Author name: CBCL

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

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?

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!

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

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

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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Determination of Jurisdiction in cases of Trans-boundary Trademark Violations in the Cyberspace, in light of the Civil Procedure Code

Company Law, Competition Law /

Determination of Jurisdiction in cases of Trans-boundary Trademark Violations in the Cyberspace, in light of the Civil Procedure Code. [Anushka Sharma] The author is a 3rd year B.A.LLB.(Hons.) student of WBNUJS, Kolkata. Introduction The advent of internet has opened the doors for a wide range of inter-state and international transactions in the commercial setup. The content posted online can be accessed worldwide which opens up the possibility of it being contradictory to the laws of some faraway jurisdiction. Numerous companies have cited the risk of prosecution in distant jurisdictions as one of the most serious threats that they encounter. Thus, in order to ensure that the laws do not come in the way of economic development it is imperative to answer the question of jurisdiction with utmost diligence. This paper seeks to answer this question of jurisdiction with reference to trans-boundary trademark violations arising out of acts committed in the cyberspace, in context of The Civil Procedure Code (‘CPC’), while discussing some general principals which can be applied to other online torts as well. The General Principle The statutory provision that governs the jurisdictional questions pertaining to civil matters in India is the § 20 of the Civil Procedure Code, 1908 and the same is applicable for determining jurisdiction pursuant to torts committed online. As per the section the plaintiff might bring an action against the defendant either at the place where the defendant resides or carries on business or at the place where the cause of action arises.[1] In addition to the above provision the Delhi High Court has evolved the following three fold test in the News Nation Networks Private Limited v. News Nation Gujarat & Ors[2] case relying on Cybersell v. Cybersell[3] to decide matters of jurisdiction pertaining to a non resident foreigner regarding the content displayed on a website. It confers jurisdiction on the forum court only when[4]- The acts of the defendant have sufficient proximity with the forum state. The resultant cause of action due to defendants acts falls in the forum state. The exercise of jurisdiction tends to be reasonable. Trademark Violations The technology today has made it possible for a person to create a website that can be used to conduct business across the globe. Now a company while offering its services on such a website might violate the trademark of another company in a faraway jurisdiction by virtue of the global accessibility of its website, which it neither targeted nor foresee. Can the courts exercise jurisdiction over such a company if it is not located within their territorial jurisdiction? Can the company said to be in the court’s jurisdiction by virtue of the accessibility of its website there? Earlier, there existed two contradictory opinions in this regard, each given by a single judge bench of the Delhi High Court. The first view which was given in the case of Casio India Co. Limited v. Ashita Tele Systems Pvt. Limited[5] (‘Casio’) held that the mere likelihood of a person getting deceived in the forum state due to the accessibility of the defendant’s website there is sufficient to establish jurisdiction of the forum court. While the other view given in the case of India TV Independent News Service Pvt. Limited v. India Broadcast Live Llc And Ors[6] (‘India TV’) warranted for a higher standard to be adopted and said that mere accessibility of the website cannot grant jurisdiction to the court. Additionally it should be established that the website is highly interactive for the court to exercise jurisdiction.[7] The current governing precedent on this issue is Banyan Tree Holding Limited v. A Murali Krishna Reddy & Anr[8] (‘Banyan Tree’) which settled the position by overruling the Casio case and upholding the India TV case. This case was a passing off claim in which the court held that to establish jurisdiction in cases where the defendant does not reside/carry on business in the forum state but the website in question is ‘universally accessible,’ the plaintiff will have to show that “the defendant purposefully availed the jurisdiction of the forum court.”[9] This includes proving that (1) The website was used with an intention to effectuate a commercial transaction and (2) The defendant specifically targeted the forum state to injure the plaintiff.[10] While in cases where the website is ‘accessible in the forum state’ it needs to establish that (1) The website was not a passive but an interactive one (2) It was targeted towards the consumers of the forum state for commercial transactions (3) A commercial transaction was entered into by the defendant using such a website which resulted in injuring the plaintiff.[11] A defining judgement on this issue post Banyan Tree was of World Wrestling Entertainment Inc. v. M/s. Reshma Collection[12] (‘WWE’). This case dealt with infringement of trademark in which the court had to decide whether the accessibility of the website of the plaintiff which was used to sell goods in the court’s jurisdiction can be held to mean that the plaintiff ‘carried on business’ there as required by the §64 of the Trademark Act. [13] The court observed that “the availability of transactions through a website at a particular place is virtually the same thing as a seller having shops in that place in the physical world” and thus, held that it had the jurisdiction to entertain the present suit.[14] Contradictory or Not Some authors have pointed out that the decision in WWE is in contravention to Banyan Tree because while in Banyan Tree the court held that the mere presence of an interactive website in a particular forum is insufficient, it must also be shown that the defendant has targeted the forum state and the culmination of commercial transactions via that website has resulted in injuring the plaintiff. In WWE they said that the mere presence of the website of the plaintiff in a particular forum which is used to conduct commercial transactions is akin to having a physical shop there and will confer jurisdiction on the forum courts. This, in my opinion is an

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Regulatory challenges faced by Equity based Crowd-funding Platforms

Company Law /

Regulatory challenges faced by Equity based Crowd-funding Platforms.  [Amala George] The author is a 5th year student of B.A.LLB (Hons.) of ILS Law College, Pune. What is Crowdfunding? With the rise of the Internet, a new method of fund raising has emerged- Crowdfunding. Crowdfunding is the solicitation of funds from multiple investors through web-based platforms.[1] Different kinds of organisations including NGOs, small companies and business ventures use Crowdfunding to raise funds for different activities, expansion, diversification etc. Crowdfunding can be broadly classified into two kinds- donation based and reward based. Donation based crowdfunding involves grants and donations with no expectation or obligation of returns. Reward based crowdfunding can be further classified into- debt based or equity based. In debt based crowdfunding if it is in the form of loans, it is called peer to peer lending and should come under the banking regulator, whereas if it is debt securities based then it would come under the purview of the securities regulator. The subject matter of this article is equity based crowdfunding in which equity shares of the company are issued in lieu of funds raised from investors. It is a popular method of fund raising by start-ups. There are web based platforms which facilitate information exchange and advertising of companies as well as act as intermediaries for fund and equity share transfer. In web-based platforms for equity crowdfunding, investors and companies looking to raise capital through equity have to register with the platforms and pay a registration fee for the same. Start-ups advertise and solicit funding on these platforms and therefore the web-based platforms act as intermediaries or a marketplace for investors and start-ups.  Social media platforms are also often used by start-ups to solicit funds from multiple investors. The need for regulation Traditionally, start-ups raise funding through Venture Capital funds and Private Equity investors who have a high risk appetite. The funding is also at a later stage, after the product/ service becomes commercially viable. However with the advent of crowdfunding platforms, multiple investors with smaller individual investment are tapped into, usually at an early stage. The benefits of crowdfunding are that it is easier, faster and cheaper method of fund raising, requires no mandatory disclosures, and possesses easier and wider access to funding and investors. While the benefits of crowdfunding are manifold for the start-ups, the risk to the investors is high. There is an information asymmetry in the functioning of these crowdfunding platforms as there are no straight jacket regulations on mandatory disclosures which apply to them. These are also characterized as high risk investments and involve a high exposure to retail investors which makes the regulators uneasy. Start-up companies also offer less liquidity and therefore might not be viable for retail investors who do not have the required skills and assessment of risk to invest in such securities. There is a lack of regulatory certainty due to absence of regulations in which these crowdfunding platforms function. Current regulatory framework The applicable laws to Equity based crowdfunding are- 1) Companies Act, 2013- Any issue of securities by a company would come under the purview of the Companies Act, 2013. In relation to issue of securities, there are two recognised modes available to companies under Section 23 of the Companies Act, 2013- Public offer through prospectus and Private placement through an offer letter[2]. 2) Securities Contract (Regulation) Act, 1956, Securities and Exchange Board of India Act (SEBI Act) and Regulations- Under Section 24 of the Companies Act, 2013, Securities Exchange Board of India (SEBI) shall regulate the issue and transfer of securities of listed companies and those companies which intend to get their securities listed. A public offer requires a ‘prospectus’ and there is a list of matters to be disclosed in the prospectus. The prospectus also needs to be filed with the Registrar of Companies (RoC) and SEBI.[3] A private placement offer under Companies Act, 2013 cannot be made to more than 200 people in a financial year.[4] The newly amended Section 42 also stipulates that private placement shall be made only to persons identified by the Board and prohibits public advertisements or utilisation of any media, marketing or distribution channels or agents to inform the public at large about such an issue.[5] Explanation III to Section 42 dealing with offer or invitation for subscription of securities on private placement reads- “If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter”. Therefore the modus operandi of crowdfunding platforms[6] of raising funding through issue of equity shares through the medium of electronic platforms with a number of registered/ member investors would neither meet the stringent regulations for a public offer nor qualify as a private placement under the Companies Act, 2013. There is more similarity to a public offer than a private placement which is on a one-to-one basis. The decision of the Supreme Court in the Sahara judgment[7] concluded that an offer to 50 or more persons constitutes a public issue and will come under the regulatory oversight of SEBI even in case of unlisted companies. In case of crowdfunding, there is no filing of prospectus with the RoC and the disclosures to be made are not complied with, therefore there is a violation of public offer norms. Private Placement under Section 42 (7) specifically bars the utilisation of any media to market and distribute to the public at large about such an issue. The solicitation made to more than 50 persons also makes crowdfunding beyond the scope of private placement. In the opinion of the author equity based crowdfunding platforms are

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The Judicial Debate on Discharge of Surety

Contemporary Issues /

The Judicial Debate on Discharge of Surety. [Debanga Goswami] The author is a 4th year student of B.A.LLB (Hons.) of NUJS, Kolkata. Introduction According to Section 126 of the Indian Contract Act, 1872, (hereinafter referred to as “the Act”) a surety is a person who provides a guarantee in a contract of guarantee.[1] The same section defines a contract of guarantee as a contract to “perform the promise, or discharge the liability of a third person in case of his default”.[2] A contract of guarantee consists of three parties- the creditor, the principal debtor (hereinafter referred to as the “PD”) and the surety, (or the guarantor) and there is a privity of contract between all of them.[3] The liability of the surety is co-extensive with that of the PD.[4] Since a surety guarantees the performance of the obligations of a third party, the laws related to him are interpreted by the Court in his favour. The legislature has made provisions to discharge the surety in circumstances under which it would be inequitable to hold him responsible for the failure of the PD. Here, the author is making an attempt to critically examine the judicial debate pertaining to the circumstances which lead to the discharge of the surety. Issue 1 The Rule Any variance made in the terms of the contract between the PD and the creditor, without the consent of the surety, discharges him as to the transactions subsequent to the variance.[5] But, Section 133 only applies to the concept of continuing guarantee, which is clear from the phrase ‘transactions subsequent to the variance’, present in the provision.[6] This implies that the surety would be liable only for the transactions that are precedent to the variance in the contract between the creditor and the PD, without his consent.[7] He would be discharged for all the subsequent transactions.[8] The Debate Section 133 is based on the premise that the surety can’t be bound to do something which he hasn’t contracted to.[9] The Indian courts have interpreted this section to mean that in order for the surety to be discharged, the variance has to be a substantial one.[10] The test to ascertain substantial variance is that whether the variance materially affects the position of the surety or not.[11] But, the courts have not been able to reach at a uniform opinion pertaining to a peculiar situation. The situation arises when the variance is of a beneficial nature for the surety. In an English case[12], it was ruled that the though the surety was not prejudiced by the variance, yet he stood discharged. The same was reiterated in an Indian case.[13] Here, the creditor and the PD contracted to reduce the mortgage amount. The Court discharged the surety by stating that in such cases, the surety is the sole judge to decide whether he wants to continue with the contract or not. However, in another Indian case[14] the debt amount was decreased from Rs. 25,000 to Rs. 20,000 through a variance in the terms of the contract. But, the Court held that the change was unsubstantial and was for the benefit of the surety. Hence, he was not discharged. The guarantee of the protection of the assets of the creditor is crucial for the commercial world to thrive. Thus, the author opines that the surety should be discharged by the courts only in cases where there is a material alteration which goes against his interests. Issue 2 The Rule Section 134 inter alia states that the surety is discharged by any act or omission of the creditor, the legal consequence of which is the discharge of the PD.[15] The omission of the creditor, the legal consequence of which is the discharge of the PD also includes failure to sue PD within the limitation period. The Debate The issue on which courts have differed is that whether failure of the creditor to sue the PD within the limitation period discharges the surety or not. The judges who believe that the surety is discharged in such a situation have a three-pronged argument. First, liability of the surety is co-extensive with that of the PD[16] and thus his discharge should lead to the discharge of the surety. Second, the liability of the surety being a secondary one, when the PD with a primary obligation is discharged, then there is no reason to hold the surety liable.[17] Third, discharge of the PD and consequent lack of a debt on his part can be used by him as a defense to not indemnify the surety after the surety fulfills his contractual obligations.[18]Viewing the same from PD’s perspective, if he remains liable to indemnify the surety even after he is discharged from his liability towards the creditor, then the effect would be to render his discharge of little or no consequence.[19] But, courts have also come up with a counter view. When Section 134 is read along with Section 137 of the Act, the phrase ‘mere forbearance’[20] implies that except express contracts, the surety is not discharged. The Madras High Court has made a distinction between barring of the remedy and complete extinction of the debt.[21]It said that when the suit of the creditor becomes time-barred against the PD, his remedy against the latter is gone. It means that he cannot approach the Court to get an order for the PD to repay his debt. But, it doesn’t mean that his right over the debt is non-existent. The debt as well as his right over it are very much existent. So, after the surety had paid off the debt to the creditor, he can get indemnified by the PD. [22] This was re-affirmed in the case of Mahant v U Ba Yi.[23] The author also supports the above-mentioned line of reasoning. Even after the suit gets time-barred against the PD, the debt and the creditor’s right over it are not extinguished. Thus, the surety should be directed to pay the creditor and later get indemnified by the PD. This would also justify the

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