Author name: CBCL

Standard Essential Patents: The Controversial FTC v. Qualcomm Judgement

Leave a Comment / Competition Law, Contemporary Issues /

[By Varsha Jhavar] The author is a student at Hidayatullah National Law University, Raipur. Introduction The world’s leading company in 5G innovation is embroiled in antitrust litigation with the United States Federal Trade Commission (hereinafter FTC), the US’ competition regulatory authority. On 21 May 2019, Judge Lucy Koh of the United States District Court for the Northern District of California held that Qualcomm was in violation of its antitrust obligations under the FTC Act. As the world is transitioning to 5G, the present case which lies on the interface between intellectual property law and competition law is of grave importance to holders and licensees of standard-essential patents(hereinafter SEPs). Qualcomm licenses its patented technologies to more than 340 companies, particularly to original equipment manufacturers (hereinafter OEMs) such as Apple, Samsung, Motorola. This article analyses the controversial 233-page decision in FTC v. Qualcomm as well as its potential impact, if the decision is upheld by the Ninth Circuit. Factual Background and Issues Qualcomm is engaged in the manufacturing of ‘modem chips’ that facilitate smartphone communication over cellular networks by utilizing industry standards such as CDMA, LTE. In 2017, FTC filed a complaint against Qualcomm alleging that through its unique business model the latter had monopolised two modem chip markets – CDMA(3G) and LTE(4G). The complaint was filed under section 5(a) of the FTC Act that prohibits ‘unfair methods of competition’. In November 2018, the District Court granted FTC’s request for The Court gave its final decision on 21 May 2019, where it primarily dealt with three issues – first, whether the Defendant followed a ‘no license-no chips’ policy; second, whether the Defendant had refused to license SEPs to its competitors in the modem chip market; and third, if the Defendant had coerced Apple into a de facto exclusive dealing arrangement. The FTC’s chief argument, the ‘no license-no chips’ policy, essentially states that Qualcomm abused its considerable market dominance in the modem chip segment, to strong-arm its chip buyers to enter into agreements for patent licensing and exclusive modem chip arrangements. Court’s Decision Judge Koh ruled in FTC’s favor, holding that Qualcomm by exhibiting ‘exclusionary conduct’ had acted in violation of the Sherman Act and thus, the FTC Act. The court found that Qualcomm had been involved in anti-competitive conduct against OEMs such as Apple, through the utilisation of its market dominance in the chip sector for securing higher royalty rates and also providing conditional rebates to OEMs who agreed to exclusive arrangements. With regard to licensing to competitors, the court citing Aspen Skiing Co. v. Aspen Highlands Skiing Corp. held that Qualcomm had an antitrust duty to license to rivals such as Intel and MediaTek, and that its conduct had harmed competition. Further, it observed that the agreements between Apple and Qualcomm were de facto exclusive licensing arrangements, as Apple had been compelled into procuring a substantial portion of their chip supply from Qualcomm. Judge Koh found that Qualcomm’s anti-competitive conduct had not been discontinued, and issued an injunction requiring it to negotiate patent licenses in good faith and facilitate the availability of licenses to its rivals on FRAND terms. Analysis Judge Koh’s decision has been praised and criticised by many, but in my opinion, there are certain concerns that the judgement failed to address. The injunction granted against Qualcomm is broad in nature and might result in a change in its business model. The remedy should have been tailored according to the specific problem, taking into consideration the potential adverse effect on innovation. Judge Koh has also failed in territorially limiting the injunction, incorporating actions that would come under the purview of foreign antitrust authorities. In the US, a claim for monopolisation cannot be brought solely on the basis of excessive pricing, it requires the exclusion of rivals, which is not the situation in this particular instance. The Aspen Skiing case is not concerned with the licensing of patented technologies, thus the court’s reliance on it is questionable. The injunction is expected to have an effect on Qualcomm’s R&D spending in 5G technology and consequently, will affect its ability to compete with other players in the market. Conditional pricing and loyalty rebates should not be considered anti-competitive,as it is a part of the business model of many companies and this decision will have a negative impact on them. The District Court had evaluated the case under the law of California and the policies of the two specific SSOs of which the Defendant was a member. The court failed to clearly specify that its partial summary judgement only applied to this particular case and not to all SEP holders subject to FRAND terms under any SSO. Judge Koh erroneously qualified the royalty rate as being ‘unreasonably high’, failing to consider any established royalty rates for determining a reasonable royalty rate. Any diminishment of Qualcomm’s global leadership could potentially affect the US’s leadership in 5G. This judgement also raises national security concerns as the company is a trusted supplier of products and services to the US Department of Defense. Current Status Qualcomm filed an appeal to the US Court of Appeals for the Ninth Circuit and pending appeal, in August 2019 the court partially stayed the injunction ordered by Judge Koh. Amicus briefs have been filed by various organisations and individuals working in the sectors of economics and law, such as the Department of Justice (hereinafter DOJ), Retired Judge Michel, International Center for Law & Economics, Scholars of Law and Economics. The DOJ criticising this decision stated that it threatens ‘competition, innovation, and national security.’ It was even condemned by a sitting FTC commissioner, Christine Wilson, averring that the decision has created for SEP holders ‘a perpetual antitrust obligation to sell every product to every competitor.’ On 13 February 2020, the Ninth Circuit heard oral arguments and the DOJ had also been granted time to argue on Qualcomm’s behalf. The court mainly attempted to determine whether Qualcomm’s behaviour was hyper-competitive or anti-competitive, as the Sherman Act does not prohibit hyper-competitive behaviour. The

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Amendments to the Indian Stamp Act – Ushering into a New Regime

Leave a Comment / Contemporary Issues /

[By Saksham Shrivastav and Urvisha Kesharwani] The authors are students at the National University of Study and Research in Law, Ranchi. To retrench the needless overlaps of liable stamp duties in the earlier regime and provide a more uniform and centralized collection system, the Government of India (“Government”) last year introduced certain legislative amendments. The amendments brought in by  Chapter IV of the Finance Act 2019 (“Amendment”) to the Indian Stamp Act, 1899 (“Stamp Act”) along with the Indian Stamp (Collection of Stamp Duty through Stock Exchanges, Clearing Corporations, and Depositories) Rules 2019 (“Rules”) finally came into force from July 1, 2020. However, this Amendment comes into effect after facing several delays as it was originally supposed to be implemented from January 9, this year. Since the power of imposing stamp duties falls under all the three lists depending upon the nature of the transaction, it allows different states to levy different stamp duty rates for the same instrument. Thereby in the prior regime, multiple incidences of duty were allowed, this not only caused varying rates for the same instrument but also raised the transaction cost in the securities market thereby impeding capital formation. Through these reforms, the Government aims to create a more cost-effective, zero-evasion centralized mechanism by harboring a uniform approach and curbing down the unnecessary transaction costs. This is not only expected to enhance capital formation but also minimize jurisdictional disputes. Following is an analysis of some of the major reforms that have been introduced in the new regime. a) Streamlining the Definitions The Amendment has brought about changes in some existing definitions and has introduced some new definitions in order to keep up with the ever-changing securities market. Following are some of the key inclusions: Instrument: The definition of ‘Instrument’ has further been broadened by the Amendment and now encompasses, a document, electronic or otherwise, created for a transaction in a stock exchange or depository by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded. Securities: A more inclusive definition for ‘securities’ has also been introduced. The prior exposition of the term ‘securities’ given under section 8A of the Stamp Act was drawn from the definition in the Securities Contract (Regulation) Act, 1956 (“SCRA”) for the purposes of that section. The Amendment has introduced the definition of ‘securities’ which now includes: Securities as defined in clause (h) of section 2 of the SCRA; ‘Derivative’ as defined under the Reserve Bank of India Act, 1934; Certificate of deposit, commercial usance bill, commercial paper, repo on corporate bonds and such other debt instrument of original or initial maturity up to one year; and Any other instrument declared by the Central Government, by notification in the official gazette. It is a, however, essential to bring to attention the fact that despite the amendment, there remain several instruments that lack clarity on whether they would come under ‘securities’. These include Warrants, Units issued by Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (InvIts), and Alternate Investment Funds (AIFs) governed by the Securities Exchange Board of India (SEBI), under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (FDI Rules), these were categorized by the RBI as ‘Non-Debt Instruments’. Debentures: Under the previous regime, the term ‘debentures’ was not defined under the Stamp Act and only ‘debentures’ that came under marketable securities were stamped as per Article 27 of the Stamp Act. Further, the amendment has also excluded the ‘debentures’ from the definition of ‘bonds’ thereby, preventing any state government from charging stamp duty on the issuance of debentures under the classification of bonds. Market Value: Prior to the Amendment the stamp duty was collected on the value of the security according to the average price or the value thereof as on the date of the instrument. However, now the stamp duty will be calculated on the ‘market value’ of security to ensure that the stamp duty is levied on the price it is transacted rather than the average price of the day. According to section 12(h) of the Amendment ‘market value’ is defined as, in relation to an instrument through which: Any security is traded in a stock exchange, means the price at which it is so traded; Any security that is transferred through a depository but not traded in the stock exchange means the price or the consideration mentioned in such instrument; Any security dealt otherwise than in the stock exchange or depository means the price or consideration mentioned in such an instrument. b) Integrating the Stamp Duty Laws The main purpose of this Amendment was to bring uniformity in the imposition of stamp duty across the country. With the insertion of sections 9A and 9B in the Stamp Act, the provisions relating to the issue, sale, or transfer of securities have been consolidated. This has been the most significant of all the changes since earlier, different state governments would have different rates on the same instrument, which lead to ‘rate shopping’. These rate differences were heavily exploited by the companies, which resulted in widespread rate shopping, thereby causing loss to the exchequer. Apart from this, uniform stamp duty rates have been prescribed for issuance and transfer of securities. The stamp duty will now be paid by only either the buyer or the seller. For example, according to Section 9A (read with the Rules), in the case of sale of securities through stock-exchange, the stamp duty will be collected only from the buyer and in the case of sale of security otherwise than through a stock-exchange or depository, from only the seller. This will remove the double imposition of stamp duty on buyer and seller, which was happening under the previous regime. c) Centralized Collection Mechanism One of the key changes brought by the Amendment is the introduction of a Centralised Collection Mechanism (“CCM”). Under CCM the stamp duty on securities will be collected on behalf of the state government by the authorized stock exchanges, clearing corporation, or depositories. The stamp

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Algorithmic Collusions and the Implications of Hub-And-Spoke Cartels

Leave a Comment / Competition Law /

[By Srishti Suresh] The author is a student at NALSAR University of Law, Hyderabad. Introduction The recent National Company Law Appellate Tribunal (“NCLAT”) ruling in the case of Samir Agrawal v. Competition Commission of India & Ors.[i], effectively upheld the previous CCI Order[ii], in holding that the algorithms used by cab aggregators such as Uber and Ola, do not result in the creation of a hub-and-spoke cartel. In its decision, the NCLAT laid emphasis on the form of arrangement between the cab aggregator and the independent drivers, as against the substantial effect such a scheme could have on free-market competition. In the appeal, the contention raised by the informant was in relation to the centralized power of the aggregator in fixing prices for the drivers though the App, thereby effectively barring them from competing with the prices in the market. Whilst possessing asymmetric information related to personalized rider data and other crucial information such as surge demand, traffic etc. gathered from AI-fueled algorithms, drivers engaged by the aggregators were required to charge their customers, a price determined by the App (which is based on preset factors). Scope for potential negotiation and bargain is stripped away, and the market forces of demand and supply are artificially distorted. This, it was alleged, leads to a potential increase of the fares and leads to price-fixing by the aggregator. At the helm, cab aggregators operating as intermediaries between the drivers and the riders, have the leverage to fix prices, distort free competition between similarly situated service providers, and effectively violate Section 3 of the Competition Act, 2002 (“the Act”). A striking aspect of the ruling, which assumes importance for the purpose of this article, is the “connectivity” between drivers. The scheme of arrangement between the drivers and the aggregator is as follows: each driver enters into a vertical agreement with the aggregator, and each driver is well aware of the fact that multiple competing drivers are simultaneously entering into an analogous agreement with the same aggregator. No driver enters into a direct agreement with the other. The process works on an implicit acknowledgement of the role played by each driver, as well as the aggregator. NCLAT in its order, focused on the absence of connectivity between drivers inter se. For a collusion inhibiting healthy market competition to exist, an understanding or agreement between each party, with the other, is a vital necessity.[iii] However, owing to the vertical arrangement between the parties, the possibility of an anti-competitive collusion was rejected. Understanding the Hub-and-Spoke Model of Cartels Cartels conventionally involve communication between cartel participants, agreeing to engage in illicit conduct. However, in the wake a more stringent antitrust regime across jurisdictions, the hub-and-spoke model has assumed great importance[iv]. In this model, the hub is either an upstream supplier or a downstream customer, and the spokes are the various colluding competitors. Each spoke enters into a separate vertical agreement with the hub and offers sensitive information.[v] The same information is disseminated by the hub to the other spokes, while engaging with them vertically. In essence, the information that is stored centrally with the hub is schematically disbursed to the spokes, without them having to communicate with each other directly. The Shortcoming of the NCLAT ruling In analyzing the narrow approach taken by the CCI and the NCLAT, one needs to steer clear of any ambiguity that might exist in understanding Section 3 of the Act, in the context of algorithmic collusion. First, the deemed provision prohibits any agreement, which among other aspects, relates to the provision of services causing an adverse appreciable effect on competition (“AAEC”) in India.[vi] A textual interpretation of the provision seen through a human prism[vii] (conventionally), prohibits agreements that cause a direct or indirect effect on competition. But AAEC is not restricted to an exhaustive list of agreements, the form of which cannot be delineated with clarity and certainty. Any arrangement with the potential to cause economic consequences, operating to the prejudice of public interests and unduly restricting competition, can be construed to pose AAEC on the market. In the present case, the information that is curated by the algorithm creates a resource and data pool, that is commonly accessed by all the drivers. By analyzing rider data, their frequency in hailing services, and any surge in a given locality, the algorithm has the potential to reduce its output in terms of services, while escalating prices for the same. By offering drivers a lucrative opportunity to earn more, by the way of increased fare charges, the aggregator’s app is at the helm of unilateral “price fixing”. While no horizontal agreement between the drivers exists, the multiplicity of analogous arrangements with the aggregator (the “hub”), coupled with a common pool of information and resource sharing among drivers (the “spokes”), increases the possibility of collusion vis a vis a hub-and-spoke agreement. In addition, given that all the drivers are aware of other competing drivers entering into similar agreements with the aggregator, for the same purpose, makes the agreement a perfect candidate for a hub-and-spoke model. The need for a proactive approach Technological advancements in service sectors have transformed the competitive landscape. The rate at which information is accessed, analyzed and processed, has increased manifold[viii]. Algorithms have a peculiar characteristic of allowing sellers to shadow their customers, by harvesting data on their consumption behaviour.[ix] While the traditional route taken by most competition regulators mandates a concurrence of understanding through a tacit or explicit agreement between participant themselves, the new age of algorithms might not follow the traditional route of concurrence.[x] OECD in its Report has acknowledged the highly uncertain and complex nature of algorithms, but it has also issued a caveat for regulators. A lack of an interventionist approach and over-regulation, could impose a high cost on the society[xi]. Algorithms have proven to be excellent automotive tools in increasing market efficiency. In reviewing the current framework, the Competition Law Review Committee (“CLRC”) Report has highlighted the broad ambit of Section 3. ‘Algorithmic collusions’ could very

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THE DRAFT NATIONAL E-COMMERCE POLICY OF INDIA: HARMS MORE THAN IT BENEFITS

Leave a Comment / Contemporary Issues /

[By Antara Deshpande]  The author is a student at National Law University, Odisha. In the last few years, India has attracted many global e-commerce giants like Amazon, Alibaba, Google, etc., with a growth rate of 17% in the financial year 2018-19. The rapid demand and progress in the e-commerce market have gradually increased the government’s inclination to regulate and maintain fair competition. With various ongoing government programs floated to digitalize Indian commerce, the need to regulate the sector was felt even more after Walmart Inc. acquired a 77% stake in the Indian e-commerce company Flipkart. The Indian Government, in February 2019 released the Draft National E-Commerce Policy (“Draft Policy”) prepared by the Ministry of Commerce and Department for Promotion of Industry & Internal Trade (“DPIIT”), and consumers with the aim of forming a regulatory framework, to check dominant e-commerce giants and ensure fair competition. It covers broad issues of the e-commerce space separated by i) Data ii) Infrastructure development iii) E-Commerce marketplaces iv) Regulatory issues v) Stimulating domestic digital economy and v) Export promotion. The move is directed towards developing a strong ecosystem for Indian apps, however, it has also raised concerns for established entities in the field. The overall narrative of the Draft Policy revolves around personal data privacy, consumer protection, and creating a level playing field between domestic and international players, however, the strategies through which the proposed policy aims to reach these objectives seem to blur the ultimate purpose. The Draft Policy which was supposed to be enacted in 2020, has been put on hold in view of COVID-19. While the policy is focused on personal data, a separate committee has been created to study issues related to non-personal data. Key Particulars of the Draft Policy: Data security or processes sensitive data shall not make it available for entities outside India or any other third party, even if the customer consents to it. Infrastructure development– An appropriate authority will take steps to develop the capacity for data storage in India. E-commerce entities will require to localize or mirror certain data as per the required guidelines, which shall be invigilated over periodic audits. A time frame will be provided to e-commerce companies to adjust to the data storage requirements. Disclosure & monitoring– The government will reserve the right to seek disclosure of source code and algorithms on demand, with the view of striking a balance between commercial interests and consumer protection issues. The proposed policy will allow the government to review, investigate, and take any action as a security measure. Business registration requirement – All e-commerce websites or apps that are available for download in India to have a registered business entity in India as the importer on record. Export promotion– The policy will aim to streamline logistics and strengthen India’s post. It shall also reduce administrative restrictions to promote exports. A specialized cell and support policy will be created to encourage MSME export activities, along with the creation of E-commerce Export Zones (EEZ), for storage, certification, customs clearance, etc. Consumer protection– A clear representation of the country of origin on imported products shall be made. All seller details shall be made available on the marketplace website. Creation of a rogue e-commerce entities list – A list of ‘Rogue E-commerce Entities’ will be created, which will include websites or apps that sell pirated content. After verification, such websites will face stringing actions like disabled access to their website, prohibition by payment gateways, etc. under the ‘Infringing Website’s List’. Grey Areas: Definition of E-commerce The Draft Policy uses the terms ‘e-commerce’, ‘electronic commerce’, and ‘digital economy’ interchangeably. It has defined e-commerce as buying, selling, marketing, or distribution of (i) goods, including digital products and (ii) services; through an electronic network. It has, therefore, expanded the generally accepted definition given under the Foreign Direct Investment Policy (“FDI Policy”) and Consumer Protection Act, 2019, which have restricted the definition of buying and selling goods and services, over digital and electronic networks. The expanded definition could potentially qualify all web services like e-commerce, even the websites providing information services, email services, or file storage services. Considering the broad definition and the requirement for every downloadable app or website to establish a registered business entity in India, many existing global services could step back from providing their services due to the increased compliance burden. This would ultimately affect the availability of choice and quality to consumers. Hence, the current ambiguity calls for the streamlining of the definition which is in sync with the other applicable laws. Cross-border data flow The Draft Policy has emphasized time and again on its intention to restrict cross-border data flow from India to any other nation. Such a step will unnecessarily disturb the existing mode of operation and can increase the expense of established multinational companies that transfer and process data in their jurisdiction. Additionally, it will also hurt Indian startups, which extensively require data analytics services amongst many other services that global distributors deliver at affordable prices. Presuming that domestic market entrants develop a data processing infrastructure, the additional cost of data storage will consequently affect the final price of the service or product, making it more expensive for the consumers and failing the purpose of the policy. The Committee of Experts report under the chairmanship of Justice B.N. Srikrishna extensively discussed the free transfer of personal data across borders and recommended against unjustifiable prevention of international transfer of data. Moreover, a complete prohibition on cross-border data flow, seemingly avoids the provisions of the proposed Personal Data Protection Bill2019, that prescribes for monitoring of cross-border transfer of personal data under section 49, and allows the authority to discontinue such transfer, only after a proper inquiry is made on reasonable grounds, under section 54. Therefore, rather than an absolute ban on international data flow along with the requirement of data localization, a sector-specific restriction of sensitive data will be a beneficial option. Foreign Direct Investment. The Draft Policy has laid down the extant FDI norms for e-commerce

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SEBI’s Informant Mechanism: Impact of the Incentives on Internal Compliance Programs

Leave a Comment / Capital Markets and Securities Law /

[ By Tushar Oberoy] The author is a student at NALSAR University of Law, Hyderabad. Last year, the Securities and Exchange Board of India (SEBI) introduced the informant mechanism for insider trading violations. The mechanism incentivizes whistleblowers by rewarding them with monetary sums in exchange for their knowledge of insider trading violations.  This step by the securities market regulator is inspired by the US Securities & Exchange Commission’s (SEC) whistleblower bounty program incorporated under the Dodd-Frank Wall Street Reform and Consumer Protection Act[i]. Since then, several concerns have been raised regarding the SEBI’s informant mechanism like maintenance of confidentiality, increment in the probability of frivolous complaints, etc. Apart from these, one of the concerns that arise is what will be the effect of incentivizing whistleblowers on the internal corporate compliance programs implemented by companies for tackling and preventing such violations at the internal level. This has also been pointed out in the SEC’s whistleblower bounty provisions and this post aims at analyzing the same in the Indian context. Issue: SEBI’s informant mechanism is based on giving monetary incentives to people, who may be privy to insider trading violations, to come forward and report them to SEBI. Considering the fact that a company’s employees are most likely to know of any insider trading activity by the management, incentivizing them to come forward will also help SEBI to achieve its objective of tracking down insider trading cases. However, companies are also mandated to implement internal compliance programs for curbing insider trading by implementing checks and reporting to SEBI in case of a breach. [ii]. These internal compliance programs also require companies to frame a whistleblower policy to enable employees to report a leak of unpublished sensitive information (UPSI) or any violation internally[iii]. Since the informant mechanism gives monetary incentives to informants, an employee is more likely to report a violation directly to SEBI’s informant hotline, rather than making use of the internally established structures. Moreover under Regulation 7B of SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations), an informant is rewarded only if he provides SEBI with “original information”[iv]. One of the important features of “original information” is that the Informant should be the sole source of information for SEBI and SEBI should not have knowledge of the insider trading violation from anywhere else[v]. Thus, employees who come to know of any insider trading violation in their organization would be in a race to first report the information to SEBI for successfully obtaining the reward. The implications of this would be that companies wouldn’t get a fair chance to self-investigate and self-report the violation to the market regulator, which goes against the crucial objective of developing a corporate compliance program. Carrying out an internal investigation of the alleged violation would also become difficult, as companies will not receive the required cooperation from its employees who might have crucial information regarding the breach. There are also cases where there may be a lapse from the side of the company itself (eg. failure to close the trading window, non-disclosure of the required information, etc.) that amounts to a violation of the PIT Regulations. Due to a lack of cooperation from employees, companies might not be able to self-report, self investigate and assist SEBI in probe of any alleged breach. A probable consequence of this would be that mitigating circumstances for determining settlement amounts under SEBI (Settlement Proceedings) Regulations, 2018[vi] (example- applicant’s conduct during the investigation) would become inapplicable to them. This would result in higher settlement amounts being passed against them if they choose to settle the matter with SEBI. From the above, it can be seen that the informant mechanism might undermine companies’ internal compliance programs, as the informant’s and the companies’ objectives will be at crossroads. Undermining of internal controls would also render useless the effort and monetary investment that a company had made for developing such institutional compliance programs. However, another question, equally pertinent that arises is whether such internal programs can be completely relied upon by SEBI for the prevention of insider trading or are external checks like the informant mechanism needed despite institutional controls. Can companies’ internal compliance programs and processes be sufficiently relied upon to curb insider trading? Observations from the Whatsapp Leak Case: One of the foremost failures of internal checks and compliance programs in matters of insider trading can be seen from the Whatsapp leak case. In this case, UPSI in the form of financial results of various companies was circulated through Whatsapp before they were publicly released. During the probe of the same, SEBI had also criticized the internal checks put in place by Axis Bank Ltd., which was one of the entities whose financial results had been leaked and also called it to improve its internal compliance mechanisms. In its order, SEBI observed that: “Such leakage is prima facie attributable to the inadequacy of the processes/controls/systems that Axis Bank as a listed company had put in place. While procurement or communication of UPSI by any person is identified as a violation of reg. 3 of PIT Regulations and section 12A(e) of the SEBI Act, it becomes incumbent upon every listed company to put in place processes/controls/systems that would ensure that such procurement or communication of UPSI does not take place.” Ineffective management of whistleblower hotlines by Indian companies: In a survey carried out by global consultancy firm Deloitte, it was found that Indian companies were merely following a “tick in the box” approach regarding the maintenance and implementation of internal whistleblower programs. The survey reported that only 68% of the firms were equipped with proper whistleblower programs/hotlines. The survey results further mentioned that in the majority of Indian companies, whistleblowing programs are often not functional, are failing to promise confidentiality to users, and are being run by without a dedicated team and mostly by persons of the human resources department. Hence, due to the casual approach adopted by Indian companies in implementing whistleblower systems, the regulator cannot expect to receive information about

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The Locus Standi of “Third Parties” Before the CCI: A Constricting Approach by NCLAT

Leave a Comment / Competition Law /

[By Anusha Shekhawat] The author is a student of Institute of Law, Nirma University Introduction The Competition Commission of India (“CCI” or “Commission”) exercises certain legal powers that are provided by virtue of the Competition Act, 2002 (“Act”), to combat anti-competitive practices and regulate a fair and healthy competition in the market. The purpose of creating a quasi-judicial body was to promote awareness among people in order to make markets work efficiently. However, these powers have often been curtailed in the past, and subjecting them to more limitations would make the work of CCI extremely challenging. Recently, the National Company Law Appellate Tribunal (“NCLAT”) pronounced a judgment that leads towards a narrower approach of viewing the Act and which is likely to create hindrance upon the ability of CCI to function effectively. This is significantly why it raises many antitrust concerns in the current times. Critical Analysis Of The Judgment The NCLAT while reviewing the matter of Samir Agrawal v. Commission, held that a “person” under Section 19(1)(a) of the Act, must be one – “who has suffered an invasion of their legal rights as a consumer or as a beneficiary of healthy competitive practices” [¶ 16]. The judgment necessitates having a direct nexus between the person filing information and the violation of legal rights under the Act; in an absence of which, a third party will not have a locus standi to approach the Commission. Contrary to the judgment, the Act of 2002 does not provide any limitation upon the locus standi of a person filing information. The reason for this was clarified by CCI in the case of Shri Sarabh Tripathy v. Great Eastern Energy Corporation, wherein it opined that the purpose behind filing information is to notify the Commission with the presence of anti-competitive practice in the market. Therefore, it is not necessary for a person to file information to be personally affected by it [¶ 15]. Similarly, the Act confers upon the Commission, the duty under Section 18 to protect the markets from practices that cause adverse effects on it and restrain consumer harm by using all reasonable measures. Furthermore, in the case of  In Re: Indian Motion Picture Producers’ Association v. Federation of Western India Cine Employee, the Commission shed light on the fact that every order passed by it is aimed towards providing “accrual benefits” to the public at large and not only to an individual/group of individuals who file(s) a piece of information. This means that orders of the Commission are “in-rem” and not “in personam” [¶11]. It does not hold much importance as to who has brought information, because if the Commission finds a prima facie violation of the Act, then it is mandated under Section 26 to start an investigation. Interestingly, for this reason, the Act was amended in the year 2007, where the word “complaint” was replaced with “information”, in order to express the intent of the legislature for providing liberty on locus standi and to avoid adversarial proceedings. Moreover, the Delhi High Court has clarified in the case of Google Inc. & Ors v. Competition Commission Of India, that the powers given to CCI for investigation are comparatively wider than those given to Police for investigation. [¶18(K)]. It is because the Police cannot begin or continue an investigation without the existence of a complaint. However, the Commission need not commence or continue an investigation merely upon receipt of information, but upon believing that a violation of the Act has occurred [¶18(G)]. Similarly, the rationale for giving wider powers was discussed in the case of XYZ v. Indian Oil Corporation Ltd,  where it was said by the CCI that the powers entrusted to it are wider in nature in order to ease the capture of wrongdoers who hamper fair competition [¶ 34]. NCLAT through the judgment describes the concern towards “unscrupulous” matters brought to the Commission [¶ 16]. However, it must be taken into account that Section 26 not only gives powers to the Commission for directing an investigation but also assures that if the information seems to stipulate no violation of the Act, is frivolous or unreasonable in nature at a prima facie stage, then the Commission can close the matter thereof. Therefore, the concern of NCLAT has already been addressed by the Act. Moreover, The COMPAT also supports this in the case of Dr. LH Hiranandani Hospital v. Competition Commission Of India, where it held that it is not necessary for the Commission to identify the locus, but it has a duty towards ensuring that the informant does not have an ulterior motive towards someone else [¶ 25]. Lessons From The European Union The European Union (“EU”) on account of Article 101 of the Treaty on the Functioning of the European Union (“TFEU”) restricts every possible practice that is against fair trade in the market. Moreover, when it comes to an investigation, it keeps itself open to any formal or informal options and provides a leeway towards filing complaints by “third parties”. The Office of Fair Trading (“OFT”) defines a “third party” as someone who is not necessarily related to the investigation. The Competition and Market Authority (“CMA”) of the U.K. also gathers information and investigates the occurrence of anti-competitive practices through various means, including leniency applications, research, and market intelligence, and whistleblowers. Moreover, the OFT for the same has analyzed that taking inputs from informed third parties or complainants has always assisted them to exercise their tasks efficiently. Conclusion: Taking A Step Back? The previous orders given by CCI, in light of the Act, justify the very reason for not limiting the third party, on the ground of locus standi to approach the Commission. However, NCLAT while interpreting Section 19(1)(a) of the Act in the impugned judgment has not referred to the provision in its true light and did not understand the legislative purpose behind creating it. The Supreme court (“SC”) in the case of Nathi Devi v. Radha Devi Gupta, has stated that it is

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TDS on E-Commerce Transactions: Is Section 194-O of the Income Tax Act Indispensable?

Leave a Comment / Taxation Law /

[By Sridattha Charan] The author is a student of Symbiosis Law School, Pune. Introduction With the development of information and communication technology, the procurement and the supply of goods and services through electronic commerce (“e-commerce”) platforms have undergone a multi-faceted expansion all around the globe, including and especially in India.[i] Considering the growth of these e-commerce transactions, the Government of India has recently introduced Section 194-O in the Income Tax Act through the Finance Act, 2020.[ii]  Section 194-O of the Act states that an e-commerce operator shall deduct tax at the time of credit to the e-commerce participant at the rate of 1 percent on the gross amount of the sale of goods or services or both. This deduction would be made at the time of credit of the amount to the account of the e-commerce participant.[iii] Section 194-O was introduced to pave the way for digital taxation in India. It seeks to widen and deepen the tax net on e-commerce transactions. However, the provision suffers from various discrepancies and inconsistencies with the pre-existing regulatory and taxation mechanisms. The author seeks to analyze and examine three such complications that arise with the introduction of the provision. Firstly, the effect of the Central Goods and Services Act, 2017 on Section 194-O since both the taxation frameworks seek to levy a tax on e-commerce transactions; secondly, the burden placed on the e-commerce operators due to the mandatory nature of the provision with respect to the concept of “direct payment”; and lastly, the inconsistency between Section 194-O and the “Guidelines on Regulation of Payment Aggregators and Payment Gateways” issued by the Reserve Bank of India (“RBI”). These inconsistencies would create complications in the compliance of the e-commerce operators and give rise to a multitude of implementation hardships for the Revenue Department. Therefore, the question of the dispensability of the provision itself should be examined beginning with the legislative intent behind it. Legislative Intent behind the Introduction of Section 194-O Section 194-O of the Act mandates the e-commerce operator to deduct tax at source from the gross amount of sales consideration payable to the seller. The legislative intent behind this provision was explicitly mentioned in the Explanatory Memorandum.[iv] The provision was introduced in order to “widen and deepen” the tax net by bringing the e-commerce transactions under ambit of the Tax deduction at source (“TDS”) provisions under Chapter XVII-B of the Act.[v]  The existing provisions of Chapter XVII-B are not applicable when a resident sells his goods through an e-commerce platform. The rationale behind placing the withholding obligation on the e-commerce operators could be that the sales proceeds for such transactions are routed through such operators. Accordingly, they possess the ability to access and control the sale proceeds and consequently possess the ability to withhold tax.[vi] Further, in e-commerce transactions, the purchasers could largely be individuals, and placing the responsibility of withholding tax on these individuals would not be consistent with the general approach adopted under Chapter XVII of the Act.  Therefore the responsibility of withholding tax is not given to the purchasers but rather to the e-commerce operators. Implications of the Central Goods and Services Act, 2017 Under the Central Goods and Services Act, 2017, a seller or an e-commerce participant is required to charge Goods and Services Tax on the sales consideration received.[vii] The amount received from the purchaser or the customer includes the Goods and Services Tax (“GST”) and the sales consideration together. The issue that arises in this situation is, whether the tax which would be withheld under Section 194-O would be levied on the total amount including the GST or excluding the GST. To illustrate, assuming that the sales consideration for a particular product or service is INR 1000 and the GST on the transaction amounts to INR 50. The issue would be the value of the ‘gross amount’, whether it would be INR 1000 or INR 1050. If the ‘gross amount’ is taken as INR 1050, it would result in the deduction of the TDS amount from the GST amount. However, it has been the general observation of the Central Board of Direct Taxes (“CBDT”) that TDS from tax is avoided. The CBDT has issued various circulars in pursuance of the same.[viii]  A striking example would be the clarification provided by the CBDT that the TDS provisions under Section 194-I of the Act will be applicable on the net rental amount payable which is exclusive of the service tax levied. [ix] The High Court of Rajasthan has adopted a similar view in the case of Commissioner of Income-Tax v. Rajasthan Urban Infrastructure.[x] The CBDT circular dated January 1st, 2014 clarified as follows; “3. The Service tax paid by the tenant doesn’t partake the nature of the “income” of the landlord. The landlord only acts as a collecting agency for Government for collection of service tax. Therefore it has been decided that tax deduction at source (TDS) under Sections 194-I of Income-tax Act would be required to be made on the amount of rent paid/payable without including the service tax.”[xi] While the circular dealt with the issue of TDS under Section 194-I, its rationale can be used to infer that the seller or the e-commerce participant only act as agents for the Government for the collection of GST. Therefore, the TDS provision under Section194-O would be applicable to the sales consideration excluding the GST amount. Further, it is important to note that the deduction of tax under Section 194-O will be in addition to the tax being collected under the Central and Goods and Services Act, 2017 which levies a tax on the goods and services being supplied through e-commerce platforms. [xii]       Therefore, the additional 1% under Section 194-O would result in the generation of an acute cash-flow crunch for e-commerce participants. Moreover, the participants of such an e-commerce transaction are required to be mandatorily registered under the Central Goods and Services Act to claim Tax Collection Credit.[xiii] This mandatory registration would inherently achieve the proposed purpose of

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Solving the Enigma of Taxing Developed Plots Under GST

Leave a Comment / Taxation Law /

[By Shubham Gupta] The author is a student at National Law University, Odisha. It is a renowned, articulated and explicitly provided fact that selling of land does not attract any kind of tax as per the Goods and Services Tax. The reason provided for non-imposition of tax in case of sale and purchase of land is that they neither come under the purview of services nor under the definition of goods under Schedule III of the CGST Act, 2017. The fact that land is an immovable property, only stamp duty is required to be paid on its purchase. However, there has been a consistent doubt regarding taxation of those plots which are sold after their development. The definition of development of land includes “levelling the land, construction of roads, laying underground cables and water pipelines, development of landscaped gardens, drainage system, demarcation of individual plots, and other infrastructure works”.  In this article, the author has tried to highlight various legal frameworks and judicial perspectives to reach out to an exact picture regarding the imposition of tax on such developed plots. The ‘Popular Meaning’ Approach The solution to this enigma can be reached by analyzing the definition of land and benefit arising out of the land. The absence of any definition of immovable property and land in the CGST Act, 2017 leads us to fall back on various other enactments and judgments. It is a well-known fact that in case of the absence of a definition in a statue, it has to be construed in its popular sense. Hence, the interpretational solace can be drawn from the Land Acquisition Act to interpret the word “Land” in Clause 5 of Schedule III. The definition of land provided by the “Section 3(a) of Land Acquisition Act, 1894” mentions that the expression “land” includes things attached to the earth or permanently fastened to something attached to the earth and also the benefits arising out of the land. Similar is the definition of land in “Section 3(4) of the Bombay Land Revenue Code, 1879”. The definition of immovable property provided in “Section 3(26) of the General Clauses Act (GCA)”, “Section 2(z) of the Real Estate (Regulation and Development) Act, 2016” and “Section 2(1)(6) of the Registration Act” have mentioned that land also includes benefits arising out of the land. In the case of “State of Maharashtra v. Reliance Industries Ltd.”, the Supreme Court, through various legal dictionaries and the maxim of “Cuius est solum, eiuses tusquead coelum et ad inferos”, attempted to define land and briefly held it to include all fixtures, structures and benefits arising out of the land. Thus, the judgment further gave an indefinite extent to land upwards and downwards. The Bombay High Court, in the case of “Sadoday Builders Private Limited v. The Jt. Charity Commissioner”, held that the benefit arising from the land is also an immovable property. Further, it also elaborated that an agreement for the use of Transferable Development Rights can especially be enforced unless it is established that compensation in money would be adequate relief. Similar was mentioned in the recent case of “DLF Commercial Projects Corporations v. Commissioner of Service Tax, Gurugram”, where the tribunal provided that transfer of development rights comes under the definition of immovable property as per the “Section 3(26) of the GCA”. Hence, it can be concluded that no service tax defined under “Section 65B(44) of the Finance Act,1994” has to be paid in the development activities because of the exemption provided on taxation of land.   Analysis of the Law In view of the above discussion, it can be very well concluded that the development of land should consequently fall within Clause 5 of Schedule III and hence, should not be taxable. The fact that it is raw land or developed land does not change the fact that it is still a land. The sale of these plots is akin to the sale of developed lands and activities like drainage works, electricity supplies, and such are incidental to land and hence, does not change the characteristics of these plots. The fact which should be taken into consideration is that parks, roads, and other such utilities are not supplied to the purchaser of a plot but belongs to the Public Authority or Municipal Corporations. The sale and purchase of plots do not change the vested powers of the authorities in such utilities. The differentiation, hence, between the open undeveloped land and developed plot should only be in terms of compensation as the value addition will be part of the total consideration. The addition might be highlighted in the sale deed registered under Section 17 of the Indian Registration Act. The Flawed Rulings The Authority of Advance Ruling (AAR) of Karnataka, Gujarat and Madhya Pradesh have held contrary and imposed service taxes on such transactions. The reasoning provided by the above-mentioned bodies is that the development of land is a supply of service and hence should be taxed. Recently, the Gujarat AAR on 19th May 2020in the case of Sh. Dipesh Kumar Naik, while taking a similar approach as that taken by the AAR of Karnataka and Madhya Pradesh, explained its decision by mentioning that the amount charged by the seller is on the “super-built basis” and not as per the measurement of the plot. The “Super built-up” area includes the area of basic amenities like water tanks, parks, roads, etc. Thus, the seller charges the price which includes the price of the land and these provided amenities. In other words, according to the AAR, these amenities are the extrinsic part of the land purchased by the buyer. Ultimately based on such reasoning, it was held by the authority that the purchase of land and developed plot are two different transactions and hence tax should be imposed on such a developed plot. The decision taken is prejudicial and biased on the very face as the authority has imposed a tax on the entire consideration of the plot. The AARignored the fact that

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Across Platform Parity Agreements: A facilitator of Hub-and-Spoke Cartels?

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[By Ritvik Maheshwari and Vatsla Shrivastava] The authors are students at National Law University Odisha, Cuttack, and National Law Institute University, Bhopal, respectively. Introduction The advent of the Internet has proven to be a groundbreaker in the introduction of new ways of commerce and business. With the incessant inclination towards e-commerce, online platforms for search and comparison of products and services have become commonplace. Consequently, a special type of agreement called Across Platform Parity Agreements (hereinafter APPA), which ensures price parity across all platforms, has become extensively employed. These agreements raise some competition concerns, one of them being perpetuating the formation of a price-fixing cartel. This article explores how APPAs can be used as a means to form a price-fixing hub-and-spoke cartels. Across Platform Parity Agreements and their Significance APPAs are used to avoid a type of market failure called free-riding or free-riders effect. A buyer uses an online platform to locate a seller, but may finally conclude the transaction on an alternative venue. When this happens, the online platform does not get any commission for such transactions, which results in free-riding by the buyer. This is more likely to occur when some other platform offers the same product/service at a lower price. These online platforms have to make investments in quality, such as improving algorithms and rankings, along with other investments such as advertising to attract the parties to the platform. If an online platform does not get a commission for transactions, it would not be able to cover these costs. Thus free-riding would break down the business model. To overcome this problem of free-riding, online platform uses APPAs. These are contractual provisions that bar the seller from charging different prices for the same product/service on other platforms. An APPA is ‘narrow’ if it prevents the seller from offering a different price on other platforms; on the other hand, it will be ‘wide’ if the agreement bars the seller from offering different prices even at its own website. If the price across all channels is the same, a buyer is more likely to conclude the transaction on the platform on which it located the seller. This ensures commission for the online platform. While APPAs do seem to be necessary to run online platforms, they are likely to hinder competition in the market by being used as a means to form a price-fixing cartel. Section 2(c) of the Competition Act, 2002(hereinafter Act) states – “cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services”. This indicates that a cartel is an arrangement among economic actors at the same level of the supply chain rather than those on different levels. Section 3(3) of the Act covers cartel-like agreements and practices such as price-fixing, market control, market allocation, and bid-rigging. Section 3(3) covers only agreements and practices between the ones engaged in similar or identical trade. Hence, in the defense of narrow APPAs, it can be argued that they are not cartel agreements since they are vertical agreements entered between platform owners and sellers. However, the concern arises when APPAs lead to the formation of a special type of cartel, i.e. hub-and-spoke cartel, whose formation and operation is different from a traditional cartel. Formation and operation of Hub-and-Spoke Cartel This is a unique arrangement of economic actors that do not co-ordinate through direct links among the horizontal competitors, but coordinate through deviant exchanges via a vertically related supplier or retailer. It becomes strenuous for enforcement agencies to recognize when intrinsically legitimate transactions between suppliers and retailers transform into a prohibited arrangement, without any explicit evidence of collusion. For instance, in the case of Argos Ltd & Anor v Office of Fair Trading, Hasbro was the leading toy manufacturer in the UK while Argos and Littlewoods were the top retailers, competing with each other. Argos and Littlewood were giving low margins on some products. In order to tackle this, Hasbro came up with a “pricing initiative”. According to this, retailers were supposed to charge a Recommended Retail Price (RRP) to increase the margins. Both of them were suspicious that the other one would undercut the RRP to acquire market shares. Here, Hasbro acted like a hub indulging in anti-competitive practice by holding discrete discussions with Argos and Littlewoods and communicating the pricing strategy with both of them. Moreover, Hasbro was continuously monitoring the retailer’s conduct directly or through the information accepted by the retailers. Henceforth, Hasbro acted as a hub, while Argos and Littlewoods were the spokes connected to this hub. These kinds of cartels are called Hub and Spoke Cartels and as we shall see in the following section, APPAs can induce the formation of such cartels. Misuse of APPAs to form Price-Fixing Cartel The formation of a price-fixing hub-and-spoke cartel via price parity agreement has been previously witnessed in the case of United States v. Apple, Inc. Apple was eager to enter the e-book market by launching its iPad and the iBookstore. Amazon was prevalent in the market with the Kindle reader and its online bookstore. Most of the publishers sold their books through Amazon and Amazon used to buy those books at the wholesale price from publishers. This allowed Amazon to set the price of the books considerably low. To tackle Amazon’s primacy in the e-books market, Apple came up with an alternative for the publishers and offered the publishers an “agency model” wherein publishers would set the prices themselves for the books to be sold via the iBookstore. In this arrangement, Apple would receive a commission of 30% for each e-book sold. However, this arrangement was not enough to compete with Amazon. Consequently, Apple incorporated a parity clause in publishers’ contracts, according to which publishers were restrained from selling e-books on any other platform lower than the prices at iBookstore. It appeared that the only way for the publishers to get out of this situation was

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