Author name: CBCL

Significance of Structuring a Transaction from a Competition Law Perspective: Learnings from the Telenor Order

Leave a Comment / Competition Law /

[Rajat Sharma & Manav Gupta]   Rajat and Manav are 4th year students of NLU, Jodhpur. Introduction: A “merger” or “amalgamation” or “acquisition” [referred to as “Combination” in the Competition Act] involving an enterprise can, inter alia, result in a reduction in the number of competitors, or in the ability of the existing competitors to compete effectively, and therefore raises several competition concerns. In India, the competition law aspect of such combinations is majorly governed by Sections 5 and 6 of the Competition Act, 2002[1] (the Act), read alongside the Competition Commission of India (Procedure in regard to the transaction of business related to combinations) Regulations, 2011[2] (Combination Regulations). The Act empowers the Competition Commission of India (CCI) to exercise adjudicatory authority while deciding whether a certain proposed combination could have an appreciable adverse effect on competition (AAEC) in India. In this regard, section 6(2) of the Act requires the parties involved in such a proposed combination to notify the CCI and seek mandatory approval, before effecting or “consummating” the said combination [if the proposed transaction falls within the thresholds prescribed under section 5 of the Act].  In cases where the parties fail to notify the CCI and ‘consummate’ the transaction without getting prior CCI approval, appropriate penalties are imposed by the CCI under Section 43A of the Act. Such cases constitute a violative action termed as ‘gun-jumping’. In one such recent Order (Telenor ASA, Telenor [India] Communications Private Limited & Telenor South Asia Investments Pte Limited)[3] passed by the CCI in proceedings under Section 43A, the role of structuring a transaction in order to avoid potential conflicts with competition law were highlighted. The Order also re-established jurisprudence on what constitutes ‘control’ within the meaning of the Act, especially in cases of highly complex structured transactions. Relevant provisions: The initial notice was filed by the parties under Regulation 9(4) of the Combination Regulations. Regulation 9(4) pertains to filing of one notice for a series of interconnected transactions, by means of which the ultimate intended effect of the primary transaction is achieved. Other relevant provision attracted in these proceedings was Regulation 4, read with Item 8 of Schedule I of the Combination Regulations, which exempts intra-group asset transfer and intra-group acquisition of shares. The Transaction & Initial Observations: The initial notice under Section 6(2) of the Act was filed in 2012 by Lakshdeep Investments & Finance Private Limited (Lakshdeep). The notice was filed to notify the CCI regarding acquisition of shares of Telewings Communications Services Private Limited (Telewings/Telenor India) by Lakshdeep pursuant to a Share Subscription & Shareholders’ Agreement (SSHA). The SSHA was entered into between Telenor South Asia Investment Pte Limited (Telenor South Asia), an indirect wholly owned subsidiary of Telenor ASA (Telenor Global), Lakshdeep and Telewings. There were a series of steps to be undertaken to complete the intended primary transaction and the combination envisaged Lakshdeep to initially acquire 51% shares in Telewings and ultimately hold 26% shares in Telewings. As a first step, the transaction was contingent on acquisition of spectrum for carrying telecom operations as part of the 2G spectrum auction by Telewings. Once this was done, Lakshdeep would acquire 51% shares of Telewings (Lakshdeep Share Transaction). Next, Telewings would acquire business of Unitech Wireless Private Limited (Uninor Business Transaction) and finally, once approval of the erstwhile Foreign Investment Promotion Board (FIPB) was received, Telenor shall increase its shareholding to 74%, such that Lakshdeep shall hold 26% in Telewings (Telenor Share Transaction- Tranche I). The parties contended that Step-III and Step-IV of the series of transactions are exempted and need not be filed with the CCI, however, the CCI may assess them in the alternative. The CCI, however, while approving the Lakshdeep transaction noted that since Lakshdeep would hold 51% shares in Telewings, the transfer of business from Uninor to Telewings and consequent increase in stake of Telenor in Telewings from 49% to 74% is not an intra-group transaction and therefore, not exempted. In an appeal to the erstwhile Competition Appellate Tribunal (COMPAT), it was noted that Steps III & IV are entirely separate and were diabolically mixed up. The COMPAT also observed that the CCI’s observations on the last two steps were premature in nature. Now, fast forward to 2017 when a separate notice was filed by Bharti Airtel Limited and Telenor India for a proposed transfer of 100% shares of Telenor India to Airtel. Interestingly, when CCI perused this notice, it found out that Telenor consummated the last two steps of the proposed 2012 transaction and even increased its shareholding in Telenor India from 74% to 100% without notifying the CCI of the same. The CCI was irked as it denied the exemption in its earlier notice and since Lakshdeep exercised joint control over Telenor India, the increase of shareholding from 74% to 100% by Telenor meant a change of control from joint to sole and hence, notifiable. On the basis of these, the CCI started proceedings under Section 43A of the Act. Submissions: With respect to the applicability of exemption on Steps III & IV, Telenor submitted that interpretation of the term ‘group’ in accordance with Explanation (b) to Section 5 of the Act becomes relevant while applying the intra-group acquisition exemption, as it stood pre-amendment in 2012 (Old Item-8 exemption). The term ‘group’ under Explanation (b) to Section 5 of the Act states: “two or more enterprises which are, directly or indirectly, in a position to: (a) exercise 26% or more of the voting rights in the other enterprise; or (b) appoint more than 50% of the members of the board of directors in the other enterprise; or (c) control the management or affairs of the other enterprise.” It was asserted that since ‘Uninor’ was already a part of the Telenor Group by virtue of the latter’s 67.25% shareholding in the former, thereby meeting criteria (a) & (c) of the abovementioned definition. Further, irrespective of ,Lakshdeep’s shareholding, Telenor possessed 49% shares in Telewings and had the authority to solely exercise decisive influence

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Commodity Derivative Trading : A Unified Exchange Regime

2 Comments / Capital Markets and Securities Law /

[Vaidehi Soni]   Vaidehi is a 4th year student of NUALS , Kochi Background The Securities and Exchange Board of India (SEBI) announced to have a unified exchange regime from October 1, 2018, wherein stock exchanges would be allowed to offer to trade in commodity derivatives. Pursuant to the said approval, Bombay Stock Exchange (BSE) is set to launch commodity derivatives segments for the delivery-based futures contract in Gold (1 kg) and Silver (30 kg) and later add metals, energy products following by agricultural commodities such as processed/Un-processed farm produce whereas NSE apart from gold and silver will begin with mini gold (100 grams) contracts so as to attract small investors from October 12, 2018. Additionally, considering the fact, Multi Commodity Exchange (MCX) being the market leader, dominates in the trade volumes in non-agricultural commodities derivatives, BSE has decided to waive off the transaction charges for the first year of commodities market operations in order to encourage more participants to join commodity markets. Understanding Commodities market Commodities markets, globally and in India can be broadly categorised into two segments, namely, the market for spot transactions and the market for derivative transactions. The former market deals with the purchase (or sale) of commodities and the settlement of the transaction takes place simultaneously i.e. trade in commodity takes place either on a physical market place or on an electronic platform whereas the latter market deals with the exchange-traded commodity futures markets, which offer a highly standardized platform for trading financial instruments which derive their value from underlying physical commodities including settlement of trade at a future date. The commodity derivative market provides a platform for discovery of future prices of a commodity and also offer an opportunity to the participants in the spot market to hedge themselves against fluctuations in future prices of the underlying commodities. A sound derivative market through hedging delivers price discovery and price risk management by stakeholders including commodity traders, farmers, and market participants. Derivative trading in India takes place either on a separate segment of an existing Stock Exchange or on a separate and independent Derivative Exchange. The settlement & clearing of all trades on the Derivative Exchange/Segment would have to take place through a Clearing Corporation/House, which is unimpeded in governance and membership from the Derivative Exchange/Segment. Legal Framework for Derivative Market The derivatives market is governed by a central legislation, viz., Securities Contracts Regulation Act, 1956 (SCRA) which provides for the legal framework for organized derivatives trading and SEBI acts as the oversight regulator. In pursuance of recommendations made by the commodities derivatives advisory committee (CDAC), vide circular dated September 28, 2016, certain amendments/omissions were made to Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 (SECC) so as to enable commodity derivatives exchanges to deal in Options. As per section 2(bc) of The Securities Contracts (Regulation) Act, 1956 (SCRA) a commodity derivatives contract can either be: Physical delivery of goods (not being a ready delivery contract) as notified by Central Government or For differences, which derives its value from prices or indices of prices of such underlying goods or activities, services, rights, interests and events, as may be notified by the Central Government, but cannot have securities. As per section 2(1) (fa) of SCRA, the commodity derivative exchange means a recognized stock exchange which assists, regulates or controls the business of buying, selling or dealing only in commodity derivatives. Since the Commodity derivative exchange cannot deal in any other product except for commodity derivatives, an option contract with commodity futures may not be eligible for trading on commodity derivatives exchanges. To overcome such legal hurdle, multifarious amendments are made including omission of the category of “Commodity Derivatives Exchange” under SECC regulation” with effect from October 1, 2018 so as to enable commodity derivatives exchanges to also organise trading in option contracts with commodity futures and accordingly  all norms issued for commodity derivative exchanges till date shall be applicable to commodity derivative segments of recognised stock exchanges/recognised clearing corporations to the extent of its applicability. Need for Integration of Spot and Derivative Markets With increasing commercialisation and changing demands of consumers, traders and other market participants; BSE’s foray into commodities derivatives The need for integration is more felt for the overall benefit to the primary producers and value chain participants as: Firstly, A comprehensive mechanism for integration would improve cohesion between futures and physical markets. Secondly, in case, the commodity is assayed before trading, it may also lead to lead to the standardization and assurance regarding the quality of commodity to the buyers. Thirdly, on an electronic spot exchange, as the price of a commodity would be determined by a wider cross-section of people from across the country in contrast to the present scenario where price discovery for commodities takes place only through local participation, such platform will bring about efficient price determination and will ensure transparency in price discovery. Fourthly, A single market may also lead to lower operational cost, reduction in timelines, wider market penetration as technological advancement would result in amelioration of accounting of all the transactions that are taking place in the market. Additionally, the Derivative market would achieve better convergence pursuant to development of a regulated electronic spot platform and/or regulated commodity spot exchanges as is evident from the success achieved by the securities market or the commodity derives market after moving to the electronic platform. Since the derivatives market assures that the future and spot price of a commodity converges on the day the derivative contract lapse for settlement, the discovery of real-time spot prices of a commodity on a pan-India electronic spot exchange will unequivocally strengthen the convergence of future and spot prices of a commodity thereby increasing efficiency of both spot and derivatives market. Thus, the functioning of these two markets could help Indian commodity markets improve its efficiencies and enhance the effectiveness of the overall functioning of the commodity ecosystem so as to benefit all the stakeholders.[1] Challenges and Recommendations Such integration poses a

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Analyzing the proposed mandate of SEBI for Large Corporates

4 Comments / Capital Markets and Securities Law /

[Kartikey Kanojiya]   Kartikey is a 5th year student of Institute of Law, Nirma University Introduction Securities and Exchange Board of India (SEBI) by virtue of the consultation paper released on 20th of July proposed an idea whereby they will be making it mandatory for the Large Corporates to raise 1/4th (25%) of their finance through bond markets only. This idea was first proposed by Mr. Arun Jaitley, finance minister of India, during the budget session speech of 2018-2019. He said “SEBI will consider mandating, beginning with Large Corporates to raise 1/4th of the financial need through debt market only.”[1]Subsequently, SEBI took up this issue and finally released a consultation paper. In this article the author analyzes the feasibility of the proposed mandate of raising 25% of finance through bond market only. Applicability By virtue of this paper, the mandate will be applicable only to Large Corporates, which have been defined as: Any entity whose outstanding borrowing is more than 100 Crores; Has a credit rating of AA and above; An entity which intends to finance itself with long-term borrowings (Long term is defined here as any period above 1 year) and; Has listed its securities on any of the stock exchange.   The mandate will be applicable from April 1, 2019 on all the Large Corporates who as on 31st March of any financial year fulfills all four conditions mentioned above. Thus, if any entity as on March 31 of a financial year is identified as Large Corporate then from the next financial year i.e. from April 1, the mandate will be applicable. However, Scheduled Commercial banks as mentioned in Schedule 2 of the Reserve Bank of India Act, 1934 are exempted from this mandate.[2] Compliance Mechanism Under the compliance mechanism it says that the large corporate shall inform the stock exchange about the same. It also creates two blocks of compliances. The First block constitutes first two years of implementation and the second block constitutes the third and fourth year of implementation. Under First block i.e. first and second year of implementation, there is a process of comply and explain whereby, the Large Corporates will try to fulfill the requirements but if they fail to do so they have to explain the reasons for the failure in writing to the authority. Under second block i.e. third and fourth year of implementation it is mandatory for the Large Corporates to meet the mandate and if they fail to do so a penalty of 0.2% to 0.3% of the shortfall will be levied on them. [3] Analysis Trend of Bank v. Bond financing in India. If we look at the prevailing finance market in India, then there is a shift in the borrowing practices followed by the corporates. The data from financial year 2012-13 to 2016-17 i.e. data of 5 financial years shows that the trend line of bond financing is going upwards while the same of bank financing is sloping downwards. In future the trend of Bond Financing will increase because of the enactment of Insolvency and Bankruptcy Code, 2016. If we look at the preference which is given to the bond holders, then they are placed above the government and thus making it easy for the bond holders to recover during the liquidation period even before tax recovery.[4] General benefits of Bond Financing Better Borrowing terms: When a company goes for loan financing the rate of interest is already fixed but in the Bond financing the company can fix the interest keeping in mind the market conditions prevailing during the time and the predicted future of the company. This flexibility gives company an edge to go for Bond Financing.[5] Covenants and Restrictions: When a company goes for loan financing there may be a time where the lender puts some restriction such as that borrower cannot make any material change in the company without the affirmative vote of the creditor and thus making it difficult for the company to enter into any arrangement. In bond financing the only liability the bond issuer has is to repay the principle amount at the time of maturity and to pay interest as per the agreed terms. The bond holders do not get any control in the company as compared to the loan lender.[6] Non Dilution in the shareholding of the present shareholders: As and when new shares are issued to raise finance the shareholding of the present shareholder depletes because of the infusion of the shareholders. For example, I had 25% share in the company and thus, a material stake in the governance matters of the company but due to issuance of new shares and new shareholders entering the company my shareholding is reduced to 20% thus, making my clout in the governance of the company less. This is not the case with bond financing. Preference during the liquidation: After the enactment of Insolvency and Bankruptcy Code, 2016 the preference is given to the bondholders, and they are placed above the government and thus making it easy for the bond holders to recover during the liquidation period. This is a positive step to attract the the investors.[7] Disadvantages of Bond Financing Long and Complicated process: To issue bonds in the market SEBI (Issue and Listing of debt securities regulations), 2008 (“regulations”) are to be followed which makes it a complex process. As per the regulations, merchant bankers are to be appointed which also makes it financially difficult as compared to loan financing. Early Repayment: In bond financing the main issues is of repayment. Even if a company has money after some time they cannot pay the debt and settle it. In Bond financing there is no mechanism of early repayment of the claim and final setoff is done between the company and the bond holder. On the other side, in loan financing the money can be paid back soon after taking loan and there is no bar for doing the same except for a penalty which is levied upon the borrower. Bonds

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Application of the term supply under CGST Act to sale as a going concern

Leave a Comment / Taxation Law /

[Maithry Kini]   Maithry is a 4th year student at School of Law, Christ (deemed to be university), Bengaluru Introduction With the enactment of a new regime for indirect tax certain aspects have become ambiguous. The recent ruling of Karnataka bench of Authority for Advance Ruling (“Authority”)has offered certain clarity with respect to Goods and Service Tax (“GST”) implications on hiving off or demerger transactions. In the application filed by M/s Rajashri Foods Private Ltd[1] (“Applicant”) the question to be determined was whether the transaction of demerger or sale of a unit as a going concern would amount to supply of goods or supply of services or supply of both goods and services. Background of the case The Applicant sought to sell a fully functional unit of the entire business to another distinct person, who would not only benefit from a right over the assets but would take over the liabilities. The facts further convey that the business shall continue as a going concern. On the basis of this fact the Applicant claimed that such a transaction does not amount to supply and that they were exempted from the levy of the tax as under sl. no 2 Notification No.12/2017-Central Tax (Rate) dated 28.06.2017[2] (“Notification”). In order determine the scope and levy of tax it is necessary to examine the meaning of the term going concern and the supply under the Central Goods and Services Act, 2017 (“Act”). Analysis of the term sale as a going concern A going concern is a concept of accounting which implies business as a whole or in entirety. Transfer of a going concern means that the business activities shall continue to be carried out by the transferee as an independent business. This was reiterated in the landmark case of In re IndorRama Textile Limited where the court held that assets and liabilities being transferred constitute a business activity capable of being run independently for a foreseeable future.[3]The Supreme Court in Allahabad Bank v. ARC Holding (“Allahabad Bank Case”) held that if the company is sold off as a going concern, then along with the assets of the company, if there are any liabilities relevant to the business or undertaking, the liabilities too are transferred.[4] Demerger is sale of a business unit as a separate functional unit formulating into a resultant company. The demerger of an undertaking into another separate undertaking is facilitated by transferring the undertaking to a new company on a going concern basis. According to the Income Tax Act, 1971 demerger[5] is defined to be transfer of an undertaking as a going concern. Further the explanation states that there much be transfer of the business as a whole and does not include individual assets of the business. Considering the above explanations with the facts of this case it is clear that the sale of undertaking in this present case amounts to demerger wherein the unit is sold as a going concern and would result into a separate company with distinct identity.   In the present case the Authority while analysing the relevance and scope of the term going concern stated that: “Such transfer of business as a whole will comprise comprehensive transfer of immovable property, goods and transfer of unexecuted orders, employees, goodwill etc. It implies that the business will continue in the new hands with regularity and a nature of permanency.”[6] Analysis of the term Supply Section 7(1) of the Act[7] defines supply to include transfer for consideration in furtherance of business.This implies that the activity undertaken is in regular course of the business such as sale or transfer of the asset, should be the effect of transactions in due course of carrying out the business. Therefore the activity to be called as supply should be such that undertaking activity shall amount to “conduct of business or enhancing the business.” Further under Part 4 of Schedule II of the Act[8] referred in the Section states that supply also includesgoods forming part of the assets of a business, transferred or disposed off under the directions of the person carrying on the business. Such assets which are disposed off under such direction or transaction do not part a form of assets of the business. This transaction shall fall under the ambit of supply. It is pertinent to note that there is an exception under the paragraph which specifically excludes business transferred as a going concern to be treated under supply. Therefore, the transfer of a going concern as a whole does not comprise an activity undertaken in furtherance of the business activity. However, the scope of Section 7(1) extends beyond the meaning of the expression in course of furtherance of the business as it further states that it includes imports for consideration with or without any transaction in furtherance of the business. Thus, upon plain reading, Section 7(1) has a wider scope to include even sale as a going concern under the ambit of supply. Further, taking into consideration the Notification that has been relied upon, the table provides for description, rate and condition for levy of central tax. The sl. no. 2 which directly pertains to the subject matter at hand states services by the way of transfer of business. Further the title clearly classifies it as description of services. Irrespective of the provisions under the Act the intention to bring sale of going concern under supply is clear by classifying it under services. Thus the Authority ruled that the sale of business as a going concern amounts to supply and that the Notification shall cover the transaction on the condition that it is sold as a going concern. Conclusion The ruling brings in various excluded transactions under the umbrella of GST regime irrespective of the levy of tax. The Authority in the present case has stepped beyond the provisions of the Act and has heavily relied on the Notification to determine the meaning of supply. Strict interpretation and observance of the provision of the enabling Act must be mandated. Although tax statutes vastly enforce compliance, interpreting

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Data Privacy Protection: Corporate Social Responsibility or not?

Leave a Comment / Contemporary Issues /

[Aditi Jaiswal]   Aditi is a 3rd year student Dr. Ram Manohar Lohiya National Law University, Lucknow What is Corporate Social Responsibility? United Nations Industrial Development Organisation (UNIDO) defines Corporate Social Responsibility (hereinafter “CSR”) as, “A management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders.” It is a concept where Companies strive to strike a balance between the financial, social and environmental imperatives, while addressing the expectations of the stakeholdersThe nature of CSR is such that it is not static in nature, rather is ever evolving.[2] With a view to keep the local players at par with the global standards, India became the first country to mandate and quantify CSR expenditure under the Companies Act, 2013.[3] Schedule VII of the Companies Act, 2013 lays down the list of CSR activities and suggests that communities should be kept at the focal point, but the draft rules suggest that the CSR needs to go beyond the concept of philanthropy.[4] Data – a Significant Corporate Asset The present day world can, without a shred of doubt, be called the digital age. The devices like mobile phones, wearable devices and personal computers, with their apps, social media, e-commerce platforms etc. have penetrated our lives and produce large amount of data.[5] Such data today has become a vital corporate asset which proves beneficial in a variety of ways, from identifying potential customers, improving customer services, predicting sale trends to recognizing patterns and reasons leading to performance breakdown in a company. A Pricewater Cooperhouse research points out that the total intangible assets comprise, on an average, some 75% of companies’ value.[6] Rearranging CSR endeavours The Digital India initiative was introduced in 2014 with a vision to transform the nation into a digitally empowered society. But till date, the Government hasn’t come up with a robust regime for data protection. Considering this, the data privacy protection becomes, important as the companies are heavily relying on the personal data of individuals for multifarious purposes and in lack of any law or regulation protecting such data, the Companies owe an ethical obligation to improve the data privacy protection by framing policies. The Indian Companies venturing in the global arena, need to rearrange their Corporate Social Responsibility endeavours and include data protection of their stakeholders in the list. Data privacy protection would majorly be covered under the domain of the social dimension of the Triple Bottom Line approach on which the Stakeholder model of CSR works. Social variable of the Triple Bottom line approach focuses on the social dimensions of the community and includes measurements of education, equity and access to social resources, health and well-being, quality of life, and social capital.[7] In the present times, data privacy protection is also one of the significant societal dimensions, as privacy and autonomy of an individual cannot be overlooked due to unregulated and arbitrary use of data, particularly after the Puttaswami judgement, in which the Supreme Court has recognized the informational privacy as an important facet of the Right to Privacy.[8] Consequences of data breach As already discussed, data plays a very vital role in identification and targeting of the particular consumer group. However, the data collected includes different forms of information which may include habits, financial details, personal details etc. Here it becomes necessary to point out that the effects of any data breach can be multi-faceted. On one hand, a single incident of data breach can harm the consumers psychologically, socially or economically, depending on the type of information leaked. Certain information may be central to the identity of an individual, like their sexuality, etc., which if revealed would affect the person psychologically. Disclosure of some kind of sensitive information, many a times, results in the stereotyping and pre-judging of an individual or lowering his reputation, which affects his social life negatively.[9] Leakage of an individual’s social security numbers or financial details can lead to a huge economic loss for him. On the other hand, companies may lose out trust which people have in them, leading to the existing as well as probable customers switching to another company or service provider. Corporate integrity is ensured by maintaining the brand value and goodwill. A company’s goodwill by breaching the promises of data care, both explicit and implicit, gets contaminated not only in the minds of the consumers, but also the partners, shareholders and all the other stakeholders. This leads to a decrease in the value of its investments in brand identity building by eroding the commercial trust. Attenuation in the goodwill of a Company would diminish the value of a Company’s assets, in turn distressing the Company, thus financially harming the employers, partners, shareholders and other stakeholders at large. According to a study in 2016, 25 percent of the leaders of the largest global companies consider the most serious impact that a cyberattack can have on their organization is the loss of reputation among their customers.[10] Skeptics may argue that keeping in mind the present scenario, investment in privacy protection is nonessential and would lead to swelling of costs of the Company in India. But this criticism comes due to a lack of a proper understanding of the long term negative effects when the privacy of the stakeholders is breached. A Company may face severe consequences, by ignoring the Data Privacy Protection Principles, especially if such a breach leads to a severe privacy violation of a consumer, or some other abuse of confidentiality, then the expenses involved in covering fines, court fees, advocates’ fees, settlement costs, paying damages and other working out other mechanisms further diminish the capital of a Company.[11] Above that, these days the databases of personally identifiable information are becoming a lucrative target for the cybercriminals who use this data for identity theft and even extortion rackets, where they can easily blackmail the Companies to pay the ransom otherwise they would leak the data.[12] These cybercriminals may even threaten with attacks from zombie drones, which could disrupt operations of

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GST Exemptions on Sanitary Napkins is not a Matter of Joy!

Leave a Comment / Taxation Law /

[Anmol Jain]   Anmol is a 3rd year student at National Law University, Jodhpur Introduction Goods and Service tax [“GST”] regime was implemented in India[1] with great hopes and number of positive aspiration, inter alia, removal of cascading effect of multiple indirect taxes, achieving uniform markets, increased regularisation of firms, simplified process.[2] The biggest of the advantage is that it has incorporated the existing indirect taxes imposed by Centre and State Governments on goods and services into a single tax called GST. Also, the compliance burden on businessperson has been eased out under the latest GST Amendment Bills,[3] which was initially pointed out as a disadvantage of the GST regime. Largely, majority of the people support GST for the success it has collected.[4] Further, the absorption of varied indirect taxes into GST has allowed the Government to effectively grant input tax credit[5] [“ITC”] to the manufacturers and businesspersons involved in the supply chain that has led to reduction in tax liability. To illustrate it, Stages Value Addition Tax Rate Tax Payable Final Amount A 100 10% 10 110 B 50 10% 5 165 C 20 10% 2 187   Under the earlier tax regime, the tax was to be paid at the total rate at which the output is being sold and not on value addition. The benefits of ITC are not available to everyone in the market. The law provides for minimum conditions that a businessperson have to fulfil.[6] One such condition is that any businessperson, who is involved in the business of a GST exempted goods, is not eligible for claiming ITC.[7] This provision of law would prove to be instrumental towards the concluding part of this Article. Along the news of successful implementation of GST over the past year came the news of exemption of sanitary napkins from GST.[8] Earlier, GST amount to 12% was levied on sanitary napkins. This development witnessed mixed response from the public. One Section of the society hailed the decision of the GST Council for their progressive outlook and freeing the necessity from the taxing process.[9] On the other hand, people have criticised such tax exemption.[10] I believe that the GST exemption has definitely reduced the cost of the product and therefore, cheering for the lower-priced product does not seem illogical. However, I moot through the course of this article that instead of GST exemption, the tax rate on the product should have been reduced to 5% as exemption brings negative implications on the domestic manufacturers along. Mathematical dig on the Hypothesis During the course of the following calculations, we shall be finding answers for two questions: Does GST exemption reduces the cost of the product? Does GST exemption brings with it evil for the domestic manufacturers in veil of larger social interest? Is GST exemption on sanitary napkins is a viable option to achieve such larger social interest? A Sanitary Napkin [“output”] is a combination of four inputs: Cotton with a GST rate of 5%; Aseptic packing paper with a GST rate of 12% Packaging plastic sheet with a GST rate of 18% Advertisement with a GST rate of 18%. These four inputs are assembled and synthesised together to derive the output. Generally, this industry only encompasses two level supply chain, i.e. one the first level, respective firms supply inputs to the output manufacturer; on the second level, the output manufacturer assembles the inputs to derive the output. To begin with the search for the first question, i.e. does GST exemption reduces the cost of the product, we shall be finding the change, if any, in the cost of the product through calculating the cost of the product in the pre-GST exemption period and post-GST exemption period, wherein the product is produced by a domestic manufacturer. Case 1: Domestic Manufacturer producing at 12% GST (ITC available) Assume that the cost of each input be Rs. 100. Therefore, cumulative input cost be Rs. 400. When such inputs are sold to the output manufacturer, total GST paid is: 5% of 100 (Cotton) = Rs. 5 12% of 100 (Aseptic packing paper) = Rs. 12 18% of 100 (Packing plastic sheet) = Rs. 18 18% of 100 (Advertisement) = Rs. 18 Therefore, TGP = 5+12+18+18 = Rs. 53 Now, assume that the value addition done by output manufacturer during assembling the inputs equals Rs. 47. Therefore, total cost incurred by the output manufacturer equals Rs. 500. Now, if he wishes to sell the product at a profit of 10%, i.e. Rs. 50, the final price [x] of product would be: x = 500 (total cost) + 50 (profit) +12x/100 (GST on output) – 53 (ITC) x = Rs. 565 Therefore, we find that a domestic manufacturer would be ready to sell his output at the cost of Rs. 565 when the output is exempted from GST. Case 2: Domestic Manufacturer producing with GST exemption (ITC not available) If we borrow the costs from the above illustration, Cumulative input cost = Rs. 400 Total tax paid = Rs. 53 Value Addition by the output manufacturer = Rs. 47 Therefore, total cost incurred by the output manufacturer = Rs. 500 Profit = Rs. 50 As there is no GST on the final output, the output manufacturer would not have to add the cost of GST in the final price of the output as well as he cannot claim the benefit of ITC. Therefore, we find that a domestic manufacturer would be ready to sell his output at the cost of Rs. 550 when the output is exempted from GST. If we compare Case 1 and Case 2, it would be safe to conclude that price of the output has decreased when the output was exempted from GST regime. This answers the first question as well that yes, GST exemption reduces the cost of the product. Moving on to the next question, i.e. does GST exemption brings with it evil for the domestic manufacturers in veil of larger social interest, we shall be finding the solution

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Direct Tax Code

Leave a Comment / Taxation Law /

[Aditi Sinha & Vishal Kumar]   Aditi and Vishal are 2nd year students at Faculty of Law, Delhi University Introduction Direct Tax Code (DTC), was first released in 2009, it sought to substitute the existing Income Tax Act, 1961 and Wealth Tax Act, 1957, through a single effective legislation, aiming towards consolidating the direct tax legislations into one manuscript and enable voluntary tax compliance on part of taxpayers. The existing direct tax law, which deals with personal income tax, corporate tax and other levies such as the capital gains tax, has undergone numerous changes over the years. In September 2017, Prime Minister Narendra Modi told tax officials that old requires certain stringent changes. The idea is to rewrite it in line with the economic needs of the country and to keep pace with evolving global best practices. One key consideration behind such noble move is to ensure that the economy becomes more tax- compliant to generate enough revenue. With a vision to bring tax rates to an equilibrium without squandering the recent gains in revenue growth and tax base, the proposed tax rate cuts will be incremental over a period of time as compliance and revenue collections grow. In this way, it shall try to bring more assesses into the tax net, make the system more equitable and beneficial for different classes of taxpayers, make businesses more competitive by lowering the corporate tax rate and phase out the remaining tax exemptions that lead to piling cases of litigation. It will also redefine key concepts such as income and scope of taxation. Globally, governments are racing to woo investments and boost job creation by offering lower corporate tax rates. Following the traditions of US and UK, India is also trying to improve its rankings in terms of doing business and making herself a better place for investments, hence improving trade, product and service quality.  Direct Tax Code Bill The first draft bill of DTC was released by GOI (Government of India) for public comments along with a discussion paper on 12 August 2009 (DTC 2009) and based on the feedback from various stakeholders, a Revised Discussion Paper (RDP) was released in 2010. DTC 2010 was introduced in the Indian Parliament in August 2010 and a Standing Committee on Finance (SCF) was expressly formed for the purpose which, after having a broad- based consultation with various stakeholders, submitted its report to the Indian Parliament on 9 March 2012. As a follow-up on this initiative and as stated by the Finance Minister (FM) in his Interim Budget Speech in February 2014, after taking into account the recommendations of the SCF, a “revised” version of DTC (DTC 2013) was released on 31 March 2014.  The DTC 2013 proposes to introduce: • General Anti Avoidance Rules (GAAR), • Taxation of Controlled Foreign Companies (CFC), • Place of Effective Management (POEM) rule as a test to determine residency and tax indirect transfer of Indian assets. • Also contains expanded source rules for taxation of royalty, fees for technical services (FTS) and interest. Further certain novel provisions are also included such as additional tax levy on certain persons having high net worth, example: dividend tax levy on dividend income earned by resident shareholders in excess of INR 10 million. It also proposes a tax rate of 35% for individuals/ Hindu Undivided Family’ where the total income exceeds INR 100 million. The new direct tax code will seek to further reduce tax evasion and improve compliance so that the ratio of direct tax to GDP goes up from the present level- 5.9% in fiscal 2018 and a projected 6.1% in the current fiscal year- to at least 9% over the next three to four years. There could be room for further improvement on this count eventually as the tax-to- GDP ratio of comparable economies (including state taxes) is about 24%, roughly half of which should be from direct taxes.  Conclusion The two structural changes in recent years- demonetisation in November 2016 and the rollout of the goods and service tax (GST) in July 2017 have helped the government increase the number of direct tax payers. With increased cross-references between the tax return filings of both GST and corporate taxes, understating revenue is set to become more difficult for businesses. Taxation of digital economy, reducing frivolous litigation and making the corporate tax rate more competitive are expected to be the focus areas of the new code. Direct Tax Code draft bill had 319 sections and 22 schedules at the inception. Whereas the existing Income Tax Act (IT Act) has 298 sections and 14 schedules. Once the DTC bill is passed in the parliament, it will embark the ending of IT Act. The New code will completely modernize and simplify the existing tax proposals for not only individual tax payers, but also corporate houses and foreign residents. The language is very simple. In order to reduce the complexity, the Direct Tax Code has been drafted in a unique manner. Litigant bulwarks are expected to decrease as the code has been drafted in a simple and lucid manner. It shall also introduce the idea of tax calculators. The tax code aims at widening the base of taxation through discontinuation of incentives, reducing threshold limit for companies under transfer pricing, etc., while reducing the taxation rates. In transfer pricing, the law is new for Indians and needs more clarifications. The new code will also recast the powers of the Central Board of Direct Taxes, and induce more transparency in decision making processes. The new code will induce more transparency in decision making and tune it with tax boards of other countries like the US, Canada and Britain.

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Strict Interpretation of Arbitration Clause Surpasses Section 11(6A) of Arbitration & Conciliation Act

1 Comment / Arbitration Law /

[Pulkit Khare]   Pulkit Khare is a 4th year B.A., LL.B. (Hons.) student at The National University of Advanced Legal Studies, Kochi Introduction The Arbitration and Conciliation Act, 1996 (hereinafter the “Act”) was enacted to consolidate and amend the laws relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards  as well as to define the laws relating to conciliation by adopting the  UNCITRAL Model Law on International Commercial Arbitration, 1995 and the UNCITRAL rules.[1]The said Act was amended by the Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter the “Amending Act”) to make arbitration process cost effective and speedy, with minimum court intervention.[2] As per Section 6 of the Amending Act, it stipulated addition of sub-section 6A in Section 11 of the Act (Section 11 provides for appointment of arbitrators under the Act), as follows: (6A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement. At this point before proceeding with Section 11(6A), it is necessary to understand sub-sections (4), (5), (6) of Section 11 which primarily speak of situations where the parties to an arbitration agreement were unable to appoint an arbitrator(s) within the 30-days of arbitration notice, or where the parties were unable to follow the procedure for appointing an arbitrator so agreed between them. In such a scenario to bring effect to a valid Arbitration clause, one of the parties may request the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court to take the appointment procedure forward. In United India Insurance Co. Ltd. & Anr. v. Hyundai Engineering and Construction Co. Ltd. & Ors.[3] the question before the apex court in light of Section 11(6A) was, Whether submitting to arbitration clause under an agreement posits unequivocal expression of the intention of arbitration or is hedged with a conditionality? Facts Respondents were awarded a contract for design, construction and maintenance of a bridge for which they undertook an agreement for a Contractor All Risk Insurance Policy (“Agreement”) from the Appellants for the entire project. The Agreement stipulated that in cases of dispute arising out of quantum of compensation, such shall be referred to Arbitration within three months. But the agreement also stipulated that no difference or dispute shall be referable to arbitration, if the Appellants had disputed or not accepted liability under or in respect of the Policy. Incident During the construction of the bridge, an accident occurred for which the Respondents submitted their claim to the Appellants. Appellants appointed a surveyor who assessed the loss to be below the Appellants claim but also opined that the damage was on account of the faulty design and improper execution of the project and hence was not payable under the policy to the Respondents. Another report of a Committee of Experts set up by the of Ministry of Road Transport and Highways, Government of India, was also taken into consideration to enquire into the accident. Appellants taking into account both the aforementioned reports intimated the Respondents that the claim put forth was not payable, since policy specifically excludes any loss/damage caused by faulty design, defective workmanship/material and also the damage was caused due to willful acts/negligence in execution of work of such nature. Reconsideration to the matter raised by the Respondents was rejected by the Appellants. View of the Madras High Court Respondents invoked the Arbitration clause and upon non appointment of Arbitrator by the Appellants approached Madras High Court under Section 11(4) and 11(6) of the Act. The Madras High Court stating the post amendment position (insertion of sub-section 6A) under the Amending Act said it had a limited mandate to examine the factum of existence of an arbitration agreement and nothing more or less.       Hence allowing the petition, it appointed an Arbitrator in the matter. Decision of the Supreme Court On appeal by the Appellants against the judgment of Madras High Court, in regards, whether the courts were to send the matter directly to arbitration in case of a valid arbitration agreement or they could consider circumstances in pre-invigoration of Arbitration. The Supreme Court relied on Oriental Insurance Company Limited v. Narbheram Power and Steel Private Limited[4] and The Vulcan Insurance Co. Ltd. v. Maharaj Singh and another[5] holding that the arbitration clause has to be interpreted strictly, since in the present case the arbitration clause will get kindled  if the dispute between the parties is limited to the quantum to be paid under the policyThus, to put is differently, there can be no arbitration in cases where the insurance company disputes or does not accept the liability under or in respect of the policy. The court therefore instead of the mandate under subsection 6A, didn’t confine itself to examination of existence of arbitration agreement, rather went ahead and decided as to whether the arbitration agreement was triggered or invigorated in the circumstances or not. Hence, the Court chose to surpass the exclusive provision for appointment of arbitrator and went ahead to check whether arbitration was enlivened in the circumstances. The Dilution of the Courts jurisdiction which was brought about by inserting sub-section 6A through Section 6(ii) of the Amending Act is now being sought to be omitted under Section 3(v) of the Arbitration and Conciliation (Amendment) Bill, 2018 (Amending Bill). This step of the Court is in line with the legislative intent, since the Amending Bill, inter alia, has been brought out to plug some of the loopholes brought in by the Amending Act. Conclusion The issues raised by Section 11(6A) of the Act has been plugged by the Supreme Court, while rendering the decision in the present case by surpassing the mandatory appointment of arbitrator on existence of an arbitration agreement. The Amending Bill shall eventually fructify the position laid down by

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The Law of Bank Guarantees: Important Tools of Modern Day Commercial Transactions

Banking Law /

The Law of Bank Guarantees: Important Tools of Modern Day Commercial Transactions. [Rangeet Poddar] The author is a 4th year B.A.LLB(Hons.) student of WBNUJS, Kolkata. Introduction According to Section 126 of the Indian Contract Act, a contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default.[1] A bank guarantee is a contractual assurance that is given by the bank to a third party creditor. By virtue of this commercial instrument, the concerned bank undertakes liability on behalf of the principal debtor to fulfill his contractual obligation in the event of default.  This secures the transaction by ensuring that no detriment is caused to the creditor. The nature of obligations of the principal debtor is primary while the obligations of the bank are secondary. By issuing a guarantee, a bank ordinarily undertakes to pay the amounts specified in the guarantee agreement to the beneficiary on demand made by him in accordance to predetermined terms and conditions.[2] The object of a bank guarantee is to ensure the due performance of certain works contracts. The guarantee can also be towards security deposit for a contract or of any kind.[3] In the case of State Trading Corp. of India Ltd. v. Jainsons Clothing Corp.[4], the Supreme Court held that the bank guarantee is a trilateral contract in which the bank has undertaken to unconditionally and unequivocally abide by the terms of the contract. It is an act of trust with full faith to facilitate free flow of trade and commerce in domestic or international trade or business. It creates an irrevocable obligation to perform the contract in terms thereof. On the occurrence of events mentioned in the guarantee contract, the bank guarantee becomes enforceable.[5] There are two types of guarantees: A conditional performance guarantee is one where the surety becomes liable to the party, claiming under the guarantee upon proof of breach of terms of the underlying contract, or on proof of both breach as well as the loss occurring from the breach. Under unconditional guarantee, the guarantor becomes liable to pay the beneficiary the stated amount whenever the demand is made in the manner provided for in the guarantee, without the need for that beneficiary to prove any breach or loss; the guarantor is bound to immediately perform the contract of guarantee without further requirements. The object of unconditional bank guarantees or on demand bank guarantees are to secure hassle-free commercial transactions. Where the bank unconditionally and irrevocably promises to pay on demand, the amount of liability undertaken in the guarantee without ‘demur or dispute’ under the terms of the guarantee, the liability of the bank is considered to be absolute and unequivocal.[6] An on-demand bank guarantee consists of three separate and substantially independent but formally accessory agreements, namely: The underlying transaction or main agreement The indemnity agreement between the account party or principal and the guarantor The on-demand instrument between the guarantor and the beneficiary[7] The question whether the guarantee is a conditional or an unconditional one payable on demand, is a matter of construction in each case from the terms of the bond.[8] Independent nature and encashment of the bank guarantee In Ansal Engineering Projects v Tehri Hydro Development Corporation[9], it was held by the Supreme Court of India that the bank guarantee is an independent and distinct contract between the bank and the beneficiary and is not qualified by the underlying transaction and the validity of the primary contract between the person at whose instance the bank guarantee was given and the beneficiary.[10] The question whether the express terms of the guarantee give rise to the contract of guarantee to be enforced will be the limited enquiry for deciding the rights and obligations flowing from such a guarantee. Bank guarantees are independent in nature.[11] It is a separate autonomous contract between the bank and the beneficiary and is not qualified by the underlying transaction and the primary contract between the beneficiary and the person at whose instance the bank guarantee is given.[12] In a bank guarantee it is not necessary to go beyond the guarantee contract between the creditor and the surety bank and one must not look at any other contract including the underlying or primary one. However the underlying contract comes into the picture only if the guarantee itself makes its encashment, subject to proof of performance of underlying contract as it happened in the Hindustan Construction case[13]. In that case, the bank guarantee was for securing mobilization advance given by State of Bihar and it was provided in the terms of the guarantee that the beneficiary would not have the unfettered right to invoke the guarantee in the event the obligations expressed in the clause of the original contract were not fulfilled by the contractor. In such exceptional scenarios, the bank guarantee loses its autonomous character and depends upon the result of inquiry to the underlying contract. [14] Besides such cases, the court does not interfere with the enforcement of bank guarantees and guarantee contracts are not qualified by underlying transactions.[15]Where the bank guarantee is unconditional and payable on demand or demur, the liability of the bank is absolute and does not depend on the ultimate decision of a pending case in a court or tribunal. The bank only has to ascertain the amount claimed within the terms of the guarantee.[16]The question of encashment of the bank guarantee is entirely upto the beneficiary to invoke the guarantee at any time as he deems to be proper.[17] The National Highways Authority v Ganga Enterprises and Another[18] case laid down that that bank guarantees furnished in the form of security for not withdrawing a bid is fundamentally different from withdrawal of offer before acceptance as per the statutory provisions of the Indian Contract act. In such cases, when a person withdraws his offer within a stipulated time, he has no right to claim the earnest money that he has given in the form of a bank guarantee.

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