Weekly Round-up on Tax and Corporate Laws | 26th to 30th December 2023

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 26^th to 30^th December 2023, namely:

(a) CBDT releases guidelines for deduction of tax under section 194-O;

(b) No TCS on sale of empty liquor bottles as uncorking liquor bottles didn’t amount to generation of ‘scrap’: HC;

(c) GSTN extends date for reporting opening balance for ITC reversal;

(d) CBIC extends time limit for passing order u/s 73 for FY 2018-19 & 2019-20;

(e) Goods can’t be confiscated for non-existence of supplier without giving purchaser opportunity to establish bona fide purchase: SC;

(f) SEBI’s Social Stock Exchange Framework: Key Elements and Requirements; and

(g) Presentation of amounts received under Channel Financing Facility as per Schedule III to the Companies Act, 2013.

1. No TCS on sale of empty liquor bottles as uncorking liquor bottles didn’t amount to generation of ‘scrap’: HC

Assessee-Company, owned by Tamil Nadu Government, had an exclusive monopoly for retail and wholesale of Indian Made Foreign Spirits (IMFS) in the entire state of Tamil Nadu.

Assessee floated tenders to select third-party bar contractors (licensees) to sell eatables and collect empty bottles left by consumers at bars adjacent to/within the assessee’s liquor retail shop. Assessee acting as an agent merely collected tender/licence amount from successful tenderer and remitted 99 per cent of same to Government retaining 1 per cent commission.

Assessing Officer (AO) treated assessee as the assessee-in-default for failure to collect tax at source under section 206C(1) on the amount tendered by the successful bar licensee from selling empty bottles by treating the sale of bottles as scrap.

The matter reached before the Madras High Court.

The Madras High Court held that to attract the liability under Section 206C, it is incumbent on the part of AO to establish that the bottles left by buyers of liquor who consume liquor in the bars attached to the assessee’s retail shops qualify as ‘Scrap’ as defined in Section 206C.

‘Scrap’ is defined as waste and discarded material resulting from the ‘manufacturing’ or ‘mechanical working of materials’ rendered unusable due to breakage, cutting up, wear, or other reasons.

The expression “mechanical working of material” has not been defined in the Income-tax Act 1961. Thus, the interpretation of “mechanical working of materials” is derived by applying the principle of noscitur a sociis, referencing the definition of “manufacture” in Section 2(29BA).

The definition of “manufacture” in Section 2(29BA) of the Income Tax Act, 1961, aligns with the definition in Section 2(f) of the Central Excise Act, 1944. Consequently, for waste or scrap to incur excise duty under Section 3 of the Central Excise Act, 1944, it must also be specified in the 1st Schedule to the Central Excise Tariff Act, 1985.

Certain activities may amount to “manufacture” yet not liable to Central Exercise Duty. An activity may resemble a “manufacturing activity”, yet may not amount to “manufacture”. Thus, only those activities which resemble “manufacturing activity”, but are not a “manufacturing activity” can come within the purview of the expression of “mechanical working of material”.

Thus, the expression “mechanical working of material” would apply only to such activities which are akin to “manufacturing activity” but not “manufacturing activity”. Only such “scrap” generated from such activity can be construed to be in contemplation of Section 206C.

Mere opening, breaking or uncorking of a liquor bottle by twisting the seal in a liquor bottle will not amount to the generation of “scrap” from “mechanical working of material” for explanation to Section 206C.

Read the Ruling

2. CBDT releases guidelines for deduction of tax under section 194-O

E-commerce operators (ECOs) are required to deduct income tax at a rate of one percent on the gross amount of sales facilitated through their digital platforms under Section 194-O. The CBDT has issued a circular outlining the tax deduction process in certain transactions, especially where multiple e-commerce operators are involved, such as through Open Network for Digital Commerce (ONDC).

(a) Tax deduction where multiple e-commerce operators are involved in a transaction

There may be an e-commerce platform or network (such as ONDC) on which multiple e-commerce operators (ECO) are involved in a single transaction of sale of goods or provisions of services. For example, a buyer-side ECO provides an interface to the buyer, and a seller-side ECO provides an interface to the seller.

In this case, the seller-side ECO who finally makes the payment or the deemed payment to the seller for goods sold or services provided shall be liable to deduct tax. However,  if the seller-side ECO is itself the seller, then the ECO who finally makes payment to it shall be liable to deduct tax.

(b) Inclusion of convenience fees, delivery fees and commission in the gross amount

In e-commerce transactions, it is common for an order to be shipped to the buyer from the seller. Therefore, sellers commonly charge the buyer additionally for shipping in the form of logistics/delivery/shipping/packaging fees, etc. Further, the buyer-side ECO and seller-side ECO may charge the seller a commission/convenience fee to enable the online transaction. The seller may choose to recoup all or part of that amount from the buyer. The CBDT has clarified that these charges shall be a part of the gross amount on which tax is required to be deducted.

Further, payments made to the platform or network provider (such as ONDC) for facilitating the transaction would form part of the “gross amount” if they are included in the payment for the transaction. However, if these payments are being paid on a lump-sum basis and are not linked to a specific transaction, then these need not be included in the “gross amount”.

(c) Treatment of discounts offered by the seller

Where the seller gives the discount, the seller would reduce the price of the products sold or services provided. For instance, if the price of a product is Rs 100 and the seller offers a discount of Rs 10. Rs 90 will be receivable from the buyer. In this case, the seller will invoice the buyer for Rs 90. Hence, tax shall deducted on the amount of Rs 90.

(d) Treatment of discounts offered by e-commerce operators

Where the buyer ECO or seller ECO gives a discount, usually the seller receives full consideration for the product. The seller receives part of the amount from the buyer, and the balance is discharged to the seller by the buyer ECO or seller  ECO, as the case may be.

For example, if the price quoted by the seller is Rs 100, and the buyer ECO gives a discount of Rs 10, Rs 90 (i.e. 100 -10) will be collected from the buyer and remitted to the seller. The buyer ECO will pay the remaining Rs 10 to the seller via the seller ECO. The invoice for the buyer will be raised for Rs 100, and the seller-side ECO will, therefore, deduct tax on Rs 100, which is the gross amount of sales.

(e) Treatment of GST or various state levies and taxes

When the tax is deducted at the time of credit of the amount in the account of the seller and the component of GST or various state levies and taxes is indicated separately in the invoice, tax shall be deducted on the amount credited without including such GST or tax component. However, if the tax is to be deducted on a payment basis because the payment is made earlier than the credit, the tax would be deducted on the whole amount as it is not possible to identify that payment with GST or tax component of the amount to be invoiced in future.

(f) Adjustment in relation to Purchase Return

It is noted that the tax is required to be deducted under section 194-O at the time of payment or credit, whichever is earlier. Thus, before purchase-return happens, the tax must have already been deducted from that purchase.

The CBDT has clarified that where the seller has refunded the money against the purchase return, the tax deducted may be adjusted against the next purchase against the same seller in the same financial year. However, where purchase return is replaced by the goods, no adjustment is required.

Read the Circular

3. GSTN extends the date for reporting the opening balance for ITC reversal

The GSTN has issued an update to inform that the opportunity to declare the opening balance for ITC reversal in the statement has been extended till 31st January 2024. Notably, to facilitate the taxpayers in correct and accurate reporting of ITC reversal and reclaim thereof and to avoid clerical mistakes, a new ledger, Electronic Credit and Reclaimed Statement was introduced on the GST portal.

It is also provided that the facility to amend the declared opening balance for ITC reversal will be available till 29th February 2024. Kindly note that after declaring the opening balance for ITC reversal, only three amendment opportunities post the declaration will be provided to correct the declared opening balance in case of any mistakes or inaccuracies in reporting. GSTN Update dated December 29th, 2023 has been issued in this regard.

Read the GSTN Advisory

4. CBIC extends time limit for passing order under section 73 for FY 2018-19 & 2019-20

The Government has extended the time limit for passing orders under Section 73 for FY 2018-19 and FY 2019-20 till 30-04-2024 and 31-08-2024, respectively. The said time limits were extended to 31-03-2024 and 30-06-2024, respectively, vide Notification No. 09/2023-Central Tax, dated 31-03-2023. Notably, the said time limit has not been extended for FY 2017-18 and will remain 31-12-2023.

It should further be noted that the above time limit is applicable for the issuance of order in case of tax not paid, short paid, or ITC wrongly availed or utilized and is not applicable in the cases of erroneous refunds. In this regard, Notification No. 56/2023- Central Tax, dated December 28th, 2023, has been issued.

Read the Notification

5. Goods can’t be confiscated for the non-existence of supplier without giving the purchaser opportunity to establish bona fide purchase: SC

The Honorable Supreme Court has recently dismissed SLP against the decision of the High Court, holding that goods owned by the purchaser cannot be confiscated because of the absence of consignor at the given address without allowing purchaser to establish bona fide purchase. This ruling is given by the Apex Court in case of Deputy Assistant Commissioner-1 (ST) v. Arhaan Ferrous and Non Ferrous Solutions (P.) Ltd.

Facts

In the present case, the department detained the petitioner’s goods on the ground that the consignor was not available at the given address. The petitioner filed a writ petition against the detention of goods. The Honorable High Court directed provisional release of goods but gave liberty to the department to initiate independent action against the petitioner under Section 129 of the CGST Act, 2017.

The department filed SLP against the order of the High Court and contended that the goods were liable to be confiscated as the consignor was not available at the given address.

Supreme Court

The Honorable Supreme Court noted that the GST department could not have confiscated goods belonging to the petitioner on account of the absence of consignor at the given address without allowing the petitioner to establish bona fide purchase, as goods were duly covered under the E-Way Bill and invoice. Therefore, the Apex Court held that it was not inclined to interfere in the matter, and the SLP was dismissed.

Read the Ruling

6. Key Elements and Requirements under SEBI’s Social Stock Exchange Framework

The SEBI introduced a detailed framework for the Social Stock Exchange (SSE) through Circular No. SEBI/HO/CFD/PoD-1/P/CIR/2022/120 on September 19, 2022. Following public feedback, the Board approved amendments to the SEBI (ICDR) Regulations, 2018, and the SEBI (LODR) Regulations, 2015. On December 21, 2023, the SEBI officially implemented these amendments and formally notified the SSE framework through Circular SEBI/HO/CFD/PoD-1/P/CIR/2023/196 Dated December 28, 2023.

The key highlights of the framework are summarized hereunder:

(a) Registration Requirements for NPOs in SSE Framework

The circular outlines prerequisites for NPO registration with SSE, requiring a valid Registration Certificate under sections 12A/12AA/12AB/10(23C)/10(46) of the Income-tax Act, 1961. Additionally, entities registered under sections 12A/12AA/12AB must possess a valid 80G registration under the Income Tax Act, 1961.

(b) Social Impact Assessment’

Emphasizing the significance of showcasing past social impact, NPOs must highlight key metrics, including trends, number of beneficiaries, cost per beneficiary, and administrative overheads, as determined by the Exchanges when seeking funds on SSE.

(c) Contents of the Fundraising Document must provide sufficient disclosures

The draft and final fundraising documents must provide truthful and sufficient disclosures to empower informed decisions. Additionally, they should incorporate disclosures as periodically specified by the Board.

(d) Other conditions relating to the issuance of Zero Coupon Zero Principal Instruments

The Zero Coupon Zero Principal Instruments shall be issued in dematerialized form only. Further, the Zero Coupon Zero Principal Instruments shall not be transferable from the original subscriber/holder till the expiry of the tenure of the said instrument.

(e) Minimum issue and application ticket size

The minimum issue size shall be rupees 50 lakhs. Further, the minimum application size shall be rupees 10,000. Also, the minimum subscription required to be achieved shall be 75% of the funds proposed to be raised through the issuance of Zero Coupon Zero Principal Instruments.

Read the Circular

7. Presentation of amounts received under Channel Financing Facility as per Schedule III to the Companies Act, 2013

A channel financing facility is a credit arrangement with Banks to fill up the working capital gap between the sale of goods by the company to dealers or distributors and the realization of sales proceeds by sanctioning working capital limits to dealers or distributors. This arrangement of sanctioning working capital limits is between the Bank and dealers/distributors on the recommendation of the company, and the company is not a party to the channel financing facility. To better understand, look at the example-

A company dealing in consumer durables has recommended a channel financing facility to all its dealers and distributors (D&D) for the working capital limit with the following hypothecations/security-

• Primary: Against all stocks, receivables and current assets of the D&D
• Collateral: First loss default guarantee (FLDG) by the company
• Guarantee: of D&D

And, if the D&D defaults to repay the credit facility provided by the Bank, the company becomes liable for such default under the FLDG arrangement of channel financing facility. Now, for accounting purposes, the following scenarios of this arrangement shall be taken into consideration:

1. In case of no default done by D&D during the credit period
2. In case of default done by D&D on the due date

In this regard, the Expert Advisory Committee (EAC) opined that the primary liability to pay the amount received from the Bank by the company against trade receivables/invoices is that of D&D and the Company has no obligation to make payment to Bank until there is a default by the D&D. Although the Company is giving FLDG and its recommendation to the Bank but the credit arrangement is entered into between the Bank and the D&D. Therefore, it is clear that the channel financing facility is not in the nature of borrowings the same should be presented and classified as ‘other financial liability’ in the balance sheet as per the requirements of Schedule III to the Companies Act, 2013. However, if there is any default on the part of the D&D and the amount is yet to be paid to the Bank by the company at the reporting date, the same should be reclassified as ‘Loans repayable on demand from bank’ under ‘Current Borrowings’.

Read the Story