SimplifiTax - Tax, Accounting & Financial Advisory

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from September 16th to 21st, 2024, namely:

CBDT notifies Direct Tax Vivad se Vishwas Rules, 2024;
Profits of PE are to be independently evaluated & ascertained; not dependent upon overall financials of Co.: HC;
Re-opening of Reporting ITC Reversal Opening Balance: GSTN Update;
HC directs GST authorities to process cancellation application without holding it up for assessment of tax;
SEBI speeds up bonus-issue process; shares would now be available for trading on a T+2 basis; and
NFRA proposes revisions to auditing standard SA 600 to enhance quality in group audits.

1. CBDT notifies Direct Tax Vivad se Vishwas Rules, 2024

To streamline the resolution of direct tax disputes, the Ministry of Finance has issued a notification introducing the “Direct Tax Vivad Se Vishwas Rules, 2024.” The new rules, promulgated under the Finance (No. 2) Act, 2024, aim to provide a comprehensive framework for taxpayers to settle their pending tax disputes with the Income Tax Department.

The Rules outline the scheme’s procedural aspects, offering a structured mechanism for taxpayers to resolve ongoing litigation by paying a specified amount, thereby reducing the burden of prolonged legal battles and interest liabilities. The Key Features of the Scheme are as follows:

1.1 Dispute Definition

Under the rules, the term “dispute” includes appeals, writs, and special leave petitions filed by taxpayers or the Income Tax Department before appellate forums. It also covers objections filed before the Dispute Resolution Panel (DRP) and the DRP has not issued any direction, or the DRP has issued direction, but the AO has not completed the assessment under section 144C(13) or applications under Section 264 of the Income Tax Act, 1961.

1.2 Payment Structure

Taxpayers who opt to settle their disputes by filing a declaration before December 31, 2024, will pay a reduced amount as specified in section 90 of the Finance (No. 2) Act, 2024. Higher amounts will be payable for declarations made between January 1, 2025, and the last date.

1.3 Forms for Declaration and Settlement

The scheme mandates the use of specific forms:

Form-1: To declare the dispute and submit an undertaking.
Form-2: The designated authority shall issue a certificate in Form-2 confirming the amount payable for full and final settlement.
Form-3: The intimation of payment made pursuant to the certificate issued by the designated authority, along with the proof of withdrawal of the appeal, is furnished by the declarant in Form-3.
Form-4: Order by designation authority in respect of payment of the amount payable by the declarant.

The Direct Tax Vivad Se Vishwas Scheme, 2024, will be effective from October 1, 2024.

Read the Notification

2. Profits of PE are to be independently evaluated & ascertained; not dependent upon overall financials of Co.: HC

In the given case, the Full Bench of Delhi High Court was constituted as a consequence of a Division Bench of the Court doubting the correctness of the view expressed in Commissioner of Income-tax (international taxation) vs. Nokia Solutions and Networks OY [2023] 147 taxmann.com 165 (Delhi).

The question before the Court was whether the profits of a foreign company having a PE in India are taxable in India on the basis that the foreign company is earning income in India through its PE, irrespective of whether the foreign company is earning profits or losses globally.

The Delhi High Court held that the concept of a PE is based upon the undertaking of economic activity in a particular State irrespective of the residence of an enterprise and the same being understood to be in the nature of a conglomerate or an entity which may have many arms or independent functional units situate in various fiscal jurisdictions. Any entrepreneurial activity that gives rise to income or profit thus becomes liable to be taxed at the source, irrespective of the ultimate recipient or owner of that income. Source here would mean the location which gives rise to the accrual of profits or income or which is the location where the same arises.

The PE concept creates a functional relationship and connects the principal entity and the place of business whose activities give rise to income or profit. This fictional creation of an independent economic center in a Contracting State informs the allocation of taxing rights. Once the DTAA confers an independent identity upon the PE, it would be wholly erroneous to answer the question of taxability based on either the activities or profitability of the parent or the entity that seeds and sustains the PE.

The Contracting State in which this imagined entity is domiciled and undertakes business thus becomes identified as an independent profit or revenue earning center liable to be taxed. The activities of PE are liable to be independently evaluated and ascertained. The taxability of income earned by a PE existing in a Contracting State is not even remotely linked or coupled to the overall operations of the enterprise of which it may be a part. The argument of worldwide income is thus rendered wholly untenable. Article 7 of the DTAA postulates that the profits of an enterprise shall be taxable only in that State.

Accordingly, the profits attributable to the assessee’s PE in India must be determined as if the PE were a distinct and independent entity. Profits can be attributed to the PE even if the enterprise has never generated profits.

Read the Ruling

3. Re-opening of Reporting ITC Reversal Opening Balance: GSTN Update

The GSTN has issued an update to inform that in order to facilitate the taxpayers in correct and accurate reporting of ITC reversal and reclaim thereof and to avoid clerical mistakes, a new ledger namely Electronic Credit Reversal and Re-claimed Statement was introduced on the GST portal from August 2023 return period for monthly taxpayers and from July-September 2023 quarter for quarterly taxpayers.

Now, the Taxpayers are being provided with one final opportunity to report their cumulative ITC reversal (ITC that has been reversed earlier and has not yet been reclaimed) as opening balance for “Electronic Credit Reversal and Re-claimed Statement”, if any, before hard locking the reversal and reclaim ledger. The functionality to reporting the opening balance will be available from 15th September 2024 to 31st October 2024 and amendments in declared opening balance will be available till 30th November, 2024. In this regard, GSTN Update dated September 17th, 2024 has been issued.

Read the GSTN Update

4. HC directs GST authorities to process cancellation application without holding it up for assessment of tax

The Honorable Delhi High Court has recently held that tax authorities must process GST registration cancellation application expeditiously upon business cessation without delay merely due to pending tax assessments as cancellation of registration does not preclude future proceedings for recovery of dues. This ruling is given in case of B.R. Enterprises v. Principal Commissioner of Goods and Service Tax [2024] 165 taxmann.com 443 (Delhi).

Facts

The petitioner was carrying on trading in polymers and propylene. It ceased to carry on the said business and applied for cancellation of its GST registration. However, the proper officer issued a notice seeking additional information including tax reconciliations and thereafter rejected the application for cancellation. Thereafter, the proper officer suspended the petitioner’s GST registration for failure on the part of the petitioner to file its returns for a continuous period of six months.

It filed writ petition and contended that since its application for cancellation of the GST registration was rejected, the petitioner was compelled to file ‘Nil’ returns to comply with the statutory provisions.

High Court

The Honorable High Court noted that the cancellation of GST registration cannot be withheld on grounds of pending tax assessment or scrutiny. The Court also noted that the cancellation of registration does not preclude future proceedings for recovery of dues or non-compliance. Therefore, the Court directed the tax authorities to process cancellation application expeditiously without holding it up for assessment of tax, interest or penalties.

Read the Ruling

5. SEBI speeds up bonus-issue process; shares would now be available for trading on a T+2 basis

The Securities and Exchange Board of India (SEBI) is speeding things up! On September 16, 2024, the SEBI vide. Circular decided to reduce the time taken to credit bonus shares and trade such shares from the record date of the bonus issue. While fixing and intimating the record date (T day) to the stock exchange, the issuer must also record the deemed date of allotment on the next working day after the record date. Further, shares will now be available for trading on a T+2 day. The circular shall apply to all bonus issues announced on or after October 1, 2024.

5.1 Current Regulatory Framework

As per Regulation 295(1) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, an issuer announcing a bonus issue must implement the bonus issue within 15 days from the date of approval of the issue by its board of directors. However, in cases where the issuer is required to obtain shareholders’ approval, the bonus issue must be implemented within 2 months from the date of the board meeting where the decision to announce the bonus issue was taken subject to shareholder’s approval.

Though the ICDR Regulations prescribe overall timelines regarding the implementation of the bonus issue, there are no specific timelines for credit of bonus shares and trading of such shares from the record date of the issue. Thus, the absence of any specific guidelines on this aspect leads to non-uniformity w.r.t timelines in which shares are credited and made available for trading in bonus issues.

5.2 Need for this amendment

On August 5, 2024, SEBI issued a Consultation Paper titled “Streamlining the process and reduction in timelines of Bonus Issue.” It focused on developing uniformity in timelines for credit and trading of bonus shares from the record date, thereby ensuring the timely implementation of the same. It proposed streamlining and reducing the timelines of bonus issues by enabling T+2 trading of shares post-record date.

As per the current market practice, after a bonus issue is announced, the existing shares remain available for trading under the original International Securities Identification Number (ISIN), and the new bonus shares are credited to the ISIN within 2-7 working days from the record date. This lacks uniformity regarding the bonus issue and exposes the market to various risks like price swings, market volatility, etc. Therefore, SEBI proposes establishing timelines for crediting and trading bonus shares post-record date.

5.3 SEBI reduces the time taken for credit of bonus and trading of bonus shares

SEBI has reduced the time taken for credit of bonus shares and trading of bonus shares from the record date of bonus issue under SEBI (ICDR) Regulations, 2018. Accordingly, the issuer-company proposing a bonus issue must apply for in-principle approval under Regulation 28(1) of LODR Regulations, 2015, to the stock exchanges within 5 working days from the date of the board meeting approving the bonus issue.

The issuer, while fixing and intimating the record date (T day) to the stock exchange for the proposed bonus issue, must also take on record the deemed date of allotment on the next working date of the record date (T+1 day).

Upon receiving the record date intimation and requisite documents from the issuer, the stock exchanges must issue a notification accepting the record date and notifying the number of shares considered in the bonus issue. The notification must include the deemed date of allotment.

After the stock exchange issues notification for acceptance of the record date, the issuers must ensure the submission of the requisite documents to Depositories for credit of bonus shares in the depository system by 12 p.m. of the next working day of the record date.

Further, shares allotted pursuant to the bonus issue must now be available for trading on the next working day of allotment (T+2 day). The issuer must ensure the upload of the distinctive number (DN) ranges in the DN database of the depository, and the stock exchange must ensure the updation of relevant dates before the credit of bonus shares.

By establishing clear and uniform timelines for the credit and trading of bonus shares, SEBI aims to reduce uncertainty and enhance transparency in the process. This would ensure prompt crediting and implementation of shares, reducing investors’ risk of market volatility. The streamlined approach minimises potential disruptions and ensures that investors receive their entitlements in a timely manner, enabling them to make well-informed decisions.

These measures improve market efficiency and build investor confidence by building a more predictable and reliable trading environment. SEBI’s proactive steps in refining the bonus issue process highlight its commitment to safeguarding investor interests and promoting a robust capital market ecosystem.

Read the Circular

6. NFRA proposes revisions to auditing standard SA 600 to enhance quality in group audits

The National Financial Reporting Authority (NFRA) has published an exposure draft for the revised auditing standard, SA 600 (Revised) titled Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors). This revision aims to address and rectify significant deficiencies in the quality of group audits, particularly concerning Public Interest Entities (PIEs) that NFRA identified during past audits.

Key proposed revisions include a clearer definition of roles and responsibilities between principal auditors and component auditors. This emphasizes enhanced communication and aims to improve audit quality across the group. The draft also introduces a more comprehensive framework for assessing materiality and identifying risks at both the group and component levels, enabling auditors to better detect and manage material misstatement risks.

Additionally, the revisions seek to strengthen supervision and documentation requirements related to component auditors, ensuring that their work is effectively integrated into the overall group audit process. Importantly, the revised standard aligns Indian auditing practices with international standards, particularly ISA 600, enhancing the reliability of audits in a global context.

The NFRA has also provided a comprehensive 35-page note with the draft, outlining the rationale for the proposed amendments and featuring practical case studies that emphasize the need for updated auditing standards. NFRA is seeking stakeholder feedback on these revisions, focusing on five key questions related to the main issues. Stakeholders are encouraged to submit detailed responses, including explanations, supporting data, and alternative suggestions where applicable, with a deadline of October 30, 2024, for comments.