Author name: CBCL

Garden Leave Clause: A Win-Win Scenario

Company Law /

[By Aparajita Marwah and Saavni Kamath] The authors are students at the National Law Institute University, Bhopal. Introduction Gardening Leave is a measure taken by the employer when an employee is terminated or tenders resignation and denotes the period of time between service of notice of termination and actual termination. A garden leave clause may be effected at any stage of an employee’s course of employment, but is largely restricted to being imposed during the notice period. In such a scenario, companies generally take steps to ensure that during this period, the employee undergoing the process of termination is no longer an active part of their workforce and has no access to clients, co-workers, or sensitive information pertaining to the organization, while still being paid a regular salary with benefits. During such leave, the employee would bound by the employment contract nonetheless and would have to refrain from any act that could hamper the interests of the employer. The reasons for imposing a gardening leave clause upon an employee are manifold. Firstly, these clauses prevent an outgoing employee from being employed by a rival organization during that period, thereby effectively restricting the sharing of any confidential information. Secondly, limiting the employee’s access to company data, clients, or other employees during this transition period, reduces the threat of any possible informational leak once the employee is free from their contract. Further, in terms of the etymological roots of the expression, it essentially means that the employee in question would bide this period by engaging in hobbies such as gardening or could also be negatively perceived in the sense that the employee in question could not even be considered fit to garden. It is imperative to point out that employers may not place an employee on garden leave without such a clause as a part of their employment contract. In the event there is an existing clause, wrongfully place such employee under leave without any wrongdoing on the latter’s part. Alternative to Non-Compete Clauses While both Garden Leave and Non-Compete Clauses are invoked during the termination of employment in order to prevent the employee from engaging with another employer for a period of time and essentially seek to serve the same end, the means used are vastly different. The latter is utilized when employment is terminated and prohibits the employee, for a stipulated period, from being employed with a rival company or engaging in a rival practice. Non-Compete Clauses are also harsher in terms of the conditions set forth and employees are not provided with salary or bonus benefits throughout this duration, resulting in stricter judicial scrutiny regarding the fairness of these terms. In comparison, Garden Leave clauses provide greater leeway and are not particularly disadvantageous to the employee being terminated. Although the employees’ access to the market is restricted during this period, they still owe a fiduciary duty to the employer and enjoy salary benefits. This subsists until the employee in question has not been terminated. Additionally, it is pertinent to distinguish between paid non-compete periods from garden leave clauses as there is a tendency to consider the two as the same. Paid non-compete periods begin only after the termination of employment and share the same advantages that a garden leave clause might grant. Judicial Perspective within the Indian Spectrum Garden Leave Clauses along with Non- Compete Clauses are generally considered within the ambit of restrictive covenants. As a result, they are often subject to rigorous judicial scrutiny, to determine whether these clauses prohibit the freedom of trade and business granted to the employee, by way of Article 19 of the Indian Constitution. Moreover, contracts that impose restrictions upon the person’s freedom to trade or business are rendered void. While there has been no statutory recognition accorded to Garden Leave Clauses in any Indian legislation, there have been several judicial decisions discussing its validity and applicability. One of the first judgments regarding the application of Garden Leave Clauses was tendered by the Bombay High Court in VFS Global Services Private Limited v. Suprit Roy. The case was filed in lieu of execution of an agreement which contained a Garden Leave Clause. However, the errant drafting of the clause wrongfully imposed garden leave upon the employee, after the termination of employment was considered void within the ambit of Section 27 of the Indian Contracts Act, 1872. The Court added that Garden Leave Clauses themselves are not restrictive of trade and if applied in the manner prescribed, could prove to be beneficial for both the employee and the employer. In subsequent judgments such as that of Niranjan Shankar Golikari v. Century Spg. & Mfg. Co. Ltd. and Percept D’Mark (India) Pvt. Ltd. v. Zaheer Khan & Anr., the Court distinguished between garden leave and non-compete clauses, and established that the employee may be restricted during the term of employment but not after termination. Further, the Court by its decision in Kouni Travel Pvt. Ltd. v. Ashish Kishore and Tapas Kanti Mandal v. Cosmo Films Ltd., upheld the validity of Garden Leave Clauses and affirmed that they can be invoked to ensure the protection of trade secrets, as long as the employee in question is remunerated during the specified period. Effect of the COVID-19 Pandemic The ongoing health crisis has exacerbated the process of decline of both the economy and the job market. It has triggered a string of consequences including reductions in employee remunerations and large-scale layoffs. With employment rates at an all-time low, the question of applicability of restrictive covenants such as garden leave clauses is a poignant one. There are two diverging opinions with regard to whether or not a Garden Leave Clause, as a part of an employment contract, should be invoked during the current scenario. The first opinion and more widely asserted contention against invoking Garden Leave Clause is the fact that tough exit clauses make it all the more difficult for employees to seek employment elsewhere, in lieu of the current environment. Considering such clauses are widely

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Analysis of Excessive Stress on Connection Between Parties to a Manipulative Trade

Capital Markets and Securities Law /

[By Anurag Shah] The author is a student at the School of Law, Christ (Deemed to be University), Bangalore. Introduction The online trading system of the Indian Stock Exchange works on the ‘blind trading system’. Such a system does not permit a buyer and a seller to have any form of interaction on the platform while undertaking a trade. The system works in such a way that after the buy order is placed on the trading platform, the system matches the same with a sell order and then a trade is executed on a price-time priority basis by the system. However, even in such a spill-proof system, time and again buyers and sellers have indulged in manipulative trades which lead to market rigging. The players have identified multiple ways to execute this rigging, which include illegal synchronized trades or trades that manipulate the Last Traded Price. However, the securities regulator in India has tried to prosecute players undertaking such trades through the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP Regulations). This regulation prohibits manipulative, fraudulent, and unfair trade practices. Whether a manipulation has been done or not is largely gathered from the intentions of the parties, however, most of the time there is no direct or conclusive evidence to such intentions. Therefore, in the absence of the same, the Courts have time and again looked into different aspects to ascertain manipulation. One such aspect is the connection between the parties to a trade. Whether it is an inter se connection between the brokers and the parties or a connection between seller and buyer, the Courts have used the same to conclusively conclude manipulation. However, recently the Securities Appellate Tribunal (SAT) has been stressing excessively on the presence of this connection. This can be analyzed through two recent orders by the SAT passed in August 2020. SAT order in the matter of Bharti Goyal v. SEBI The SAT in the matter of Bharti Goyal v. SEBI, modified a penalty of Rs. 5 lakhs issued by SEBI into a warning for the alleged violation of the PFUTP Regulations. SEBI had passed an order against sixteen entities for manipulating the price of the scrip of Mapro Industries Limited. The order held that even though no connection could be established between the suspected entities, by the very nature of their trades they manipulated the prices and disturbed the market equilibrium. The aggrieved appellants approached the SAT. The first appellant defended his trades by submitting that he was a salaried employee who occasionally engaged in the stock market trading and therefore undertook the trade only based on the rumors and had no intention to manipulate the prices. The second appellant as well maintained that the trades were done in the normal course of business without any intent to manipulate. Moreover, both the appellants stressed the fact they had no connection or relationship with any connected or suspected entity. SEBI maintained its position that making such trades was completely irrational and no rational person would do such trades until they wanted to manipulate scrip. SEBI contended that the appellants had manipulated both the price and volume of the scrip and therefore violated Regulations 3 and 4 of the PFUTP Regulations. SEBI reiterated that even though no connection/relationship of the two appellants with other authorities in question could be established, the nature and pattern of their trade itself could be found to be foul of the provisions. For this they relied upon the decision of the Supreme Court of India in the case of Securities and Exchange Board of India vs. Kishore R. Ajmera wherein the Hon’ble Court was of the view that in absence of hard evidence, the conclusion has to be gathered from various circumstances like that volume of the trade and such other relevant factors. The tribunal was not satisfied with the contention of the appellants that they made the trades because they were keen to invest in Mapro Industries owing to its extremely promising nature. This was because the scrip was not liquid or lucrative for investment. On the other hand, the tribunal also took note of the fact that the SEBI order could not join the dots concerning the connection or relationship between the suspected entities and the appellants. Therefore due to the nature and pattern of the trades, the appellants violated the regulations, but since no conclusive relationship/connection or interaction between the appellants and the other suspected entities is established, the SAT modified the penalty into a warning. SAT order in the matter of Rajesh Jivan Patel v. SEBI The SAT in the matter of Rajesh Jivan Patel v. SEBI quashed an order by a Whole Time Member (WTM) of SEBI through which SEBI had restrained the appellants and other noticees from accessing the securities market for six months and further froze the mutual funds and other securities of the appellants. The order was passed by SEBI after an investigation was conducted on the alleged violations of Regulations 3 and 4 of the PFUTP Regulations. SEBI had alleged that the appellants along with a few parties, without any intention to sell, had sold meager amounts of the shares of a company over a period of time to establish a price above the Last Trading Price (LTP). The same, if done in collusion would amount to price manipulation under the PFUTP Regulations. The WTM while adjudicating on the order held that even though there was no connection between the buyer and the seller, they had unilaterally manipulated the price. SEBI also stated that a connection between a buyer and a seller was immaterial in the question of price manipulation under the PFUTP Regulations 2013 unless it a synchronized trade. The aggrieved appellants had appealed to the said order in the SAT. While quashing the order SAT held that the WTM had traveled beyond the specific charges listed by the SEBI in the Show Cause Notice (SCN), which included inter alia a collision to manipulate

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Evaluating India’s Overseas Direct Investment Policy: A Call For Reform

Contemporary Issues /

[By Divyani Auti ] The author is a student at the Maharashtra National Law University, Nagpur. Introduction As the world enters into an era of financial austerity amidst an economic slowdown brought about by the Covid-19 pandemic, the restrictive regulatory stance of the Reserve Bank of India (RBI) in relation to cross-border flow of capital has been attracting considerable attention lately. In recent years, there has been an increase in Overseas Direct Investment (ODI) from India and consensus seems to be evolving in favour of liberalizing the current framework to facilitate such investments. At a broader level, such outflow of capital has been happening in two ways: first, expansion of business operations through cross border mergers and acquisitions to facilitate wider access to overseas markets (internationalisation); second and more commonly, incorporation of foreign holding companies by Indian entities to take advantage of favourable regulatory framework (externalisation). Against this backdrop, this post advocates the rationalisation of the regulatory framework governing such cross-border investment whilst highlighting the practical challenges associated with the current framework. In particular, this post shall examine the setting up of step-down subsidiaries overseas and critique the differential treatment meted out to resident individuals. It will then conclude by tracing the round-tripping concerns underlying the prevailing stance and suggest potential changes to help strengthen the framework. Overseas Direct Investment in India It is a known fact that investors look for ways to maximise their returns, while businesses look to raise capital from newer markets. This brings into sharp focus the need to find ways to overcome barriers to the cross-border flow of capital. There are many strategic incentives for internationalisation/externalisation, foremost of these being access to capital from global investors resulting in the diversification of investor base. This way, companies don’t have to solely rely on domestic investors who have typically shown less appetite for nascent companies. Also, establishing holding companies offshore provides for greater commercial certainty due to consistency in adjudication, mitigates tax risks, and protects against currency fluctuation. Here, it is pertinent to mention that Foreign Exchange Management Act, 1999 (FEMA) along with FEMA 120 Regulations govern the ODI framework in India. India’s Regulatory Approach And Impact On International Investors Recently, the RBI issued clarifications stating that under the FEMA 120 Regulations an Indian party is not permitted to acquire a stake in a foreign company that already has Foreign Direct Investment (FDI) in India. This observation is significant as it characterises even instances wherein an Indian Party doesn’t hold a controlling stake in the overseas company, which in turn has a downstream investment in India as a contravention of applicable law. To better understand the implications of this, let us consider the case of an individual (Indian Party) holding a single share, with no power to influence investment decisions in the overseas company (ODI approval route). Under the current framework, it is entirely plausible that even this would be considered as a joint venture (JV) and consequently, the liability imposed would be disproportionate and can have the effect of curbing entrepreneurial vision. Similarly, RBI also clarified that FDI in India through a foreign JV/wholly-owned subsidiary (WOS) in which an Indian Party has invested shall require specific approval of RBI. Again, this is crucial as even if it is a limited embargo it affects foreign investors looking to invest in India by increasing compliance costs. In fact, having such an onerous regulatory framework at a time when global supply chains are getting disrupted will not only be ill-suited but will also disincentivise businesses through FDI in India. Crucially, this being an insertion under Frequently Asked Questions (FAQ) and not a change in law, it can further have the effect of calling into question existing investment arrangements, which can lead to uncertainty. In view of these concerns, a High-Level Advisory Committee was constituted which recommended easing these restrictions to attract foreign investment. It emphasised the need to do away with RBI approval as long as the investments are routed through proper banking channels and are for legitimate business purposes. However, despite such strident calls for liberalisation, these measures have continued to elude the Indian framework. Overseas Direct Investments in Joint Venture/Wholly Owned Subsidiary The RBI’s restrictive stance towards ODI can be seen from its earlier embargo on ‘resident individuals’ from investing in overseas companies. Prior to the 2013 Amendment, the FEMA 120 Regulations only permitted an ‘Indian Party’ to invest overseas. While at first glance, this may be seemingly innocuous, however, it is crucial to note that the definition of ‘Indian Party’ did not extend its coverage to ‘resident individual’. Instead, only a company, statutory body and partnership firm were covered under this definition.[1] This predictably came with its own practical challenges as in contrast to FEMA 120 Regulations, the Liberalised Remittance Scheme (LRS) notwithstanding such embargo allowed individuals to get remittance for the purchase of securities. As a result of these divergent stances, it is not inconceivable that individuals already made remittances which resulted in the acquisition or setting up of businesses abroad. Therefore, the Kishori J. Udeshi Committee apprehending such a scenario characterised such restrictions as a ‘handicap’. It further observed that the provisions of then FEMA precluded resident individuals from acquiring the majority stake or establishing business outside India and consequently recommended liberalising the framework to achieve greater capital account convertibility. Thereafter, in a move affirming the Committee’s observations, the 2013 Amendment permitted resident individuals to invest in equity shares and compulsorily convertible preference shares (CCPS) of JV/WOS outside India.[2] The Amendment, although was welcomed by India Inc., was a fragmented effort at best. This was because the proposed framework whilst permitting the resident individual to set up JV/WOS abroad prohibited setting up or acquisition of a step-down subsidiary. In other words, the JV/WOS was only permitted to the extent that it was an operating entity and not a holding entity.[3] Further still, notwithstanding the 2013 Amendment which expanded the ‘Indian Party’ definition to include ‘resident individuals’ thereby permitting individuals to invest overseas, the

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Interest on Delayed Payment of GST – Murky Legal Waters

Taxation Law /

[By Aditya Bhayal] The author is a student at the NALSAR University of Law, Hyderabad          Introduction The Goods and Service Tax (GST) was introduced with ease of doing business as one of its main objectives. In its 3 year journey to date, the regime has faced quite a few roadblocks towards achieving that goal, one of them being the controversy surrounding the payment of interest on delayed payment of GST.  Section 50 of the CGST Act mandates such payment of interest. The moot point surrounding the quandary which marred the regime was whether the interest was to be paid on the gross-tax liability or the net-tax liability i.e. amount left after setting-off the Input Tax Credit (ITC), which was the case in the erstwhile regime. After shuttling back-and-forth for 3 years, the dust was finally settled when the amendment, which specified that interest is to be paid on net liability, was finally notified. This post seeks to reflect on the hue & cry surrounding this issue and discusses how the amendment, and its subsequent notification, leaves things to be desired for the taxpayers. Background Section 50 of the CGST Act, which imposes interest on delayed payment of GST, doesn’t specify the amount on which such interest is to be levied. GST Council, in its 31st meeting, took cognizance of the matter and suggested that the interest on such deferred payment is to be levied after setting-off ITC. Input Tax Credit allows the taxpayer to deduct the tax paid on its inputs for business from the tax collected on its output supply, thereby reducing the overall tax liability. Honoring the GST Council’s recommendations, the Government introduced the Finance Act (No.2) 2019, which amended  Section 50 to include a proviso clarifying that the interest is to be paid on the net-tax liability. As the amendment was never notified, the benefit never really reached the taxpayers. To the dismay of the taxpayers, the Telangana High Court in “Megha Industries and Infrastructure ltd. v. CCT”, held that the interest is to be levied on the gross-tax liability, which would exclude the deductions under ITC. The GST Council, in its 39th meeting, reiterated that the amendment would be notified with retrospective effect from 1st July, 2017. The Amendment was finally notified on 25th August, 2020 with a prospective effect given to the proviso. The Central Board of Indirect Taxes and Customs (‘CBIC’), on the very next day, came up with a clarification that although the amendment is being given a prospective effect due to technical reasons, but the authorities won’t be making any recoveries so as to give a retrospective effect to the amendment in essence. Prospective or Retrospective? Although CBIC had clarified that the authorities won’t be recovering any dues to give a retrospective effect to the amendment, but the Ministry did not give any indication as to what will happen to the taxpayers who, in light of the ambiguity which was prevalent until very recently, had deposited interest on the gross tax liability. As no guidance was given for such taxpayers, the law remains prospective in nature for these assesses. The Supreme Court, in the case of “Allied Motors v. CIT”, had held that “a proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the section and is required to be read into the section to give it a reasonable interpretation, requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the section as a whole”. With regards to section 50, the proviso was included to provide a beneficial reading for the taxpayers and avoid the unintended interpretation which goes against their interests, and thus, there is a need for uniform retrospective application of the proviso. The Apex Court, in the case of “Vijay v. State of Maharashtra”, also held that “It is now well-settled that when a literal reading of the provision giving retrospective effect does not produce absurdity or anomaly, the same would not be construed to be only prospective. The negation is not a rigid rule and varies with the intention and purport of the legislature, but to apply it in such a case is a doctrine of fairness”. Imparting a retrospective reading to the beneficial provisions, like the one added by this amendment, would be exigent to avoid multiple litigations and provide hassle-free application of the section. Scope of Section 50 Section 50 is applicable to make good the deprival of the state and not when the state is retaining money to the credit of the assessee. ITC reflects the GST already deposited with the authorities. ITC is a book-entry and section 50 doesn’t envisage levying interest on something which is merely a book-entry. The section monitors cases of delayed payment of taxes for which the assessee is liable. It represents that part of tax which is unpaid. ITC is amassed to the taxpayer on the tax already paid. A right is accrued to the taxpayer when they pay tax on inputs. Moreover, the Supreme Court has previously ruled that interest is the payment to compensate the exchequer for delayed payment of tax. Taking a cue from the reasoning adopted by the Apex Court, it is only fair to hold that no such interest should be paid on loss that the government didn’t suffer in the first place. In such a scenario, it will be manifestly unjust on some taxpayers if the authorities fail to reimburse that amount of interest which was levied on the gross tax liability. Such views have also been upheld in the Madras HC ruling in “M/s. Refex Industries Limited v. Assistant Commissioner of CGST”, wherein it was noted that “The amendment introduced to section 50 is clarificatory in nature and therefore, retrospective”. The Delhi & Orissa High Courts also fortified this line of argument when they stayed a recovery of interest on the gross tax liability. These rulings call

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The Liability of Cab Aggregators in India vis-à-vis their Consumers

Contemporary Issues, Contract Law /

[By Suyash Tiwari and Prakul Khera] Suyash is a student at the Hidayatullah National Law University, Raipur, and Prakul is a student at the Institute of Law Nirma University, Ahmedabad. The reputation of ride-hailing platforms like Uber has been marred with a plethora of cases involving sexual assault and negligence of its drivers. The case in the Indian context is no less different. These platforms are operating under such a regulatory grey area that they easily evade liability for the acts of drivers. The Motor Vehicles (Amendment) Act, 2019 introduced the term aggregator for these platforms which defines them as “digital intermediary or marketplace for a passenger to connect with a driver for the purpose of transportation”. This provision brought such platforms under the purview of the Motor Vehicles Act, 1988. However, the only body of law that governs the employment status of drivers engaged with these platforms is the terms and conditions of these aggregators. These terms and conditions that a user agrees to avail the services of these platforms provide that the drivers are independent third-party contractors and not employees of the company. Since the principle of vicarious liability doesn’t apply to independent contractors,[i] such clauses exempt the liability of these aggregators in case of any mishap. In the current article, the authors advocate for the liability of such aggregators for the acts of drivers.  Control test obsolete in the modern economy Under the control test, the employment status is determined not only through the control of the employer in directing what work is to be done but also through the control exercised over the manner of doing work. [ii]However, In Silver Jubilee Tailoring House v. Chief Inspector of Shops, the Supreme Court of India held that the control test can’t be treated as an exclusive one for distinguishing a ‘contract of service’ from ‘contract for service’ and it would be more reasonable to examine all the factors that constitute the case in hand. It was further opined that it would be unrealistic to apply the test of control in many skilled employments for determining the existence of a master-servant relationship. Therefore this test can’t be treated as a precise one for ascertaining the employment status of the drivers. A progressive test was propounded in Stevenson Jordan and Harrison Ltd. v. Macdonald and Evens. It was held that a person is under a contract of service when the work performed by him is an integral part of the business, whereas the person is under a contract for service when the work is ancillary to the main business. The rationale for using this test is that the functions which constitute a contract of service are the sole source of revenue for a corporation. Since transportation is an integral part of the business and constitutes a major source of revenue, the drivers should be treated as employees of the aggregators Position in other jurisdictions In 2015 a United States District Court for the District of Columbia in Erik Search v. Uber, where the driver had stabbed a rider, made Uber liable to pay damages. The court relied on the apparent agency theory which stems from the so-called duck test. According to this test, “if it walks like a duck, swims like a duck, and quacks like a duck, it’s a duck.” The rationale that stems from this test is that liability can be imputed to the principal if he, through his words whether written or spoken or any other conduct makes a third party believe that he has consented to the acts done on his behalf by the apparent agent. Hence the perception of a third party with respect to the agent’s authority is significant in determining the liability. Therefore, taking into account the way Uber functions, the court held that the riders were under a reasonable belief that the drivers were indeed the employees. Similarly, in Doe v. Uber Techs., Inc., where the driver had raped a consumer, the District Court for the Northern District of California held that drivers were employees and Uber was vicariously liable for their conduct. While holding so, the Court relied on a set of the factual matrix. These include, inter alia, the fact that the drivers can’t negotiate the fares and the same are set by Uber without any input from the driver. Further Uber has the authority to alter the amount being charged from customers if the driver takes a circuitous route. Thirdly, control over customer contact information lies with Uber. The drivers have to accept all rides requests when logged into the application or else they have to face disciplinary actions. Lastly Uber retains the right to terminate drivers at will. In Uber France v. M. A. X, the Court of Cassation (the highest court in France) classified the drivers as employees and not self-employed. The Court laid down a three-limb test to categorize a person as self-employed. Under this test, if the person can build his own client base, fix the tariff to be charged on his own, and set the terms and conditions for providing the service, only then, one can be classified as self-employed. Further, according to the Court, as the drivers were following orders from Uber, there was a relationship of subordination between the Company and the drivers. The High Court of Australia in Hollis v. Vabu Pvt. Ltd. held that persons employed as bicycle couriers by Courier Company under a ‘contract for service’ who owned their bicycles and also bore the expenses of running them, were employees. The court relied on the fact that their uniforms bore the logo of the company which represented to the general public that they were employees. As Lord Peace stated in Imperial Chemical Industries Ltd v Shatwell “the law of vicarious liability has evolved from social convenience and rough justice and not from any clear logical or legal principle.” Therefore, the Indian courts must take into consideration the principles evolved by the foreign courts as they reflect an approach

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Mediation in India- Challenges, Recommendations and Relevance in Post COVID Scenario

Contemporary Issues /

[By Krishnanunni U and Kessia E. Kuriakose] The authors are students at the NALSAR University of Law, Hyderabad. Introduction The outbreak of the COVID-19 pandemic has led to a sudden surge in the number of commercial disputes across the world. Most corporates have been inundated with unprecedented challenges arising out of delayed performance of contracts. At this juncture, the amicable restructuring of contracts to accommodate contemporary realities becomes ever pertinent. Hence, mediation being quicker and efficient than conventional modes of dispute resolution will automatically become the preferred option for businesses to tackle the predicament posed by COVID-19. Further, mediation will help in fostering relations by settling disputes amicably. In India, COVID-19 has brought about various developments that have set the stage for propelling mediation to the forefront. For example, insolvency proceedings have been terminated for a year and RERA has extended the timeline for completing projects by including COVID-19 as one of the force majeure conditions. Litigating disputes connected to COVID-19 will consume time, money, and effort. Mediation being cheap, quick, and confidential would be the most feasible solution to tackle the conundrum. However, blindly accepting mediation as the solution can have serious repercussions. Mediation in India is marred with a lot of problems, lack of legal sanctity being the primary concern. In this article, we seek to identify and provide recommendations to resolve the challenges faced by mediation in India by carefully analyzing the existing legal framework around mediation.  Existing Legal Provisions Mediation in India is primarily governed by two legislative acts viz. the Code of Civil Procedure, 1908 (“CPC”) and the Arbitration and Conciliation Act, 1996 (“ACA”). Section 89 of the CPC (added by way of amendment in 1996) gave courts the power to direct disputes to various ADR mechanisms including mediation for their settlement. Part II of the Civil Procedure – ADR Rules 2003 clearly defines the process of Mediation and specifies certain rules related to mediation (Mediation Rules). Further, Part III of ACA governs conciliation proceedings that courts have interpreted to be synonymous with the mediation process. In addition to that, several legislations like the Companies Act, 2013, and Commercial Courts Act, 2015 provide for mediation, but these rarely opt for dispute resolution. Hence, it is very apparent that laws governing mediation in India are in a rudimentary stage with no standardized process in place. Recently, the government has taken affirmative actions for promoting mediation but the absence of an overarching legislation will continuously pose impediments for the growth of mediation in India. Initial efforts to strengthen mediation can be traced back to 1988 where the 129th Law Commission Report recommended ‘Urban Legislation Mediation’ as an alternative to adjudication. Afterward, the judgment in Salem Bar Association v. Union of India held that all disputes coming to court need not necessarily be resolved by the courts and alternative dispute resolution mechanisms should be actively engaged. This prompted an amendment to the CPC and Section 89 was incorporated. Another major development was an amendment to the Commercial Courts Act, wherein Section 12A was introduced in 2018. This made it mandatory for parties to conduct mediation before instituting a commercial dispute. The constitution of the “The Mediation and Conciliation Project Committee” entrusted with discussing policy matters related to mediation has given further impetus to the development of mediation. In 2019, India signed the United Nations Convention on Mediation (the Singapore Convention), which made international commercial mediation agreements enforceable in India. However, the qualms regarding enforcement can be fully dismissed only when a new law concerning mediation is enacted. Challenges and Recommendations 1) Lack of Codification– In January 2020, the apex court in MR Krishna Murthi v. New India Assurance Co. Ltd pointed out the urgent need for enacting a uniform legislation for mediation in India. In furtherance to this, the court set up a committee to come up with a draft legislation that will help in conferring legal sanctity to disputes settled by mediation. A uniform statute governing mediation is the need of the hour. Such legislation should ideally aim at making mediation a mandatory exercise before approaching courts or arbitral tribunals. This would help in altering the current status of mediation from being a particular form of dispute resolution to the mandatory first stage of dispute resolution. A statute governing mediation will also address the enforceability concerns plaguing mediation in India. Even in the landmark Ayodhya case, the Supreme Court had initially directed the parties to mediation. However, the lack of a binding factor has deterred parties from acknowledging mediation, thereby vitiating mediation proceedings in India. An overarching legislation would confer legal sanctity and provide procedural guidance to parties. Just like how the ACA revolutionized the arbitration culture in India, a mediation specific law can instill confidence in parties to resolve their disputes through mediation. 2) Apprehension towards mediation & Lack of Awareness – Mediation has never garnered sufficient reception among the legal fraternity. In order to popularize mediation as a dispute resolution mechanism, training sessions and seminars should be conducted to familiarize judges with the benefits of mediation. This will help in creating a conducive environment for the growth of mediation in India. Further, public awareness related to mediation should also be increased.  A coordinated approach by the Judiciary and the Executive can help in disseminating information regarding the benefits of mediation to the public. Lawyers should also be encouraged to advise mediation to their clients. 3) Infrastructural Concerns and Quality Control– Improved emphasis on mediation will directly increase the workload on mediation centers which lack administrative strength. This can lead to the languishing of cases that go against the basic tenet of mediation i.e. fast resolution of disputes. To tackle this, the practice of mediation should be professionalized in India. People should be incentivized to become full-time mediators. The recent proposal of the Bar Council of India to compulsorily include mediation in the legal curriculum will definitely assist law students in taking up a career in mediation. Further, it is pertinent to supplement the growth of

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Calculation Of Interest In CGST: A Relief for the Tax Payers?

Taxation Law /

[By Shubham Gupta and Jayesh Advani] The authors are students at the National Law University, Odisha. Introduction Section 50(1) of the Central Goods and Service Tax (CSGT) Act, 2017, imposes interest on the tax liability occurred in accordance with the provisions of the CGST Act on the person who fails to pay the whole tax or any part of the tax, in the prescribed time. The interest is added to the original tax liability until the period the whole tax liability is settled by the defaulter. The interest rate notified by the government on the defaulted amount is 18 %. Although Section 50(2) provided for the method of calculation of interest, the Act was silent on the question of whether the interest has to be calculated on the gross amount of tax liability or the net amount. For instance, assume the Gross amount of tax that is not paid to be Rs. 1,00,000 and the amount of Input Tax Credit (ITC) to be 60,000. The question of law was whether the interest should be charged on Rs. 1,00,000 or on the Net amount which is calculated by deducting the ITC from the Gross amount i.e. Rs. 40,000. To solve this dilemma, the Central Board of Indirect Taxes has given effect to Section 100 of the Finance Act, 2019 from 1st September 2020 to amend Section 50 of the CGST Act. According to the Amendment, the interest is applied to the net amount i.e. Rs. 40,000 which is calculated by deducting the ITC from the gross tax liability. The inserted proviso to Section 50(1) has explicitly mandated to pay the interest in accordance with Section 39 of the CGST Act. However, in situations where initially no tax is paid by the defaulter and he is paying tax only after the notice is served, under Section 73 or 74 of the CGST, the interest is to be calculated on the gross amount. Exception to the Proviso There seems to be a major issue with the provision that has been added to Section 50 of the Act. It mentions two exceptional scenarios in which the benefit will not be available. The bare text uses the words “except where such return is furnished after the commencement of any proceedings under Section 73 or Section 74 in respect of the said period…”. The use of these words implies that when Section 73 and Section 74 come into play, the interest will be calculated on the gross liability. Both these Sections talk about the procedure that is followed to determine the tax liability in cases when the “tax is not paid, or short paid or erroneously refunded, or where input tax credit has been wrongly availed or utilized”. The difference lies in the applicability conditions of both sections. Section 74 is attracted specifically when an element of fraud, wilful misstatement, or suppression of facts is present with an intention to evade tax. On the other hand, Section 73 is attracted in the case where the events occur for any other reason than the ones covered in Section 74. It is pertinent to note here, that both these Sections determine the amount of penalty which shall be applied on such person chargeable with tax. When these sections specifically mention certain percentages of tax liability to be imposed as a penalty in different situations, then why an additional penalty is being imposed by charging an additional interest under the veil of these exceptions? In the author’s view, the reason for charging the interest on gross liability, even in these exceptional scenarios is unfounded. Moreover, charging a higher interest in these cases makes the ‘interest’ punitive in nature. This goes contrary to the judgments delivered by the courts. One of the initial cases in this regard is M/s Pratibha Processors v. Union of India. In this case, the Supreme Court held that interest is compensatory in nature and should be payable only when the cenvat (now known as ITC) is actually utilized. It has been repeatedly adjudicated by the Supreme Court that “interest is a mere accessory to the principal and if the principle is not payable, consequently, no interest is payable”. The approach of the courts has remained the same in the post GST era as well. In the case of State of Karnataka v. Karnataka Pawn Brokers Association, the Supreme Court sustained the approach adopted in the Pratibha Processors’ case. This issue was further discussed in the latest case of Reflex Industries v. Sherisha Technologies dated 6 January 2020. In this case, the Madras High Court articulated the purpose of imposing the interest on the default amount and elaborated why in all scenarios the interest must be calculated only on the net amount. The court also held that the purpose of imposing interest is to compensate the state, for the loss of funds; they were entitled to receive. The interest imposed is in no sense a punishment. Hence, in a scenario where the interest is calculated on the gross amount, it will lead to the enrichment of the state, which is contradictory to the very purpose of this provision. These judicial decisions suggest that different treatment of the cases where proceedings related to Section 73 and Section 74 has commenced is not a correct approach. The amount of ITC had been effectively paid to the department, thus, reducing the amount of principal that is payable. Considering the fact that interest is only an accessory to the principle, the amount of ITC shall always be deducted to charge interest. The same should be the case when proceedings are commenced under Section 73 and Section 74. Moreover, if interest is charged on the gross value in these cases, then it would not be compensatory in nature. Instead, it would turn into a method of penalizing and punishing the person chargeable with tax.   The Unfilled Gap The above-mentioned judgments highlight the fact that the concerned amendment is a mere articulation and addition to the approach of the judiciary. It is brought into force to remove the

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A Tale Of Divergent Interpretations: Revisiting What Constitutes “International Commercial Arbitration”?

Arbitration Law /

[By Hitoishi Sarkar and Animesh Bordoloi] Hitoishi is a student at Gujarat National Law University and Animesh is an Assistant Lecturer at Jindal Global Law School. On 20th July 2020, the Rajasthan High Court in a rather interesting decision held that if the nationality of both the parties is Indian, then even a foreign seated arbitration will not qualify as an International Commercial Arbitration pursuant to Section 2(1)(f) of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’). The decision is significant as the court carved out a third type of arbitration which is foreign seated and enforceable as a foreign award while still not qualifying as an International Commercial Arbitration. In this post, we seek to analyze the dicey interpretation of the term “international commercial arbitration” by Indian courts while also contrasting the same with the UNCITRAL Model Law on International Commercial Arbitration. The latter part of this post deals with the implication of such a restrictive interpretation of the term from the standpoint of party autonomy. Factual Matrix An application under Section 9 of the Arbitration Act had been preferred by the applicant inter-alia praying that the respondent be restrained from invoking bank guarantee of rupees five crores, which it had furnished pursuant to the contract executed with the Respondent. The Respondent argued that the application was liable to be dismissed for want of jurisdiction, as the jurisdiction to hear the application under Section 9 of the Arbitration Act lies with the Principal Civil Court at Udaipur and not with the High Court. However, the applicant urged that considering the fact that the seat of arbitration was Singapore, the arbitration in question must be treated as an International Commercial Arbitration and as a necessary fall out of such finding, the application under Section 9 of the Arbitration Act be also held maintainable before the High Court and not before the Principal Civil Court. The Court held that an arbitration to be termed or treated as an International Commercial Arbitration, the agreement has to have at least one foreign party or a company whose nationality is other than that of India. The glaring discord with the Model Law Article 1(3) of the UNCITRAL Model Law on International Commercial Arbitration provides that an arbitration is “international” if the place of arbitration is situated outside the State in which the parties have their places of business. Thus, the central criterion relied upon by the Model Law is the internationality of dispute while defining an international arbitration. It is pertinent to note here that while drafting the Model Law, the Working Group also faced the same dilemma as divergent views were expressed as to whether “an arbitration should qualify as international if parties that have their places of business in the same State have chosen a seat outside their place of business.” However, the Working Group ruled in favor of party autonomy and thereby retained the aforementioned provision. Thus, the Rajasthan High Court’s decision in Barminco Indian Underground v.Hindustan Zinc Limited wherein it ruled that “if the nationality of both the parties is Indian, then even a foreign seated arbitration will not qualify as an International Commercial Arbitration” runs contrary to the approach of the Model Law and thereby is a step back from the standpoint of party autonomy. Analyzing the ambiguity surrounding the “Place of Business.” A relevant defense taken by the Petitioner in Barminco was that the Applicant is a part of the Barminco Group of companies with operations in Australia, Asia, and Africa. The rationale for such an argument was that section 2(1) (f) (iii) of the Arbitration Act construes an arbitration to be an “international arbitration” if the management or control of one of the parties is outside India. However, the Indian interpretation has pointed to an approach where even though a company is foreign-controlled if the place of incorporation in India, it is the latter that is used as the determining factor.  Interestingly, the Law Commission in its 246th Report which had initially proposed to delete the word ‘company’ from section 2(1)(f) (iii) re-enforced the ‘place of incorporation’ principle for determining the residence of a company thereby also concurring with the position of law laid down by the Supreme Court in TDM Infrastructure Private Limited v. UE Development India Private Limited and thus missed an opportunity to further the case of party autonomy.  Moreover, the international understanding of the issue has also been divergent. Unlike the Indian position which puts stress on ‘place of incorporation’, some jurisdictions focus on ‘place of business’, the interpretation of which has been left to the national legislations. While some countries such as Austria have adopted a more lenient approach by qualifying it as any location from which parties can independently participate in economic transactions, others such as Russia have adopted a narrower one. Irrespective of such varied interpretations, however, the primary debate boils down to where the Indian approach stands when compared to the Model Law, which is clear in its position that if one of the parties’ place of business is abroad, the arbitration ‘is’ international whereas Indian Courts have relied extensively on the “place of incorporation” principle while determining the nationality of parties pursuant to Section 2 of the Arbitration Act. International Commercial Arbitration: Decluttering the Indian understanding The Indian position on whether two Indian parties can choose a foreign seat for arbitration has caused much uncertainty. Although the judgments in Sasan Power Limited v. North American Coal Corporation India Pvt. Ltd. and subsequently in GMR Energy Limited v. Doosan Power Systems India, the High Courts inclined towards the position that it is permitted for Indian parties to choose a foreign seat. The Bombay High Court in Addhar Mercantile Private Limited v. Shree JagdambaAdrico Exports Pvt. relied on TDM Infrastructure to disregard the validity of arbitration clauses when two Indian parties had chosen a foreign seat. While High Courts do not have a binding precedent over other High Courts, such contradictory opinion reflects the need for the Supreme Court

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