expenses equal to that usually reflected in sales of goods of the same class or kind as the goods being valued which are made by producers in the country of exportation for export to India.

(c) Cost or value of all other expenses referred to in Rule 10(2).

Where valuation is not possible under the deductive method, valuation can be done using the computed value method and it is also possible for applying this method first before using the deductive value method. Ideally, this method is possible where the producer is in a position to provide the cost details. The Rules for interpretation provide that the information should be based on the commercial accounts which is based on GAAP. Items such as commission, brokerage, packing cost will have to be added. Similarly, materials that are supplied free, cost of tooling, development and engineering charges will



have to be added. General expenses and profit would be added to arrive at the value.

Residual MethodSubject to Rule 3, where the value of imported goods cannot be determined under the provisions of any of the preceding rules, the value shall be determined using reasonable means consistent with the principles and general provisions of these rules and on the basis of the data available in India provided that the value so determined shall not exceed the price at which such or like goods are ordinarily sold or offered for sale for delivery at the time and place of importation in the course of international trade when the seller or buyer has no interest in the business of other and price is the sole consideration.

As a measure of safety, Rule 9(2) provides that no value shall be determined under the provisions of this rule on the basis of –

(a) The selling price in India of the goods produced in India;

(b) A system, which provides for acceptance for customs purposes of the highest of two alternative values;

(c) Price of the goods on the domestic market of the country of exportation;

(d) Cost of production other than computed values, which have been determined for identical or similar goods in accordance with Rule 8;

(e) Price of the goods for export to a country other than India;

(f) Minimum customs values; or

(g) Arbitrary or fictitious values.

This Rule can be applied in order to cure certain minor inability in the application of a preceding Rule. For example, Goods could be imported from UK and Rule 3 would fail. While there is another imported commodity, which is identical in all aspects it could not be considered as identical as it was imported from US. By application of this Rule, this condition can be relaxed and the transaction value of the US commodity can be adopted.

In the deductive value method, there is a requirement that the sale of the imported commodity should have happened before the expiry of 90 days from the date of importation. Under this Rule, this condition could be flexibly interpreted and the 90 days requirement could be administered flexibly.

When valuation of goods was done, on the basis of selling price in India, the same was rejected – CC vs. HM Leisure3.

Special Valuation BranchIn the Circular No. 1/98 – Cus. Dated 01.01.1998, the first set of instructions were given to the Special Valuation Branch in relation to the transactions involving special relationships. At that point of time, the SVBs were located only at Chennai, Calcutta, Delhi and Mumbai. As per the Circular, any decision taken in respect of a particular case in any of the four major Custom Houses was to be followed by all the other Custom Houses/formations. According to this Circular, where in the declaration prescribed under the Custom Valuation (Determination of Price of Imported Goods) Rules, 1988, the importer himself has made an averment that the transactions are between related persons in accordance with Rule 2(2) of the Valuation Rules, 1988 and there is a prima

3. (2006) 199 ELT 464 (CESTAT Bangalore)



facie justification for further enquiry, the concerned case of import may be referred to the SVB of the concerned Custom House, where a separate case file would be opened and a registration number assigned to the case. The Notification further deals with the explanation regarding various determining factors to investigate the transactions between ‘related persons.’

In terms of Circular No. 11 of 2001 – Cus. Dated 23.02.2001, it was stipulated that it would be imperative for the Commissioner of Customs to critically examine the issues involved and decide whether it merits detailed enquiries by SVB and adoption of the provisional assessment procedure.

In each and every case, the decision would be taken at his level before provisional assessment is ordered and matter referred to SVB. There would be however no need to obtain Commissioners’ approval for imports made under different bills of entry, in a particular case, once the case has been registered with SVB. An Extra Duty Deposit (EDD) on 1% on the assessable value of goods was to be paid. If the questionnaire regarding relevant information was not completed within 30 days of receipt, the Extra Duty Deposit (EDD) payable increased from 1% to 5%.

Circular No. 5 of 2016 dated 09.02.2016Taking into account various representations made by trade and industry in relation to the delays in finalisation of SVB investigations, continued uncertainty due to provisional assessment, increase in transaction costs due to extra duty deposits and burdensome procedure of renewal of SVB borders, the procedures were streamlined vide this Circular. The key points to be noted under this Circular are:

(i) The SVB is to function under the supervisory control of the jurisdictional

Chief Commissioner/Principal Commissioner.

(ii) The Director General of Valuation (DGoV) shall support the Commissioners by issuing advisories on legal issues and guidance notes.

(iii) The Extra Duty Deposit as a security was abolished. However, failure to provide documents and information within 60 days of requisition would attract 5% of the declared assessable value to be imposed by the Commissioner for a period not exceeding the next three months along with granting of 60 more days to provide the information.

(iv) In case the information is not submitted within the extended period as well, the Commissioner in charge of SVB may consider the use of other provisions of the Customs Act for obtaining documents. Information from an importer for conducting investigations.

(v) The SVB was to no longer issue an appealable order and instead, convey its investigative findings by way of an investigation report to the referring customs formation for finalizing the provisional assessments.

(vi) A questionnaire was also introduced by the Department to be filled by the importer, to enable the jurisdictional officer to take a decision on whether a case needs to be referred to SVB for investigations.

(vii) Three categories were exempted from SVB investigations – import of samples and prototypes from related sellers; imports from related sellers where duty chargeable (including additional duty of Customs, etc.) is unconditionally fully



exempted or nil; any transaction where the value of imported goods is less than Rs.1 Lakh but cumulatively these transactions do not exceed Rs. 25 Lakhs in any financial year.

(viii) Cases which may be considered for SVB investigations along with the procedure for considering reference to SVB; procedure for cases where reference to SVB was not required; procedure in SVB; finalization of assessments; instructions in relation to change in circumstances surrounding the sale were also provided.

(ix) The DGoV was to facilitate co-ordination amongst the SVBs. Once a case was registered by the SVB, detailed information regarding the same along with the IEC Code of the importer should be entered in the Central Registry Database (CRD) maintained by the DGoV and they shall monitor the progress of the investigations and report to the Board cases involving any inordinate delays.

The 2016 Circular has completely altered the entire SVB scenario and the process has become quite smooth. The reference is escalated and a dedicated team of officers examine the surrounding circumstances as against every transaction being examined at the time of import.

Faceless Assessment - 2020Faceless assessment of bill of entry of goods imported primarily under Chapter 84 and Chapter 85 was introduced at Bengaluru and Chennai and subsequently it has been rolled out across the country and across all Chapters.

In terms of Instruction No. 9/2020-Cus., dated 05.06.2020, the procedure for certain exceptional circumstances have been identified wherein the proper officer of the Faceless Assessment Groups may, with the approval of a senior officer not below the rank of Joint Commissioner/Additional Commissioner, transfer the bill of entry using the Customs Automated System to PAG at the port of import for assessment, without completion of verification of assessment. The Faceless Assessment Groups may also transfer a bill of entry to the PAG in any other exceptional circumstances, but in this case, this would be done after due approval from the Commissioner supervising the proper officer.

One of the circumstances identified is related party transactions warranting investigation by SVB (other than cases that are already covered by an earlier order of the SVB such as in the case of continuing imports which have earlier been taken up for investigation by the SVB). In this case the port of import would refer the case to its jurisdictional Special Valuation Branch (SVB) for further investigation.

There is nothing that wastes the body like worry, and one who has any faith in God

should be ashamed to worry about anything whatsoever.

Mahatma Gandhi

Special Story — Interplay between Customs and Transfer Price


Ms Smita Roy & CA Partho Dasgupta

Interplay between Customs and Transfer Price

BackgroundCross border transaction between related parties is subject to rigors of both transfer pricing and customs laws in India. Valuation under Customs laws is guided by tenets captured in General Agreement on Tariffs and Trade and guided by World Customs Organisation; while valuation under transfer price (Income Tax) is largely governed by Organisation of Economic Cooperation & Development (OECD) and UN model.

These laws have a commonality of purpose i.e. to ensure that transactions between related parties are undertaken on arm’s length basis. This effectively means that both laws have their mechanisms and processes to evaluate whether transaction value or price has been influenced due to the relationship between parties. Transfer Pricing regulations are concerned whether the price paid in related party purchase transaction is too high and/or the price charged in a related party sale transaction is too low. Corporate Law provisions only provide for approval mechanisms to be followed in case the related party transactions are not entered in the ordinary course of business or not at arm’s length price. The intent of Corporate Law provisions is to only protect the interest of

the shareholders. On the other hand, Customs laws are concerned with addressing any undervaluation of related party transactions for Customs duty purposes. Circumstances governing sale of imported goods between related parties and disclosures made by importer to Customs authorities are crucial to determine whether price is influenced by relationship between parties. In case transaction value meets the tests prescribes for arm’s length price then assessment is concluded, which also aids in clearance of subsequent imports between such parties. In cases where tests are not met or entail additions to transaction value then matter with significant revenue implications are referred to Special Valuation Branch (SVB) for investigation and imports are cleared under provisional assessment route till findings are concluded and assessments finalized.

Hence, the Transfer Pricing regulations aim at maximizing taxable income of the importer by minimizing the value of goods imported [which, in turn, will show lesser expenditure and greater profits] whilst Customs regulations aim to ensure that the relationship between the parties has not resulted in undervaluation.

Broad comparative summary of these laws is tabulated below.



Particulars Transfer Pricing Customs

Relevant regulations Income Tax Act, 1961 and Income Tax Rules, 1962

Customs Act, 1962 and Customs Valuation Rules, 2007

Applicability Import/export of goods, services both tangible and intangible or any other transaction between tax payer and its Associated Enterprise

Primarily, all import and export of goods; including transactions between related parties

Related party The definition is wide and goes beyond shareholding/group entities.

The definition is wide and includes shareholding/group entities, sole agent/distributor etc.

Timing of Valuation While setting up and reviewed regularly (annually) under self-Compliance

At the time of every import/export.

Basis of pricing a transaction

‘Arm’s length price’, a price which would prevail for the transaction with an unrelated party under uncontrolled circumstances

Transaction value, a price which would prevail for transaction with an unrelated party where price is the sole consideration for sale. Revaluation using prescribed methods in case the price is found to be influenced by the relationship between the parties

Methods of valuation prescribed (broad similarities)

Comparable Uncontrolled Price (CUP)

Transactional Value of similar/identical goods

Resale Price Method (RPM) Deductive Value

Cost Plus Method (CPM) Computed Value

Profit Split Method (PSM)/Transactional Net Margin Method (TNMM)/Other Method

Residual Method

Comparability factors for determining method

Type of transactions, profile of the parties and the functional analysis of the transactions

Same or similar transactions (profile and functional analysis not relevant)

Comparable Data sources

Use of databases by independent service providers like CMIE, Capital Market, etc

Proprietary data available within the Customs database/archives/repository

Time of assessment by revenue

2-3 years from the end of the relevant year

At the time of clearance of the goods through the customs frontiers of India

Focus of revenue authorities

Reduce the import price and thereby increase the profit base to tax

Increase the import price to increase the incidence of import duty; to enable higher collection of duty on the value of import



Therefore, while there is a divergent approach to valuation under Customs and Transfer Pricing laws for import /export of goods, it is also noteworthy to examine the treatment accorded to intangibles while concluding the aforesaid.

Emerging issue – intangibleWe will be analysing here some of the key issues encompassing intangibles other than traditional import & export of goods.

Advertisement Marketing & Promotion Expenses (AMP)

The issue has been discussed in case of transfer price for some years now and the issue is today stuck at the various court including Supreme court.

Let us try and explain you the brief background: Post India liberalised the foreign direct investment norms, lot of global companies starts operating as a subsidiary of the foreign parents. The Indian subsidiaries are operating as pure trading (buy /sell) model /or manufacturing/rendering service mostly to their Indian customers. While operating in India being a member of the global group, they use global trade mark, logo etc. Sometimes, they pay royalty for such usage. In order to make their presence felt in India and to

push their revenue /top line they undertake lot of advertisement, marketing and sales promotion activities. This kind of expenditures is essential especially in FMCG sector.

Economically, the expenses incurred under this head may not rewarding in the year hence there will be significant mismatch of expenses versus revenue. While undertaking the transfer price study arm’s length price is determined for the international with the associated enterprises, while so called AMP expenses are incurred by the local companies and paid the third parties in India hence presumed to be outside the ambit of transfer price. However , the tax officers belief is that the AMP expenditures incurred by the Indian subsidiaries enhances the value for the foreign brands /logo , in effect it means a services being rendered to your associated enterprises and hence should be rewarded by the brand/trade mark owner.

Accordingly, there is numerous court rulings & dispute.

In contradistinction, AMP expenses (except where included in price of imported goods), incurred as a condition of sale of imported goods are included in taxable base for Customs duty purposes. This includes payment made by buyer to third party towards discharge of pre-existing obligation of foreign

Particulars Transfer Pricing Customs

Dispute resolution Appellate hierarchy Appellate hierarchy

Advance agreement with revenue authorities

Advance Pricing Agreement (APA) with the revenue, can be entered into for a period up to 5 years

In cases where related party transaction is referred to SVB for investigation, findings shared with jurisdictional Commissionerate for assessment would continue to hold good. This will be revisited in case of change in terms of conditions between parties or circumstances of sale.



seller. Such inclusion arises if payments (to seller/third parties) are made as a condition of sale of imported goods. If the agreement between related parties does not include any stipulation /enforceable right for such expense (e.g. incur any percentage of invoice value of imported goods towards advertisement), or is not linked with discharge of any pre-existing obligation of foreign seller towards third parties then such inclusion would not arise.

Further, AMP expenses incurred on own account are specified as an exclusion under Customs valuation rules. Such exclusion will apply even if advertisement spend results in benefit to the foreign seller.

Issue of includability of AMP expenses in Customs valuation base has been litigated before various appellate fora. Jurisprudence on this matter has emerged to state that:

• Valuation inclusions will be permissible if AMP expense is an obligation of the importer to its foreign seller for import of goods. For example, in a scenario where sharing of advertisement cost, annual franchise fee etc. is a pre-condition for import of goods or if the importer is required to submit marketing plan, budget, draft of endorsement contract with third parties to foreign seller before incurring expenditure then invoice value will be loaded to that extent for customs valuation purposes.

• Such expenses will not be includible if these are incurred by the importer on own account and not chargeable to foreign supplier. For example, if payment made by a sport apparel brand to sports person towards brand promotion /sponsorship is not on behalf of foreign supplier and not as condition of imported goods then such inclusion will also not arise.

RoyaltyRoyalty can be paid for technology (means continuous upgrade, along with the usage), use of trade mark etc. Historically, in transfer price often the arms-length price is often supported from the regulatory approvals in absence of any database. However, it has started becoming more challenging once the regulatory approvals were done away with.

Even today there is no specific data base purely from India perspective, there are global database available. However, the challenge is the royalty rates are determined on various terms and conditions and which will be unique to each agreement. Tax officer in certain cases have also considered as arm’s length or not using the profitability test such as TNMM etc

Inclusion of royalty charges in customs valuation base has been a matter of extensive debate. In case the buyer is obligated to make royalty payments as a condition of sale of imported goods then such payments are required to be considered for valuation purposes if not included in the price of imported goods. Also, if royalty is based solely on imported goods and can be quantified then it will be considered for assessable value purposes. However, if objective and quantifiable data is not available or royalty payments are not mandated as a condition of sale then seeking to include royalty may not hold ground.

SubventionTypically in case of low risk distributor (LRD) often it has been observed that a year-end subvention is received by the Indian subsidiaries in order to maintain the arm’s length profitability. Hence, for the purpose of transfer price the purchases by the Indian subsidiary is often considered as arm’s length while applying a profit based method under company as a whole approach.



This method is an accepted approach from India transfer price perspective.

However, from customs perspective, any change in reported Customs value due to year end price adjustment is required to be reported to the customs authorities at port of import and SVB. These must be determined at transaction level as it may trigger duty and interest implications in case of increase in customs base. Voluntary disclosure of comprehensive details would mitigate any penalty exposure.

Year end adjustment -Debit notes/Credit notesThe concept is also known as budgeted versus actual. While arriving the cost of imports in some cases it has been observed is arrived on the basis of budgeted cost based on cost of bill of materials (BOM) used in ERP. The budgeted cost often dependent on many factors including the uncertain market demand. As the year progresses the actualisation happens and accordingly the difference between the two budgeted and actual is adjusted through debited/credit notes.

From transfer price perspective, arms -length is often calculated at year end on aggregation of all the transaction (import of goods in this case) accordingly, even if there is price fluctuation is during the year but be aggregation the arm’s length compensation can be arrived at.

However, for Customs purposes, arm’s length price is required to be established at the time of importation of goods into India. All factors relevant for establishing such price should necessarily be furnished at the time of import. This includes transfer pricing studies, APAs, comparable invoices etc. Related party transactions involving high revenue implications is referred to SVB

for sharing its findings with adjudicating authority. This is undertaken at transaction level as each import is a separate taxable event under Customs laws. Post importation price adjustment such as payment of royalty, AMP expenses etc. is regarded as change in circumstances surrounding the sale and is required to be disclosed both to concerned Customs authority and SVB for finalization of assessment. Any increase in taxable base would trigger consequent duty and interest implications where reported voluntarily.

Way forwardWhile harmonised approach and synergies between Customs and transfer pricing has been oft debated, alignment of valuation methodologies under these laws may not be viable. This is based on the rationale that transfer pricing is undertaken at entity level on annual basis while Customs assessment is required to be undertaken at a transaction level, leaving little room for arriving at a common price under these laws. However, in a key shift in its approach, the CBIC had initiated reliance on TP study and APAs to gather information for determining arm’s length price of related party transactions.

In summary, effective coordination and data sharing between CBIC and CBDT is vital for ensuring clarity and certainty to taxpayers. In its bid to meet the objective, the aforesaid tax administrators had recently inked a pact in July 2020 (in supersession to 2015 MOU) to enable automated data sharing. Specific information available in their respective databases will also be shared on request. Given this, businesses should have a harmonious position under the respective laws to mitigate exposure to litigation.

Special Story — GST & Related Party – Levy and Valuation


Suyog Bhave, Advocate

GST & Related Party – Levy and Valuation

The concept of ‘related party’ is perhaps one of the few concepts that are common to all forms of tax legislation. The extraordinary relation/association between two related persons inevitably influences the price/value/consideration in a transaction, which forms the fundamental base for any indirect tax levy. With a view to take into account and tackle the effect of such influence, the Goods and Services Tax (“GST”) law has been embedded with special provisions regarding related persons. Apart from the distinct definition provided for the term “related persons”, the GST law also contains provisions having specific implications on the taxability of related party transactions and the valuation of such transactions. This article seeks to provide a brief insight into the said provisions under the GST regime and its effect.

Meaning/DefinitionThe erstwhile Central Excise Act, 1944 contained a lengthy and comprehensive definition for the term “related persons”. Comparatively, the Central Goods and Services Tax Act, 2017 (“CGST Act” or “the Act”) provides for a simple and yet exhaustive definition for the said term. It is pertinent to note that the said definition has been

borrowed from the Customs Valuation Rules, 2007. Thus, it would be reasonable to place reliance on judicial pronouncements made under the Customs Valuation Rules for this purpose.

Although the definition is contained under the Explanation to Section 15 of the Act, which is the valuation provision, the said Explanation begins with the clarification that the definition applies to the entire Act and not just the valuation provision. The definition envisages nine scenarios/conditions to qualify as related persons, which can be broadly categorized into three mutually exclusive tests, viz., Ownership/Control Test, Business Association Test, Other Tests. It is pertinent to note that none of the prescribed conditions stipulate any time-period for or during which the said condition needs to be fulfilled. In the absence of such stipulation, it would be reasonable to assume that the said condition/test has to be fulfilled while the transaction under consideration is being undertaken by the persons.

Ownership/Control TestIt is stated that persons would be deemed to be related persons if:



Court in Shamrao Vithal Co-operative Bank vs. Kasargod Pandhuranga Mallya [(1972) 4 SCC 600], where it is held that control is synonymous with superintendence, management or authority to direct, restrict or regulate. Be that as it may, in the absence of any specific provision in this regard, the question as to whether one person controls another would have to be examined on the basis of the facts and circumstances of each case.

Business Association TestThe business association test involves the existence of interests of the following kind in one other’s businesses, which interest is likely to influence the price:

(i) such persons are officers or directors of one another’s businesses

(ii) such persons are legally recognised partners in business

(iii) one of them is the sole agent or sole distributor or sole concessionaire, as may be described, of the other

As regards the first condition, the term “officer” has not been defined under the Act. Having regard to common parlance and the definition of the term under Section 2(59) of the Companies Act, 2013, an officer may include any director, manager, key managerial personnel, or any other individual having influence or control over the management personnel of an entity. Also, to qualify as related persons, it is not enough that only one of such persons is an officer or director in the other’s business and not vice versa. Although such a person may be said to fulfill the control test depending on the degree of influence the person exercises on the management of the other’s business.

(i) any person directly or indirectly owns, controls, or holds twenty-five percent or more of the outstanding voting stock or share of both of them

(ii) one of them directly or indirectly controls the other

(iii) both of them are directly or indirectly controlled by a third person

(iv) together they directly or indirectly control a third person

A bare perusal of the first condition makes it clear that the Act provides for an economic ownership test rather than a legal ownership test. That is to say, if a person ultimately benefits or exercises control over the ownership of the required quantity of stock/shares, whether through numerous subsidiaries or otherwise, in both the supplier and the recipient of goods or services, such supplier and recipient will qualify as related persons under the Act.

As regards the control test, it is pertinent to note that the term “control” has not been defined under the GST law. Section 2(27) of the Companies Act, 2013 defines “control” as including “the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.” In common parlance, the term control implies that one person influences the management, operational or policy decisions of the other. The meaning of the term “control”, as elaborated in Words and Phrases (Vol. 9) Permanent Edition, has been adopted by the Hon’ble Supreme



Although the second scenario seems pretty straightforward, an ambiguity exists as to whether it extends only to partners recognised under the Indian Partnership Act, 1972, and the Limited Liability Partnership Act, 2000 or it includes persons who join in business through legally recognised associations or joint ventures under legally enforceable contracts.

A sole agent, distributor or concessionaire is also deemed to be a related person because of the exclusivity of the relationship, i.e., the exclusive right to act on behalf of another person. The term agent has been defined under Section 2(5) of the Act as a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer, or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another. The Oxford Dictionary defines the term “distributor” to mean an agent who supplies goods to the retailer. The term “concessionaire” has been defined by the Oxford Dictionary to mean the holder of a concession or grant, especially for the use of land or commercial premises or for trading rights.

Other Tests (applicable to individuals)Finally, there are two conditions that could apply specifically to individuals alone:

(i) such persons are employer and employee

(ii) they are members of the same family

The existence of an employer-employee relationship or a familial relationship is more than likely to affect the price in a transaction. It has thus been recognized as a condition to qualify as related persons. The issue as regards the existence of an employer-

employee relationship is a factual one and it may be resolved basis an examination of the form of remuneration, level of supervision, applicability of labour laws and so on. In this regard, reference may be made to the decisions in Balwant Rai Saluja vs. Air India Limited [(2014) 9 SCC 407 (SC)], L. Jeewanlal v. CIT [(1953) 24 ITR 217 (All.)] and CIT vs. M S P Rajes [(1993) 202 ITR 646 (Kar.)], which lay down certain general principles and tests to determine the existence of an employer-employee relationship.

On the other hand, the term “family” has been exhaustively defined under Section 2(49) of the CGST Act to mean (i) the spouse and children of the person, and (ii) the parents, grandparents, brothers and sisters of the person if they are wholly or mainly dependent on the said person. In other words, under the GST regime, the term family has been restricted to what may commonly be known as immediate family members of a person.

Levy of GST on Related Party TransactionsNarrowed down to the basics, GST is a tax on the supply of goods and services, as defined under Section 7 of the Act. As a general rule, in order to constitute a supply, the activity carried out by a person has to be rewarded by way of some reciprocal consideration. However, Schedule I of the Act lists down four activities which are liable to be treated as supply, and consequently exigible to GST, even if made without consideration. In particular, the following two related party activities have been treated as supply even if made without consideration:

(i) Supply of goods and services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business



(ii) Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business

Therefore, the supply of any goods or services to a related person or an import of services from a related person shall be exigible to GST even when there is no flow of consideration between the related persons in respect of such activities. A common requirement in respect of the two activities listed above is that in order to qualify as a supply, the said activities have to be carried out in the course or furtherance of business. As defined under Section 2(17) of the Act, the term business is wide enough to cover all and sundry activities irrespective of their frequency or regularity. However, it must be noted that if one claims that a particular set of activities is not carried out in the course or furtherance of business, no input tax credit will be permitted to be availed in respect of such activities. The common credit shall be subjected to apportionment in terms of Section 17 of the CGST Act.

Import of Services from a Related PersonSpecial consideration has been given to the import of services from related persons. At the outset, this entry requires that the importer/recipient of the services must be a taxable person, unlike the other entry in Schedule I, wherein the activity is to be treated as supply irrespective of whether or not either of the related persons is a taxable person. Section 2(11) of the IGST Act defines import of service as a supply of service where the supplier is located outside India, the recipient is located in India and the place of supply of the service is in India. Section 13 of the IGST Act contains the specific and general provisions to determine the place of supply of different kinds of services where the location

of the supplier or recipient is outside India. Further, it is pertinent to note that in terms of Section 5(3) of the IGST Act read with Sl. No. 1 in Notification No. 10/2017-IT(R) dated 28 June 2017, the taxable person in India shall be liable to pay GST on a reverse charge basis on such related party import of service.

Exceptions/Levy on transactions between employer and employeeParagraph 2 of Schedule I provides that gifts given by an employer to the employee not exceeding fifty thousand rupees in value in a financial year shall not be treated as supply. The term “gift”, though not defined under the Act, means anything given voluntarily without any reciprocal payment. Basis this definition under common parlance, one may conclude that perquisites and benefits extended to an employee as a part of the employment will not constitute a gift since there is a certain level of quid pro quo involved, i.e., the same has been extended with a view of increase the productivity/performance of the employee. Illustrations of this include rent-free accommodation, transport facilities, food and beverages, and bonus payments. On the other hand, ex-gratia payments, festivity gifts, whether in cash or in kind, would fall under this exception.

Apart from the above, paragraph 1 of Schedule III has stipulated that services provided by an employee to the employer, in the course or furtherance of the employment, shall not be treated as supply and thus, shall not be liable to GST. In other words, where an employee performs any activity which does not fall within the purview of the terms of employment and such employer is benefitted by such activity, the said activity will be treated as supply even where no consideration is paid by the employer.



It is pertinent to note that the exceptions are restricted to gifts extended by an employer to the employee and services provided by the employee to the employer. The question then arises as to whether the facilities and benefits extended by the employer are to be treated as supply. Contrary decisions have been given by the Advance Ruling Authorities in this regard. In a recent decision in Re: Tata Motors Ltd. [(2020) 119 taxmann.com 106 (AAR)], the Maharashtra AAR has held that providing transportation facilities to employees in lieu of a nominal monthly amount is not to be treated as supply. Similarly, in Re: Jotun India (P.) Ltd. [(2019) 29 GSTL 778 (AAR)], the Maharashtra AAR has held that recovery of insurance premia from employees does not amount to supply of service since the same is not made in the course or furtherance of business. On the other hand, in Re: Caltech Polymers (P) Ltd. [(2018) 18 GSTL 373 (AAAR)], the Karnataka Appellate Authority has held that the employer is liable to pay GST on the supply of food items to employees in a canteen in lieu of consideration. With the ever-growing ambiguity, filled with contrary AAR decisions, it is best to proceed with caution in respect of employer-employee transactions.

Valuation of Related Party TransactionsAs per the scheme of the GST regime, tax is payable on an ad-valorem basis, and the taxable value is the transaction value, i.e., the price actually paid or payable, provided the supplier and the recipient is not related and the price is the sole consideration. As stated earlier, the main pain point in the taxation of related party transactions is the deviation caused in the transaction value therein from an arm’s length price. For this very purpose, a unique valuation mechanism has been

embedded in the GST law in the form of Rule 28 of the Central Goods and Services Tax, Rules, 2017 (“the CGST Rules”). Under Rule 28 of the CGST Rules, the value of supply between related persons shall be determined using the following methods in seriatim:

Open Market ValueIn order to tackle the overvaluation/undervaluation caused by the related party status, first preference is given to taxation of the transaction based on its open market value. The term “open market value” has been defined under the Rules to mean the full value (devoid of taxes) of a supply transaction carried out at the same time, between persons who are not related and where the price is the sole consideration. In India, there is a dearth of readily available public information required to determine the open market value (one of the primary sources being the Customs database of imports and exports). Thus, practically, the open market value is generally determined based on the value at which the same supplier makes supplies to a non-related recipient.

However, in terms of the second proviso to Rule 28, the transaction value adopted by the related persons shall be deemed to be the open market value if the recipient is eligible for the entire input tax credit. The Tamil Nadu Appellate Authority for Advance Ruling in Re: M/s. Specsmakers Opticians Private Limited [2020 (1) TMI 63] has categorically held that there is no specific provision under the Rules which require the other methods be applied in seriatim before invoking the provisos. It was further held that the second proviso deals with a scenario independently and thus, has to be applied independently. An ambiguity that has crossed the minds of taxpayers, and which is



yet to be laid to rest by way of any judicial pronouncement or legislative clarification, is whether the eligibility to take full input tax credit has to be examined on an entity level or transaction level. Therefore, a supplier may be denied the benefit of the second proviso in case the recipient is required to reverse input tax credit proportionate to exempt supplies made, in terms of Section 17 of the Act. However, a more reasonable view would be to examine the eligibility of credit in respect of each transaction, the rationale being that any abnormal valuation would be revenue neutral since the entire tax paid by the supplier on such value would become the input tax credit for a related person.

Value of Goods/Services of Like Kind and QualityIn the absence of an open market value of the goods/services, the value may be computed basis the value of supply of goods or services of like kind and quality, i.e., a supply made under similar circumstances of goods or services bearing resemblance in respect of the characteristics, quality, quantity, functional components, materials, and the reputation. Unlike in the case of open market value, a lot more leeway is given regarding the characteristics of the comparable goods or services of like kind and quality. This method permits a difference in the quantity, commercial terms (such as freight, insurance, warranty, etc.) and characteristics of the goods/services supplied and the comparable.

Cost-based ValueThe inability to determine value using the above two methods requires the supply transaction to be valued at 110% of the cost of production/manufacture/acquisition of the goods or the cost of provision of the services,

in terms of Rule 30. It is to be noted that under general costing principles, the cost of production of goods is computed without taking into account selling and distribution overheads attributable to such goods. This may lead to a much lower valuation of the transaction.

Residual MethodFinally, where the value of related party transactions cannot be determined by any of the above methods, the invocation of Rule 31 permits the value to be determined using reasonable means consistent with principles and the general valuation provisions under the Act and the Rules. It is to be noted that the residual method entails a best judgment assessment of the value based on the facts of each case and the general principles of valuation contained under the law. However, given the different sequential valuation methods available, it is anticipated that this residual provision will be rarely invoked.

Valuation of Goods Intended for Further SupplyIndependent of the above in seriatim methods, the first proviso to Rule 28 states that where the goods are supplied by a related person to another for the purpose of further supply by such recipient, the value shall be an amount equivalent to ninety percent of the price of goods of like kind and quality supplied by such recipient to an independent customer. Applicability of this mechanism is not mandatory but left to the discretion of the supplier. As stated earlier, it has been held in Re: M/s. Specsmakers Opticians Private Limited (supra) that the provisos are to be applied independently of the above methods.



Burden of ProofIt is a settled position in law that once the taxpayer has declared a particular value, the onus lies on the revenue to prove that the value so declared by the taxpayer is not in accordance with the valuation provisions discussed above. Even in cases where the taxpayer is of the view that the other party does not constitute a related person under the Act and has thus, not treated the transaction as such, the burden of proving otherwise lies on the revenue. In its decisions in Eicher Tractors Ltd. vs. CC [(2000) 122 ELT 321 (SC)], CC vs. Bayer Crop Science Ltd. [(2015) 324 ELT 17 (SC)] and Tata Teleservices Ltd. vs. CC [(2006) 194 ELT 11 (SC)], the Hon’ble Supreme Court has categorically held that the burden of proving that the value declared by the taxpayer is incorrect lies on the revenue. Be that as it may, as observed by the Hon’ble Supreme Court in East African Traders vs. CC [(2000) 115 ELT 613 (SC)], the revenue can pierce the veil of the taxpayer-company to determine whether the supplier and recipient are related persons.

DocumentationAs can be seen from the above, the methods prescribed for the valuation of related party transactions are based on a certain degree of estimation and assumptions. In this regard, reliance may be placed on publicly available information, expert opinions or comparables from within the entity. Also, the fact that the buyer and seller are related within the

terms of the Explanation to Section 15 is not in itself ground to reject the price adopted by the parties. It is open to the supplier to demonstrate that the relationship has not influenced the price.

Be that as it may, as and by way of precaution, it is advisable to maintain proper documentation regarding the value arrived at by the taxable person, which documentation may be presented before the auditors and revenue officers. In the absence of any specific provision requiring maintenance of such documentation or providing guidance, regard may be had to the minimum standards contained in the transfer pricing regulations under the Income Tax law.

Concluding RemarksThe existence of a related party relation with a supplier or recipient entails considerable deviation from the standard scheme of things under the GST regime and, consequently, the additional administrative burden on the taxpayer. Adding to this are the open-ended ambiguities that exist in the aforesaid provisions that are yet to see the light of the judicial review, mainly due to the stalled appellate mechanism. Going forward, taxpayers must, with great caution, undertake an independent examination of the existence of any related party transactions and the taxability and valuation of such transactions.

We may never be strong enough to be entirely nonviolent in thought, word and deed.

But we must keep nonviolence as our goal and make strong progress towards it.

Mahatma Gandhi

Special Story — Accounting and Auditing Considerations for Related Parties’ Transactions


CA Khushroo B. Panthaky & Jatin Kalra, ACCA

Accounting and Auditing Considerations for Related Parties’ Transactions

IntroductionRelated party transactions have traditionally received special attention from preparers, auditors and regulators. They are also getting increasing scrutiny from independent directors and shareholders. In this article, the multi-fold regulations get covered that govern related party transactions in so far as the accounting and auditing standards, Companies Act, 2013 (the 2013 Act) and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) are concerned.

The regulations respond to the fact that these transactions may not have been independently conceived as they are between entities that have other pre-existing relationships. As such, they carry additional risk of misstatements and fraud. However, a vast majority of such transactions are inevitable, and form part of business as usual. For example, it is common for one entity within the group to perform a specific function, like procuring certain goods, licensing intellectual property, or managing treasury. Further, the management of any entity would certainly draw remuneration, and possibly also purchase goods/services from the entity at prices similar to those offered to other employees.

Therefore, additional disclosures/regulations are necessary for readers of the financial

statements to understand their effects on the organisation, and for the auditors to respond to the additional risk they bring.

Governance framework of related party transactions in India As mentioned before, for related party transactions, there are multiple regulations to consider.

The 2013 Act covers related party transactions to determine who should approve such transactions and when. Further, the 2013 Act has prescribed several other provisions relating to administration/ maintenance of records of related party and transactions with such parties, which a company shall comply with.

LODR puts in additional compliances on listed companies, primarily for ‘material’ related party transactions.

On the other hand, Ind AS 24 in Companies (Indian Accounting Standards) Rules, 2015 (“Ind AS”), and AS 18 in Companies (Accounting Standards) Rules, 2006 (“Indian GAAP”) focus on ensuring that related party transactions are appropriately disclosed.

Standard on Auditing (“SA”) 550 deals with what statutory auditors should do regarding related party relationships and transactions

SS-I-60



or instructions of a director or manager;

vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:

Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;

viii) body corporate which is —

A. a holding, subsidiary or an associate company of such company; or

B. a subsidiary of a holding company to which it is also a subsidiary;

C. an investing company or the venturer of the company;

For the purpose of this clause, “the investing company or the venturer of a company” means a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.

ix) such other person, as may be prescribed

Rule 4 of Companies (Specification of Definition Details) Rules, 2014 further prescribes who shall be deemed as a relative. It provides that following relations shall be considered as a relative:

a) Father (includes step-father).

b) Mother (includes the step-mother).

c) Son (includes the step-son).

d) Son’s wife.

e) Daughter

f) Daughter’s husband.

when performing an audit of financial statements. The focus is on planning and performing the audit, in a manner that such transactions are appropriately identified and understood.

While the objectives of different regulations can be understood by the different perspectives they bring in, the lack of alignment on some of the common aspects results in significant complexity for entities. The most critical aspect for related party transactions, i.e. who should be considered as a related party, under the different regulations is being discussed.

Defining a related partyBefore any regulator can provide requirements around related party transactions, they need to tackle the question of who should be considered as a ‘related party’. And this question has been subject to much debate.

Section 2(76) of the 2013 Act states “related party”, with reference to a company, means:

i) a director or his relative;

ii) a key managerial person or his relative;

iii) a firm, in which a director, manager or his relative is a partner;

iv) a private company in which a director or manager or his relative is a member or director;

v) a public company in which a director or manager is a director and holds along with his relatives, more than 2% of its paid-up share capital;

vi) any body corporate whose Board of Directors (Board), managing director or manager is accustomed to act in accordance with the advice, directions

SS-I-61



g) Brother (includes the step-brother);

h) Sister (includes the step-sister).

Ind AS 24 on the other hand takes a different approach to defining related parties. It provides that a related party is a person or entity that is related to the entity, which is preparing its financial statements (in this Standard referred to as the ‘reporting entity’)

a) person or a close member of that person’s family is related to a reporting entity if that person:

(i) has control or joint control of the reporting entity

(ii) has significant influence over the reporting entity; or

(iii) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.

b) An entity is related to a reporting entity if any of the following conditions apply:

(i) The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).

(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).

(iii) Both entities are joint venturers of the same third party

(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.

(v) The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.

(vi) The entity is controlled or jointly controlled by a person identified in (a).

(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

(viii) The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity.

A close read of the two definitions would throw up several interesting differences. A few of them are discussed below:

a) The definition of key management personnel (“KMP”) in Ind AS is principles based, and includes those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. On the other hand, the 2013 Act has a rule-based definition, and provides that the MD, CEO, Whole Time Director, CFO and CS are treated as KMPs. Thus, it is clear that certain persons like CFO/CS may be a KMP under the 2013 Act, but not



under the Ind AS, while certain persons like independent directors may be a KMP under Ind AS but not under the 2013 Act.

b) The story is similar with reference to the relatives of KMP, which shall be identified as related parties. The 2013 Act provides a concise list, as was mentioned before, although the 2013 Act does include persons on ‘whose advice, directions or instructions, a director or manager is accustomed to act’ as related parties. On the other hand, Ind AS 24 uses the term ‘close member of that person’s family’ and provides a non-exhaustive list. Under Ind AS, identification of close family member is subject to judgment, and there may be circumstances where son/daughter in-law, father/mother in law or even grand-parents might be considered close family member, and circumstances where they may not be.

c) Ind AS includes KMP (and close family members) of not just the entity, but also its parent, as related parties. On the other hand, the 2013 Act mentions only KMP of the entity as a related party.

d) Further, the definition under Ind AS mentions terms like ‘control’, ‘joint control’ and ‘significant influence’, while the definition under the 2013 Act mentions terms like ‘subsidiary’ and ‘holding’ and ‘associate’. The judgment involved in interpreting the terms of Ind AS means that there could be certain entities who are considered related parties as per Ind AS but not as per the Companies Act.

e) An entity which is also a joint venture of the same third party, is considered

to be a related party under Ind AS but may not be under the 2013 Act. The 2013 Act instead provides that a private company, in which a director or manager or his relative is a member or director, or a public company in which a director or manager is a director and holds along with his relatives, more than 2% of its paid-up share capital shall be related parties. Therefore, there are possible scenarios where inconsistencies would arise.

LODR thankfully does not give an independent definition. It instead takes reference of the two definitions already provided and defines the term ‘related party’ as those falling within such definition of either the 2013 Act or the applicable accounting standards. It does however add that any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of shareholding in the listed entity shall also be deemed to be a related party. The fact that LODR includes related parties as per accounting standards also in its definition, really accentuates the impact of differences between the definitions under the 2013 Act and Ind AS for regulatory purposes.

The number of complex situations that such differences throw up should not be underestimated, and the entities need to have adequate controls to ensure compliance.

Defining related party transactionsOnce we understand what related parties are, we need to determine what are those related party transactions which are covered under the regulations.

Ind AS 24 and LODR have used a principle-based approach to define a related party transaction and include transfer of resources,



services or obligations between a reporting entity and a related party, regardless of whether a price is charged.

Section 188 of the 2013 Act however lays down an exhaustive list of transactions which, if entered into with a related party, shall be construed as related party transactions. Such transactions are:

a) sale, purchase or supply of any goods or materials

b) selling or otherwise disposing of, or buying, property of any kind

c) leasing of property of any kind

d) availing or rendering of any services

e) appointment of any agent for purchase or sale of goods, materials, services or property

f) such related party's appointment to any office or place of profit in the company its subsidiary company or associate company; and

g) underwriting the subscription of any securities or derivatives thereof, of the company

Section 188 is for transactions where board resolution is required, while Section 177 (4)(iv), which has regulations around responsibility of audit committee in connection with transactions with related parties, may include additional transactions as well.

Compliance mechanisms under the Companies actAll related party transactions require prior Audit committee approval (although an omnibus approval with relevant criteria may be given by them).

Section 188 of the Companies Act 2013 applies to related party transactions that are not entered into on an arm’s length basis or in the ordinary course of business operations of the Company. Therefore, the interpretation of “arm’s length basis” and “normal course of business” is of upmost importance. These transactions require prior approval of the Board of Directors of the company. Additionally, certain specified transactions would require prior shareholder’s approval by an ordinary resolution if they exceed the under mentioned thresholds:

Specified transactions Threshold above which shareholder approval is required

Sale, purchase or supply of any goods or materials (directly or through an agent)

Amounting to 10 per cent or more of the turnover*

Selling or otherwise disposing of, or buying, property of any kind (directly or through an agent)

Amounting to 10 per cent or more of the net worth*

Appointment to any office or place of profit in the company, subsidiary company or associate Company

Remuneration exceeding INR2.5 lakh per month*

Underwriting the subscription of any securities or derivatives of the company

Remuneration exceeding 1 per cent of the net worth



Shareholder approval is also mandated under the LODR for all ‘material’ related party transactions. Under LODR, transactions with a related party is considered to be material, where value of such transactions (individually or taken together with previous transactions) during a financial year exceeds 10% of annual consolidated turnover of the company. In case the transaction involves payment for brand usage or royalty, the threshold shall be lower at 5%. It may be noted that shareholders’ approval under LODR is required irrespective of whether the transaction is in the ordinary course of business or whether the same is on arm’s length basis. This is not the case under the 2013 Act, and therefore the requirements for listed companies for taking shareholder approval may be considered much more stringent.

Disclosures of Related party transactions – as per Ind AS 24

Even if no transactions entered during the yearRelationships between a parent and its subsidiaries shall be disclosed irrespective of whether there have been transactions between them. An entity shall disclose the name of its parent and, if different, the ultimate controlling party. If neither the entity’s parent nor the ultimate controlling party produces consolidated financial statements available for

public use, the name of the next most senior parent that does so shall also be disclosed.

Only if transactions entered during the yearThe standard has not specified the extent of disclosures to be provided, as it would essentially depend on the nature of transactions. However, they have specified that minimum disclosures as mentioned below are to be mandatorily provided if applicable.

• the amount of the transactions;

• the amount of outstanding balances, including commitments, and:

— their terms and conditions, including whether they are secured and the nature of the consideration to be provided in settlement; and

— details of any guarantees given or received;

• provisions for doubtful debts related to the amount of outstanding balances; and

• the expense recognised during the period in respect of bad or doubtful debts due from related parties.

The disclosures should be provided for each of the categories as below:

• the parent;

Specified transactions Threshold above which shareholder approval is required

Availing or rendering of any services (directly or through an agent)

Amounting to 10 per cent or more of the turnover

Leasing of property of any kind Amounting to 10 per cent or more of the turnover*

(*transaction or transactions to be entered into either individually or taken together with the previous transactions during a FY)



• entities with joint control of, or significant influence over, the entity;

• subsidiaries;

• associates;

• joint ventures in which the entity is a joint venture;

• key management personnel of the entity or its parent; and

• other related parties

An entity shall disclose KMP compensation in addition to above under each of the following categories:

• short-term employee benefits;

• post-employment benefits;

• other long-term benefits;

• termination benefits; and

• share-based payment

It is generally good to disclose items of a similar nature in aggregate, except when separate disclosure is necessary for an understanding of the effects of related party transactions on the financial statements of the entity. Significant variations exist on this point in practice.

It is noted that ‘duty of confidentiality’ or ‘non-disclosure as per contract’ are not considered to be valid arguments for not meeting the disclosure requirements of Ind AS 24.

Risk of material misstatements from related party transactions – considerations for auditorsSome of the common risk of material misstatements that may arise due to related party transactions are as follows:

• Failure to identify or disclose related party relationships and transactions

• Creating fictitious terms of transactions with related parties designed to misrepresent the business rationale of these transactions.

• Fraudulently organizing the transfer of assets from or to management or others at amounts significantly above or below market value.

• Engaging in complex transactions with related parties, such as special-purpose entities, that are structured to misrepresent the financial position or financial performance of the entity.

The auditor's objective is to obtain an understanding of related party relationships and transactions. This understanding should then be used to assess any resulting fraud risk indicators, and to conclude on the appropriateness of the accounting treatment and disclosures applied to related parties and transactions.

Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected. Planning and performing the audit with professional scepticism is therefore particularly important in this context, given the potential for undisclosed related party relationships and transactions.

During the audit, the auditor should remain alert, when inspecting records or documents, for arrangements or other information that may indicate the existence of related party relationships or transactions that management has not previously identified or disclosed to the auditor. In particular, the auditor should inspect the following for indications of the existence of related party relationships


SS-I-67

Prayer is not asking. It is a longing of the soul. It is daily admission of one's weakness.

It is better in prayer to have a heart without words than words without a heart.

Mahatma Gandhi

The will is not free - it is a phenomenon bound by cause and effect - but there is

something behind the will which is free.

Swami Vivekananda


or transactions that management has not previously identified or disclosed to the auditor:

a) Bank, legal and third-party confirmations obtained as part of the auditor’s procedures and

b) Minutes of meetings of shareholders and of those charged with governance.

Inspecting the underlying contracts or agreements and the business rationale (or lack thereof) of the transactions is generally a useful tool for the auditors to identify potential related party transactions.

If the auditor identifies significant transactions outside the entity’s normal course of business, the auditor should inquire of management about the nature of these transactions and whether related parties could be involved.

The auditor should then consider whether the transactions are appropriately accounted for in accordance with the applicable accounting framework and gather evidence that the transactions are approved and authorized by those charged with governance. Depending upon the circumstances, implications for the audit, including the auditor’s report may also be considered.

ConclusionThe requirements around related parties are potentially challenging and may not always be intuitive. However, it is hard to overstate their importance.

A couple of regulators have changed their requirements around related party transactions several times in the last decade. The focus is to address the risk posed by such transactions while not being too onerous for the entities (and their ‘ease of doing business’). SEBI’s regulations on this topic are again under review, with the definition of related party, and materiality threshold for shareholder approval being the key areas considered by the working group constituted by SEBI. Ever more corporates are getting undesired media attention around their related party transactions, and the focus is unlikely to move away from this topic in the near future.

As such it is prudent for different stakeholders like companies, independent directors, internal auditors, and statutory auditors to review their current practices and consider if the requirements are being met.

Special Story — Regulatory and compliance mechanism of Related Party Transactions


CS Sudhakar Saraswatula

Regulatory and compliance mechanism of Related Party Transactions

One of the most important elements of Corporate Governance of any organization is that how the Related Party Transactions (“RPTs”) are handled. Generally RPTs are an area of conflict of interest and more attention is to be given to compliance requirements. RPTs per se are not disadvantageous to the organizations but there is a huge scope for abuse of the same. Hence for the benefit of the stakeholders and as a good Corporate Governance measure transparency in such transactions shall be established. To understand the legal fabric of RPTs one has to look into the provisions of Companies Act, 2013 (“the Act”) and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”).

The concept of RPTs was not explicitly defined in the Companies Act, 1956 (“the 1956 Act”). However, restrictions were imposed on certain kinds of transactions with certain related parties by way of Sections 294, 294A, 294AA, 297 and 314 of the 1956 Act.

In case of RPTs, one important aspect to be taken note of is that every transaction with a related party may not be a ‘related party transaction’ but every ‘related party

transaction’ is necessarily to be a transaction with a related party.

In order to appreciate the nuances of compliance with RPTs one should look into the following

1) Whether the party with whom the transaction is being entered into is a Related Party as defined under the Act/LODR?

2) Whether the transaction being entered into is a RPTs as defined under the Act/LODR?

3) Whether the transaction being entered into requires the approval of the Audit Committee/Board of Directors/Shareholders?

4) Whether the transaction being entered into is in the ordinary course of business and on an arm’s length basis and is exempted from the provisions of section 188 of the Act?

5) Finally, whether the transaction being entered into qualifies for obtaining an Omnibus approval from the Audit Committee?

SS-I-68



Explanation. —For the purpose of this clause, ‘the investing company or the venturer of a company’ means a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.

(ix) such other person as may be prescribed.”

The Companies (Specification of definitions details) Rule, 2014 prescribes a director, other than an independent director, or key managerial personnel of the holding company or his relative with reference to a company, as a deemed ‘related party’.

Who is a Related Party under the Listing Regulations?Under Regulation 2(zb) of the LODR, “Related Party” means a related party as defined under section 2(76) of the Act or under the applicable accounting standards. The proviso to the regulation 2(zb) reads as follows:

“Provided that any person or entity belonging to the promoter or promoter group of the listed entity and holding 20% or more of shareholding in the listed entity shall be deemed to be a related party”

This proviso was inserted in the 2018 amendment to LODR pursuant to the recommendations of Report of the Committee on Corporate Governance (hereinafter referred to as “Kotak Committee”).

Thus, the definition of ‘related party’ is much wider under the LODR than under the Companies Act, 2013

SEBI Working Group on Related Party TransactionsSEBI constituted a Working Group in November 2019 to review the policy space

Who is a Related Party under the Companies Act, 2013?Section 2(76) of the Act defines "related party", with reference to a company as -

“(i) a director or his relative;

(ii) key managerial personnel or his relative;

(iii) a firm, in which a director, manager or his relative is a partner;

(iv) a private company in which a director or manager or his relative is a member or director;

(v) a public company in which a director or manager is a director and holds along with his relatives, more than two per cent of its paid-up share capital;

(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:

Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity;

(viii) any body corporate which is—

(A) a holding, subsidiary or an associate company of such company;

(B) a subsidiary of a holding company to which it is also a subsidiary; or

(C) an investing company or the venturer of the company;

SS-I-69



pertaining to RPTs under the Chairmanship of Mr. Ramesh Srinivasan, Managing Director & CEO, Kotak Mahindra Capital Company Limited (hereinafter referred to as “Working Group”). The Working Group submitted its report in January 2020. The relevant paragraphs of the report have been extracted hereinbelow:

“The Working Group deliberated on the definition of Related Party and was of the view that all persons or entities belonging to the ‘promoter’ or ‘promoter group, irrespective of their shareholding in the listed entity, should be deemed to be related parties for the following reasons.

(i) The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR”) inter-alia defines a “promoter” as a person who has control over the affairs of the issuer, directly or indirectly whether as a shareholder, director or otherwise or in accordance with whose advice, directions or instructions the board of directors of the issuer is accustomed to act. Thus, a promoter may exercise control over a company irrespective of the extent of shareholding.

(ii) The Working Group observed that the definition of “related party” as per the accounting standards includes, inter-alia, any person who has control or significant influence over an entity; however, the accounting standards define these terms in a subjective manner. Hence, there is a possibility that owing to the subjectivity of the definition, certain promoters/promoter group entities with less than 20% shareholding in the listed entity may not get categorised as related parties. Therefore, transactions with such

persons may not get categorised as RPTs under the LODR.

(iii) The Working Group noted that control over a listed entity does not depend only on shareholding. Further, a significant percentage of Indian businesses are structured as intrinsically linked group entities that operate as a single economic unit, with the promoters exercising influence over the entire group. The Working Group observed that it is thus not uncommon for group entities to regularly engage in related party transactions such as inter corporate loans, cross collateralization and significant influence arrangements; such inter-linkages in business, operations and management can raise concerns relating to RPTs. Considering that promoters may exercise control on promoter group entities and consequently, influence decision making on the group as a whole, the Working Group recommended that promoter group members may also be included under the definition of a related party, irrespective of their shareholding.”

Accordingly, the working group proposed the definition of related party as under:

“Related Party” means a related party as defined under sub-section (76) of section 2 of the Companies Act, 2013 or under the applicable accounting standards,

Provided that (i) any person or entity belonging to the promoter or promoter group of the listed entity or (ii) any person or any entity, directly or indirectly (including with their relatives), holding 20% or more of the equity shareholding in the listed entity shall be deemed to be a related party.”



What is a Related Party Transaction under the Companies Act, 2013?Pursuant to section 188(1) of the Act, the following transactions are considered to be RPTs that requires approval of the board given by a resolution at a Board meeting:

a) Sale, purchase or supply of any goods or materials

b) Selling or otherwise disposing of or buying property of any kind

c) Leasing of property of any kind

d) Availing or rendering of any services

e) Appointment of any agent for purchase or sale of goods, materials, services or property

f) Such related party’s appointment to any office or place of profit in the company as subsidiary company or associate company and

g) Underwriting the subscription of any securities or derivatives thereof of the company

h) Underwriting the subscription of any securities or derivatives thereof, of the company

Only the above transaction with related parties are considered to be RPTs and require compliances pertaining to RPTs under section 188 of the Act. Hence for the sake of understanding we may say that transactions other than the above may be transactions with Related Parties but not RPTs. For example, making Investment, Lending, Borrowing, providing Guarantee or Securities to related parties may be transactions with related parties but not RPTs. The transactions with Related Parties require prior approval of the Audit Committee (under section 177 of the

Act read with rule 6A of the Companies (Meetings of Board and its powers) Rules, 2014 (“Company Meeting Rules”)) but does not require the approval of the Board of Directors or Shareholders of the Company as the case may be.

What is a Related Party Transaction under the Listing Regulations?Under Regulation 2(zc) of the LODR, “Related Party Transaction” means “a transfer of resources, services or obligations between a listed entity and a related party, regardless of whether a price is charged and a "transaction" with a related party shall be construed to include a single transaction or a group of transactions in a contract”.

As evident from above, the definition of Related Party and RPTs under the LODR is very wide in comparison to the Act

Material Related Party TransactionUnder the LODR there is a concept of material RPTs, which is not there under the Act. Under Regulation 23(1) of LODR, “a transaction with a related party shall be considered ‘material’ if the transaction(s) to be entered into individually or taken together with the previous transactions during a financial year, exceeds ten percent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.”

Working group deliberations on Related Party TransactionsThe Working Group also deliberated on the avoidance techniques of RPTs. The relevant paragraph has been extracted hereinbelow:

“The Working Group observed that recently, certain innovative structures have been used to avoid classification of transactions as RPTs



and thus avoid the associated regulatory compliances and disclosure requirements. Some such instances are mentioned below:

• use of complex structures;

• transactions undertaken by a listed entity with seemingly unrelated parties, however intended to benefit related parties; and

• instances of loans being given to an unrelated party which in turn gives such loan to a related party.”

The working group recommended the following amendments to the RPTs definition in the LODR under Regulation 2(zc):

“a transaction involving a transfer of resources, services or obligations between

i. the listed entity or any of its subsidiaries on the one hand and a related party of the listed entity or any of its subsidiaries on the other hand; or

ii. the listed entity or any of its subsidiaries on the one hand and any other person or entity on the other hand the purpose and effect of which is to benefit a related party of the listed entity or any of its subsidiaries

regardless of whether a price is charged or not. Such ‘transaction’ shall be construed to include a single transaction or a group of transactions.

Provided that the following shall not be treated as related party transactions:

a) the issue of specified securities on a preferential basis, subject to requirements under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 being complied with, and

b) the following corporate actions by the listed entity which are uniformly applicable/offered to all shareholders in proportion to their shareholding

i. payment of dividend

ii. subdivision or consolidation of securities

iii. issuance of securities by way of a rights issue or a bonus issue and

iv. buy-back of securities.”

Thus, certain exemptions were proposed from RPTs.

Requirement of approval of Audit Committee, Board of Directors and Shareholders

Approval of Audit CommitteeBoth under the Act (under section 177 read with rule 6A of the Company Meeting Rules) and the LODR (Regulation 23), all transactions with a related party and its subsequent modifications require prior approval of the audit committee. Subject to the conditions prescribed under the Act and the LODR, the Audit Committee may give an Omnibus approval for the transactions proposed. Such omnibus approvals are valid for a period not exceeding one financial year and require fresh approvals after the expiry of such financial year.

In case of transactions, other than transactions referred to in section 188 of the Act, where the Audit Committee does not approve the transaction, it shall make its recommendations to the Board. In case any transaction involving any amount not exceeding one crore rupees is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the



Audit Committee within three months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee. If the transaction is with the related party to any director or is authorised by any other director, the director concerned shall indemnify the company against any loss incurred by it.

These provisions doesn’t apply to a transaction, other than a transaction referred to in section 188 of the Act, between a holding company and its wholly owned subsidiary company

Approval of the Board of DirectorsAll RPTs under LODR and all RPTs referred to under section 188 of the Act require prior approval of the Board of Directors. Under the Act the approval of the Board of Directors to be given by way of a resolution passed at the meeting of the Board of Directors.

Hence the approval can’t be given by way of a circular resolution. However, there is no such restriction for giving approval to the transactions with a related party by the Audit Committee and such approval of the Audit Committee may be given by way of a circular resolution.

As per rule 15(2) of the Company Meeting Rules, where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement

For any RPTs entered into by the company in its ‘ordinary course of business’ other than transactions which are not on an ‘arm’s length’ basis provisions of section 188(1) of the Act are not applicable. This means such

transactions doesn’t require approval of either Board of Directors or of the Shareholders of the Company. However, such exemption is not provided under the LODR.

What is ordinary course of business?The Act has not defined the term ‘ordinary course of business’. In common parlance, ‘ordinary course of business’ would include transactions which are entered into in the normal course of the business pursuant to or for promoting or in furtherance of the company’s business objectives, as per the charter documents of the company. For example, in case of a manufacturing company, purchase and sale of goods, taking premises on lease/rent, construction of factory, employing workers, etc. will be considered as ordinary course of business. To carry on a business, several activities are carried on by the company; all such activities will be considered to be in the ordinary course of business.

However, when a company take up any activity which is completely alien to the normal day today activities, it’s not in the ‘ordinary course of business’. For example, if a company acquire land to construct building to provide as staff quarters, is in the ‘ordinary course of business’. However, if the company acquire land and construct buildings thereon with an intention to sell them, it’s not in the ‘ordinary course of business’.

Hence any activity in furtherance of the business the same can safely be categorized as ordinary course of business.

What is ‘arm’s length’ transaction?Explanation to sub-section (1) of Section 188 of the Act defines the term ‘arm’s length’ transaction as “a transaction between two related parties that is conducted as if they are unrelated, so that there is no conflict of



interest”. ‘Arm’s length basis does not mean arm’s length price, as price is just one on the components of the terms of dealing with the other party and there are several other matters which need to be considered. Other factors may be quality, delivery terms, credit period etc.

Approval of the Shareholders under the Companies Act, 2013Rule 15 of the Company Meeting Rules as follows:

“(3) For the purposes of first proviso to sub-section (1) of section 188, Except with the prior approval of the company by a resolution, a company shall not enter into the following transactions -

(a) contracts or arrangements with respect to clauses (a) to (e) of sub-section (1) of section 188, with criteria as mention below-

(i) sale, purchase or supply of any goods or material, directly or through appointment of agent, amounting to ten percent or more of the turnover of the company, as mentioned in clause (a) and clause (e) respectively of sub-section (1) of section 118;

(ii) selling or otherwise disposing of or buying property of any kind, directly or through appointment of agent, amounting to ten percent or more of net worth of the company, as mentioned in clause (b) and clause (e) respectively of sub-section (1) of;

(iii) leasing of property any kind amounting to ten per cent or more of the turnover of the company, as mentioned in clause (c) of sub-section (1) of;

(iv) availing or rendering of any services, directly or through appointment of agent, amounting to ten percent or more of the turnover of the company as mentioned in clause (d) and clause (e) respectively of sub-section (1) of section 188:

Explanation.— It is hereby clarified that the limits specified in sub-clause (i) to (iv) shall apply for transaction or transactions to be entered into either individually or taken together with the previous transactions during a financial year.

(b) is for appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding two and a half lakh rupees as mentioned in clause (f) of sub-section (1) of section 188.

(c) is for remuneration for underwriting the subscription of any securities or derivatives thereof, of the company exceeding one percent of the net worth as mentioned in clause (g) of sub-section (1) of section 188.”

The turnover or net worth referred in the above sub-rules is computed on the basis of the audited financial statement of the preceding financial year.



In case of wholly owned subsidiary, the resolution passed by the holding company shall be sufficient for the purpose of entering into the transaction between the wholly owned subsidiary and the holding company and no separate resolution passed by the shareholders of the subsidiary company is not required. However, under the LODR transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting only are exempted from such approval.

No member of the company who is a related party shall vote on such resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party. However, where a company in which ninety per cent. or more members, in number, are relatives of promoters or are related parties, such restriction is not applicable. Vide General Circular No 30/2014 dated July 17, 2014 it was clarified that “‘related party’ referred to above has to be construed with reference only to the contract or arrangement for which the said resolution is being passed. Thus, the term ‘related party’ in this context refers only to such related party as may be a related party in the context of the contract or arrangement for which the said resolution is being passed.”

However, under the LODR all entities falling under the definition of related parties shall not vote to approve the relevant transaction irrespective of whether the entity is a party to the particular transaction or not.

Approval of the Shareholders under the Listing RegulationsUnder Regulation 23 of LODR all material RPTs shall require approval of the

shareholders through a resolution and no related party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not. This, effectively, means that the related party can vote to not to approve the relevant transaction. Pursuant to Kotak committee recommendation this amendment was brought into and prior to this no related party can vote on the transaction, either for or against. Post this amendment the related party can vote to not approve the transaction i.e. against the resolution.

The aforesaid provisions of the LODR lead to obtaining the approval of majority of minority shareholders for RPTs. In view of this while entering transactions with related parties, the corporates are to be more responsible and accountable and have to establish transparency and fairness in the transactions. In the absence of this they will not be able to sail through in obtaining the requisite approvals, especially in these days wherein the shareholder activism is at its peak.

A transaction with a related party shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds ten percent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.

With effect from July 01, 2019, a transaction involving payments made to a related party with respect to brand usage or royalty shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceed five percent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity.



The aforesaid requirements shall not apply in respect of a resolution plan approved under section 31 of the Insolvency Code, subject to the event being disclosed to the recognized stock exchanges within one day of the resolution plan being approved.

The following transactions are exempted from the above provisions

(a) transactions entered into between two government companies;

(b) transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

The listed entity shall formulate a policy on materiality of RPTs and on dealing with RPTs including clear threshold limits duly approved by the board of directors and such policy shall be reviewed by the board of directors at least once every three years and updated accordingly.

Regulation of RPTs by the listed entity at the subsidiary levelThe Working Group noted that “neither the LODR (except for sale, disposal or leasing of 20% or more of the assets of a material subsidiary) nor the Companies Act specifically requires approvals at the listed entity level in respect of transactions undertaken by an unlisted subsidiary with any related party of the consolidated entity (i.e., the listed entity and/or its subsidiaries).”

The Working Group further noted that “the current RPT regulatory framework may be insufficient and felt the need to strengthen

the laws for regulation and oversight of RPTs undertaken by a subsidiary with the related parties of the listed entity or its subsidiaries.”

The Kotak committee report, quoted by the Working Group, observed that “The Committee notes that ……… while investors hold direct equity only in the listed holding company, they have valued the entire business structure at the time of investment. Therefore, it is important for boards to ensure that good governance trickles down to the entire structure.”

Considering the present regulatory framework governing transactions of subsidiaries of a listed entity, the Working Group recommended that prior approval of the audit committee of the listed entity should be mandatory for transactions carried out between:

(i) the listed entity or any of its subsidiaries on the one hand and a related party of the listed entity or any of its subsidiaries on the other hand; or

(ii) the listed entity or any of its subsidiaries on the one hand and any other person or entity on the other hand, the purpose and effect of which is to benefit a related party of the listed entity or any of its subsidiaries.

While the LODR specifically requires prior approval of the audit committee, the word prior’ is not used for shareholder approval. In order to maintain consistency, the Working Group also recommended that the word prior’ may be added for shareholder approval as well.

Omnibus approval by the Audit CommitteeBoth under the Act and LODR the concept of making approval for RPTs on omnibus basis is permitted, subject to the relevant compliances.



Provisions under the Companies Act, 2013Rule 6A of the Company Meeting Rules 2014 govern the provisions under which the Audit Committee may make omnibus approval for RPTs proposed to be entered into by the company subject to the following conditions:

“(1) The Audit Committee shall, af ter obtaining approval of the Board of Directors, specify the criteria for making the omnibus approval. The criteria shall include the following, namely: -

(a) maximum value of the transactions, in aggregate, which can be allowed under the omnibus route in a year;

(b) the maximum value per transaction which can be allowed;

(c) extent and manner of disclosures to be made to the Audit Committee at the time of seeking omnibus approval;

(d) review, at such intervals as the Audit Committee may deem fit, related party transaction entered into by the company pursuant to each of the omnibus approval made;

(e) transactions which cannot be subject to the omnibus approval by the Audit Committee.

(2) The Audit Committee shall consider the following factors while specifying the criteria for making omnibus approval, namely: -

(a) repetitiveness of the transactions (in past or in future);

(b) justification for the need of omnibus approval.

(3) The Audit Committee shall satisfy itself on the need for omnibus approval for transactions of repetitive nature and that such approval is in the interest of the company.

(4) The omnibus approval shall contain or indicate the following: -

(a) name of the related parties;

(b) nature and duration of the transaction;

(c) maximum amount of transaction that can be entered into;

(d) the indicative base price or current contracted price and the formula for variation in the price, if any; and

(e) any other information relevant or important for the Audit Committee to take a decision on the proposed transaction:

Provided that where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may make omnibus approval for such transactions subject to their value not exceeding rupees one crore per transaction.

(5) Omnibus approval shall be valid for a period not exceeding one financial year and shall require fresh approval after the expiry of such financial year.

(6) Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company.

(7) Any other conditions as the Audit Committee may deem fit.”



Provisions under the Listing RegulationsWith a slight variance in the provisions, the LODR also permit the Audit committee to grant omnibus approval for RPTs proposed to be entered into by the listed entity on omnibus basis subject to the following conditions:

“(a) the audit committee shall lay down the criteria for granting the omnibus approval in line with the policy on related party transactions of the listed entity and such approval shall be applicable in respect of transactions which are repetitive in nature;

(b) the audit committee shall satisfy itself regarding the need for such omnibus approval and that such approval is in the interest of the listed entity;

(c) the omnibus approval shall specify:

(i) the name(s) of the related party, nature of transaction, period of transaction, maximum amount of transactions that shall be entered into,

(ii) the indicative base price/current contracted price and the formula for variation in the price if any; and

(iii) such other conditions as the audit committee may deem fit:

Provided that where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may grant omnibus approval for such transactions subject to their value not exceeding rupees one crore per transaction.

(d) the audit committee shall review, at least on a quarterly basis, the details of related party transactions entered into by the listed entity pursuant to each of the omnibus approvals given.

(e) Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of one year:”

ConclusionRPTs are a common occurrence and. companies often seek business deals with known entities to which they are familiar which are falling under the definition of related parties. Considering the scope of conflict of interest and scope of abuse of the transactions, though they are legal they are subject to intensified legal. scrutiny by the Regulators. RPTs have been an area that has received considerable attention in India and across the globe. Significant corporate frauds have happened connected to RPTs or similar arrangements. Considering these the Regulators are on constant vigil to ensure robust compliance mechanism in place to arrest illegal profiteering. Though over a period of time the provisions relating to compliances of RPTs are aligned between the Act and LODR, still the compliance mechanism under the LODR is more stringent considering the involvement of the interest of public.

Considering that the proposed changes, as mentioned above, may have a significant impact on corporate governance of listed entities it would be crucial for corporates to track the final regulations and put in place the necessary processes to ensure compliance with enhanced governance requirements.

Special Story — Related Party Transaction under IBC: Concept and Evolution


Rajeev Vidhani, Vishnu Shriram & Ashwij Ramaiah, Advocates

Related Party Transaction under IBC: Concept and Evolution

IntroductionThe concept of ‘Related Party Transactions’, i.e. transactions entered into by a corporate entity with its related parties, and the treatment of such transactions is a keenly regulated aspect of corporate governance. Their relevance gains more importance in the context of avoidance transactions of a corporate entity that is facing an imminent threat or likelihood of insolvency proceedings.

From a corporate insolvency resolution process (“CIRP”) perspective, avoidance transactions are essentially those transactions whose effects, an administrator or insolvency professional seeks to avoid against the entity undergoing insolvency for the reason that such transactions have eroded the value of the said entity and taken place during the ‘twilight period’, or the period during which the management of the entity is presumed to be aware of the possibility of commencement of insolvency proceedings. Transactions can be deemed avoidable for a number of reasons such as extension of undue preference to a particular creditor over others, undervalued transactions, extortionate transactions and those entered with the intent to defraud creditors.

Although an entity may enter into avoidance transactions even with an unrelated party, the treatment of avoidance transactions entered into with related parties as a sui generis category arises because related parties may have superior information relating to the said company’s financial affairs which may be used to divert assets of the company away from its creditors and stakeholders in during the period leading up to the commencement of insolvency proceedings1.

However, avoidance transactions and their effects on a company may not be ostensibly identifiable, particularly when looking back in time after the commencement of insolvency proceedings. Therefore, a well-developed and robust legal framework for identifying and reversing the effects of avoidance transactions for the protection of the insolvent entity’s estate and the interests of its stakeholders has become a sine qua non for every modern insolvency process.

Every able administrator or insolvency professional knows, as a rule of thumb, that the managers or promoters of an entity may use their knowledge of early signs of financial stress of the indebted company (“Corporate Debtor”) for their own benefit or

1. Legislative Note to Clause 46 of the Insolvency and Bankruptcy Bill, 2016.

SS-I-79



c. a company in which a director, partner or manager of the corporate debtor is a director and holds along with his relatives, more than two percent (2%) of its share capital;

d. a body corporate/limited liability partnership firm/partnership firm whose board of directors, partners, managing director, manager, in the ordinary course of business, acts on the advice, directions or instructions of a director, partner or manager of the Corporate Debtor;

e. a body corporate which is a holding, subsidiary or an associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary;

f. any person who controls the composition of the board of directors or corresponding governing body of the Corporate Debtor;

g. any person who controls more than 20% of voting rights in the corporate debtor on account of ownership or a voting agreement;

h. any person in whom the Corporate Debtor controls more than 20% of voting rights on account of ownership or a voting agreement; and

i. any person who is associated with the Corporate Debtor on account of- (i) participation in policy making processes of the Corporate Debtor; or (ii) having more than 2 (two) directors in common between the Corporate Debtor and such person; or (iii) interchange of managerial

for the benefit of other related parties, which may hamper maximization of value for all stakeholders in insolvency. Therefore, related party transactions may significantly erode the value of an already financially distressed entity and even prejudice the resolution prospects.

The Insolvency and Bankruptcy Code, 2016 (“IBC”) is by far India’s most comprehensive insolvency resolution framework and is armed with necessary provisions to deal with avoidance transactions and protecting the interests of the stakeholders of a Corporate Debtor who are aggrieved by such transactions.

In this paper, we will analyse the framework and development of jurisprudence of avoidance transactions in the context of related parties under the IBC, and the protection it offers against such transactions.

Who is a Related Party?An exhaustive, yet precise and unambiguous definition as to who a related party is, in relation to a Corporate Debtor, is critical to ensure that no mischief slips through the cracks when it comes to avoidance transactions. For the purposes of avoidance transactions entered into by a Corporate Debtor, the IBC provides a comprehensive and exhaustive list of persons and entities, which are “related parties” of the Corporate Debtor2. These persons inter-alia include:

a. director, partner or key managerial personnel of the Corporate Debtor;

b. a limited liability partnership or a partnership firm in which a director, partner, or manager of the Corporate Debtor or her relative is a partner;

2. Section 5(24) of the IBC



personnel between the Corporate Debtor and such person; or (iv) provision of essential technical information to, or from, the Corporate Debtor.

Avoidance Transactions and Related PartiesOne of the duties of a Resolution Professional (RP)/Liquidator (as the case may be) is to examine and identify if any transactions have been undertaken by the Corporate Debtor which qualify as preferential transaction, undervalued transaction, extortionate credit transactions or transactions with the intent of defrauding creditors or for any fraudulent purpose (together “Avoidance Transactions”). If the RP/liquidator is of the opinion that any Avoidance Transaction has occurred, then she is obligated to report the same to the Adjudicating Authority for necessary directions3. If the impugned transactions are adjudged to be an Avoidable Transaction, then the Adjudicating Authority may, inter-alia, issue necessary directions for reversing such transactions and directing the beneficiaries of such transactions to return any property or any beneficial interest back to the Corporate Debtor. Certain categories of Avoidance Transactions are particularly relevant in the context of related parties owing to the longer “lookback period”.

The UNCITRAL Legislative Guide on Insolvency Law (“UNCITRAL Guide”) also acknowledges examining transactions entered into by a Corporate Debtor with its

related parties with greater scrutiny from the perspective of identifying avoidance transactions4. The Legislative Guide also recommends longer lookback period for transactions entered into with related parties vis-à-vis identifying and addressing avoidance transactions5.

Lookback Period and Related Parties Under the scheme of the IBC, for a transaction to be considered an Avoidance Transaction, the transaction (except undervalued transactions undertaken deliberately for keeping assets of the Corporate Debtor beyond the reach of its claimants6, and transactions committed with the intent to defraud creditors or for any fraudulent purpose7) is required to have occurred within a specified time period prior to/looking back from the date of commencement of CIRP of the Corporate Debtor (“Lookback Period”). Since, the inception of the IBC, there has been a general consensus that the Lookback Period is required to be longer for related parties compared to unrelated parties. The Bankruptcy Law Reforms Committee, in Volume I of its Report dated 4 November 2015 expressly observed that “….There should be stricter scrutiny for transactions of fraudulent preference or transfer to related parties, for which the “look back period” should be specified in regulations to be longer8”.

The determination of whether a transaction is an Avoidance Transaction is a mixed

3. Regulation 35A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution for Corporate Persons) Regulations, 2016

4. UNCITRAL Legislative Guide on Insolvency Law, Paragraphs 182-184, p.146, 20055. UNCITRAL Legislative Guide on Insolvency Law, Paragraphs 182-184, p.146, 20056. Under Section 49 of the IBC7. Under Section 66 of the IBC8. Bankruptcy Law Reforms Committee, The Report of the Bankruptcy Law Reforms Committee Volume I:

Rationale and Design, Paragraph 5.5.7, Page 101 (November, 2015)



question of fact and law, and each transaction is required to be examined on a case to case basis. Although Avoidance Transactions can be undertaken with related or unrelated parties, it is interesting to note that a significant number of cases before Courts/Tribunals for determination of Avoidance Transactions are related party transactions.

We will now analyse each of the Avoidance Transactions envisaged under the IBC with a focus on related parties.

Preferential TransactionsPreferential Transactions are essentially transactions where “an insolvent debtor makes a transfer to or for the benefit of a creditor so that such beneficiary would receive more than what it would have otherwise received through the distribution of bankruptcy estate9.”

The use of the term “preference” here is to denote the act of ‘paying or securing to one or more of his creditors, by an insolvent debtor, the whole or part of their claims, to the exclusion of the rest”10. As far back as the 15th century, the principles relating to avoidance of certain preferences have evolved, particularly in mercantile laws and insolvency/bankruptcy laws11. In fact, since 1874, almost all jurisdictions across the world have incorporated provisions for identifying and avoiding preferential transactions into their bankruptcy/insolvency laws12. The UNCITRAL

Guide defines “preferential transaction” as “a transaction which results in a creditor obtaining an advantage or irregular payment”13.

In India, the legal position pertaining to the identification and avoidance of preferential transactions under IBC are set out in Sections 43 and 44 of the IBC. Under Section 43 of the IBC, a transaction entered into by the Corporate Debtor is said to be a preferential transaction if the following ingredients are satisfied:

a. there is a transfer of property or an interest thereof of the Corporate Debtor for the benefit of a creditor or a surety or a guarantor for or on account of an antecedent financial or operational debt or other liabilities owed by the Corporate Debtor14; and

b. the said transfer has the effect of putting such creditor or surety or guarantor in a beneficial position than it would have been in the event of a distribution of assets being made in accordance with section 53 of the IBC15; and

c. such transaction does not fall under any of the below mentioned exceptions16:

• the transfer was made in the ordinary course of business or financial affairs of the Corporate Debtor or the transferee; and

9. Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited vs. Axis Bank Limited Etc. Etc. CIVIL APPEAL NOS. 8512-8527 OF 2019

10. Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited vs. Axis Bank Limited Etc. Etc. CIVIL APPEAL NOS. 8512-8527 OF 2019

11. Supra Note 912. Supra Note 913. Supra Note 4 at Paragraph 12(ff), p. 614. Section 43(2)(a) of the IBC15. Section 43(2)(b) of the IBC16. Section 43(3) of the IBC



• such transfer creates a security interest in property acquired by the Corporate Debtor to the extent that it : (a) secures new value and was given at the time of or after the signing of a security agreement that contains a description of such property as security interest, and was used by corporate debtor to acquire such property; and (b) such transfer was registered with an information utility on or before thirty days after the corporate debtor receives possession of such property.

The Supreme Court of India (“Supreme Court”) in the matter of Anuj Jain Interim Resolution Professional For Jaypee Infratech Limited vs. Axis Bank Limited Etc.17 has laid down the key principles for identifying preferential transactions as follows:

a. The Supreme Court distinguished Section 43 of the IBC from Sections 32818 and 32919 of the Companies Act, 2013 and observed that if the ingredients of Section 43 of the IBC

(as set out above) are satisfied, then the transaction is deemed to be a preferential transaction, notwithstanding the intent of the parties;

b. The bare text of Section 43(3)(a) of the IBC stipulates that a transaction is exempt from being treated as a preferential transaction if it was carried out in the ordinary course of business or financial affairs of the Corporate Debtor or the transferee. However, the Supreme Court observed that a purposive interpretation of Section 43 demands that the phrase “Corporate Debtor or transferee” should be interpreted as “Corporate Debtor and transferee”. In other words, the Supreme Court observed that for a transaction not to be considered as a “preferential transaction” such transaction is required to have been undertaken in the “ordinary course of business” or “financial affairs” not only of the transferee but also of the Corporate Debtor;

c. The phrases “ordinary course of business” and “financial affairs” are not

17. Civil Appeal Nos. 8512-8527 Of 2019.. 18. Section 328 of the Companies Act, 2013 reads as under:

“(1) Where a company has given preference to a person who is one of the creditors of the company or a surety or guarantor for any of the debts or other liabilities of the company, and the company does anything or suffers anything done which has the effect of putting that person into a position which, in the event of the company going into liquidation, will be better than the position he would have been in if that thing had not been done prior to six months of making winding up application, the Tribunal, if satisfied that, such transaction is a fraudulent preference may order as it may think fit for restoring the position to what it would have been if the company had not given that preference.

(2) If the Tribunal is satisfied that there is a preference transfer of property, movable or immovable, or any delivery of goods, payment, execution made, taken or done by or against a company within six months before making winding up application, the Tribunal may order as it may think fit and may declare such transaction invalid and restore the position.”

19. Section 329 of the Companies Act, 2013 reads “Any transfer of property, movable or immovable, or any delivery of goods, made by a company, not being a

transfer or delivery made in the ordinary course of its business or in favour of a purchaser or encumbrancer in good faith and for valuable consideration, if made within a period of one year before the presentation of a petition for winding up by the Tribunal under this Act shall be void against the Company Liquidator."



defined in the IBC. The Supreme Court has applied the interpretation of the High Court of Australia in the matter of Downs Distributing Co Pty Ltd vs. Associated Blue Star Stores Pty Ltd (in liq)20 where it was held that “ordinary course of business” means “that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation.” However, it is relevant to note that the Supreme Court did not interpret the meaning of the phrase “financial affairs” for the purpose of Section 43 of the IBC;

d. For determining whether an alleged transaction entered into by a Corporate Debtor with its related party was conducted in the “ordinary course of business” of the Corporate Debtor, the Supreme Court analysed the unique nature of the relationship between the Corporate Debtor and its related party. For instance, the Supreme Court inter-alia observed that the Corporate Debtor (being a special purpose vehicle) mortgaging its assets to secure the borrowings of its parent company cannot be construed to be in the ordinary course of business of such corporate debtor;

While the Lookback Period for examining Preferential Transactions is 1 (one) year from the date of commencement of CIRP

of the Corporate Debtor (“ICD”) in relation to transactions entered into with unrelated parties, it is 2 (two) years from the ICD in relation to transactions entered into with Related Parties21.

Given the uniquely influential position of a related party to undertake a preferential transaction, even at the initial stages of the IBC’s development it was considered that “a longer Lookback Period for transactions entered into with Related Parties is necessary for avoiding preferential transactions as a number of transactions diminishing creditor wealth entered into with Related Parties occur not only in the 'zone of insolvency' but as soon as early signals of trouble are visible. It further provides that Related Parties often have superior information of the Corporate Debtor's financial affairs and may collude with the corporate debtor to siphon off assets with the knowledge that the corporate debtor may become insolvent in the near future.”

In the event a transaction is adjudged to be a preferential transaction by the adjudicating authority under the IBC (i.e. the National Company Law Tribunal), it may inter-alia pass the following orders22:

a. require any property transferred in connection with the giving of the preference to be vested in the Corporate Debtor;

b. require any property to be so vested if it represents the application either of the proceeds of sale of property so transferred or of money so transferred;

20. (1948) 76 CLR 46321. Section 43(4) of the IBC22. Section 44(1) of the IBC



c. release or discharge (in whole or in part) of any security interest created by the corporate debtor;

d. require any person to pay such sums in respect of benefits received by him from the Corporate Debtor, such sums to the liquidator or the resolution professional, as the Adjudicating Authority may direct;

e. direct any guarantor, whose financial debts or operational debts owed to any person were released or discharged (in whole or in part) by the giving of the preference, to be under such new or revived financial debts or operational debts to that person as the Adjudicating Authority deems appropriate; and

f. direct for providing security or charge on any property for the discharge of any financial debt or operational debt under the order, and such security or charge to have the same priority as a security or charge released or discharged wholly or in part by the giving of the preference.

However, it is relevant to note that the under the IBC, the order passed by the Adjudicating Authority in relation to a preferential transaction does not23:

a. affect any interest in property which was acquired from a person other than the corporate debtor or any interest derived from such interest and was acquired in good faith and for value;

b. require a person, who received a benefit from the preferential transaction in good faith and for value to pay a sum to the liquidator or the resolution professional.

Undervalued TransactionsThe UNCITRAL Guide defines “undervalued transactions” as “Transactions where the value received by the debtor as the result of the transaction with a third party was either nominal or non-existent, such as a gift, or much lower than the true value or market price, provided the transaction occurred within the suspect period24.”

These transactions may be entered into by the Corporate Debtor either with a mala fide intention of causing wrongful gain to its related parties at the expense of its other stakeholders; or alternatively, in a situation wherein a Corporate Debtor who is in need of cash may sell assets quickly at a price significantly below the real value in order to achieve a quick result, without ever having any intention to defeat or delay creditors. However, in either of these cases, the net result, however, may be a clear reduction of the assets available to creditors in insolvency25.

Under the IBC, a transaction is considered to be an “undervalued transaction” if the Corporate Debtor26:

a. makes a gift to a person; or

b. enters into a transaction with a person which involves the transfer of one or

23. First proviso to Section 44(1) of the IBC24. Supra Note 4 at Paragraphs 174-176, p. 143 (2005)25. Supra Note 4 at Paragraphs 174-176, p. 143 (2005)26. Section 45(2) of the IBC read with Dipti Mehta, Resolution Professional, Prag Distillery Private Limited vs.

Shivani Amit Dhanukar MA 267 of 2018 In CP (I&B) 1067/NCLT/MB/2017



more assets by the corporate debtor for a consideration the value of which is significantly less than the value of the consideration provided by the corporate debtor, and,

c. such transaction has not taken place in the ordinary course of business of the corporate debtor.

The National Company Law Tribunal, Allahabad Bench has held in the matter of IDBI Bank vs. Jaypee Infratech Ltd27 that a transaction can be said to be an undervalued transaction, if the consideration for entering into the transaction was significantly lower than what it would have otherwise been had it been entered at an arm’s length basis.

It is relevant to note that like in preferential transactions, a transaction is exempt from being treated as an “undervalued transaction” if such transaction was carried out in the ordinary course of business of the Corporate Debtor28.

If the Adjudicating Authority adjudges that a transaction is an undervalued transaction, then it may pass an order directing the following29:

a. restoring the position as it existed before such transactions and reversing the effects of such transaction thereof; and

b. requiring the Insolvency and Bankruptcy Board of India to initiate disciplinary proceedings against the liquidator or the resolution professional as the case may be.

Further, similar to preferential transactions, the Lookback Period for examining undervalued transactions is 1(one) year from ICD in relation to transactions entered into with unrelated parties, and 2(two) years for transactions with related parties30. The rationale for a longer Lookback period for related parties is that the “management of the Corporate Debtor which has better knowledge of the Corporate Debtor's financial affairs may enter into transactions with related parties to strip the corporate debtor of value upon receiving early signals of financial trouble31.”

Undervalued transactions to defraud creditorsUnder the IBC, an undervalued transaction in terms of Section 45 (2) of the IBC is the one with the intention of keeping assets of the Corporate Debtor beyond the reach of any person who is entitled to make a claim against the Corporate Debtor or in order to adversely affect the interests of such person is treated differently32.

If the undervalued transaction has taken place in terms of Section of the IBC as stated above, the Adjudicating Authority can pass an order to:

a. restore the position as it existed before such transaction was entered into; and

b. protect the interests of the persons who are victims of such transactions.

However, the orders passed by the Adjudicating Authority shall not:

27. C.A No. 26/2018 in Company Petition No. (IB) 77/ALD/201728. Dipti Mehta, Resolution Professional, Prag Distillery Private Limited vs. Shivani Amit Dhanukar MA 267 of 2018

In CP (I&B) 1067/NCLT/MB/201729. Section 47(2) of the IBC30. Section 46 of the IBC31. Notes Clause 46 of the Insolvency and Bankruptcy Bill, 201532. Section 49 of the IBC



a. affect any interest in property which was acquired from a person other than the corporate debtor or any interest derived from such interest and was acquired in good faith and for value; and

b. require a person, who received a benefit from the undervalued transaction in good faith and for value to pay a sum to the liquidator or the resolution professional.

In the case of undervalued transactions within the meaning of Section 49 of the IBC, there is no Lookback Period for determining whether such transactions have taken place, and the RP/liquidator is required to

Extortionate Credit TransactionsA transaction would be considered as an “extortionate credit transaction” if the following conditions are satisfied33:

c. such contracts require the Corporate Debtor to make exorbitant payments in respect of the credit provided; or

d. are unconscionable under the principles of law relating to contracts.

In the event the Corporate Debtor has entered into such a transaction, the liquidator or the RP as the case may be, may make an application for avoidance of such transaction to the Adjudicating Authority if the terms of such transaction required exorbitant payments to be made by the Corporate Debtor. It is relevant to note that unlike in the case of preferential transactions or undervalued transactions, the Lookback Period is 2 (two)

years, regardless of whether the counter-party is a related party or unrelated party.

Wrongful Trading/Fraudulent TradingA transaction can be termed as wrongful trading/fraudulent trading if during the CIRP or a liquidation process it is found that any business of the Corporate Debtor has been carried on with intent to defraud creditors of the Corporate Debtor or for any fraudulent purpose.

If the Adjudicating Authority adjudges a transaction to be wrongful trading/fraudulent trading, then it may pass an order that any persons who were knowingly parties to the carrying on of the business in such manner shall be liable to make such contributions to the assets of the Corporate Debtor as it may deem fit34.

As to whether a transaction can be considered as “fraudulent trading” or “wrongful trading” depends on the facts and circumstances of each case, and is a subjective assessment of whether it can be demonstrated that the transaction was entered into in order to defraud the creditors of the Corporate Debtor35.

In the case of transactions under Section 66 of the IBC there is no Lookback Period for identifying transactions which could be considered wrongful trading/fraudulent trading. However, given that the nature of the transaction, it typically only persons in the management of the Corporate Debtor who could orchestrate a transaction to defraud creditors.

33. Section 50(1) read with Regulation 5 of the CIRP Regulations and Section 45(2) of the IBC read with Dipti Mehta, Resolution Professional, Prag Distillery Private Limited vs. Shivani Amit Dhanukar MA 267 of 2018 In CP (I&B) 1067/NCLT/MB/2017

34. Section 66(1) of the IBC35. IDBI Bank Limited vs. Jaypee Infratech Limited CA No. 26/2018 in Company Petition No. (1B)77/ALD/2017



Therefore, in case the Adjudicating Authority determines that a transaction has taken place within the meaning of Section 66 of the IBC, it may direct that a director or partner of the corporate debtor (who qualify as the Related Parties of such Corporate Debtor), shall be liable to make such contribution to the assets of the Corporate Debtor as it may deem fit, if:

a. before the ICD, such director or partner knew or ought to have known that the there was no reasonable prospect of avoiding the commencement of a corporate insolvency resolution process in respect of such corporate debtor; and

b. such director or partner did not exercise due diligence in minimising the potential loss to the creditors of the corporate debtor.

If the Adjudicating Authority adjudges a transaction as a fraudulent transaction then it may inter-alia direct that the liability of any person found guilty of committing wrongful trading/fraudulent trading to be a charge on any debt or obligation due from the Corporate Debtor to him, or on any mortgage or charge or any interest in a mortgage or charge on assets of the Corporate Debtor held

by or vested in him36. Additionally, if the Adjudicating Authority has passed an order in relation to a person who is a creditor of the Corporate Debtor, it may, direct that the whole or any part of any debt owed by the Corporate Debtor to that person and any interest thereon shall rank in the order of priority of payment under Section 53 after all other debts owed by the Corporate Debtor37.

ConclusionThe threat of related parties diluting the value of the Corporate Debtor, whether during the lookback period of 2 years prior to the insolvency commencement date, during the CIRP or even through payments and benefits under a resolution plan is sufficiently guarded against by a host of safeguards under the IBC. The robust framework for identifying avoidance transactions entered into with related parties and provisions to protect the interests of stakeholders of a Corporate Debtor is at the very heart of achieving one of the most important objectives of IBC - the resolution of insolvency while also ensuring maximisation of the value, preservation of the assets of the Corporate Debtor and safeguarding the interests of all stakeholders of the Corporate Debtor.

36. Section 67(1)(a) of the IBC37. Section 67(2) of the IBC.

Each one has to find his peace from within. And peace to be real must be unaffected

by outside circumstances.

Mahatma Gandhi

ML-1

Direct Taxes — Supreme Court


1Rajasthan State Electricity Board vs. Dy. CIT; [2020] 424 ITR 704 (SC): dated 19/03/2020

Assessment — Additional tax — Ss. 32(2) and 143(1A) of ITA 1961 – Change of law — Amendment to effect that where loss declared by assessee reduced by reason of prima facie adjustments, additional tax leviable — Only to be invoked where lower amount shown in return by assessee was with intent to evade tax — Assessee by bona fide oversight claiming depreciation at 100 per cent. instead of at 75 per cent. — Return remaining one of loss — No intention to evade tax — Mechanical levy of additional tax uncalled for (A. Y. 1991-92)For the A. Y. 1991-92, the assessee, in its return filed on December 31, 1991, showed a loss of ` 427,39,32,972. Due to a bona fide mistake the assessee claimed depreciation at 100 per cent. on the written down value of assets instead of at 75 per cent. An intimation u/s. 143(1)(a) of the Income-tax Act, 1961 was issued by the Assessing Officer disallowing 25 per cent. of the depreciation, restricting the depreciation to 75 per cent. and levying additional tax u/s. 143(1A) of the Act of ` 8,63,64,827. The assessee filed an

application for rectification of the demand and a petition to the Commissioner for revision stating that even after allowing only 75 per cent. of depreciation the income of the assessee remained a loss at ` 3,43,94,90,393 and prayed for quashing the demand of additional tax. The application for rectification was rejected by the Assessing Officer as was the revision petition by the Commissioner.

The assessee filed a writ petition which a single judge allowed quashing the levy of additional tax u/s. 143(1A). The Department filed an appeal which the Division Bench allowed upholding the demand of additional tax.

The Supreme Court allowed the appeal filed by the assessee and held as under:

“i) The object of section 143(1A) of the Income-tax Act, 1961 as substituted by the Finance Act, 1993 with effect from April 1, 1989 was the prevention of evasion of tax. The Memorandum Explaining the Provisions of the Finance Bill ([1993] 200 ITR (St.) 140) was also to persuade assessees to file their Income-tax returns carefully to avoid mistakes. The provisions of section 143(1A) should be made to apply only

DIRECT TAXESSupreme Court Keshav B. Bhujle,

Advocate

ML-2



to tax evaders. Section 143(1A) can only be invoked where it is found on the facts that the lower amount stated in the return filed by the assessee is a result of an attempt to evade tax lawfully by the assessee.

ii) Although while interpreting a tax legislation the consequences and hardship are not looked into, the purpose and object by which taxing statutes have been enacted cannot be lost sight of.

iii) By the Taxation Laws (Amendment) Act, 1991, the third proviso was inserted in section 32 to provide that from the A. Y. 1991-92 the depreciation shall be restricted to seventy-five per cent. on the written down value. The return was filed by the assessee on December 31, 1991, prior to which date the Taxation Laws (Amendment) Act, 1991 had come into operation. It was due to a bona fide mistake and oversight that the assessee claimed 100 per cent. depreciation instead of 75 per cent. Even after reduction of 25 per cent. depreciation the return was one of loss. In claiming 100 per cent. depreciation the assessee claimed that there was no intention to evade tax and the claim was only a bona fide mistake.

iv) The object of section 143(1A) was the prevention of evasion of tax. The Memorandum Explaining the Provisions of the Finance Bill stated that the object was to persuade assessees to file Income-tax returns carefully to avoid mistakes. The Commissioner in deciding the revision petition had not made any observation that the claim to 100 per cent. depreciation was with intent to evade payment of tax lawfully

payable by the assessee. The mechanical application of section 143(1A) in the facts of the present case was uncalled for.

v) In the result, we allow the appeal, set aside the judgment of the Division Bench of the High Court as well as demand of additional tax dated February 12, 1992 as amended on February 28, 1992.”

2 Vodafone Idea Ltd. vs. ACIT; [2020] 424 ITR 664 (SC): fated 29/04/2020

Refunds — Ss. 143(1), (1D), (2), 241A of ITA 1961 — Assessment — Processing of returns claiming refund u/s. 143(1) and request for refund — Power to decline processing — Assessment pursuant to scrutiny notice u/s. 143(2) — Assessee cannot insist that processing be completed and refund made before completion of assessment pursuant to scrutiny notice — Where notice issued and proceedings initiated, processing of return “shall not be necessary” for assessment years ending on March 31, 2017 or before — Issuance of notice itself sufficient — No separate intimation that refund withheld pending scrutiny assessment contemplated — Change of law — Assessment years commencing on or after April 1, 2017 — Conditions to be satisfied before refusing refund u/s. 143(1D) — Separate recording of satisfaction by AO that refund likely to adversely affect revenue and previous approval of Principal Commissioner or Commissioner necessary: (A. Ys. 2014-15 to 2017-18)For the A. Ys. 2014-15 and 2015-16, the assessee filed its returns claiming refunds of `. 1532.09 crores, ` 1355.51 crores and ` 1128.47 crores respectively. It filed its

ML-3



return for the A. Y. 2016-17, claiming refund of ` 1,128.47 crores. Notices u/s. 143(2) of the Act were issued to the assessee within the specified time. By letters dated July 24, 2017 and September 19, 2017, the assessee communicated to the Department that it was under immense financial stress and, therefore, the returns should be processed forthwith. It filed its return for the A. Y. 2017-18 on November 25, 2017 claiming a refund of ` 743.67 crores.

On the ground that there was complete inaction on the part of the Department in processing the returns filed by the assessee and in issuing appropriate refunds to the assessee, the assessee filed a writ petition. During the pendency of the writ petition, the Assistant Commissioner issued a letter dated July 23, 2018 stating that exercising the powers u/s. 143(1D) and 241A of the Act, the processing of returns u/s. 143(1) was declined. In the meantime, a revised return was filed by the assessee for A. Y. 2017-18 claiming refund of ` 744.94 crores. Notice u/s. 143(2) was issued thereafter for this year. On March 14, 2019 an intimation was sent to the assessee by the Assistant Commissioner stating that refund for the A. Y. 2017-18 had been withheld till the completion of scrutiny proceedings u/s. 143(3) or 144C of the Act. For the A. Ys. 2014-15 and 2015-16, final assessment orders u/s. 143(3) of the Act were passed on October 31, 2019, holding the assessee entitled to refund of ` 733 crores (approximately) in respect of A. Y. 2014-15, and raising a demand in the sum of ` 582 crores (approximately) for A. Y. 2015-16. In an appeal preferred by the assessee, the demand for A. Y. 2015-16 was stayed by the Appellate Tribunal.

The High Court dismissed the writ petition. On appeal, the Supreme Court held as under:

“i) Sub-section (1D) was inserted in section 143 of the Income-tax Act, 1961 by

the Finance Act, 2012 to provide that processing of returns will not be necessary in cases where notice under sub-section (2) of section 143 has been issued for scrutiny of the return. With effect from April 1, 2017, sub-section (1D) and its proviso provide that with effect from A. Y. 2017-18, processing u/s. 143(1) of the Act is to be done before the passing of the assessment order and that the provisions of the sub-section shall cease to apply in respect of returns furnished for A. Y. 2017-18 and onwards. A new section 241A was also inserted to provide that, for the returns furnished for assessment year commencing on or after April 1, 2017, where refund of any amount becomes due to the assessee u/s. 143(1) of the Act and the Assessing Officer is of the opinion that grant of refund may adversely affect the recovery of revenue, he may, for reasons recorded in writing and with the previous approval of the Principal Commissioner or Commissioner, withhold the refund up to the date on which the assessment is made.

ii) The dimension of power under sub-sections (2) and (3) of section 143 of the Act is far greater and deeper than mere adjustments to be made in respect of what is available from the return. Once such scrutiny is undertaken and proceedings are initiated by issuance of a notice under sub-section (2) of section 143, it would be anomalous and incongruent that while such proceedings so initiated are pending, the return be processed under sub-section (1) of section 143, which may in a given case, entail payment of refund. Logically, the outcome of the exercise initiated through notice under sub-section (2) of

ML-4



section 143, must determine whether any refund is due and payable. If the return itself is under probe and scrutiny, such return cannot be the foundation to sustain a claim for refund till such scrutiny is complete. Considering the nature of power exercisable under these two limbs of section 143 , the inescapable conclusion is that the processing of the return under sub-section (1) of section 143 must await the further exercise of power of scrutiny assessment under sub-sections (2) and (3) of section 143. If the power under sub-section (2) of section 143 of the Act is initiated in a manner known to law, there cannot be any insistence that the processing under sub-section (1) of section 143 be completed and refund be made before the scrutiny pursuant to notice under sub-section (2) of section 143 is over.

iii) This conclusion is fortified and strengthened by clear stipulation to that effect in sub-section (1D) of section 143. The legislative intent is clear from the expression, “the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2) ” and by use of the non obstante clause. Though the period for which it would not be necessary to process the return was sought to be specified by the Finance Act, 2016, the mere absence of such period in the provision as it stands today, makes no difference. The intent of Parliament is that in cases where notice under sub-section (2) is issued and proceedings are initiated, the processing of a return under sub-section (1) shall not be necessary. The intent to have the general principle emanating from sub-section (1) of section 143 overridden,

in cases where proceedings are initiated pursuant to notice under sub-section (2) of the Act, is emphasised by use of the non obstante clause in sub-section (1D) and the expression “it shall not be necessary”. Therefore, in respect of assessment years ending on March 31, 2017 or before, if a notice was issued in conformity with the requirements stated in sub-section (2) of section 143 of the Act, it shall not be necessary to process the refund under sub-section (1) of section 143 of the Act and the requirement to process the return shall stand overridden.

iv) Issuance of notice under sub-section (2) itself is sufficient indication that the matter is being considered from the perspective whether there is any avoidance of tax in any manner. Sub-section (1D) of section 143 of the Act does not contemplate either issuance of any such intimation or further application of mind that the processing must be kept in abeyance. It would not, therefore, be proper to read into the provision the requirement to send a separate intimation. Issuance of notice under sub-section (2) of section 143 is enough to trigger the required consequence. No other intimation is either contemplated by the statute to achieve any purpose.

v) However, in respect of assessment years commencing on or after April 1, 2017, section 241A of the Act requires a separate recording of satisfaction on the part of the Assessing Officer that having regard to the fact that a notice has been issued under sub-section (2) of section 143 , the grant of refund is likely to adversely affect the Revenue ; whereafter, with the previous approval

ML-5



of the Principal Commissioner or Commissioner and for reasons to be recorded in writing, the refund can be withheld. Since the statute envisages exercise of power of withholding of refund in a particular manner for assessment years commencing after April 1, 2017 the requirements of section 241A of the Act must be satisfied.

vi) The Department had conceded that the order dated July 23, 2018 passed u/s. 143(1D) of the Act in respect of A. Y. 2017-18 was without jurisdiction, as by that time no order u/s. 143(2) of the Act for that assessment year had been passed. In the circumstances, a fresh order was passed on March 14, 2019 after due compliance with the statutory requirements. The record showed that all the antecedent steps leading to the order were taken in accordance with law and settled practice: the intimation u/s. 143(1) was sent to the e-mail address provided by the assessee, and the intimation stated that refund determined u/s. 143(1) in the intimation was withheld in terms of the proviso to section 241A and that the refund if any would be released on completion of the assessment u/s. 143(3)/144(4) as the case may be, with interest u/s. 244A and subject to adjustment of arrears demand, if any u/s. 245.

vii) The submission that the intimation dated July 23, 2018 must be held to be invalid, inter alia, on the ground

that it was issued well after the period within which the return was required to be processed under sub-section (1) of section 143 of the Act, was not tenable, in respect of A. Ys. 2014-15 to 2016-17.

viii) In terms of the second proviso to sub-section (1) of section 143 of the Act, the required intimation under the sub-section must be given before the expiry of one year from the end of the financial year in which the return is made. In respect of the A. Y. 2017-18, the return having been filed on November 25, 2017, the period available in terms of the second proviso was up to March 31, 2019, without taking into account the fact that a revised return was filed on July 13, 2018. The exercise of power on March 14, 2019 was not only after issuance of notice under sub-section (2) of section 143 and after recording due satisfaction in terms of section 241A of the Act, but was also well within the period contemplated by sub-section (1) of section 143 of the Act for causing due intimation.

ix) For the A. Y. 2014-15 the final assessment order passed u/s. 143(3) of the Act indicated that the assessee was entitled to refund of ` 733 crores, while for A. Y. 2015-16 there was a demand for ` 582 crores. [The court directed refund of the amount of `733 crores within four weeks subject to any proceedings that the Department may deem appropriate to initiate in accordance with law.]”

ML-6

Direct Taxes — High Court


1Hansa Estates (P) Ltd. vs. ACIT, T.C. Appeal No. 399 of 2019, Hon’ble Madras High Court, order dt. 30 July 2020, AY 2009-10.

Interest deduction u/s 36(1)(iii) – interest free loan given to holding company – commercial purpose not proved by the Assessee, hence disallowance confirmed.

FactsThe assessee, a private limited company, filed its Return of Income for the assessment year 2009-10 on 30.09.2009, disclosing a total income of ` 1,44,89,527/-. The assessment was completed under Section 143(3) of the Act on 30.12.2011 at a total income of ` 6,94,76,277/-, after making certain disallowances. One among them was disallowance of interest claimed under Section 36(1)(iii) of the Act to the tune of ` 2,09,24,549/-. This disallowance was made by the Assessing Officer on the ground that the assessee had given interest free advances to M/s. Tiruvengadam Investments Pvt. Ltd., which is a holding company of the assessee. The transaction was in the nature of current account and the advances were made for acquiring land on behalf of the assessee for

construction of a project called 'Hansa Chitra Project'. In this regard, the assessee had referred to a Joint Development Agreement with the holding Company and the assessee. Challenging the disallowance, the assessee preferred appeal to the CIT (A) which was dismissed. The assessee preferred appeal to the Tribunal which had also rejected. The Assessee further filed an appeal before the High Court.

Arguments before the Court It is submitted by the assessee that the disallowance of interest paid by presuming that it is diversion of borrowed funds for non-business purposes, was an erroneous conclusion arrived at by the Tribunal. The Tribunal failed to note the factual position and did not properly appreciate the terms and conditions of the Joint Development Agreement dated 11.04.2007 between the assessee and the holding Company, where, land acquired by the holding Company was to be developed by the assessee as a joint development project. Thus Tribunal committed an error in presuming that it amounted to diversion of borrowed funds for non-business purposes. It is further

Paras S. Savla, Jitendra Singh, Nishit Gandhi, Advocates

DIRECT TAXESHigh Court

ML-7



submitted that the Assessing Officer erred in concluding that there was no commercial expediency in the contract, without appreciating the inextricable link caused by the Joint Development Agreement entered into between the Assessee and the holding Company. Referring to the conditions in the Joint Development Agreement, it was submitted that the Agreement entered for payment of Rs. 11,25,00,000/- plus 50% of the gross profit earned in the project as a consideration for development of the land owned by the Company. Basis this it was urged that treatment of the advances paid by the assessee to its holding Company would squarely fall within the ambit of Section 36(1)(iii) of the Act and therefore, the Assessing officer committed an error in disallowing the claim for deduction. It was argued that the Assessing officer, the CIT (A) as well as the Tribunal failed to appreciate the basic fabric of the simple business transaction between the assessee and its holding Company and if it had been properly construed, the claim for deduction would have been allowed.

It was further submitted that on the same set of facts in the subsequent AY i.e., 2010-11, the ld. CIT(A) deleted the addition and the Department did not file any further appeal before this Tribunal. The CIT(A) had accepted the business purpose of the utilization of the borrowed funds namely deployment of borrowed funds in the joint venture projects. Hence, Tribunal’s act of sustenance of disallowance on wrong presumption of facts for the immediate preceding assessment year namely 2009-10 was erroneous and not sustainable in law. The Assessee further relied on the Supreme Court’s decision of S.A. Builders vs. CIT 288 ITR 01 (SC).

The Department rebutted by contenting that the Assessing Officer, the CIT (A) as well as the Tribunal on facts held that the assessee

could not substantiate their claim. The terms and conditions of the Joint Development Agreement were considered and it has been found that the assessee could not establish the business expediency in advancing money to the holding Company. Further on facts, the CIT (A) found that the assessee had failed to discharge the onus of proving that the lands were used only for business purpose and therefore, held that the decision of the Hon'ble Supreme Court of India in M/s. S.A. Builders (supra) was not applicable to the facts of the assessee.

Court’s decisionThe Court referring to the Joint Development Agreement dated 11.04.2007, observed that the Assessee was the Developer in the said Agreement, and the Holding Company was termed as an Investor, who had secured development rights of a project called 'Hansa Chitra' in the land situate in Zamin Pallavaram Village. The Investor/ holding Company had approached the assessee/developer to develop the said property by constructing 67 flats. The assessee agreed to put up built up area of 84,860 sq.ft at its cost and expenses, according to the recital in the Agreement. This was because holding company investing ` 11,25,00,000/- and assigning the development rights to the assessee and the Assessee agreed to pay the holding Company ` 11,25,00,000/- as also 50% of the gross profit earned in the project. Subsequently, the holding company is stated to have addressed a letter to the assessee dated 03.04.2009, requesting for increase in the profit share from 50% to 75%. The assessee readily agreed and Addendum to Joint Development Agreement was entered into on 11.06.2009 and the relevant clauses in the agreement were modified where under, the holding company was entitled to 75% of the gross profit. The Court observed that when these

ML-8



facts and documents were placed before the Assessing Officer, wherein, the assessee claimed interest payment as a deduction, the Assessing Officer issued show cause notice dated 14.12.2011 calling upon the assessee to explain as to why the interest payment to the said advance should not be disallowed. The assessee's explanation was that the advance was given to the holding Company during the financial year 2008-09 and the advance is in the nature of current account transaction and therefore, the assessee had not provided any interest during the year. It has further stated that the said advance was paid to the holding company for the investments made by them on behalf of the assessee for the 'Hansa Chitra Project' for acquiring land, for which, the assessee had not claimed deduction under section 80IB of the Act. The terms and conditions of the Joint Development Agreement was also referred to. The Assessing Officer did not accept the said contention raised by the assessee and noted that at no point of time, the holding Company which itself was an Investor had an occasion to take advance from the assessee's Company as they had borrowed loans from Banks. Further on considering the return of income and the materials placed, the Assessing Officer found that the assessee is paying Rs. 42,85,869/- towards operational expenses of the holding Company and this amount was shown in the Ledger Account as the joint venture share of the holding Company and therefore, it is not necessary for the assessee to give any advance to the holding Company. Thus, the Assessing Officer concluded that the assessee had failed to establish commercial expediency. The Court further observed that, taking note of the requirement of business services, the Assessing Officer concluded that the expenditure was unwarranted, unreasonable and unnecessary for the business of the assessee as it is not laid out or expended wholly and exclusively

for the purpose of business or profession of the assessee and therefore, the interest corresponding to the amount lent interest free needs to be disallowed under Section 36(1)(iii). With this finding the quantum of disallowance was recomputed. The Court further observed that, CIT(A) clearly pointed out that the Hon'ble Supreme Court in the case of M/s. S. A. Builders had made it clear that the allowability or otherwise of interest payment under Section 36(1)(iii) depends on the facts and circumstances of the case and the assessee on facts failed to establish any commercial expediency for advancing interest free amount to the holding Company. Further taking note of the stand of the assessee that the advance amount has to be treated as deemed dividend in the hands of the holding Company, further strengthens the belief that the assessee is unable to establish the element of commercial expediency in the impugned transaction between itself and the holding Company.

The Court observed that there was no perversity in the approach, observation and conclusion arrived at by the lower authorities and the Tribunal. The Court held that the nature of transaction makes it clear that there is no element of commercial expediency. The Court held that within about two months of the joint development agreement wherein share of profit was 50%, another Agreement dated 09.06.2009 was entered into by modifying certain clauses in the Joint Development Agreement, where under, the holding Company gets 75% of the profits. The holding Company had borrowed loans from Banks and there was no occasion rather need for the holding Company to take advances from the assessee for the purpose of purchase of the land. Apart from that the assessee was paying Rs. 42,85,869/- toward operational expenses and in the Ledger Account, this was

ML-9



shown as Joint Venture Share of the holding Company. Basis this the Court dismissed Assessee’s appeal, confirming the disallowed made by the Assessing officer.

2New Woodlands Hotels Pvt. Ltd. vs. Asst. CIT, T.C. Appeal Nos. 467 and 470 of 2019, Hon’ble Madras High Court, order dt. 04 September 2020, AY 2013-14 & 2014-15.

Deduction of expenses u/s 37 – Allegation of the AO that expenditure was inflated – High Court reversed the finding of AO, CIT(A) & Tribunal - Merely going by statements of a few employees, AO cannot disbelieve statutory registers and forms, as there is a presumption to its validity and the onus is on the person, who disputes the validity or genuinity of the document

FactsAssessee was a company engaged in the business of boarding and lodging i.e. into hospitality business. The assessee filed their return of income for the assessment years viz., 2013-14 and 2014-15 on 27-9-2013 and 25-9-2014, respectively. For the assessment year 2013-14, the assessee admitted a total income of ` 76,16,990/- and for the assessment year 2014-15, it admitted a loss of ` 3,87,017/-. The assessments were selected for scrutiny and notices were issued under section 142(1) of the Act calling for details. After the books of accounts were produced by the assessee and information was furnished, the assessment was completed under section 143(3) on 15-3-2016 by making an addition of ` 2,16,80,648/- towards inflation of expenditure under the head "Service Charges" for the assessment year 2013-14. The assessment for the year 2014-15 was completed under section 143(3) of the Act on 30-9-2016 making an addition of

` 2,03,68,410/- stating to be bogus expenditure claimed towards service charges.

The assessee challenged the assessment orders before CIT(A), who by common order dated 26-7-2017, partly allowed the appeals by restricting the disallowance of service charges to ` 1,22,70,445/- as against ` 2,16,80,648/- for the assessment year 2013-14 and to ` 1,17,79,582/- as against ` 2,03,68,410/- for the assessment year 2014-15. Against the said orders of CIT(A), the Assessee and the Revenue preferred appeals to the Tribunal. The Tribunal, dismissed the appeals filed by the Assessee and allowed the appeals filed by the Revenue. Challenging the said order, the Assessee filed further appeal before Hon’ble High Court challenging that portion of the order passed by the Tribunal, which rejected the entire case of the assessee and allowed the Revenue's appeals on an issue, which was never canvassed by the Revenue.

Court’s decisionThe Court observed that during the course of assessment, the Assessing Officer pointed out that the assessee has debited amount towards service charges. The assessee was called upon to explain the same, who had stated that the service charges are paid in lieu of tips. Since the tips were received by the room boys only whereas, the other employees were not able to avail the same and ultimately, the matter was discussed with the employees and an agreement was entered into. The assessee furnished breakup of the service charges to the three category of employees, viz., permanent employees, managerial and other employees and administrative/temporary employees. The Assessing Officer examined a few of the employees of the assessee and also recorded statement after which, show cause notice dated 20-9-2016 was issued. The assessee submitted their reply dated 24-9-2016

ML-10



giving additional details including the breakup of service charges, the Memorandum of Settlement arrived at between the assessee and the workers union dated 2-8-2012 and details of the columns and contents of the registers produced during the scrutiny proceedings. The Assessing Officer held that the assessee had resorted to this modus operandi for inflation expenditure by showing the same under the head "service charges" and the transaction was disbelieved. The Court observed that CIT(A) after analyzing the nature of claim held that the service charges paid through the banking channels to the permanent employees and the service charges paid in cash to the other temporary employees is allowable and held that the balance of expenditure is not allowable. The ld. CIT(A) had considered the total amount of service charges collected by the assessee-company and out of which the service charges paid to the permanent employees through banking channel was reduced to arrive at the amount of service charges paid to the temporary employees in cash. The service charges deemed to have been paid to the temporary employees was reduced and the balance of service charges claimed to have paid in cash to the permanent employees was disallowed. The Court further analyzing the Tribunal order, observed that in opinion of the Tribunal, the orders of the CIT(A) were merely based on presumption that the assessee company would not have paid to the employees to the extent of service charges collected. The Court observed that there were two aspects to such opinion. Firstly, whether the Assessing Officer was right in concluding that the assessee had adopted this modus operandi for inflating its expenditure. The Court was of the view that under normal circumstances, the expression "modus operandi" is used when an assessee resorts to something which is illegal. Law recognises tax planning and penalizes tax avoiders.

Considering the nature of material placed by the assessee before the Assessing Officer, CIT(A) and in the paper book filed before the Tribunal, the Court held that the Assessing Officer should not have used the expression "modus operandi" to mean that the assessee had adopted dubious tactics to inflate its expenditure. The Court took of the documents being, the annual accounts; the statement of income; copy of the letter dated 23-8-2016 to the Assistant Commissioner of Income-tax enclosing the register of wages of persons employed (Form No. 16 under Payment of Wages Act) for the relevant period evidencing payment of service charges to permanent employees; copies of vouchers for payment of service charges paid in cash to administrative/management/other employees; copy of service charges register for the relevant month evidencing payment to administrative/temporary employees; copy of the letter dated 9-5-2017 of the Chartered Accountant filed explaining the payment of service charges to the employees; and Memorandum of Settlement between the assessee and the Anna Thozhilalar Sangam dated 2-8-2012 under section 18(1) of the Industrial Disputes Act, 1947.

The Court observed that the Assessing Officer while rejecting the assessee's contention had not disbelieved any of these documents. The payments effected in cash were sought to be substantiated by the assessee by producing vouchers. The Court held that if the Assessing Officer was of the view that the vouchers are fabricated documents, then all of such employees should have been examined and statements should have been recorded and if the same was done, the assessee is entitled to an opportunity of cross examination. This having not been done, the assessment order, as per the Court was flawed. The Court was of the view that Assessing Officer’s reference to statements of four persons and on reading of

ML-11



selected portions of the statement, as extracted in the assessment order, does not lead to the inference that the entire transaction is bogus. The Court was mindful of the assessee's explanation that tips were being given to the room boys and they alone were benefited and the other employees/workers raised objection and the matter was discussed in several meetings and ultimately, a settlement was arrived at between the employees union and the assessee management. Giving due credence to the Memorandum of Settlement dated 2-8-2012 recorded in the presence of the Labour Officer, the Court opined that if according to the Assessing Officer, this statement was also a bogus document, then he ought to have recorded such a finding. However, law prohibited him from doing so because of the binding effect of the settlement on the management and the workmen. Therefore, the settlement could not have been brushed aside. The Court held that the register of wages of persons employed was a statutory form under the Payment of Wages Act and there is a presumption to its validity. The bulk of the materials produced by the assessee before the Assessing Officer could not have been rejected.

The Court further held that though CIT(A) accepted the documents produced by the assessee, he held that there is no justification for payment in cash for temporary employees. As per the Court such finding was not sufficient because vouchers had been produced, register had been produced, where the concerned temporary employees had signed. Therefore, to outrightly reject the vouchers and register, was incorrect. If according to the CIT(A), the vouchers and registers, insofar as temporary employees are concerned, were not admissible, then there should have been a finding to the said effect, which was conspicuously absent in the orders passed by the CIT(A).

Referring to the Tribunal order, the Court held that the Tribunal erred in observing that the orders of the CIT(A) to the extent it grants relief to the assessee are on presumption. This finding was incorrect because the relief granted by the CIT(A) was in respect of payments, which were verifiable. The Court observed that it was not in dispute that the vouchers and registers were produced before the Assessing Officer and the originals were also shown to have been produced at the time of assessment. The Assessing Officer merely going by statements of a few employees, cannot disbelieve statutory registers and forms, as there is a presumption to its validity and the onus is on the person, who disputes the validity or genuinity of the document. The Court thus held that the Tribunal ought not to have interfered with the relief granted by the CIT(A) and the CIT(A) ought to have interfered with the orders passed by the Assessing Officer in its entirety and not restricted the same to a partial relief. The appeals were thus allowed and the substantial questions of law were answered in favour of the Assessee.

3Pesco Beam Environmental Solutions (P) Ltd. vs. DCIT, T.C. Appeal Nos. 219 of 2020, Hon’ble Madras High Court, order dt. 19 August 2020, AY 2012-13

Appeals before the CIT(A) – Mandatory condition u/s 249(4) – Statute neither gives any discretion to the appellate authority to entertain an appeal nor extends the time for paying the self-assessment tax

FactsThe Assessee was a private limited company. The assessment for AY 2012-13 was completed under section 143 (3) by order dated 27-2-2016. Being aggrieved against certain addition Assessee filed an appeal before the CIT(A).

ML-12



The appeal was not considered on merits and was dismissed by the CIT (A) by order dated 31-7-2017 on the ground that the assessee had not paid the self-assessment tax which the assessee had admitted before the appellate authority. Aggrieved by the same, the assessee preferred an appeal before the Tribunal. When the appeal was taken up for hearing before the Tribunal, the assessee raised additional grounds contending that they had inadvertently offered an income of ` 82.37 crores relating to inbuilt Revenue which was neither received nor accrued. The Tribunal upon considering the grounds of appeal raised by the assessee at the first instance as well as additional grounds, rejected the same by holding that the self-assessment tax was admittedly not paid and there is no satisfactory evidence to substantiate the assessee's plea that the assessee has wrongly computed the income. Aggrieved by such an order, the Assessee filed an appeal before the High Court.

Court’s decisionReferring to the grounds of appeal raised before the Tribunal the Court found that the challenge to the order passed by the CIT(A) was on the ground that the CIT (A) ought to have granted time to the assessee to pay the self assessment tax. The Court observed that when the appeal was heard, additional grounds raised were entirely factual. On the first issue as to whether the CIT (A) ought to have granted time to the assessee to pay the self assessment tax, is concerned, the Court held that Sub Section 4 of Section 249 of the Act, it is made clear that unless and until, the assessee has paid the income tax due on the income returned by him, no appeal under Chapter XX will be admitted. The Statute neither gives any discretion to the appellate authority to entertain an appeal nor extends the time for paying the self-assessment

tax, except in respect of cases falling under clause b of Section 249(4) in terms of proviso under the said Section. The Court observed that though such a ground was raised in the appeal memorandum filed before the Tribunal, the assessee appeared to have been more interested in canvassing the additional grounds with regard to offering a sum of ` 82.37 Crores relating to inbuilt revenue which according to the assessee was an inadvertent income. The Court held that Tribunal had rightly held that there is no satisfactory evidence placed before it to substantiate the assessee's plea that they wrongly computed the admitted income. Assessee’s appeal was thus dismissed.

4M/s Sutherland Global Services Pvt. Ltd. vs. CIT, T.C. Appeal Nos. 32 of 2019, Hon’ble Madras High Court, order dt. 23 September 2020, AY 2008-09

Power of the Tribunal – Tribunal restored the matter back to AO, on an issue which had attained finality – the jurisdiction of the Tribunal is confined to the lis before it and more particularly in the instant case, it is the assessee's appeal and they cannot be worse off in their appeal and the Tribunal has no jurisdiction to direct the Assessing Officer by virtually reopening the proceedings concluded under Section 201

FactsAssessee, a private limited company, engaged in business process outsourcing, filed its return of income for AY 2008-09 declaring ‘’Nil’’ income under normal provisions and ` 39,64,55,782/- u/s. 115JB of the Income Tax Act, 1961 (in short ‘’the Act’’). The AO, after studying the notes to accounts, filed by the assessee alongwith its Audited Financial Statements, found that it had paid a sum of ` 22,41,69,067/- as business development

ML-13



commission to one M/s. Sutherland Global Services, Inc, USA. This entity was the parent company of the assessee. Assessee was required to explain why deduction of tax at source as per Section 195 of the Act not made while effecting the above payments. Rejecting the submissions made by the Assessee, the AO disallowed the claim u/s 40(a)(i). The CIT(A) confirmed the disallowance. Before the Tribunal specific ground was taken that non-taxability of business development commission having been accepted by department pursuant to the order of learned CIT(A) against TDS order u/s 201, the issue attained finality in favour of the Assessee, and hence disallowance ought to be deleted. The Tribunal without adjudicating this aspect, restored the issue back to the AO for fresh consideration.

Court’s decisionThe Court observed that very issue was considered by the TDS Authority and an order was passed on 30.3.2013, which was adverse to the assessee. The assessee carried the matter on appeal to the concerned CIT(A), who, by order dated 03.2.2014, held in favour of the assessee. The Court observed that the Assessee specifically contended before the Tribunal that the above order attained finality and that the Tribunal had no jurisdiction to reopen the same especially in the absence of an appeal filed by the Revenue against the said order. The Court found that though such an argument was noted by the Tribunal, the Tribunal misdirected itself by observing that it has got all powers to examine full facts as it is the final fact finding Authority. The Court held that that there can be no quarrel with regard to the aspect that the Tribunal is

the final fact finding Authority. Nevertheless, the jurisdiction of the Tribunal is confined to the lis before it and more particularly in the instant case, it is the assessee's appeal and it cannot be worse off in its appeal and the Tribunal had no jurisdiction to direct the Assessing Officer by virtually reopening the proceedings concluded under Section 201 of the Act pursuant to the order dated 03.2.2014 passed by the CIT(A) concerned. The Court was of the view that, the Tribunal ought to have referred to the said order and if, in its opinion, the order does not bind the Tribunal, then, adequate reasons ought to have been assigned by the Tribunal in that regard. However nothing was recorded by the Tribunal in its order. The Court further observed that the Tribunal while referring back to the AO had directed that the Assessing Officer has to examine as to whether there was any concerted effort to shift profits by camouflaging it as commission on sales. The Court held that this was never the case of the Revenue either before the Assessing Officer or before the CIT(A) or for that matter before the Tribunal. As per the Court the tenor of the observations gave a different impression to the transaction done by the assessee, which, as per the Court, was not called for. The Court thus held that the Tribunal exceeded in its jurisdiction while remanding the matter to the Assessing Officer, which has the effect of reopening a concluded proceedings vide order dated 03.2.2014 passed by the concerned CIT(A). The Court thus allowed the appeal decided in favour of the Assessee on this limited legal point.

Direct Taxes — Tribunal


Reported Decisions

1Dr. Devika Gunasheela vs. JCIT [ITA 1047/Bang/2016] (Assessment Year: 2012-13), Order dated 26.08.2020, [2020] 119 taxmann.com 275 (Bangalore-Trib.)

Section 54F of the Act – Exemption u/s 54F cannot be denied to the Assessee merely because at the time of transfer he owned more than two properties, not in the nature of residential properties, other than new residential property

FactsThe Assessee is an Individual, who is a Doctor by profession. On 29.09.2011, the Assessee and her sister, Dr. Madhavi N. Gunasheela sold an inherited property and received 50% share in total consideration of ` 3,02,40,000/- which comes to ` 1,51,20,000/-. The Assessee filed return of income in which she declared Capital Gains amounting to ` 1,26,98,100/- and claimed the benefit of sec 54 on the basis of investment made in a residential property. During the course of assessment proceedings, the A.O. observed

that the Assessee is not eligible for an exemption u/s 54 as the property sold by her is vacant land and not a residential property. Before A.O., the Assessee contended that she is entitled for an exemption u/s 54F since the property sold is a capital asset other that residential property. However, the A.O. denied the said claim on the reason that the Assessee owned more than one residential house other than the new asset on the date of the transfer of an original asset. On appeal, the CIT(A) observed that the Assessee has one residential flat which is her self-occupied property. Other than that, the Assessee has two lands and income from which had been disclosed as IFHP after claiming benefit u/s 24 in the A.Y. 2011-12. Thus, it is not open to the appellant to make contradictory claims in the two successive years. The CIT(A) held that before claiming exemption u/s 54F, the Assessee should have withdrawn the benefits claimed on House Property in respect of the said two lands which she failed to do. In view of the same, the CIT(A) confirmed the action of A.O. Being aggrieved, the Assessee preferred an appeal before ITAT. Before ITAT, the Assessee submitted that in the A.Y. 2012-13, she accepted that the rent received from the said properties is a lease

Neelam Jadhav, Neha Paranjpe & Tanmay Phadke, Advocates

DIRECT TAXESTribunal

ML-14



rent and the same is not a rent received from house properties. Further, it was explained that based on assessment for the A.Y. 2012-13, reopening was done in the A.Y. 2011-12 and in the reassessment order, the lease rent was treated as IFOS which was accepted by the Assessee. Thus, it is not correct to say that the Assessee owned more than two residential houses, other than the new asset on the date of transfer of the original asset. After considering the submission of both the sides, the ITAT held as under:

HeldThe ITAT held that the basis for denying the benefit of sec 54F to the Assessee was that she has owned more than two residential houses, other than the new asset on the date of transfer. On perusal of the assessment order passed u/s 147 for the A.Y. 2011-12, ITAT held that the assessment for A.Y. 2011-12 was re-opened based on assessment proceedings for the A.Y. 2012-13 wherein the Assessee admitted that the rent received from the said properties is a lease rent and the same cannot be the income from house properties under Chapter VI-C of the Act. The ITAT further, held that in the assessment order for the A.Y. 2011-12, the Assessee accepted that the said properties were not residential properties and she is not entitled to deduction of 30% as per sec 24(a) of the Act. ITAT noticed that the assessment for the A.Y. 2011-12 completed assessing the rent received from the said two properties as ‘IFOS’. The ITAT therefore, held that from the said facts, it is clear that the Assessee did not own more than one residential house, other than the new asset on the date of transfer of the original asset. Therefore, ITAT directed the A.O. to allow the exemption u/s 54F. Thus, the appeal of the Assessee allowed by the ITAT.

2ACIT vs. Anala Anjibabu [ITA 415/Viz/2019] (Assessment Year: 2014-15), Order dated 17.08.2020, [2020] 118 taxmann.com 463 (Visakhapatnam - Trib.)

Section 56(2)(vii)(b) – When the agreement for purchase of property entered into by the Assessee prior to A.Y. 2014-15 and part of consideration was paid at the same time then, the provisions of sec 56(2)(vii)(b) cannot be triggered merely because the registration of agreement was done belatedly in the A.Y. 2014-15 due to a genuine cause

FactsThe Assessee is an Individual who entered into an agreement with Smt Simhari Sunitha for purchasing a property on 13.08.2012. The said agreement was registered vide document No. 4539/2013 on 28.10.2013 for a consideration of ` 5 Crores. During the course of assessment, the AO held that the provisions of sec 56(2)(vii)(b) of the Act are attracted in the Assessee’s case since the purchase transaction is completed in the F.Y. 2013-14 relevant to A.Y. 2014-15. The AO therefore, adopted the Government value of the said property amounting to ` 12,67,82,500/- and thereby made the addition of ` 4,55,11,750/- being difference between the consideration paid and the SRO value as on the date of agreement u/s 56(2)(vii)(b) of the Act. On appeal, the CIT(A) allowed Assessee’s appeal by observing that since the agreement for sale was entered into by the Assessee for the purpose of purchase of the property in August, 2012 related to the F.Y. 2012-13, relevant to the Assessment Year 2013-14, which is prior to insertion of section 56(2)(vii)(b). Further, it was held that the provisions of sec 56(2)(vii)(b) was introduced in the Finance Act, 2013 w.e.f. A.Y. 2014-15. Thus, the same have no application in the Assessee’s case. Being aggrieved, the

ML-15



Department preferred an appeal before ITAT. After considering the submission of both the parties, the ITAT held as under:

HeldThe ITAT held that the provisions of sec 56(2)(vii)(b)(ii) came into statute by Finance Act 2013 w.e.f. 01.04.2014 i.e. from A.Y. 2014-15. In the instant case, the Assessee had entered into an agreement for purchase of the property on 13.08.2012 for a consideration of Rs.5 crores and paid the part of sale consideration by cheque. The ITAT noticed that this fact is evident from the assessment order. Thus, there is no dispute with regard to existence of agreement. The ITAT further, from the CIT(A)’s order noticed that the property was in dispute due to bank loan and the original title deeds were not available for complying with the sale formalities. Therefore, there was a delay in obtaining the title deeds for completing the registration. Thus, the ITAT held that there was a genuine cause for delay in getting the property registered which was beyond the control of the Assessee. It was further, held that the law as applicable as on the date of agreement required to be applied for taxing the income. The ITAT noticed that the department has not made out any case of application of sec 56(2)(vii)(b). The ITAT further, observed that since, the provisions of section 56(2)(vii)(b)(ii) were not available in the statute as on the date of entering into the agreement, the same cannot be made applicable to the Assessee. ITAT noticed that the department has not brought any evidence to show that there was extra consideration paid by the Assessee over and above the sale agreement or sale deed. In view of the same, the ITAT confirmed the order of the CIT(A) and dismissed the appeal filed by the Department.

3Nilkanth Urban Co-operative Bank Ltd. vs. CIT (ITA No. 2644/PUNE/2017) (Assessment Year 2013–14), Order dated 10.09.2020, [2020] 119 taxmann.com 369 (Pune-Trib)

Section 40(a)(ia) – the disallowance under section 40(a)(ia) cannot be made for non-deduction of TDS under section 194A on the payment of interest to HUF and unregistered firms which are members of the Assessee as specified in clause (v) of section 194A(3) of the Act.

FactsThe Assessee is a Co-operative Bank, filed return of income declaring total income at ` 97,40,280/-. During the course of assessment proceedings, the A.O. asked the Assessee to furnish the details of `Person-wise deposits' held by the bank and interest credited or paid to them along with a copy of Bye-laws of the bank. In response, the Assessee provided the said details as called by the A.O. On perusal of bye-laws, the A.O. observed that as per clause 4(ix), a "Person" means an adult-individual, registered partnership firm or local authority or any other body corporate and public trust registered etc. He further, observed that as per clause 4(iv), a "Member" means a `Person' joining with an application of registration of bank including a Nominal and Associate Member. On a conjoint reading of clauses 4(ix) and 4(iv), the AO held that only a "Person" can be a "Member". Thus, since HUF and unregistered firms do not fall within the definition of the term "Person", it cannot be treated as "Members". Therefore, the interest of ` 4,20,773/- paid to the said entities without deducting TDS u/s 194A is hit by the provisions of sec 40(a)(ia) of the Act. Thus, the A.O. added a sum of ` 4,20,773/- u/s 40(a)(ia) of the Act in the hands of Asessee. On appeal, the CIT(A) confirmed the view of the AO. The Assessee

ML-16



therefore, preferred an appeal before ITAT. After considering submission of both the parties, the ITAT held as under:

HeldITAT held that the authorities below have denied the benefit of deduction of interest by making disallowance u/s. 40(a)(ia) by holding that the Assessee ought to have deducted TDS u/s 194A on interest paid to HUF and unregistered firms as they are not legal Members in accordance with the bye-laws. After referring to the provisions of sub-section (3) and (1) of 194A, the ITAT held that a co-operative society is required to deduct TDS from any interest paid by it except where the interest is paid to its Member or to any other Cooperative society. During the course of hearing the question arose before the ITAT that whether nominal, associate and sympathizer members were also covered by the exemption u/s 194A(3)(v). The ITAT referred to CBDT Circular No. 9/2002 which clarified that the exemption is available only to such members who have joined in application for registration of co-operative society and those who are admitted to membership after registration in accordance with the bye-laws and rules. The ITAT held that going by the Circular, if a `Person' has been admitted as a `Member' contrary to the bye-laws and rules of the co-operative society, such a person will not be entitled to be covered within section 194A(3)(v). Further, referring to the decision of Jurisdictional High Court in case of District Central Cooperative Bank Ltd. and Anr vs. UOI [2004] 265 ITR 423, the ITAT held that the Hon'ble High Court has quashed the said circular by holding that it restricts the exemption u/s 194A(3)(v) only to such

members who have joined in application for the registration of the co-operative society and those who are admitted to the membership after the registration in accordance with the bye-laws and rules. The said circular excludes nominal, associate or sympathizer members which is in conflict with the provisions of sec 194A(3)(v) and thus, it is outside the scope of sec 119 of the Act. The ITAT further, held that in view of quashing of the said circular, which is even otherwise not binding on the ITAT, the position which stands is that the exception carved out in clause (v) of sec 194A(3) applies to all types of members of the eligible co-operative Banks whether or not they were admitted to the membership in accordance with the bye laws and rules of the co-operative bank. A plain reading of sec 194A(3)(v) deciphers that the legislature has not added any adjective to the term `Member', such as, nominal or associate or sympathizer, so as to restrict the application of clause (v) only to the regular and participating members. The ITAT observed that it is not the case of the A.O. that HUF and unregistered firms were not otherwise the members of the Assessee. It was specifically recorded by authorities below in their orders that both the said entities are members of the Assessee and they have been admitted as `Members' by way of an application made by them to the bank and passed a resolution to the extent of their admission as members of the bank in its Board of Directors meeting. The ITAT therefore, held that since Assessee made payment of interest to HUF and unregistered firms, which happened to be its 'members', no deduction of tax at source was required to be made u/s. 194A on such payments. The ITAT therefore, directed the A.O. to delete the disallowance made u/s 40(a)(ia) and allowed the appeal of the Assessee.

ML-17



Unreported Decision

4M/s. Kingfisher Finvest India Ltd. vs.. Dy. CIT (ITA NO. 2641 & 2642/Bang/2019) (Assessment Year 2013-14 & 2015-16, order dated 18.09.2020

Section 14A: No Disallowance of interest expenditure can be made if interest free funds are more than value of investments and loan funds are used for the purpose of business only.

FactsThe Assessee Company is engaged in the business of making investment in shares and providing guarantees to group companies. During the assessment year 2013-14, the Assessee earned exempt income of Rs.4.19 crores. The Assessee did not make any suo moto disallowance u/s 14A. The A.O. therefore, asked the Assesee as to why the disallowance was not made u/s 14A as per Rule 8D while computing total income of the Assessee. In reply to the same, the Assessee submitted that the majority of the investments were made in the earlier years and the loans taken during the year were used for the purpose of business. The A.O. did not agree with the contentions of the Assessee and accordingly, made disallowance of ` 52.10 crore u/s 14A of the Act invoking rule 8D which consisted disallowance of interest of ` 46.88 crore under rule 8D(2)(ii) and disallowance expenditure of ` 5.22 Crore under rule 8D(2)(iii). On appeal, the CIT(A) directed to the A.O. to restrict the disallowance u/s 14A of the Act to the extent of exempt income. Being aggrieved, the

Assessee preferred an appeal before ITAT. After hearing both the parties, the ITAT observed as under:

HeldWith respect to the disallowance under Rule 8D(2)(ii), the ITAT observed that majority of investments have been made in the earlier years out of interest free funds provided by the group companies of the Assessee. The ITAT held that the loans on which interest expenditure have been incurred by the Assessee for the relevant year have not been utilised for the purpose of making the investments. The ITAT further, referred to the decision in the case of Reliance Industries Ltd., [2019] 410 ITR 466 (SC) and held that if the interest free funds available with the Assessee are more than the value of investments, then it is presumed that the Assessee has used interest free funds for making investments. The ITAT further, held that if the Assessee is able to demonstrate the same, then the disallowance under rule 8D(2)(ii) should not be made. Further, with respect to disallowance administrative expenses made under Rule 8D(2)(iii), the ITAT appreciated the submission of the Assessee that the majority of expenses debited to Profit & Loss A/c are not related to the exempt income. The expenses relatable to the exempt income can be identified and the same is lower than the amount computed by the

A.O. under rule 8D (2)(iii). ITAT therefore, directed the A.O. to examine these issues in light of the above observations. The appeal of the Assessee, therefore, allowed by the ITAT for statistical purpose.

ML-18

International Taxation — Case Law Update


A. High Court

1DIT vs. Jeans Knit Pvt Ltd

(I.T.A. No. 383 OF 2012) ([TS-472-HC-2020(KAR)]

Services rendered by a non-resident, in nature of quality testing of fabrics would not be in nature of fees for technical services u/s 9(1)(vii) of the IT Act when the non-resident was neither involved in the selection of the fabric nor in the identification of the vendor from whom the fabrics were required to be purchased

Factsi) The assessee, a domestic company,

was engaged in the business of manufacturing and export of garments. The choices of fabrics and accessories to be used for the production of final products was done by the assessee in consultation with its customers and in most of the cases the customers had tie-ups with international manufacturers of denim fabrics from whom the fabrics were required to be imported by the assessee.

ii) For the above purpose, the assessee had engaged Sharp Eagle International Ltd. (SEL), a company incorporated in Hong Kong, to ensure that the imports were received in India on time and in the correct quantity so that the production schedule could be met and garments could be shipped to its customers as per the commitment given by the assessee.

iii) SEL rendered various services such as inspection of fabrics at the time of imports, timely dispatch of material etc. and the assessee paid 12.5% of the imported value of fabrics as consideration for the services rendered by SEL, without withholding any taxes at source.

iv) The AO initiated proceedings u/s 201 and observed that since no DTAA was executed between India and Hongkong, the taxability had to be determined under the provisions of the IT Act. The AO held that the payments made to SEL were in nature of fees for technical services u/s 9(1)(vii) of the IT Act, by observing as under:

CA Tarunkumar Singhal & Dr. Sunil Moti Lala

INTERNATIONAL TAXATIONCase Law Update

ML-19



a. Services rendered by SEL i.e. inspection of fabrics was not a simple job and required technical knowledge/skills in the field of textiles and also it required experience to inspect and analyze the fabrics/materials and to point out defects therein. Therefore, the services rendered by SEL were in the nature of technical services.

b. SEL was required to advise on the defects detected in the fabrics/materials and further had to clarify whether the same was to be imported or not. Thus, the said services were in the nature of consultancy services.

c. SEL was also required to manage/attend the work given by the assessee and thereby SEL was also rendering managerial services.

v) The AO passed order u/s 201(1), thereby holding the assessee as ‘assessee in default’ for not withholding taxes @ 10% u/s 115A(1)(b)(BB) r.w.s 9(1)(vii) of the IT Act. The action of the AO was upheld by the CIT(A).

vi) On appeal, the Tribunal held that the impugned payments were not in nature of fees for technical services u/s 9(1)(vii) of the IT Act, by observing as under:

a. The services rendered could not be termed as ‘consultancy services’, since, in terms of the agreement between assessee and SEL, SEL was not involved in the identification of the vendor from which the fabrics were required to be purchased or in the selection of the material and negotiating the price.

b. The services could not be termed as ‘technical services’ since the quality of the material was already determined by the assessee and SEL was only required to make a physical inspection of the material to verify whether it resembles the quality/samples specified by the assessee, and thus elementary knowledge of the type of material and fair sense of identifying the correctness of the quality was sufficient. Accordingly, SEL did not require any technical knowledge nor any skilled technical personnel was required to discharge its obligation under the agreement, and thus the services were not in nature of ‘technical services’.

c. Further, the services could also not be termed as ‘managerial services’, since SEL was acting on behalf of the assessee as its agent and thus, there was no independent application of thought process in any of the activities to be carried out by SEL i.e. it had only to act at the behest of the assessee and also discharge its commitments as per the direction of the assessee.

vii) On further appeal by Revenue, the Karnataka HC held as under.

Decisioni) The Karnataka HC held that the

expression ‘managerial’, ‘technical’ and ‘consultancy services’ employed in Explanation 2 to Section 9(1)(vii) of the Act have neither been defined under the IT Act nor under the General Clauses Act, 1987 and thereby the aforesaid words have to be understood in the

ML-20



sense in which they are understood by the persons engaged in the business and by the common man who is aware and understands the same.

ii) The HC, by relying on the decision in case of Santhosh Hazari vs. Purushottam Tiwari (2001) 3 SCC 179 and decision in case of CIT vs. Soft Brands Pvt. Ltd. (2018) 406 ITR 513, observed that it is a well-settled legal proposition that Income Tax Appellate Tribunal is a fact-finding authority and decision on facts rendered by the Income Tax Appellate Tribunal could be gone into by the High Court only if a question is referred to the High Court, which says that the findings of the Income Tax Appellate Tribunal are perverse.

iii) The HC observed that SEL was neither involved in the identification of the vendor from which the fabrics were required to be purchased nor in the selection of the material and negotiating the price. The quality of the material was also determined by the assessee and SEL was only required to make a physical inspection to verify whether it resembles the quality/sample specified by the assessee. In view of the same, for rendering the aforesaid service, no technical knowledge was required.

iv) The HC also observed that the Tribunal had recorded a finding that SEL was not rendering any consultancy services to the assessee and therefore, the same would not fall within the services contemplated u/s 9(1)(vii) of the Act.

v) Further, the HC observed that since the findings of the Tribunal were based on

meticulous appreciation of evidence on record and no ground with regard to the perversity of the aforesaid findings was raised, the said findings could not be termed as perverse and thus, the substantial questions of law framed were to be answered against the Revenue.

B. Tribunal

2BOEING India Pvt. Ltd

[TS-404-ITAT-2020(DEL)]

Section 195 of the IT Act would not be applicable to reimbursement of salary expenses of seconded employees to F Co. if the I Co. had withheld taxes u/s 192 of IT Act

Factsi) The assessee, a domestic company,

during the year under consideration, reimbursed the salaries of expatriates employees deputed to it, by its AEs without withholding any taxes u/s 195 of the IT Act.

ii) During the course of assessment proceedings, the AO referring to the terms of Secondment Agreement and drawing support from the decision of the Hon'ble Delhi High Court in the case of Centrica India Offshore India Ltd (364 ITR 336), held that taxes were required to be withheld by the assessee at the time of making payments to its AEs and accordingly made a disallowance u/s 40(a)(i) of the Act. The action of the AO was upheld by the DRP.

iii) Accordingly, the present appeal was filed by the assessee before the Tribunal.

ML-21



Decisioni) The Tribunal perused the Secondment

Agreement and observed that the seconded employees had expressed their willingness to be deputed under the assessee and its AE had agreed to release the said seconded employees to the assessee. Further, it was also provided that the AE would facilitate payment of salaries in the home country of the seconded employee on behalf of the assessee and the seconded employees would be working for the assessee, under supervision, control and management of the assessee as an employee of the assessee.

ii) The Tribunal observed that the seconded employees were, in fact, in the employment of the assessee and the assessee had just reimbursed the salaries to its AE, since in terms of the Secondment Agreement the AE were paying salaries of the seconded employees in their home country. Accordingly, these facts clearly demonstrated that the assessee had paid salaries to its own employees and this fact alone clearly distinguished the facts in the case of Centrica India Offshore Ltd. (supra)

iii) The Tribunal also perused the TDS certificates, Forms 15CA and 15CB, and observed that the assessee had deducted tax at source u/s 192 of the Act and hence provisions of section 195 of the Act would not be applicable.

iv) In view of the above, the Tribunal deleted the disallowance made by the AO.

Note:

i. In the aforesaid case, a merger u/s 233 of the Companies Act, 2013 was notified for amalgamation of an amalgamating company with the amalgamated company (i.e. the assessee being the successor of the said amalgamating company) and the said merger was duly notified to the AO by the assessee. However, the AO passed a draft assessment order u/s 144C in the name of the non-existent amalgamating company. On appeal by the assessee, the Tribunal held that since the draft order framed u/s 144C was in the name of a non-existent company it was void–ab initio, and thus all the subsequent proceedings were non-est. However, for sake of completeness, the Tribunal adjudicated the other issues on merits.

ii. The Tribunal adjudicated the issue pertaining to TP adjustment on outstanding receivables from AEs. The Tribunal observed that the assessee was a debt-free company; it was a 100% captive service provider and neither any interest was charged from non-AE transactions nor interest was paid to its creditors/suppliers. In view of the above, the Tribunal deleted the interest adjustment qua outstanding receivables from AEs.

3Goldman Sachs Investments (Mauritius) Limited

[TS-496-ITAT-2020(Mum)]

Capital Losses brought forward by an assessee, being a tax resident of Mauritius, could not be adjusted against the capital

ML-22



gains (short term and long term) earned from transactions executed in India which are exempt from taxation in India under India-Mauritius DTAA

Factsi) The assessee, a tax resident of

Mauritius, was registered with the Securities and Exchange Board of India (SEBI) as a Foreign Institutional Investor (FII) for carrying out portfolio investment activity in Indian capital market. During the year under consideration, the assessee had earned capital gains which inter alia included long term capital gains (LTCG) to the tune of INR 5.63 crores, short term capital gains (STCG) to the tune of INR 392.44 crores and incurred long term capital loss (LTCL) to the tune of INR 12.08 crores. The assessee, being a tax resident of Mauritius, claimed the capital gains earned on transfer of securities in India, as exempt from taxation in India under Article 13 of the India-Mauritius DTAA.

ii) Further, the assessee also had brought forward short term capital loss (STCL) to the tune of INR 3926.37 crores and LTCL to the tune of INR 7.64 crores. However, in the return of income for the year under consideration, the assessee neither set-off the brought forward losses nor current year LTCL against the capital gains earned during the subject year as the capital gains were exempt under Article 13 of the India-Mauritius DTAA. Accordingly, the assessee carried forward the entire brought forward losses from earlier years as well as the current year LTCL u/s 74(1).

iii) During the course of assessment proceedings, the AO proposed to reject

the claim of the assessee to carry forward the total losses (i.e. of the current year as well the losses brought forward from the earlier years) on the ground that:

a. The assessee had not set-off the brought forward capital losses against the capital gain earned during the year under consideration, which violated the very purpose for which the capital losses were being brought forward and carried forward u/s 74.

b. Since the capital gain derived by the assessee were exempt in India under the India-Mauritius DTAA, the question of carry forward of capital losses from such transactions would not arise at all either in India or Mauritius.

c. Pursuant to the India-Mauritius DTAA, the “capital gains” arising to the assessee, a resident of Mauritius, was not chargeable to tax in India, therefore, the assessee was neither required to show income under that head in its return nor entitled to file a return showing “capital losses” merely for the purpose of getting the same computed and carried forward to the subsequent years.

d. Section 74 was not applicable to the assessee since the capital gains was not computed under the head ‘capital gains’ and the capital loss which were exempt under India-Mauritius DTAA did not fall within the term “total income”.

e. Since the assessee claimed that the capital gains were not taxable

ML-23



in India under the India-Mauritius DTAA, therefore, it would not be permissible on its part to revert back to the provisions of the IT Act to carry forward the capital losses derived from transactions executed in India.

iv) The assessee filed objections before the DRP against the draft of the AO proposing to reject the claim of the assessee to carry forward the total losses. The DRP gave partial relief to the assessee, as follows:

a. W.r.t the STCL brought forward from the earlier years, the DRP observed that since the carry forward was allowed in the previous years by the AO (which had already been computed and allowed to be carried forward to subsequent years by the A.O in his order passed u/s 143(3) for A.Y 2012-13), it was not within the jurisdiction of the AO to review the same and reject it in the year under consideration. However, the DRP held that the STCL brought forward from A.Y.2012-13, was required to be first adjusted against the STCG for the year under consideration i.e. A.Y 2013-14, and only the balance amount of STCL would be available for being carried forward to the subsequent years.

b. W.r.t the LTCL brought forward from earlier years, the DRP held that the same had to be adjusted against the current year LTCG and only the net should be allowed to be carried forward.

c. W.r.t the LTCL incurred during the year under consideration, the DRP held that the same could not be carried forward to the subsequent years, since loss from an exempt source (i.e. Article 13 of the India-Mauritius DTAA) could neither be allowed to be set-off nor could be allowed to be carried forward and absorbed against income from a taxable source in the subsequent years.

v) Accordingly, the present appeal was filed by the assessee before the Tribunal.

Decisioni) The Tribunal observed that the direction

of the DRP i.e. the brought forward STCL be first adjusted against exempt short term and long term capital gains, and only the balance amount of brought forward STCL be carried forward to the subsequent years, was bereft of any reasoning and did not merit acceptance. The Tribunal observed that when admittedly the short term and long term capital gains earned by the assessee from transfer of securities during the year under question were exempt under Article 13 of the India-Mauritius DTAA, there would be no occasion for seeking adjustment of the brought forward STCL against such exempt income. In this regard, the Tribunal placed reliance on the co-ordinate bench decision in case of Flagship Indian Investment Company (Mauritius) Ltd. vs. ADIT (2010) 133 TTJ 792 (Mum).

ii) W.r.t the claim of the Revenue that by virtue of India-Mauritius DTAA, section 45 of the IT Act was rendered unworkable in respect of “capital gains”

ML-24



derived by the assessee from transfer of securities in India, and that therefore, the “capital losses” would also not form part of the assessee's “total income” and thus, could not be computed under the Act, -- the Tribunal observed that the Revenue had lost sight of the fact that the “capital losses” in question had been brought forward from the earlier years and had been determined and allowed to be carried forward by the AO while framing the assessment for AY 2012-13, and had not arisen during the AY 2013-14. Accordingly, the claim of the AO that the “capital losses” bought forward from the earlier years, pertaining to a source of income that was exempt from tax was thus not to be carried forward to the subsequent years, was devoid of any merit, and liable to be rejected.

iii) The Tribunal also observed in case the assessee during one year does not opt for the DTAA, it would not be precluded from availing the benefits of the said DTAA in the subsequent years. Reliance in this regard was placed on the decision of Pune Bench in case of DCIT vs. Patni Computer Systems Ltd (2008) 114 ITD 159 (Pune).

iv) Thus, the Tribunal concluded that the brought forward capital losses would not be adjusted against the capital gains earned during the year under consideration and directed the AO to allow carry forward of the brought forward STCL and LTCL to the subsequent years.

Note: It seems that the issue pertaining to carry forward of current year LTCL was not raised by the assessee before the Tribunal.

ML-25

Man is supposed to be the maker of his destiny. It is only partly true. He can make his

destiny, only in so far as he is allowed by the Great Power.

Mahatma Gandhi

Never think there is anything impossible for the soul. It is the greatest heresy to think

so. If there is sin, this is the only sin; to say that you are weak, or others are weak.

Swami Vivekananda

Never stop fighting until you arrive at your destined place - that is, the unique you.

Have an aim in life, continuously acquire knowledge, work hard, and have perseverance

to realise the great life.

A. P. J. Abdul Kalam

Indirect Taxes — GST Gyaan — The Conundrum of Gst Refunds under Inverted Duty Structure


The credits mentioned in section 17(5) of the CGST Act, 2017 are blocked and would not be eligible to the assessee even if used by him for business. All credits other than these, if used for making taxable supplies, would be eligible, provided the other conditions in the law are also satisfied. Hence it is important to understand the scope and ambit of these blocked credits to ensure that the assessee does not lose availing those credits that are otherwise not blocked. Also, at the same time, one needs to ensure that he does not avail any credit which is otherwise blocked, in which case the consequences of interest and penalty will be huge. This is important in cases where the assessee could have otherwise included the ineligible credit in his cost and recovered from his customers.

Motor vehicles related creditIn this article we would be having a closer look at the blocked credit mentioned in clause (a) of the said provision, which presently reads as under:

“motor vehicles for transportation of persons having approved seating capacity of not more

than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely:-

(A) further supply of such motor vehicles; or

(B) transportation of passengers; or

(C) imparting training on driving such motor vehicles;”

It can be deduced from this provision that a vehicle which is for transportation of goods would be eligible for credit. It is only in cases of vehicles that are for transportation of persons with the stated seating capacity, the credit is blocked unless they are used for the above stated 3 purposes.

However, prior to 1st Feb ’19 the same provision read as below:

"(a) motor vehicles and other conveyances except when they are used––

(i) for making the following taxable supplies, namely:-

(A) further supply of such vehicles or conveyances ; or

CA Shilpi Jain

INDIRECT TAXES

GST Gyaan — Motor Vehicle – Blocking is from the perspective of design or usage

ML-26



(B) transportation of passengers; or

(C) imparting training on driving, flying, navigating such vehicles or conveyances;

(ii) for transportation of goods;

As per the above provision the vehicles that are used for transportation of goods are eligible for credit. All other vehicles would be eligible for credit only if they are used for the above stated purposes.

Both the above versions of the provision seem to be almost conveying the same meaning. Then what was the need for bringing about a change in the provision? Was it only to give relaxation of credit for vehicles with seating capacity of 13 persons or more? Maybe not.

From the above, the following striking differences exist between the 2 provisions

Description Prior to 1st Feb ‘19 On or after 1st Feb ‘19

Provision motor vehicles ………except when they are used for

motor vehicles for transportation of persons……

Implication It is a clear indication that the motor vehicles that are USED for transportation of goods are eligible. The other vehicles are eligible for credit based on the condition set out in S. No. ‘(i)’

It is not very clear whether the vehicle should be meant for or used for the transportation of persons, for the restriction of credit not to apply. This is because the word ‘for’ is not qualified with meant or used.

What can be seen is that prior to the amendment, any vehicle that was used for transportation of goods, the credit would have been eligible. In case a Mercedes was used for transporting gold jewels, credit would have been eligible since it is used to transport goods i.e. jewels. Further, in the case of Srinivasa Transports 2020 40 GSTL 334, the Hyderabad Tribunal held that CENVAT credit would be eligible in respect of the vehicle as it is used for cargo handling services since it is not mentioned in the law that the vehicle has to be used exclusively for providing cargo handling services and thereby it would be sufficient even if it is partly used for it. Considering this proposition, it can be said that credit on Mercedes would be eligible as it is used for transportation of goods, though not exclusively.

However, post amendment we will have to examine if the same will apply or not. This is for the reason that the phrase reads as ‘motor vehicles for transportation….’. The word ‘used’ is missing. In such a case whether it has to be considered to be ‘used for’ or ‘meant for’.

We are all aware that while interpreting the statute no words should be added or deleted as was held in the case of Rohitash Kumar & Ors vs. Om Prakash Sharma & Ors on 6 November, 2012 (SC). So, would it be right to add ‘used’ in the provision from 1st Feb ’19, to state that the credit of Mercedes would be eligible since it is not used only for transportation of persons but is also used for transportation of goods? Maybe not.

Since there is an ambiguity, let us have a look at the provision further to see how it can be

ML-27



interpreted. In the provision, the following are relevant:

The restriction is not applicable to vehicles

a. Having approved seating capacity of not more than 13 persons,

b. Those that are further supplied, or

c. Those that are used for imparting training on driving such motor vehicles.

From the above clauses it can be seen that in case we interpret the word ‘for transportation of persons…’ as ‘used for transportation of persons….’ It would mean that the credit would be restricted only if the vehicle is actually used for transportation of persons (<=13 seater) and not in a case where a passenger vehicle is used for other purposes, say demo purpose, training purpose, testing, further selling, etc.

In such a case the existence of clauses ‘b’ and ‘c’ mentioned above would make no sense for the reason that, if the vehicle is intended for further supply (i.e. a dealer of motor vehicles) or is used for imparting training, then it would not be actually used by the supplier (i.e. dealer/trainer) for transporting persons to be eligible for credit?

Further, the phrase ‘approved seating capacity’ would be relevant only in case of a vehicle that is meant for transporting persons. It would not be relevant for other kinds of vehicle.

Considering the above discussion, it can be fairly concluded that in the above referred provision, the credit is blocked in case of a vehicle which is meant for transportation of persons in order to make sense out of the provision.

If that is the case then any passenger vehicle, even if used for transporting goods, credit would not be available from 1st Feb ’19, which would have been available before this date as the provision earlier allowed credit in respect of a vehicles used for transportation of goods.

From the above discussion it can be seen that in cases where the statute is not very clear and when more than one interpretations are possible, it would be relevant to harmoniously interpret the law considering the other provisions or the intent behind the said provision.

ML-28

I have also seen children successfully surmounting the effects of an evil inheritance.

That is due to purity being an inherent attribute of the soul.

Mahatma Gandhi

In a democracy, the well-being, individuality and happiness of every citizen is important

for the overall prosperity, peace and happiness of the nation.




A. WRIT PETITIONS

1. M/S. BRITANNIA INDUSTRIES LIMITED VS. THE UNION OF INDIA –

Gujarat High Court [2020-TIOL-1495-HC-AHM-GST]

Facts, Issue involved and contention of PetitionerPetitioner is a limited company located in Special Economic Zone (‘SEZ’). Being a SEZ unit and making zero rated supplies under GST, it was not able to utilize the credit of IGST received from its Input Service Distributor (‘ISD’) and was lying unutilized in its Electronic Credit Ledger. Therefore, petitioner had claimed refund of such unutilized ITC amounting to ` 99,05,156/- for F.Y. 2018-19 in Form GST RFD-01A. The refund application was rejected broadly on following grounds:

• Supply of goods and/or service is zero rated and hence not eligible for refund u/s 54 of CGST Act.

• SEZ unit is not supposed to pay any tax and thus there would be no question of ITC.

• Refund filed by the Petitioner cannot be processed under any category of

refund specified under manual refund processing Circular No. 17/17/2017-GST) dated 15.11.2017 and Circular No. 24/24/2017-GST dated 21.12.2017.

• No circular, notification/relevant guidelines have been issued by the board providing guideline to process GST refund claim application of units situated in Special Economic Zones in respect of tax paid an inward supply.

Aggrieved by order rejecting the refund, petitioner has preferred writ before Hon’ble Gujarat High Court.

Petitioner’s contentionsSection 16 entitles petitioner to claim ITC of tax charged on any supply of goods and/or service by supplier which are used in the course or furtherance of its business.

ISD, as defined u/s 2(61) of CGST Act, means an office of the supplier of goods and/or service which receives tax invoices issued u/s 31 towards receipt of input services and issues a prescribed document for the purpose of distributing the credit. GST does not restrict distribution of ITC by ISD to SEZ. Since the petitioner has received ITC from ISD, it is entitled to refund of the same.

CA Naresh Sheth & CA Jinesh Shah

INDIRECT TAXES

GST – Recent Judgments and Advance Rulings

ML-29



Circular No. 17/17/2017-GST dated 15th November, 2017 clarifies that unutilized ITC of IGST distributed by ISD, is required to be refunded on application for refund made in that regard.

Notification No. 28/2012-ST dated 20th June, 2012, under erstwhile service tax law, also allowed SEZ unit to claim refund of unutilized ITC distributed by ISD. Petitioner also took cognizance of judicial precedence in case of M/s. Amit Cotton Industries [2019-TIOL-1443-HC-AHM-GST] pronounced by Hon’ble Gujarat High Court.

Respondent’s contentionsPetition is not maintainable as alternative remedy of filing an appeal before appellate authority is available.

Government has offered various incentives to SEZ units which includes duty free imports/domestic procurement of goods, exemption from sales tax, service tax and from state sales taxes which are all subsumed under GST. N/No. 15/2017 – IT(R) and N/No. 18/2017-IT(R) have exempted all goods and services imported by a unit or developer in SEZ, for authorized operations, from levy of integrated tax. Also, supplies to SEZ is zero rated. Hence, petitioner is not entitled for refund u/s 54 of CGST Act.

Section 16(3) entitles a supplier to claim refund in respect of zero rated supplies. SEZ not being a supplier in the instant case, is not entitled to refund in respect of zero rated supplies.

Section 54(3) of CGST Act states that no refund of unutilized ITC shall be allowed in cases other than zero rated supplies without payment of tax and inverted duty structure. Also, Rule 89 of CGST Rules entitles supplier to claim refund in respect of supplies made

to SEZ unit/developer. Petitioner not being a supplier in the instant case, shall not be entitled for refund of ITC.

Petitioner was not at all liable to pay tax on the supplies received by them and therefore is not liable to claim refund.

Refund claimed by petitioner cannot be processed under any of the manual refund filing categories specified under Circular No. 17/17/2017-GST dated 15.11.2017 and Circular No. 24/24/2017-GST dated 21.12.2017. Neither any circular nor any notification has been issued by Government/CBIC for processing of such refund application. Hence, petitioner is not entitled to claim refund.

Respondents/Revenue placed reliance on following in support of their contentions:

• Authorized officer, State Bank of Travancore vs. Matthew K. C. [(2018) 3 SCC 85]

• United Bank of India vs. Satyawati Tondon and Others [(2010) 8 SCC 110]

Discussions by and Observations of High CourtHigh Court took note of provisions relating to definition of ISD, eligibility conditions of ITC, refund provisions r.w. Rule 89 of CGST Rules and section 16 of IGST Act.

Observations made in M/s. Amit Cotton Industries case shall be applicable to the present petition with the only difference that, Rule 89 shall be applicable in the present case instead of Rule 96 of CGST Rules (as applicable in former one).

ISD is defined to mean an office of the supplier of goods and services which receives tax invoice issued for input services and issues a prescribed document to for the purpose of

ML-30



distributing credit. Therefore, in facts of the case, it is not possible for a supplier to claim refund of credit distributed by ISD. Therefore, stance of the department that petitioner is not entitled to seek refund of ITC paid in connection with goods or services supplied to SEZ unit is not tenable.

N/No. 28/2012-ST dated 20th June, 2012, issued under erstwhile service tax law, allowed SEZ to claim refund of ITC distributed by ISD.

Decision of High CourtHon’ble High Court allowed the petition and accordingly granted refund of unutilized IGST credit distributed by ISD to SEZ unit.

B. Ruling by Appellate Authority for Advance Ruling

2. M/s. Ascendas Services (India) Private Limited – AAAR Karnataka (2020-TIOL-39-AAAR-GST)

Facts, Issue involved and Query of the AppellantAppellant is engaged in the business of operation and maintenance of International Tech Park, Bangalore which includes operation and maintenance of electrical systems at common areas, building and civil repairs, maintenance of lifts etc. In addition, the appellant also arranges for the transport of its staff and employees of the corporate clients in the Tech Park who are the tenants of the business park. For arranging the transport facility, the Appellant has entered into a contract with Bangalore Metropolitan Transport Corporation (‘BMTC’), whereby it allots one bus to the Appellant for every 50 passes purchased. Bus passes received by appellant from BMTC are either Non-AC buss pass (not leviable to GST) or combo

pass which can be used for AC as well as Non AC buses (GST levied at 5%). Appellant charges a separate fee of ` 300 per commuter as ‘facilitation fee’ for arranging the transport facility for commuters.

Appellant had sought advance ruling on following questions1. Whether the value of bus passes

distributed by the applicant to the commuters is to be included in the value of facilitation charges as per section 15(2) of the CGST Act, 2017 and KGST Act, 2017?

2. Whether the supply of service in the hands of the applicant could be classified as merely a supply of facilitation services between BMTC and the commuters?

Ruling of AARIn respect of question (1), the value of the bus passes distributed by the applicant to the commuters and the facilitation charges is to be included in the value of services provided by the applicant.

In respect of question (2), the service provided by the Appellant in arranging the transportation of the employees is not rendered in the capacity of an intermediary and is not a facilitation service between BMTC and the commuters.

Appeal to AAAR and further submissions made by the appellantAggrieved by ruling of AAR, appellant has preferred appeal before AAAR.

Appellant’s submissionsAppellant submits that they are merely facilitating transportation service by obtaining bus passes from BMTC and providing the

ML-31



same to the commuters and the employees of the tenants of the Appellant are the service recipients who receive the following two services:

• Transportation service provided by BMTC, and

• Facilitation service provided by the Appellant by making available the bus passes to the commuters at their respective workplaces.

They submitted that the benefit of the transportation service accrues to the commuters. The further relied on the case of Verizon communication India Pvt. Ltd reported in 2018 (8) GSTL 32 (Del) which held that recipient of service is one who benefits from the service. Further it would be almost impossible for BMTC to get into a contract with each of the individual passengers and therefore, the contract is between the Appellant and BMT. Appellant is merely facilitating transportation service between BMTC and the commuters owing to the practical difficulty of raising invoices in the name of each individual passenger. BMTC raises a consolidated invoice in the name of the Appellant and they issue a separate invoice for such facilitation and charges a facilitation fee of Rs 300 and applicable GST at 18% as "Support services in transport".

They submitted that apart from the facilitation charges, they receive the actual amount incurred to obtain such bus passes for distribution and therefore the Appellant cannot be held as service recipient of transportation service since the said services are primarily rendered to the commuters who are the ultimate beneficiary of transportation service. They are an intermediary with respect to the supply of bus passes as they arrange the service of transportation by providing the bus pass to the occupants and do not provide

the transportation service on its own account. Appellant has stepped into shoes of facilitator who has helped to bring about an outcome by providing unobstructed assistance to both commuters and BMTC.

Further it was argued that the bus pass given by the Appellant to the commuters is an ‘Actionable claim’. In light of definition of actionable claim u/s 2(1) of the CGST Act and ruling of the Supreme Court in H. Anraj vs. Govt of Tamil Nadu (AIR 1936 SC 63), it can be construed that bus passes are an acknowledgement of receipt of money in advance for rendering services in the future. It can be contended that it constitutes a debt for the service provider. They relied on decision in case of Bharti Airtel Ltd vs ACST (2010 (34) VST 202) wherein it was held that even recharge vouchers could constitute an actionable claim as it is an acknowledgment of money received in advance for rendering services. Therefore, they submitted that the bus passes are akin to the recharge coupon vouchers whereby the bus passes provide the commuters with the right to enjoy transport facilities in buses and the bus passes satisfy the conditions for qualifying to be an actionable claim, and same should not be brought to the ambit of taxation. Thus, the value of the bus passes distributed by the Appellant to commuters should not be included to the value of facilitation charges as per Section 15(2) of the CGST Act.

Discussions by and observations of AAARThere are two distinct transactions involved viz.

(a) a supply of required number of buses and bus passes by BMTC to the Appellant which will be operated by BMTC as per the schedule given by the Appellant; and

ML-32



(b) issue of monthly bus passes by the Appellant to the commuters (who are the employees of corporate clients in the International Tech Park) and scheduling the bus routes for the transport of the commuters

In the first transaction, BMTC is providing the service of operating the buses for the Appellant. The recipient of the service in this leg of the transaction is the Appellant since the consideration for the service of operating the buses and the supply of the bus passes (both AC and Non-AC), provided by BMTC, is paid by the Appellant. As per the provisions of Section 2(93) of the CGST Act,2017, the person who is liable to pay the consideration is defined as the 'recipient of supply of goods or services. The contract for transportation is entered into between the Appellant and BMTC. No doubt the commuters are the beneficiaries of this contract but that does not make them the recipients of the service provided by BMTC. The position does not change merely because the actual users of the transportation service are the commuters.

"Intermediary" is defined to mean a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account. In the instant case, the appellant is not an agent of BMTC in providing the transportation to the commuters. The appellant is neither appointed to act as broker nor an agent, nor it is appointed in any manner similar to that of a broker of agent. The service is provided by BMTC to the appellant as recipient but the customers of the appellant are dealt with by the service provider. This arrangement does not make the

appellant an intermediary. AAAR held that the appellant is receiving the services from BMTC on principal to principal basis and is also supplying the service to their clients on a principal to principal basis.

In case of second aspect, the appellant has contended that bus pass given by them to commuter is an actionable claim and have relied on the case of Bharti Airtel Ltd. Actionable claim as defined under CGST Act read with Transfer of Property Act contains two limbs viz.

(a) claim to an unsecured debt; and

(b) claim to beneficial interest in moveable property.

Goods defined under erstwhile laws specifically excluded actionable claims from their ambit whereas goods defined under GST legislation specifically includes actionable claim. Voucher has also been specifically defined under GST regime as it is an instrument which satisfies the conditions of being accepted as consideration/part consideration against purchase of specified goods. Voucher is neither money nor actionable claim. It is not a claim to a debt nor does it give a beneficial interest in any movable property to the bearer of the voucher.

Similarly, in the instant case, the bus passes are purchased by the commuters on paying a value in money. The commuter produces the bus pass for purchasing the service of transportation. The bus passes only give the commuter the right to travel. If the commuter does not use the bus pass within the duration for which it is valid or loses the bus pass, it becomes invalid and cannot be used to procure the service of transportation. The bus pass is only a contract of carriage. A contract is not property, but only a promise supported by consideration. Thus, the bus pass is not an actionable claim as defined under Transfer

ML-33



of Page 16 of 17 Property Act. By virtue of Section 15 of the CGST Act, the value of the service supplied by the Appellants will include the value of the bus passes as well as the facilitation charges.

Order of AAARAAAR upheld the Ruling of AAR and dismissed the appeal filed by the appellant on all counts.

3. Taghar Vasudeva Ambrish– Aaar Karnataka (2020-TIOL-46-AAAR-GST)

Facts, Issue involved and Query of AppellantAppellant along with four others has collectively let out a Residential complex (comprising of stilt floor, ground floor and four floors) to M/s D. Twelve Spaces Pvt. Ltd. (herein called as “Company”) which is engaged in the business of providing affordable residential accommodation to students on a long-term basis (starting from 3 months to 11 months).

Applicant has sought advance ruling for the following:

1. Whether exemption prescribed under Entry no. 13 of 9/2017-Integrated tax (R)dated 28.06.2017 can be sought and the lessors (here appellant) need not charge GST while issuing invoice for the lease service to M/s D Twelve Spaces Pvt. Ltd.?

2. Whether lease service falls under the exemption and can be described as 'Services by way of renting of residential dwelling for use as residence' as listed in the aforesaid notification?

Discussions by and observations of AARThe contract of the applicant group with the company indicates that what is given is an immovable property consisting of only 42 rooms with attached toilets as per the layout

of the leased premises. It does not fit into the meaning of a dwelling, which means a house. They are like hotel rooms and the entire leased premises of 42 rooms cannot be termed as residential dwelling.

Even if considered that property is leased out for residential purposes, the services provided by Lessee is not for use as residence. Further, service of lessee and ultimate use of property is similar to that of hotel, inn, guest house, club site, etc. and hence not covered under exemption entry.

Ruling of AAR1. Exemption prescribed under Entry no.

13 of 9/2017-Integrated tax (R) dated 28.06.2017 cannot be extended and the lessors (as an entity) have to charge GST while issuing the invoice for the lease services to M/s D Twelve Spaces P Ltd., provided they are registered under GST.

2. Lease services do not fall under the exemption “Services by way of renting of residential dwelling for use as residence” as listed in Entry no. 13 of 9/2017-Integrated tax (R) dated 28.06.2017.

Appeal to AAAR and further submissions made by appellantBeing aggrieved by the ruling passed by AAR, the appellant has filed this appeal to the AAAR. Appellant submitted that following are sine qua non in order to claim exemption under GST under Entry no. 13 of NN 9/2017-Integrated tax (R) dated 28.06.2017-

a. It must be a service of renting;

b. The property so let out must be a residential dwelling; and

c. Such residential dwelling must be given for use as a residence

ML-34



Regarding the first condition, the appellant submitted that it is an undisputed fact that services of renting of immovable property have de facto been provided by them to the Lessee (Company).

Regarding the second condition, the appellant submits that property let-out by them can be sufficiently covered under the definition of ‘residential dwelling’ used in exemption entry. To support their submission, they put forth the following points:

• The term ‘residential dwelling’ has not been defined under the GST law. However, it has been defined in Education Guide issued by CBIC which reads as under

“The phrase ‘residential dwelling’ has not been defined in the Act. It has therefore to be interpreted in terms of the normal trade parlance as per which it is any residential accommodation, but does not include hotel, motel, inn, guesthouse, campsite, lodge, houseboat, or like places meant for temporary stay”

It can be deduced from the above meaning that any residential accommodation, which is used for long-term stays, can be referred to as ‘residential dwellings’ for the purposes of Service Tax and GST.

• The property is a residential property in the records of Bruhat Bangalore Mahanagara Palike (BBMP), which was constructed and approved as a residential building.

• It is different from hotel, motel, inn, guest house, etc. as-

o Legislators have themselves created a distinction between services provided by hotel, inn, motel,

guesthouse etc. and hostels/paying guest by classifying these two services under different SAC i.e. 996311 and 99632;

o Billing pattern of both the services, i.e. per day tariff for hotel, inn etc. as compared to monthly rent for hostels, paying guest also substantiate the fact that the nature and duration of stay is different for these two services.

o Land zoning regulations of Bangalore also provides that a hotel cannot be operated in a residential land zone whereas paying guest accommodation can be run therein.

Regarding the third condition to qualify under Exemption Notification, such property must be used as a residence, the ultimate usage of the property rented out by the appellant in the hands of the Lessee (‘Company’) must be seen. The paying guest accommodation run by Lessee is used for staying by individuals (majorly students) for a period of 3 to 11 months. The purpose and intent of letting out property by lessee is for long-term residential accommodation.

To support their submission, the appellant relied on Supreme Court’s decision in case of Bhagwan Dass and Ors vs. Kamal Abrol and Ors and Jeewanti Pandey vs. Kishan Chandra Pandey which held that ‘residence’ generally means where person actually stays and that too for a considerable amount of time depicting permanency and not just casual visits.

Appellant also contended that since the order has not been passed by AAR within the time limit prescribed under statute (i.e. 90 days from date of filing of application), the order must be set aside as having no legal sanctity.

ML-35



Discussions by and findings of AAARFrom the records submitted by appellant, impugned property was constructed as a Hostel Building. The project description in sanctioned plan submitted indicated that the plan is for construction of hostel building.

A common understanding of a hostel is that of an establishment which provides inexpensive accommodation to students and travelers. On the other hand, a common understanding of the term ‘residential dwelling’ is one where people reside treating it as a home. The appellant has constructed the building with the intention of providing hostel accommodation, which is more akin to sociable accommodation rather than a residential accommodation. Therefore, the impugned property cannot be termed as “residential dwelling “and hence exemption under Entry no. 13 of NN 9/2017-Integrated tax (R) dated 28.06.2017 will not be applicable.

Assuming but not accepting that impugned property is a residential dwelling, the exemption is available only if the person who has taken property on lease uses the said property as a residence. In this case, the lessee (who is the recipient of service) is using the impugned property for conducting his business of running a paying guest accommodation. On this ground also the appellant is not eligible for exemption under Entry no. 13 of NN 9/2017-Integrated tax (R) dated 28.06.2017.

Further, ruling passed beyond the prescribed time limit does not render the ruling null and void or unsustainable. An order passed without jurisdiction renders the ruling null and void. An order suffering from illegality or irregularity of procedure cannot be termed inexecutable. Not adhering to time limit for passing order is an irregularity in procedure which can be set right in appeal proceedings.

Order of AAARAAAR upheld the ruling passed by AAR.

C. Ruling by Authority for Advance Ruling

4. M/s. Karma Buildcon – AAR Gujarat (2020-TIOL-243-AAR-GST)

Facts, Issue involved and Query of the ApplicantApplicant is engaged in the business of construction. Applicant buys land and develops residential/commercial property on the said land. On the basis of plans and approvals from various authorities, they enter into an agreement with the prospective buyers for such residential/commercial property. The agreements entered into are inclusive of land or undivided share of land basis. Applicant constructs such residential/commercial property by engaging labour and materials and thereafter transfers such property to the buyers.

Applicant has sought advance ruling on following:

1. What will be the value of supply for the transaction of sale of residential/commercial property with undivided rights of land?

2. In the case of construction of residential/commercial complex, the builder charges an amount which is inclusive of land or undivided share of land. As per Not No. 11/2017-CT(Rate) and 08/2017-CT(Rate) both dated 28.06.2017 the land value is deemed to be one third of the total amount and GST is payable on balance amount. But in applicant’s case the value of Land is clearly ascertainable. In that case, can actual cost of Land can be deducted for the purpose of arriving at the taxable value of supply?

ML-36



Applicant’s contentionsThe cost of land that is being transferred to the buyers on inclusive of land or undivided share of land basis need to be allowed to be deducted as a whole and not as provided in Notification No. 11/2017-CT (Rate) dated 28.06.2017 [as one third (33.33%) of the value], because in applicant's case the cost of land is distinctly determinable and is more than one third (33.33%) of the consideration value of sale of property.

Applicant submitted that when the amount of land to be deducted is not ascertainable then in such case a prescribed ratio/percentage is applied to determine the amount to be deducted. According to the applicant the prescribed ratio/percentage under the erstwhile Value Added Tax Rules,2006 was used when the amount of labour was not ascertainable in works contract transaction.

Intention behind allowing the deduction of land value in construction of immovable property transaction is to exclude the value of land on which sale of GST is not to be levied. Also, the deemed value as prescribed in the Notification No. 11/2017- CT (Rate) can be applied when the value of land is not ascertainable. But in the applicant’s case said value of land is very much ascertainable. The value of land cannot be same at all places so a uniform deduction for land @33% is contrary to ground realties. Also if the actual cost of land is allowed to be deducted, assessee shall get encouragement to disclose the actual cost of land.

Discussions by and Observations of AARApplicant’s grounds of contention as stated in aforesaid para are not tenable and are beyond the purview of legality. In para 2 of the Notification no. 11/2017-CT (Rate) as amended by Notification no 01/2018-CT (Rate), the value of land or undivided share of land

required to be deducted from the total amount charged for the subject supply has been clearly provided. In the said para, there is a deemed provision that the value of transfer of land or undivided share of land, as the case maybe, shall be deemed to be one third (33%) of the total amount charged for such supply. Accordingly, the applicant’s contention to allow deduction of actual value of land from the sale value on grounds that their land value is ascertainable and other grounds is not legal in terms of para 2 of Notification no 11/2017-CT(Rate) as amended vide Notification no 01/2018-CT(Rate).

Further, the reliance of Rule 18(A)(A) of the erstwhile Gujarat Value Added Tax Rules,2006 is not warranted in the instant case as since the Value Added Tax Act is no more in existence. The Value Added Tax Act does not have any legal value in determination of GST liability since the value of supply is to be arrived in terms of the provisions of the GST Act.

AAR RulingApplicant is required to deduct one third value of land or undivided share in land from the total value charged for the supply of construction services in terms of Para 2 of Notification No. 11/2017-CT (Rate) dated 28.06.2017, as amended vide Notification No. 1/2018-CT (Rate), dated 25-1-2018.

Applicant cannot deduct the actual cost of land, even if ascertainable, for arriving at the taxable value of supply.

5. M/S V 2 Realty – AAR Gujarat (2020-TIOL-252-AAR-GST)

Facts and Issue involvedApplicant is engaged in the construction business and their project ‘V2 Signature’ located at Vapi is currently in under-

ML-37



construction stage. The Ground and First Floor in all wings of their project are commercial shops. The Remaining floors are residential flats. They have received ‘Building Use Permission – BUP’ (Completion Certificate) for commercial shops i.e. Ground and First floors on 26.09.2017. There is also first occupancy in the building from 26.12.2017.

Applicant has sought advance ruling for the following:

1. Whether selling of residential flats af ter date of completion certificate of commercial shops or after first occupancy in building is exempt supply?

2. Manner of reversal of ITC on expenses incurred up to date of completion certificate shops.

3. Manner of claiming ITC on expenses incurred after date of completion certificate of commercial shops.

Applicant is of the view that as per entry 5(b) of Schedule II to CGSTA Act they are not liable to pay GST from 26.09.2017 in respect of sale of new commercial and residential units.

Discussions by and observations of AARPara 5(b) of Schedule II to CGST Act, 2017 reads as under:

Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier shall be treated as supply of services.

Applicant has submitted the copy of Building Used Permission dated 26.09.2017 issued by Chief Officer, Vapi Area Development

Authority, which clearly shows that they have received only partial Building Use Permission in respect of commercial shops of building.

The applicant has not submitted any documents, by which it can be established that they have received the Building Used Permission in respect of Residential Flats. Further, during the personal hearing, the applicant himself stated that they didn't receive Completion Certificate in respect of their residential building (units).

Since no Building Use Permission has been issued by the competent authority in respect of residential flat and no residential unit has been occupied by prospective buyer, supply of residential flats shall be treated as supply of service in terms Para 5(b) of Schedule-II of CGST Act, 2017. Input tax credit is to be claimed in manner specified u/s 16 and 17 of CGST Act. reversal of ITC on expenses incurred up to date of completion certificate is to be done in accordance with Rule 42 and 43 of CGST Rules.

Ruling of AAR1. Selling of residential flats after date

of BUP (Completion certificate) of commercial shops or after first occupancy in building is not an exempt supply.

2. The manner of claiming Input tax credit and reversal thereof has been provided under Section 16 and 17 of CGST Act, 2017 read with Rules 42 and 43 of CGST Rules, 2017.

6. M/s Tata Motors – Maharashtra AAR [2020-TIOL-245-AAR-GST]

Facts and issue involvedApplicant has engaged service providers to provide transportation facility to its employees,

ML-38



in non-air conditioned buses having seating capacity of more than 13 persons. The transportation facility is open to all the employees desirous of availing such facility. Applicant issues passes to employees who avail such transportation facility and nominal amount is recovered on monthly basis. In other words, difference between amount paid to service provider and amount recovered from employees is cost to company as salary cost.

Applicant has sought advance ruling on following questions:

1. Whether input tax credit (ITC) is available to Applicant on GST charged by service provider on hiring of bus/motor vehicle having seating capacity of more than thirteen persons for transportation of employees to & from workplace?

2. Whether GST is applicable on nominal amount recovered by Applicants from employees for usage of employee bus transportation facility in non-air conditioned bus?

3. If ITC is available as per question no. (1) Above, whether it will be restricted to the extent of cost borne by the Applicant (employer)?

Applicant’s submissionsSection 17(5)(b)(i) of the CGST Act, 2017 has been amended, w.e.f. 01.02.2019, to block ITC on leasing, renting or hiring of motor vehicles having approved seating capacity of not more than 13 persons. Hence ITC is allowed on leasing, renting or hiring of motor vehicles having seating capacity of more than 13 persons.

By Press release dated 10.07.2017. it was clarified that supply by employer to the employees in terms of contractual agreement of employment entered into between employer

and employee (which arc treated as a part of salary/cost to company), will not be subject to GST. Expenditure on employee bus transportation service borne by Applicant is a part and parcel of cost to the company and hence nominal amount recovered should not be liable to GST. It cannot be said that particular employee has availed bus on hire/charter basis from the applicant. Applicant is entitled to claim exemption under Notification No. 12/2017-Central Tax (Rate) which provides that transport of passengers, with or without accompanied belongings, by non-air-conditioned contract carriage other than radio taxi, for transportation of passengers, excluding tourism, conducted tour, charter or hire is exempted.

Hon'ble High court of Bombay in the case of CCE. Nagpur vs. Ultra Tech Cements Ltd [2010-TIOL-745-HC-MUM-ST] held that credit is not admissible to manufacturer on part of cost borne by worker and proportionate credit embedded in cost of food recovered from employees, needs to be reversed. Applicant has submitted that credit is not admissible to them on part of cost borne by worker and thus ITC will be restricted to the extent of cost borne by them.

Discussions by and Observations of AARThere is no doubt that the transportation services received by the applicant is used in the course or furtherance of their business and therefore prima facie, they are eligible to take credit of GST charged by their suppliers.

It is clear and apparent that Section 17(5) had clearly debarred Input Tax Credit on motor vehicles or conveyances used in transport of passengers till the date of the amendment i.e. 01.12.2019. However, with effect from 01.12.2019, Input Tax Credit has been allowed on leasing, renting or hiring of motor vehicles, for transportation of persons, having approved

ML-39



seating capacity of more than thirteen persons (including the driver). Since the applicant has specifically submitted and as agreed by the jurisdictional officer, that they are using motor vehicles having approved seating capacity of more than thirteen persons (including the driver), the applicant shall be eligible for Input Tax Credit in this case.

In respect of second question raised by the applicant, applicant has submitted that they issue pass only to their employees, so that the transportation facility can be used by such employees. Once, employee ceases to be in employment with applicant, he/she is not authorized to use the transportation facility. In other words, employer-employee relationship is must to avail this facility. The applicant's contentions that they are eligible for exemption from GST under SI. No. 15(b) of Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 in respect of nominal amounts of recoveries made from their employees towards bus transportation service, is not correct. The exemption under the said notification is available only when the supply is taxable in the first place. In the subject case, the transaction between the applicant & their employees, due to "Employer-Employee" relation as stated by the applicant in their submissions, is not a supply as provided in Schedule III under GST Act. As the applicant is not supplying any services to its employees, GST is not applicable on the nominal amounts recovered by Applicants from their employees in the subject case.

In respect of last question, there is no reason to deviate from views expressed by jurisdictional officer as well as applicant that ITC is not admissible to Applicant on part of cost borne by employee and thus ITC will be restricted to the extent of cost borne by the Applicant.

AAR Ruling1. ITC is available to the applicant on GST

charged by service provider on hiring of bus/motor vehicle having seating capacity of more than 13 persons for transportation of employees to & from workplace but only after 01.02.2019.

2. GST is not applicable on nominal amount recovered by applicant from employees for usage of employee bus transportation facility in non-air conditioned bus.

3. ITC is to be restricted to the extent of cost borne by the applicant.

7. M/s. Global Vectra Helicorp Limited – AAR Gujarat (2020- TIOL- 241- AAR- GST)

Facts, Issue involved and Query of the ApplicantApplicant is providing “Rental services of aircraft including passenger aircrafts, freight aircrafts, and the like with or without operator”. Under the charter hire services entered into by the applicant with various customers, the applicant is responsible for operating and maintaining the aircrafts. As per the terms of contract, Aviation Turbine Fuel (ATF), required for flying aircrafts, would be the responsibility of the customers. However, at locations where the customer is unable to provide the fuel and in order to ensure continuity of flying, the contract requires applicant to procure the fuel on behalf of the customer and subsequently the cost of the fuel is reimbursed by the customer at actuals (without charging any mark-up).

Applicant has sought advance ruling as to whether the amount recovered as reimbursement (at actual) by the applicant from the customer, for the fuel procured on behalf of the customer is required to be

ML-40



included in the value of services provided by the Applicant?

Applicant’s SubmissionOn perusal of contract with ONGC, it is evident that ONGC is responsible for supply of fuel in case of Mumbai and offshore locations whereas for other locations, the fuel supply charges are required to be reimbursed by ONGC to applicant on an agreed basis and the cost of the fuel is not included in the Flying Hour Charges.

As per Charter Hire Agreement, the only consideration paid or payable to the applicant for the services rendered is in the form of fixed monthly charges and flying hourly charges. GST is not applicable on fuel debit notes raised by the applicant on customers as the same are in the nature of reimbursements and not consideration towards any taxable supplies/services provided. Value of fuel reimbursed by the customers does not result into any benefit to the applicant. The arrangement of providing fuel by the applicant was merely for administrative convenience and debit notes raised by the applicant for recovery of fuel do not have any direct nexus with the Charter hire services of Aircrafts provided by the applicant to the customers and hence GST should not be applicable on such debit notes.

Applicant further stated that recovery of fuel cost from their customers is not covered under Section 15(2)(c) as it does not qualify as incidental expenses to the rental services provided by the applicant and also it does not does not represent an amount charged for anything done by the applicant in respect of supply of rental services provided by the applicant.

Applicant also stated that the fuel costs recovered from the customer is the actual

cost of fuel and the applicant is acting only as a pure agent of the customer. Therefore, reimbursement of fuel debit notes is not to be included in the value of taxable services provided by the applicant.

Applicant also relied on case of Union of India & Anr. vs. M/s. Intercontinental Consultants and Technocrats Pvt Ltd [2018-TIOL-76-SC-ST] under erstwhile service tax regime which held that reimbursements are not liable to tax.

Discussions by and Observations of AARDefinition of consideration u/s 2(31) of CGST Act clearly includes any payment made or to be made in respect of supply of goods or services or both by the recipient or by any other person. It also includes all the monetary value for the supply of goods or services or both, whether by recipient or any other person. In the instant case, payment made or to be made by the recipient to the applicant would not only include the payment for the supply of services but would also include the amount for the fuel filled in the aircraft by the applicant. Therefore, the amount of ATF fuel, which is received as reimbursement by the applicant will undoubtedly form a part of the 'consideration' i.e. the value of the services provided by the applicant and liable to GST.

Section 15(1) of CGST Act provides for transaction value i.e. price actually paid or payable for the supply of goods or services. In the instant case, price actually paid or payable for the supply of services includes the value of services i.e. "Rental services of aircraft including passenger aircrafts, freight aircraft and the like with or without operator" as well as the amount for the fuel filled in the aircraft by the applicant and this would be the sole consideration for the supply as per the said section.

ML-41



Judgement of the Hon'ble Supreme Court of India in case of Union of India & Anr. vs. M/s. Intercontinental Consultants and Technocrats Pvt. Ltd [2018-TIOL-76-SC-ST] pertains to pre-GST era. Further, the said case law pertains to the period prior to 14th May, 2015, when the legislative amendments were not brought out in the Finance Act, 1994 and hence cannot be made applicable to GST legislation.

As per Section 15(2)(c), any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services would also form part of the value. In the instant case, the applicant is filling ATF fuel in the aircraft before the supply of services to the customer and the amount of the ATF fuel is being charged from the customer as reimbursement of expenses. This act of the applicant would be considered as 'any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services' and would, therefore, form part of the value.

For the applicant to qualify as a 'pure agent' the applicant is required to provide documentary evidence to prove that the reimbursement received from their customer is as per actual and without mark up. However, they have not produced the relevant documents to prove this point. Therefore, this condition is not satisfied. Further, the applicant was required to indicate the payment of fuel made by him separately in the invoice issued by him to the recipient of service. However, the applicant has not indicated the payment of fuel made by him on behalf of the recipient of supply, separately on the invoice issued by him to the recipient of service. Hence this condition of pure agent is also not satisfied. ATF fuel procured by the

applicant for the aircraft is not in addition to the services he supplies on his own account but a part of his own services as the ATF fuel filled in the fuel tank of the aircraft would enable the aircraft to fly and thereby enable the applicant to provide the charter hire services to its customers.

AAR RulingAmount recovered for fuel procured on behalf of customers as reimbursement (at actuals) is required to be included in the value of services provided by the Applicant.

8. M/s. Crown Tours and Travels – AAR Rajasthan (2020-TIOL-237-AAR-GST)

Facts, Issue involved and Query of the ApplicantApplicant is engaged in business of providing tour services to the tourists identified by the Main Tour Operator. Applicant undertakes to provides local transportation services along with services like elephant ride, lunch/dinner, local sightseeing, guide services etc. As per industry practice, there is a contractual understanding between the tourist and the main tour operator to provide a complete packaged tour. For execution of the tour, the main tour operator engages sub-tour operator such as applicant to provide local transportation services along-with one or more of the services like providing guide services, sightseeing, and elephant ride.

Applicant raises a single invoice wherein all the services are shown as separate line item (with its respective rate) for accounting purposes. The final amount charged by the applicant from the Main tour operator is total amount of all the services together provided by the applicant to the tourist i.e. local transportation services along-with services like guide, elephant ride, local sightseeing.

ML-42



Applicant’s submissionsIn transaction at hand, the Main Tour Operator specifies the services which has to be provided by applicant to particular tourist or group of Tourist. Accordingly, the Applicant organizes and arranges the tour for the Tourist(s) which includes local transportation along-with sightseeing, elephant ride, guide services. Thus, as per the above definition in notification, applicant is a Tour Operator.

Further, tour operator includes any person engaged in the business of operating Tours. The term ‘business of operating tours' is very exhaustive and it will include activities which are incidental and ancillary to the business of operating tours like elephant ride, guide services, local sightseeing etc. It is humbly submitted that the Applicant shall be construed to be supplying tour operator services.

In respect of the condition no. (i) stated above, ITC in respect of goods and services used in supplying the said services has not been taken except in case wherein ITC is in respect of input services received from another Tour operator.

On perusal of condition no. (ii), it can be construed that the bill which is issued by the Tour operator should be inclusive of all the charges including charges of accommodation and transportation required for such a tour. The definition of the term 'tour operator' states that the person providing the tour operator's services may or may not provide the service of accommodation. Thus, it is humbly submitted on the co-joint reading of the condition no. (ii) with the definition of Tour Operator' and applying the rules of harmonious construction, it can be construed that the fulfilment of the

ML-43

Applicant has sought advance ruling as to whether GST at rate of 5% under heading 9985(i) of Notification no. 11/2017-Central Tax (Rate) dated 28.06.2017 is applicable on transaction which the Applicant intents

to undertake wherein a single invoice is raised in respect of all the services i.e. local transportation services along-with services like sightseeing, tour guide, elephant ride etc., provided by the Applicant to Main Tour Operator?

Heading Description of Service Rate Condition

Heading 9985 (Support services)

(i) Supply of tour operator’s services.

Explanation.- “tour operator” means any person engaged in the business of planning, scheduling, organizing, arranging tours (which may include arrangements for accommodation, sightseeing or other similar services) by any mode of transport, and includes any person engaged in the business of operating tours.

2.5 1. Provided that credit of input tax charged on goods and services used in supplying the service, other than the input tax credit of input service in the same line of business (i.e. tour operator service procured from another tour operator) has not been taken.

2. The bill issued for supply of this service indicates that it is inclusive of charges of accommodation and transportation required for such a tour and the amount charged in the bill is the gross amount charged for such a tour including the charges of accommodation and transportation required for such a tour



condition of inclusion of accommodation charges in the bill of tour operator is required only when such services have actually been provided.

Discussions by and observations of AARThere are four elements in the definition of ‘Tour Operator’ as provided in the rate notification. Tour operator is a person, who;

• Plan, schedule, organize and arrange tours;

• Might be providing accommodation, sightseeing and other similar services;

• Engaging any mode of transport for above services; and

• Engaged in business of operating tours.

The first condition in rate notification is related to restriction of ITC whereas the second condition is related to criteria for inclusion of charges of accommodation and transportation in the bill of a tour operator.

The second condition clearly emphasizes that a bill issued by a tour operator for supply of its services should be inclusive of charges of accommodation and transportation required for such a tour. The conjunction 'and' clearly explains that accommodation and transportation, both are must elements for a tour whereas conjunction 'or' may have rendered option between accommodation and transportation.

Applicant in this case is rendering only transportation with some ancillary services and not rendering any accommodation services. As such, it does not satisfy the condition mentioned in rate Notification No. 11/2017-CT (Rate) dated 28.06.2017 and therefore, rate of 5% GST is not applicable.

Ruling of AARServices provided by the applicant do not fall under the purview of Tour operator servi ces as provided in Notification No. 11/2017-CT(Rate) dated 28.06.2017 and rate of 5% GST is not applicable.

9. M/s. Hooghly Motors Private Limited- AAR West Bengal (2020-TIOL-215-AAR-GST)

Facts, Issues involved and Query of the AppellantApplicant is a manufacturer of “three wheeled motor vehicle” commonly known as “toto”. It has sought advance ruling on classification of the following:

1. Three wheeled motor vehicle (Operated with battery)

2. Three wheeled motor vehicle (Operated without battery)

Appellant’s contentionsThree wheeled motor vehicle (Operated with battery), being an electronically operated three-wheeled motor vehicle is classifiable under HSN 8703. Three wheeled motor vehicle (Operated without battery) is classifiable under HSN 8708.

Discussions by and observations of AARThree wheeled motor vehicle (Operated with battery) is an e-rickshaw as defined u/s 2A of the Motor Vehicles Act, 1988 (‘MV Act’). Explanation to Entry No. 242A of Schedule I to N/No. 1/2017-Central Tax (Rate) dated 28.06.2017 defines the term "electrically operated vehicle" to mean "vehicles which run solely on electrical energy derived from an external source or from one or more electrical batteries fitted to such road vehicles and shall include E-bicycles". Battery pack is an essential character of an e-rickshaw. If battery

ML-44



pack is withdrawn, it will no longer be three wheeled electrically operated vehicle.

Motor Vehicle carrying less than 10 passengers are classified under Heading 8703 of first Schedule to Customs Tariff Act, 1975 (‘Tariff Act’), borrowed under GST. All sub-headings except residual sub-heading 8703 90, refer to vehicles fitted with an internal combustion engine. Hence, three wheeled motor vehicle (Operated with battery) is classifiable under HSN 8703 90 10.

Three-wheeled motor vehicle without the battery pack does not have the essential character of an "electrically operated vehicle”. Heading 8706 includes chassis fitted with motor to convert electrical energy into the mechanical energy to put the vehicle into locomotion once the battery pack is attached. Such a device is called the engine of the vehicle. It is, therefore, classifiable under Tariff-head 8706 00 31, being the chassis fitted with an engine of a vehicle under sub-heading 8703.

Ruling of AARA three-wheeled motor vehicle is classifiable under HSN 8703 as an electrically operated vehicle, provided it is fitted with the battery pack. Otherwise, it will be classifiable under HSN 8706.

10. M/s. Enfield Apparels Limited – AAR West Bengal (2020-TIOL-214-AAR-GST)

Facts, Issue involved and Query of the ApplicantApplicant has gone under liquidation and National Company Law Tribunal (hereinafter referred to as “NCLT”) has appointed the liquidator who has obtained separate registration as a distinct person. One of the assets under liquidation is the leasehold factory unit along with car parking space

(hereinafter referred to as “Demised premises”).

West Bengal Industrial Development Corporation Ltd (hereinafter referred to as “the Sub-lessor”) granted the applicant the possession of the Demised Premises under a registered deed for 99 years and after the expiry of at least 5 years, applicant is entitled to assign to another person the unexpired residual period of the sub-lease after taking approval of the Sub-lessor and on payment of transfer fee, being 10% of the prevailing market value of the property.

The liquidator has sought advance ruling on following questions:

1. Whether GST is payable on the consideration receivable on aforesaid assignment. If so, what should be the SAC and the rate applicable?

2. Whether he can claim input tax credit for the GST paid on the transfer fee?

Applicant’s submissionsApplicant submitted that leasehold right to immovable property is an immovable property. He relied on Section 3(26) of the General Clauses Act, 1897, which defines immovable property to include land, benefits to arise out of the land and things attached to the earth, or permanently fastened to anything attached to the earth. According to the applicant, the phrase 'benefits to arise out of land' refers to the interest in land. It also submitted that the transfer of development rights in the land through joint development is also treated as the sale of land. The applicant relied upon following judgements:

• Mati Lal Daga and Ors. vs. (Sri Sri) Iswar Radha Damodar, AIR 1936 Cal 727;

• Girnar Traders vs State of Maharashtra, (2011) 3 SCC 1;

ML-45



• Chheda Housing Development vs Bibijan Shaikh Farid and Ors.

Hence, assignment of leasehold rights on land is nothing but the transfer of immovable property akin to the sale of land and buildings and hence not liable to GST.

In respect of input tax credit (hereinafter referred to as “ITC”), the applicant submitted that transfer fee is the consideration payable to the sub-lessor for rendering service in the course or furtherance of business. Further, it also referred to the term “business” defined u/s 2(17) of the CGST Act and more specifically clause (d) where “business” is defined to include supply or acquisition of goods or services in connection with the closure of a business. In view of this, GST paid on transfer fee is admissible as ITC where the assignment of leasehold right is taxable.

Discussions by and observations of AARAuthority observed that applicability of the General Clauses Act, 1897 in the context of a Special Act like the CGST Act, 2017 is limited to areas where no express provisions are made under the said Special Act.

Scope of supply u/s 7(1A) read with Schedule II of the CGST Act provides that which supplies shall be treated as supply of goods or services. Para 2 of Schedule II provides that with respect to transactions relating to land and buildings, any lease, tenancy, easement, license to occupy the land, letting out of a building including a commercial, industrial or residential complex for business or commerce is the supply of services.

Hence, benefits arising from land (as stipulated in said para 2) are not to be treated as transactions in immovable property but as the supply of service. The deed, therefore, confers upon the applicant no better title to the Demised Premises other than a service

contract of lease. Applicant's interest in the benefits arising out of the Demised Premises is limited to sub-leasing in terms of the Deed, and he is capable of transferring the benefits only to that extent. Clause 11 of the Deed provides the rights of the Sub-lessee. They include the right to have peaceful possession of the Demised Premises on regular payment of the lease rental and compliance to the conditions and restrictions enumerated under clause 12 of the Deed. A conjoint reading of the two clauses makes it clear that the Sub-lessor allows the applicant only conditional possession. Therefore, the applicant enjoys no title or ownership (except conditional possession) which is central to sale of any immovable property within the meaning of section 54 of the Transfer of Property Act, 1882.

Further, the applicant's reference to the case laws, where joint development right is treated as the sale of an immovable property, is not relevant as none of those cases is decided in the context of the GST law.

Ruling of AAR1. The activity of assignment is in the

nature of agreeing to transfer one's leasehold rights. It does not amount to further sub-leasing, as the applicant's rights as per the Deed of sub-lease stands extinguished after assignment.

2. It is a service classifiable under 'Other miscellaneous service' (SAC 999792) and taxable at the rate of 18% under Sl. No. 35 of Notification No. 11/2017-CT(R) dated 28.06.2017.

3. The transfer fee charged is the consideration payable to the sub-lessor for providing a service in the course or furtherance of business. Hence, GST paid thereon is admissible as ITC.

ML-46

Indirect Taxes — GST Gyaan — E-invoicing implementation – A bird’s eye view

November 2020 | The Chamber's Journal | 171 |

E-invoicing is one of the most significant and path breaking tax reforms introduced in the recent past under the indirect tax regime. It primarily envisages to automate GST compliances by ensuring auto reporting of invoices in GST returns, auto generation of e-waybills, facilitating standardisation and inter-operability between ERP systems, thereby, leading to reduction of disputes among transacting parties, reduction of processing costs, and improved overall business efficiency.

The seeds of the e-invoicing initiative were sown at the 37th GST Council meeting held on 20 September 2019 wherein a recommendation was given for introduction of electronic invoice (‘E-invoice’) in GST in a phased manner. While the initial date for roll out was planned with effect from 1 April 2020, the government had notified 1 October 2020, as the revised date for implementation of e-invoicing in a phased manner.

Enough and more has been said about e-invoicing but it continues to be a riddle for many. Through this article we have tried to demystify the concepts of e-invoicing through

common FAQs and have also described the practical process and challenges in generating e-invoices by an entity.

I. Frequently Asked Questions (FAQs)

• What is E-invoicing? E-invoicing is uploading of specified information on the Invoice Registration Portal (referred as ‘IRP’) for generation of a unique Invoice Reference No. (referred as ‘IRN’) along with a QR code. The invoice format has been prescribed under Form GST INV-01 (called as ‘Schema’). Presently, e-invoicing has been made mandatory for B2B transactions for businesses with a turnover exceeding INR 500 cr. (based on PAN) in any preceding financial year. It is expected that e-invoicing will be made applicable to companies having turnover > INR 100 cr. & < INR 500 cr. from 1 January 2021. However, a date is yet to be notified.

• What is IRP?IRP is the government body under NIC to handle e-invoice. IRP will generate the unique IRN and QR code for such E-invoice.

Gunjan Prabhakaran

INDIRECT TAXES

GST Gyaan — E-invoicing implementation – A bird’s eye view

ML-26


| 172 | The Chamber's Journal | November 2020

• What is IRN?IRN or Invoice Reference Number is a unique reference number (commonly referred as “HASH”) generated and returned by IRP, on successful registration of E-invoice. The Hash is based on supplier’s GSTIN, document type, document number and financial year.

• What does a typical IRN look like?IRN is a unique 64-character hash, e.g. fc1331d9ef242a5617ed8fd985ac1242ceb 268fb4c83eaf6ef8a30c8bbd431bd

• What is QR Code and what are the contents of a QR Code?

A QR Code or Quick Response Code, can be read by a cell phone or any QR Code reader device to takeout a piece of information a seller wants to transmit, or government authorities ask to transmit. In GST the IRP will generate the QR Code with the information Supplier GSTN, Recipient GSTN, Invoice number (as given by supplier), Date of generation of invoice, Invoice value, Number of line items, HSN Code of the main item (the line item having the highest taxable value), Unique IRN or HASH.

• What does ‘Schema’ mean? ‘Schema’ simply means a structured template or format containing information and their validations. The ‘E-invoice’ schema is notified as ‘Form GST INV-1’.

• Why is an e-invoice standard/schema required?

It is required for ensuring uniformity in reporting to IRP across businesses. Schema ensures that the E-invoice is ‘machine-readable’ and ‘inter-operable’, i.e. the invoice/format can be readily ‘picked up’, ‘read’, ‘understood’ and further processed by different ERP systems.

• What is the file format in which invoice must be reported to IRP?

Invoice details in prescribed schema (INV-01) must be reported to IRP in notified JSON (Java Script Object Notation) format. It can be thought of as a common language for systems/machines to communicate between each other and exchange data. This format is also used in GST systems for reporting data to GST Systems.

• What are the various types of fields in E-invoice schema?

1. Data for fields marked as ‘Mandatory’ have to be provided compulsorily

2. A mandatory field not having any value can be reported as NIL (0)

3. Fields marked as ‘Optional’ may or may not be filled up. Many of these are relevant for specific businesses (e.g. Batch No., Attributes etc.) and to cater to specific scenarios (e.g. export, E-waybill etc.)

Some sections in the schema are marked as ‘Optional’. But, if this section is selected, some of the fields may be mandatory. For example, the section ‘E-waybill Details’ is marked as optional. But, if this section is chosen, then the filed ‘Mode of Transportation’ becomes mandatory.

• What documents are required to be registered on IRP?

The following list of documents is required to be registered with IRP:

− B2BInvoices

− B2G(Business toGovernment) Invoices

− Export Invoices

− ReverseCharge Invoices

ML-27



− CreditNotes

− DebitNotes

• What are the transactions and sectors that are exempted from e-invoicing?

The following sectors/ transactions have been kept outside the purview of e-invoicing:

− B2Csupplies

− BillofSupplysupplies

− Jobworksupplies

− ISDsupplies

− SEZunits

− Bankingcompanyorfinancial institutionor NBFCs

− Insurance

− GoodsandTransportAgencysupplyingservices in relation to transportation of goods by road in a goods carriage

− Passenger transportation

− Exhibition ofCinematograph films inmultiplex screens

• A GST invoice will be valid only with an IRN?

Yes, though there is no extensive change in the current practice of recoding transactions in ERP or Accounting software, e-invoicing has brought a new dimension to the existing invoicing procedures. Companies will continue to raise invoices through their ERPs. However, in order to generate IRN from IRP there are additional steps required to be undertaken in an automated environment. While it appears simple that an IRN can be generated from IRP in seconds, there is significant decision making involved before a company can commence it’s E-invoicing journey.

• What are the different modes available for transmission of data to IRP?

1. API based integration with IRP (This option will result in direct integration between Taxpayer’s System and IRP)

2. API based integration with Taxpayer’s System through GSP/ASP

3. Free Offline Utility - ‘Bulk Generation Tool’, downloadable from IRP

4. Manual upload through ASP

In order to choose which option is best suited for a company’s requirements, one needs to keep certain factors in mind:

− Volume of invoices (invoices, creditnotes and debit notes);

− ERPreadiness;

− Periodicityof issuanceof invoice (daily,monthly, quarterly, etc.)

If the number of invoices required to be generated is voluminous, it’s advisable to opt for automation. This will ensure reverse integration of IRNs with the Company’s ERP. Further, a company needs to determine the desired degree of automation.

• What is e-invoice – Sandbox/API Testing?

The supplier needs to undertake identification and implementation of gaps in standard reports generated from his ERP, accounting/ billing software vis-à-vis schema, the data generated in new reports needs to be tested on sandbox (i.e. testing server provided by the IRP) for proper validation of data and further improvements in reports. In case the supplier has opted for API based integration, the API’s is required to be tested before go-live (i.e. Actual implementation). In order to get

ML-28



more info, the supplier can visit: https://einv-apisandbox.nic.in.

• Will the e-invoice details be pushed to GST System? Will they populate the return?

Yes. On successful reporting of invoice details to IRP, the invoice data (payload) including IRN, will be saved in GST System. The GST system will auto-populate them into GSTR-1 of the supplier and GSTR-2A of respective receivers with source marked as ‘E-invoice ’.

• Does the e-waybill get auto-generated from the IRP portal?

In case both Part-A and Part-B of the e-waybill are provided in the e-invoice schema, the details will be used to generate e-waybill.

In case Part-B details are not provided at the time of reporting invoice to IRP, the same will have to be provided by the user through ‘ASP tool’, ‘E-waybill’ tab in IRP log in or E-waybill Portal, so as to generate E-waybill.

• Who is an ‘Application Service Provider’? How can one become an ASP?

ASPs are software service providers who route GST data of their clients to GST System through GSPs (GST Suvidha Providers). There are service providers who are both ASPs and GSPs.

II. Stepwise plan for e-invoicing implementation

There are four broad ways in which e-invoices can be generated by a taxpayer viz. (i) API based; (ii) mobile app based; (iii) offline tool based; and (iv) GSP based. The taxpayer needs to choose the most suitable way of e-invoice implementation based on his requirements. Generally, more the volume of transactions, more automation is required and the same

may be achieved through API integration. Further, IRP accepts data reporting only in JSON format. Accordingly, the ERP/Accounting software of the supplier needs to generate the sales report for each invoice or bulk invoices in notified JSON format. In case the ERP/Accounting software of the supplier is not capable of providing data in notified JSON structure, the seller may take help of ASP-GSP or use manual excel upload directly on IRP. Generally, the following steps are involved in generation of e-invoices by a taxpayer –

Step 1: Gap AnalysisTo begin with, regardless of the option selected for e-invoice implementation, the supplier needs to undertake a gap analysis of data fields appearing in the sales report or any other report generated from his ERP/ Accounting software (‘Sales Report’), which will be used for e-invoicing vis-a-vis data fields appearing in Schema. It is to be ensured that all the mandatory data fields in schema are available in the sales report. Further, there may be certain conditional mandatory fields which should also be part of the sales report, if the optional fields are applicable to business.

Further, the supplier may also generate the e-waybill along with the e-invoice, if the entire information required for both the documents are captured in the sales report and passed to the IRP. Accordingly, the optional fields in schema e.g. Transport Vehicle no. Transporter’s ID etc. would become mandatory. Upon identification of gaps in sales report, the missing data fields need to be built in the ERP/Accounting software and tested.

Step 2: Identification of best suited optionA company needs to identify the best suited option for transmission of data to IRP as discussed above. The decision may be based



on various factors such as volume of invoices, frequency of invoicing, manner of raising invoices, type of business etc. As a thumb rule, it is generally presumed that more the number of transactions, more would be the requirement of adopting automation.

Step 3: Sandbox testing Sandbox is a testing server provided by the IRP to the taxpayers to test the implementation of e-invoicing. The supplier needs to undertake identification and implementation of gaps in standard reports generated from his ERP, accounting/ billing software vis-à-vis

schema, the data generated in new reports needs to be tested on sandbox for proper validation of data and further improvements in reports. In case the supplier has opted for API based integration, the API is required to be tested before go-live .

Step 4: Go live Post sandbox testing once necessary modifications and debugging has been undertaken the company can commence processing invoices in the live environment and generate IRNs real time.

Step 5: Generation of Invoice & IRNThe overall workflow of an ‘E-invoice’ system is depicted below.

Seller E-Invoicing Registrar GST System Buyer

Generation of invoice & conversion into JSON

Push/Uploads E-Invoices JSON to IRP

B

2

B

A

P

Is

De-duplication check By Central Registry

Registrar 1

Registrar 2

Registrar n

E-Waybill System

GST Returns

Buyer can view the ITC related to this invoice in GSTR-2A

1

2

3

45

6 7

Receives JSON containing• Digitally signed invoice • Digitally signed QR CODE• (in digital stream) that

contains basic invoice details• Seller can view the invoice

liability in GSTR – 1

• Send data for de-duplicated check with GST System

• Generate hash• Validates hash (if received through

API from seller system)• Sign it with Digital signature• Add QR code to json• Sends authenticated payload to GST

system• Send to E-waybill system

• De-duplication checked• Hash Stored in GST invoice

registry• GST System now has a

unique Invoice with a unique number

• GSTR - 1 updated of Seller• GSTR – 2A updated of

Buyer

Buyer -• receives Registered

invoice from IRP Can use QR code

to verify the invoice (functionality to be announced by government in phased manner)



1. The seller shall generate invoices in his own ERP/Accounting system and the invoice data shall be converted into JSON structure for sending to IRP portal.

2. Upon successful creation of JSON file, the same needs to be pushed/ uploaded on the IRP portal using the way selected by seller e.g. Govt. API/ASP-GSP/Excel upload.

3. Upon receipt of payload in JSON, the IRP will send the data to Central Registry of GST System to ensure that the same document number (invoice, Credit Note etc.) has not been reported by the supplier earlier during the Financial Year.

4. Upon receipt of confirmation of no duplication, the IRP will generate IRN or HASH based on data shared by supplier and add QR Code and affix the digital signature. Subsequently, the digitally signed JSON containing the unique IRN and details of QR Code is sent to seller.

5. At this stage, the seller receives the digitally signed invoice and digitally signed QR CODE for his reference and records. Further, the seller can view the invoice details in GSTR – 1. In case the ERP or accounting software of the seller is not capable of accepting the payload in JSON, then the seller may store the JSON offline and print invoices from IRP portal. However, in case the seller is using the services of any ASP, the user may print the invoices from ASP tool itself .

6. While the payload is being processed the IRP portal sends the data to the GSTIN System for populating GSTR – 1

of the supplier and GSTR – 2A of the buyer. Moreover, the same information is also shared with the e-waybill portal to allow the seller to login into the e-waybill portal and generate the waybill for movement of goods. Please note that, the schema includes parameters e.g. ‘Transporter ID’ and ‘Vehicle Number’, etc. that are required for generating e-waybills. These can be entered if available with seller at the time of generation of the e-invoice itself. In such cases the e-waybill can be created without any further requirement of data entry by the user. The e-invoice reporting portal already allows reporting of e-invoice and generation of e-waybill with the same data simultaneously.

7. It is important to note that, post registration of an e-invoice, the data will appear in GSTR – 2A of the customer. Basis this, the customer can take the credit in monthly returns in a timely manner. Initially, the government had planned to send the signed payload in JSON to customer for their records and reference through email. However, the said activity has been kept on hold and shall be developed in phased manner.

III. Challenges during E-invoicing implementation

E-invoicing has already been made effective from 1 October 2020 for taxpayers having aggregate turnover exceed INR 500 cr. in a financial year. In the course of generating e-invoices practically, several challenges have been encountered by the taxpayers in the first month of implementation. Some of the practical challenges are enumerated below –



1. Non-availability of IRP data after 24 Hours

Information relating to an e-invoice generated on the IRP portal is not available on the IRP portal beyond 24 hours of its generation. Accordingly, if the seller has missed to record the IRN generated, the same would no more be available for downloading and recording.

2. Amendment to e-invoice It is pertinent to note that, no amendment in the particulars of invoice is allowed once the same has been registered on IRP. The amendment can only be carried out on the GST portal or through issue of debit/ credit note.

3. Cancellation of e-invoice It is important to note that once the data in invoice has been reported to IRP portal, it cannot be edited in the same document number. Accordingly, the user has the following two options to modify the data –

• Cancel the IRN within 24 hours of generation of IRN and re-upload the data under new invoice number with correct particulars. The 24 hour ends at the next day mid night of the day IRN generated.

• If the 24 hours-time has been lapsed, the customer has to cancel the invoice by raising credit note as per GST laws.

It is pertinent to note that any clerical error would increase the volume of work currently undertaken by any seller.

Further, in case any e-waybill has been generated by the user against any IRN, the user needs to cancel the e-waybill first by logging into the e-waybill portal as the same cannot be done from IRP portal and then

cancel the e-invoice. This increases multiple logins and extra unproductive hours.

4. Reconciliation of transaction for preparing GSTR – 1

E-invoices are required to be generated only for specified supplies. All transactions are not required to be reported to IRP portal. However, in GSTR – 1, all the transactions are required to be reported. Further, the IRP portal will automatically populate the IRN data in GSTR – 1 of the seller. Accordingly, before filing of GSTR – 1 the user needs to reconcile the total data and check for any mismatch therein.

5. Reverse integration In the current scenario most of the small ERP, accounting/ billing software are not designed to read the JSON payload received from IRP. In such a case, the seller cannot print invoices or keep record of registered transactions in his ERP, accounting/ billing software. Accordingly, the user needs to keep record of the IRN generated offline and take help of IRP portal or ASP to print the e-invoice. The accounting software thus, needs to be upgraded and developed to read the payload and generate invoices properly.

6. Non-generation of e-waybill from IRP portal in case of unregistered transporter

In case of unregistered transporters, the e-waybill cannot be generated from IRP portal. In such a situation, the seller needs to either generate the e-waybill from the e-waybill portal or use a registered transporter.

7. Inconsistency in database of GSTIN and IRP portal

It has been experienced that in relation to certain customer GSTINs, an error with a



description – “Either supplier GSTIN or e-commerce GSTIN can generate IRN” is observed. The Authorities have explained that such an error is due to non-syncing of GSTIN database to IRP. For dealing with such errors, the user/ seller has to sync the same using new API released thereafter. This is creating unnecessary issues with the seller to initiate the individual sync of customer GSTIN from GST portal to IRP portal.

8. Dynamic QR Code in case of B2C QR code

Printing of dynamic QR code for B2C transaction was put on hold at the last moment. It is important to note that by the due date of e-invoice implementation i.e 01 October 2020, the government themselves were having no details that could guide the seller to create and print the dynamic QR code for all B2C invoices. Yet clarification is awaited for such cases.

9. Impact of Covid-19Training of personnel and formulation of internal controls is imperative for a smooth

transition into the e-invoicing regime. Due to world-wide pandemic and ongoing WFH model of working, it is very difficult for IT people to physically visit the billing location, understand implementation of E-invoicing and identify the issues.

IV. ConclusionThe long-term benefits of e-invoicing cannot be disputed. It is a move towards complete digitisation of the tax compliance framework in India. Ultimately, it would result in a win-win situation for all the stakeholders since on one hand, it would reduce the compliance burden of the taxpayers by increasing automation in the return filing procedure, while on the other hand it would help authorities in increasing efficiency by implementing advanced data analytics tools. Hence, a smooth and steady implementation of the entire e-invoicing framework is necessary to set the ground rolling for a seamless and transparent tax ecosystem.

Indirect Taxes — Service Tax – Case Law Update


1M/s Haresh V Kagrana (HUF) vs. Deputy Commissioner (Refund) CGST & CX 2020-9-TMI-425- (Commissioner Appeals-III) Mumbai

Background Facts of the caseThe appellant had booked a residential flat in a project of M/s. Bharat Infrastructure & Engineering Pvt. Ltd (hereinafter referred to as builder). The builder issued invoice to appellant on receipt of ` 25,00,000/- and ` 27,50,000/- from them for service tax (including SBC) amounting to ` 90,625/- and ` 99,688/- respectively.

The appellant cancelled the said flat, however the builder has not refunded service tax amount to them. Therefore, they have claimed refund of the service tax of ` 1,90,313/- under the provisions of Section 11B of the Central Excise Act, 1944 (CEA) as applicable to Service Tax under Section 83 of The Finance Act 1994.

The Adjudicating Authority held that once a consideration has been received prior to receipt of the completion certificate, the entire value of construction become taxable and mere cancellation of booking of flat does not

mean that there was no service. He further found that flat was booked by the Appellant on 28.12.2015 and booking was cancelled on 19.02.2019. The refund claim has been filed on 19.08.2019 that is after the expiry of one year from the date of agreement/intent or the date of payment of service tax, the same was hit by limitation of time under Section 11B of CEA and therefore liable for rejection. Hence the present appeals.

Arguments by the Appellantsa) Cancellation of under construction flats

before completion certificate will be treated as non-provision of service.

b) The booking got cancelled in Feb. 2019 by which time GST regime had been ushered in and the builder could not get opportunity to make adjustment of excess service tax paid in above case under Rule 6(3) of Service Tax Rules, 1994. Hence the refund claim.

c) Without prejudice, the time limit under Section 11B is required to be computed from the date of cause of action and not from the date of payment.

d) Doctrine of unjust enrichment is not applicable in the present case.

CA Rajiv Luthia & CA Keval Shah

INDIRECT TAXES

Service Tax – Case Law Update

ML-47



Arguments by the Respondentsa) That Section 142(5) of the CGST Act.

2017, is applicable only in the refund case admissible to taxpayers under the existing Central Excise and Service Tax law; however, the claim is filed in GST regime.

b) That the Service Provider (builder) has availed Cenvat Credit on selling of the under construction flat and has not reversed the availed Cenvat credit on the cancelled flat. Relying on the judgement of Hon'ble Apex Court in the case of Sahakari Khand Udyog Mandal Ltd, vs. CCE [2015 (181) ELT 328 (SC)]. That the claim is also hit by the doctrine of unjust enrichment.

Decisiona) The appellant has submitted letter

dated 19.02.2019 from M/s. Bharat Infrastructure & Engineering Pvt. Ltd. wherein the builders have confirmed that they had collected and paid service tax amounting to ` 1,90,313/- to the Government on booking of their flat and that they had refunded the entire advance excluding the service tax component.

b) They further confirmed that the service tax paid by them corresponding to the cancelled contract has not been adjusted against any future Service Tax/GST liability in accordance with Rule 6(3) of STR or any other manner. The same has also been certified by the Chartered Accountants Kagrana & Associates

c) As regards the finding of respondents that despite cancellation of booking, service is deemed to be provided the same is not tenable. In case of

construction service, service tax is required to be paid on amount received from buyers towards booking of flat before the issue of completion certificate by the competent authority and this process goes on for years and the bookings can be cancelled by the buyers before taking possession of the flat.

d) No service has been provided to the appellant in this case as the consideration for service was returned and the service contract got terminated. Once it is clear that service is not provided, refund under Section 142(5) of the CGST Act, 2017 becomes admissible.

e) In this regard it would be pertinent to refer to the latest FAQ issued on Banking, Insurance and Stock Brokers Sector (Updated as on 27.12.2018) by CBIC, wherein vide question no, 71, it has been specifically clarified that any service paid on or before 30 June 2017 for the services to be provided but subsequently not provided shall be eligible to claim refund under Section 142(5) of CGST Act, 2017.

f) The FAQ recognises that all claims for non-provision of Service in respect of which adjustment/credit would have been available under erstwhile Rule 6(3) of Service Tax Rules, 1994 would merit to be honoured under Section 142(5) of CGST Act. 2017 in the GST regime.

g) That no service has been provided to the appellant in this case and therefore the provision of relevant date of one year and date of payment of payment as per Section 11B of CEA cannot be made applicable in the present case. The service tax paid by the appellant is

ML-48



in the nature of deposit and not service tax.

h) Notwithstanding the above, even if the payment is in the nature of service tax, the date of cancellation of flat will be considered as the relevant date for calculating the time limit of one year, as the event that led to the refund of taxes is the cancellation by the buyer. If the cancellation would not have happened, the refund claim would not have arisen at all.

i) It is on record that the component of Service Tax was recovered from appellants by the builder and paid to the exchequer. It is also on record that the builder has not refunded Service Tax to the appellant. It is therefore clear that appellant has borne the incidence of Service Tax whose refund is being claimed, It is crystal clear that the claim is not hit by the doctrine of unjust enrichment.

2Commissioner of Service Tax, Ahmedabad vs. Adani Gas Ltd [2020] 118 taxmann.com 567 (SC)

Background Facts of the caseThe respondent is in the business of distributing natural gas - Compressed Natural Gas and Piped Natural Gas - to industrial, commercial, and domestic consumers. Among other purposes, industrial consumers use PNG for manufacturing operations. Domestic and commercial consumers use PNG for cooking, power supply and air-conditioning. In order to facilitate the distribution of PNG to industrial, commercial and domestic consumers through pipes, the respondent installs an equipment described as 'SKID' at their customers' sites.

The SKID equipment consists of isolation valves, filters, regulators and electronic meters. The equipment regulates the supply of PNG being distributed and records the quantity of PNG consumed by the customer, which is then used for billing purposes. The respondent enters into an agreement - the Gas Sales Agreement - with consumers to whom gas is supplied by it.

During the course of an audit by the officers of Central Excise, Ahmedabad-I during January 2009, it was noticed that the respondent had received income under the head of "gas connection charges" from its industrial, commercial, and domestic customers. From the GSA and the invoices, it was found that charges were collected for the "supply of pipes, measuring equipment etc." while providing new gas connections to customers. The ownership of the equipment is not with the customer but is retained by the respondent. The customer does not have control or any legal rights over the equipment. A Notice to Show Cause was issued to the respondent stating that the transactions undertaken by them are covered under the category of "supply of tangible goods service", under section 65(105)(zzzzj) of Finance Act, 1994.

Arguments by the Appellantsa) The SKID equipment is installed by

the respondent at the cost of the buyer. Neither ownership nor possession of the equipment is transferred to the buyer.

b) The measurement equipment is installed, maintained and repaired by the respondent at the cost of the buyer. Mere technical expertise on part of the respondent to operate the equipment does not preclude the usage by the buyer.

ML-49



c) The buyer is as much concerned about the accuracy of the billing as the supplier of gas. The measurement equipment ensures to the benefit of the buyer for the purpose of verifying the correctness of the charges levied based on the quantity of gas consumed;

d) Though the gas connection charges which are initially recovered are claimed to be refundable, the quantum of refunds may vary from buyer to buyer and the data which was produced by the respondent indicates that in several cases full refunds have not been made; and

e) The CBEC circular No. 334/1/2008-TRU dated 29 February 2008 has clarified that transactions that enable usage of goods without transferring the right to use, are in the nature of a service under section 65(105)(zzzzj) and not sale under Article 366(29-A)(d) of the Constitution of India. Since the respondent has not paid VAT for the charges collected on supply of pipelines and the measurement equipment, this transaction must be treated as a service.

Arguments by the Respondentsa) The GSA is an agreement for the

sale and purchase of goods, namely, PNG. The terms of the GSA provide contractual rights to the buyer, including the right to verify and dispute the bill raised by the supplier and to seek arbitration.

b) The rights of a buyer of gas under the GSA must be kept distinct from the use of the SKID equipment and the essential issue in the present case is whether the equipment is installed for the use of the buyer.

c) Under the terms of the GSA, ownership continues to vests with the respondent at all times and the buyer of gas is not entitled to adjust, modify or maintain the equipment. The buyer has no possessory right nor can they lease or sub-let the equipment.

d) The purpose of the measurement equipment in a gas supply contract is to measure the quantity of gas supplied to the buyer of gas. However, the buyer gets no service out of the equipment.

e) In determining the issue in appeal, it is necessary to isolate the rights conferred by the GSA on the buyer of gas from the issue as to whether the buyer has the use of the SKID equipment. The SKID equipment is a technical device and the buyer has no right to use the equipment; and this inability to use the equipment by the customer would not be within the scope of the taxing provision, which must be construed strictly.

f) Amounts collected under the head of "gas connection charges" are mainly in the nature of interest-free security deposits, which are required to be refunded in part, or in full, depending on the duration of the contract which determines depreciation. They are not collected as a consideration for providing a service; and under Article 366(29-A)(d), a tax on the sale or purchase of goods includes a tax on the transfer of the right to use goods for any purpose, without necessarily transferring the title. Section 65(105)(zzzzj) was introduced with the intention of capturing services which were technically not 'sales' and were escaping the net of VAT. In the present

ML-50



case, there is no transfer of the right to use the equipment nor is there any element of service in the supply of the metering equipment. The equipment is installed by the respondent as a seller of gas and is not used by the buyer.

Decisiona) Sales tax is levied in pursuance of

Article 366(29-A)(d) on transactions which resemble a sale in substance as they result in a transfer of the right to use in goods, instead of the transfer of title in goods. The Finance Act, 1994, deriving authority from the residuary Entry 97 of the Union List, enabled the CG to levy tax on services. 'Service tax' was introduced as a response to the advancement of the contemporary world where an indirect tax was necessary to capture consumption of services, which are economically similar to consumption of goods, in as much as they both satisfy human needs. The introduction of Section 65(105)(zzzzj) in the Finance Act, 1994, was with the intention of taxing such activities that enable the customer's use of the service provider's goods without transfer of the right of possession and effective control. This provision creates an element of taxation over a service, as opposed to a 'deemed sale' under Article 366(29-A)(d).

b) In the present case, it is clear from the provisions of the agreement, and it has been admitted by both the parties, that there is no transfer of ownership or possession of the pipelines or the measurement equipment (SKID equipment equipment) by the respondent to its customers. Clause 5.3 of the agreement specifically provides that the 'Measurement Equipment' is to

be supplied, installed and maintained by the seller at the cost of the buyer and that the ownership of the equipment will rest with the respondent forever. Clause 5.6 further clarifies that the buyer has no right to adjust, clean, handle, replace, maintain, remove or modify the measurement equipment. Clause 5.10 guarantees that the seller shall have the right of entry at all hours to the Measurement Equipment and associated apparatus at the Buyer's premises. The pipelines are also part of the "Seller's Facilities" under the agreement and are constructed and maintained by the respondent at the cost of the customer.

c) The seller is concerned with the precise quantification of the gas which is supplied to the buyer. The buyer has an interest in ensuring the safety of its facilities and that the billing is based on the correct quantity of gas supplied and delivered under the GSA. To postulate, as did the Tribunal, that the measurement equipment is only for the benefit of the seller in measuring the quantity of the gas supplied would not be correct. The GSA is an agreement reflecting mutual rights and obligations between the seller and the purchaser. Both have a vital interest in ensuring the correct recording of the quantity of gas supplied. Additionally, delivery of gas in a safe and regulated manner, enabled by the SKID equipment, is an essential component of the GSA. The SKID equipment subserves the contractual rights of both the seller and the purchaser of gas. Indeed, without the SKID equipment there would be no gas supply agreement. In fact, in the GSA, the buyer has also

ML-51



provided a warranty to ensure that the "Buyer's Facilities" remain technically and operationally compatible with the "Seller's Facilities", both of which include the 'measurement equipment'. This warranty would not have been provided if the measurement equipment was not of 'use' to the buyer. The equipment is thus a vital ingredient of the agreement towards protecting the mutual rights of the parties and in ensuring the fulfilment of their reciprocal obligations as seller and buyer in regulating the supply of gas. As an incident of regulating supply, it determines the correct quantity of gas that is supplied. The obligation to supply, install and maintain the equipment is cast upon the seller as an incident of control and possession being with the seller. Section 65(105)(zzzzj) applies precisely in a situation where the use of the goods by a person is not accompanied by control and possession.

Accordingly, the Supreme Court held that the supply of the pipelines and the measurement equipment (SKID equipment) by the respondent, was of use to the customers and is taxable under section 65(105)(zzzzj) of the Finance Act 1994.

3State Bank of Bikaner & Jaipur vs. Commissioner of Central Excise & Service Tax [2020] 118 taxmann.com 251 (New Delhi - CESTAT)

Background Facts of the caseThe Appellant an Indian bank was providing banking services to importers/exporters by facilitating settlement of payment between them in connection with import and export of

goods/services. In the case of export trade, as per the specific instructions of Indian exporter, the Appellant Bank provides services like sending export documents to the exporter's buyers bank, collection for payment of bill of exchange. Similarly, in the case of import trade, at the specific request of the importer, the Appellant Bank provides services like issue of Letter of Credit, acceptance of Bill of Exchange, providing documents of title of the goods to the importer, making payment of Bill of Exchange on due date. The Appellant Bank charges commission/fees for the provision of such services to the exporters/importers and pays service tax on such services. The rendering of such service by the Appellant is not in dispute in this Appeal.

In an export transaction from India, the exporter submits the export documents to the Appellant Bank and informs the name and address of buyer's bank for sending the export documents against acceptance and payment of Bill of Exchange. The Appellant Bank forwards these documents to the Foreign Bank or the Foreign Intermediary Bank for collection of payment from the importer. If the exporter decides to bear all the bank charges, then the foreign bank charges its fees from the exporter for handling of export documents and collection of export proceeds. The foreign bank charges are then recovered from the exporter by deducting the foreign bank charges from the amount collected from the importer.

The audit team of the Department raised an objection that the Appellant Bank had not paid service tax on foreign bank charges under the reverse charge mechanism and sought details of such charges paid.

Arguments by the Appellantsa) The Appellant Bank cannot be

considered as the recipient of the

ML-52



service provided by the Foreign Bank. The nexus between consideration (i.e. foreign bank charges) and the services provided by the Foreign Bank is established between the Foreign Bank and the exporter/importer and not between the Foreign Bank and the Appellant Bank.

b) The Foreign Bank and the Appellant Bank are co-service providers to the exporters/importers. The foreign bank charges cannot be considered as 'consideration' received by the Appellant Bank and included in the value of services.

c) The Trade Notice dated February 10, 2014 issued by the Commissioner of Service Tax, Mumbai, does lay down the correct legal position, and in fact runs contrary to the judgment of the Supreme Court in State of Andhra Pradesh & Ors. vs. Larsen & Toubro Ltd. & Or 2008-TIOL-158-SC.

d) A Notice issued to the Appellant Bank by the Department on the same grounds for the period April 01, 2006 to March 31,2011 was dropped by order dated January 31, 2013 passed by the Additional Commissioner, Central Excise & Service Tax, Jaipur. The larger period of five years contemplated under the proviso to section 73(i) of the Finance Act could not have been invoked in the facts and circumstances of the case as the conditions mentioned therein are not satisfied.

Arguments by the Respondentsa) The foreign importer of goods pays

` 100/- to the Foreign Bank, which after deducting ` 1/- as its bank charges

forwards the remaining ` 99/- to the Appellant Bank. The Appellant Bank after deducting ` 1/- as its bank charges, forwards the remaining ` 98/- to the Indian exporter of goods. Therefore, the Foreign Bank provides a service (relating to transfer of money and Letter of Credit) to the Appellant Bank, which would be an input service for the Appellant Bank and the Appellant Bank, in turn, provides the same service to the Indian exporter, which would be an output service of the Appellant Bank.

b) Further, the Tribunal, in Greenply Industries Ltd. vs. Commissioner of Central Excise, Jaipur-I 2015 (38) STR 605 (Tri-Del) which decision was relied upon by the Tribunal in four other cases, held in an identical case that an exporter cannot be the recipient of service from the Foreign Bank and it is the Indian Bank which receives the service from the Foreign Bank;

c) The Appellant Bank acted as guarantor for the Indian exporter in the financing of international trade, and, therefore, it cannot be a pure agent of the Indian exporter;

d) As per section 66A of the Finance Act, for levy of service tax on import of service under the reverse charge mechanism, the service recipient is deemed to be the service provider and all the restrictions/conditions of definition of taxable service apply only to the service recipient;

Decisiona) Service tax is chargeable on any taxable

service with reference to its value, then

ML-53



such value shall be determined in the manner provided for in (i), (ii) or (iii) of sub-section (1) of section 67. What needs to be noted is that each of these refer to 'where the provision of service is for a consideration', whether it be in the form of money, or not wholly or partly consisting of money, or where it is not ascertainable. In either of the cases, there has to be a 'consideration' for the provision of such service. A service recipient may be required to fulfil certain conditions contained in the contract but that would not necessarily mean that this value would form part of the value of taxable services that are provided. The Appellant Bank has not paid any consideration to the Foreign Bank as is clear from the factual position emerging out of the export trade and, therefore, also the Appellant Bank cannot be said to be the recipient of any service by the Foreign Bank.

b) It would be seen from the earlier order of the Additional Commissioner that two reasons have been assigned for dropping the demand made in the show cause

notice. The first is that the Foreign Bank does not transact business of banking in India and, therefore, would not fall within the definition of a 'banking company', which is a pre-requisite for a service to be covered under banking & other financial services'. The second reason assigned by the Additional Commissioner is that the Indian Bank does not pay any amount to the Foreign Bank and, in fact, the Indian Bank only plays a role of a mediator between the Indian exporter and the foreign banker representing the foreign importer. This is a general practice that the exporters are required to follow by routing the export documents through a banking channel. Thus, the Indian bank did not receive any service from the Foreign Bank. Since the said issue was already considered by the Additional Commissioner, the extended period of limitation is not invokable.

Accordingly, the appeal filed by the Appellants was allowed.

ML-54

It is easy enough to be friendly to one's friends. But to befriend the one who regards

himself as your enemy is the quintessence of true religion. The other is mere business.

Mahatma Gandhi

My view is that at a younger age your optimism is more and you have more imagination

etc. You have less bias.


Corporate Laws – Company Law Update


1. Company Law

Sandeep Agarwal & Anr. v. Union of India & Anr., Delhi High Court, Order dated 2nd September, 2020

Facts of the case• The Petitioners were directors in two

companies, one of the companies was struck off from the register of Companies on 30th June, 2017 due to non-filing of financial statements and annual returns

• The Petitioners, being directors of the struck off company, were also disqualified w.e.f. 1st November, 2016 for a period of 5 years till 31st October, 2021 u/s. 164(2)(a) of the Companies Act, 2013

• Pursuant to such disqualification, the Petitioners’ DIN and DSC had also been cancelled

• Therefore, the Petitioners were not able to carry out business and file returns etc. in the active company

• Accordingly, the Petitioners had filed a writ petition to challenge the

disqualification and sought quashing of the impugned list of disqualified directors

Arguments on behalf of the Petitioners• Section 164(2) and Section 167(1)(a) of the

Companies Act, 2013 were materially amended by Companies (Amendment) Act, 2017 and introduction of disqualification in proviso u/s. 167(1)(a) was made effective from 7th May, 2018

• The judgment of Mukut Pathak & Ors. vs. Union of India & Ors., 265 (2019) DLT 506 was referred by the Petitioners. It was, further, submitted that the conjoint reading of both the sections referred above showed that the disqualification would not apply in a retrospective manner

• It was, further, stated that the active company wanted to take the benefit of the Companies Fresh Start Scheme (“CFSS” hereinafter), 2020 dated 30th March, 2020 introduced by Ministry whereby active companies were permitted to make good any defaults in filing of documents and seek immunity from disqualification

CS Makarand Joshi

CORPORATE LAWS

Case Law Update

ML-55



• However, since the directors, who had to sign the papers, had been disqualified and their DIN and DSCs had been deactivated. the active company was not able to avail the benefit of such scheme

Arguments on behalf of the Respondents• The judgment in Mukut Pathak (Supra),

referred to by the Petitioners, had been challenged by way of an appeal by the Ministry. This appeal which was pending, however no stay had been granted

• The Respondents also relied upon the recent order passed by the Division Bench in 2 writ petitions i.e. Anamika devi vs. Union of India & Anr. and Gaurav Kumar vs. Union Of India & Anrto submit that the disqualification list had been notified in 2017, the challenge to the same was extremely belated, hence the writ petition deserved to be dismissed

Held• The judgement in Mukut Pathak, insofar

as the merits of the case concerned, was squarely applicable in the present case. The said judgment clearly held that the proviso to Section 167(1)(a) of the Act couldn’t be read to operate retrospectively

• Furthermore, the proviso to Section 167(1)(a), being a punitive measure with respect to rights and obligations of directors, couldn’t be applied retrospectively unless the statutory amendment expressly provided so.

• the 2 writ petitions, on which the Division Bench had passed orders, as

mentioned by the Respondents, sought the following directions:

o ROC be directed not to treat the Petitioners as disqualified directors and to seek issuance of writ of mandamus, quashing publication of their names in the list of disqualified directors

o The Respondents be directed to unfreeze the Petitioners’ DINs and DSCs and to enable them to file documents/returns of behalf of company on which they had been serving as directors

• The Divisional Bench’s order dismissed the mentioned petitions. However, the court highlighted that “the power of judicial review are discretionary and the question of delay is to be examined in the particular facts and circumstances of each case” in light of its observation that the filing of writ-petition was very belated.

• The facts and circumstances, in the present case, showed that, CFSS was new scheme which was notified on 30th March, 2020 which had not been invoked before the Division Bench.

• The scheme was obviously launched by Government. to give a reprieve to such companies who had defaulted in filing documents. Such companies were allowed to file requisite documents and to regularize their operations, so as to not face disqualification.

• In the present case, the Petitioners were directors of 2 companies– one whose name had been struck off and one, which was still active. In such

ML-56



a situation, the disqualification and cancellation of DINs would be a severe impediment for them in availing remedies under the scheme, in respect of the active company.

• In order for the scheme to be effective, the Petitioners, directors of these companies, ought to be given an opportunity to avail such scheme. The launch of the scheme itself constituted a fresh and a continuing cause of action. Under such circumstances the question of delay or limitation would not arise

• Considering the COVID-19 pandemic, the MCA had launched the CFSS, which ought to be given full effect. Since it is not uncommon to see directors of one company being directors in another company, under such circumstances, to disqualify directors permanently and not allow them to avail of their DINs and DSCs could render the Scheme itself nugatory.

• In order to enable the directors of Koksun Papers i.e. the Petitioners, to continue the business of the active company in the fitness of things and also in view of the judgment in Mukut Pathak (supra), the disqualification of the Petitioners as directors was set aside. The DINs and DSCs of the Petitioners were directed to be reactivated, within a period of three working days.

Footnote:

Although the order, passed by the court, stated that the disqualification of Petitioners as directors was set aside, in our understanding, the order had probably set aside the vacation of office of the directors from the active company and not the disqualification that occurred u/s 164(2) of the Companies Act, 2013.

Readers may refer to the following judgements:

1. Kaynet Finance Limited vs. Verona Capital Limited on 9 July, 2019 (Bombay HC)

2. Mukut Pathak & Ors. vs. Union of India & Ors., 265 (2019) DLT 506 (Delhi HC)

2. SEBI

Utsav Pathak (‘Appellant’) vs. Securities and Exchange Board of India (SEBI), (‘Respondents’), Securities Appellate Tribunal (‘SAT’), Order dated 12th June 2020

Facts of the case1. CRISIL Ltd (“the Company”) is a credit

rating agency and is registered with SEBI and its shares are listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). SEBI, on the basis of reference received from NSE relating to suspected insider trading by certain persons, conducted an investigation of trading activity in the scrip of the Company.

2. On June 3rd, 2013 McGraw Hill Asian Holdings along with Persons Acting in Concert (“PAC”) namely, McGraw Hill Financial Inc., S&P India LLC and Standard & Poor LLC had made an announcement of open offer to acquire up to 1,56,70,372 equity shares of the Company which amounted to 22.23% of the total shareholding of the Company. The open offer was made @ ` 1210/- per share even though the price of the share on that date on the stock exchange was ` 1129.90/- per share. The announcement of the public offer led to an increase in the price of the shares by almost 20%.

ML-57



3. This open offer was considered as a Price Sensitive Information (“PSI”) under the SEBI (Prohibition of Insider Trading) Regulations, 1992 (“PIT Regulations”).

4. A Confidentiality Agreement was entered between the McGraw Hill Asian Holdings and Morgan Stanley India Company Private Limited (“Merchant Banker”) on 4th April, 2013 to work on the open offer assignment for acquisition of the shares of the Company.

5. The Appellant was an employee of Merchant Banker during the unpublished price sensitive information period (“UPSI period”) and was also directly involved with the activities pertaining to the open offer. The Managing Director of Merchant Banker had confirmed the fact that the Appellant was one of the employees who was working on the open offer assignment of the Company and was privy to the PSI.

6. The Adjudicating Officer of SEBI (“the AO”) after considering the material evidence on record and after giving an opportunity of hearing to the Appellant, found that the Appellant was a ‘connected person’ under Regulation 2(c)(ii) of the PIT Regulations and also an ‘insider’ as per Regulation 2(e). The AO further found that Ms Priyanka Pathak (sister of appellant), Husband of Ms Priyanka Pathak, mother-in-law of Ms Priyanka Pathak and Father in law of Ms Priyanka Pathak (collectively referred to as “Tippees”) were ‘persons deemed to be connected’ as per Regulation 2(h)(viii) of the PIT Regulations.

7. The AO on the basis of circumstantial evidence came to the conclusion that the Appellant had tipped the Tippees with regard to the PSI and, therefore violated Regulation 3(ii) read with Clause 2.0 and 2.1 of Schedule I Part B of Model Code of Conduct of PIT Regulations for Other Entities. The AO further held that on the basis of information supplied by the Appellant, Tippees traded in shares of the Company in large quantities during UPSI period which had not been seen before based on the trading activity of Tippees.

8. Consequently, the AO by its order dated August 30th, 2019 held the Appellant guilty of insider trading, however, did not impose any penalty as Appellant.

Appeal filedThe Appellant had filed the appeal to the SAT as he was aggrieved by the charge of insider trading levied by AO.

Arguments made by Appellant before SAT1. The Appellant argued that statements

given by Tippees were not considered by the AO. If the said statements were considered, one would have found that the Tippees were all independent professional persons who could take their own decisions logically. Their statements would have adequately proven that Appellant was not having good terms with his sister and her family

2. It was, further, argued that finding of the AO that the Appellant had tipped the Tippees was based on surmises and conjectures and was not based on any foundational facts

ML-58



or evidence. The mere fact that the Appellant was closely related to the Tippees could not lead to a finding of guilt without considering the second part of Regulation 2(e)(i) of the PIT Regulations which stated that to become an ‘insider’ it was necessary to prove whether the person was reasonably expected to have access to UPSI by virtue of connection in respect of securities of company. Reliance was placed on rulings in the case of Chintalapati Srinivasa Raju vs. SEBI, (2018) 7 SCC 443 and order of SEBI in A. Vellayan & A R Murugappan dated 12th May, 2016 wherein it was held that finding of guilt on the basis of family relationship was not proper.

3. It was, further, submitted that SEBI had investigated Ajay Bhalla and his firm Kotak Premier Investment and was found to have traded far more than the Tippees in question and had made a profit of more than ` 5 crores. The Appellant highlighted that Ajay Bhalla, etc. had been let off, whereas the Appellant had been found guilty merely on the ground that he had close relationship with the Tippees.

Arguments made by SEBI before SAT1. The Respondents submitted that in

a case of insider trading, there is hardly any direct evidence and from the foundational facts itself, one could infer on a preponderance of probability or could infer from a circumstantial evidence as to whether a person was guilty of insider trading.

2. It was contended that the Appellant was a ‘connected person’ as well as an

‘insider’ being privy to PSI i.e. the open offer and also pricing of open offer. Based on these foundational facts, the AO had rightly come to a conclusion that the Appellant had tipped the Tippees.

3. It was, further, submitted that there was a close relationship between the Appellant and the Tippees. which the Appellant had tried to conceal before the SEBI. The trading pattern of Tippees was also brought to the notice of the SAT which as per the Respondents lead to an irresistible inference that the Appellant had passed on the information to the Tippees.

Held1. It held that the Appellant had not

denied the fact that he was privy to UPSI. The Appellant had also not denied that he was ‘a connected person’ and an ’insider’. Further he had also not denied that the fact that he had close relationships with Tippees. Consequently, Regulation 2(e)(i) of PIT Regulations were fully applicable upon the Appellant as he was a ‘connected person’ and was in possession of and had access to PSI. These facts were corroborated by the statement of the Managing Director of the Merchant Banker.

2. It was held that given the facts that (i) Appellant being a ‘connected person’ and an ’insider’ was privy to UPSI, (ii) had close relationship with Tippees, (iii) during investigation he had made attempts to conceal his relationship with Tippees, (iv) Trading Pattern of Tippees showed that Tippees traded only in shares of the Company during

ML-59



UPSI Period by purchasing large chunks and selling it immediately after announcement of the open offer, (v) the Tippees sold all other shares to finance buy orders of the Company led to draw reasonable, logical, and irresistible inference that the Appellant had passed on PSI to Tippees.

3. The order of the AO holding the Appellant guilty of insider trading needed no interference. It was, further, stated that the decisions cited by the Appellant on the issue that a person could not be held guilty only on the strength of proximity of relationship with the Tippees were distinguishable on facts and were not applicable in the instant case.

Cases referredAppellant: Chintalapati Srinivasa Raju vs. SEBI, (2018) 7 SCC 443, SEBI AO Order A. Vellayan & A R Murugappan dated 12.05.2016, SEBI AO Order Sanjay Gala 02.12.2016

Respondent: USA vs. Raj Ratnam, 09 Cr. 1184 (RJH), V. K. Kaul vs SEBI in Appeal No.55/2012 decided on 08.10.2012, Chintalapati Srinivasa Raju vs. SEBI (2018) 7 SCC 443, Rajiv Gandhi vs. SEBI in Appeal No.50/2007 decided on 09.05.2008,SEBI vs. Kishore R Ajmera(2016) 6 SCC 368,SEBI vs. Kanaiya Lal Baldevbhai Patel (2017) 15 SCC 753and SEBI vs Rakhi Trading Pvt. Ltd. (2018) 13 SCC 753.

3. IBC

Rita Kapur (‘Appellant’) vs. Invest Care Real Estate LLP (Respondents), National Company Law Appellate Tribunal, (NCLAT) New Delhi, Order dated 2nd September 2020

Facts of the Case• The Appellant had filed an application

u/s Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) with National Company Law Tribunal (“NCLT”) to initiate Corporate Insolvency resolution process (“CIRP”) against the Invest Care Real Estate LLP (the Respondents/the Corporate Debtor)

• The Appellant had given loan of ` 40 Lakhs to the Corporate Debtor and the same was to be repaid in four instalments along with interest. However, the amount had not been repaid. The Appellant claimed to be regarded as a ‘Financial Creditor’ and hence invoked IBC.

• The Respondent contended that the Appellant was a general partner of the LLP and claimed that the amount was not loan but a capital contribution for being general partner of the LLP

• The NCLT had rejected the Appellant’s petition on the grounds that the Appellant was not a ‘Financial Creditor’.

• Aggrieved by the order of NCLT, the Appellant filed an appeal with NCLAT

Arguments by the Appellant• The Appellant had given loan of

` 40 Lakhs to the Corporate Debtor and the same was to be repaid in four instalments. The late husband of the Appellant had also invested ` 1 Crore.

• It was, further, contended that neither the principal amount nor interest thereon had been paid to her and to her late husband.

ML-60



• It was also alleged that the loan had been converted into equity on 25th March 2014, which was against the terms and conditions of the Loan Agreement 9th July, 2013.

• The Appellant also disputed the signature on the Amended Agreement dated 1st December, 2013.

• The Appellant claimed to be a ‘Financial Creditor’ and disputed how the Loan could be converted into equity based on a certified copy of the resolution signed by two designated partners and not by other partners. It was alleged as pre-planned acts to deceive, defraud the Appellant

• The Appellant relied on the judgments passed by the NCLAT/Supreme Court to prove her stand on the issue of (a) striking down and unfair and unreasonable contract and (b) the dishonesty should not be permitted to bear the fruits and benefits to the persons who played fraud or made misrepresentation amongst others.

Arguments by the Respondents• Apart from raising several issues in the

appeal regarding irregularity in signing of Power of Attorney/Authority Letter, the Respondent had alleged that the Appellant was the ‘Investor’ initially as a loan-provider in July, 2013.

• However, all the 40 Investors became either a designated partner or a general partner by way of the ‘Amended Agreement’ dated 1st December, 2013. This document had also been signed by the Appellant. In addition

to this document, the Supplementary Agreement dated 25th March, 2014 was also executed by all the partners including the Appellant.

• The Auditor Certificate also certified the investment as capital contribution including that of the Appellant.

• The Respondents, further, submitted that the Appellant was not a ‘Financial Creditor’ rather was a related party.

Held• The court noted the following facts:

o The Appellant, a senior citizen, and her late husband had invested huge amount in the Corporate Debtor

o The Corporate Debtor suffered from several irregularities

• The provisions of section 7 of the IBC provides for initiation of the CIRP by a ‘Financial Creditor’ only and that too, if there was a ‘debt’ and a ‘default’. Therefore, the relevant question was whether the Appellant was to be considered as a ‘Financial’ Creditor u/s 5(7) of the IBC and whether the ‘debt’ was ‘Financial Debt’.

• Since the ‘debt’ was converted into ‘Capital’, it could not be termed as ‘Financial Debt’ and the Appellant could not be described as a ‘Financial Creditor’.

• Accordingly, it was held that the grievance of the Appellant did not fall under the provision of the IBC and the appeal was dismissed.

ML-61

Best of The Rest


Consumer Protection - Developer delaying possession of flat – Enforcing one-sided flat buyers’ agreements restricting compensation – flat buyers being given an alternative of either executing Deeds of Conveyance or pursuing claims for compensation. Pursuant to the representations made by the developer, flats were booked in the project by many persons. The Apartment Buyers Agreement (the “Agreement”) indicated in clause 11 that the developer would endeavour to complete construction within a period of 36 months from the date of the execution of the agreement save and except for force majeure conditions. Force majeure stipulations were illustrated in the Agreement, which included delay due to the reasons beyond the control of the developer and failure to deliver possession due to Government rules, orders or notifications. The obligation to handover possession within a period of thirty-six months was not fulfilled and the flat buyers were communicated expected dates of completion which were breached from time to time.

A total of 171 flat purchasers filed the present appeals before the Supreme Court against the order of the National Consumer Disputes Redressal Commission (“NCDRC”) which inter alia held that the complainants who took possession of their flats before filing the complaint/application those who took

possession and executed deeds of conveyance during the pendency of the complaint/impleadment applications were not entitled to any compensation.

The flat purchasers submitted that there was a gross delay ranging between two and four years in handing over possession and the flat buyers ought not to be constrained by the terms of the agreement which are one-sided and unreasonable. The execution of conveyances or settlement deeds would not operate to preclude the flat buyers from claiming compensation since the developer did not permit the flat buyers to execute conveyances or to receive possession under protest.

The main argument of the Developer was on the basis of clause 14 of the Agreement which read as follows:

“14. The Allottee agrees and understands that if the company is unable to give possession within the period as mentioned above or such extended period as permitted under this Agreement, due to reasons other than those mentioned in this Agreement, then the Company agrees to pay only to the Allottee and not to anyone else, subject to the Allottee, not being in default under any terms of this Agreement compensation @ Rs. 5/- per

Rahul Sarda, Advocate

BEST OF THE REST

ML-62

Best of The Rest


sq. feet of the Super Area of the said apartment per month for the period of such Delay. The adjustment of such compensation shall be done only at the time of execution of the Conveyance Deed of the Said Apartment to the Allottee first named under this Agreement and not, earlier.”

Though the Developer accepted the delay, it was argued by it that the expression “endeavour” in clause 11 indicated that the developer did not bind itself to an inflexible timeline of thirty-six months. According to the developer (i) the flat purchasers are bound by the above stipulations under which their entitlement was to receive compensation at the agreed rate (and hence not beyond); and (ii) no evidence has been adduced to indicate that the rate which has been prescribed in the agreement is unreasonable.

The Supreme Court noted that by the provisions of clause 14, the developer agreed to compensate the flat buyers at the rate of ` 5 per square feet of the super area of the apartment per month for the period of delay. Delay, being an admitted, fact, the only issue which fell for determination was whether the flat buyers were constrained by the stipulation contained in clause 14 of the Agreement providing compensation for delay at the rate of ` 5 per square feet per month.

The Supreme Court noted the various clauses of the Agreement and observed that the Agreement was one-sided. For instance, a delay on the part of the flat buyer attracted interest at the rate of 18% per annum beyond ninety days while the flat buyer was restricted to receiving interest at ` 5 per square foot per month under clause 14 (which according to the flat purchasers worked out to 1-1.5% interest per annum) where the developer delayed possession. The Supreme Court noted that the terms of the agreement had been drafted by the developer; they did not maintain a level platform as between the

developer and purchaser. The stringency of the terms which bound the purchaser were not mirrored by the obligations for meeting times lines by the developer.

The Supreme Court held that flat purchasers suffer agony and harassment, as a result of the default of a developer. Flat purchasers make legitimate assessments in regard to the future course of their lives based on the flat which has been purchased being available for use and occupation. These legitimate expectations are belied when a developer is guilty of a delay of years in the fulfilment of a contractual obligation. To uphold the contention of the Developer, which had delayed possession as in the present case, that the flat buyer is constrained by the terms of the agreed rate irrespective of the nature or extent of delay would result in a miscarriage of justice. The Court could not be oblivious to one-sided nature of the flat buyers’ agreements which are drafted by and to protect the interest of the developer. Parliament had consciously designed remedies in the Consumer Protection Act, 1986 to protect consumers and the jurisdiction of the consumer forum to award just and reasonable compensation as an incident of its power to direct the removal of a deficiency in service could not be constrained by the terms of a rate which is prescribed in an unfair bargain.

The NCDRC in its order had held that the execution of the Deed of Conveyance by a flat purchaser precluded a consumer claim being raised for delayed possession. However, from the e-mail communications sent by the Developer to the flat purchasers, the Supreme Court noted that the flat buyers were presented with an unfair choice of either retaining their right to pursue their claims (in which event they would not get possession or title in the meantime) or to forsake the claims in order to perfect their title to the flats for which they had paid valuable consideration. The Supreme Court held it to be manifestly unreasonable to expect that

ML-63

Best of The Rest


in order to pursue a claim for compensation for delayed handing over of possession, the purchaser must indefinitely defer obtaining a conveyance of the premises purchased or, if they seek to obtain a Deed of Conveyance to forsake the right to claim compensation and hence reversed the decision of the NCDRC on that count as well.

Wg. Cdr. Arifur Rahman Khan & Ors vs. DLF Southern Homes Pvt. Ltd. (Civil Appeal Nos. 6239 & 6303 of 2019, dated 24th August 2020 – Supreme Court of India)

Insolvency and Bankruptcy Code, 2016 - Financial Debt - Personal Loan to a Promoter or a Director of the company – Whether a financial debt?Between 2002 and 2005, the Respondents had advanced an aggregate sum of ` 2.20 crores, in tranches, to M/s Radha Exports, a proprietorship concern of Mrs. Radha Gouri, for its business purposes. M/s Radha Exports repaid ` 80,40,000/- to the Respondents between 1st October, 2003 to 18th March 2004. The Appellant Company was incorporated under the Companies Act, 1956 on or about 19th July, 2004, to take over the business of the proprietorship concern, M/s Radha Exports, along with its assets and liabilities and as on that date, the proprietorship concern, M/s Radha Exports had a loan liability of ` 1,11,85,350/-, which was taken over by the Appellant Company. On 19th July, 2004, when the Appellant Company was incorporated, the Respondents requested the Appellant Company to convert a sum of ` 90,00,000/- from out of the said outstanding loan as share application money for issuance of shares in the Appellant Company, in the name of the Respondent No. 2 (wife of Respondent No. 1). Accordingly, a sum of ` 90,00,000/- was adjusted by the Appellant Company, as share application money, for issuance of shares in a Appellant Company in the name of the Respondent No. 2. Thereafter, the balance loan liability of the company was ` 21,85,350/-.

On or about 6th October, 2007, the Respondent No. 2 resigned from the Board of the Appellant Company. At the time of resignation, the Respondent No. 2 requested the Appellant Company to treat the share application money of ` 90,00,000/- as share application money of Mr. M Krishnan, who was the promoter of the Appellant company, and to issue shares of the value of ` 90,00,000/- in the name of Mr. M. Krishnan. The amount of share application money of ` 90,00,000/- transferred to Mr. M. Krishnan, was to be treated as a personal loan from the Respondent No. 2 to the said Mr. M. Krishnan. The Appellant Company claimed that it had issued shares of the value of ` 90,00,000/- in the name of Mr. M. Krishnan in 2008. According to the Appellant Company, there was thus, no further liability to be discharged by the Appellant Company to the Respondents.

However, by a legal notice dated 19th November, 2012, the Respondents called upon the Appellant Company to repay to the Respondents a sum of ` 1,49,60,000/- alleged to be the outstanding debt of the Appellant Company, repayable to the Respondents as on 19th July, 2004. A winding up petition was filed by the Respondents against the Appellant company which was hotly contested by the Appellant company. The winding up petition was transferred to the NCLT and came to be dismissed with liberty to file a fresh petition. The Respondents filed a petition in terms of the liberty given by the NCLT which also came to be dismissed inter alia on the ground of being barred by limitation. The NCLAT allowed the appeal of the Respondents and thus the Appellant company filed an appeal before the Supreme Court.

The Supreme Court observed that there were letters signed by the Respondent Nos. 1 and 2 which showed that on 6th October, 2007, Respondent No. 2 resigned from the Board of the Appellant Company and at that time the Respondent No. 2 requested the Appellant

ML-64

Best of The Rest


Company to treat the share application money of ` 90,00,000/- as share application money of Mr. M. Krishnan and to issue shares for aforesaid value to Mr. M. Krishnan. The amount was to be treated as a personal loan from the Respondent No. 2 to Mr. M. Krishnan. A personal Loan to a Promoter or a Director of a company could not trigger the Corporate Resolution Process under the IBC. The disputes as to whether the signatures of the Respondents were forged or whether records have been fabricated, as claimed by the Respondents, could be adjudicated upon evidence including forensic evidence in a regular suit and not in proceedings under section 7 of the IBC. The payment received for shares, duly issued to a third party at the request of the payee as evident from official records, could not be regarded as a debt, much less a “financial debt” so as to enable initiation of corporate insolvency proceedings.

Radha Exports (India) Pvt. Ltd. vs. K.P. Jayaram & Anr. (Civil Appeal No. 7474 of 2019, dated 28th August 2020 – Supreme Court of India)

Insolvency and Bankruptcy Code, 2016 – Limitation – Time barred application for initiation of corporate insolvency resolution process – Effect of acknowledgement of debt in writing without placing the same on record in the application under section 7 of IBC.The Director of the Corporate Debtor filed the present appeal before the Supreme Court against the order of the NCLAT rejecting the contention that the application made by Respondent No. 2 under Section 7 of the IBC was barred by limitation. The said application was filed on or about 21st March 2018 by Respondent No. 2 as the financial creditor. In the application so filed, against the date of default, the financial creditor had mentioned the date of 8th July 2011. Various agreements for loan, promissory notes, tripartite agreements, consortium agreements and supplemental agreements were mentioned by the Financial Creditor in the application.

The application was admitted by the NCLT and corporate insolvency resolution process was initiated against Respondent No. 1. The NCLAT, on noticing that the IBC had come into effect only on 1st December 2016, the application under section 7 of the Code, having been filed in the year 2018 (i.e. within three years), was not barred by limitation. The NCLAT further held that the period of limitation was twelve years for recovery of possession of the mortgaged property and, therefore, the claim is not barred by limitation.

On behalf of Respondent No. 2 (i.e. the applicant-financial creditor), it was argued that the debt in question had been legally and unequivocally admitted to be due and payable in writing by Respondent No. 1 all throughout from the year 2011 until 2017 in its balance sheets filed along with annual returns before the Registrar of Companies.

The Supreme Court while holding that for the purpose of IBC, the period of limitation was governed by Article 137 (i.e. the residuary clause) of the Limitation Act and not Article 61(b) (which prescribes a period of 12 years for recovery of possession of immovable property mortgaged), further held that no suggestion in the application was made regarding the acknowledgements on which Respondent No. 2 sought to now rely upon. Only the date of default as 8th July 2011 was stated for the purpose of maintaining the application, and not even a foundation had been laid in the application for suggesting any acknowledgement or any other date of default. That being the case, the Supreme Court held that no case for extension of period of limitation was available to be examined. Since the date of default was in the year 2011 and the application was filed in the year 2018, the application was held to be time barred.

Babulal Vardharji Gurjar vs. Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr. (Civil Appeal No. 6347 of 2019, dated 14th August 2020 – Supreme Court of India)

ML-65

The Chamber News


Though the Country is facing a lockdown due to Covid-19 pandemic, the Chamber has continued the journey of education through online webinars in this tough time. Important events and happenings that took place online between 1st September, 2020 to 30th September, 2020 are being reported as under:

I. ADMISSION OF NEW MEMBERS1) The details of new members which were admitted in the Managing Council Meeting held

through video conferencing on 5th September, 2020 are as under:

Type of Membership No. of Members

Life Member 15

Ordinary Member 20

Student Member 06

II. PAST PROGRAMMES Sr. No.

Date Speaker Topic

Commercial & Allied Laws Committee

1. The Commercial & Allied Laws Committee had planned a series of Webinar “Drafting of Deeds and Documents” The session-wise details for the webinar series is as under:

a. 12.09.2020 Parimal Shroff, Advocate and Solicitor

Overview of drafting (Indian Contract Act and Specific Relief Act)

b. 18.09.2020 Mahesh Shah, Solicitor Real estate contracts and conveyancing – Part 1 (Conveyance, Development agreement and JDA)

c. 20.09.2020 P. A. Jani, Advocate and Solicitor Real estate contracts and conveyancing – Part 2 (Tenancy, lease, license, release and gift deed)

CA Haresh Kenia & CA Neha Gada, Hon. Jt. Secretaries

THE CHAMBER NEWS

ML-66

The Chamber News


Sr. No.

Date Speaker Topic

d. 25.09.2020 Sharad Abhyankar Shareholders agreement, franchise agreement and other commercial contracts

Bengaluru Study Group

1. 22.09.2020 CA S Ramasubramanian Operation Clean Money (demonetisation assessments) - Issues before appellate authorities

2. 26.09.2020 CA TR Rajesh Kumar Recent Judgements in GST

Direct Taxes Committee

1. 14.09.2020 Panel Discussion - Shri Patanjali-PCCIT, Mumbai

Shri D K Chhablani - PCIT (ReAC), Mumbai

Sr. Adv. Saurabh Soparkar

Moderator – CA Mahendra Sanghavi

Lecture Meeting On Transparent Tax – A Landmark Moment In India’s Tax History

2. 16 & 17.09.2020

CA Ashok Mehta & CA Gopal Bohra

Chairman – CA Mahendra Sanghvi

Workshop on Practical and Legal Issues in Tax Audit

3. 24.09.2020 CA Abhitan Mehta Recent important Direct Tax descision

4. 22.09.2020 CA Ketan Vajani Recent Developments in TDS & TCS provisions under the Income Tax Act

Hyderabad Study Group

1. 05.09.2020 CA Sekkhizhar Balasubramanian Overview of Auditing Standards

IT Connect Committee

1. 28.09.2020 CA Mitesh Katira #WorkFromHome - Self Clean-up and Tune-up of Computers

Indirect Taxes Committee

1. 03.09.2020 Group Leader - CA Keval Shah & Chairman Jatin Christopher

Issues connected with GST Annual Return GSTR 9 & GST Audit GSTR 9C for FY 2018-19

International Taxation Committee

1. The International Taxation Committee had planned a series of Webinar “Transfer Pricing Course” The session-wise details for the webinar series is as under:

a. 04-09-2020 CA Vispi Patel Basic Concepts of Transfer Pricing

ML-67

The Chamber News


Sr. No.

Date Speaker Topic

b. 05-09-2020 CA Bhavesh Dedhia Various Compliances in Transfer Pricing

c. 11-09-2020 CA Kunj Vaidya Global Perspective on Transfer Pricing Law

d. 12-09-2020 CA Paresh Parekh TP Recent issues surrounding taxable income of non-resident in India, Debatable issues in TP Assessment and Appeal Process, Secondary Adjustments, Limitation of Interest Deductions

e. 19-09-2020 Mr. Sanjeev Sharma, Principal CIT, ex-APA Commissioner

Assessments, Alternate Dispute Resolution Mechanism through APA or MAP (Effects of APA, Process and Procedure of entering into an APA, etc.) Safe Harbour Rules

2. 08-09-2020 CA Rajesh P. Shah FEMA Compliance Audit

3. 23-09-2020 CA Kartik Badiani Equalisation Levy and its Interplay with Royalty and Fees for Technical Services

4. 30-09-2020 CA Narendra Jain Equalisation Levy and its Interplay with SEP and Business Connection

Student Committee

1. 26.09.2020 CA Chintan Gandhi Tax Audit – Recent Changes and Do’s & Don’ts

2. 26 & 27.09.2020

Preliminary and the Quarter Final Rounds were judged by Eminent legal and tax professionals

Semi-Final round was judged by the members of the Hon’ble Income Tax Appellate Tribunal, Mumbai

Final round was judged by the sitting judges of the Hon’ble Bombay High Court

4th The Chamber of Tax Consultants National Online Moot Court Competition, 2020

Study Circle & Study Group Committee

1. 29.09.2020 CA Ramnath V. Issues in Presumptive Taxation Section 44AD, 44ADA & 44AE of Income-tax Act

ML-68


4TH THE CHAMBER OF TAX CONSULTANTS NATIONAL ONLINE MOOT COURT COMPETITION, 2020 WAS HELD

ON 26TH AND 27TH SEPTEMBER, 2020

Best Speaker : Ms Aanchal Maheshwari, Government Law College, Mumbai

2nd Best Speaker : Ms. Priyanshi Chokshi, Government Law College, Mumbai

Best Team : L to R : Ms Priyanshi Chokshi, Ms Aanchal Maheshwari & Ms Tejal Kale, Government Law College, Mumbai.

Runner-up Team : L to R : Mr. Sharan Sanjay Goud, Ms Adhya M, Mr. Niranjan Kumar, School of Law, Christ University

2nd Best Memorial: L to R : Mr. Varun M. Nair, Ms Neha Maria Antony, Ms. Rithika Rarichan, The National University of Advanced Legal Studies

Best Memorial : L to R : Mr. Sharan Sanjay Goud, Ms Adhya M, Mr. Niranjan Kumar, School of Law, Christ University

The Competition was inaugurated by Hon’ble Shri Justice P. P. Bhatt (Retd.), President of the Income Tax Appellate Tribunal.

The Final Round was judged by and the Valedictory Function was graced by the sitting judges of the Hon’ble Bombay High Court i.e. Hon’ble Shri. Justice Ujjal Bhuyan and Hon’ble Shri Justice Abhay Ahuja.

Printed and Published by Shri Kishor D. Vanjara on behalf of The Chamber of Tax Consultants, 3 Rewa Chambers, Ground Floor, 31, New Marine Lines, Mumbai - 400 020 and Printed at Finesse Graphics & Prints Pvt. Ltd., 309 Parvati Industrial Premises, Sun Mill Compound, Lower Parel (W),Mumbai - 400 013. Tel.: 4036 4600 and published at The Chamber of Tax Consultants, 3, Rewa Chambers, Ground Floor, 31, New Marine Lines, Mumbai - 400 020. Editor : Vipul B. Joshi

No. MCS/149/2019-21

R.N.I. No. MAHENG/2012/47041

Date of Publishing 12th of Every Month

Posted at the Mumbai Patrika Channel

Sorting Office, Mumbai 400 001.

Date of Posting: 15th-16th of Every Month

TheChamber’s

Journal

October 2019 November 2019 December 2019 January 2020

February 2020 March 2020 April 2020

September 2020

May 2020

June 2020 July 2020 August 2020

Date post:	25-Oct-2020
Category:	Documents
Upload:	others
View:	6 times
Download:	1 times