Weekly Round-up on Tax and Corporate Laws | 18th to 23rd March 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from March 18^th to 23^rd, 2024, namely:

a) Govt. notifies reduced tax rates on royalty and FTS with Spain by invoking MFN clause;

b) Exemption under section 10(26) not available to firm even if all partners are members of Scheduled Tribe: ITAT;

c) HC set aside the order as the right to fair hearing was compromised where SCN was not uploaded;

d) HC dismissed writ petition against summons issued by CGST authority where SGST authority already initiated proceedings;

e) Provision for awarding interim compensation in cheque bounce case u/s 143A of NI Act is directory and not mandatory: SC;

f) CCI orders probe into Google’s Payment Policies for App Developers; and

g) Measurement and Disclosure requirements related to Investment Property.

1. Govt. notifies reduced tax rates on royalty and FTS with Spain by invoking MFN clause

The Ministry of Finance has issued a notification modifying the Convention between India and Spain for the avoidance of double taxation and prevention of fiscal evasion (DTAA).

Paragraph 7 of the Protocol of the DTAA consists of the most-favoured-nation (MFN) clause. The paragraph ensures that if India reduces its taxation at the source of royalties or technical service fees (FTS) in any future agreement with an OECD member country (after January 1st, 1990), the same reduced rate will automatically apply to India-Spain DTAA.

Since India agreed to lower tax rates on royalties and technical service fees in its 1996 Convention with Germany (an OECD member), the same lower rates apply to this Convention with Spain. Accordingly, the Central Government directs the substitution of paragraph 2 of Article 13 of the India-Spain DTAA.

The substituted Article 13(2) provides that the source country may tax royalties and technical service fees, but the tax charged shall not exceed 10% of the gross amount if the recipient is the beneficial owner of the royalties or fees for technical services.

Under the pre-amended Article, the cap was 10% for equipment-related royalties and 20% for FTS and other royalties.

The amended Article 13(2) of the India-Spain DTAA is effective from Assessment Year 2024-25.

Read the Notification

2. Exemption under section 10(26) not available to firm even if all partners are members of Scheduled Tribe: ITAT

The assessee partnership firm was running a hotel business under the name and style of M/s Hotel Centre Point at Shillong. It consisted of two partners, and both the partners were brothers and belonged to the Khasis tribe, which is enlisted as a Scheduled Tribe in the State of Meghalaya and is covered under Clause (25) of Article 366 of the Constitution of India

The assessee claimed that because partners are individually exempt under section 10(26), a partnership firm comprised of those same partners should also be exempt. However, the Assessing Officer (AO) rejected the assessee’s claim.

Aggrieved by the order, the assessee preferred an appeal to the CIT(A). The CIT(A) allowed the claim of exemption under section 10(26) and the matter reached before the Tribunal.

The Tribunal held that a partnership firm is considered a separate entity for tax purposes under the Income Tax Act. This means it is subject to its own set of rules regarding tax rates, deductions, and allowances, distinct from those applicable to individuals. Deductions or exemptions available to individuals cannot be transferred to or used by the firm, and vice versa.

Section 5 of the Indian Partnership Act clarifies that a partnership is formed through a contract between partners, not by their status as members of a Hindu Undivided Family (HUF) or the same family. Therefore, even if the partners of a firm are siblings or spouses, their relationship does not impact the firm’s status or tax liability.

The exemption under section 10(26) has been specifically conferred on members of the Scheduled Tribe residing in the specified area. This exemption cannot be extended to another separate and distinct person.

The advantages and disadvantages conferred under the Income-tax Act on separate classes of persons are neither transferrable nor inter-changeable. The scope of the beneficial provisions cannot be extended to a different person, even after liberal interpretation, as it may defeat the mechanism and process provided under the Income Tax Act for the assessment of different classes/categories of persons.

Therefore, the benefit of exemption under section 10(26) as available to the individual members of the Khasi tribe cannot be extended to the firm.

Read the Ruling

3. HC set aside the order as the right to fair hearing was compromised where SCN was not uploaded

The Honorable Allahabad High Court has recently held that right of the petitioner to object to the notice and his right to hearing is completely compromised if the show cause notice was not uploaded on portal by way of attachment.

Facts

In the present case, the department issued a notice imposing penalty on the petitioner, but the dashboard on the portal operated by the petitioner only disclosed reference number, issue date, due date to reply, requirement of personal hearing, section description under which notice was issued, but the file was not attached. It filed writ petition against the order levying penalty since the portal did not contain the notice that was necessary to be attached.

High Court

The Honorable High Court noted that due to inadvertent error, the notice remained to be uploaded by way of attachment. It is beyond doubt that the petitioner had a perfect right to object to the show cause notice, and he had a near-perfect right to personal hearing.

Also, the perusal of the printout of the dashboard display clearly indicated that the GST authority also did not seek to deny such right to the petitioner. However, owing to such inadvertent error, the right of the petitioner to object to the notice and his right to hearing was completely compromised. Therefore, the Court held that impugned order be set aside with liberty to GST authority to proceed according to law.

Read the Ruling

4. HC dismissed writ petition against summons issued by CGST authority where SGST authority already initiated proceedings

The Honorable Rajasthan High Court has recently held that summons issued by DGGI under Section 70 cannot be said to be initiation of proceedings on same subject matter under CGST Act if State Authorities had initiated proceedings against assessee and thus, the issuance of summons was not hit by Section 6(2)(b). This ruling is given by the High Court of Rajasthan in case of Rais Khan v. Add. Commissioner, Enforcement Wing-II, Rajasthan.

Facts

The petitioner was issued summons by the DGGI under Section 70 of the CGST Act, 2017. It filed writ petition and contended that State Authorities had already initiated proceedings. As per Section 6(2)(b), if a proper officer under the SGST Act, 2017, had initiated any proceedings on a subject matter, no proceedings shall be initiated by the proper officer under the CGST Act, 2017, on the same subject matter.

High Court

The Honorable High Court noted that in the instant case, the petitioner had already filed a writ petition against the notice issued by State Authorities and had not appeared before the State Authorities. The Court further noted that the scope of Section 6(2)(b) and Section 70 is different and distinct as the former deals with any proceedings on the subject matter, whereas the latter deals with the power to issue summon in an inquiry.

Therefore, the words ‘proceedings’ and ‘inquiry’ cannot be mixed up to read as if a department has a bar to invoke power under Section 70. Thus, it was held that the summons issued under Section 70 was not hit by Section 6(2)(b), and the petition was liable to be dismissed.

Read the Ruling

5. Provision for awarding interim compensation in cheque bounce case under section 143A of NI Act is directory and not mandatory: SC

The Supreme Court, in the matter of Rakesh Ranjan Shrivastava v. State of Jharkhand [2024] 160 taxmann.com 479 (SC), ruled that provision u/s 143A of the Negotiable Instruments Act, 1881 for awarding interim compensation is discretionary and directory.

Section 143A of the Negotiable Instruments Act 1881 outlines the power of the Court to direct interim compensation. It states that the Court trying an offence u/s 138 may order the drawer of the cheque to pay interim compensation to the complainant, either in a summary trial or any other case, upon framing charges. Further, the interim compensation shall not exceed 20% of the cheque amount.

Brief facts of the case

In the instant case, the complainant/respondent no. 2 registered a complaint u/s 138 of the Negotiable Instruments Act, 1881, against the appellant/accused after a cheque amounting to Rs. 2,20,00,000/- was dishonoured by the bank. During the pendency of the proceedings, the complainant moved an application u/s 143A of the Negotiable Instruments Act, seeking a direction against the appellant/accused to pay 20% of the cheque amount as compensation.

The Trial Court allowed the said application and directed the accused to pay Rs. 10,00,000/- to the respondent no. 2/complainant as interim compensation. The High Court upheld the decision of the Trial Court. Aggrieved by the High Court’s decision, the appellant/accused filed an appeal before the Supreme Court.

Appellant’s contentions

The appellant contended that both the High Court and the Trial Court erred in allowing the application of the complainant, directing him to pay interim compensation. As per the appellant, the order directing the appellant to pay interim compensation was passed mechanically without stating any reasons.

Further, the appellant contended that merely filing a complaint under the Negotiable Instruments Act doesn’t empower the Court to direct him to pay interim compensation. As per the appellant, the word ‘may’ used in section 143A shouldn’t be construed as ‘shall’, and the decision regarding paying compensation should be based on the facts and circumstances of each case.

Supreme Court Observations

The Supreme Court noted that while dealing with an application u/s 143A of the Negotiable Instruments Act, 1881, the Court will have to prima facie evaluate the merits of the case made out by the complainant and the merits of the defence pleaded by the accused in reply to an application under section 143A.

The Supreme Court, further noted that the presumption u/s 139 of the Negotiable Instruments Act, 1881 by itself, is no ground to direct the payment of interim compensation. The reason is that the presumption is rebuttable. The question of applying the presumption will arise at the trial. Only if the complainant makes out a prima facie case, a direction can be issued to pay interim compensation.

Supreme Court Ruling

The Supreme Court held that the word ‘may’ used in section 143A(1) shouldn’t be construed as ‘shall’ and that the payment of interim compensation to the complainant isn’t mandatory but discretionary. If the word ‘may’ is interpreted as ‘shall’, it will have drastic consequences as in every complaint u/s 138, the appellant/accused will have to pay interim compensation up to 20% of the cheque amount.

Such an interpretation will be unjust and contrary to the well-settled concept of fairness and justice. If such an interpretation is made, the provision may expose itself to the vice of manifest arbitrariness. The provision can be held to be violative of Article 14 of the Constitution. In a sense, section 143A(1) provides for penalizing an accused even before his guilt is established.

Further, the Supreme Court laid down the following parameters for exercising discretion under Section 143A of the Negotiable Instruments Act, 1881 –

(a) The Court will have to prima facie evaluate the merits of the case made out by the complainant and the merits of the defence pleaded by the accused in the reply to the application. The financial distress of the accused can also be a consideration.

(b) A direction to pay interim compensation can be issued only if the complainant makes out a prima facie case.

(c) If the defence of the accused is found to be prima facie plausible, the Court may exercise discretion in refusing to grant interim compensation.

(d) If the Court concludes that a case is made out to grant interim compensation, it will also have to apply its mind to the quantum of interim compensation to be granted. While doing so, the Court will have to consider several factors such as the nature of the transaction, and the relationship, if any, between the accused and the complainant.

There could be several other relevant factors in the peculiar facts of a given case, which cannot be exhaustively stated. The parameters stated above are not exhaustive.

Read the Ruling

6. CCI orders probe into Google’s Payment Policies for App Developers

The CCI, in the matter of People Interactive India (P.) Ltd. v. Alphabet Inc. [2024] 160 taxmann.com 472 (CCI), was of the prima facie view that Google violated the provisions of Section 4 of the Competition Act, 2002. Accordingly, the Commission ordered an investigation into Google over the alleged abuse of its dominant position and the imposition of unfair payment policies on app developers within the Google Play Store.

Brief facts of the case

The Informants filed the present information u/s 19(1)(a) of the Competition Act, 2002 against Google, alleging contravention of section 4 of the Act. The Informants approached the CCI against Google’s updated payment policy in relation to its proprietary app store (i.e. Google Play Store), alleging that Google was abusing its dominant position in the relevant market in violation of section 4 of the Act.

The Informants alleged that Google’s updated billing policy was discriminatory and unfair as it skewed competition in the downstream app markets (favouring Google’s own apps) and cemented Google’s position in the payment processing market as well.

Further, the Informants alleged that Google was imposing a service fee/commission model wherein it admittedly made only 3% of the app developers bear the entire cost of all 100% of the app developers on the Google Play Store by charging them an exorbitant service fee/commission without providing commensurate additional services.

As per the Informants, Google introduced a ‘User Choice Billing’ (UCB) pilot wherein certain changes were made to Google Play Store’s payment policies. In the UCB system, Google offered an illusory choice for users to opt for an alternative billing option next to Google Play’s billing system (GPBS).

CCI Observations

The CCI observed that Google appeared to be charging a service fee ranging from 10% to 30% in the case of GPBS and 6% to 26% in the case of ABS (alternative billing system). Based on the break-even revenue share disclosed by the Informant, it appeared that the service fee being charged by Google substantially exceeded its cost of providing the services and, thus, was excessive.

Further, the CCI observed that based on this 6% break-even revenue share, Google was charging 4 to 5 times its cost to the app developers, which prima facie appeared to be disproportionate to the economic value of services being rendered to the app developers and appeared to constitute an abuse of dominant position by Google.

The CCI also observed that the revenue distribution model within the Google Play Store appeared skewed in favour of Google, with app developers potentially facing substantial costs. Accordingly, the CCI recorded a prima facie finding that Google’s conduct amounted to the imposition of unfair prices, constraining the growth of the app market and obstructing market access to developers.

CCI Ruling

After a thorough analysis, the CCI concluded that Google violated provisions of Section 4 of the Act. It directed an investigation by the Director General (DG). It instructed the DG to complete the investigation and submit a consolidated investigation report within 60 days from the date of receipt of the order. Further, the DG was instructed to investigate without being influenced by the Commission’s observations.

Read the Ruling

7. Measurement and Disclosure requirements related to Investment Property

Investment property is a property held to earn rental income, capital appreciation, or both rather than for use in producing or supplying goods or services, administrative purposes, or sale in the ordinary course of business.

The Research Committee of the Institute of Chartered Accountants of India (ICAI) clarified that investment property shall always be recognized on the cost model. This requirement leaves no alternative options for recognition other than the cost model. Therefore, investment property must consistently be valued at cost, regardless of any market fluctuations in its value.

However, the standard also requires entities to measure the “fair value of investment property” only for disclosure, even though they are mandatory required to follow the cost model. Any market fluctuations in the value of the investment property shall be disclosed by way of notes to accounts.

However, the committee, while reviewing the financial statements of the listed entities, observed lapses such as the wrong valuation method used to measure the investment property, failure to separately disclosure the fair value of the investment property, failure to separately disclose the direct operating income and direct operating expenses relating to investment property from the items of regular nature, failure to disclose the depreciation methods used for the investment property, especially in the case where land is held as an investment property, etc.

Read the Story