Taxmann Review Bulletin | Taxmann.com | May 2021 by Taxmann

Taxmann Review Bulletin A quick review of important Taxes & Laws updates reported on Taxmann.com

May 2021 1

Contents DIRECT TAX LAWS 1

Aspects to be considered on application of MFN Clause of Tax Treaty

New rules for registration and approval of NGOs w.e.f. 01-04-2021

SOFR as a replacement of LIBOR: Transfer Pricing considerations

Taxation of software payments – Understanding tax implications based on IP law

Kashif Ali, CA Dr. Manoj Fogla - Senior Partner -SAGA LAW LLP, & Founder, SAGA, Suresh Kejriwal - FCA, Tarun Kumar - ACA, DIIT-ICAI Rajeev Jain - CA, Shikha Mehta - Transfer Pricing Professional

R. Subhashree - Advocate, DR. G. GOKUL KISHORE - Advocate

GOODS & SERVICES TAX 5

Beneficial Exemption: Should it be construed in a Strict or a Liberal way?

Taxmann’s Research & Advisory (Indirect Tax) Team

The Uncertainty Encircling ITC Availment on Corporate Social Responsibility

Tushar Aggarwal - CA, Founder Partner, Tattvam Advisors

INSOLVENCY & BANKRUPTCY CODE 7

Supreme Court upholds the sanctity of Resolution Plan & the ‘Clean Slate Theory’ under IBC

Deepak Joshi - FCA, Advocate

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Aspects to be considered on application of MFN Clause of Tax Treaty KASHIF ALI, CA

1 4

Section 90(1) of the Income-tax Act, 1961 (the Act) empowers Central Government to enter into an agreement with the Government of any country outside India or specified territory for following purposes: (a) Granting of relief in respect of double taxation; (b) Avoidance of double taxation; (c) Exchange of information; (d) Recovery of income tax. Accordingly, India has entered into Double Taxation Avoidance Agreement (DTAA) with various countries for meeting above purpose. The DTAAs are generally based upon two models: u The Organisation for Economic Co-operation and Development (OECD) Model u United Nation Model (UN Model) OECD Models are generally adopted by developed nations and their emphasis is on the residency based taxation. UN Model emphasis is on the source based taxation and generally adopted by the developing nations. Most of India’s DTAAs are based on UN Model. Over the period of time, there is need for amending such DTAA. For amending such DTAA, India has signed protocols with different countries. Generally, the purpose of signing protocol is to reduce the scope of non-taxation or reduced taxation through tax evasion. Delhi High Court in the case of Steria (India) Ltd. v. CIT [2016] 72 taxmann. com 1/241 Taxman 268/386 ITR 390 held that protocol is an integral part of DTAA and it will have equal effect as that of articles contained in DTAA. Further, in several other cases, the validity of protocol has been upheld. Some of the protocols1 signed by India contains Most Favored Nation Clause (MFN Clause). By virtue of MFN clause, one state binds itself to another state with respect to favourable treatment afforded by it in future to a third State. For example, the MFN clause under the protocol of India-Belgium DTAA is reproduced below: “1. Ad Articles 5, 7 and 12 If under any Convention or Agreement between India and a third State being a member of the OECD which enters into force after 1st January, 1990, India limits its taxation on royalties or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in the present Agreement on the said items of income, the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under the present Agreement with effect from the date from which the present Agreement or the said Convention or Agreement is effective, whichever date is later. In the above MFN clause, Belgium has bound India that if India after the date of agreement with Belgium limits its taxation on royalties or fees for technical services (FTS) to a rate lower or a more restricted scope with any other state, the same rate or scope shall also apply under the agreement with Belgium. In the above backdrop, we will evaluate the types of MFN clause and aspects of considerations while applying it.

Aspects to be considered on application of MFN Clause of Tax Treaty

Direct Tax Laws

Background

Direct Tax Laws

Types of MFN Clause- As per the wordings of MFN clause under different DTAAs, it may be categorized into two type as below: 1.

Self-operational MFN Clause- This type of MFN Clause will apply automatically and does not need to be notified separately by the Government of both the countries. For instance, the MFN clause as mentioned under the protocol of India-Belgium DTAA (reproduced above) is self-operational. Similarly, the MFN clause in the protocols of India-UK DTAA, India- Sweden DTAA, India-Switzerland DTAA, India-France DTAA, India-Netherlands DTAA, India-Hungary DTAA and India-Spain DTAA contain similar language and hence, may be categorized as self-operational.

Non self-operational MFN Clause- This type of MFN Clause would require the intervention of Government of respective country for notification of more favourable clause that state B has with state C. For instance, the MFN clause as appearing in the protocol of India-Philippines DTAA requires notification by India if Philippines agrees to a lower or nil rate of tax with a third State in respect of income under Article 8 (Air Transport) or Article 9 (Shipping): “4. With reference to Articles 8 and 9 if at any time after the date of signature of the Convention the Philippines agrees to a lower or nil rate of tax with a third State the Government of the Republic of the Philippines shall without undue delay inform the Government of India through diplomatic channels and the two Governments will undertake to review these Articles with a view to providing such lower or nil rate to profits of the same kind derived under similar circumstances by enterprises of both Contracting States.”

Aspects to be considered while applying the MFN Clause- While applying the MFN clause, a taxpayer may consider following aspects: 1.

Types of MFN Clause: While applying the MFN clause, a taxpayer need to check the type of MFN clause. If the MFN clause is not self-operational, the taxpayer may not apply it unless it has been notified separately by the Government. However, in case of self-operational MFN clause, there is no need of separate notification. This view has been upheld by Delhi High Court in Steria (India) Ltd. (supra). Further, in the context of MFN clause under the protocol of India-France DTAA which contains self-operational MFN clause, various courts2 have allowed the benefit without requiring any separate notification by Government.

Date of agreement: As discussed above, MFN clause applies when state B after entering into DTAA with state A, enters into DTAA with state C which has more beneficial clause in respect of specified nature of income (generally royalty or FTS). Therefore, the date of DTAA between state ‘A’ and state ‘B’ and between state ‘B’ and state ‘C’ will be very important aspect to check.

OECD Member: Generally, the MFN clause requires the third state (State C) with which state B has entered into DTAA with more beneficial provision, to be member of OCED. Therefore, it is important to see whether the third state is a member of OECD. So far, there are 37 countries3 which have become the member of OECD.

Date of becoming OECD Member: As per the language of MFN clause, it appears that state ‘C’ shall become the member of OECD prior to entering into DTAA with state ‘B’.Therefore, the date of becoming the member OECD also has very vital role in application of DTAA.

Aspects to be considered on application of MFN Clause of Tax Treaty

Income Tax Act – 2021 Author

: Taxmann

Edition

: 66th Edition

ISBN No

: 9789390831104

Date of Publication

: March 2021

Weight (Kgs)

: 1.89

No. of papers

: 1792

Rs. 1995

| USD 68

Description Taxmann’s Income Tax Act covers the annotated text of the Income-tax Act, 1961, in the most authentic, amended & updated format. The Present Publication is the 66th Edition & Updated till the following:  The Finance Act, 2021  The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 The noteworthy features of the book are as follows:  [Bestseller Series] Taxmann’s Bestseller Book for more than Five-Decades  [Zero Error] Follows the Six Sigma Approach to achieve the Benchmark of ‘Zero Error’  [Legislative History of Amendments], since 1961  [Relevant provisions of all other allied laws] referred to in the Income-tax Act  Comprehensive Table of Contents  [Quick Navigation] Relevant Section Numbers are printed in Folios for Quick Navigation  Annotation under each section shows: n

Relevant Rules & Forms

Relevant Circulars & Notifications

Date of enforcement of provisions

Allied Laws referred to in the Section

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Direct Tax Laws

Conclusion: MFN clause can be applied by a non-resident taxpayer while computing his tax liability. It can also be applied while withholding taxes by resident payer in view various judicial precedents4 and CBDT Circular No. 728 dated 30 October 1995. Further, CBDT has recently notified Form 15E for application for grant of certificate under section 195(2) and 195(7). One of the clauses5 of this Form seeks information in regard to the ‘Make Available’ clause in the DTAA, or such claim is invoked though MFN clause and if the notification requirement is fulfilled or otherwise. Therefore, a person can apply MFN clause both at the time computing his tax liability or while withholding tax. However, considering the penal consequences of short withholding or non-withholding of taxes or failure to disclose proper income, it would be advisable to consider all the aspects of MFN clause of applicable DTAA. The Views expressed in this article are personal. lll

1. Protocol with Sweden, Swiss Confederation, France, Israel, Philippines, Belgium, Netherlands, Kazakhstan, Hungary and Spain contain MFN clause 2. Kolkata ITAT Dy. CIT v. ITC Ltd. [2002] 82 ITD 239 (Kol.), Karnataka High Court CIT v. ISRO Satellite Centre [2013] 35 taxmann.com 352/218 Taxman 74 (Karn.), Mumbai ITAT Dy. DIT v. IATA BSP India [2014] 46 taxmann.com 150/64 SOT 290 (Mum. - Trib.), Mumbai ITAT National Organic Chemical Industries Ltd. v. Dy. CIT [2006] 5 SOT 317 (Mum.), AAR Poonawalla Aviation (P.) Ltd., In re [2011] 16 taxmann.com 120/[2012] 343 ITR 202 (AAR - New Delhi) 3. Source- http://www.oecd.org/about/members-and-partners/ 4. Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT [2021] 125 taxmann.com 42 (SC), GE India Technology (P.) Ltd. v. CIT [2010] 187 Taxman 110 (SC), Vodafone 5. point 5(D)(b)(ii)/(iii)/(iv)) in the said form.

Aspects to be considered on application of MFN Clause of Tax Treaty

Master Guide To Income Tax Act 2021 Author

: Pradeep S. Shah , Rajesh S. Kadakia

Edition

: 31st Edition

ISBN No

: 9789390831128

Date of Publication : April 2021 Weight (Kgs)

: 2.1

No. of papers

: 1972

Rs. 2295 | USD 76

Description Taxmann’s Master Guide to Income Tax Act, is a unique book that provides the following:  Section-wise commentary on the Finance Act 2021  Ready-referencer for all-important procedural aspects of the Income-tax Act.  Section-wise Digest of landmark rulings  Section-wise gist of all circulars and notifications which are still in force The Present Publication is the 31st Edition, amended by the Finance Act 2021 & the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020.

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New rules for registration and approval of NGOs w.e.f. 01-04-2021 DR. MANOJ FOGLA Senior Partner -SAGA LAW LLP, & Founder, SAGA

SURESH KEJRIWAL FCA

TARUN KUMAR ACA, DIIT-ICAI

2 10

These provisions pertaining to registration were originally made effective from 01-062020, subsequently, due to the crisis caused by COVID-19, the CBDT announced to defer the implementation of the new procedure for approval and registration. Accordingly, the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (‘the Amendment Act, 2020’) deferred the date of enforcement of the new procedure introduced by the Finance Act, 2020 to 01-04-2021 and, therefore, the old process for approval under section 10(23C) continued till 31-03-2021. The CBDT has notified the Income-tax (6th Amendment) Rules, 2021. These rules shall come into force on the 1st day of April, 2021. In these rules, the CBDT has notified new process and forms for registration and approval of trust or institution or fund mentioned under section 10(23C), 35, 12A, 80G. In this article, we have discussed the new requirements of registration and approval for NGOs effective from 1st April 2021.

1. Filing of form 10A The Income-tax (6th Amendment Rules), 2021 have notified Form 10A for making application for registration or provisional registration or intimation or approval or provisional approval. 1.1. Who can apply in Form 10A? Form 10A shall be used for the following purposes. u u

Application for revalidation of registration/approval for existing trust registered/ approved under Section 12A/12AA/10(23C)/80G. Application for provisional registrations/approval under section 12AB/ 10(23C) / 80G ( For New cases).

1.2. Timeline to apply in Form 10A Category

Timeline to make application

Trusts already approved/registered and their approval/registration is continuing on 01-04-2021

On or before 30-06-2021

Trusts making application provisional registration/approval

1 month before the commencement of the previous year relevant to the assessment year from which the said approval is sought.

for

1.3. To whom an application has to be made? The application for the registration in Form 10A shall be made to the PCIT OR CIT authorized by the CBDT.

New rules for registration and approval of NGOs w.e.f. 01-04-2021

Direct Tax Laws

The Finance Act 2020 has brought in major changes for registration and approval of NGOs by introducing new section 12AB replacing section 12AA and bringing in similar amendments in section 10(23C) and Section 80G. The process of registration and approvals of NGOs is made completely electronic under which a unique registration number (URN) shall be issued to all new and existing charity institutions. This database shall help in bringing the exact size of NGO sector in India as it has always remained unregulated as compared to the corporate sector. Further, under the new scheme of registration, the department will revisit the registration every five years before the expiry of the period of the exemption. Hence, now, the registration under the new scheme shall be valid for a specified period, that is, up to 3 years for provisional cases and a maximum period of 5 years for final registration.

Direct Tax Laws

The CBDT vide Notification No. 30 /2021/F. No. 370142/4/2021-TPL dated 01-04-2021 has authorized Director of Income Tax (Centralized Processing Centre), Bengaluru and Commissioner of Income-Tax (Exemption), Bengaluru, for the following purposes: (a) For receiving applications for provisional registration or registration or provisional approval or approval or intimation in Form 10A. (b) For passing order granting provisional registration or registration or provisional approval or approval in Form 10AC. (c) For issuing Unique Registration Number (URN) to the applicants (d) For cancelling the approval granted in Form 10AC and Unique Registration Number (URN) 1.4. Procedure on receipt of application in Form 10A On receipt of an application in Form No. 10A, the PCIT or CIT shall pass an order in writing granting approval in Form No. 10AC and issue a sixteen-digit alphanumeric Unique Registration Number (URN) to the applicants. If, at any point of time, it is noticed that Form No. 10A has not been duly filled in by not providing, fully or partly, or by providing false or incorrect information or documents required to be provided under this rule, the PCIT or CIT, after giving an opportunity of being heard, may cancel the approval granted in Form No. 10AC and URN, and such approval in Form No.10AC or such URN shall be deemed to have never been granted or issued.

2. Filing of Form 10AB The Income-tax (6th Amendment Rules), 2021 have notified Form 10AB for making application for registration or approval. 2.1. Who can apply in Form 10AB? Form 10AB shall be used for the following purposes. u Conversion of provisional registration into regular registration u Renewal of registration/approval after five year u Activating inoperative registration due to approval under section 10(23C)/10(46) u Re-registration for modification of objects for entities registered under Section 12AB 2.2. Timeline to Apply in Form 10AB Category

Timeline to Apply

Conversion of provisional registration into regular registration

At least 6 months before the expiry of period of the provisional registration or within 6 months of commencement of its activities, whichever is earlier.

Renewal of after five year

registration/approval

At least 6 months prior to expiry of the said registration period.

Activating inoperative registration due to approval under section 10(23C)/10(46)

At least 6 months before the commencement of the assessment year from which the said registration is sought to be made operative.

Re-registration for modification of objects for entities registered under Section 12AB

Within 30 days from the date of the said adoption or modification.

New rules for registration and approval of NGOs w.e.f. 01-04-2021

INCOME TAX RULES 2021 Author

: Taxmann

Edition

: 58th Edition

ISBN No

: 9789390831111

Date of Publication

: March 2021 Rs. 1975

Description The Present Publication is the 58th Edition & Updated till Income-tax (Fifth Amendment) Rules, 2021 with the following noteworthy features:  [Bestseller Series] Taxmann’s series of Bestseller Books for more than Five Decades  [Zero Error] Follows the Six Sigma Approach to achieve the benchmark of ‘Zero Error’  Coverage of this book includes: l

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2.3. Procedure on receipt of application in Form 10AB Once an application in Form 10AB is submitted by the Trust or Institution, a notice is issued by the concerned commissioner to furnish the documents/clarifications/ information to satisfy himself about the genuineness of activities of the trust or institution and the compliance of such requirements of any other law for the time being in force by the trust or institution as are material to achieve its objects. The commissioner is under an obligation to follow the procedure prescribed under section 12AB/10(23C)/80G before he grants or refuses registration or approval. In case of an application made in Form No. 10AB, the order of registration or rejection or cancellation of registration shall be in Form No. 10AD and in case if the registration is granted, sixteen-digit alphanumeric number URN shall be issued by the PCIT or CIT.

3. Documents to be submitted The application in Form Nos. 10A or 10AB shall be accompanied by the following documents: (a) where the applicant is created or established, under an instrument, selfcertified copy of such instrument creating or establishing the applicant; (b) where the applicant is created or established, otherwise than under an instrument, self-certified copy of the document evidencing the creation or establishment of the applicant; (c) self-certified copy of registration with Registrar of Companies or Registrar of Firms and Societies or Registrar of Public Trusts, as the case may be; (d) self-certified copy of registration under Foreign Contribution (Regulation) Act, 2010 (42 of 2010), if the applicant is registered under such Act; (e) self-certified copy of existing order granting approval under clause (23C) of section 10; (f) self-certified copy of order of rejection of application for grant of approval under clause (23C) of section 10, if any; (g) where the applicant has been in existence during any year or years prior to the financial year in which the application for registration is made, selfcertified copies of the annual accounts of the applicant relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up; (h) where a business undertaking is held by the applicant as per the provisions of sub-section (4) of section 11 and the applicant has been in existence during any year or years prior to the financial year in which the application for registration is made, self-certified copies of the annual accounts of such business undertaking relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up and selfcertified copy of the report of audit as per the provisions of section 44AB for such period;

New rules for registration and approval of NGOs w.e.f. 01-04-2021

Master Guide To Income Tax Rules 2021 Author

: Taxmann

Edition

: 28th Edition

ISBN No

: 9789390831135

Date of Publication : April 2021 Weight (Kgs)

: 1.38

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: 1336

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(i) where the income of the applicant includes profits and gains of business as per the provisions of sub-section (4A) of section 11 and the applicant has been in existence during any year or years prior to the financial year in which the application for registration is made, self-certified copies of the annual accounts of such business relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up and self-certified copy of the report of audit as per the provisions of section 44AB for such period; (j) note on the activities of the applicant

4. Mode of filing form The application in Form Nos. 10A or 10AB shall be furnished electronically under digital signature, if the return of income is required to be furnished under digital signature. In other cases, it shall be submitted through electronic verification code (EVC).

5. Verification of Form The application shall be verified by the person who is authorised to verify the return of income under section 140, as applicable to the applicant.

6. Requirement of darpan ID NGOs play a major role in the development of the nation by supplementing the efforts of the Government. Registration with NitiAayog is mandatory to apply for grants under various schemes of Ministries/Departments/Governments Bodies. NitiAayog developed a portal NGO-DARPAN to provide a space for the interface between NGOs/Voluntary Organizations (VOs). NGO-DARPAN portal has been started as an initiative of the Prime Minister’s Office, to create and promote a healthy partnership between VOs/NGOs and the Government of India. This Portal is managed by NITI Aayog currently. It is an e-governance application offered by NITI Aayog to electronically maintain data and transparency regarding NGOs/VOs in the country. NGO has to sign-up on the NGODARPAN portal to obtain a Unique Identity Number (UIN) by furnishing the required details like registration number of the organization, PAN of the organization, PAN and Aadhaar details of the office bearers/trustees etc. The new rules provide that the applicant has to provide: (a) Details of Registration number with Darpan portal of NitiAayog is to be provided if already there and (b) mandatorily to be given if the applicant receives or intends to receive any grant or assistance from either the Central Government or State Government.

7. Requirement to file statement of donation and issuance of certificate to donor 7.1. Obligations to file Statement of Donation With effect from the financial year 2021-22, the institutions notified under section 35 or approved under Section 80G are required to file a statement of donation received and also to issue the certificate to the donor. Deduction on account of the donation shall be allowed to the donor only on the basis of the statement filed by the donee trust or institution. Hence, if a statement is not filed, the donor will not get a deduction for the donation.

New rules for registration and approval of NGOs w.e.f. 01-04-2021

DIRECT TAXES READY RECKONER 2021 Author

: Dr. Vinod K. Singhania

Edition

: 45th Edition | A.Ys. 2021-22 & 2022-23

ISBN No

: 9789390831159

Date of Publication

: March 2021

Weight (Kgs)

: 0.98

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: 796

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In case of delay in filing such statement, a late fee of Rs. 200 per day shall be applicable under newly inserted Section 234G of the Income-tax Act. Further, a penalty under Section 271K, which shall not be less than Rs. 10,000 and which may extend up to Rs. 1 lakh, shall be leviable if the trust or institution fails to file such statement or fails to issue a certificate of donation. The Income Tax (6th Amendment) Rules, 2021 has inserted new Rule 18AB for Furnishing of Statement of particulars and certificate under clause (viii) and clause (ix) of section 80G(5) or under section 35(1A). 7.2. Form for filing Statement of particulars required to be furnished by reporting person shall be furnished in respect of each financial year, beginning with the financial year 2021-2022, in Form No. 10BD 7.3. Aggregation of Amount The reporting person shall while aggregating the amounts for determining the sums received for reporting in respect of any person take into account all the donations of the same nature paid by that person during the financial year. The donations shall be proportionately attributed the value of the donation or the aggregated value of all the donations to all the persons, in a case where the donation is recorded in the name of more than one person and where no proportion is specified by the donors, attribute equally to all the donors. 7.4. Certificate to Donor The reporting person shall furnish the certificate to the donor in Form No. 10BE specifying the amount of donation received during financial year from such donor. 7.5. Date of filing and Issuing Certificate The certificate of donation in Form 10BE is required to be furnished to the donor on or before the 31st May, immediately following the financial year in which the donation is received. Statement of donation in Form No. 10BD shall be furnished on or before the 31st May, immediately following the financial year in which the donation is received. lll

New rules for registration and approval of NGOs w.e.f. 01-04-2021

Direct Taxes Manual – 2021 With Supplement (Set of 3 Volumes) Author

Taxmann

Edition

51st Edition

Date of Publication

March 2021

Rs. 6295

Description Taxmann’s Direct Taxes Manual is a compilation of annotated, amended and updated:  Income-tax Act, 1961  Income-tax Rules, 1962  Circulars & Notifications  Allied Laws  Law Lexicon  Gist of Landmark Rulings The Present Publication is the 51st Edition, comes in a set of 3 volumes, that incorporates all changes made by the following:  Volume 1 – The Finance Act, 2021 & the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020  Volume 2 – The Income-tax (Eighth Amendment) Rules, 2021  Volume 3 – Law stated is amended up to 1st March, 2021

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SOFR as a replacement of LIBOR: Transfer Pricing considerations RA JEEV JAIN - CA, SHIKHA MEHTA - Transfer Pricing Professional

3 20

Since there is no single alternate reference rate (ARR) available in the market like LIBOR with various currencies and maturities, countries are introducing their own local currency denominated ARRs and have set-up transition committees to replace LIBOR specific rates. Some of the ARRs introduced by countries are listed below: Country

LIBOR Rate

ARR

United States

USD LIBOR

SOFR (Secured Overnight Financing Rate)

United Kingdom

GBP LIBOR

SONIA (Sterling Overnight Index Average)

Japan

TIBOR

TONA (Tokyo Overnight Average Rate)

Europe

EURIBOR

ESTER (Euro Short Term Rate)

Canada

CDOR

CORRA (Canadian Average)

Switzerland

CHF LIBOR

SARON (Swiss Average Rate Overnight)

Overnight

Repo

Rate

Further, following the approach adopted by the US regulators and other countries, the Reserve Bank of India (RBI) has also tasked Indian Bank’s Association (IBA) to recognise and measure the impact of LIBOR’s cessation on the Indian markets. The IBA has since formed three workstreams on (i) LIBOR transition arrangements (ii) rates and methodology (iii) outreach to market participants IBA has also circulated guidance note among its member banks to enable them assess their preparedness for LIBOR transition on various parameters, viz., exposure assessment and assessment of the accounting, tax, information technology (IT) related implications. The ‘rates and methodology’ workstream is developing an acceptable alternative for Mumbai Interbank Forward Offer Rate (MIFOR) – which has LIBOR as one of its components – as a key benchmark used in the interest rate swap (IRS) markets. From a transfer pricing standpoint, all existing inter-company loan agreements expiring after 2021 (i.e. after the end of LIBOR) will be directly impacted by this transition. This will necessitate companies to re-align all such inter-company agreements.

Challenges faced by MNEs 2 u With the multiple ARRs introduced by different countries to replace their respective currency LIBOR rates, it becomes a tedious task for MNEs to revise multicurrency agreements with multiple adjustment methodologies. u Since the British regulator has already announced that it will no longer require banks to submit interbank lending information after 2021, many banks have already opted out themselves in providing quotes. Accordingly, considering fewer data, reliability of LIBOR even for existing agreements is also questionable.

SOFR as a replacement of LIBOR: Transfer Pricing considerations

Direct Tax Laws

For the past many years, London Interbank Offer Rate (LIBOR)1 was used as a reference rate for variety of financial products around the world. With the unprecedented end of LIBOR by 2021, financial regulators as well as market participants are looking for the alternate reference rate(s) to replace the LIBOR in their existing as well as future contracts (i.e., loans, derivatives, mortgages, etc.).

Direct Tax Laws

u While drafting new inter-company agreements, companies usually replicate practices followed for comparable third-party loan agreements, however, in the transition phase MNEs will face challenges in deciding on terms of the agreements as well as spread that needs to be added to the base rate as the comparable data may not available.

SOFR 3 as a replacement of LIBOR In 2014, the U.S. Federal Reserve commissioned the Alternative Reference Rate Committee (ARRC) to identify alternative reference rates for USD LIBOR. On 22 June 2017, the ARRC identified SOFR as its recommended alternative to LIBOR after considering a comprehensive list of potential alternatives and the New York Federal Reserve began publishing SOFR in April 2018. SOFR is a broad measure of the cost of borrowing cash overnight collateralised by U.S. Treasury securities. It is representative of general funding conditions in the overnight Treasury repurchase market. SOFR is considered as a replacement benchmark on the following premise: u

Averaging over $1 trillion of daily trading, transaction volumes underlying SOFR are far larger than the transactions in any other U.S. money market.

It is based on observable transactions rather than based on estimates like LIBOR.

Though SOFR is so far considered as a replacement rate for USD LIBOR, it can’t be just replaced without making appropriate adjustments as the two rates differ in many ways as follows: LIBOR

SOFR

Bank-to-bank lending rate based on estimation

Overnight secured rate observable transactions

Unsecured

Secured by treasury securities

Includes credit risk

No credit risk (risk-free rate)

Forward term rate (1-month, 3-month, 1-year, etc.), borrower know the interest rate in advance

Backward looking rate (overnight), borrower will not know interest payment until the end of interest period

based

Since, the two rates differ on account of credit risk and term maturity, an adjustment to that effect is required to make SOFR comparable to the USD LIBOR. The ARRC in their consultation paper has suggested a fallback approach along with the spread adjustment methodology to amend the existing agreements (denominated in USD LIBOR) with SOFR.

Fallback approach to be adopted The ARRC has recommended a “fallback language” to amend the existing agreements, with the following two options: u

Hardwire approach – The hardwire approach provided the language to amend the existing agreements with specific fallback rates and spread adjustment to be adopted at the trigger event4.

SOFR as a replacement of LIBOR: Transfer Pricing considerations

Direct Taxes Law & Practice Professional Edition Author

Vinod K. Singhania, Kapil Singhania

Edition

Assessment Years 2021-22 & 2022-23

ISBN No

9789390831807

Date of Publication

April 2021

Weight (Kgs)

2.7

No. of papers

2176

Rs. 3595

Description Taxmann’s flagship commentary on Direct Taxes, has been the most trusted & bestselling commentary for experienced practitioners, for more than 20 years now. This book aims at not only making the reader understand the law, but also helps the reader develop the ability to apply the law. In other words, this books aims at providing the reader the following:  Acquire a familiarity with the various direct tax provisions  Awareness of direct tax provisions  The nature and scope of direct tax provisions  Up-to-date knowledge of how a statutory provision has been interpreted by different courts of law, on different occasions The Present Publication is the Latest Edition for Assessment Years 2021-22 & 2022-23), authored by Dr. Vinod K. Singhania & Dr. Kapil Singhania, incorporating all the amendments made by the following:  The Finance Act, 2021  The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020

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Direct Tax Laws

Amendment approach - The amendment approach does not identify the successor rate5 or spread adjustment. Instead, it provides an amendment process for negotiating the fallback rate in the future. It expands the language to include specificity around the process and parameters for selecting the benchmark replacement, specific trigger events for the transition, and inclusion of a benchmark replacement adjustment.

Companies could opt for any of the above approaches to amend their existing intercompany agreements, however, one need to customise the fallback language based on the domestic market requirements. Also, a spread adjustment is required to be calculated to make the SOFR comparable with USD LIBOR.

Spread adjustment methodology The International Swaps and Derivatives Association (ISDA) has recommended a spread adjustment methodology, which will be calculated based on a 5-year period of historical differences between LIBOR and a compound average of SOFR set in arrears. Although the methodology would be same across different tenures of LIBOR, it would be applied to each LIBOR tenure separately, so that there will be a separate recommended spread adjustment calculated for 1-month, 2-month, 3-month, 6-month and 1-year LIBOR. Bloomberg has already started calculating and publishing a daily adjustment value for each LIBOR tenure. The recommended spread adjustments would not and are not intended to apply to new contracts referencing SOFR. The above methodology recommended by ARRC is specific to the agreements denominated in USD LIBOR. For the intercompany agreements denominated in currencies other than USD, one would need to analyse the currency specific ARRs and guidelines recommended by the relevant country. In general, the companies should be proactive and analyse the impact of base rate changes in their existing as well as new contracts. The companies should consider following actions from transfer pricing (TP) perspective: Actions to be taken from TP perspective u

Re-alignment of existing agreements: Companies should re-align existing inter-company agreements to include appropriate fallback language along with the spread adjustment methodology and evaluate the impact of changes from the perspective of both the parties involved (i.e., lender and borrower) so that neither of the party is disadvantaged. The fallback clauses need to be customised to domestic market requirements. Also, one should consult the relevant tax, accounting and regulatory experts to analyse the potential impact of any amendments in the existing agreements.

Drafting new contracts using new ARRs: New contracts to be drafted using new ARRs instead of LIBOR even if they expire before the end of LIBOR as the rate will become less reliable. New loans will also require changes in documentation, payment structures, funding vs. lending mismatch, and other changes. Upgrading systems and processes: Companies should analyse their existing IT systems and processes that are currently based around LIBORs as the same may require upgrades in order to deal with ARRs that are backward looking and overnight-only, where amounts payable as interest are only known shortly before the payment date.

SOFR as a replacement of LIBOR: Transfer Pricing considerations

TDS Ready Reckoner Author Edition ISBN No Date of Publication Weight (Kgs) No. of papers

: : : : : :

Taxmann April 2021 9789390831685 April 2021 0.910 804 Rs. 1650

Description Taxmann’s TDS Ready Reckoner provides a ready referencer on all Sections of TDS and TCS. All provisions of TDS and TCS are covered in independent chapters with prominent headings for pinpointed discussions on all aspects of law and compliances. The key highlights of this book are as follows: 

Alphabetical TDS Reckoner



Your Queries on TDS



TDS Charts



FAQs on the following:

Section(s) 194P/194Q & 206C(1H)

Deferment of TDS on ESOPs by Start-ups

The Present Publication is the Latest Edition and amended as per the following: 

The Finance Act 2021



The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020

This book is divided into four divisions, namely: 

Introduction



Tax Deduction at Source



Tax Collection at Source



Statement of Financial Transactions

The key features of the book are as follows: 

[Tabular Format] Overview of all provisions of TDS and TCS in tabular Format



Information about all the interconnected provisions are provided at a single place



[Detailed Analysis] of TDS and TCS provisions



[Complete Analysis of the Rules] prescribed in respect of TDS and TCS



[Illustrations] for easy understanding of various complex provisions



[Guidance on the Controversial Issues] with supporting Case Laws



[Circulars and Notifications] are linked with the relevant provisions



[Forms] required for meeting compliance requirements

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Direct Tax Laws

Set-up internal policy guidance: An internal policy providing guidance on implementing new ARRs and fall back provisions should be prepared in order to standardise an organisation-wide approach. Companies should also educate their internal team members on an ongoing basis on the developments in this regard.

Other aspects: Thought should also be given to the non-contractual uses of LIBOR and the operational and process impact of the phase-out. For example, LIBOR may be used for accounting purposes and for internal reporting or analysis.

Conclusion Since 2021 has already begun, companies should start analysing the transfer pricing impact on their inter-company agreements and decide on the transition plan to tackle the issues arises from this change. In order to replace USD LIBOR with SOFR in the existing agreements, one should consider the recommendations made by ARRC with respect to the fallback language and spread adjustment methodology. However, the same needs to be customised to domestic market requirements. Furthermore, comparable data will also be available soon as the market has started dealing in SOFR. Some US institutions have already started issuing securities and writing contracts that based on SOFR. Even India has started dealing in SOFR. Two of the Indian banks i.e. SBI and ICICI has recently entered in their first alternative risk-free rate transactions utilising the SOFR, which is an important step for the Indian market to support the LIBOR’s transition and move ahead with the implementation phase. Needless to say that, the companies should keep an eye on the developments taking place in the market in this regard and accordingly, move ahead with the transition. lll

1. LIBOR is a set of several benchmarks that reflect the average interest rate at which large global banks can borrow from each other. It is produced once a day by the Intercontinental Exchange (ICE) and regulated by the Financial Conduct Authority. 2.

Multinational enterprises

3. SOFR is based on transactions in the Treasury repurchase market, where investors offer banks overnight loans backed by their bond assets. 4. A trigger event is an occurrence that precipitates the conversion from LIBOR to a new reference rate. 5. The successor rate is the reference rate that would replace LIBOR in contracts.

SOFR as a replacement of LIBOR: Transfer Pricing considerations

Deduction of Tax at Source

with Advance Tax and Refunds Author

Vinod K. Singhania

Edition

34th Edition

ISBN No.

9789390831753

Date of Publication

April 2021

Rs. 1995

Description Taxmann’s Deduction of Tax at Source with Advance Tax and Refunds provides legal analysis of the provisions along with guidance on all practical problems supported by illustrations and legal jurisprudence. The Present Publication is the 34th Edition and amended as per the following: 

The Finance Act 2021



The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020

This book is divided into four divisions, namely: 

Deduction of Tax at Source



Advance Tax



Tax Collection at Source



Refund

The key features of the book are as follows: 

[Detailed Analysis] of TDS and TCS provisions



[Illustrations] for easy understanding of various complex provisions



[Case Laws] Covering ratio of all important Case Laws relating to TDS & TCS



[Complete Analysis of the Rules] prescribed on TDS and TCS provisions



[Guidance on the Controversial Issues] with supporting Case Laws



[Circulars and Notifications] are linked with the relevant provisions

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Taxation of software payments – Understanding tax implications based on IP law R. SUBHASHREE - Advocate, DR. G. GOKUL KISHORE - Advocate

4 28

The issue The tax department’s view regarding taxation of payments for use of software/ purchase of software is that payment for grant of license- whether exclusive or nonexclusive, distribution and sale of CD carrying the software, sale of equipment with software would be taxable as royalty since a part of such payment, if not in entirety, is for copyright in the software. However, assessees in various categories - end-users, resellers, distributors took a stand that the payment is not for any copyright since no right is conveyed to the payer/buyer of software and it is not taxable as royalty. The distinction between use of/right to use copyright and a copyrighted article or physical object containing a copyrighted software was emphasised to contend that no tax is deductible on such payments. Moreover, since the non-residents would choose to be governed by the DTAA which does not classify such payment as royalty, in any event, the benefit under Section 90 (2) could be availed and the sum would not be chargeable to tax in India.

Judgment of the Supreme Court The Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT [2021] 125 taxmann.com 42 (SC) has held that payment by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not payment of royalty for the use of copyright in the computer software. This judgment has brought clarity to the much-debated issue of taxation of payment for computer software. The key points in the above-mentioned judgment which approves the decision of various High Courts and AAR in favour of the taxpayer are: u The transfer of right has to be understood with reference to Copyright Act, 1957 and grant of license without proprietary interest is not covered. u There must be a parting with the right enabling the recipient to exercise the right enumerated in the Copyright Act like right to reproduce the work, issue copies etc. u The transfer of the ownership of the physical substance, in which copyright subsists is not grant of right. u A non-exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights. u Where the core of a transaction is to authorize the end-user to have access to and make use of the “licensed” computer software product over which the licensee has no exclusive rights, no copyright is parted with. u Right to reproduce and the right to use computer software are distinct and separate rights and in case of non-exclusive EULAs no right is parted with.

Taxation of software payments – Understanding tax implications based on IP law

Direct Tax Laws

The payment for “transfer of all or any rights” including grant of license in respect of intellectual property like patent, design, trademark copyright is taxable as royalty as per Section 9(1)(vi) of the Income Tax Act, 1961 (the Act). Royalty is taxable as income deemed to arise in India and a person making payment to a non-resident is obliged to deduct tax on the payment. Explanation 4 which was inserted in 2012 with retrospective effect to clarify that transfer of right in respect of any right, property or information includes transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. The definition of royalty in the Double Taxation Avoidance Agreements (DTAA) is not quite as wide.

Direct Tax Laws

The Supreme Court further held that changes to the domestic Act which could not have been contemplated at the time of entering into the DTAA cannot be imported into the understanding of the term ‘royalty’ under the DTAA. Thus, the various rulings upholding the static rule of interpretation has also been given approval. Further, it also held that where the sum is not chargeable to tax as royalty, there was no need to deduct tax. It said that the ruling in Pilcom v. CIT [2020] 116 taxmann.com 394/271 Taxman 200/425 ITR 312 (SC) would not apply since the tax deduction in the case of Pilcom was not under Section 195 in respect of “sum chargeable to tax” and the payer did not have any option but to deduct tax whether the sum was ultimately taxable or not.

Deduction under Section 194J The CBDT had issued Notification No.21/2012 dated 13-6-2012 in terms of which where tax has already been paid on the first transfer of software either under Section 194J or Section 195, tax was not required to be deducted in subsequent transfers where transferor is a resident. Interestingly Explanation 4 does not find mention in Section 194J which requires the person making payment of any royalty to a resident to deduct tax. The definition of royalty is as per Section 9(1)(vi), Explanation 2. Explanation 4 which was inserted in 2012 was not included in the definition for purposes of Section 194J. It may now be possible to take an argument that even for resident payees, the definition of royalty is not satisfied in case of payment for software with limited rights to use the same both on account of absence of reference to Explanation 4, in Section 194J and the elucidation by the Supreme Court that unless there is a transfer of right, payment for the limited right to operate the software will not fall within the ambit of royalty.

Implications for other IPRs The focus of the arguments on taxability remained on transfer of right in respect of copyright or “use of or right to use” as it appears in DTAA(s) and the amendment to Explanation 4 to Section 9(1)(vi). The Supreme Court held that to satisfy the term use of or right to use copyright, an interest or right must be created in such distributors/endusers. The Supreme Court has categorically held that in event of non-exclusive license non-transferable license does not enable a person to enjoy the rights as right-holder and hence there is no transfer of rights or right to use. The IT Act covers payment for transfer of rights as well as use in case of other IPRs like patent, trademark etc., under separate clauses. The distinction between copyright and other IPRs is that in case of copyright the making of a single copy is not treated as infringement as per Section 52 (1)(aa) of Copyright Act, 1957. Similar provisions have not been drafted for other IPRs. Therefore, a non-exclusive, restrictive permission to use patent and payment for such patent could still be covered under ambit of royalty where the person is enabled to produce the goods using the patent, uses the trademark on goods or services since in the absence of such permission it would be infringement. The Commentary to OECD Model Tax Convention states that royalty is a form of income from letting of property and is for the permission given by the right holder to use the property. The words “use of” would cover payments even in case of infringement of patents, trademark, copyright etc., and “right to use” seeks to cover payment for entitlement to use. The proposed changes to the UN Model (revised draft published in February 2021 seeking further public comments), seek to tax payments for use of software irrespective of the transfer of copyright. It remains to be seen whether the changes proposed are adopted in the current DTAAs. [The authors are Advocates in Gokul & Subha Advocates, Chennai. Views expressed are personal] lll

Taxation of software payments – Understanding tax implications based on IP law

Income Tax Act Pocket Edition Author

Taxmann

Edition

27th Edition

ISBN No.

9789390831203

Date of Publication

April 2021

Weight (Kgs.)

0.635

No. of papers

1144

Rs. 850

Description Taxmann’s Income Tax Act [Pocket Edition] covers the annotated text of the Income-tax Act, 1961, in the most authentic, amended & updated format. The Present Publication is the 27th Edition & Updated till the following:  The Finance Act, 2021  The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020  The contents of the book are as follows:

Division One – Income-tax Act, 1961

Arrangement of Sections

Text of the Income-tax Act, 1961 as amended by the Finance Act, 2021 and Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020

Division Two – Finance Act, 2021

Relevant Text of the Finance Act, 2021

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Beneficial Exemption: Should it be construed in a Strict or a Liberal way? TAXMANN’S RESEARCH & ADVISORY (INDIRECT TAX) TEAM

5 32

The strict rule of interpretation means each of the words in the Statute should be interpreted by letter and no interpretation should be given beyond the spirit of the statute. In contrast, the liberal rule of interpretation is based on beneficial construction and aims to advance the purpose or object of the statute. The Constitution Bench of the Hon’ble Supreme Court in the case of Dilip Kumar & Company1 held that an exemption clause should primarily be interpreted in a strict manner. In case of any ambiguity while interpreting the exemption clause, the benefit of doubt should go in favour of the revenue. In a recent judgment of Mother Superior Adoration Convent2 the division bench of Hon’ble Supreme Court, while interpreting the exemption provision under the Kerala Building Tax Act, 1975 has distinguished itself from the said judgment of the Constitution Bench. The division bench has made a distinction between general exemption provisions and exemption provisions having a beneficial purpose. Therefore, interpretation rule would vary depending on the purpose of the exemption. The principles derived by the Hon’ble division bench would surely have an impact on the future litigations in the Country relating to availability of exemptions. In this article, we have discussed the issue dealt and interpretations derived by the Hon’ble Division bench. The article also focuses on the applicability of the judgment under the GST and Customs laws.

2. Levy under the Kerala Building Tax Act, 1975 and Question of law before the Division Bench The Kerala Building Tax Act, 1975 (‘the Act’) levies tax on construction of Buildings and luxury tax on certain residential building. The Act also provides an exemption in respect of buildings that are used principally for religious, charitable or educational purposes are. In the given case, the question was of levying tax on buildings which were either used by the nuns for residential purposes or by students staying in the hostel accommodations attached to various educational institutions. It was argued by the Department exemption shall not be available in respect of above buildings as these are used for residential purpose and not falling under the ambit of religious or educational purposes. The question before the Division Bench of the Supreme Court was whether the subject hostel building and residential building, falls under the term ‘educational and religious purposes’ and thus entitled for the exemption under the Act.

3. Arguments of the parties The State contended that the exemption could only be availed if building was principally used for religious or educational purposes and not for an activity which has no direct connection with religious/educational activity. Since no religious/educational activities were carried on at the buildings which accommodated the nuns and students therefore it would not entitled for the exemption. The State has taken support from the Dilip Kumar case (supra) and contended that an exemption provision contained in a fiscal statute must be construed strictly and in the case of doubt or ambiguity must be construed in favour of the State.

Beneficial Exemption: Should it be construed in a Strict or a Liberal way?

Goods & Services Tax

1. Introduction

Goods & Services Tax

On the other side, the assessee argued that the building should be exempted as a beneficial legislation which is meant to further religious, charitable and educational purposes should not be construed in a narrow fashion, and should be construed in a liberal way in accordance with the object sought to be achieved.

4. Order of Division Bench The Division Bench in the given case distinguished itself from this general principle and held that beneficial exemptions having their purpose as encouragement or promotion of certain activities should be liberally interpreted. Additionally, in case of an ambiguity in a beneficial exemption provision, it should be interpreted in favour of the assessee. In reference to Dilip Kumar’s case (supra), it held that the Constitution bench has not made any distinction between exemption granted generally and exemption provisions that have a beneficial purpose, therefore, it cannot be said that for beneficial exemption liberal rule of construction has been done away with. In other words, for construction of beneficial exemption strict rule of interpretation may not be required to be applied.

5. Our Comments The Conclusion in the given case, with due respect to the authorities, in our humble view could also have been derived by applying the strict rule of interpretation. The exemption provision provides that any building that is used for religious, charitable or educational purposes are exempted from paying the building tax. The use of the term ‘religious purpose’ shows that the legislature did not intend to restrict the scope of application of the section to religious buildings (say Temple, Church, etc.)/Educational buildings (say School, Colleges etc.) The important factor to is to check whether the religious purpose/ educational purpose is getting achieved or not. In other words, if the legislature intended that only the building having the place of worship be exempted then it would have mentioned ‘Religious place’ instead of ‘Religious purposes’. Further, the Rule of liberal interpretation cannot be applied as straight jacket formulae by the taxpayers using this judgment. In order to apply the ratio of this judgment, one would have to prove that its case falls within the meaning of ‘Beneficial Exemption’. Notably, what construes as ‘Beneficial Exemption’ has not been explained in detail by the Hon’ble Division Bench. In this regard, the Hon’ble Bench has just provided that an exemption provision should be liberally construed if the provision aims to grant incentive for promoting economic growth or otherwise has some beneficial reason behind it. The principles derived by the Hon’ble Division Bench would surely have an impact on the future litigations in the Country relating to availability of exemptions. lll

1. Commissioner of Customs (Import), Mumbai v. Dilip Kumar & Company [2018] 95 taxmann.com 327 (SC). 2. [2021] 126 taxmann.com 68 (SC)[01-03-2021].

Beneficial Exemption: Should it be construed in a Strict or a Liberal way?

Balance Sheet Decoded Author

GC PIPARA

Edition

3rd Edition

ISBN No.

9789390831876

Date of Publication

April 2021

No. of Pages

484

Rs. 1395

Description This book aims to explain the readers how to read, understand, analyse and interlink the voluminous information available in the financial statement with the help of charts, case analysis, etc. In other words, this book provides in-depth analysis, stepwise approach with the use of case analysis, to understand & decode the financial statements. This book extensively deals with the following issues & suggests on how they can be mitigated through proper analysis of financial statements:  Laxity in credit risk appraisal and loan monitoring in banks  Lack of appraisal skills for projects that need specialised skills, resulting in acceptance of inflated cost or aggressive projections etc.  How to find out frauds, wilful default, diversion of funds  How to find out early warning signs based on proper analysis of financial statements The entire concept of decoding of financial statement has been divided into six keys:  Key #1 deals with Statement of Profit & Loss  Key #2 deals with Balance Sheet  Key #3 deals with Concept of Audit and Auditor’s Report  Key #4 relates to Companies Auditor’s Report Order  Key #5 is used for decoding Connecting Statements, and  Key #6 is the Master Key

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The Uncertainty Encircling ITC Availment on Corporate Social Responsibility TUSHAR AGGARWAL - CA, Founder Partner, Tattvam Advisors

6 36

Although social responsibility as a concrete notion might be the product of the recent time, it has shared an interwoven colloquy with the business industry for a while now. While maximizing profit is the primary objective of a business entity and exercising autonomy towards its fulfilment is its substantive right, it nevertheless has several stakeholders to be accountable to. This accountability comes about in light of the impact it leaves on them and resultantly, the larger the entity, the bigger is the impact. The public, the society and the environment, inter alia, are stakeholders, towards which a sizable corporate entity owes certain responsibilities in terms of providing prosperity and welfare and that is by and large referred to as the Corporate Social Responsibility (CSR). This concept was integrated into the Indian legal system via the Companies Bill, 2009, in order to ensure that corporate entities contribute meaningfully towards the growth and prosperity of the nation. Section 135 of the Companies Act, 2013 requires every company having a specified net worth or turnover or profit, to contribute at least two per cent of its average net profit towards satisfying its corporate social responsibility. Further, Schedule VII of the Act and the Companies (Corporate Social Responsibility) Rules, 2014 provide for certain conditions and guidelines which are geared towards advancing CSR objectives. This stipulation inter alia relates to activities ranging from eradicating extreme hunger and poverty to imparting employment enhancing vocational skills and promoting gender equality. Now, a seemingly benevolent and rather edifying provision becomes convoluting once a mandate is attached to it and tax implications flow subsequently. The challenge being faced by the taxpayers in indirect taxation realms is with respect to eligibility of availing Input Tax Credit (ITC) on these transactions. Section 16(1) of the CGST Act provides that a registered person is eligible to avail the credit of goods or services supplied to it and used by it in the course or furtherance of business. Further, according to Section 17(5) of the CGST Act, input tax credit is not available in respect of supplies listed therein, notwithstanding anything contained in Section 16(1) of the CGST Act. Therefore, for availing ITC under the GST regime it is pertinent that the particular supply must be used in the course or furtherance of the business and should not be specifically bared by Section 17(5) of the CGST Act.

Whether CSR expenditure is in the course or furtherance of business CSR activities are a part of the commercial transactions of a corporation, wherein the entity provides certain contributions and earns goodwill, which is crucial part of any corporate undertaking. Moreover, they have to be carried out by certain companies, in absence of which, they can face repercussions. CSR therefore facilitates the furtherance of a business by being a valuable but also imperative input. In Asstt. CIT v. Jindal Power Ltd. [2016] 70 taxmann.com 389 (Raipur - Tri.), the issue for examination before the tribunal was allowability of expenditure incurred in discharge of corporate social responsibility on voluntary basis. The assessee had incurred voluntary expenses on construction of school building, devasthan/ temple, drainage, barbed wire fencing, educational schemes and distributions of clothes etc. It was held that the expenses would be allowed as long as they are incurred under section 37(1) of the Income Tax Act, 1961 are incurred wholly and exclusively as required, for the purposes of earning the income from business or profession. Further, the Hon’ble Madras High Court in the case of CIT v. Madras Refineries Ltd. [2004] 138 Taxman 261/266 ITR 170 has upheld deductibility of the amount spent by the assessee even on bringing drinking water to locality and in aiding local school. It was held that charitable activities which bring goodwill are in respect of business.

The Uncertainty Encircling ITC Availment on Corporate Social Responsibility

Goods & Services Tax

Introduction

Goods & Services Tax

The above judgments examined the claim of expenditure under section 37 of the Income Tax Act, 1961. In the case of Jindal Power Ltd. (supra) the revenue had contested that in view of the explanation 2 to section 37(1) the CSR contribution cannot be allowed. The courts have held that the said explanation is merely prospective and applies only to obligatory CSR contributions and not to voluntary contributions. In authors view, a provision under Income Tax Law would apply only for examining the eligibility to claim expenditure under that law only. Similar restrictions cannot be made applicable under GST Law in the absence of any specific restriction in respect of CSR contributions vide specific provision in this regard. Further, one of the most pertinent cases in reference to this is the case of Essel Propack Ltd. v. Commissioner of CGST1 wherein the Bombay High Court held that CSR Activities are input service for the purpose of availing CENVAT Credit after considering the mandatory requirement of CSR under Companies Act, 2013 and other direct & indirect advantages which the Corporate derives by discharging CSR. Allowing CENVAT credit in respect of CSR expenditure, this decision has paved way for steering further litigation on this subject. By the same token, AAR Uttar Pradesh has recently held CSR activity to be used in the course or furtherance of business. The companies which meet the criteria for CSR have to mandatorily undertake CSR activities and it therefore forms a part of the business itself. Taking this into consideration, the Authority concluded that ITC in terms of Section 16, CGST Act, is to be allowed on such transactions.2 Thus, in authors view undertaking CSR activities is certainly a business endeavour in as much as it arises from a legal mandate.

Deconstructing the nature of CSR vis a vis Section 17(5) of CGST Act Fulfilling Corporate Social Responsibility can take two ways and means, viz. availing services and availing goods.

ITC on goods purchased for fulfilling CSR obligations CSR can also be undertaken by endowing goods. In our view, the ITC on such goods should also be available unless there is a specific bar under Section 17(5) of the CGST Act. Many a times taxpayers also wonder if they will be barred to take ITC of the goods altogether for CSR purpose as Section 17(5) inter alia debars ITC when goods written off or disposed of by way of gift or free samples. In this regard, light needs to be cast on the term “gift or free samples” as distributing goods under CSR can be misidentified with the same by reason of a unilateral nature. Meaning of a gift Section 122 of the Transfer of Property Act, 1882, defines “gift” as follows: “the transfer of certain existing movable or immovable property made voluntarily and without consideration, by one person, called the donor, to another, called the donee, and accepted by or on behalf of the donee.” Attention is invited to the expression “voluntarily” which conveys that the very nature of a gift is wilful, uncompelling and self-induced. Moreover, the Gift-Tax Act, 1958, has defined the word gift to mean transfer by one person to another of any existing movable or immovable property voluntarily and without consideration in money or money’s worth. The definition of this term has also been cited by the Hon’ble Supreme Court as a voluntary transfer of property and as a gratuity and an act of generosity.3Besides, the Madras High Court also held that a transaction undertaken due to compulsion or enforcement does not amount to a ‘gift’ within the meaning of S. 122, TOPA. And worth to mention the Bombay High Court’s observation, that the essence of gift thus is a voluntary transfer. Further, the term “voluntarily” means without compulsion, freely and uninfluenced by pressure.4 The Uncertainty Encircling ITC Availment on Corporate Social Responsibility

Taxation of

Capital Gains Author

Taxmann

Edition

10th Edition

ISBN No.

9789390831678

Date of Publication

April 2021

Weight (Kgs.)

0.850

No. of papers

816

Rs. 1795

Description Taxmann’s Taxation of Capital Gains provides complete an in-depth & thorough analysis on each aspect of capital gains, with the help of ‘relevant’ judicial pronouncements, Circulars & Notifications, illustrations, checklists of actions to claim deductions & FAQs. This book covers the following:  Taxation of ULIPs with FAQs  Taxation of reconstitution of firms/LLPs/AOPs/BOIs with FAQs  Finance Act 2021 measures [Section 43CA amendments] to boost real estate with FAQs The Present Publication is the 10th Edition, as amended by the Finance Act 2021, with the following noteworthy features:  [Complete Analysis of each aspect of Capital Gains] with the help of relevant judicial pronouncements and Circular & Notifications  [Illustrations] for easy understanding of various complex provisions  [Guidance on the Controversial Issues] with supporting Case Laws  [Charitable Trusts] Separate chapter for treatment of capital gains in case of charitable trusts  Checklist of actions to claim deductions with extended time-limits for compliances under the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020

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Goods & Services Tax

In light of the above, it can be seen that the voluntary nature of a gift is recognized in several legal authorities and this disposition runs contrary to the substance of a CSR, which essentially arises out of a legal mandate and not voluntarily. The Allahabad High Court perceived this term as “a person doing an act/acts of his own volition and knows the nature of his acts and does not act in performance of a legal duty, not due to coercion or fraud or misrepresentation or mistake.” Meaning of an obligation Unlike the term suggests, Corporate Social Responsibility is more than a mere responsibility and is admittedly in the nature of an obligation. Indeed, the role of a large enterprise due to its statute and influence should ideally not be limited to generating profit but should also entail a responsibility towards the society and public at large. However, mandating such responsibility takes it a step further from ‘duty’ and makes it an obligation or a liability. Drawing a line of distinction between the two terms, the Patna High Court observed that it is one thing to say that one has a duty, but a legal obligation is a different thing.5 “Obligation” means a duty or a liability arising in law or from contract and liability itself means subjection to a legal obligation.6 The Calcutta High Court held that the word ‘obligation’ implies not a moral duty, but a legal duty which can be enforced by law and which is imposed upon a person by an outside agency or a third party in respect of the subjectmatter.7 And very importantly, it was stated by CESTAT, New Delhi, that the expenditure on Corporate Social Responsibility is a statutory requirement under the Companies Act.8 A perusal of these judicial pronouncements reveals that an obligation does not entail a voluntary action, but a mandatory one and undertaking CSR activities is a mandate by the statute, thereby making it an obligation and clearly discerning the difference between goods given under CSR and gifts distributed otherwise. Thus, in authors view, it is possible to take a view that availing ITC on above CSR activities is not restricted by law as it does not come under the expanse of Section 17(5) of CGST Act. Therefore, utilizing ITC in respect of expenditure incurred for fulfilling CSR obligation should justifiably be allowed, taking into consideration the surrounding facts and circumstances of each case. However, the same is likely to be disputed by the department and shall be settled at higher forum only.

ITC on services availed for fulfilling CSR obligations In authors view, the credit would be available in respect of all services which are not covered under Section 17(5) of CGST Act, 2017. To illustrate – If a company is making certain houses for persons belonging to economically backward classes and availing works contract/construction services for the same, the ITC on such services will not be available since there is a specific bar on availing ITC of such services by a person who is not engaged in further supply of such services.

Concluding Comments Amidst the hue and cry subsequent to the roll out of GST, the provision for availing ITC was the pacifier. The seamless procedure for utilizing input credit has been lauded, however, it is not free of its own convolutions. There is ambiguity surrounding the availment of ITC with respect to certain transactions owing to the obscurity of their true nature and in some cases, the different treatment of similar activities. As far as CSR is concerned, taking into account it’s essence and the relevant jurisprudence, it will only be fair to allow ITC claims on the same. CSR activities bear a nexus with the business and are performed out of the its net profits itself. Moreover, their obligatory nature further stresses the need to allow the same as they are a mandatory expenditure in the books of the companies. Making this mandatory and not permitting to take ITC on the same

The Uncertainty Encircling ITC Availment on Corporate Social Responsibility

Tax Audit Author

Srinivasan Anand G.

Edition

13th Edition

ISBN No.

9789390831746

Date of Publication

April 2021

Weight (Kgs.)

0.685

No. of papers

648 Rs. 1850

Description Taxmann’s Tax Audit provides a detailed commentary/clause-by-clause analysis on provisions relating to Tax Audit and clauses of Forms 3CA, 3CB and 3CD along-with guidance notes issued by ICAI & Tax Audit Reckoner. This book also Tax Audit Reckoner covering the following topics: 

Audit of Cash Transactions



Audit of Sale of Immovable Property



Audit of Share Capital



Audit of Loans, Deposits and Borrowings Liabilities



Clauses of From No. 3CD not relevant/applicable to tax audit for assessment year 2021-22



Clauses of Form No. 3CD relevant/applicable to individuals/HUFs who are liable for tax audit u/s 44AB



Clauses of Form No. 3CD relevant/ applicable to Firms/LLPs/AOPs/BOIs who are liable for tax audit u/s 44AB



Clauses of Form No. 3CD Relevant/applicable to companies who are liable for tax audit u/s 44AB



Audit reports/report of accountant, etc. prescribed under Income-tax Rules



Clauses of Form No. 3CD not applicable to assessees following cash basis of accounting



Form No. 3CD – Clause wise applicability reckoner of income computation and disclosure standards



Statutory provisions relevant to various clauses of Form No. 3CD

The Present Publication is the 13th Edition, amended by the Finance Act 2021 & Income-tax (Eighth Amendment) Rules 2021, authored by CA Srinivasan Anand G., with the following noteworthy features 

Analysis of the audit requirement under Income tax provision;



An in-depth discussion on every clause of the tax audit report Form No. 3CA, 3CB and 3CD;



Analysis of guidance note released by the ICAI on tax Audit.

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Goods & Services Tax

would go against the tenet of equity. Therefore, all things considered, availing ITC on CSR expenditure (unless barred by Section 17(5) of the CGST Act) should be within the accepted bounds of law. lll

1. Essel Propack Ltd. v. Commissioner of CGST [2020] 117 taxmann.com 409 (Mum. - CESTAT). 2. Dwarikesh Sugar Industries Ltd., In re [2021] 125 taxmann.com 329 (AAR - Uttar Pradesh) 3. Ku. Sonia Bhatia v. State of U.P. [1981] 3 SCR 239. 4. Laxman v. CIT [1989] 42 Taxman 47/[1988] 174 ITR 465 (Bom.); Sholapur Spg. & Wvg. Co. Ltd. v. Pandharinath Martand Sulakhe [1928] 30 Bom LR 893. 5. Mahanth Girjanand Bhagat v. Bhagwan Bhagat AIR 1967 Pat 101. 6. Punjab National Bank Ltd. v. Union of India [1986] 59 Comp. Cas 35 (Delhi). 7. State of West Bengal v. Iswar Damodar Jew AIR 1976 Cal 46. 8. Northern Coalfields Ltd. v. Commissioner of GST, Customs & Central Excise [Excise Appeal No. 51442 of 2018, dated 20-11-2019]

The Uncertainty Encircling ITC Availment on Corporate Social Responsibility

Faceless Assessment Appeals & Penalty Ready Reckoner with Real Time Case Studies Author

Mayank Mohanka

Edition

4th Edition

ISBN No.

9789390831005

Date of Publication

April 2021

Rs. 1395 Description This book is a ready reckoner for the assessee and tax practitioners, to understand practicalities and nuances of the following, in an effective, qualitative and timely manner:  Faceless Assessments under the newly inserted Section 144B of the Income Tax Act w.e.f. 01.04.2021  Faceless Appeal Scheme, 2020 legislated w.e.f. 12.02.2021  Faceless Penalty Scheme, 2021 incorporated w.e.f. 12.02.2021  Legislative provisions concerning Faceless ITAT The Present Publication authored by Mayank Mohanka, is the 4th Edition & amended by the following:  The Finance Act, 2021  The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020  All Important & Relevant CBDT’s Legislative Schemes, Circulars, Notifications & Press Releases on the Faceless Taxation Regime are updated till 31.03.2021 This book has the following noteworthy features:  [Illustrative Tables, Infographics, Visuals & Real-time Scrutiny Windows] to explain the newly inserted Section 144B containing provisions for ‘Faceless Assessments’ and the Legislative Schemes of ‘Faceless Appeal Scheme, 2020’ and ‘Faceless Penalty Scheme, 2021’.  [Real-time Practical Case Studies] on ‘Faceless Assessments’ on issues of: n Addition on account of HSBC Foreign Bank Account n Reassessment on account of Information from another IT Authority n Admission of Additional Evidence under Rule 46A n Cash Deposits out of Earlier Cash Withdrawals n Addition on account of considering Rental Business Income as Income from House Property n Appeal against Revisionary Order u/s 263 n TDS on Transmission & Wheeling Charges n Appeal against Rectification Order u/s 154 n Cash Deposits during Demonetization n Valuation of Shares u/s 56(2)(x) n Share Capital/Share Premium n LTCG on Penny Stocks n Disallowance u/s 14A/Rule 8D n Disallowance of Pre-commencement Business Expenditure n Taxability of Compensation received under RFCTLAAR Act, 2013 n Revenue Recognition & Expenditure Booking in Real Estate Business n Bogus Purchases, Seized Diary, AIR/STR information  [Specimens of Suggestive Qualitative & Meritorious] ‘e-Responses/Submissions’ on ‘Faceless Assessments & Faceless Appeals’  Practicalities & Nuances of Differences between the Conventional Assessments, Appeals and Penalty Proceedings & the New Faceless Assessments, Appeals and Penalty Proceedings.  [‘Step-by-Step-Manner’ through ‘Real-time’ ‘e-Proceedings’ windows] for demonstrating the actual conduct of ‘Faceless Assessments’, ‘Faceless Appeals’ & ‘Faceless Penalty’ proceedings  [Practical Guide] to ‘e-Filing of Rectification Applications u/s 154’ & ‘e-Responses to Outstanding Income Tax Demands’.  [Doctrine of Audi Alteram Partem] Critical Litigative Issues in the Faceless Taxation Regime  Faceless ITAT: Some Key Issues  FAQs on the ‘Faceless Taxation Regime’  International Best Practices in Tax Administration & Indian Tax Administration

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Supreme Court upholds the sanctity of Resolution Plan & the ‘Clean Slate Theory’ under IBC DEEPAK JOSHI - FCA, Advocate

7 44

Insolvency & Bankruptcy Code, 2016 (“IBC”) is a legislation aimed at timely resolution of an entity (“corporate debtor”) which has defaulted in payment to its creditors (including the statutory authorities). The corporate debtor has to undergo baptism by fire in the form of a Corporate Insolvency Resolution Process (“CIRP”). Once the corporate debtor is admitted into CIRP, it is the duty of the resolution professional to collate all the outstanding claims from all classes of creditors against the corporate debtors. It is only once all such claims have been crystallised, that the IBC allows for interested parties (“resolution applicant”) to submit their respective resolution plans which include the treatment of the aforesaid claims. These plans are then put to vote before the body of financial creditors (“Committee of Creditors”/”CoC”) who then vote for the most commercially viable resolution plan. The successful resolution plan then carries through the transition of the corporate debtor into the new entity. Amidst the very brief overview of the abovementioned process, there arises an interesting issue. As has been the experience so far, most of the resolution plans provide for a ‘haircut’ in payment to the creditors. This means that the successful resolution applicant will implement the plan by paying some value of the outstanding claim and extinguish the unsatisfied part of the claim. The IBC does not expressly provide for the treatment of the unsatisfied part of the claim. Would this mean that the creditors who have suffered a haircut or whose claims have been rejected out rightly, can still initiate legal proceedings against the new avatar of the corporate debtor for recovery of their outstanding claims? Further, would pending demands from the statutory authorities also face the same treatment as that of a normal class of creditors and hence they cannot also continue the demands post a successful resolution? The Hon’ble Supreme Court in a very recent decision in Ghanshyam Mishra v. Edelweirs Asset Reconstruction Co. Ltd. [Civil Appeal No. 8129 of 2019] has laid to rest the above doubts and controversies.

Factual Narration The Hon’ble Supreme Court was presented with a batch of matters wherein a common issue arose - whether after approval of resolution plan by the Adjudicating Authority a creditor including the Central Government, State Government or any local authority is entitled to initiate any proceedings for recovery of any of the dues from the Corporate Debtor, which are not a part of the Resolution Plan approved by the adjudicating authority? The creditors in these batch matters included statutory authorities like the State commercial tax department, State mining department, income tax department etc. in respect of their respective outstanding demands against the corporate debtors. In each of these matters, the concerned successful resolution plan had stipulated that the claims (including statutory liabilities and contingent liabilities) to the extent not satisfied or received under the plan will be extinguished. The corporate debtor in its new avatar shall not be liable to bear the same. The Hon’ble Adjudicating Authority in each of these cases had approved the resolution plans exercising jurisdiction under section 31 of the IBC. On appeal, the approval of these resolution plans was upheld. However, the Hon’ble NCLAT had given the following liberty to various class of creditors: u Workmen can move appropriate applications before the labour court for recovery. u Statutory dues of various government departments are dues outstanding & would qualify as operational debt. u Corporate Guarantee can be invoked against the new entity.

Supreme Court upholds the sanctity of Resolution Plan & the ‘Clean Slate Theory’ under IBC

Insolvency & Bankruptcy Code

Brief Background

Insolvency & Bankruptcy Code

The effect of these observations was that the creditors were now filing claims/ suits/recovery actions against the corporate debtor in its new avatar (under a new management). The statutory authority continued to press their demands for outstanding dues. Hence, the successful resolution applicants were aggrieved with these observations of the Hon’ble NCLAT and the matters were carried to the Hon’ble Supreme Court. The above factual narration has culminated into the present decision.

Decision of the Supreme Court u Once a resolution plan is duly approved by the Adjudicating Authority under Section 31, the claims as provided in the resolution plan shall stand frozen and will be binding on the creditors (including statutory authorities, employees and guarantors) u On the date of approval of resolution plan by the Adjudicating Authority, all such claims, which are not a part of resolution plan, shall stand extinguished and no person will be entitled to initiate or continue any proceedings in respect to a claim, which is not part of the resolution plan. u The amendment made to section 31 of the IBC is clarificatory and declaratory in nature and therefore will be effective from the date on which I&B Code has come into effect. u Consequently all the dues including the statutory dues owed to the Central Government, any State Government or any local authority, if not part of the resolution plan, shall stand extinguished and no proceedings in respect of such dues for the period prior to the date on which the Adjudicating Authority grants its approval under Section 31 could be continued.

Comments 1. The decision furthers the objective of the Act u The intent of the I&B Code was to inter alia permit a restructuring process whereby the liability of a corporate debtor could be reset in order to enable a new management to begin with a clean slate for reviving the business of the corporate debtor. u This becomes clear from the debate in Rajya Sabha when the IBC was first introduced. The Hon’ble Finance Minister had clearly envisaged a system of resetting the debt in the following words: “…There is a reset and then after the reset the company is competitive once again and it goes forward and it becomes successful. That is what happens consistently in the United States. They go into bankruptcy, the liabilities are reset, they become competitive again and then thereafter they do fine…” In this regard, it is instructive to refer to the Supreme Court’s decision in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta [2019] 111 taxmann.com 234, which held as under: “88.…….A successful resolution applicant cannot suddenly be faced with “undecided” claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully take over the business of the corporate debtor. ……….This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove. For these reasons, the NCLAT judgment must also be set aside on this count.” Supreme Court upholds the sanctity of Resolution Plan & the ‘Clean Slate Theory’ under IBC

Taxation of Real Estate Developers & Joint Development Arrangements with Accounting Aspects Author Edition ISBN No Date of Publication Weight (Kgs) No. of papers

: : : : : :

Raj K. Agarwal , Rakesh Gupta 4th Edition 9789390831326 April 2021 0.6 568

Rs. 1100

Description A Complete Guide to all matters pertaining to Taxation of Real Estate Developers & Joint Development Arrangements from an income tax & accounting perspective. The Present Publication is the 4th Edition, amended by the Finance Act 2021 & authored by Dr. Raj K. Agarwal & Dr. Rakesh Gupta. The noteworthy features of this book are as follows: Income Tax 

Critical Income Tax issues relating to joint development arrangement of real estate

In the case of land owner

In the case of real estate developer



Income Tax issues relating to determination of year of transfer of capital asset and value of sale consideration in the case of joint development of real estate, particularly when joint development agreement is drafted in complex manner.



Analysis of provisions of:

Deeming provisions of Sections 43CA, 50C, 56(2)(x)(b) & 23(5)

Section-80-IBA granting deduction too developers for construction of affordable housing

Section 2(47) | Definition of “Transfer” of capital asset/Section 45(2)

Conversion of capital asset into stock-in-trade/Section 50D

Fair Market Value deemed to be Full Value of consideration.



[Analysis of provision of newly introduced sub-section (5A) to Section 45] of the Income Tax Act, 1961



Attraction of capital gains tax liability in case of transfer of Agricultural Land.



[Analysis of various judgments of ITAT & High Courts] applicable to the Land Owner and Real Estate Developer in the case of Joint Development of Real Estate.

Accounting Aspects 

In depth analysis of Guidance Note on Accounting for Real Estate Transactions (Revised 2012) issued by the ICAI, applicable to Real Estate Developer.



Analysis of applicability of principle of Revenue Recognition to Real Estate Developer at different point of time.



Analysis of applicability of Income Recognition to Real Estate Developer under IFRS & ICDS Regime.

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Insolvency & Bankruptcy Code

u If a civil suit/recovery proceeding is permitted to be initiated after the conclusion of insolvency proceedings and after the moratorium is lifted, it will lead to a multiplicity of endless legal proceedings. Clearly, such an argument defeats the very objective of I&B Code and any legal proceedings so initiated in respect of a rejected claim once the moratorium is lifted, will be in teeth of the provisions of I&B Code u Further, the SC in the case of Swiss Ribbons (P.) Ltd. v. Union of India [2019] 101 taxmann.com 389/152 SCL 365 has held that the aim of the IBC, 2016 is to economically rehabilitate the Corporate Debtor and for that purpose, the timelines protect the corporate debtor’s assets from further dilution. To achieve the said purpose, it is essential that creditors are barred from raising belated claims against the successfully Resolution Applicant who is trying to resuscitate the Corporate Debtor. u Lastly, the approach propounded by the NCLAT has the effect of giving liberty to the fence sitters to raise their claims belatedly even after the resolution of the corporate debtor. In such a case, most of the creditors will not submit their claims and will wait for the resolution so that they can initiate proceedings against the corporate debtor. There will never be clean slate as is envisaged by the IBC. 2. IBC allows for settlement of debt at a reduced value u Regulation 37 of the IBBI (Insolvency Resolution of Corporate Persons) Regulations, 2016 (“CIRP Regulations”) mandates a Resolution Applicant to provide in its resolution plan any reduction in the amount payable to a particular category of creditor. Accordingly, settlement of a debt at a reduced value is clearly permissible pursuant to a Resolution Plan. 3. Section 31(1) makes the resolution plan binding on all stakeholders – Since the inception of IBC u Any entity which is involved in the CIRP Process shall be bound by the Resolution Plan, including any provision for extinguishment of claims. A creditor which submits its claim is certainly involved in the CIRP Process as it has submitted its claim as per the provisions of IBC to get his claim resolved under the CIRP Process. u In fact, the Government recently passed the 2019 Amendment to the IBC, 2016 [Act No. 26 of 2019] wherein it was further clarified that the rigours of Section 31 also apply to the Central and State Government, as well as local authorities. Therefore, once the Resolution Plan is approved by the Adjudicating Authority, it is binding on all parties under Section 31 of the Code. u The Finance Minister, while answering questions about the 2019 Amendment Act, explained before the Rajya Sabha on 29.07.2019 that, “The amendment now is clearly making it binding on the Government. It is one of the ways in which we are providing that. The Government will not raise any further claim. The Government will not make any further claim after resolution plan is approved. … So, now, they need not be scared that the taxman will come after them for the faults of the earlier promoters….”

Supreme Court upholds the sanctity of Resolution Plan & the ‘Clean Slate Theory’ under IBC

GST Ready Reckoner Author

V.S. Datey

Edition

16th Edition

Date of Publication

April 2021

Description Taxmann’s Ultimate Best-Seller for Indirect Taxes – ‘GST Ready Reckoner’, is a ready referencer for all provisions of the GST Law covering all important topics of GST along-with relevant Case Laws, Notifications, Circulars, etc.

Rs. 2100

The Present Publication is the 16th Edition, amended by the Finance Act 2021 & updated upto 1st April 2021, authored by Mr. V.S. Datey. This book follows the SixSigma approach to achieve the benchmark of ‘zero-error’.

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The Hon’ble Supreme Court has rightly held that this amendment is a mere clarificatory amendment and has to apply retrospectively. u Therefore, we need to read Regulation 37 along with section 31. On one hand, Regulation 37 allows for settlement of debt at a reduced value. On the other hand, Section 31 makes the Resolution Plan binding on all stakeholders involved in the Resolution Plan. Therefore, a creditor is bound by the Resolution Plan even if his claim has not been decided on merits. However, there is a note of caution for professionals, practitioners and lawyers – these observations have been made wherein the plan explicitly mentioned that the rejected claims shall be extinguished forever. Hence, the application of the law will depend on the actual wording of the resolution plans.

Conclusion This decision is a welcome one because there were increasing instances wherein statutory departments as well as other creditors were filing/continuing recovery proceedings despite a successful resolution. Further, owing to observations of the NCLAT, the creditors in whose favour guarantee was provided by the erstwhile corporate debtor, had the liberty to initiate recovery against the new entity. This was a big impediment for the prospective resolution applicants because there was always an apprehension that even after crystallised part payments of debts, the new entity will be saddled with claims. The Hon’ble Supreme Court has established it beyond any doubts that the dominant purpose of IBC is that the corporate debtor should start with fresh slate on the basis of the resolution plan. The scope for a “hydra head” monster to appear again in form of fresh claims has been rightly restricted by this important ruling. lll

Supreme Court upholds the sanctity of Resolution Plan & the ‘Clean Slate Theory’ under IBC

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Taxmann Review Bulletin | Taxmann.com | May 2021

Articles inside

INSOLVENCY & BANKRUPTCY CODE 7 Supreme Court upholds the sanctity of Resolution Plan & the ‘Clean Slate Theory’ under IBC

4 Taxation of software payments – Understanding tax implications based on IP law

6 The Uncertainty Encircling ITC Availment on Corporate Social Responsibility

GOODS & SERVICES TAX 5 Beneficial Exemption: Should it be construed in a Strict or a Liberal way?

2 New rules for registration and approval of NGOs w.e.f. 01-04-2021

3 SOFR as a replacement of LIBOR: Transfer Pricing considerations

DIRECT TAX LAWS 1 Aspects to be considered on application of MFN Clause of Tax Treaty