SEBI Directions on Listed Companies going through CIRP

On December 16, 2020, the SEBI Board met for what is its last meeting before the full budget for Financial Year 2020-21. Certain key decisions were announced in relation to shareholding norms for listed companies going through Corporate Insolvency Resolution Process (CIRP). 

Presently, during Corporate Insolvency Resolution Process (CIRP) where the public shareholding falls below 10%, listed companies are required to bring the public shareholding to at least 10% within a period of 18 months and to 25% within 36 months.  Per the Press Release the following has been reported:

"..., the Board has decided the following in respect of companies which continue to remain listed as a result of implementation of the resolution plan under the Insolvency and Bankruptcy Code: 

"i. Such companies will be mandated to have at least 5% public shareholding at the time of their admission to dealing on stock exchange, as against no minimum requirement at present. 

"ii. Further, such companies will be provided 12 months to achieve public shareholding of 10% from the date such shares of the company are admitted to dealings on stock exchange and 36 months to achieve public shareholding of 25% from the said date. 

"iii. The lock-in on equity shares allotted to the resolution applicant under the resolution plan shall not be applicable to the extent to achieve 10% public shareholding within 12 months. 

"iv. Such companies shall be required to make additional disclosures, such as, specific details of resolution plan including details of assets post-CIRP, details of securities continuing to be imposed on the companies’ assets and other material liabilities imposed on the company, proposed steps to be taken by the incoming investor/acquirer for achieving the minimum public shareholding (MPS) and quarterly disclosure of the status of achieving the MPS."

Source: https://www.sebi.gov.in/media/press-releases/dec-2020/sebi-board-meeting_48451.html. 

Ex-Gratia Payment of Interest to Borrowers during COVID

October 23, 2020

As a part of relief measures announced in view of the COVID-19 pandemic, the Ministry of Finance, on October 23, 2020, issued a scheme for grant of ex-gratia payment of difference between compound and simple interest. The period to be considered for this payment would be 184 days, from March 1, 2020 to August 31, 2020.  This applies to borrowers with aggregate loans (with all banks) upto that INR 20 million (INR 2 crores). This is subject to the condition that the account should be categorised as ‘standard’ i.e. the account shouldn’t have been declared an Non Performing Assets at any time as on February 29, 2020.  

The banks would be required to submit their claims for reimbursements with State Bank of India (SBI). SBI would be the nodal agency for disbursement of funds to such other banks.  

In case any compound interest has been paid by the borrowers, the same shall be refunded to the extent of difference between the simple interest and the compound interest. The rates applicable would differ as under:

  • Education, housing, cars, personal loans to professionals, consumptions loans, consumer durable loans and terms loans to MSMEs as per the agreement
  • Cash credit overdraft facilities to MSMEs as per the rates applicable as on February 29, 2020
  • Credit card dues as per the Weighted Average Lending Rate (WALR) charged by card issuer for transactions charged on EMI basis. The WALR has to be certified by the statutory auditor of the card issuer.
  • In case no interest has been charged on the Equated Monthly Installment (EMI) for specific period then as per lenders’ base rate or marginal cost of funds based lending (MCLR), whichever is applicable

The Scheme provides that this exercise would be completed by lending institutions by November 5, 2020. Further, lending institutions would be required to establish a grievance redressal mechanism for eligible borrowers within 1-week from October 23, 2020.

The Scheme is in consonance with submissions made by the Central Government before the Supreme Court in relation to provision of policy measures for reliefs to borrowers. This may provide a major relief to small businesses and individual borrowers. However, impact of the Scheme on the banking sector remains a question as Scheme does not provide for a time period within which the lending institutions would. 

By Vineet Shrivastava and Sayli Petiwale. Views are personal.  Vineet and Sayli can be reached at vineet.shrivastava@aureuslaw.com and sayli.petiwale@aureuslaw.com respectively. 

From Yatin’s Desk: Delhi ITAT provides relief on indirect transfer of shares made prior to April 2015

In what comes as a relief to foreign investors stuck in litigation around indirect transfer of share (transfer prior to April 2015) held in an Indian company, the Delhi Bench of ITAT in the case of Augustus Capital PTE Ltd has held that the threshold specified in Explanations 6 and 7 of section 9(1)(i) of the Income tax Act would have to be read with Explanation 5 and given retrospective effect.

Explanation 5 inserted by the Finance Act 2012 provides that shares in a foreign company shall be deemed to have been situated in India if the shares derives, directly or indirectly, value substantially from the assets located in India. This has retrospective effect. Explanation 6 and 7 were inserted by the Finance Act 2015 (i.e. made effective from FY 2015-16). Explanation 6 provides thresholds for the applicability of indirect transfer rules i.e. the value of assets (owned by the foreign entity whose shares are being sold) exceeds INR 10 Cr and represents 50% or more of the value of all assets owned by the foreign entity. Further Explanation 7 excludes from the ambit transfers made by the non-resident transferor who directly or indirectly, neither holds management right/control over the foreign company or voting power/ share capital exceeding 5% at any time during the period of 12 months preceding the date of transfer.

The tax authorities have been contesting that while the ambit of indirect transfer has been made retrospective, the exclusion only applies prospectively from FY 2015-16. Thus, indirect transfer made prior to April 2015 will be subject to tax in India. The ITAT decision would come as a relief to foreign investors who can now take benefit of the thresholds prescribed under Explanation 6 and 7, a claim being denied by the tax authorities. It is useful to take note that the Hon'ble Delhi High Court in the case of Copal Market Research Limited had interpreted the term ‘substantially’ in Explanation 5 to cover transfer of shares of a company incorporated overseas, which derive more than 50% of their value from assets situated in India, and not otherwise. The decision was rendered before the insertion of Explanation 6 and 7. However by reading of Explanation 6 and 7 as being retrospective by the ITAT, the ruling provides additional benefit to certain category of foreign investors who may have otherwise not satisfied the 50% India assets value criterion. 

Yatin can be reached at yatin.sharma@aureuslaw.com. Views are personal. 

      

High Court Denies Refund of Credit under Inverted Duty Structure

In a recent judgment of Madras High Court in the case of TVL Transtonnelstroy Afcons Joint Venture v. UOI,[1] the Court denied refund of tax paid on input services on account of inverted tax structure. This marks significant blow to taxpayers who operate under ‘inverted duty structure’, and have been claiming refund on account of paying higher rate of tax on input supply.  Earlier in July, the Gujarat High Court in VKC Footsteps India Private Limited v. UOI[2], had read down the explanation (a) to Rule 89(5) of Central Goods & Services Tax Rules, 2017 (“Rules”), and had allowed refund of tax paid on input services as well.

What is “Inverted Tax Structure”?

Inverted Tax Structure is a situation where the supplier pays higher rate of tax on its input supplies, and discharges comparatively lower rate of tax while making its output supply. Consequently, a large pool of credit of tax paid on input supplies is accumulated. This would result in cascading effect of taxes in the form of unabsorbed excess tax on inputs with consequent increase in the cost of product which is against the very tenet of GST being a consumption tax. In order to address the said anomaly, GST law provides for refund of accumulated unutilised input tax credit (“ITC”).

Issue

Section 54 of the Central Goods and Services Tax Act, 2017 (“Act”) provides for refund of GST in certain cases. Sub-section (3) provides for refund of unutilized ITC in cases of zero rated supplies and ITS i.e. where credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. ITC has been defined under Section 2(63) of CGST Act to mean credit of ‘input tax’. Section 2(62) defines ‘input tax’ to mean tax charged on supply of goods and / or services. Accordingly, the taxpayers were eligible to claim refund of unutilised ITC accumulated due the inverted tax structure basis the formula prescribed under Rule 89(5) of CGST Rules. Said rule was amended with retrospective operation from July 1, 2017 by an amendment introduced in 2018 to exclude ‘tax paid on input services’ from the meaning of ‘Net ITC’. In effect, the amended Rule 89(5) by employing the expression “input tax credit availed on inputs’, has the effect of granting refund of tax paid only on ‘inputs’ and denying the same on ‘input services’. Said amendment was challenged in multiple proceedings by contending that amended Rule 89(5) by restricting the refund to ‘inputs’ only, runs contrary to the substantive provision i.e. Section 54(3), and is ultra vires to this extent.

Gujarat High Court’s view in the VKC (supra)

Court observed that Section 54(3) employs the expression ‘any unutilised input tax credit’, and ITC is defined under Section 2(63) to mean credit of input, and ‘input tax’ as defined in Section 2(62) means central tax, state tax, integrated tax or union territory tax charged on any supply of goods and / or services. Hence, Section 54(3) must be read to include tax paid on input services as well. Accordingly, upon conjoint reading of Act and Rules, Court held the explanation (a) to Rule 89(5) ultra vires the provision of Section 54(3), and observed that by prescribing formula under the Rules, the Executive cannot restrict the substantive provision enacted by the Legislature. Accordingly, Revenue was directed to process the refund of unutilised ITC by including the tax paid on ‘input services’ as well.

Madras High Court’s view in TVL (supra)

Madras HC did not subscribe to the view taken by the Gujarat HC in VKC (supra) by observing that the import of proviso to Section 54(3) was not discussed in VKC (supra). It was observed that Section 54(3) undoubtedly enables a registered person to claim refund of any unutilised ITC. However, the principal of the said enacting clause is qualified by the proviso which states that "provided that no refund of unutilised input tax credit shall be allowed in cases other than". It was observed that unless a registered person meets the requirements of clause (i)[3] or (ii)[4] of Sub-section 3, no refund would be allowed. Under clause (ii), the expression used is ‘inputs’, which must mean to include goods[5] only and not input services[6]. Hence, Explanation to Rule 89(5) by prescribing the formula, thereby limiting the ambit of ‘Net ITC’ to mean tax paid on ‘inputs’ only, is valid and vires to Section 54(3).

Court also observed that refund is a statutory right, and the Parliament is within its legislative competence to impose a source-based restriction in order for a supplier to be eligible for refund of unutilized ITC.

Conclusion

Fundamental principle behind the overhauling of erstwhile indirect tax regime by replacing it with much-awaited GST law, was to remove cascading effect of taxes by way of set-off in order to ensure continuous chain of credits from supplier to the last retail point. Law relating to credits has evolved over time as CENVAT was introduced in place of MODVAT to allow of credits of service tax as well. Under the GST regime as well, un-amended Rule 89(5) did not differentiate between the taxes paid on ‘inputs’ and ‘input services’. However, the restriction imposed by retrospective amendment to Rules, seeks to create a source-based parameter for refund entitlement of unutilised ITC.

In view of the dissenting views of Madras HC and Gujarat HC, Supreme Court’s decision on the constitutionality of said amendment remains to be seen. In the meantime, taxpayers may continue to claim refund of unutilised ITC relating to ‘input services’ as time limit for claiming such refund is only two years.

Contributed by Manish Parmar. Manish can be reached at manish.parmar@aureuslaw.com.

Views are personal.

 


[1] Madras High Court’s decision dated September 21, 2020

[2] Gujarat High Court’s decision dated July 24, 2020

[3] (i) Zero rated supplies made without payment of tax;

[4] (ii) Where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:

[5] Section 2(59) of CGST Act defines ‘input’ to mean goods other than capital goods used or intended to be used by supplier in the course or furtherance of business;

[6] Section 2(6) of CGST Act defines ‘input services’ to mean services used or intended to be used by a supplier in course or furtherance of business;

Income tax through the prism of Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code, 2016 (‘IBC’), as stated in the preamble of the code, has been enacted as a legislation for consolidating and amending the laws relating to reorganisation and insolvency resolution in a time-bound manner for maximization of value of assets , promote entrepreneurship, availability of credit including alteration in the order of priority of payment of government dues. The provisions of IBC have an overriding effect over other enactments in case of any inconsistency. To give teeth to the IBC, amendments have been made under several legislations including the Companies Act, Income Tax Act, The RDBFI Act, SARFAESI Act, etc.

Given this backdrop, it is relevant to examine the interplay of IBC vis-à-vis the Income Tax Act and its impact on the latter. This understanding assumes significance as it impacts the interests, rights, obligations and duties not only of the taxpayer and the income tax authorities, but also other stakeholders such as the creditors, resolution applicant, resolution professional, liquidator, etc.

Does the IBC prevail over tax laws?

The primary question-whether IBC prevails over the Income Tax Act can be analysed in light of S. 238 of IBC which states to the effect that provision of IBC overrides all other enactments to the extent inconsistent. The provision provides as under:

“The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”

In this context, the overriding effect of IBC over the Income Tax Act has been examined by the Hon’ble Supreme Court in the case of Pr. Commissioner of Income Tax Vs. Monnet Ispat and Energy Ltd, wherein the court has ruled that S. 238 of IBC will override anything inconsistent contained in any other enactment, including the Income Tax Act. This has significant impact on regular tax matters as can be inferred from judicial development over the period.

Suspension of tax proceedings and institution of appeals during moratorium

The IBC provides for a period of moratorium from the date of admission of resolution application by the Adjudicating Authority i.e. the National Company Law Tribunal (NCLT). The moratorium is declared u/s 14 of IBC which prohibits-

“the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority”.

Such moratorium has effect till the completion of the corporate insolvency resolution process or approval of resolution plan or passing of order for liquidation of corporate debtor.

In context of tax laws, it merits consideration that the moratorium also applies to tax proceedings, appeals and litigations (pending or new) during the period. The position has been upheld by the Hon’ble Delhi High Court (affirmed by the Hon’ble Supreme Court) in PR. COMMISSIONER OF INCOME TAX-6, NEW DELH v. Pr. Commissioner of Income Tax Vs. Monnet Ispat and Energy Ltd.

It is however relevant to note that in certain cases, for instance, as was in the case of Deputy Commissioner of Income Tax Vs. Bhuvan Madan RP for Diamond Power Infrastructure Ltd. & Anr, considering the necessity of the assessment arising out of search proceedings and findings of irregularities by the Corporate Debtor (which may have led to huge tax demand), the prayer of the tax authorities was accepted to the extent of only conducting assessment. The continuation of proceedings was considered necessary to protect the interest of the exchequer. The NCLT however directed that tax authorities may file their claim as operational creditor with the resolution professional for examining the claim in accordance with the provisions of the code.

The short point being that tax proceedings including litigation before appellate forums would need to be kept in abeyance during the moratorium period. In certain cases, and as an exception to the general rule, continuation may be permitted subject to necessary direction by the NCLT. However, such proceedings cannot culminate in enforcing recovery of outstanding taxes during the moratorium period which can only be claimed in the manner prescribed for operational creditors.

Downward settlement of crystalized tax liability under resolution plan

One significant impact of IBC on income tax law is regarding the recovery of tax due. As part of the resolution process, the resolution applicant (for simplicity – the potential acquirer) is required to submit a resolution plan for the revival of the corporate debtor, which on approval by the NCLT is binding. The resolution plan provides for, amongst others, the payment of debts of operational creditors which cannot be less than the amount to be paid to such creditors in the event of a liquidation of the corporate debtor.  In other words, the resolution plan would typically provide for a haircut of the outstanding dues towards various stakeholders including operational creditors and resultantly also the dues of the tax authorities (regarded as operational creditors).

The significance and magnitude of this can be judged from the facts in the case of Pr. Director General of Income Tax (Admn. & TPS) & Ors. Vs. Synergies Dooray Automative Ltd. & Ors. wherein NCLT (Hyderabad) approved the resolution plan under which the income tax liability/ demand in respect of the corporate debtor amounting to Rs. 338 Crores was settled for 1% of the ‘crystallized demand’ to a maximum of Rs.2.58 crores. In the appeal filed against the order of the NCLT, The NCLAT (Delhi) ruled that statuary dues are operational creditors and equated with similarly situated ‘operational creditors’. There was accordingly no infirmity in settlement of tax dues pursuant to approved resolution plan thereby approving a significant write-off of statutory dues.

Tax during liquidation

Another interesting issue recently arose in the case of LML Limited Vs. Office of Commissioner of Income Tax, Mumbai [NCLT Allahabad Bench] regarding payment of capital gain tax on sale of assets of the corporate debtor in liquidation. The question was whether such capital gain tax would form part of ‘liquidation expense” and hence payable in priority of other claims such as of secured creditors & workmen compensation etc, as per waterfall mechanism u/s 53 of IBC. The NCLT ruled that capital gain tax would not form part of liquidation cost and hence can only be recovered in the order of priority specified u/s 53. The NCLT took note of the amendment in section 178(6) of the Income Tax Act providing overriding effect of IBC and also S. 238 of the IBC ruling that the provision of the code shall have an overriding effect on any other enactment. While one may debate whether capital gain liability arising in the circumstances is ‘liquidation expense’ or not, however if the determination is held to be correct, there can be significant impact on recovery of taxes by the exchequer consequent to overriding effect of IBC.

In somewhat relatable situation, in Om Prakash Agarwal Vs. Chief Commissioner Of Income Tax  (TDS) & Anr., the question arose with respect to applicability of TDS on sale proceeds received by the liquidator under section 194 (IA) [TDS of 1% applicable on transferor of immoveable property]. The Principle Bench, NCLT held in favour of the tax authorities observing that the overriding effect u/s 238 is applicable to the issues between the creditor and the debtor but not to TDS deductions. It held that deduction of TDS does not tantamount to payment of government dues in priority to other creditors since it is not a tax demand for realisation of tax dues. It observed that the liquidator is not asked to pay TDS and it is the duty of the purchaser to credit TDS to the account of income tax authorities.

In conclusion, the above highlights some of the nuances of law and the issues involved relating to aspects of tax proceedings, recovery of tax, tax deduction, attachment of assets, etc. Ordinarily, the conventional wisdom on tax laws would generally lead one to assume the overarching dominance of the tax laws and administration against all others claims and proceedings. Given much has changed with the advent of IBC, an isolated analysis of the income tax law will be entirely inadequate while dealing with tax matters. Both legislations prescribe severe implications in case of defaults under either law making it that much more relevant to examine the tax laws through the prism of IBC.

Contributed by Yatin Sharma.

Yatin can be reached at yatin.sharma@aureuslaw.com.

Receipt of amalgamated company’s shares in lieu of shares held as ‘stock-in-trade’ is realization of income (Delhi High Court)

The Delhi High Court (HC) in a recent decision in the case of Commissioner Of Income Tax vs M/S Nalwa Investment Ltd has examined an important question-whether any income accrues to a shareholders (holding such shares as ‘stock in trade’) upon receipt of shares of the amalgamated company in lieu of shares held in the amalgamating company. In the lower appellate proceedings, the Income Tax Appellate Tribunal (ITAT), had taken a view that no profit accrues unless the shares held are either sold or transferred otherwise for consideration, irrespective of the nature of holding (i.e. whether held as ‘investment’ or ‘stock-in-trade’). In other words, the ITAT held that no taxable event arose on receipt of share in the amalgamated company and hence it would not matter whether such shares are held as ‘investment’ or ‘stock in trade’ without going into the issue of characterization of shares. Impliedly, event of taxability was co-related to the transfer of shares of the amalgamated company.

The conclusion drawn by the ITAT was regarded erroneous by the HC considering the law settled by the Supreme Court (SC) in the case of Grace Collis. The SC in the matter has ruled that upon amalgamation, the shares held by the shareholders of amalgamating company are ‘extinguished’ and covered under the scope of ‘transfer’ u/s 2(14) of the Income Tax Act, 1961 for the purpose of capital gain [though exempted u/s 47(vii)].

However, the important debate of relevance that arose in the matter was whether any income would arise if the shares were held as ‘stock in trade’ (i.e. not as capital asset and thus outside the scope of capital gain.). It was argued by the assesses that if the shares are held as stock-in-trade, the receipt of shares of the amalgamated company could not lead to income in the hands of assessee since there can be no addition of any notional accretion/notional profit under the head ‘profit and gain of business or profession’ u/s 28 of the Act. Only profit on realisation of stock- in-trade by way of sale can be brought to tax under that head.

The HC accepted the basic proposition that no notional gains can be taxes in case of ‘stock-in-trade’. However, the HC observed that in the instant case, the assessee had received shares of amalgamated company in lieu of amalgamating company, the new shares did not represent the same stock in the inventory of the assesses and such shares would be valued entirely on different fundamentals. Further, under the scheme of amalgamation, the dissenting shareholders receive the value of their shareholding while the approving shareholders receive the same value in the form of shares of the amalgamated company and taxation principles would apply equally irrespective of the status of the shareholder. Accordingly, upon receipt of new shares (against shares in amalgamating company), there was actual realization of income and not notional accretion/profit. In arriving at the conclusion, the HC drew support from the decision of the SC in the case of Orient Trading Co. Ltd., (which was in context of exchange of shares) and certain English case laws on the subject referred to by the SC.

In conclusion, the HC has opined on an important principle of taxation relating to extinguishment of shares held as ‘stock in trade’ consequent to amalgamation. While the principle that no income arises by mere holding of inventory on account of notional gains is well established, however, extinguishment of shares and receipt of new shares in lieu thereof would be a case of ‘actual realization’ of income and not ‘notional income’ as clarified by the HC.  The ruling bears significance for taxpayers engaged in the business of stock trading who receive shares in a scheme of amalgamation in lieu of shares held in amalgamating company prompting a review of the tax position.

Contributed by Yatin Sharma. Views are personal.

Yatin can be reached at yatin.sharma@aureuslaw.com.