Weekly Round-up on Tax and Corporate Laws | 19th to 24th May 2025

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from May 19^th to 24^th, 2025, namely:

1. Cost of acquisition of asset received on liquidation of Co. to be FMV of asset if asset sold in the year of receipt: HC.
2. RBI grants a grace period for Investment Vehicles to file Form InVI for pre-May 23, 2025, partly paid units without LSF.
3. Refund of ITC of cess paid, on purchase of coal used in manufacture of goods exported under LUT, is admissible: HC.
4. IGST refund could not be denied as assessee was not intermediary without contractual link or consideration from universities or students: HC; and
5. Adjusting the volume rebates in inventory valuation for interim financial statements under the Ind AS framework.

1. Cost of acquisition of asset received on liquidation of Co. to be FMV of asset if capital gain on such receipt was taxed: HC

The Madras High Court ruled on a case involving the computation of the cost of acquisition of an asset distributed on liquidation of the Company. The issue before the Court was to determine the cost of acquisition of the asset in the hands of the shareholders.

The assessee contended that the cost of acquisition should be computed as per Section 55(2)(b)(iii) while the AO computed the cost of acquisition as per Section 49(1)(iii)(c).

The High Court held that the unique factor that had transpired in the assessee’s case was that both Section 49(1)(iii)(c) and Section 55(2)(b)(iii) would stand attracted. The transfer of shares, firstly, by way of extinguishment of right therein and in consideration of which the assessee received the asset from the company (transaction 1) and secondly, by transfer of the asset received on liquidation and in consideration of which the assessee received actual money (transaction 2).

Relevantly, as aforesaid, both transactions took place in the same financial year as the assessees sold their share of the property to MRL in the same year the asset had been distributed to them, fusing the applications of both applicable statutory provisions.

The High Court further held that the provisions of Section 46(2) as applicable to shareholders, states that where a shareholder, on the liquidation of a company, has received any money or asset from the company, he shall be chargeable to tax under the head ‘capital gains’ in respect of the money received or market value of the assets as on the date of distribution, reduced by dividend received by him and the resultant sum shall be the full value of consideration for the purposes of Section 48 of the Act.

The AO contended that the cost of acquisition shall be computed as per Section 49(1)(iii)(c), but the same is not the correct interpretation of the provisions. In the present case, the assessee had offered the capital gains for taxation in the same year in which the gain accrued. Therefore, the provisions of Section 55(2)(b)(iii) would come into play.

As per section 55(2)(b)(iii), where the capital asset is received pursuant to distribution of capital assets by a company on its liquidation and the assessee has been assessed to income-tax under the head “Capital gains” in respect of that asset under section 46, the cost of acquisition is the fair market value (FMV) of the asset on the date of distribution.

However, as per section 49(1)(ii)(c), where the capital asset becomes the property of the assessee on any distribution of assets on the liquidation of a company, the cost of acquisition of the asset shall be deemed to be the cost of acquisition (as increased by the cost of improvement, if any) incurred by the previous owner of the property.

In the present case, the assessee has not postponed the taxability of capital gains but is offering it for tax in the same year in which the gains have accrued. Therefore, the interpretation that income under section 46 was not assessed to tax since both the transactions fell in the same financial year and hence, section 49(1)(ii)(c) should apply, would result in unnecessarily burdening the assessee with a higher tax liability.

The matter can also be viewed from a chronological perspective—Transaction A occurs first, leading to Transaction B. Accordingly, the assessee must first compute and offer capital gains on Transaction A, followed by Transaction B. Since capital gains are taxed under section 46, section 55(2)(b)(iii) applies, allowing the fair market value on the date of distribution to be treated as the cost of acquisition.

Read the Ruling

2. RBI grants a grace period for Investment Vehicles to file Form InVI for pre-May 23, 2025, partly paid units without LSF

As per Regulation 4(10) of the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, an investment vehicle that issues its partly paid units to a person resident outside India (PROI) must file Form InVI via the FIRMS Portal within 30 days from the date of issuance. The RBI has now clarified the reporting requirements for issuances made prior to May 23, 2025 and for those made on or after May 23, 2025.

2.1 RBI allows a Grace Period of 180 days to file Form InVI for issuances before May 23, 2025

RBI vide Circular No. A.P. (DIR Series) Circular No. 06 dated May 23, 2025, has relaxed the reporting timeline for issuances of partly paid units by an investment vehicle to a person resident outside India. Through this circular, the RBI has provided the following key relaxations and clarifications:

• Investment Vehicles that have issued partly paid units before May 23, 2025, are now permitted to file Form InVI within 180 days from the date of the circular.
• No late submission fees (LSF) shall be levied for such delayed reporting, if completed within this 180-day grace period.

2.2 Reporting Timeline for issuance of partly paid units on or after May 23, 2025

All issuances of partly paid units by investment vehicles on or after May 23, 2025, must continue to be reported within the 30-day timeline as per the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019.

2.3 Impact of decision taken by RBI

The RBI’s decision provides investment vehicles with additional time to file delayed Form InVI without any fees for issuances made prior to May 23, 2025, thereby reducing compliance risks arising from earlier delays. It also clarifies the reporting process for investment vehicles, especially for issuances made on or after May 23, 2025.

This relaxation is expected to enhance the ease of doing business and improve overall compliance. Also, it helps to streamline reporting processes and address concerns related to delayed filings by offering clear guidance on timelines for submission.

Read the Circular

3. Refund of ITC of cess paid, on purchase of coal used in manufacture of goods exported under LUT, is admissible: HC

The Hon’ble Gujarat High Court held that the petitioner is entitled to a refund of unutilized Input Tax Credit (ITC) on Compensation Cess paid on coal used to manufacture goods exported under LUT with IGST payment. The Court reasoned that since no Compensation Cess is payable on exported goods, the proviso to Section 11(2) of the Compensation Cess Act—disallowing refund if IGST is paid—does not apply, and the statutory provisions and circulars collectively support the refund claim. This was held in Patson Papers (P.) Ltd. vs. Union of India [2025].

Facts

The petitioner, a GST-registered manufacturer, purchased coal on which Compensation Cess was paid. This coal was utilized in the manufacture of goods that were subsequently exported by the petitioner under a Letter of Undertaking (LUT) with payment of Integrated Goods and Services Tax (IGST). The petitioner received a refund of the IGST paid on such exported goods from the Customs Authorities under Section 54(3) read with Section 16(3) of the IGST Act, recognising the exports as zero-rated supplies. Subsequently, the petitioner filed refund applications claiming Input Tax Credit (ITC) on the portion of unutilised Compensation Cess paid on the purchase of coal used in manufacture. However, the department issued show cause notices proposing to reject the refund claims, relying on Paragraph 42 of Circular No. 125/44/2019 dated 18-11-2019 read with Paragraph 5 of Circular No. 45/19/2018 dated 30-05-2018. These circulars stated that refund of unutilized ITC of cess is admissible only if exports are made without payment of tax, whereas in this case, the petitioner had exported goods on payment of IGST. The department thus contended that the refund of cess ITC was not permissible. The petitioner, then filed an appeal before Gujarat High Court.

Held

The Hon’ble High Court held that the department had misinterpreted the relevant circulars while rejecting the petitioner’s refund applications. A conjoint reading of Section 54(3) of the CGST Act, Section 16(3) of the IGST Act, and Section 11(2) of the Goods and Services Tax (Compensation to State) Act, along with the aforementioned circular provisions, established that the petitioner was entitled to refund of the unutilized ITC of cess paid on coal used for manufacturing goods exported as zero-rated supplies. Although the petitioner paid IGST on export, no Compensation Cess was payable on the exported goods because they were exempt from cess levy. Consequently, the proviso to Section 11(2) of the Cess Act, which disallows refund of cess ITC if IGST is paid, was not applicable. The petitioner, having paid IGST under Section 16(3) of the IGST Act on zero-rated supplies and being entitled to a refund of such IGST, was also entitled to refund of unutilized ITC of Compensation Cess paid on inputs used in manufacture. Accordingly, the Court directed the department to process the petitioner’s refund applications, affirming the entitlement to refund in favour of the petitioner.

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4. IGST refund could not be denied as assessee was not intermediary without contractual link or consideration from universities or students: HC

The Hon’ble Bombay High Court held that a service provider without contractual linkage or direct consideration from third parties does not qualify as an ‘intermediary’ under Section 2(13) of the IGST Act and is entitled to IGST refund on export of services. The Court emphasized the necessity of a contractual and consideration-based relationship to establish intermediary status, relying on settled judicial precedent. This was held in IDP Education India Pvt Ltd vs. Union of India [2025].

Facts

The petitioner, a subsidiary of IDP Australia, was engaged in providing back-end support services exclusively to its foreign holding company in connection with Indian students seeking admission to foreign universities. As per the commercial understanding, IDP Australia shared with the petitioner a fixed percentage of the fees it received from foreign universities. The petitioner neither had any contractual relationship with the foreign universities nor with the students, and did not raise any invoice or receive any direct consideration from either party. For the period from March 2019 to March 2021, the petitioner treated the services rendered to IDP Australia as export of services and filed a claim for refund of IGST paid thereon under Section 54 of the CGST Act read with the Maharashtra GST Act, 2017. The Revenue rejected the refund claim on the ground that the petitioner qualified as an ‘intermediary’ under Section 2(13) of the IGST Act alleging that the petitioner facilitated the supply of services between Indian students and foreign universities. Aggrieved by this rejection, the petitioner approached the Bombay High Court challenging the classification as intermediary and the consequent denial of refund.

Held

The Hon’ble Bombay High Court held that the petitioner was not an intermediary within the meaning of Section 2(13) of the IGST Act and was therefore eligible for refund of IGST paid on export of services. The Court observed that the petitioner provided services solely to IDP Australia and did not act as a facilitator between two other persons. It was emphasized that the petitioner had no contractual obligation towards the foreign universities or the students, did not act on their behalf, and received no consideration from them. The Court placed reliance on a categorical finding previously rendered by the CESTAT in the petitioner’s own case under identical facts, where it was conclusively held that the petitioner did not qualify as an intermediary. Finding no reason to depart from this settled position, the Court concluded that the petitioner had fulfilled all conditions necessary to constitute an export of service and was thus entitled to refund. Accordingly, the matter was remanded for reconsideration of the refund claim in accordance with law.

Read the Ruling

5. Adjusting the volume rebates in inventory valuation for interim financial statements under the Ind AS framework

Under Indian Accounting Standards, particularly Ind AS 2, Inventories, rebates form part of the cost of purchase and must be deducted in arriving at the cost of inventories. However, such adjustments are appropriate only when the rebate is either earned or there is a high degree of certainty that it will be realised. The challenge often arises in interim reporting periods, where companies may be tempted to recognise the impact of anticipated rebates based on projections rather than actual contractual entitlement.

In a recent case, a company entered into a year-long supply agreement that promised a 5% rebate if either a quantity or value threshold was achieved by year-end. By the end of the second quarter, actual purchases had not met the minimum threshold required to trigger the rebate, and no binding purchase commitments for the remainder of the year existed. However, based on internal forecasts, the company began accruing the rebate and adjusting the cost of inventory downward in its interim financial statements, which is not correct. Though the illustrative guidance from interim standards such as IAS 34, Interim Financial Reporting, allow for anticipated volume rebates to be reflected in interim accounts, but it is permissible only when it is probable that such rebates have been earned or will take effect, and there is objective evidence to support this. In this case, the forecasted volume alone, without contractual enforceability, did not provide the level of certainty required to justify the rebate’s recognition.

This example illustrates the importance of applying judgment and ensuring objective and verifiable evidence before recognising volume rebates in interim periods. Recognising such rebates prematurely can misstate profits and inventory values, compromising the reliability and comparability of financial statements. Unless the purchase threshold is actually met or there is sufficient assurance backed by enforceable commitments, such rebates should not be recognised during interim reporting. This approach not only aligns with the requirements of Ind AS 2 and the broader principles of prudence and faithful representation but also ensures consistency in financial reporting across periods.

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