Weekly Round-up on Tax and Corporate Laws | 2nd to 7th December 2024

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from December 02^nd to 07^th, 2024, namely:

1. WhatsApp’s updated privacy policy mandating data sharing for non-service purposes violates Section 4;
2. Trust not liable to pay surcharge just because its income is taxable at maximum marginal rate: ITAT;
3. Putting together a structure of plywood sheets isn’t constructing a residential house: Delhi HC;
4. Mismatch between GSTR-3B and GSTR-1 does not invoke Section 74 without fraud or suppression of facts: HC;
5. Initiation of an enquiry or summons under CGST cannot be considered as initiation of proceedings: HC and
6. Accounting for incremental Defined Benefit Obligations and Past Service Cost under AS 15.

1. WhatsApp’s updated privacy policy mandating data sharing for non-service purposes violates Section 4

The Competition Commission of India (CCI), in the matter of ‘Updated Terms of Service and Privacy Policy for WhatsApp Users [2024] 168 taxmann.com 482 (CCI)’, held that WhatsApp’s updated privacy policy which mandated sharing of data of its users for purposes other than providing WhatsApp services, without offering any choice to its users to opt-out from same, disregarded legitimate expectation of users to decide as to how their data would be collected and used.

This conduct was deemed prima facie violative of Section 4 of the Competition Act. Consequently, WhatsApp was directed to cease and desist from such practices, as they were found to contravene the provisions of the Act.

Brief facts of the case

In the instant case, WhatsApp had updated its privacy policy and terms of service for WhatsApp users. It was inter alia reported that new policy made it mandatory for users to accept terms and conditions in order to retain their WhatsApp account information and provided as to how it would share personalised user information with Facebook (later renamed as Meta) and its subsidiaries. Consequently, commission, decided to take suo motu cognisance of matter.

CCI’s Observations

The CCI observed that WhatsApp was dominant in the relevant market for Over the Top (OTT) messaging apps through smartphones in India. Later, users were made to accept 2021 update, which mandated sharing of data for purposes other than providing the WhatsApp services, without offering any choice to opt out from same, this imposition disregards legitimate expectation of users to decide as to how their data would be collected and used.

The CCI noted that by compelling all users to accept data-sharing conditions, WhatsApp reduces the level of privacy (an important non-price parameter of competition in digital markets) that users expect, thus diminishing consumer welfare.  Additionally, this would result in increasing entry barriers for rivals and thus potentially leading to their exclusion from the market.

CCI’s Ruling

The CCI held that the impugned conduct of data-sharing by WhatsApp with Facebook apparently amounted to degradation of non-price parameters of competition, ultimately constituting an abuse of market power. It was further held that WhatsApp had prima facie contravened provisions of section 4 through its exploitative and exclusionary conduct, in garb of policy update. Accordingly, in terms of provisions of Section 27(a) of Act, WhatsApp was directed to cease and desist from indulging in such practices, which had been found to violate provisions of Act.

Read the Ruling

2. Trust not liable to pay surcharge just because its income is taxable at maximum marginal rate: ITAT

The assessee was a private discretionary trust registered under the Indian Trust Act. The assessee filed its return of income for the relevant assessment year. The return of income was processed under section 143(1), and the assessee was entitled to a refund of Rs. 1,80,670.

However, the Assessing Officer (AO) assessed the income of the assessee at Rs. 6.73 lakhs and levied a surcharge at the rate of 37 per cent as against nil computed by the assessee. The assessee contended that the surcharge was levied despite the total income being less than Rs. 50 lakh.

The matter was carried to the CIT(A), wherein the surcharge was upheld. The assessee preferred an appeal to the Mumbai Tribunal.

The Tribunal held that the only issue that required adjudication was whether a surcharge could be levied where the total income was less than Rs. 50 lakhs. CIT(A) contended that since the assessee’s tax liability would fall under the maximum marginal rate, a surcharge would be applicable in the assessee’s case as per section 2(29C). The contention of the CIT(A) was incorrect.

The relevant provisions of the Finance Act 2022 stated that the surcharge was applicable only when the assessee, in the case of an Individual, Hindu Undivided Family or Association of Persons or Body of individuals, had a total income exceeding Rs. 50 lakh of such income tax.

Thus, the surcharge was leviable only if the total income exceeded Rs. 50 lakh. During the year under consideration, the assessee’s income was assessed at Rs. 6,73,590, less than Rs. 50 lakh. Therefore, levying of surcharge would not be applicable.

Read the Ruling

3. Putting together a structure of plywood sheets isn’t constructing a residential house: Delhi HC

The assessee sold a residential property and claimed exemption under Section 54 of the Act. The Assessing Officer (AO) denied the exemption claim on the ground that the assessee had not constructed a residential house but purchased vacant agricultural land. The structure on the agricultural land, which the assessee claimed was a constructed residential house, was only a makeshift structure raised to evade tax liability.

On appeal, the CIT(A) reversed the AO’s order and granted the exemption. However, the Tribunal upheld the AO’s order. The matter reached the Delhi High Court.

The High Court held that Section 54 allowance is available if the assessee utilises the capital gains arising from the sale of residential property for purchasing a residential property or constructing a residential house. It is obvious that constructing a residential house would entail raising the construction for inhabitation as a residential dwelling unit.

The Inspector’s report, which the learned ITAT had accepted, is a makeshift guardroom made of plywood of 7 feet x 6 feet was found on the site, and a similar room of plywood of 16 feet x 12 feet with a toilet attached was found at the said site. Putting together a structure of plywood sheets cannot be construed as constructing a residential house.

The Inspector had also reported that there was no electricity or water connection on the land, and electricity was used by the genset. In the instant case, the structures made of plywood sheets were found to exist on the subject property during the second visit of the Inspector.

Therefore, no question of law arises for consideration of this court, given the description of the subject property in question. The findings of the learned ITAT cannot be assailed as perverse or manifestly erroneous.

Read the Ruling

4. Mismatch between GSTR-3B and GSTR-1 does not invoke Section 74 without fraud or suppression of facts: HC

The Honorable Delhi High Court has recently held that provisions of section 74 would not be attracted on a mere allegation of mismatch between GSTR-3B and GSTR-1 unless a case of fraud, wilful misstatement or suppression of facts is made out. This ruling is given in the case of Xiaomi Technology India (P.) Ltd. v. Additional Commissioner, CGST Delhi West Commissionerate [2024] 169 taxmann.com 24 (Delhi).

Facts

The petitioner was engaged in the business of supplying mobile phones. The department issued notice and alleged that there was a mismatch in GSTR-3B and GSTR-1. It was also alleged that the petitioner had availed excess ITC, and huge difference of ITC was availed.

The petitioner filed writ petition against the demand and contended that the provisions of Section 74 would not be attracted on a mere allegation of a mismatch between GSTR-3B and GSTR-1.

High Court

The Honorable High Court noted that the provisions of Section 74 would be liable to be invoked only if it be alleged that a case of fraud, wilful misstatement or suppression of facts is made out. However, in the instant case, the department issued notice on the grounds of mismatch of GSTR-3B and GSTR-1 without alleging any fraud or wilful misstatement.

Therefore, the Court held that the matter required a detailed investigation and the department was allowed to proceed further with the impugned Show Cause Notice. However, it was also held that any final orders, if passed, shall not be given effect until the next date of hearing.

Read the Ruling

5. Initiation of an enquiry or summons under CGST cannot be considered as initiation of proceedings: HC

The Honorable Kerala High Court has recently held that initiation of an enquiry or issuance of summons under Section 70 could not deemed to be ‘initiation of proceedings’ for purpose of Section 6(2)(b). This ruling is given in the case of K.T. Saidalavi v. State Tax Officer [2024] 168 taxmann.com 211 (Kerala)

Facts

In the present case, the CGST department had initiated enquiry regarding non-payment of GST and had directed the production of certain records. This was followed by summons issued under Section 70 of the CGST Act leading to the recording of certain statements. The petitioner filed writ petition to challenge the action by contending that State Authority had already initiated proceedings under Section 74 read with Section 122(1) of the CGST/SGST Acts.

High Court

The Honorable High Court noted that the term ‘initiation of any proceedings’ is a reference to the issuance of a notice under the provisions of the CGST/SGST Acts and the initiation of an enquiry or the issuance of summons under Section 70 of the CGST /SGST Acts cannot be deemed to be initiation of proceedings for the purpose of Section 6(2)(b) of the CGST/SGST Acts.

In the present case, the Central Authority had only initiated an enquiry and the proceedings were initiated by the State Authority by the issuance of notice under Section 74 of the CGST/SGST Acts. Therefore, it was held that the petitioner was not entitled to any relief and the writ petition was liable to be dismissed.

Read the Ruling

6. Accounting for incremental Defined Benefit Obligations and Past Service Cost under AS 15

Effective recognition and measurement of Defined Benefit Obligation (DBO) are crucial for accurate financial reporting, as they directly impact a company’s balance sheet and profit and loss statements. This process also helps stakeholders, such as investors, regulators, and employees, assess the company’s financial health and its ability to fulfill pension-related commitments.

As per AS 15, Employee Benefits, past service cost refers to the change in the present value of the DBO for employee services in prior periods due to the introduction or modification of benefits. These costs can be positive (for enhanced benefits) or negative (for reduced benefits). AS 15 requires recognizing past service costs, along with current service costs, interest costs, actuarial gains/losses, and expected returns on plan assets, in the profit and loss account, unless another standard permits their inclusion in asset costs.

Actuarial gains and losses resulting from changes in the DBO or the fair value of plan assets must be recognized immediately in the profit and loss account. The net defined benefit liability reported on the balance sheet is calculated as the present value of the DBO minus the fair value of plan assets and any unrecognized past service costs. Interest cost is determined by applying the discount rate at the start of the period to the DBO, while the expected and actual returns on plan assets are recognized as actuarial gains or losses.

For Example, XYZ Ltd., which operates a defined benefit retirement plan, reported a DBO of ₹5,00,000 and plan assets of ₹4,20,000 as of April 1, 20X1, with a discount rate of 5%. During FY 20X2, a ₹1,50,000 increase in the obligation due to plan amendments was recognized as past service cost in the profit and loss account. Interest expense on the obligation (₹25,000) and income from plan assets (₹21,000) were also recognized. Additionally, the company contributed ₹70,000 to the plan during the year.

As of March 31, 20X2, the DBO rose to ₹7,80,000, and plan assets increased to ₹5,60,000, resulting in a net liability of ₹2,20,000. Actuarial adjustments included a ₹35,000 loss on the obligation and a ₹1,19,000 gain on plan assets, both recognized in the profit and loss account. This treatment complies with AS 15, ensuring transparent and accurate financial reporting.

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