Weekly Round-up on Tax and Corporate Laws | 22nd to 27th April 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from April 22nd to 27th, 2024, namely:

1. No liability to deduct/collect tax at higher rates if payee links PAN-Aadhaar by May 31, 2024: CBDT;
2. Interest liability arises automatically on delayed filing of returns even if payment made from credit ledger: Patna HC;
3. Bombay HC quashed SCN issued to levy GST on ocean freight on FOB contracts;
4. RBI introduces Draft Circular on ‘Digital Lending – Transparency in Aggregation of Loan Products from Multiple Lenders’;
5. RBI prescribes mode of payment/remittance of sale proceeds for equity shares of Indian companies listed on International Exchanges; and
6. Imposing Penalties on both the Partner and Audit Firm does not constitute double jeopardy.

1. No liability to deduct/collect tax at higher rates if payee links PAN-Aadhaar by May 31, 2024: CBDT

Rule 114AAA lists down consequences that apply if the PAN of a person becomes inoperative due to non-linking with his Aadhaar. One of the consequences listed is tax shall be deducted/collected at a higher rate in accordance with section 206AA/206CC.

The Central Board of Direct Taxes (CBDT) vide Circular No. 3 of 2023 dated 28.03.2023 clarified that all the consequences provided under the Income-tax Act should take effect from July 1 2023, and continue till the PAN becomes operative.

The Board noticed that taxpayers were complaining about getting notices for not deducting/collecting enough TDS/TCS towards payees’ who have inactive PANs. This results in demands from the Department against deductors/collectors during TDS/TCS statement processing.

In response to complaints, the Board has decided to modify Circular No. 03 of 2023. The CBDT has specified that for transactions up to March 31, 2024, if the PAN becomes active (linked with Aadhaar) by May 31, 2024, there shall be no liability on the deductor/collector to deduct/collect the tax under section 206AA/206CC. Tax shall be deducted/collected as per the relevant provisions of the Act.

However, the Circular failed to clarify what actions should be taken concerning demands that have already been settled or remain outstanding.

Read the Circular

2. Interest liability arises automatically on delayed filing of returns even if payment made from credit ledger: Patna HC

The Patna High Court has recently held that interest liability arises for delayed filing of returns. It noted that Section 50 of the CGST Act, 2017 cannot be read in isolation, but it should be read along with the provisions relating to filing of returns and payment of tax and such combined reading implies that payment of tax is linked with filing of return regardless of whether payment is made from the Electronic Credit Ledger or Electronic Cash Ledger. This ruling is given by the Honorable High Court of Patna in case of Sincon Infrastructure (P.) Ltd. v. Union of India.

Facts

The petitioner received a notice for the recovery of interest on the belated payment of tax. The interest was charged for the tax paid from the Electronic Credit Ledger (ECL) for the financial year 2018-19, and the order was passed. Aggrieved by the order, the petitioner filed a writ petition to the High Court of Patna.

High Court

The High Court noted that the payment of tax and furnishing of return have to occur simultaneously. The Court further noted that the input tax credit and the resultant payment of tax from the Electronic Credit Ledger occurs only when a return is furnished. If there is a delay in furnishing of returns, then obviously, there is a delay in the input tax credit coming into the Electronic Credit Ledger and a resultant payment being made to the Government as tax, interest, penalty or other amounts due under the Act.

Therefore, the claim of the petitioner that the proviso of Section 50(1) mandates a levy of interest only when there is a delayed furnishing of return and debit made and payment effected from the Electronic Cash Ledger was rejected. The Court also held that interest shall be payable on the delay occasioned in the payment of tax, and as per section 50(1), interest liability would arise automatically on delayed filing of returns, irrespective of whether payment is made from Electronic Credit Ledger or Electronic Cash Ledger.

Read the Ruling

3. Bombay HC quashed SCN issued to levy GST on ocean freight on FOB contracts

The Bombay High Court has recently held that the rate notification of services levying GST itself has been declared ultra vires by the Supreme Court of India, and then levying GST on ocean freight based on that notification would amount to applying an illegal notification. Therefore, the levy and collection of tax on such ocean freight under the impugned notifications are not permissible in law. This ruling is given by the Honorable High Court of Bombay in case of Agarwal Coal Corporation (P.) Ltd. v. Assistant Commissioner of State Tax.

Facts

The petitioner was engaged in importing coal from various countries on FOB (Free on Board) and CIF (Cost, Insurance and Freight) basis. The department issued A show cause notice primarily relying on Notification No. 8/2017-Integrated Tax (Rate) dated 28-6-2017 levying IGST along with interest and penalty on the ocean trade service on FOB contracts.

It filed writ petition to challenge the show cause notice on the ground that the said notification was struck down by Division Bench of Gujarat High Court in case of Mohit Minerals (P.) Ltd. v. Union of India [2020] 113 taxmann.com 436. The department contended that the said decision needed to be applied only in respect of cases involving contracts on a CIF basis and not on FOB contracts.

High Court

The Honorable High Court noted that the case of Mohit Minerals (P.) Ltd. involved both categories of contract, namely CIF and FOB, and the notification itself was declared ultra vires, and the Supreme Court upheld the same. Therefore, following the mandate of the settled principle of law, the notification was not available to the State Authorities to be applied as it would amount to applying an illegal notification. Thus, the Court held that the impugned notice was to be quashed and striking down the notification would also be applicable to FOB contracts.

Read the Ruling

4. Insights into RBI’s Proposals: Enhancing Transparency in ‘Loan Aggregation Services’ and ‘Digital Lending Practices’

The RBI vide Press Release No. 2024-2025/194, dated April 26, 2024, notified the draft Circular on ‘Digital Lending – Transparency in Aggregation of Loan Products from Multiple Lenders’. The Circular is open for public comments and feedback till 31.05.2024.

The key highlights of the draft circular are as follows:

(a) Lending Service Providers (LSPs) to provide borrowers with a digital view of all available loan offers

The LSP must provide a digital view of all the loan offers available to the borrower, based on his/her requirements, from all the willing lenders with whom the LSP has arrangements.

(b) LSPs to follow a consistent approach in determining lenders’ willingness to offer loans

The LSP may adopt any mechanism to ascertain the willingness of the lenders to offer a loan. However, it must follow a consistent approach in this regard, which shall be disclosed transparently on the LSP’s website.

(c) LSPs to include loan offer contents for fair comparison and enhanced transparency

The digital loan view must include the name(s) of the Regulated Entities (REs) extending the loan offer along with details such as the loan amount, tenor of the loan, the Annual Percentage Rate (APR) and other key terms and conditions, enabling borrowers to make a fair comparison between various offers. Further, a link to the key facts statement (KFS) for each RE must be provided.

(d) Content displayed by LSPs must be unbiased and shall not promote products of a specific RE

All content displayed by the LSP must be unbiased and refrain from directly or indirectly promoting products of a particular RE, including using any practices or deceptive patterns, such as ‘dark patterns’ designed to mislead borrowers into choosing a specific loan offer.

Conclusion

In conclusion, the RBI’s draft Circular on ‘Digital Lending – Transparency in Aggregation of Loan Products from Multiple Lenders’ represents a significant step in regulating loan aggregation services provided by LSPs.

By focusing on enhancing transparency, fostering customer-centric practices, and empowering borrowers to make informed choices, this framework seeks to establish a fair and competitive digital lending environment. The public feedback period, until May 31, 2024, provides stakeholders a valuable opportunity to shape these crucial regulations.

Read the Press Release

5. RBI prescribes mode of payment/remittance of sale proceeds for equity shares of Indian companies listed on International Exchanges

The RBI vide Notification No. SO 395(2)/2024-RB dated 19.04.2024 amended regulation 3.1 of the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019. This regulation deals with the instructions on the Mode of payment and Remittance of sale proceeds.

A new Schedule XI has been added after Schedule X. Schedule XI outlines norms regarding the mode of payment and remittance of sale proceeds for the purchase/subscription of equity shares of an Indian company listed on an International Exchange.

Further, regulation 4 has been amended to deal with the reporting requirements. Now, the Investee Indian Company shall be under an obligation to report  (through an Authorised Dealer Category I bank) to the RBI in Form LEC (FII) the purchase/subscription of equity shares (where such purchase/subscription is classified as Foreign Portfolio Investment under the rules) by permissible holder, excluding transfers between permissible holders, on an International Exchange. The discussion of the amendments is elaborated as follows:

(a) Mode of Payment for Purchase/Subscription of Equity Shares of Indian Companies on International Exchanges Scheme by Permissible Holder

The amount of consideration for the purchase/subscription of equity shares of an Indian company listed on an International Exchange shall be paid:

1. 1. 1. through banking channels to a foreign currency account of the Indian company held in accordance with the FEM (Foreign currency accounts by a person resident in India) Regulations, 2015, as amended from time to time or
      2. as inward remittance from abroad through banking channels.

Further, it is important to note that the proceeds of the purchase/subscription of equity shares of an Indian company listed on an International Exchange shall either be remitted to a bank account in India or deposited in a foreign currency account of the Indian company held in accordance with the FEM (Foreign currency accounts by a person resident in India) Regulations, 2015, as amended from time to time.

(b) Remittance of sale proceeds of Equity Shares of Indian Companies on International Exchanges Scheme by Permissible Holder

The sale proceeds (net of taxes) of the equity shares may be remitted outside India or credited to the bank account of the permissible holder maintained in accordance with the FEM (Deposit) Regulations, 2016.

(c) Obligation on the investee Indian Company to report purchase/subscription of equity shares, classified as FPI in Form LEC (FII)

As per the amended regulation 4, the Investee Indian Company is obligated to report (through an Authorised Dealer Category I bank) to the RBI in Form LEC (FII) the purchase/subscription of equity shares (where such purchase/subscription is classified as Foreign Portfolio Investment under the rules) by permissible holder, other than transfers between permissible holders, on an International Exchange.

Read the Notification

6. Imposing Penalties on both the Partner and Audit Firm does not constitute double jeopardy

With Order No. 09/2024 dated 23.04.2024, NFRA bring clarity on the following matters:

(a) Given that the engagement partner signs the audit report, what is the extent of the Engagement firm’s accountability regarding non-compliance with auditing standards?

Under section 139 of the Companies Act 2013, the audit firm is appointed as an auditor and thus holds accountability for the auditor’s duties per section 143 of the Act, including compliance with Standards on Auditing (SAs). Footnote 2 to paragraph 3 of SQC 1 notes that audit reports in India are issued/signed by its partner on behalf of the firm. Therefore, the firm cannot distance itself from the responsibilities associated with preparing and signing the audit report. Consequently, the audit firm cannot absolve itself of responsibilities for non-compliance related to statutory audits.

(b) Is having a system of quality control enough to ensure quality in an audit firm?

No, establishing policies under SQC 1 based on the firm’s size and operations is not adequate alone to ensure quality control in the audit firm. Para 2 of SA 220 and para 3 of SQC 1, require the firm not only to have an SQC 1 policy but also to ‘reasonably assure’ that the firm and its personnel comply with professional standards, legal and regulatory requirements and that the reports issued by the firm or the Engagement Partner (EP) are appropriate in the given circumstances. Therefore, having a robust system of quality control is necessary but not sufficient; active assurance and adherence to standards are also crucial.

(c) Does a change in the composition of an auditing firm absolve it from accountability for non-compliance with auditing standards or the code of ethics?

No, a change in the composition of an auditing firm does not absolve it from accountability for non-compliance with auditing standards or the code of ethics. According to Section 143(9) of the Companies Act, 2013, auditors are mandated to comply with auditing standards, which are essential for ensuring the reliability and integrity of financial statements. Non-compliance with these standards undermines professional conduct and the integrity of financial reporting. Therefore, regardless of changes in personnel within the firm, the firm itself, as the appointed auditor, remains responsible for any professional misconduct related to audit activities.

(d) Does taking action against both the auditing firm and the Engagement Partner (EP) for the same alleged offence constitute double jeopardy against the EP?

No, action against both the auditing firm and the EP for the same alleged offence does not amount to double jeopardy. The relationship between a firm and an engagement partner is that of a principal and agent, making them jointly and severally responsible for professional misconduct during an audit. Therefore, the National Financial Reporting Authority (NFRA) has the right to punish the EP separately for the same alleged offence without it being considered double jeopardy.

Therefore, based on the above discussion, NFRA imposed a monetary penalty of Rs. 5,00,000/- (Rupees five lakhs only) on the audit firm for being guilty of professional misconduct other than a penalty on the engagement partner.

Read the Story