Taxation and Policy – Aureus Law Partners

Rights Issue Process in a Private Limited Company: Insights and Challenges

Understanding the Rights Issue Process

The rights issue is a method for raising additional capital by offering existing shareholders the opportunity to purchase additional shares in proportion to their current holdings. A rights issue is a corporate finance strategy employed by companies to raise capital without diluting the existing shareholder base.

This method of raising capital presents a range of benefits for companies seeking to raise capital. In an event that the shareholders wish to participate in the rights issue process, this method offers a straightforward and rapid way to generate funds by allowing existing shareholders to purchase additional shares. This approach enables the company to quickly secure the necessary capital to support initiatives like expansion, research, debt reduction, or other strategic projects. By engaging with shareholders who are already committed to the company, it also strengthens the relationship with these stakeholders.

If the shareholders wish to participate in the rights issues process, this method offers a cost-effective alternative to other fundraising methods. By opting for a rights issue, the company can bypass underwriting fees and other related expenses, making it a more economical choice without having the need to increase its liabilities. This approach allows the company to maintain greater control over its capital structure by reducing the need for external investors. By offering shares first to existing shareholders, the company ensures that ownership remains within the current shareholder group. This helps preserve the company’s independence and avoids increasing its liabilities, aligning with its immediate financial needs while safeguarding its autonomy.

This process is primarily governed by Section 62 of the Companies Act, 2013, which outlines the legal framework and procedural requirements that companies must adhere to while raising funds through this method.

While the rights issue process is straightforward in many cases, complications often arise when one or more shareholders are foreign entities or individuals. This article aims to explore the rights issue process under Section 62 and highlight the specific challenges encountered when dealing with foreign shareholders.

The primary steps involved in the rights issue process are as follows:

Brief Process of Rights Issue:

Step 1- Obtain Valuation Certificate- Secure a valuation certificate of the company from a chartered accountant, SEBI-registered merchant banker, or practicing cost accountant.

Step 2- Prepare Draft Offer Letter: Draft the offer letter for rights issue considering the size of the issue, valuation of equity shares, offer period, etc. Further, issue a notice of the board meeting with the agenda including the rights issue of shares and approval of the offer letter.

Step 3- Conduct Board Meeting: Approve the record date (which refers to the number of shareholders of the company on the date of the board meeting), offer letter, offer period, and the ratio of the shares to be issued in the Board Meeting. Thereby passing a resolution of raising further capital via the rights issue process.

Step 4- Send Offer Letter to Shareholders: Send the offer letter to all shareholders as of the record date decided by the Board of Directors. The offer period shall open 3 days after the issuance of the offer letter.

Offer Period- Per Section 62(1)(a) of the Companies Act, 2013, the offer period must be at least 15 days but not more than 30 days.

Renunciation of Shares- Under Section 62(1)(c) of the Companies Act, 2013, if existing shareholders choose not to participate in the rights issue, they are required to formally communicate their decision of non-participation to the company before the closure of the offer period. Additionally, shareholders who opt not to partake in the rights issue have the option to renounce the shares offered to them in favour of other existing shareholders, thereby enabling the reallocation of such shares within the current shareholder base.

The Application Form and Receipt of Money – In an event that the shareholders wish to participate in this process, the shareholders have to submit the application form along with the application money. The application money should be received in the company’s bank account after the offer opens and before it closes.

Step 5- Post-Offer Actions: After receiving the money and the closure of the offer period, the company has to issue a notice for the next board meeting. The agenda for this board meeting shall include the topic of allocation of shares through a rights issue.

Step 6- Board Meeting for Allotment of Shares: Conduct the board meeting and pass the resolution for the allotment of shares on a rights issue basis to the applicants.

Step 7- Submission of Returns:

FORM PAS-3: This form is to be submitted to the Registrar of Companies within 30 days from the date of allotment i.e., the board meeting for allotment of shares.
FORM FC-GPR: This form has to be submitted to the Reserve Bank of India within 30 days from the date of allotment. The company raising the funds shall obtain a copy of the Foreign Inward Remittance Certificate (FIRC) and Know Your Customer (KYC) documents for submitting FORM FC-GPR with the RBI. These should be provided by the bank where the foreign investment has been received. Further a Company Secretary (CS) certificate will be required at the time of submitting FORM FC-GPR.

Challenges When Dealing with Foreign Shareholders

While the process outlined above is relatively simple when dealing with domestic shareholders, complications arise when one or more shareholders are foreign entities. The involvement of foreign shareholders introduces a layer of complexity due to the interplay of various regulations, including the Foreign Exchange Management Act (FEMA), 1999, and the Foreign Direct Investment (FDI) policy. One has to ensure that the FDI is coming through the Automatic Route or the route by which governmental approvals are required. In the automatic route no prior approvals are required from the Government for the investment.

Pricing Guidelines: FEMA regulations impose specific pricing guidelines for shares issued to foreign shareholders and it should be offered at the same price as Indian resident shareholders. Furter, the issue price must be determined based on the valuation guidelines provided by the RBI and the valuation of shares must be done by a registered valuer.
Time Zone and Communication Barriers: Coordinating with foreign shareholders can be challenging due to differences in time zones and communication barriers. Ensuring timely acceptance or renunciation of the offer and completing the necessary documentation can be a cumbersome process.
Compliances with respect to Share Application Money: When a foreign shareholder processes a payment for a rights issue, the foreign bank is required to provide a six-pointer KYC to the domestic bank where the funds are to be remitted, which includes details such as the shareholder’s identity, source of funds, and purpose of the transaction. If the bank fails to supply this KYC documentation or does not specify the reason for the transfer (e.g., investment in equity), it can cause delays. Nonetheless, the Foreign Inward Remittance Certificate (FIRC), which provides both the date of processing and the date of credit, serves as sufficient proof that the payment was made before the closing date. This documentation helps protect against the lapse of the offer letter, ensuring compliance with the specified timeline.
Compliance with Currency Exchange Rates: When a domestic company raises funds in INR but receives the transfer is in the currency of the foreign shareholder’s country, it is crucial to ensure that the share application money meets or exceeds the amount intended to be raised. For example, if the domestic company seeks to raise INR 2,00,00,000, which is equivalent to USD 230,000 at an exchange rate of INR 86.96 per USD on the offer’s opening date, and the exchange rate changes to INR 88 per USD by the processing date, the foreign shareholder must ensure that the transferred amount still corresponds to the required INR amount. Failure to match the required share application money could lead to complications. It is acceptable for the amount received to exceed the required sum, but it must not be less.
Mismatch in Name of the Account Holder and Shareholder Name: One of the challenges encountered during a rights issue process is the mismatch between the name of the account holder and their registered name as a shareholder as reflected in the official records. Such mismatches can lead to delays in processing share application money and/or completion of the rights issue process, as banks/ the relevant authority may reject transactions or require additional verification to reconcile the records. To address this issue, the company must ensure that the names on all relevant documents, including the shareholder register and bank account details, are consistent and accurate. In cases where discrepancies exist, letters from the company and other supporting documents from shareholders may be necessary to validate their identity and ensure processing of funds within the stipulated timeframe.

During our experience with rights issues involving foreign shareholders, we have encountered several challenges that can potentially delay the process or result in non-compliance. For example, obtaining the KYC of the foreign shareholder, obtaining the necessary approvals can be time-consuming, particularly if the foreign shareholder’s country has stringent regulations regarding outbound investments. Additionally, there has to be some margin kept as the date of opening of the offer and the date of closing, there could be a fluctuation of the foreign exchange rate.

In conclusion, while the rights issue process under Section 62 of the Companies Act, 2013, is designed to be straightforward, the involvement of foreign shareholders introduces several complexities. By understanding the challenges and adopting best practices, companies can navigate the process effectively and ensure a successful rights issue.

Contributed by Nishant Kantawala.

Please feel free to reach out to us at aureus@aureuslaw.com should you require any assistance on the topic of this conversation.

IBC – Income Tax: Face off.

It is now settled by the Hon’ble Supreme Court that provisions of Insolvency and Bankruptcy Code (IBC) will prevail over provisions of Income Tax Act, 1961 (IT Act) to the extent inconsistent. Of the many interesting aspects emerging as the IBC law matures, a question that often arises is whether tax proceedings can continue during the period of moratorium when the corporate debtor (CD) is under resolution. This is in context of Section 14 of IBC which prescribes that on the insolvency commencement date, the Adjudicating Authority is required to declare moratorium for prohibiting, amongst others, 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 during the resolution period. The National Company Law Appellate Tribunal (NCLAT), in the matter of Mohan Lal Jain, In the capacity of Liquidator of Kaliber Associates Pvt. Ltd. Vs. Income Tax Officer, has fairly settled that there is no bar in making assessment during the period of moratorium. However, order cannot be enforced-meaning thereby that recovery of tax pursuant to the order cannot be made. The claim of the tax authorities will form part of the claim before the Resolution Professional. This position is logical considering that all parties are required to make their claim before the Resolution Professional as on the insolvency commencement date. Determination of tax claim would thus necessitate conclusion of tax proceedings during the resolution period.

Another interesting tax aspect is regarding applicability of Withholding Tax (WHT) on transfer of property of a CD in liquidation. Ordinarily, transfer of immoveable property entails TDS of 1% under Section 194IA of the IT Act. The NCLAT in case of Om Prakash Agrawal Liquidator-S.Kumars Nationwide Limited Vs. CCIT (TDS), has held that TDS under Section 194IA of IT Act, is an advance capital gain tax, recovered through transferee on priority over other creditors of the company. The priority of distribution of liquidation proceeds amongst the various stake holders is mandated under Section 53 of IBC which is a non-obstante provision overriding any other law enacted by the Parliament or any State Legislature. Hence, no TDS is warranted since it would run contrary to the waterfall mechanism provided under Section 53 of IBC. This principle will hold good for other Income tax deductions, as applicable during liquidation process.

Such developments reinforce the need for a holistic understating of inter-connected laws, oversight of which can have significant legal and financial implications.

Contributed by Yatin Sharma. Yatin can be reached at yatin.sharma@aureuslaw.com

Whither Balance Sheet Entries For Extension of Limitation In Insolvency Cases?

Section 18 of the Limitation Act 1963 (the Limitation Act) provides for extension of the limitation period where there is an acknowledgement of the debt by a borrower. In various cases, it has been held that an entry in the financials of a borrower to the effect that there is an amount due to a debtor amounts to such an acknowledgement. However, recently the NCLAT has set a cat amongst the pigeons as it were by holding that Insolvency & Bankruptcy Code, 2016 (IBC) would in effect be an exception to this general rule laid down by various other judicial authorities. There is a bit of a history to this pronouncement.

On August 17, 2018, the Second Amendment to IBC was made. This amendment added section 238A to the IBC, effectively making the provision of section 18 of the Limitation Act to all insolvency proceedings. The Second Amendment was made effective from June 6, 2018.

The Saga of the Second Amendment

The Second Amendment came on the heels of a debate over the applicability of limitation to proceedings under the IBC. Recall that ordinarily, a money debt can be claimed anytime within 3 years of the debt being due and payable. Beyond this period of 3 years, statutory limitation would come to apply such that a claimant couldn't then assert her rights over the debt due. Paraphrasing the Supreme Court, the rationale behind having such limitation period is to prevent disturbance of a right acquired in equity and justice by long enjoyment by the debtor¹. Essentially, via a period of limitation of 3 years, the law ensures that if the lender has not acted or claimed the debt for a period of 3 years then the borrower acquires the right to enjoy it forever due to long enjoyment and should not be deprived of it under the principles of equity and justice.

Prelude to the Saga

Now, prior to the Second Amendment, the highest quasi-judicial authority dealing with insolvency matters had arrived at certain judgements holding that the Limitation Act did not apply to IBC proceedings.² This was on the basis that the IBC was not a law for recovery of money but for resolution of insolvency³ and attendant liquidation (if resolution doesn't materialize). The NCLAT then went on to state that if there is a debt including interest due and there is default of debt and has a continuous cause of action, the argument that the claim of money is barred by limitation cannot be accepted.⁴

Amongst the rationale given by NCLAT was also that IBC is a complete code in itself. It does not provide for, or indeed incorporate any reference to the Limitation Act. Hence, per the NCLAT, before the Second Amendment Act came into effect, Limitation Act could not have applied to proceedings under the IBC.⁵

These pronouncements, collectively, had the effect of allowing a 'right to sue' to keep running for a creditor indefinitely.

What happened next

Needless to add, there were various cases where the debate regarding limitation cropped up. The decision in Speculum Plast Pvt. Ltd.⁶ was pronounced on November 7, 2017. Wheels, however, were already in motion in relation to, amongst other such questions, the question of limitation elsewhere. The Injeti Srinivas led Insolvency Law Committee (the Committee) was set up on November 16, 2017.

Its report (the Report) was submitted to the Union Minister of Finance and Corporate Affairs on March 26, 2018. Doubtless, there were several issues that were deliberated upon by the Committee. One amongst the issue was also in relation to limitation that is the subject matter of this document. Thought the topic of limitation was not mentioned in the Preface to the Report issued, the application of Limitation Act to IBC first finds mention at page 72 as a summary of its detailed recommendation and then again at Chapter 28 of the Report. In about three paragraphs and just about one page of space, the Report succinctly states that the intent was not to package the IBC as "a fresh opportunity for creditors and claimants who did not exercise their remedy under existing laws within the prescribed limitation period"⁷. And thus, came to be inserted section 238A into the IBC Code on August 17, 2018 (with effect from June 6, 2020).

Supreme Court on applicability of limitation

With the question of applicability of Limitation Act to IBC now settled, the pages turned quickly to BK Educational Services Pvt. Ltd. v. Parag Gupta & Associates⁸. This case was culmination of various appeals filed against various NCLAT judgements on limitation before the Report had been released - one amongst them the case law of Speculum Plast Pvt. Ltd.⁹. On various grounds, the Supreme Court proceeded to decide that Limitation Act is indeed applicable to the IBC - this was the decision of the Supreme Court even without recourse to the Second Amendment¹⁰. However, the Supreme Court also noted that such applicability would be only from the inception of the IBC, i.e. in the same vein as the Speculum Plast Pvt. Ltd.¹¹ (i.e. section 137 of the Limitation Act would be relevant).

Subsequently, the Apex Court in K. Sashidhar v. Indian Overseas Bank¹² reiterated the ratio laid down in B.K. Educational Services Case.

Then came Jignesh Shah v. Union of India¹³ where three judges of the Supreme Court were faced with a winding up petition filed by IL&FS Financial Services Ltd. against La-Fin Financial Services Pvt. Ltd. Such winding up petitions after enactment of the IBC were converted to section 7 proceedings under IBC.

Above decision, while holding that a winding up petition was time-barred, having been filed beyond three years, made a passing observation that an "acknowledgment of liability under Section 18 of the Limitation Act would certainly extend the limitation period". This therefore, neatly brings us to the controversy at hand - extension of limitation period under section 18 of the Limitation Act.

Recall that in the beginning of this article, the authors had referred to section 18 of the Limitation Act. This provision provides for a fresh period of limitation, where there is 'acknowledgment of liability', which is to be computed from the date of 'acknowledgment'.¹⁴

The Saga Continues

It has been held in several cases¹⁵ that an entry in the balance sheet amounts to an acknowledgement of the debt. Therefore, if any entry is indeed made, then a fresh period of limitation under section 18 of the Limitation Act would begin from the date of such accounts. With the Second Amendment, the question of applicability of the Limitation Act to proceedings under IBC was put to rest in that Limitation Act would indeed apply.

However, what was intended to be a final settlement of the issue of applicability of limitation to IBC threw up a vexed problem. The latter would need some explanation - what usually occurs is that even though the 'date of default' as per the records of financial creditors occurs upon the happening for certain pre-defined events, filing of a petition under IBC is delayed beyond a period of 3 years from such date of default. One such case was that of Babulal Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd.¹⁶. In this case, the bank had proceeded against the corporate debtor in 2011 after its accounts were declared non-performing assets in a proceeding under the RDBFI Act¹⁷. Suffice it to say that a case came to be filed before the NCLT in March 2018 (note that the default had occurred in 2011, well beyond 3 years earlier). The NCLT admitted the application and the process under IBC commenced. However, not to be outdone, Mr. Babulal Gurjar who was one of the directors of the company, appealed to the NCLAT. One amongst his pleas was to do with limitation - i.e. having been filed well after 3 years' time, the case filed in the NCLT was barred by limitation. The NCLAT dismissed his appeal summarily. Mr. Gurjar being of a strong bent of mind, approached the Supreme Court against the NCLAT order where he contended that the NCLAT shouldn't have summarily rejected his appeal and instead, at the least, heard him on the various issues he had raised, including that of limitation. The Supreme Court agreed with the point of view regarding limitation and directed the NCLAT to hear the matter again, specifically in relation to limitation.

The NCLAT, under the Supreme Court's express orders thereafter, re-heard the matter, and came to the conclusion that its earlier decision was correct. It based its decision on the fact that limitation would be counted only from December 2016, i.e. when the IBC came into effect, and also that even otherwise, there were mortgaged properties that were involved, the limitation for invocation of which is anyways 12 years.

Mr. Gurjar, being of a resilient bent of mind, approached the Supreme Court a second time against this pronouncement of the NCLAT. The Supreme Court on August 14, 2020 stated that the application filed by the creditors was barred by limitation as it had been filed after the period of 3 years had expired from the date of default as mentioned in the application itself. The Supreme Court also held that there is no basis to the assertion that limitation would commence only from the date on which IBC was enacted.

Now, it must be pointed out here that in the above case, the books of the corporate debtor did reflect that it owed the amounts in question to the bank / financial institution. However, the Supreme Court, having been apprised of this particular quirk of the case, said that since the application itself records the date of default as July 8, 2011, the records of the corporate debtor would not be of assistance in extending the limitation period.

As it would transpire, before the judgement of the Supreme Court in Babulal Vardharju Gurjar's case could have been pronounced, the NCLAT had already arrived at a conclusion even more far reaching.

This was the seminal judgement rendered in V. Padmakumar Vs. Stressed Assets Stabilization Fund (SASF)¹⁸ (the "First Padmakumar case") by the NCLAT.

Decision in the case of Padmakumar Case (supra) was rendered by a 4:1 majority, which in itself was a result of reference to a Larger Bench to resolve conflicting decisions of coordinate benches¹⁹ of the NCLAT. Majority decision had held that balance sheets / annual returns being mandatory requirements under the CA'13, cannot amount to acknowledgement under section 18 of the Limitation Act.

The NCLAT observed that the Apex Court and various High Courts have consistently held that an entry made in the company's balance sheet amounts to an acknowledgment of debt under section 18 of the Limitation Act. Accordingly, reference was made to a larger bench to reconsider the Padmakumar Case (supra).

Soon however, a matter came to be heard in the NCLAT - Yogeshkumar Jashwantlal Thakkar v. Indian Overseas Bank²⁰ where the date of default mentioned in the application was January 1, 2016 but the application for commencement of proceedings under IBC was filed on April 1, 2019 (i.e. 3 months beyond the 3 year limitation, to the day). What makes this case stand apart is the fact that the bank in question had obtained a "debit confirmation" from the borrower on March 31, 2017. This "debit confirmation" was seen by the NCLAT as the acknowledgement of debt under section 18 of the Limitation Act. Thus, the NCLAT held in this case on September 14, 2020, that the application, even though having been filed on April 1, 2019, was well within 3 years from March 31, 2017, i.e. the date of "debit confirmation". This case, as is wont, has been challenged before the Supreme Court and is pending as on date of going to press.

Despite the aforesaid judgement being pending in appeal before the Supreme Court, on September 25, 2020, a three-member bench of the NCLAT in Bishal Jaiswal vs. Asset Reconstruction Company (India) Ltd. & Anr.²¹, "with the great respect to the Hon'ble Members of the Judgement" (sic) in the First Padmakumar case, thought it fit to refer the First Padmakuma case for reconsideration.

The NCLAT in reference proceedings initiated in Bishal Jiswal (supra), observed that the majority decision in First Padmakumar case (supra) had dealt with the conflict between the decision of the coordinate benches²², and had observed that Ugro (supra) cannot be relied upon as Apex Court's decisions were not brought to the notice of the bench during the proceedings. Accordingly, the NCLAT dismissed the reference, and held that the date of default with regard to application under Section 7 of the Code is the date of classification of the account as NPA. Most importantly it observed that limitation cannot be impacted by an acknowledgement of liability under section 18 of Limitation Act to keep the 'debt' alive for the purpose of insolvency proceedings.²³ This decision on reference was rendered by the NCLAT on December 22, 2020.

This order of reference was challenged before the Supreme Court²⁴, which rendered its ruling on April 15, 2021. The Bench comprising of Justices RF Nariman, BR Gavai and Hrishikesh Roy, while answering the legal question of 'Whether acknowledgement of debts in the balance sheet will be considered for Section 18 of Limitation Act", held that balance sheets can amount to an acknowledgement of debt for insolvency matters.

The court also examined the provisions under the Companies Act, 2013 qua any compulsion of law for filing of balance sheets and acknowledgements made therein²⁵. It observed that there is no doubt that the filing of balance sheet is mandatory, violations of which being punishable under law. However, Section 134(7) of the Companies Act expressly recognises the auditor's report and notes annexed to the said financial statement, which may provide for caveats with regard to 'acknowledgements' made in the books of account / balance sheet. In relation to the same, the Court appreciated the law laid down by the Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff²⁶. In the said judgment, the court had held that though the filing of a balance sheet is by compulsion of law, the acknowledgement of a debt is not necessarily so. In fact, it is not uncommon to have an entry in a balance sheet with notes annexed to or forming part of such balance sheet, or in the auditor's report, which must be read along with the balance sheet.

Now therefore, coming to the central question posed by this article.

Whither balance sheet entries for extension of limitation in insolvency matters?

While the application of Article 137 of the Limitation Act to IBC matters has been consistently upheld by the NCLAT and the Supreme Court, there was still confusion that whether balance sheet entries constitutes a valid 'acknowledgment' for extending the limitation period. Pursuant to the aforesaid judgment of April 15, 2021, the Supreme Court has clarified that entries in the balance sheet of the corporate debtor shall qualify as an 'acknowledgement' in terms of section 18 of the Limitation Act.

Therefore, the position as of date appears to be that if a Corporate Debtor has acknowledged a 'debt' in the form of a balance sheet entry, such entry would extend the period of limitation for the purposes of IBC. However, it is to be noted that the Supreme Court also observed that treatment of an entry in corporate debtor's balance sheet as an 'acknowledgment', would depend on facts of each case as to whether a balance sheet entry qua any particular creditor is unequivocal or is saddled with caveats. Then, the said balance sheet entries along with caveats, if any, would have to be examined on a case to case basis in order to establish the extension of limitation under section 18 of the Limitation Act. In fact, while doing so, the Supreme Court has itself put a 'caveat' to the law regarding the treatment of balance sheet entries as a valid 'acknowledgment' under IBC. However, this also gives rise to some practical issues, some of which the author has summarised hereunder:

Where the corporate debtor has not put a caveat to the balance sheet entries of previous financial year, then in such a situation, whether such entries would constitute a valid 'acknowledgement'. Also, prior to the April 15, 2021 judgment of the Supreme Court, balance sheet entries were held to be not a valid acknowledgement as per the NCLAT's five-member bench's decision²⁷.
How does it impact the operational debt owed by the corporate debtor to its suppliers of goods and services. In situations, where such operational creditor fails to demand the due amount within 3 years, then whether the balance sheet entries would extend the limitation under IBC.

It remains to be seen how courts answer the aforesaid questions.

One of the key takeaway from the Supreme Court's decision is that it casts a responsibility on the key managerial personnel along with the secretarial and audit officers to examine each loan transaction(s) entered by the corporate debtor. Accordingly, balance sheet and reports prepared and authenticated by the management of corporate debtor would ultimately determine the admissibility of IBC petitions. Hence, it may prudent to put in place a mechanism to examine each and every loan transaction(s) in order to put proper caveats. To illustrate, where the normal period of limitation i.e. 3 years have elapsed, the corporate debtor(s) may while acknowledging the debt, may put caveat to the effect that a particular debt is beyond the period of limitation.

Abhishek Dutta, Partner with inputs from Yatin Sharma, Partner and Manish Parmar, Senior Associate.

From Yatin’s Desk: The Faceless Assessment – Principles of Natural Justice

Imbibe technology – this has been the mantra of the Governments for years now. In context of income tax laws, while the first chapter can be dedicated to use of technology for tax compliances, we have now ushered into the more delicate phase of transforming assessments, appeals and the likes to a faceless regime through use of technology. Whatever be the reason – whether for sake of transparency, ease of business, minimizing interaction with authorities, mapping accountability, or simply cleaning the system, there is no doubt that the change is desirable. However, if not implemented within the realms of Natural Justice, this will be a recipe of unwanted litigation. Also, in view of our system of laws and constitutional provisions, non-observance of principles of Natural Justice will spell failure of this novel system.

The scheme of Faceless Assessment

The legislature has enshrined a detailed procedure for conduct of faceless assessment under the provisions[1] of the Income Tax Act, 1961 (‘Act’). The National Faceless Assessment Centre (‘NFAC’), as the nodal wing of tax administration, acts as the fulcrum for the conduct of assessment, coordinating between the taxpayer and other wings comprising of assessment units, the review units and the technical units, each bestowed with specific functions.

As part of the procedure, faceless assessment requires the assessment unit to make in writing a draft assessment order, either accepting income returned by the taxpayer or making variation to the said income, providing therein details of penalty proceeding to be initiated, if any. The assessment unit is required to consider all the relevant material available on record while making the draft assessment order. A copy of such order is sent to the NFAC. The NFAC upon examining the draft assessment order may decide to:

Finalize the assessment in case no variation prejudicial to the interest of assessee is proposed as per the draft assessment order, serve such order and notice for initiating penalty proceedings, if any, to the taxpayer, along with the demand notice, or
Provide an opportunity to the taxpayer, in case any variation prejudicial to the interest of taxpayer is proposed, by serving a notice calling upon him to show-cause as to why the proposed variation should not be made; or
Assign the draft assessment order to a review unit for conducting review of such order.

Where the taxpayer has received the show-cause notice, he may furnish his response to the NFAC within the stipulated timelines which thereafter is required to be considered by the assessment unit. The assessment unit is required to make a revised draft assessment order and send it to NFAC after taking into account the response furnished by the taxpayer.

NFAC, upon receiving the revised draft assessment order would proceed to finalise the assessment as per the revised draft assessment order and serve a copy of such order and notice for initiating penalty proceedings, if any, to the taxpayer.

As is notable from the aforesaid procedure, the law requires issuance of a show-cause notice (‘SCN’) to the taxpayer where any variation is proposed to the income declared, prior to issuance of final assessment order.

What if procedure is not followed?

It is being witnessed that in many cases, the NFAC has proceeded to issue final assessment orders with variation without issuance of SCN. In some cases, where SCN has been issued and objections filed by the taxpayer, the taxpayer is still denied the opportunity of personal hearing even where requested by the taxpayer. The question that arises is how tenable is the action of the tax authorities and what legal remedy do the taxpayers have?

The classical approach will be to file an appeal with the first appellate level i.e. Commissioner (Appeals) and work through the prolonged spell of litigation over years. Even if one reconciles to this fate, an impediment to such approach is the requirement to pay 20% of the disputed tax upfront for grant of stay of balance tax demand as per the prevailing CBDT directions. This has material impact on the cash flows of taxpayers which are anyway squeezed given the prevailing conditions. Thus, for taxpayers willing to explore unconventional opportunity, it may be worthwhile to examine the writ jurisdiction of the High Courts under Article 226 of the Constitution.

Writ jurisdiction of High Court in tax matters

Article 226 of the Constitution confers wide powers to High Courts to issue writs. The remedy of writ is not absolute but discretionary in character. If the High Court is satisfied that the aggrieved party has an adequate or suitable relief elsewhere, it can refuse to exercise its jurisdiction.[2] The Court, in extraordinary circumstances, may exercise the power if it concludes that there has been a breach of principles of natural justice or procedure required for decision has not been adopted. Thus, the normal rule is that a writ petition under Article 226 of the Constitution ought not to be entertained if alternate statutory remedies are available, except in cases falling within the well-defined exceptions. In this regard, the Supreme Court in Commissioner of Income Tax and Others vs. Chhabil Dass Agarwal[3], observed as follows:

‘19. Thus, while it can be said that this Court has recognized some exceptions to the rule of alternative remedy, i.e., where the statutory authority has not acted in accordance with the provisions of the enactment in question, or in defiance of the fundamental principles of judicial procedure, or has resorted to invoke the provisions which are repealed, or when an order has been passed in total violation of the principles of natural justice, the proposition laid down in Thansingh Nathmal case, Titagarh Paper Mills case and other similar judgments that the High Court will not entertain a petition under Article 226 of the Constitution if an effective alternative remedy is available to the aggrieved person or the statute under which the action complained of has been taken itself contains a mechanism for redressal of grievance still holds the field. Therefore, when a statutory forum is created by law for redressal of grievances, a writ petition should not be entertained ignoring the statutory dispensation.’

Therefore, extraordinary circumstances meeting the prerequisite for exercise of writ jurisdiction of the High Court arise where statutory authorities have not acted in accordance with the provisions of the enactment, or in defiance of the judicial procedure, or when an order has been passed in total violation of the principles of natural justice.

In context of the faceless assessment scheme, provisions of the Act specifically require issuance of a SCN where any variation is proposed to the income declared. These provisions cannot be considered redundant or insignificant. These embody the basis right of fair hearing to the taxpayer and adherence to principle of natural justice. The basic principle of natural justice requires the authority to give the affected party reasonable notice. Such notice must specify the grounds on the basis of which an action is proposed to be taken so as to enable the noticee to defend himself. In this regard, it will be useful to take note of the observation of the Supreme Court in the case of UMC Technologies Private Limited versus Food Corporation of India and Anr.[4] as under:

“13. At the outset, it must be noted that it is the first principle of civilised jurisprudence that a person against whom any action is sought to be taken or whose right or interests are being affected should be given a reasonable opportunity to defend himself. The basic principle of natural justice is that before adjudication starts, the authority concerned should give to the affected party a notice of the case against him so that he can defend himself. Such notice should be adequate and the grounds necessitating action and the penalty/action proposed should be mentioned specifically and unambiguously. An order travelling beyond the bounds of notice is impermissible and without jurisdiction to that extent. This Court in Nasir Ahmad v. Assistant Custodian General, Evacuee Property, Lucknow and Anr.,1 has held that it is essential for the notice to specify the particular grounds on the basis of which an action is proposed to be taken so as to enable the noticee to answer the case against him. If these conditions are not satisfied, the person cannot be said to have been granted any reasonable opportunity of being heard.”

More specifically, the Supreme Court in the case of Gokak Patel Volkart Limited vs Collector Of Central Excise^[5], while examining the provision of section 11A of the Central Excises and Salt Act, 1944 containing specific provisions for issuance of SCN for recovery of duty of excise observed as under:

“The provisions of Section 11A (1) and (2) make it clear that the statutory scheme is that in the situations covered by the sub-section (1), a notice of show cause has to be issued and sub-section (2) requires that the cause shown by way of representation has to be considered by the prescribed authority and then only the mount has to be determined. The scheme is in consonance with the rules of natural justice. An opportunity to be heard is intended to be afforded to the person who is likely to be prejudiced when the order is made, before making the order thereof. Notice is thus a condition precedent to demand under sub-section (2). In the instant case, compliance with this statutory requirement has not been made, and, therefore, the demand is in contravention of the statutory provision.”

Thus, it appears that failure of NFAC to issue SCN, enabling the taxpayer to contest such action would clearly fall short of the threshold of natural justice. In the circumstances, it will be a strong case to contest that the statutory authority has not acted in accordance with the specific provisions of the Act. There in non-adherence to the judicial procedure and principles which are considered to be a bedrock of a common law based civilized society. There is thus, blatant infringement of the right of the taxpayer under the Act in so far as there is denial of the opportunity to contest the variations proposed before issuance of final order.

Persuasive jurisprudence

In somewhat comparable provisions prescribed in relation to matters^[6] which are subject to the jurisdiction of Dispute Resolution Panel (‘DRP’), section 144C of the Act require the Assessing Officer to issue a draft assessment order wherein variation is proposed which is prejudicial to the interest of the taxpayer. This is to enable the taxpayer file objection contesting the variation before the DRP, prior to issuance of final order.

In the past, there have been a number of instances wherein the Assessing Officers have proceeded to issue the final order, overlooking the specific requirement to issue a draft order. In such cases, the taxpayers have often exercised the writ jurisdiction of the courts challenging failure to adhere to the mandatory requirement of section 144C i.e. the obligation to first pass a draft assessment order to enable filing of objections before the DRP. In such cases, the courts have held that failure to follow mandatory procedures prescribed in statute could not be termed as mere procedural irregularity and thus cannot be cured. The orders thus passed are contrary to, and in violation of, the mandatory provisions of the Act, and would result in invalidation of the final assessment order, demand notice and penalty proceedings.

This position of law is now fairly established across jurisdictions, indicatively as held in the case of Zuari Cement Ltd[7], Vijay Television[8], Turner International[9], JCB India[10], etc.

Significantly, in a direct case relating to the faceless assessment scheme, a writ petition has been filed before the Delhi High Court in the case of K L Trading Corporation vs National E-Assessment Centre Delhi & Anr[11]. In the matter, the taxpayer has challenged the action of the tax authorities wherein a final order with variation has been issued without prior issuance of the SCN. The taxpayer has contested that there has been a breach of the principles of natural justice which stands engrafted in the faceless assessment scheme. The Court has found prima-facie merit in the petition and admitted the same for further hearing. On similar issues, a writ has been admitted by the Delhi High Court in the case of SAS Fininvest LLP v National E-Assessment Centre Income Tax Department, New Delhi[12]

In yet another matter, in Magick Woods Exports Private Limited v National e-Assessment Centre, Delhi.^[13], the Madras High Court in a recent writ petition set aside the order passed in violation of principles of natural justice. The impugned order was assailed on the ground that it was passed contrary to the principles of natural justice. In response to SCN issued upon the taxpayer accompanied by a draft assessment order, the petitioner has sought an adjournment on the ground that the petitioner is collating materials necessary to substantiate its stand. However, the impugned order of assessment was passed without taking note of the request of the petitioner for adjournment. The request for adjournment had also not been rejected. The court observed that there has been apparent violation of principles of natural justice. The court accordingly directed the tax authorities to enable the online portal to receive the objections, hear the petitioner and complete the assessment in accordance with law.

The way ahead

As we move toward completion of the annual tax assessment cycle, one can expect some misadventure from the tax authorities who may, consciously or ignorantly, err in finalizing tax assessment with income variation in haste, without providing opportunity in the manner prescribed. Taxpayers need to carefully weigh their options for challenging the assessment orders. Writ petition before jurisdictional High Court can be looked at as the preferable option where the principles of natural justice have been violated. Where successfully contested, in the best-case scenarios, invalidation of final assessment order, demand notice and consequential penalty proceedings would put an end to the rigours of lengthy litigation, or to the least a direction from the court to rehear the objections, limitation permitting.

Contributed by Yatin Sharma. Yatin can be reached at yatin.sharma@aureuslaw.com

[1] Sec 144B of the Act

[2] Constitution Benches of the Supreme Court in K.S. Rashid and Sons vs. Income Tax Investigation Commission, AIR 1954 SC 207

[3] 2014 (1) SCC 603

[4] Civil Appeal No. 3687 of 2020

[5] 1987 AIR 1161

^[6] Orders wherein variation arises consequence of Transfer Pricing orders and assessment of non-residents.

^[7] Zuari Cement Ltd. V. ACIT (decision dated 21st February 2013 in WP(C) No.5557/2012)

^[8] Vijay Television (P) Ltd. Vs. Dispute Resolution Panel & Ors. (2014) 369 ITR 0113 (Mad)

^[9] Turner International India (P) Ltd. Vs. Deputy Commissioner of Income Tax

^[10] Jcb India Ltd. Vs. Deputy Commissioner of Income Tax (2017) 298 CTR 0558 (Del)

^[11] W.P.(C) 4774/2021

[12] W.P.(C) 5087/2021, Order dated 04.05.2021

[13] W.P. No.10693/2021, Order dated 28.04.2021

Anti – Dumping Duty in India – A Primer

This offering from Aureus Law Partners seeks to present a primer on Anti-Dumping Laws and procedure in India. Anti-Dumping Duties (“ADD“) are imposed to counter dumping of goods or articles in India causing material injury to the domestic industry. Hence, the imposition of ADD is driven from Government’s intent to provide expeditious relief to the domestic producers from the trade-distorting phenomenon of dumping.

ADD measures are different from the ‘Safeguard’ measures where the requirement to establish ‘material injury’ is more stringent, and when duties of safeguard are imposed, Exchequer may also be required to pay compensation to the trading countries. For the purposes of this article, we have limited ourselves to law and procedure relating to ADD in India.

Legal Framework

Member nations of the World Trade Organisation have agreed to the General Agreement on Tariffs and Trade of 1994 (“GATT”). As per Article VI of GATT, 1994 read with Anti-Dumping Agreement, WTO member states can impose anti-dumping measures subject to conditions.[1]

Indian laws were amended with effect from January 1, 1995 to align the national law with the Article VI of GATT and specific agreements between the member nations.

Sections 9A, 9B and 9C of the Customs Tariff Act, 1975 (“Tariff Act”) as amended in 1995 and the Customs Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and for Determination of Injury) Rules, 1995 (“ADD Rules”) framed thereunder constitute the legal basis for anti-dumping investigations and for the levy of anti-dumping duties.

Currently, given the slowdown faced by the domestic industry due to the COVID pandemic and ensuing decrease in cross-border trade, there has been upward trend in imposing ADD on several items of import. In 2021 itself, the Ministry of Finance until March 11 has issued more than 10 notifications imposing ADD on several items of import (primarily from China PR).

What is ‘Dumping’

Dumping occurs when the ‘Export Price’ of goods imported into India is less than the ‘Normal Value’ of ‘like articles’ sold in the domestic market of the exporter. The ‘Normal Value’ refers to the comparable price at which the ‘product under consideration’ (“PUC”) are sold, in the ordinary course of trade, in the domestic market of the exporter.

The ‘Export Price’ of goods imported into India /PUC is the price paid or payable for the goods by the primary independent buyer. Principles governing the determination of “export Price’ include – (i) Arm’s Length Transaction; (ii) Resale price to an independent buyer[2]; and (iii) Price determined on a reasonable basis[3].

‘Margin of Dumping’ refers to the difference between the Normal Value of the like article and the Export Price of the PUC. These are normally determined on the basis of – (i) a comparison of weighted average Normal Value with a weighted average of prices of comparable export transactions; or (ii) a comparison of ‘Normal Value’ and ‘Export Price’ on a transaction to transaction basis[4].

The ‘Export Price’ and the ‘Normal Value’ of the PUC are to be compared at the same level of trade i.e. ex-factory price, for sales effected during the nearest possible time. Due consideration is also made for differences that affect price comparability of a domestic sale and an export sale. These factors, inter alia, include – (i) physical characteristics; (ii) levels of trade; (iii) quantity; (iv) taxation; (v) conditions and terms of sale.

It is pertinent to note that the said factors are only indicative and any other factor which can be demonstrated to have an effect on the price comparability, may be considered.

Injury to the Domestic Industry

The Indian domestic producer must show that dumped imports of PUC are causing or are threatening to cause ‘material injury’ to the Indian ‘Domestic Industry’[5].

Broadly, the principles governing the determination of ‘material injury’ because of alleged dumping are – (i) PUC has been exported to India from the subject country below its ‘Normal Value’; (ii) Domestic Industry has suffered ‘material injury’; and (iii) There is a casual link between the alleged dumping and ‘material injury’ caused to the Domestic Industry. Also, the analysis of ‘material injury’ is undertaken by following two methods:

Volume Effect

Examination of volume of the dumped imports, including the extent to which there has been or is likely to be a significant increase in the volume of dumped imports. These may be either in absolute terms or in relation to production or consumption in India, and its effect on the Domestic Industry.

Price Effect

The effect of dumped articles on prices in the Indian domestic market including price-undercutting, price depression or preventing increase in price which otherwise would have increased.

Investigation for imposing ADD

An investigation for alleged dumping may be initiated by the Designated Authority upon an application made by or on behalf of Domestic Industry.[6] Following two conditions are pre requisites for a valid application to be considered by the Designated Authority:

Application must be supported by domestic producers accounting for not less than 25% of total production of the like article in India; and
Domestic producers supporting the application must account for more than 50% of total production of like article by those opposing the application.

Enlarge

Miscellaneous Provisions

Termination of Investigation

Request in writing from the Domestic Industry at whose instance the investigation was initiated;
No sufficient evidence of dumping or injury;
If the Margin of Dumping is less than 2% of the Export Price;
If the volume of dumped imports from a country is less than 3% of the total imports of the like article into India or the volume of dumped imports collectively from all such countries is less than 7% of the total imports;
Injury is negligible.

Retrospective imposition of ADD

If there is a history of dumping which caused the injury or that the importer was, or, should have been aware that the exporter practices dumping and that such dumping would cause injury, and
If the injury is caused by massive dumping, in a relatively short time, so as to seriously undermine the remedial effect of anti-dumping duty.

Such retrospective application will not go beyond 90 days of the date of imposition of provisional duty.

Refund of collected duty

If the imposed ADD on the basis of final findings is higher than the provisional duty (already imposed and collected), the difference shall not be collected;
If the final ADD is less than the provisional duty (already imposed and collected), the difference shall be refunded;
If the provisional duty is withdrawn based on a negative final finding, then the provisional duty already collected shall be refunded.

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

Views are personal.

[1] Pursuant to investigation in accordance with the Agreement, a determination is made (a) that dumping is occurring, (b) that the domestic industry producing the like product in the importing country is suffering material injury, and (c) that there is a causal link between the two. In addition to substantive rules governing the determination of dumping, injury, and causal link, the Agreement sets forth detailed procedural rules for the initiation and conduct of investigations, the imposition of measures, and the duration and review of measures.

[2] If there is no export price or the export price is not reliable because of association or a compensatory arrangement between the exporter and the importer or a third party, the export price may be determined on the basis of the price at which the imported articles are first resold to an independent buyer.

[3] If the PUC are not resold as above or not resold in the same condition as imported, their export price may be determined on a reasonable basis.

[4] Introduced after the Uruguay Round.

[5] Rule 2(b) of ADD Rules.

[6] Under Rule 5(4) of ADD Rules, the Designated Authority may also initiate investigation suo motu based on information received from Customs authorities or any other person.

From Yatin’s Desk: Income escaping assessment – A revamped law on reassessment proceedings

As the dust settles and the excitement subsides over Budget 2021 announcements, it is now an opportune time to examine the fine print of tax proposals. One such proposal which have drawn considerable attention and has the effect of substantially rewriting the law relates to the provision of Income Escaping Assessment i.e. Reassessment Proceedings.

A Look back at the extant provisions

The extant law relating to reassessment are codified under S. 147, to S. 153 of the Income Tax Act, 1961 (‘the Act’). The provisions enable the Assessing Officer (‘AO’) who has ‘reason to believe’ that an income has escaped assessment to reopen concluded assessment years to reassess the escaped income and any other income which comes to his notice subsequently in the course of such proceedings. However, where the assessee has been subject to scrutiny assessment in relation to a year, no reassessment can be made beyond a period of 4 years from the end of relevant assessment year (‘AY’) unless the assessee has failed to ‘disclose fully and truly all material facts necessary for his assessment’ for the year. Where the income likely to have escaped amounts to Rs. 1 lac or more, assessment can be reopened upto 6 years from the end of relevant AY[1]. Before making any reassessment, the AO is required to ‘record his reasons’ for reopening the assessment and serve a notice requiring the assessee to file a tax return. Re-opening of assessment beyond a period of 4 years requires sanction of the Principal Chief Commissioner/Chief Commissioner/Principal Commissioner/Commissioner.

Reopening of assessment – an evergreen controversy

Reassessment proceedings, often, have been challenged in writ proceedings before the High Courts on the ground that the notice for reassessment lacks legal validity on account of failure by the AO to follow due process of law enshrined in the provisions and established under common law. Rather than the merits of concealment, courts are overwhelmed with cases to decide upon the sustainability of the core issue of initiation of reassessment i.e. whether the AO had ‘reasons to believe’, did he ‘record his reasons’ appropriately, did the assessee fail to ‘disclose fully and truly all material facts necessary for his assessment’, was proper ‘sanction’ of the appropriate authorities taken, etc.

The Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. vs. ITO & Ors. has laid that when a notice for reopening of assessment u/s 148 of the Act is issued, the proper course of action for the assessee is to file the return and, if he so desires, to seek reasons for issuing the notices. The AO is bound to furnish reasons within a reasonable time. On receipt of reasons, the assessee is entitled to file objections to issuance of notice and the AO is bound to dispose the same by passing a speaking order.

Recently the Hon’ble Supreme Court in the case of New Delhi Television Limited v DCIT (Civil Appeal No. 1008 Of 2020), in the context of disclosure of ‘fully and truly all material facts necessary for his assessment’ has held that the obligation of the assessee is to disclose all primary facts before the AO and he is not required to give any further assistance to the AO by disclosure of other facts. It is for the AO at this stage to decide what inference should be drawn from the facts of the case. The court went on to hold that non-disclosure of other facts which may be termed as secondary facts is not necessary.

Further, numerous court decisions have repeatedly stated that while the AO has to record reasons for reopening, there should be proper application of mind and it should not just be a mechanical process.

As the reality stands, proper reopening in the manner provided under law has remained wanting. The courts have over and again expressed anguish over the mechanical approach of reopening assessment without adherence to the provisions which have resulted, more often than not, reassessment proceedings being quashed on the issue of proper exercise of jurisdiction itself.

Budget proposal 2021 – revamp of reassessment procedure

The Finance Minister brought smiles by announcing in her budget speech the proposal to reduce time-limit for reopening of assessment to 3 years from the present 6 years, and in serious cases where there is evidence of concealment of income in a year of Rs. 50 lakh or more, upto 10 years. However, on examining the details, one can observe that far-reaching changes have been proposed to the entire scheme of reassessment.

The proposals substitute the exiting provisions of S. 147 with a new section which pari materia contain similar provisions to the extent enabling the AO to assess the escaped income and any other income which comes to his notice subsequently in the course of proceedings. The new substituted S. 148 however makes a significant departure from the existing provisions which put the onus upon the AO to form a belief that an income has escaped assessment. The new provisions propose to provide a monitored criterion, having application across jurisdiction and assesses, to establish when the AO would be considered to have information which suggests that the ‘income chargeable to tax has escaped assessment’.

Defined meaning of expression ‘income chargeable to tax has escaped assessment’

The expression, forming the basis for triggering reassessment proceedings has now been defined in a restrictive manner to mean –

(i) any information flagged in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Central Board of Direct Taxes (CBDT) from time to time. Such flagging would largely be done by the computer based system;

(ii) any final objection raised by the Comptroller and Auditor General of India to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of this Act.

In case of Search & Seizure (S. 132), Survey (S. 133A), Requisition of books of accounts, etc relating to the assessee (S. 132A) or where money, bullion, jewellery or other valuables articles are sized in case of another person but belong to the assessee or books of accounts or documents seized or requisitioned in case of another person pertain to the assessee or contain information related to the assessee, the AO is ‘deemed to have information suggesting escapement of income’ chargeable to tax for 3 AY preceding the AY relevant to the year in which the aforesaid proceedings is conducted (i.e. 4 preceding financial years). These provisions principally seek to simplify and align the special procedure presently applicable to matters relating to search & seizure etc., with the new procedure for reassessment.

It is pertinent to note that the information flagged in accordance with the risk management strategy should necessarily pertain to ‘the assessee’ and thus it appears that information flagged in the case of thirds party, even if implicating the assessee cannot be made a basis of issuance of notice. Perhaps it may have to be seen whether the mechanism to be formulated by the CBDT ensures checks and balances to identify such delinquent taxpayers also.

Procedure to be followed before issuing notice for reassessment

The new provisions further codify the procedure to be followed by the AO before issuing a notice for reassessment. The provisions required the AO to:

Conduct any enquiry, if required, with prior sanction of the specified authority, with respect to the information suggesting escapement of income;
Provide the assessee an opportunity of being heard by serving a notice to show cause within such time (being not less than 7 days and not exceeding 30 days) as to why a notice under section 148 should not be issued on the basis of information suggesting escapement of chargeable income and results of enquiry conducted, if any;
Consider the reply of assessee, if any, furnished and basis the material including reply of the assessee, decide whether a notice is to be issued by passing an order, with the prior approval of specified authority, within 1 month from the end of the month in which the reply referred to in received/ time allowed to furnish a reply expires.

The aforesaid procedure is not required to be followed in cases relating to search and seizure, or where books of account, other documents or any assets are requisitioned under section 132A, etc. (i.e. situations where AO is deemed to have information suggesting escapement of assessment.)

Time limit for issuance of reassessment notice

The new provisions reduce the time-limit for re-opening of assessment to 3 years from the end of relevant AY. For instance, in relation FY 2017-18 corresponding to AY 2018-2019, the reassessment proceedings can be opened only upto 31 March 2022 (being 3 years from the end of relevant AY). FY 2016-17 and prior years will henceforth be barred by limitation if a notice is issued after 31 March 2021 (as against FY 2013-14 and prior years under existing law). In case where the AO has in his possession books of accounts or other documents or evidence which reveal that the income chargeable to tax, ‘represented in the form of assets’, which has escaped assessment amounts to Rs. 50 lacs or more, the assessment can be re-opened upto 10 years.

Grandfathering period of limitation for AY 2021-22 and prior years

The new reassessment provisions are applicable from April 1, 2021. The provisions grandfather issuance of notice for reopening of assessment for financial years (FY) ending till 31 March 2021 upto the end of 6 assessment years relevant to such assessment year (for which notice is issued) as prescribed under the existing provisions. This would imply that if a notice for reassessment was to be issued in FY 2021-22, notice for reassessment can be issued only for FY 2017-18 and subsequent years (i.e. 3 years limitation under new provisions). Further, if it is a case where the quantum of income escaped is Rs.50 lacs or more, notice for reassessment can be issued only for FY 2015-16 and subsequent years on account of grandfathering provisions. The extended period of 10 years would not apply in such case.

Analysing the changes

The proposals, in all fairness are in the right direction. Reduction of period of limitation from 6 to 3 years would provide much desired certainty and closure to a large section of taxpayers. Further restricting reopening based on risk management strategy of CBDT and objections raised by CAG will bring an end to the often-abused powers of reopening exercised by AO, typically at the fag end of the limitation period. By providing a clear mechanism of inquiry, issuance of notice and its timeframe, the proposal will, to a major extent, aid in streamlining the procedure. The unpleasant surprise of receiving reassessment notice on the last day of the financial year will now be a thing of the past given that the new provisions require a detailed procedure to be followed and opportunity to be granted to the assessee to provide his reply before issuance of notice.

The proposal for extended 10 years limitation where the alleged income, ‘represented in the form for assets’, has escaped assessment exceeds ‘Rs. 50 lacs or more’, principally seem reasonable. Prima-facie, it appears that since the revelation of escaped income has to be ascertained from ‘the books of accounts or other documents or evidence in possession of the AO’, this may typically apply to cases of search and seizure, survey, requisition of books, etc. However there seems to be some ambiguity which could have far reaching implications.

The new provision in so far as relate to matters of search & seizure, requisition of books etc. prescribe that where the aforesaid proceeding are initiated, the AO shall be deemed to have information suggesting escapement of chargeable income for 3 AY immediately preceding AY relevant to the FY in which such proceedings are undertaken. Thus, for instance, if search proceedings are initiated against an assessee in FY 2021-22 (relevant AY being 2022-23), income will be deemed to have been concealed for 3 immediately preceding AY i.e. AY 2019-20, AY 2020-21& AY 2021-22, (corresponding to FY 2018-19, FY 2019-2020 & FY 2020-21). Thus, notice would be issued for all the 3 years. Consider this in light of the operative provision which prescribes that where income chargeable to tax has escaped assessment for any assessment year, the AO shall reassess such income for such assessment year. The combined reading of law appears to suggest that in case of aforesaid matters, reassessment proceedings can be undertaken only for 3 years prior to the year in which search proceedings are initiated. If this was to hold good, the question arises whether the extended period of 10 year is really redundant for search & seizure/survey/requisition of books, etc. matters?

This leads to the next pertinent question – in which situations will the 10-year limitation period apply?

The limitation period beyond 3 year and upto 10 year is applicable where the AO ‘is in possession’ of books of accounts or other documents or other evidence which reveal escapement of income chargeable to tax and represented in the form of assets. Ordinarily, AO obtains possession of bocks of accounts/other documents/evidence in proceedings relating to search & seizure/survey/requisition of books, etc. matters. As discussed above, given the provisions as presently stated, one possible reading is that reassessment proceedings can only be undertaken for 3 years prior to the year in which search proceedings, etc are initiated. Would this imply that the extended period of 10 years would apply to matters other than search & seizure/survey/requisition of books, etc.?

In light of the aforesaid, the expression “Assessing Officer has in his possession books of accounts or other documents or evidence which reveal that…”, a necessary condition for exercising extended limitation of 10-year, merits consideration. Would it therefore mean that the documents gathered during regular assessment proceedings may well be regarded as relevant ‘documents or evidence’ being in the possession of the AO. ‘Books of accounts’ are typically not given in possession during assessment proceedings, and therefore how it fits into the scheme of things remains a grey area. Further, would the information mined and provided under the ‘risk mitigating strategy’ of CBDT also be regarded as ‘evidence’ in possession of the AO.

While this may still be debatable, any such inference would be a huge damper as it would now enable reopening assessment for 10 years (subject to Rs. 50 lacs threshold) as against 4 year under the existing law even where the assessee has made full and true disclosure of material facts during the course of prior assessment. Take for instance a case where risk management strategy of CBDT flags substantial increase in loans and advances or investments as a data point for triggering reassessment. The same would logically have been disclosed in the balance sheet. In such a situation, inspite of such disclosure, there could perhaps be possibility to reopen reassessment proceedings upto 10 year (subject to monetary threshold), effectively giving the CBDT a 10-year timeframe to refine its data intelligence and risk-based criterion. This would certainly be an area of concern.

Overall, it is encouraging to note a transformational change in the provisions relating to reassessment proceedings. There is a fundamental shift from an obscure and discretionary regime to systematic and risk-based criterion applicable uniformly across jurisdictions and taxpayers, without bias and subjectivity. It will however be interesting to see how the authorities go about enforcing the extended period of limitation given the ambiguity involved. One can hope the same is not enforced against the interest of taxpayer, specifically taking a liberal interpretation of 10 years extended limitation period, which otherwise will be a huge disappointment.

[1] Extended period of 16 years is prescribed in case of escaped income in relation to an asset located outside India.

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;

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: 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.

From Yatin’s Desk: Government clarifies on proposed residency rule for Indian Citizens

The Finance Bill (FB) 2020 has proposed a significant change by regarding an Indian citizen (who otherwise is not resident in India under the basis stay rule of 182/120 days or more) as ‘deemed resident’ if the individual is ‘not liable to tax in any other country’ by reason of his domicile or residence or other criteria of similar nature. Memorandum to the FB 2020 explains the intent by stating that the change is proposed to address the practice by individuals to arrange affairs in a fashion such that he is not liable to tax in any country or jurisdiction during a year. Such arrangements are typically employed by high net worth individuals to avoid paying taxes to any country/ jurisdiction on income they earn. The change, at first sight, is bound to give jitters to certain category of citizens who are genuinely employed in tax free countries, for instance UAE which does not have personal income tax.

It will be interesting to take note of the text proposing the change which states as follows – “an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.”;

The use of the expression “by reason of his domicile or residence” is intriguing given the effect could have perhaps been achieved simply by specifying that ‘a citizen of India shall be deemed to be resident in India if he is not liable to tax in any other country’. One wonders whether the use of expression “by reason of his domicile or residence” gives some scope for argument that the deeming residency rule may not apply to citizens where non-taxability is on account of general exclusion of ‘Individual’ from taxation and not on account of lack of meeting threshold of domicile/residence? The debate may have just begun and will certainly open another area of protracted litigation.

While the analysis continues, one way to wriggle out of this conundrum is to take shelter of ties breaker rule under tax treaties, which is again a complex exercise involving interpretations. It will further be pertinent to take note that individuals qualifying as “resident but not ordinarily resident” (RNOR) are not taxable in relation to income which accrues or arises outside India unless it is derived from a business controlled or a profession setup in India. As further proposed in FB 2020, a person will qualify as “RNOR” in India in any previous year, if he has been a non-resident in India in 7 out of 10 previous years preceding that year. Thus, even if an individual is regarded as a “deemed resident” under the new framework from FY 2020-2021, he may still qualify as “RNOR“ thereby safeguarding income accruing outside India from India taxation during the years “RNOR” status is maintained. The 7/10 rule for RNOR status while provides some comfort to citizens who have been settled overseas for over 7 years, this will have far reaching implications for recent emigrants.

The government is ceased of the issue and to its credit has issued a press release clarifying that in case of an Indian citizen who becomes ‘deemed resident’ of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession. Further clarification is expected to be incorporated in the relevant provision of law. Hope the government also ensures there is no associated filing/reporting burden cast on the overseas citizens.

Whether it is at all worthwhile to change the status quo only for targeting a few HNI’s misusing the law..perhaps not!