NOVEMBER 2020

Who are Independent Directors?

Independent directors are as the name suggests is an Individual who should have no relationship whatsoever with the Company directly or indirectly through his relatives. As an outsider in the board, he is expected to bring best practices of corporate governance in the management of any company. As per the Statute, Every listed public Company shall have at least one-third of the total number of directors as Independent directors and the following companies shall have at least two independent directors:

• The Public Companies having paid up share capital of ten crore rupees or more
• The Public Companies having turnover of one hundred crore rupees or more
• The Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees

Independent Director in relation to a company means a director other than a managing director or a whole-time director or a nominee director-

• who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience
• (i) who is or was not a promoter of the company or its holding, subsidiary or associate company
  (ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company
• who has or had no pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten per cent. of his total income with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year

none of whose relatives —
(i) is holding any security of or interest in the company, its holding, subsidiary or associate company during the two immediately preceding financial years or during the current financial year: Provided that the relative may hold security or interest in the company of face value not exceeding fifty lakh rupees or two per cent. of the paid-up capital of the company, its holding, subsidiary or associate company or such higher sum as may be prescribed;
(ii) is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors, in excess of such amount as may be prescribed during the two immediately preceding financial years or during the current financial year;
(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors of such holding company, for such amount as may be prescribed during the two immediately preceding financial years or during the current financial year
(iv) has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or associate company amounting to two per cent. or more of its gross turnover or total income singly or in combination with the transactions referred to in sub-clause (i), (ii) or (iii)


• who, neither himself nor any of his relatives —
  (i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed
  Provided that in case of a relative who is an employee, the restriction under this clause shall not apply for his employment during preceding three financial years (ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of—
  (A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company
  (B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm
  (iii) holds together with his relatives two per cent. or more of the total voting power of the company
  (iv) is a Chief Executive or director, by whatever name called, of any nonprofit organisation that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company;
• who possesses such other qualifications as may be prescribed.

The need for the amendment

The recent crisis at IL & FS and recent cases of many credit rating agencies that liberally granted or downgraded the Companies as per their wish brought the role and performance of their duties by Independent directors into question. Thus, the government has decided to bring in a new system of creating a data bank of existing and new Independent directors and mandating an individual to pass an assessment test to continue or before being appointed as an Independent director in a Company. Thus, the appointment of Independent director in a company could be made only if he is competent for the role and performing his duties and thereby curb the practices of promoters appointing an incompetent person as namesake Independent director only to comply with the laws and regulations.

The Amendment

As per the Companies (Appointment and Qualification of Directors) Fifth Amendment rules, 2019 commencing from 1st of December 2019, every individual appointed as an Independent director in a company or intending to get appointed as an independent director in a company in the future, shall make an application to Indian Institute of Corporate Affairs to include his/her name in a data bank (to be created and maintained by Indian Institute of Corporate affairs as per the Companies creation and maintenance of databank of Independent Directors Rules, 2019) within a period of three months from the commencement of this rules or before being appointed as Independent director in a company in the future.

An application shall be made by the Individual for inclusion of name for a period of one or five years or for life time, as long as the independent director continues to hold office in a company. In case of expiry of the period up to which the previous application for inclusion of name is made, within 30 days from such expiry, renewal shall be made for further period of one or five years or for life time as long as the Independent director continues to hold the office.

Every Independent director shall submit a declaration to the Board that he has complied with the abovementioned provisions in the first board meeting in which he participates as director and thereafter at the first Board meeting in every financial year.

After the inclusion of his/her name in the databank, the Individual shall pass an online proficiency self-assessment test by securing not less than 60% of marks in the test conducted by the Indian Institute of Corporate Affairs within a period of one year from the date of inclusion of his/her name in the data bank, failing which his/her name shall be removed from the databank. On the date of inclusion of name in the data bank, if an Individual has served as director or key managerial personnel for a period of not less 10 years in a listed company or in an unlisted public company having a paid up share capital of Rs.10 Crore or more shall not be required to pass the self-assessment test.

The Boards report of a company shall include a statement regarding opinion of the Board with regard to integrity, expertise and experience including the proficiency (which means the proficiency of the independent director as ascertained from the online proficiency test conducted by the institute) of the independent directors appointed during the year.

Conclusion

The steps taken by MCA for assessing the proficiency of individuals to be appointed as Independent director is appreciable, whereas the quality of the assessment test to determine the proficiency of the individual, has to be seen as this will be the first year of such practice. The proficiency assessment of an individual who is appointed as Independent director in his technical or professional capacity cannot be valid when the test includes subjects like Companies law, securities law, basic accountancy and other areas.

Many registered persons could not avail the transitional credit since the introduction of GST either on account of technical glitches in filing Form GST Tran-1 and Form GST Tran-2 or due to furnishing of incorrect information or for any other reason. This has caused great deal of hardships especially for those persons who have huge amount of credit lying accumulated from pre-GST regime.

Recently, various judicial pronouncements were passed giving relief in respect of entitlement of transitional credit when such transitional credit forms could not be filed within due date.

In this article we shall discuss on few of the recent judgements in detail.

Provisions of Transitional Credit in GST

Section 140 of CGST Act, 2017 prescribes the transitional arrangement of input tax credit which ensures seamless flow of credit of pre-GST regime. This section provides that a registered person, except composite registered person, shall be entitled to take CENVAT credit carried forward or credit of unavailed CENVAT credit of capital goods not carried forward, in the return furnished under existing laws relating to the period immediately preceding GST implementation date, subject to certain conditions.
Section 140(3) of CGST Act, 2017 reads as follows:
A registered person, who was unregistered under the existing law, or who was manufacturer of exempted goods or providing exempted services, or who was providing works contract service and availing of the benefit of notification no. 26/2012-Service Tax dated 20-6-2012, or a first stage dealer or a second stage dealer or a registered importer or a depot of a manufacturer, shall be entitled to take credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on July 1, 2017. However for availing of such credit in his electronic credit ledger following conditions need to be fulfilled:-

• Such inputs or goods are used or intended to be used for making taxable supplies under GST
• The said registered person is eligible for input tax credit on such inputs under GST
• The said registered person is in possession of invoice or other prescribed documents evidencing payment of duty under the existing law in respect of such inputs
• Such invoices or other prescribed documents have been issued not earlier than 12 months immediately preceding the GST implementation date, i.e., July 1, 2017
• The supplier of services is not eligible for any abatement under GST

'Eligible Duties' in respect of inputs held in stock and inputs contained in semi-finished goods or finished goods held in stock on GST implementation date, i.e., July 1, 2017, mean-

• The additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957
• The additional duty leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975
• The additional duty leviable under sub-section (5) of section 3 of the Customs Tariff Act, 1975
• The duty of excise specified in the First Schedule to the Central Excise Tariff Act, 1985
• The duty of excise specified in the Second Schedule to the Central Excise Tariff Act, 1985
• The National Calamity Contingent Duty leviable under section 136 of the Finance Act, 2001

Judicial Pronouncements

Siddharth Enterprises v. Nodal Officer – Gujarat High Court

The writ-applicant is a partnership firm registered under GST. It is engaged in the business of import-export and is a distributor of branded house hold wares. It could not file Form GST Tran-1 within the specified date, i.e., December 27, 2017 due to technical difficulties.
The Honorable High Court addressed the following aspects

• Transitional provisions under the CGST Act provides for a substantive right which cannot be defeated on account of procedural lapses
• The entitlement of credit of eligible duties on the purchases made in the pre-GST regime as per Cenvat credit rules is a vested right and cannot be taken away by virtue of rules prescribed for transitional credit, i.e., Rule 117 of the Central GST Rules, 2017, with retrospective effect on account of failure to file the Form GST Tran-1 within the due date, i.e., 27.12.2017
• The Objects and Reasons of the Constitution 122nd Amendment Bill, 2014 clearly set out that it is intended to remove the cascading effect of taxes and to bring out a nationwide taxation system. Hence the right to carry forward the CENVAT Credit is a constitutional right
• Disallowing the vested right goes against the essence of doctrine of legitimate expectation

The Honorable Court gave directions to the revenue authorities to allow filing of Form GST Tran-1 and Form GST Tran-2 enabling writ-applicants to claim transitional credit of eligible duties in respect of inputs held in stock on July 1, 2017. Also, the due date given for Form GST Tran-1 and Form GST Tran-2 under Rule 117 of the CGST Rules for the purpose of claiming transitional credit is procedural in nature and thus, it should not be interpreted as a mandatory provision.

Aadinath Industries vs Union of India – Delhi High Court

Similar to the above case, the applicant made a writ petition for non filing of TRAN 1 on account of technical glitches persisting at the common portal.
The Honorable High Court held

• The petitioner could not be denied the credit of credit for technical glitches as it a constitutional right conferred upon the petitioner.
• Thus, the Competent Authority is directed to either open the online portal so as to enable the assessee to file Form GST TRAN-1 electronically or to accept the same manually.

Adfert Technologies (P.) Ltd vs Union of India – Punjab & Haryana High Court

Petitioners are registered under Central/State Goods and Services Tax Act, 2017 and are seeking direction under Article 226 of Constitution of India to Respondents to permit carry forward of unutilized CENVAT credit of duty paid under Central Excise Act, 1944 and Input Tax Credit of VAT paid under PVAT Act, 2005 or HVAT Act, 2003 which could not be carried forwarded on account of non-filing or incorrect filing of prescribed statutory Form i.e. TRAN-1 by the stipulated last date i.e. 27.12.2017.

The division bench comprising of Justice Jaswant Singh and Justice Lalit Batra directed to permit the writ applicants to allow filing of declaration in form GST TRAN-1 and GST TRAN-2 so as to enable them to claim transitional credit of the eligible duties in respect of the inputs held in stock on the appointed day in terms of Section 140(3) of the Act.

The Court also ruled that, “the due date contemplated under Rule 117 of the CGST Rules for the purposes of claiming transitional credit is procedural in nature and thus should not be construed as a mandatory provision”.

While concluding the Judgment, the Court also directed Respondents to permit the Petitioners to file or revise where already filed incorrect TRAN-1 either electronically or manually statutory Form(s) TRAN-1 on or before 30th November 2019. The court further added “The Respondents are at liberty to verify genuineness of claim of Petitioners but nobody shall be denied to carry forward legitimate claim of CENVAT / ITC on the ground of non-filing of TRAN-I by 27.12.2017.”

Conclusion

The aforesaid Judicial Pronouncements by declaring right to entitlement of transitional credit a 'vested right' despite of procedural lapses would restore the fundamental right of the person to claim such credit. These judgments would act a savior for all those persons who were eligible to avail of transitional credit but due to some reason or the other, whether on account of technical difficulties of portal or any other reason were denied of the benefit of transitional credit to be carried forward in post-GST regime. Now, it would be interesting to see what stand the Government and revenue authorities, who were already burdened due to pending applications and litigations to allow filing of Form GST Tran-1 and Form GST Tran-2, will take after thesePronouncements.

Impairment loss is the excess of the carrying value of an asset or CGU over the recoverable amount of such asset or CGU. The reduction in the carrying amount of an asset or CGU to its recoverable amount results in an impairment loss.

CASH-GENERATING UNITS

Definition-- “CGU is the smallest identifiable group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or group of assets.”

In certain cases, it becomes difficult to calculate the recoverable amount for an individual asset because expected cash flows fromindividual assets cannot be calculated separately. Such individual asset in itself without the help of other assets cannot generate cash flows. Therefore, for the purpose of identifying cash flows, assets are grouped into a smallest unit and such grouping of assets facilitates the identification of cash flows. It gives rise to a new concept of Cash-Generating Units (CGUs).

Example – ABC Limited is a Company engaged in operating Airlines. It operates across 3 routes by obtaining license to operate its aircrafts. Multiple aircrafts are used by the entity to operate in the routes interchangeably. The aircrafts and license for operating airlines form part of the assets of the Company.

However, the aircrafts would not be able to generate cash flows independently.Similarly, without the presence of aircrafts, the license would not be able to generate cash flows independently.

Therefore, aircrafts including the respective license for operation form a CGU.

A CGU includes the carrying amount of only those assets which are attributed directly or allocated on a reasonable and consistent basis to it. When assets are grouped for recoverability assessments, it is important to include in the CGU, all assets that generate or are used to generate the relevant stream of cash inflows. This might include goodwill or corporate assets at head office.

CORPORATE ASSETS

Definition-- “Corporate Assets are assets other than goodwill that contribute to the future cash flows of the CGU.”

Corporate Assets include group or divisional assets such as the Head Office Building or Research Division etc. Because corporate assets do not generate separate cash inflows, the recoverable amount of individual corporate assets cannot be determined.

Accordingly, corporate assets will be tested for impairment at a level that reflects the entity’s operations and with which the corporate assets would be naturally be associated.

GOODWILL

IND AS permits recognition of goodwill arising only on account of business combinations and does not permit recognition of self-generated goodwill.

Such a goodwill would be an asset that represents the future economic benefits arising from other assets acquired in business combination. The allocation is made on the basis of benefits expected from the synergies of the combination.

Goodwill is allocated to lowest possible unit level or group of unit level within an entity at which the goodwill is monitored for internal management purposes.

Accordingly, goodwill will be tested for impairment at a level that reflects the entity’s operations and with which the goodwill would be naturally be associated.

MEASUREMENT OF CASH-GENERATING UNITS

The recoverable amount of a CGU shall be the higher of its fair value less costs of disposal and value in use.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at a measurement date. Cost of disposal are incremental costs directly attributable to the disposal of a CGU.

Example – Cost of disposal includes legal costs, stamp duty and similar transaction taxes, cost of removing the asset etc.

Value in use is the present value of the future expected cash flows to be derived from the CGU. The two major factors contributing to the computation of “value in use” are –

• Estimating future cash flows
• Discount rate to be used

Future cash outflows or related cost savings that are expected to arise from a future restructuring to which an entity is not committed, shall not be considered.

In computing future cash flows from CGU, the current condition of the asset shall be considered. Estimates of future cash flows shall not include estimated cash flows which are expected to arise from –

• Future restructuring to which an entity is not yet committed
• Improving or enhancing asset’s performance
• Cash flows from financing activities
• Income tax receipts or payments.

IMPAIRMENT LOSS FOR CASH-GENERATING UNITS

An impairment loss shall be recognised for a CGU only if the recoverable amount of CGU is less than the carrying amount of CGU. The impairment loss shall be allocated to reduce the carrying amount of the CGU in the following order –

• First, to reduce the carrying amount of any goodwill allocated to the CGU
• Second, to the other assets of the CGU pro-rata on the basis of the carrying amount of each asset in the CGU

These reductions in carrying amounts shall be treated as impairment losses on individual assets. Total impairment loss shall not be greater than the carrying amount of each asset.

REVERSAL OF IMPAIRMENT LOSS FOR A CASH-GENERATING UNIT

A reversal of an impairment loss for a CGU shall be allocated to the assets of the CGU, except goodwill, on pro-rate basis of the carrying amount of those assets.

In allocating a reversal of an impairment loss for a CGU, the carrying amount of an asset shall not be increased above the lower of

• Its recoverable amount
• The carrying amount that would have been determined if no impairment loss been recognised for the assets in the prior periods.

Ind AS 36 prohibits reversal of impairment loss recognised for goodwill in any subsequent period.

GENERAL DISCLOSURES

An entity is required to disclose the following for each class of assets:

• The amount of impairment losses recognised in profit or loss during the period and the line item(s) of the statement of profit and loss in which those impairment losses are included.
• The amount of reversals of impairment losses recognised in profit or loss during the period and the line item(s) of the statement of profit and loss in which those impairment losses are reversed.

Amendment of Rule 61

CBIC has amended Rule 61 of the CGST Rules, 2017 retrospectively w.e.f. July 1, 2017 vide Notification No. 49/2019-Central Tax, dated October 9, 2019, according to which:-

• A proviso has been inserted in Rule 61(5) which states that where a return is furnished by a person in GSTR-3B then such person is not required to furnish return in GSTR-3.
• Earlier Rule 61(6) was inserted for matching of discrepancies between GSTR-3 and GSTR-3B and has been omitted now. Since GSTR-3 was not operationalized yet, matching details of GSTR-3 and GSTR-3B would not be possible and, hence, omission of this rule was justified.

Reverse Charge Mechanism.

The Following services shall attract payment of tax under Reverse Charge mechanism.

• Copyright services provided by Music composer, photographer, artist, or the like or author shall attract tax on reverse charge basis.
• Renting of motor vehicle to body corporate
• Services of lending of securities under Securities Lending Scheme, 1997 (“Scheme”) of Securities and Exchange Board of India (“SEBI”).

3. Changes in rates of GST

• Dry Tamarind/ Plates and cups made up of leaves, flowers or bark has been exempted.
• Precious/semi-precious stones, natural or synthetic, to attract rate of 0.25%.
• Marine fuel, Wet stone grinder to attract rate of 5%.
• Polyethylene/polypropylene bags and sacks, strips packing material to attract rate @12%.
• Caffeinated beverages to attract rate of 28%.
• Rail locomotives, coaches, vans, parts etc. to attract rate of 12%.
• Small motor vehicle for persons with orthopedic physical disability to attract rate of 18%
• Tax on hotel accommodation [tariff of less than 7500/- per day] has been reduced to 12% and for tariff more than 7500/- per day has been reduced to 18%.
• Rate of tax on Other professional, technical and business services relating to exploration, mining or drilling of petroleum crude or natural gas or both has been reduced to 12%.
• Job work to attract general rate of 12%. Job work related to bus body building shall attract rate of 18%. Job work in relation to diamond shall attract a rate of 1.5%

Other Changes

• Services by way of grant of alcoholic liquor license:
  It has been notified that “Service by way of grant of alcoholic liquor licence, against consideration in the form of licence fee or application fee or by whatever name it is called” shall neither be treated as supply of goods nor supply of services.
• Aerated water has been excluded from the benefit of composition scheme
• Certain supply of goods to Food and Agricultural Organization (FAO) have been exempted.

Companies Act:

• The Ministry of Corporate Affairs has decided to extend the due date of annual filing by the companies incorporated under the Companies Act. Now, the extended date of filing e-form AoC-4. AoC-4 XBRL up to November, 2019 and e-form MGT-7 up to December 31, 2019.
• The Ministry of Corporate Affairs (MCA) has decided to extend the last date of filing CRA-4 for all the eligible companies till Dec. 31, 2019
• The Ministry of Corporate has come up with new online proficiency self- assessment test for independent directors. Now, all the independent directors need to clear the exam.
  Provided that the individual who has served for a period of not less than ten years as on the date of inclusion of his name in the databank as director or key managerial personnel in a listed public company or in an unlisted public company having a paid-up share capital of rupees ten crore or more shall not be required to pass the online proficiency self-assessment test:
  Provided further that for the purpose of calculation of the period of ten years referred to in the first proviso, any period during which an individual was acting as a director or as a key managerial personnel in two or more companies at the same time shall be counted only once.