The Unanswered Question of Limitation– A contentious issue post Supreme Court ruling on reassessment controversy

The Hon’ble Supreme Court (‘SC’), in the case of Union of India & Ors vs. Ashish Agarwal has pronounced an exceptional decision concerning thousands of reassessment notices issued to taxpayers during the period 1.04.2021 to 31.06.2021 (‘specified period’), albeit under the reassessment provision of the Income Tax Act (‘the Act’) applicable till 31.03.2021. The decision has drawn immense interest given the consequence and uniqueness of the order.

The SC was faced with the challenge of balancing equity for both the taxpayer and the Revenue Authorities (‘RA’) given the magnitude of reassessment notices (90,000) and the impact on the government exchequer. The circumstances pivoted the SC to exercise its constitutional powers under Article 142 of the Indian Constitution to strike a balance, rather than adopt a strict technical view on this important subject. This can be inferred from the following observation of the Court:

“There is a broad consensus on the aforesaid aspects amongst the learned ASG appearing on behalf of the Revenue and the learned Senior Advocates/learned counsel appearing on behalf of the respective assessees. We are also of the opinion that if the aforesaid order is passed, it will strike a balance between the rights of the Revenue as well as the respective assesses as because of a bonafide belief of the officers of the Revenue in issuing approximately 90000 such notices, the Revenue may not suffer as ultimately it is the public exchequer which would suffer.’

Whatever the rationale for the decision, one would have hoped that the SC ruling would bring certainty and closure on this subject. Unfortunately, it may not be the last word yet on this contentious issue. One specific aspect that may now become a subject of dispute and litigation is the ‘question of limitation’ applicable to reassessment proceedings which have now been given a fresh lease of life consequent to the SC order.

Concurrence with High Court orders

The reading of the SC decision makes it clear that the court agreed with the proposition articulated by various High Courts holding that substituted reassessment provisions (effective 1.04.2021) would apply in respect of notices issued on or after 1.04.2021. This is inferable from the following observations:

“7. Thus, the new provisions substituted by the Finance Act, 2021 being remedial and benevolent in nature and substituted with a specific aim and object to protect the rights and interest of the assessee as well as and the same being in public interest, the respective High Courts have rightly held that the benefit of new provisions shall be made available even in respect of the proceedings relating to past assessment years, provided section 148 notice has been issued on or after 1st April, 2021. We are in complete agreement with the view taken by the various High Courts in holding so…..

…….It is true that due to a bonafide mistake and in view of subsequent extension of time vide various notifications, the Revenue issued the impugned notices under section 148 after the amendment was enforced w.e.f. 01.04.2021, under the unamended section 148. In our view the same ought not to have been issued under the unamended Act and ought to have been issued under the substituted provisions of sections 147 to 151 of the IT Act as per the Finance Act, 2021.”

It is accordingly decided by the SC that reassessment notices issued during the period 1.04.2021 to 30.06.2021 should have been issued under the substituted provision of Sec. 147 to 151 as per the Finance Act, 2021.

A middle ground for resolution

The legal consequence of the High Court orders was the carte blanche quashing of reassessment notices issued during the specified period as per the law applicable till 31.03.2021 (‘erstwhile law’). It was observed by the SC that the judgments of the several High Courts quashing the notices would result in no reassessment proceedings at all, even if the same are permissible under substituted Sec. 147 to 151 of the Finance Act, 2021. It would thus appear that to resolve this impasse, leeway has been given to proceed further with the reassessment proceedings as per the substituted provisions of Sec. 147 to 151 of the Finance Act, 2021. While adopting a middle ground, the SC has categorically stated that all defences/ rights/ contentions available to the assessee and the RA as under the Finance Act, 2021 and in law shall continue to be available. This is made clear by the following observations from the SC.

“However, at the same time, the judgments of the several High Courts would result in no reassessment proceedings at all, even if the same are permissible under the Finance Act, 2021 and as per substituted sections 147 to 151 of the IT Act. The Revenue cannot be made remediless and the object and purpose of reassessment proceedings cannot be frustrated…….

… …..There appears to be genuine non application of the amendments as the officers of the Revenue may have been under a bonafide belief that the amendments may not yet have been enforced. Therefore, we are of the opinion that some leeway must be shown in that regard which the High Courts could have done so. Therefore, instead of quashing and setting aside the reassessment notices issued under the unamended provision of IT Act, the High Courts ought to have passed an order construing the notices issued under unamended Act/ unamended provision of the IT Act as those deemed to have been issued under section 148A of the IT Act as per the new provision section 148A and the Revenue ought to have been permitted to proceed further with the reassessment proceedings as per the substituted provisions of sections 147 to 151 of the IT Act as per the Finance Act, 2021, subject to compliance of all the procedural requirements and the defences, which may be available to the assessee under the substituted provisions of sections 147 to 151 of the IT Act and which may be available under the Finance Act, 2021 and in law.”

It can therefore be inferred that the limited point of disagreement with the decision of the High Courts is only vis-a-vis the treatment of reassessment notices. As against the quashing of the notices by the High Courts, the SC has opined that such notices should be deemed as a show cause notice under amended Sec. 148A of the Act and consequent proceedings should be conducted subject to substituted reassessment provisions. Other than this specific aspect, the SC has not withered down any other aspect of the High Court decisions. The SC has accordingly partly allowed the petition filed by the RA and modified/substituted the judgements passed by the various High Courts only to the extent of the following:

  • Notices issued u/s 148 (of erstwhile Act) will be construed as notice u/s 148A(b) of the amended Act [requiring the assessee to show cause as to why a reassessment notice u/s 148 (of the emended law) should not be issued on the basis of information suggesting escapement of income]
  • The RA shall, within 30 days (from the date of SC order i.e. 04.05.2022) provide to the assessee information and material relied upon alleging escapement of income
  • The assessee will have the opportunity to file reply to the show cause notices within 2 weeks.
  • The RA shall thereafter pass orders in terms of Sec. 148A(d) i.e. determining whether it is a fit case for reassessment and thereafter proceed to issued notices under substituted Sec.148 of the Act
  • All defences available to the assesses including those available u/s 149 of the Act and all rights and contentions under Finance Act, 2021 shall be available.

Open question of Limitation

The reassessment notices in question were issued during the period 1.04.2021 to 30.06.2021 under the erstwhile Sec. 148 of the Act. Such notices were issued within the extended timelines specified under notifications issued under Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA). Further, such notices have primarily been issued in relation to assessment year (AY) 2013-14 to AY 2017-18.

The Finance Act 2021 has altered the scheme of reassessment substituting Sec. 147 to Sec 149 and Sec. 151 of the Act. The substituted Sec. 149 of the Act has curtailed the time limit for issuance of notice u/s 148 to 3 years (where the alleged concealment is less than INR 50 lacs) and 10 years where the monetary threshold is breached (subject to further grandfathering to 6 years for pre-amendment years).

The question thus arises is whether the limitation period as prescribed under amended Sec. 149 of the Act would be applicable in respect of the proceedings proposed to be regularized pursuant to the decision of the SC, or would such proceedings continue unabated, notwithstanding the period of limitation u/s 149 of the amended Act. This has significance considering that if the limitation under amended Sec. 149 of the Act were to apply, AY 2013-14 to AY 2017-18 would fall beyond the limitation period of 3 years (where allegation for concealment is less than INR 50 Lacs). Also, where the threshold is breached, AY 2013-14 and AY 2014-15 may still fall outside the limitation period [extended limitation of 10 years (restricted to 6 years for pre-amendment years)].

It should be possible to argue that the decision of the SC has merely regularized a step in the process to be followed under the amended reassessment law applicable w.e.f. April 2021. The SC has unequivocally agreed with the decision of the High Courts on the matter, however, with leeway to proceed with the proceedings as per the substituted reassessment provisions as per the Finance Act, 2021.

In this respect, the SC has only construed the reassessment notices issued u/s 148 of the unamended Act as a deemed notice to show cause as per the amended Sec. 148A(b). The SC has categorically stated that the judgements passed by the various High Courts, pursuant to the SC decision have been modified/substituted only to the limited extent as specified. There is no disagreement with the High Courts with respect to the proposition that notices issued on or after 1.04.2021 will be subject to reassessment provisions as amended. It may therefore be fair to state that SC has in fact affirmed the decision of the HCs which have held that the notification issued under TOLA have no applicability to the reassessment proceedings initiated on or after 1.04.2021.

The following extract of the decision of the Allahabad High Court which was under review by the SC clarifies this aspect.

“75. As we see there is no conflict in the application and enforcement of the Enabling Act and the Finance Act, 2021. Juxtaposed, if the Finance Act, 2021 had not made the substitution to the reassessment procedure, the revenue authorities would have been within their rights to claim extension of time, under the Enabling Act. However, upon that sweeping amendment made the Parliament, by necessary implication or implied force, it limited the applicability of the Enabling Act and the power to grant time extensions thereunder, to only such reassessment proceedings as had been initiated till 31.03.2021. Consequently, the impugned Notifications have no applicability to the reassessment proceedings initiated from 01.04.2021 onwards.

Upon the Finance Act 2021 enforced w.e.f. 1.4.2021 without any saving of the provisions substituted, there is no room to reach a conclusion as to conflict of laws. It was for the assessing authority to act according to the law as existed on and after 1.4.2021. If the rule of limitation permitted, it could initiate, reassessment proceedings in accordance with the new law, after making adequate compliance of the same. That not done, the reassessment proceedings initiated against the petitioners are without jurisdiction.”

Thus, given the limited modification of High Court orders primarily deeming the notices issued u/s 148 of the erstwhile reassessment provisions as show cause notice under the substituted provisions of Sec. 148A(b) of the Act and specifying the procedure to be followed thereafter, the SC has not disturbed the position stated by the Allahabad High Court that notifications issued under TOLA will not be applicable in relation to reassessment proceedings initiated on or after 1.04.2021. Further in light of unequivocal declaration by the SC that reassessment proceedings shall proceed as per substituted provisions of Sec. 147 to 151 of the Finance Act, 2021, the reassessment reinitiated should be subject to process, requirements, and limitations imposed (as under amended Sec. 149 of the Act). Thus, the view that reassessment proceedings will be subject to the period of limitation as prescribed under the substituted Sec.149 of the Act should be sustainable.


The moot point of debate now is whether the amended period of limitation as prescribed under the substituted Sec. 149 of the Act will have a bearing on the fate of reassessment notices regularized consequent to the SC order. It seems fair to take a view that reassessment proceedings thus initiated will be subject to limitation period as specified under the amended Sec. 149, in which case AY 2013-14 to AY 2017-18 would fall beyond the limitation period of 3 years (where allegation for concealment is less than INR 50 Lacs). Also, where the threshold is breached, AY 2013-14 and AY 2014-15 may still fall outside the limitation period. While the position seems justified, it is highly unlikely that the RA will give into the same without a legal fight. The stage seems set for the next round of legal battles on this contentious issue.

Contributed by Yatin Sharma. Yatin can be reached at

Immunity from imposition of Penalty & Prosecution under the Income Tax Act – An attractive litigation resolution strategy

Provisions of law

Section 270AA of the Income Tax Act enshrined in the statute effective April 2017 enables a taxpayer to seek immunity from (a) imposition of penalty u/s 270A (in case of under reporting of income other than on account of misreporting) and (b) initiation of prosecution proceedings for wilful attempt to evade taxes (section 276C) or failure to furnish return of income in due time (section 276CC). The immunity is subject to fulfilling the prescribed condition, namely:

  • Payment of assessed tax and interest within the stipulated time; and
  • Non filing of appeal against the order of assessment.

To avail such immunity, the taxpayer is required to make an application in the specified form (Form 68) within a period of one month from the end of the month in which the order is received. Upon receipt of the waiver application, the Assessing Officer, subject to fulfilment of eligibility condition, and on expiry of period prescribed for filing an appeal, is mandated to grant immunity from imposition of penalty and initiation of prosecution proceedings. The order accepting or rejecting such application is required to be passed within a period of one month from the end of the month in which the application is received. Further no order rejecting the application can be passed without given the taxpayer an opportunity of being heard.

The immunity scheme provides the opportunity to fast-track settlement of tax dispute and serve as an attractive strategy to reduce protracted litigation. The provisions however raise interesting questions some of which have recently been subject to judicial scrutiny.

Where penalty notice does not specify – “underreporting” or “misreporting” of income

One of the basic conditions for availing immunity from penalty and prosecution is that the notice for initiating penalty should be only in respect of under reporting of income other than on account of misreporting. In Schneider Electric South East Asia (HQ) Pte. Ltd vs. ACIT International Taxation Circle 3 (1)(2), New Delhi and Ors., the Hon’ble Delhi HC examined the question whether the taxpayer would be eligible to avail the immunity provisions where the penalty notice did not specify the limb (ie. ‘underreporting’ or ‘misreporting’ of income), under which the penalty proceedings had been initiated. Taking into regard the facts, the Court observed that the notice initiating penalty did not specify the particular limb under which penalty notice was issued. The Court further observed that the mere reference to the word ‘misreporting’ by the Assessing Officer in the assessment order could not form the basis to deny immunity (from imposition of penalty and prosecution) where there was no mention as to how the ingredients of “misreporting” were satisfied. Therefore, the impugned order rejecting application for grant of immunity was manifestly arbitrary. The Court accordingly directed the tax authorities to grant immunity under section 270AA.

The ruling brings to relevance the significance of specifying the particular limb under which penalty proceedings are initiated, non-specification of which can be inferred as a case of mere ‘underreporting’. Whether non-specification of specific limb can be a ground for quashing of the penalty notice itself would also be a point to ponder drawing analogy from the jurisprudence under the erstwhile penalty regime in relation to ‘concealment of income’ or ‘furnishing inaccurate particulars.

Failure to pass order accepting or rejecting the immunity application within stipulated period

Under the immunity scheme, the order accepting or rejecting application seeking immunity is required to be passed by the Assessing Officer within a period of one month from the end of the month in which the application is received. In Nirman Overseas Private Limied v NFAC Delhi, the Hon’ble Delhi High Court examined the question whether non issuance of the order by the Assessing Officer accepting or rejecting the immunity application under Section 270AA within the statutory timeline would be regarded as non-passing of the order granting immunity to the taxpayer or otherwise. The Court observed that under the scheme, there is prohibition for availing the benefit of immunity from penalty and prosecution under Section 270AA only in case where proceedings for levy of penalty have been initiated on account of alleged ‘misreporting’ of income. Further the scheme provides for satisfaction of specified condition i.e. payment of tax demand and non-institution of appeal. Where the aforesaid conditions are satisfied, the taxpayer cannot be prejudiced by the inaction of the assessing officer in passing an order (accepting or rejecting the application) within the statutory time limit considering the settled law that no prejudice can be caused to a taxpayer on account of delay/default on the part of the tax authorities. Consequently, penalty order u/s 270A of the Act was set aside with direction to grant immunity under Section 270AA of the Act. The decision of the Court brings forth the significance of the specified timeframe for passing the order accepting/rejecting the immunity application, non-conformance of which would impliedly mean acceptance of the immunity application.

Assessment order assessing a loss and nil tax liability

One of the eligibility conditions requires the taxpayer to pay the assessed tax and interest within the stipulated time before filing the application for grant of immunity. This raises a question whether immunity waiver can be availed in cases where no tax is assessed as payable, for instance where a loss return, after adjustment of variation proposed in the order still remain a loss. The plausible view in this regard is that such cases should also be eligible for the immunity scheme as any contrary interpretation would result in discrimination.

Take for instance a situation where an X amount is proposed as adjustment in case of 2 distinct taxpayer filing a loss return which results in assessed loss in case of taxpayer 1 and a marginal positive income of say Rs. 1000 (and consequentially tax and interest liability) in case of taxpayer 2. While there is no ambiguity regarding eligibility of taxpayer 2 to avail the immunity benefits, however in case taxpayer 1 is denied similar immunity benefit, this may result in discrimination in respect of same class of taxpayer which is constitutionally impermissible.

Also examining this from the perspective of ‘Doctrine of Impossibility’, it is now widely accepted by the courts that the law does not compel a man to do anything impossible or to do something which he cannot possibly perform. In the circumstances where income is assessed at a loss and there is Nil tax demand, the condition (to pay tax and interest) cannot be fulfilled and is arguably not applicable.

It will be useful to take note that case of Nirman Overseas Private Limited (supra) and similar case of Ultimate Infratech Private Limited v NFaC Delhi & Anr. decided in favour of the taxpayers were examined against the backdrop of the facts where the taxpayer was assessed at a loss and there was Nil tax liability, though this issue was not specifically contested by the parties. 

Immunity does not impact contentions in earlier years

A pertinent question which often arises in evaluating the option of availing the immunity scheme is whether it would have any adverse consequences on the issues assented (in connection with which immunity is sought) in relation to other years. To address any apprehension of adverse consideration by the Tax Authorities, the CBDT vide Circular No. 05/2018 dated 16 August 2018, has clarified that seeking immunity from penalty and prosecution u/s 270AA of the Act will not bar the taxpayer from contesting the same issue in any earlier assessment year. It has further been clarified that the Tax Authority shall not take an adverse view in penalty proceedings for earlier assessment years under old penalty regime merely because the taxpayer has applied for immunity under the new scheme.

Closing note

Tax litigation is time consuming and involves significant costs. The immunity scheme provides an attractive opportunity to stay clear from such litigations specially in cases where the amount of tax involved is not significant or the tax position adopted is less likely to be sustainable in higher litigation. This scheme would also be beneficial for taxpayer incurring losses with limited possibility to benefit from carry forward and setoff of such loss in future years. Taxpayers should therefore evaluate the scheme in interest of mitigating litigation and buying peace of mind.

Contributed by Yatin Sharma. Yatin can be reached at

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

Interest free loans held to be ‘financial debt’ under IBC

Recently, on July 26, 2021, a Division Bench of the Supreme Court pronounced a judgement[1] upholding that interest free loans would fall under the definition of ‘financial debt’ as defined under section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC).

Facts leading to Supreme Court’s decision

M/s Sameer Sales Private Limited (Original Lender), advanced a term loan of INR 1.60 crores to its sister concern, M/s Samtex Desinz Pvt. Ltd. (Corporate Debtor) for a period of two years for working capital requirement. The Original Lender assigned the outstanding loan to M/S Orator Marketing Pvt. Ltd. (Appellant).

The Appellant filed an application under section 7 of IBC for initiation of corporate insolvency resolution process (CIRP) against the Corporate Debtor. The adjudicating authority (AA) rejected the section 7 application vide its order dated February 1, 2020. While rejecting the application, the AA held that neither the loan agreement has any provision regarding the payment of interest nor there is any supporting evidence/document to establish applicable rate of interest to be paid on the said loan. Also, that the Appellant failed to prove that the loan was disbursed against consideration for time value of money, particularly when it has been affirmed that no interest has been paid and was not payable at any point of time. For this, the AA relied on the appellate tribunal’s decision of Dr. B.V.S. Lakshmi vs. Geometrix Laser Solutions Private Limited[2].

Further, the AA relied on the decision of appellate tribunal in the case of  Shreyans Realtors Private Limited & Anr. vs. Saroj Realtors & Developers Private Limited,[3] to observe that when corporate debtor never accepts the component of interest and has given no undertaking to repay the loan with interest, then such debt cannot be termed as ‘financial debt’ under section 5(8) of IBC.

Being aggrieved by the order of the AA, the Appellant preferred an appeal before the appellate tribunal. In appeal, the order of AA was confirmed, and accordingly, the appeal was dismissed. Against the said order of appellate tribunal, the Appellant preferred appeal before the Apex Court.

Apex Court’s Order

Apex Court referred to the definition of ‘financial debt’ as contained in section 5(8) of IBC to observe that the same cannot be read in isolation, without considering other relevant definitions. It then proceeded to discuss the definitions of ‘claim’ in section 3(6), ‘corporate debtor’ in section 3(8), ‘creditor’ in section 3(10), ‘debt’ in section 3(11), ‘default’ in section 3(12), ‘financial creditor’ in section 5(7) and, provisions of  sections 6 and 7 of the IBC.

Section 5(8) defines ‘financial debt’ to mean ‘a debt along with interest, if any, which is disbursed against the consideration of the time value of money and includes money borrowed against the payment of interest’. Basis the same, the Apex Court observed that the orders of AA and appellate tribunal are flawed as they  have overlooked the words ‘if any’, which the legislature, could not have intended to be otiose.

Apex Court proceeded to observe that ‘financial debt’ means outstanding principal due in respect of a loan and would also include interest thereon, if any interest were payable thereon. If there is no interest payable on the loan, only the outstanding principal would qualify as a ‘financial debt’.

Also, the court observed that both the appellate tribunal and AA have failed to notice clause(f) of section 5(8), which provides that ‘financial debt’ includes any amount raised under any other transaction, having the commercial effect of borrowing.

Apex Court also referred to the decision of Pioneer Urban Land and Infrastructure Ltd. Vs. Union of India,[4]where it was held that even individuals who were debenture holders and fixed deposit holders, are financial creditors who could initiate the CIRP.

Basis the aforesaid observations, the Apex Court held that ‘money borrowed against payment of interest’ is one type of financial debt, among various kinds of financial debt as enumerated under section 5(8)(a) to section 5(8)(i) of IBC. Also, that  the definition of ‘financial debt’ in section 5(8) of the IBC does not expressly exclude an interest free loan. Hence, the Apex Court held that ‘financial debt’ would have to be construed to include interest free loans advanced to finance the business operations of a corporate body.


This decision is solely based on the interpretation of term ‘if any’ as contained alongside ‘interest’ in the definition of ‘financial debt’ under section 5(8). However, the phrase ‘time value of money’ was not discussed. Essentially, this phrase assumes that money, for what it is worth today, would be more in future. Therefore, the question remains as to what constitutes ‘time value of money’ in an interest free loan. The Apex Court’s decision has not elaborated on this aspect.

Contributed by Manish Parmar. Manish can be reached at

Views are personal.

[1] M/s Orator Marketing Private Limited vs. M/s Samtex Desinz Private Limited, Civil Appeal No. 2231/2021

[2] Company Appeal (AT) (Insolvency) No. 38 of 2017

[3] Company Appeal (AT) (Insolvency) No.311 of 2018

[4] (2019) 8 SCC 416

Amendment proposed to E-Commerce Rules, 2020

Recently on June 21, 2021, the Government has proposed amendments to the Consumer Protection (E-Commerce) Rules, 2020 (“E-Commerce Rules, 2020”). Notification states that since July, 2020,[1] the Government has received several representations from aggrieved consumers, traders and associations complaining against widespread cheating and unfair trade practices being observed in e-commerce ecosystem. Hence, certain amendments have been proposed to bring transparency in the e-commerce platforms and further strengthen the regulatory regime to curb the prevalent unfair trade practices.

E-Commerce Rules, 2020 regulate all goods and services bought and/or sold over a digital / electronic network, and applies to all models of e-commerce, including marketplace and inventory models of e-commerce, retail e-commerce. Non-compliance with the E-Commerce Rules, 2020 is construed as violation of the Consumer Protection Act, 2019 and attracts penal provisions contained therein. It contains strict guidelines inter alia to regulate price manipulation, ensure compulsory display of details related to country of origin of the product, return, refund, exchange, warranty, delivery and shipment, quality control to enable the consumers make an informed decision at a pre-purchase stage.

In the above background, I have discussed the proposed amendments under the following heads.

Widening the definition of ‘e-commerce entity’

Proposed amendment includes entities via which the platforms undertake the last mile delivery of goods and services to their customers. This may warrant e-commerce companies to ensure that the vendors undertaking last mile delivery of goods and services are compliant with the E-Commerce Rules, 2020 as well. Also, requirement of appointment of nodal officers have been extended to e-commerce entities which are limited liability partnerships and partnership firms.

Concept of ‘cross selling’ introduced

‘Cross selling’ implies sale of goods or services which are related / complimentary to a purchase made by a consumer from an e- commerce entity, and the same is indicated or advertised therein with an intent to maximise the revenue of such e-commerce entity. Proposed amendment intends to prevent dissemination of manipulative advertisement / information by such entities, and aims to promote domestic goods.

Ban on ‘Flash Sales’

‘Flash sale’ has been defined to mean a sale at significantly reduced prices, high discounts or any other such promotions or attractive offers for a predetermined time on selective goods and services or otherwise with an intent to attract large number of consumers. Proposed amendment intends to prevent instant / unannounced sales that maybe manipulated to give advantage or preferential treatment to a particular seller or a group of sellers. Initially, the proposal indicated a blanket ban on all flash sales but a clarification was issued subsequently to exempt ‘conventional’ flash sales. However, what constitutes ‘conventional flash sales’ have not been specified.

Ban on misleading advertisements

Proposal provides that no e-commerce entity shall allow any display or promotion of misleading advertisement whether in the course of business on its platform or otherwise. This may include any advertisements on price, quality and guarantee of goods and services, and potentially impact the online advertising by such entities.

Requirement of country of origin

Proposal to mandate the e-commerce entities to display the country of origin in respect of goods being imported into India. This requirement is in line with the declarations mandated for imported products under the Packaged Commodity Rules, 2011[2]. However, this may be challenging for entities given that products displayed on the e-commerce / website are manufactured at multiple locations across the globe. Hence, it may not be possible to pre-empt the ‘country of origin’ for such products while displaying such products on the e-commerce platform / website.

Fall-back liability introduced

A marketplace e-commerce entity shall be subject to a fall-back liability where a seller registered on its platform fails to deliver the goods or services due to their negligent conduct, omission or commission of any act by such seller.

Ban on sale by related entities

Related entities of marketplace e-commerce entities have been proposed to be banned from selling on such platform. This may impact the business model of various such entities having stake in sellers registered on their platforms.

Strict compliance timeline

Proposed amendment requires every e-commerce entity to provide information under its control or possession, or assistance to the government agency for investigative or protective or cyber security purposes within seventy-two hours of the receipt of an order. This may increase the cost towards meeting this compliance of maintaining and sharing requisite data with govt. agencies.

Department of Consumer Affairs has invited views and comments on the aforesaid amendments proposed to E-Commerce Rules, 2020 by July 21, 2021.

Contributed by Manish Parmar. Manish can be reached at

Views are personal.

[1] E-Commerce Rules, 2020 were introduced with effect from July 23, 2020

[2] This requirement was introduced in 2018

RBI issues guidelines for dividend declaration by NBFCs – Links it to capital and NPA norms

The Reserve Bank of India (RBI) on June 24, 2021 has issued guidelines for distribution of dividends by non-banking financial companies (NBFCs) from the profits of financial year (FY) ending March 31, 2022 and onwards.

These guidelines shall be applicable to all NBFCs regulated by the RBI.

Board Oversight

While considering a dividend proposal, the Board of Directors of NBFCs (BoD) has to take into account supervisory findings of the RBI and National Housing Bank (NHB) for Housing Finance Companies (HFCs) on divergence in classification and provisioning for non-performing assets (NPAs). The BoD shall also take into account any qualification in the auditor’s report to the financial statements, and the long-term growth plans of such NBFC.

RBI has mandated the BoD to ensure that the total dividend payout in a FY does not exceed the ceilings prescribed under these guidelines.

Prudential Norm

The RBI has linked declaration of dividend by NBFCs to certain minimum prudential norms on capital and bad loans. Guidelines prescribe the following requirements:

# Parameter Requirement
1. Capital Adequacy a.     NBFCs (other than Standalone Primary Dealers[1] (SPDs)) should have met the applicable regulatory capital requirements[2] for each of last 3 financial years;

b.     SPDs should have maintained a minimum CRAR[3] of 20 percent for the financial year for which dividend is being proposed.

2. Net NPA Net NPA ratio to be less than 6 percent in each of the last three FYs, including at the close of the FY for which dividend is proposed to be declared.
3. Other criteria a.     NBFCs to maintain the Reserve Fund[4] in accordance with the RBI Act, 1934, and other applicable RBI regulations / guidelines;

b.     HFCs to maintain the Reserve Fund[5] in accordance with the NHB Act, 1987;

c.      RBI and NHB (for HFCs) should not have prescribed any other explicit restrictions on declaration of dividends.

Dividend Payout Ratio (DPR)

DPR is the ratio between the amount of the dividend payable in a FY and the net profit as per the audited financial statements for FY for which the dividend is proposed. Proposed dividend to include dividend on equity shares and compulsorily convertible preference shares eligible for inclusion in Tier 1 Capital[6].

In case the net profit for the relevant FY indicates an overstatement[7] of net profit, the same shall be reduced from net profits while determining the DPR.

RBI has prescribed following overall ceilings on DPR:

# NBFCs Maximum DPR (percentage)
1. NBFC not accepting public funds and not having any customer interface No ceiling
2. Core Investment Company 60
3. SPDs 60
4. Other NBFCs 50

Further, NBFCs (other than SPDs), which do not meet the prescribed Prudential Norms, may declare dividend up to 10 percent DPR, provided that it meets the capital adequacy requirement for the FY for which dividend is being declared, and has less than 4 percent NPA.

Also, for SPDs, which have CRAR between 15 to 20 percent, the DPR shall not exceed 33.3 percent.

Reporting Requirements

Details of declared dividend to be reported to RBI within a fortnight of such declaration.

[1] In 1995, the RBI introduced the system of Primary Dealers (PDs) in the Government Securities Market, which comprised independent entities undertaking PD activity. In order to broad base the PD system, banks were permitted to undertake PD business departmentally in 2006-07. Further, the standalone PDs were permitted to diversify into business activities, other than the core PD business, in 2006-07, subject to certain conditions.

[2] Capital requirements applicable to different categories of NBFCs as on June 24, 2021.

[3] Capital to Risk-Weighted Assets Ratio is the ratio of a bank’s capital to its risk. In April 1992, RBI introduced a CRAR system for banks (including foreign banks) in India as a capital adequacy measure in line with the Capital Adequacy Norms prescribed by Basel Committee.

[4] Section 45IC of the RBI Act, 1934

[5] Section 29C of the NHB Act, 1987

[6] Tier I Capital includes (a) paid-up capital (ordinary shares), statutory reserves, and other disclosed free reserves, if any; (b) perpetual non-cumulative preference shares (PNCPS); innovative perpetual debt instruments; and capital reserves representing surplus arising out of sale proceeds of assets.

[7] includes any exceptional and/or extra-ordinary profits/ income or the financial statements are qualified (including ’emphasis of matter’) by the statutory auditor that indicates an overstatement of net profit.

Contributed by Manish Parmar. Manish can be reached at

Fate of pending challenge(s) to arbitral awards upon approval of resolution plan under IBC

An award-holder of an arbitral proceeding is naturally under the impression that she has a rightful  claim to the amounts having been arbitrated upon and awarded to her.  However, what if, before the award has actually been paid out, the opposite contestant to the arbitration (known in technical legal language as ‘award-debtor’) goes into insolvency?  Does the award-holder have any rights to continue to claim the amount due to it (as decided under arbitrations)?  What happens if a resolution plan is accepted by the NCLT, and the award-debtor had never filed its claim before the Resolution Professional (being under the impression that the arbitral award being enforceable in a Court of law need not be claimed before an RP)?

An arbitral award holder is usually considered to be an ‘Operational Creditor’ under the Insolvency & Bankruptcy Code of India (“IBC”).

On May 7, 2021, the Calcutta High Court answered these questions.[1]  Being an important facet impacting both Insolvency and the Arbitration laws, we have brought forward the nuances via this article.

Relevant facts leading to the judgment dated May 7, 2021 being passed by the Calcutta High Court

Sirpur Paper Mills Limited (“Petitioner”) was an award debtor in an arbitration proceeding with I.K. Merchants Pvt. Ltd. (“Respondent”). The Petitioner challenged the said award on October 31, 2008 under section 34 of the Arbitration & Conciliation Act, 1996 (“A&C Act”) before the Calcutta High Court. The impugned award was automatically stayed upon filing of the application under section 34 of the 1996 Act as it stood prior to amendment of 2016, which came into effect from October 23, 2015.

During the pendency of section 34 application, an application for commencement of corporate insolvency resolution process (“CIRP”) came to be filed against the Petitioner before the jurisdictional NCLT in the year 2017. Subsequently, CIRP was admitted on September 18, 2017 and a RP was appointed on the same day. RP made the public announcement on September 25, 2017 inviting claims from the creditors of the Petitioner company. The Respondent i.e. the award holder did not submit its claim with RP within the time granted under the public announcement. Pursuant to collation of claims received from various creditors, RP invited resolution plans from eligible resolution applicants, which came to be finally approved by NCLT on July 19, 2018. This order of the NCLT came to be further challenged before the appellate tribunal in multiple proceedings, and was only later confirmed by the National Company Law Appellate Tribunal, Delhi.

In the midst of the above, the Petitioner prayed before the Calcutta High Court that the pending section 34 application should not be kept in abeyance as IBC proceedings have been invoked and are in the process of completion. To this, the Court vide its order dated January 10, 2020 held that CIRP cannot be used to defeat a dispute which existed prior to initiation of the CIRP and rejected the Petitioner’s prayer. It further held that the Respondent (the award-holder) could not have filed a claim before the NCLT since there was no final or adjudicated claim on the date of initiation of the CIRP against the Petitioner (the award-debtor).

With the resolution plan having been confirmed by the NCLAT, the successful resolution applicant commenced the process of taking over the Petitioner company as per the provisions of IBC.

Present proceedings

The Petitioner again approached the Court praying that the present proceeding under section 34 of the A&C Act, has become infructuous by reason of its management (the award-debtor) being taken over by a new entity following the approval of a resolution plan by NCLT under IBC.

Petitioner’s arguments

Petitioner relied on the section 31 of IBC to contend that an approved resolution plan is binding on the corporate debtor and its employees, members and other stakeholders. In this regard, reliance was place on a decision of the Supreme Court in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta[2]. It was further contended that a successful resolution applicant cannot be faced with undecided claims after the resolution plan has been accepted.

The Petitioner also argued that its debts stand extinguished except to the extent of the debts which have been taken over by the resolution applicant under the approved resolution plan.[3]

Respondent’s arguments

Respondent raised the issue of res judicata by highlighting that the same arguments were made by the Petitioner earlier as well on two occasions, which came to be decided by the court, and such orders were not under challenge.

It submitted that as per the law prevailing prior to 2016 amendment to the A&C Act. upon filing of the application under section 34 of the A&C Act in October 2008, the award was automatically stayed and the Respondent could not submit its claim[4] under IBC.

Court’s observation & findings

On the issue of res judicata

The Court observed that Supreme Court’s decision in Essar and more recently in Edelweiss[5], constitutes a significant and subsequent development of the law in relation to the fate of existing claims during and after CIRP. This would clearly constitute a sufficient reason for the Court to revisit its earlier judgment of January 10, 2020. In Essar and in Edelweiss, the Supreme Court had held that once a resolution plan is approved, a creditor cannot initiate proceedings for recovery of claims which are not part such resolution plan. Basis the same, the Court rejected the Respondent’s argument on res judicata by observing the following:

“12. A decision-making process must be attuned to a dynamic legal landscape shaped by legislative intervention and judicial pronouncements. The most predictable aspect of law is its constant evolution. It would hence be judicial short-sightedness, even stubbornness, to hold on to a view when the law, in the meantime, has transformed into a different avatar.”

In view of the aforesaid, the Court recorded that question of maintainability of the application under Section 34 of the A&C Act can be considered at any point of time on the legal aspect and particularly on the pronouncement of a decision relevant to the matter.

Law laid down by Supreme Court in Essar

In the aforesaid decision, the Supreme Court had considered questions relating to the role of resolution applicants, RPs and committee of creditors constituted under IBC as well as the jurisdiction of NCLT and the NCLAT with regard to resolution plans that have been approved by the Committee of Creditors.

The view of the Supreme Court was that the successful resolution applicant who takes over the business of the corporate debtor must start running the business of the corporate debtor on a “fresh slate”. This was reiterated in the Edelweiss, where the Supreme Court while considering section 31 of IBC, held that once the Resolution Plan is approved by the NCLT, it shall be binding on the corporate debtor and its employees, members etc. Since revival of the corporate debtor is one of the dominant purposes of IBC, the Supreme Court was of the view that any debt which does not form a part of the approved Resolution Plan shall stand extinguished and no person will be entitled to initiate or continue any proceeding in respect of such claim.

Whether the Respondent could have lodged and pursued its claim before the NCLT pending section 34 proceedings

The Respondent had contended that there was no scope for the it to approach NCLT since the impugned award was automatically stayed upon filing of the application under section 34 of the 1996 Act as it stood prior to amendment of 2016, which came into effect from 23rd October, 2015.

In this regard, the Court cited the law laid down by the Board of Control for Cricket in India vs. Kochi Cricket Private Limited[6], to observe that Section 34 applications which were pending at the time of the judgment in Kochi Cricket would also be governed by the new section 36 of the A&C Act, as amended. Hence, the Respondent was not rendered immobile in pursuing its claim under IBC by virtue of pendency of section 34 application.

It observed that the facts of the case would show that the Respondent had ample opportunity to approach NCLT for appropriate relief, and hence was under an obligation to take active steps under IBC instead of waiting for adjudication of section 34 application under the A&C Act.

Final order

The Court followed the law as crystallised by the Supreme Court in Essar and Edelweiss to hold that pre-existing and undecided claims which have not featured in the collation of claims by RP shall be treated as extinguished upon approval of the resolution plan under section 31 of IBC. In relation to the same, the Court observed as under:

“This can be seen as a necessary and an inevitable fallout of the IBC in order to prevent, in the words of the Supreme Court, a “hydra head popping up” and rendering uncertain the running of the business of a corporate debtor by a successful resolution applicant. In essence, an operational creditor who fails to lodge a claim in the CIRP literally missed boarding the claims-bus for chasing the fruits of an Award even where a challenge to the Award is pending in a Civil Court.”

In view of the aforesaid discussions, the Court ordered the pending application under section 34 of the A&C Act to be rendered infructuous upon approval of resolution plan under section 31 of IBC.


As is evident from facts of the present case, the Petitioner company as a corporate debtor was successfully revived by way of CIRP and was handed over to another entity as a ‘going concern’. Taking note of the same, the Court upheld the principle imbibed under IBC that the prime objective of CIRP is revival of the corporate debtor and a successful resolution applicant should not be saddled with legacy claims or debts. This holds true in view of the new law relating to challenge to arbitral awards, where the award is not automatically stayed upon filing of section 34 application, it would be advisable for the award holders to file their claims with RP within stipulated time. The law relating to challenge to an arbitral award (as it stands today) stipulates that the court may only grant stay upon filing of a separate application. In this regard, the court has the discretion to fasten a condition while granting stay of an award or grant an unconditional stay. In such a case, the award holder would be constrained to file its claim before RP. Accordingly, the claims shall stand extinguished where either the claims have not been submitted to RP or the same have been held to be non-admissible before resolution plan is approved.

However, where the CIRP fails and order for liquidation of the corporate debtor is passed, the principle that corporate debtor should have a ‘fresh start’ as is in the case of successful resolution, may not hold true. This is because of the fact that in liquidation, the assets of corporate debtor are monetised in order to meet the outstanding claims of creditors and business of the corporate debtor is not transferred as a ‘going concern’. Hence, the fate of pending challenge to arbitral awards as claim(s) against a company under liquidation under IBC remains to be seen.

Contributed by Manish Parmar. Manish can be reached at

Views are personal.

[1] Sirpur Paper Mills Limited vs. I.K. Merchants Pvt. Ltd.; A.P. 550 of 2008

[2] 2020) 8 SCC 531

[3] Cases relied on – Gaurav Dalmia vs. Reserve Bank of India & Ors.; 2020 SCC Online Cal 668, Axis Bank Limited vs. Gaurav Dalmia MANU/WB/0739/2020; Sumitra Devi Shah & Ors. vs. Tata Steel BSL Limited; 2021 SCC Online Cal 114

[4] Relied on Board of Control for Cricket in India vs. Kochi Cricket Private Limited; (2018) 6 SCC 287 and Government of India vs. Vedanta Limited (Formerly Cairn India Limited); (2020) 10 SCC 1 for the proposition that amendments will only have prospective application.

[5] Ghanshyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited; 2021 SCC OnLine SC 313

[6] (2018) 6 SCC 287

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:

  1. 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.
  2. 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

[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

From Yatin’s Desk: Taxation of Dividend Income of Non-Residents – Most Favored Nation Clause under Indian Tax Treaties

The Indian domestic tax laws in relation to taxation of dividend income were amended by the Finance Act of 2020 restoring taxability of dividend income distributed by companies to the classical system of taxation of such income in the hands of the shareholder. Prior to this amendment, for some time, dividend distributed by a company was subject to dividend distribution tax (‘DDT’) in the hands of the company and exempt in the hands of the shareholder. DDT paid by the company, arguably, did not enjoy benefit of lower withholding tax (‘WHT’) rate prescribed under Double Tax Avoidance Agreements (‘DTAA’), though during the last few years prior to the amendment now made, attempts had been made by taxpayers to claim the DTAA rates; an issue which is currently sub judice.

The change has once again brought the relevance of DTAAs to forefront given that DTAAs in most case prescribe a lower rate of WHT vis-à-vis the WHT rate of 20% applicable on dividend income in the hands of non-resident under the domestic tax law. Generally, application of a WHT rate prescribed under a DTAA is simple and straight forward. However, applying WHT rate where DTAAs have a Most Favored Nation (‘MFN’) clause has its nuances which have from time to time been examined by Indian courts.

In this respect, the Delhi High Court in a recent case of Concentrix Service Netherlands B.V. vs Deputy Commissioner of Income Tax & Anr.[1] (‘Concentrix’) had the occasion to examine applicability of MFN clause under the India-Netherlands DTAA in context of WHT rate applicable on dividend income received by the Dutch parent company from its India subsidiary. Under Article 10 of the India-Netherlands DTAA, dividend received by a resident of one country from the payer of the other resident country is subject to 10% WHT. However the protocol provides a MFN clause stating that in respect of dividend, interest, royalties and fee for technical services (‘FTS’), if after signing of the DTAA, under any Convention or Agreement between India and a third State which is a member of the OECD, India limits its taxation at source on such income to a rate lower or a scope more restricted than the rate or scope provided for in India – Netherlands DTAA, the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention. Simply put, if the provision of another DTAA subsequently entered between India and OECD member country is beneficial to the stated nature of payments, the same would apply notwithstanding the provisions of India-Netherlands DTAA.

Taxpayer’s Contention

In Concentric, the taxpayer had applied for a WHT order before the tax authorities seeking 5% WHT rate (as against 10% prescribed under India-Netherlands DTAA) in relation to divided income taking the benefit of MFN clause and applying the rates applicable under India-Slovenia[2], India – Lithuania[3] and India – Columbia[4] DTAA. It was contended that since India has executed DTAAs with such other countries which were members of OECD, the lower rate, or the restricted scope in the DTAA executed between India and such other country would automatically apply to India-Netherlands DTAA.  This is considering the protocol which inter alia stated that the protocol “shall form part an integral part of the Convention” i.e., the subject DTAA.

In support of this plea, reliance was placed on the judgements in the case of Steria (India) Ltd. vs. Commissioner of Income-tax-VI[5], Apollo Tyres Ltd. vs. Commissioner of Income Tax, International Taxation[6].

Tax Authorities Contention

The tax authorities however contested the claim putting forth the following argument:

  • that the protocol appended to the India-Netherlands DTAA providing benefit of the lower rate of WHT or a scope more restricted would be available only if the country with which India enters into a DTAA was a member of the OECD at the time of the execution of the India-Netherlands DTAA, and
  • the DTAAs with such third States were entered while such States were OECD member countries.

India’s DTAA with Slovenia, Lithuania and Columbia were executed prior to such countries becoming OECD member countries. Since none of the countries, i.e., Slovenia, Lithuania, and Columbia were members of the OECD, on the date when such States executed DTAAs with India, protocol appended to the DTAA would have no applicability.

The Ruling

The Court however ruled in favour of taxpayer holding that:

  • the protocol forms an integral part of the DTAA and therefore no separate notification is required, insofar as the applicability of provisions of the protocol is concerned,
  • the state of affairs i.e. the point of time when the third State should be a member of OECD, should exist not necessarily at the time when the subject DTAA (India – Netherlands DTAA) was executed but when a request is made by the taxpayer or deductee for issuance of a lower rate withholding tax certificate.

The Court went on to draw reference to the decree issued by the Kingdom of Netherlands on 28.02.2012[7] wherein it was thus specified:

“Slovenia became a member of the OECD on 21 July 2010. Under the most favored nation clause in the Protocol to the Convention, this event has the effect that, with retroactive effect to July 21, 2010, a rate of 5 per cent will apply to participation dividends paid by a company resident in the Netherlands to a body resident in India.”

The Court made an important observation regarding principle of “Common Interpretation” to be adopted by courts of the contracting States. This would ensure that Conventions/DTAAs are applied efficiently and fairly so that there is consistency in the interpretation of the provisions by the tax authority and courts of the concerned contracting State. The Court accordingly accepted application of WHT rate of 5% prescribed under the DTAA with Slovenia, applying the MFN clause.

Insight for taxpayers

The court ruling reinforces importance of MFN clauses in DTAAs which, if applied judiciously, present significant opportunity of tax saving. The ruling provides credence to the application of MFN clause under DTAAs with countries such as Netherland, France, Sweden, Hungry and Switzerland enabling application of lower rate of WHT of 5% on dividend payment as against the 10% prescribed under the respective DTAAs. The MFN clause also aids in reading down the scope of certain categories of income, more specifically FTS in DTAA such as with France, Sweden, Hungry, Belgium and Spain, restricting taxability in the state of residence only in case of a permanent establishment in the country of source.

Appropriate application of MFN clause also becomes important considering that the resident State may allow credit of tax payable in the country only to the extent of appropriate tax applicable under DTAA. For instance, Indian DTAAs such as with Netherlands and France prescribe a period of three years within which application for refund of excess tax levied at source should be filed. Further, applications for the refund of the excess amount of tax will have to be lodged with the authority of the State having levied the tax. This makes it critical to evaluate impact of MFN clause under the applicable DTAA.

It is also relevant to take note that the Finance Act of 2020 has materially amended provisions relating to filing of income tax returns by non-residents. As per the current provisions, a non-resident taxpayer will mandatorily be required to file an Indian tax return where lower WHT rates as prescribe under DTAA are applied in respect of income in the nature of royalty/FTS (taxable on gross basis), interest or dividend. Dispensation to file the tax return is available only where WHT has been deducted at the rate prescribed under the domestic tax law. A non-compliance has penal implications.

Given the significance of MFN clause under DTAAs and the opportunity such clause offers to reduce the tax cost, taxpayers will be well advised to evaluate MFN clause under the relevant DTAA while at the same time ensuring timely fiscal compliance to remain on the right side of law.

Contributed by Yatin Sharma. Yatin can be reached at

[1] W.P.(C) 9051/2020, judgement dated 22 April 2021

[2] DTAA executed between India and Slovenia; which came into force on 17.02.2005 and was notified on 31.05.20

[3] DTAA executed between India and Lithuania; which came into force on 10.07.2012 and was notified on 25.07.2012

[4] DTAA executed between India and Columbia; which came into force on 07.07.2014 and was notified on 23.09.2014

[5] [2016] 386 ITR 390 (Delhi)

[6] [2018] 92 166 (Karnataka)

[7] [No. IFZ 2012/54M, Tax Treaties, India], published on 13.03.2012