Abhishek Dutta – Page 5 – Aureus Law Partners

Deciphering the IBC Ordinance 2020

With a view to aid struggling businesses in wake of the COVID-19 pandemic and consequent nation-wide lockdown, Government of India has introduced two major amendments under the Insolvency and Bankruptcy Code, 2016 (“IBC / Code”). It has suspended functioning of Sections 7, 9 and 10 for 6-months and further granted exemption to transactions which may be deemed as wrongful trading transactions under Section 66(2), during this period. These amendments were brought into effect vide the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 dated June 5, 2020 (“Ordinance”). The Ordinance can be accessed here.

Section 10A – Analysis

Sections 7 and 9 relate to insolvency proceedings against corporate persons by financial creditors and operational creditors. Section 10 relates to insolvency proceedings initiated by corporate debtor against itself.

By way of this Ordinance, Section 10A has been introduced under IBC. It states that in relation to Sections 7, 9 and 10, no application to initiate corporate insolvency resolution process (“CIRP”) shall be filed for defaults occurring on or after March 25, 2020 till a period of 6-months. It stipulates that this period may be extended, but not beyond 1-year. The Ordinance further clarifies that no application could ever be filed in relation to defaults for aforementioned period. Further, Section 10A would not apply to defaults occurring prior to March 25, 2020.

Hence, Section 10A stipulates three things; one, default occurring between March 25, 2020 and September 25, 2020 or March 25, 2021 (if extended) (“exempt period”) would not be considered as default. Two, for this period, no corporate person could ever be brought under ambit of IBC. Three, defaults occurring prior to March 25, 2020 would not be affected by Section 10A, and fresh proceedings therein may be filed.

Remedy suspended for exempt period, claim remains intact

The introduction of Section 10A would effectively eliminate defaults committed during the exempt period from being considered for the purposes of bringing a corporate person under IBC in future. However, the question which arises is whether this would mean that claims arising vis-à-vis defaults committed during such exempt period would stand extinguished completely. For this purpose, it becomes pertinent to understand claim, debt and default as provided under IBC, which has been explained in the diagram herein below:

The Ordinance however, categorically states that filing of petitions for defaults committed during the exempt period is not allowed. It does not state that those amounts can never be claimed or cannot be ‘debt’ under IBC.

Therefore, when default continues beyond the exempt period, and aggregate amount of default (after eliminating default amount during exempt period) comes upto INR 1 crore, the creditor can initiate insolvency proceedings. However, this exclusion could be interpreted to be applicable only vis-à-vis filing of applications and it may not have an impact on claims filed before the Resolution Professional (“RP”) once CIRP has commenced.

Hence, it would appear that merely the remedy available to a creditor for bringing a corporate person under IBC has been suspended with respect to defaults during the exempt period. The creditor’s right to claim amounts in relation to these defaults would remain intact.

No effect on other proceedings under IBC or parallel remedies

Section 10A only suspends the functioning of Sections 7, 9 and 10 of IBC for the exempt period. It does not touch upon other proceedings under the Code, which may continue to function normally. For instance, proceedings already pending under these aforementioned sections wherein CIRP has been admitted or application is reserved for orders; applications required/ made during the course of CIRP; initiation of liquidation proceedings under Section 33; initiation of insolvency resolution process against personal guarantors under Sections 94 and 95 and initiation of bankruptcy against personal guarantor under Section 121, etc.

Additionally, the remedies available to a creditor other than under IBC may still be availed. Viz. a suit for recovery under provisions of the Code of Civil Procedure, 1908; proceedings under Recovery of Debts and Bankruptcy Act, 1993, proceedings under Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, etc. would not be affected by promulgation of the Ordinance.

Section 66(3) – Analysis

Section 66 of IBC allows the Adjudicating Authority (“AA”) to declare any third persons (in case of fraudulent trading transactions) and directors/ partners (in case of wrongful trading transactions) liable for such transactions. Under the said section, the AA is empowered to pass orders to this effect upon an application by the RP under Section 66(1)(2).

Vide the Ordinance, a new provision in the form of Section 66(3) has been inserted. It states that if a wrongful trading transaction as stipulated under Section 66(2) has taken place during the exempt period, the RP cannot not file an application before the AA to hold the directors/ partners liable for those transactions.

This would be applicable in the event CIRP is commenced against a corporate person in future (i.e. post exempt period and if default is INR 1 crore, after deducting default amount for exempt period) and is ongoing/ liquidation has commenced.

Under the current unprecedented circumstances, directors/ partners may take certain decisions in the financial interest of their businesses, which could be deemed as wrongful trading transactions, should the entity enter into CIRP in future. However, the insertion of Section 66(3) provides a blanket protection to the directors/ partners for such transactions entered into during the exempt period.

Conclusion

The suspension of Sections 7, 9 and 10 may provide relief to stressed businesses being adversely impacted due to COVID-19. It appears that this suspension would go hand-in-hand with the extended moratorium granted by the Reserve Bank of India (“RBI”) vide press release dated May 22, 2020. The press release can be accessed here. Hence, it would appear that financial creditors would benefit under this scenario.

The brunt of the amendment may be faced by operational creditors or financial creditors who are home buyers. Further, for continuing defaults beyond the exempt period, it may prove difficult to establish aggregate default of INR 1 crore. To proceed under IBC, such creditors would either have to file application jointly (in case of financial creditors meeting requirements under Section 7(1)) or wait till aggregate debt becomes INR 1 crore or CIRP is initiated as a result of some other creditor’s application.

In the alternate they would be required to approach other forums, and the multiplicity of proceedings in various forums may lead to confusion and may prove counter-productive for all stake holders.

[1] The Ordinance can be accessed here.

[2] The press release can be accessed here.

Contributed by Sayli Petiwale, with inputs from Vineet Shrivastava, Astha Srivastava.

Sayli can be reached at sayli.petiwale@aureuslaw.com.

Creation of Payments Infrastructure Development Fund

The Reserve Bank of India (“RBI”) on June 5, 2020 announced creation of a Payments Infrastructure Development Fund (“PIDF”) of INR 500 crores.[1] This would boost the deployment of Point of Sale (“PoS”) devices in tier-3 to tier-6 centres and north eastern states. It would also help in enhancement of PoS infrastructure (both physical and digital modes) in these underserved areas.

In this regard, the initial funding of INR 250 crores would be provided by the RBI. The remaining amount of INR 250 crores would be contributed by card issuing banks and card network companies. Also, contributions would be provided by banks and card network companies in the PIDF to cover operational expenses. The RBI may further contribute towards the yearly shortfalls, if required. The PIDF would be governed through an Advisory Council and managed and administered by the RBI.

This step would encourage the development of digital payments ecosystem in the underserved areas of the country. The deployment of PoS devices would support businesses to accept payment through digital/ e-modes, which in turn would help in reduction in cash transactions.

Contributed by-

Astha Srivastava

[1] The press release in this regard could be accessed here.

From Yatin’s Desk: Delhi High Court rules on respondent’s right in absence of filing cross appeal or objections

Taxpayers are often faced with a dilemma regarding filing an appeal when though on merits the matter is decided in their favour, on validity of the proceedings (issue of jurisdiction), Revenue’s position is accepted by the appellate forum. For instance, in a reassessment matters, if the taxpayer has obtained relief on merits with regard to the additions made, while the appellant authority upholds the validity of reopening in favour of the Revenue, question arises – what should be the strategy with regard to future litigation?

A common-sense approach would suggest that there is no purpose of filing an appeal give the overall outcome being in favour of the taxpayer. But what if the Revenue is in appeal against the favourable order of the lower appellate authority which has provided relief on merit? In such a situation can the taxpayer at the stage of appellate hearing challenge the lower appellate authorities order with respect to the ground decided against it (upholding jurisdiction i.e. validity of proceedings) or is such opportunity lost in case the taxpayer has not filed a cross appeal/objections against the appeal preferred by the Revenue.

This interesting issue has recently been examined by the Hon’ble Delhi High Court (HC) in the case of Sanjay Sawhney v. Principal Commissioner of Income Tax. In a detailed reasoned order in favour of the taxpayer, the HC has held that the taxpayer was entitled to agitate the jurisdictional issue relating to the validity of the reassessment proceedings even in absence of cross appeal/objections by the taxpayer. The HC examined scope of Rule 27 of the Appellate Tribunal Rules, 1964 (ITAT Rules) which enables the respondent, even if he may not have appealed to support the order appealed against on any of the grounds decided against him.

In the facts of the case, pursuant to a search action, the return filed by the taxpayer was reassessed and income enhanced by the Assessing Officer (AO). Before the first appellate authority [CIT(A], the taxpayer besides challenging the additions made by the AO on merits also raised legal grounds challenging the validity of the reassessment proceedings. The CIT(A) while upholding the reassessment proceedings as being valid, on merits, allowed the appeal in favour of the taxpayer and deleted all the additions made by the AO. The CIT(A) order was contested by the Revenue before the Income Tax Appellate Tribunal (ITAT). In the proceedings before the ITAT, the appellant- assessee made an oral application under Rule 27 of ITAT Rules and urged additional grounds against the findings of the CIT(A) upholding validity of the proceedings. The ITAT disagreed with taxpayer and on a technical ground refused to consider the legal ground challenging validity of proceedings {as upheld by the CIT(A)} premised on Rule 27 of the ITAT Rules considering no application had been filed by the taxpayer.

The Court took note that Rule 27 of the ITAT Rules, as it stands today, does not mandate the application to be made in writing, distinguishing such requirement which is prescribed under the draft Appellate Tribunal Rules 2017 (not notified yet) proposing to insert a proviso to Rule 27, providing for an application to be made in writing. The Court observed that Rule 27 embodies a fundamental principal that a Respondent who may not have been aggrieved by the final order of the Lower Authority or the Court, and therefore, has not filed an appeal against the same, is entitled to defend such an order before the Appellate forum on all grounds, including the ground which has been held against him by the Lower Authority, though the final order is in its favour. Not having filed a cross objection does not lead to an inference that the Respondent– assessee had accepted the findings in part of the final order, that was decided against him.

In the case before hand, the HC accordingly held that the jurisdictional issue sought to be urged by the appellant under Rule 27 is interlinked with the other grounds of appeal, and its adjudication would have a direct impact on the outcome of the appeal. The validity of the proceedings goes into the root of the matter and for this reason, the assessee should not be precluded from raising a challenge to that part of the order which was decided against him by the CIT(A). The Court however clarified that if there is an issue which is decided against a respondent [in appeal], and the decision on the said issue has no bearing on the final decision of the CIT (A), then invocation of Rule 27 to challenge the correctness of the same cannot be sustained. Such issues can be challenged only way of filings a cross appeal/objection.

The decision sheds light on an important right of the respondent which is often marred in controversy. It is however relevant to note that this right does not enable reigniting a settled matter (in absence of an appeal/cross objection) but will be available only for an issue which has a bearing or a nexus on the matter appealed. An issue of jurisdiction clearly falls in this category.

A vital principle of natural justice has been explained by the court which will come as a relief to taxpayer effected by such litigations. Nevertheless, as a course, it may be prudent to exercise the option of cross objection wherever possible to obliterate needless dispute.

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Aureus’ presentation on the New Economic Policy as of May 31, 2020 (with notifications and updates)

From Yatin’s Desk: Enhanced threshold of Rs. 1 crore for initiation of Corporate Insolvency Resolution applies prospectively

The Government of India (GoI) has announced various relief measures with respect to statutory and regulatory compliance matters across various sectors and Special Economic Package to counter the impact of COVID -19 on the economy. One notable relief measure announced related to enhancement of threshold for triggering corporate insolvency resolution from Rs.1 lac to Rs. 1 crore. This measure was taken to prevent many companies, more specifically MSME’s, from being pushed into insolvency on account of financial distress due to virtual shut down of businesses due to lockdown. The GoI, acting with speed, issued necessary notification on the 24th of March enhancing the monetary limit.

The monetary change has initiated a debate on the fate of corporate insolvency applications filed but pending admission by the National Company Law Tribunals (NCLT) as on the date of notification. Under the scheme of IBC, Corporate Insolvency Resolution Process (CIRP) is initiated on the date when the applicant (who could be a financial creditor/operational creditor or the corporate debtor itself) files an application with NCLT for initiating CIRP. However, CIRP only commences on the date of admission of application by the NCLT.

In perhaps first such decision, the Hon’ble Kolkata Bench of NCLT in the case of Foseco India Limited v. Om Boseco Rail Products Limited had the occasions to examine whether the minimum default limit to Rs. 1 crore will be applicable to applications pending for admission as on the date of notification. The NCLT took note of the settled law that statute is presumed to be prospective unless it is held to be retrospective, either expressly or by necessary implication. Further, the amendment brought by the notification nowhere mentioned that its application will be retrospective. Accordingly, the NCLT has ruled that the amendment shall be considered as prospective and not retrospective, thus admitting the application for CIRP.

While the NCLT did not refer to any ruling to propound the view, it will be useful to take note of the ruling of Hon’ble Supreme Court in the case of K. Sashidhar vs Indian Overseas Bank. The ruling had interpreted the effect of lowering the voting threshold of Committee of Creditors (CoC) from 75% to 66% by Act No. 26 of 2018 w.e.f. 6 June 2018 in context of Sec 30(4) of the IBC. The court had held that the amendment is to modify the voting share threshold for decisions of the CoC and cannot be treated as clarificatory in nature. It changes the qualifying standards for reckoning the decision of the CoC concerning the process of approval of a resolution plan. The rights/obligations crystallized between the parties in terms of the governing provisions (at the point of time) and can be divested or undone only by a law made in that behalf by the legislature. There is no indication that the legislature intended to undo the decisions of the CoC already taken prior to 6 June, 2018. In view thereof, the 75% threshold as was applicable on the date of passing of the resolution plan by the CoC was considered sacrosanct.

The ratio of the ruling of the SC would directly lend support to the decision in the case of Foseco India Limited. Thus, taking recourse to protection under the enhanced threshold of Rs. 1 crore in respect of application pending for admission as on the date of notification may not be rewarding for corporates exploring this as a escape route.

Suspension of fresh initiation of CIRP

On a related note, another aspect that requires consideration is regarding the announcement made by the Finance Minister as part of the Special Economic Package announced over May 13 to 17 with regard to suspension of fresh initiation of insolvency proceedings up to one year (though with a qualification – ‘depending upon the pandemic situation’). The announcement was made on May 17. Based on media reports, apparently the government has promulgated an ordinance for suspending initiation of new CIRP which is pending Presidential assent, however fine print is awaited. This leaves an ambiguity whether CIRP can be initiated in the interim. Going by the intent, one needs to be cautious of any adventurism in initiating new CIRP. It may not be out of place to assume issuance of retrospective notification effective May 17^th (date of announcement). Doing otherwise may only show the GoI in bad light which is best avoidable given the situation.

Regarding the fate of applications already filed (i.e. CIRP ‘initiated’ but ‘not admitted’), it may be reasonable to infer that the suspension may not have an impact on such applications. This is considering the use of expression “suspension of fresh initiation of insolvency proceedings”. CIRP’s initiated, though pending for admission as on 17^th May 2020, may therefore continue, unless the notification prescribes otherwise. Interestingly, if the government was to take a liberal call and suspend all CIRP applications pending admission by NCLT as on the date of announcement (17^th May), it may provide reprieve to numerous corporates whose fate is left hanging in balance due to defaults, including those whose CIRP’s are admitted by NCLT post effective date of notification. This may well be wishful thinking.

It will be worthy of the Government to notify the suspension at the earliest to settle the debate.

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From Yatin’s Desk: Equalization levy on non-resident e-commerce, Government widens the tax net

The Finance Act 2020 (FA 2020) was notified by the Government of India (GoI) on 27th March 2020 giving effect to the tax proposal for financial year (FY) 2020-21. One notable change having significant implication for non-resident is the expansion of the provisions of ‘Equalization levy’ (EL) to defined e-commerce operations. As was surprising for many, at the Finance Bill stage, there was no mention of these proposals, which silently found its place in the FA 2020 without any debate either in the parliament or outside by the industry/professionals at large. Nevertheless, a law has been laid which needs to be dealt with effective 1 April 2020.

EL was introduced through the Finance Act 2016 as a separate piece of legislation distinct from the Income Tax Act, 1961 (IT Act). EL prior to the amendment had limited application bring to levy online advertisement, provision for digital advertising space and other facility/service for online advertisement. This was a step taken to bring part of digital economy under the tax net which typically remained non-taxable in India in the hands of non-resident taxpayers.

The FA 2020 has widened the scope of EL to now additionally bring within its ambit considerations in the hands of ‘e-commerce operator’ from ‘e-commerce supply or services’. For the purpose of this levy ‘e-commerce operator’ has been defined to means a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both. Further, ‘e-commerce supply or services’ means online sale of goods owned by the e-commerce operator or provision of services provided by the e-commerce operator or facilitation of online sale of goods or services.

EL on the new category of e-commerce operations of non-residents is applicable at the rate of 2% (vis-à-vis 6% EL on-advertisement services) on the consideration for supply or service made to (i) a person resident in India; (ii) a person who buys such goods or services or both using internet protocol address located in India; (iii) a non-resident for sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement though internet protocol address located in India; and (iv) a non-resident for sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India;

EL is not chargeable where the e-commerce operator has a permanent establishment in India and such e-commerce supply or services is effectively connected with such permanent establishment or such consideration is covered under advertisement related EL. Also, non-residents having consideration of less than INR 20 million have been excluded from the purview. Income of non-resident subjected to EL is exempt from income tax.

The e-commerce operator subject to levy is required to deposit the taxes on a quarterly basis by the 7th of the month following the quarter other than for the quarter ending March for which the taxes have to be paid by 31st March. Additional annual statement in respect of EL is required to be filed on or before 30 June following the end of the financial year.

The new provisions have wide ramification for non-residents. The government has sought to significantly widen the tax base (through EL levy) by bring within the tax fold broader spectrum of digital businesses which hitherto remained immune from Indian taxation primarily due to the exclusion enjoined under beneficial provisions of Double Tax Avoidance Agreements (DTAA). Typically, such businesses claimed non-taxability in absence of a PE in India or restricted scope of fee for technical services under DTAA. For instance, provision of software & digital products, e-com sale through overseas platform, remote online technical services (like maintenance support), online books/magazines subscriptions, non-technical research report services, etc. are typically not taxable in the hands of non-resident in light of DTAA provisions. Such businesses carried through digital platforms may now prima-facie be impacted by the new EL provisions. The coverage further extends to non-residents who facilitate such sale or provision of services through digital platform.

Digital economy adopts unique models with distinctive process flow, technology inter phase, contractual, legal & commercial arrangements, etc. making it relevant for each business to evaluate in detail the implications of e-commerce EL and deal with nuances of the new law. Given the wide ambit, it will be interesting to see how the authorities are able to monitor digital flow of data and compliance. Overall interesting times for tax professionals and challenging times for digital economy.

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Companies Fresh Start Scheme, 2020 – An opportunity to regularize delinquency

Astha Srivastava & Sayli Petiwale

The Ministry of Corporate Affairs (“MCA”) has introduced the Companies Fresh Start Scheme, 2020 (“Scheme”) on March 30, 2020.[1] This Scheme has been introduced in furtherance of the steps undertaken by the government for providing relaxations to businesses from statutory and regulatory compliance matters amidst COVID-19.[2] The Scheme allows the defaulting companies to make a fresh start by enabling filing of belated documents at the MCA Registry without incurring any additional fee and/ or prosecution charges as may be prescribed under the Companies Act, 2013 (“Act”).

This is a unique Scheme introduced by the MCA, which provides an opportunity to the defaulting companies to avail a one-time waiver on imposition of additional fees on filling of belated documents. Considering the unprecedented pandemic and slowdown in the economy due to preventive measures taken by the government, this Scheme would ease out the financial burden on the companies. Moreover, the Scheme would provide applicant companies immunity from prosecution/ penal proceedings with respect to filing of belated returns/ documents. The Scheme also covers inactive companies within its ambit and provides certain relaxations, which would enable them to remain on the register of companies with minimal compliance requirements. This Scheme would indeed enable the companies to start afresh and be compliant.

An overview of the provisions of the Scheme is provided hereunder:

Applicability:

The Scheme is applicable on ‘defaulting companies’ i.e. a company which has made a default in filing of any: (i) document; (ii) statement; and (iii) return, etc. including annual statutory document on the MCA 21 registry. The Scheme can be availed irrespective of duration of default. Currently, the MCA has issued a list of 76 forms (for companies and Limited Liability Partnership Firms) covered under this Scheme.[3]

Tenure:

The tenure of the Scheme is from April 1, 2020 to September 30, 2020. Therefore, the pending fillings must be completed within this period to avail benefits provided under the Scheme.

Payment of fee:

The fee applicable on belated filing of any document/ form with the Registrar of Companies (“RoC”) would attract normal fees for such filing, as per section 403 of the Act read with Companies (Registration Offices and Fee) Rules, 2014. Additional fee towards delay in filing of such forms/ documents would not be applicable.

Immunity under the Scheme:

An immunity from prosecution or proceedings against imposition of penalty would be provided to the defaulting companies on account of delay in filing of documents/ forms. The Scheme however does not provide immunity for any other consequential proceedings including proceedings involving the interest of shareholders or any other person qua the company or its directors or key managerial personnel etc. Thus, immunity is against delayed filing of documents/ forms and not for violation of substantive provisions of law.

Withdrawal of appeal preferred by the defaulting company:

If an appeal has been preferred by the defaulting company/ its officer in default against: (i) issuance of notice; (ii) filing of complaint; or (iii) passing of an order, in relation to statutory filings, by a competent court/adjudicating authority the applicant would be required to withdraw such appeal before filing an application under this Scheme. A proof of such withdrawal is required to be furnished along with the application seeking issuance of immunity certificate.

Extension of time for filing appeal:

Additional time of 120 days has been granted for filing appeal with the Regional Director against the order of adjudicating authority imposing penalty for delay in/ non-filing of any document. This extension is available for appeals falling due within March 1, 2020 to May 31, 2020 enabling defaulters to avail of the scheme without having the need to file the appeal within the statutory period of 60 days. During the additional period no prosecution for non-compliance of order related to non-filing of document/ form shall be initiated.

Application for issuance of immunity certificate:

An application seeking immunity from filing of belated documents is required to be filed with the RoC in Form CFSS-2020. The application is required to be made after closure of the Scheme and filing of documents (taken on record or approved by RoC) but before the expiry of 6 months from date of closure of the Scheme. Therefore, Form CFSS-2020 is required to be filed by March 31, 2020. Pertinently, no fee is payable on filing of Form CFSS-2020. An immunity certificate would be issued by the RoC on the basis of declaration made in this Form.

It is important to note here that immunity shall not be granted where any appeal is pending before any court or in case of management disputes of the company pending before any court or tribunal. Further, immunity shall not be provided if any court has ordered conviction, or any adjudicating body has imposed penalty and no appeal has been preferred against such orders before the commencement of this Scheme.

Exclusions from the Scheme:

The Scheme shall not be applicable in following cases:

RoC has initiated final notice of strike off under section 248 of the Act;
An application for strike off under section 248 of the Act has been filed by a company;
Companies which have been amalgamated under a scheme of compromise or arrangement under the Act;
Application has been made for obtaining dormant status under section 455 of the Act;
Vanishing companies;
Where an increase in authorized capital is involved (Form SH-7) and charge related cases (Forms CHG-1, CHG-4, CHG-8 and CHG- 9 for creation and satisfaction of charges);

Effect of immunity:

Upon granting immunity, the RoC would be required to withdraw any pending prosecutions before the concerned court(s) and any pending penalty proceedings under Section 454 of the Act (except where appeal has not been preferred against conviction order/ imposition of penalty before commencement of the Scheme). The grant of immunity would be deemed as completion of action on behalf of the RoC with respect to defaults for which immunity is sought under the Scheme.

Scheme for inactive companies:

The inactive companies[4] while filing Form CFSS-2020 can simultaneously:

Apply for dormant status by filing Form MSC-1 at a nominal fee; or
Apply for striking-off by filing Form STK-2 and paying the applicable fee.

Implications on not availing the Scheme:

The RoC would take appropriate action under the Act against the companies which fail to avail the benefits under the Scheme and are in default with respect to statutory filings.

[1] Circular bearing No. 12/2020 dated March 30, 2020 issued by the MCA. This circular could be accessed here.

[2] The Notification could be accessed here.

[3] This list could be accessed here.

[4] Section 455 (1) (i) of the Act, “inactive company means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years”.

COVID 2019: Relaxation from Statutory and Regulatory compliances

From Yatin Sharma‘s desk with Astha Srivastava and Sayli Petiwale

These unprecedented times call for unprecedented measures. As one of the first steps taken by the Government of India (“GoI”) to counter the impact of COVID -19 on the economy, the Union Finance & Corporate Affairs Minister on March 24, 2020 announced certain relief measures with respect to statutory and regulatory compliance matters across various sectors. Further, relief in the area of taxation — both direct and indirect have also been announced. This note provides a short summary of the various measures.

Corporate Affairs

Under the Companies Act, 2013 (“CA, 2013”)

A moratorium period has been introduced from April 1, 2020 to September 30, 2020, whereby an additional fee would not be levied on late filing of any document, return, statement, etc. required to be filed with the Ministry of Corporate Affairs (“MCA”) registry. This will reduce the compliance burden on companies/ Limited Liability Partnerships (“LLPs”) and also help in reduction of financial cost involved in adherence to these compliance for the prescribed time period.
The requirement for holding a board meeting within the prescribed time period (i.e. 120 days) as per section of 173 of the CA, 2013 has been relaxed by 60 days, which would be applicable for the next two quarters i.e. till September 30, 2020. Therefore, the gap between two consecutive meetings of the board may extend to 180 days for the next two quarters.
The Companies Auditors’ Report Order, 2020 would be applicable from Financial Year (“FY”) 2020-2021. A notification bearing F. No. 17la5l2015-CL-V Part I dated March 25, 2020 (“Notification”) has been issued by the MCA in this regard.[1]
No violation of law shall be considered if the independent directors are unable to hold even a single meeting as per Schedule lV of the CA, 2013, for the FY 2019-2020.
The time period for filing a declaration within 6 months of incorporation of a company regarding commencement of business in Form 20A, has been extended by additional 6 months. This will reduce the compliance burden on newly incorporated companies as the commencement of business may pose certain challenges in these testing times.
No violation of law shall be considered if a director is unable to comply with minimum residency requirement of 182 days as per section 149 of CA, 2013. This would be relevant considering the travel restrictions imposed by the countries across the globe as well as lockdown in India.
The requirement of creation of reserve for 20 percent of all the deposits maturing in the next FY before April 30, 2020 has been deferred till June 30, 2020.
The requirement of investing 15 percent of the amount of maturing debentures during a year by April 30, 2020 as per section 173 of CA, 2013 read with Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014, has been deferred up to June 30, 2020.

Please note that MCA has issued a circular bearing No. 11/2020 dated March 25, 2020 (“Circular”) with respect to the above.[2] These relaxations would help easing compliance burden upon the companies/ LLPs.

Insolvency and Bankruptcy Code, 2016 (“IBC”)

Following critical measures have been introduced under the IBC:

The minimum threshold for filing a petition under IBC has been increased from INR 1 Lakh to INR 1 Crore with immediate effect. This will provide immediate relief to Micro, Small and Medium Enterprises, which will bear direct and adverse effect of COVID-19 on a large scale. It is important to note here that the notification bearing F. No. 30/9/2020-Insolvency dated March 24, 2020 (“IBC Notification”) issued by the MCA does not prescribe any time limit for increase in the threshold.[3] Therefore, it appears that the increase in threshold has not been notified for a certain time period.
In the event the situation in relation to COVID-19 persists beyond April 30, 2020, the operation of Sections 7, 9 and 10 under IBC may be considered for a 6 month suspension. Section 7 of the IBC relates to initiation of corporate insolvency resolution by a financial creditor, while Section 9 and 10 talk about initiation of corporate insolvency resolution by operational creditor and corporate applicant. As a result, initiation of insolvency resolution proceedings against defaulting corporates will be suspended for a limited time period once the measure is introduced. This will provide some relief to the small and medium-sized businesses which may be pushed to the brink of bankruptcy due to this black swan event.

Income Tax Act, 1961

The following measures have been announced in relation to the Income Tax Act, 1961 (“IT Act 1961”):

In relation to FY 2018-19, the last date for filing of belated income tax returns has been extended to June 30, 2020 from March 31, 2020.
In relation to delayed payments of advanced tax, self-assessment tax, regular tax, TDS, TCS, equalization levy, STT, CTT made between March 20, 2020 and June 30, 2020, an interest at a reduced rate of 9 percent (as opposed to 12 percent or 18 percent per annum) would be charged. Hence, on a monthly basis, a rate of 0.75 percent would be charged (instead of 1 percent or 1.5 percent). Further, there would be no late fees or penalty chargeable on delay in relation to this period. This is a welcome step as it would ease up the financial burden on the assessee.
The last date for Aadhaar-PAN linking has been extended to June 30, 2020.
Certain waivers have been offered in relation to payments under the Direct Tax Vivaad Se Vishwas Act, 2020. This legislation was introduced with an objective of resolving direct tax disputes. Under this Act, tax payers availing this scheme and making payment of amount of tax under dispute on or after April 1, 2020 were required to pay additional 10 percent of the determined tax amount. However, payments made by March 31, 2020 did not attract such charge. Vide the measures announced by, no additional payment of 10 percent would be required for payments made till June 30, 2020. This would enable the relevant assessee to take benefit of this legal amnesty scheme without incurring any additional cost.
The due dates in relation to the following, which are due for expiration between the period of March 20, 2020 and June 29, 2020 shall be extended till June 30, 2020:
- issuance of notice, intimation, notification;
- passing of approval order and sanction order;
- filing of appeal;
- furnishing of return, statements, applications, reports and any other documents;
- time limit for completion of proceedings by the authority; and
- any compliance by the taxpayer including investment in saving instruments or investments for roll over benefit of capital gains under various laws including IT Act 1961, Prohibition of Benami Property Transaction Act, 1988, The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, STT law, CTT Law, Equalization Levy law, Direct Tax Vivad se Vishwas Act, 2020.

It may be noted that necessary circulars and legislative amendments in this regard would be issued by the relevant Ministry / Department in the due course.

Goods and Service Tax

The following measures have been announced in relation to Central Goods and Service Tax Act, 2017 and the Indirect Taxes:

The due date for filing of Form GSTR-3B which is due in March, April and May, 2020, for companies having aggregate annual turnover less than INR 5 Crores, has been extended to the last week of June, 2020. Further, no interest, late fee, and penalty shall be chargeable in this regard. This is carried out to ease the compliance burden on the small and medium scale enterprises.
In relation to companies having aggregate annual turnover of more than INR 5 Crores, for filing of Form GSRT-3B which is due in March, April and May, 2020, the same has been extended till last week of June, 2020. However, if the return is filed after fifteen (15) days from the due date, a rate of interest at 9 percent per annum (instead of 18 percent per annum) would be chargeable. In this regard, no late fee and penalty would be charged if compliance is done prior to June 30, 2020.
The date for opting for composition scheme has been extended till June, 2020. Additionally, the last date for making payments for the quarter ending March, 2020 and for filing returns for FY 2019-20 by composition dealers would be extended till the last week of June, 2020.
The date for filing of GST annual returns of FY 2018-19, has been extended to the last week of June, 2020 from March 31, 2020.
The due dates in relation to the following compliances under the GST regime, wherein the time limit is due for expiration between March 20, 2020 to June 29, 2020 has been extended to June 30, 2020:
- issuance of notice, notification;
- approval order, sanction order;
- filing of appeal;
- furnishing of return, statements, applications, reports and any other documents;
- time limit for any compliance under the GST laws.

It may be noted that the necessary legal circulars and legislative amendments in this regard shall follow with the approval of GST Council.

Payment date under the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 shall be extended to June 30, 2020 and no interest for this period shall be charged if the payments are made by June 30, 2020.

Customs

The following decisions have been taken with respect to compliances under Customs Act, 1962 (“Act of 1962”):

Customs clearance has been categorized as an essential service, which shall be available 24×7 till June 30, 2020.
The time limit for issuance of notice, notification, approval order, sanction order, filing of appeal, furnishing applications, reports, any other documents, etc., time limit for any compliance under the Act of 1962 and other allied laws where the time limit is expiring between March 20, 2020 to June 29, 2020, has been extended till June 30, 2020.

Financial Services

The following measures have been introduced in relation to financial services:

A waiver on additional charges for cash withdrawals via debit-cards of a particular bank from an ATM of other banks would be granted for 3-months. This would entail charge free cash withdrawal, as it would be difficult to access an ATM with which an individual holds a bank account, during the lockdown period.
The requirement for minimum balance fee for bank accounts would be waived for a period of 3-months.
The bank charges would be reduced for digital trade transactions for all trade finance consumers. This step has been taken to ensure that people prefer digital transactions over traditional modes due to easy access.

Department of Commerce

In relation to the commerce sector, the GoI has announced that there would be an extension of timelines in relation to compliances and procedures. The detailed notification in this regard would be released by the Ministry of Commerce.

Conclusion

The COVID-19 pandemic and resultant preventive measures have affected the business sector and given rise to various complications. With a view to reduce the reeling effects of this pandemic, the GoI through the Ministry of Finance has introduced a slew of measures to relax the statutory and regulatory compliances for businesses. These relaxations have been introduced for ease of day-to-day functioning and compliances. Further, these measures would also sustain in management of the financial and operational burdens vis-à-vis statutory and regulatory related compliances. Small and medium scale businesses have been affected the most due to the outbreak of COVID-19, and these measures would go a long way in easing their financial burdens. From an individual perspective, certain relaxations have been introduced in the financial services sector to reduce bank charged for digital transactions. In addition to the above, the due date of ongoing proceedings (regulatory, quasi-judicial and judicial) under the tax regime (direct and indirect) has been extended. This is a much-needed relief for the hour, as given the circumstances, the courts and tribunals across the nation are not functioning or hearing selective matters, and hence taking a legal recourse in this regard would pose a challenge. The formal circular / notification in this regard from the relevant Ministry / Department is expected soon.

[1] The Notification could be accessed here.

[2] The Circular could be accessed here.

[3] The IBC Notification could be accessed here.

From Yatin’s Desk: Impact on oilfield service providers-Delhi High Court rules on deemed tax regime applicability u/s 44BB on software service contracts

The Delhi Court in a significant decision on applicability of Sec. 44BB of the Income Tax Act, 1961 (Act) has ruled that income in the nature of “royalty” would not be covered under the deeming provisions applicable to non resident taxpayers engaged in prospecting, extraction or production of mineral oil. However in relation to fee for technical services (FTS), where the dominant purpose of the agreements is prospecting, extraction or production of mineral oils, based on the doctrine of “pith and substance” the activities would fall within the ambit of “mining or like projects”, which are specifically excluded from the scope of FTS. Such technical services would be subject to deemed profit tax under Sec. 44BB.

To set the context, u/s 44BB of the Act, income of a non resident engaged in providing services or facilities in connection with prospecting, extraction or production of mineral oil is subject to tax at deemed profit rate of 10%. However, income falling within the purview of section 44DA [which covers Royalty and FTS connected with the Permanent Establishment (PE) in India] is excluded from the ambit of deemed tax regime and is subject to net basis taxation. While at first instance, the provisions seem innocuous, the interpretation has been subject to much litigation over years. Tax payers have often argued that income earned by non resident taxpayer engaged in oilfield service will fall within the scope of Sec. 44BB being a specific provision applicable to oilfield service.

The Delhi High Court (HC) in the recent case of PARADIGM GEOPHYSICAL PTY LTD. had the occasion to examine taxability of software related service contracts under the deeming provisions. In the case before the court, the taxpayer was engaged in the business of developing and providing customized software enabled solutions and annual maintenance services used in oil and gas industry in relation to prospecting, extraction, production and seismic analysis. The tax payer, placing reliance on the decision of the Hon’ble Supreme Court in the case of Oil and Natural Gas Corporation Ltd (ONGC) v. CIT (2015) 376 ITR 306 contended that Sec. 44BB of the Act being a special provision, its income being in connection with prospecting, extraction or production of mineral oils, should be taxed under deeming provision.

The HC took note of the changes effective 01.04.2011 whereby through parallel amendments in Sec. 44BB and Sec. 44DA it was stipulated that provisions of Sec. 44BB shall not apply in respect of income falling under the provisions of Sec. 44DA and vice-versa. The court went on to hold that both provision (Sec. 44BB and Sec. 44DA) are special in nature and operate in their own clearly defined spheres. Accordingly once a receipt of income qualifies as Royalty/FTS, it cannot be taxed u/s 44BB and has to be taxed u/s 115A/44DA of the Act. The court held that the controversy surrounding the interplay of the two provisions stands resolved by virtue of the amendments and further the question of interplay of the two provisions was not dealt with in the case of ONGC (supra).

The court went on to hold that it was incumbent on the tax authorities to determine whether the nature of income was Royalty or FTS. This aspect has importance since FTS has a restricted scope on account of specific carve out of “payment received for construction, assembly, mining or like project”. In other words, if the consideration received falls within the exclusion, the payments would not be regarded as FTS and hence outside the scope of Sec. 44DA but taxable u/s 44 BB. It is the proximity of the work contemplated under an agreement executed with a non-resident taxpayer with mining activity or mining operations that would be crucial for the determination of the question whether the payments made is to be assessed u/s 44BB or otherwise. If the services provided by the taxpayer constitute services for “mining or like project”, the consideration thereof would be excluded from the scope of FTS and would be taxable u/s 44BB.

Importantly, the HC rejected the arguments of the tax authorities that the scope of expression “mining or like project” has to be confined only to situations where services are performed onsite i.e. at the site of mining/drilling. Relying on the doctrine of “pith and substance”, the court opined that the same has to be applied in respect of each contract/agreement, to ascertain whether the dominant purpose of the agreements was prospecting, extraction or production of mineral oils, in which case the same would fall within the ambit of “mining or like project”.

In context of specific facts of the case, the HC has ruled that if the income from services provided by the taxpayer from the supply of software as well as ancillary services such as maintenance and installation is regarded as “Royalty”, deeming provision of Sec. 44BB would not apply. On the contrary, if the payments are for technical service, the income would be taxable under section 44BB since it is excluded from the definition of FTS being covered under the exception relating to “mining or like” activities (basis dominant purpose of the contract). The court however did not examine the nature of income in absence of any such determination by the tax authorities.

The decision of the court has significant bearing on the oil & gas industry. The ruling does provide clarity and to an extent certainty for oilfield service providers engaged in provision of technical service (whether on-site or remote) having dominant purpose of prospecting, extraction or production of mineral oil with respect to taxability under Sec. 44 BB. However service providers providing software license and incidental services or receiving other payments which may fall under the purview of “Royalty” under the Act will have to brace for re-calibrated tax positions. Importantly, where the tax payer now argue non taxability of software related payment under favorable Double Tax Avoidance Agreement (DTAA) provisions, it may still have to deal with business profit tax where the taxpayer has a PE in India. The ruling perhaps make it incumbent for tax payers to evaluate the possibility of restructuring software licence and incidental contracts (typically impacting data processing and analysis activities) as technical service contracts.

All in all a sound judgement on interpretation of deeming provisions u/s 44BB of the Act.

From Yatin’s Desk: Delhi High Court favorably rules on alternate Writ remedy against DRP directions

The Delhi High Court (HC), in a recent ruling in the case of P.D.R SOLUTIONS FZC has allowed the Writ petition filed by the petitioner and set aside the order of the Dispute Resolution Panel (DRP) holding that the DRP erred in not taking into consideration all the material and contentions furnished by the petitioner before the DRP. The matter was remanded back to the DRP for considering the objections raised by the petitioner in detail and for passing a fresh order on merits by giving reasons and findings. To put in perspective, the petitioner was a UAE tax resident company engaged in the business of selling domain names, providing web hosting services & server space to clients. The petitioner had claimed a non-taxable position under India-UAE DTAA , which was one of the objection raised before the DRP. The DRP however, without examining the objection, passed an adverse direction following the decision of the Income Tax Appellate Tribunal (ITAT) in case of GoDaddy.com, taxability in which case was determined only under the domestic tax laws.

As a norm, Writ remedies are generally not entertained when there is alternate appellate remedy available to the taxpayer. However, in this case the HC observed that since no assessment order had yet been passed by the Assessing officer (AO), the alternate remedy was not available as yet. Further, the DRP did not adjudicate petitioner’s categorical objections on the taxability under the India-UAE DTAA which violated the principles of natural justice, there was a fundamental error relating to the exercise of jurisdiction and the approach of the DRP rendered the entire process of the dispute resolution as per the scheme of law farcical.

In the ordinary course, a taxpayer would be required to go through the tedious process of litigation – filing appeal before the next level appellate forum (ITAT) against the final order once issued by the AO (based on DRP direction). In a matter like this where the DRP has not examined the technical merits of the case, generally the ITAT would remand the matter back to AO/DRP for consideration on merits. Procedurally, this may take substantial time, perhaps years, before appeal is considered by the ITAT. Given the favourable consideration by HC at the draft order stage (where only DRP direction has been passed), there may now be another opportunity for tax payer to perhaps explore the Writ option and expedite their litigation where there is a blatant non considerations of the objection raised before the DRP. Having said that, one needs to take note (as observed by the HC) that not every order, where there is a non-application of mind, would become open to challenge under Writ jurisdiction, but only fundamental error which are glaring and noticeable.

The HC has made a fine balance in all fairness and brings forth an alternate remedy where the taxpayer is aggrieved against DRP direction, albeit which may be considered judiciously in exceptional circumstances.