This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from July 30th to 05th, 2025, namely:
- Sale of equity-oriented mutual funds is not akin to alienation of ‘equity shares’ for taxability under India-Mauritius DTAA: ITAT;
- RBI bans pre-payment charges on floating rate loans and advances granted to individuals and MSEs;
- SC upheld High Court’s ruling that amended Rule 89(4) cannot be applied retrospectively and matter remanded for review of legality of Circular;
- No tax payable on goods in transit for export being zero rated supply and hence penalty for expired e-way bill not sustainable: HC;
- ICAI releases exposure draft of revised guidance note on Tax Audit under section 44AB of the Income-tax Act, 1961; and
- Accounting of revenue for a multi-element contract: Equipment, Installation, and Maintenance under Ind AS 115.
1. Sale of equity-oriented mutual funds is not akin to alienation of ‘equity shares’ for taxability under India-Mauritius DTAA: ITAT
The question before the Delhi Tribunal was:
“Whether, under the DTAA, investment in equity-oriented mutual funds should be treated as investment in shares and, accordingly, whether the resulting income qualifies as ‘gains from the alienation of shares’ under Article 13(3A) of the DTAA?”
The Delhi Tribunal held that all aspects of share issuance, types, shareholder rights and liabilities, dividend rights, and transferability are governed by the Companies Act, 2013. In contrast, mutual funds in India are established as trusts under the Indian Trusts Act, 1882, and are regulated by the SEBI (Mutual Funds) Regulations, 1996. A mutual fund pools investors’ money to invest in equities, bonds, or other securities as per its investment objective.
Professional fund managers manage these funds, and income/gains are distributed to investors based on the scheme’s NAV, after deducting expenses and charges. Section 30 of the SEBI Act, 1992, empowers SEBI (with Central Government approval) to frame regulations covering mutual fund formation, documents, advertising, returns assurance, minimum corpus, and investment valuation.
In mutual funds, dividends arise from booked profits on portfolio sales and differ from stock dividends, which reflect company profits. Mutual fund dividends don’t indicate scheme profitability; NAV falls by the dividend amount.
Selling shares carries risks of price rigging and capital gain siphoning, unlike mutual funds, where such rigging isn’t possible. Under Indian law, shares and mutual funds are distinct securities with different rights, regulations, and tax treatments for investors.
While equity mutual funds may get similar tax benefits under section 10(38) or 112, gains from their sale aren’t ‘gains from alienation of shares’ under the DTAA. DTAA provisions must be strictly interpreted; unless a security is specifically mentioned, it can’t be equated to another by purposive interpretation. Accordingly, capital gains earned on the sale of equity-oriented mutual funds cannot be said to be out of alienation of shares under Article 13(3A) of the DTAA.
Read the Ruiling
2. RBI bans pre-payment charges on floating rate loans and advances granted to individuals and MSEs
In a significant move to protect borrowers and promote fair lending practices, the Reserve Bank of India (RBI) vide Circular dated July 2, 2025, notified the Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025. This step follows the RBI’s observation that many lenders were adopting inconsistent and often unfair practices in levying prepayment charges on loans extended to Micro and Small Enterprises (MSEs). Such practices not only led to confusion and disputes but also included restrictive clauses in loan agreements that discouraged borrowers from shifting to lenders offering better terms. The new guidelines aim to ensure that MSEs can access credit on fair, transparent and flexible terms empowering them to make choices in their best financial interest.
Applicability of RBI Directions
These Directions apply to commercial banks (excluding payments banks), co-operative banks, Non-Banking Financial Companies (NBFCs), and All India Financial Institutions (AIFIs). They are applicable to all loans and advances sanctioned or renewed on or after January 1, 2026.
Key Regulatory Provisions on Pre-payment Charges
The RBI has laid down specific rules based on the type of borrower, purpose of the loan, and category of the lender, as outlined below:
1. No Pre-payment Charges on Loans for Non-business Purposes
For floating-rate loans taken by individuals for non-business purposes, Regulated Entities (REs) must not impose any prepayment charges, regardless of whether the loan has co-obligants.
2. Loans taken for business purposes by Individuals and MSEs
In the case of loans taken for business purposes by individuals or MSEs, the levy of pre-payment charges depends on the category of the lender:
- No Pre-payment Charges (any amount): Applicable if the loan is from a Scheduled Commercial Bank (excluding Small Finance Bank, Regional Rural Bank and Local Area Bank), Tier 4 Primary Urban Co-operative Bank, NBFC–Upper Layer, or an All India Financial Institution.
- No Charges up to 50 Lakh: Applicable where the lender is a Small Finance Bank, Regional Rural Bank, Tier 3 Urban Co-operative Bank, State or Central Co-operative Bank, or NBFC–Middle Layer. Loans above Rs. 50 lakh may attract charges as per the lender’s policy.
3. No Restriction on Source of Pre-payment or Lock-in Period
The Directions clarify that the source of funds used for pre-payment is irrelevant. Borrowers can repay from savings, alternative borrowings, or other sources without affecting the chargeability. Additionally, no minimum lock-in period is required before making a prepayment.
4. Treatment of Special Loan Structures
For loans with dual or special interest structures (fixed and floating), the pre-payment norms will apply only if the loan is in its floating rate phase at the time of pre-payment.
5. Pre-payment Charges for Other Loan Categories
For loans that do not fall under the specified exemptions, Regulated Entities (REs) are permitted to levy pre-payment charges in accordance with their board-approved policy. In the case of term loans, any such charges must be proportionate to the amount being prepaid, ensuring fairness and preventing excessive levies. For cash credit or overdraft facilities, if the facility is closed before the due date, the pre-payment charges, if any, shall be levied only on an amount not exceeding the sanctioned limit.
6. Special Provisions for Cash Credit and Overdraft Accounts
In the case of cash credit or overdraft facilities, REs cannot levy pre-payment charges if the borrower notifies in advance, as per the loan agreement, that they do not wish to renew the facility and the account is closed on the due date. Also, no charges can be levied where pre-payment is initiated by the RE itself, such as under a restructuring proposal.
7. Disclosure and Transparency Requirements
REs must disclose the applicability or exemption of pre-payment charges in the sanction letter, loan agreement, and Key Facts Statement (KFS). Further, hidden or undisclosed charges are prohibited, and once a charge is waived, it cannot be reimposed at the time of pre-payment.
Conclusion
The RBI’s directions aim to bring consistency and fairness to loan servicing conditions, particularly for MSEs, which often face challenges in switching to better credit terms due to high pre-payment penalties. The framework promotes transparency, strengthens borrower autonomy, and enhances competitiveness in the credit market, thereby enabling borrowers to explore better loan terms, refinance when needed and manage credit more efficiently.
Read the Circular
3. SC upheld High Court’s ruling that amended Rule 89(4) cannot be applied retrospectively and matter remanded for review of legality of Circular
The Hon’ble Supreme Court held that the amended Rule 89(4) of the CGST Rules, which restricts export refunds to the lower of invoice or shipping bill value, is substantive and cannot be applied retrospectively. The Court held that in the absence of express intent, substantive amendments affecting refund computation must apply prospectively, and remanded the issue of the Circular’s validity for reconsideration.
Facts
The petitioner challenged Paragraph 47 of Circular No. 125/44/2019-GST, dated 18-11-2019, which mandated that, for processing export refund claims, the lower of the values indicated in the tax invoice or the shipping bill should be considered. The petitioner contended that this provision was ultra vires the CGST Act and the CGST Rules as well as arbitrary and violative of Articles 14 and 19(1)(g) of the Constitution of India. In addition, the petitioner contested the amendment to Rule 89(4) by Notification No. 14/2022, which introduced a similar stipulation for comparison between the invoice value and the shipping bill value. The petitioner argued that this amendment should not apply retrospectively. The High Court ruled that the amendment to Rule 89(4) was substantive, not clarificatory, and thus could not be applied retrospectively. The matter was placed before the Supreme Court for final determination.
Held
The Supreme Court upheld the High Court’s finding that the amendment to Rule 89(4) could not be applied retrospectively, as it was a substantive change in law. However, the Supreme Court remanded the matter to the High Court for a limited purpose: to review the legality of Circular No. 125/44/2019-GST, dated 18-11-2019. The Supreme Court did not interfere with the High Court’s conclusion regarding the retrospective operation of the amendment, but directed that the legality of the Circular be reconsidered
Read the Ruling
4. No tax payable on goods in transit for export being zero rated supply and hence penalty for expired e-way bill not sustainable: HC
The Gujarat High Court held that no penalty under section 129 of the CGST Act is sustainable where goods in transit are meant for export under a zero-rated supply without payment of tax. The Court clarified that such export supplies made under a Letter of Undertaking (LUT) are exempt from tax liability, and in the absence of tax payable, invoking penal provisions on the basis of an expired e-way bill lacks legal justification.
Facts
The petitioner, an exporter, challenged the imposition of penalty under section 129 of the CGST Act in relation to goods in transit that were being transported for export under a zero rated supply. The petitioner had received an export order from a buyer in the UAE for sports-related apparel and accessories and placed a corresponding purchase order on a vendor in Gurugram through its sister concerns. The goods were dispatched from Gurugram to Mundra Port with duly generated e-invoice and e-way bill clearly indicating their export purpose. During transit, one of the conveyances broke down and, owing to the Diwali festival, the delivery could not be completed within the validity period of the e-way bill, which expired. Upon interception by the jurisdictional officer under GST, a notice in Form GST MOV-7 was issued proposing penalty on the ground of expired e-way bill. The petitioner objected, contending that no tax was payable on the goods since they were being exported under a letter of undertaking (LUT) with zero rated supply status. Despite this, the authority passed an order confirming penalty at 200 per cent of the tax purportedly leviable on the goods. The matter was accordingly placed before the Gujarat High Court.
Held
The Gujarat High Court held that as the goods in transit were part of a zero rated supply under section 16 of the IGST Act, no tax was payable by the petitioner-exporter. Although tax on export is leviable under section 5(1) read with section 7(5) of the IGST Act, the exporter is not liable to pay such tax where the supply is made under LUT without payment of tax. The Court further clarified that in such cases, the exporter may either furnish an undertaking or claim refund of the input tax credit as per rule 89 and/or rule 96 of the CGST Rules and the Gujarat GST Rules. Therefore, in the absence of any tax payable on the transaction, the computation of penalty under section 129 of the CGST Act was unsustainable. The penalty was accordingly reduced to a nominal amount of Rs. 25,000.
Read the Ruiling
5. ICAI releases exposure draft of revised guidance note on Tax Audit under section 44AB of the Income-tax Act, 1961
The Institute of Chartered Accountants of India (ICAI), through its Direct Taxes Committee, has released the exposure draft of the revised guidance note on Tax Audit under Section 44AB of the Income-tax Act, 1961. This draft is a significant update reflecting recent legislative, procedural, and judicial developments, including amendments to Form 3CD under the Income-tax Rules and the introduction of new clauses such as 36B, alongside the omission of clauses 28 and 29. It clarifies audit applicability thresholds, particularly for presumptive taxation and derivative transactions, and provides updated guidance on complex issues like turnover computation, GST treatment, and professional reimbursements.
The revised note aims to ensure consistency, clarity, and improved compliance in tax audit practices. ICAI has invited comments from stakeholders by July 20, 2025, offering the professional community an opportunity to contribute to shaping the final document. The exposure draft of the revised guidance note under Section 44AB is a critical development in the realm of direct tax compliance. It not only addresses the need for contemporary audit practices but also reinforces ICAI’s proactive role in guiding the profession through complex and dynamic tax regulations. All tax professionals are encouraged to review the draft and provide constructive feedback to strengthen the final guidance.
Read the News
6. Accounting of revenue for a multi-element contract: Equipment, Installation, and Maintenance under Ind AS 115
Recognising revenue correctly is essential for presenting a true and fair view of a company’s financial performance. Ind AS 115, Revenue from Contracts with Customers, outlines clear rules to help companies determine when and how much revenue to recognise. One of the key requirements is identifying different promises made in a contract, called performance obligations, and checking whether they are distinct. A performance obligation is considered distinct if the customer can benefit from it on its own and if it is clearly separate from other items in the contract. This step ensures that revenue is recognised in line with the actual delivery of goods or services to the customer.
This becomes especially important in contracts involving multiple elements, such as supplying equipment, installing it, and then providing maintenance services. These elements might look separate, but if they are closely linked or one cannot function without the other, they may need to be treated as a single unit for accounting purposes. Failing to assess this correctly can lead to recognising revenue too early or too late, affecting the reliability of financial statements.
For example, a company signed a ₹5 crore contract to supply and install chemical processing equipment and provide five years of maintenance. On review, while the maintenance service was clearly a separate performance obligation, the equipment and installation were not. They were closely linked, one could not work without the other, and the company provided a significant service by integrating them. So, under Ind AS 115, the equipment and installation were treated as one combined performance obligation.
This case illustrates the importance of understanding the nature of each part of a contract and how they relate to one another. Applying Ind AS 115 correctly enables companies to report revenue in a manner that accurately reflects their progress in fulfilling their promises. It builds trust with investors and avoids confusion or errors in financial reporting.
Read the Story
The post Weekly Round-up on Tax and Corporate Laws | 30th to 05th July 2025 appeared first on Taxmann Blog.