MSME-1 Compliance: A Definitive Guide for Businesses

 The Ministry of Corporate Affairs (MCA), through Notification No. S.O. 1376(E) dated 25th March 2025, has made it mandatory for companies procuring goods or services from Micro and Small Enterprises (MSEs) to submit a half-yearly return in Form MSME-1 if payments exceed 45 days from the date of acceptance or deemed acceptance.

This directive aims to enforce financial discipline, enhance liquidity for MSEs, and strengthen the overall business ecosystem by addressing delayed payments.

Applicability: Who Must File Form MSME-1?

• All companies purchasing from MSEs (excluding medium enterprises) must comply.

• Filing is compulsory if payment delays exceed 45 days from the date of acceptance or deemed acceptance.

• Ensuring accurate payment tracking is crucial to avoid non-compliance penalties.

Essential Information Required for MSME-1 Filing

• Supplier Name & PAN (Mandatory for all MSEs reported)

• Number of transactions with each MSE supplier

• Mode of payment (Through TReDS or Other mode)

• Amount Paid & Outstanding Details:

  • Paid within 45 days

  • Paid after 45 days

  • Outstanding for 45 days or less

  • Outstanding for more than 45 days

• Reason for delayed payments (if applicable)

Mandatory Filing Deadlines

Due Date	Period Covered
30th April	October - March
31st October	April - September

Late filing or non-compliance may attract penalties, making it critical for businesses to file on time.

Business Implications of MSME-1 Compliance

• Regulatory Penalties: Failure to comply may result in financial and legal consequences.

• Stronger Supplier Relationships: Timely payments enhance trust and long-term business partnerships.

• Enhanced Financial Planning: Structured payment tracking fosters better cash flow management.

• Operational Adjustments: Companies must set up robust monitoring systems for MSE payments.

Step-by-Step Compliance Plan

To avoid last-minute delays, companies should complete the following steps before the due date:

MSME-1 Compliance Checklist

✔ Identify all transactions with MSE suppliers
✔ Verify payments exceeding 45 days from acceptance date
✔ Gather Supplier Details (Name & PAN)
✔ Categorize payments as per MCA reporting guidelines
✔ Record payment delays and reasons (if applicable)
✔ Complete the attached MSME Excel Sheet with accurate data
✔ Submit the Excel Sheet by 15th April for timely filing
✔ Review all details for accuracy to prevent errors

Companies must proactively manage their obligations, ensuring compliance with MCA regulations to mitigate risks and uphold responsible corporate governance.

TDS Late Filing Fee Under Section 234E - Compliance, Challenges & Reliefs

With increasing compliance scrutiny and automated processing of TDS returns, deductors are frequently receiving demand notices under Section 234E for late filing fees. Many taxpayers are unaware that late fees cannot be waived and that demands are being raised for older periods. With the approaching deadline of 31.03.2025, it is crucial to address any pending TDS compliance issues to avoid financial penalties. This article aims to clarify when the late fee is valid, when it is not applicable, and how to ensure compliance to avoid unnecessary financial burden.

Applicability of Late Filing Fee under Section 234E

Section 234E of the Income Tax Act, 1961, mandates a late filing fee for the delayed submission of TDS/TCS returns. If a deductor fails to submit the TDS/TCS statement within the prescribed due date, they are liable to pay a fine of ₹200 per day until the failure continues, subject to the total TDS amount deducted.

Key Aspects of Late Filing Fee (Post 1st June 2015)

1. Legal Validity – The late filing fee under Section 234E has been explicitly made applicable with the insertion of Section 200A(1)(c) and (d) by the Finance Act, 2015, with effect from 1st June 2015. Prior to this, there was no provision for automatic levy of fees under intimation under Section 200A.

2. Auto-Adjustment in TDS Intimations – Post 1st June 2015, the late fee is automatically adjusted while processing TDS statements under Section 200A, and the deductor is mandatorily required to pay it.

3. Upper Limit on Late Fee – The total fee cannot exceed the total tax deducted/collected for the respective quarter.

4. Non-Waivable Nature – Unlike penalties, the late fee under Section 234E is mandatory and non-waivable, meaning that no appeal or discretion is available to reduce or remove this charge.

5. Applicability on Older Defaults – Late filing fees for TDS statements filed before 1st June 2015 but processed after this date should not be charged, as per multiple judicial pronouncements.

Relevant Provisions Before and After Finance Act 2015

Section 200A Prior to 1st June 2015 (Before Amendment):

Prior to 1st June 2015, Section 200A allowed for processing of TDS returns, but did not provide for levying a fee under Section 234E. It allowed only for the computation of arithmetical errors, incorrect claims, and interest payable on TDS defaults. There was no legal basis for imposing a late filing fee under Section 234E before this amendment.

Additionally, it was provided that no intimation under this sub-section shall be sent after the expiry of one year from the end of the financial year in which the statement is filed. Furthermore, an incorrect claim apparent from any information in the statement was defined as:

• An entry that is inconsistent with another entry in the same or another statement.

• A deduction rate that is not in accordance with the provisions of the Act.

Section 200A After 1st June 2015 (Post Amendment):

The Finance Act, 2015, amended Section 200A to include sub-clause (c) and (d), thereby permitting the computation and levy of fee under Section 234E while processing TDS statements. This means that from 1st June 2015 onwards, the late filing fee became enforceable through automated demand intimations.

The amendment also clarified that the intimation of any demand under this section must be sent within one year from the end of the financial year in which the statement is filed.

Judicial Precedents Supporting Non-Imposition of Fee for Periods Before 1st June 2015

Several court rulings have held that demands under Section 234E cannot be enforced for returns filed before 1st June 2015, even if processed afterward. Some key cases include:

• Rajesh Kourani v. UOI (Gujarat HC) – Held that prior to 1st June 2015, there was no mechanism to levy a fee under Section 234E, making such charges invalid for earlier periods.

• Fatheraj Singhvi v. UOI (Karnataka HC) – Upheld that 234E is not applicable for TDS statements filed before 1st June 2015, even if processed later.

Compliance and Payment Mechanism

1. Checking Defaults – Deductors should review TRACES portal for any pending 234E late fee demands and clear dues before 31.03.2025 to avoid further complications.

2. Payment Process – The fee must be paid using challan ITNS 281 under Fee under Section 234E.

3. Avoiding Future Late Fees – Ensure timely TDS filings as per due dates:

   • Q1 (April-June) – 31st July

   • Q2 (July-September) – 31st October

   • Q3 (October-December) – 31st January

   • Q4 (January-March) – 31st May

Conclusion

The late filing fee under Section 234E is strictly applicable post 1st June 2015, and courts have ruled against retrospective imposition. With automated compliance checks and the deadline of 31.03.2025, it is crucial for deductors to ensure timely TDS return filing and clear any outstanding late fees to avoid unnecessary penalties and additional financial burden.

MCA Mandates Half-Yearly Returns for Delayed MSE Payments – Compliance Alert

The Ministry of Micro, Small and Medium Enterprises, through Notification No. S.O. 1376(E), dated 25th March 2025, has mandated all companies procuring goods or services from Micro and Small Enterprises (MSEs) to submit a half-yearly return to the Ministry of Corporate Affairs (MCA) if payments exceed 45 days from the date of acceptance or deemed acceptance. This directive, issued under F. No. 16/8/2018/E-P&G/Policy, is signed by Dr. Rajneesh, Additional Secretary and Development Commissioner.

To address the persistent issue of delayed payments, the directive enforces financial discipline, improves liquidity for MSEs, and strengthens the overall business ecosystem. All companies dealing with MSEs must track their payment cycles and comply with the reporting requirements to avoid regulatory scrutiny.

Compliance Requirements:

• Applicability: Covers all companies procuring goods or services from MSEs (excludes medium enterprises).

• Filing Trigger: If payments exceed 45 days from the date of acceptance or deemed acceptance.

• Details to Report:

  • Outstanding payment amounts due to MSEs.

  • Reasons for payment delays.

• Filing Frequency: Biannual submission to the MCA.

Business Implications:

• Regulatory Scrutiny: Non-compliance may lead to penalties and legal consequences.

• Operational Adjustments: Companies must implement strong monitoring systems to track MSE payments.

• Financial Planning: Timely payments will help businesses maintain better relationships with suppliers and ensure smoother cash flow.

Companies should proactively manage their obligations, ensuring compliance with the MCA directive to mitigate risks and foster responsible corporate governance.

Analysis of TDS on Rent and House Rent Allowance (HRA) under the Income-tax Act, 1961

Recent Notices by the Income Tax Department

The Income Tax Department has recently intensified its scrutiny of deductions and exemptions claimed by taxpayers, particularly focusing on donations under Section 80G and House Rent Allowance (HRA) exemptions under Section 10(13A).

On Sunday, several taxpayers received official communications via SMS and email, highlighting concerns over non-deduction of Tax Deducted at Source (TDS) on rental payments. These alerts are linked to the provisions of Section 194-IB of the Income-tax Act, 1961 ('Act'), which mandates TDS deduction on rental payments that exceed a specified threshold. The tax department has urged taxpayers to verify the legitimacy of their HRA claims and rectify any discrepancies.

Understanding Section 194-IB of the Act

Applicability of Section 194-IB

Under Section 194-IB, individuals and Hindu Undivided Families (HUFs) who are not required to get their accounts audited under Section 44AB must deduct TDS when:

• The monthly rent paid to a resident landlord exceeds Rs. 50,000.

• TDS must be deducted at the rate of 2% (previously 5%, reduced w.e.f. October 1, 2024).

• The tax must be deducted once in a financial year, either in March or in the last month of tenancy if the rental arrangement is terminated earlier.

This means that tenants who paid rent exceeding Rs. 50,000 per month without deducting TDS are now being flagged by the tax department for non-compliance.

Repercussions of Non-Deduction of TDS on Rent

Failing to deduct and deposit TDS on rent as required by Section 194-IB may result in serious consequences:

• Liability to deduct and pay the tax retroactively if not deducted earlier.

• Interest on non-deduction of tax at 1% per month under Section 201(1A).

• Deemed assessee-in-default under Section 201(1).

• Penalty equivalent to the amount of tax not deducted, as per Section 271C.

• Prosecution risk under Section 276B, leading to imprisonment ranging from 3 months to 7 years.

• Disallowance of 30% of rent payments as an expense under Section 40(a)(ia) if claimed as a business deduction.

These stringent provisions highlight the importance of complying with TDS obligations on rental payments.

Relief Provisions Under Section 201(1) of the Act

Taxpayers can seek relief from penalties under the proviso to Section 201(1) if:

• The landlord has filed an income tax return under Section 139.

• The landlord has included the rental income in their return and paid applicable taxes.

• The tenant obtains Form 26A, a Chartered Accountant’s certificate, confirming that the above conditions are met.

By submitting Form 26A electronically, taxpayers can avoid being deemed an assessee-in-default and escape penalties, except for interest on non-deduction.

The CBDT Notification No. 11/2016 dated December 2, 2016, outlines the detailed procedure for furnishing and verifying Form 26A to rectify non-deduction defaults.Computation Illustration

Partial-Year Tenancy (2-3 Months Before Year-End)

Ms. T, a self-employed individual, rented an apartment from January to March 2024 at Rs. 80,000 per month. The total rent paid was Rs. 2,40,000, exceeding the Rs. 50,000 per month threshold but falling below the annual threshold.

Applicability of TDS:

• Since the tenancy ended before October 2024, the applicable rate was 5%.

• TDS on Rs. 2,40,000 at 5% = Rs. 12,000.

• Interest if unpaid until July 2024: Rs. 12,000 × 1% × 5 months = Rs. 600.

For partial-year tenancies, tenants must deduct and deposit TDS in the last month of the tenancy to avoid interest and penalties.

Where Landlord Has Not Paid Tax

If the landlord has not reported the rental income in their tax return, or if Form 26A is not obtainable, the taxpayer has two options:

• Deduct and deposit TDS retroactively, along with applicable interest and penalties.

• Forego the HRA exemption and pay tax on the differential taxable salary, updating their tax return accordingly.

Taxpayers who failed to deduct TDS on rent payments should act promptly to correct non-compliance before penalties and prosecution become applicable.

Steps to Ensure Compliance:

• Verify if rent paid exceeds Rs. 50,000 per month.

• Deduct TDS at 2% (or 5% for tenancies ending before October 2024).

• File Form 26A if the landlord has already paid tax.

• Ensure accurate reporting in tax returns to avoid penalties.

By proactively addressing these obligations, taxpayers can avoid scrutiny, penalties, and potential legal action, ensuring smooth compliance with TDS provisions on rental payments.

GST Compliance Roadmap & Key Updates for Businesses – March 2025

As the financial year 2024-25 comes to a close, it is imperative for businesses and taxpayers to stay updated with the latest GST-related advisories, compliance requirements, and parliamentary discussions. This professional note provides a comprehensive summary of the key updates, case studies, and actionable steps for March 2025.

GSTN Advisories for March 2025

1. Biometric Authentication for Directors

Background: The GST Network (GSTN) has introduced an enhancement allowing directors to opt for biometric authentication at any GST Suvidha Kendra (GSK) in their home state. Previously, biometric authentication was restricted to designated GSKs in the taxpayer’s jurisdiction.

Key Features:

• Available for Public Limited, Private Limited, Unlimited, and Foreign Companies.

• Currently enabled in 33 states/UTs; to be extended soon to Uttar Pradesh, Assam, and Sikkim.

• Not mandatory—directors may still visit the designated jurisdictional GSK if preferred.

Case Study: A private limited company based in Maharashtra faced delays due to long queues at its jurisdictional GSK. With this new option, the director was able to complete biometric authentication in a GSK near his residence, reducing processing time by two weeks.

2. Issues in Filing Applications under Waiver Scheme (SPL 01/SPL 02)

GSTN has addressed multiple grievances regarding difficulties in filing waiver applications. Key issues include:

• Order details not appearing in SPL-02.

• Payment details not auto-populating.

• Challenges in linking voluntary payments (DRC-03) with demand orders (DRC-03A).

Clarification on Deadlines:

• Waiver applications can be filed until June 30, 2025 (not March 31, 2025).

• However, the tax payment deadline under the waiver scheme is March 31, 2025.

• If issues persist, taxpayers should use Form DRC-03 under the ‘Others’ category and later submit Form DRC-03A.

Example: A taxpayer in Gujarat attempted to file SPL-02 but faced auto-population issues. By manually checking the Electronic Liability Ledger, he identified the correct payment details and successfully filed his waiver application.

GST Action Plan for March 2025

Taxpayers must complete the following tasks before the financial year ends:

Action Item	Deadline
Opt for Composition Scheme (CMP-02)	March 31, 2025
File LUT for export/zero-rated supplies	March 31, 2025
File GSTR-9C (if pending)	March 31, 2025
Avail GST Amnesty Scheme (SPL-01/SPL-02)	March 31, 2025
Opt for QRMP scheme	March 31, 2025
Apply for GST refunds (April 2023 onwards)	March 31, 2025
Reconcile ITC claims (GSTR-2A vs. GSTR-3B)	March 31, 2025
Obtain ISD registration (mandatory from April 1, 2025)	March 31, 2025
Close existing invoice series and start a new one	March 31, 2025

Conclusion: March is a critical month for GST compliance. Taxpayers should proactively address their compliance requirements to avoid penalties, ensure smooth transitions into the next financial year, and take advantage of relief measures such as the waiver scheme. Staying updated with GSTN advisories and parliamentary developments will help businesses navigate tax complexities efficiently.

For more details, visit the GST portal or consult a tax expert to ensure timely compliance.

Parliamentary Updates on GST: Updates include GST evasion data, GST on insurance services, and forward charge mechanism for GTAs, along with annual RODTEP return filing deadlines.

Intangible Assets- Compliance Strategies & Case Studies

Introduction

Intangible assets play a crucial role in financial reporting, offering insights into a company’s intellectual and creative wealth. However, their correct recognition, measurement, and disclosure present challenges. The Financial Reporting Review Board (FRRB) of ICAI has observed various discrepancies in financial statements concerning compliance with Indian Accounting Standards (Ind AS), particularly Ind AS 38 on intangible assets.

Leading corporations like Infosys and TCS have successfully leveraged intangible assets such as proprietary software and patents to enhance their market value. In contrast, companies that fail to provide adequate disclosures often face regulatory scrutiny and investor skepticism. Improper reporting of intangible assets can lead to financial misstatements, negatively impacting stock valuations and stakeholder confidence.

This article presents key observations by the FRRB and provides guidance on ensuring compliance, supported by real-world examples and a case study.

Observations on Intangible Assets

Inadequate Disclosure of Goodwill

Observation

Many financial statements reflect substantial goodwill but fail to disclose its origin. Internally generated goodwill should not be recognized as an asset under Ind AS 38. If goodwill is acquired through a business combination, relevant disclosures under Ind AS 103 are mandatory but often missing.

Relevant Provisions

• Ind AS 38 - Intangible Assets: "Internally generated goodwill shall not be recognised as an asset."

• Ind AS 103 - Business Combinations: Mandates detailed disclosure of goodwill reconciliation for material business combinations.

Implication & Guidance

Companies must clearly disclose the source of goodwill and comply with impairment testing requirements under Ind AS 36. Failure to do so may result in non-compliance penalties and financial misstatements. If goodwill arises from a business combination, detailed disclosures as per Ind AS 103 should be incorporated.

Example: TCS Limited’s consolidated financial statements for FY 2023-24 correctly disclosed goodwill acquired under business combinations, ensuring transparency.

Misclassification of Research and Development (R&D) Expenditure

Observation

Some financial statements classify R&D expenses as either revenue or capital expenditure without distinguishing between research and development phases. Ind AS 38 requires research costs to be expensed immediately, while development costs may only be capitalized if specific conditions are met.

Relevant Provisions

• Ind AS 38 - Intangible Assets: "No intangible asset arising from research shall be recognised. Expenditure on research shall be recognised as an expense when incurred."

• Ind AS 38 - Intangible Assets: Lists conditions under which development costs can be capitalized.

Implication & Guidance

Companies should correctly classify R&D expenses—research costs must be expensed, and development costs should only be capitalized if all Ind AS 38 conditions are met. Misclassification can lead to misrepresentation of financial performance and asset values. Clear R&D accounting policies should be disclosed in annual reports.

Example: A pharmaceutical company developing a new drug can only capitalize development expenses if clinical trial success is probable and the drug has regulatory approval pathways.

Non-Disclosure of Intangible Assets Reconciliation

Observation

A company reported a significant increase in ‘Intangible Assets Under Development’ but did not disclose a reconciliation of carrying amounts at the beginning and end of the period, as required under Ind AS 38.

Relevant Provisions

• Ind AS 38 - Intangible Assets: Requires disclosure of reconciliation showing additions, disposals, revaluations, and impairment losses.

Implication & Guidance

Companies must ensure proper reconciliation of intangible assets in financial statements. Clearly distinguishing between internally generated and acquired assets enhances investor understanding and compliance with regulatory requirements.

Example: Infosys Limited’s standalone financial statements for FY 2023-24 correctly provided a reconciliation of intangible assets.

Omission of Amortization Method and Useful Life

Observation

A company recognized software as an intangible asset but did not disclose the amortization method and useful life, violating Ind AS 38 requirements.

Relevant Provisions

• Ind AS 38 - Intangible Assets: Requires disclosure of amortization methods and useful life for each class of intangible assets.

Implication & Guidance

To ensure compliance, companies must disclose the amortization method and useful life of intangible assets. These disclosures are crucial for assessing asset valuation and future financial performance.

Example: Infosys Limited’s FY 2023-24 financial statements correctly disclosed the amortization method and useful life for acquired software.

Lack of Clarity on Internally Generated vs. Acquired Intangible Assets

Observation

Some companies recognize intangible assets like software, memberships of corporate networks, customer contracts, and brand trademarks but do not specify whether they were internally generated or acquired.

Relevant Provisions

• Ind AS 38 - Intangible Assets: Requires entities to distinguish between internally generated and acquired intangible assets.

Implication & Guidance

Companies must explicitly state whether their intangible assets are internally generated or acquired. This disclosure ensures compliance with Ind AS 38 and provides investors with clarity on asset valuation and financial decision-making.

Best Practices for Compliance

1. Ensure Comprehensive Disclosures: Companies should provide complete and clear disclosures of intangible assets, including goodwill, amortization methods, and R&D expenses.

2. Maintain Proper Classification: Clearly differentiate between research and development expenses, internally generated and acquired assets, and various intangible asset classes.

3. Conduct Regular Impairment Testing: Periodically assess the recoverable value of goodwill and other intangible assets to prevent overstatement.

4. Implement Strong Internal Controls: Establish governance frameworks to ensure compliance with Ind AS 38 and other applicable standards.

5. Provide Reconciliation of Intangible Assets: Include a reconciliation statement in financial reports to enhance transparency and compliance.

Case Study: Leveraging Intangible Assets for Business Growth

Company: XYZ Tech Solutions Pvt. Ltd.

Scenario: XYZ Tech Solutions developed a proprietary AI-based software and acquired premium memberships in corporate networks, significantly increasing its valuation. Initially, it expensed all software development costs and membership fees. However, after meeting Ind AS 38 recognition criteria, it capitalized later-stage development costs and classified network memberships as intangible assets.

Challenges Faced:

• Unclear differentiation between research and development expenses.

• Inadequate disclosure of goodwill from acquired startups.

• Lack of an amortization policy for software and memberships.

Corrective Actions Taken:

1. Implemented a structured R&D expense classification system.

2. Disclosed goodwill reconciliation and its impact on valuation.

3. Clearly defined the software’s useful life, membership amortization period, and disclosure policies in financial statements.

The company’s revised disclosures improved investor confidence, facilitated better financial planning, and ensured regulatory compliance. Proper disclosure and classification of intangible assets enhance investor confidence and regulatory compliance. Adhering to Ind AS 38 helps prevent financial misstatements and legal repercussions. Strong governance and internal controls are essential for maintaining compliance with financial reporting standards. By proactively addressing these challenges, organizations can mitigate risks, ensure reliable financial statements, and strengthen their market credibility.

Comprehensive Analysis of Section 194T: TDS on Payments to Partners (Effective from April 1, 2025)

Introduction Section 194T of the Income Tax Act, effective from April 1, 2025, introduces a 10% Tax Deducted at Source (TDS) on payments exceeding Rs. 20,000 annually made by partnership firms or Limited Liability Partnerships (LLPs) to their partners. These payments include salary, remuneration, commission, bonus, or interest. The TDS obligation arises at the time of crediting such amounts to the partner’s account (including the capital account) or making the payment, whichever is earlier. This section has various complexities, which are explored below, along with potential solutions.

Key Complexities and Case Studies

1. Applicability of Section 194T

• TDS is applicable for the financial year 2025-26 onwards.

• Any payment related to previous financial years but made on or after April 1, 2025, is not subject to TDS under this section.

• The deduction applies when the payment exceeds Rs. 20,000 in a financial year.

Case Study 1: A firm credits Rs. 25,000 as remuneration to a partner’s capital account in April 2025, relating to FY 2024-25.

• Since the amount pertains to the previous financial year, no TDS is applicable under Section 194T.

Case Study 2: A firm pays Rs. 30,000 as interest on a partner’s capital in May 2025, related to FY 2025-26.

• Since the amount relates to FY 2025-26, TDS at 10% is applicable under Section 194T.

2. Interpretation of Salary, Remuneration, Commission, Bonus, and Interest

• The term "salary" is not defined in the Income Tax Act for partners.

• As per Explanation 2 to Section 15, payments made to partners are not considered salary for tax purposes.

• The phrase "in the nature of" broadens the scope of applicability.

Case Study 3: A firm provides perquisites to partners instead of direct remuneration.

• Whether perquisites are covered under Section 194T or under Section 194R is ambiguous.

• Since Section 194T covers remuneration in the broader sense, TDS may still be required.

3. Disallowance of Expenses and TDS on Gross Amount

• Section 40(b) prescribes limits for claiming interest and remuneration as expenses.

• The absence of a similar proviso in Section 194T raises a question: should TDS be deducted on the gross amount or only up to the allowable limit?

Case Study 4: A firm pays Rs. 5,00,000 as remuneration to a partner, but only Rs. 3,00,000 is allowable under Section 40(b).

• If TDS is deducted on the full Rs. 5,00,000, the partner may face a mismatch between Form 26AS and taxable income.

• A possible solution is to request clarification from CBDT to align Section 194T with Section 40(b).

4. Issues with Partner Withdrawals

• Partners often withdraw funds throughout the year, which are later adjusted as remuneration.

• It is unclear whether TDS should be deducted at the time of withdrawal or only at year-end upon finalization.

Solution:

• Firms should define a clear policy for withdrawals and remuneration payments.

• If the amount is treated as remuneration in books, TDS should be deducted at the time of credit.

5. Non-Resident Partners and DTAA Considerations

• Section 194T does not distinguish between resident and non-resident partners.

• Section 195 requires TDS on payments to non-residents.

Case Study 5: A firm pays Rs. 50,000 as remuneration to a non-resident partner.

• Should TDS be deducted under Section 194T or Section 195?

• Since Section 195 is more specific, TDS should be deducted under Section 195 at applicable DTAA rates.

6. Interest on Partner’s Loan vs. Capital Account

• Section 194A exempts TDS on interest paid to partners.

• Section 194T mandates TDS on "interest" paid to partners.

Case Study 6: A firm pays Rs. 40,000 as interest on a partner’s loan and Rs. 25,000 as interest on capital.

• Interest on a loan is exempt under Section 194A(3)(iv).

• Interest on capital requires TDS under Section 194T.

7. Cash Basis Accounting for Firms like CA and Doctors in Practice

• Professionals like Chartered Accountants and doctors often follow the cash basis of accounting.

• TDS under Section 194T applies at the time of credit or payment, whichever is earlier.

• If a firm credits remuneration but does not make actual payments, TDS will still be required.

Solution:

• Professional firms should evaluate their cash flow to ensure they can meet TDS obligations even if payments are not immediately made.

8. Compliance and Mismatch in Form 26AS

• Firms deduct TDS on gross amounts, while partners claim deductions under Section 40(b), creating reconciliation issues.

• Automated notices from tax authorities due to mismatched Form 26AS.

Solution:

• CBDT should issue clarifications or FAQs on proper reporting.

• Firms should educate partners on proper income reporting.

Checklist for Compliance with Section 194T

Before 31.03.2025

✅ Review partnership agreements and finalize any pending payments to partners before 31.03.2025 to avoid TDS applicability. ✅ Assess the total remuneration, commission, and interest to be paid in FY 2025-26 and structure payments accordingly. ✅ Set up TDS compliance mechanisms, including ERP/accounting system updates for automatic deduction of TDS under Section 194T. ✅ Educate partners about the new TDS implications and the need for proper Form 26AS reconciliation. ✅ Clarify any ambiguity regarding withdrawal policies and remuneration structures in financial statements.

After 01.04.2025

✅ Deduct TDS at 10% when crediting or paying remuneration, commission, bonus, or interest to partners exceeding Rs. 20,000 annually. ✅ Ensure correct classification of payments and reconcile with Form 26AS to prevent mismatch issues. ✅ File TDS returns accurately and within prescribed deadlines to avoid penalties. ✅ Monitor any clarifications or amendments issued by the CBDT regarding Section 194T. ✅ Conduct periodic internal reviews to ensure compliance and minimize potential disputes.

Conclusion

Section 194T introduces multiple complexities, including:

• Ambiguities in definitions (salary vs. remuneration).

• Conflict with Section 40(b) limits.

• Issues in treating non-resident partners.

• Distinguishing between interest on loans vs. capital.

• Compliance burdens and potential tax notices.

By proactively addressing these challenges, firms and partners can ensure smooth implementation and compliance with Section 194T

GST Compliance & Job Work: Key Legal Insights, Case Study & Avoiding Costly Pitfalls

Introduction

Goods and Services Tax (GST) compliance is critical to avoid penalties and business disruptions. The recent judgment in Famus India v. State of U.P. by the Allahabad High Court highlights the necessity of strict adherence to GST documentation, especially for goods transported under job work transactions. This professional guidance note interprets the legal aspects of the case and outlines a proactive compliance strategy to prevent defaults and penalties.

Case Study: Famus India v. State of U.P.

Case Facts

• Famus India transported goods for job work without a properly filled challan as mandated by Rule 55 of the CGST Rules.

• The goods were found at a location different from the one mentioned in the documents.

• The tax authorities detained the goods and imposed penalties under Section 129 of the CGST/UPGST Act, 2017.

• The taxpayer contended that the lapse was procedural, but the court upheld the penalty, citing non-compliance with GST regulations.

Legal Interpretation from the Judgment

The Allahabad High Court’s ruling reinforces key GST compliance principles:

1. Strict Adherence to Rule 45 & Rule 55: Proper documentation is mandatory for job work transactions.

2. Destination Mismatch Leads to Penalty: Goods found at an unintended location justify detention and penal action.

3. Incomplete or Incorrect Challans Violate GST Law: Missing key details in transport documents results in non-compliance.

4. Taxpayer Bears the Burden of Proof: Businesses must ensure their delivery challans and transport records are accurate.

5. No Leniency for Procedural Errors: Even minor procedural lapses can attract financial penalties under GST.

How to Avoid Penalties and Defaults

To ensure compliance and mitigate risks, businesses should adopt the following best practices:

1. Maintain Proper Documentation for Goods Movement

• Always issue a complete and accurate delivery challan for job work transactions.

• The challan must include:

  • Date and serial number

  • GSTIN of consignor and consignee

  • HSN code, goods description, and quantity

  • Taxable value and applicable GST rate

  • Place of supply (for interstate transactions)

2. Compliance with Rule 45 & Rule 55

• Rule 45 mandates proper documentation for job work transactions to prevent tax liability.

• Rule 55 specifies the essential details for a valid transport challan, which must be strictly followed.

3. Generate E-Way Bills Where Required

• E-Way Bills must be generated in applicable cases to ensure transparency and compliance.

• Verify that destination details match the actual delivery location.

4. File ITC-04 for Job Work Transactions

• ITC-04 is mandatory for tracking goods sent for job work.

• Monitor the return timelines under Section 143 to avoid unnecessary tax liability.

5. Maintain a GST-04 Register for Job Work Transactions

• The GST-04 Register helps track goods movement and compliance with job work provisions.

• Suggested columns for the register:

  • Date of dispatch

  • Challan number

  • Description of goods

  • HSN Code

  • Quantity sent for job work

  • Name and GSTIN of the job worker

  • Expected date of return

  • Actual date of return

  • ITC-04 filing status

  • Remarks

6. Conduct Regular Compliance Audits

• Perform internal audits to ensure adherence to GST documentation and transport regulations.

• Train logistics, finance, and supply chain teams on evolving GST requirements.

7. Seek Expert Consultation for Complex Transactions

• In case of ambiguity, seek advance rulings or consult GST professionals.

• Implement technology-driven solutions for automated challan generation and E-Way Bill tracking.

Professional Analytical Note

The Famus India v. State of U.P. judgment highlights the government’s strict stance on GST compliance, emphasizing the need for:

• Robust internal controls to ensure proper documentation of goods movement.

• Continuous training to keep compliance teams updated on GST rules and legal precedents.

• Automation tools to reduce human errors in transport documentation.

By adopting a structured compliance approach, businesses can avoid penalties, ensure operational efficiency, and maintain a strong GST compliance record.

Checklist to Avoid Defaults and Penalties

✅ Ensure job work transactions have a valid and complete delivery challan ✅ Verify destination details to match the transport documents ✅ Generate E-Way Bills for applicable transactions ✅ File ITC-04 returns timely for job work movements ✅ Maintain a GST-04 Register with updated job work details ✅ Conduct periodic GST audits to detect compliance gaps ✅ Seek professional advice for complex GST transactions

Strict adherence to these compliance measures will help businesses safeguard against unnecessary penalties and legal challenges under GST law

Strategic Tax Planning through Asset Reclassification: A Case Study on Ind AS 105 Compliance

Introduction:

Tax planning is a crucial financial strategy that enables corporations to minimize tax liabilities while adhering to legal compliance. One effective approach is asset reclassification, which can impact financial statements, tax obligations, and overall profitability. This case study explores how Orion Tech Solutions Ltd. successfully leverages asset reclassification under Ind AS 105 to optimize its tax position before divesting a production facility.

Case Study: Tax Optimization through Asset Reclassification

Background:

Orion Tech Solutions Ltd. ("the company"), a leading IT hardware manufacturer, has decided to divest its assembly unit in Noida. Instead of directly selling the entire unit as a Capital Gains transaction, the company strategically reclassifies certain fixed assets into inventory to optimize tax benefits.

Initial Financial Position (As of 31st March 2025):

Component	Carrying Amount (₹ in Crores)
Land	500
Buildings	300
Machinery	220
Computers	30
Inventory	110
Trade Receivables	80
Trade Payables	(150)
Provision for Warranty	(30)
Total Assets (before reclassification)	1,240
Total Liabilities	(180)
Net Carrying Amount	1,060

Strategic Asset Reclassification Approach:

To maximize tax efficiency, the company transfers specific assets from fixed assets to inventory before divesting the unit.

Step 1: Identifying Assets for Reclassification

• Machinery and Computers are reclassified from fixed assets to inventory.

• These assets are recorded at the lower of cost or net realizable value (NRV) to reduce taxable gains.

Step 2: Valuation at Lower of Cost or NRV

• Machinery: ₹220 crores (Cost) → Revalued at ₹190 crores (NRV)

• Computers: ₹30 crores (Cost) → Revalued at ₹25 crores (NRV)

• Total Inventory (Including Existing Stock of ₹110 crores) = ₹325 crores

Step 3: Tax Planning Impact

• The sale of machinery and computers is now taxed as business income, enabling deductions for related expenses.

• Depreciation recapture is minimized as assets are reclassified before sale.

Revised Financial Position After Reclassification:

Component	Carrying Amount (₹ in Crores)
Land	500
Buildings	300
Inventory (Reclassified Assets + Existing)	325
Trade Receivables	80
Trade Payables	(150)
Provision for Warranty	(30)
Total Assets (After Reclassification)	1,225
Total Liabilities	(180)
Net Carrying Amount	1,045

Step 4: Execution of Sale and Financial Impact

• Inventory (including reclassified machinery and computers) is sold for ₹350 crores.

• Remaining CGU assets (land and building) are sold for ₹750 crores.

Tax Implications:

• Business Income: ₹350 crores from inventory sale

• Capital Gains: ₹750 crores - (Land ₹500 crores + Building ₹300 crores) = ₹50 crores Capital Loss, which offsets other capital gains for tax savings.

Accounting Entries for Compliance:

1. Reclassification of Machinery & Computers to Inventory:

   Inventory A/c Dr. ₹215 crores
   Accumulated Depreciation A/c Dr. ₹35 crores
   To Machinery A/c ₹220 crores
   To Computers A/c ₹30 crores

2. Impairment Loss on Reclassified Assets:

   Impairment Loss A/c Dr. ₹35 crores
   To Inventory A/c ₹35 crores

3. Sale of Inventory at ₹350 crores:

   Cash A/c Dr. ₹350 crores
   To Inventory A/c ₹215 crores
   To Business Profit A/c ₹135 crores

4. Sale of Land & Building (Corrected Entry):

   Cash A/c Dr. ₹750 crores
   Capital Loss A/c Dr. ₹50 crores
   To Land A/c ₹500 crores
   To Building A/c ₹300 crores

Conclusion:

This case study illustrates how strategic asset reclassification can be an effective tax-saving tool while ensuring Ind AS 105 compliance. The key benefits include:

1. Capital Gains Tax Reduction – Reclassifying fixed assets before sale helps offset capital losses against gains.

2. Lower Taxable Income – Business income classification allows deductions that capital gains taxation does not.

3. Regulatory Compliance – Proper accounting treatments align with Ind AS 105 standards.

4. Enhanced Financial Planning – Effective asset reclassification maximizes both immediate and long-term tax benefits.

This structured tax strategy ensures corporations optimize tax savings while maintaining financial compliance and transparency.

Mandatory Input Service Distributor (ISD) Registration Under GST (Effective April 1, 2025)

1. Introduction

Effective April 1, 2025, the Indian government has mandated Input Service Distributor (ISD) registration for businesses having multiple GST registrations under the same PAN. This change, introduced via Notification No. 12/2024-Central Tax dated July 10, 2024, aims to:

✅ Ensure uniform distribution of Input Tax Credit (ITC) across branches
✅ Prevent misuse of ITC and tax evasion
✅ Streamline compliance, improve tax governance, and eliminate revenue leakage

Before this mandate, businesses could choose whether to register as ISD, leading to inconsistent ITC distribution and possible tax disputes. The new regulation ensures that ITC on common input services must be allocated systematically through ISD.

2. Understanding Input Service Distributor (ISD) Under GST

2.1 What Is an ISD? (As per Section 2(61) of CGST Act, 2017)

An Input Service Distributor (ISD) is a GST-registered entity that:

✔ Receives invoices for input services used by multiple branches.
✔ Does not engage in outward supply of goods or services.
✔ Distributes ITC to branches in proportion to their turnover.

💡 Example:
A corporate office in Delhi receives a ₹10 lakh invoice for legal consultancy services benefiting branches in Mumbai, Bangalore, and Chennai. The GST credit on this service must be distributed to these branches via ISD mechanism.

3. Legal Framework: ISD Under GST

3.1 Key Provisions in CGST Act, 2017

Section	Provision	Interpretation
Section 2(61)	Defines ISD	ISD distributes ITC of common services among branches.
Section 20	Prescribes ITC distribution mechanism	ITC must be allocated based on turnover of branches.
Section 49	Governs ITC utilization	Specifies order of ITC utilization for tax payments.

3.2 Relevant GST Rules (Amended w.e.f April 1, 2025)

Rule	Provision	Amendment
Rule 39	Governs ITC distribution methodology	Revised for mandatory ISD compliance.
Rule 54(1A)	Specifies invoice issuance by ISD	ISD must issue ISD invoices instead of tax invoices.
Rule 87(13A)	Covers ITC utilization restrictions for ISD	ISD cannot use ITC for outward supplies.

4. ITC Distribution Mechanism Under ISD

4.1 What Type of ITC Must Be Distributed?

✅ ITC related to input services (not goods).
✅ Only ITC available in ISD’s electronic credit ledger can be distributed.
✅ ITC must be allocated to registered branches/units under the same PAN.

🔹 Direct ITC (specific to one branch) → Distributed only to that branch.
🔹 Common ITC (used by multiple branches) → Distributed pro-rata based on turnover.

4.2 Manner of ITC Distribution (As per Section 20(3) of CGST Act, 2017)

Type of ITC Received	Can Be Distributed As
CGST	CGST or IGST
SGST	SGST of the same state (not inter-state)
IGST	IGST or CGST (as per recipient’s location)

💡 Example:
If the corporate office in Delhi receives ₹1,00,000 IGST credit for an advertising campaign covering multiple locations, the ITC must be allocated based on the branches' turnover ratio.

5. Case Studies on ISD ITC Distribution

Case Study 1: ISD Distribution to Two Branches

Scenario:

• A company has its corporate office in Mumbai and two branches in Delhi and Bangalore.

• The head office receives a ₹5,00,000 IGST invoice for software services benefiting both branches.

• Branch Turnover:

  • Delhi: ₹40 crore

  • Bangalore: ₹60 crore

  • Total Turnover = ₹100 crore

🔹 Solution: Proportional ITC Allocation

Branch	Turnover %	ITC Allocation (₹5,00,000 IGST)
Delhi	40%	₹2,00,000 IGST
Bangalore	60%	₹3,00,000 IGST

Case Study 2: ISD Distribution to 50+ Branches

Scenario:

• A retail chain with 50 stores across India has its corporate office in Chennai.

• The head office pays ₹25,00,000 for pan-India advertising services.

• The total turnover of all stores is ₹5,00,00,00,000.

• ITC must be distributed based on each store’s turnover percentage.

🔹 Solution: Step-by-Step ITC Distribution

✔ Step 1: Calculate percentage of turnover per store
✔ Step 2: Multiply percentage with ₹25,00,000 ITC
✔ Step 3: Issue ISD invoices to each branch

Branch	Turnover (₹ Crores)	% of Total Turnover	ITC Allocation
Mumbai	50	10%	₹2,50,000
Delhi	80	16%	₹4,00,000
Bangalore	70	14%	₹3,50,000
Chennai	60	12%	₹3,00,000
Kolkata	40	8%	₹2,00,000
Other 45 Stores	200	40%	₹10,00,000 (distributed among 45 stores)

6. Compliance: ISD Return Filing Procedure

6.1 Monthly Filing of GSTR-6

📅 Due Date: 13th of every month
📌 Purpose: Reports ITC received and distributed.

6.2 Auto-Populated GSTR-6A

🔹 Invoices issued to ISD auto-populate in GSTR-6A for reconciliation.

✅ Step-by-Step Process for ISD Compliance
1️⃣ Apply for ISD registration (Form REG-01).
2️⃣ Receive invoices for common services at a central location.
3️⃣ Compute ITC allocation based on turnover proportion.
4️⃣ Issue ISD invoices to distribute ITC.
5️⃣ File Form GSTR-6 before the 13th of every month.

7. Key Takeaways and Strategic Considerations

✅ Benefits of Mandatory ISD Registration

✔ Ensures proper credit utilization and prevents misallocation.
✔ Reduces tax disputes and improves compliance tracking.

⚠ Challenges & Compliance Risks

🚨 Strict Turnover-Based ITC Allocation: If turnover changes, ITC must be revised.
🚨 Penalties for Non-Compliance: Failure to register as ISD can result in interest, penalties, and ITC denial.

8. Conclusion

Mandatory ISD registration from April 1, 2025, is a major GST reform ensuring structured ITC distribution, preventing misuse, and enhancing compliance.

🔹 Businesses must align their ITC processes with the ISD mechanism to avoid penalties and maximize tax benefits. 🚀