Author name: CBCL

Taxation of Unintended Home PE and Work From Home Model

Leave a Comment / Taxation Law /

[By Shikha Mohini] The author is a student at Symbiosis Law School, Pune. Introduction In sync with international standards, India follows two types of taxation mechanisms- residence-based and source-based. In case of residence-based taxation, the tax is levied on the global income whereas in source-based, the tax procured is only on the income generated from the source country. In order to avoid double taxation on the same income in a particular time period in two different jurisdictions, countries usually enter into a Double Tax Avoidance Agreement (DTAA). The different articles of the DTAA govern taxation in matters where two states have simultaneous right to tax a particular income. Article 7 of the DTAA concerning taxation of business profits settles that the profits of an enterprise of one contracting state shall be taxable in the other contracting states only when a ‘Permanent Establishment (PE)’ is maintained in the latter. The source state shall tax the profits of the enterprise only to the extent attributable to the PE. In order to constitute a PE, there must be an existence of a fixed place of business where a foreign enterprise either partly/wholly carries out the business.[i] Due to the ongoing Covid-19 pandemic, countries have imposed lockdowns and international travel is banned. The employees of various multinational corporations have been stranded in different jurisdictions or have returned back to their home state, both of which may be different from the residential or incorporating state of the corporation. The employees are contributing to the generation of profits for the foreign enterprise by working from their home in a different jurisdiction which can lead to the emergence of a PE and consequent taxation of the profits of the enterprise in the state where the employee is residing. The present article seeks to analyse the emergence of unintended PEs and tax liability arising out of the Covid-19 pandemic. It also sheds a light on the grey area existing in international taxation with respect to a permanent ‘Work from Home’ model. Analysing The Concept Of Permanent Establishment As mentioned above, a PE must fulfill three essential criteria which are the existence of a place of business, the place should be fixed and a part/whole of the business of the foreign enterprise must be carried through it.[ii] A place of business[iii] can cover any premise, facility, or installation which is used for carrying out the business of the foreign enterprise in the source state. Exclusivity in carrying out the business and a formal legal right[iv] on the place is not considered a requirement for a PE. It is however necessary that the place of business carries on the core functions of the enterprise and the same is not intermittent in nature. The term ‘fixed’ means that the PE must be located at a distinct place and there must essentially be a link between the place of business and a specific geographical point in the source state.[v] There must be an identifiable location that constitutes a “coherent whole-commercially and geographically with respect to that business.[vi]” In addition, there must be a degree of permanency, i.e., the place of business must fulfill the threshold limit enumerated in the DTAA to constitute a PE. The threshold limit usually varies between 6 months and 1 year. The two exceptions to the ‘fixed place’ criteria is when the activities are of recurrent nature or when activities are wholly carried out in the source state for a short period of time. In the former scenario, all the periods of time during which the PE is in use is calculated in combination, and in the latter case, since the connection with the source country is exceptionally strong, the place may constitute a PE despite not crossing the threshold period. A third criteria mandates the PE to carry out the business of the foreign enterprise, in part or whole. It is necessary to note that interruptions in the operations will not lead to the ceasing of a PE status. A PE begins to exist at the commencement of the business activity of the foreign enterprise through it and ceases with the cessation of activity or disposal of the fixed place.[vii] Establishment Of Home Office As Fixed Place PE In India A complete lockdown was announced in India on 25th March, 2020 with international travel still majorly suspended. Due to the lockdown, either the employees of multinational companies were stranded in India or Indian employees of foreign enterprises returned back to their country. In either situation, provided they resumed their operation from their home, it could be argued that a possible PE is constituted. India will then have a right to tax the foreign enterprise on the income arisen or accrued here due to the operations of the employee. If such a home office operates, it satisfies the condition of ‘place of business’ and ‘fixed place’. The criteria of the foreign enterprise running its business ‘wholly or partly’ through the PE will depend on the facts and circumstances of each case.[viii] It is also necessary that such a home PE must carry out functions that are not preparatory or auxiliary in nature but constitute the core functions of the foreign enterprise.[ix] This again is a factual exercise and a subjective test.[x] The OECD commentary also mandates that for PE’s constitution, the foreign enterprise must require its employee to use the location for carrying out its business either by not providing an office when the nature of employment requires it or otherwise.[xi] It further goes on to give an example of a cross-border worker working from his home office in one State rather than the office made available to him in the other State. The commentary states that this scenario would not constitute a PE as the home office was not a requirement of the foreign enterprise. India in its observation however disagrees with the above example holding the stated situation to constitute a PE.[xii] Hence, when Indian nationals working in foreign companies returned back to India and

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The Merchant of Flipkart: Analyzing What NCLAT’s Recent Decision Means For The Indian E-Commerce Market

Leave a Comment / Competition Law /

[By Hitoishi Sarkar and Mr. Animesh Anand Bordoloi] Hitoishi is a student at Gujarat National Law University and Animesh is pursuing his LL.M from the National University of Singapore (NUS), Law. On 4th March 2020, the National Company Law Appellate Tribunal (India) (NCLAT) set aside an earlier order by the Competition Commission of India (CCI), which refused to investigate Flipkart India on charges of abuse of dominant market position under section 4 of the Competition Act, 2002. The informant’s primary contention was that Flipkart India sold goods to companies such as WS Retail Services Private Limited owned by its founders at heavily discounted rates and the same companies later listed these goods on Flipkart’s e-commerce platform thereby making it a clear case of preferential treatment. The decision is significant because it may open the floodgates of antitrust litigation for e-commerce companies such as Amazon, which are also battling increasing anti-trust litigation in Indian courts.[[i]] This post aims to expound on the broader implications of this decision for the e-commerce sector while also addressing the Indian statutory framework on competition law. Background The CCI has recently stepped up its enforcement activities in the e-commerce space. For instance, in January 2020, it released a Market Study on E-Commerce, which identified platform neutrality as a critical concern in the operation of such platforms. The Study is significant as for the first time it analyzed the issue of preferential treatment meted out to certain vendors’ by e-commerce platforms from the standpoint of anti-trust laws. However, interestingly the CCI had, in its earlier decision which was set aside by the NCLAT, refused to investigate Flipkart despite its alleged preferential treatment to promoter owned companies such as WS Retail Services Private Limited, holding that “the terms and conditions on which sellers access the Flipkart marketplace are standard and the incentive is based on objective criteria such as quality of product and volume and value of sales.” Likewise, the Ministry of Commerce & Industry vide its revised FDI policy dated 26th December 2018, prohibited e-commerce platforms from exercising ownership or control over the goods purported to be sold on their platforms. However, this policy has been heavily critiqued for its implications from the standpoint of customer dissatisfaction. Legal Analysis The NCLAT concurred to the appellant, in this case, the All India Online Vendors Association’s (AIOVA) argument of there being a ‘prima facie’ case of abuse of dominant position under section 4(2)(a)(ii) of the Competition Act, 2002. This is for the reason that Flipkart India Private Limited sold goods to its promoter owned company (WS Retail Private Limited) at unjustifiably low rates. Interestingly, the evidence of such predatory pricing was drawn from an earlier order of the Income Tax Appellate Tribunal (ITAT)(Bangalore Bench), which found that the parties purchasing products from Flipkart India were unrelated third parties, including WS Retail Services Private Limited. The CCI’s order refusing an investigation against Flipkart hinged on the aforementioned ITAT’s exoneration of Flipkart. However, the NCLAT rejected the CCI’s misplaced reliance on the ITAT’s order, ruling that the ITAT was “dealing only with the question of applicability of the concerned provisions of the Income Tax Act to the facts which were found by the Assessing Officer.” Furthermore, the NCLAT found the facts recorded in the same ITAT order to be of significant relevance to its adjudication as the facts provided scathing evidence against Flipkart of having sold goods to WS Retail Private Limited at preferential rates. For instance, the ITAT order records that Flipkart’s business model was based on a practice of “buying goods at say Rs.100/- and selling them to the retailers at Rs.80/-.” Such practices as was highlighted by the Assessing Officer before ITAT contrary to popular opinion was not an ‘irrational economic behavior’ of suffering continuous losses but that of predatory pricing which was used to enhance branding as well as market intangibles so as to increase their valuations, leading to more venture capitalist’s investment. Such predatory pricing by established players in the market, is additionally harmful to the small retailers and could lead to a contravention of section 4(2) and 3(4) of the Competition Act. CCI’s dilemma in investigating Flipkart and other such entities for anti-competitive practice is further aggravated by the absence of the definition of “competition” from the Competition Act, 2002. Although the CCI has treated “competition” by leaning towards the US approach of following a consumer welfare standard which focuses on the price of goods and services rather than the number of players in the market, the theoretical ambiguity around the meaning of the term has also clouded the understanding of “dominance” given that its assessment depends significantly on the economic considerations. It is argued that while dealing with digital firms the meaning of dominance must be extended to include non-price considerations thereby extending the ambit beyond the traditional metrics so that the unique nature of online services provided by digital platforms is kept in check.  However, if we are to rely on the international understanding of dominance, it is pertinent here to note the ruling of the European Court of Justice in the United Brands v. Commission, which defined dominance as “a position of economic strength enjoyed by an undertaking, which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers.” Flipkart’s practices scratch the ambit of this definition given their multi-layered business model which has helped them achieve deep discounts to see off competitions, at the risk of making huge losses, which also points out the economic strength enjoyed by such platforms. Interestingly, the Supreme Court, in Uber India Systems v. Competition Commission of India, had held such losses bereft of any economic sense suffered by companies to see off competitors as a prima facie indication of their position of strength. It would only be logical given the current circumstances to extend the findings to e-commerce platforms as well.

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Hinged Upon Misplaced Reasoning: NCLAT Disallows Set-Off Under the Insolvency Regime

Leave a Comment / Insolvency Law /

[By Riya Jain and Kajal Singh] Riya is a graduate from the Institute of Law, Nirma University and Kajal is currently a student at the Institute of Law, Nirma University. Introduction Set-off is a plea in defense, which by adjustment would wipe-off or reduce the liability of the debtor.[i] It is an equitable right that allows parties to cancel or offset the mutual debts that the parties owe towards each other. Under Indian laws, set-off is categorized under two heads, namely, equitable set-off, which stems from the basic principles of equity, justice and good conscience, and legal set-off, which is envisaged under Order VIII Rule 6 of the Code of Civil Procedure, 1908. The usage of set-off in insolvency cases has occasioned much debate across jurisdictions. Recently, NCLAT in the case of Vijay Kumar V Iyer v. Bharti Airtel & Ors.[ii] had the opportunity to comment upon the nature of set-offs and their utility in matters concerning insolvency. NCLAT in the instant judgment held that no dues can be set off during the period of the Corporate Insolvency Resolution Process (CIRP) when the company is under moratorium. Further, NCLAT opined that if such set-off is allowed it would mean that creditor is accorded preferential treatment which stands in contravention to the tenets of the Insolvency and Bankruptcy Code, 2016 (the Code). NCLAT’s judgment raises certain important questions with reference to a creditor’s right to claim set-off against a company under insolvency. The authors in the subsequent discussion will critically analyze the judgment and argue that NCLAT’s ruling, in not allowing the set-off, lacks perspicuity and fails to provide the much-needed clarity required in respect of set-off of claims under the Code. Factual background & Judgment A Spectrum Trade Agreement (“STA”) was entered into between Aircel Limited & Dishnet Wireless Limited (Aircel Ltd.) and Bharti Airtel. Pursuant to the agreement, Airtel Ltd. was to furnish bank guarantees of approximate INR 453 crores on behalf of the Aircel Ltd. Pertinently, Aircel, pursuant to unpaid invoices, also owed an approximate amount of INR 112 crores to Airtel Ltd. As Aircel Ltd. entered into insolvency, certain differences with reference to the STA arose between the parties. Consequently, the differences were first adjudicated by the Telecom Disputes Settlement and Appellate Tribunal, and subsequently by the Supreme Court (SC). In view of the SC judgment, Resolution Professional (RP) pursued Airtel Ltd. to pay INR 453 crores to Aircel Ltd.  Subsequently, Airtel Ltd. paid INR 341 crores to Aircel Ltd. and withheld 112 crores by setting-off the said amount against the total amount owed to Aircel. Airtel then moved an application before NCLT Mumbai to get an affirmation order with respect to the set-off made.  NCLT Mumbai, in its order dated 1.05.2019, allowed Airtel to set off the amount to the tune of approx. Rs.112 crores. Pursuant to NCLT Mumbai’s order, RP of the Corporate Debtors filed a complaint under section 61 of the Code. RP alleged that the NCLT, by permitting the set-off, has accorded Airtel Ltd. a preferential treatment over other operational creditors and has resultantly violated the objective of the Code, which is to balance the interest of all stakeholders. Moreover, it was contended by the RP that this has also led to a violation of section 14 of the Code. NCLAT observed that in light of the non-obstante clause, the provisions of the Code will prevail over accounting conventions. Further, it adverted to the judgments in the case of Indian Overseas Bank v. Mr. Dinkar T.Venkatsubramaniam[iii] and MSTC Ltd. v. Adhunik Metaliks Ltd &Ors[iv] to conclude that no dues can be set-off when moratorium under section 14 is in force. Analysis NCLAT in the instant judgment has failed to explain the application of the cases and provisions so referred, to the facts and circumstances of the present case. NCLAT relied upon the case of Indian Overseas Bank and MSTC to conclude that set-off shall not be permitted. In the aforementioned cases, NCLAT held that after the admission of an application under Section 7 or 9 of the code, the creditor is not allowed to recover any dues from the corporate debtor as the same would lead to the creation of additional burden on an already stressed debtor.[v] Notably, set-off does not tantamount to recovery of dues as set-off is not merely a defense to a creditor’s claim but provides equal relief to the debtor as well. Additionally, set-off does not create stress on the assets of a company as both the parties are reciprocally creditor and debtor to one another, whereas, recovery of debts leads to the creation of a liability on the debtor, thereby, exacerbating its condition. Resultantly, set off in a way helps in reducing the pressure on the debtor by either reducing or extinguishing the outstanding amount altogether. NCLAT could have examined the issue better had it revisited the elementary rationale behind moratorium. The primary purpose of the moratorium is to disallow any transaction that will result in creating more burden on an already stressed Corporate Debtor (CD). However, if the transaction carries the prospect of any kind of refund of money to the CD, then the same shall not be disallowed at any cost. Axiomatically, as held in the case of SSMP Industries Ltd. vs. Perkan Food Processors Pvt. Ltd.[vi], the term “proceedings” as envisaged under section 14(1)(a) of the Code does not include “all” proceedings. Therefore, the ambit of section 14(1)(a) extends only to those proceedings and suits which might pose a coercive action against the CD. Appositely, NCLAT, instead of rejecting the set off categorically, should have objectively assessed the situation taking into consideration the situation of the CD. Essentially, if allowing the set-off does not lead to further dissipation of the assets of the debtor and strengthens the financial position of the same, the parties should have been allowed to carry out the set-off. Further, as opposed to the Provincial Insolvency Act, 1920, even though there is no particular provision of set-off under the present code, it

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Cross-Border Insolvency and International Commercial Arbitration: The Need for Legislation

Leave a Comment / Arbitration Law, Insolvency Law /

[By Nidhi Thakur and Akshita Tiwary] The authors are students at Government Law College, Mumbai. Introduction The current Covid-19 pandemic has had an adverse impact on economies all over the world. The global financial crisis has resulted in recession, tightening of credit markets and a widespread lack of economic confidence. All of this has resulted in a substantial increase in insolvencies. Most commercial contracts include an arbitration clause that allows them to resort to arbitration in case of breaches. For parties participating in arbitral proceedings during or immediately after the pandemic, the potential insolvency of an award debtor will become a real concern. This interaction between national insolvency regimes and international commercial arbitration is an issue which has received relatively little attention. With several multinational companies declaring bankruptcy or insolvency, foreign creditors would be at a disadvantage when it comes to protecting their interests unless states endeavour to frame comprehensive laws on the subject. These laws can strengthen confidence in the international dispute resolution mechanism by paving the way for consistent procedures and predictable outcomes. In consonance with the same, this article aims to highlight the intersectionality and complexities arising out of parallel cross-border insolvency and international commercial arbitration proceedings, with a particular focus on the Indian stance. Intersectionality between International Commercial Arbitration and Cross-Border Insolvency “Arbitration and insolvency processes embody, to an extent, contrasting legal policies. On the one hand, arbitration embodies the principles of party autonomy and the decentralisation of private dispute resolution. On the other hand, the insolvency process is a collective statutory proceeding that involves the public centralisation of disputes so as to achieve economic efficiency and optimal returns for creditors.” The aforesaid was rightly upheld by the Singapore Court of Appeal in the case of Larsen Oil and Gas Pte Ltd v. Petroprod Ltd. International commercial arbitration is a transnational feature that seeks to resolve disputes arising out of commercial transactions conducted across national boundaries. On the other hand, insolvency is a mostly domestic proceeding which gets triggered when companies are no longer in a state to meet their financial obligations to creditors as debts become due. Cross-border insolvency occurs in a situation where the insolvent debtor has assets in more than one nation, or where some of the creditors belong to jurisdictions other than the one where the insolvency proceedings have been filed. The United Nations Commission on International Trade Law sought to create uniform model laws for both these areas. As a result, the UNCITRAL Model Laws on Cross-Border Insolvency and International Commercial Arbitration were formulated in 1997 and 1985, respectively. However, the organisation has failed to address the interrelationship between these model laws. International arbitration and insolvency regulation set in motion distinctive legal procedures, with each having its own distinct purpose, objective, and underlying policy. Therefore, intersectionality between both these areas of law poses a challenge for courts and arbitral tribunals. Certain judgements offer a unique opportunity to discuss the delicate interaction between arbitration and insolvency. In the case of Syska v. Vivendi, the English Court of Appeal upheld the decision of the LCIA arbitral tribunal that foreign insolvency proceedings should have no effect on pending arbitration proceedings, which are decided according to the law of the land where the lawsuit is pending. In this judgement, Lord Justice Longmore rightly said that to protect the legitimate expectations of people in business with regards to the certainty of transactions, lawsuits should come to an appropriate conclusion. The Swiss Supreme Court’s decision of 2009 in the Vivendi v. Elektrim dispute upheld the award of an arbitral tribunal seated in Switzerland, which declined to exercise jurisdiction over Elektrim after it had been declared insolvent in Poland. However, in 2012, the Supreme Court overturned this decision to declare that insolvency proceedings do not affect the arbitral tribunal’s jurisdiction. The rationale behind this was that the capacity to participate in an arbitral proceeding presupposes general ‘legal capacity,’ which bestows certain rights and obligations upon the company. These rights and obligations remain unaffected even when insolvency proceedings have been commenced according to domestic laws. Hence, insolvency proceedings would have no bearing on the arbitration agreement. This gives arbitrators in Switzerland a wide jurisdiction to decide disputes relating to insolvency cases as well, which includes claims made on behalf of the estate itself. This reasoning is a desirable one, given that it protects the interests of cross-border creditors who may find themselves left without any remedy when arbitration proceedings are subverted to domestic insolvency laws. Complexities arising due to Parallel Cross-Border Insolvency and International Commercial Arbitration Proceedings When considered unilaterally, both seem to have an established set of laws in place. However, an inter-jurisdiction parallel proceeding raises a multitude of issues. One difficulty might be the enforceability of an arbitration agreement made before the insolvency of one of the parties. A second might be whether and to what extent the insolvency matters or bankruptcy issues could be made the subject of the arbitration. A third could be whether a stay of the arbitral proceedings could be given when insolvency proceedings have commenced. A fourth relates to the enforceability or challenge of an arbitral award on substance pending or after insolvency. A fifth might be the role of the judiciary in controlling insolvency proceedings against the background of arbitral proceedings having been commenced. The list of different contextual settings and issues can go on.[1] This anomaly requires countries to develop their domestic legal framework, which can harmoniously resolve these issues. Unfortunately, many nations, including India, have not yet taken steps to rectify this lacuna. Given the context of the current pandemic, such measures need to be deliberated upon urgently. An Overview Of Key Indian Law Considerations The Arbitration and Conciliation Act, 1996, is the fundamental law governing arbitration in India and is widely based on the UNCITRAL Model Law on International Commercial Arbitration (1985). It was enacted to consolidate, define, and amend the law concerning domestic arbitration, international commercial arbitration, and the enforcement of foreign arbitral awards in India.

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Leniency Regime In India: An Incoherent Approach Of The CCI

Leave a Comment / Competition Law /

[By Kirti Talreja and Abhishek Singh] The authors are students at National Law University, Odisha Introduction The Competition Act, 2002[i] (hereinafter “The Act”) was enacted with the objective of ensuring healthy competition and eradicating anti-competitive practices in the market. Competition authorities across the globe have considered cartels as the most heinous form of anti-trust offence. Eradicating cartels have been the top-most priority of most of the jurisdictions and the Competition Commission of India (‘hereinafter’ “The Commission”) has been no exception to it. However, over time, detecting and prosecuting cartels have become a challenging task for fair trade regulators. Henceforth, in a bid to aid enforcement, various jurisdictions, including India, have adopted leniency regimes to encourage undertakings involved in cartels to disclose information about any existing cartels in exchange for complete or partial immunity. Since the enactment of the legislation, the Act has gone through a series of amendments taking valuable insights and considerations from multifarious developed jurisdictions across the globe. In 2017, certain amendments were also made to the Lesser Penalty Regulations[ii] which considerably increased the scope of the powers conferred upon the Commission regarding leniency programmes in India. Why Leniency? Cartels are associations of manufacturers or sellers whose objective is to maximize their profits collectively through price-fixing, limiting supply, or any other practices. These types of agreements and associations deter healthy competition in the market thereby hampering the sustenance and growth of competitors in the market. For instance, a market study revealed that the end consumers pay, on average, 49% more than the authentic price of the products.[iii] It is appalling to note that, 249 cartel cases investigated in 20 developing countries exhibited that the excess profits bagged from the cartels were equivalent to 1% of the GDP of various countries.[iv] Cartels have been extremely difficult to prove as the unfolding of the events to detect a cartel is based solely on circumstantial evidence like communications among the firms, variations in bid quotations not justified by cost considerations, and minutes of the meetings held with competitors, etc.[v]The European Union, bestowed with a robust and erudite anti-trust regime, detects 70-75% of cartel cases spurred by undertakings seeking leniency before the Commission.[vi] Henceforth, the fair-trade regulators worldwide supplement cartel detection with a robust leniency regime. The leniency clauses are a type of whistle-blower protections that proffer undertakings involved in cartels an opportunity to take a step forward and disclose information about the cartels. The undertakings have a chance to provide substantial evidence and cooperate with subsequent investigations, in exchange for immunity or leniency in the penalty imposed, which would have otherwise faced stringent action if the existing cartel would have been disclosed by the Commission itself. Section 46 of the Act, which provides for the leniency clause, reads as follows: “The Commission may, if it is satisfied that any producer, seller, distributor, trader or service provider included in any cartel, which is alleged to have violated section 3, has made a full and true disclosure in respect of the alleged violations and such disclosure is vital, impose upon such producer, seller, distributor, trader or service provider a lesser penalty as it may deem fit, than leviable under this Act or the rules or the regulations.”[vii] This clause has been adopted with the prime motive of unveiling the cartels existing in the market and to deter undertakings from entering into anti-competitive agreements. The intent, based on prisoner’s dilemma, is to create a sense of distrust among the participants involved in cartels as there is a perpetual threat of disclosure of the cartel agreement by any of the participants to the authorities concerned. Pertinently, before delving into the lesser penalty regulations, the Commission must inoculate certain essential conditions in its orders such as the nature of the information,i.e., it must be a ‘vital disclosure’[viii], the cooperation of the applicant must be genuine, full and expeditious, and the relevant evidence must not be hampered with or manipulated, to mention a few.[ix] The Indian Leniency Regime: A Snail’s Walk The USA was the first country to adopt the leniency practices. This was done with the objective of alleviating the problems faced by the competition authorities in detecting cartel arrangements. A two-fold increase in the detection of such cases was witnessed by the country within 3 years. A market study exhibited that with the adoption of the leniency regime, the rate of cartel formation alleviated by a massive 59% and the cartel detection augmented by 62%.[x] However, the Indian Competition Law regime has not been successful in emulating success as that of the USA. The reason is the excessive discretionary powers bestowed upon the Commission in India. The Regulations state that the Commission thus enjoys a very vast discretion to decide the penalty to the first applicant, on the basis of parameters like vital disclosures, stage of the application, and subsequent confessions. Furthermore, “any other condition” parameter is rather ambiguous and adds a layer of uncertainty, thereby acting as a barrier to the undertakings involved in cartels to approach the Commission. Contrast this, the leniency regime in developed jurisdictions like the USA and Australia have well-formulated provisions wherein the first undertaking to disclose about the cartel gets leniency.[xii] Orders of the Commission- A String of Irregularity Continues  The ineffectiveness of the Commission in passing orders concerning leniency programmes can be gauged by the non-uniformity in all the five leniency orders that have been passed in the last 10 years of the clause’s inception. The first leniency order was passed by the Commission in 2007. In a suo-motu action of “Cartelisation in respect of tenders floated by Indian Railways for supply of brushless DC Fans and other electrical items”, the Commission penalized 3 undertakings inclusive of their officeholders for bid-rigging. The Commission granted one of them a 75% markdown in the total leviable penalty for becoming an approver and adding significant value to the determination of the existence of a cartel. However, despite Pyramid being the first applicant to plea leniency, the Commission did not scrap

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GAFA – An Economy of Untamed Capitalism

Leave a Comment / Competition Law, Contemporary Issues /

[By Dhriti Mitra] The author is a student at Symbiosis Law School, Pune. Introduction GAFA, an acronym coined in France for Google, Apple, Facebook, and Amazon, identifies these Big Tech companies as an entity with expansive capital infrastructure and great customer reach. However, the fact that these companies can use their popularity to ensure that its products sit on top while suppressing competition in downstream markets, have repeatedly drawn the attention of the antitrust authorities. In today’s digital era where personal data is the currency to market power and expansion, GAFA has a tight grip over an abundance of user data. Google is the largest search engine in the world and has access to almost every search that we make with the help of the internet. Apple monopolizes through its mobile operating system platforms (iOS) and its downstream apps, for example, apple music. Facebook holds an advantageous position in the social network market, especially after it purchased Instagram and WhatsApp in 2012 and 2014 respectively. Amazon runs the most prominent e-commerce platform that allows consumers to purchase all kinds of goods from third-party vendors as well as its brand. It can be discerned from the above, that to protect competition, it is essential to have adequate legal regulation in this ‘winner takes all’ market system. GAFA poses multiple challenges to the overall competition existing in various global markets and the same has been discussed below along with the extant regulatory framework and the tenable courses of action that will help deal with the defined issues. Predominant Facets of GAFA It is an established fact that the aforementioned tech quadropoly dominates our digital spaces, but that in itself is not a breach of antitrust provisions. All digital markets have a unique set of characteristics that create significant barriers to entry, access to large amounts of consumer data, and often low cost or free. It is therefore important to understand them before we delve into exactly how their behavior is a threat to competition. Two-sided Markets: In a two- sided market, the size of the network determines the user utility. Due to the existence of economies of scale, the overall cost incurred in providing a service automatically reduces. Hence, the reduced cost allows companies to provide the services at a lower price or for free. GAFA is characterized by this form of market and accumulates a substantial amount of data, human resources, and technology, thereby enforcing its market dominance. Control over Data: Algorithms and data influence indeed make our lives infinitely easier, but it is also a matter of great concern how people who have access to this data, utilize it. For example, through software and devices such as Alexa, Google Home. and Siri, GAFA has complete access to our data usage on a day to day basis.  All in all, from the news we read, to the friends we add on our social media, are all influenced by a variety of cognitive biases that we are unaware of. Advertisement Income: Prima facie the four companies seem to diversify into different markets, but one thread that binds them all is their advertising revenue. In order to provide inexpensive or free services, it is essential that the revenue is earned from elsewhere. Advertisement helps in subsidizing their overall costs and allows GAFA to earn a substantial portion of their revenue. International Taxation: The traditional models of taxation that were directed towards brick and mortar businesses are not well equipped to handle the taxation of online businesses. GAFA is known to have made large revenues by shifting all its profits to low-tax jurisdictions. For example, Amazon received undue tax benefits of around €250 million in Luxembourg. Threats Posed by GAFA GAFA’s omnipotence helps them to impose their products and services on the masses, thereby creating multiple threats that may kill innovation and competition in such markets. Some of the threats have been discussed as follows; Firstly, in the case of data protection, GAFA’s algorithms have pressed us into conformity and laid waste to privacy. A great example of this is how Cambridge Analytica with the help of data collected from millions of Facebook users, were able to target messages in support of Brexit in the UK and Trump’s 2016 election in the US.  Although this episode in particular concerns Facebook alone, it has highlighted the excessive power of GAFA over our societies. Secondly, GAFA banks on its dominance in one market to enter new markets and gain substantial market share in that sector. For instance, Facebook introduced its cryptocurrency libra, and GAFA have their respective e-wallet platforms. With its significant investments in the provision of financial services, if unregulated, GAFA may become the future of finance. On the legal front, GAFA has often been charged for breach of antitrust provisions.  In the recent past, Google was fined €1.49 billion by the EU for abusing its market dominance for the brokering of online search adverts, Apple was fined $1.2 billion by the French antitrust authorities for the creation of cartels within its distribution network and abusing the economic dependence of its outside resellers. Germany’s top court declared that Facebook has abused its dominance in the social media sector by illegally harvesting user data for its benefit, and Amazon is under the EU’s radar for breach of antitrust provisions for its illegal use of data from third-party retailers that sell on its marketplace. Unfortunately, these cases account for only a few of the anticompetitive activities practiced by GAFA. Lastly, as GAFA indulges in a great deal of non- price competition, most of its services are primarily free for its users. So much so, that one could argue that they promote consumer welfare. However, GAFA earns its currency from the data that its users provide, and by concealing the full extent of its, they cause more harm than good. It is also important to note the loss that is caused to small businesses that do not have the resources or ownership of other vertical platforms in

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Online Dispute Resolution In Digital Payments– An Attempt To Read Consumer Protection In Digital Payments Framework In India

Leave a Comment / Contemporary Issues /

[By Vanya Chhabra & Sadhvi Chhabra.] Vanya is an associate at AZB & Partners, Delhi and Sadhvi is a student at National Law University, Jodhpur. The blog post seeks to address the introduction of ODR by the RBI as the need of the hour on account of increased digitalization and growth in the digital payments ecosystem. It traces and attempts to capture the transition in approach to a consumer-friendly mode to deal with the disputes online considering conventionally the industry has seen onerous consumer litigation. The blog in detail explores the contours of RBI policy to address concerns related to failed transactions while using ODR in digital modes of payment. The blog also touches upon the challenges involved in the evolution of the RBI policy and how innovation may come to rescue dispute resolution with fintech solutions. India is rapidly moving towards a digital economy. E-commerce has captured large segments of the Indian population making the online market space more complex and information rigorous due to the rising number of digital transactions. The RBI has shown quick adaptability to hold onto the speed of the steadfast moving financial technology with the introduction of online dispute resolution for digital payments. The increased digitisation has radically altered the relationship between the customer and the financial institution. This blog aims to analyse RBI’s attempt to introduce the online dispute resolution mechanism for the digital payments ecosystem in India. Post-demonetization, the digital payments ecosystem saw a sharp acceleration and growing malleability towards online cash-less payments. The major contributors to this success and growth in digital payments are the flagship government initiatives inter alia Digital India, etc. Furthermore, in order to address the growing COVID- 19 concerns, digital payments appeared as one of the most promoted method of payment. Keeping in mind the increase in transactions, the questions of faster dispute redressal remained prominent and unanswered. In the past, the banking industry adopted a hands-off approach while dealing with disputes that arose out of digital transactions. As a result, it was seen that in a plethora of cases, the realm of disputes had always been onerous with the burden of proof on the consumer to fight for their rights through the means of litigation. In order to address the rising concerns relating to digital transactions, the Reserve Bank of India (“RBI”) introduced a policy of “Online Dispute Resolution (ODR) for Digital Payments” vide its statement on developmental and regulatory policies dated August 6, 2020 (“Policy”), which aims to enhance and ease the digital payments framework in India. The purpose of introducing such a Policy with mandatory compliance for payment system operators is to encourage an easy and accessible online dispute settlement for cases arising out of digital transactions. The effort of addressing online disputes through the means of this  Policy is a welcome step to match the global outlook on FinTech policies. Furthermore, in order to accommodate the rapid digitisation of courts, Niti Aayog is also exploring avenues for advancing online dispute resolution in India. The Policy is in consonance with the RBI’s mission to ensure that all payments and settlement systems operating in India are inter alia primarily safe, secure, efficient, and accessible. Through this Policy, the RBI seeks to use customer friendly online dispute resolution to address concerns related to failed transactions while using digital modes of payment like Net Banking or E-wallets or any other grievance as raised. The ease of dispute resolution even though dependant on the design and structuring of applications by the payments system operators, shall be a significant step to boost to digital payments ecosystem in India. Online Dispute Resolution in Digital Payments Online Dispute Resolution (“ODR”) could be simply defined as an online method of dispute resolution using the means of technology to facilitate the dispute resolution between parties. The various schools of thought bifurcate multiple dispute resolution techniques between involving absolute control over the process to reach an amicable solution (negotiation) and the parties being mere spectators to a process led by third parties in fiduciary relationships (arbitration).. ODR for digital payments would involve ‘technology-driven redressal mechanisms’ that are rule-based, transparent and involve minimum (or no) manual intervention to deal with the disputes in an effective manner within a specified timeline. In India, the payment systems are governed and regulated by The Payments and Settlement Systems Act, 2007 (“PSSA”). Regulatory Regime of ‘Payment System’ Under The Payments and Settlement Systems Act, 2007 A ‘payment system’ under PSSA means a system that enables payment to be effected between a Payer and a Beneficiary. The essentials to qualify as a ‘payment system’ would involve performing three major functions – clearing, payments or settlement services or all of them; the systems enabling credit card operations, debit card operations, smart card operations, money transfer operations or similar operations (Section 2(1)(i), PSSA), while categorically excluding stock exchanges (Section 2(1)(i)  r/w Section 34, PSSA). The RBI is a statutory regulator of payment and settlement systems in India (Section 4 of PSSA), while the Board for Regulation and Supervision of Payment and Settlement Systems (“BRSPSS”), a sub-committee of the Central Board of the RBI, is the highest policy-making body on the payment and settlement systems. Before the introduction of the Policy, the RBI had a fast- track and cost-free dispute resolution mechanism for complaints regarding digital transactions undertaken by customers of the system participants vide the As per Clause 9 of the Scheme, the complainant for redressal of any grievance must first approach the system participant concerned. “If the system participant does not reply within a period of one month after receipt of the complaint or rejects the complaint, or if the complainant is not satisfied with the reply given, the complainant can file the complaint with the Ombudsman for Digital Transactions within whose jurisdiction the branch or office of the system participant complained against would be located.” As per the RBI, there has been ‘a concomitant increase’ in the number of disputes and grievances due to the steady rise in the

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Debunking the Constitutionality of the NFRA

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[By Ridhi Arora and Hitoishi Sarkar] The authors are both students at Gujarat National Law University. On 22 July 2020 the former head of Deloitte Haskins and Sells LLP, Udayan Sen was banned from being appointed as an auditor or internal auditor for any company for a period of seven years in an order passed by the National Financial Regulatory Authority (“NFRA”) The NFRA found him guilty of professional misconduct in his audit of the fraud-ridden IL&FS Financial Services Ltd (“IFIN”) and also imposed a monetary liability of Rs 25 lakhs.  Interestingly, Mr. Udayan Sen had challenged the constitutionality of the NFRA vide Writ Petition W.P (C)  no. 1524/2020 before the Delhi High Court. Despite the same being sub judice before the Delhi High Court, the NFRA went ahead with its proceedings and passed an order dated 22 July, 2020. This post seeks to analyse the constitutional issues surrounding the NFRA, while also analysing it vis-à-vis the provisions of the Chartered Accountants Act, 1949 (“CA Act”) and the Supreme Court jurisprudence. Background The NFRA is established under Section 132 of the Companies Act, 2013. The NFRA aims to regulate the conduct of chartered accountants in the country and draws heavily from section 22 of the CA Act, which conclusively lays down the definition of what constitutes professional misconduct. Evidently, the NFRA comes in direct conflict with the Institute of Chartered Accountants of India (“ICAI”), which grants licenses to the Chartered Accountants and is the regulator for the profession of chartered accountants in India. The ICAI had expressed their reservations over the constitution of NFRA and the same was noted by  the Standing Committee On Finance in its 37th Report as follows: “a) Multiple Regulatory Bodies: Creating NFRA would result in two regulatory bodies (ICAI and NFRA) governing the same audit profession. This would result in duplication of efforts, added huge costs with no significant incremental benefits. This would also change the self-regulated profession to an externally regulated body. b) The ICAI Context: NFRA might seem necessary to ensure that standard-setting and enforcement are not carried out by the same body (ICAI). However, it would be pertinent to mention that the ICAI, has been created by an Act of Parliament for this specific dual role (like SEBI). The constitution of NFRA needs to be re-examined in the mentioned contexts where relevant mechanisms and units have been enabled by and/or within the ICAI organization to deliver the twin objectives of robust policy-making and unbiased enforcement in a timely manner. c) Relevance of NFRA in the context of the Companies Act 2013: The objective of NFRA is to regulate audit quality and protect the public interest. These, in any case, are also the main objectives of ICAI which strives to be a world-class regulator.” Interestingly, the Committee opined in its Report that the CA Act should be streamlined and strengthened without needlessly adding to regulatory levels and the Centre could simply amend the CA Act to grant it more power if the need arose. However, the Ministry of Corporate affairs went ahead with the constitution of NFRA. Demystifying the Constitutionality The NFRA presents a significant challenge from the standpoint of constitutionality when looked at through the prism of several fundamental rights such as the freedom of profession, guaranteed under Article 19 (1) (g) of the constitution. An authority which has not issued the license to practice to an individual should not exercise the power to investigate a person for professional misconduct. The law on this point has been well settled by a Five Judge Bench of the Supreme Court in Supreme Court Bar Assn. v. Union of India & Anr., when it ruled that “since the jurisdiction to grant a licence to a law graduate to practice as an advocate vests exclusively in the Bar Council of the State concerned, the jurisdiction to suspend his license for a specified term or to revoke it also vests in the same body.” [i] Juxtaposing the aforementioned judgment with the functions of the NFRA, it seems that the authority operates in contradiction to principles of law laid down by the Court. The notion of the unconstitutionality of the NFRA further stems from its considerable overlap with the CA Act. This is due to the Supreme Court’s generally broad interpretation of the CA Act. For instance, in Council of the Institute of Chartered Accountants v. B. Mukherjea, a Three-Judge Bench of the Supreme Court held that “any violations by a Chartered Accountant even as a liquidator will also be dealt with under the CA Act because the legislation is aimed at regulating the CA profession in totality.” [ii] Furthermore, the regulatory tussle between the ICAI and the NFRA will be unavoidable considering that section 22 of the CA Act clearly lays down grounds of misconduct for the CAs. Thus, the operation of both the ICAI and the NFRA will add to the already labyrinthine Indian regulatory framework. It is no longer res integra post the Supreme Court’s ruling in Ashoka Marketing Ltd. v. Punjab National Bank and Ors., that “when general enactment covers a situation for which specific provision is made by another enactment contained in an earlier Act, it is presumed that the situation was intended to continue to be dealt with by the specific provision rather than the later general one.” [iii] Thus, considering that the CA Act is a special act to regulate the conduct of Chartered Accountants, even after the enactment of the later general enactment i.e , section 132 of the Companies Act, 2013 the specific provisions of the CA Act are likely to prevail.  The Supreme Court has in its ruling in Maganlal Chhaganlal (P) Ltd. v. Municipal Corpn. of Greater Bombay frowned upon such a practice and opined that “where there are two procedures for determination and enforcement of liability, be it civil or criminal or revenue, one of which is substantially more drastic and prejudicial than the other, and they operate in the same field, without any guiding

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Blockchain and Competition: Anti-Trust Practices and (In)Sufficiency of Legal Regime

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[By Abhinav Gupta] The author is currently a student at National Law University, Jodhpur. Introduction The ever-increasing integration of technology with daily functions has led to better innovations and has revolutionized commercial transactions. One such prominent innovation is Blockchain Technology. It has varied applications and has the potential to impact the functioning of a wide array of commercial activities, from a small It is expected that the Blockchain Technology will significantly. Most of the financial institutions have shown great interest in blockchain technology because of its and significantly reduce processing time. Despite this, the businesses using the blockchain technology for their operations need to be very careful of anti-trust issues, especially in cases where they have to interact with their competitors. However, blockchain does not pose any inherent competition threat to the firms. It has to be analyzed on the basis of each situation, judging by the information that was exchanged. In this article, the author seeks to explore the anti-trust challenges posed by the use of blockchain and whether the current provisions of the Competition Act, 2002 (hereinafter “the Act”) are sufficient to tackle these challenges. Blockchain Technology Blockchain is a ledger of transactions. It is a distributed ledger that resides on each participant’s device. In order to complete a transaction on a blockchain network majority of the participants need to consent. This is known as a consensus mechanism. Each copy is updated whenever a transaction or set of transactions is completed. By using the blockchain, the stakeholders are placing their trust in a technological platform and this rules out the need for intermediaries such as banks, governments, brokers. In order to better understand the underlying anti-trust challenges, it is important to understand the types of blockchain networks. Public/Open Blockchain: Public Blockchain is based on an open network. The information on the network can be accessed and joined by anyone, as it is available in the public domain. For e.g. Bitcoin Blockchain is a public blockchain, where anyone can read the data on available on it. Private/Permissioned Blockchain: As the name suggests, a private blockchain or permissioned network requires a permission/invitation for access, hence restricting the participant pool. The essential feature of private blockchains is that it cannot be accessed and identified by outsiders and only parties to a particular transaction can access the information available over such a network. Anti-Trust Practices Collusive Behavior: A major issue posed by the advent of blockchain technology is that it might lead to collusion among the competitors in a market. The major players in the market might come together and form a blockchain consortium. Concern has been raised that blockchain is merely a means of colluding and getting away with it. A discussion paper on ‘Blockchain Technology and Competition Policy’, issued by the Organization for Economic Co-operation and Development states that the most essential enabling factor behind the blockchain technology is ‘authentication’.  This paper also analyses whether there is a possibility of collusion via the use of Blockchain. There is a possibility of collusion when all the competitors start using the same blockchain network. In this scenario, it will become easier for the cartel participants to identify deviations due to the increased transparency. An additional benefit is that as most of the contracts entered into between the competitors will be smart contracts backed by blockchain. Hence, in case a cartel participant deviates from the agreement there will be automatic punishments. Blockchain’s transparency can facilitate the exchange of information between the participants of the blockchain. Due to this, price coordination may emerge between the members as they will get to know about price changes as soon as it happens and can adapt to such change accordingly. Moreover, due to increased transparency provided by a market-wide blockchain, the firms in an oligopolistic market may coordinate without any explicit agreement or direct contact. A blockchain application works in different ways and hence, there cannot be a straitjacket formula of finding out if there is collusion or not. Ordinarily, where there is no exchange of personalized consumer information or disclosure of price information, it cannot be considered anti-competitive.  This means that an investigation for an alleged anti-competitive agreement over blockchain would largely be fact-based, investigating the information that was shared between the blockchain participants. Abuse of Dominance: The blockchain consortium formed by the firms in the market by coming together might acquire a dominant position in the market. If this is the case, the consortium may refuse to provide access to a new entrant. Such refusal can be considered as ‘abuse of dominance’. There can be instances where the owner of the private blockchain network does not directly refuse access to the new entrant but imposes a certain set of requirements that needs to be fulfilled in order to be part of the consortium indirectly deterring new entry into the market. The risk of exclusionary conduct is higher in private blockchains as it requires invitation or permission to access, unlike public blockchain which is open to all. This will not only hamper the competition in the market but would also deter new players from entering the market, slow down innovation and prevent the emergence of new products in the market. The (In)sufficiency of Current Legal Regime The biggest problem regulatory authorities may face while dealing with blockchain is in conducting investigations. The issue arises here due to difficulty in the detection of anti-competitive practices and the identification of the organizations involved in such practices. Considering the fact, that blockchain is based on the concept of pseudonymity it will be a daunting task for the regulators to identify the perpetrators and impose penalties on them. Furthermore, it will be difficult for the authorities to obtain the data shared over the blockchain network to conduct an investigation. The blockchain participants might share data over permissioned networks. Considering only people who have received authorization can access the network, authorities have to find a way to compel the organization to share the data to conduct the investigation. Moreover, as

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