Author name: CBCL

Skill Loto Solutions v. Union of India: Ingredients of a Perfectly Legislative Cake

Leave a Comment / Taxation Law /

[By Tanya Rathod] The author is a student at the National Law University, Odisha. Layers after layers of retrospection, judicial pronouncements, and amendments are the key to make any legislative policy a successful one. GST (Goods and Service Tax) regime is always on a path to unravel, widening the scope of jurisprudential interpretation. One such attempt was made by the Hon’ble Supreme Court of India recently, in the case of Skill Lotto Solutions v. Union of India[1]. The three-judge bench held that the levy of GST on Lottery, betting, and gambling is not in violation of any fundamental right. In doing so the court also said that such activities are ‘res extra commercium’; rendering such levy of GST on lottery, betting, and gambling lawful. The author in this article analyzes the skill lotto judgment to comprehend the sovereignty of the legislature in making the laws pertaining to taxation when the goods in question are not objects of private rights. Background The Apex Court was approached by Skill Lotto Solutions Pvt. Ltd. who was an authorized agent of sale and distribution of lottery in Punjab. The writ petition was filed impugning the definition of goods under §2(52) of Central Goods and Services Tax Act, 2017 (CGST) and notifications to the extent they levy  tax on lotteries. The writ challenged the practice of levying GST on lottery, betting and gambling on the ground that it is not only discriminatory but also violative of the Articles 14, 19(1)(g), 301, and 304 of the Constitution of India. Prior to the introduction of GST, through the One hundred and first Amendment in the Indian constitution, Article 246A was inserted which gave the Central Government or respective states the power to levy GST, in furtherance of which central and state legislations transpired. §2(52) of the Central Goods and Services Tax Act, 2017  defines ‘goods’ as, every kind of movable property other than money and securities but includes actionable claim.  However, it must be noted that the Entry III Schedule 6 of the 2017 CGST Act exempts levy of tax on all actionable claims meanwhile creating an exception for lottery, betting, and gambling. This exception with respect to lottery, betting, and gambling was challenged to be inconsistent with the jurisprudential rule of intelligible differentia under Article 14 of the Indian Constitution. The petitioner primarily contended that the definition of ‘Goods’ under §2(52) of the (CGST) Act is not inclusive of the lottery. Adjudicating upon the above contention as laid down in the petition, the Apex Court ruled the following. A. Conflict of Definition: The Crust of the Cake The petitioner challenged that the definition of ‘goods’ in the CGST Act 2017 stands in conflict with the definition given in the Constitution of India as under Article 366 (12) to include all materials, commodities and articles. The article thus fails to contain the term actionable claim rendering the levy of GST on actionable claims such as lottery, betting, and gambling unconstitutional. Reaching for the crumb of the cake, the court held that the power of the legislature to make laws under article 246A of the Constitution is plenary and the definition of goods so made under Section 2(52) of the CGST Act 2017 is ‘inclusive’ rather than restrictive in nature, making way for the legality of inclusion of lottery in the definition of actionable claims. The court relied on the case of Sri Krishna Das v. Town Area Committee, Chirgaon, which stated that- the legislature or the taxing authority determines the question of need, the policies and selects the goods or services for taxation and Courts do not have the power to review those decisions B. Reasonable Classification: The Frosting The petitioner called into question the discriminatory proviso under Item no. 6, Schedule III which creates an exception for the activities or transactions which are treated neither as the supply of goods nor supply of services to include all actionable claims; and on the contrary leaving out lottery, betting and gambling as taxable. It was contended that there was no intelligible differentia in including actionable claims like lottery, betting, and gambling for tax purposes when all other actionable claims are free from levy of GST. The Supreme Court in this regard stated that firstly, the activities of the lottery, betting, and gambling are res extra commercium i.e. things outside of commercial intercourse or the things which are not available for ownership, trade, or commerce. In the State of Bombay Vs. R.M.D. Chamarbaugwala and Anr the court said that; “activities of trade, commerce or intercourse doesn’t include activities which inherently promote the susceptibility of man towards earning money by chance and steer him towards losing hard-earned income which further gives rise to a state of indebtedness to be made the subject-matter of a fundamental right guaranteed by Article 19(1)(g).” Relying on the said judgment the bench in Skill Lotto case held that there is sufficient nexus for the legislature to levy GST on those who carry the activities which are inherently res extra commercium and such regulations with regard to levy of tax on gambling activities are primed keeping in mind the welfare of society as a whole. The idea of the makers of the constitution was in no way to promote gambling activities and in doing so, the levy of tax on such activities is clearly not in contravention to the doctrine of equality as laid down in Article 14 of the Constitution. In the case of State of West Bengal v. Anwar Ali Sarkar case, the court held that the differentia or classification must have a rational nexus with the object sought to be achieved by the statute in question. The reasonable classification of goods on the basis of what falls within the category of trade and commerce; and activities that do not trade and rather pernicious is justifiable. Consequently, it cannot be said that the exemption made for actionable claims from the tax net apart from three actionable claims; lottery, betting, and gambling is discriminatory

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Impact of COVID-19 on International Trade in India

Leave a Comment / Trade Law /

[By Vanshika Chansoria and Raj Aryan] Vanshika is a student at the National Law Institute University, Bhopal, and Raj is a student at the Lloyd Law College, Greater Noida. Introduction International trade is the movement of commodities, goods, services, and intellectual property across the national borders of one’s own country. Trade has been taking place across borders since the time when there was no form of formal body regulating such trade. During the earlier 16th and 17th century the first kind of structured trade started in Europe which came to be known as “mercantilism”. Mercantilism is based on the idea to maximize the exports of the country by imposing restrictions on imports. The export of goods and services accounted for 19.74% and import accounted for 23.64 % of Gross Domestic Product (GDP) of India during the pre-COVID- 19 era. The advent of COVID- 19 brought disruption in the global import-export market and curtailed free trade between countries. According to the World Trade Statistical Review 2019, India is one of the developing economies in Asia whose role in international trade has been increasing in the global value chain. But the impact of COVID-19 on trade in India is estimated to be 348 million dollars and India falls under the category of 15 most-affected economies of the world as per the United Nations Report. Since International trade has curtailed, its great time to encourage domestic products and producers and boost domestic production, by implementing the theory of protectionism. Protectionism  The theory of Protectionism aims to increase exports and decrease imports by imposing various kinds of trade barriers so that the domestic industries can get a fair chance to fight with international products and services. India was a protectionist country until the 1990s. But in the late 20th century India opened its market for international trade as a part of the Liberalisation, Privatisation, and Globalisation (LPG) model. COVID-19 has spread in all major countries of the world resulting in the reduction of trade all across the world. This knowingly or unknowingly has led the countries to use their own products due to reduction of trade. The point to be considered here is if developing countries like India are ready to face such challenges of Covid-19 and use domestic products. The theory of protectionism can be enforced in various ways: Impose heavy taxes on imports from other countries. A restriction on commodities to be imported. Provide subsidies to domestic producers. Make rules and regulation which can make it difficult for foreign producers to obtain license. Decrease the cost of domestic products in foreign markets by exchanging rate controls. Come up with Anti-dumping policies. The current decision of the Indian Government to boycott Chinese goods and stopping trade practices with China encourage them to adopt the theory of protectionism. Adding to the same, further, the Indian Government has banned 59 Chinese mobile applications and later banned 118 Chinese Apps, including PUB-G, on the surge of National Security, Sovereignty, and Integrity of India. As a result of this step taken by the government, various substitute apps came up front, and people were encouraged to use the same along with domestic products with the aim of becoming self-reliant, i.e. Atma Nirbhar. In the gaming sector, Bollywood actor Akshay Kumar has announced the launch of the FAU-G game, keeping in view the vision of Atma Nirbhar, in which 20% of the generated revenue will be donated to BharatKeVeer Trust. Atmanirbhar Bharat In order to overcome the problem of lack of local production, Prime Minister, Shri Narendra Modi in his speech on 11 May, 2020 announced the idea of Atma Nirbhar Bharat.  The vision envisages the production of goods and raises India’s capacity. It is not just to ‘Make in India’ but for the world. There are 5 essential features of the Atma Nirbhar Policy which include – economy, structure, technology-driven system, vibrant demography, and demand. Prime Minister’s vision of Atmanirbhar Bharat is to make India a self-sufficient country. This does not direct India to be in isolation or anti-global. India has a great opportunity to emerge as a manufacturing hub and has the capacity of producing ready and consumable goods on a large scale. India provides a large market size for the whole world. The objective behind this vision is to make India competitive with the rest of the world. Even during the peak of COVID – 19, India has attracted $38 billion of foreign direct investment. The vision expands to not produce goods only for the domestic market only but for the global market as well. The New Education Policy (NEP) which was launched this year will enlarge the scope of the education sector in facilitating greater exposure for Indian students and will establish India as a global education hub. It will make the youth capable enough to make India the global leader in science, technology, and other sectors; shaping the vision of Atmanirbhar Bharat. The theory, vision, and steps taken to achieve the Atmanirbhar Bharat are promoting the theory of Protectionism. CHANGES AND RELAXATIONS MADE BY THE GOVERNMENT OF INDIA AFTER THE ADVENT OF COVID – 19: A recent report which has been released by the World Trade Organization (WTO) said that international trade in 2020 will drop sharply with a rate of 32%. The government of India in order to mitigate the loss accrued by the economy affecting trade has come with new programs in order to facilitate international trade. Firstly, the government has launched an Incentive program of Rs 10,000 crore for stimulating the local Active Pharmaceutical Ingredients (API) production. In the near future, the imports and exports of API could also be considered for ramping up manufacturing for domestic use and exports. Secondly, in order to recover the economic impact on the economy of the country and boost the MSME sector, the government has come up with some new economic packages to transfer income to the poorer segments in the economy along with complementary liquidity enhancing measures of the monetary authority. Thirdly,

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Digital Taxation: A Clarion Call

Leave a Comment / Taxation Law /

[By Neha Mehta and Mahek Shah] The authors are both students at the NMIMS Kirit P. Mehta School of Law. As a response to the outbreak of COVID-19, businesses across the globe have adopted digital models. ‘Digital India’, a government initiative, got a big boost with the demonetisation move four years ago. A 2019 report by the Ministry of Electronics and Information Technology (MeitY) in association with McKinsey & Co. predicted India’s digital economic value to surpass US$ 1 trillion by 2025. With the changing business models, value – creation is becoming less dependent on the physical presence of people or property. However, the current Indian taxation regime is based on conventional notions of physical existence and these concepts are now being challenged. The digitalisation of the economy is raising questions regarding the effectiveness of existing international taxation rules. The intergovernmental economic organisation, the OECD has expressed deep economic and societal impacts with rapid digitalisation and the absence of a global consensus on aspects of international taxation regulations which make a fertile ground for tax disputes. The business models are undergoing a complete technological revolution at full throttle while facing challenges with the effectiveness of outmoded global tax systems. Keeping these transformations in mind, the article canvasses the conflict between the existing  Indian taxation regime and the Equalisation Levy – a direct tax that is withheld by the service recipient at the time of payment to a non-resident service provider. Flashback: OECD’s Action Plan and India’s Equalisation Levy In 2015, the OECD and G20 nations concertedly aimed to come up with a global solution to specifically deal with tax challenges of the digital economy by the end of 2020. It was in the backdrop of the Base Erosion and Profit Shifting project (hereinafter referred to as the “BEPS Project”) that OECD released the Action Plan 1. Despite failing to provide concrete solutions, it has guided countries to structure their tax laws as per the changing digital landscape. Limitations of the existing Permanent Establishment rules (hereinafter referred to as the “PE rules”) and the ability of MNC’s to avoid taxes through profit shifting strategies create concerns for countries like India that follow source-based taxation. India is an active member of the OECD and has staunchly expressed the need to eliminate tax uncertainty and stimulate global trade. Drawing an inference from the 2015 Action Plan 1, India was amongst the first countries to implement the ‘Equalisation Levy Rules’ in 2016 (hereinafter referred to as “EL 1.0”).   Primarily, the imposition of this direct tax vide the Budget 2016 was limited to only non-resident companies engaged in providing digital advertising services and digital space. However,  the Finance Act, 2020 broadened the scope of Equalisation Levy 1.0 to contain all e-commerce supply of services known as Equalisation Levy 2.0 (hereinafter referred to as “EL 2.0”) Equalisation Levy 2.0: What does it seek? Unlike EL 1.0 that sought to uprightly tax online digital advertisement services at a rate of 6%, EL 2.0 imposes a 2% tax on e-commerce operators for supplying or providing services over INR 2 Crores: i. Indian Resident; ii. Persons availing online services using an Indian IP address; iii. Non – Residents in the following cases: Only those sales of advertisement services that target a resident of India or a user having IP address located in India. Sale of data that is collected from a resident of India or a user having IP address located in India. Challenging the Status Quo The introduction of EL 2.0 certainly is a step in the right direction. However, the expansion in its scope poses numerous challenges. a. Lack of Clarity on Definitions EL 2.0 fails to explain several terms such as “operate,” “digital,” “electronic facility,” “platform,” “online sale,” “goods” and “online provision of services” that are mentioned in the statute. This creates room for wide interpretation and could be disputable. For instance, situations where sales could be concluded online through emails or messages but the deliveries are undertaken in an offline mode. The failure to define terms like “online sale” creates confusion in determining whether the levy would have applicability to a combination of online and offline sales. Therefore, it is unclear if the levy is applicable on every transaction with a component of digital dealing. b. Impediments with Extra-Territorial Application As per  Section 92F(iii)(a) read along with Section 92F(iii) of the Income Tax Act, 1961 and the Double Taxation Avoidance Agreements (hereinafter referred to as “DTAAs”), non-resident entities need to generate profits that can be attributable to a fixed place of business or demonstrate sufficient business connection in India for their income to be assessed in India. However, owing to the digital economy, it has become difficult to show a PE of business models that relies on intangibles such as cloud- computing, algorithms, etc. They have enabled the capability to conduct business through foreign jurisdictions. Therefore,  concepts like Place of Effective Management (POEM) that are based on corporeal and tangible aspects have now proved to be redundant. In its Action Plan 1 Report, the OECD identified three plausible options amongst which was to establish nexus through Significant Economic Presence (hereinafter referred to as “SEP”). Despite deferring the applicability of SEP in India, it may prove ineffective due to the treaty override. c. Fiscal Shortfall The committee on Taxation of E-Commerce headed by Chairman Akhilesh Ranjan, Joint Secretary (FT & TR-I), CBDT, Department of Revenue, Ministry of Finance released a report in 2016. The report highlighted fiscal constraints on governments due to violation of tax neutrality. Fiscal deficits are often reimbursed through local residents who pay increased taxes on income earned, goods and services, etc. This adversely impacts businesses and disrupts the existing market equilibrium. d. Characterisation of Income Firstly, there is a possibility that transactions may be assessed as Royalty/ Fees for Technical Services (FTS) / Fees for Included Services (FIS) by the Assessing Officer in a tax audit, much after the payment of the Levy. As the Levy falls outside the ambit of

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Financial Institutions as Promoters: The SARFAESI-RERA Conundrum

Leave a Comment / Banking Law, Capital Markets and Securities Law /

[By Aman Saraf] The author is a student at the Government Law College, Mumbai. Introduction Through a recent decision in Deepak Chowdhary v.PNB Housing Finance Ltd. & Ors, the Haryana Real Estate Regulation Authority (“HARERA”) delivered a significant order vis-à-vis the status of lenders (especially banks and Non-Banking Financial Companies (“NBFC”)). It affects those lenders that take over a development project in the event that the original developer is unable to repay his debts to a financial institution. Such financial institutions will now assume the status of a promoter under the Real Estate (Regulation and Development) Act, 2016 (“RERA”), thus making them liable to protect the rights of allottees. Further, the lenders are not permitted to auction and sell the project or land, as the case may be, without first obtaining the consent of two-thirds of the allottees as well as a Real Estate Regulatory Authority. This Order will have far-reaching consequences for all the financial institutions that are a source of “bailout credit” to real estate development agencies. In the author’s opinion, the decision of the HARERA is flawed with a glaring contradiction – the scope of lenders and promoters are fundamentally different and any effort to create an overlap renders the Order vulnerable to future challenges. Consequently, the direction passed by the authority mandating certain approvals from the allottees and HARERA before selling the land/project creates an inherent conflict between the RERA and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”). According to the author, the erroneous reading of RERA and the obstruction of the financial institutions’ ‘right to enforce securities’ under SARFAESI call for a review of this decision. Lenders and Promoters: The Conflict HARERA, through its decision, has deemed lenders as promoters via Section 2(zk)(i) of RERA, by which a promoter is defined as “a person who constructs or causes to be constructed an independent building or a building consisting of apartments, or converts an existing building or a part thereof into apartments, for the purpose of selling all or some of the apartments to other persons and includes his assignees”. HARERA has placed reliance on the term ‘assignees’, stating that lenders that takeover projects from the developers in essence transform to assignees of the developers as they ‘cause the construction’ of the project. Firstly, a bank or a non-banking financial institution that advances a loan cannot be said to have caused the construction of the project in question. The purpose behind extending a loan to a developer in distress is to lend and generate interest on the same, not to construct the land and project – construction still remains the onus of the developer. In Bikram Chatterji v. Union of India, the Supreme Court held that if the real estate business has to survive in India, the builders must be answerable and liable to the homebuyers, authorities and the bankers. Further, in Ferani Hotels Private Limited v. the State Information Commissioner, Greater Mumbai, the Apex Court held that a major public element of RERA is of “making builders accountable to one and all.” This clearly emphasizes the fact that promoters and lenders can under no circumstance be considered as overlapping. Secondly, the definition of ‘assignment’ is the transfer of either the whole or part of any property, real or in action or in rights. This by no means translates to the inclusion of banks as assignees of the promoter – a loan cannot automatically impose the obligations of a borrower on a lender. Should this logic be accepted, banks will have to step into the shoes of each and every individual that borrows monies from them. HARERA also used the argument that the developer in effect assigns his rights to the lender by way of mortgage loans, thus bringing the transaction under the purview of an ‘assignment’. This line of reasoning is based on an erroneous reading of the law, as Section 11(4)(g) of RERA expressly states that the payment of mortgage loans is an obligation of the promoter.  This clearly portrays the fact that the title of promoter does not transfer to a lender. Thirdly, it must not be forgotten that Section 2(d) of the National Housing Bank Act, 1987 reaffirms the true purpose of house financing companies that turn lenders in such situations – entering into transactions of providing housing finances. A cumulative reading of this Act as well as the regulations of the Reserve Bank of India shows that lenders are categorically separated from promoters. Lastly, it must be noted that had the legislature intended to include lenders within the scope of promoters, there would have been no separate provisions mandating the disclosure of mortgages, liabilities, interests etc. by the promoters, like section 4(2)(l)(B) of RERA . Section 4(2)(b) also calls for a detail of all past real estate projects carried out – a clear indication that lenders such as banks were not envisaged to come within the scope of a promoter. Furthermore, Section 15 of RERA expressly deals with the transfer of a promoter’s rights to a third party. This section clearly states that such a transfer is based on the caveat that the intending promoter does not take any extra time to complete the real estate project. A simple interpretation of this indicates that the legislature could not have deemed banks and NBFCs as suitable parties to complete the project. As held in Nathi Devi v. Radha Devi Gupta, the main interpretative purpose of Courts is to ascertain the true intent of the legislature. Therefore, the words ‘causes to be constructed’ and ‘assignee’ cannot be read in isolation but must be realigned with the remaining provisions of RERA to determine the intention of the Act. SARFAESI Rights Section 9(d) of SARFAESI provides that the relevant company can take the requisite measures for the enforcement of their security interests. Should banks and NBFCs be considered as lenders under RERA, it would constitute a direct overlap and conflict between the two acts. MahaRERA, via

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Arbitrating WTO Disputes: A Temporary Solution to the Appellate Body Quagmire

Leave a Comment / Trade Law /

[By Ashuthosh V] The author is a student at the Institute of Law, Nirma University. Introduction The Dispute Settlement Body (‘DSB’) is a forum that resolves disputes between the World Trade Organization (‘WTO’) members. Such disputes must be a subject matter under any WTO agreement arising out of the Final Act of the Uruguay Round. The Dispute Settlement Understanding (‘DSU’), a WTO agreement, lays down a specific set of rules and procedures that govern the functioning of the current Dispute Settlement System (‘DSS’). It ensures that obligations are enforced against the signatories when they fail to comply with such obligations. It is considered one of the most successful international dispute resolution systems. The Appellate Body (‘AB’) is a part of the DSS that reviews an appeal against the proceedings conducted by a panel established by the DSB. The AB reviews only legal questions surrounding trade conflicts between the Member States. The AB consists of seven members and requires a minimum quorum of three members to hear an appeal. On December 11, 2019, the terms of two of the last three members expired and the United States (US) has been blocking the appointment of new members to the AB. With only one judge left, the AB cannot adjudicate upon any appeal pending in the WTO. This has led the WTO-DSS to a grinding halt and created an AB crisis within the WTO framework. The author in this article shall analyze arbitration under Article 25 of DSU as a potential alternative to AB proceedings till the crisis remains. The author shall also explain how the ad-hoc arbitration mechanism under the WTO framework is not a permanent option to the WTO Members. The Appellate Body Crisis The US has criticized the AB for undermining US sovereignty by engaging in judicial activism. Further, the AB was claimed to have other issues such as long delays, reversing factual findings of the panel report, and creating new obligations in an existing dispute that has not been approved by the Members. The AB ignores existing rules and adds new rules which undermine WTO as a forum for negotiation. It is perceived by other WTO members such as India, Canada, Australia, China, and European Union, that the AB passes decisions that amount to judicial overreach, thus, rendering trade remedies less effective at addressing several issues such as unfair dumping, the imposition of tariffs, unfair subsidies, and restriction of trade. The current status of the AB is that there is one judge left and the US is using its veto power to block the appointment or reappointment of new members to the AB. Until such vacancies are filled, ongoing trade disputes and future disputes would be left pending, as a result of which, countries would have to rely on an alternative mechanism outside the WTO framework to adjudicate the matter between them and seek a remedy. According to the DSU rules, the DSB cannot adopt a panel report before its appeal is resolved. Since the AB is not able to hear any appeal due to non-fulfillment of the quorum, any WTO member could use this loophole to block the enforcement of a panel report by appealing against such findings under DSU rules. It is imperative to understand that the AB is not able to hear any appeal but the WTO rules do not restrict any member from filing such an appeal before the AB. Therefore, the ability of WTO to enforce binding decisions on parties has been temporarily paralyzed subject to the appointment of members. Arbitration Mechanism under Article 25 of DSU: An Analysis Arbitrating trade disputes within the WTO framework was widely considered by several member states. Article 25 of DSU provides for an option to settle the dispute through arbitration. This clause could be invoked even at the stage of appeal against a panel report. The effect under Article 25 is that the award passed by the arbitrator is binding and enforceable against the disputed parties similar to the Panel and AB decisions that are adopted by DSB and further implemented. The parties mutually agree to the process, and there is no influence or involvement of any outside party unless permitted by the disputing parties. The US will be prevented from blocking the functioning of the Arbitration panel because it is not allowed to interfere with its proceedings involving other Members. The Arbitration panel would apply both substantial and procedural rules of WTO agreements to resolve a dispute, thereby enforcing obligations under multilateral agreements between the Member States. To ensure that Article 25 is effective to be considered as an alternative to the AB, member states must mutually agree on drafting a plurilateral general arbitration agreement that shall lay down the procedures of arbitration, the scope of subject-matter of arbitration, and ensure that the rulings are binding on the parties. On April 2, 2020, the European Union along with 15 other WTO Members entered into a Multi-Party Interim Arbitration Agreement (MPIA). The objective of the agreement was to strengthen arbitration under Article 25 to replace the AB for WTO members till it is inoperative. The agreement proposed reviewing panel decisions through arbitration with the mutual consent of the parties under Article 25.2 of DSU. It also provided for certain agreed procedures to facilitate arbitration under Article 25. The objective of the agreement is to enable Arbitration as an alternative within the WTO framework to resolve existing trade disputes until the AB is inoperative. Therefore, once the minimum quorum of the AB is established, i.e, three members are present, the AB would be able to hear appeals against the panel findings. In 2001, the US and European Union in the United States- Section 110(5) of the US Copyright Act agreed to apply Article 25 to use arbitration to determine the level of benefits impaired to the European Union. Arbitration was used as the parties could not agree on the level of benefits within a reasonable period to implement the panel report. Thus, Article 25 can be used

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Unwrapping the Conundrum: The Vodafone-India Tax Saga

Leave a Comment / Arbitration Law, Contemporary Issues, Taxation Law /

[By Urja Dhapre and Chetan Saxena] The authors are students at the Institute of Law Nirma University. Introduction In an attempt to draw things to a close, the Permanent Court of Arbitration [PCA] has passed an award against India’s Income Tax Department, upholding Vodafone International Holding BV’s [VIH] claims to not pay the tax liability for a whopping $2.2 billion. The award holds the Indian Tax Department to be in violation of Article 4(1) of the Bilateral Investment Treaty [BIT] between India and the Netherland which elucidates the principle of fair and equitable treatment to the investors. VIH’s saga of a tax dispute in India dates back to the year 2007 wherein a tax liability was imposed on VIH by India’s Tax Department alleging VIH to have concluded its acquisition with Caymanian-based CGP Investments from Hutchison Telecommunications International Ltd [HTIL] based in Hong Kong as a colorable device to ultimately get a controlling interest in Hutchison Essar Ltd [HEL], an Indian company whose control was held by CGP Investments. While the Bombay High Court [BHC] ruled in favor of the tax department, the Supreme Court [SC] overturned the BHC’s judgment by clarifying that the transaction in contention was not related to the transfer of an asset but rather the transfer of a share. VIH’s resort to International arbitration rests on the grounds of a retrospective amendment in the Income Tax Act, 1961 [IT Act]by the government in 2012, such that it overturned the Supreme Court of India’s [SC] judgment, making VIH labile for tax dues. Offshore Indirect Transfers and their Taxation Aspects Offshore indirect transfers [‘OITs’] like the one of VIH-Hutch, are one such category of transactions that are viewed to have built to abuse the tax regulations of a country, such that the ownership and effective control of an asset is transferred without replacing its legal owner. The underlying asset does not change hands, so there is formally no capital gain directly realized. However, gains are made out of such underlying assets even though the primary ownership remains the same. The chargeability of such gains is thus contested due to its uncertainty in interpreting OITs and their taxation with no standard regulations set across the globe. In June 2020, the Platform for Collaboration on Tax [PCT] came up with a report concluding that location countries shall have the right tax OIT’s. However, an important deliberation was of the inclusion of specific provisions taxing the OIT’s. While the report transcripts the view that OITs shall be taxable where the underlying asset lies, it refrains from the applicability of such taxes retrospectively. The Retrospective Amendment and its Validity The amendment brought forward by the Government of India overturning the decision of the SC disrupts the entire affixed jurisprudence of tax statutes in India. The aspect of retrospectively amending tax clauses for the sole purposes of overturning the judgment has been questioned and its condemnation has been widely unveiled through a catena of judgments. In the case CIT v. NGC Networks (India) Pvt. Ltd., BHC applied the principle of lex non cogit ad impossibilia (the law does not compel a man to do what he cannot possibly perform) with respect to the contested retrospective amendment of Explanation 6 to Section 9(1)(vi) of the IT Act. Moreover, the Indian Tax Authority [ITAT] in the case of Cairn India Ltd &Ors. v. Government of India (post the Vodafone ruling) had held that the assessee cannot be burdened with the levy of interest where it could not have visualized its tax liability at the time of the transaction, and tacitly lent credence to the view that the indirect transfer provisions were new and did not previously exist. The approach of the SC with respect to retrospective amendments is also very unambiguous. In the case of Commissioner of IT, New Delhi v. Vatika Township Private Ltd the court observed that taxing principles should be construed in their strict interpretation, and ordinarily, a statute should not be held to have a retrospective effect. Anything contrary breaches the principles of natural justice along with it being violative of the right to carry trade under Article 19(1)(g) of the Constitution of India. Another bench of the SC, held on similar lines, clarifying “the Legislature cannot set at naught the judgments which have been pronounced by amending the law, not for the purpose of making corrections or removing anomalies but to bring in new provisions which did not exist earlier.” Principle of Fair and Equitable Treatment and Offshore Indirect Transfer The principle of fair and equitable treatment [FET] is one of the most accustomed provisions often found in Bilateral Investment Treaties [BITs], casting an obligation on the host countries to provide foreign investors with a fair and equitable treatment. A lot of discussion has evolved to interpret the minimum standard of the FETs as to whether it is a self-contained standard, referring to general International Law which has to be interpreted in each case by the arbitrators or it should be linked to customary international minimum standard. To resist a blurred and ambiguous situation, the tribunals have analyzed five categories of elements to be encompassed to interpret this principle: Obligation of vigilance and protection, Due process including non-denial of justice and lack of arbitrariness, Transparency, Good faith – which could include transparency and lack of arbitrariness and Autonomous fairness elements. Analyzing the tribunal’s decision to be against the fair and equitable principle accorded in Article 4(1) of the India-Netherlands BIT, the authors attempt to study in the light of international jurisprudence the approach that tribunals have undertaken in similar cases. One such remarkable case is of the Occidental Exploration and Production Company [OEPC] initiating arbitral proceedings against Ecuador for violating the FET provision of their BIT. The Tribunal interpreted the FET standard to require the “stability of legal and business framework” to be met with the transaction. It concluded that the framework, under which the investment had been made and operated, was altered to a crucial extent by amending its

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Amendment to the IBBI (Liquidation Process) Regulations

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[By Arushi Gupta] The author is a student at the National Law University, Odisha. The Insolvency and Bankruptcy Board of India (hereinafter ‘IBBI’) in a press release dated November 13, 2020, has notified the Insolvency and Bankruptcy Board of India (Liquidation Process)(Fourth Amendment) Regulations, 2020 (hereinafter ‘the Amendment’). The amendment enables the liquidator to assign or transfer a ‘not readily realizable asset’ (hereinafter referred to as ‘NRRA’) to any person after due consultation with the stakeholders’ consultation committee.[1]The article aims to discuss the backdrop and possible implications of the amendment. Background The amendment has been introduced to address the concerns with respect to the increasing delays in the liquidation process due to the non-realization of certain assets that are uncertain in nature and the realization of which takes time longer than the usual time frame for the realization of other assets. These concerns were first highlighted by the report of the Bankruptcy Law Reforms Committee which while contemplating upon the “Rules to close the liquidation” for the code, discussed the issues regarding the probability of recoveries of certain assets forming part of the liquidation estate in the future (i.e after the end of the liquidation). The committee was of the view that the liquidator must close down the case with the permission of the adjudicating authority and create a trust wherein the recoveries would be deposited. Subsequently, due to the rising number of corporate insolvency cases with a long-drawn liquidation process leading to a reduction in the realizable value of such assets, a discussion paper on the Corporate Liquidation Process was floated by the IBBI to address the aforementioned issue. The discussion paper discusses in detail the need for the amendment and the framework for the same. The discussion has also been substantiated with the examples of various International Practices[2] and statutory provisions[3] in the Indian realm, wherein assignment of a cause of action to a third party is allowed. Rationale The code basically envisages the timely completion of the liquidation process so as to ensure that the assets of the Corporate Debtor can be put to use for alternate purposes. As per regulation 44(1) of the IBBI (Liquidation Process) Regulations, 2016, the liquidator is required to liquidate the corporate debtor within a period of one year from the date of commencement of the liquidation.[4] However, the presence of NRRA in the liquidation estate leads to delays due to the uncertain nature of the asset and the indefinite period involved for the conversion of such assets into cash. An NRRA has been defined as any asset which is included in the liquidation asset and includes contingent or disputed assets, and assets underlying proceedings for preferential, undervalued, extortionate credit, and fraudulent transactions.[5] Before the amendment came into the picture, two scenarios could be envisaged: In case of dissolution of the Corporate debtor without realization of the NRRA, the assets would be left unrealized and in an undistributed state. Furthermore, the stakeholders would be deprived of their due recovery leading to the interests of such stakeholders being compromised; or In case the dissolution is kept pending for the purposes of realization of the value of NRRA, it would lead to mounting expenses of the liquidation process and also lead to depreciation of the value of an asset over the pending time period. Furthermore, the liquidator would have to arrange for monetary resources (i.e. funds) to suffice for the costs associated with legal proceedings. Additionally, considering the delay involved in the litigation, the liquidation process might extend beyond the timelines and hence defeat the entire object of timely completion of the liquidation process. In order to address the above-mentioned concerns, the amendment has been introduced. The amendment essentially aims at enabling the liquidator to assign or transfer an NRRA to any person in consultation with the stakeholders’ consultation committee. It is to be noted here that the liquidator must first attempt to sell the assets. In case of failure to sell, the asset may be assigned or transferred to any person after consultation. In a scenario where both the remedies fail, the undisposed assets would be distributed amongst the stakeholders with approval from the Adjudicating Authority. Analysis The discussion paper while contemplating upon the amendment discusses in detail the concept of assignment of rights and cause of action. With respect to assignment, in the case of ICICI bank Ltd. v Official Liquidator of APS Star India Ltd.[6], the Supreme Court held that “rights under a contract are always assignable unless the contract is personal in its nature or unless the rights are incapable of assignment, either under the law or under an agreement between the parties”. Hence assignment may be denied on the grounds of (a) a provision in the respective law barring the assignment, or (b) an agreement between the parties placing a restriction on assignment. It is to be noted that the entire discussion upon the assignment and the framework proposed by IBBI does not deal with the consequences or possible alternatives in a case where the agreement between the parties places a bar on assignment. Furthermore, another point of consideration that arises is that there is no express provision in the Code that bars or allows such assignment in the liquidation process. While the code does allow the creditors to assign their claims or interest in favor of the third parties at the resolution stage, there is no such right that has explicitly provided at the liquidation stage. Considering the fact that time is the essence in the liquidation processes, the amendment would serve a dual purpose of ensuring the maximum realization of the NRRA and the closure of the liquidation process within the specified timelines. Furthermore, this move would also lead to the creation of a new market for these assets and consequently better utilization of such assets. Endnotes: [1] https://ibbi.gov.in//uploads/press/2020-11-13-220539-eb6yn-50277513bcc7d94092ce4ee2b6591aad.pdf [2] Practices of UK, Australia, Hongkong and Singapore [3] Transfer of Property Act, Section 132; Code of Civil Procedure, Order XXV [4] IBBI(Liquidation Process) Regulations, 2016, Regulation

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A Case for Buy-Back Agreements under the IBC

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[By Anjali Soni] The author is a student at the National Law University, Odisha. Introduction Real estate developers use various mechanisms to raise finance apart from the traditional loans received from Financial Institutions and buy-back agreements are one of such instruments. Buyback schemes are where the developers agree to repurchase the property at a higher price, within a stipulated time, during which the homebuyers generally get some percentage of annual returns. Such offers are usually undertaken to encourage sales. Even though the homebuyers were declared as financial creditors so far as the Insolvency and Bankruptcy Code is concerned, however, homebuyers categorized as speculative investors have no remedy under the IBC. The NCLAT recently in the case of  Shubha Sharma, Suspended Board of Director v. Mansi Brar Fernandes ruled that homebuyers with a compulsory buy-back agreement are not genuine buyers but mere speculative investors and hence cannot seek relief under the provisions of the IBC. This article seeks to analyze the judgment and make a case for investors under buy-back agreements. Facts Gayatri Infra Planner Pvt. Ltd. Company, a real estate developer, and Mrs. Mansi Brar Fernandes entered into an agreement/MoU for the provisional allotment of four apartments in a project named “Gayatri Life”. Rs. 35 lacs was paid by the financial creditor at the time of signing the agreement. The agreement had a compulsory buy-back provision which stipulated that upon the expiry of 12 months, the Corporate Debtor was to return the initial amount along with an additional Rs. 65 lacs as premium, failing which the homebuyer was to take possession of the apartments. The Corporate Debtor issued two post-dated cheques in favor of the financial creditor. Upon inquiring, the Corporate Debtor expressed his interest to exercise the buyback but the said cheques were dishonored upon encashment. No amount was returned after repeated extensions nor the possession of the apartments was given. The financial creditor finally filed the application under Section 7 of the IBC. Decision of the adjudicating authority The two primary objections raised before the Adjudicating Authority. First, that the allottee does not come under the definition of Financial creditor, and second, that the amount of default is Rs. 35 lacs and not Rs. 1,02,50,000 as claimed by the allottee. The NCLT did not accept either of the objections and admitted the application on the grounds of the debt being a financial debt in view of the explanation inserted under clause Section 5(8)(f) by the Insolvency and Bankruptcy (Second Amendment) Act, 2018. Aggrieved by this order, the former Director of the Corporate Debtor filed an appeal before the Appellate Tribunal. Decision of the Appellate Tribunal The Honourable Appellate Tribunal while setting aside the impugned order ruled that the MoU signed by the financial creditor and the real estate developer is an agreement to buy back the apartments and not an agreement for sale of the apartments. Since the buyback is an irrevocable and compulsory buy-back agreement, the homebuyer is actually a speculative investor and not a genuine homebuyer. Judicial precedents regarding homebuyers with a buy-back agreement under IBC In the case of Kussum Chadha v. C&C Towers Ltd. the real estate developer launched a ‘Buy Back’ scheme inviting investors but defaulted in payment of the assured monthly returns to financial creditors. Cheques issued in favor of the financial creditors towards the refund and premium due were dishonored, and the CIRP petition was admitted by the NCLT. Similarly, in the case of Narender Kumar v. Aadinath Probuild a buy-back agreement cum guarantee deed was executed in favor of the applicant and after the default in payment, CIRP proceedings were initiated. The Adjudicating Authority categorically laid down that since the amount of money has been raised under a real estate project, it has the commercial effect of a borrowing and comes within the scope of a financial debt. Analysis of the nature of debt under a buy-back agreement In the author’s opinion, homebuyers under a compulsory buy-back agreement should be considered as financial creditors because the debt owed to them fulfills all the prerequisites of a financial debt. Section 5(8) of the IBC provides two primary components for a debt to be classified as a financial debt. First, the debt has to be disbursed against the consideration for the ‘time value of money’ and second, the transaction should fall under any clauses between (a) to (i). The NCLAT in the case of Nikhil Mehta and Sons (HUF) v. AMR Infrastructure Ltd ruled that the first essential requirement of financial debt has to be that the debt is disbursed against the consideration for the time value of money. Black’s Law Dictionary defines ‘time value’ as “the price associated with the length of time that an investor must wait until an investment matures or the related income is earned”. Essentially, the time value of money is the incentive that the said investor gets after a stipulated time period against the investment. Under buy-back agreements, the real-estate developers give lucrative offers to investors in order to stimulate sales. These offers include assured annual returns at attractive rates and heavy premiums along with the principal amount after the time period is over. The time value of money in such transactions is evident from the monetary benefits received by such investors. With regard to the second requirement, a debt can be classified as a financial debt if it is raised under any transaction having the commercial effect of a borrowing as mentioned in Section 5(8)(f) of IBC. The Hon’ble the Appellate Tribunal in the case of Rajendra Kumar Saxena v. Earth Gracia Buildcon Pvt. Ltd. held that the explanation inserted under Section 5(8)(f) states that any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing, making all allottees of real estate as ‘financial creditors’. Finances raised under a buy-back agreement also have the same commercial effect of a borrowing. During times of financial crises, real estate developers resort to raising funds through buy-back agreements

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Homebuyer Decree Holder as Financial Creditor: The Never-Ending Debate

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[By Nikhil Singh] The author is a student at the National University of Juridical Sciences, Kolkata. Introduction The Insolvency and Bankruptcy Code, 2016 (“Code”) was brought with an intent to secure the creditors’ interests by providing exhaustive provisions for corporate restructuring and debt recovery. Creditors are classified into two heads i.e. financial and operational creditors and the process to initiate a corporate insolvency resolution process (“CIRP”) has been provided in the Code. The phrase “creditor” has also been defined in the code itself under Section 2(10). The definition expressly includes “decree holder” within the scope of the term. As regards the homebuyers, the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 put them in a priority position by including the amount advanced by them to the builders within the definition of “financial debt” under Section 5(8)(f) of the Code. The Supreme Court has also held that the remedies under Real Estate (Regulation and Development) Act, 2016 (“RERA”) and the Code co-exist with concurrent remedies under the two statutes. However, a recent ruling by the National Company Law Appellate Tribunal (“NCLAT”) has raised a debate as to whether a decree holding homebuyer would be covered within the definition. Analysis In Sushil Ansal v Ashok Tripathi (“Sushil Ansal Case”), the respondent i.e. the homebuyer had purchased a flat from the appellants and paid a certain amount in relation to it. Upon the appellant’s failure to deliver possession, the respondent got a recovery certificate i.e. decree in his favour from the Real Estate Regulatory Authority. After this, he initiated CIRP under Section 7 claiming himself as a decree-holder, and not a homebuyer. Now based on the facts of the case, it was clear that there was no dispute as to the existence of the debt and even the appellants did not challenge this. The only contention raised by the appellant was that once the respondent became a decree-holder, the underlying builder buyer contract stood terminated and thus no CIRP could be initiated based on it. Now a question arises as to whether a decree-holder ceases to be a financial creditor who can imitate a CIRP under Section 7. On this point, there are contradicting positions taken by the courts. In the case of Urgo Capital Ltd. v Bangalore Dehydration and Drying Equipment Co.(“Urgo Case”) the court had ruled in the positive holding that a decree-holder continues to be a financial creditor and can consequently initiate a CIRP under Section 7. The court had further clarified that just because the claimant does not go for court execution of the decree, it does not disqualify him from initiating CIRP based on the decree. Further jurisprudence on Section 7 is that the claimant only needs to show the existence of creditor-debtor relations by proving the existence of a debt. More specifically, the court had allowed section 7 application stating that as long as the amount under the decree has not been paid, the debt exists and that the decree itself will be evidence of the existence of a debt. Now, a parallel to money decree can be drawn from arbitral awards passed by tribunals. The position taken by the court in K Kishan v Vijay Nirman Co. was that an award- the creditor is considered as a financial creditor who can initiate a CIRP based on the award. The only condition is that the timeline to challenge the award under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) has elapsed. This analogy is further strengthened by Section 36 of the Arbitration Act, which states that an award is to be enforced as if “it is a decree of a court”. Now, one might rightly argue that if an arbitral award is kept on the same pedestal as a court decree, the Code and NCLAT cannot treat them differently to establish the creditor-debtor relations. The NCLAT had done the same mistake in the heavily criticized judgment in Digamber Bhondwen v. JM Financial Asset Reconstruction Company (“Digamber”). There, the Tribunal had taken an erroneous position in holding that a decree-holder, although falling under the definition of a creditor under section 3(10) of the Code, will not be entitled to file an application under section 7 or section 9 of the Code as the definition of a ‘financial creditor’ or an ‘operational creditor’ does not include a decree-holder. Such a position is flawed because it would invalidate the definition of the term “creditor” itself. If decree-holder has been expressly included in the scope of creditor, and judicial precedents have appreciated such inclusion, the position in Digamber would not only be in conflict with the legislative intent but also its own position in previous judgements. Now although a larger bench in the Urgo Case has contradicted this and taken the correct position, the judgement has not been overruled and has made way for the larger bench decision in the Sushil Ansal Case. Thus, currently, these two judgements stand in contradiction with each other and as both are of the same bench strength, none of them have overruled the other. This has created a gap on this issue which can only be settled by a larger bench of the NCLAT or the Supreme Court of India. Another, problem that the exclusionary position creates is that the decree holding homebuyers are now left remediless under the Code. Explanation II of Section 5(8) categorically includes the amount raised through a builder buyer contract as a “financial debt” enabling homebuyers to initiate CIRP as financial creditors under Section 7. Now it is true that the basis of the creditor-debtor relation is the builder buyer contract and that once a decree is passed based on such a contract, the contract stands terminated. However, this basis is only relevant to prove the existence of the debt and once a decree is passed based on such a contract, the decree itself becomes evidence of the debt if there is no appeal against it. The NCLAT seems to have failed in analysing this point in

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