Weekly Round-up on Tax and Corporate Laws | 3rd to 8th February 2025

1. RBI to introduce exclusive internet domain ‘bank.in’ and ‘fin.in’ for Indian banks to combat financial fraud;
2. Section 92BA applies to all assessees regardless of section 80-IA deduction is claimed: ITAT;
3. GSTN issued advisory on e-way bill generation for goods under Chapter 71;
4. No SCN under Section 73 if explanation offered in response to notice was accepted by department: HC; and
5. Revenue recognition for annual and monthly subscriptions by software companies under Ind AS framework.

1. RBI to introduce exclusive internet domain ‘bank.in’ for Indian banks to combat financial fraud

On February 7, 2025, the RBI vide Press Release no. 2024-2025/2096, released a Statement on various developmental and regulatory policies relating to (i) Financial Markets (ii) Cybersecurity and (iii) Payment Systems. These proposals aim to enhance market efficiency, strengthen security and promote investor confidence in the financial ecosystem. The key measures include allowing ‘SEBI-registered non-bank brokers’ direct access to NDS-OM platform, introducing exclusive internet domains to boost cybersecurity, and mandating an additional factor of authentication for international transactions. The key proposals, as outlined in the Statement on Developmental and Regulatory Policies are discussed in detail below:

1.1 ‘SEBI-registered non-bank brokers’ allowed direct access to Negotiated Dealing System-Order Matching (NDS-OM) platform

The Negotiated Dealing System—Order Matching (NDS-OM) is an electronic trading platform for secondary market transactions in government securities. Currently, access to NDS-OM is available to regulated entities, bank clients, and standalone primary dealers. To widen participation, the RBI has allowed SEBI-registered non-bank brokers to directly access the NDS-OM platform on behalf of their clients. This move aims to enhance market participation, improve liquidity in government securities trading and promote a more efficient secondary market.

1.2 ‘Additional Factor of authentication’ (AFA) for international transactions to reduce risk of cyber fraud

An Additional Factor of Authentication (AFA) refers to the requirement of using an extra layer of verification beyond just a password to authenticate a digital transaction, often in the form of an OTP or biometric data to enhance the security and prevent fraud.

The introduction of AFA for digital payments has significantly improved transaction safety, boosting customer confidence in adopting digital payments. However, this requirement is currently mandatory only for domestic transactions. In order to provide a similar level of safety for online international transactions using cards issued in India, the RBI has proposed enabling AFA for such transactions. This move aims to enhance security of online international transactions, reduce fraud risks and boost customer confidence in using India issued cards globally.

1.3 Working Group to undertake a ‘comprehensive review of trading & settlement timings of markets’

Over the past few years, several developments have taken place, including the increased electronification of trading, the availability of forex and certain interest rate derivative markets on a 24X5 basis, increased participation of non-residents in domestic financial markets, and the availability of payment systems on a 24X7 basis.

The RBI has now decided to set up a working group with representation from various stakeholders to undertake a comprehensive review of the trading and settlement timing of financial markets regulated by the Reserve Bank. The group is expected to submit its report by April 30, 2025. This initiative marks a significant step towards aligning market and settlement timings, enhancing price discovery, and optimizing liquidity management.

1.4 Exclusive internet domains ‘bank.in’ and ‘fin.in’ to strengthen cybersecurity

The increased instances of fraud in digital payments are a significant concern. To address this, the RBI has decided to introduce exclusive internet domain ‘bank.in’ for Indian banks and ‘fin.in’ for non-bank financial entities. This initiative aims to reduce cyber security threats and streamline secure financial services, thereby enhancing trust in digital banking and payment services. The RBI’s move to introduce exclusive domains sets a new standard for digital financial security, enabling safer online transactions. It simplifies entity verification and helps prevent phishing attacks, ensuring a more secure and trustworthy digital banking ecosystem.

1.5 Introduction of forward contracts in Government securities to enhance liquidity and risk management

Over the past few years, the RBI has expanded the range of interest rate derivative products available to market participants for managing interest rate risks. In addition to Interest Rate Swaps, products such as Interest Rate Options, Interest Rate Futures, Forward Rate Agreements, etc. are also available to market participants.

Based on market feedback regarding the need for forward contracts in Government securities to support market development, the RBI has decided to introduce these contracts. These contracts will enable long-term investors such as insurance funds to manage their interest rate risk across interest rate cycles and enable more efficient pricing of derivatives that use bonds as underlying instruments. This move aims to enhance market depth, improve risk management for long-term investors and facilitate efficient price discovery in the bond and derivatives market.

1.6 Conclusion

In conclusion, the RBI’s measures aim to enhance market participation, strengthen cybersecurity and improve financial security. Allowing non-bank brokers direct access to NDS-OM platform, introducing forward contracts in government securities and reviewing trading & settlement timings will boost market efficiency and liquidity. At the same time, exclusive internet domains and additional factor of authentication will enhance digital security and reduce fraud risks. Overall, these steps will create a safer, more accessible and well-regulated financial ecosystem.

Read RBI’s Press Release

2. Section 92BA applies to all assessees regardless of section 80-IA deduction is claimed: ITAT

The assessee was engaged in the manufacturing of Clinker and Ordinary Portland Cement. It had a power-generating unit that was eligible for deduction under section 80-IA. Assessee entered into specified domestic transaction of sale of power by power-generating unit to cement manufacturing unit and had not claimed deduction under section 80-IA for the year under consideration.

The case was referred to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP), and the TPO determined the adjustment to be made to the assessee’s income on account of the Specified Domestic Transactions entered into by the assessee. The TPO passed the order under section 92CA(3).

The matter reached the Hyderabad Tribunal.

The Tribunal held that section 92BA requires invoking its provisions that the assessee’s transactions should be covered in any of the clauses mentioned at Sl. No. (ii) to (vi) of Section 92BA, either with it any of its associates or with any person having a close connection with the assessee.

If the assessee has the specified domestic transaction with itself or its close associate as per section 92BA, then the arm-length price in relation to the specified domestic transaction is required to be determined by following Most Appropriate Methods as mentioned in section 92C.

On a plain reading of the above sections, it is clear that to attract the rigours of section 92BA, it is required that the transaction should either fall within the realm of 80-IA(8) or 80-IA(10).

In the present case, the power-generating unit of the assessee is connected with the assessee within the meaning of section 80-IA(8) and (10), and it is not disputed that in the course of business, they had entered into the agreement for the supply of electricity. The assessee shifted the extraordinary profit to its power-generating unit.

In other words, by purchasing the power at a higher rate, the assessee increased its expenditure, reducing its income/profit. The relationship between the two is squarely covered by the provisions of sections 80-IA(8) and 80-IA(10). Hence, the transaction is a qualified transaction within the meaning of section 92BA.

It is amply clear that for the invocation of section 92BA, there is no necessity for the assessee to opt for the deduction under section 80-IA during the assessment year under consideration. The option is with the assessee to claim the deduction under section 80-IA for any 10 consecutive assessment years out of the 15 years, as per section 80-IA(2). Merely because the assessee has not exercised the option will not make the eligible transaction falling either in section 80-IA(8) or section 80-IA(10) become ineligible.

Read the Ruling

3. GSTN issued advisory on e-way bill generation for goods under Chapter 71

Pursuant to the introduction of the E-way bill (EWB) for goods classified under Chapter 71, (excluding HSN 7117 for Imitation Jewellery) in the state of Kerala for intra-state movement, the National Informatics Centre (NIC) had provided an option to generate such EWBs under the category ’EWB for Gold’ on the EWB portal.

However, it was observed that various industry stakeholders have voluntarily been generating EWBs for goods under Chapter 71 due to the availability of this option in the EWB system. In this regard, it is now clarified by GSTN through advisory that while the system previously allowed EWB generation for goods under Chapter 71, but now this facility has been withdrawn.

Accordingly, taxpayers and transporters who are engaged in the movement of goods under Chapter 71 (except HSN 7117) are advised that EWB generation is not required. Additionally, it is to be noted that EWB generation remains mandatory for intra-state movement of such goods within Kerala. In this regard, GSTN Update dated 6th February, 2025 has been issued.

Read the Update

4. No SCN under Section 73 if explanation offered in response to notice was accepted by department: HC

The Honorable Rajasthan High Court has recently held that power under Section 73 could be invoked only when explanation offered was not satisfactory and once explanation was accepted, no further proceedings could be initiated by department. This ruling is given in the case of Goverdhandham Estate (P.) Ltd. v. State of Rajasthan [2025] 170 taxmann.com 727 (Rajasthan).

Facts

The petitioner was engaged in the business of operating hotels and submitted its monthly returns. The department issued a notice stating that the petitioner had availed input tax credit which was not available to him as per Section 17(5) of the CGST Act, 2017. It submitted a reply but the department issued a show cause notice (SCN) under Section 73 of the Act. It filed a writ petition to challenge the SCN.

Held

The Honorable High Court noted that the power under Section 73 could be invoked only when the explanation offered was not satisfactory. In the instant case, a communication in FORM No. GST ASMT-12 was issued to the petitioner, stating that the petitioner’s reply to the notice under Section 61 had been found to be satisfactory. However, despite this communication, the department initiated proceedings under Section 73 through a show cause notice. Therefore, it was held that the SCN was liable to be set aside.

Read the Ruling

5. Revenue recognition for annual and monthly subscriptions by software companies under Ind AS framework

In today’s digital economy, subscription-based revenue models have become the backbone of software companies. With customers opting for monthly or annual payment plans, these companies must carefully determine when and how to recognize revenue in their financial statements. While this might seem like a straightforward process, incorrect revenue recognition can lead to financial misstatements, regulatory non-compliance, and investor distrust.

One of the key accounting standards governing revenue recognition in India is Ind AS 115, Revenue from Contracts with Customers. This standard ensures that companies recognize revenue in a manner that reflects the transfer of services to the customer. However, many businesses still follow outdated practices, such as recognizing annual subscription payments as revenue immediately upon receipt, rather than spreading it over the service period. Such practices can artificially inflate income in one period and create financial inconsistencies in the following months.

For Example, consider a software company that provides cloud-based solutions under a subscription model, offering both monthly and annual payment plans. Customers who opt for a monthly plan make payments at the beginning of each month, while those choosing an annual plan pay a lump sum for the entire year upfront. The performance obligation in such cases is to provide uninterrupted software services over the agreed period. Revenue recognition should align with this performance obligation.

The company’s accounting treatment for monthly subscriptions should be recognizing the revenue on monthly basis, matching the performance obligation. The company should recognize the revenue for the annual subscription on a time-based manner, rather than recognizing the entire amount upfront. The correct accounting treatment for annual subscriptions would involve deferring the revenue and recognizing it progressively over the 12-month period as the performance obligation is satisfied.

Read the Story

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