Author name: CBCL

Indian Budget 2023: Proposed Amendments for the Indian Gaming Industry & its Impact

Leave a Comment / Taxation Law /

[By Anuradha Garg] The author is a student of Gujarat National Law University, Gandhinagar.   Introduction The new Budget 2023-24 has proposed certain amendments for the gaming sector in India which has witnessed striking growth in the past few years. Currently, the gaming market in India has been estimated to be approximately twice that of China and thrice that of the USA.[i] However, the gaming industry has faced several challenges in India which has hindered its growth. Taxation on this sunrise sector has always been a contentious issue. The growth potential of this sector makes it imperative to analyse the proposed amendments for the gaming industry in budget 2023. Proposed Amendments In Budget 2023-24, the Union Government has proposed the removal of the 30% Tax Deducted at Source (Hereinafter as “TDS”) threshold of 10,000 INR on net winnings.[ii] Earlier, if a player won more than 10,000 INR, the online gaming operator had to withhold 30% as TDS. It follows that under the new regime, irrespective of the money won by the gamer, it will be subjected to TDS under the Income Tax Act, 1961. Hence, the existing provision of Section 194B of the Income Tax Act, 1961 will stand amended.[iii] However, this threshold removal would only apply to online games and games like puzzles and lotteries would be excluded from the application of this provision. The Finance Bill, 2023 has proposed the insertion of two new provisions to the Income Tax Act, 1961. These are Section 194BA which prescribes a tax deduction on net winnings from online games at the end of the financial year or when such winnings are withdrawn and Section 115BBJ which provides for a tax rate of 30% on net winnings from online gaming.[iv] Section 115BBJ also defines ‘computer resource’, ‘internet’ and ‘online game.’[v] The two provisions will be effective from July 1, 2023, and April 1, 2024, respectively. Impact Analysis The removal of the minimum threshold can be seen as a welcome move. Subjecting the income from gaming to TDS under the Income Tax Act, 1961 essentially means that such income will form part of the total income of the player. Therefore, online gaming contests can be created with higher winning amounts and will ultimately promote India’s economic growth. Further, the minimum threshold for TDS had led to the splitting of winnings by players and therefore, this amendment will also aid in curbing this practice. The only downside of such a provision will be that casual players constitute a large proportion of online gaming platforms and they usually earn less than 10,000 INR. This means that the current proposed framework will subject them to TDS if they fulfil the requisite criteria as per the Income Tax Act, 1961. The removal of the minimum threshold will act as a deterrence. Since the new provisions will take effect from July 1, 2023, the gaming companies would be required to follow the old provision i.e., Section 194B for the period preceding it. This can be troublesome and can cause inconvenience in the computation of tax especially when a player wins monies less than 10,000 INR prior to July 1, 2023, but withdraws it a time after the amendment comes into force. Therefore, whether the tax has to be withheld at the time of winning or at the time of withdrawing that winning will remain a matter of concern unless the government clarifies the same. Further, the unresolved complexities will also burden the gaming companies with heavy costs of compliance. Removal of the minimum threshold for online games will also help in settling the conundrum of the ‘game of skill’ and ‘game of chance’ in India. The Finance Bill, 2023 clearly excludes lotteries and puzzles from the purview of this provision which means they will continue to be subject to the 30% TDS requirement. In a way, it also differentiates games of skill from games of chance which the Indian Courts have also attempted to do in various landmark cases like R. Lakshmanan v. State of Tamil Nadu.[vi] A possible outcome of such distinction can be the standardization of tax rates and the formation of tax slabs for the gaming industry in the near future. It will thus help in simplifying the tax regime for the Indian gaming industry. The new amendments to the Income Tax Act will also pave the for the players to set off their losses using their winnings from such gaming contests. Since now, the income from online games can come within the ambit of ‘income from other sources,’ the same can be adjusted as per the Income Tax laws and rules. With the addition of ‘online game’ under Section 194BA, it seems that Section 194B relates to ‘offline game’ under the Income Tax Act, 1961. Thus, in the context of betting and gambling, which can be held both online and offline, the direct tax implications can vary depending upon the definition of ‘online game’ which will likely be clarified by the government in due course of time. Conclusion Good regulatory practices and fair tax policies are crucial to the growth of any economic sector. The same holds true for the Indian gaming sector. While the government has proposed positive amendments on the direct tax front, the future of the Indian gaming industry on the indirect tax front remains ambiguous. In July 2022, the Central Government proposed a 28% GST levy on online games of chance and skill as against the present 18% GST.[vii] This proposal was already vicious for the domestic companies considering the global tax rate for the gaming sector ranges between 15-18%. Further, the non-addressal of the same in the budget 2023 has added to the quandary. To address the loopholes in the proposed framework, certain measures can be taken by the government. As highlighted earlier, the removal of the minimum threshold will deter casual gamers who earn less than 10,000 INR in online games. Therefore, the government can introduce special provisions to exempt such category of gamers from the scope

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Penalty on Global Turnover: A Critique of India’s Latest Competition Regime

Leave a Comment / Competition Law /

[By Nikita Parihar] The author is a student of Lovely Professional University, Punjab.   Introduction Competition Amendment Bill 2023 [‘‘CAB23’’] recently introduced in the parliament introduced the concept of penalty on the Global Turnover [‘‘GT’’] of the infringing party in India as well. It is said to be a wild card entry because it is neither introduced in Competition Amendment Bill 2022 [‘‘CAB22’’] nor was recommended by the standing committee report. The earlier penalty was given on the average turnover of the relevant market which watered down the deterrent motive of the law that is to be attained. A penalty on GT is a type of penalty or fine that can be foisted on companies for overstepping competition law. In some jurisdictions, such as the European Union [‘‘EU’’], competition law authorities have the power to impose fines on companies that engage in anticompetitive behavior, such as price-fixing or market allocation. These fines can be significant and are often based on a percentage of the company’s GT. The use of a penalty on GT is intended to make the fine significant enough to deter companies from engaging in anticompetitive behavior, while also considering the company’s size and economic power. By imposing a fine that is a percentage of the company’s GT, competition authorities aim to set the seal that the penalty has a meaningful impression on the company’s bottom line, and remits a strong signal to other companies that anti-competitive behavior will not be endured. It is worth noting that the use of a penalty on GT is not universally accepted, and there is some debate over whether it is an appropriate form of penalty. However, many competition law authorities continue to use this form of penalty, and it remains an indispensable tool for enforcing competition law and stimulating fair competition in global markets. The author argues that it can disproportionately impact companies and that the calculation of GT can be convoluted and can also take hold of India’s market by putting off global players’ entry. A potential barrier to global players Penalizing an enterprise altogether and taking its GT as leverage to keep them truncated might have detrimental effects on the Indian market as it might agitate global corporations to set foot in the Indian market. But that actually depends upon authorities to balance with the most awaiting guidelines for the same, EU also has akin laws to tackle inequitable players and it turned out to be effectual but considering India’s growing market and fluctuations it can serve as a menace to the Indian economy.. As developing nations, we need to captivate corporations to invest and operate in India to contribute to its extension. Still, imposing fines that are detrimental to their growth may affect India’s growth. There are many conglomerates’ deals across many sectors and if CAB23 is passed and they are found doing anti-competitive practices in one sector they will be fined taking turnover all across the sectors they deal in which will be a matter of concern for them as well. Though this can help the Competition Commission of India [‘‘CCI’’] bring down the cases but endangering the entry of global players and the existence of smaller companies or startups will curtail the purpose of the competition law itself. Detrimental to the existence of smaller companies When it comes to small companies, the European Commission’s competition policy recognizes that they may face different challenges compared to larger companies, such as limited financial resources or market power. Therefore, the Commission takes into account the specific circumstances of Small and Medium-Sized Enterprises [‘‘SMEs’’] when applying competition law. The Commission has adopted various measures to support SMEs in their business activities while ensuring a level playing field for competition. For example, the Commission has simplified the procedures for SMEs to apply leniency in cartel cases, and it has also provided guidance on how SMEs can participate in public procurement procedures. In addition, the Commission has established specific funding programs to support SMEs in their business activities and encourage innovation and growth, such as the Horizon 2020 program. However, it’s worth noting that competition law applies equally to all companies, regardless of their size. If a small company engages in anti-competitive behavior, it may face fines and other penalties under EU competition law. The Commission’s goal is to ensure that competition is not distorted, and consumers are not harmed, while also considering the particular challenges SMEs face. Excessive fines leading to over-deterrence The article argues that while fines imposed for anti-competitive practices should be significant, they should also be proportionate to the actual harm caused. Excessive fines can lead to increased scrutiny and compliance burdens for organizations, ultimately impacting customers who may have to pay increased prices. The spirit of competition law in India is to protect customers and market forces, but over-deterrence resulting from disproportionate fines could discourage enterprises from entering the Indian market or result in unfair treatment of customers. Therefore, the author suggests that the CCI should ensure that penalties are in proportion to the harm caused, and not more. While the calculation of GT may pose challenges for the CCI, particularly in the early stages, the author suggests that developing a process for collecting relevant information and consolidating it will be essential for the CCI to handle cases efficiently and effectively. Implementing foreign concepts in the Indian market The first time a penalty was levied on a GT by competition authorities in the EU was in the case of Intel Corporation. In 2009, the European Commission fined Intel a record 1.06 billion euros for abusing its dominant market position by offering rebates to computer manufacturers on the condition that they purchased all, or almost all, of their x86 CPUs from Intel. The Commission found that these rebates were part of a strategy by Intel to exclude its main rival, Advanced Micro Devices (‘‘AMD’’), from the market for x86 CPUs. The Commission also found that Intel made direct payments to a major computer retailer, Media-Saturn, to stock

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The Doctrine of Necessity and CCI’s Combination Regime

Leave a Comment / Competition Law /

[By Aneesh Raj] The author is a student of National Law University and Judicial Academy, Assam.   “Necessity knows no law.” – Aesop INTRODUCTION The doctrine of necessity and the Competition Commission of India’s (CCI) combination regime are two important concepts in the realm of competition law in India. The doctrine of necessity refers to situations where a law may be relaxed or suspended in cases of emergency or other extreme circumstances. The CCI’s combination regime, on the other hand, pertains to the assessment of mergers and acquisitions that may have an impact on competition in India. A newspaper article says that the CCI could use the “doctrine of necessity” to look into merger and acquisition deals. The current situation is that there is a lack of the required quorum, which means that many deals are awaiting CCI approval. So, a significant question arises here: in the existing scenario, can CCI invoke the doctrine of necessity to clear its regulatory logjam? In this article, we will explore these two concepts and their relationship in the context of Indian competition law and also find the answer to the above question. THE DOCTRINE OF NECESSITY The doctrine of necessity is a legal principle that allows for the relaxation or suspension of laws in cases of emergency or other extreme circumstances. The doctrine is based on the idea that laws are created to serve the public good, and that in certain circumstances, strict adherence to the law may be detrimental to the public interest. The doctrine of necessity is not a blanket license to ignore the law, but rather a recognition that in certain situations, strict adherence to the law may not be practical or desirable. The Supreme Court has established that the doctrine of necessity should not be invoked on a regular basis for minor matters because it may result in the absence of the rule of law, if given the choice between allowing a biased person to act on a matter or stopping the matter itself, the former will be preferred over the latter, even if the latter may be afflicted by that biased person’s or authority’s bias; however, the decision of that biased person will be upheld. ORIGIN OF THE PRINCIPLE OF DOCTRINE OF NECESSITY Necessity is a legal principle that can be used to justify an individual’s actions in an emergency situation that they did not create. This means that if a person is faced with a situation that requires immediate action to prevent harm or danger to themselves or others, they may be allowed to take actions that would normally be considered unlawful or illegal. In 1954, Chief Judge Muhammad Munir of Pakistan was faced with a situation where the Governor General, Ghulam Moulam, had exercised emergency powers that went beyond the limits of the constitution. Munir recognized the urgency of the situation and made the ground-breaking decision to sanction the Governor General’s actions, coining the term “doctrine of necessity” for the first time. This doctrine essentially meant that in extreme circumstances, such as an emergency or crisis, the law could be temporarily suspended or modified to ensure the safety and well-being of the people. To support his decision, Chief Judge Munir referred to the ancient legal maxim of Bracton, who stated that “That which is otherwise not lawful is made lawful by necessity.” Munir’s decision was a landmark one that established the concept of the doctrine of necessity in law. It recognized the need for flexibility and pragmatism in times of crisis, while also emphasizing that such extraordinary measures should only be taken as a last resort and with the goal of preserving the rule of law and protecting individual rights. APPLICATION OF PRINCIPLE IN INDIA The doctrine of necessity, which allows for the justification of actions taken in emergency situations, was first used in India in the significant case of Gullapalli Nageswara Rao v. APSRTC[1] in 1958. This decision paved the way for the further development of the doctrine, with subsequent cases providing new interpretations, applications, and invocations of the principle. One such case was the landmark decision of Election Commission of India v. Dr. Subramanian Swamy, which is credited with transforming the necessity doctrine into the absolute necessity doctrine. However, some legal experts have argued that over-reliance on this principle could lead to the erosion of the rule of law. Consequently, the Supreme Court has emphasized that the doctrine of necessity should only be used in the most extreme and urgent circumstances. In other words, while the necessity doctrine provides a means of justifying actions taken in emergencies, it should not be used as a loophole to circumvent the law or justify questionable decisions. Instead, the doctrine should be invoked sparingly, and only when there is no other alternative to address a situation that threatens public safety or welfare. Even though this is unprecedented for the CCI, Indian regulators have had trouble in the past because of late appointments. Take into account the central government’s four-year difficulty in locating a qualified “technical member” for the patent bench of the Intellectual Property Appellate Board (IPAB), which hears appeals relating to patents. Similarly, after technical member CKG Nair retired in March 2021 and his replacement was appointed almost a year later, India’s highly regarded securities market regulator SEBI’s appeal tribunal, the Securities Appellate Tribunal (SAT), went nearly a year without a technical member. Both of these tribunals’ inability to make critical decisions was hampered by the delay in the appointment of crucial members, which had serious economic and regulatory repercussions. But when important appointments to statutory bodies and tribunals were not made on time, like in these two cases, the courts stepped in to keep the justice system from getting stuck. The Delhi High Court reinstated and functionalized the IPAB’s patent bench in Mylan Laboratories Limited v. Union of India[2] (2019), noting that the Constitution required that all citizens have the right to access justice, which would be compromised if tribunals were unable to fulfil their

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Resolving Bias of Resolution Professionals

Leave a Comment / Insolvency Law /

[By Ishaan Saraswat] The author is a student of Jindal Global Law School.   On January 18, 2023, the Ministry of Corporate Affairs, Government of India proposed certain changes in relation to the Insolvency and Bankruptcy Code, 2016 (“IBC” or “Code”). These suggestions deal with the acceptance of corporate insolvency resolution process applications, the streamlining of insolvency resolution, the reformatting of the liquidation process, and the function of service providers under the IBC. Of the plethora of proposals, a key consideration was with regard to amending Section 10 of the IBC to bring about a transparent appointment of the interim resolution professional (“IRP”). The present regime under Section 10 is adverse to the stakeholders of a corporate insolvency resolution process (“CIRP”) since on admission, the corporate debtor’s (“CD”) management is ousted, and an IRP who is nominated by the same management takes over control. The proposal encapsulates amending Section 10 to expunge the right of the CD to nominate an IRP, and that the Adjudicating Authority (“AA”) would appoint the IRP on the recommendation of the Insolvency and Bankruptcy Board of India (“IBBI”). A brief background of CD-nominated-IRP A corporate applicant is one who is either the CD, a member/partner of the CD, an individual managing the operations of the CD, or a person who has control over the financial affairs of the CD. This corporate applicant can approach the AA under Section 10 of the Code to admit the CD for CIRP. While doing so, the corporate applicant shall also nominate an IRP. As per Section 16 of the Code, the AA shall appoint the person nominated to be an IRP. The IRP, on appointment, is vested with vast powers by Section 17, such as managing the affairs of the company, exercising the powers of the board, taking actions in the name of the company, accessing the internal records and books of the company and so on. The question that arises is whether such vast powers are regulated. Prevention of abuse Chapters VI and VII of the Code provide for extreme cases of siphoning off assets, concealment of assets, misconduct in the resolution process, and fraudulent or wrongful trading. The AA has time and again barred resolution professionals from making misleading statements, abdicating their duties and flouting the orders of the tribunal wilfully, and even for charging an exorbitant fee. Furthermore, the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 (“IP Regulations”), provide for qualifications of an IRP and the code of conduct to abide by. However, all these measures may not suffice. The vast powers vested in the IRP allow them to misguide the Committee of Creditors (“CoC”) formed subsequently, and damage the CIRP process. Instances have been recorded where IRPs have not maintained a list of claimants properly, have not verified assets of a company, have appointed suspended directors of the CD for assistance in managing operations, have handed over incomplete records of the CD etcetera. The instances above may be more damaging and discreetly, when there are clear-cut conflicts of interest, with the potential for unfairness or bias. The IRP and their firms, for instance, may have ongoing relationships with the CD or creditors who are involved in the insolvency process in various ways; relationships with the directors of specific companies may create conflicts; personal interests and other appointments held may be relevant; the IRP’s firm may have financial interests present or future that may be impacted by recommendations or decisions relating to a troubled company; and the volume of work or compensation received by the IRPs may also be relevant. Addressing the independence of insolvency professionals The Bankruptcy Law Reforms Committee has observed that, “As the RP plays a key role in the life-cycle of the insolvency resolution process – from the time of the acceptance of the application, the design and agreement of the repayment plan, to the final execution of the plan – it is possible that unfair conduct of the RP jeopardises the interests of either party”. To curb any unfair conduct, by way of bias or impartiality, tribunals have sought substitution of IRP when affiliated with a financial creditor by virtue of employment history and pecuniary interest. But when we move the gaze away from creditors, a clear case of impartiality may be observed under the current scheme of Section 10 of the Code where the CD itself nominates an IRP. To address this, the IP Regulations’ code of conduct demands disclosure of any pecuniary or personal relationship with any stakeholders in the CIRP. Any such lack of independence warrants the IRP to be replaced. The IP Rules provide that a relationship may be established if the resolution professional is a shareholder, director, key managerial employee, or partner of the related party, or if the related party accounts for 5% or more of the resolution professional’s gross revenue (“relationship”). Further, an instance of impartiality may also be there if a relative of the resolution professional has a relationship with the related party, or where the resolution professional is a part of an insolvency professional entity, which has a relationship with the related party. The ‘relationship’ that an IRP may share with the stakeholders and the metrics mentioned earlier may not suffice to eradicate impartiality. The ‘relationship’ expounded in the IP Regulations seems narrow since there is no mention of an indirect interest, such as being a shareholder of an associate company or a sister concern or a company that engages in business with the CD. Furthermore, esteemed resolution professionals render services often to the same set of creditors, for instance, the big lenders. In such scenarios, there is a familiarity bias and an expectation for the IRP to work in a particular manner. This also bypasses the code of conduct since the IRP earns the revenue from the CD, not from the creditors. Moreover, as the UNCITRAL Legislative Guide on Insolvency Law elaborates, a prior or current business relationship with the debtor (including being a party to a

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Appeals in Competition Law Enforcement: A Costly Ticket

Leave a Comment / Competition Law /

[By Shourya Mitra and Ishaan Saraswat] The authors are students of Jindal Global Law School.   Introduction  Upon perusing the National Company Law Appellate Tribunal’s (NCLAT) approach to competition appeals, it appears that there is a trend of requiring a 10% deposit to the NCLAT as a prerequisite for hearing penalties resulting from an order of the CCI. However, questions arise regarding the imposition and impact of this mandate. In the case of Make My Trip (“MMT-GO“), the NCLAT sought a 10% deposit of the penalty as a precondition for hearing the appeal, but no stay was granted by the NCLAT regarding the remaining fine. The Delhi High Court had to clarify that no recovery could be initiated on the remaining 90% penalty amount after MMT-GO deposited 10% of the penalty amount to the NCLAT. However, in the case of Google, the NCLAT did not stay the order or elaborate further on the penalty despite seeking a 10% deposit. This piece analyzes the validity of such a condition and discusses inconsistencies in the imposition of the 10% penalty by the NCLAT in the aforesaid cases involving MMT-GO and Google. The Saga of an Appeal Section 53B of the Competition Act, 2002 (“the Act”) provides for the right to appeal against the decision of the CCI before the NCLAT. It is a settled position in law that the right to appeal is created by the statute, which means that the right to appeal can only be limited or restricted by the provisions of the statute that creates it. In other words, the right to appeal is not an absolute right, and it can be subject to certain conditions or restrictions. Under the Act, the aggrieved party must file the appeal within sixty days of the decision being appealed against. Apart from this, the Act does not impose any other requirements or limitations on the aggrieved party. We can trace the inception of the 10% of penalty amount to the case of Ultratech Cement Ltd. v. Competition Commission of India, wherein an ancillary question before the Supreme Court of India  was whether the NCLAT  can direct the aggrieved party to deposit ten percent of the penalty imposed as a condition precedent to hearing the appeal. The Supreme Court opined that decisions or penalties involving the payment of money are seldom overturned since the affected party can usually be compensated if the decision is later found to be flawed. Therefore, according to the Apex Court, if the Tribunal decides to require the appellants to pay ten percent of the penalty owed, it would be appropriate, even if it’s only an interim measure. Rather, it would be an equitable way to handle the matter. Additionally, as per the Supreme Court in Himmatlal Agrawal v. Competition Commission of India (“Himmatlal”), the NCLAT is a legal body created by a statute, and its actions are limited by the provisions of the law. The Act does not state that the Tribunal has the power to require an appellant to deposit a specific amount before hearing their appeal. Rather, the condition to deposit ten percent of the penalty was only imposed in relation to the stay of the penalty order issued by the CCI. Therefore, in the event that a deposit is not made, the Tribunal has the authority to lift the stay on the CCI’s decision and continue with the appeal, rather than dismissing the appeal itself. In this regard, the NCLAT has the authority to mandate that a portion of the penalty be deposited as security to stay the decision of the CCI. A Fork in the Road Having discussed the jurisprudence of the 10% penalty, it is clear that the imposition of the 10% penalty as a precondition to hearing the appeal cannot be sustained as a mandate and that the lack of an explicit stay on the penalty would go against the settled position of law. However, such an inconsistent application of law will now be shown through the contrasting orders of MMT-GO and Google. The CCI on October 19, 2022, imposed penalties on MMT-GO for violating the provisions of the act, as it was abusing its dominant position. The Commission also found that MMT-GO had contravened the provisions of Section 3(4)(d) read with Section 3(1) as MMT-Go had entered into Vertical anti-competitive agreements with the service providers. On appeal to the NCLAT, the Tribunal directed MMT-GO to deposit 10% of the fee as a precondition to hearing the appeal. However, this was challenged before the Delhi High Court as the NCLAT did not impose any stay on the recovery of the remaining penalty.. The Court noted that the pre-deposit of the 10% could not be merely for the admission of the appeal. The Court felt the need to clarify the stay on the order and consequently, it confirmed that no recovery could be initiated with respect to the 90% remaining penalty amount. The outlier in a similar time period as the case of MMT, is the case of Google. Therein, the CCI had imposed penalties on Google for contravening the provisions of the Act. One of them pertained to the abuse of dominance via mandatory installation of apps (Competition Appeal (AT) No. 1 of 2023) while the other was for imposition of payment methods on the developers (Competition Appeal No.4 of 2023). Across the two orders, NCLAT sought the deposition of 10% fine. However, the NCLAT did not stay the order in either of the cases. In Competition Appeal (AT) No. 01 of 2023, NCLAT stated that there was no requirement for an interim stay with respect to the order of the CCI. It did not elaborate on the penalty nor any consequent stay. The tribunal simply held that there was no need for passing any interim order. The question that the authors are proposing is whether there could be any forceful deposition of the 10% penalty as a precondition to hearing the appeal and without any stay on recovery of the

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The Taxation of Digital Goods and Services in the Global Economy

Leave a Comment / Taxation Law /

[By Arghya Sen] The author is a student of Amity University.    I. Introduction The digital economy has grown rapidly over the past few decades, and as a result, the taxation of digital goods and services has become an increasingly important issue in the global economy. In this article, we will explore the challenges and opportunities associated with taxing digital goods and services and the various ways in which countries and organizations are responding to this issue. The digital economy now represents a significant share of global economic activity, and it is expected to continue growing in the years to come. As more goods and services are delivered digitally, it becomes increasingly difficult for governments to tax them effectively. This has led to a growing concern among policymakers and tax authorities around the world about how to ensure that the tax system remains fair and effective in the face of technological change. The purpose of this article is to provide an overview of the taxation of digital goods and services in the global economy. We will examine the challenges that arise when taxing digital goods and services, the responses of different countries and organizations to these challenges, and the proposed solutions to the issue. Ultimately, this article aims to help readers gain a better understanding of the complex and rapidly evolving landscape of digital taxation and its implications for businesses, governments, and consumers. II. Background Digital goods and services are products and services that are delivered electronically or through the internet. This includes things like e-books, music and video streaming services, online advertising, software, and cloud computing.[i] The growth of the digital economy in India has been significant in recent years. In 2020, the total size of the Indian digital economy was estimated to be around $400 billion and it is projected to grow to $1 trillion by 2026.[ii] The digital economy has had a profound impact on traditional industries in India and has created new opportunities for businesses to reach customers all over the country. However, the growth of the digital economy has also posed challenges for Indian tax authorities. Traditional tax systems were designed for goods and services that are delivered in a physical location, making it difficult to apply these systems to digital goods and services. The borderless nature of the digital economy means that it is often unclear which jurisdiction has the right to tax a particular transaction, and the ease with which digital goods and services can be delivered across borders means that tax revenue can be lost if the tax system is not adapted to this new reality. Currently, the tax system for digital goods and services in India is inconsistent and fragmented. The Goods and Services Tax (GST) was introduced in 2017, which replaced the earlier tax regime and included provisions for digital goods and services. However, there are still many unresolved issues related to the taxation of digital goods and services in India. Recently, India has also introduced a digital services tax (DST) which imposes a 2% tax on the revenues of foreign e-commerce companies that provide digital services in India. However, this tax has faced criticism from some quarters for being discriminatory and potentially harmful to India’s own digital industry[iii]. Overall, the taxation of digital goods and services in India remains a complex and evolving issue, with many challenges still to be addressed. The Indian government is currently working on a number of proposals to modernize the tax system and ensure that it is able to capture revenue from the digital economy. III. The Challenges of Taxing Digital Goods and Services While the digital economy has provided many opportunities for businesses and consumers, it has also posted significant challenges for governments and tax authorities. Some of the major challenges that arise when taxing digital goods and services include: Determining the place of consumption: One of the primary challenges in taxing digital goods and services is determining the jurisdiction in which the transaction occurs. Unlike physical goods and services, which are typically delivered to a specific location, digital goods and services can be consumed anywhere in the world. This creates significant challenges for tax authorities, as they must determine which jurisdiction has the right to tax the transaction. Determining the value of digital goods and services: Another challenge in taxing digital goods and services is determining their value. Many digital goods and services are intangible, which makes it difficult to assign a monetary value to them. Additionally, the value of digital goods and services can be difficult to measure, as it is often based on factors such as usage or user engagement. Implementing and enforcing tax laws: Taxing digital goods and services can be difficult to implement and enforce. Many digital businesses are based in one jurisdiction but operate in many others, which can make it difficult for tax authorities to track and regulate their activities. Additionally, digital goods and services can be easily transferred across borders, which makes it difficult to enforce tax laws and ensure compliance. Tax avoidance and evasion: The borderless nature of the digital economy can also make it easier for businesses and consumers to avoid or evade taxes. Some businesses may choose to locate their operations in jurisdictions with lower tax rates, while others may use complex tax structures to reduce their tax liabilities. This can result in lost tax revenue for governments and an uneven playing field for businesses. Technological complexity: The digital economy is constantly evolving, which can make it difficult for tax authorities to keep up with the latest technologies and business models. This can make it difficult to design and implement effective tax policies that keep pace with technological change. Overall, the challenges of taxing digital goods and services are complex and multifaceted, requiring careful consideration and collaboration between governments, businesses, and other stakeholders. IV. The Global Response The challenges of taxing digital goods and services are not unique to India, and many countries and international organizations have been grappling with this

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Ushering Substantive Democracy into the Corporate Sphere: Expanding Shareholders’ Rights

Leave a Comment / Company Law /

[By Ankit Rao] The author is an Associate at Archer Jurists LLP.   INTRODUCTION Democracy is more than mere procedures that follow the will of the majority. Substantive democracy entails governing in the interest of all stakeholders. The concept of a holistic democracy such as this has become relevant in all spheres of life, public and private both. Thus, the corporate sector should not be exempt from democratic functioning. In a corporate democratic setup, the rule of the majority is endorsed and the will of the majority necessarily prevails. However, in the pursuit of substantive democracy, the need to balance and preserve the right of minority shareholders has been recognised and accordingly materialised by incorporating a proviso in the form of Section 241 of the Companies Act, 2013 (“Act”). As per Section 241(1)(a) of the Act, if affairs of the company are being administered in such a form so as to be deemed prejudicious to the interest of the public/company or detrimental to an individual member or all other members, it entitles the relevant member(s) to move an application before the National Company Law Tribunal (“NCLT”) seeking relief against oppression and mismanagement. In a parallel construct, under Section 241(1)(b) of the Act, relevant member(s) are also authorized to move an application before NCLT seeking relief if a material change is brought about in the company’s administration/control, which does not qualify to be in the preservation of interest of the Company, its members, creditors or any class of shareholders, and might potentially result in the affairs of the company being conducted in such a manner so as to be detrimental to the interest of company/its members. The position of being a member in a Company carries and provides for an inherent right to file an application against oppression and mismanagement and seek relief if the member duly fulfills certain statutory eligibility criteria laid down under Section 244(1) of the Act. A minimum of 100 members or 1/10th of the aggregate number of members of a company, whichever is lower, is a prerequisite to filing an application to the NCLT in case of a company having a share capital, and in case of a company not having a share capital, a minimum of 1/5th of the total number of the members is the required threshold to be entitled to move such an application. This article primarily argues for dispensing with technicalities in the pursuit of justice because rigid adherence would not be in the best interest of the company or the stakeholders. Rather, striking a balance between the procedural and substantive aspects of the law is optimal for creating an equitable environment for all stakeholders, members, and non-members both. To that end, the article will first analyse the mandatory nature of minimum shareholding criteria to move an application of oppression & mismanagement and in doing so it explores whether the right to move an application can be struck down on the basis of technical non-compliances, second it determines as to whether this right is confined to the members or it extends to potential members, third, it elaborates on the findings of Supreme Court in World Wide Agencies Pvt. Ltd. & Ors. V. Margarat T. Desor & Ors. (“World Wide Agencies”) where the Court extended the rights of deceased members to their legal representatives, even though in the register of members, the deceased member’s name exists. MANDATORY NATURE OF THE MINIMUM SHAREHOLDING ELIGIBILITY The pivotal question which arises is how rigid is the eligibility criteria for holding shares to the extent of the 10% threshold as stipulated under Section 244 of the Act. If the said threshold is not met, does it strike at the very root and viability of the application under Section 244? It does not seem inescapable and mandatory in nature, since the NCLT is empowered to waive all the requirements as specified in Section 244(1)(a) & (b) of the Act. The concerned proviso empowering the NCLT to grant waivers on Section 244 did not specify the circumstances wherein such authority can be exercised and it also does not indicate any reasoning which must be taken into account by the NCLT while granting such exemptions. To discern the obligatory nature of the minimum shareholding requirement, the object and reasoning behind prescribing a qualifying percentage of shares to entertain a petition under Section 244 need to be examined. The Supreme Court of India in J.P. Srivastava & Sons Pvt. Ltd. & Ors. V. M/s. Gwalior Sugar Co. Ltd. & Ors. [AIR 2005 SC 83] dwelled upon the said issue and held that the object of prescribing a qualifying percentage of shares to entertain petitions under Section 397 & 398 of Companies Act, 1956 which is pari materia to Section 241 & 244 of the Companies Act, 2013, was to ensure that frivolous litigation is not indulged in by persons who have no legal stake in the company. The Hon’ble Supreme Court stipulated that the guiding principle in such matters is a broad common sense approach and that there exists certain non-compliance which can be condoned or dispensed with. The Supreme Court further observed that if a Court is satisfied that the petitioner moving an application of oppression & mismanagement represents a body of Shareholders holding the requisite percentage, it can assume that involvement of the company in litigation is not lightly done and it should entertain the matter on its merit, and not reject it on a technical requirement. RIGHT TO MOVE AN APPLICATION CONFINED TO MEMBERS? Now, the material question which needs to be delved into is whether this right, specifically reserved for the members, can be enlarged and extended to include anyone who may be entitled to become a member or even just a potential member. The definition of a member as provided under Section 2(55)(a) & (b) of the Act needs to be borne in mind before probing this material question. As per Section 2(55)(a) of the Act, ‘members’ encompasses, within its domain, subscribers of a memorandum

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Settling the Dust of avoidance application: In light of Venus Recruiter v. Tata Steel

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[By Rituraj Singh Parmar & Devyani Mishra] The authors are students of National Law Institute University, Bhopal.   Introduction: Avoidance application is the action against preferential or fraudulent transactions made by company which has gone into insolvency. The IBC 2016 in order to reverse such transactions has developed a mechanism which is stipulated under chapter 3 of the code (Section 43-51). The avoidance application can be adjudicated at three possible stages viz., during CIRP, liquidation stage and post resolution. However, the single bench of Delhi high court ruled that Avoidance application ends with the conclusion of CIRP and therefore can’t be adjudicated once CIRP is completed. Overruling this, in the case of Tata steel v Venus recruiter (Venus Recruiters) the division bench of Delhi High court rectified the mistake made by single judge bench and held that avoidance application can be pursued post CIRP. This particular judgment by Delhi high court is landmark because it is not restricted to stage of adjudication of avoidance application but also deals with various other important fragments relating to it. In light of this ruling of Delhi High Court, the article attempts to analyse the implications of the judgement. First Section of this post will first delve into the background of the case; thereafter author will explore and discuss the different aspects of the judgement. The article will conclude by analysing the case within the broader context of IBC vis-à-vis avoidance application and the possible reasons of lower rate of adjudication of such applications. Brief background of the case: In the instant case, RP moved an avoidance application under Section 43 IBC after the submission of resolution plan to NCLT. Upon approval of Resolution Plan, Tata Steels BSL Ltd. subsumed the control of Bhushan Steel Ltd. NCLT upon the observation that avoidance application was submitted before the approval of Resolution Plan, proceeded to issue notice to the Respondent (Venus Recruiter pvt ltd). Aggrieved by the same, respondent moved petition before the Ld. Single Judge thereby, challenging the legality of avoidance application. In light of this, court upheld that avoidance application cannot be pursued post CIRP and that; RP becomes functus officio to the further proceedings. Expanding the Ambit of Section 60(5) of IBC The Single Judge bench of Delhi High Court narrowed down the jurisdiction of NCLT under Section 60(5) IBC while holding that the phrase “arising out of or in relation to the insolvency resolution” only includes matter pertaining to CIRP and NCLT becomes functus officio once CIRP is concluded.  Due to the very same reason, the single bench allowed the appellant to approach the high court for want of any other efficacious alternative remedy under IBC. Overruling this, the present court held that phrase “in relation to insolvency resolution” connotes a wider import. The court has placed reliance on report of the Bankruptcy Law Reforms Committee (BLRC), Titaghur Paper Mills v State of Odisha, Swiss Ribbons v Union of India, Gujarat Urja Vikas Nigam  v Amit Gupta to conclude that dispute arising out of any local statute has to be remedied by exhausting the remedy present under that statute first. Court also referred to Essar Steelv Satish Kumar Gupta (Essar Steel)wherein the apex court held that no other court other than NCLT has jurisdiction to deal with proceedings mentioned under 60(5).  Building upon the rationale of these authorities, the division bench has categorically held that “Ld. Single Judge erred in holding the writ petition was maintainable. An appeal ought to have been preferred by Respondent No. 1 before the NCLAT underSection 61 of the IBC and the NCLAT itself was the appropriate forum to decide the controversy posed before the Ld. Single Judge” Thus, the present court while widening the ambit of NCLT has fairly settled the law relating to adjudication of Avoidance application that any petition or application arising out of the adjudication application of a corporate person shall be dealt by NCLT first and then as a second appeal to the NCLAT. Effects of Regulation 35A and 38(2)(d) of CIRP Regulations, 2016 post the conclusion of CIRP: The Ld. Single Judge via its impugned judgement held that avoidance applications cannot continue after the conclusion of CIRP. In the present matter, the avoidance application was held to be infructuous because the same wasn’t filed within the timelines prescribed by Regulation 35A of the CIRP Regulations, 2016. The division bench overturned the impugned judgement and upheld that avoidance application can be pursued upon the conclusion of CIRP process. The bench ruledthat “The timelines prescribed under regulation 35A are merely directory and not mandatory in nature”. It further cited the case of Essar Steel,wherein, Hon’ble Supreme Court upheld that CIRP process in itself is not mandatorily bound by the prescribed timelines.Section 25(2)(j) under IBC provides that RP needs to file avoidance application before the conclusion of CIRP, the said obligation, in the present matter, had been discharged. The respondent (Venus Recruiter pvt ltd) argued that on account of Regulation 38(2)(d), earlier, avoidance application wouldn’t survive after the approval of Resolution Plan. However, the bench upheld that the said regulation has no bearing on the instant matter. Regulation 38(2)(d) mandates Resolution Plan to provide for the ways to deal with avoidance applications and the proviso further sets cut-off date for the implementation of the regulation i.e., 14 June 2022. The Resolution Plans prior to cut-off date is not required to clarify the manner in which these applications are to be dealt with. Therefore, the NCLT does have jurisdiction over the avoidance applications submitted by Resolution Professionals. Position of RP vis-à-vis CIRP on one hand and avoidance application on the other: The arguments put forth by respondent that Resolution Professional (RP) becomes functus officio upon the successful conclusion of CIRP and accordingly, cannot pursue avoidance application, holds no ground because the objective of IBC provides for intelligible demarcation between the proceedings of CIRP and avoidance application. Section 26 of IBC states that the application to avoid certain transactions i.e., preferential or fraudulent by the

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A Critique of the Pre-Packaged Insolvency: A Flawed Framework?

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[By Unnati Sinha] The author is a student of Narsee Monjee Institute of Management Studies.   Introduction The Pre-Packaged Insolvency Resolution Process (“PPIRP”) was added to Chapter III of the Insolvency and Bankruptcy Code, 2016 (“Code”) in 2021. It was introduced in view of the worldwide economic downturn brought on by the lockdown prompted by the epidemic. Corporate insolvencies are on the increase because of the recession. In the latter half of the previous year, 283 companies in India were accepted into the Corporate Insolvency Resolution Process (“CIRP”). The purpose of using PPIRP is to align the needs of creditors and debtors while preserving the operations of defaulters and it becomes very crucial when the debtor is an MSME (Medium Small and Micro Enterprise). These businesses are mostly reliant on their promoters for their day-to-day management and financial needs and hence, it would be impossible to revive the company if management were transferred to a resolution professional in accordance with Section 35 of the Code. This article’s assessment of the PPIRP framework highlights the Debtor-in-Possession (“DIP”) approach’s problematic provisions, the function of operational creditors, and an examination of the lack of a tranquil time are highlighted. In order to tackle the aforementioned issues, the author also offers an analysis of the effects of such shortcomings and further investigates the potential for rebuilding the framework. PPIRP: An Overview The report of the subcommittee led by M.S. Sahoo (“Sub-committee”) served as the foundation for the PPIRP framework. A corporate debtor designated as an MSME that is also qualified to propose a resolution plan under Section 29A may apply for PPIRP in accordance with the requirements of Section 54A of the amended Code. This happens if a statement to that effect is issued by a majority of the partners and is accepted by creditors who account for 66% of the amount owed. Furthermore, according to Section 54D, the PPIRP must be finished within 120 days. This is different from the current framework, which advocates a 270-day window for the procedure’ completion, with the option to extend it by 90 days. The change in the function of the resolution professionals is a substantial modification. The new structure vests management in the existing board of directors, as contrast to CIRP, where the professional oversees the business as a subsisting concern. The separation of the resolution professional’s functions in India signifies the end of the creditors-in-control strategy. With the current strategy, the promoter lost actual control of the firm to the creditors. A shift in this strategy would mean that the debtor still had management control over the creditor, who would then have less power over them. Additionally, it denotes a decrease in the amount of responsibility placed on the resolution specialist. However, the resolution specialist still has a lot of power, particularly over the completion of the PPIRP. Inconsistencies with the DIP framework There is a substantial difference with the advent of the DIP strategy, which gives the board of directors of the defaulting firm the power to run the affairs. The model’s introduction has caused what seems to be inconsistencies in the framework. The relevant provisions show that the creditors have authority over the settlement process, even though it might appear that the Code has accepted the DIP model. The reason behind this is because under Section 54J(xii) the creditor has the authority to change the company’s management from the board to the resolution professional. When the Committee of Creditors (“CoC”) is certain that the company’s affairs have been handled fraudulently, they may exercise the provision by submitting an application. . The addition of such a clause was recommended by the Sub-committee to stop the promoters from siphoning off company assets, but it runs the risk of delaying the process if the promoters disagree with the creditors’ assessment.By submitting pointless petitions that would take up a lot of time during the resolution process, creditors might obstruct the insolvency process. Furthermore, by initiating the resolution after receiving 66% of the voting share, the CoC has also exercised its power to start the CIRP against the Debtor. By doing this, the PPIRP would be terminated beforehand. It has been codified in the Code’s Section 54-O. This clause emphasizes the incorrect terminology used to describe the DIP model, which is what the amendment aims to do. As a result, the management powers of the corporation and the settlement procedure are biased in favor of the creditors. Preclusion of Operational creditors The PPIRP does not apply to operational creditors. The Code, among other things, traditionally denied operational creditors the opportunity to participate in the CoC but gave them the ability to start a CIRP against the debtor. The modification doesn’t apply to operational creditors’ rights since only the debtor may start a PPIRP. The CoC established thus is like that established under CIRP and forbids involvement of operational creditors. The Apex Court’s justification for the exclusion in the Swiss Ribbon’s case relies on the faulty assumption that financial creditors have the knowledge to assess the sustainability of the resolution plan, while operational creditors are only interested in recovering the value of products and services. The justification is strong because it is based on the presumption that the creditors would support the plan based on its feasibility rather than on their desire to maximize their asset recovery. The policies in other jurisdictions, such as the United States, where a committee of unsecured creditors is constituted to defend the interests of such creditors who may not be given enough attention. Similarly, any corporation facing resolution in the United Kingdom must have the consent of creditors who account for 75% of the total value of each class of creditors. Since MSMEs themselves are regarded as operational creditors, the deprivation is also detrimental to their interests. Given that MSMEs would not be able to vote or express an opinion, any future PPIRP structure for larger corporations would undoubtedly be detrimental to MSMEs. Truancy of Calm Period The terms of the current CIPR procedure involve a

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