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

This weekly newsletter analytically summarizes the key stories reported at taxmann.com during the previous week from 22nd to 27th November 2021, namely:

(a) CBDT issues another set of clarifications on deduction and collection of tax at source under sections 194-O, 194Q & 206C(1H);

(b) High Court held that registration of purchaser could not be cancelled for fraud committed by the seller;

(c) SEBI registered investment adviser can’t provide services of creating or rebalancing ‘basket of foreign securities;

(d) No service tax to be levied on the earnest money forfeited for non-delivery of goods: CESTAT;

(e) Treatment of dues recoverable on account of invocation of bank guarantee in the balance sheet.

1. CBDT issues more clarifications on deduction and collection of tax at source under Sections 194-O, 194Q & 206C(1H)

The Finance Act, 2020 and the Finance Act, 2021 have inserted Sections 194-O, 194Q, and 206C(1H) to the Income-tax Act mandating deduction and collection of tax at source on certain transactions. These sections empowered the CBDT to issue guidelines for removing any difficulties and provide clarity to taxpayers on provisions.

The CBDT had already issued Circular 17 of 2020, dated 29-09-2020, and Circular 13 of 2021, dated 30-06-2021, providing such guidelines. In continuance of this, the CBDT has issued another set of guidelines for the taxpayers.

(a) TDS under Section 194-O on e-auction

In case of purchase of goods through the digital or electronic facility or platform, every e-commerce operator, facilitating the sale of goods or provision of services of an e-commerce participant through its digital or electronic facility or platform, is required to deduct tax at source under Section 194-O.

In an e-auction, the e-auctioneer is only responsible for the price discovery, and the transaction of purchase/sale is carried out directly between the purchase and seller. Further, the price so discovered can be negotiated between parties without the knowledge of the e-auctioneer. Thus, the CBDT has clarified that section 194-O shall not apply to e-action activities carried out by e-auctioneers if the prescribed conditions have been satisfied.

(b) TDS under Section 194Q on the component of indirect taxes other than GST

Every buyer who is responsible for paying any sum to any resident seller to purchase any goods of the value exceeding Rs. 50 lakhs in any previous year shall be liable for deduction of tax under Section 194Q.

The CBDT vide Circular 13 of 2021, dated 30-06-2021, has clarified that in case GST component has been indicated separately in the invoice, tax is to be deducted under Section 194Q only on the amount credited in the account of the seller without including GST. However, Circular 13 of 2021 is silent on other non-GST levies such as VAT, excise duty, CST, etc.

Now, the CBDT has clarified that if the component of VAT, sales tax, excise duty, CST, etc., have been indicated separately in the invoice, then TDS under section 194Q is to be deducted without including such amounts.

(c) TDS under Section 194Q if exemption is provided under section 206C(1A)

Section 206C(1H) provides for the collection of tax (TCS) by a seller from the amount received as consideration for the sale of goods if it exceeds Rs. 50 lakhs in any previous year. Said section also provides that no tax shall be collected in respect of goods which are covered under sub-section (1), (1F), or (1G).

Further, Section 206C(1A) provides that the seller is not required to collect tax from the resident buyer if such buyer has filed a declaration that goods are purchased for manufacturing, processing, or producing articles or things or for generation of power and not for trading purpose.

Considering the above, it has been represented that goods that are covered under sub-section (1) but exempted under sub-section (1A), no tax would be collectible as section 206C(1H) categorically exclude the goods which are covered under sub-section (1). The stakeholders requested to clarify whether the provisions of section 194Q will be applicable in such a case?

The provisions of Section 194Q don’t apply to those transactions where tax is collectible under Section 206C except sub-section (1H) thereof. Since by virtue of Section 206(1A), tax is not required to be collected for goods covered under sub-section (1), the CBDT has clarified that the provisions of Section 194Q will apply, and the buyer shall be liable to deduct tax if specified conditions are fulfilled.

(d) TDS under Section 194Q in case of department of Government

A government department that is not carrying out any business or commercial activity is not regarded as a ‘buyer’ for section 194Q. Thus, such organizations are not required to deduct tax on goods purchased by them

An issue has been raised whether the Government dept. will be considered ‘seller’ for deduction of TDS under Section 194Q.

The CBDT has clarified that the Central Government or State Government shall not be considered as a ‘seller’. No tax is to be deducted under Section 194Q if the seller of goods is Central Government or State Government.

It is also clarified that no such exemption is provided to Public Sector Undertaking (PSU) or Corporation established under the Central or State Act or any other body, authority, or entity. They are required to comply with the provisions of Section 194Q.

Read the Circular

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2. Registration of purchasing dealer cannot be canceled for fraud committed by selling dealer: HC

The High Court of Orissa has recently held that registration of purchasing dealer cannot be cancelled for fraud committed by selling dealer. The cancellation of registration is not sustainable when the department has failed to prove that ITC was availed with full knowledge of the buyer about seller being non-existent. The Honorable Orissa High Court gives this ruling in the case of Bright Star Plastic Industries v. Additional Commissioner of Sales Tax.

Facts

The show-cause notice was issued to the petitioner for cancellation of registration alleging the claim of the input tax credit on fake invoices issued by a non-existent supplier. It filed clarification, but registration was cancelled, holding that clarification submitted was not satisfactory. It filed for revocation of cancellation of registration, but it was rejected. Thereafter, an appeal was filed before the Appellate Authority, and the same was also rejected. Consequently, it filed a writ petition against the same in the High Court.

High Court

The Honorable High Court observed that the department has to show that the purchasing and selling dealer acted in connivance to defraud the revenue. However, the department failed to show that the petitioner as a purchasing dealer deliberately availed of the ITC in respect of the transactions with an entity, knowing that such an entity was not in existence. Thus, the department was directed to restore the petitioner’s registration by issuing appropriate orders/directions.

Read the Ruling

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3. SEBI registered investment adviser can’t provide services of creating or rebalancing ‘basket of foreign securities’

The securities market regulator, SEBI, in an interpretative letter, has clarified that services of creation or rebalancing of foreign stacks by a SEBI registered Investment adviser doesn’t come under the purview of SEBI (Investment advisers) regulations. Therefore, it can’t provide services of creating or rebalancing of stacks incapacity of an Investment adviser.

SV Capital (SVC), an Investment Adviser registered under the SEBI (Investment Advisers) Regulations, 2013 sought an interpretative letter under the informal guidance scheme. SV Capital revealed that it was appointed by the US Company to execute the agreement with the US Stock Broker identified by the US Company under which SV Capital was required to facilitate the purchase of foreign securities by customers through the Platform by providing the facilitation services described to the US Stock Broker.

SV capital sought as to whether the service of creation and rebalancing of Stacks (a basket of foreign securities) for the US Company (which provides an online platform to Indian customers, to deal in foreign securities) based on certain predefined financial or qualitative criteria constitutes “investment advice” for SEBI (Investment Advisers) Regulations, 2013.

SEBI, through its letter dated November 12, 2021, clarified that for an activity to be covered under the IA Regulations, it has to be an Investment Advice, as defined under Regulation 2(1)(l) of SEBI (Investment Advisors) Regulations, 2013 provided by an Investment Adviser for a consideration and includes financial planning.

As per Regulation 2(1) (l) of SEBI (Investment Advisors) Regulations, 2013

“Investment Advice” means advice relating to investing in, purchasing, selling, or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral, or through any other means of communication for the benefit of the client and shall include financial planning.

Provided that investment advice is given through newspapers, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to the public shall not be considered as investment advice for the purpose of these regulations

The SEBI clarified that based on submissions made by SVC, the proposed services by SVC, i.e., creating and rebalancing stacks for a US Company which provides an online platform for customers, including Indian Customers, to purchase and invest in foreign securities, and receive compensation for the same in the form of commission or fixed monthly retainer does not appear to be an activity for providing ‘investment advice’ as envisaged under the IA Regulations.

‘’Consequently, the proposed services to be provided by SVC shall not come under the purview of IA Regulations. Hence, in the capacity of a SEBI registered investment adviser, SVC cannot provide the proposed services’’ said SEBI.

Read the notification

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4. No service tax on earnest money forfeited due to non-delivery of goods: CESTAT

The New Delhi Bench of CESTAT has recently held that the amount retained on forfeiture of earnest money on non-delivery of goods are not liable to service tax under the declared service of ‘agreeing to the obligation to refrain from an act or tolerate an act or situation’. The Honorable CESTAT gives this ruling in the case of Tirupati Balaji Furnaces (P.) Ltd. v. Commissioner, Central Goods and Service Tax.

Facts

The appellant was engaged in the manufacture of MS ingots. During the audit of the appellant, some miscellaneous income was observed on account of non-performance of the agreement to sell and non-compliance with the conditions of the contract of supply of goods. The dept. has alleged that it would amount to agreeing to the obligation to refrain from any, or to tolerate an act or a situation, or to do an act’ and thus a consideration towards a ‘declared service’.

The show-cause notice was issued, and service tax demand was raised towards the amount received on account of forfeiture of earnest money and account of a sum being received as compensation for non-delivery of goods. The appeal was filed, and it was rejected. Thereafter, the appellant filed an appeal before the Tribunal.

CESTAT

The Honorable Tribunal observed that the appellant was not carrying out any activity to receive compensation. The purpose of compensation was to ensure that the default would not be undertaken again or repeated. Moreover, from any stretch of the imagination, the retention of earnest money cannot be said to be an act of receiving consideration towards tolerating the default of the other parties. Hence the question of tolerating the act of default as alleged by the department would not arise and appeal to be allowed.

Read the Ruling

5. Treatment of dues recoverable on account of invocation of bank guarantee in the balance sheet

Example

X Ltd. provides financial assistance to Y Ltd for the procurement of raw materials. Y Ltd. defaulted in repayment of such dues to X Ltd. Accordingly, X Ltd invoked the BG. However, the respective bank did not pay the invoked amount of BG to X Ltd. until 31st March of the financial year.

How X Ltd. Should classify this amount recoverable from the bank on account of invocation of bank guarantee in his books of accounts if the company follows

(a) Accounting Standards;

(b) Indian Accounting Standards?

Answer

(a) When a company follows Accounting Standards (ASs)?

Para 49(a) of the Framework for the preparation and presentation of Financial Statements provides that an asset should be de-recognized from the financial statements when it ceases to meet the definition of ‘asset’. When an asset is no longer a ‘resource controlled’ by the enterprise, from which future economic benefits are expected to flow to the enterprise, it should be de-recognized from the financial statements. Therefore, X Ltd. should evaluate the asset based on its own facts and circumstances and considering the relevant provisions/terms of the Bank Guarantee Bond and any other Agreement between X Ltd. and Y Ltd. or the bank, as to whether on invocation of the BG, it still has a control (through legal right or otherwise as explained above) over Y Ltd. If after such evaluation, it is concluded that X Ltd. does not have such control, it should de-recognize the ‘Receivable from debtors’ from its financial statements and an asset in the form of ‘Receivable from bank due to invocation of bank guarantee’ should be created, provided it meets the definition of ‘asset’.

(b) When a company follows Indian Accounting Standards (Ind ASs)?

Considering the requirements of Ind AS 109, X Ltd. should evaluate whether on invocation of the BG, the contractual rights to the cash flows from the debtor(Y Ltd.) are transferred to the bank. Further, whether X Ltd. has transferred substantially all the risks and rewards of ownership of the financial asset (receivable from Y Ltd.), based on the facts and circumstances and considering the relevant provisions/terms of the Bank Guarantee Bond and any other Agreement between X Ltd. and Y Ltd. or the bank. If after such evaluation, it is concluded that the receivable from Y Ltd. should be de-recognized, then X Ltd. should de-recognize the ‘receivable from debtor units’ from its financial statements. Further, at the same time, X Ltd. should recognize a new financial asset in the form of receivable/recoverable from the bank, considering the requirements of Ind AS 109.

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