Dispute Resolution

Report of the Insolvency Law Committee: The New Way Forward

Report of the Insolvency Law Committee: The New Way Forward

On November 16, 2017, the Government of India constituted a committee to undertake a comprehensive review of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) in light of the experiences of various stakeholders during the past year. The Ministry of Corporate Affairs (‘MCA’) constituted the Insolvency Law Committee (‘ILC’) which comprises representatives from across the industry. Bahram N Vakil, a founding partner of AZB & Partners (‘Firm’) and a member of the Bankruptcy Law Reform Committee (the committee entrusted with drafting of the IBC in 2015) is one of the members of the ILC.

The MCA released ILC’s report on April 3, 2018 (‘Report’). The Report proposes various amendments to the IBC and the rules and regulations thereunder. The Parliament is likely to consider the Report in the near future to make the relevant legislative changes. Some of the major changes proposed by the Report are as below:

  • Homebuyers upgraded 

The IBC does not explicitly categorise homebuyers who have paid advances towards completion of real estate projects as financial or operational creditors in the corporate insolvency resolution process (‘CIRP’) of the real estate developer.The ILC took the view that advances paid by homebuyers are effectively used by real estate developers as working capital to finance the completion of projects thereby giving it the commercial effect of a borrowing and has proposed that homebuyers be treated as financial creditors. Note that their secured status depends on the nature of their contract with the developer and the bank providing the home loan. The ILC has also proposed that a large block of creditors be allowed to participate in meetings of the committee of creditors (‘CoC’) through an authorised representative.

  • Interest clock on interim finance extended

Under the IBC, interim finance and any interest on it is classified as insolvency resolution process cost which receives the highest priority on any payout under a resolution plan. However, in the event of liquidation, though the principal amount of interim finance still retains its highest priority, the interest stops accruing from the date of the liquidation order.The ILC felt that the clog on accrual of interest in liquidation was affecting liquidity and raising the coupon on interim finance. The ILC has proposed that interest on interim finance shall continue to accrue for up to one year from the liquidation commencement date. Note that the Insolvency and Bankruptcy Board of India (‘IBBI’) has already made necessary changes to this effect in the IBBI (Liquidation Process) Regulations, 2016.

  • Disqualification for bidders – revisited again

Section 29A of the IBC was introduced to address concerns that persons who by their conduct had contributed to the financial distress of the corporate debtor or are otherwise deemed not to be fit and proper to gain control over distressed assets, should be disqualified from being resolution applicants. However, the market felt that the range of disqualifications and the affected persons was too large. To address this issue, the ILC has made several proposals, some of which are set out below:

i.  Section 29A of the IBC lays down eligibility criteria vis-à-vis the resolution applicant as well as any person acting jointly or in concert with the applicant. The term ‘acting jointly or in concert’ is not defined in the IBC and causes market participants to rely on the definition contained in the Securities and Exchange Board of India (‘SEBI’) (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. This results in inclusion of an extremely broad range of persons, including even those who are involved in the resolution plan in an ancillary way. The ILC proposes to restrict the eligibility test only to the applicant and its connected persons. Additionally, any person acting with a common objective of acquiring voting rights or control over the company would also have to pass the eligibility test.

ii. Section 29A(c) of the IBC bars persons who have been in control of a non-performing asset (‘NPA’) for more than one year. However, this provision effectively disqualified several ‘pure play’ financial investors who are in the business of investing in companies across the credit spectrum. For instance, asset reconstruction companies, private equity and distressed debt funds are quite likely to have some distressed assets in their portfolios. The ILC has proposed that the test under Section 29A(c) of the IBC should not apply to such pure play financial entities.

 iii.  Section 29(A)(d) of the IBC bars persons who have been convicted of a criminal offence punishable with imprisonment for more than two years. This disqualification was thought to be very expansive and would disqualify applicants for offences, the commission of which have no nexus to the ability of the person to run the corporate debtor successfully. The ILC has proposed that the nature of offences, the commission of which will incur the disqualification should be economic in nature and a schedule listing such specific crimes be provided. Additionally, the disqualification should also not apply in case a stay against the conviction has been obtained from a higher court.

iv. Section 29A(h) of the IBC disqualifies persons who have executed an enforceable guarantee in favour of a corporate debtor currently undergoing CIRP. The ILC felt that the scope of the disqualification is overreaching since it bars guarantors solely on account of issuing an enforceable guarantee. The ILC has proposed that the disqualification should only apply against guarantors against whom the underlying guarantee has been invoked by the creditor and remains unpaid.

  • Curious case of guarantors’ liability – now resolved

Section 14 of the IBC imposes a stay on any recovery action against the corporate debtor and the enforcement of any security interest created by a corporate debtor over its assets during the CIRP period. However, a few recent judicial pronouncements have suggested that the moratorium in an ongoing CIRP will also stay enforcement of guarantees or security interest from promoters and group companies of the corporate debtor since it is not feasible to determine the liability of the relevant third party until the CIRP is concluded.The committee felt that the scope of the moratorium is very clear and should not be interpreted broadly. The intent of law could not have been to deprive creditors of contractually negotiated remedies against third parties as long as the corporate debtor’s assets remain unaffected. The ILC proposes that an explanation be added to Section 14 of the IBC to clarify that the moratorium does not apply to any recovery action that does not impact the assets of the corporate debtor.

  • CoC voting thresholds reduced

The IBC provides that all decisions by the CoC be taken by vote of 75% of the CoC, by value. The ILC felt that effectively granting minority lenders constituting 25% of the CoC a veto right to any proposed resolution plan could cause many companies to be liquidated. To ensure that there is a higher likelihood of resolving a distressed company as a going concern under the IBC, the ILC has proposed that the voting threshold for important matters during the CIRP including voting on resolution plans be reduced to 66% of the CoC. Additionally, for other routine decisions that the CoC is required to take during the CIRP, the voting threshold should be reduced to 51% to assist the resolution professional in ease of conducting day to day operations.

  • IBC trigger threshold now ten times    

To keep debt recovery actions from small operational creditors at bay, the ILC recommended that the minimum amount to trigger the IBC be raised to Rs. 10 lakh (approx. US$ 15,000). This may reduce pressure on the NCLT – as statistics suggest that many small creditors used the IBC to coerce recovery. But what of the small creditor? Back to the long queues in the debt recovery tribunals? Perhaps small creditors can accumulate their debt and then trigger IBC.

  • In and out with ninety percent

Currently, once an IBC case is admitted, the law does not permit withdrawal of the same without the consent of all creditors. This is consistent with the philosophy that this is a collective and representative process for all creditors and settlement with the ‘filing creditor’ should not permit withdrawal. The Supreme Court has thought otherwise and has permitted withdrawal post admission. The ILC reiterated the aforesaid philosophy but saw merit in permitting withdrawal post admission if 90% of the committee of creditors deem fit. Would this have been of use in the Binani Cement saga?

  • Regulatory approvals window

An immediate issue for acquirers in the IBC process is obtaining governmental and regulatory consents, dispensations and permits. Should the bidders bear this risk or the CoC live with the uncertainty? Today, negotiations resolve this tug-of-war to some extent while bidders draft their resolution plans treating the NCLT as a single window clearance. The ILC observed that single window clearance was not the intent of the IBC. This is a critical observation for bidders. Some solutions were debated but a comprehensive solution remained elusive. Instead, the ILC has recommended that a requirement be placed to obtain consents, dispensations and permits within a maximum of one year. It’s unclear how this will impact the fine balance currently trying to be achieved in practice by bidders.

  • Competition approval fast tracked

 In a welcome development, the ILC has been informed that the Competition Commission of India will clear notifications for combinations arising out of the IBC within 30 days, with an extension of 30 days for exceptional cases. This is already being borne out in practice and echoes the collaborative effort being taken by Indian regulators to make the IBC work.

  • Liquidation waterfall and priority of security

Concerns had been raised that the language in the IBC liquidation waterfall may override inter se ranking of security amongst creditors; i.e., in liquidation, a secured creditor with a first charge over an asset may receive the same amount as another with a second charge over such asset. After reviewing the language, related laws and relevant case law, the ILC felt confident that any such interpretation would be incorrect and valid subordination agreements should not be disregarded by the IBC and so no change has been proposed.

  • MSME promoters get a breather

Micro, small and medium enterprises are thought to be the bed rock of the Indian economy. When such companies go through the IBC process, keeping their incumbent promoters out of the bidding process has raised concerns of mass liquidation of such companies leading to potentially significant job losses. The ILC has recommended that promoters of such companies be permitted to bid for their companies in the IBC process (despite Section 29A disqualifications) unless they are willful defaulters. In balancing the opposing forces involved, this seems to be the socially appropriate decision.

  • Limitation now uncomplicated

Lenders benefited from judicial decisions which indicated that the Indian limitation legislation did not apply to an application under the IBC (although doctrine of laches might still apply). But this was yet to be confirmed by the Supreme Court, which had declined to comment on this issue in one matter. The ILC has recommended that limitation should apply to IBC applications other than those made by a corporate debtor itself.

  • No man’s land now occupied

 A resolution plan is approved by the CoC and submitted to the NCLT for confirmation. At this stage, the role of the resolution professional ends and the CoC ceases to exist. But the NCLT order may take weeks or months. Who runs the company during this time and what duties, powers and protections apply to such person? The ILC has recommended that the resolution professional be statutorily required to continue during this period, presumably with the same duties, powers and protections as during the CIRP.

For queries, please email bahram.n.vakil@azbpartners.com, ashwin.ramanathan@azbpartners.com, piyush.mishra@azbpartners.com, nilang.desai@azbpartners.com or suharsh.sinha@azbpartners.com. Bahram N Vakil, one of the founding partners of the Firm, leads the Restructuring and IBC Practice Group at the Firm. Ashwin Ramanathan, Piyush Mishra and Nilang Desai are partners and Suharsh Sinha is a senior associate in the Restructuring and IBC Practice Group at the Firm.

 

 

 

 

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The Dirty Dozen – first off the block

The Dirty Dozen – first off the block

 

Electrosteel Steels Limited was one of the twelve large stressed accounts directed by the Reserve Bank of India (‘RBI’) to be placed into the corporate insolvency resolution process of the Insolvency and Bankruptcy Code and has now become the first to be resolved under that process. The National Company Law Tribunal yesterday (i.e. April 17, 2018) approved the resolution plan submitted by Vedanta Limited. News reports suggest that the haircut taken by lenders is in the region of 55%. Vedanta awaits clearance from the Competition Commission of India before it can complete the acquisition. Many of the other ‘dirty-dozen’ are in the closing stages of their corporate insolvency resolution process and the next few weeks will see more resolutions and in some cases objections and litigation. The litigation in this space may settle some of the issues that lenders and acquirers fret about.

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Major Amendments introduced to the Insolvency and Bankruptcy Code

Major Amendments introduced to the Insolvency and Bankruptcy Code

The President of India promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (‘Ordinance’), which has become effective from June 6, 2018. Pursuant to the Ordinance, many of the amendments suggested by the Insolvency Law Committee (‘ILC’), which included our founding partner Mr. Bahram N Vakil, have now been implemented. The major changes introduced by the Ordinance have been summarised below:

  • Homebuyers Upgraded as ‘Financial Creditors’

Prior to the Ordinance, the Insolvency and Bankruptcy Code, 2016 (‘IBC’) did not recognise persons who had paid advances towards completion of real estate projects as either ‘financial creditors’ or ‘operational creditors’. The Ordinance now provides that any amount raised from an allottee under a real estate project shall be considered a financial debt under the IBC. Since the number of such allottees could be numerous and their participation in a committee of creditors (‘CoC’) could be unwieldy, the Ordinance provides that allottees may appoint authorised representatives to attend CoC meetings on their behalf, with prior instructions on voting matters.

  • Amendments to Eligibility Criteria for a Resolution Applicant

Section 29A sets out ineligibility criteria for potential bidders in a corporate insolvency resolution process (“CIRP”). The ambit of Section 29A may have been in some instances too wide and could have unintentionally disqualified some sophisticated bidders on technical grounds. The Ordinance has, therefore, introduced the following amendments to Section 29A :

i.   Section 29A(c): NPA Related disqualification

(a)     Section 29A(c) provides that persons controlling accounts which have remained non-performing assets (‘NPA’) in excess of one year are barred from acting as resolution applicants in an ongoing CIRP. However, no clarification had been provided on whether the one-year period would be determined from: (i) insolvency commencement date of the corporate debtor; or (ii) the time at which the bid was submitted in the ongoing corporate insolvency resolution process (‘CIRP’) of the corporate debtor. The Ordinance has clarified that the relevant date should be the latter.

(b)   The Ordinance provides that the disqualification under Section 29A(c) shall not apply to a ‘financial entity’ (scope of which is discussed under Paragraph iii below).

(c)   Successful resolution applicants acquiring companies under the CIRP end up being in control or management of accounts which have turned NPA. Such acquirers would, as a result, fall foul of Section 29A(c) and would be estopped from making any further bids for any other company undergoing CIRP. In order to rectify this anomaly, the Ordinance provides for a grace period of three years in favour of a resolution applicant, calculated from the date of acquisition of such corporate debtors with NPAs during which the acquirer will not be disqualified from bidding for other companies undergoing CIRP. A similar carve-out has also been granted under Section 29(A)(g) of the IBC, to successful bidders, who have acquired companies in CIRP where certain avoidable transactions may be been undertaken by the previous promoters or officers.

ii.  Section 29A(d): Disqualification on account of Criminal Convictions

(a)     Section 29A(d) of the IBC disqualified a resolution applicant if it or any of its ‘connected persons’ had been convicted for an offence punishable with imprisonment for two years or more. It was argued that there must be a rational nexus between the underlying offence and the ability of the bidder to successfully restructure the corporate debtor.

(b)   This sub-section has been amended to provide that: (i) conviction for two years or more is a bar only if the offence relates to certain statutes prescribed in the newly introduced Twelfth Schedule to the IBC; and (ii) conviction for seven years or more would be a bar irrespective of which statute the offence fell under.

(c)   A list of twenty-five laws is specifically mentioned in the Twelfth Schedule covering areas such as money laundering, foreign exchange, pollution control norms, tax, anti-corruption and securities market regulations. The Twelfth Schedule only covers Indian statutes and an interpretation may be taken that similar violation by the bidder or its connected persons under foreign laws may not attract the disqualification. However, the disqualification relating to conviction for seven years or more would apply under Indian as well as foreign laws.

(d)   The Ordinance provides that the bar under Section 29A(d) will not apply if more than two years have elapsed from the date of release from imprisonment (rather than a bar in perpetuity).

iii.  Explanation to Section 29A(i) : Reducing the Scope of ‘Connected Person’

(a)     Part (iii) of the definition of ‘connected person’ under Section 29A(i) of the IBC, is extremely broad and includes the holding company, subsidiary company, associate company or any related party of the proposed acquirer, its promoters, the acquirer’s board as well as the proposed management of the corporate debtor or its promoters. By virtue of their business model, it was inevitable that several pure play financial entities would have connected persons through their investee companies in India or abroad which suffered from the disqualifications (especially relating to NPAs) listed in Section 29A. The IBC was amended late last year to create a carve-out from part (iii) of the definition for scheduled banks, asset reconstruction companies and alternate investment funds registered with the Securities and Exchange Board of India (‘SEBI’) – however this exemption did not benefit foreign private equity players, venture capital and distressed assets funds.

(b)   Pursuant to the Ordinance, relaxation has now been provided to foreign financial investors. The definition of ‘financial entities’ now includes the following additional classes of entities: (i) any entity regulated by a foreign central bank or any other financial sector regulator of a jurisdiction outside India; and (ii) any investment vehicle, registered foreign institutional investor, registered foreign portfolio investor or a foreign venture capital investor as defined in regulation 2 of the Foreign Exchange Management (Transfer of Issue of Security by a Person Resident Outside India) Regulations, 2017.

iv.  Section 29A(d): Disqualification on account of Criminal Convictions

(a)     The impact of Section 29A of the IBC was such that in many cases, it would force a change of control of the erstwhile promoter under a resolution plan or in liquidation. There was a concern that there may not be enough interest from third party buyers in companies under IBC, which are of a comparatively smaller size. A ‘one size fits all’ approach could hamper recoveries where there is little scope for turnaround of smaller companies unless the promoters submit a resolution plan. Recognizing this, the Ordinance provides for limited exemptions from the provisions of Section 29A of the IBC for Micro, Small and Medium Sector Enterprises (‘MSMEs’).

(b)   However, the statutory thresholds for recognizing MSMEs under the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSME Act’) are low. For instance, for companies engaged in manufacturing, the thresholds for classification as MSMEs are investment in plant and machinery ranging from less than INR 25,00,000 (approximately USD 37,000) to INR 10,00,00,000 (approximately USD 1.5 million). The Central Government had approved an amendment to the MSME Act on February 7, 2018 providing that the thresholds in the MSME Act be redefined. The proposal is to re-align the definition of MSMEs on the basis of annual turnover ranging from less than INR 5,00,00,000 (approximately USD 750,000) to INR 250,00,00,000 (approximately USD 37 million). Once the proposed amendment to MSME Act is notified, it will provide significant relief to promoters of a large number of small companies facing financial distress.

  • Withdrawal of an Ongoing CIRP Proceeding

Once an application filed under the IBC is admitted, it can either lead to a successful resolution plan or liquidation. Under the IBC, a company undergoing the CIRP process did not have the power to arrive at a settlement or compromise by which the ongoing CIRP proceedings could be withdrawn. However, in a few cases, the courts had gone beyond the purview of the IBC and allowed settlement of the claims of a creditor, bilaterally leading to withdrawal of the matter.

The Ordinance clarifies that withdrawal of a CIRP proceeding will be permissible if 90% of the CoC approves it. However, such withdrawal will be permissible only prior to the resolution professional formally inviting resolution plans from interested bidders.

  • CoC voting thresholds reduced

The IBC provided that all decisions by the CoC be taken by a vote of 75% of the CoC by value. The Ordinance has reduced the voting threshold from 75% to 66% for major decisions such as: (i) applying for an extension for the CIRP period from 180 to 270 days; (ii) replacement of an interim resolution professional or resolution professional; and (iii) approving a resolution plan. For other routine decisions, the voting threshold has been reduced to 51%.

  • Role of shareholders of the corporate debtor in approving resolution plans

The consent of shareholders of the corporate debtor is generally required for significant corporate actions. The Ministry of Corporate Affairs (‘MCA’) released a clarification last year to the effect that approval of shareholders of the company for any corporate action in the resolution plan (otherwise required under any law) is deemed to have been given on its approval by the NCLT. The Ordinance specifically amends the IBC to incorporate the clarification proposed by the MCA.

  • Resolution professional responsible for ongoing legal compliances by the corporate debtor

Under Section 17 of the IBC, on insolvency commencement date, the board of the company is suspended and an insolvency professional takes control over management control. However, several laws including many provisions of the Companies Act, 2013, regulations issued by SEBI, Factories Act, impose obligations on the board of the company. The Ordinance clarifies that insolvency professionals shall be responsible for complying with the requirements under all applicable laws on behalf of the corporate debtor.

  • Participation of ‘related party’ financial creditors in the CoC

The IBC provided that financial creditors which were related to the corporate debtor would not be allowed to participate, attend or vote in CoC meetings. Financial institutions which had converted their debt into substantial equity stakes in the corporate debtor under any previous restructuring, were deemed ‘related’ to the corporate debtor and were thereby precluded from attending or voting in CoC meetings. The Ordinance provides an exemption from this prohibition for such financial creditors provided they are regulated by a financial sector regulator.

  • Grace period for fulfilling statutory obligations

A critical issue for acquirers in the IBC process is obtaining governmental and regulatory consents, dispensations and permits. Currently, acquirers tend to draft their resolution plans treating National Company Law Tribunal (‘NCLT’) as a single window clearance for all such approvals. But this approach is susceptible to legal challenge. The Ordinance provides for a one year grace period for the successful resolution applicant to fulfill various statutory obligations required under various laws to implement the resolution plan.

  • Issue of guarantors’ liability resolved

Section 14 of the IBC imposes a stay on any recovery action against the corporate debtor and the enforcement of any security interest created by a corporate debtor over its assets during the CIRP period. However, in a few cases, courts had taken the view that the moratorium in an ongoing CIRP will also stay enforcement of guarantees or security interest from promoters and group companies of the corporate debtor. The Ordinance states that the moratorium under Section 14 will not apply to the enforcement of guarantees granted by promoter guarantors or other group companies which are not undergoing a CIRP.

  • Further regulations to govern the bidding process

In most CIRP proceedings, the CoC formulates a process memorandum which governs the timelines for receiving bids, procedure for rebidding, grounds for rejection of bids etc. Such provisions and their application have been subject to several legal challenges at the NCLT by unsuccessful bidders. In a press release accompanying the Ordinance, the government has indicated that the regulations will govern issues such as non entertainment of late bids, bar on negotiations with late bidders and a standardised process for maximization of value of the corporate debtor.

  • Triggering CIRP by a company voluntarily

The IBC provided that a company may initiate its own CIRP and that the persons eligible to initiate a voluntary CIRP were: (i) the corporate debtor itself; (ii) a shareholder of the company specifically authorised to do so under the articles; (iii) director and key employees; and (iv) the chief financial officer. The Ordinance now makes a special resolution of shareholders mandatory for filing for its CIRP. It remains to be seen if a special resolution will be possible in closely held companies where promoters have a dominant stake. But directors and officers will need to be mindful of provisions in the IBC which impose civil and criminal sanctions on erstwhile directors and officers of the company for wrongful trading.

  • Limitation Act to apply to IBC

Lenders have benefited from judicial decisions which indicated that the Indian limitation legislation did not apply to an application under the IBC (although the doctrine of laches might still apply). However this has not been confirmed by the Supreme Court till date, as it had declined to comment on this issue. The Ordinance now provides that the law of limitation will apply to IBC applications.

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Amendment to the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014

Published In:Inter Alia - Quarterly Edition - April 2017 [ English Chinese japanese ]

SEBI, by way of a notification dated February 27, 2017 has amended the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014. Some key amendments are:

i. In case of delay, the applicant has to file an application for condonation of delay and the settlement fees payable by the applicant will be increased by levying simple interest at the rate of 6% p.a.;

ii. An application for default, which has been previously rejected by SEBI or withdrawn by the applicant, may be refiled and considered in exceptional circumstances (such as lapse of time since the default, weight of evidence against the applicant) and the payment of the additional fees and/or interest as recommended by the High Powered Advisory Committee;

iii. The settlement amount must be paid within 15 calendar days from the receipt of the notice of demand and such period may be extended by the panel of whole time members by an additional 15 calendar days, but no later than 90 calendar days from the date of the receipt of the demand notice. If the amount is remitted between the 30th and 90th calendar day, interest at 6% p.a. will be levied from the date of the notice till the payment of the settlement amount. Upon failure by the applicant to remit the settlement amount within such period and/or abide by the relevant undertaking and waivers, SEBI may reject the application;

iv. Except in cases specifically excluded from settlement, a settlement notice indicating the substance of charges and the probable actions may be issued in advance of the notice to show cause so as to afford an opportunity to file a settlement application within 15 calendar days from the receipt of such settlement notice. However, SEBI will have the power to modify the enforcement action to be brought against the notice and the notice will not confer any right to seek settlement or avoid any enforcement action; and

v. Applications filed voluntary or suo moto will get the benefit of a proceeding conversion factor of 0.65 as opposed to the existing 0.75.

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TRAI Tariff Order and Interconnection Regulations for Broadcasting and Cable Services

Published In:Inter Alia - Quarterly Edition - April 2017 [ English Chinese japanese ]

The Telecom Regulatory Authority of India (‘TRAI’) has on March 3, 2017, issued two sets of regulations governing, inter alia, the pricing of television channels by broadcasters and distributors, namely the Telecommunication (Broadcasting and Cable) Services (Eighth) (Addressable Systems) Tariff Order, 2017 (‘Tariff Order’) and the Telecommunication (Broadcasting and Cable) Services Interconnection (Addressable Systems) Regulations, 2017 (‘Interconnection Regulations’), which repeal certain related regulations applicable to pricing and addressable systems.

The Tariff Order and the Interconnection Regulations specify the framework for tariffs to be charged by broadcasters and distributors and also govern the arrangements between various service providers engaged in broadcasting services, and inter alia:

(i) provide that broadcasters are required to declare a monthly maximum retail price for a-la-carte channels; (ii) prescribe the amounts distributors may charge for channels as the capacity fee per network; (iii) manner in which charges may be levied by broadcasters and distributors for channel bouquets; and (iv) manner in which discounts and carriage fees may be applied by broadcasters and distributors.

Star India and Vijay Television have filed a writ petition in the Madras High Court (‘Madras HC’) challenging TRAI’s authority to regulate pricing of content on television channels. During the pendency of these proceedings, the Supreme Court (‘SC’) has granted TRAI leave to notify regulations (including the Tariff Order and Interconnection Regulations), while observing that the new cause of action arising from the notification of the regulations may be taken up with the Madras HC.

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Right to be Forgotten

Published In:Inter Alia - Quarterly Edition - April 2017 [ English Chinese japanese ]

The High Court of Karnataka (‘Karnataka HC’) passed an Order, on January 23, 2017 in the case of Vasunathan v. The Registrar General, High Court of Karnataka and Ors.[1], regarding the rule of ‘Right to be forgotten’. In the instant matter, a writ petition was filed before the Karnataka HC seeking masking of the name of the petitioner’s daughter from all court records (including the cause title), which contained details of a previous marriage of the petitioner’s daughter that had been annulled, as well as court records of orders that had been passed in criminal proceedings filed by his daughter’s former husband. The masking was sought to protect her reputation in society and her relationship with her current husband.

The Court held that the Registry will endeavour to ensure that the petitioner’s daughter’s name was not reflected in any internet search in the public domain including any search within the order or in the body of the order apart from the cause title. This would be in line with the trend in many foreign jurisdictions where the principle of ‘Right to be forgotten’ is followed in sensitive cases involving women in general, and cases involving rape or affecting the modesty and reputation of the person concerned. The Court further held that where the website of the Karnataka HC is concerned, no steps need to be taken to anonymize the petitioner’s daughter’s name and accordingly, any certified true copy of the relevant order of the Karnataka HC will reflect the name of the petitioner’s daughter.

[1]     Writ Petition 62038 of 2016 (GM-RES), order dated January 23, 2017

 

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Issue on Appointment of ex-Government Employees as Arbitrators in Disputes Arising out of a Contract with the Government

Published In:Inter Alia - Quarterly Edition - April 2017 [ English Chinese japanese ]

By its judgment passed on February 10, 2017, SC has held in Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd.,[1] that ex-Government employees could be appointed as arbitrators, under the amended Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), in disputes arising out of a Government contract, and that such appointment does not run foul of the conflict of interest guidelines listed in the Seventh Schedule of the Arbitration Act.

Facts of the case

Under the contract awarded to Voestalpine Schienen GmbH (‘Voestalpine’), Voestalpine was required to nominate an arbitrator from a panel of arbitrators selected by Delhi Metro Rail Corporation Ltd. (‘DMRC’). After disputes arose, DMRC furnished the names of five arbitrators, who were retired engineers of various Government departments or public sector undertakings (‘PSUs’), including the Indian Railways. Voestalpine challenged the selection of the panel of arbitrators on the basis that the DMRC nomination was disqualified by Section 12 of the Arbitration Act, read with Entry 1 of the Seventh Schedule of the Arbitration Act, which prohibits a person from acting as an arbitrator if he is/has been an employee, consultant or advisor with one of the parties to the arbitration.

Decision of the SC

SC held that the selection of retired engineers of Government departments or PSUs did not violate Section 12(5) of the Arbitration Act simply because the person (sought to be appointed as an arbitrator) is a retired officer of a Government or other statutory corporation or PSUs. If such person had no connection with the DMRC, then that person would not be treated as ineligible under Section 12(5) of the Arbitration Act. The judgment effectively rejects the proposition that all Government entities and PSUs are to be seen as one composite entity for purposes of conflict of interest in choice of arbitrators. Therefore, in disputes arising out of Government contracts, private parties will not be entitled to object to the process of nomination of arbitrators by the Government entity, so long as such nominees are not/were not directly employed with the particular Government entity that is party to the relevant dispute.

[1]     2017 SCC OnLine SC 172.

 

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Claim of Damages for Breach of Contract under Section 73 of the Contract Act, 1872 by a non-resident does not violate the RBI guidelines

Published In:Inter Alia - Quarterly Edition - April 2017 [ English Chinese japanese ]

On February 9, 2017, in the case of Shakti Nath and Ors v. Alpha Tiger Cyprus Investments[1], the Delhi High Court (‘Delhi HC’), while deciding a challenge to an arbitral award involving enforcement of put option rights, held that awarding damages to a non-resident investor does not amount to an indirect enforcement of an optionality clause under a contract.

Facts

Two foreign entities (‘Respondents’) had entered into inter alia a shareholders’ agreement (‘SHA’) with certain resident entities (‘Petitioners’) to invest in an Indian company in the real estate sector. The SHA provided for a ‘put option right’ in favour of the Respondents, entitling the Respondents, upon non-fulfilment of certain conditions by the Petitioner, to require the Petitioners to acquire the Respondents’ shares at a price ‘equal to the Investors’ Capital plus a post tax IRR of 19% on the Investors’ Capital’. The arbitral tribunal, appointed upon occurrence of certain disputes, awarded damages to the Respondents on finding that the Petitioners had breached their obligations under the SHA.

The issue before the Delhi HC was whether awarding damages to the Respondents would amount to an enforcement of their put option right, thereby violating the guidelines set out in the RBI Circular dated July 15, 2014 (‘RBI Circular’). The RBI Circular states that a transfer of shares between a resident and a non-resident is required to be undertaken at a price computed in accordance with internationally accepted methodology, with the underlying principle being that a non-resident investor cannot be guaranteed an assured return on its exit price.

Decision

The Delhi HC held that the Respondents had a choice between enforcement of the put option and claiming damages for breach of the SHA. Given that the Respondents chose to make a claim for damages for breach of contract under Section 73 of the Contract Act, 1872, the question of violation of the RBI Circular did not arise.

It is pertinent to note that the judgment reflects the pro-arbitration stance of Indian Courts, and indicates a liberal approach towards enforcement of awards arising out of obligations under optionality contracts.

[1]     Judgment dated February 9, 2017, in OMP (Comm) 154/2016. (Delhi High Court)

 

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Delhi High Court on Permissibility of Photocopying of Text Books for Preparing Course Packs

Published In:Inter Alia - Quarterly Edition - January 2017 [ English Chinese japanese ]

A Division Bench (‘DB’) of the Delhi High Court, by its judgement dated December 9, 2016 in the case of Chancellor, Masters & Scholars of the University of Oxford & Ors v. Rameshwari Photocopy Services and Ors[1], disposed the appeal filed by the publishers against the order passed by the Single Judge on September 16, 2016.[2] The DB held that photocopying of copyrighted materials for preparing course packs would be a permissible activity and would not constitute infringement so long as such copying was for purposes of educational instruction. The DB reaffirmed the following findings of the Single Judge on substantive points of law: (i) utilisation of the copyrighted work would constitute fair use to the extent justified for the purpose of education, irrespective of the quantity of reproduction; (ii) “course of instruction” under Section 52(1)(i) of the Copyright Act, 1957 was not limited to a lecture in a class room and extends to various acts of imparting instruction; (iii) reproduction of works under Section 52(1)(i) can be made by an intermediary, i.e., a photocopier, and need not be limited only to reproduction by a teacher / pupil; (iv) course packs will not adversely impact the market of the publishers since students are not potential customers; and (v) distribution of course packs would not amount to “publication” as the element of profit was missing in such publication.

The DB, however, partially overturned the judgment of the Single Judge and remitted the matter to the trial court for a fact specific determination of whether: (i) inclusion of the copyrighted works in the course packs was justified by the purpose for which course packs are prepared, i.e. for instructional use; and (ii) whether photocopying of entire textbooks (copied back to back) would be a permissible activity. This issue arose from the findings of the local Commissioner’s report highlighting that apart from the course packs that contained excerpts of various textbooks, eight books had been photocopied back to back.

In light of the legal determination above, the DB refused to grant the publishers an interim injunction. However, the photocopying agency was called upon to maintain records of the course packs photocopied by it and supplied to the students and also file a statement to this effect with the trial court every six months till the trial is completed.

[1]     Chancellor, Masters & Scholars of the University of Oxford & Ors v. Rameshwari Photocopy Services and Ors., RFA(OS) 81/2016, Delhi High Court

[2]     The Chancellor, Masters & Scholars of the University of Oxford & Ors v. Rameshwari Photocopy Services and Ors., CS(OS) 2439/2012, Delhi High Court (Judgement dated September 16, 2016).

 

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Mere Allegations of Fraud Simplicitor Will Not Render a Dispute Non-Arbitrable

Published In:Inter Alia - Quarterly Edition - January 2017 [ English Chinese japanese ]

In a recent decision passed by the Supreme Court (‘SC’) on October 4, 2016 in the case of A. Ayyasamy v. A Parmasivam,[1] it was held that a dispute will not be rendered as non arbitrable because of mere allegations of fraud simplicitor, and distinguished it from serious fraud allegations.

Sections 34(2)(b) and 48(2) of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), inter alia, provide that an arbitral award may be set aside if the Court finds that the “subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force”.

While the Arbitration Act does not specify the kinds of cases that are not arbitrable, in a number of its previous judgments, the SC has specified examples of certain kinds of disputes that are not arbitrable. In Booz Allen and Hamilton Inc. v. SBI Home Finance Limited and Others,[2] the SC held that the following matters were not arbitrable: (i) disputes relating to rights and liabilities that give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights and child custody; (iii) guardianship matters; (iv) insolvency and winding up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes.

The SC in the present judgement, clarified that a mere allegation of fraud simplicitor may not constitute grounds to nullify the effect of the arbitration agreement between the parties, and listed examples of serious allegations of fraud that would render a dispute non arbitrable, such as: (i) serious allegations of forgery or fabrication of documents in support of the plea of fraud; (ii) where fraud is alleged against the arbitration provision itself; and (iii) where the fraud is of such a nature that it permeates the entire contract, including the agreement to arbitrate, i.e., where fraud goes to the validity of the contract itself – either the entire contract that contains the arbitration clause or the validity of the arbitration clause itself.

The SC held that it is only in cases where there would be a serious issue of fraud involving criminal wrongdoing that the exception to arbitrability carved out in N. Radhakrishnan v. Maestro Engineers[3] would apply. In cases involving allegations of fraud simplicitor, the arbitration clause need not be avoided and that the parties can be relegated to arbitration.

[1]     A. Ayyasamy v. A Parmasivam., AIR 2016 SC 4675.

[2]     Booz Allen and Hamilton Inc. v. SBI Home Finance Limited and Others, 2011 5 SCC 532.

[3]     N. Radhakrishnan v. Maestro Engineers, 2010 1 SCC 72.

 

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Dishonour of a Post-dated Cheque for Repayment of a Loan Covered by Section 138 of the Negotiable Instruments Act, 1881

Published In:Inter Alia - Quarterly Edition - January 2017 [ English Chinese japanese ]

On September 19, 2016, the SC in Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited[1] dealt with the issue of whether the dishonor of post-dated cheques that have been described as ‘security’ in a loan agreement, would attract criminal liability under Section 138 of the Negotiable Instruments Act, 1881 (‘Negotiable Instruments Act’), the penalty for which includes imprisonment for a term upto two years, or a fine, or both.

The SC held that Section 138 of the Negotiable Instruments Act applies only if, on the date of issuance of the cheque, the liability or debt exists or the amount has become legally recoverable, and not otherwise. The SC further held that the issuance of a cheque and admitted signature on such cheque creates a presumption of a legally enforceable debt in favour of the payee, and a mere statement by the accused that the cheques were issued as “security” and not as repayment, would not rebut this presumption.

In the present case, though the word “security” was used, the cheques were towards repayment of installments, which became due under the relevant agreement immediately upon advancement of the loan. Therefore, the dishonor of cheque was for an existing liability and covered under Section 138 of the Negotiable Instruments Act.

[1]     Sampelly Satyanarayana Rao v. Indian Renewable Energy Development Agency Limited, (2016) 10 SCC 458.

 

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Liability of Personal Guarantors of a Corporate Debtor during the Corporate Insolvency Resolution Process

Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]

State Bank of India (‘SBI’) had sanctioned a loan to Lohia Machines Limited (‘LML’) which was guaranteed by the directors of LML. Upon non repayment, SBI approached the Debt Recovery Tribunal, Allahabad (‘DRT’). However, in parallel, LML also filed an application before the National Company Law Tribunal (‘NCLT’), Allahabad Bench, to initiate a corporate insolvency resolution process (‘CIRP’) in respect of itself. In response to the CIRP being admitted, although the DRT stayed the proceedings against LML, it continued to hear the matter in relation to the enforcement of personal guarantees given by the directors of LML. Aggrieved by DRT, the personal guarantors filed a writ petition before the Allahabad High Court. The Allahabad High Court passed an order[1] dated September 6, 2017, staying the DRT proceedings against the personal guarantors and stated: (i) under Section 60(1) of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), NCLT is the adjudicating authority for resolution of insolvency and liquidation of a corporate person (including a personal guarantor); (ii) when liability is co-extensive and proceedings are still in a fluid stage, two split proceedings cannot go on simultaneously before the DRT and the NCLT for the same cause of action; and (iii) the scope of the CIRP order passed by NCLT imposing a moratorium on all legal proceedings, extends beyond the properties of the corporate debtor and suits/proceedings pertaining to the corporate debtor. Accordingly, the Allahabad High Court stayed the DRT proceedings against the personal guarantors till the finalisation of the CIRP or till approval of the resolution plan by NCLT or passing of an order for liquidation of LML by NCLT, as the case may be.

[1]     Sanjeev Shriya v. State Bank of India, Writ–C Nos. 30285 and 30033 of 2017

 

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Ability of a Power of Attorney Holder to Initiate Insolvency Proceedings

Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]

ICICI Bank Limited (‘ICICI’) filed an application before the NCLT through a representative, holding a power of attorney (‘PoA’), on behalf of ICICI to commence CIRP for Palogix Infrastructure Private Limited (‘Palogix’). Under the PoA in question, ICICI gave a general authority to the representative to appoint pleaders, advocates and solicitors to appear and act on behalf of ICICI before any NCLT bench and/or before other forums and to attend meetings of creditors in insolvency or bankruptcy or winding up matters and to vote at such meetings and to accept composition and to take such proceedings as he may think proper. Palogix objected that the person authorised by ICICI did not have adequate authority under the PoA to initiate bankruptcy proceedings before the NCLT. The National Company Law Appellate Tribunal (‘NCLAT’), in this case, took the view that IBC being a specialized law creating new rights and obligations, requires that a PoA be interpreted strictly so that the powers given to the agents are not abused and the actions are restricted only to the extent the power is indicated or given. It further stated that an authorization, in case of a company, means a specific authorization by the board of directors of the company by way of passing a resolution. Any application under Section 7 of the IBC, if signed and filed by a ‘general PoA holder’ without specific authorization under the IBC, will not be maintainable.

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Limitation Act does not apply to Proceedings under the IBC

Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]

By its order dated August 11, 2017,[1] NCLAT held that the provisions of the Limitation Act, 1963 (‘Limitation Act’) do not apply to the insolvency and bankruptcy process under the IBC. It stressed on the fact that the IBC was not enacted for the purpose of recovery of money claims, but rather for the initiation of CIRP. Accordingly, NCLAT allowed a debt that was time barred under the Limitation Act to form the basis of an application for the initiation of CIRP.

On August 23, 2017, the Supreme Court (‘SC’) dismissed an appeal from the order of NCLAT and declined to interfere with it. However, it noted that the question of law, viz whether the Limitation Act applies to IBC proceedings, has been kept open.

[1]     Neelkanth Township and Construction Pvt. Ltd. v. Urban Infrastructure Trustees Limited, Company Appeal (AT) (Insolvency) No. 44 of 2017.

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IBC prevails over the Maharashtra Relief Undertakings (Special Provisions) Act, 1958

Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]

In its first extensive ruling on the operation and functioning of the IBC, the SC in its order dated August 31, 2017[1] held, inter alia, that the Maharashtra Relief Undertakings (Special Provisions) Act, 1958, being a State legislation, cannot stand in the way of CIRP under the IBC, being a Central enactment, especially in view of the non-obstante clause contained in Section 238 of the IBC.

[1]     M/s. Innoventive Industries Ltd. v. ICICI Bank & Anr., Civil Appeal Nos. 8337-8338 of 2017.

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Fundamental Right to Privacy

Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]

A nine-judge SC bench , on August 24, 2017, held that an inalienable fundamental right to privacy resides in Article 21 of the Constitution of India and other fundamental freedoms contained in Part III of the Constitution.[1] It however observed that the fundamental right to privacy must yield in given circumstances to legitimate State interests and will be subject to reasonable restrictions. Consequently, any encroachment to privacy will have to subscribe to the touchstone of permissible restrictions and invasion of privacy would have to be justified against the standard of a fair, just and reasonable procedure.

However, the SC did not categorically comment on the Aadhar scheme, which was the original subject matter in the context of which the nine-judge bench had been constituted. The bench observed that it had not been constituted to look into the constitutional validity of the Aadhar scheme, and the same is currently pending before another bench of the SC.

[1]     Justice K.S. Puttaswamy v. Union of India and Ors., WP (Civil) No. 494 of 2012.

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Arbitral Tribunal has the Power to make Representation to the Court for Contempt of its Orders

Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]

On July 6, 2017, the SC held that an arbitral tribunal is empowered under Section 27 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’) to make a representation before the Court for contempt of any order passed during the arbitral proceeding.[1]

While the Bombay High Court had taken a restricted interpretation of Section 27 stating that the power of the arbitral tribunal to make a representation before the Court for contempt of orders is limited to the failure of the parties to follow the process of taking evidence, the SC took a broader view and held that if the parties fail to comply with any orders, including interim orders of an arbitral tribunal, they may be liable for contempt, on representation by the arbitral tribunal. Such orders would be deemed to be orders of the Court for all purposes and would be enforced under the Civil Procedure Code, 1908 in the same manner as if they were orders of the Court.

[1]     Alka Chandewar v. Shamshul Ishrar Khan, Civil Appeal No. 8720 of 2017.

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Proceedings under Section 37 of the Arbitration Act would not constitute ‘Dispute’ for IBC

Published In:Inter Alia - Quarterly Edition - October 2017 [ English Chinese japanese ]

Under Section 9 of the IBC, the existence of a dispute could bar an application by a financial or operational creditor. Section 8(2) of the IBC provides that, while pendency of “arbitration proceedings” has been included as “existence of dispute”, pendency of an application under Section 37 of the Arbitration Act has not been included as “existence of dispute”.

By an order dated August 29, 2017,[1] the NCLAT considered the relationship between the IBC and the Arbitration Act. It held that an arbitral award reaches finality upon: (i) expiry of the time within which an application under Section 34 of the Arbitration Act to set aside the arbitral award can be made, or (ii) an application made under Section 34 being rejected. Accordingly, the pendency of an appeal under Section 37 of the Arbitration Act would not constitute an “existence of a dispute” within the meaning of the IBC.

[1]     M/s Annapurna Infrastructure P. Ltd. v. Soril Infra Resources Ltd., Company Appeal (AT) (Insolvency) No. 32 of 2017.

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Provisions relating to Applications against Oppression and/or Mismanagement brought into force

Published In:Inter Alia - Quarterly Edition - October 2016 [ English Chinese japanese ]

The MCA has notified the following provisions of the Companies Act, which came into force on September 9, 2016:

i.  Section 227, which deals with confidentiality of privileged communications made to any legal advisor and information regarding legal proceedings before any Governmental authority;

ii.  Section 242(1)(b), which deals with the circumstances in which the company tribunal may exercise its powers for winding up of a company upon receipt of an application under Section 241 of the Companies Act, regarding oppression and mismanagement of the affairs of the company;

iii.  Section 242(2) (c) and (g), which deals with the powers of the company tribunal to pass orders for reduction of the share capital of the company upon purchase of the shares of an existing member and / or for setting aside any transfer, delivery of goods payment, execution or other act relating to property taken by or against the company within the preceding three months of the date of application under Section 241; and

iv.  Section 246, which states that Sections 337 to 341, which deal with liability for the fraudulent conduct of business and powers of the company tribunal to assess damages against delinquent directors in companies / partners in firms, respectively, would apply mutatis mutandis to applications made under Section 241 and Section 245 (which deals with class action suits), of the Companies Act.

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Companies (Mediation and Conciliation) Rules, 2016

Published In:Inter Alia - Quarterly Edition - October 2016 [ English Chinese japanese ]

The MCA has, by way of a notification dated September 9, 2016, notified the Companies (Mediation and Conciliation) Rules, 2016 (‘Mediation Rules’), whereby any party to a proceeding before the Central Government or the company tribunal or the Appellate Tribunal (‘Authority’) can apply to the Authority, or the Authority may apply suo moto, for the matter to be referred to the Mediation and Conciliation Panel in accordance with the process prescribed under the Mediation Rules.

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Diverging John Doe orders in relation to blocking URLs

Published In:Inter Alia - Quarterly Edition - October 2016 [ English Chinese japanese ]

The Bombay High Court (‘Bombay HC’) recently passed a number of orders dated June 16, 2016,[1] July 1, 2016[2] and July 22, 2016[3] that have narrowed down the scope of John Doe orders. The Bombay HC refused to pass orders that would result in wholesale blocking of hundreds of websites that allegedly offered and hosted illicit links to the movies ‘Udta Punjab’, ‘Great Grand Masti’ and ‘Dishoom’. The Bombay HC held that an order to block entire website without demonstrating that the entire website contains infringing material cannot be granted and that specific uniform resource locators (‘URL’) containing infringing material must be identified and established.

On the other hand, in the case of Department of Electronics and Information Technology v. Star India Private Limited,[4] a division bench of the Delhi High Court (‘Delhi HC’), by its judgement dated July 29, 2016, upheld a sweeping John Doe order for blocking 73 websites on the grounds that if only a single URL is blocked, the same website can very easily provide access to the blocked content through another URL.

[1]     Balaji Motion Picture Limited & Anr. v. Bharat Sanchar Nigam Ltd. & 49 Ors., Notice of Motion (L) No. 1783 of 2016 in Suit (L) No. 633 of 2016.

[2]     Balaji Motion Pictures Ltd. & Anr. v. Bharat Sanchar Nigam Ltd. & Ors., Notice of Motion (L) No. 1940 of 2016 in Suit (L) No. 694 of 2016.

[3]     Eros International Media Ltd. and Anr. v. Bharat Sanchar Nigam Limited & Or., Notice of Motion (L) No. 2147 of 2016 in Suit (L) No. 751 of 2016.

[4]     Department of Electronics and Information Technology v. Star India Private Limited, R.P.131/2016 in FAO (OS) 57/2015.

 

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Diverging rulings by the Bombay HC and Delhi HS on the Issue of Jurisdiction in Trademark and Copyright Infringement Cases

Published In:Inter Alia - Quarterly Edition - October 2016 [ English Chinese japanese ]

Pursuant to the decision of the Supreme Court of India (‘SC’) in Indian Performing Rights Society Ltd. v. Sanjay Dalia and Anr. [1] (‘Sanjay Dalia Case’), the Bombay HC and the Delhi HC have had the opportunity to interpret this ruling and have adopted diverging views.

For instance, in the case of Manugraph India Limited v. Simarq Technologies and Ors[2] the plaintiffs (having registered offices in Mumbai) brought a suit for trademark infringement before the Bombay HC, although the cause of action arose in Delhi for one set of plaintiffs, and in Kolhapur for the other set. The Bombay HC, however, ruled that it continues to have jurisdiction despite no cause of action having arisen in Mumbai on the reasoning that Sections 134 and 62 of the Trade Marks Act, 1999 and the CR Act allow plaintiffs to institute suits at the place where they carry on their business, irrespective of whether or not a cause of action arose in that place. Further, the Bombay HC held that the only mischief the SC was trying to remedy in Sanjay Dalia Case was the mischief of plaintiffs filing suits at far-flung subordinate offices where no cause of action had arisen.

However, a Division Bench of the Delhi HC has taken a contrary view in the case of Ultra Homes v. Purushottam Kumar Chaubey & Ors.[3] In this case as well, the plaintiff instituted a suit before the Delhi HC on the ground that it carried on business in Delhi, i.e. its principal office was located in Delhi. However, the cause of action arose in Deogarh, Jharkhand (where the plaintiff’s subordinate office is located). Applying the principle laid down in the Sanjay Dalia Case, the Delhi HC held that the plaintiff would be deemed to carry on business at the place of his subordinate office and not at the place of the principal office and therefore, in such a situation, the plaintiff could sue only at the subordinate office and not at the place of its principal / registered office.

[1]     Indian Performing Rights Society Ltd v. Sanjay Dalia and Anr., Civil Appeal Nos. 10643-44/2010 (arising out of Civil Suit FAO (OS) No. 359/2007)and Civil Appeal arising out of SLP [C] No. 8253/2013.

[2]     Manugraph India Limited v. Simarq Technologies and Ors, Notice of Motion No. 494 of 2014 in Suit No. 516 of 2013, Bombay High Court (judgement dated June 15, 2016).

[3]     Ultra Homes v. Purushottam Kumar Chaubey & Ors., FAO (OS) 494/2015, Delhi High Court (judgement dated January 20, 2016).

 

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Photocopying for Course Packs Falls within “Fair Dealing” and Does Not Amount to Copyright Infringement

Published In:Inter Alia - Quarterly Edition - October 2016 [ English Chinese japanese ]

In the case of The Chancellor, Masters & Scholars of the University of Oxford & Ors v. Rameshwari Photocopy Services and Or.[1], a suit was filed by five publishers against Delhi University and Rameshwari (a photocopying shop attached to Delhi University) alleging that by photocopying and distributing substantial extracts of academic text books for course packs, for sale, the defendants were infringing the publishers’ copyright in these books. However, the defendants’ main argument that photocopying of academic books for course packs fell under Section 52 of the CR Act, i.e. the fair dealing provisions, was upheld by the Delhi HC. On the grounds that the acts of the defendants fell under Section 52(1)(i) of the CR Act i.e. reproduction of a work by a teacher / pupil in the course of instruction, the Delhi HC held that: (i) this provision applies to an institution and its students and is not limited to an individual teacher and his / her student; (ii) the words “course of instruction” is not limited to a lecture in a class room and extends to various acts of imparting instruction throughout the academic session; (iii) the course packs were provided to students at nominal rates and only contained extracts of the books and, hence, would not be considered as competing with the books of the publishers; and (iv) such an interpretation would not violate the Berne Convention for the Protection of Literary and Artistic Works or the Agreement on Trade-Related Aspects of Intellectual Property Rights as these conventions have left this issue to be decided by their respective member countries. The publishers have filed an appealed on October 5, 2016 challenging this decision and the matter is pending before a Division Bench of the Delhi High Court.

[1]     The Chancellor, Masters & Scholars of the University of Oxford & Ors v. Rameshwari Photocopy Services and Or., CS(OS) 2439/2012, Delhi High Court (judgement dated September 16, 2016).

 

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Disputes under Trust Deeds and the (Indian) Trust Act, 1882 Not Arbitrable

Published In:Inter Alia - Quarterly Edition - October 2016 [ English Chinese japanese ]

The SC, in the matter of Vimal Kishor Shah & Ors v. Jayesh Dinesh Shah[1], by way of an order dated August 17, 2016, has held that disputes relating to trusts, trustees and beneficiaries arising out of trust deeds and the (Indian) Trust Act, 1882 (‘Trust Act’) are not capable of being decided in arbitration despite the existence of an arbitration clause in the trust deed. This judgment is significant as it adds another category of disputes that are not capable of being decided in arbitration prescribed by the SC in the matter of Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd.[2]

The dispute in the present case arose in respect of a family trust deed that contained an arbitration clause that provided for arbitration in terms of the (Indian) Arbitration Act, 1940 for disputes between / with beneficiaries who were not parties to the trust deed. The beneficiaries in the present matter challenged the appointment of an arbitrator by the Bombay HC before the SC on the ground that a valid and enforceable arbitration agreement did not exist.

Referring to Section 7 of the Arbitration and Conciliation Act, 1996 which sets out the requirements of a valid arbitration agreement, the SC held that since the beneficiaries did not sign the document (being the trust deed), they are not parties to such deed and therefore, no agreement could have been entered into between the beneficiaries. The SC also examined the provisions of the Trust Act and observed that the Trust Act exhaustively deals with trusts, trustees and beneficiaries and provides for adequate and sufficient remedies to all aggrieved persons by giving them a right to approach civil courts.

[1]     Vimal Kishor Shah & Ors v. Jayesh Dinesh Shah, (2016) SCC OnLine SC 825

[2]     Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532 wherein SC had held that the following types of disputes are not capable of being settled by arbitration: (i) disputes regarding rights and liabilities arising out of or giving rise to criminal offences; (ii) matrimonial disputes including child custody; (iii) guardianship matters; (iv) insolvency and winding up matters; (v) testamentary matters; and (iv) eviction or tenancy matters governed by special statutes.

 

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Messer Holdings: Supreme Court Judgement on Enforceability of Share Transfer Restrictions

Published In:Inter Alia - Quarterly Edition - July 2016 [ English Chinese japanese ]

In the case of Messer Holdings Ltd. v. Shyam Madanmohan Ruia[1], an appeal had been preferred before the Supreme Court (‘SC’) from a decision of the division bench of the High Court of Mumbai (‘Mumbai HC’), which had held that share transfer restrictions as set out in an agreement between shareholders are not violative of the Companies Act, 1956 (‘CA 1956’). The issue of enforceability of share transfer restrictions has long been vexed. It was expected, therefore, that SC would provide some clarity on this issue. However, in its judgment on April 19, 2016, SC effectively refused to answer the questions of law and further criticised the parties for unreasonably taking up the time of the court. While the Companies Act, 2013 (‘CA 13’) appears to clarify this issue under Section 58(2), there continue to remain some unanswered questions, including whether the Mumbai HC judgment would still be valid law.

[1]     Messer Holdings Ltd. v. Shyam Madanmohan Ruia, SLP (Civil) Nos. 33429-33434 of 2010.

 

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SEBI Board Meetings

Published In:Inter Alia - Quarterly Edition - July 2016 [ English Chinese japanese ]

SEBI, in its board meeting held on May 19, 2016, approved the incorporation of the internal guidance note in the SEBI (Settlement of Administrative and Civil Proceedings) Regulations 2014 (‘Settlement Regulations’), to clarify that only serious and substantial cases are to be taken for enforcement under Regulation 5(2)(b) of the Settlement Regulations. For this purpose, defaults which in the opinion of SEBI have a bearing on the securities market as a whole and not just the listed security and its investors may be considered to have market wide impact.

Thereafter, in its meeting held on June 17, 2016, SEBI approved the two consultation papers in relation to the changes to be made to the SEBI (Portfolio Managers) Regulations and the SEBI InvIT Regulations.

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Supreme Court Decision in the Case of Star Sports India Private Limited v. Prasar Bharati and Ors.

Published In:Inter Alia - Quarterly Edition - July 2016 [ English Chinese japanese ]

On May 27, 2016, SC upheld the order passed by the Delhi High Court against Star Sports India Private Limited (‘Star Sports’), in connection with a dispute relating to the mandatory sharing of feeds for television broadcast of sporting events of national importance on cable or direct-to-home (‘DTH’) networks in India.

Under Section 3 of the Sports Broadcasting Signals (Mandatory Sharing with Prasar Bharati) Act, 2007, a content rights owner or holder and a television or radio broadcasting organisation (‘Broadcaster’) are prohibited from carrying live television broadcast of a sporting event of national importance on cable or DTH networks, unless it simultaneously shares the live broadcasting signals, without its advertisements, with Prasar Bharati to enable it to retransmit the same on its terrestrial and DTH network.

In the present case, live feeds being provided by Star Sports to Prasar Bharati contained commercial enhancements such as ‘logos’ and ‘on-screen credits’ (‘Logos’) inserted by the event organiser, i.e., International Cricket Council (‘ICC’). Star Sports argued that the words ‘without its advertisements’ in Section 3, relates to advertisements inserted by the Broadcaster and not by the event organiser, and therefore the Logos inserted were not prohibited under Section 3.

The SC observed that the word ‘its’ under Section 3 relates to all three categories, viz: (i) content rights owner; (ii) contents holder; and (iii) television or radio broadcasting service provider. Accordingly, the SC held that Star India is required to remove all commercial content from the feed, even if such commercial content has been included by ICC and Star Sports does not earn any revenue from such commercial content, before sharing the feed with Prasar Bharati.

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Orders of Two Different High Courts on Stamp Duty Payable on a Scheme of Amalgamation

Published In:Inter Alia - Quarterly Edition - July 2016 [ English Chinese japanese ]

A bench of three judges of the Mumbai HC in the case of Chief Controlling Revenue Authority, Maharashtra State, Pune and Superintendent of Stamp (Headquarters), Mumbai v. Reliance Industries Limited, Mumbai and Reliance Petroleum Limited, Gujarat[1] has considered whether stamp duty would be payable on orders of two different HCs in case of a scheme of arrangement under Sections 391 to 394 of the CA 1956 involving two States.

In 2002, Mumbai HC and the Gujarat High Court sanctioned a scheme of amalgamation between Reliance Industries Limited (‘RIL’) having its registered office in Maharashtra and Reliance Petroleum Limited (‘RPL’), having its registered office in Gujarat (‘Scheme’). While RPL paid stamp duty in Gujarat on the order passed by the Gujarat High Court, RIL contended before the Superintendent of Stamps, Mumbai that the stamp duty paid in Gujarat by RPL should be set off against the stamp duty payable on the Mumbai HC order under the Maharashtra Stamp Act, 1958.

Based on an application made by RIL, Mumbai HC held that: (i) stamp duty is charged on an ‘instrument’, and not on the ‘transaction’ effected by the ‘instrument’; and (ii) orders passed by two different HCs, albeit pertaining to the same scheme of amalgamation, are separate instruments, and therefore, full stamp duty is payable in all States where such a scheme of amalgamation is sanctioned.

[1]     Chief Controlling Revenue Authority, Maharashtra State, Pune and Superintendent of Stamp (Headquarters), Mumbai v. Reliance Industries Limited, Mumbai and Reliance Petroleum Limited, Gujarat, AIR 2016 Bom 108

 

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Reference to BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985

Published In:Inter Alia - Quarterly Edition - July 2016 [ English Chinese japanese ]

SC, in the case of Madras Petrochem Limited v. Board for Industrial and Financial Reconstruction and Ors.[1], dealt with the interaction between SARFAESI and the Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’) and held that SARFAESI prevails over SICA to the extent that the latter is inconsistent with the former.

The main issue before SC was with regard to Section 22 of SICA which provides that if a company is registered as a sick industrial company with the BIFR, all other legal proceedings against the company will be suspended and cannot be resumed without the BIFR’s permission. Further, proviso 3 to Section 15(1) of SICA provides that a reference pending before the BIFR will abate if secured creditors representing 75% or more of the borrower’s total debts initiate action under SARFAESI to recover their debts. In considering the above, SC held as under:

i. Where a single secured creditor in whose favour an exclusive charge has been created seeks to recover its debt under SARFAESI, such secured creditor may realise such secured debt notwithstanding provisions of SICA;

ii. Where there are more than one secured creditors of a sick industrial company, and at least 60% of such secured creditors in value of the amount outstanding as on a record date decide to proceed against the security charged in their favour, the provisions of SICA will not be applicable; and

iii. Where secured creditors representing not less than 75% in value of the amount outstanding against financial assistance decide to enforce their security under SARFAESI, any reference pending under SICA cannot be proceeded with and the proceedings under SICA will abate. Hence, if such SICA proceedings abate, any party can proceed to recover its dues and all pending proceedings against the industrial undertaking will stand revived.

[1]     Madras Petrochem Limited v. Board for Industrial and Financial Reconstruction and Ors., (2016) 4 SCC 1

 

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SEBI Order in the matter of Price Waterhouse relating to the case of Satyam Computer Services Limited.

Published In:Inter Alia - Quarterly Edition - March 2018 [ English Chinese japanese ]

An order was passed by SEBI in relation to the financial fraud perpetrated by the senior management of Satyam Computer Services Limited (‘Satyam’).

PriceWaterhouseCoopers, Chartered Accountants (‘PWC’) were the statutory auditors of Satyam since April 1, 2000. When the financial irregularities at Satyam came to light, SEBI issued notices to 11 entities in the PWC group and the 2 signatories of the auditors’ report of Satyam on behalf of PWC, namely, Mr. S Gopalakrishnan and Mr. Srinivas Talluri (collectively, the ‘Noticees’). The Noticees were accused by SEBI of (i) acting in violation of certain provisions of the SEBI Act and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (‘FUTP Regulations’) and in gross violation of their duties and responsibilities as auditors while certifying the financial statements of Satyam for the period from 2000 to 2008; and (ii) being complicit or acquiesced in the fraud perpetuated at Satyam.

In its order of January 10, 2018 (‘Order’), SEBI observed that there had been a total abdication by PWC of its duty to follow minimum standards of diligence (including PWC’s own manual), which inter alia required external confirmation of bank balances and fixed deposits. Further, PWC failed to reconcile discrepancies in the records of Satyam, which it had full knowledge of and which had been flagged by Satyam’s internal auditors, and its report certified the fairness of Satyam’s financial statements, forming a vital component of the prospectus inducing investors to trade in the scrip of Satyam believing it to be in a sound financial position.

SEBI inferred that their involvement was mala fide, and that the only reason for such a casual approach taken by PWC could be either complacency or complicity, and that PWC’s acts amounted to commission of fraud for the purposes of the SEBI Act and the PFUTP Regulations. In SEBI’s view, while PWC group entities are separate entities, they functioned as a single unit for all practical purposes in the context of the fraud at Satyam, and therefore, SEBI directed: (i) debarment from directly or indirectly issuing certificates of audit of listed companies, compliance of obligations of listed companies and intermediaries registered with SEBI for a period of two years for all PWC entities practicing as chartered accountants in India, and for a period of three years for the Noticees; (ii) disgorgement of wrongful gains of approximately Rs. 13.09 crore (approx. US$ 2 million) (joint and several liability) by PWC, Bangalore and the Noticees, with interest; and (iii) all listed companies and intermediaries registered with SEBI not to engage audit firms forming part of the PWC network for issuing any certificate with respect to compliance of statutory obligations for a period of two years.

An appeal against this Order filed by PWC is pending before the Securities Appellate Tribunal (‘SAT’). SAT has refused to grant a stay on the two-year audit ban imposed by SEBI, but has clarified that PWC is permitted to service its existing clients for the fiscal year 2017-2018 and is also permitted to complete assignments already undertaken for listed entities that follow the calendar year as their fiscal year, but is not permitted to undertake any new listed assignments.

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Amendment to the Companies (Audit and Auditors) Rules, 2014

Published In:Inter Alia - Quarterly Edition - July 2017 [ English Chinese japanese ]

By way of notification dated June 22, 2017, the MCA has notified an amendment to Rule 5 of the Companies (Audit and Auditors) Rules, 2014 (‘Audit Rules’). Prior to the amendment, as per Section 139(2) of the Companies Act read with Rule 5, inter alia all private limited companies having a paid up share capital of INR 20 crores (approx. USD 3 million) (or more), were permitted to appoint (i) an individual as the statutory auditor only for a single term of five consecutive years; and (ii) an audit firm as the statutory auditor only for two terms of five consecutive years. Pursuant to the amendment, the limit of INR 20 crores (approx. USD 3 million) (or more) has been increased to INR 50 crores (approx. USD 7.7 million) (or more).

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Applicability of the Arbitration and Conciliation Act (Amendment) Act, 2015 to pending arbitration/ court proceedings

Published In:Inter Alia - Quarterly Edition - March 2018 [ English Chinese japanese ]

The Supreme Court (‘SC’) in Board of Control for Cricket in India v. Kochi Cricket Private Limited[1] has decided on whether the amendments introduced to the Arbitration and Conciliation Act, 1996 on October 23, 2015 (‘Commencement Date’), would be applicable to pending arbitration/court proceedings, which came into force.

Kochi Cricket Private Limited successfully defended the decision of the Bombay High Court (‘Bombay HC’) on the applicability of the amended Section 36 to a pending challenge to an arbitral award filed under Section 34 of the Act. Under the amended Section 36, a party cannot obtain an automatic stay of an arbitral award (and may be required to deposit security for the amount in dispute), whilst the challenge to the award was pending in Court. The issue before the SC was whether amended Section 36 would apply to a Section 34 challenge proceeding, which was filed before the Commencement Date

The SC held that the amendment is prospective in nature, and will apply to those arbitral proceedings commencing, on or after the Commencement Date. However, only the amended Section 36 will be applicable to Section 34 applications filed both before and after the Commencement Date even if the arbitral proceedings were initiated prior to such date.

The SC has interestingly also opined on the proposed Section 87 of the Arbitration and Conciliation (Amendment) Bill, 2018 (‘Bill’), approved by the Cabinet of Ministers on March 7, 2018, which stipulates that the amendment introduced in 2015 does not apply to Court proceedings arising out of or in relation to arbitral proceedings which commenced prior to the Commencement Date, irrespective of whether such Court proceedings commenced prior to or after the Commencement Date. In fact, the SC has observed that the proposed Section 87 would defeat the specific purpose of the amendment.

[1]     2018 SCC Online SC 232.

 

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Whether foreign law firms / foreign lawyers are permitted to practice in India?

Published In:Inter Alia - Quarterly Edition - March 2018 [ English Chinese japanese ]

The SC in Bar Council of India v. A.K. Balaji and Ors.[1] was called upon to decide the question of whether foreign law firms / foreign lawyers are permitted to practice in India and held that foreign law firms/companies and foreign lawyers cannot practice Indian law in India either in relation to litigation or non litigation matters. However, there is no bar on foreign law firms or foreign lawyers visiting India for temporary periods, on a ‘fly in and fly out’ basis for the purpose of giving legal advice to their clients in India regarding foreign law or their own system of law and on diverse international legal issues. The expression ‘fly in and fly out’ will only cover a casual visit, not amounting to ‘practice’. Whether a foreign lawyer is limiting itself to ‘fly in and fly out’ would be determined by the Bar Council of India. However, the Bar Council of India or the Union of India will be at liberty to make appropriate rules in this regard, including extending the Code of Ethics to such cases.

With regard to the conduct of arbitration proceedings by foreign lawyers in India, the SC held that there is no absolute right of a foreign lawyer to conduct arbitration proceedings in respect of disputes arising out of a contract relating to the international commercial arbitration. In some cases, foreign lawyers may not be debarred from conducting arbitration proceedings arising out of international commercial arbitration in view of Sections 32 and 33 of the Advocates Act, 1961 (‘Advocates Act’). However, they will be governed by code of conduct applicable to the legal profession in India.

Business process outsourcing companies do not come within the purview of the Advocates Act or the Bar Council of India Rules. However, if in pith and substance the services amount to practice of law, then the provisions of the Advocates Act will apply and foreign lawyers/law firms will not be allowed to do so.

[1]     2018 SCC Online SC 214.

 

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Supreme Court grants Recognition to “Living Wills”

Published In:Inter Alia - Quarterly Edition - March 2018 [ English Chinese japanese ]

The SC, in its judgment dated March 9, 2018 in the case of Common Cause (A Regd. Society) v. Union of India and Another,[1] gave recognition to “living wills” by terminally ill patients, and held that the right to life and liberty as envisaged under Article 21 of the Constitution of India includes the right to live with dignity. The SC further observed that the right to live with dignity also includes the smoothening of the process of dying in case of a terminally ill patient or a person in a persistent vegetative state with no hope of recovery. The SC drew a distinction between active euthanasia and passive euthanasia as the former entails a positive affirmative act, while the latter relates to withdrawal of life support measures or withholding of medical treatment meant for artificially prolonging life. Further, the SC provided that directions and guidelines laid down by it to give effect to passive euthanasia will remain in force till a legislation is passed by the Parliament on this subject.

[1]     Writ Petition (Civil) No. 215 of 2005.

 

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Division Bench of the Bombay High Court restrains Wockhardt from using the mark ‘CHYMTRAL FORTE’

Published In:Inter Alia - Quarterly Edition - March 2018 [ English Chinese japanese ]

In the matter of Torrent Pharmaceuticals Ltd. (‘Torrent’) v. Wockhardt Ltd. & Anr.[1] (‘Wockhardt’), by way of order dated November 17, 2017, the Division Bench of the Bombay HC set aside the order of the Single Judge dated March 15, 2017 following an appeal filed by Torrent and granted an interim injunction restraining Wockhardt.

Torrent filed a suit inter alia for infringement and passing-off against Wockhardt based on their registrations for the marks CHYMORAL and CHYMORAL FORTE with rights dating back to the year 1962, and Wockhardt’s subsequent adoption, use and registration of the mark CHYMTRAL FORTE (‘Impugned Mark’). The key arguments relied upon by Wockhardt were that: (i) both the rival marks were derived from the active ingredient TRYPSIN – CHYMOTRYPSIN and the prefixes CHYM and CHYMO are publici juris; (ii) the Impugned Mark was not deceptively similar to CHYMORAL FORTE; (iii) Torrent failed to prove any misrepresentation by Wockhardt; and (iv) there has been significant delay as well as acquiescence as the Impugned Mark had been registered and allegedly coexisted in the market with Torrent’s product CHYMORAL FORTE for a period of eight years.

The Single Judge dismissed Torrent’s application for an interlocutory injunction against Wockhardt and held that the three tests in the classical trinity of passing off, i.e. reputation, misrepresentation and likelihood of damage, had not been satisfied, and that Torrent (and its predecessors) were also held to have acquiesced in the use of the Impugned Mark by Wockhardt as it failed to oppose or object to the use and registration for a considerable period of time.

The Division Bench allowed the appeal, inter alia, on the basis that Torrent had satisfied the tests for establishing passing-off. The Division Bench held that in order to prove ‘misrepresentation’, the plaintiff does not have to prove any mala fide intention and the act of putting the goods in the market with a deceptively similar trademark, is enough to constitute misrepresentation. The Division Bench also held that an incorrect test had been applied to determine ‘reputation’ and that association of the product with its source or the maker is not required to prove reputation. Further, the Division Bench observed that the tests laid down in Cadila Health Care Ltd. v. Cadila Pharmaceuticals Ltd.[2] should be adopted while determining possibility of confusion between medicinal products and accordingly, Wockhardt ought to be restrained from continuing the use of the same. On the issue of delay and acquiescence, the Division Bench opined that there was no proof of a positive act attributable to Torrent and mere inaction or delay must not be confused with acquiescence.

Wockhardt has now challenged this order of the Division Bench by way of a Special Leave Petition before the Supreme Court, which is currently pending.

[1]     Commercial Appeal No. 125 of 2017 in Notice of Motion of (L) 35 of 2017 in Commercial Suit (L) 32 of 2017.

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Trade variations of footwear / sandals should not be given exclusive monopoly: Delhi High Court denies interim protection for Crocs registered designs

Published In:Inter Alia - Quarterly Edition - March 2018 [ English Chinese japanese ]

In the matter of Crocs Inc. USA (‘Crocs’) v. Liberty Shoes Limited & Ors. and other footwear manufacturers in India (‘Defendants’), the Delhi High Court (‘Delhi HC’) rejected Crocs’ applications for interim injunctions for piracy of copyright in their registered design.

Crocs had obtained design registrations under the Designs Act, 2000 for its perforated and non-perforated clog-type slippers/shoes in May of 2004. Crocs brought various infringement suits against the Defendants who were manufacturing and selling sandals with clog-type designs largely similar to Croc registered design. The Delhi HC was of the opinion that the registered designs ought not to have been registered in the first place and the registrations were liable to be cancelled as these designs were published and disclosed prior to their registration dates. This finding was arrived at on the basis of internet archival pages dated 2002 (which disclosed similar designs) from the website of Holey shoes. Evidence was also gathered from Crocs’ own website prior to 2004 which also revealed largely similar designs. On the issue of novelty and originality, the Court was of the view that the designs registered by Crocs were neither original nor novel as they were not significantly distinguishable from products already existing in the market and were mere ‘trade variants’ of a sandal, which did not deserve any exclusivity or monopoly.

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Copyright Board Merged with the IPAB

Published In:Inter Alia - Quarterly Edition - July 2017 [ English Chinese japanese ]

Sections 160 and 161 of the Finance Act, which have come into force on May 26, 2017, amend the provisions of the Copyright Act, 1957 and the Trade Marks Act, 1999 to pave way for the merger of the Copyright Board with the IPAB. As a result, all the functions of the Copyright Board (including adjudicating disputes in relation to assignment of copyright, granting of compulsory licenses and statutory licenses in relation to certain types of works) will now get transferred to the IPAB.

Pursuant to powers granted under the Finance Act, the Central Government has promulgated and brought into force the Tribunal, Appellate Tribunal and other Authorities (Qualifications, Experience and other Conditions of Service of Members) Rules, 2017 (‘Tribunal Rules’) which govern the qualifications, experience and other conditions of service of the members of various tribunals, including the IPAB. According to the Tribunal Rules, a search-cum-selection committee would be responsible for the recruitment of members for the IPAB.

Given the fact that the Copyright Board has not been functional for quite a few years now, the merger of the Copyright Board with the IPAB gives a forum to the concerned stakeholders to seek redressal of their grievances. However, it still remains to be seen how effectively the IPAB will be able to perform the tasks, roles and responsibilities erstwhile carried out by the Copyright Board, given the huge backlog of pending matters at the IPAB.

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Summary Judgment by the Delhi HC in a Trademark Suit

Published In:Inter Alia - Quarterly Edition - July 2017 [ English Chinese japanese ]

In the case of Ahuja Radios v. A Karim,[1] filed under the Commercial Courts Act, 2015, the Delhi HC, by its order dated May 1, 2017, passed a summary judgment granting a permanent injunction restraining infringement of trademark, passing off and delivery in favour of the plaintiff, i.e. Ahuja Radios.

The plaintiff had procured an interim injunction on March 6, 2013 against the defendant restraining the defendant from dealing in products (being public address systems and audio equipment) bearing the plaintiff’s model number ‘SSA 250 M’ under the ‘AHUJA’ trademark or those which were deceptively similar. Thereafter, upon the inspection of the defendant’s premises by a local commissioner on April 3, 2013, amplifiers of 250 W [Model No. SSA 250 M] were recovered and the Commissioner’s report mentioned that the defendant had admitted to the amplifiers not being original. Despite of the defendant’s allegation that the recovered amplifiers were fraudulently implanted at its premises, the Delhi HC determined that the plaintiff is the undisputed registered proprietor of the trademark in question and that the defendant is not entitled to use the same. The Court noted that the defendant has no real prospect of resisting the decree of injunction and also has little prospect of succeeding in its defense.

[1]     Ahuja Radios v. A Karim, CS(OS) 447/2013, Delhi High Court (order dated May 01, 2017).

 

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Designation of the Seat of Arbitration is Akin to an Exclusive Jurisdiction Clause

Published In:Inter Alia - Quarterly Edition - July 2017 [ English Chinese japanese ]

In Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited,[1] the SC held that an arbitration clause, pursuant to which a place has been determined as the ‘seat’, would vest the Courts of such place with exclusive jurisdiction for the purpose of regulating the arbitral proceedings. This is irrespective of the fact that such a venue may not, in the classical sense, have jurisdiction over the dispute at all, in that no part of the cause of action may arisen at such venue. Pursuant to this decision, the SC distinguished arbitral law from the law contained in the provisions of the Code of Civil Procedure, 1908 (‘CPC’) and observed that while under CPC, jurisdiction is closely linked to the place at which the cause of action of arises, under arbitral law, the courts having jurisdiction over the place designated as the seat of the arbitration would have exclusive jurisdiction for the purposes of regulating arbitral proceedings arising out of the agreement between the parties.

[1]     Civil Appeal Nos. 5370-5371 of 2017.

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Courts have no Power to Relegate Parties before the Arbitral Tribunal after having set aside the Arbitral Award and on its Own Motion

Published In:Inter Alia - Quarterly Edition - July 2017 [ English Chinese japanese ]

In Kinnari Mullick v. Ghanshyam Das Damani,[1] the SC held that Section 34(4) of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’) does not allow the Court to suo motu relegate the parties back to the arbitral tribunal after having set aside the arbitral award. It held that the limited discretion available to the Court under Section 34(4) of the Arbitration Act to relegate the parties back to the arbitral tribunal can be exercised only upon a written application made by a party to the arbitration proceedings and not suo motu.

[1]     Civil Appeal No. 5172 of 2017 (Arising out of SLP (Civil) no. 2370 of 2015).

 

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Scope of the term ‘dispute’ under Section 5 (6) of the IBC

Published In:Inter Alia - Quarterly Edition - July 2017 [ English Chinese japanese ]

In Kirusa Software Private Limited v. Mobilox Innovations Private Limited,[1] the National Company Law Appellate Tribunal (‘NCLAT’) held that the term ‘dispute’ has to be given a wide meaning, for the purpose of Sections 8 and 9 of the IBC, which deal with applications made by an operational creditor. In the instant case, NCLAT held that the term ‘dispute’ has to be given an inclusive meaning and not an exhaustive one, provided it is relatable to the existence of the amount of the debt, quality of good or service or breach of a representation or warranty as provided under Section 5(6) of the IBC. The term should thus cover all disputes on debt, default etc. without being limited to only two ways of disputing a demand made by an operational creditor, i.e. a pending suit or an arbitration.

The NCLAT however also cautioned against an illusory dispute being raised for the first time while replying to the notice under Section 8 of the IBC as a tool to reject an application under Section 9 of the IBC.

[1]     Company Appeal (AT) (Insolvency) 6 of 2017.

 

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Applicability of Section 9 of the Arbitration and Conciliation Act, 1996 to Foreign Awards Prior to Enforcement under Section 48

Published In:Inter Alia - Quarterly Edition - July 2017 [ ]

On April 28, 2017, Bombay HC, in the case of Aircon Beibars FZE v. Heligo Charters Pvt. Ltd held that Section 9 of the Arbitration Act, as amended by the Arbitration (Amendment) Act, 2015, can be invoked in relation to a foreign award prior to the enforcement of such award under Section 48 of the Arbitration Act.

The Petitioners, Aircon Beibars FZE (‘Aircon’), made an application under Section 9 of the Arbitration Act for an order of injunction to protect the assets of the respondent company, Heligo Charters Pvt. Ltd. (‘Heligo’), in order to secure the amount of a final award dated January 25, 2017, made by an arbitral tribunal seated in Singapore in favour of Aircon. An ad-interim order in these terms had already been passed by the Bombay HC on April 17, 2017.

The primary issue before the Bombay HC was whether Section 9 of the Arbitration Act as amended by the Amendment Act would apply to a foreign seated arbitration which commenced after the Amendment Act came into force, and where the award had not yet been enforced under Section 48 of the Arbitration Act. The Bombay HC therefore allowed the respondent’s petition and confirmed the ad-interim order dated April 17, 2017, to come to its finding that the amended Section 9 of the Arbitration Act would be applicable to awards pending recognition under Section 48 of the Arbitration Act.

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IBC Update Committee of creditors approves first resolution plan

Published In:IBC Update - June 26, 2017 [ ]

In a first, the committee of creditors has passed the first resolution plan in regard to a Hyderabad based company, Synergies Dooray Automative Limited. The resolution plan will be submitted to the NCLT on July 6 2017 and is set to be approved by the NCLT on July 11 2017.

Synergies Dooray was put into the resolution process under IBC on January 25 2017 with Mamta Binani as the resolution professional. This was also the first corporate debtor application to be admitted under the IBC. The IBC envisages a 180 day resolution process period (extendable by 90 days) which in this case, is to expire on July 23 2017.

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A Guaranteed Mess?

Published In:IBC Update - January 31, 2018 [ ]

Recent news reports indicate that State Bank of India, India’s largest corporate lender has decided to invoke all outstanding personal and corporate guarantees in relation to companies undergoing Corporate Insolvency Resolution Process (‘CIRP’) under the Insolvency and Bankruptcy Code 2016 (‘IBC’).

The treatment of guarantees issued by and in favour of companies undergoing CIRP should be relatively straightforward under the IBC. But jurisprudence over the last few months in this context has introduced complexity. This note briefly sets out the key themes that have evolved so far.

Invocation of Guarantee issued by a corporate debtor after Insolvency Commencement Date (‘ICD’)
.

Courts (in the Edu Smart case and MBL case)[i] have held that invoking a guarantee issued by a corporate debtor after its ICD is analogous to foreclosing, recovering or enforcing any security interest in respect of the property of the corporate debtor, which is prohibited on account of the moratorium imposed under Section 14 of the IBC.

Submission of proof of claim for guarantees yet to be invoked

Courts (in the Edu Smart case and the Binani case)[ii] have held that a proof of claim can only be submitted for claims that have crystallized “i.e.,” are due and payable by the corporate debtor on the ICD. A guarantee claim will be considered due and payable only after due invocation under the terms of the contract. So effectively, if a guarantee issued by a corporate debtor has not been invoked before ICD, no proof of claim can be filed. As a result, the rights of such beneficiary post-resolution plan remains uncertain (for the beneficiary and the resolution applicant).

Guarantee issued by a third party (“e.g.,” promoter or group company of the corporate debtor) not undergoing CIRP not hit by moratorium

Some judgements (the Alpha & Omega case and the Schweitzer case)[iii] have indicated that enforcement of any security interest granted by a third party for the debts of the corporate debtor is not prohibited by the moratorium under Section 14 of the IBC, since the moratorium only applies to the security created in respect of the assets of the corporate debtor appearing on its balance sheet. Though these cases don’t explicitly deal with third party guarantees, the principal enunciated could easily be extended to guarantees as well inferring that invoking a third party guarantee after ICD would not be prohibited.

On second thoughts, (invoked) guarantee issued by a third party (“e.g.,” promoter or group company of the corporate debtor) not undergoing CIRP hit by moratorium

Somewhat contrary to the above, the Allahabad High Court (in the Sanjeev Shriya case)[iv] held that in an ongoing CIRP, the obligations of the corporate debtor are in a fluid state and have not been conclusively determined; and that therefore, till such time as the CIRP continues any guarantee given by the promoters of the corporate debtor cannot be enforced since the guarantor’s obligations cannot be established while the company’s obligations are in flux. For the record, the guarantee was invoked before ICD of the corporate debtor.

On further reflection, (invoked) guarantee issued by a third party (“e.g.,” promoter or group company of the corporate debtor) not undergoing CIRP hit by moratorium and cannot be used to start IBC proceedings against the issuer

In the recent Vista Steel case[v], a group company of a borrower had provided a guarantee to a financial creditor. This financial creditor also benefited from security provided by the borrower. There was an ongoing CIRP against the borrower/principal debtor. The financial creditor of the principal debtor (in CIRP) invoked the guarantee granted by the group company before the ICD of the principal debtor. The guarantor did not make payment under the invoked guarantee and so the creditor sought to invoke IBC proceedings against the guarantor (for crystallised debt). The court held that doing so would cause the guarantor to be subrogated to the rights of the secured financial creditor causing creation of a security interest over the assets of the borrower/principal debtor, violating the moratorium under Section 14 of the IBC. On this basis, the court denied the financial creditor from proceeding with the IBC application against the guarantor.

Where do we stand?

The principle set out by the Alpha & Omega case and the Schweitzer case was, in our view, the right way to approach the matter. Subsequent decisions have made it difficult for lenders to proceed simultaneously against guarantors and borrowers. This dilutes the usefulness of a guarantee for a lender and currently provides one of the few silver linings for promoters whose companies are in CIRP/IBC.

 

[i] Axis Bank Limited v. Edu Smart Services Private Limited NCLT, New Delhi October 27, 2017 and RBL Bank Limited v. MBL Infrastructures, NCLT Kolkata, December 18, 2017.
[ii] Axis Bank Limited v. Edu Smart Services Private Limited NCLT, New Delhi October 27, 2017 and Bank of Baroda v. Binani Cements Ltd., NCLT Kolkata, November 17, 2017.
[iii] Alpha & Omega Diagnostics (India) Ltd. v. Asset Reconstruction Company of India Ltd & Ors, NCLAT, New Delhi July 31, 2017 and Shweitzer Systemtek India Pvt. Ltd. v. Phoenix ARC Pvt. Ltd. & Ors, NCLAT, New Delhi, August 9, 2017.
[iv] Sanjeev Shriya v. State Bank of India, Allahabad High Court, September 6, 2017.
[v] ICICI Bank Limited v. Vista Steel Private Limited, NCLT Kolkata Bench, December 15, 2017

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Employment Law Update: Forfeiture of Gratuity

This is an update about a recent judgement of the Supreme Court pertaining to forfeiture of gratuity under the Payment of Gratuity Act, 1972 (Gratuity Act).  The Apex Court, in Union Bank of India vs C.G. Ajay Babu and others, has held that forfeiture of gratuity upon termination of employment for an act constituting an offence involving moral turpitude is permissible only if the employee is convicted for the offence by a court of competent jurisdiction.

As per the Gratuity Act, gratuity is payable to employees who have been in continuous employment with the employer for at least five years (beneficially interpreted as four years and two hundred and forty days for those having a six day work week and four years and one hundred and ninety days for those who have a five day work week) at the time of cessation of employment.  Gratuity is calculated at the rate of fifteen days’ wages for each year of completed service, subject to a maximum of INR 2,000,000 (~USD 28,500).

As per the statute, gratuity may be forfeited upon termination of employment of the employee:

a. for any act, willful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer, to the extent of the damage or loss so caused;

b. for riotous or disorderly conduct or any other act of violence; or

c. for any act which constitutes an offence involving moral turpitude, provided that such offence is committed in the course of employment.

With respect to forfeiture of gratuity for offences involving moral turpitude, the Supreme Court in the said judgement, has observed that the requirement of the statute is not for an employer to merely prove that the misconduct involved moral turpitude, but also that a court of law duly establishes that the said act is an offence involving moral turpitude under applicable law.

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Prohibition on dealing in Virtual Currencies

Published In:Inter Alia - Quarterly Edition - June 2018 [ English Chinese japanese ]

On April 6, 2018, the RBI issued a circular prohibiting entities regulated by the RBI from dealing in virtual currencies or providing services (including maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer / receipt of money in accounts relating to purchase / sale of virtual currencies) for facilitating any person or entity in dealing with or settling virtual currencies. Prohibited entities already providing these services as on the date of the circular, have been directed to exit such relationship by July 6, 2018.

This RBI circular was challenged in the Supreme Court, which has not granted a stay on the circular.

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Summary Dismissal of Suit for infringement

Published In:Inter Alia - Quarterly Edition - June 2018 [ English Chinese japanese ]

In the matter of Jaideep Mohan v. Hub International Industries & Anr.,[1] the Delhi High Court (‘Delhi HC’) summarily dismissed the suit for trademark infringement at the initial stage of framing of issues.

Jaideep Mohan (‘Plaintiff’) had instituted the suit, inter alia, for permanent injunction to restrain Hub International Industries and NV Distilleries & Industries Pvt. Ltd. (‘Defendants’), from using the trade mark ‘GOLDSMITH’ on the grounds that the same is deceptively similar to the Plaintiff’s registered trademark ‘BLACKSMITH’ in respect of identical goods i.e., alcoholic beverages.

The Defendants contended that the Plaintiff cannot claim exclusivity in the mark ‘SMITH’ as the application for registration of the mark ‘SMITH’ in class 33 (which covers alcoholic beverages) was still pending, and, accordingly, argued that the Plaintiff’s suit was liable to be dismissed under Section 17 of the Trade Marks Act, 1999. The Defendants also  contended that there are many entities which have been using the word ‘SMITH’ and ‘BLACKSMITH’ prior to the use of the word by the Plaintiff and that the overall packaging and get-up of the rival goods are completely different.

The Delhi HC, relying on Godfrey Philips India Ltd v. PTI Pvt Ltd,[2] summarily dismissed the suit for infringement and passing off and took the view that the terms ‘BLACKSMITH’ and ‘GOLDSMITH’ have a definite meaning and are clearly understood by most of the population of the country, including those who are not conversant with the English language, and hence there was no infringement and the suit was not likely to succeed. The Delhi HC was also persuaded by the fact that more than 90% of the sales of the Plaintiff were effected through defense and police canteens, where the relevant public was unlikely to get confused merely by the commonality of the term ‘SMITH’.

[1] 2018 (74) PTC 154 (Del).
[2] 2017 SCC OnLine Del 12509.

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Establishment of an Appellate Tribunal for the State of Maharashtra under RERA

Published In:Inter Alia - Quarterly Edition - June 2018 [ English Chinese japanese ]

The Real Estate (Regulation and Development) Act, 2016 (‘RERA’) provides for appeals to be preferred to the appellate tribunals of the respective States against the orders passed by the regulatory authorities of such States. For the State of Maharashtra, the Maharashtra Revenue Tribunal (“MahaRT”) was designated as a temporary appellate tribunal for hearing appeals from the orders passed by the Maharashtra Real Estate Regulatory Authority (‘MahaRERA’) till the constitution of the appellate tribunal as required under RERA. The Government of Maharashtra has, on May 8, 2018 constituted the Maharashtra Real Estate Appellate Tribunal (‘Appellate Tribunal’), as the permanent appellate tribunal under RERA for the State of Maharashtra, to hear appeals from the orders passed by MahaRERA. All matters pending with MahaRT now stand transferred to the Appellate Tribunal.

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New Plea of Jurisdiction permitted to be raised for the first time during Set-Aside Proceedings for an Arbitration Award

Published In:Inter Alia - Quarterly Edition - June 2018 [ English Chinese japanese ]

In M/s Lion Engineering Consultants v. State of Madhya Pradesh & Ors., the respondent  had filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’) against an award passed in favour of the appellant. The respondent sought to belatedly amend this petition, which was rejected by the trial court, but was allowed by the High Court of Madhya Pradesh. The petitioner approached the Supreme Court contending, inter alia, that the amendment should not have been permitted as it introduced new grounds at the stage of the petition under Section 34 of the Arbitration Act, which had not been raised under Section 16 of the Arbitration Act before the tribunal. The appellant relied on MSP Infrastructure Ltd. v. MPRDC Ltd. (‘MSP Infrastructure’).

The Supreme Court overruled the MSP Infrastructure judgement to hold that there is no bar to the plea of jurisdiction being raised by way of an objection under Section 34 of the Arbitration Act, even if no such objection was raised under Section 16, as both stages are independent of one another. The MSP Infrastructure judgement had also held that public policy of India means the policy of the Union i.e., central law and not State law. The Supreme Court overruled the same to hold that ‘public policy of India’ refers to law in force in India, whether State law or central law.

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NCLAT Ruling on Maintainability of Application under the IBC after Winding Up Proceeding is Initiated

Published In:Inter Alia - Quarterly Edition - June 2018 [ English Chinese japanese ]

In Indiabulls Housing Finance Limited v. Shree Ram Urban Infrastructure Limited, the National Company Law Appellate Tribunal (‘NCLAT’) was faced with the issue of whether an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) is maintainable when winding up proceedings against the ‘Corporate Debtor’ have been already initiated. The impugned order, passed by the National Company Law Tribunal, Mumbai (‘NCLT Mumbai’) had dismissed the application as not maintainable as the winding up proceeding against the ‘Corporate Debtor’ had already been initiated by the High Court of Bombay. The NCLAT upheld the NCLT decision and held that once the second stage i.e., the initiation of liquidation process, is initiated, then there is no question of reverting to the first stage i.e., initiation of corporate insolvency resolution process (‘CIRP’).

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NCLAT stays admission of an Insolvency Petition against Reliance entities based on an Out-of-court Settlement

Published In:Inter Alia - Quarterly Edition - June 2018 [ English Chinese japanese ]

By orders dated May 15, 2018 and May 18, 2018, the NCLT Mumbai had admitted a petition filed under Section 9 of the IBC by Ericsson India Private Limited (‘Ericsson’) against Reliance Communications Limited (‘RCom’), Reliance Infratel Limited (‘RIL’) and Reliance Telecom Limited (‘RTL’). RCom, RIL and RTL, along with certain financial creditors / the Joint Lenders’ Forum, had approached the NCLAT, seeking a stay on the ground that the CIRP would prejudice recovery. On May 30, 2018, the NCLAT passed an order staying the CIRP till September 30, 2018, to enable RCom to pay Ericsson Rs. 550 crore (approx. US$ 80 million) (out of the Rs. 1150 crore (approx. US$ 167 million) due) and settle the matter (‘NCLAT Order’).

The NCLAT has granted a stay on the orders dated May 15, 2018 and May 18, 2018 passed by the NCLT Mumbai, taking into consideration the stand of the parties that if the CIRP was allowed to continue, financial and operational creditors may suffer more loss. The NCLAT Order mandates the resolution professionals to allow the managements of RCom, RIL and RTL to function and has stayed the CIRP until further orders.

This is arguably a precedent on the proposition that even after an operational creditor’s petition is admitted by the NCLT and the CIRP commences, the process can be reversed / stayed if the dues of the operational creditors are settled.

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NCLAT Overturns CCI’s Penalty on Hyundai

1.     On September 19, 2018, the National Company Law Appellate Tribunal (‘NCLAT’) issued a decision setting aside an order of the Competition Commission of India (‘CCI’) against Hyundai Motor India Limited (‘Hyundai’) (FX Enterprise Solutions India Pvt. Ltd. & St. Antony’s Cars Pvt. Ltd. v. Hyundai Motor India Limited, Case Nos. 36 & 82 of 2014). This decision has interesting ramifications for the decision-making procedure, and evidentiary standards, followed by CCI while assessing allegations of infringement. The NCLAT’s decision is also specifically relevant for businesses which are reliant on distribution-channels. However, unfortunately, the decision misses out an opportunity to clarify the substantive law on anticompetitive vertical restraints under Section 3(4) of the Competition Act, 2002 (‘Competition Act’).

2.     CCI had imposed a penalty of Rs 870 million on Hyundai for imposing: (i) resale price maintenance (‘RPM’) by setting and implementing a ‘Discount Control Mechanism’ on its dealers, and (ii) “tie-in” agreements which mandated that its dealers use recommended lubricants (‘CCI Order’).

Analysis of relevant market

3.     The NCLAT has not discussed CCI’s substantive findings against Hyundai on RPM and tie-in agreements in detail and also avoided a substantive review of the market definition relied on by the CCI (CCI had defined an upstream market for sale of all brands of passenger cars in India, and a downstream market for the dealership and distribution of Hyundai cars in India). Rather, the NCLAT, relying on the decision of the Supreme Court in Competition Commission of India v. Coordination Committee of Artistes and Technicians of West Bengal Film and Television and Ors. ((2017) 5 SCC 17), found fault with the methodology followed by the Director General (‘DG’) and CCI while defining the relevant markets. According to NCLAT, while defining relevant markets, both DG and CCI had failed to properly consider factors they were statutorily obliged to, namely: (i) the factors under Section 19(6) of the Competition Act, including regulatory trade barriers, local specification requirements, in determining the relevant geographic market; and (ii) factors under Section 19(7) of the Competition Act, including the physical characteristics and end-use of goods, and consumer preferences, in determining the relevant product market.

CCI’s assessment of the DG’s Report

4.     Interestingly, the NCLAT went on to hold that CCI cannot merely rely on the findings in the DG’s report to establish a contravention under Section 27 of the Competition Act; rather, it is required to make an independent analysis of the evidence available on record. The NCLAT further noted that the CCI Order was self-contradictory, reflecting a non-application of mind by CCI, and even went on to point out certain examples of such contradictions. For example, at paragraph 108 of the CCI Order, CCI stated that the cancellation of warranty upon use of non-recommended oils / lubricants does not amount to a contravention of Section 3(4)(a) of the Competition Act (which deals with tie-in arrangements). However, it went on to conclude (at paragraph 116) that Hyundai contravened the tie-in provision of the Competition Act in mandating that its dealers use recommended lubricants / oils and in penalising them for use of non-recommended lubricants and oils. NCLAT also noted CCI’s and DG’s failure to support the conclusion that Hyundai had penalized its dealers for not acting in accordance with the tie-in agreement, and further observed that CCI and DG had failed to consider that it is normal for car dealers of all companies to recommend the use of a particular quality of lubricant and oil based on vehicle-type.

Conclusion

5.     While it does not contain a substantial ruling on the assessment of anticompetitive vertical restraints in India, this is nevertheless a significant decision – especially, as it clarifies CCI’s proper role while adjudicating infringement allegations, which is to objectively assess the evidence presented in the DG’s investigation report and carry out its own independent analysis before arriving at any conclusions.

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Investor-State Arbitration 2019 | India

Published In:Investor-State Arbitration Laws and Regulations 2019 - 1st Edition [ ]

1       Treaties: current status and future developments

1.1       What bilateral and multilateral treaties and trade agreements has your country ratified?

India is a signatory to 83 Bilateral Investment Treaties (“BITs”), of which it has ratified 74.  Information available in the public domain as of August 2018 (including the Joint Interpretative Statement for BITs), suggests that 55 are currently in force.

India has signed and ratified trade agreements with several countries such as Korea, Singapore, Japan and Malaysia.  Additionally, India is a signatory to several tax treaties as well as intergovernmental agreements such as the General Agreement on Trade-in Services (“GATS”).  India has also signed framework agreements with the Association of South East-Asian Nations (“ASEAN”), Mercado Común Sudamericano (“MERCOSUR”) and the European Union (“EU”).

1.2       What bilateral and multilateral treaties and trade agreements has your country signed and not yet ratified? Why have they not yet been ratified?

India has not ratified a total of nine BITs and five other trade agreements.

The making of international treaties is an executive act.  Accordingly, in order to ensure that India is in a position to discharge all obligations under a given treaty, the process of ratification is undertaken only after the relevant domestic laws have been amended, or the enabling legislation has been enacted in cases where there are no domestic laws on the subject.  While there is no publicly available information on the status of the ratification of treaties, the long, drawn-out process may cause some delay in concluding the ratification.

1.3       Are your BITs based on a model BIT? What are the key provisions of that model BIT?

Indian BITs were largely based on the Model India BIT 2003.  On December 28, 2015 a new Model BIT (“Model BIT”) was introduced.  This was seen as India’s reaction to the large number of treaty claims brought against India over the last decade.  Through the Model BIT, India has adopted an approach which tilts in favour of the State.  The Indian government has also expressed its intention to terminate at least 58 of the existing BITs and renegotiate the same on the conservative wording of the 2015 Model BIT.  Some of the key provisions of the Model BIT are outlined below:

a)      The Model BIT seeks to narrowly define “investment” by adopting a hybrid asset/ enterprise-based definition.  An enterprise has been defined to mean any legal entity constituted in compliance with the laws of the Host State and having its real and substantial business operations in the territory of the Host State.  For the purpose of the definition of an enterprise, “real and substantial business operations” are required to satisfy certain cumulative criteria, such as, the enterprise must: (i) be a commitment of capital or other resources; (ii) for a certain duration; (iii) for expectation of profit or gain; (iv) involve the assumption of risk; and (v) be of significance for the development of the Host State”.

b)      The definition of investor includes both natural and juridical persons who own or control an investment in the Host State.

c)      The Model BIT does not include a Most Favoured Nation obligation or a broad Fair and Equitable Treatment obligation.  Instead, the Model BIT provides for a defined scope of Standard of Treatment.  The 2015 Model BIT however, does accord full protection and security to the investor and its investment and also extends National Treatment to investors.

d)     Notably, the Model BIT requires an investor to exhaust local remedies before initiating arbitration proceedings.

1.4       Does your country publish diplomatic notes exchanged with other states concerning its treaties, including new or succeeding states?

India does not maintain publicly accessible treaty preparatory materials.

1.5       Are there official commentaries published by the Government concerning the intended meaning of treaty or trade agreement clauses?

The Government of India does not publish official commentaries concerning the intended meaning of a treaty or trade agreements.

2       Legal frameworks

2.1       Is your country a party to (1) the New York Convention, (2) the Washington Convention and/or (3) the Mauritius Convention?

India is party to the United Nations Convention on the Recognition and Enforcement of Foreign Awards, 1958 (“New York Convention”).  India is not however, a signatory to either the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“the Washington Convention”) or the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration (“the Mauritius Convention”).

2.2       Does your country also have an investment law? If so, what are its key substantive and dispute resolution provisions? 

In addition to compliance with statutes that govern every contract, India is an exchange controlled jurisdiction and investments made by non-resident investors require compliance with the Foreign Exchange Management Act 1999 and Regulations (“FEMA”).  Further, depending on the target entity, investments may also require to be made in compliance with the Securities and Exchange Board of India Act 1992 and Regulations (that apply to an entity whose shares are traded on a stock exchange).  Further, if the investment crosses certain thresholds, one needs to comply with the Competition Act 2002.  There are also specific verticals where specific laws may be applicable, for instance, the Insurance Act, 1938 that governs investments by a non-resident.

Disputes in India are adjudicated in a manner similar to commonwealth jurisdictions.  They are dealt with by either civil courts or specialised tribunals.  Given the backlog of cases in Indian courts, large commercial contracts often provide for adjudication of disputes by arbitration.

2.3       Does your country require formal admission of a foreign investment? If so, what are the relevant requirements and where are they contained?

The principal law governing foreign investment in India is the FEMA, the rules prescribed under the FEMA and circulars issued by the Reserve Bank of India (“RBI”).  Additionally, the Department of Industrial Policy and Promotion (“DIPP”) makes policy pronouncements on foreign investment through press notes or press releases which are notified by the RBI.  Such regulations, press notes, press releases, circulars, etc., together constitute the regulatory framework for foreign investment.

In India, foreign investment can be made either:

1.      by the Automatic route which does not require formal/prior approvals from the RBI; or

2.      by the Government route which requires prior approval from the concerned Ministries/ Departments through a single window: The Foreign Investment Facilitation Portal (“FIFP”).  The FIFP is administered by the DIPP, Ministry of Commerce and Industry and the Government of India.

The Government route however, is mandatory in investments made beyond certain thresholds in some sectors such as mining, defence, broadcasting, telecommunications and banking.

3       Recent Significant Changes and Discussions

3.1       What have been the key cases in recent years relating to treaty interpretation within your jurisdiction?

The Indian courts have not yet had the opportunity to interpret the terms and/or standards of protection under an investment treaty.

3.2       Has your country indicated its policy with regards to investor-state arbitration?

Investor-State Arbitration began to gain major traction in India as a result of the treaty award passed against India in White Industries Australia Limited v. Republic of India (“White Industries”).  In May 2002, the Investor-Claimant (White Industries Australia Ltd.) obtained an ICC award against Coal India Limited (a State-owned Indian company).  For a period of over nine years, White Industries sought to enforce this award before the Delhi High Court. Finally, in 2010, White Industries took the matter to investment treaty arbitration under the India-Australia BIT on the grounds that the inordinate delay in Indian courts to enforce the arbitration award violated various substantive protections afforded under the said BIT.

White Industries led to a drastic shift in India’s stance on Investor-State Arbitration, which is clearly reflected in India’s Model BIT.  India recently concluded a BIT with Brazil.  While the text of the India-Brazil BIT is not available at present, it has been widely reported that the BIT does not contain a provision for Investor-State Arbitration.

India also recently approved a BIT with Cambodia, which is the first BIT to be based on the Model BIT.

3.3       How are issues such as corruption, transparency, MFN, indirect investment, climate change, etc. addressed, or intended to be addressed in your country’s treaties?

The Model BIT lays down certain obligations pertaining to corruption.  These obligations provide that an investor shall not (i) offer, promise, or give any undue pecuniary advantage, gratification or gift whatsoever, either (ii) directly or indirectly, to a (iii) public servant or official of the Host State as an inducement or reward for doing or forbearing to do any official act, or (iv) make any illegal contributions to candidates for public office or to political parties amongst others.

The Model BIT provides for transparency in the form of specific disclosures to be made by an investor from time to time, as well as transparency in arbitral proceedings.

The Model BIT has omitted the MFN obligation altogether.  Further, the cumulative requirements to constitute an investment (as outlined in detail in question 1.3 above) leave little scope for an indirect investment to be afforded substantive protections under the Model BIT.

Finally, the Model BIT carves out broad exceptions for actions or measures of the Host State which have been taken with a view to protect and conserve the environment.

3.4       Has your country given notice to terminate any BITs or similar agreements? Which? Why?

As of 2018, India has discontinued several BITs with most of its trading partners and has issued termination notices to about 58 countries, including several EU States.  While no other official government clarification is presently available on the subject, several newspaper reports have noted that only a few countries such as Armenia, Belarus, Kyrgyz Republic, Oman, Qatar, Switzerland, Tajikistan, Thailand, Turkmenistan, UAE and Zimbabwe have agreed to renegotiate the treaties after the draft model BIT was approved by the Union Cabinet in December 2015.

4       Case trends

4.1       What investor-state cases, if any, has your country been involved in?

As of September 11 2018, a total of 24 treaty arbitrations have been initiated against India [according to publicly available information, including the website of the United Nations Conference on Trade and Development (“UNCTAD”)]. Currently, 13 claims are pending, nine have been settled, and an award has been passed in two claims. The White Industries award (discussed in question 3.2 above) was decided against India. In what may be termed as India’s first known victory in treaty arbitration – Louis Dreyfus Armateurs SAS v. The Republic of India, India has recently defeated a claim of USD 36 million by Louis Dreyfus (a French investor), under the France-India BIT. This case has not been updated on the UNCTAD website – which still reflects 14 pending cases.

4.2       What attitude has your country taken towards enforcement of awards made against it?

As it has been noted in respect of question 4.1 above, of all the treaty claims that have been made against India, only one has resulted in an adverse award (White Industries) so far.  According to publicly available information, Coal India Limited paid AUD 9.8 million to the investor. There are no known cases at present, wherein India has sought to resist the enforcement of unfavourable awards.

4.3       In relation to ICSID cases, has your country sought annulment proceedings? If so, on what grounds?

India has not sought annulment proceedings in relation to ICSID cases.

4.4       Has there been any satellite litigation arising whether in relation to the substantive claims or upon enforcement?

No.  Refer to questions 3.1 and 4.2 above.

4.5       Are there any common trends or themes identifiable from the cases that have been brought, whether in terms of underlying claims, enforcement or annulment?

Of the 13 treaty arbitration cases pending against India, a majority of the cases include a claim for indirect expropriation, the most prominent one being the claims brought by the Vodafone Group.

It has also been observed that there is a trend amongst investors to institute parallel commercial proceedings.  For instance, Devas Multimedia (a Mauritian entity) pursued treaty arbitration against India for the termination of its contract with government-owned Antrix Corp Ltd., the commercial wing of the Indian Space Research Organisation.  Devas Multimedia also pursued a parallel commercial arbitration under the investment contract in which it received a favourable award for an amount of USD 562.5 million.  As far as the treaty arbitration is concerned, the investor has received a favourable determination on the issue of liability, the valuation of which is currently pending.

Investment arbitration disputes in India have been growing in number mostly in sectors such as telecommunications, oil and gas.

5       Funding

5.1       Does your country allow for the funding of investor state claims?

Third- party funding has not been blessed with specific legislation in India. Although there is no express bar on obtaining third-party funding (“TPF”), TPF agreements will nevertheless be subject to several complications due to the lack of legislative framework to regulate such funding.

5.2       What recent case law, if any, has there been on this issue in your jurisdiction?

The subject of TPF is still at a very nascent stage in India and there is no recent case law that adequately addresses the subject.  However, the Supreme Court of India has in Bar Council of India v. A.K. Balaji & Ors. (2018 5 SCC 379) observed that, there appears to be no restriction on third parties’ funding litigation and getting repaid upon the outcome of the litigation.

5.3       Is there much litigation/arbitration funding within your jurisdiction?

In practice, TPF institutions have claimed to pursue opportunities in India.  Due to the absence of publicly available data on the subject, it is, however, not possible to provide a definitive position on this.

6       The Relationship Between International Tribunals and Domestic Courts

6.1       Can tribunals review criminal investigations and judgments of the domestic courts?

Article 14.2 of the Model BIT clearly states that in addition to the specified limits on a tribunal’s jurisdiction, the tribunal will not have jurisdiction to re-examine any legal issue which has been finally settled by any judicial authority of the Host State.  It also provides that the tribunal cannot review the merits of a decision made by a judicial authority of the Host State.

However, the bar on a tribunal’s jurisdiction to review judgments of domestic courts is not absolute, insofar as Article 3 of the Model BIT provides that each Party shall not subject investments of investors of the other Party to measures which constitute a denial of justice under customary international law.  Thus, it appears that where the tribunal is required to decide as to whether the Host State’s treatment of an investor constitutes denial of justice, the tribunal would be in a position to review the decision of domestic courts.

6.2       Do the national courts have the jurisdiction to deal with procedural issues arising out of an arbitration?

A recent decision of the Delhi High Court in Antrix Corporation Ltd. v. Devas Multimedia (FAO (OS) (COMM) 67/2017) highlights some of the procedural difficulties associated with arbitrations seated in India.  Devas initiated arbitration proceedings before the International Chamber of Commerce (“ICC”) for wrongful termination of the contract by Antrix Corporation Limited (“Antrix”) (see question 4.5 above).

The arbitration clause (pertaining to the appointment of arbitrators) substantially departed from the ICC Rules in relation to the appointment of arbitrators.  ICC notified the parties that it was not in a position to make such a departure from its Rules.  Antrix objected to the position taken by the ICC and filed an application before the Chief Justice of India under Section 11 (for appointment of an arbitrator) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

Thereafter, Antrix filed an application under Section 9 of the Arbitration Act (for interim reliefs) before the Bangalore City Civil Court, seeking to restrain Devas from proceeding with the ICC arbitration which was contrary to the parties’ arbitration agreement.  In April 2014, the ICC arbitration was stayed by the Chief Justice’s designate and was only subsequently dismissed by the Supreme Court.

Finally, the ICC tribunal awarded Devas USD 562.5 million on the basis that Antrix had wrongfully terminated the agreement with Devas. Upon obtaining the award, Antrix Ltd.  proceeded to file a Section 9 application to attach Antrix’s bank accounts in the Delhi Courts.  Finally, the Delhi High Court held that designating a seat does not automatically confer exclusive jurisdiction upon the courts of the seat.

In Indian seated arbitrations, parties do, in some cases, run the risk of arbitration-related proceedings being dragged before different forums.

It must be noted however, that the ICC award was passed in relation to the commercial arbitration proceedings initiated against Antrix.  The outcome of the treaty arbitration between Devas and Antrix is still pending.

6.3       What legislation governs the enforcement of arbitration proceedings?

The enforcement of a foreign award in India is governed by Part II of the Arbitration Act, which incorporates the provisions of the New York Convention.  With respect to enforcement of a domestic award, the same is governed by Part I of the Arbitration Act.

Pertinently, the Delhi High Court in Union of India v. Vodafone Group PLC United Kingdom & Anr. (“Vodafone Case”) (CS (OS) 383/ 2017) held that investment arbitration disputes are fundamentally different from commercial disputes and are thus not governed by the provisions of the Arbitration Act.  An appeal before a Division Bench of the Delhi High Court is currently pending.

6.4       To what extent are there laws providing for arbitrator immunity?

A new provision has been introduced in the Arbitration Act by way of the Arbitration and Conciliation (Amendment) Bill, 2018 (“Amendment Bill”).  At present, the Amendment Bill has been passed by the Lok Sabha (Lower House) and is pending approval of the Rajya Sabha (Upper House) of the Indian Parliament.  The newly inserted Section 42B provides that no suit or other legal proceedings shall lie against the arbitrator for anything which is done in good faith or intended to be done under the Arbitration Act or the rules or regulations made under it.

6.5       Are there any limits to the parties’ autonomy to select arbitrators?

Where India is the seat of arbitration, the parties’ choice of arbitrators would be subject to Schedules V and VII of the Arbitration Act.  On October 23, 2015, India became the first jurisdiction to statutorily adopt the IBA Guidelines on Conflicts of Interest in International Arbitration (“IBA Guidelines”) in Schedules V and VII.  Schedule V contains circumstances under the Orange List and Schedule VII contains circumstances under the Red List of the IBA Guidelines.  Parties can however, waive the bar on the appointment of an arbitrator (where such arbitrator is squarely covered by the circumstances under Schedule VII) after a dispute has arisen between such parties.

6.6       If the parties’ chosen method for selecting arbitrators fails, is there a default procedure?

Where India is the seat, as per Section 11 of the Arbitration Act, if the parties’ chosen method for selecting arbitrators fails, a party may apply to the Supreme Court (in case of an international commercial arbitration) to take the necessary measures to secure an appointment.  The Amendment Bill now provides for appointment by arbitral institutions designated by the Supreme Court, for international commercial arbitrations.

6.7       Can a domestic court intervene in the selection of arbitrators?

As addressed in question 6.6 above, in arbitrations where India is not the seat, there would be no court involvement in the selection of arbitrators.

7       Recognition and Enforcement

7.1       What are the legal requirements of an award for enforcement purposes?

Under Article I of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (embodied in the First Schedule of the Arbitration Act), India has declared that the New York Convention applies only to differences arising out of legal relationships, whether contractual or not, that are considered “commercial” under Indian law.

At present, it is uncertain whether investment arbitrations are covered by the Arbitration Act for the purposes of enforcement.  This has already been highlighted with respect to the Vodafone Case in question 6.3 above.

India has not officially recognised all of the signatories to the New York Convention and thus, Indian courts will only enforce foreign awards under the Convention if such awards have been issued in a State that has been notified in the Official Gazette of India, as a country to which the New York Convention applies.  At present, only Australia, France, China, Hong Kong, Japan, Singapore, the United Kingdom and the United States have been notified by India in the Official Gazette.

7.2       On what bases may a party resist recognition and enforcement of an award?

A party may resist the enforcement of an award in the circumstances set out in Article V of the New York Convention.  These circumstances have been incorporated in Part II, Chapter I of the Arbitration Act along with some amendments.  Section 44 lays down circumstances in which an award may be declared to be in conflict with the public policy of India.  These circumstances have been limited to an award which is (i) induced or affected by fraud or corruption, (ii) in violation of Section 75 of Section 81 of the Arbitration Act, (iii) in contravention with the fundamental policy of Indian law, and (iv) in conflict with basic notions of morality or justice.

An explanation to Section 44 further clarifies that a test as to whether there has been a contravention of the fundamental policy of Indian law shall not entail a review on the merits of the dispute.

7.3       What position have your domestic courts adopted in respect of sovereign immunity and recovery against state assets?

India does not have a separate legislation on foreign State sovereign immunity. Section 86 of the Code of Civil Procedure (“CPC”) provides that no foreign State may be sued in any Court (otherwise competent to try the suit) without prior consent of the Central Government.

While India became a signatory to the the United Nations Convention on the Jurisdictional Immunities of the States and their Property on January 12, 2007, the same has not yet been brought into force.  It is however, indicative of India’s inclination to more formally adopt the “qualified” immunity approach, which has, in any case, been adopted by Indian courts.  In Ethiopian Airlines v. Ganesh Narain Saboo (“Ethiopian Airlines”) (2011 8 SCC 539), the Supreme Court held that Ethiopian Airlines was not entitled to sovereign immunity with respect to a commercial transaction, which was in consonance with the growing body of international law principles.

7.4       What case law has considered the corporate veil issue in relation to sovereign assets?

As highlighted in the preceding question, the Supreme Court in Ethiopian Airlines made it abundantly clear that a corporate entity which carries on business or trade in India does not fall within the protection of the doctrine of sovereign immunity as embodied in Section 86 of the CPC.

In Qatar Airways v. Shapoorji Pallonji (2013 2 BomCR 65), the Bombay High Court placed reliance upon the decision of the Supreme Court in Andhra Pradesh State Road Transport Corporation v. Income-tax Officer (AIR 1964 SC 1486), to hold that in dealing with corporations established by a State, the corporation, though statutory (or not), has a personality of its own and this personality is distinct from that of the State or other shareholders.  In this context, the Supreme Court also referred to the observations made in Tamlin v. Hanna (1950 1 K.B. 18) that, “the corporation is its own master and is answerable as fully as any other person or corporation.  It is not the Crown and has none of the immunities and privileges of the Crown.  Its servants are not civil servants and its property is not that of the crown”.

These decisions collectively lay down a position that so far as commercial actions of a given corporation are concerned, the corporate veil may not be lifted for the purpose of claiming sovereign immunity.

Authors:

1. Rajendra Barot, Partner
2. Sonali Mathur, Partner

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Delhi High Court imposes costs on Defendant in a Trademark Infringement Action to Curb Dilatory Tactics

Published In:Inter Alia - Quarterly Edition - September 2018 [ English Chinese japanese ]

Skechers Inc. (‘Skechers’), a US footwear brand, filed a civil suit[1] before the Delhi High Court (‘Delhi HC’) against a local footwear manufacturer, M/s Pure Play Sports and other retailers, on the grounds of trade dress infringement, passing-off, dilution, unfair competition etc., as the defendants were involved in the commercial dealing of lookalikes / replicas of Skechers GOwalk 3 products. On May 25, 2016, the Delhi HC granted an interim injunction restraining the defendants and appointed a local commissioner to visit the premises of the defendants to seize the offending goods.

As the defendants failed to appear and/or file pleadings in their defense, within the prescribed period under the recently introduced Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015, the right of all the defendants to file their written statements was declared to have been closed, and the Delhi HC proceeded ex-parte against the defendants, except Pure Play. In view of the above, the Delhi HC passed a summary order for disposal and imposed costs in favor of Skechers and opined that it had the power to pass a summary decree in a suit, even in the absence of a specific application requesting the same, as it is satisfied that nothing would come out of putting the parties through the rigmarole of a trial. Thereafter, Skechers filed an application under Sections 35, 35A and 35B of the Civil Procedure Code read with Chapter 23 of the Delhi High Court Original Side Rules, 2018 (‘DHC Rules’), accompanied with a detailed bill of costs, praying for quantification of the costs of the proceedings due to be paid to it. This application file by Skechers was the first of its kind under the DHC Rules.

The key considerations to be taken into account by a Court when granting such costs are (i) judicial time consumed in litigation; (ii) delay in service of summons or efforts made; (iii) delay caused by any party by raising frivolous issues or unnecessary objections; (iv) failure of a party to effect discovery of documents or refusal to answer interrogatories; (v) incorrect denial of facts/ documents, thus, protracting trial; (vi) monetary and other stakes involved in the proceedings; (vii) costs incurred on execution of commission; and (viii) any other cost which the Court may deem fit and proper. Further, under Rule 2 of the DHC Rules, the Taxing Officer / Joint Registrar of the Court (’JR’) has been empowered to entertain, adjudicate and quantify costs by appreciating the documentary evidence put forth.

After reviewing the bill of costs submitted by Skechers, the JR awarded costs amounting to Rs. 8,698,173 (approx. US$118,000) to Skechers. Pure Play has filed a chamber appeal against the order of JR, which is currently pending adjudication. However, the execution petition of Skechers has been admitted and the Court has directed Pure Play to disclose its assets and remain present before the Court on the next date of hearing.

This case has set an important precedent on two counts. First, it lays down with clarity that a Court has the powers to pass a summary judgment / decree suo motu, even in the absence of a written application. Second, the quantum of costs granted by the JR demonstrate the Court’s seriousness in curbing the dilatory tactics employed by litigants, which will likely act as an effective deterrent / disincentive for infringers, who otherwise find it profitable to continue their illegal activities until shut down by an injunction of the Court (as they are fully aware of general trend of Courts being reluctant to impose financial sanctions in intellectual property matters).

AZB represented Skechers before the Delhi HC.

[1] Skechers USA Inc. II v Pure Play Sports, CS(COMM) 573/2016, High Court of Delhi

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Supreme Court Upholds the Constitutional Validity of Aadhaar Act

Published In:Inter Alia - Quarterly Edition - September 2018 [ English Chinese japanese ]

The SC, by way of its order in Justice K.S. Puttaswamy (Retd.) & Anr. v. Union of India & Ors.[1], upheld the constitutional validity of the Aadhaar (Targeted Delivery of Financial and other Subsidies, Benefits and Services) Act, 2016 (‘Aadhaar Act’), but struck down certain provisions including its linking with bank accounts, mobile phones and school admissions. The judgment was passed with a majority of 4:1.

Some of the key observations of the majority decision are set out below:

i.  The Aadhaar Act meets the concept of limited government, good governance and constitutional trust, and does not tend to create a surveillance state. It is not held to be violative of the right to privacy under Article 21 of the Constitution of India (‘Constitution’) and serves the legitimate State aim, i.e. to ensure that social benefits reach the deserving community.

ii.  The passing of the Aadhaar Act as a ‘Money Bill’ was upheld on the ground that Section 7, which is the core provision of the Aadhaar Act, satisfies the conditions of Article 110 of the Constitution (which sets out the criteria for a ‘Money Bill’).

iii.  Authentication records are not to be retained beyond six months (as opposed to six years required under the Aadhaar Act).

iv.  Any individual, whose information is sought to be released, will be afforded with an opportunity of being heard. The provision enabling any body corporate/person to seek authentication services on the basis of purported agreement between an individual and such body corporate/ person has been struck down as unconstitutional as it would lead to commercial exploitation of individual biometric and demographic information by private entities.

v.  Section 139AA of the IT Act which makes it mandatory to quote Aadhaar when filing tax returns or for allotment of Permanent Account Number, was upheld.

vi.  A robust data protection regime, in the form of an enactment on the basis of Justice B.N. Srikrishna (Retd.) Committee Report with necessary modifications, should be adopted. Please refer to our Client Alert dated August 3, 2018 available at https://www.azbpartners.com/bank/the-personal-data-protection-bill-2018/, for key highlights of the Personal Data Protection Bill, 2018.

Dissenting with the majority, Justice D.Y. Chandrachud held the Aadhaar Act to be unconstitutional for failing to meet the requirements of a Money Bill under Article 110(1) of the Constitution. While elaborating on several other infirmities in the Aadhaar Act, he also declared the Aadhaar Act to be violative of various fundamental rights, including the right to privacy and directed the Government to initiate steps to bring a fresh legislation for ensuring conformity with this judgment, till which time the data collected under the Aadhaar Act will neither be destroyed nor be used for any purpose whatsoever. If the Government fails to bring such legislation within a period of one year, it is directed that the data will be destroyed.

[1] Judgment dated September 26, 2018, in Writ Petition (Civil) No. 494 of 2012

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Application for Setting Aside an Arbitral Award to require Examination of Evidence beyond record of the Arbitrator

Published In:Inter Alia - Quarterly Edition - September 2018 [ English Chinese japanese ]

In its judgment dated August 20, 2018 in M/s Emkay Global Financial Services Limited v. Girdhar Sondhi[1], the Supreme Court of India examined whether a party can lead evidence in proceedings instituted under Section 34 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’). Relying on its judgment in Fiza Developers & Inter-Trade Private Limited v. AMCI (India) Private Limited.[2], the Supreme Court held, inter alia, that in order to ascertain whether a party has “furnishe[d] proof” under Section 34(2)(a) of the Arbitration Act, a Court need not examine anything beyond the record of the proceedings before the arbitrator. If the matters relevant to the determination of issues exist, which are not contained in the record of the arbitration proceedings, the same may be brought to the notice of the Court by way of affidavits filed by the parties in the proceedings under Section 34 of the Arbitration Act. It was also held that cross-examination of persons swearing to such affidavits should not be permitted unless absolutely necessary.

[1]M/s Emkay Global Financial Services Ltd. v. Girdhar Sondhi, 2018 SCC OnLine SC 1019
[2]Fiza Developers & Inter-Trade Pvt. Ltd. v. AMCI (India) Private Limited, (2009) 17 SCC 796

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Madras High Court directs non-signatories to arbitrate under the ‘Group of Companies’ doctrine

Published In:Inter Alia - Quarterly Edition - September 2018 [ English Chinese japanese ]

A division bench of the Madras High Court (‘Madras HC’) in its judgment dated July 23, 2018 in SEI Adhavan Power Private Limited & Anr. v. Jinneng Clean Energy Technology Limited & Other,[1] held that non-signatories to an arbitration agreement may be referred to arbitration, on the basis of the ‘group of companies’ doctrine. AZB & Partners successfully represented Jinneng Clean Energy Technology Limited (‘Jinneng’) in this matter.

Jinneng, along with SunEdison Energy Holding (Singapore) Pte Ltd. (‘SunEdison Singapore’) were parties to a Non-Disposal Undertaking (‘NDU’). Upon a breach of the NDU, Jinneng initiated arbitration against SunEdison Singapore as well as SEI Adhavan Power Private Limited (‘SEI’) and SunEdison Solar Power India Private Limited (‘SunEdison India’), neither of which were signatories to the NDU. SEI and SunEdison India therefore filed a suit before the Madras HC, seeking an injunction against the arbitration, on the ground that they were non-signatories to the NDU and thus were not bound by the arbitration agreement thereunder.

The Madras HC (single and division benches) referred SunEdison India and SEI to arbitration under the NDU, on the ground that SEI, SunEdison India and SunEdison Singapore constituted a single economic entity, i.e., the SunEdison group of companies, were “intrinsically connected to each other”, and the transactions between the parties were all in respect of the same project. The Madras HC referred to and relied upon the Supreme Court judgment in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. and Others,[2] in which it was held, inter alia, that an arbitration agreement entered into by a company within its group of companies can bind its non-signatory affiliates.

[1] Judgment dated July 23, 2018 in Original Side Appeal Nos.170 to 175 and 206 to 210 of 2018 (Madras High Court)
[2] Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. and Others, (2013) 1 SCC 641

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Payment of Stamp Duty not a Requisite for Enforcement of a Foreign Arbitration Award in India

Published In:Inter Alia - Quarterly Edition - September 2018 [ English Chinese japanese ]

In the case of Shriram EPC Limited v. Rioglass Solar SA,[1] the SC held that non-payment of stamp duty would not render a foreign arbitration award unenforceable in India. The Supreme Court found that the term ‘award’ under Item 12 of Schedule I of the Indian Stamp Act, 1889 (‘Stamp Act’) has never included a foreign award, from the date of commencement of the Stamp Act till date.

Tracing the history of the Stamp Act, the erstwhile provisions of the Code of Civil Procedure, 1882 and the Indian Arbitration Act, 1899, the SC concluded that the Stamp Act only referred to an award made in the territory of British India provided that such award was not made pursuant to a reference made by an order of the Court in the course of a suit. Accordingly, an award made in a princely State or in a foreign country, if enforced by means of a suit in British India, would not be covered by the expression ‘award’ as contained in Item 12 of Schedule I of the Stamp Act. The Supreme Court noted that this position has remained unchanged even after the introduction of the Arbitration Act, and, therefore, a foreign award is not liable to stamp duty under the Stamp Act.

[1] Judgment dated September 13, 2018, in Civil Appeal No. 9515 of 2018 (Supreme Court of India)

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Update on Amendments to the Commercial Courts Act, 2015

Published In:Inter Alia - Quarterly Edition - September 2018 [ English Chinese japanese ]

The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Act, 2018 (‘Amendment Act’) came into force with effect from May 3, 2018, amending the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 (‘2015 Act’). Some of the notable amendments to the 2015 Act are: (i) decrease in the value of the subject matter in respect of which a commercial suit may be instituted from Rs. 1 crore (approx. US$ 135,000), to Rs. 3 lakh (approx. US$ 4,000); and (ii) a suit not contemplating urgent interim relief cannot be instituted unless the remedy of pre-institution mediation has been exhausted.

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Amendments to Specific Relief Act, 1963

Published In:Inter Alia - Quarterly Edition - September 2018 [ English Chinese japanese ]

The Central Government has, by way of a notification dated August 1, 2018, introduced the Specific Relief (Amendment) Act, 2018 (‘Amendment Act’), which amends the Specific Relief Act, 1963 (‘1963 Act’). However, the date on which the provisions of the Amendment Act will come into effect has not yet been notified.

The 1963 Act provides for, inter alia, parties to a contract to seek specific performance when aggrieved by the non-performance of such contract. Some of the key amendments introduced by the Amendment Act have been set out below:

i.  Specific performance: The 1963 Act provided that specific performance is a limited remedy, which may be granted by a Court, at its discretion, subject to certain conditions. The Amendment Act empowers the Court to grant specific performance as a general rule, subject to the certain exceptions. A brief comparison of the conditions, pre and post amendment of the 1963 Act, under which Courts would not grant specific performance are:

Pre-amendmentPost amendment
A contract for the non-performance of which compensation is an adequate reliefThis condition does not apply
A contract which runs into such minute or numerous details or which is so dependent on the volition of the parties or otherwise from its nature is such that the court cannot enforce specific performance of its material termsThese conditions do not apply
A contract which is so dependent on the personal qualification of the parties that the court cannot enforce specific performance of its material termsThis condition is still applicable
A contract which is in its nature determinableThis condition is still applicable
A contract, the performance of which involves the performance of a continuous duty which the court cannot superviseThis condition is still applicable

 

ii.  Substituted performance: The Amendment Act gives an affected party the option to arrange for performance of the contract by a third party or by his own agency (substituted performance), and costs for such substituted performance may be recovered from the defaulting party. After obtaining substituted performance, specific performance cannot be claimed. However, the affected party’s right to claim compensation will not get affected.

iii. Infrastructure projects: A schedule has been added pursuant to the Amendment Act which broadly describes the infrastructure projects which would be under the purview of the 1963 Act. These projects can be categorized as follows: (i) transport; (ii) energy; (iii) water and sanitation; (iv) communication (such as telecommunication); and (v) social and commercial infrastructure (such as affordable housing).

iii.  Injunctions: The Amendment Act prevents Courts from granting injunction in respect of contracts relating to infrastructure projects, if such an injunction would hinder or delay the progress or completion of the infrastructure project.

iv.  Special Courts: The Amendment Act requires that State Government will, in consultation with the Chief Justice of the relevant High Court, designate one or more Civil Courts as Special Courts to deal with cases under the 1963 Act, in relation to infrastructure projects. Such cases must be disposed off within 12 months, which period can be extended by six months, of the date of service of summons to the defendant.

v.  Experts: The Amendment Act inserts a new provision which empowers the Courts to engage experts in suits where expert opinion may be needed. Such expert may be examined in the Court in relation to the expert’s findings, opinions, etc.

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Maintainability of a Derivative Action in India on Behalf of a Foreign Company

DERIVATIVE SUIT BY SHAREHOLDERS IS MAINTAINABLE IN INDIA ONLY IF THE COMPANY IS AMENABLE TO JURISDICTION OF INDIAN COURTS

On November 26, 2018, the Supreme Court (‘SC’) in Ahmed Abdulla Ahmed Al Ghurair v. Star Health And Allied Insurance Company Limited, laid down the law in relation to derivative action on behalf of a foreign company in India, forum non conveniens, under Clause XII of the Letters Patent Act[1], and declaratory relief in relation to beneficial interest of shares sought in the teeth of Section 89 of the Companies Act, 2013.

A derivative suit was filed in the Madras High Court in January 2017, on behalf of a Dubai incorporated company (‘ETA Star Dubai’), by its Dubai based minority shareholders (holding 34% shares) (‘Minority Shareholders’). The Minority Shareholders of ETA Star Dubai sought to protect and declare the beneficial interest of ETA Star Dubai in the 6.16% shares (‘Shares’) of Star Health Allied & Insurance Private Company Limited (‘Star Health’) (one of the largest health insurance company incorporated in India). It was alleged that, though these Shares were legally registered in the names of defendant Nos. 3 to 7 (being the majority shareholders of Eta Star Dubai) (‘Majority Shareholders’), the company, i.e. ETA Star Dubai was in fact the beneficial owner of the Shares (since the acquisition of these Shares had been indirectly funded by ETA Star Dubai). In light of the above, the Minority Shareholders further claimed that the Majority Shareholders had, in collusion with Star Health, acted against the interest of ETA Star Dubai.

The Single Judge granted Clause XII Leave and allowed the suit to proceed (after rejecting applications for revocation of the leave and for rejection of the Plaint). This order was challenged and overturned by the Division Bench of the Madras High Court, which held the following:

1.       Jurisdiction

  • A Court can decline the exercise of jurisdiction under Clause XII of the Letters Patent Acton the principle of forum non conveniens. This is the first SC decision recognizing the principle of forum non conveniens (i.e. the Court is not the appropriate/ convenient forum) for a Clause XII leave.
  • When the dispute is between the shareholder and a company with respect to the shares held in another company, the mere existence of registered office of the subsequent company is not a factor to clothe jurisdiction upon the court which has territorial jurisdiction over the area covering the registered office of the other company.

2.     Derivative Action

A derivative action of a foreign company is not maintainable in India as such a company is not amenable to the jurisdiction of Indian Courts. The fundamental test for a derivative action is that ‘such an action will necessary have the sanction of a law and this shall have no obligation to a foreign entity having beneficial interest which can be enforced in India especially when there are provisions dealing with such a situation.’

3.     Beneficial Interest

If a person holding beneficial interest in shares fails to make necessary declarations under Section 89 of the Companies Act, 2013, then neither the beneficial owner nor any person claiming through it can thereafter try to enforce the beneficial interest by seeking declaratory relief from an Indian court.

The SC has dismissed all 13 SLPs filed by the Minority Shareholders and affirmed the judgment of the Division Bench of the Madras High Court.

AZB & Partners successfully represented the Majority Shareholders in this case. This decision is significant, not only in law, but also as a means to pave the way for a proposed transaction involving sale of 100% of Star Health’s shares to the private equity investors (for approximately US$ 1 billion). Notably, AZB & Partners had also acted for the promoters for this transaction earlier this year.

[1] Clause XII of the Letters Patent of the High Court of Madras (‘Letters Patent’) sets the limits of the original jurisdiction of the Court. Except for certain suits, the High Court of Madras has jurisdiction to entertain suits where inter alia part of the cause of action has arisen within its territorial limits. However, for this purpose, the leave of the Court has to be first obtained.

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Changing Landscape of Intermediary Liability

The High Court of Delhi (‘Court’), in a spate of recent judgments, has critically evaluated the liability of e-commerce platforms in respect of trademark infringement, by carefully examining the business model of the e-commerce platform and the role played by such e-commerce platform in the overall transaction, involving marketing and sale of products to end consumers. The Court has provided substantive guidance on when an e-commerce player operating a marketplace can claim to be an ‘intermediary’, and claim immunity or ‘safe harbour’ under Section 79 of the Information Technology Act, 2000 (‘IT Act’). Section 79 of the IT Act, more popularly known as the ‘safe harbour’ provision, essentially immunizes certain types of intermediaries from liability qua third-party content and material, hosted or made available by them, provided such intermediaries fulfil the prescribed conditions.

The first and foremost of these judgments was rendered in the matter of Christian Louboutin SAS v. Nakul Bajaj & Ors.[1] In this case, Christian Louboutin (‘Plaintiff’), the registered proprietor of the single-colour mark for its distinctive ‘red sole’ filed a suit against www.darveys.com  (‘Defendant’), a website marketing itself as a ‘luxury brands marketplace’ (‘Louboutin Case’), for marketing, offering and selling allegedly counterfeit Louboutin branded products using the name and image of Mr. Christian Louboutin. According to the Plaintiff, the Defendant was also using the Plaintiff’s registered trademarks and the names ‘Christian’ and ‘Louboutin’ as ‘meta-tags’ on its website and in turn, diverting internet traffic. The Defendant, however, argued that the goods sold on the website were genuine. The Defendant further claimed that it was merely booking orders, placed by customers, whose supplies are effected through various sellers and, therefore, it was a mere intermediary, entitled to protection under Section 79 of the IT Act.

At the outset, the Court examined the definition of an ‘intermediary’ under the IT Act and emphasized that its role is limited to ‘receiving, storing, transmitting an electronic record or providing a service with respect to that record’. The Court further observed that in assessing whether an e-commerce platform can be considered as an ‘intermediary’, it is important to assess whether such platform played only an inactive or passive role in the marketing and selling process; in other words, whether such a platform was merely acting as a conduit or passive transmitter of records or of information. Further, the Court also observed that it must be analysed whether such an e-commerce platform is taking adequate measures to ensure that no unlawful acts are committed by the sellers. The Court laid down certain factors to assess this, which include: (i) the terms of agreements entered into between the platform and the sellers; (ii) the manner in which terms were enforced; (iii) whether adequate measures have been put in place to ensure trademark rights are being protected; and (iv) whether the platforms have knowledge of unlawful acts.

The Court found that the Defendant was not an ‘intermediary’ as it was substantively involved in the business operations and had control over the products being sold on the platform. The Court found that the Defendant was actively involved in, inter alia: (a) identifying the sellers; (b) enabling the sellers actively; (c) promoting them; (d) selling the products in India; (e) providing guarantee of authenticity for products on the platform; and (f) claiming that it has relationships with the exclusive distributors of the Plaintiffs’ products etc. The Court further observed that on www.darveys.com, the seller and the person from whom the seller purchases the goods are not known and it is also unclear whether goods are genuine. In view of this, the Court observed that the conduct of the Defendant amounted to ‘conspiring, abetting, aiding or inducing unlawful activity’ as it promoted the infringing products to its members who signed up on the website (by payment of a membership fee). In view of this, the Court came to a finding that the Defendant was not entitled to any protection as an ‘intermediary’ under the IT Act.

The Court, inter alia, directed the Defendant to disclose complete details of all its sellers including their contact information, obtain a certificate of authenticity from its sellers and implement a system whereby upon being notified of any counterfeit product by the Plaintiff, the Defendant must ascertain the authenticity of the product with the seller on its site and thereafter, examine the same with evidence to check if it must be removed. Lastly, the Court further ordered that the Defendant should remove all meta-tags containing the Plaintiff’s mark.

Placing reliance on the Louboutin case, the Court has held two more e-commerce players, being www.kaunsa.com and www.shopclues.com liable for trademark infringement in the cases of Luxottica v. Mify Solutions[2] and L’Oréal v. Brandworld & Anr.[3], respectively.

These decisions are undoubtedly a big step forward in ensuring that brand owners’ rights on e-commerce platforms are protected. The decision in the Louboutin case is especially important as it throws light on specific situations in which an e-commerce marketplace can claim ‘safe harbour’ under the IT Act. Another key practical implication of these cases is that e-commerce marketplaces may now be required to re-evaluate their business models as well as the role they play in the marketing and sale of products on their platforms.

[1] CS(COMM) 344/2018, order passed by Hon’ble Mrs. Justice Pratibha Singh dated November 2, 2018.
[2] CS (COMM) 453/2016, Luxottica Group S.P.A. and Ors. vs. Mify Solutions Pvt. Ltd. and Ors. (12.11.2018 – DELHC)
[3] CS(COMM) 980/2016 – Delhi High Court

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SEBI notifies the SEBI (Settlement Proceedings) Regulations, 2018

Published In:Inter Alia - Quarterly Edition - December 2018 [ English Chinese japanese ]

On November 30, 2018, SEBI issued the SEBI (Settlement Proceedings) Regulations, 2018 (‘New Settlement Regulations’) which are effective from January 1, 2019, on the basis of the report of the High Level Committee chaired by Justice Dave and have replaced the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014 (‘Old Settlement Regulations’). The key changes introduced by the New Settlement Regulations are as follows:

(i)      Definition of ‘securities laws’ has been widened to include all laws administered by SEBI. The Old Settlement Regulations merely covered the SEBI Act, 1992, the Securities Contract (Regulations) Act, 1956 and the Depositories Act, 1996. Similarly, the definition of ‘specified proceedings’ has been expanded to include proceedings pending before any forum, and not just SEBI.

(ii)    The ‘cooling-off’ period of 24 months prescribed under the Old Settlement Regulations between the date of the last settlement order and an application for a new settlement has been done away with. Further, the restriction on applying for a settlement, if the applicant has received two settlement orders in the past 36 months, has also been removed.

(iii)   Under the Old Settlement Regulations, violation of laws pertaining to insider trading, communication of unpublished price sensitive information, fraudulent and unfair trade practices having market-wide impact (such as front-running, mis-selling to an investor, violation of internal code of conduct in insider trading), could not be considered for settlement, as these were considered ‘serious offences’. The New Settlement Regulations remove any such restriction, subject to the qualification that SEBI may not consider any such specified proceeding, where the alleged default tends to have a market-wide impact, cause losses to a large number of investors or affect the integrity of the market.

(iv)     A person cannot apply for a settlement if he is classified as a willful defaulter, a fugitive economic offender or a person who has defaulted in payment of any fees due or penalty imposed under any securities law.

(v)    The New Settlement Regulations additionally grant SEBI the discretionary power to settle a proceeding confidentially, in order to benefit applicants who agree to provide ‘substantial assistance in the investigation, inspection, inquiry or audit, to be initiated or ongoing, against any other person in respect of a violation of securities laws’. The applicant’s identity and any information, evidence or documents provided by the applicant will be kept confidential in such a case.

The New Settlement Regulations have introduced a new concept of ‘settlement schemes’, by way of which SEBI will specify the procedure and terms of settlement of specified proceedings under a settlement scheme for any class of persons involved in respect of any similar defaults specified. A settlement order issued under such a settlement scheme will be deemed to be a settlement order under the New Settlement Regulations.

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New SEBI Order in the Satyam Matter

Published In:Inter Alia - Quarterly Edition - December 2018 [ English Chinese japanese ]

SEBI order dated November 2, 2018 (‘New Satyam Order’) modified its previous orders in the matter of Satyam Computer Services Limited (‘Satyam’), in respect of B. Ramalinga Raju, B. Rama Raju, B. Suryanarayan Raju, and SRSR Holdings Private Limited (collectively, the ‘Satyam Noticees’). In the previous orders, the Satyam Noticees had been restrained from trading in the stock market for a certain period and had been directed to disgorge wrongful gains made by them, inter alia, by falsifying financial statements of Satyam and committing insider trading in Satyam’s shares.

The key legal issue involved in the New Satyam Order was whether the benefit of ‘intrinsic value’ can be given to the Satyam Noticees while computing the disgorgement amount (by deducting the ‘intrinsic value’ of shares from the receipts from sale of such shares in order to arrive at the illegal gain). SEBI, relying on its previous decisions, held that the Satyam Noticees should not be given the benefit of discounting the intrinsic value, as it would amount to conferring undeserving benefits and may act as a moral hazard rather than as a deterrent. Therefore, only the acquisition cost and statutory dues were deducted from the sale proceeds to arise at the disgorgement amount.

SEBI also considered the point in time from which interest may be levied on the disgorgement amount. Relying on a previous decision of the Supreme Court (‘SC’) on this question, SEBI reiterated that interest could be levied right from the inception of the cause of action (i.e. date of commission of the fraudulent actions). However, SEBI did not interfere with its previous orders in this matter which had levied interest on the disgorgement amount from January 7, 2009, being the date on which Mr. Ramalinga Raju confessed that he had committed fraud with respect to Satyam’s books of accounts.

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SC upholds Ultratech’s Bid for Binani Cement

Published In:Inter Alia - Quarterly Edition - December 2018 [ English Chinese japanese ]

The SC, in its decision dated November 19, 2018, upheld the bid of UltraTech Cement (‘Ultratech’) for Binani Cement Limited (‘BCL’). A review petition filed by Rajputana Properties Private Limited (‘RPPL’) challenging the aforesaid order of the SC, was rejected on January 8, 2019.

RPPL and Ultratech, an entity belonging to the Aditya Birla group, had both submitted bids in the corporate insolvency resolution process (‘CIRP’) of BCL under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). RPPL’s bid was declared the highest bidder (‘H1’) (on the basis of the points obtained as per the evaluation criteria) while Ultratech’s bid was declared the second highest (‘H2’). Subsequently, Ultratech raised its bid amount significantly and agreed to deliver a higher payout to all financial and operational creditors. However, by this time the deadline for submission of bids, as set out in the request for resolution plan (‘RFRP’) formulated by the committee of creditors (‘CoC’), had already lapsed. The CoC refused to entertain the bid submitted by Ultratech on the ground of late submission and approved the bid submitted by RPPL. Ultratech challenged the CoC’s decision to select RPPL as the successful bidder, relying on the provision contained in the RFRP, which permitted the CoC to consider bids from any party, till such time that a resolution plan submitted for BCL was approved by the NCLT.

The National Company Appellate Tribunal (‘NCLAT’) referred to the aforementioned provision in the RFRP and approved the resolution plan submitted by Ultratech on the ground that it was offering a higher amount, thereby ensuring compliance with the primary objective of IBC, i.e. ensuring maximization of the value of the assets of the corporate debtor. The NCLAT also noted that the bid submitted by RPPL was discriminatory on the ground that it differentiated between financial creditors who are equally situated (i.e. financial creditors to whom the corporate debtor owed a debt in its capacity as the primary borrower and financial creditors to whom the corporate debtor owed a debt in its capacity as a guarantor for third party debt) and did not balance the interests of the other stakeholders, such as operational creditors. Finally, the NCLAT also observed that any resolution plan, which is shown to be discriminatory against one or other financial creditor or operational creditor, can be held to be violative of the IBC. RPPL appealed the NCLAT’s decision before the SC. However, the SC refused to set aside the NCLAT’s judgement, while observing that there was no infirmity in the order.

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Commencement of TRAI Tariff Order, Interconnection Regulations and Quality of Service Regulations for Broadcasting and Cable Services

Published In:Inter Alia - Quarterly Edition - December 2018 [ English Chinese japanese ]

As reported in the September 2018 issue of Inter alia, the validity of the Telecommunication (Broadcasting and Cable) Services (Eighth) (Addressable Systems) Tariff Order, 2017 (‘Tariff Order’) and the Telecommunication (Broadcasting and Cable) Services Interconnection (Addressable Systems) Regulations, 2017 (‘Interconnection Regulations’) issued by the TRAI on March 3, 3017 had been upheld by the Madras High Court. Consequently, the Tariff Order, the Interconnection Regulations and the Telecommunication (Broadcasting and Cable) Services Standards of Quality of Service and Consumer Protection (Addressable Systems) Regulations, 2017 came into effect from July 3, 2018. Subsequently, Star India preferred an appeal before the SC against the Madras High Court judgement arguing, inter alia, that the Tariff Order and the Interconnection Regulations regulated the content of the transmission, which was solely within the ambit of the Copyright Act, 1956 and fell outside the jurisdiction of the TRAI. The SC, by its judgment dated October 30, 2018, upheld the jurisdiction of the TRAI to regulate the content of transmission in light of the larger public interest involved and upheld the validity of the Interconnection Regulations and the Tariff Order in their entirety.

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Passing-off and Design Infringement can be tried together in a Composite Suit

Published In:Inter Alia - Quarterly Edition - December 2018 [ English Chinese japanese ]

In the matter of Carlsberg Breweries v. Som Distilleries and Breweries,[1] the special bench of the Delhi High Court has, in its order dated December 14, 2018, held that the joinder of two separate causes of action, one for infringement of a registered design and the other for passing-off is permissible and can be tried together in a composite suit. The plaintiffs in this suit alleged both infringement of a registered design as well as passing-off of the plaintiff’s trade dress in respect of the bottle and overall get up of its ‘Carlsberg’ mark. The defendants, in response, raised the threshold objection that such a composite suit was not maintainable in view of the judgment of the full bench (three judges) of the Delhi High Court in the matter of Mohan Lal v. Sona Paint[2] The Single Judge hearing this matter was of the opinion that the decision in Mohan Lal required a second look and based on the Chief Justice’s instructions, the present Special Bench (five judges) was constituted.

The majority in the Mohan Lal case had held that two separate suits would have to be filed for actions arising out of the infringement of a registered design and passing-off. The Court in the Mohan Lal case had however clarified that if such actions are filed at the same time, or in close proximity, they may be tried together as there may be some aspects which may be common.

The special bench of the Delhi High Court overruled the decision of the full bench of the Delhi High Court, inter alia on the ground that the full bench overlooked provisions of Order II Rule 3 of the Code of Civil Procedure, 1908, which permits joinder of multiple causes of action. The special bench further observed that the cause of action of passing-off and that of design infringement, in the instant case, emanated from the same transaction and therefore it was inconceivable for the cause of action to be ‘split’ in some manner and presented in different suits. Therefore, the Special Bench held that to avoid multiplicity of proceedings, on account of common questions of law and fact, a joinder of such causes of action would be permissible.

[1] CS(OS) 1485/2015.
[2] Mohan Lal v. Sona Paint, 2013 (55) PTC 61 (Del) (FB).

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SC confirms Applicability of Limitation Act to Applications made under Section 7 and 9 of IBC

Published In:Inter Alia - Quarterly Edition - December 2018 [ English Chinese japanese ]

The SC, in its decision dated October 11, 2018, in B. K. Educational Services Private Limited v. Parag Gupta and Associates[1], addressed the issue of the applicability of the recently amended Section 238A (which came into effect on June 6, 2018) of the IBC, which deals with applicability of the Limitation Act, 1963 (‘Limitation Act’) to all applications made under the IBC. SC held that the Limitation Act applies to all applications filed under the IBC from the inception of the IBC, i.e. December 1, 2016 since Section 238A was a clarification of the existing position under the IBC and the law of limitation is procedural in nature and, therefore, can be applied retrospectively.

[1] Civil Appeal No. 23988 of 2017.

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SC distinguishes between ‘Place’, ‘Venue’ and ‘Seat’ of Arbitration

Published In:Inter Alia - Quarterly Edition - December 2018 [ English Chinese japanese ]

The SC had referred Union of India v. Hardy Exploration and Production[1] to a three-judge bench of the SC to decide the basis and principles on which the ‘seat’ of the arbitration is to be determined when the arbitration agreement specifies the ‘venue’ for holding the arbitration sittings but not the ‘seat’. In the present case, the law governing the substantive contract was Indian law. The law governing the arbitration proceedings was the UNCITRAL Model Law. The venue of the arbitration proceedings was Kuala Lumpur. Article 20 of the UNCITRAL Model Law provides that the parties are free to agree on the ‘place’ of arbitration, failing which the arbitral tribunal shall determine the place of arbitration.

The three-judge bench of the SC, in its decision dated September 25, 2018, observed that when the ‘place’ is specified, and no other condition is attached to it, it is equivalent to ‘seat’ and that finalizes the issue of jurisdiction. However, if a condition is attached to the term ‘place’, the attached condition has to be satisfied for the ‘place’ to become equivalent to ‘seat’. The three-judge bench concluded that in this case neither the parties had chosen a juridical seat nor the tribunal had made an express determination of the ‘seat’ in the arbitral award. Therefore, the conditions attached to the term ‘place’ had not been satisfied. Reiterating the settled distinction between the ‘juridical seat’ and ‘venue’ of arbitration, the SC held that Kuala Lumpur could not be considered to be the ‘juridical seat’ merely because it was the venue and that the award was signed in Kuala Lumpur. In view of the above, the three-judge bench came to the conclusion that the courts in India have jurisdiction to hear the application for setting aside under Section 34 under the Arbitration and Conciliation Act, 1996 (‘A&C Act’).

[1] Civil Appeal No. 4628 of 2018.

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SC interprets scope of Definition of ‘International Commercial Arbitration’ under Arbitration and Conciliation Act

Published In:Inter Alia - Quarterly Edition - December 2018 [ English Chinese japanese ]

The SC in its decision dated October 3, 2018 in Larsen and Toubro Limited v. Mumbai Metropolitan Region Development Authority[1] addressed the issue of: (i) whether a consortium formed between an Indian company (i.e. L&T) and a foreign company (i.e. Scomi Engineering BHD) is a ‘body corporate’ or an ‘association’; and (ii) whether an arbitration proceeding in which such consortium is a party, would be considered to be an International Commercial Arbitration[2] under the A&C Act. The SC held that it was not open for L&T and Scomi to act as independent entities while dealing with Mumbai Metropolitan Region Development Authority as they will have to deal with the MMRDA only as a consortium only and not as two separate entities. Thus, it was held that the consortium formed by L&T and Scomi falls within the meaning of an association under Section 2(1)(f)(iii) of the A&C Act. The SC further held that since the lead member of the consortium was L&T, a company incorporated in India, and the consortium’s office was in Mumbai, the central management and control of the consortium was in India and, therefore, the matter did not qualify as an international commercial arbitration under the A&C Act.

[1] Arbitration Petition (C) No. 28 OF 2017.
[2] An ‘international commercial arbitration’ is defined at Section 2(1)(f) of the A&C Act as an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is—(i) An individual who is a national of, or habitually resident in, any country other than India; or (ii) A body corporate which is incorporated in any country other than India; (iii) A company or an association or a body of individuals whose central management and control is exercised in any country other than India; (iv) the Government of a foreign country.

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SC holds Jurisdiction of Consumer Courts cannot be Curtailed Despite Existence of Arbitration Agreement

Published In:Inter Alia - Quarterly Edition - December 2018 [ English Chinese japanese ]

The SC, in its decision dated December 10, 2018, in Emaar MGF Land Limited v. Aftab Singh[1] has held that the remedy available to a consumer under the Consumer Protection Act, 1986 (‘CPA’) is a special remedy in law. Hence, the jurisdiction of consumer courts cannot be curtailed despite the existence of an arbitration agreement between the parties to a dispute. The SC  further stated that the 2015 amendment to Section 8 of the A&C Act were not to override special / additional remedies provided under different statutes, including the CPA.

[1] 2018 SCC OnLine SC 2771.

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SC upholds Optional Arbitration Clause

Published In:Inter Alia - Quarterly Edition - December 2018 [ English Chinese japanese ]

The SC, in its decision dated September 14, 2018, in Zheijang Bonly Elevator Guide Rail Manufacture Co. Ltd. v. Jade Elevator Component[1] has upheld the validity of optional arbitration clauses i.e. dispute resolution clauses which present parties with a choice to resolve disputes between them either through arbitration or through litigation in court. The SChas held that where parties have agreed to such an optional clause, and one party invokes arbitration, the dispute shall be referred to arbitration and not litigation. This decision alters the previously settled position of law that a court shall refer parties to arbitration only if there is a clear and unequivocal intention of parties to arbitrate disputes arising out of a contract.

[1] 2018 (9) SCC 774.

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Supreme Court Upholds the Constitutionality of the IBC

The constitutional validity of the Insolvency & Bankruptcy Code, 2016 (“IBC”) had been challenged in the Supreme Court on various grounds. In its Order today, the Supreme Court has upheld the constitutional validity of the IBC in its entirety, and has made certain observations to narrow the ambit of Section 29A of the IBC. The Order of the Supreme Court has been recently published, and we will circulate our detailed analysis of the Order shortly.

Mr. Bahram N. Vakil, one of the founding partners of AZB & Partners was a member of the Indian Government’s Bankruptcy Law Reform Committee which was instrumental in drafting the policy and legislative framework of the IBC. He is now a member of the Indian Government’s Insolvency Law Committee, constituted to conduct an ongoing review of the IBC and recommend amendments/clarifications.

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Supreme Court Upholds Constitutionality of the Insolvency and Bankruptcy Code, 2016

On January 25, 2019, in the matter of Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India, the Supreme Court (‘SC’) delivered a landmark verdict upholding the constitutionality of various provisions of the Insolvency and Bankruptcy Code, 2016 (‘Code’). While declaring the Code to be a beneficial legislation with a primary focus on revival and continuation of the corporate debtor, and not being a mere recovery legislation for the creditors, the SC has, inter-alia, dealt with the following issues:

1.  Classification of Operational and Financial Creditors is not Unconstitutional

One of the key challenges to the Code was on account of differential treatment between operational and financial creditors, and such differentiation being violative of the principle of equality enshrined under Article 14 of the Constitution of India. Keeping in mind that the primary objective of the Code is resolution and not liquidation, the classification was alleged to be arbitrary and unreasonable. The SC upheld the classification / differential treatment between “financial creditors” and “operational creditors” and held that such distinction is neither unreasonable nor discriminatory and hence, is not violative of Article 14.

Following are some of the various differences in the nature of the two classes of creditors outlined and examined by the SC:

(i)   Role of financial and operational creditors

Financial creditors, unlike operational creditors, are involved in assessing the viability of the corporate debtor from the very beginning and are also involved in the restructuring / reorganization of the borrower in the event there is financial stress. Further, the difference also lies in the nature of agreements with the two kinds of creditors (in terms of secured / unsecured, long term / short term, dispute resolution process and so on). Therefore, there is an intelligible differentia between the two which has a direct relation to the object of the Code, i.e. maximum recovery while preserving the corporate debtor as a going concern.

(ii)  No Voting Rights

When dealing with the issue of operational creditors not having voting rights in the Committee of Creditors (‘CoC’), the SC referred to the Report of the Bankruptcy Law Reforms Committee and the Report of the Insolvency Law Committee and observed that financial creditors, i.e., banks and financial institutions, are best equipped to assess the viability and feasibility of the business of the corporate debtor; whereas operational creditors are only involved in the recovery of amounts and are typically unable to assess the viability and feasibility of the business.

(iii)  Notice and Hearing

On the issue of notice and hearing, the SC referred to various provisions of the Code and its judgement in Innoventive Industries Ltd. v. ICICI Bank[1]. The SC observed that a corporate debtor is served with a copy of the application with the adjudicating authority and has the opportunity to file a reply and be heard. The Code prescribes penalties for furnishing false information and for fraudulent or malicious initiation of proceedings. Further, a financial creditor has to prove ‘default’ as opposed to an operational creditor who has to merely ‘claim’ a right to payment of liability or obligation in respect to the debt which may be due.

Upon bearing this aspect in mind, the difference between triggering an insolvency resolution process by financial creditors under Section 7 and by operational creditors under Sections 8 and 9 of the Code becomes clearer.

(iv)  Safeguards for Operational Creditors

The SC further noted that while looking into the viability and feasibility of resolution plans that are approved by the CoC, tribunals always examine whether or not the operational creditors were given roughly the same treatment as the financial creditors and whether plans have been modified such that the rights of the operational creditors are safeguarded. Further, the operational creditors are required to be paid liquidation value at the minimum. The amended Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 further strengthens the rights of operational creditors by providing priority in payment over financial creditors.

2.    Constitutional Validity of Settlement Post Admission [Section 12A]

On settlement of proceedings under the Code post initiation of corporate insolvency resolution process under Section 12A, the SC observed that the proceedings under the Code are a collective proceeding and therefore, the body which is to oversee the resolution process should be consulted before any corporate debtor is permitted to settle its debt. As a result, the SC deferred to legislative intent on the requirement of 90% voting share of the CoC for approval or withdrawal of application. It was further clarified that between the initiation of the insolvency resolution process and the constitution of the CoC, applications for withdrawal or settlement are to be made to the NCLT under Rule 11 of the National Company Law Tribunal Rules, 2016. It further clarified that if the CoC arbitrarily rejects a just settlement and/or withdrawal claim, the National Company Law Tribunal (‘NCLT’), and thereafter, the National Company Law Appellate Tribunal (‘NCLAT’) can set aside such decision under Section 60 of the Code.

3.    Persons not Eligible to be Resolution Applicant [Section 29A and Section 35(1)(f)]

Section 29A of the Code declares certain persons as not eligible to be resolution applicants and the liquidator is also barred from selling property or actionable claims of the corporate debtor to such persons[2]. The constitutionality of the provision was challenged on the ground that Section 29A(c) is not restricted to malfeasance and is retrospective and, therefore, arbitrary.

The SC clarified that categories of persons who are held ineligible from submitting a resolution plan under the section is not restricted to people who are malfeasant (such as an undischarged insolvent). Following the observations made by the SC in Arcelor Mittal India Private Limited v. Satish Kumar Gupta[3], the SC held that a promoter or any resolution applicant has no vested right to apply for being considered as a resolution applicant.

It is settled law that a statute is not retrospective merely because it affects existing rights; nor is it retrospective merely because a part of the requisites for its action is drawn from a time antecedent to its passing. On the issue of time period of one year provided in Section 29A(c), the SC observed that the primary basis for Section 29A lies in the fact that a person who is unable to service its own debts for such a long period of time is unfit to be a resolution applicant. It referred to circulars issued by the Reserve Bank of India which grant a long grace period to persons unable to pay debts, before an asset is classified as a non-performing asset.

Related Party and Relatives

While dealing with the concept of ‘related parties’ and ‘relatives’ under the Code, the SC has, however, read down this Section to provide that in relation to ‘connected persons’ it should only be persons who are connected with the business activity of the resolution applicant who are disqualified under Section 29A, rather than the original scope, which covered all ‘connected persons’.

4.    Distribution of Assets in Liquidation [Section 53]

The challenge to Section 53 on the ground that operational creditors are subordinate to all other creditors, including other unsecured financial creditors, in the liquidation process was rejected. The SC observed that the reason for differentiating between secured financial debts and unsecured operational debts is the relative importance of the two types of debts when it comes to the object sought to be achieved by the Code. Repayment of financial debt infuses capital in the economy.

With reference to workmen dues, which are also unsecured, it was observed that they have traditionally been placed above most other debts. Unsecured debts are of various kinds, and as long as there is some legitimate interest sought to be protected, having relation to the object sought to be achieved by the statute in question, Article 14 does not get infringed.

5.    Other Key Observations

  • The exemption granted to micro, small and medium enterprises under section 29A is valid. The rationale for excluding such industries from the eligibility criteria laid down in Section 29A(c) and 29A(h) is because in the case of MSME industries, other resolution applicants may not be forthcoming, which may inevitably lead to liquidation and not resolution.
  • The resolution professional is a facilitator of resolution plans whose administrative functions are overseen by the CoC and the NCLT. Therefore, it only has administrative and no quasi-judicial powers. On the other hand, when the liquidator ‘determines’ the value of claims admitted under Section 40, such determination is a ‘decision’, which is quasi-judicial in nature.
  • Circuit benches of the NCLAT are to be established by the Union of India within 6 months from the date of the order.
  • The NCLT and NCLAT must function under the Ministry of Law and Justice and not the Ministry of Corporate Affairs and the executive should follow the earlier judgements of the Court in this regard.
  • The constitutional challenge to the Code based on information utilities being private bodies and use of their records as conclusive evidence of default was rejected by the Court. It was noted that such evidence is only prima facie evidence of default, which is rebuttable by the corporate debtor and further referred to the requirements of authentication and verification by the corporate debtors.

[1] (2018) 1 SCC 407
[2] Section 35(1)(f) of the Code.
[3] Civil Appeal Nos. 9401-9405/2018, decided on October 4, 2018.

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A Look Back at 10 Years Of CCI’s Penalties

Published In:Inter Alia Special Edition Competition Law February 2019 [ English ]

Introduction

The behavioural provisions of Competition Act, 2002 (‘CA02’), i.e., Section 3 relating to anti-competitive agreements and Section 4 relating to abuse of dominant position, were operationalised on May 20, 2009. Section 27 of CA02 empowers Competition Commission of India (‘CCI’) to impose penalties on any person or enterprise violating these provisions. Given the passage of nearly a decade since the behavioural provisions of CA02 were operationalised, this article attempts to analyse the penalties levied by CCI.

Types of Penalties that CCI may Impose

Section 27 of CA02 empowers CCI to use the following metrics to impose penalties:

(i)      For vertical restraints and abuse of dominant position: penalty of up to 10% of the average turnover for the last three preceding financial years upon the infringing person or enterprise (‘Average Turnover Metric’); and

(ii)     For cartels:

(a)     penalty of up to 10% of the average turnover for the last three preceding financial years upon the infringing person or enterprise (‘Cartel Average Turnover Metric’); or

(b)    penalty of up to three times of the profit of the infringing producer, seller, distributor, trader, or service provider for each year of the continuance of cartel or 10% of its turnover for each year of the continuance of cartel, whichever is higher (‘Cartel Profit Metric’).

Further, Section 48 of CA02 also allows CCI to penalise individuals in-charge of and responsible to the enterprise for the conduct of the business of the enterprise or any a director, manager, secretary or other officer of the enterprise whose consent, connivance, or negligence resulted in the contravention by the enterprise.

A Look at the Penalties on Enterprises in relation to Cartels

CCI imposed its first penalty on May 25, 2011[1] – two years after the enforcement of the behavioural provisions. A review of the 55 decisions issued by CCI in relation to cartels so far[2] shows that lowest penalty imposed by CCI on an enterprise in the last decade is approximately INR 15,000 (approximately US$211[3])[4] and the highest penalty imposed by CCI on an enterprise is INR 1,323.6 crores (approximately US$186.06 million), with the highest cumulative being approximately INR 6,300 crores (approximately US$885.58 million).[5]

A further analysis indicates that CCI prefers to use the Cartel Average Turnover Metric, having done so in approximately 80% of the cases. CCI has started imposing penalties using the Cartel Profit Metric only recently, having used it in only 6 out of the 55 aforementioned cases.

It is also noteworthy that while CCI has not hesitated to use the highest possible Cartel Average Turnover Metric of 10% (25 cases), its decisions do not provide any rationale for meriting imposition of high penalties on these enterprises. However, a visible pattern apparent is that CCI has imposed the highest possible Cartel Average Turnover Metric in cases where the absolute value of the turnover of the enterprise was relatively low. Accordingly, despite the use of the highest possible metric, the final penalty amount in each of these cases was less than/approximately INR 1 crore (approximately US$140,000).

When using the Cartel Profit Metric to determine penalty, CCI has only gone up to two times the profits of the enterprise over the last three years and has not imposed the maximum possible penalty of up to three times the profits of the enterprise in the last three years.

Based on the nature of offence, CCI has consistently used a higher Cartel Average Turnover Metric in cases involving limitation of production, with the average being approximately 9.5%. CCI has used a broad range of 3%-10% when using the Cartel Average Turnover Metric to determine penalties in price-fixing cases.

A leniency regime was introduced in India in 2009.[6] CCI has issued five decisions involving varying reductions in penalty from 20%-100%, pursuant to this regime in the last two years. However, CCI’s decisions do not detail the rationale for the reduction in penalty. For instance, in Brushless DC Fans case[7], CCI granted a penalty reduction of 75% to the first applicant (who was eligible for a reduction of up to 100%). CCI’s reasons for granting a lesser reduction were: (a) the applicant approached CCI at a later stage in investigation; and (b) CCI already possessed some evidence. However, it is not clear why the CCI chose to reduce the penalty by 75% in particular rather than, for instance, 85% or even 70%.

Analysis of Abuse of Dominance (‘AoD’) Penalties

In AoD cases, CCI is only empowered to use the Average Turnover Metric. A review of CCI orders relating to AoD suggests that CCI has imposed fines in fewer AoD cases, as compared to cartels – a total of only 16 orders.[8] The lowest penalty imposed by CCI is INR 7 lakh (approximately US$9,840).[9] The lower figure was possibly on account of the recent decision of the Supreme Court of India (‘Supreme Court’) clarifying that penalties must be calculated only on the basis of relevant turnover.[10] The highest penalty imposed by CCI on an enterprise, Tata Motors, is INR 1,346.46 crores[11] (approximately US$189.27 million as of January 2019), with the highest cumulative penalty being nearly INR 3,000 crores (approximately US$421.7 million) in the same CCI decision.[12] Further, unlike cartel cases, CCI has used the highest possible Average Turnover Metric of 10% sparingly (only 2 out of 16 cases). In one such case,[13] CCI noted that the ‘quantum of penalties imposed must correspond with the gravity of the offence and the same must be determined after having due regard to the mitigating and aggravating circumstances of the case’. However, CCI decision failed to apply this test to the facts of the case. The table below also shows the penalty imposition trend based on allegations against the enterprise:

AllegationNumber of casesLowest penalty percentageHighest penalty percentageAverage
Discriminatory pricing51% of average turnover7% of average turnoverapproximately 3.6%
Discriminatory conditions1NA5% of average turnover5%
Denial of market access24.48% of average turnover6% of the average turnoverapproximately 5.24%
Multiple allegations82% of average turnover10% of average turnoverapproximately 5.38%

As may be discerned from the table above, CCI has usually imposed higher penalties in cases involving multiple allegations of AoD. A review of all the penalties imposed by CCI in AoD cases reveals that the average penalty imposed by CCI has been 4.78% of the average turnover of the enterprise for the preceding three years.

Penalties on individuals

CCI first imposed penalties on individuals in 2014[14] – approximately three years after it began imposing penalties on enterprises for contravention of the provisions of CA02. The penalties imposed on individuals largely mirror the penalties imposed on the corresponding enterprises in the same case and are based on the individuals’ income statements. It is noteworthy that CCI has so far not imposed penalties on individuals in AoD cases.

Conclusion

CCI has been imposing penalties for over a decade. Its decisions during this period should have yielded some trends and guidance on its methodology in calculating the appropriate penalty level. Unfortunately, the analysis does not provide much clarity. CCI’s orders also do not provide any reasoning on the parameters applied by CCI in choosing the metric to calculate fines or calculating the quantum of the fine. Thus, it is imperative that CCI issues clear guidelines detailing (i) how it chooses the appropriate metric to impose fines; and (ii) how it calculates the quantum of the fine. Such guidelines would encourage more leniency applications by giving businesses greater certainty on how the quantum of penalty and any reductions to it will be calculated and will also be instrumental in safeguarding due process.

[1] FICCI – Multiplex Association of India v. United Producers/Distributors Forum, Case Number 01 of 2009.
[2] This number reflects the final decisions issued by CCI i.e. where cases were remanded back to CCI, this analysis only takes into account the final penalty imposed by CCI. This analysis does not take into account the sole CCI decision relating purely to vertical restraints. Further, the data in this article only reflects cases published on CCI’s website until January 11, 2019.
[3] All US$ figures are as of January 2019.
[4] M/s Arora Medical Hall Ferozpur v. Chemists & Druggists Association Ferozpur, Case Number 60 of 2012.
[5] Builders Association of India v. Cement Manufacturers’ Association, Case Number 29/2010. CCI issued its first decision on June 20, 2012, which was remanded by the Competition Appellate Tribunal on procedural grounds. Subsequently, CCI reissued its decision on August 31, 2016 albeit with the same penalties.
[6] Section 46 of CA02 provides an opportunity to producer, seller, distributor, trader or service provider included in the cartel to approach CCI and claim a reduction in the penalty by making full and true disclosure in respect of the alleged violations. CCI (Lesser Penalty) Regulations, 2009 provide detailed guidelines in this respect.
[7] In Re: Cartelisation in respect of tenders floated by Indian Railways for supply of Brushless DC Fans and other electrical items, Suo Moto Case Number 03 of 2014.
[8] This number reflects only the final AoD-related decisions issued by CCI i.e. where cases were remanded back to CCI, this analysis only takes into account the final decisions issued by CCI.
[9] Hemant Sharma v. All India Chess Federation, Case Number 79 of 2011.
[10] In Excel Crop Care Limited v. Competition Commission of India, Civil Appeal Number 2480 of 2014 (‘Excel Crop’), the Supreme Court held that for multi-product companies, the penalty provisions of CA02 apply to the turnover generated from the product/service at issue. The Supreme Court further held that including all products’ turnover (which were not a part of the arrangement/cartel) for the purpose of imposition of penalties is not justified. This principle was then adopted by the CCI in its subsequent decisions.
[11] As Tata Motors was penalised prior to the Supreme Court’s decision in Excel Crop, the penalty was computed on the basis of its total turnover and not the relevant turnover.
[12] Shri Shamsher Kataria v. Honda Siel Cars India Limited, Case Number 03 of 2011.
[13] House of Diagnostics LLP v. Esaote S.p.A, Case Number 09 of 2016.
[14] M/s Arora Medical Hall Ferozpur v. Chemists & Druggists Association Ferozpur, Case Number 60 of 2012.

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NCLT dismisses Efforts from Erstwhile Promoters to Once Again Drag Bhushan Steel into Insolvency, Post Approval of Tata Steel’s Resolution Plan

Background

The Hon’ble National Company Law Tribunal, Principal Bench (‘Adjudicating Authority’) has, by way of its judgment dated February 26, 2019, dismissed a petition filed by Vistrat Real Estates Private Limited (‘Vistrat’) against Bhushan Steel Limited (now known as Tata Steel BSL Limited) (‘BSL’) under Section 9 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’). The judgment also imposes a cost of ₹ 50,000 (approx. US$ 700) on Vistrat. Vistrat has been found to be a related party to the erstwhile promoters of BSL, including Mr. Neeraj Singal and Mr. Brijbhushan Singal (‘Singals’).

Earlier, in the largest resolution under the IBC, the Adjudicating Authority had, by way of its judgment dated May 15, 2018 (‘Approval Order’), approved the resolution plan (‘Plan’) submitted by Tata Steel Limited (‘TSL’) in the corporate insolvency resolution process (‘CIRP’) of BSL, which had been initiated on July 26, 2017. The order of the Adjudicating Authority was also subsequently confirmed by the Hon’ble National Company Law Appellate Tribunal. This had resulted in successful resolution of accumulated debt of BSL amounting to approximately ₹ 58,000 crores (approx. US$ 8 billion) and realization by banks of approximately ₹ 36,000 crores (approx. US$ 5 billion). This has also resulted in the revival of BSL in the control of TSL (through its subsidiary Bamnipal Steel Limited).

Brief Facts

Shortly after the Approval Order, Vistrat filed a petition under Section 9 of the IBC seeking initiation of CIRP against BSL. The following facts are noteworthy:

(a)    Vistrat is a private limited company registered in India. The erstwhile promoters of BSL, the Singals, were the signatories to the Memorandum of Association of Vistrat. There are various other connections between Vistrat and the erstwhile promoter group of BSL.

(b)      Vistrat owns premises in New Delhi, which was leased to BSL pursuant to a memorandum of lease (‘MoL’) dated May 1, 2015. The MoL acted as a lease discounting facility for a loan availed by Vistrat from IndusInd Bank (‘IndusInd’). The MoL provided Vistrat an option of termination with the prior approval of IndusInd. However, no express right of termination was provided to BSL.

(c)      During the CIRP of BSL, the Resolution Professional (‘RP’) had, pursuant to an independent valuer’s report, found the terms of the MoL to be onerous and leading to value leakage. Since the lease rental under the MoL was above the market rate, during the CIRP of BSL the RP had paid a reduced amount to Vistrat towards lease rental for the premises.

(d)      The Plan approved by the Adjudicating Authority recognized the MoL as a value leakage transaction and provided for its termination. The Plan also provided for no liabilities to related parties, associates and joint venture of the erstwhile promoters of BSL. Pursuant to the change in control of BSL upon the successful completion of the CIRP, TSL immediately terminated the MoL and handed over possession of the premises to Vistrat on September 10, 2018.

(e)       The petition claimed a default in payment of lease rental by the RP of BSL for the period during the CIRP, for which a reduced lease rental amount was paid to Vistrat.

Highlights of the Judgment

Some of the key highlights of the judgment are:

(a)      The Adjudicating Authority recognized the independent valuer’s report submitted by the RP and accepted the decision of the RP to pay a reduced lease rental during the CIRP period basis the same. The Adjudicating Authority also accepted that the MoL was described as a value leakage and an onerous transaction in the Plan, and the Plan provided for no liability to related parties, associates and joint ventures of BSL.

(b)      Based on facts before it, the NCLT accepted that Vistrat was a related party to BSL (prior to commencement of CIRP) and its erstwhile promoters and, thus, liabilities of BSL to Vistrat stood excluded in terms of the Plan.

(c)      The relationship between Vistrat and the erstwhile promoter group of BSL has been noted through: (i) the presence of Neeraj Singal and Brijbhushan Singal as the signatories to the Memorandum of Association of Vistrat and its initial shareholders; (ii) the authorisation in favour of the Singals to act on behalf of Vistrat, including in connection with the loan from IndusInd, and operate the loan facility, even though they were not directors of Vistrat at that time; and (iii) the transfer of shares of Vistrat to Ritu Singal (wife of Neeraj Singal) taking place less than two years prior to the commencement of CIRP of BSL. The Adjudicating Authority has held that given the fact that the Singals exercised control and were persons on whose advice / directions / instructions the directors of Vistrat were accustomed to act, coupled with Neeraj Singal’s wife being a director of Vistrat, BSL (prior to commencement of CIRP) had substantive control over Vistrat. Further, given the nature of the transaction and the timing of the transfer of shares of Vistrat being within the look-back period in respect of BSL’s CIRP, the transactions are capable of being examined during the CIRP and deemed to be preferential transactions.

(d)      Whilst there is no bar under Section 11 of the IBC from a fresh petition being filed post the Approval Order, the only course open to Vistrat was to file its claim before the RP during the CIRP. The remedy of filing of claim has been exhausted and has resulted in acceptance of Vistrat’s claim partially by the RP. The rejected claim cannot find basis for a new petition, more particularly, when (i) the Plan has even specifically excluded the claim of related parties, and (ii) BSL has terminated the MoL and handed over possession of the premises after the Approval Order.

In dismissing the petition, the judgment has taken note of various actions of the RP during the CIRP of BSL and accepted the same. Further, the Adjudicating Authority has also implemented terms of the Plan, including for termination of value leakage agreements and no liability for related party transactions, in order to hold that no amount was due to Vistrat. Finally, the Adjudicating Authority has also held that absence of a bar under Section 11 of the IBC from filing a fresh petition post the Approval Order does not permit a party to file fresh proceedings for initiating insolvency for claims which arose prior to the Approval Order. The Adjudicating Authority has recognized that in such cases, the remedy is filing of claim before the RP during the CIRP.

The judgment shows that the Adjudicating Authority is accepting the decision of the successful resolution applicant and the committee of creditors in identifying and terminating value leakage agreements. It also shows that the Adjudicating Authority is dismissing efforts from erstwhile promoters to, directly or indirectly, stall or disrupt the actions to effectively resolve a distressed company.

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Basic Instinct: A Landmark in Modern Constitutional Jurisprudence | Kesavananda Bharati v. State of Kerala (1973)

Published In:Zia Mody, 10 Judgements that Changed India (2013) [ ]

INDIA HAS OFTEN been faced with situations where its paramount democratic institutions have clashed.[1] One such run-in was the struggle for power between the judiciary and the legislature which reached its boiling point in the mid-1970s. In the backdrop of a struggle for constitutional supremacy, the Supreme Court delivered what is arguably the most monumental decision in its history on 24 April 1973. Kesavananda Bharati v. State of  Kerala [2]  (Kesavananda)  is  a  case  ‘unique  in  the  history  of international constitutional law [3] for several reasons: the anxious political circumstances [4] in which it was delivered,[5] the shift in the balance of democratic power it caused, the unprecedented number of separate opinions delivered by the court as well as the sheer length of the judgement itself.

For Kesavananda, the Supreme Court sat in judgement for the longest amount of time since its inception[6] almost five months—to determine issues pivotal to the interaction between and powers of the three conventional branches of government. The judgement, which spans nearly 800 pages and is about 420,000 [7] words long, has been named the ‘longest appellate decision’[8] of the last century. Apart from its exceptional length, Kesavananda was significant in that the Supreme Court ascribed to itself the function of preserving the integrity of the Indian Constitution. The ‘basic structure’ doctrine formulated by the court represented the pinnacle of judicial creativity [9] and set a benchmark for other constitutional courts around the world, particularly in South  Asia.[10]

An analysis of Kesavananda is incomplete without a brief discussion of the cases which led up to the Supreme Court’s judgement  in 1973.

A Conservative Supreme Court: Shankari Prasad and Sajjan Singh

The struggle for the custody of the Constitution arose from questions concerning the right to property, which (until 1978) was a fundamental right under Article 31. Soon after the Constitution entered into force, agrarian land reform legislation was enacted in Bihar, Uttar Pradesh and Madhya Pradesh. Zamindars [11] thus deprived of a significant portion of their landholdings filed petitions in different high courts alleging that their fundamental right had been infringed. When the Bihar Land Reforms Act, 1950 was invalidated by the Patna High Court in 1951,[12] the Constituent Assembly (functioning then as the provisional Parliament [13]) passed the Constitution (First Amendment) Act, 1951. This amendment inserted two provisions [14] in the Constitution to insulate land reform legislation from judicial scrutiny. One of these provisions, Article 31B, created the Ninth Schedule to the Constitution (which became the subject of sustained judicial examination in several cases discussed later). Any laws inserted (through constitutional amendments) into the Ninth Schedule could not be challenged for being inconsistent with fundamental rights.

Zamindars then challenged the amendment itself in Shankari Prasad v. Union of India (Shankari Prasad).[15] One of the several grounds of challenge was that the expression ‘law’ under Article 13(2), which prohibits the Parliament from making any laws that abridge or take away fundamental  rights,  included  not only ordinary laws, but also amendments. If the court accepted this  contention  it  would  have  implied  that  Part  III  of  the Constitution (which deals with fundamental rights) could never be amended by the Parliament so as to take away or abridge fundamental rights. However, a five-judge bench of the Supreme Court unanimously rejected this argument, asserting that the constitutional scheme provided for a clear demarcation between ‘ordinary law, which is made in exercise of legislative power, and constitutional law, which is made in exercise of constituent power’[16] The  net  effect  of  the  Supreme  Court’s  decision  in Shankari Prasad was that amendments to the Constitution could not be reviewed by courts.

In Sajjan Singh v. State of Rajasthan (Sajjan Singh),[17] the validity of the Constitution (Seventeenth Amendment) Act, 1964—which inserted forty-four statutes into the Ninth Schedule—was challenged before another five-judge bench of the Supreme Court. Unlike in Shankari Prasad, the Parliament’s right to amend fundamental rights was not questioned in Sajjan Singh. Instead, the case challenged the Parliament’s failure to follow the procedure prescribed to amend the Constitution.[18] As was the case in Shankari Prasad, this petition was also dismissed unanimously by the judges. However, while three of the five judges agreed that fundamental rights could not be amended, Justices Mohammad Hidayatullah and Janardan Raghunath Mudholkar expressed doubts about the correctness of the view adopted in Shankari Prasad that an amendment to the Constitution was not ‘law’ under Article 13(2) of the Constitution and therefore could not be reviewed by courts. In fact, Justice Mudholkar also sowed the seeds for the basic structure doctrine adopted in Kesavananda when he referred to the ‘intention of the Constituent Assembly to give permanency to the basic features of the Constitution’[19] and said: ‘It is also a matter for consideration whether making a change in a basic feature of the Constitution can be regarded merely as an amendment or would it be, in effect, rewriting a part of the Constitution.’[20]

Cordoning Off Fundamental Rights from Constitutional Amendment

Could the Parliament amend fundamental rights? This issue was raised yet again in I.C. Golak Nath v. State of Punjab (Golak Nath).[21] The petitioners—again, landowners deprived of their surplus landholdings under state land reform legislation— challenged the validity of the First, Fourth and Seventeenth Amendments.[22] The Supreme Court constituted an eleven-judge bench to examine, yet again, whether constitutional amendments could be passed to take away or abridge fundamental rights and whether courts could review such amendments. By a slender majority of 6:5, the Supreme Court ruled that the distinction between constituent power and legislative power laid down in Shankari Prasad was unfounded. In other words, constitutional amendments fell within the purview of ‘law’ under Article 13(2) and courts could review them if they violated the fundamental rights of citizens. The court found fundamental rights to be so sacrosanct and transcendental that even a unanimous vote of all members of the Parliament would not be sufficient to weaken or undermine them.[23]

Though the court asserted that fundamental rights are inviolable, it also admitted that applying this decision across the board to earlier constitutional amendments would lead to chaos, confusion and serious inequities. Therefore, it decided to employ the American doctrine of ‘prospective overruling’, based on which its decision would apply only to subsequent constitutional amendments. So, the petitioners in Golak Nath got no relief, but, in the words of the court in Kesavananda, ‘left the court with the consolation that posterity will enjoy the fruits of the walnut tree planted by them’[24]

The application of the doctrine of prospective overruling in Golak Nath was questionable. To borrow Seervai’s words, the doctrine ‘had no advocate in Golak Nath’s case and it had no defender in Kesavananda’s case’.[25] The doctrine’s shortcoming is that the court applies a principle to the party before it, but gives the party no relief. All the court can say is that, irrespective of what happens in the case before it, a new rule is laid down for the  future—a  function  that  sounds  perilously  similar  to that performed by the Parliament. If the court assumes jurisdiction for an exclusively ‘future’ function as opposed to a ‘present– future’ jurisdiction, it could be excessively anti-democratic and counter-majoritarian and could damage (what remains of) the democratic balance envisaged in our Constitution. In the United Kingdom, the House of Lords has recognized that prospective overruling amounts to a ‘judicial usurpation of the legislative function’,[26] while a court of appeal in Canada has stated that ‘the most cogent reason for rejecting this technique is the necessity for our courts to maintain their independent, neutral, and non-legislative role’.[27]

In Golak Nath, for the first time, the Supreme Court based its decision purely on political philosophy.[28] On legal principles, Golak Nath received little acceptance from constitutional scholars. Both academic research and public opinion were driven against the Supreme Court’s argument.[29]

Eventually, the Parliament sought to reconcile the question of whether constitutional amendments were ‘law’ under Article 13 by passing the Constitution (Twenty-fourth Amendment) Act, 1971 and inserting Article 13(4) to expressly exclude constitutional amendments from the ambit of Article 13. Through this amendment, the Parliament nullified the Supreme Court’s decision in Golak Nath and ensured that amendments to the Constitution could once again not be reviewed by courts even if they violated the fundamental rights of citizens

Kesavananda Bharati: The Lead-Up

His Holiness Swami Kesavananda Bharati Sripadagalvaru was the head of Edneer math[30] in Kerala. The Kerala Land Reforms Act, 1963 had affected the property of his religious institution, leading him to challenge state land reform legislation in Kerala in 1970.[31] While the proceedings were under way, the Parliament passed the Constitution (Twenty-ninth Amendment) Act, 1972, which inserted certain land reform laws[32] to the Ninth Schedule and adversely affected Swami Kesavananda. Nani Palkhivala, the petitioner’s counsel, seized the opportunity and challenged the constitutional validity of the Twenty-fourth, Twenty-fifth and Twenty-ninth Amendments to the  Constitution.[33]

Here is a background to each of the amendments that was challenged:

1.       According to the Twenty-fourth Amendment (enacted in 1971 to nullify Golak Nath), constitutional amendments were not ‘law’ under Article 13, and the Parliament had the power to amend, vary or repeal any provision of the Constitution.

2.       The Twenty-fifth Amendment (enacted in 1971) gave Articles 39(b) and 39(c)[34]—described by Granville Austin as the most ‘classically socialist’[35] provisions in the directive principles of state policy—precedence over the fundamental rights to equality, the seven freedoms[36] and property.[37] It also took away the power of the courts to decide whether a law was actually passed to further the policy laid down in these Articles.

3.         The Twenty-ninth Amendment (enacted in 1972) added two land reform statutes to the Ninth Schedule of the Constitution.

The Supreme Court had to reconsider its decisions in Shankari Prasad, Sajjan Singh and Golak Nath. The most critical questions it dealt with were regarding how much amending power was granted to the Parliament under Article 368 and whether that power was unfettered, or could courts review amendments? The petitioners in Kesavananda contended that the challenged amendments nullify some of the most cardinal principles of our Constitution and the Parliament could not draw authority from the Constitution to alter those very principles. On the other hand, the government argued that there was no limit to the Parliament’s amending power under Article 368—the Parliament could do anything short of repealing the Constitution itself. Hence, it was relevant for the Supreme Court to examine the Parliament’s amending power to ascertain the constitutional validity of the amendments.

Thirteen judges of the Supreme Court sat en banc [38] for almost five months to consider questions that stood to define constitutionalism and the exercise of democratic power in India.

‘Basic Structure’ Doctrine: Judging the Constitutionality of Constitutional Amendments

The court issued as many as eleven separate opinions, with each judge expressing divergent views on every issue, implying that there is no clear indication of what the Supreme Court actually held.[39] For the first time in the court’s history, the judges gave a summary of their decision, which four judges refused to sign because they said it was inaccurate [40]

The views of the majority on each issue were as follows:

1.       The Twenty-fourth Amendment to the Constitution was valid.

2.       The Twenty-fifth Amendment to the Constitution was valid, except for the clause ousting the courts’ jurisdiction.

3.       The Twenty-ninth Amendment to the Constitution was valid.

4.     The Golak Nath judgement, which had asserted that fundamental rights could not be taken away or nullified by the Parliament, was overruled.

5.       There were no implied limitations on the Parliament’s power to amend the Constitution under Article 368.

However, the court’s most significant decision, made by a thin majority of 7:6, was that although the Parliament had the power to amend any part of the Constitution, it could not use this power to alter or destroy the ‘basic structure’—or framework—of the Constitution. In other words, adopting a teleological approach,[41] the Supreme Court held that the expression ‘amendment’ did not encompass defacing the Constitution such that it lost its identity.[42] All constitutional amendments enacted after the date on which the Kesavananda judgement was delivered would have to pass the ‘basic-structure filter’ created by the Supreme Court. The court empowered itself to judge the constitutionality of amendments and revoke any that compromised the essential features  of  the Constitution.

And the Basic Features Are . . .

German jurist Professor Dieter Conrad—perhaps influenced by radical constitutional amendments in Germany during  the Weimar regime—is responsible for the genesis of the basic structure doctrine.[43] Coming to the judgement of the Supreme Court, there was no unanimity of opinion on what the basic structure was. Each judge in the majority prepared a list of what (according to them) comprised the basic structure—some judges [44] accompanied this with a rider that the list they provided was not exhaustive.

Chief Justice Sikri listed the following features as encompassing the basic structure of the Constitution: supremacy of the Constitution, republican and democratic form of government, secular character of the Constitution, separation of powers between the legislature, executive and judiciary, and the federal character of the Constitution.

Justices Shelat and Grover reproduced, broadly, a similar list, with the following two additional elements: dignity of the individual (secured by fundamental rights) and the mandate to build a welfare state (in the directive principles of state policy), and the unity and integrity of the nation.

Justices Hegde and Mukherjea listed: sovereignty of India, democratic  character  of  India’s  polity,  unity  of  the  country, essential features of the individual freedoms secured to the citizens, and the mandate to build a welfare state and an egalitarian society.

Justice Jagmohan Reddy’s basic features comprised: sovereign democratic republic, parliamentary democracy and the three organs of the state.

In delineating the basic structure of the Constitution, most judges relied upon the Preamble, the fundamental rights and the directive principles of state policy.[45] It is very difficult to say what these lofty principles constituting the basic structure really mean. The only certainty is that judges will be free to mould the ‘basic structure’ corpus to emasculate any constitutional amendment that strikes at the ‘spirit of Indian democracy’. Upendra Baxi’s words in 1974 that Kesavananda was ‘the Indian Constitution of the future’ turned out to be near prophetic.[46]

Observations on the Supreme Court’s Judgement in Kesavananda

While the Supreme Court’s decision in Golak  Nath  was the first significant sign of judicial supremacy in constitutional interpretation, Kesavananda firmly established that the Supreme Court was unmatched in authority when it came to constitutional matters. In Kesavananda, the Supreme Court made a strategic retreat over amendments to fundamental rights,[47] but significantly broadened the scope of its judicial review by assuming the power to scrutinize all constitutional amendments—not just those affecting fundamental rights. If the Parliament had an unfettered right to amend the Constitution, the Supreme Court had a coextensive power to review and invalidate any amendment that destroyed its basic structure.[48] To an extent, the majority of judges who recognized the basic structure doctrine in Kesavananda sought to achieve a win–win situation for the Parliament and the Supreme Court.

Kesavananda recognizes the distinction between the drafting and the working of the Constitution. Can representative bodies, whose amending power is untrammelled, virtually redraft the Constitution on the pretence of making amendments to it? The Supreme Court answered in the negative. This is significant on issues where the government’s stance is anti-majoritarian—where the will of the people’s elected representatives does not represent the will of the people. Under the guise of making constitutional amendments, can the Parliament alter the Constitution in a way that is opposed to the nation’s most basic values—secularism, representative democracy and independence of the judiciary— even though the people do not want such changes? By limiting the Parliament’s power to amend the Constitution, the Supreme Court pre-empted such a scenario and ensured that the people’s representatives—meant to be servants of the Constitution— would not become its masters.[49] The decision in Kesavananda ensured that the Parliament, which holds its constituent power in trust for the people of India, can never change the fundamental bases of India. The Parliament’s power to amend is not limitless and is always coextensive with that of the people.[50]

The basic structure doctrine postulated in Kesavananda has been credited with protecting the Indian state from collapsing like many of its South Asian counterparts, whether through totalitarian rule, military coups or other extra-constitutional means.[51] It has also protected India from moving in a ‘sharply socialist direction’.[52]

Both Kesavananda and Golak Nath were decisions taken by a judiciary weary of the Parliament subverting India’s constitutional and democratic structure. These decisions were the kind where judges primarily decided on the ends, and then set out to discover the legal means to achieve those predetermined ends. Although Justices Hedge and Mukherjea held that ‘no single generation can bind the course of the generation to come’, this is what the Kesavananda judgement did, in a way. By finding certain parts of the Constitution to be basic, indestructible and immune, even from constitutional amendments, the Supreme Court held that certain parts of the Constitution bound successive parliaments in India in perpetuity. Yet, the power to determine the parts of the Constitution that qualify as ‘basic’ rests with the Supreme Court, whose interpretation is fluid—the court being a perpetual and indissoluble institution. It is through this interesting arrangement that the stability of basic values is tinged with a little flexibility, and the Supreme Court becomes the safety valve that decides when stability is shaken too much for the well- being of the nation. It also ensures that the Supreme Court has the final say on what form our Constitution takes at any given point of time, thus giving the Supreme Court the ‘custody of the Constitution’ and establishing the Supreme Court’s supremacy in the realm of the interpretation of the Constitution.

Criticism of the Supreme Court’s Verdict

One of the most serious criticisms of Kesavananda is that the basic structure doctrine finds no mention in the language of the Constitution[53] and opposes the original intent of the Constituent Assembly. Sathe has even described the judgement as an ‘attempt to  rewrite  the  Constitution’.[54]  Although  some  authors  have argued that Kesavananda is supported by textual constructs,[55] the link between the constitutional text and the basic structure doctrine is very remote. Indeed, the doctrine has very little to  do with what is written in the Constitution. The nexus between the doctrine and the Constitution as it has been codified can be attributed more accurately to spirit than to    text.

In fact, Golak Nath finds more support from the constitutional text than Kesavananda. Unlike the case in Kesavananda, where the court inferred a power to review constitutional amendments from the basic structure doctrine by holding constitutional amendments  as  ‘law’  under  Article  13  of  the  Constitution, the  court  assumed  review  jurisdiction [56]  through  a  more direct and textually legitimate (though questionable) route  in Golak Nath

Apart from this, Kesavananda has been condemned for being too lengthy, thus causing uncertainty about what the eleven opinions collectively mean [57] and what the basic structure actually comprised. The judgement has also been described as one that provides  an  ‘outstanding  study  on  lack  of  consensus’.[58] The danger with the ambiguity of the basic structure doctrine is that each judge’s conception depends on his personal preferences and virtually vests amending power in judges,[59] resting on variable judicial perceptions and majorities.[60]

The basic structure doctrine has also been sharply criticized as being counter-majoritarian, and one that causes a democratic imbalance since it gives inordinate power over constitutional amendments to the Supreme Court,[61] an unelected and self- appointed body. Some have gone to the extent of saying that acts of judicial temerity, such as in Kesavananda, can damage democratic principles as much as the totalitarian experiments of Indira Gandhi,[62] although this seems hyperbolic. However, the  Supreme  Court’s  message  in  Kesavananda  was  clear—if any constitutional authority was going to wield substantial power over constitutional interpretation inconsistent with the traditional democratic process, it would be the judiciary.

The Supersession and the Emergency

The then Chief Justice of India, S.M. Sikri was due to retire  a day after the decision in Kesavananda—on 25 April 1973; the government was yet to announce his successor. As per convention, the senior-most judge of the Supreme Court is generally appointed as the Chief Justice of India; were this convention followed, the Chief Justiceship would have been accorded to Justice Shelat followed by Justices Grover and Hegde. However, angered with the Kesavananda decision, the government superseded these three judges who had ruled against it in Kesavananda. Instead, it appointed Justice A.N. Ray, who had ruled in its favour, as the Chief Justice of India. This undermined the long-standing practice of appointing the senior-most judges of the Supreme Court. Justices Shelat, Grover and Hegde resigned in protest and the Indira Gandhi government’s attempt at muzzling judicial independence in the lead-up to the Emergency began in earnest.

Soon after, Raj Narain, Indira Gandhi’s political adversary, challenged her election to the Lok Sabha from the Rae Bareli constituency in the Allahabad High Court. He alleged that Indira Gandhi had committed corrupt practices under the Representation of the People Act, 1951. Accepting this contention,  the  court  voided  Indira  Gandhi’s  election.  On appeal to the Supreme Court, the judgement of the Allahabad High Court was stayed, and it was held that Indira Gandhi could continue to function as the Prime Minister of India on the condition that she would not draw a salary and would not speak or vote in the Parliament. The fallout of this judgement was that a national Emergency was proclaimed in India[63] on 25 June 1975. It lasted twenty-one months.

During the pendency of the appeal, the Parliament hurriedly passed the Constitution (Thirty-ninth Amendment) Act, 1975, placing the election of the President, Vice-President, Prime Minister and Speaker of the Lok Sabha beyond the scrutiny of courts. The amendment was meant to nullify the judgement of the Allahabad High Court so as to shield Indira Gandhi’s election from being challenged in the Supreme Court. As a result, in Indira Nehru Gandhi v. Raj Narain,[64] Raj Narain challenged the validity of the constitutional amendment itself—the first time a constitutional amendment was challenged not in respect of the right to property or social welfare, but with reference to an electoral law.[65] By a majority of 4:1, the Supreme Court struck down the amendment, recognizing that it vitiated certain fundamental tenets forming part of the basic structure of the Constitution, including free and fair elections and the rule of law. Although four of the five judges had not accepted the basic structure argument in Kesavananda, they recognized that they were bound by the decision and applied the theory in this case. However, Indira Gandhi’s election was not affected, since the court upheld retrospective amendments to the electoral laws.

The Unsuccessful Attempt to Review Kesavananda

In 1975, in the midst of the national Emergency declared by the Indira Gandhi-led Congress government, the Chief Justice of India A.N. Ray constituted a thirteen-judge bench to review the Supreme Court’s decision in Kesavananda. The bench was dissolved after two days of hearings and much of what transpired was shrouded in secrecy. The reporting of courts’ judgements by the press was also restricted at the time.[66] Only those lawyers and judges who were present in the courtroom at that time, therefore, could give accounts of what had occurred.

Austin has described this disintegration of the bench (which was to review Kesavananda) as ‘the most critical moment’ for the Constitution and Supreme Court since the original decision in Kesavananda.[67] One of the principal arguments for the review of Kesavananda was that the basic structure doctrine was nebulous, and every judge had different opinions about what the doctrine encompassed.[68] The Supreme Court rightly chose uncertain democracy over certain tyranny.

The Last Effort at Parliamentary Supremacy

During the Emergency, the Parliament passed the most controversial and revolutionary of the constitutional amendments—the  Constitution  (Forty-second  Amendment) Act, 1976 (the Forty-second Amendment Act). Enacted to eliminate ‘impediments to the growth of the Constitution’,[69] the amendment virtually remoulded the original Constitution through sweeping changes—substantive and  symbolic—such as: the insertion of Part IVA into the Constitution, which highlighted the ‘fundamental duties’ of citizens, enabling the protection of any laws that gave effect to the directive principles under Article IV of the Constitution, insertion of the expressions ‘socialist’ and ‘secular’ into the Preamble to the Constitution, amendment of Article 368 nullifying the decision in Kesavananda that  the  Parliament’s  amending  power  was  subject  to  the ‘basic structure’ limitation, and strengthening the position of the Central government vis-à-vis the state governments. This amendment was a manifestation of India’s distinct shift to the political left.

Within a couple of years of the Forty-second Amendment Act being passed, the owners of a textile mill in Karnataka challenged the government’s nationalization of their undertaking. The mill was nationalized under a statute placed in the Ninth Schedule by the Parliament. In Minerva Mills v. Union of India (Minerva Mills),[70] the petitioners challenged the validity of Section 55 of the Forty-second Amendment Act, which amended Article 368 to transform the Parliament’s amending power over the Constitution (which was limited by Kesavananda) into an unlimited one. The Supreme Court unanimously struck down the amendments to Article 368, holding that judicial review and a limited amending power were basic features of the Constitution, which, according to the judgement in Kesavananda, could not be altered, destroyed or nullified. The court’s logic was simple—if a donee was vested with limited power, it could not be permitted to exercise that very power and convert it into an unlimited one.[71] To take the aid of a simple example, if a genie grants you three wishes, it is understood that you cannot, as one of your wishes, ask for an unlimited number of wishes!

The Supreme Court’s judgement in Minerva Mills established that from the perspective of the basic structure doctrine, a minimum standard of judicial review was inviolate.[72] Minerva Mills was the last case in which the government made a concerted effort to establish parliamentary supremacy over the Constitution.[73] Having failed to scale back on the basic structure doctrine, Minerva Mills marks the beginning of an era of judicial supremacy in India, with the Supreme Court firmly entrenched as the final arbiter of constitutional interpretation in India.

The Ninth Schedule and Judicial Review

Since the insertion of the Ninth Schedule into the Constitution in 1951, 284 statutes (or segments) have come under its protection. Although it was initially meant to protect land reform legislation, the schedule now contains many statutes that have little to do with land reform—the Essential Commodities Act, 1955, the Levy Sugar Price Equalisation Fund Act, 1976, and the Bonded Labour System (Abolition) Act, 1976 to cite a few examples. In many cases, statutes or provisions of statutes which were struck down as violating fundamental rights could be protected by inserting them into the Ninth Schedule through constitutional amendments.[74]

The critical question before a nine-judge bench of the Supreme Court in I.R. Coelho v. State of Tamil Nadu (Coelho) [75] was whether after the date of the Kesavananda decision, statutes could be made exempt from the test of satisfying fundamental rights by their insertion into the Ninth Schedule. The Supreme Court held that while laws could be added to the Ninth Schedule, once Article 32 (the right to move the Supreme Court for the enforcement of fundamental rights) was triggered, they would be subjected to the test of fundamental rights, which were a part of the basic structure. The court also asserted that if any legislation added to the Ninth Schedule sought to nullify the principles of the ‘golden triangle’[76] of fundamental rights, it would be declared void. Therefore, all amendments seeking to    insert legislation into the Ninth Schedule would be subjected to a two- fold test: (1) Did they conform with the basic structure of the Constitution? and (2) Did they conform with the fundamental rights as forming a part of the basic structure under Part III of the Constitution? The second test is a natural corollary of the first. The court unanimously concluded that the government could not wantonly exploit the Ninth Schedule as the ‘black hole’ of the Constitution.

Apart from marking a significant development in the Supreme Court’s basic structure jurisprudence,[77] Coelho has preserved the supremacy of the judiciary in constitutional adjudication.

Has the Basic Structure Doctrine Outlived Its Purpose?

A hotly contested question among scholars of constitutional law is whether the basic structure doctrine, formulated at the height of an oppressive era of single-party dominance, has crossed its expiry date. In the era of coalition politics, it is very unlikely that any party will wield the power that the Indira Gandhi government exercised in the 1970s. Yet, if one had to choose between the legislature and the judiciary as the custodian of the Constitution, it would likely be the latter.

Although the Kesavananda decision does not find favour with those who have been brought up with the traditional concept of judicial review, even sceptics would admit that it was the judiciary’s rescue operation that saved Indian democracy.[78] From a practical perspective, arguments against the basic structure doctrine have been largely speculative, based on how some useful structural changes would be vitiated by its operation. Although authors have opined on the possible evils of the doctrine, it has not stalled any beneficial constitutional amendment so far and Indian courts have invoked it sparingly. Have we learnt from our mistakes? Unless we can say with conviction that we have, there is no saying that history will not repeat itself.

A hypothetical question before we close this chapter: if we accept the argument of those who oppose the basic structure doctrine, how can we discard it? Since the system of binding precedents in India rests on the principle of law that a judgement represents a decision of the entire bench of judges (not only those in the majority), another bench consisting of at least thirteen judges would have to be constituted to reconsider Kesavananda.[79] Moreover, since Kesavananda, by its very nature, cannot be overruled by the legitimate exercise of legislative power, the only other method of doing so would be through extra-constitutional means. Both of these situations seem highly improbable, at least in the near future. In any event, as a safety valve to preserve Indian democracy, the basic structure doctrine in Kesavananda should live on.

[1] Milan  Dalal,  ‘India’s  New  Constitutionalism:  Two  Cases  That  Have  Reshaped Indian  Law’,  Boston  College  International  and  Comparative  Law  Review,  vol.  31 (2008):   p. 257
[2] AIR 1973 SC 1461
[3] V.R. Jayadevan, ‘Interpretation of the Amending Clause: The Brawl Between the Spirit of Natural Law and the Ghost of Analytical Positivism—A Comparative Overview of the American and Indian Experiences’, Hamline Law Review, vol. 33 (2010): p. 243
[4] This included attempts by the Indira Gandhi-led Congress government to pass radical constitutional amendments and place intense political pressure on the Indian judiciary.
[5] In  the  words  of  Justice  Y.V.  Chandrachud,  the  case  was  fraught  with  ‘unusual happenings’ (see Granville Austin, Working a Democratic Constitution: The Indian Experience (New Delhi: Oxford University Press, 1999), p. 259)
[6] Gobind Das, ‘The Supreme Court: An Overview’ in Supreme But Not Infallible: Essays in Honour of the Supreme Court of India, eds B.N. Kirpal et al. (New Delhi: Oxford University Press, 2000), pp. 21–22
[7] Vivek Krishnamurthy, ‘Colonial Cousins: Explaining India and Canada’s Unwritten Constitutional Principles’, The Yale Journal of International Law, vol. 34 (2009): p. 207
[8] Ibid
[9] Raju  Ramachandran,  ‘The  Supreme  Court  and  the  Basic  Structure  Doctrine’  in Supreme But Not Infallible: Essays in Honour of the Supreme Court of India, eds B.N. Kirpal et al. (New Delhi: Oxford University Press, 2000), p.  108
[10] Whether or not they agreed with the decision in Kesavananda, courts in the countries neighbouring India were forced to take notice of the judgement
[11] Historically, an Indian landowner; especially one who leases land to tenant farmers.
[12] Kameshwar Singh v. State of Bihar (AIR 1951 Pat 91) (Patna High Court)
[13] Article 379 of the Constitution provided that until both houses of Parliament were duly constituted, the Constituent Assembly was to exercise the powers conferred on the Parliament by the Constitution.
[14] Articles 31A and 31B of the Constitution
[15] [1952] 1 SCR 89.
[16] Shankari Prasad v. Union of India, [1952] 1 SCR 89
[17] AIR 1965 SC 845
[18] H.M. Seervai, Constitutional Law of India, 4th ed. (New Delhi: Universal Book Traders,  1999),  p. 3110.
[19] Sajjan Singh v. State of Rajasthan (AIR 1965 SC 845)
[20] Ibid.;  also  see  Ramachandran,  ‘The  Supreme  Court  and  the  Basic  Structure Doctrine’, p. 111
[21] AIR 1967 SC 1643
[22] The Constitution (First Amendment) Act, 1951 inserted Articles 31A and 31B into Part III of the Constitution. The Constitution (Fourth Amendment) Act, 1955 amended Article 31A. The Constitution (Seventeenth Amendment) Act, 1964 further amended Article 31A and also included forty-four statutes (almost all dealing with agrarian reforms) in the Ninth Schedule to protect them from judicial review
[23] Venkatesh Nayak, ‘The Basic Structure of the Indian Constitution’, Commonwealth HumanRights Initiative, www.humanrightsinitiative.org/publications/const/the_ basic_structure_of_the_indian_constitution.pdf (accessed 31 October 2012).
[24] Kesavananda at para. 2135
[25] Seervai, Constitutional Law of India, p. 3111
[26] National Westminster Bank plc v. Spectrum Plus Limited and Others ([2005] UKHL 41).
[27] Re Edward and Edward ((1987) 39 DLR (4th) 654)
[28] Das, ‘The Supreme Court: An Overview’, pp. 19–20
[29] P.K. Tripathi, ‘Kesavananda Bharati v. The State of Kerala: Who Wins?’, Supreme Court Cases (Journal), vol. 1 (1974): p. 3
[30] A religious establishment (usually Hindu)
[31] Arvind Datar, Commentary on the Constitution of India (New Delhi: LexisNexis Butterworths Wadhwa Nagpur, 2007), pp.  2021–22.
[32] The Kerala Land Reforms (Amendment) Act, 1969 and the Kerala Land Reforms (Amendment) Act, 1971 were inserted into the Ninth Schedule. The Constitution (Twenty-ninth Amendment) Act, 1972, was passed after the Supreme Court struck down the Kerala Land Reforms (Amendment) Act, 1969 in Kunjukutty Sahib v. State of Kerala (AIR 1972 SC 2097).
[33] Granville  Austin,  ‘The  Supreme  Court  and  the  Struggle  for  Custody  of  the Constitution’ in Supreme But Not Infallible: Essays in Honour of the Supreme Court of India, eds B.N. Kirpal et al. (New Delhi: Oxford University Press, 2000), p.  6.
[34] The relevant portion of Article 39 of the Constitution reads: ‘The State shall, in particular, direct its policy towards securing . . . (b) that the ownership and control of the material resources of the community are so distributed as best to subserve the common good, (c) that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment
[35] Austin, ‘The Supreme Court and the Struggle for Custody of the Constitution’,p. 5
[36] Article  19  of  the  Constitution  specifies:  (i)  freedom  of  speech  and expression,(ii) freedom to assemble peaceably without arms, (iii) freedom to form associations or unions, (iv) freedom to move freely throughout India, (v) freedom to reside and settle in any part of India, (vi) freedom to acquire, hold, and dispose of property (subsequently deleted by the Constitution (Forty-fourth Amendment) Act, 1978),  and (vii) freedom to practise any profession or to carry on any occupation, trade or business.
[37] Set out under Article 31 of the Constitution. A negative duty of the state vis-à-vis the citizen, this is distinct from the freedom enumerated in Article 19(1)(f) of the Constitution, which was a positive right conferred upon the citizen.
[38] French term meaning ‘on a bench’; used to refer to the hearing of a legal case.
[39] M.V. Pylee, Emerging Trends of Indian Polity (New Delhi: Regency Publications, 1998), p. 50
[40] Seervai,  Constitutional  Law  of  India,  p.  3112;  also  see  T.R.  Andhyarujina,  ‘The Untold Story of How Kesavananda Bharati and the Basic Structure Doctrine Survived an Attempt to Reverse Them by the Supreme Court’, Supreme Court Cases (Journal), vol. 9 (2009): p. 33
[41] S.P. Sathe, Judicial Activism in India: Transgressing Borders and Enforcing Limits (New Delhi: Oxford University Press, 2002), p.  78
[42] Nani Palkhivala, We, the People, 23rd reprint (New Delhi: UBSPD, 2007), p. 184
[43] Datar, Commentary on the Constitution of India, pp. 2022–23
[44] See, for example, the judgement of Justices Shelat and Grover in Kesavananda in which they stated that the basic features of the Constitution ‘cannot be catalogued but can only be illustrated’
[45] Ramachandran, ‘The Supreme Court and the Basic Structure Doctrine’, p. 115
[46] Upendra Baxi, ‘The Constitutional Quicksands of Kesavananda Bharati and the Twenty-Fifth Amendment’, Supreme Court Cases (Journal), vol. 1 (1974): p. 45
[47] Richard Stith, ‘Unconstitutional Constitutional Amendments: The Extraordinary Power of Nepal’s Supreme Court’, The American University Journal of International Law and Policy, vol. 11 (1996): p. 47
[48] See also Surya Deva, ‘Does the Right to Property Create a Constitutional Tension in Socialist Constitutions: An Analysis with Reference to India and China’, NUJS Law Review, vol. 1 (2008): p. 583, where the author refers to the ‘implied and open- ended limitation (imposed by Kesavananda) on the power of Parliament to amend the Constitution’
[49] Palkhivala, We, the People, p. 208
[50] Jayadevan, ‘Interpretation of the Amending Clause’, p. 243
[51] Abhishek Singhvi, ‘Emerging India Remarks: India’s Constitution and Individual Rights: Diverse Perspectives’, George Washington International Law Review, vol. 41 (2009): p. 327. See Palkhivala, We, the People, p. 184—the Kesavananda judgement ensured that ‘tyranny and despotism’ would not ‘masquerade as constitutionalism’
[52] Elai Katz, ‘On Amending Constitutions: The Legality and Legitimacy of Constitutional Entrenchment’, Columbia Journal of Law and Social Problems, vol. 29 (1996): p.  251
[53] Kemal Gözler, Judicial Review of Constitutional Amendments: A Comparative Study (Bursa: Ekin Press, 2008), p. 9
[54] Sathe, Judicial Activism in India, p. 70.
[55] Andrew B. Coan, ‘The Irrelevance of Writtenness in Constitutional Interpretation’, University of Pennsylvania Law Review, vol. 158 (2010): p. 1025.
[56] Review jurisdiction refers to the jurisdiction of a bench to review its own decision; only the same bench can review the decision on the ground that there is an error apparent on the face of the record
[57] Austin, ‘The Supreme Court and the Struggle for Custody of the Constitution’,p. 6
[58] Gul  Bukhari,  ‘Resounding  Silence’,  Daily  Times,  15  November  2010, http://  dailytimes.com.pk/default.asp?page=2010%5C11%5C15%5Cstory_15-11-2010_ pg3_5 (accessed 20 November 2012)
[59] Gözler, Judicial Review of Constitutional Amendments, p. 95.
[60] Ramachandran, ‘The Supreme Court and the Basic Structure Doctrine’, p. 129
[61] Madhav  Khosla,  ‘Addressing  Judicial  Activism  in  the  Indian  Supreme  Court: Towards an Evolved Debate’, Hastings International and Comparative Law Review, vol. 32 (2009): p. 55; also see Stith, ‘Unconstitutional Constitutional Amendments’, p. 47, where the author interestingly observed that even though Kesavananda was more anti-majoritarian than Golak Nath, it received greater public acceptance than the latter
[62] Katz, ‘On Amending Constitutions’, p. 251
[63] Andhyarujina,  ‘The  Untold  Story  of  How  Kesavananda  Bharati  and  the  Basic Structure Doctrine Survived’, p. 33
[64] AIR 1975 SC 2299
[65] Seervai, Constitutional Law of India, p. 3117
[66] Andhyarujina,  ‘The  Untold  Story  of  How  Kesavananda  Bharati  and  the  Basic Structure Doctrine Survived’, p. 33
[67] Austin, ‘The Supreme Court and the Struggle for Custody of the Constitution’,p. 8
[68] Andhyarujina,  ‘The  Untold  Story  of  How  Kesavananda  Bharati  and  the  Basic Structure Doctrine Survived’, p. 33
[69] Statement of Objects and Reasons appended to the Constitution (Forty-second Amendment) Act, 1976
[70] AIR 1980 SC 1789
[71] Palkhivala, We, the People, p. 210
[72] Krishnamurthy,  ‘Colonial  Cousins:  Explaining  India  and  Canada’s  Unwritten Constitutional Principles’, p. 207
[73] Ramachandran, ‘The Supreme Court and the Basic Structure Doctrine’, p. 108
[74] See, for instance, the Gudalur Janmam Estates (Abolition and Conversion into Ryotwari) Act, 1969 which was struck down by the Supreme Court in Balmadies Plantations Ltd. v. State of Tamil Nadu ([1973] 1 SCR 258) and later inserted in the Ninth Schedule by the Constitution (Thirty-fourth Amendment) Act, 1974
[75] AIR 2007 SC 861
[76] This includes: (i) the right to equality before the law and the equal protection of the laws (Article 14 of the Constitution), (ii) the protection of the six freedoms— originally seven till the right to property under Article 19(1)(f) of the Constitution was deleted—of citizens (Article 19 of the Constitution), and (iii) the right to life and personal liberty (Article 21 of the Constitution)
[77] Khosla, ‘Addressing Judicial Activism in the Indian Supreme Court’, p. 55
[78] Jayadevan, ‘Interpretation of the Amending Clause’, p. 243
[79] Chintan Chandrachud, ‘The Supreme Court’s Practice of Referring Cases to Larger Benches: A Need for Review’, Supreme Court Cases (Journal), vol. 1 (2010): p. 37.

Author

Zia Mody, Partner

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Buyer – Seller Arrangements: Is CCI Expanding The Cartel Horizons?

Published In:Inter Alia Special Edition- Competition Law - March 2019 [ English ]

On January 15, 2019, Competition Commission of India (‘CCI’) imposed a penalty on Godrej and Boyce Manufacturing Company Limited (‘Godrej’) and four of its officials for entering into a price fixing arrangement with Panasonic Energy India Company Limited (‘Panasonic’) in violation of Section 3(3) of the Competition Act, 2002 (‘Competition Act’) (‘Godrej Order’).[1] By way of a separate order, involving similar facts, CCI imposed a penalty on Geep Industries (India) Private Limited (‘Geep’) and its officials for a similar arrangement with Panasonic (‘Geep Order’).

To appreciate the implications of the Godrej Order and the Geep Order, the background and facts of these cases are particularly important[2]: (i) on one hand, Panasonic was a manufacturer of zinc-carbon dry cell batteries (‘DCBs’), on the other hand, Godrej did not have the capability to manufacture DCBs; (ii) Panasonic and Godrej entered into a product supply agreement (‘PSA’) for supply of DCBs starting from early 2012 until late 2014; (iii) similar to customary contract manufacturing arrangements, the DCBs were procured by Godrej from Panasonic in a ready to sell form i.e., the labelling and packaging of the battery was also done by Panasonic; (iv) the DCBs procured by Godrej from Panasonic were sold by Godrej under its own brand name, giving due credit to Panasonic as manufacturer of such batteries, on the labelling of the DCB.

In parallel, Panasonic entered into a price fixing arrangement with its competitors i.e., Eveready Industries India Ltd. (‘Eveready’) and Indo National Limited (‘Nippo’) during the period between May, 2009 and August, 2016. Panasonic filed a leniency application before CCI disclosing this conduct and CCI found Panasonic, Eveready and Nippo guilty of a cartel conduct. In the Godrej Order, CCI specifically notes that Panasonic used its knowledge of future prices fixed with Eveready and Nippo and used ‘its position of leverage to extract higher procurement price’ from Godrej, by indicating that the prices will go up. Yet, CCI held Godrej guilty of entering into a cartel with Panasonic on the basis of: (i) a specific mutual comfort clause under the PSA effectively stating that the buyer and seller would not act against each other’s market interests; and (ii) e-mails that were exchanged between the officials of Panasonic and Godrej in relation to procurement price of DCBs pursuant to the PSA.

CCI’s reasoning appears to be primarily based on the following premise: (i) Godrej and Panasonic were identified as ‘independent principals’ under the agreement and therefore, a mutual comfort clause was inherently anti-competitive; and (ii) none of the e-mail exchanges used the term ‘procurement price’ and therefore, could not have been viewed as negotiation between buyer and seller in relation to procurement price. As a corollary, CCI reasoned that price related discussion on e-mails could only be viewed as an anti-competitive price fixing of DCBs.

The Godrej Order appears to suggest that an agreement entered between a buyer and seller on a principal-to-principal basis could be viewed as akin to an agreement between independently operating competitors and therefore, could be scrutinized under the ambit of Section 3(3) of the Competition Act. Section 3(3) of the Competition Act (i.e., horizontal agreements) which precludes collusion between competitors i.e., independent operating entities at the same level of the production chain. In contrast, Section 3(4) (i.e., vertical agreements) of the Competition Act deals with agreements between two or more enterprises that are at different stages of the production chain. Vertical agreements manifest an interdependent relation between (non-competing) enterprises as a result of being staged at different points of a value chain and generally proscribe harm associated with unilateral conduct. On the other hand, Section 3(3) of the Competition Act governs agreements between competitors, who were otherwise required to act independently. EU does not consider agreements between enterprises at different levels of the production chain as horizontal agreements, unless the parties are potential competitors. By way of an example, a seller could be considered to be a potential competitor to a buyer if in the event of non-supply or increase in prices of products provided by the seller, the buyer could be reasonably expected to manufacture the product supplied on its own in a short period of time.

In fact, the EU and US antitrust regimes do not view the type of arrangement entered into between Panasonic and Godrej in the present matter as akin to a horizontal agreement between competitors. The very reason for not considering these types of agreements between competitors as horizontal, but only as vertical, is the inability of one party to compete at the manufacturing level with the other and therefore, an inherent inability of the buyer to enter the market where the manufacturer is present. CCI appears to have overlooked the fact that Godrej and Panasonic could not have been treated as competitors, i.e. Godrej could not have reasonably been expected to start manufacturing DCBs and therefore, could not have been expected to compete independent of Panasonic’s manufacturing capabilities.

The Godrej Order rings an alarm, given that buyer-seller, distributorship, dealership or contract manufacturing arrangements which are generally viewed as vertical arrangements and are all entered on a principal to principal basis could potentially be categorized, scrutinized and punished under the cartel provisions of the Competition Act.

Another key takeaway is that a buyer, distributor, or dealer needs to exercise caution in terms of their agreement and interactions with their respective manufacturer, contract manufacturer, and supplier, as the case may be, if both of them are present in the market for sale of products or provision of services. Such agreements and interactions/price negotiations pursuant to such agreements could, contrary to commercial realities, be viewed and scrutinized under Section 3(3) of the Competition Act as agreement between competing enterprises.

In order to mitigate the possibility of any potential risk, until there is settled jurisprudence on this issue, entities involved in similar arrangements should closely look at their existing legal arrangements and all communications should clearly reflect the necessity of negotiations in such commercial arrangements.

[1] Suo Moto Case No. 3 of 2017.
[2] For the purposes of this article, we have referred to the specific facts in the Godrej Order.

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CCI Dismisses Allegations against Royal Western Turf Club India Limited

Published In:Inter Alia Special Edition- Competition Law - March 2019 [ English ]

On January 15, 2019, CCI dismissed information filed by Mr. Habib Rajmohamad Patel (‘Informant’) against Chairman/Secretary, Royal Western Turf Club India Ltd. (‘RWTCIL/ OP’) alleging violation of Section 3 and Section 4 of the Competition Act. [1]

The Informant alleged that the OP controlled horse racing activity and imposed unfair and discriminatory conditions for getting results in their favour. The RWTCIL comprises three committees i.e., (i) Management Committee; (ii) Stewards of the Club; and (iii) Board of Appeal. It was alleged that members of these committees were race horse owners, stud farm owners or breeders having a direct interest in the horse races. Without RWITCL’s prior approval, no person could own any race horse, train any horse or ride any horse. The Stewards of the Club could revoke or suspend the approved race horse owners and levied fines if any jockey/ horse owner/ trainer violated racing rules that ultimately caused loss to racing punters. The approval of licenses was done by the seven members of Managing Committee having vested interest. The members of Board of Appeal deciding contentious issues were horse owners themselves.

The OP argued that horse racing was regulated under Bombay Race Course Licensing Act, 1912 and racing licenses are typically granted for a year. The terms and conditions for these licenses were stringent and had to be adhered to. There were additional checks and balances in place to govern horse racing. The objections regarding any race event are taken up under close public vigilance and there was no scope for foul play. It was also argued that betting for horse racing was legalized in India after obtaining a license under the abovementioned statute.[2]

CCI noted that the allegations were vague and lacked evidence. With respect to Section 3 allegations i.e. allegations with respect to anti-competitive agreements, the Informant did not provide evidence of any agreement. The Section 4 allegations i.e. allegations regarding abuse of dominance were made without defining any relevant market. CCI defined the market as ‘market for organization of horse races by turf clubs in India’. In the said market, CCI assessed whether OP was in dominant position. However, it was found that OP had a market share of only 23%. Therefore, OP was not found to be dominant and CCI concluded that there was no contravention of Section 3 or 4 of the Competition Act and the complaint was dismissed.

[1]       Case No. 40 of 2018
[2]       Dr. K R Lakshmanan v. State of Tamil Nadu, AIR 1996 SC 1153

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CCI dismisses complaint against KAFF Appliances on minimum resale price by Snapdeal

Published In:Inter Alia Special Edition- Competition Law - March 2019 [ English ]

On January 15, 2019, CCI dismissed allegations of resale price maintenance (‘RPM’) filed by Jasper Infotech Private Limited (‘Snapdeal’) against KAFF Appliances (India) Private Limited (‘KAFF’). [1]

KAFF’s products were being sold on Snapdeal for a discounted price. KAFF, on its website, displayed a caution notice alleging that KAFF’s products sold on Snapdeal’s website were counterfeit and that Snapdeal would not honour warranties.

Snapdeal alleged that this statement was due to Snapdeal’s discounts on KAFF’s products on its online portal. Snapdeal further provided the documentary evidence i.e., an email by KAFF which revealed that KAFF tried to impose the market operating price on Snapdeal (‘MOP’).

CCI in its prima facie order found contravention of Section 3(4)(e) read with Section 3(1) of the Competition Act and the Director General (‘DG’) was asked to further investigate. After the investigation, the DG concluded that KAFF did not violate Section 3(4) (e) of the Competition Act.

The DG concluded that since Snapdeal was a marketplace, facilitating exchange of products between buyers and sellers, it would not form a part of the vertical chain. The DG, in its investigation report, noted that an online platform does not perform any material function which could make it a part of the vertical chain. With respect to RPM, there needs to a presence of a buyer–seller relationship, which in this case was not present; further, Snapdeal did not influence the price of the products listed on its website.

CCI observed that online platforms act as a parallel distribution chain, to their offline counterparts. CCI relied on its previous decisions[2] and observed that online and offline platforms are not two separate relevant markets, but two different channels of distribution in the same relevant market. While noting that the DG had taken a myopic view, CCI stated that the online platforms are peculiar in nature and cannot be compared to the traditional buyer–seller relationship. CCI stated that instead of looking at the vertical chain in a traditional manner, the test for determining whether a firm can be deemed to be a part of the product chain should be whether it contributes value to the product (or service). Online platforms can influence the prices by giving discounts or cashback that are limited only to online platforms.

KAFF argued that the caution notice was a knee jerk reaction to the excessively low priced products being displayed on Snapdeal’s online portal which raised a genuine apprehension on the part of KAFF of such products being counterfeit.

KAFF further demonstrated that it never hindered the sale of its products on online portals and the caution notice was not followed by any concrete action on its part and hence, there was no impact on the online sale of OP’s products.

While dismissing the information, CCI held that the manufacturers have a right to choose the most efficient distribution channel, unless the said choice leads to AAEC. Therefore, the contravention of Section 3(4)(e) read with Section 3(1) of the Competition Act was not established and the complaint was dismissed.

[1]   Case No. 61 of 2014
[2]  Mr. Deepak Verma Vs. Clues Network Pvt. Ltd., Case No. 34 of 2016; Confederation of Real Estate Brokers’ Association of India Vs Magicbricks.com & Ors., Case No. 23 of 2016

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The need for settlements and commitments under the Competition Act

Published In:Inter Alia Special Edition - Competition Law - April 2019 [ English ]

Background – The Problem of Pendency

The Competition Commission of India (‘CCI’ or ‘Commission’) receives a number of cases year on year pertaining to antitrust matters (i.e., cases relating to anticompetitive agreements and abuse of dominant position). Unlike combinations, these ‘behavioural’ cases before CCI take several years to dispose of.

For instance, CCI took five years to issue its decision in India Glycols Limited v. Indian Sugar Mills Association and Others[1] and seven years to issue its decision in East India Petroleum Private Limited v. South Asia LPG Company Private Limited.[2] On average, CCI has taken approximately four years to reach the final decisions it had issued in the year 2018 under Section 27 of the Competition Act, 2002 (‘Act’). Further, approximately 476 orders of CCI have been appealed before the Competition Appellate Tribunal (‘COMPAT’), between the years 2009 and 2017. The COMPAT has set aside 213 matters i.e., about 44.75% of these orders. There is also a growing backlog of cases pending before CCI’s investigative arm, the Office of the Director-General (‘DG’). As per the CCI Annual Report 2016-17 (‘Report’), 129 cases were pending before the DG in the year 2016-2017. Pertinently, the Report notes the following: “It is observed that the investigations are taking increasingly more time for completion. This partly reflects inadequate staff strength in the office of the DG and partly reflects increasing complexity of cases being referred to the DG by the Commission.”

The above statistics demonstrate that a significant amount of CCI’s resources are being expended on long-drawn investigations and defending appeals against its orders. It is therefore imperative to consider adopting new methods through which CCI’s resources may be utilized more optimally, , i.e.,  a mechanism which ensures that the adjudication of cases by CCI is put on a fast track and consumes fewer of CCI’s resources, without affecting the quality of adjudication and investigation.

In more mature jurisdictions, such as the European Union (‘EU’) and the United Kingdom (‘UK’), competition law enforcement is streamlined and expedited by way of ‘commitments’ and ‘settlements’. The adoption of these mechanisms has been recently considered by the Competition Law Review Committee (‘CLRC’), a panel set up by the Government of India with a view to review and amend the Act. Drawing from such other jurisdictions, this article will examine the effects of adopting these enforcement tools in India.

Commitments

Commitment decisions in antitrust cases are enforcement tools by which a competition authority can terminate the investigation initiated against a party, on the basis of certain behavioural remedies (‘Commitments’). This is carried out by accepting such behavioural remedies, voluntarily proposed by the parties to address the initial concerns identified by the authority. Barring the United States of America (‘US’), Commitments are a relatively new enforcement tool for most competition authorities worldwide. For example, the European Commission (‘EC’) formally adopted the commitment procedure only in the year 2004.

Notably, Commitments cannot be offered in every case. Agencies worldwide consider certain criteria when deciding whether to accept a Commitment. These are: (i) the nature of the suspected infringement; (ii) the nature and ability of the Commitments offered to quickly and effectively solve the competition concerns; and (iii) ensuring sufficient deterrence in the future. In addition, agencies consider the interests of the parties involved in the investigation, interests of third parties and of the market in general.

In the US, the Federal Trade Commission (‘FTC’) and the Department of Justice (‘DOJ’) follow parallel procedures to impose commitment decisions. The DOJ files consent decrees, or civil consent judgments, in a US federal district (trial) court to obtain effective relief without taking a case to trial while the FTC issues negotiated administrative consent orders to resolve violations without a trial under its statutory authority. In addition to using consent decrees/orders in merger cases, the DOJ and FTC also use these tools to settle alleged competition violations that include both unilateral conduct, such as exclusive dealing and monopolization, and unlawful vertical agreements. Separately, the EC, though not obligated to do so, may consider a commitment decision if and when:

i.       The companies under investigation are willing to offer Commitments which remove the EC’s initial competition concerns as expressed in a preliminary assessment;

ii.      The case is not one where a fine would be appropriate (this therefore excludes commitment decisions in hardcore cartel cases);

iii.   Efficiency reasons justify that the EC limits itself to making the Commitments binding, and does not issue a formal prohibition decision; and

iv.    The Commitments can be either behavioural or structural and may be limited in time. Moreover, the EC can reassess the situation if a material change takes place in any of the facts on which the decision was based. It is also possible for the company to ask the EC to lift a Commitment which is no longer appropriate.

Adopting commitment mechanisms to address competition concerns has a number of benefits for the enforcers, the enterprises involved in these proceedings, and for the market at large. First, commitment decisions are often driven by procedural economy. If negotiations start early in the process, the timelines of the investigation will shorten as a full investigation will become unnecessary. Second, commitment procedures can facilitate a quicker resolution of cases with swifter changes to the market, and certain and ready results, as opposed to long, costly and often uncertain outcomes. They are beneficial for the business of the companies as the time invested in resources, and burdensome and lengthy antitrust investigations would be saved. Third, the investigated companies are not required to admit liability for the alleged infringement and in many jurisdictions, companies can avoid the threat of high, unpredictable fines associated with a possible infringement decision. In addition, as there is no fining of infringement, aggrieved third parties would not be successful in suing for damages (for losses suffered as a result of the alleged anticompetitive practises). Other factors, such as the positive media exposure (as the firm or company in question, is perceived as co-operative and willing to solve a possible competition concern) are also added benefits of the commitments process.

Presently, the Act is silent on the possibility of offering Commitments to CCI, although this may be amended in the near future. The obvious benefits of Commitments are the proficient disposal of cases while still addressing competition concerns, as well as the effect on CCI’s caseload as a result. The person/enterprise should be willing to offer commitments to remove CCI’s competition concerns, without an admission of infringement. Therefore, if the commitment procedure is adopted in India, the facility to offer Commitments should be available to less egregious practices – unlike cartels under Section 3(3) of the Act. Such an amendment will be consistent with the position in various other jurisdictions, including the EU.

Settlements

Like Commitments, settlements allow agencies/regulators to terminate cartel and other investigations early on, thus saving investigative resources. The investigated parties are rewarded for their cooperation with a reduction of the fine that would have otherwise been imposed by the agency. In some jurisdictions, settlements also offer ‘finality’ as they provide certainty to the outcome of the investigation.[3]

There are important differences between settlement procedures and commitment procedures:[4]

i.      To enter into a settlement negotiation, the agency is typically required to establish an infringement of the competition law as full investigation is required;

ii.      Settlements require the company to admit liability for the infringement, whereas Commitments usually do not require the company to do so;

iii.     Settlements still require the imposition of a fine, albeit with a reduction for cooperation with the agency; and

iv.      Settlements constitute legal precedents for the treatment and establishment of an infringement, which have precedential value and can be used for establishment of recidivism or for purposes of filing a private action for damages.

The EU uses a settlement mechanism to speed up the procedure for adoption of a cartel decision when the parties admit to the EC’s objections, and in return such parties receive a 10% reduction in the fine.[5] The EC has to show the parties that it has sufficient evidence to bring a final decision, and the parties must respond with a statement of objections. Since the ‘Settlement Notice’[6] was announced in June 2008 in the EU, several cartel cases have been settled.[7]

Some jurisdictions also allow settlements for all types of antitrust proceedings. In Germany, on December 23, 2013, the Federal Cartel Office (‘FCO’) through its settlement note clarified that settlements are possible in all types of antitrust proceedings.[8] The US has a longstanding practice of using the settlement mechanism and settles a large majority of its cartel cases. A credible track record and clear fining guidelines provide useful guidance to defendants and their counsel when they assess the benefits and costs of entering into a settlement.[9] Therefore, by implementing a settlement process, competition authorities can save resources that would have otherwise been utilized for more detailed investigations, prosecutions, reasoning of detailed decisions and litigation of cartel cases.

The Act is silent on the adoption of a settlement process. However, the concept of settlements is not unknown in India. Notably, the Securities and Exchange Board of India (‘SEBI’) has already implemented a mechanism for settlements. The SEBI Act, 1992 (‘SEBI Act’) read with the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014[10] (‘SEBI Settlement Regulations’), envisages a mechanism for settlement of specific violations of various laws in relation to the securities market, by the payment of fees without admitting guilt.[11] Any person, against whom any proceedings have been initiated or may be initiated under Section 11, Section 11B, Section 11D, Section 12(3) or Section 15-I of SEBI Act, may file an application in writing to SEBI seeking a settlement (without admitting or denying the findings of fact and conclusions of law) of the proceedings initiated or to be initiated for the alleged defaults. On receipt of the application, SEBI may, after taking into consideration the nature, gravity and impact of defaults, agree to the proposal for settlement, on payment of such sum by the alleged defaulter or on such other terms as may be determined by SEBI. Therefore, CCI would not be the first regulatory body adopting such a settlement mechanism.

Conclusion

From an enterprise’s perspective, the main advantage of settlement mechanisms and commitment procedures is the ability to expedite the closure of the matter. The broad principle of these procedures, the importance of transparency and predictability, are additional benefits to an enterprise. By choosing a settlement/commitment process, an enterprise negates the impact an investigation may have on its reputation. This includes the negative impact of an unclear outcome of the investigation (i.e., the possibility of a high amount of penalty on the enterprise or its employees) and the negative influence of the investigation on an enterprise’s stock prices.

The end purpose of any antitrust legislation and its related agency should be to provide consumers and competitors a free market with healthy competition. For this, CCI should be given the necessary flexibility and discretion to perform its function in such a manner that it meets the objectives of the Act. Bringing an end to antitrust concerns should be the primary objective of the CCI, and by instituting mechanisms for settlements and commitments procedures, it should be possible to achieve this goal in a more efficient manner.

[1] Case No. 21, 29, 36, 47, 48, 49/2013.
[2] Case No. 76/ 2011.
[3] Available at https://one.oecd.org/document/DAF/COMP(2016)7/en/pdf.
[4] Available at https://one.oecd.org/document/DAF/COMP(2016)7/en/pdf.
[5] Available at http://ec.europa.eu/competition/cartels/legislation/cartels_settlements/settlements_en.html.
[6] Available at http://ec.europa.eu/competition/cartels/legislation/settlements.html.
[7] Till 2016, EC had successfully settled cases of varying degrees of complexity and with different unique feature in the pragmatic resolution of cartel cases: 21 out of 35 cases decided since 2010 are settlement cases, while eight out of 10 cases settled in 2014, and two out of five cases settled in 2015.
[8] Available at:

http://competitionlawblog.kluwercompetitionlaw.com/2014/01/17/the-fco-publishes-note-on-settlement-procedures-in-antitrust-proceedings-in-germany/.
[9] Available at https://www.globallegalinsights.com/practice-areas/cartels-laws-and-regulations/singapore.
[10] Last amended on December 27, 2017
[11] SEBI had settled 378 cases during 2014-15 to 2017-18 and collected approximately Rs52.25 crore as settlement amount

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CCI Dismisses Allegations of imposing vertical restraints against Inox Leisure Limited and Hindustan Coca-Cola Beverages Private Limited

Published In:Inter Alia Special Edition - Competition Law - April 2019 [ English ]

On February 28, 2019, CCI dismissed allegations of violations of Section 3 of the Act by Inox Leisure Limited (‘Inox’) and Hindustan Coca-Cola Beverages Private Limited (‘Coke’), made by Mr. Vijay Gopal (‘Informant’).[1]

The allegations pertained to an arrangement between Inox and Coke whereby Inox would only sell Coke’s products in its multiplexes, to the exclusion of its competitors, amounting to an exclusive supply agreement as well as an exclusive distribution agreement between Inox and Coke (in violation of Section 3(4)(b) and (c) of the Act). Further, given that Inox did not allow its patrons to carry any eatables from outside to within its premises, the patrons were forced to purchase essential commodities such as water from within the premises of Inox, and to this extent the sale of such commodities were in essence tied to the provision of watching movies in Inox’s theatre, in violation of Section 3(4)(a) of the Act. Additionally, it was also alleged that Coke’s products that were sold within Inox’s premises were priced differently (higher) than the retail price at which they were generally available in the market, leading to a loss to consumers.

CCI in its analysis relied on its observations in In Re M/s Cine Prekshakula Viniyoga Darula Sangh v. Hindustan Coca Cola Beverages Private Limited[2] and In Re Consumers Guidance Society v. Hindustan Coca Cola Beverages Private Limited and Inox Leisure Private Limited[3] (decided collectively by a common order dated May 23, 2011) and noted that in these cases, the DG had delineated two markets for the purpose of the investigation namely; (i) “market of retail sale of bottled water and cold drinks inside the multiplexes of Inox”; and (ii) “the market of supply of bottled water and cold drinks to the owners of closed market of multiplexes and to other commercial enterprises where it is treated as the preferred beverage supplier”.

Thereafter, CCI specified the pre-requisites which were to be satisfied for a violation of Section 3(4), detailed as follows:

i.       Existence of an agreement;

ii.      Between ‘enterprise’ or ‘persons’;

iii.     Engaged at different stages or levels of the production chain in different markets;

iv.      With respect to production, supply, distribution, storage, sale or price of, or trade in goods, or provisions of services;

v.       Including tie-in-arrangement, exclusive supply agreement, exclusive distribution agreement, refusal to deal, and resale price maintenance; and

vi.      Which agreement causes or is likely to cause an appreciable adverse effect on competition (‘AAEC’) in India.

CCI observed that points (i), (ii), (iii), and (iv) were applicable to the present case. However, it clarified that the allegation of a tie-in was not made out given the facts on record. As per CCI, there was no explicit condition that the consumers had to necessarily buy Coke’s products to watch the movies. Therefore, Coke’s products were incidental to the activity of watching a movie and not the main driving force for customers to visit Inox’s multiplexes. CCI also noted that, in any case, free water was available within Inox’s multiplexes.

Regarding the allegation of an exclusive supply arrangement between Inox and Coke, CCI observed that Coke did not have significant market power, given the presence of multiple competitors. Further, after analysing the Sale and Supply Agreement between Inox and Coke (‘Agreement’), CCI noted that the Agreement was only for a period of three years initially, but Inox and Coke had continued their arrangement through fresh agreements thereafter. However, the successive agreements had been revised to the extent that Coke was no more an exclusive partner to Inox, thereby providing complete autonomy to Inox to market products from any manufacturer, including Coke’s competitors. CCI also noted that the Agreement could be terminated by either party by giving a 60 days notice and to this extent, there were no exit barriers which were implemented by Inox or Coke.

Accordingly, after considering the factors for determining AAEC as specified under Section 19(3) of the Act, CCI observed that the impugned arrangement: (i) lacked any entry/exit barriers; (ii) did not posses any ability to drive any existing competitors out of the market (or had not driven any existing competitors out of the market); and (iii) did not result any market foreclosure.

[1] Case No. 29/2018.
[2] Case No. RTPE 16/2009.
[3] Case No. UTPE 99/2009.

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National Company Law Appellate Tribunal

Published In:Inter Alia Special Edition - Competition Law - April 2019 [ English ]

NCLAT affirms CCI’s order dismissing allegations of collusive bid-rigging against Bharat Heavy Electricals Limited, IL&FS Technologies Limited, and Hitachi Systems Micro Clinic Private Limited

On February 26, 2019, the National Company Law Appellate Tribunal (‘NCLAT’) dismissed an appeal filed by Reprographic India (‘Appellant’) filed against the order of CCI dismissing allegations of collusive bid-rigging against Bharat Heavy Electricals Limited (‘BHEL’), IL&FS Technologies Limited (‘ILFS’), and Hitachi Systems Micro Clinic Private Limited (‘Hitachi’) (collectively ‘Respondents’), in violation of Section 3(3) of the Act.[1]

The Appellant was an ancillary to BHEL’s Haridwar unit, engaged in the manufacture of folding and finishing systems as well as the manufacture and distribution of information technology (‘IT’) products and provision of services. The Appellant had been supplying IT products to BHEL directly, or through System Integrators (‘SI’) of Original Equipment Manufacturers (‘OEMs’). ILFS and Hitachi were SIs, which sourced Hewlett Packard (‘HP’) products and provided IT solutions. As per the Appellant, BHEL floated a tender on April 1, 2017, for supply, installation and maintenance of personal computers (‘PCs’) and peripherals for more than 20 locations, for a period of five years on lease basis on ‘Corporate Rate Contract’ (‘Tender’). The total items which were being sought pursuant to the Tender were grouped into two categories, namely, group-A comprising 24 items pertaining to PCs and peripherals, and group-B comprising 47 items pertaining to ‘Enterprise Equipment’. The bidders were at liberty to bid for either group A or both groups A and B. As per the conditions of the Tender, with regard to group A, only OEMs and SIs were eligible to bid. Further, all items in each group were supposed to be of the same OEM. Pursuant to the Tender, only two bids, i.e., of ILFS and Hitachi were received with regard to group A products and ultimately the Tender was awarded to Hitachi. As per the Appellant, both Hitachi and ILFS acted in collusion through out this process in violation of Section 3(3) of the Act.

CCI in its observation noted that the Tender was an open tender with no embargo on any SI or OEM to participate. Moreover, various SIs and OEMs had participated in the pre-bid discussions. It further observed that only ILFS and Hitachi submitted bids with regard to group A since the Tender with regard to group A mandated a provision for maintenance and other services for a five year lease period. CCI noted that the stringent requirements of group A may have resulted in low bidding. Additionally, it stated that the facts on record did not support the allegation of supportive bidding on part of ILFS, or that ILFS and Hitachi were engaged in bid rotation. Moreover, the fact that both ILFS and Hitachi had common business links with HP was not in itself sufficient to confirm an allegation of collusion. Further, CCI also did not consider the fact that some employees of one Respondent were working with the other Respondent at some point of time, as relevant for the purposes of the allegations, clarifying that this was a routine affair in the IT industry. In sum, CCI was of view that a meeting of minds for purposes of bid rigging/collusive bidding could not be inferred from mere proximity and the Appellant had failed to furnish any evidence that would suggest otherwise. Accordingly, CCI through an order under Section 26(2) of the Act had dismissed the allegations.

NCLAT at the outset clarified that directing an investigation to be conducted by the DG is entirely dependent on existence of a prima facie case warranting such investigation, and unless CCI is so satisfied, the informant has no vested right to seek investigation into the alleged contravention of the provisions of the Act. It further clarified that it was the obligation of the informant to make out a prima facie case based on proven facts warranting an investigation by the DG. Further, NCLAT stated that as the successful bidder, Hitachi had the discretion to quote products of any OEM, especially given that it would have to provide maintenance and other services during the entire lease period. Additionally, it reiterated that there may have been business links between ILFS and Hitachi; however, in the absence of any material to suggest any collusion between ILFS and Hitachi, no adverse inference suggesting collusive bidding could be drawn against them. Accordingly, NCLAT affirmed CCI’s observations and dismissed the appeal filed by the Appellant.

[1] Case No. 41/2018.

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India Chapter in The Dispute Resolution Review – Eleventh Edition

Published In:The Law Reviews [ ]

I INTRODUCTION TO DISPUTE RESOLUTION FRAMEWORK

As with most common law countries, Indian law may broadly be classified as substantive or procedural law. While substantive law determines rights and liabilities of parties or confers legal status or imposes and defines the nature and extent of legal duties, procedural laws prescribe practice, procedure and machinery for the enforcement or recognition of rights and liabilities.2 To put it another way, substantive laws are those that are enforced while procedure deals with the rules through which the substantive law is enforced.3

Dispute resolution in India may be through courts, specialised tribunals (such as those for recovery of debt by banks or company disputes, among others) or alternative dispute resolution mechanisms that include arbitration, mediation and conciliation. The recent introduction of the Commercial Courts Act 2015 (the Commercial Courts Act) also provides for the constitution of commercial courts at a district level, except areas where the High Court exercises ordinary civil jurisdiction, commercial divisions (in all High Courts having ordinary civil jurisdiction) and commercial appellate divisions in each High Court for the adjudication and speedy disposal of commercial disputes4 of a specified value of not less than 10 million rupees or such other notified value within the limits of the relevant territorial jurisdiction.5

The primary laws codifying court procedure in India are the Code of Civil Procedure 1908 (CPC) and the Code of Criminal Procedure 1973 (CrPC). Charter High Courts such as the High Courts of Bombay, Calcutta, Delhi and Madras may also apply Letters Patent Rules, which when applicable may override the provisions of the CPC. The procedure to be applied by tribunals is often governed by the statute that establishes the tribunal (and rules framed thereunder). Courts have held that the principles contained in the CPC would continue to apply to the tribunals even if the tribunals are not bound to follow specific provisions of the CPC.6

While the legislative and executive branches of the Indian government follow a federal structure, the Indian judicial system comprises a unified three-tier structure with the Supreme Court of India (the Supreme Court) holding the position of the apex court. Below the Supreme Court are the High Courts, functioning (in most cases) in each state. Lower in the hierarchy are the subordinate courts, which include courts at district level and other lower courts.

Law declared by the Supreme Court is binding on all other courts in India.7 By acceptance of the doctrine of stare decisis, law declared by High Courts binds subordinate courts8 and may have persuasive value over High Courts of other states.9 The Supreme Court and the High Courts are charged with original, appellate and writ jurisdiction. Under the writ jurisdiction they have the power to review administrative action including for the purposes of the enforcement of constitutional and fundamental rights granted under Part III of the Constitution of India.

The Arbitration and Conciliation Act 1996 (the Arbitration Act) governs the law related to domestic arbitration, foreign-seated arbitration and enforcement of foreign awards, in India. The Arbitration Act is based on the UNCITRAL Model Law as adopted by the United Nations Commission on International Trade Law on 21 June 1985. Mediation and conciliation have also been given statutory recognition through the Arbitration Act.

As a recent trend, even courts often promote alternative dispute resolution. This was discussed in great detail in the case of Afcons Infrastructure Limited v. Cherian Varkey Construction,10 where the Supreme Court laid down guidelines for courts to follow for the effective implementation of Section 89 of the CPC, which encourages parties to settle their disputes by means of alternative dispute resolution.

II THE YEAR IN REVIEW

The year 2018 witnessed a series of amendments aimed at introducing greater ease of doing business in India, and at bringing the current law in tune with the rapid economic growth in the country in order to aid foreign direct investments, public private partnerships, public utilities infrastructure developments, etc.

One of the primary legislative changes brought about during 2018 are the amendments to the Insolvency and Bankruptcy Code 2016 (IBC), which introduce significant changes on the substantive as well as procedural aspects of the IBC. The IBC, which came into effect on 1 December 2016, is a comprehensive legislation that seeks to replace extant insolvency and restructuring laws in India and proposes to cover corporate persons (i.e., companies and limited liability partnerships), individuals and partnerships. The National Company Law Tribunals (NCLT) have been vested with the jurisdiction in respect of insolvency and restructuring proceedings against corporate persons in India, while the Debt Recovery Tribunal will oversee proceedings against individuals and partnerships. Some of the important amendments to the IBC include the following.

Under the IBC, various categories of creditors,11 including foreign creditors, may trigger the insolvency resolution process and provide a single forum to oversee resolution and liquidation proceedings. The recent amendment to the definition of ‘financial debt’ includes amounts raised from allottees in respect of a real estate project (as defined under the Real Estate (Regulations and Development) Act 2016), thereby recognising their status as financial creditors.12 Homebuyers can now initiate the insolvency process against errant real estate developers and will be entitled to representation on the Committee of Creditors (CoC) of the corporate debtor. Homebuyers will be treated as a class of creditors. Given the large number of homebuyers for a project, they will be represented in the CoC by an authorised representative to be appointed by the National Company Law Tribunal.

The IBC provides that the Corporate Insolvency Resolution Process (CIRP) may be initiated on the occurrence of a single payment default of 100,000 rupees and the NCLT will determine whether a payment default has taken place. Accordingly, a CIRP application can be admitted against the corporate debtor.13 The recent amendment14 provides that the law of limitation will apply to IBC applications, removing earlier confusion in this regard.

Under the IBC, the NCLT is required to declare a moratorium of 180 days (that may be extended for a further period of 90 days) against any recovery actions and new cases filed against the corporate debtor and its assets,15 and appoint an interim resolution professional who will oversee the formulation of the restructuring plan.16 However, in a few cases, courts took the view that the moratorium in an ongoing CIRP will also stay enforcement of guarantees or security interest from promoters and group companies of the corporate debtor. The amendment now clarifies that the moratorium period shall not apply to the enforcement of guarantees granted by promoter guarantors or other group companies that are not undergoing a CIRP.17 The Supreme Court has also clarified that this does not cover the assets of the personal guarantor of the corporate debtor.18 Where there is conflict, especially when there is a direct clash between moratoriums under the two statutes, then the IBC will take precedence over any other legislation.19

Once the CIRP has been initiated, the NCLT becomes the sole forum to entertain disputes either initiated by the corporate debtor or against the corporate debtor.20 In order to protect the interest of all creditors, the amendment:

a. bars withdrawal of corporate insolvency proceedings even if the matter is settled between the parties, unless it is approved by 90 per cent of the Committee of Creditors;21

b. reduces the threshold from 75 per cent to 66 per cent for the CoC22 to approve certain actions such as appointment of a resolution professional, approval of the resolution plan, approaching the NCLT for passing of liquidation order, etc.;

c. lists disqualifications23 to restrict the participation of persons in the resolution process who are likely to rig the resolution process, such as the promoters of the corporate debtor or persons responsible for the default of the corporate defaulter in the past, including persons related to such defaulters; and

d. states that the consent of shareholders of the corporate debtor is generally required for significant corporate actions.24

The Ministry of Corporate Affairs (MCA) released a clarification in the past year to the effect that approval of shareholders of the company for any corporate action in the resolution plan (otherwise required under any law) is deemed to have been given on its approval by the NCLT. The IBC is amended to incorporate the clarifications proposed by the MCA.

The IBC provided that financial creditors who were related to the corporate debtor would not be allowed to participate, attend or vote in CoC meetings. Financial institutions that had converted their debt into substantial equity stakes in the corporate debtor under any previous restructuring were deemed related to the corporate debtor and were thereby precluded from attending or voting in CoC meetings. The amendment provides an exemption from this prohibition for such financial creditors provided they are regulated by a financial sector regulator.25

Another significant legislative change brought about in the past year is the recent amendments to the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act 2015, which established special courts governed by procedures tailored for the speedy resolution of commercial disputes. Reducing the ceiling limit from 1 million to 300,000 rupees,26 the recent amendment has increased the pecuniary jurisdiction of commercial courts. In order to reduce the caseload of all commercial cases to be heard by a high court, additional commercial courts,27 based on their pecuniary threshold, have been created below district judge levels for states where high courts do not have original civil jurisdiction, and at the district judge level for states where high courts have ordinary original civil jurisdiction. Appeals from the orders of the commercial courts below district judge level would be filed before commercial appellate courts28 specially created for the purpose. Interestingly, with a view to encourage resolution of commercial disputes by alternate dispute redressal mechanisms, the amendment provides that no commercial suit can be instituted unless the plaintiff exhausts the remedy of pre-institution mediation,29 except in cases where urgent interim relief is contemplated.

Further, the Specific Relief Act 1963 that prescribes remedies for enforcement of certain civil rights also introduced key amendments in its provisions dealing with specific performance of contracts. Prior to the amendment, specific performance of contract would be granted by the courts subject to their discretion30 only if:

a. the monetary compensation for breach of contract was inadequate; or

b. if the damage caused by the breach could not be determined.

However, under the amended law,31 the conditions for the grant of specific performance are better defined. The amendment bars grant of injunction32 in suits involving infrastructure project or contracts where injunctions would delay or hinder the progress of the projects. Special courts33 will be designated for hearing suits in respect of infrastructure project contracts. The amendment posits that disposal of suits within a period of 12 months34 from the service of process are subject to extension for an aggregate period of six months.

There were a number of significant judgments of courts in 2018.

In Board of Control for Cricket in India v. Kochi Cricket Private Limited,35 the Supreme Court laid to rest the ambiguity that existed around the applicability of the amended provisions of the Indian Arbitration and Conciliation Act 1996 (the Arbitration Act), especially to court proceedings that arise out of an arbitration that commenced before 23 October 2015, the date of commencement of the amendment. Prior to 23 October 2015, mere filing and pendency of an application for setting aside an arbitration award would lead to an automatic stay against its enforcement. The 2015 amendment did away with this provision (under Section 36 of the Arbitration Act), but its applicability on the pending applications for setting aside the arbitral awards caused conflicting decisions by various high courts in India. The Supreme Court has held that amended provisions would apply to pending applications for setting aside the arbitral award. The judgment debtor would now need to specifically seek a stay of the arbitration award or prepare to pay the award notwithstanding the pending challenge to set aside the award.

In Union of India v. Hardy Exploration and Production (India) INC,36 the Supreme Court decided on the principle to be applied for determining the seat of an arbitration when the arbitration agreement specifies the venue for holding the arbitration but does not specify the seat. The Supreme Court held that when an arbitration clause only specifies the term ‘place’ and no other condition is attached to it, it is equivalent to ‘seat’ and that finalises the issue of jurisdiction. However, if a condition is attached to the term ‘place’, the same has to be satisfied for the place to become equivalent to seat.

In M/s Emkay Global Financial Services Ltd. v. Girdhar Sondhi,37 the Supreme Court has held that an application to set aside an arbitration award are summary proceedings and the courts should ordinarily not allow the parties to lead evidence unless necessary.

In Cheran Properties Ltd v. Kasturi and Sons Ltd and Ors,38 the Supreme Court has paved the way for expedient execution of arbitral awards. The Supreme Court held that an arbitral award is capable of being enforced as if it were a decree of the Court, and that to effectuate transfer of shares awarded in arbitration, recourse to the remedy of the rectification of the register was appropriate and necessary. Thus, armed with this decree, a party is entitled to seek rectification of the register by approaching the NCLT under the relevant provisions of the Companies Act 1956. The Supreme Court, relying on the Group of Companies doctrine, further held that since the facts of the present case indicate a mutual agreement by parties (including non-signatories) to be bound by the arbitral award, an arbitral award can be enforced against a third party. In a similar vein, the Division Bench of the Madras High Court in SEI Adhavan Power Private Limited and Ors v. Jinneng Clean Energy Technology Limited and Ors39 set aside an anti-arbitration injunction and stated that the duty of the court is to impart a sense of business efficacy to the commercial understanding reflected in the terms of the agreement between the parties. Applying the Group of Companies Doctrine, the court held that a non-signatory or third party could be subjected to arbitration only in exceptional cases. In addition to factors such as the direct relationship of the party signatory to the arbitration agreement, direct commonality of the subject matter and the agreement between the parties being a composite transaction, the Court would have to examine whether a composite reference of such parties would serve the ends of justice.

In Ahmed Abdulla Ahmed Al Ghurair v. Star Health And Allied Insurance Company Limited & Ors,40 the Supreme Court of India held that a derivative action of a foreign company is not maintainable in India and upheld the principle of forum non conveniens while granting leave to a party to institute a suit before the Madras High Court under Clause XII of the Letters Patent Act.41 It further held that if a person holding beneficial interest in shares fails to make necessary declarations under Section 89 of the Companies Act 2013 then neither the beneficial owner nor any person claiming through it can thereafter try to enforce the beneficial interest by seeking declaratory relief from an Indian court.

III COURT PROCEDURE

i Overview of court procedure

It can be seen in connection with the Indian legal system (as a criticism more than a compliment) that ‘there is ample – sometimes excessive – due process; and one has to be patient and persevering’.42 Broadly, court procedure in India is governed by the CPC for civil matters and the CrPC for criminal matters. As discussed above, even where statutes create specialised tribunals and courts to deal with particular disputes, it is sometimes recognised that the principles contained in the CPC and CrPC would continue to apply. This is often so because provisions in the CPC and the CrPC are recognised as the embodiments of the principles of fair play, natural justice and due process.

ii Procedures and time frames

The primary statute governing limitation is the Limitation Act 1963. As a general rule, most suits, especially those relating to contracts and accounts have a limitation period of three years for filing. Some suits relating to immovable property may fall within a longer limitation ranging from 12 to 30 years.43 The periods prescribed under the Limitation Act may not apply in the event a specific statute prescribes a period of limitation.44

Where a plaintiff approaches a court for injunctive relief, especially at an interlocutory stage, the court may require the plaintiff to demonstrate (quite aside from being within limitation) that the plaintiff has acted in a timely manner and has not acquiesced to the infringement of its rights.45

A writ court may require a petitioner (although no limitation is prescribed for writs) to demonstrate that he or she has approached the court without delay, since a delay may disentitle a petitioner to relief.46

After amendments in 2002, the CPC requires written statements of defence to be filed in a timely manner. This is normally within 30 days of the service of summons, which may be extended by a further 60 days.47 The CPC also curtails the number of adjournments that may be sought and attempts to curtail practices that are often perceived as dilatory, such as belated amendments to pleadings48 and belated production of documents.49

It is pertinent to note that the Arbitration Amendment Act now mandates time-bound arbitrations. A time limit of 12 months has been prescribed from the date that the arbitrators have received notice in writing of their appointment. Parties may also agree in writing to have their dispute resolved by fast-track procedures, which would require the award to be made within six months from the date of entry of the arbitral tribunal upon reference.50 If the court passes any interim measure under Section 9 of the Arbitration Act, the arbitral proceedings must commence within 90 days of the court passing such an order.51

The Commercial Court Act has also set a time of 30 days for the submission of written arguments and 90 days from the date of conclusion of arguments for the pronouncement of a judgment. Appeals have to be disposed of by the appellate body within 60 days from the date of the appeal.

The IBC provides a period 180 days from the date of admission of an application for initiating CIRP as the period of the insolvency resolution process that culminates with the submission of a resolution plan to the NCLT.52

In spite of these recent developments to reduce time frames, the time taken for the completion of a trial in civil and criminal proceedings may be several years.

iii Class actions

The CPC recognises that where there are numerous persons with the same interest in one suit, one or more of such persons may, with the permission of the court, sue or be sued, or may defend such suit on behalf of or for the benefit of all persons interested.53

The Companies Act 1956 and the Companies Act 2013 stipulate that a specified number of members or depositors may, if they are of the opinion that the management or control of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the company law tribunal on behalf of the members or depositors.54

The Supreme Court has in the exercise of its writ jurisdiction long recognised the ability of an individual or a group of individuals to bring ‘public interest litigations’ to espouse the cause of larger sections of society.55

iv Representation in proceedings

The Constitution of India guarantees the right of a person accused of an offence to be represented by a legal practitioner of his or her choice.56

In other proceedings, while litigants are typically represented by advocates enrolled under the Advocates Act 1961, there may be exceptions to the rule. For instance, the Family Courts Act57 stipulates that a party may be represented by an advocate only if the court thinks that it is necessary for a fair trial. Further, the Industrial Disputes Act58 restricts the conditions under which a lawyer can appear before the industrial tribunal. The Advocates Act59 empowers a court to permit any person who has not been enrolled as an advocate to appear before it in any particular case.

v Service out of the jurisdiction

The CPC60 and the CrPC61 contain provisions for service out of the territory of India. India has also entered into bilateral treaties and multilateral conventions for these purposes.

Under the CPC, when a defendant resides outside India and no agent in India is empowered to accept service, summons or notice may be sent by courier or post service as approved by the appropriate High Court. This provision must, however, be read together with the procedure prescribed by the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters 1965 to which India is a party.

The CrPC recognises bilateral arrangements and makes compliance with such an arrangement mandatory. It is prescribed that summons or warrants issued by a court in India should be served and executed in accordance with the bilateral arrangement, if any. Also, the Ministry of Home Affairs in India has, by a circular dated 11 February 2009, clarified the procedure to be followed for the issuance of summons to a foreign resident (the MHA Circular). Under the MHA Circular, all requests for service of summons, notices or judicial processes on persons residing abroad shall be addressed to the Under Secretary (Legal) of the Ministry of Home Affairs. Thereafter, the Ministry, after scrutinising the request, can forward it to the relevant foreign officer.

vi Enforcement of foreign judgments

A money decree obtained from a court of a jurisdiction notified by the Indian Union government as a reciprocating territory under the CPC can be enforced in India directly by filing an execution petition in a court of competent jurisdiction.62 As a result, judgments of courts not notified as reciprocating territories or decrees other than money decrees cannot be executed directly in India. A decree holder in such a case may file a fresh lawsuit in the Indian courts on the basis of the foreign judgment. In either execution proceedings or fresh suits filed on the basis of foreign judgments, parties may rely on Sections 1363 and 1464 of the CPC.

Section 44 of the Arbitration Act prescribes that a foreign award that arises out of (1) an agreement to which the New York Convention on the Recognition and Enforcement of Foreign Awards (the New York Convention) applies and (2) is made in one of the territories in respect of which the Central Government declares that the New York Convention applies on satisfaction that reciprocal provisions are being made, may be enforced in India. In this regard, the Arbitration Amendment Act has clarified that a foreign arbitration award may be set aside if it violates the public policy of India on the same grounds as described for domestic awards above. However, unlike domestic awards, foreign awards cannot be set aside on the ground of patent illegality.

vii Assistance to foreign courts

Assistance may be given to foreign courts65 on the basis of bilateral agreements with the reciprocating territories. In civil matters, the CPC provides for the service of foreign summons issued by certain specified courts only. In such cases, assistance is given when a defendant resides or works for gain or carries on trade or business within India and the summons itself may be a summons for the appearance of the defendant, production of documents or furnishing of information.66

Also as discussed above, India is a signatory to the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters 1965, whose key objective is to improve the organisation of mutual judicial assistance by simplifying and expediting procedures.

viii Access to court files

Rules relating to access to court files may vary depending on the nature of the proceeding, who is seeking access and whether the proceeding is ongoing or concluded. In most cases a person who is a party to the proceeding is allowed to search, inspect or have copies of all pleadings and other documents or records of the case. A third party seeking the information or record may need to apply to the court and show cause to be allowed to do so.

ix Litigation funding

Disinterested third-party funding is not common. While some courts have found that third-party funding may be permissible,67 other courts have often declined to uphold such agreements on the grounds of public policy or professional ethics.68

IV LEGAL PRACTICE

i Conflicts of interest and Chinese walls

The Bar Council of India Rules (the BCI Rules), notified by the Bar Council of India (BCI) under the Advocates Act 1961, impose standards on advocates to ensure that conflicts of interest are avoided. These include:

a prohibition on appearing for opposite parties in the same matter, and from taking instructions from anyone other than the client and the client’s authorised agent;
a prohibition on lending to a client, or converting funds in the advocate’s hands to a loan, or adjusting fees against personal liability owed by an advocate to the client;
a prohibition on bidding for, or acquiring an interest in property of actionable claim involved in litigation;
a prohibition on appearing in matters where the advocate has a pecuniary interest;
a prohibition on representing establishments of which the advocate is a member;
a prohibition on appearing in matters where he or she is a witness;
a prohibition on appearing before relatives who are judges;
the obligation to make a full and frank disclosure to client relating to his or her connection with the parties and any interest in or about the controversy likely to affect his or her client’s judgement in either engaging him or her, or continuing the engagement; and
the obligation not to disclose information or instructions provided by the client.

ii Money laundering, proceeds of crime and funds related to terrorism

While there are no specific obligations on lawyers with respect to money laundering, India has a strong legislative framework, including the Prevention of Money Laundering Act 2002, the Income Tax Act 1961, the Foreign Exchange Management Act 1999, the Foreign Contribution Regulation Act 2010 and the Companies Act 2013, that serves to detect and prevent money laundering and the proliferation of the proceeds of crime.

iii Data protection

Data protection in India is primarily governed by the Information Technology Act 2000 and the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules 2011 (the IT Rules). These rules define sensitive personal data and information (SPDI)69 and prescribe the manner in which SPDI may be collected, processed, transferred, disclosed or stored. The IT Act provides for damages in the event that the SPDI is not protected and wrongful loss is caused as a result.

The introduction of the IT Rules has affected how lawyers may collect and use SPDI. To the extent that SPDI is collected directly from the data subject, the consent of the data subject is required for the purpose of using the SPDI or transfer of SPDI.

In the context of due diligence and onward sharing of data with other law firms and LPOs, the levels of compliance appear higher in as much as data sharing agreements usually incorporate the requirements of the IT Rules.

However, compliance with the procedures specified in the IT Rules by lawyers generally appear to be relatively lax when it comes to collection and use of data in the course or for the purposes of litigation, especially as damages may be claimed only if wrongful loss can be proved.

iv Other areas of interest

As discussed above, most provisions of the Companies Act 2013 have been notified. There are certain significant changes with respect to the liability of actors such as directors70 and auditors71 under the Companies Act 2013.

For instance, directors of companies facing civil and criminal proceedings are now required to demonstrate that they had ‘acted diligently’ in connection with the subject matter of the dispute in order for them to be excused from personal liability.72 Under the previous jurisprudence, it was acceptable in some circumstances for non-executive and independent directors to take the defence that they were not involved in the day-to-day operations or management of the company.73 It is likely that this defence will no longer be available.

V DOCUMENTS AND THE PROTECTION OF PRIVILEGE

i Privilege

Subject to specified exceptions,74 Section 126 of the Indian Evidence Act, 1872 (the Evidence Act) prohibits an attorney75 from disclosing without his or her client’s express consent any communication made to him or her in the course of and for the purpose of his or her employment as an attorney. Recognising the role of interpreters, clerks and other support staff employed by attorneys, the privilege is extended by Section 127 of the Evidence Act to facts coming into their knowledge in the course of their employment. Section 129 protects a client from being compelled to disclose any confidential communication that has taken place with his or her ‘legal professional adviser’.

As discussed above, an advocate is also prohibited by the BCI Rules from disclosing client communications or advice given by him or her to the client.

A contemporary area of interest around this question is whether the protection of attorney–client communication extends to in-house counsel. The area is not free from doubt. While the Bombay High Court in its judgment in Municipal Corporation of Greater Bombay v. Vijay Metal Works76 took the view that in-house counsel would be covered by privilege, this view was doubted by the same court in Larsen & Toubro Limited v. Prime Displays Private Limited77 in light of the observations of the Supreme Court in Satish Kumar Sharma v. Bar Council of Himachal Pradesh.78

ii Production of documents

Under the CPC, the court can, at any time during the pendency of any suit, order the production (under oath) of such documents, relating to any matter in question in such suit. Further, the Evidence Act provides that a witness summoned to produce a document must, if it is in his or her possession, bring it to court regardless of any objection to its production or admissibility.79

If a party asserts privilege over a document that it is asked to produce and this assertion is disputed by the opposite party or not accepted by court, it is likely that the court would review the claim for privilege and possibly the documents under seal and decide on whether the protection of privilege applies.80

VI ALTERNATIVES TO LITIGATION

i Overview of alternatives to litigation

Since India has permitted foreign investments in various industries and sectors through its new liberal policies, there is a considerable increase in the number of commercial disputes. As a mechanism to deal with its heavy caseload, India has striven to encourage alternative dispute resolution (ADR) mechanisms. In several areas and even at the level of the High Courts and the Supreme Court, the law has allowed for parties to be directed towards ADR.81

ii Arbitration

Apart from the Arbitration Act, the Supreme Court of India in Salem Bar Association v. Union of India82 recommended the adoption of arbitral rules that were formulated by the Jagannadha Rao Committee. The draft rules made by the Committee were circulated to all the High Courts. The rules provide for the procedure according to which the referral to ADR mechanisms under Section 89 of the CPC can take place, including the stage at which the referral can take place. Guidelines to be observed by the court before making such referral have also been set out.

The arbitration framework, however, has been outlined in the central Arbitration Act, which provides for various matters such as the interpretation of the arbitration agreement, interim measures that can be taken, appointment and termination of arbitrators, place and procedure for the arbitration and grounds for challenges. India is also party to the three main international conventions that govern international arbitrations in different territories and that have been consolidated under the Arbitration Act:

the Geneva Protocol on Arbitration Clauses of 1923;
the Convention on the Execution of Foreign Awards 1923 (the Geneva Convention); and
the Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention).
The Arbitration Act is applicable both to domestic and foreign-seated arbitrations. Part I covers the scope of domestic arbitrations, whereas Part II covers foreign-seated arbitrations and the enforcement of foreign awards. Part I defines the scope of what constitutes arbitration,83 the essentials of an arbitration agreement84 and the procedure for determining the validity of such an agreement.85 It is important to note in this regard that there are limited instances and time-bound procedures for challenging the validity of such an agreement and the arbitral tribunal has the power to determine its jurisdiction. Section 5 of the Arbitration Act specifically provides, with respect to Part I, that no judicial authority may intervene in arbitration except in a case where a stipulation to this effect has been made.

The initial years of the implementation of the Arbitration Act saw regressive interpretation that allowed frequent and wide-sweeping judicial intervention from Indian courts. The judgments of the Supreme Court and High Courts have, however, broken the trend and are serving to restore confidence in India as a potential arbitration destination. The Arbitration and Conciliation (Amendment) Act 2015 has also introduced various provisions that promote arbitration by reducing the timelines and costs involved.

Further, although statistically there are more ad hoc arbitrations conducted in India, the use of institutional arbitration is growing gradually. This has to do in part with the reputed arbitration institutions, such as the Singapore International Arbitration Centre, setting up establishments in India. India’s first international arbitration centre, the Mumbai Centre for International Arbitration, was set up in Mumbai in 2016. The High Courts at Delhi, Karnataka, Punjab and Haryana, and Madras, inter alia, have set up arbitration centres with the objective of providing recourse to credible yet affordable arbitration.

iii Mediation

The most important component of mediation is that it is the parties to the dispute who decide the terms of settlement. In conciliation on the other hand, the conciliator makes proposals, and formulates and reformulates the terms of settlement. Mediation was first given statutory recognition in the Industrial Disputes Act 1947, where officers appointed under Section 4 of the Act are ‘charged with the duty of mediating in and promoting the settlement of industrial disputes’. Mediation, as a form of dispute resolution has not obtained independent force in India but is mostly institutionally annexed to the courts through Section 89 of the Code of Civil Procedure Code 1809. To that extent, this might compromise the independence of mediations from court-related procedures and interference. Nevertheless, it gives mediations greater legitimacy and compatibility with the formal dispute resolution processes in society.

Another point to be noted is the growing importance of mediation clauses in commercial agreements. Both mediation and consultation form a mandatory aspect of pre-arbitration procedure. It has also been held by courts that mediation and consultation are a substantial part of the agreement and are to be followed prior to any arbitration being initiated.86 In the event that the dispute is referred first to arbitration, the tribunal has the power to render the petition inadmissible on the grounds of the pre-arbitration procedure prescribed by the agreement being violated by the parties.

Akin to the Arbitration Rules 2006, the judges of the Salem bench also recommended the adoption of the Civil Procedure Mediation Rules 2006. These rules govern almost the whole of the mediation process starting from the procedure for appointment of the mediator by both the parties from a panel of mediators who have already been formed for this purpose by the district courts. The qualifications and disqualifications for the panel, the venue of the mediation, the removal of a mediator from the panel, their impartiality and independence, the procedures during the mediation itself, confidentiality, privacy, the settlement agreement and many other aspects are governed by these rules.

It is pertinent to note also the popularity of court-annexed mediation whereby mediation centres have been set up by various High Courts including in Delhi, Madras and Bangalore.

iv Other forms of ADR

Conciliation has been inserted in Part III of the Arbitration Act and is less formal than arbitration, but more formal than mediation. To the extent that it requires only mutually consenting parties and not a formal written document executed to be able to conciliate,87 it proves an easier form of dispute resolution. The parties can appoint up to three conciliators.88 An important requirement of conciliation proceedings is the independence and impartiality of the conciliator and the attempt to ensure the appointment of a conciliator not having the nationality of either of the parties.89 The conciliators form a medium of communication between the parties inviting them for proceedings and helping them exchange documents and evidence. When the conciliators are of the opinion that elements of a settlement exist, they can draw up the terms of conciliation and, after being signed by the two parties, it shall be final and binding on both to the same extent as an arbitral award.90

VII OUTLOOK and CONCLUSIONS

In India, the judge-to-population ratio is not adequate to meet the huge volume of litigation, effectively adding to the delay in redressal. This phenomenon is often referred to as the ‘docket explosion’. Considering the extensive legal framework and significant backlog of litigation, Indian arbitration has made strong attempts to bring about a dynamic change. However, the ordinances, especially if enacted by Parliament, are expected to reduce many difficulties with regard to timing, cost, finality of awards and interim reliefs faced by both foreign and Indian parties wishing to arbitrate in India.

i Arbitration in India

In a practical scenario, a foreign investor will have the ability to approach a court for protective relief with respect to Indian shares and Indian assets and for other support, such as the recording of evidence in India. On the other hand, the ability to apply to an Indian court for annulment of an award may not be beneficial in all cases. Indian courts in exercise of jurisdiction under Section 34 of the Arbitration Act have previously taken an expansive interpretation of the grounds for challenge of an award. While the Arbitration Amendment Act has attempted to narrow the scope of interpretation around the term ‘public policy’, this remains untested in Indian courts. Therefore, it is possible that an Indian arbitral award may be re-litigated in an Indian court.

ii Arbitration outside India

Unlike the previous regime, where parties to arbitrations seated outside India did not have recourse to Indian courts under Part I of the Arbitration Act, the Arbitration Amendment Act extends certain provisions of Part I (discussed above) to foreign-seated arbitrations, subject to an agreement to the contrary. This amendment may therefore enable a foreign investor who thinks an Indian party may dissipate its assets or transfer or devalue Indian shares, to approach an Indian court for interim relief. Therefore, even if the Indian party does not have a presence or assets at the foreign location where the arbitration is seated, given the extension of certain provisions of Part I of the Arbitration Act by the Arbitration Amendment Act, foreign investors may be able to obtain protective orders in India. This reduces the risks attached to waiting until an award is finally pronounced by the tribunal.

In this regard, an award of a foreign tribunal, if required to be enforced in India, would need to be presented for enforcement under Section 48 of the Arbitration Act. An Indian court can review the foreign award to the limited extent provided under Section 48 of the Arbitration Act to examine whether it may be enforced. As stated above, since the definition of ‘court’ under the Arbitration Act has been amended to mean the jurisdictional High Court for international commercial arbitrations, the proceedings for enforcement of foreign arbitral awards will now lie before the High Court. Additionally, if the subject matter of the dispute resulting in the foreign award is in excess of the ‘specified value’ as defined under the Commercial Courts Act, all such matters will be heard and disposed of by the commercial appellate division of that High Court. The impact of judicial precedents on the arbitration regime in India remains, however, to be seen. It may be too soon to ascertain the prospects for a young country such as India.

Footnotes:

1 Zia Mody is the founder and managing partner and Aditya Vikram Bhat is a partner at AZB & Partners. The authors would like to acknowledge Priyanka Shetty, who is a senior associate and Jomol Joy, who is an associate at AZB & Partners for their assistance.
2 Glanville Williams, Learning the Law (Sweet & Maxwell, 1982) p. 19; Law Commission of India, 54th Report, p. 8.
3 Bharat Barrel and Drum Manufacturing Company Private Limited v. Employees State Insurance Corporation AIR 1972 SC 1935.
4 Section 2(c) of the Commercial Courts Act.
5 Sections 3, 4 and 2(i) of the Commercial Courts Act.
6 See e.g., Groz Beckert Sabool Ltd v. Jupiter General Insurance Co Ltd and Ors AIR 1965 P&H 477 and Sri Ramdas Motor Transport Limited v. Karedla Suryanarayana 110 ComCas 193 (Andhra Pradesh).
7 Article 141 of the Constitution of India.
8 Baradakanta Misra v. Bhimsen Dixit (1973) 1 SCC 446.
9 Pradip J Mehta v. CIT (2008) 14 SCC 283.
10 (2010) 8 SCC 24.
11 Sections 7 and 9 of the IBC.
12 Inserted by the Insolvency and Bankruptcy (Second Amendment) Act 2018 as Section 6A of the IBC.
13 Sections 7 and 9 of the IBC.
14 Inserted by the Insolvency and Bankruptcy (Second Amendment) Act 2018 as Section 238A of the IBC.
15 Section 14 of the IBC.
16 Section 13 of the IBC.
17 Section 14 of the IBC amended by the Insolvency and Bankruptcy (Second Amendment) Act 2018.
18 State Bank of India v. Ramakrishnan Civil Appeal No. 3595/2018.
19 (2018) 1 SCC 40.
20 Section 60(5) of the IBC.
21 Section 12A of the IBC inserted by the Insolvency and Bankruptcy (Second Amendment) Act 2018.
22 Amended by the Insolvency and Bankruptcy (Second Amendment) Act 2018.
23 Section 29A of the IBC inserted by the Insolvency and Bankruptcy (Second Amendment) Act 2018.
24 Section 10 of the IBC amended by the Insolvency and Bankruptcy (Second Amendment) Act 2018.
25 Section 21 of the IBC amended by the Insolvency and Bankruptcy (Second Amendment) Act 2018.
26 Section 3 of the principal Act was amended by the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Act 2018.
27 ibid.
28 Section 3A to the principal Act inserted by the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Act 2018.
29 Section 12A to the principal Act inserted by the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Act 2018.
30 Section 10 of the Specific Relief Act 1963.
31 Section 10 is amended by the Specific Relief (Amendment) Act 2018.
32 Section 20A inserted in the principal Act by the Specific Relief (Amendment) Act 2018.
33 Section 20B inserted in the principal Act by the Specific Relief (Amendment) Act 2018.
34 Section 20C inserted in the principal Act by the Specific Relief (Amendment) Act 2018.
35 (2018) 6 SCC 287.
36 AIR 2018SC 4871.
37 2018 (10) SCALE 15.
38 2018 SCC OnLine (SC) 431.
39 Original Side Appeal Nos.170 to 175 and 206 to 210 of 2018.
40 2018 (15) SCALE 133.
41 Clause XII of the Letters Patent of the High Court of Madras sets the limits of the original jurisdiction of the Court. Except for certain suits, the High Court of Madras has jurisdiction to entertain suits where, inter alia, part of the cause of action has arisen within its territorial limits. However, for this purpose, the leave of the Court has to be first obtained.
42 Fali S Nariman, ‘India and International Arbitration’, 41 Geo Wash Intl L Rev 367.
43 Schedule I to the Limitation Act 1963.
44 For instance, the Consumer Protection Act 1986 sets out a period of limitation of two years from the date when the cause of action arose for filing a complaint. Or, for instance, under the Arbitration Act an application for setting aside a final award can be made within three months from the date of the award. A court at its discretion taking on record reasons for delay can grant an extension of 30 days.
45 Power Control Appliances v. Sumeet Machines Limited (1994) 2 SCC 448.
46 AP Steel RE Rolling Mill v. State of Kerala (2007) 2 SCC 725.
47 Order VIII, Rule 1 of the CPC.
48 Order VI, Rule 17 of the CPC.
49 Order VII, Rule 14 of the CPC; Order XII Rule 2 of the CPC.
50 Section 15 of the Arbitration Amendment Act.
51 Section 5 of the Arbitration Amendment Act.
52 Section 12 of the IBC.
53 Order I, Rule 8 of the CPC.
54 Section 241 read with Section 244 and Section 245 of the Companies Act 2013. Sections 397, 398 and 399 of the Companies Act 1956.
55 People’s Union for Democratic Rights v. Union of India 1983 SCR (1) 456.
56 Article 22 of the Constitution of India.
57 Section 13 of the Family Courts Act 1984.
58 Section 36 of the Industrial Disputes Act 1947.
59 Section 32 of the Advocates Act 1961.
60 Order V, Rule 25 of the CPC.
61 Section 105 of the CrPC.
62 Section 44A of the CPC.
63 Section 13 of the CPC states:

A foreign judgment shall be conclusive as to any matter thereby directly adjudicated upon between the same parties or between parties under whom they or any of them claim litigating under the same title except (a) where it has not been pronounced by a Court of competent jurisdiction; (b) where it has not been given on the merits of the case; (c) where it appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognise the law of India in cases in which such law is applicable; (d) where the proceedings in which the judgment was obtained are opposed to natural justice; (e) where it has been obtained by fraud; (f) where it sustains a claim founded on a breach of any law in force in India.
64 Section 14 of the CPC states:

The Court shall presume upon the production of any document purporting to be a certified copy of a foreign judgment that such judgment was pronounced by a Court of competent jurisdiction, unless the contrary appears on the record; but such presumption may be displaced by proving want of jurisdiction.
65 Section 2(5) of the CPC defines a ‘foreign court’ as a court situated outside India and not established or continued by the authority of the central government.
66 Section 29 of the CPC.
67 Intertoll Ics Cecons O & M Co Private Limited v. National Highways Authority of India 129 (2006) DLT 146.
68 Re KL Gauba AIR 1954 Bom 478; In Re: Mr ‘G’, A Senior Advocate of The Supreme Court AIR 1954 SC 557.
69 The ‘sensitive personal data or information’ is defined in the IT Rules as personal information that consists of (1) the password; (2) financial information such as bank account, debit or credit card; (3) physical, psychological and mental health condition; (4) sexual orientation; (5) medical records and history; (6) biometric information; (7) any detail relating to the above as provided to the body corporate for providing a service; or (8) any of the information received under each of the heads by the body corporate for processing, or to be stored or processed under a lawful contract.
70 See, for instance, Section 2(60), which includes directors within the definition of ‘officers in default’. Section 166 also lays down duties of directors, which if contravened would result in penal consequences in the form of fines. Section 42(10) stipulates that contravention of the procedure of private placement would impose liability on the directors of the company for a penalty up to 20 million rupees or the amount involved in the offer, whichever is higher. In general, the penal provisions are Sections 447 to 457 of the Companies Act 2013.
71 See, for instance, Section 140, which empowers NCLT to suo moto or on an application, if it is satisfied that an auditor has acted in a fraudulent manner, direct a company to change its auditor. Such auditor will also be liable to penal action under Section 447. Section 147 also penalises auditors for contravention of duties of auditors and auditing standards as set out under the Companies Act 2013. Separately, Section 247 of the Companies Act 2013 imposes penalties on a valuer who has not exercised adequate due diligence.
72 Section 166(3) imposes a specific duty on a director to exercise his or her duties, inter alia, with due and reasonable care. Separately, however, Section 463(1) empowers the court to grant relief if the director has acted honestly and reasonably.
73 Section 149 read with Schedule IV provides for a code of conduct to be followed by independent directors. Specifically, Section 149(12) imposes a liability of independent directors in respect of actions or omissions that had occurred through his or her knowledge or where he or she had not acted diligently.
74 There are two statutory exceptions to the rule of client–attorney privilege. First, any communication made in furtherance of any illegal purpose is not protected and second, facts observed by the attorney in the course of his or her employment, showing that any crime or fraud has been committed since the commencement of his or her employment, are not protected.
75 The Evidence Act predates the Advocates Act 1961. The expressions ‘barrister’, ‘attorney’, ‘pleader’ or ‘vakil’ refer to various categories of legal practitioners recognised when the Evidence Act was enacted. The Advocates Act 1961 now recognises a single category of legal practitioner qualified to practise law, and defines them as ‘advocates’.
76 AIR 1982 Bom 6.
77 (2003) 114 CompCas 141 (Bom).
78 (2001) 2 SCC 365.
79 Section 162 of the Indian Evidence Act 1872.
80 See, for instance, the judgment of the Bombay High Court in Larsen & Toubro Limited v. Prime Displays Private Limited (2003) 114 CompCas 141 (Bom).
81 Afcons Infrastructure Limited v. Cherian Varkey Construction (2010) 8 SCC 24.
82 AIR 2005 SC 3353.
83 Section 2(1)(f) of the Arbitration Act.
84 Section 7 of the Arbitration Act.
85 Section 16 of the Arbitration Act.
86 Thermax Limited v. Arasmeta 2008 (1) ALT 788.
87 Section 62 of the Arbitration Act.
88 Section 63 of the Arbitration Act.
89 Section 64(2) of the Arbitration Act.
90 Sections 73 and 74 of the Arbitration Act.

Authors:

Zia Mody, Founder & Managing Partner
Aditya Vikram Bhat, Partner

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Legal Privilege & Professional Secrecy in India

Published In:Get The Deal Through (GTDT) [ ]

Domestic legislation

Attorney-client communications doctrine

Identify and describe your jurisdiction’s laws, regulations, professional rules and doctrines that protect communications between an attorney and a client from disclosure.

Professional communication between a legal adviser and a client is accorded protection under the Indian Evidence Act, 1872 (the Act), the Advocates Act, 1961 (Advocates Act) and the Bar Council of India Rules (BCI Rules).

Sections 126 to 129 of the Act is a codification of the principles of common law on professional communications between attorneys and clients. Any person who seeks advice from a practicing advocate, registered under the Advocates Act, would have the benefit of the attorney-client privilege and his or her communication would be protected. Attorneys cannot, without the express consent of the client:

  disclose any communication made during the course of or for the purpose of his or her employment as such attorney, by or on behalf of his or her client;

  state the contents or condition of any document with which he or she has become acquainted in the course of and for the purpose of his or her professional employment; or

  disclose any advice given by him or her to his or her client in the course and for the purpose of such employment.

There are certain limitations to the privilege and the law does not protect the following from disclosure:

  disclosures made with the client’s express consent;

•  any such communication made in furtherance of any illegal purpose; or

  any fact observed by any attorney in the course of his or her employment, showing that any crime or fraud has been committed since the commencement of his or her employment. The fact that the attention of the attorney was or was not directed to such fact by or on behalf of his or her client in not material in this regard.

Further, under section 129 of the Act, no one shall be compelled to disclose to the court any confidential communication that has taken place between him or her and his or her attorney, unless they have offered themselves as a witness in which case they may be compelled to disclose any communication as may appear to the court necessary to be known in order to explain any evidence that they have given, but no other.

Communications between an attorney and client are privileged even if they contain information from third parties. Prohibition of disclosure also extends to any interpreters, clerks or servants of the attorney. While the attorney-client privilege continues even after the employment has ceased, there is no privilege to communications made before the creation of an attorney-client relationship (Kalikumar Pal v Rajkumar Pal 1931 (58) Cal 1379).

The above prohibitions on disclosure of attorney-client communications is further bolstered by the provisions of the BCI Rules enacted under the Advocates Act, which govern the conduct of advocates in India.

The BCI Rules stipulate certain standards of professional conduct and etiquette for all attorneys. These provide that ‘An advocate shall not, directly or indirectly, commit a breach of the obligations imposed by section 126 of the Act’, thus reiterating the spirit of attorney-client privilege (Rule 17, Chapter II, Part VI).

Further, Rules 7 and 15 of the BCI Rules on An Advocate’s Duty Towards the Client provides as follows:

  Rule 7. Not disclose the communications between client and himself: An advocate should not by any means, directly or indirectly, disclose the communications made by his client to him. He also shall not disclose the advice given by him in the proceedings. However, he is liable to disclose if it violates section 126 of the Indian Evidence Act, 1872.

•  Rule 15. An advocate should not misuse or takes advantage of the confidence reposed in him by his client.

A breach of the above Rules would subject an advocate to disciplinary proceedings. In view of the above, privileged communication between an attorney and a client are not admissible as evidence.

Since the law on privilege is governed by the Act, one (possibly unintended) consequence is the argument that attorney-client communications are strictly not protected from law enforcement agencies in course of investigations. Having said that, any privileged material, if produced, may not be admissible as evidence in court proceedings.

In-house and outside counsel

Describe any relevant differences in your jurisdiction between the status of private practitioners and in-house counsel, in terms of protections for attorney-client communications.

The issue regarding the position of an in-house counsel on the question of attorney-client privilege in India is not free from doubt. This question has been the subject matter of judicial interpretation. In this regard, the relevant provisions of law in this regard are as under:

Section 2(a) of the Advocates Act defines advocate as an advocate entered in any roll under the provisions of the Act.

Section 29 of the Advocates Act states that only advocates are entitled to practise the profession of law in India, which has  judicially defined to include:

  appearance before court (ie, to practise in courts); and

  to practise the profession of law outside court by giving legal advice as attorney and counsel at law or by drafting or drawing legal documents or advising clients on non-contentious matters.

Rule 49 of the BCI Rules states that an advocate shall not be a full-time salaried employee of any person, government, firm, corporation or concern, as long as he or she continues to practise and shall, on taking up any such employment, disclose the fact to the Bar Council on whose roll his or her name appears, and shall thereupon cease to practise as an advocate so long as he or she continues in such employment.

It is therefore often argued that an in-house lawyer (ie, one who draws a salary) cannot practise as an advocate until such time that he or she is in full-time employment (Sushma Suri v Government of National Capital Territory of Delhi (1999) 1 SCC 330).

The Supreme Court of India clarified this question of law in Satish Kumar Sharma v Bar Council of Himachal Pradesh (2001) 2 SCC 365. On whether a salaried employee can be an ‘advocate’ under the Advocates Act, the court held:

The test, therefore, is not whether such person is engaged on terms of salary or by payment of remuneration, but whether he is engaged to act or plead on its behalf in a court of law as an advocate. In that event the terms of engagement will not matter at all . . . If the terms of engagement are such that he does not have to act or plead, but does other kinds of work, then he becomes a mere employee of the Government or the body corporate. Therefore, the Bar Council of India has understood the expression advocate as one who is actually practicing before courts which expression would include even those who are law officers appointed as such by the Government or body corporate.

However, the above distinction between lawyers who are engaged to act or plead as advocates and lawyers who are employees does not materially alter the position of law in respect of attorney-client privilege. This has been clarified by the Bombay High Court in the following cases:

•  In Municipal Corporation of Greater Bombay v Vijay Metal Works, AIR 1982 Bom 6, the Bombay High Court, while considering whether privilege would extend to communications between an in-house counsel and the client, has held that a paid or salaried employee who advises his or her employer, on all questions of law and relating to litigation, must get the same protection of law and therefore any such communication made in confidence by his or her employer to him or her for the purpose of seeking legal advice or vice versa should get protection of sections 126 and 129 of the Act. The Court further distinguished that such protection may not extend to the work undertaken by an in-house legal counsel for his or her employer that is in another capacity (such as work of an executive nature). Communications exchanged in any other capacity (not legal) would not be subject of legal professional privilege under sections 126 to 129 of the Act.

  In Larsen & Toubro Ltd v Prime Displays (P) Ltd [2003] 114 Comp Cas 141 (Bom), the Bombay High Court observed that:

It is, thus, clear that, even according to the applicant, in order that an advice given by an internal legal department of the applicant becomes entitled to protection, under Section 129, that advice must be given by a person who is qualified, to give legal advice.

This observation appears to indicate that where the in-house counsel would, save for his or her employment with the concerned litigant, be otherwise be qualified to give legal advice, then privilege under sections 126 and 129 of the Act would attach itself to advice given by that in-house counsel. The Court in Larsen & Toubro, however, did not make any finding on this issue, due to lack of pleadings on the issue. In Larsen & Toubro, the Court also permitted a claim of privilege in the case of certain documents, which included communications between company and in-house counsel, but solely on the ground that the same had been created in anticipation of litigation.

Work-product doctrine

Identify and describe your jurisdiction’s laws, regulations, professional rules and doctrines that provide protection from disclosure of tangible material created in anticipation of litigation.

All materials created (tangible or intangible) and communication exchanged between a client and attorney in anticipation of litigation will be privileged communication (Larsen & Toubro). This includes communication for the purpose of obtaining advice for the litigation; for obtaining or collecting evidence to be used in the litigation; and for obtaining information that will lead to such evidence, drafts of notices, pleadings and so forth exchanged between the attorney and the client.

Information called for by the client and provided by an employee or a third-party agent, on the request of, and for the purpose of submission to, the attorney may also be protected (Woolley v North London Railway (1868-69) LR 4 CP 602).

However, communication between the employees of the client in the ordinary course of business, which may have utility for anticipated litigation, is not protected. Accordingly, there is no protection accorded to the following:

•  for statements made by an employee regarding the subject matter of certain suit proceedings which were not to be submitted to their attorney (The Central India Spinning Weaving And Manufacturing Co Ltd v G.I.P Railway Co, AIR 1927 Bom 367); and

  letters written by one employee to another regarding information that could potentially become useful to their attorney (Bipro Doss Dey v Secretary of State for India in Council (1885) ILR 11 Cal 655).

Recent case law

Identify and summarise recent landmark decisions involving attorney-client communications and work product.

In Vijay Metal Works, the Bombay High Court held that a salaried employee who advises his or her employer on legal questions would be afforded the same privileges and protections under sections 126 and 129 of the Act as afforded to practising advocates.

In Larsen & Toubro, a petition for winding up filed by the respondents against the petitioner company, the Bombay High Court held in favour of the petitioner company that attorney-client work in anticipation of litigation is entitled to protection under sections 126 and 129 of the Act.

The Right to Information Act, 2005 (RTI Act) enables Indian citizens to access information held by public authorities. This has raised interesting questions about attorney-client privilege as grounds for refusing to disclose professedly public information in the hands of public authorities. In Mukesh Agarwal v Public Information Officer, Reserve Bank of India [2012] CIC 11210, the Central Information Commission (CIC) held that while there may be a fiduciary relationship in respect of communication from the client to his or her attorney, there is no fiduciary relationship in respect of communication from the attorney to the client when the client is a public body with public responsibility under the RTI Act. Section 8.1(e) of the RTI Act excludes from disclosure of information available to a person in his or her fiduciary relationship, unless the competent authority is satisfied that the larger public interest warrants the disclosure of such information. The CIC in this case held that there was a larger public interest warranting disclosure, and accordingly ruled in favour of the citizen seeking information.

The same principle was applied by the CIC in 2015 in Alok Srivastava v CPIO, English & Foreign Language University, where the client (being a public university with an aforementioned public responsibility) was directed to disclose material information as there was a public interest that outweighed the protected interest. These CIC cases show that traditional attorney-client privilege does not apply to governmental entities if the exception provided in section 8.1(e) of the RTI Act applies.

In the Superintendent, High Court v The Registrar, Tamil Nadu Information Commission and M Sivaraj, 2010 (5) CTC 238, it was held that even though the office of the public prosecutor is a public authority, the Act only requires the public prosecutor to furnish such information, which is available to him or her and capable of being furnished, subject to section 8(1)(e) of the Act. Here, the public prosecutor, bound by attorney-client privilege to not disclose information provided to it by the State of Tamil Nadu, directed a citizen seeking information to approach the State of Tamil Nadu directly. The Madras High Court, which was approached in this connection, held that:

Instead of asking the [Public Prosecutor], who holds such an information in the capacity of counsel, the petitioner is very well entitled to approach the client, ie, the State of Tamil Nadu directly for getting such information.

In Cecilia Fernandes v State represented by the Director General of Police Goa and Anr, Criminal Miscellaneous Application No. 9 of 2005, the Bombay High Court held that the right to consult a legal practitioner under article 22(1) of the Constitution of India could only be exercised meaningfully in confidence. Thus a police officer, while entitled to stay within a certain distance of an accused, cannot insist on being within hearing distance so as to prevent an accused from instructing his lawyer in confidence.

Attorney-client communications

Elements

Describe the elements necessary to confer protection over attorney-client communications.

Section 126 of the Act prohibits an attorney from disclosing an attorney-client privileged communication. The communication may be of any form and nature, verbal or documentary. It even covers facts observed by an attorney in the course and purpose of the attorney-client relationship. The elements necessary to confer protection are:

There must be:

  communication between a client and his attorney;

  documents exchanged between a client and an attorney, the contents and condition of which the attorney should be acquainted with; or

•   advice from the attorney to the client.

•  The above information must have been provided in the course of and for the purpose of the professional engagement with the attorney or in anticipation of litigation, and cannot just be general information.

  The communication should not be in furtherance of any illegal purpose, or such information should not relate to the commission of any fraud or crime after the commencement of engagement with the attorney.

  Whether the attention of the attorney was specifically directed by the client (or someone on behalf of the client) to a particular fact is not relevant.

Section 129 of the Act provides protection to a client from being compelled to disclose any ‘confidential communication’ with his or her legal professional adviser. The scope of attorney-client privilege under this section extends to all communications, oral or written. Based on observations in case laws on this issue, it appears that for any communication to qualify as being privileged under section 129, there are two tests that have to be satisfied, namely:

•  whether the person is a professional legal adviser; and

•  if yes, whether the communication is confidential and whether it is in relation to any legal issue or litigation, or in relation to legal advice sought by the client from the professional legal adviser.

To claim privilege, the communication must be of a private and confidential nature, and must have been provided sub sigillo confessionis (ie, in confidence). Where the communication is made in the presence of third parties, the court will examine whether the person intended it to be confidential or not. The position occupied by the third party and whether the third party had the same interests is relevant.

In Bhagwani Choithran v Deoram, AIR 1933 Sind 47, a client made a statement to his attorney in the presence of the client’s friends. The court held that since the friends occupied more or less the same position as the client, and had the same interests, privilege was not destroyed; however, the court held that it could be evidence that communication was not being made in confidence.

In Memon Hajee v Moulvi Abdul, (1878) 3 Bom 91, the defendants, in the presence and within the hearing of the plaintiff, had communicated information to their attorney who was at the relevant time also the attorney for the plaintiff. This information was held to be not confidential in light of the conduct of the defendants, and given that the statements were made to the attorney not exclusively in his character as attorney for the defendants but also as attorney for the plaintiffs.

Exclusions

Describe any settings in which the protections for attorney-client communications are not recognised.

Under section 129 of the Act, no one shall be compelled to disclose any confidential communication to the court, which has taken place between a client and his or her attorney, unless the client offers himself or herself as a witness in which case he or she may be compelled to disclose any such communication as may appear to the court necessary to be known in order to explain any evidence which he or she has given, but no other.

Any fact observed by any attorney in the course of his or her employment, showing that any crime or fraud has been committed since the start of his or her employment is not accorded protection under the Act. The fact that the attention of the attorney was or was not directed to such fact by or on behalf of his or her client is not material in this regard.

Further, under section 91 of the (Indian) Code of Criminal Procedure, a court can compel the production of any document, and the person in whose possession it is, if the document is necessary or desirable for the purpose of any inquiry, trial or other proceeding. The court in Chandubhai v State, AIR 1962 Guj 290, held that the protection against production or disclosure, however, does not extend to any original document that might have come into the possession of an attorney from his or her client. The attorney is but the agent of the client to hold the document and if the client is compellable to produce the document, there is no reason either on principle or authority on which the attorney can refuse to produce the document. The document handed over to the attorney by the client cannot be said to be privileged under section 120 of the Act unless the document contains any communication made to the attorney by the client in the course and for the purpose of the engagement as an attorney. The letter of which production was sought in the present case from the attorney of the accused was obviously not a letter in respect of which any privilege could be claimed by the attorney of the accused under section 126 of the Act.

Who holds the protection?

In your jurisdiction, do the protections for attorney-client communications belong to the client, or is secrecy a duty incumbent on the attorney?

Section 126 of the Act prohibits an attorney from disclosing attorney-client communications, without the express consent of the client. Therefore, the client may release the attorney from his or her obligation to maintain secrecy. However, in the absence of express consent, the attorney has a duty to maintain secrecy. If the attorney fails in his or her duty and discloses confidential information, that information may be held inadmissible (Bakaulla Mollah v Debiruddi Mollah, (1911-12) 16 CWN 742 (Cal)).

Underlying facts in the communication

To what extent are the facts communicated between an attorney and a client protected, as opposed to the attorney-client communication itself?

The facts between an attorney and a client are privileged as far as they are exchanged after the attorney’s engagement and subject to the exceptions set out above (such as such facts not in relation to an illegal purpose, etc).

Agents

In what circumstances do communications with agents of the attorney or agents of the client fall within the scope of the protections for attorney-client communications?

Section 126 of the Act includes communications made to the attorney ‘on behalf of’ the client within the scope of the protection. This will arguably extend protection to communications made by the agent of the client to the attorney on the client’s behalf in relation to legal advice or in anticipation of legal proceedings. Section 127 of the Act extends protection under section 126 to all interpreters and clerks or servants of the attorney.

Corporations claiming protection

Can a corporation avail itself of the protections for attorney-client communications? Who controls the protections on behalf of the corporation?

Yes. The protection is granted for a ‘client’, the meaning of which is not restricted to individuals. Communication between a corporation (through its agents) and external attorney in relation to legal advice or in anticipation of litigation are considered to be privileged communication under sections 126 to 129 of the Act. Such protection is not absolute and subject to limitations as set out in question 1.

Under Indian law, the board of directors of a corporation, or an authorised representative thereof, are understood to be in control of the corporation. In the case of protection of attorney-client communications, the board of directors, or a duly authorised representative, may be understood to be in control.

Communications between employees and outside counsel

Do the protections for attorney-client communications extend to communications between employees and outside counsel?

Yes, the protection for attorney-client communications will extend to communications in relation to legal advice or in anticipation of litigation between employees (as agents of the corporation) and outside counsel provided. Such protection is not absolute and subject to limitations as set out in question 1.

Communications between employees and in-house counsel

Do the protections for attorney-client communications extend to communications between employees and in-house counsel?

Yes, the protection for attorney-client communications will extend to communications in relation to legal advice or in anticipation of litigation between employees (as agents of the corporation) and outside counsel provided. Such protection is not absolute and subject to limitations as set out in question 1. Further, such protection may not extend to the work undertaken by an in-house legal counsel for his or her employer which is undertaken in another capacity (such as work of an executive nature). Communications exchanged in any other capacity (not legal) would not be subject to legal professional privilege under sections 126 to 129 of the Act (Vijay Metal Works).

Communications between company counsel and ex-employees

To what degree do the protections for attorney-client communications extend to communications between counsel for the company and former employees?

Privilege under section 126 of the Act extends to attorney communication with employees (working in a client corporation) in the course of and for the purpose of their professional employment. Section 126 specifically states that the obligations of such persons continue after the employment has ceased.

Further, section 126 of the Act protects communication between an attorney and a client or on behalf of his or her client. Any communication between a former employee, as an agent of the client with an attorney, can be considered as privileged communication. Such a protection is not absolute and subject to limitations as set out in question 1.

Who may waive protection

Who may waive the protections for attorney-client communications?

The privilege accorded under sections 126 to 129 of the Act is established for the protection of the client. Hence, such a privilege can only be waived by the client.

Actions constituting waiver

What actions constitute waiver of the protections for attorney-client communications?

Under section 126 of the Act, a client is required to expressly consent to the waiver of privilege. This need not be in writing necessarily, and could be inferred from the facts and circumstances. Further, under section 128, if a client calls his or her attorney as a witness and, in the course of examination, asks questions that specifically require a disclosure of attorney-client privileged information, then such a client is understood to have waived privilege.

Accidental disclosure

Does accidental disclosure of attorney-client privileged materials waive the privilege?

Waiver of privilege under section 126 of the Act occurs only when the client expressly consents to it, or in the case of section 128, consents to it by implication. While there is no judicial pronouncement by the courts of India on this issue, considering any waiver must be deliberate (indicating consent), accidental disclosure may not be considered as a waiver of privilege.

Sharing communications among employees

Can attorney-client communications be shared among employees of an entity, without waiving the protections? How?

While confidential communications between principal and agent, even if relating to matters in a suit (or other litigation advice or proceedings) are not privileged, attorney-client communications are privileged correspondence. Only the client entity can waive such privilege. Therefore, sharing the attorney-client communication among employees of a client entity does not waive protection.

Exceptions

Describe your jurisdiction’s main exceptions to the protections for attorney-client communications.

Section 126 of the Act lays down two exceptions to attorney-client privilege, namely:

  communication made in the furtherance of any illegal purpose; and

  any fact observed by an attorney in the course of his or her employment that shows a crime or fraud has been committed since the start of his or her employment.

Litigation proceedings overriding the protection

Can the protections for attorney-client communications be overcome by any criminal or civil proceedings where waiver has not otherwise occurred?

Under section 91 of the Code of Criminal Procedure, a court can compel the production of any document, and the person in whose possession it is, if the document is necessary or desirable for the purpose of any inquiry, trial or other proceeding.

The court in Chandubhai held that the protection against production or disclosure, however, does not extend to any original document that might have come into the possession of an attorney from his or her client. The attorney, when holding a document on behalf of a client, is acting as the agent of the client, and if the client is compellable to produce the document, there is no reason based on principle or authority on which the attorney can refuse to produce the document. The document handed over to the attorney by the client cannot be said to be privileged under section 120 of the Act unless the document contains any communication made to the attorney by the client in the course and for the purpose of the engagement as an attorney. The letter requested in Chandubhai from the attorney of the accused was obviously not a letter in respect of which any privilege could have been claimed by the attorney of the accused under section 126 of the Act.

In civil proceedings, under section 30 (order XI) of the Code of Civil Procedure, a party can seek discovery or summons by issuing interrogatories, demanding production of documents by the other party and so forth. In such circumstances, attorney-client privilege is a ground to object to discovery.

Recognition of foreign protections

In what circumstances are foreign protections for attorney-client communications recognised in your jurisdiction?

This is not a settled question of law in India. In a given case, the question of whether foreign protections for attorney-client privilege exist or not would be a question of foreign law. Under Indian law, questions of foreign law are treated as questions of fact. Therefore, foreign protections for attorney-client communications will be recognised if the same is proven as a fact before an Indian court.

Best practice to maintain protection

Describe the best practices in your jurisdiction that aim to ensure that protections for attorney-client communications are maintained.

There are no prescribed best practices in India to maintain protections for attorney-client communications. It is advisable to mention the words ‘privileged and confidential’ in attorney-client correspondence.

Work product

Elements

Describe the elements necessary to confer protection over work product.

Indian law follows the English position in relation to work product. The work product must be prepared by counsel or at the request of counsel in anticipation of litigation to confer protection.

Exclusions

Describe any settings in which the protections for work product are not recognised.

See question 3.

Who holds the protection

Who holds the protections for work product?

See question 7.

Types of work product

Is greater protection given to certain types of work product?

No, different levels of protection are not granted to work product depending on their nature. If the elements necessary to confer protection over work product are satisfied, the work product will be protected.

In-house counsel work product

Is work product created by, or at the direction of, in-house counsel protected?

Yes, work product created by or at the direction of in-house counsel in anticipation of litigation will be protected. However, such protection may not extend to the work undertaken by an in-house legal counsel for his or her employer that is in another capacity (such as work of an executive nature).

Work product of agents

In what circumstances do materials created by others, at the direction of an attorney or at the direction of a client, fall within the scope of the protections for work product?

See question 3.

Third parties overcoming the protection

Can a third party overcome the protections for work product? How?

No, protection for work product can only be overcome when the client waives privilege; a third party cannot overcome the protections.

Who may waive work-product protection

Who may waive the protections for work product?

See question 14.

Actions constituting waiver

What actions constitute waiver of the protections for work product?

See question 15.

Client access to attorney files

May clients demand their attorney’s files relating to their representation? Does that waive the protections for work product?

Yes, clients may demand their attorney’s files relating to their representation. The mere demand of files will not amount to waiver, as it does not amount to express consent on the part of the clients, to release the attorney from the duty of privilege.

Accidental disclosure of work product

Does accidental disclosure of work-product protected materials waive the protection?

See question 16.

Exceptions

Describe your jurisdiction’s main exceptions to the protections for work product.

See question 18.

Litigation proceedings overriding the protections

Can the protections for work product be overcome by any criminal or civil proceedings where waiver has not otherwise occurred?

See question 19.

Recognition of foreign protection

In what circumstances are foreign protections for work product recognised in your jurisdiction?

See question 20.

Other issues

Who determines what is protected

Who determines whether attorney-client communications or work product are protected from disclosure?

Whether communications or work products are protected under attorney-client privilege is a determination made by the courts in India. In civil proceedings (see question 19), under the Code of Civil Procedure, when an opposite party makes an application for discovery, a party can resist production on the grounds of attorney-client privilege. The civil court is entitled to decide whether the documents or communications in question are privileged or not.

If a court issues a summons in a criminal proceeding under section 91 of the Code of Criminal Procedure, then attorney-client privilege over documents or communications cannot prevent a court from examining the same. It cannot be argued that the section 91 order is illegal simply because it overrides the privilege conferred under section 126 of the Act. The power to issue notice under section 91 is not limited by section 126. The court in the appropriate cases can make an order under section 91 that would override the provisions of section 126 of the Act.

The issuance of summons is a discretion exercised by the court and the possibility of the court not to make an order that violates the privilege conferred under section 126, in the exercise of its discretion, cannot be ruled out.

Common interest

Can attorney-client communications or work product be shared among clients with a common interest who are represented by separate attorneys, without waiving the protections? How may the protections be preserved or waived?

Section 126 of the Act does not contemplate sharing of attorney-client communications or work product among persons with a common interest without waiving protections. As per the language of section 126, a client may waive privilege entirely or not at all.

Limited waiver

Can attorney-client communications or work product be disclosed to government authorities without waiving the protections? How?

Sections 126 to 129 of the Act do not contemplate limited waiver. As per the language of section 126, a client may waive privilege entirely or not at all.

Other privileges or protections

Are there other recognised privileges or protections in your jurisdiction that permit attorneys and clients to maintain the confidentiality of communications or work product?

Apart from sections 126 to 129 of the Act and rule 17, chapter II, part VI of the BCI Rules, there are no formal recognised privileges or protections. Attorneys and clients may in their contract enter into arrangements to maintain confidentiality of communications or work product. This will be capable of protection under (Indian) contract law.

Authors:

Aditya Bhat, Partner
Priyanka Shetty, Associate

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SC Decision on Definition of ‘Basic Wages’ under the EPF Act

Published In:Inter Alia - Quarterly Edition - March 2019 [ English Chinese japanese ]

The Supreme Court of India (‘SC’) heard multiple appeals[1] arising from various High Courts raising a common question of law i.e., whether special allowances paid by an establishment to its employees would fall within the expression ‘basic wages’ for computation of contribution towards the employees provident fund.

In its judgment dated February 28, 2019, the SC reiterated the position that had been earlier laid out in relation to the question of what would constitute ‘basic wages’ for the purposes of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (‘EPF Act’). The SC applied the tests laid down in, inter alia, Bridge and Roof Co. (India) Limited v. Union of India[2] and Manipal Academy of Higher Education v. Provident Fund Commissioner[3], and reaffirmed the position that had been set out in these judgements, viz. where an allowance is universally, necessarily and ordinarily paid to all across the board, such allowances would be ‘basic wages’ for the purpose of the EPF Act. This is not a new position, but the SC has simply reinforced the position that had already been laid out clearly. However, it appears to have created a ripple amongst employers who continued to exclude all allowances, even those that are paid universally to all employees, for the purposes of computation of basic wages under the EPF Act.

[1] (1) Regional Provident Fund Commissioner v. Vivekananda Vidyamandir (Civil Appeal No. 6221 of 2011), (2) Surya Roshni Ltd. v. Employees Provident Fund (Civil Appeal Nos. 3965-66 of 2013), (3) U-Flex Ltd. v. Employees Provident Fund (Civil Appeal Nos. 3969-70 of 2013), (4) Montage Enterprises Pvt. Ltd. v. Employees Provident Fund (Civil Appeal Nos. 3967-68 of 2013), and (5) Management of Saint-Gobain Glass India Ltd. v. The Regional Provident Fund Commissioner, Employees’ Provident Fund Organisation (Transfer Case (C) No.19 of 2019, arising out of T.P. (C) No. 1273 of 2013).
[2] Bridge and Roof Co. (India) Limited v. Union of India, (1963) 3 SCR 978.
[3] Manipal Academy of Higher Education v. Provident Fund Commissioner, (2008) 5 SCC 428.

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SC Clarifies that Plea of Territorial Jurisdiction cannot be Raised through Application for Revocation of the Leave Granted under the Letters Patent Act, 1865

Published In:Inter Alia - Quarterly Edition - March 2019 [ English Chinese japanese ]

SC, in its decision dated March 7, 2019 in Isha Distribution House Private Limited v. Aditya Birla Nuvo Limited[1], has considered if the High Court was justified in allowing the defendants’ application for revoking the leave granted to the plaintiff under Clause XII of the Letters Patent Act, 1865 (‘LPA’). Setting aside the order of the High Court, SC held that a plea of territorial jurisdiction is a mixed question of fact and law, which ought to be raised in the written statement to enable the Court to try it on merits in accordance with Order XIV of the Code of Civil Procedure, 1908 and other relevant provisions. As such, a plea of such a nature cannot be tried by filing an application for revocation of the leave granted under Clause XII of the LPA. Accordingly, SC remanded the case to the High Court for deciding the plea of territorial jurisdiction afresh in accordance with the above observations.

[1] Isha Distribution House Private Limited v. Aditya Birla Nuvo Limited, Civil Appeal Nos. 2554­2555 of 2019 (arising out of S.L.P.(C) Nos. 19777­19778 of 2017).

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SC Strikes Down the Requirement of 10% Pre-Deposit for Initiating Arbitration against a State Entity

Published In:Inter Alia - Quarterly Edition - March 2019 [ English Chinese japanese ]

SC, in its decision dated March 11, 2019 in Icomm Tele Limited v. Punjab State Water Supply & Sewerage Board[1], had to judge the validity of an arbitration clause that provided for a deposit of 10% of the claim amount in a scheduled bank in the name of the arbitrator, as a condition for initiation of arbitration by a claimant, prescribed in tender documents of a State entity.

SC held that deterring a party from invoking the arbitration process by a pre-deposit of 10% would discourage arbitration, contrary to the object of de-clogging the courts, and would render the arbitral process ineffective and expensive. Accordingly, the impugned clause was held to be violative of Article 14 of the Constitution and was struck down to such extent. SC has also reiterated that terms of an invitation to tender are not open to judicial scrutiny, as they are in the realm of contract, unless they are arbitrary, discriminatory or actuated by malice.

[1] Icomm Tele Limited v. Punjab State Water Supply & Sewerage Board, Civil Appeal No. 2713 of 2019 (arising out of SLP (Civil) No. 3307 of 2018).

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SC Clarifies Regarding Appointment of an ‘Independent Arbitrator’

Published In:Inter Alia - Quarterly Edition - March 2019 [ English Chinese japanese ]

SC, in its decision dated March 29, 2019 in Union of India v. Parmar Construction Company[1], has held that with respect to appointment of an independent arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 (‘A&C Act’), there should be emphasis to act on the agreed terms and to first resort to the procedure in the arbitration agreement, which should be given effect to as closely as possible. Therefore, an independent arbitrator should be appointed by the Court under Section 11(6) of the A&C Act after the remedies provided for in the agreement had been exhausted. The SC also held that the Arbitration and Conciliation (Amendment Act), 2015, which came into force on October 23, 2015, would not apply to arbitral proceedings which had commenced (in accordance with Section 21 of the A&C Act) before the coming into force of such amendment, unless the parties had otherwise agreed.

[1] Union of India v. Parmar Construction Company, Civil Appeal No(s). 3303 of 2019 (arising out of SLP(C) No(s). 6312 of 2018).

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Delhi HC Refuses to Grant an Anti-Bilateral Investment Treaty Arbitration Injunction

Published In:Inter Alia - Quarterly Edition - March 2019 [ English Chinese japanese ]

The Delhi High Court in its decision dated January 29, 2019 in Union of India v. Khaitan Holdings (Mauritius) Limited[1] has refused to grant an anti-Bilateral Investment Treaty (‘BIT’) arbitration injunction to restrain Khaitan Holdings (Mauritius) Limited from relying upon the arbitration provision in the BIT agreement entered into between India and Mauritius. It was held that: (i) the A&C Act, would not apply to BIT arbitrations as they were not commercial arbitrations and therefore, the provisions of the Code of Civil Procedure, 1908 would apply; (ii) while the Indian Courts did have jurisdiction to grant anti-BIT arbitration injunctions, such injunctions would only be granted in very rare circumstances given that it is a principle of public policy that the Government has to honour its commitments; and (iii) an arbitral tribunal constituted under a BIT is competent to decide its own jurisdiction.

[1] Union of India v. Khaitan Holdings (Mauritius) Limited, CS (OS) 46 of 2019.

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Bombay High Court Decides on Enforceability of a Put Option in a Share Purchase / Shareholders’ Agreement

Published In:Inter Alia - Quarterly Edition - March 2019 [ English Chinese japanese ]

The Bombay High Court in its decision dated March 27, 2019 in Edelweiss Financial Services Limited v. Percept Finserve Private Limited[1] has set aside an arbitral award which had held that a put option provided to Edelweiss Financial Services Limited was void and unenforceable. The arbitral award held that such put option was a forward contract and in any event a derivative contract under the Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and therefore illegal under the notifications issued under Section 16 and also contrary to Section 18A of the SCRA. The Bombay High Court set aside the arbitral award on the ground of ‘patent illegality’ and held that such a put option is enforceable as the contract of sale comes into existence only after the exercise of such option. Therefore, such an option is neither a forward contract nor a derivative contract under Section 2(ac) of the SCRA. The Court further held that even assuming the option is a derivative, its illegality must not be borne from Section 18A of the SCRA – which only positively provides for legality and validity of contracts in derivative. The Court has also ruled that cross objections filed by a respondent in a petition under Section 34 of the A&C Act are not maintainable since the provisions of Civil Procedure Code, 1908 are not applicable to proceedings under Section 34 as the A&C Act is a code in itself and Section 34 does not make any provision for filing of cross objections.

[1] Edelweiss Financial Services Limited v. Percept Finserve Private Limited, Arbitration Petition No. 220 of 2014.

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NCLAT holds that it is not necessary to Initiate IBC Proceedings against the Principal Borrower before Initiating CIRP against the Corporate Guarantors

Published In:Inter Alia - Quarterly Edition - March 2019 [ English Chinese japanese ]

The National Company Law Appellate Tribunal (‘NCLAT’), in its decision dated January 8, 2019, in Ferro Alloys Corporation Limited v. Rural Electrification Limited[1], has reasoned that the Insolvency and Bankruptcy Code, 2016 (‘IBC’) does not exclusively prescribe any inter-se rights, obligations and liabilities of a guarantor qua a financial creditor. Thus, the NCLAT has held that, in the absence of any express provisions to this effect, the same will have to be noticed from the provisions of the Indian Contract Act, 1872 and therefore it is not necessary to initiate Corporate Insolvency Resolution Process (‘CIRP’) under the IBC against the ‘Principal Borrower’ before initiating it against the ‘Corporate Guarantors’. Without initiating any CIRP against the ‘Principal Borrower’, it is open to the financial creditor to initiate CIRP against the ‘Corporate Guarantors’, as such financial creditor is also the ‘Financial Creditor’ qua the ‘Corporate Guarantor’ under Section 7 of the IBC.

[1] Ferro Alloys Corporation Limited v. Rural Electrification Limited, Company Appeal (AT) (Insolvency) No. 92 of 2017.

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SC Strikes Down RBI Circular dated February 12, 2018

Published In:Inter Alia - Quarterly Edition - March 2019 [ English Chinese japanese ]

In Dharani Sugars and Chemicals Limited v. Union Of India[1], the SC dealt with various petitions challenging the constitutional validity of RBI circular dated February 12, 2018 (‘RBI Circular’). The SC struck down the RBI Circular and declared it as ultra-vires.

With respect to the scope of RBI’s power to issue the RBI Circular under Section 35AA of the Banking Regulation Act, 1949 (‘BR Act’), the SC held that RBI can direct banking institutions to initiate insolvency proceedings if two conditions are fulfilled, namely if: (i) there is a Central Government authorization to do so, and (ii) the direction is in respect of specific defaults. Section 35AA, by necessary implication, prohibits RBI to exercise the power in any manner other than as set out in Section 35AA. Whilst prior to the enactment of Section 35AA of the BR Act, RBI could have issued directions under Section 21 and Section 35A of the BR Act to initiate an insolvency resolution process under the IBC; after the enactment of Section 35AA, this can be done only within the four corners of Section 35AA.

With respect to the scope of Section 35AB of the BR Act, the SC interpreted the words “without prejudice” appearing in Section 35AB to be only illustrative of a general power which does not restrict such general power. Therefore, the power to issue directions under Section 35AB is in addition to the power under Section 35A. Additionally, Section 35AB is not without prejudice to the provisions contained in Section 35AA and, therefore, the power under Section 35AB (read with Section 35A) is to be exercised separately from the power conferred by Section 35AA. The SC held that the scheme of Sections 35A, 35AA, and 35AB of the BR Act is as follows:

i.         Section 35AA is the only source of power to issue directions to initiate the insolvency resolution process under IBC;

ii.     When it comes to issuing directions in respect of stressed assets, which directions are directions other than resolving the problem of stressed assets under IBC, such power falls within Section 35AB (read with Section 35A).

The SC was of the view that all actions taken under the RBI Circular, including actions by which IBC has been triggered, falls along with this RBI Circular. As a result, all cases in which debtors have been proceeded against by financial creditors under Section 7 of IBC, only because of the operation of the RBI Circular, have been declared to be non-est.

[1] Dharani Sugars and Chemicals Limited v. Union Of India, Transferred Case (Civil) No. 66 of 2018 in Transfer Petition (Civil) No. 1399 of 2018.

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NCLAT Dismisses Tata Steel’s Appeal Against Liberty in the Matter of Bhushan Power & Steel

Published In:Inter Alia - Quarterly Edition - March 2019 [ English Chinese japanese ]

The NCLAT, in its judgment dated February 4, 2019, has dismissed the appeal filed by Tata Steel Limited (‘TSL’) against Liberty House Pte. Ltd. (‘Liberty’). TSL had challenged the order of the National Company Law Tribunal, Principal Bench (‘NCLT’) dated April 23, 2018 whereby the Committee of Creditors (‘CoC’) of Bhushan Power & Steel Limited (‘BPSL’) was directed to consider the resolution plan submitted by Liberty after expiry of the last date for submission of the same. During the CIRP of BPSL, TSL and JSW Steel Limited (‘JSW’) had submitted their respective bids within the timelines provided by the resolution professional. Whilst TSL’s appeal against the NCLT’s order dated April 23, 2018 was pending before the NCLAT, JSW revised its earlier bid and, thereafter, continued to revise its bid, which was also challenged by TSL before the NCLAT (along with actions of the CoC in connection with the same).

The issues for consideration before the NCLAT were whether the NCLT/CoC could provide multiple opportunities to resolution applicants to revise their respective resolution plans and if the CoC was authorized to entertain fresh or revised resolution plans without exhausting available bids. The NCLAT relied upon the judgment in the Binani Industries case and confirmed that prior to the voting on resolution plans placed before the CoC, the CoC can call for and consider the ‘improved financial offer(s)’ in order to ensure value maximization and within the IBC timelines it was open for the CoC to grant multiple opportunities to the resolution applications to revise their respective financial offers.

The NCLAT also held that the appeal filed by TSL was premature in absence of any final decision taken by the NCLT as to the approval of the resolution plan. The NCLAT took note of the approval of the resolution plan of JSW by the CoC during the pendency of the appeal and directed that proceedings could be initiated before the NCLT for approval of the same. Subsequently, the resolution professional has filed an application before the NCLT for approval of the resolution plan of JSW, which is currently pending.

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Delhi High Court Clarifies Powers of CCI and Director General to Initiate Criminal Proceedings under Section 42(3) of the Act for Non-compliance of its Orders and Directions

Published In:Inter Alia Special Edition- Competition Law - May 2019 [ English ]

On March 29, 2019, the Delhi High Court (‘DHC’) passed a judgment in the matters of M/S Rajasthan Cylinders and Containers Ltd. v CCI[1], Shri Jose C. Mundadan v. State and Anr.[2] and Jose C. Mundadan v. Government of NCT of Delhi and Anr.[3] (the three writ petitions are collectively referred to as ‘Petitions’). By way of this judgment, the DHC refrained from interfering with the non-compliance criminal proceedings initiated by CCI against Rajasthan Cylinders and Containers Limited (‘RCCL’), Film Distributors Association, Kerala (‘FDA’) and Mr. Jose C. Mundadan in his capacity as the Honorary General Secretary of FDA, (collectively referred to as ‘Petitioners’), under Section 42(3) of the Act. These proceedings were initiated separately against the Petitioners before the court of the Chief Metropolitan Magistrate, New Delhi (‘CMM’). The writs filed by each of the Petitioners were heard together by the DHC.

A.       RCCL (‘Petition 1’)

CCI instituted a criminal complaint under against RCCL for failure to pay penalty imposed by CCI for non-compliance with the Director General (‘DG’) and CCI’s directions in certain suo moto proceedings initiated by CCI.

B.       FDA and Mr. Jose C. Mundadan (‘Petition 2 and Petition 3’)

CCI instituted a criminal complaint against FDA through Mr. Jose C. Mundadan and against Mr. Jose C. Mundadan, in his capacity as the Honorary General Secretary of the FDA for failure to pay penalty imposed by CCI and comply with DG’s directions.

The Petitioners challenged the jurisdiction of CCI in initiating criminal proceedings for failing to pay the penalty imposed by CCI and comply with directions of DG. It was argued that the penal clause leading to such criminal action in the court of CMM under Section 42(3) of the Act: (i) was not intended to cover non-compliance of orders directing payment of penalty; (ii) only dealt situations arising out of non-compliance of orders of CCI and not the DG; and (ii) would lead to double jeopardy, which is prohibited under Article 20(2) of the Constitution of India.

DHC clarified that the cause of action for criminal complaint to be filed in the court of CMM arises in two possible situations: (i) failure to ‘comply with the orders or directions’ issued under the law; or (2) failure to pay fine imposed for non-compliance with orders or directions of CCI under specified provisions (i.e., Sections 27, 28, 31, 32, 33, 42A and 43A of the Act), with CCI finding absence of ‘reasonable cause’ after inquiry. DHC held that legislature intended the offence under Section 42(3) of the Act to have a larger sweep, covering failure to comply with the orders or directions issued under the law, including failure to pay penalty, irrespective of whether they had been issued by CCI or by its functionaries, like DG-CCI.

As for the argument on double jeopardy, the DHC relied on Union of India & Anr. v. Purushottam[4], and held that the imposition of penalty under Section 43 of the Act is civil in nature and imposed by the statutory authority (CCI) in exercise of powers conferred on it by the Act. However, the criminal action by CCI (i.e., alleging an offence under Section 42(3) of the Act) carries an additional element of failure to comply further with the said directions/orders. On this basis, DHC held that such an action did not violate Article 20(2) of the Constitution of India and rejected the Petitions for these reasons.

[1] Crl. M.C. 4363/2018
[2] Crl..M.C. 5324/2018
[3] Crl. M.C. 5371/2018
[4] (2015) 3 SCC 779

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Delhi High Court Rules on the Constitutionality of Certain Provisions of the Act in its Auto Parts decision

Published In:Inter Alia Special Edition- Competition Law - May 2019 [ English ]

On April 10, 2019, a division bench of the DHC, comprising of Justice Ravindra Bhat and Justice Prateek Jalan, (‘Bench’) pronounced its landmark judgement in relation to the petitions filed by original equipment manufacturers (‘OEMs’) of passenger cars (‘Petitions’)[1]. The Petitions challenged the constitutional validity of certain provisions of the Act and associated regulations. Specifically, Sections 8, 9, 15, 17, 22, 26, 27(b), 17, 36, 53A, 53B, 53C, 53D, 53E, 53F, 53T, 55, 56 and 61 of the Act, and Regulations 37, 41, 44, 45 and 48 of the Competition Commission of India (General) Regulations, 2009 (‘General Regulations’), (together, the ‘Impugned Provisions’) were challenged, along with two orders of the CCI dated April 26, 2011 and August 25, 2014.

Background

The genesis of the Petitions relates to information filed with CCI by Mr. Shamsher Kataria (‘Informant’) against Honda Siel Cars India Limited, Volkswagen India Private Limited and Fiat India Automobiles Limited. On February 24, 2011, by way of a prima facie order under Section 26(1) of the Act, CCI directed its DG to conduct an investigation based on the Informant’s allegation that the three OEMs placed restrictions on: (i) their authorized dealers from making over-the-counter sales of their spare parts and diagnostic tools; and (ii) the supplier of the spare parts making direct sales in the market. The Informant had alleged that such practices limited consumer choice and raised the prices of repair and maintenance services of the OEMs’ cars. On April 26, 2011, CCI passed an order accepting the DG’s request to expand the scope of the investigation to include 11 other OEMs (‘First Order’).On August 25, 2014, based on the submissions of the OEMs and the DG’s investigation report, CCI held that the OEMs had contravened Section 3(4) (Prohibition against Anti-Competitive Vertical Agreements) and Section 4 (Prohibition of Abuse of Dominance) of the Act, inter alia, for restricting supply of their spare parts in the market (‘Final Order’). CCI imposed a penalty of 2% of the total turnover in India for three financial years (2007-08, 2008-09 and 2009-10) on each of the 14 OEMs, along with directions which, inter alia, included the standardization of spare parts across brands, and access to diagnostic tools and spare parts of the OEMs to all independent repairers.

DHC’s Issue-Wise Findings

10 of these OEMs (viz., Mahindra, Tata Motors, General Motors, Mercedes Benz, Skoda, Honda, Volkswagen, Hindustan Motors, Fiat and BMW) filed a writ petition before the DHC on the constitutional validity of the Impugned Provisions, and on that basis, the validity of CCI’s First Order and Final Order. Based on the submissions in the Petitions and those by CCI, the Bench delineated six issues for consideration:

i.       Whether CCI is a tribunal exercising judicial functions:

The Bench held that unlike a tribunal which performs purely judicial functions, CCI is a body that is in part administrative, expert (when discharging advisory and advocacy functions) and quasi-judicial (when it determines the rights and liabilities of parties by way of issuing final decisions, directions and penalties, after the conclusion of the DG’s investigation), and does not perform exclusively adjudicatory functions.

ii.      Whether the composition of CCI violates the constitutional principles of separation of powers:

The Bench held that to examine whether a particular law violates the ‘separation of powers’ principle, the Court is required to examine if the executive branch or any other branch usurps an essential judicial function. Based on the reasons provided below, the Bench held that there was no violation of the separation of powers principle in the present case:

•        Comparison with other regulatory bodies: The Bench made reference to other commissions and Tribunals, including the Securities and Exchange Board of India (‘SEBI’), the Telecom Regulatory Authority of India (‘TRAI’), and the Central Electricity Regulatory Commission (‘CERC’). It observed that different specialized bodies follow different models, and there is no ‘one size fits all’ approach or a tipping point, where regulatory models are considered ideal. Accordingly, the Bench held that since CCI performs multiple tasks as stipulated by the Act (advisory, advocacy, investigation and adjudication), it is not necessary for CCI or the appellate tribunal to necessarily comprise entirely of lawyers or those possessing judicial experience or those entitled to hold office as judges, to conform with the Constitution (however, please see the point on composition of CCI below).

•        Exclusion of jurisdiction of Civil Courts (Section 61 of the Act): The Bench noted that CCI does not decide a traditional lis (dispute), which is premised on an adversarial proceeding, like a Court. Therefore, no party has the absolute right to demand that a dispute is to be adjudicated only by a Civil Court. The Bench relied on a previous judgement of the Supreme Court that had examined similar considerations in relation to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and found it to be constitutional. For these reasons, Section 61 was held valid.

•        Exclusion of the scrutiny of High Courts (Section 53T of the Act): Section 53T, which provides for an appeal from an order of the appellate tribunal to be made directly to the Supreme Court (excluding scrutiny by the High Court altogether), was held to be valid. While the Bench acknowledged that there may be some merit in allowing an appeal from a decision of the appellate tribunal to the High Court, the same is insufficient to hold a section unconstitutional.

•        Composition of CCI (Section 8 of the Act): Under the Act, CCI is presently required to be comprised of members with qualifications and expertise in diverse fields (including legal). It is not mandatory for CCI to have a judicial member. The Bench held that this does not satisfy the test of constitutionality as set by the Supreme Court in State of Gujarat v. Utility Users Welfare Association[2] which requires the presence and participation of a judicial member at all times when adjudicatory orders (especially final orders) are made by CCI. Accordingly, the Bench read into Section 8 of the Act the requirement for CCI to mandatorily have a judicial member at all times.

•        Selection procedure of CCI Members (Section 9 of the Act): The Bench observed that under Section 9 of the Act, the selection committee consists of five members, including the Chief Justice of India (or his nominee) as the Chairman, and two outside independent experts. Accordingly, the Bench held that the Act provided sufficient safeguards to ensure that the executive does not dominate the selection process of CCI members, by mandating the five-member selection committee to be chaired by the Chief Justice of India (or his nominee) and two independent experts.

•        Tenure of CCI Members and supersession by the Central Government (Sections 11, 55 and 56 of the Act): The Petitions had alleged that Sections 55 and 56 of the Act violated the principle of ‘separation of powers’ since they allowed the Central Government to issue directions to CCI and supersede it in the event the Central Government perceives that CCI is unable to discharge its functions. The Bench stated that similar provisions have been made by the Parliament in other regulatory enactments, and therefore Sections 55 and 56 were not specific to the Act. Further, Section 11(3) of the Act safeguards the tenure of  CCI members from any arbitrary removal by the Central Government as it requires the Central Government to seek the permission of the Supreme Court before removing a CCI member. Accordingly, Section 11 was held to be valid.

•        Constitution of the Appellate Tribunal (Section 53D of the Act): The Bench has opined that the Chairman of the appellate tribunal should be a former Supreme Court judge or a Chief Justice of a High Court, which will sufficiently guarantee the application of a judicial mind, and judicial principles to the issues brought before that Appellate Tribunal. The Bench also observed that the provisions relating to Appellate Tribunal contained in regulatory enactments in various sectors (telecom, electricity, airports, securities etc.) follow an identical pattern.

•        Composition of the selection committee of the Appellate Tribunal (Section 53E): The Bench drew a distinction between the Appellate Tribunal for competition law from other regulatory tribunals, finding that the former has the ability to not merely adjudicate on appeals, but to also award compensation for damages. The Bench held that the composition of the selection committee has to be in accordance with the law laid down by the Supreme Court in the two Madras Bar Association cases, (i.e., Madras Bar Association v. Union of India[3] and Madras Bar Association v. Union of India[4]) and in Swiss Ribbons Pvt. Ltd. v. Union of India[5]], i.e., the Chief Justice or her/ his nominee should have a final say in the matter of selection, with the right to have a casting vote. Accordingly, the Bench held that Section 53E of the Act, as it stood, before the amendment by the Finance Act, 2017 (‘Finance Act’), is unconstitutional since it renders the Chief Justice a minority in the selection committee. However, the Bench has clarified that this observation was not determinative and is subject to the Supreme Court’s decision in Central Administrative Tribunal v. Union of India[6] – where certain provisions of the Finance Act have been challenged.

iii.     Whether CCI’s decision-making process under Section 22(3) and the revolving door practice (whereby any members of CCI can participate in any proceeding at any given point of time) is unconstitutional:

•        The Bench noted that a casting vote (by the CCI chairman), which may potentially lead to an adjudicatory result is unconstitutional.  It held that the principle of giving equal weight to the decisions of each participant of a quasi-judicial tribunal is destroyed by Section 22(3) of the Act, and therefore declared it to be void. The Bench however upheld the proviso to Section 22(3) of the Act, which mandates a minimum quorum of three members (including the Chairman) for any meeting of CCI where an adjudicatory decision is made.

•        With respect to the ‘revolving door policy’ which Section 22(3) of the Act permits, the Bench held that the mere possibility of abuse of power is not a ground to hold a provision of a law as arbitrary. Determination of whether a concerned party has been prejudiced by a ‘revolving door’ would depend on the facts and circumstances of each case. Referring to the facts of the case, the Bench held that the mere fact that another subsequent member participated in two intervening hearings, but was not a party to the final decision, did not in itself amount to a violation of principles of natural justice.  Having so concluded, the Bench was nevertheless of the opinion that a hearing by a larger body and decision by a smaller number (for compelling reasons or otherwise) leads to undesirable and possibly avoidable situations. To address this, the Bench issued certain directions to CCI and suggestions to the Central Government (set out in point vii below).

iv.      Whether the First Order, expanding the scope of the inquiry and notice under Section 26(1), was passed in an illegal and in an ‘overboard’ manner:

The Bench relied on the Supreme Court’s decision in Excel Crop Care Limited v. Competition Commission of India[7] (‘Excel Crop’) to observe that it is well within the DG’s powers to investigate against persons not mentioned in the information or a prima facie order under Section 26(1) of the Act. This is because the subject matter included in the prima facie order includes not only the issues alleged, but other allied and unspecified issues as well. The Bench also noted that at the prima facie stage, CCI may not necessarily have all information or material in respect of the parties’ conduct which affects competition in the market, and therefore it is within CCI’s power to expand the scope of inquiry to include other allied issues and parties.

v.       Whether Section 27(b) of the Act, which empowers CCI to impose a penalty as ‘it may deem fit’, is unconstitutional and the Final Order arbitrary since no separate hearing on penalty was provided to the petitioners:

Differentiating the petitioners’ allegation (that the Final Order was arbitrary since there was no separate hearing on penalty) from previous Supreme Court precedents, the Bench held that the need for a separate hearing on penalty is undermined in the present case since CCI followed all the steps indicated in the statute, and did not adopt an unfair procedure in not granting a separate hearing on penalty. The Bench stated that at the time of submitting their written and oral arguments on the DG’s report, the parties are aware of the range of findings and/or sanctions that CCI can impose, as well as the statutory cap (of not more than 10%) on the quantum of penalty. The Bench further stated that the statute did not compel CCI to adopt an unfair procedure (i.e., the absence of a second specific hearing before imposition of penalty). Therefore, Section 27 could not be held as arbitrary or unconstitutional.

Further, the Bench issued the following directions:

        CCI is to frame regulations to ensure that ‘one who hears decides’ is embodied in letter and spirit in all cases where final hearings are undertaken and concluded, i.e., once final hearings in any complaint or batch of complaints begin, the membership should not vary, and a matter should preferably be heard by seven or at least, five members;

       After the commencement of a hearing, all CCI members who have commenced hearing the case must continue to be a part of the proceeding, all hearings must be conducted en banc, and every member who participates in the hearings must also be a party to the final order(s);

        No CCI member should be allowed to take a break during a hearing to rejoin later as this would violate the principles of natural justice and undermine public confidence in CCI’s functioning;

•        The Central Government is to take expeditious steps to fill all existing vacancies in CCI within six months;

•        CCI is to ensure that at all times, during the final hearing, the judicial member is present and participates in the hearing; and

      In all cases, at the final hearing stage, the parties have to: (i) address arguments taking into consideration the factors indicated by the Supreme Court in Excel Crop and any other relevant factors; and (ii) make submissions on imposition of penalty and mitigating factors, without prejudice to the other submissions.

The Bench also allowed the petitioners to approach the appellate tribunal within six weeks, and directed the appellate tribunal to admit the appeal(s) on merits, without raising any objection on limitation.

Implications

The Bench has held Section 22(3) of the Act (with the exception of the quorum rule), which forms the basis on which CCI takes all decisions, including adjudicatory decisions, to be unconstitutional. Moreover, in light of the Bench’s direction that the minimum quorum for a CCI hearing should be five members (with at least one judicial member), and given that CCI is currently composed of three members (with no judicial member), the Central Government will need to fill up vacancies at CCI. CCI will be constrained from hearing or passing any order of an adjudicatory nature (including final orders) absent a judicial member, until the time the remaining members are appointed by the Central Government.

[1] W.P. (C) No. 11467 of 2018
[2] 2018 (6) SCC 21
[3] (2014) 10 SCC 1
[4] 2015 (8) SCC 583
[5] 2019 SCC OnLine SC 73
[6] W.P.(C) 640/2017
[7] Civil Appeal No. 2480 Of 2014

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Digital Economy – The Emerging PE and Attribution Issues

1. Background

1.1 Do you remember the first thing you ever bought or sold online?  As we have been living in a digital economy for an entire generation, many of us would need to take a stroll down the memory lane. In fact, it was just over 20 years ago in Ottawa in 1998, when the OECD together with Canadian government held the first international ministerial meeting on electronic commerce, which may appear shorthand for what we now call the digital economy. It is worth recalling that in 1998, Google was in its infancy and Facebook, YouTube and Twitter were still a long way off. Many mobile phones still sported visible antennas and the price of internet access was steep. Truly, we have come a long way off. [1]

1.2 Almost a century ago (in the era of League of Nations), value creation in different jurisdictions in a cross-border business was pictorially described as below[2]:

“The oranges upon the trees in California are not acquired wealth until they are picked, not even at that stage until they are packed, and not even at that stage until they are transported to the place where demand exists and until they are put where the consumer can use them. These stages, up to the point where wealth reached fruition, may be shared in by different territorial authorities.”

1.3 The above paragraph highlights the value creation in multiple jurisdictions and value realization in the market jurisdiction, which is typical of a transnational business carried on by a Multi-National Enterprise (“MNE”). Prior to the advent of digitalization, the MNE could not do significant business in a market jurisdiction without having some kind of a physical presence in that market jurisdiction. This led to the allocation of taxing powers between Residence Jurisdiction and Source Jurisdiction primarily upon presence or absence of a tangible physical nexus in the form of Permanent Establishment (“PE”) in the market jurisdiction.  Explosive growth and development of information and communication technology have enabled MNEs to sell goods and services in a market jurisdiction without having the need of a traditional brick-and-mortar PE in market jurisdiction thereby avoiding payment of the legitimate share of taxes in the market jurisdiction where the MNE derives a significant share of revenues.

2. Explosive growth of Internet users in the world[3]:

TABLE

[As on January 15, 2019    Source: www.worldatlas.com]

3. Worldwide Retail E-Commerce Sales[4]

[Source: www.shopify.com]

4. India’s Retail market and e-commerce market[5]

TABLE

[Source: Economic Times dated February 26, 2019]

5. Tax Issues thrown up by an exponential growth of the digital economy in the last two decades[6]

(i) The exponential expansion of information and communication technology has made it possible for the businesses to conduct themselves in ways that did not exist earlier and has given rise to new business models that rely more on digital and telecommunication networks, do not require physical presence, and derive substantial value from data collected and transmitted through digital networks. These new business models have created new tax challenges for tax authorities around the world in terms of nexus, characterization, and valuation of data and user contribution. These challenges have been recognized by the international community and have since been accepted and endorsed by the G-20 and OECD in the form of Base Erosion and Profit Shifting Project (“BEPS”) Action 1.

(ii) The ambiguities in taxation of income arising from the digital economy and the resultant tax disputes are also a constraint for the taxpayers, who may end up getting subjected to inconsistent approaches on the part tax authorities, a situation which at best should be avoidable.

6. Forms of Prevalent Businesses in Digital Economy

The BEPS Report on Action 1 lists some of the more prevalent forms of digital businesses in paragraphs 118 to 121, as under:

4.2.1.1 Business – to – business models

118.The vast majority of e-commerce consists of transactions in which a business sells products or services to another business (so-called business-to-business (B2B)) (OECD, 2011). This can include online versions of traditional transactions in which a wholesaler purchases consignments of goods online, which it then sells to consumers from retail outlets. It can also include the provision of goods or services to support other businesses, including, among others: (i) logistics services such as transportation, warehousing, and distribution; (ii) application service providers offering deployment, hosting, and management of packaged software from a central facility; (iii) outsourcing of support functions for e-commerce, such as web-hosting, security, and customer care solutions; (iv) auction solutions services for the operation and maintenance of real-time auctions via the Internet; (v) content management services, for the facilitation of website content. management and delivery; and (vi) web-based commerce enablers that provide automated online purchasing capabilities.[7]

4.2.1.2 Business-to-consumer models

119. Business-to-consumer (B2C) models were among the earliest forms of e-commerce. A business following a B2C business model sells goods or services to individuals acting outside the scope of their profession. B2C models fall into several categories, including, for example, so-called “pureplay” online vendors with no physical stores or offline presence, “click-and-mortar” businesses that supplemented existing consumer-facing business with online sales, and manufacturers that use online business to allow customers to order and customize directly.[8]

120. The goods or services sold by a B2C business can be tangible (such as a CD of music) or intangible (i.e. received by consumers in an electronic format). Through digitization of information, including text, sound, and visual images, an increasing number of goods and services can be delivered digitally to customers increasingly remote from the location of the seller. B2C e-commerce can in many cases dramatically shorten supply chains by eliminating the need for many of the wholesalers, distributors, retailers, and other intermediaries that were traditionally used in businesses involving tangible goods. Partly because of this disintermediation, B2C businesses typically involve high investment in advertising and customer care, as well as in logistics. B2C reduces transaction costs (particularly search costs) by increasing consumer access to information. It also reduces market entry barriers, as the cost of maintaining a website is generally cheaper than installing a traditional brick-and-mortar retail shop.[9]

4.2.1.3 Consumer-to-consumer model

121. Consumer-to-consumer (C2C) transactions are becoming more and more common. Businesses involved in C2C e-commerce play the role of intermediaries, helping individual consumers to sell or rent their assets (such as residential property, cars, motorcycles, etc.) by publishing their information on the website and facilitating transactions. These businesses may or may not charge the consumer for these services, depending on their revenue model. This type of e-commerce comes in several forms, including, but not limited to: (i) auctions facilitated at a portal that allows online bidding on the items being sold; (ii) peer-to-peer systems allowing sharing of files between users; and (iii) classified ads portals providing an interactive, online marketplace allowing negotiation between buyers and sellers.”[10]

7. Characteristics of Digital Economy

Digitalised business models have the following 3 characteristics:

i. Scale without Mass

ii. Heavy reliance on intangible assets

iii. Data & user participation.

8. Distortions caused by Digital Economy

The most demonstrable distortion caused by digital businesses is horizontal inequity i.e. non-resident enterprise selling goods and services in source jurisdiction does not pay taxes on the income earned from sales in source jurisdiction because of the absence of PE, while at the same time domestic enterprises of source jurisdiction engaged in similar business activities have to pay tax. If this distortion is not addressed to in a timely manner, this may lead to obvious undesirable economic effects in the economy of source jurisdiction, and consequently impede the transnational flow of goods, services, capital and personnel.

9. Overarching Principles of Tax Policy

Following well-established principles of tax-policy have to be kept in mind while addressing the distortions caused/ being caused by the digital economy:

i. Equity:

Taxpayers in similar circumstances should bear a similar tax burden

ii. Neutrality:

Economic choices available for carrying on businesses should be tax-neutral

iii. Efficiency:

Minimum compliance costs to the taxpayer and minimum administration costs for governments

iv. Certainty and simplicity:

Tax rules to be simple and easy to understand for the tax-payers

v. Effectiveness and fairness:

Taxation should produce the right amount of tax at the right time avoiding either double taxation or double non-taxation.

vi. Flexibility:

Taxation systems and policies should be flexible and dynamic enough to ensure they keep pace with technological and commercial developments.

10. Options suggested by OECD and their fundamental features[11]

During the course of deliberations on Action Point 1 of BEPS Project, OECD recommended a two-pronged approach:

10.1 There should be a significant salutary impact of other BEPS measures on BEPS concerns caused by Digital Economy, namely:

(i) Changes suggested by BEPS Action 7 which could control artificial avoidance of PE status.

(ii) Changes suggested by BEPS Action 8-10 strengthening transfer pricing rules.

10.2 Pending the evaluation of impact of other BEPS measures on BEPS effects caused by the digital economy, OECD considered various other options but stopped short of adopting any of those options as OECD recommended standard.  Rather it left it to the countries to consider/ adopt any of the options either alone or in conjunction with other options, subject to the countries having regard to principles of existing treaty obligations.

10.3 The following table evaluates the fundamental characteristics of these 3 options:

Options Analysis[12]

11. Analysis of current scenario:

11.1 In view of a wait-and-watch approach adopted by OECD and allowing the countries to adopt unilateral measures in the interim, some countries, have decided to impose a Withholding Tax on the gross amount of revenues derived by an MNE from source jurisdiction. Some details are below:

(i) India imposes 6% Equalisation Levy on specified base-eroding digital businesses. This levy has been kept out of the tax treaty network, hence there are issues on the ability of the affected non-resident to take a foreign tax credit of taxes withheld in India.[13]

(ii) EU recommended 3%. However, some countries in EU have opposed this levy, namely Ireland, Sweden, Denmark and Germany.

(iii) USA has opposed the imposition of digital tax as it would hit the tax bills of the US tech giants like Facebook, Google, Amazon by forcing them to pay taxes to the governments where they do business, instead to low tax jurisdictions like Ireland or Luxembourg.

(iv) UK is proposing Digital Services Tax

(v)               Bangladesh imposed a VAT on digital businesses.

11.2          It is evident that these measures are unilateral and uncoordinated among countries. By their very nature, they are ad hoc, inconsistent and lack clarity, leading to imposition of a disproportionate tax burden on the MNEs in multiple tax jurisdictions. Such measures cannot provide a lasting solution to the problem.

12.              Possible Features of SEP based new economic nexus[14]

(i)                 The new PE nexus may consist of the following elements:

(a)                Specified sale and service transactions carried out digitally;

(b)                user threshold;

(c)                a de minimis revenue threshold

(ii)               For this purpose, a new article 5(8) may be introduced in the OECD Model / Article 5(9) in the United Nations Model with the following suggested wording-

“If an enterprise resident in one Contracting State provides access to (or offers) an electronic application, database, online market place or storage room or offers advertising services on a website or in an electronic application used by more than 1,000 individual users per month domiciled in the other Contracting State, such enterprise shall be deemed to have a permanent establishment in the other Contracting State if the total amount of revenue of the enterprise due to the aforementioned services in the other Contracting State exceeds XXX (EUR, USD, GBP, CNY, CHF, etc.) per annum.”

(iii)             The advantage of this method is that the allocation of taxing powers can be implemented in line with the arm’s length principle or through a mix of arm’s length principle and formulary apportionment. As regards the former scenario, it may be necessary that the current OECD Transfer Pricing Guidelines be amended in order to apply to income allocation between an enterprise and its PE based on digital presence.

13.              Dual Approach-Withholding tax coupled with an option of SEP based net taxation[15]

(i)                 This option considers both the options of installing a withholding tax mechanism as the primary response to these challenges and the option of using withholding taxes in support of a SEP-nexus based solution.

(ii)               Nexus-based solution should prove superior to the withholding tax solution since it is consistent with the OECD’s approach to the matter (it is likely to be more efficient, i.e. less wasteful) and it would likely be easier to fine-tune in order to reach a stable balance between source and residence taxation.

(iii)             Consequently, a practical way could be to impose a global consensus-based standard X%[16]    final withholding tax on all base-eroding business payments to registered non-residents, with specific, again global consensus-based exemptions to payees registered to be taxed in the source jurisdiction under a net taxation scheme. Such net taxation scheme may be a nexus-based solution or an elective scheme to avoid the withholding tax proposed here. This proposal depends on a reliable, global consensus-based standard, quick, cheap and automatically shared registration system shared by at least the major economies, such as the BEPS countries.

(iv)             Payments to unregistered payees will be subject to a higher percentage of  withholding tax as compared to non-residents covered in (iii) above. These would include payments to accounts in or owned by low- or no-tax jurisdictions (say, a 15% general corporate tax threshold). This tax may be non-final and partially refundable upon filing.

(v)               B2C transactions should initially be exempt as non-base eroding. Yet, if countries are already concerned with the revenue division implications of such a decision, a complimentary final withholding tax of X%[17] could be collected on all payments cleared by financial institutions, unless the payees register to be taxed under any net taxation scheme.

(vi)             The withholding tax scheme is not perfect; however, in the case that countries cannot reach agreement on a nexus-based scheme, it permits a simple, if crude, response to the challenges of the digital economy. As such, however, it requires monitoring and perhaps tweaking over time based on experience gained. Therefore, the scheme should be accompanied by a review mechanism.

(vii)           Furthermore, the multilateral instrument (Action 15) may be used for efficient standardization of the solution. Advances in reporting (e.g. CbC) and automatic information exchange, as well as all monitoring aspects (Actions 11-13) also fit well with the necessary review mechanism.

14.              Long Term Perspective

14.1          In the long-term, it appears that a net basis taxation on the basis of SEP as a nexus, in addition to the traditional brick and mortar PE, may turn out to be the most effective measure to address the taxation problems of the digital economy.

14.2          Basis of SEP based PE threshold:

(i)                 The nexus should be uniform globally. As an example, gross revenues from digital businesses derived by an MNE from a source jurisdiction amounting to say X Million US Dollars or equivalent amount in local currency in a tax year. In other words, this basis cannot work if every country were to decide its own threshold without having any regard to the global pattern.  A cue can be taken from the 750 Million Euro threshold which triggers the filing of Country by Country Report on transfer pricing under BEPS Action Point 13.

14.3          SEP-based PE-Income Computation:

(i)                 Net income from SEP-based PE could be computed either on Attribution Basis under Arms’ Length Principle or Formulary Apportionment or may be a mix of the two. The author recognises that OECD has always preferred Attribution Basis over a Formulary Apportionment basis. But one cannot forget the old adage that “Necessity is the mother of invention”. Unique problems do call for unique solutions. There are obvious constraints in applying Attribution principle which is essentially based on Arms’ Length Principle. In a digital business it is likely that most of functions performed, assets utilized and even some of the major risks will not be located in source jurisdiction. Only sales, revenue realisation and post-sale warranty obligations will happen in source jurisdiction.  Under these circumstances, how effective it will be to apply Arms’ Length Principle, is anybody’s guess.

(ii)               However, in case, global consensus is reached on Attribution basis, it will be further desirable to apply all principles applicable to computation of business income as contained in Article 7 of double tax treaties, as far as possible, since SEP based PE will also be a PE at par with traditional brick and mortar PE. In particular, there should be allowed as deduction expenses incurred for the purposes of the business of SEP-based PE, including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest and other expenses incurred, whether in source state or elsewhere.

15.              Role of Multilateral Instrument:

Since the SEP-based PE will require an amendment to existing double tax treaties, the proposal suggested herein can be efficiently achieved only through Multi- National Instrument.

PS: The views expressed herein are the views of the author and not necessarily the views of AZB & Partners.

[1] http://oecdobserver.org/news/fullstory.php/aid/6145
[2] https://www.indiabudget.gov.in/ub2018-19/memo/memo.pdf
[3] https://www.worldatlas.com/articles/the-20-countries-with-the-most-internet-users.html

[4] https://www.statista.com/statistics/379046/worldwide-retail-e-commerce-sales/
[5] reference from  https://economictimes.indiatimes.com/industry/services/retail/indian-e-commerce-market-to-touch-usd-84-billion-in-2021-report/articleshow/68169239.cms

[6] references taken from https://www.slideshare.net/MuraliD1/income-taxation-in-digital-economy-t-n-pandey
[7] para 4.2.1.1 of article https://www.slideshare.net/MuraliD1/income-taxation-in-digital-economy-t-n-pandey

[8] para 4.2.1.2 at https://www.slideshare.net/MuraliD1/income-taxation-in-digital-economy-t-n-pandey

[9] Ibid
[10] para 4.2.1.3 at https://www.slideshare.net/MuraliD1/income-taxation-in-digital-economy-t-n-pandey

[11] reference taken from https://www.oecd.org/tax/beps/tax-challenges-digitalisation-part-2-comments-on-request-for-input-2017.pdf

[12] Ibid
[13] Reference from https://www.oecd.org/tax/beps/tax-challenges-digitalisation-part-2-comments-on-request-for-input-2017.pdf

[14] Some inputs from IBFD Working Paper “Blueprints for a New PE Nexus to Tax Business Income in the Era of the Digital Economy” authored by Prof Peter Hongler and Prof Pasquale Pistone available at https://www.ibfd.org/sites/ibfd.org/files/content/pdf/Redefining_the_PE_concept-whitepaper.pdf

[15] Some inputs from IBFD Working Paper “Withholding Taxes in the Service of BEPS Action 1: Address the Tax Challenges of the digital Economy ” authored by Prof Yariv Brauner and Prof Andres Baez available at https://www.ibfd.org/sites/ibfd.org/files/content/WithholdingTaxesintheServiceofBEPSAction1-whitepaper.pdf

[16]  This is a conscious departure from the Paper of Prof Yariv Brauner and Prof Andres Baez
[17] Ibid

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Advertising and Transfer Pricing – Unraveling the complexities

Abstract

Who would have thought that engaging Indian cricketers or Bollywood celebrities to promote brands may trigger a transfer pricing issue involving ever-increasing stakes, currently valued beyond a few billions of dollars?

Over the past decade, one of the most litigious issue surrounding the transfer pricing (‘TP’) regime in India pertains to adjustments on account of advertisement, marketing and promotional (‘AMP’) expenses incurred in India by an Indian entity, which is a related party[1] of a foreign entity in relation to the business carried out by the Indian entity in India.  Typically, the Indian entity is set up to carry out either manufacturing activity or distribution activity of products sold by the foreign entity and is granted the necessary rights to use brands associated with such products by such foreign entity.  During the course of its business in India, such Indian entity incurs expenses on account of AMP activities, which as per the Indian Income Tax Department (‘Department’) increase the brand value of the foreign entity, which does not compensate commensurately the Indian entity for carrying out such AMP activities in India.  Such view of Department has resulted in transfer pricing adjustments in the hands of the Indian entity which, as per the Department, ought to have received compensation as well as a mark-up for carrying out the AMP activities in India that increase the value of the brand of the foreign entity.

Introduction

The Indian tax regime allows, any expenditure, unless otherwise restricted, laid out or expended wholly and exclusively for the purposes of the business or profession as a deduction[2] while computing income in the nature of ‘Profits and gains of business or profession’ that is chargeable to tax in India.  As a sequitur, spending on marketing and advertising activities, wholly and exclusively for the purposes of the business is allowable business expenditure.  The TP provisions that run parallel provide that any income arising from an ‘international transaction’ shall be computed basis the arm’s length price[3]. The two parallels met when the Department started computing transfer pricing adjustments vis-à-vis excess amount of money spent by the Indian entity on AMP activities (and not selling and distribution activities) while operating under a license to use brands owned by the related foreign entity, thereby ushering a new era of litigation, which currently awaits final outcome before the Supreme Court of India.

Transfer Pricing

An ‘international transaction’ between two related parties (either or both of whom are non-residents) becomes subject matter of TP adjustment if the same is not at arm’s length (i.e., such transaction is evaluated as if the same was entered into between two unrelated parties).  While computing TP adjustment, evaluation of activities carried out by all the related parties vis-à-vis a particular ‘international transaction’ are evaluated, prior to comparing such related party situation with a comparable unrelated party situation.  After evaluating comparable unrelated party situation, arm’s length price (“ALP”) of the relevant ‘international transaction’ is determined and if the same does not match with the actual value of the ‘international transaction’, a TP adjustment is computed.

One relevant aspect of the TP provisions contained in the ITA is that they become inapplicable if the TP adjustment would lead to reduction of income chargeable to tax or increase in loss for the party in whose hands the TP adjustment is sought to be computed.  In simple words, if an Indian entity is making a payment to a related non-resident entity for goods or services, then the price that Indian entity pays will not invite a TP adjustment in its hands, if such price is equal to or less than the ALP.  This is for the reason, as an example, if the Indian entity pays nothing for such goods or services, where the ALP of the transaction is INR 100/-, then, by making an upward adjustment of INR 100/-, Department would actually be decreasing the profit of the Indian entity that would be chargeable to tax in India.  Therefore, the ITA makes TP provisions inapplicable if the TP adjustment would lead to reduction of income chargeable to tax or increase in loss for the party in whose hands the TP adjustment is sought to be computed.    For the same reason, if an Indian entity is receiving money from a related non-resident entity then the price that the Indian entity receives will not invite a TP adjustment, if such price is equal to or more than the ALP.  In essence, the TP provisions contained in the ITA seek to prevent shifting of taxable profits from India.

It is also noteworthy that while TP adjustment in the hands of one party vis-à-vis a particular ‘international transaction’ may be computed in accordance with the ALP, there is no corresponding effect of such adjustment granted to the other related party.  For example if the Indian entity in the above example pays INR 200/- to a related non-resident entity, where the ALP of the transaction is INR 100/-, then while the Department may compute a downward TP adjustment of INR 100/- in the hands of the Indian entity, thereby decreasing the expenditure if claimed by the Indian entity and hence increasing taxable profit of the Indian entity in India, there would be no corresponding effect of such TP adjustment for Indian tax purposes in the hands of the non-resident entity.  The same is again for the reason that such corresponding effect, if given to the non-resident entity, would lead to reduction of income chargeable to tax in India for the non-resident.

Transaction & Jurisprudence

In a typical scenario, there is a foreign brand owner that has a related Indian entity which carries out manufacturing of goods in India or distributes goods or services manufactured/ provided by such foreign brand owner.  Such foreign brand owner grants a license in favour of such Indian entity to carry out manufacturing/ distribution activities along with the right to use brand, trademark, technical know-how etc.  There may or may not be a ‘royalty’ pay-out as consideration for such license granted to the Indian entity.  However, what is relevant in a typical fact pattern is a direction to the said Indian entity to carry out AMP activities in India and the extent to which the Indian entity should spend on it.

In such a fact pattern, the Indian entity spends money on AMP activities, which amount is disbursed to local third parties in India, which on a bare reading of the provisions of Chapter X of the ITA, could not constitute an ‘international transaction’ between related parties.  To elaborate, the word ‘transaction’ has been defined in the ITA[4] to include an arrangement, understanding or action in concert irrespective of the fact whether the same is formal or in writing or is intended to be enforceable by legal proceeding.  Furthermore, the phrase ‘international transaction’, has been defined in the ITA[5] to mean a transaction[6] between two or more related parties, either or both of whom are non-residents for Indian tax purposes.  Therefore, for TP provisions to trigger the subject ‘transaction’ must be between a resident and a related non-resident or two related non-residents[7].

However, courts have interpreted the above provisions in an oscillating manner.  The first point in time when the AMP controversy reached courts was in 2010 in the case of Maruti Suzuki India Ltd. (MSIL) v. ACIT.[8]  In this case, the Delhi High Court set aside the order of the Transfer Pricing Officer (‘TPO’) and remanded back the issue to the TPO while observing that the expenditure incurred by a domestic entity, which is a related party of a foreign entity, on AMP activities using a foreign trademark/brand did not require any payment or compensation by the owner of the foreign trademark/brand, so long as the expenses incurred by the domestic entity did not exceed the expenses which a similarly situated and comparable independent domestic entity would have incurred.  As a sequitur it was held that if the expenses incurred by a domestic entity towards AMP activities were more that what a similarly situated and comparable independent domestic entity would have incurred, the foreign entity in such a case needed to suitably compensate the domestic entity with respect to the advantage obtained by it in the form of brand building and increased awareness of its brand in the domestic market.

Although the Supreme Court of India in 2011 in an SLP filed against the aforesaid order in Maruti Suzuki India Ltd. v. ACIT[9] directed the TPO to remain uninfluenced by the guidance given by the Delhi High Court in computing a TP adjustment on account of AMP activities, the decision of the Delhi High Court paved the path for what is called the bright line test (‘BLT’).  BLT as a concept for the purposes of computing a transfer pricing adjustment vis-à-vis AMP expenses means a line drawn with the overall amount of money spent on AMP, one side of which represents routine business expenses and the other side represents the amount spent on brand building.

In the beginning of 2013, a special bench of the Income Tax Appellate Tribunal (“Tribunal”) in the case of L.G. Electronics India (P.) Ltd. v. ACIT[10] interpreted the TP provisions in a fact pattern similar to the one elucidated above, and observed that the ratio of the advertisement expenditure incurred by the Indian entity while using the brand of a foreign related entity to the sales made by such Indian entity was proportionally higher than comparable situations between two non-related entities.  The ratio of comparable situations in this case was considered to be the bright line, expenditure on one side of which was considered to be advertisement expenditure and expenditure on the other side of which was considered to be expenditure towards brand building.  By resorting to such application of BLT, the Tribunal inferred the existence of an “international” transaction” between L.G. Electronics and its foreign related entity for brand building.  The Tribunal in this case also observed that it was immaterial that the payments towards AMP were made to third parties since the ‘international transaction’ in question was the value addition made by the Indian entity to the brand by making payments which were to be included in the overall AMP expenses paid to third parties.

The uproar created as a result of the aforesaid decision of the Tribunal, resulted in the decision of the Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT[11], in March 2015.  In the said case, involving Indian entities[12] engaged in distribution and marketing of products manufactured and sold by their respective related non-resident entities, the High Court upheld the expenditure pertaining to AMP to be in the nature of ‘international transaction’, primarily pursuant to the concession given by the assessees therein that there existed an ‘international transaction’ for incurring cost vis-à-vis AMP activities.  However, while doing so, the High Court held various principles applied in the case of LG Electronics (supra) to be erroneous and unacceptable.  Amongst various guidelines issued by the High Court in this decision, the most important direction vis-à-vis the development of jurisprudence on the subject of AMP litigation was the rejection of BLT.  The High Court opined that application of BLT, by virtue of lacking statutory backing as a means to determine existence of an ‘international transaction’, would lead to judicial legislation.  In that manner, the High Court remanded back the AMP issue to the file of the TPO to re-ascertain the ALP of the international transaction in accordance with the recognized TP principles in India.   This decision of the Delhi High Court was limited in scope as far as it applied only in cases of a distributor who had accepted that there was an ‘international transaction’ vis-à-vis incurring of expenses on AMP activities.

However, the landscape of AMP litigation has been shaped differently for a full fledged manufacturing entity.  Subsequent to the Sony Ericsson (supra) decision, in December 2015, the Delhi High Court in the celebrated decision of Maruti Suzuki India Ltd. v. CIT[13] held that there was no ‘international transaction’ for the purposes of the TP provisions to apply in case of an Indian manufacturing entity, which had received no direction in the form of an agreement whether oral or written, from its foreign related entity who was the brand owner of the brand which was being used by such Indian entity in its AMP activities and the onus to prove the same lied on the Department and such onus was to be discharged without using BLT.  It was also held by the High Court that in the absence of any substantive or machinery provisions contained in the ITA to recognize existence of an ‘international transaction’ in the context of AMP expenses, a TP adjustment could not be made.  This decision, therefore, created two parallels as far as the AMP litigation is concerned, both of which parallels have reached the Supreme Court level and are currently awaiting final outcome.

Recently, in November 2018, the Delhi Tribunal in the case of PepsiCo India Holdings Pvt. Ltd. v. ACIT[14] deleted the transfer pricing adjustment to the tune of Rs 2,900 crores computed on account of AMP expenses incurred by Pepsi in its capacity as a full-fledged manufacturer in India.[15]  In fact, umpteen number of cases before various High Courts and the Tribunal involving a manufacturing entity have relied upon the Delhi High Court decision in the case of Maruti Suzuki India Ltd. v. CIT (supra) to hold that there was no ‘international transaction’ vis-à-vis incurring AMP expenses that could trigger the applicability of the TP provisions in India.

This decision of the Delhi Tribunal has been recently followed in number of decisions.  However, the same has been distinguished by the Delhi Tribunal[16] recently in March, 2019 in a case involving an Indian distributor.  On the contrary, a decision similar to the Delhi Tribunal decision in PepsiCo has been rendered by the Delhi Tribunal[17] again in April, 2019 in a case involving an Indian manufacturer.  Therefore, there is an apparent split on how the jurisprudence on this subject is being carried forward to Supreme Court between a case involving a manufacturer and other kind of business models.  However, the bottom line, as far as this controversy is concerned, is whether there is an ‘international transaction’ between the Indian entity and related non-resident entity for incurring a certain amount of expenditure on AMP activities.  Further, the Department is also before the Supreme Court in relation to the applicability of BLT[18].  Even at the international level, this controversy seems to not rest in peace.  Needless to add, it is important for cross border arrangements to be drafted carefully in order to avoid getting entangled in this controversy.

Authors:
Ravi Prakash, Partner
Anmol Anand, Associate

End Notes:
[1] Under the Income-tax Act, 1961 (‘ITA’), the term ‘associated enterprises’ has been used instead of ‘related parties’.  Therefore, the term related party or related parties used in this article should be construed to mean ‘associated enterprise’ as defined in ITA.
[2] Section 37 of the ITA.
[3] Chapter X, Section 92 of the Act.
[4] Section 92F(v) of the ITA.
[5] Section 92B of the ITA.
[6] “in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and includes a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.”.
[7] For the purposes of this article and the subject dealt herein, the concept of specified domestic transaction has been ignored.
[8] Maruti Suzuki India Ltd. (MSIL) v. ACIT, (2010) 328 ITR 210 (Delhi High Court).
[9]  Maruti Suzuki India Ltd. v. ACIT, (2011) 335 ITR 121 (Supreme Court of India).
[10] L.G. Electronics India (P.) Ltd. v. ACIT, (2013) 22 ITR(T) 1 (Delhi -Trib.) (SB).
[11]  Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT, (2015) 374 ITR 118 (Delhi).
[12] Sony Ericsson Mobile Communications India (P.) Ltd., Discovery Communications India, Daikin Airconditioning India Pvt. Ltd., Haier Appliances (India) Pvt. Ltd., Reebok India Company Ltd. etc.
[13]    Maruti Suzuki India Ltd. v. CIT, (2016)381 ITR 117.
[14]   PepsiCo India Holdings Pvt. Ltd. v. ACIT, (2018) 100 taxmann.com 159 (Delhi – Tribunal).
[15] Pepsi was represented by the Tax Litigation Team at AZB & Partners before the Tribunal.
[16] M/s. Olympus Medical Systems India Pvt. Ltd. v. DCIT, ITA No. 7414/Del/2018, order dated 27.03.2019.
[17]  Casio India Co. Pvt. Ltd.. v. DCIT, ITA No. 1764/Del/2015, order dated 22.04.2019.
[18] Sony Ericsson Mobile Communications India Pvt. Ltd. (now merged with Sony India Pvt. Ltd.) v. CIT, CA No. 135/2016.  All other matters in relation to AMP expenses have been clubbed with this case and the entire AMP batch is likely to be listed during the second half of 2019.

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Asia Arbitration Guide 2019: India Chapter

Published In:Respondek & Fan [ ]

Which laws apply to arbitration in India?

The Arbitration and Conciliation Act, 1966 (“Arbitration Act”) is the primary legislation which governs arbitration in India. The Arbitration Act was amended by the Arbitration and Conciliation (Amendment) Act, 2015, which came into effect on October 23, 2015 (“Amendment Act”). Principles from the Indian Contract Act, 1872 may be applied to the construction of an arbitration agreement and provisions of the Code of Civil Procedure, 1908 govern the enforcement of arbitral awards and applications to court in support of arbitral proceedings, in addition to the Arbitration Act. Various High Courts have notified rules governing the conduct of judicial proceedings in support of arbitration like Bombay High Court Rules Relating to the Arbitration & Conciliation Act, 1996. The rules of arbitration institutions will apply to arbitration proceedings, where institutional arbitration is adopted like the Mumbai Centre for International Arbitration (“MCIA”) Rules, 2016 or Delhi International Arbitration Centre (Arbitration Proceedings) Rules, 2018.

Is the Indian Arbitration and Conciliation Act based on the UNCITRAL Model Law?

Yes, The Arbitration Act is based largely on the UNCITRAL Model Law on International Commercial Arbitration, 1985 and the UNCITRAL Conciliation Rules, 1980, (together, “Model Law”), but deviates from the Model Law in certain aspects.

Are there different laws applicable for domestic and international arbitration?

Currently, India has a consolidated legislation i.e. the Arbitration Act, under which Part I applies to arbitrations seated in India, and Part II relates to the enforcement of certain foreign awards, such as awards under Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘New York Convention”), 1958 and the Convention on the Execution of Foreign Awards, 1923 (“Geneva Convention”). Pursuant to the Amendment Act, certain provisions of Part I of the Arbitration Act such as seeking interim relief from courts, assistance of court in taking evidence, also apply to arbitrations seated outside of India, unless the arbitration agreement specifically excludes such an application.

Has India acceded to the New York Convention?

India signed the New York Convention on June 10, 1958 and ratified it on July 13, 1960 subjecting its applicability to the following conditions:

• Only awards made in the territory of another contracting state that are also notified as reciprocating territories by India would be recognised and enforced;

• Only differences arising out of legal relationships, whether contractual or not, that are considered commercial under the national law would be considered arbitrable.

Can parties agree on foreign arbitration institutions (i) if both parties are domiciled in the country, (ii) if one party is domiciled in the country and the other party abroad?

The Arbitration Act provides that parties may contractually agree on the procedure for arbitration and does not stipulate restrictions on the choice of arbitration institutions even if both parties are domiciled in the country or one party is domiciled in the country and the other party abroad. Therefore, parties may choose to agree on a foreign arbitration institution. However, in the absence of clarity in the Arbitration Act and due to conflicting judicial pronouncements, it is unclear whether two domestic parties could agree on foreign seated arbitration i.e. where both the judicial seat of the arbitration and the procedure governing the arbitration derogate from Indian law.

Does the Indian arbitration law contain substantive requirements for the arbitration procedures to be followed?

There are no substantive requirements for the procedure to be followed under the Arbitration Act. The Arbitration Act permits the parties to agree on the procedure to be followed by the arbitral tribunal. In the event that parties are unable to agree on the procedure to be followed, then the arbitral tribunal may decide the procedure. Proceedings conducted by arbitration institutions will be governed by the procedure laid down in the institutional rules.

Does a valid arbitration clause bar access to state courts?

An arbitration clause does not operate as an absolute bar on the courts of India. If a dispute in a matter covered by a valid arbitration clause is brought to court, the court is required to refer that to arbitration, if an application to that effect is made by the defendant not later than the date of submitting the first statement on the substance of the dispute to the court. The precondition is therefore an application before the court seeking reference to arbitration In addition, parties may be able to approach the courts (i) for appointment (Section 11) and removal (Section 13 & 14) of arbitrators, (ii) seeking interim relief pending arbitration (Section 9), (iii) seeking to set aside awards (Section 34) and (iv) enforcement of awards (Section 36). The jurisdiction of Indian courts is different in cases where the arbitration is seated in India and where it is seated abroad.

What are the main arbitration institutions in India?

Arbitration institutions such as the Mumbai Centre for International Arbitration (“MCIA”), and institutions attached to various High Courts such as Delhi International Arbitration Centre (“DIAC”) in Delhi, Karnataka, Punjab and Haryana, to name a few. Apart from these, there are arbitration institutions run by the Chambers of Commerce in different states such as the Bombay Chambers of Commerce and Madras Chambers of Commerce. The Singapore International Arbitration Centre has also opened an offshore office in Mumbai given the increasing number of commercial arbitrations in India, although this office does not directly administer any India related arbitrations.

Addresses of major arbitration institutions in India?

Mumbai Centre for International Arbitration (MCIA)
20th Floor, Express Towers,
Nariman Point,
Mumbai – 400021 (India)
Tel: +91-022-61058888
Website: www.mcia.org.in

Delhi Centre for International Arbitration (DCIA)
Delhi High Court Campus
Shershah Road
New Delhi – 110503
Tel: +91-11-23386492, 23386493
E-mail: delhiarbitrationcentre@gmail.com
Website: www.dacdelhi.org

Arbitration Rules of major arbitration institutions?

The above-mentioned arbitration institutions have a specific set of rules which is available on their websites, as provided above.

What is/are the Model Clause/s of the major arbitration institutions?

The model clauses of the arbitration institutions are available on their respective websites. For MCIA, the following clause has been suggested as a model clause22:

“Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration in accordance with the Arbitration Rules of the Mumbai Centre for International Arbitration (“MCIA Rules”), which rules are deemed to be incorporated by reference in this clause. The seat of the arbitration shall be_______________ .
The Tribunal shall consist of [one/three] arbitrators).
The language of the arbitration shall be _______________ .
The law governing this arbitration agreement shall be
The law governing the contract shall be _____________.” 

The Delhi Centre for International Arbitration recommends the following arbitration clause in the contracts23:

“All dispute and differences arising out of or in connection with or relating to the present agreement shall be settled under the Rules of Delhi International Arbitration Centre by one or more arbitrators appointed in accordance with its Rules.

Note: Parties may consider adding the following:

(a) The number of arbitrator(s) shall be .
(b) The language of the arbitration proceedings shall be .
(c) Specific qualifications of the arbitrator(s) including language,
technical qualifications and experience, if any.
(d) The place of arbitration shall be the Delhi International
Arbitration Centre at Delhi.

How many arbitrators are usually appointed? 

Under Section 10 of the Arbitration Act, the parties may choose to determine the number of arbitrators. However, such number must be an odd number. In the absence of any agreement between the parties on the number of arbitrators, a sole arbitrator is appointed.

An arbitrator may be challenged on the following grounds:

• if circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or

•  if he does not possess the qualifications agreed to by the parties.

The grounds which given rise to the above circumstances have been mentioned in the Fifth Schedule of the Arbitration Act. A separate procedure for challenging the arbitrator(s) is provided for in Section 13 of the Arbitration Act.

Are there any restrictions as to the parties’ representation in arbitration proceedings? 

The Arbitration Act does not impose any restrictions on the representation of parties during proceedings. However, the specific rules of the respective arbitration institution may prescribe certain restrictions.

When and under what conditions can courts intervene in arbitrations?

For arbitrations under the Arbitration Act, a court may not intervene in an arbitration proceeding except on application by either of the parties under the following circumstances:

(i) application for dispute to be referred to arbitration under Section 8 for domestic arbitrations and Section 45 for international arbitrations;

(ii) application for interim measures under Section 9, for international arbitrations as well, subject to any agreement to the contrary;

(iii) application for court to appoint arbitrator under Section 11;

(iv) application challenging the appointment of an arbitrator under Section 13;

(v) application to determine the termination of mandate of an arbitrator and appointment of a substitute arbitrator under Section 14;

(vi) application for assistance in taking evidence under Section 27;

(vii) application to set aside an arbitral award under Section 34;

(viii) enforcement of the award under Section 36;

(ix) appeals from certain orders of the court under Section 37;

(x) application to order the tribunal to deliver the award to the applicant on payment to the court under Section 39;

(xi) application for jurisdiction under Section 42;

(xii) extension of time period under Section 43;

In relation to arbitrations seated outside India, apart from points (i) (ii) and (vi) above, a court in India may intervene in relation to the enforcement of such foreign award delivered outside India under Sections 48 and 57.

Do arbitrators have powers to grant interim or conservatory relief?

Under Section 17 of the Arbitration Act, the arbitral tribunal may, at the request of a party, grant interim relief in respect of the subject matter of the dispute or require a party to furnish appropriate security for the relief granted. Furthermore, the rules of certain arbitration institutions also allow an arbitral tribunal to grant interim relief. For instance, under the MCIA Rules, 2016 Article 15.1 allows an arbitral tribunal to “at the request of a party, issue an order granting and injunction or any other interim relief it deems appropriate. The Tribunal may order the party requesting interim relief or provide appropriate security inconnection with the relief sought.”

What are the formal requirements for an arbitral award (form; contents; deadlines; other requirements)?

• Forms and Contents

The form and contents of an arbitral award have been set out under Section 31 of the Arbitration Act. The following are the key requirements under the above provision:

An arbitral award has to be in writing and must be signed by the members of the arbitral tribunal.

• The arbitral award must state the reasons upon which it is based, unless:

– the parties have agreed that no reasons are to be given, or
– the award is an arbitral award on agreed terms in the form of a settlement under Section 30.

• The arbitral award must provide the date and the place of arbitration.

• In the event that the arbitral award contemplates the payment of money, the award must include the sum, the rate of interest as considered reasonable by the tribunal and the duration for the interest to be paid.

• Section 31 A inserted by the Amendment Act has introduced a regime for costs. The arbitral tribunal will determine which party is entitled to costs and the amount of costs and the manner in which the costs are to be paid. The general rule is that the unsuccessful party shall be ordered to pay the costs of the successful party.

• Deadlines for issuing arbitral awards 

The Arbitration and Conciliation (Amendment) Act, 2015 stipulates that the arbitral tribunal is to render its award within twelve months from when the matter was referred to the tribunal. The arbitral tribunal is deemed to be in reference on that date on which the arbitrator, or all the arbitrators, have received notice of their appointment to the case. There can be a further extension of a maximum period of six months with the consent of both the parties. If the tribunal is in requirement of more than eighteen months for issuing an award, then it may apply for such an extension to the Court having jurisdiction. However, the Court is likely to grant such extension only when sufficient cause has been shown and the arbitrators may be penalized for the delay, with a proportionate reduction of their fees, if the same can be attributable to them.

• Other formal requirements for arbitral awards 

An arbitral award may be required to be stamped in accordance with applicable stamping statutes.

(a) Stamp Duties requirements

The Arbitration Act is silent on the stamping and registration of an award. However, stamping of the arbitral award is required as per the requirements of the Indian Stamp Act 1899 or the relevant state stamp duty statutes, as may be applicable. Documents which are required to be stamped will not be admissible in evidence “for any purpose” if it is not duly stamped. In addition, penalties may also be levied. The rates at which stamp duty is levied may vary across states. Recently, the Supreme Court of India in Shriram EPC Ltd v Rioglass Solar SA held that an award under Item 12 of 115 INDIA Schedule I of Stamp Act, 1899 will not include ‘foreign award’ and therefore a foreign award is not liable to incur stamp duty for its enforcement in India.

(b) Registration requirements

While the Arbitration Act is silent on registration requirements, pursuant to the Registration Act 1908, awards that purport to impact immovable property, must be registered. Failure to register a document that is mandatorily registered under the statute renders it unenforceable. The registration fee varies depending on the state in which the award is sought to be enforced.

On what conditions can arbitral awards be (i) appealed or (ii) rescinded? 

There are no appeals against arbitral awards. However, Section 34 of the Arbitration Act permits a party to make an application to a court to challenge an arbitral award under the following circumstances:

(i) if a party was under some incapacity;

(ii) the arbitration agreement is not valid under law;

(iii) the party making the application was not given proper notice as required;

(iv) the arbitral award deals with a dispute not contemplated in the submission; or

(v) the composition of the tribunal was not in accordance with the agreement of the parties.

Section 34 also permits a court to set aside an arbitral award if the court finds that the subject matter is not capable of settlement by arbitration or if the arbitral award is in conflict with the public policy of India.

Domestic awards may also be set aside if found to be vitiated by patent illegality appearing on the face of the award, provided that the award cannot be set aside on the ground that there was an erroneous application of the law or there is a requirement for re-appreciation of evidence. Similarly, Section 48 states that the enforcement of a foreign award may be refused under the following conditions:

(i) if the parties were under some incapacity or the agreement was not valid under the law of the country where the award was made, or the agreement was subject to;

(ii) the party against whom the award is invoked was not given proper notice as required;

(iii) the award deals with a difference not contemplated by the submission to arbitration;

(iv) the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties;

(v) the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country under the law of which that award was made;

(vi) the subject matter of the dispute is not capable of being settled under the laws of India;

(vii) if the enforcement of the award would be contrary to the public policy of India.

In order to harmonise various decisions of the courts, the Amendment Act has clarified that an award is in conflict of public policy if the making of the award was induced or affected by fraud or corruption, is in contravention of the fundamental policy of Indian Law or in conflict with the basic notions of morality or justice. However, the court shall not review the merits of the dispute in order to examine whether the award is contrary to the fundamental policy of Indian Law.

What procedures exist for enforcement of foreign and domestic awards? 

i. Enforcement of Domestic Awards

Under Section 36 of the Arbitration Act, once an award is final or an application to set aside the arbitration award has been rejected, then such an award shall be executed under the Code of Civil Procedure, 1908 in the same manner as if it were a decree of the court.

ii. Enforcement of Foreign Awards

If the court is satisfied that the foreign award is enforceable, it will be deemed to be a decree of the court. The party applying for the enforcement of the foreign award must produce the following: (a) the original award or authentic copy; (b) original arbitration agreement or authentic copy; (c) evidence necessary to prove that it is a foreign award. Further, if the award is in a foreign language, the party must produce a copy of the award that has been translated into English that is also certified by the diplomatic or consular agent of such country.

The Supreme Court in M/s. Fuerst Day Lawson Ltd v. Jindal Exports Ltd, held that under the Arbitration Act a foreign award is already stamped as the decree. It observed that, “In one proceeding there may be different stages. In the first stage the Court may have to decide about the enforceability of the award having regard to the requirement of the said provisions. Once the court decides that foreign award is enforceable, it can proceed to take further effective steps for execution of the same. There arises no question of making foreign award as a rule of court/decree again.”

Can a successful party in the arbitration recover its costs? 

The Amendment Act has introduced Section 31 A which is a regime of costs. While the arbitrators will determine whether costs are payable by one party to another, the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party. The tribunal may make a contrary award by recording its reasons in writing.

Any agreement which has the effect that one of the parties has to pay the whole or part of the costs of the arbitration in any event shall only be valid if such agreement is made after the dispute in question has arisen.

Each arbitration institution will also have separate rules governing costs. For instance, under the MCIA Rules, Rule 32.6 of the MCIA Rules defines “costs of the arbitration” to include: “(a) The Tribunal’s fees and expenses and the Emergency Arbitrator’s fees and expenses, where applicable; (b) the MCIA’s administrative fees and expenses; and (c) the costs of expert advice and of other assistance reasonably required by the Tribunal.” Rules 32 and 33, inter alia, provide for detailed rules on fixing the aforementioned “costs of the arbitration”, including directing parties to make advance payments of such costs. The Registrar of the MCIA has the ultimate power to determine the costs and their payment, including directing payment of advance on the costs. Rule 29, inter alia, however, allows for the arbitral tribunal to make orders on apportionment of costs between the parties.

Are there any statistics available on arbitration proceedings in the country? 

A 2013 PWC study found that 47% of Indian companies that had chosen arbitration as their preferred method of dispute resolution chose ad hoc proceedings.24 India has an estimated 31 million cases pending in various courts. As of 31.12.2015 there were 59,272 cases pending in the Supreme Court of India, around 3.8 million cases are pending in the High Courts and around 27 million pending before the subordinate judiciary. 26% of cases, more than 8.5 million, are more than 5 years old.25

Are there any recent noteworthy developments regarding arbitration in the country (new laws, new arbitration institutions, significant court judgments affecting arbitration etc.)?

A. Proposed Legislative Changes to The Arbitration Act: 

The government introduced new amendments via The Arbitration and Conciliation (Amendment) Bill, 2018 (the Amendment Bill) on July 18, 2018 which is yet to be passed by the Rajya Sabha. The highlights of the Amendment Bill are as follows:

a) The Amendment clarifies that the amendments to the Act that were introduced with effect from 23 October 2015 are prospective, i.e., the amended Act will only apply to arbitrations and court proceedings relating to arbitrations, if the arbitration itself was commenced after 23 October 2015.

b) Any request for appointment of arbitrator (s) is required to be disposed within thirty days from the date of service of notice on the opposite party. Parties can approach designated arbitration institutions for the appointment of arbitrators. For international commercial arbitrations, the appointments will be made by institutions designated by the Supreme Court of India. For domestic arbitrations, appointments will be made by the institution designated by a High Court. In the event there are no designated arbitral institutions available, the Chief Justice of the concerned High Court will maintain a panel of arbitrators to perform the functions of the arbitral institutions.

c) The Amendment Bill proposes the establishment of a statutory authority called the ‘Arbitration Council of India’ (“the ACI”). The ACI will, inter alia, identify and grade qualifying arbitration institutions to be considered for designation, by High Courts or the Supreme Court for appointment of arbitrators.

d) The Amendment Bill 2018 now requires that the statement of claim and statement of defence are filed within six months of the arbitral tribunal’s appointment. The arbitration award must be passed by the arbitral tribunal within twelve months from the date of completion of pleadings. The timeline for passing an award, prescribed by the Act cannot be extended in the case of international commercial arbitrations.

e) The Amendment Bill 2018 provides for the training of arbitrators in India to equip them with skills to handle complex commercial arbitration.

f) An express confidentiality provision to govern arbitration proceedings is proposed. An express provision on immunity of arbitrators is also proposed.

g) Applications challenging an award would require to be decided only on the basis of the record of the arbitral tribunal, and not on extraneous evidence.

2. Recently, The Lok Sabha passed the New Delhi International Arbitration Centre Bill, 2018, which aims to establish the New Delhi International Arbitration Centre to conduct arbitration. The bill is yet to be passed by the Rajya Sabha. The Bill also aims to declare the NDIAC as an institution of national importance and promote the development of alternate dispute resolution in India.

B. Recent Supreme Court Decisions in relation to Arbitration 

In Board of Control for Cricket in India v. Kochi Cricket Private Limited, the Supreme Court held that the amended provisions of the Arbitration Act would apply to pending applications for setting aside all arbitral awards filed before October 23, 2015. The judgment debtor would now need to specifically seek a stay of the arbitration award or prepare to pay the award notwithstanding the pending challenge. The decision is another step towards ensuring speedy disposal of matters since stays on arbitral awards as noted by the Supreme Court itself would sometimes be in effect for a few years before being adjudicated.

In K. Kishan v. Vijay Nirman Company, Civil Appeal No. 21824 of 2017, The Supreme Court of India held that Corporate Insolvency Resolution Proceedings (CIRP) under the Insolvency and Bankruptcy Code, 2016 cannot be initiated against an operational debtor when an arbitral award, which has been passed in favour of the creditor is still being adjudicated upon under Section 34 of the Arbitration Act, as the pendency of such proceedings amount to a dispute under the Insolvency and Bankruptcy Code, 2016.

In Emaar MGF Land Limitd v. Aftab Singh, The Supreme Court of India held the arbitration clause cannot ouster the jurisdiction of the consumer courts. If a statue provides a special remedy to the party who is also under an arbitration agreement, the aggrieved party has an option to opt the special remedy provided under the statute i.e. the consumer courts under the Consumer Protection Act, 1986 or initiate arbitration. However, a party cannot after initiating an arbitration proceeding, apply for a special remedy.

In Union of India v. Hardy Exploration and Production (India) INC, the Supreme Court held that in the absence of additional conditions in the contract the term “place” or “venue” of arbitration used in an arbitration agreement can be read as “seat”.

In S.P Singla Constructions Pvt. Ltd. v. State of Himachal Pradesh and Others, the Supreme Court held that any challenge to the arbitrator appointed should be raised before the arbitrator in the Arbitration Act in the first instance and only thereafter can be raised at the time of setting aside of the arbitral award under section 34 of the Arbitration Act.

In Simplex Infrastructure Ltd. V Union of India, the Supreme Court held that the three months timeline for filing of an application to set aside an arbitration award cannot be extended except for a further period of thirty days on showing sufficient cause.

Authors:

Zia Mody, Founder and Managing Partner
Aditya Vikram Bhat, Senior Partner

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NCLAT ESSAR Steel Judgement

The Hon’ble National Company Law Appellate Tribunal (‘NCLAT’) in its order in Standard Chartered Bank v. Satish Kumar Gupta, R.P. of Essar Steel Limited & Ors. has dealt with various important legal issues in relation to the corporate insolvency resolution process (‘CIRP’). Some of the key aspects of this judgment have been summarised below:

1. Validity of Guarantee

While dealing with the argument on guarantor’s right to subrogation and to be indemnified under the Indian Contract Act, 1872 with reference to a personal guarantee, the NCLAT observed that a guarantee becomes ineffective in view of the payment of underlying debt in resolution. Typically, lenders preserve their rights with respect to a third-party security and the resolution applicant protects itself from claims through extinguishment of rights of the guarantor. In the Sharon Bio matter, NCLAT had upheld the extinguishment of subrogation right under a resolution plan. This will likely impact the enforcement of third-party security in all cases where a resolution plan has been approved.

2. Claims after CIRP

On the issue of whether approval of plan extinguishes all claims against the corporate debtor, NCLAT held that where National Company Law Tribunal (‘NCLT’) or NCLAT has not been able to decide on a claim on merits, it is open for the party to raise the issue before the appropriate forum in terms of Section 60(6) of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), which extends the period of limitation after the period of moratorium is over. If NCLT or NCLAT has adjudicated on a matter, the claim is satisfied and cannot be re-agitated after the approval of the resolution plan. When a matter was pending adjudication before the Arbitral Tribunal and the High Court, and no claim was filed before the resolution professional during the CIRP, the party was allowed to pursue the matter before the Arbitral Tribunal or the High Court in terms of Section 60(6) of the IBC.

3. Commercial Decisions of Committee of Creditors (‘CoC’)

(a) A ‘Core Committee’ or ‘Sub-Committee’ of lenders is unknown and against the provisions of the IBC. IBC or insolvency regulations do not empower the CoC to delegate the duties of the CoC to such committees. Specifically, the CoC cannot delegate its powers to negotiate a resolution plan to any sub-committee. Each lender must consider the resolution plan and its viability and feasibility, which are commercial decisions of the CoC and not amenable to judicial review.

(b) The key commercial decisions to be taken by the COC are: (i) to identify if the corporate debtor is viable or not and to provide for rescue of a failing viable corporate debtor and close one that is failing and unviable; (ii) to visualise the appropriate resolution plan by the resolution applicant who can reorganise the corporate debtor in terms of its complexity and scale, address the cause of failure, parameters to assess the viability and feasibility; (iii) to ensure that the corporate debtor continues as a going concern; (iv) to consider only those plans which are – (a) provided by capable resolution applicants, (b) in compliance with applicable law, (c) feasible and viable, (d) have potential to address the default, and (e) provide for effective implementation of the plan. Of such plans, the CoC must approve the one which maximises the value of the assets of the corporate debtor and balances all the stakeholders, irrespective of realisation of creditors.

(c) Distribution of amounts under a resolution plan is not a commercial decision. CoC may approve restructuring of realisation for financial creditors to maximise value, or sharing of realisation under the plan among various classes of creditors or exemptions from taxes and duties, for implementation of the plan. However, such decisions of CoC are not commercial and open to scrutiny by the tribunals / courts.

4. Power of Distribution of Proceeds

NCLAT held that given that the members of the CoC are interested parties, they are not supposed to decide the manner in which the distribution is to take place. Financial creditors being claimants at par with other claimants have a conflict of interest and cannot distribute the amount amongst themselves and provide minimal or nil amount to other financial creditors or operational creditors. Resolution applicant in its plan must provide the amount it proposes and its distribution among stakeholders. Resolution professional is required to notice if the plan provides for payment to operational creditors in the prescribed manner (Section 30(2)(b)). If a resolution plan does not show the distribution among creditors, it cannot be placed before the CoC.

5. Classification of Creditors

(a) Financial Creditors as one class

The resolution plan submitted by the resolution applicant in this case categorised the distribution of amounts amongst the financial creditors under four sub-heads i.e. (i) Secured Financial Creditors, having charge on project assets; (ii) Secured Financial Creditors, having no charge on project assets; (iii) Unsecured Financial Creditors, with admitted claims less than Rs. 1 million; and (iv) Unsecured Financial Creditors, with admitted claims equal to or above Rs. 1 million. NCLAT observed that all financial creditors form one class and they cannot be sub-classified into secured or unsecured for the purpose of resolution plan. There can be no distinction between secured or unsecured financial creditors for the purposes of distribution of monies under a resolution plan.

(b) Classification of Operational Creditors

The resolution plan submitted by the resolution applicant in this case categorised the distribution of amounts amongst the operational creditors under three sub-heads i.e. (i) workmen and employees; (ii) operational creditors (other than workmen and employees) – where admitted claim amount was less than Rs. 10 million; and (iii) operational creditors (other than workmen and employees) – where admitted claim amount was equal to or more than Rs. 10 million (‘Operational Creditors II’). The Resolution Plan proposed payment of 100% of admitted claims to the first two categories of the operational creditors and NIL amount to Operational Creditors II. NCLAT observed that, based on the definition of ‘operational debt’ in IBC, operational creditors can be classified in three classes for determining the manner of distribution (i) employees and workmen, (ii) suppliers of goods and services; and (iii) statutory dues. It was held that Operational Creditors II cannot ask for same treatment as first two categories i.e. payment of 100% of admitted claims.

6. Manner of Distribution of Proceeds

(a) NCLAT held that the resolution under a CIRP involves distribution of debt out of the amount proposed to be paid by the resolution applicant. It is not distribution out of the assets of the corporate debtor pursuant to liquidation and Section 53 (Distribution of Assets) of the IBC cannot be used to determine the manner of distribution of monies among stakeholders under a resolution plan.

(b) The share of financial and operational creditors in amounts proposed under a resolution plan was held to be the percentage that the resolution amount bears to the total amount of admitted claim of all stakeholders. So percentage of amount payable to all financial creditors was held to be a fixed percent (60.7%) of the respective admitted claim amount.

(c) On the pay out to operational creditors proposed under the resolution plan, NCLAT observed that the allocation to Operational Creditors II was discriminatory (originally NIL and then revised by CoC to 20.5%). It was held that the amount proposed under a resolution plan should be shared in the same percentage between the financial creditors and operational creditors, with amounts payable to operational creditors subject to adjustment as per classification of operational creditors noted above. Hence the total amount available to operational creditors was held to be 60.7% of operational debt and Operational Creditors II were to be paid 60.268%, while the other operational creditors were allowed payment of 100% of admitted claims.

7. Profits during CIRP Period

Unless a resolution applicant pays full claimed amount to creditors, profit during CIRP period should be paid to financial and operational creditors on pro-rata basis not exceeding their admitted claim.

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Supreme Court Upholds a Minority Arbitration Award

Published In:Inter Alia - Quarterly Edition - July 2019 [ English ]

On May 8, 2019, the SC held that[1] the amendments to Section 34 of the Arbitration Act would apply to appeals filed post the 2015 amendments even if the arbitral proceedings had commenced prior to the date of the amendments i.e., October 23, 2015. On this basis, the SC set aside the majority award under Section 34 of the Arbitration Act in the impugned matter. Instead of the dispute being referred afresh to arbitration, in order to do complete justice between the parties, the SC invoked its powers under Article 142 of the Constitution of India and upheld the minority award and directed the parties to execute the same.

[1] Ssangyong Engineering & Construction Co. Limited v. National Highway Authority of India, 2019 SCC Online SC 677.

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Video Conferencing in Legal Cases – A Facilitator to Justice

Recording of evidence (through examination-in-chief of a witness and cross examination) is a crucial stage in any proceeding. Post 2002, the recording of the examination in chief of witness(es) is done through affidavits in all civil cases, including arbitrations. However, cross-examination continues to be conducted orally and a witness is still required to appear before the court / commissioner / arbitrator for the recording of the cross examination.

With technological advancement, witnesses have often requested courts/ arbitrators to waive the requirement of their physical presence and to instead record evidence through a video-conference (“VC”). The Courts have in past held that recording of evidence via VC could be allowed on grounds of (i) witness residing abroad[1]; (ii) avoiding cost of travel and stay[2]; (iii) poor health of witness[3]; (iv) cross examination of victims of sexual crimes, particularly, child witnesses;[4] (v) conflicting schedules of expert witnesses[5].

One of the first instances, in which evidence was allowed to be recorded by the Supreme Court through VC, was in the 2002 criminal case of State of Maharashtra vs. Dr. Praful Desai[6]. Under Section 273 of the Criminal Procedure Code, 1973 (“CrPC”), evidence is to be recorded in the presence of the accused. While allowing the recording of evidence of a witness based in the USA by VC, the SC held section 273 was satisfied since the accused and his pleader could see the witness as if he was sitting before them. The playback option available in the VC recording was noted to be an added advantage enabling better observation of the witness’ demeanor.

Thereafter, several courts followed the judgment of Dr. Praful Desai (supra) and allowed recording of evidence through VC in civil[7] and criminal[8] cases. Dealing with a potential security risk of transporting the 26/11 terror attack accused, Ajmal Kasab, from prison to Court for hearings, the Bombay High Court allowed Kasab to attend the hearings by VC.[9] However, in a rare instance the Madras High Court[10] after referring to the case of Dr. Praful Desai (supra), rejected the prayer for cross-examination by VC, inter alia, holding that the party had relied upon voluminous documents and the cross-examination would be more effective if done in open court.

Courts have generally considered the nature and stage of proceedings to be relevant while considering such requests of evidence through VC, which were generally granted. However, in matrimonial cases, post a three-judge SC bench decision in Santhini vs. Vijaya Venketesh[11], the Court held that in matrimonial cases presence of both parties before the Court is necessary for an effective trial, especially for endeavoring a settlement/reconciliation. However, if the matter proceeds to trial, both parties must consent to conducting the evidence though VC.

Courts appear to be increasingly inclined to allow the use of technology to overcome difficulties in the conduct of proceedings. Modernization of infrastructure and a boost to technical expertise would help better harness this expedient facility in courts across the country. In the Indian arbitration space, evidence through VCs are also becoming popular and expedient, particularly in light of the strict timelines prescribed under the Arbitration Act.

Author:
Pooja Kshirsagar, Senior Associate

End Notes:
[1] Universal Ferro and Allied Chemicals Ltd vs. Vipkon Property Development Co. Ltd 2015 SCCOnline Bom 7328, Stemcor (S.E.A) Vs Mideast Intergrated Steels Limited 2018 SCC Online Bom 1179,
[2] The State of Maharashtra vs. Chandrabhan Sudam Sanap Order passed by Bombay High Court dated December 20, 2018 in Confirmation Case No. 3 of 2015
[3] Sat Pal Dhawan and Ors. vs. Davinder Singh Aulakh and Ors. (2017)185PLR166
[4] Mahender Chawla and Ors. vs. Union of India (UOI) and Ors.  2018(15)SCALE497
[5] The State of Maharashtra vs. Chandrabhan Sudam Sanap Order passed by Bombay High Court dated December 20, 2018 in Confirmation Case No. 3 of 2015
[6] (2003) 4 SCC601
[7] Liverpool and London Steamship Protection & Indemnity Association Ltd. 2005 (6) Bom CR 278, Milano Impex Private Limited vs. Egle Footware Pvt. Ltd 2011(124) DRJ 668, Universal Ferro and Allied Chemicals Ltd vs. Vipkon Property Development Co. Ltd 2015 SCCOnline BOM 7328, International Planned Parenthood Federation (IPPF) vs. Madhu Bala Nath AIR 2016 Del 71, unreported judgment of Delhi High Court dated May 2, 2011, in the case of (CS (OS) No. 1350/1995) Gurnam Kaur vs. Pritam Singh Bhatia, Twentieth Century Fox Film Corporation and Anr. vs. NRI Film Production Associates (P) Ltd. AIR2003Kant148
[8]Malay Kumar Ganguly  vs. Sukumar Mukherjee and Ors. AIR2010SC1162, Nipun Saxena and Ors. vs. Union of India (UOI) and Ors.  (2019)2SCC703
[9] Order of Bombay High Court dated September 20, 2010 in  Confirmation Case No.2 of 2010
[10] R. Sridharan Vs. R. Sukanya 2011 (2) MWN (Civil) 324
[11] AIR2017SC5745

 

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Orissa High Court Allows Input Tax Credit on Construction Services of a Shopping Mall

Published In:Inter Alia - Quarterly Edition - July 2019 [ English ]

Under Section 17(5)(d) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) input tax credit (‘ITC’) is not allowed on goods or services received by a taxable person for construction of an immovable property (other than plant or machinery) including when such goods or services are used in the course or furtherance of a business.

However, recently, the Orissa High Court[1] has allowed ITC on inputs and input services used for construction of a shopping mall wherein such mall is intended to be let-out upon construction, on the following grounds: (i) The very purpose of the Goods and Services Tax (‘GST’) regime is to prevent cascading of taxes, which objective should not be frustrated by adopting a narrow interpretation of the aforesaid Section 17(5)(d) of the CGST Act; and (ii) the shopping mall would not be used for personal business, and would instead be let-out, which is an activity covered under GST.

[1] Safari Retreats Private Limited, W.P. (C) No. 20463 of 2018.

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Delhi High Court awards exemplary damages to Philips for IP infringement

Published In:Inter Alia - Quarterly Edition - July 2019 [ English ]

In a precedent setting and landmark decision, the Delhi High Court on April 22, 2019 in the matter of Koninlijke Philips N.V. v. Amazestore[1], awarded damages to the tune of approx. Rs. 3.15 crores (approx. US$ 450,000) against the defendants for willful infringement and piracy of designs, copyrights and trade dress.

The plaintiffs had argued that the defendants in this matter viz. M/s. Badri Electro Supply and Trading Company (owner of the trademark ‘NOVA’) (‘Bestco’), Nova Manufacturing Industries Limited (manufacturer of the infringing products) (‘Nova’) and Omni Exim Private Limited (importer of the infringing products) (‘Omni’) had imitated the design of its products under the Advance Beard Trimmer Series 3000 as well as copied the accompanying product literature, packaging, colour scheme and trade dress. The Court observed that: (i) the impugned products of the defendants did indeed closely resemble the aesthetics of the plaintiff’s products; (ii) the defendants with mala fide intent had deliberately imitated the shape and configuration of the plaintiffs’ products, which constituted piracy of the registered designs of the plaintiffs; (iii) the defendants had copied the product packaging, literature and trade dress of the products. In light of the above, the Court proceeded to grant the relief of permanent injunction restraining the defendants from infringing upon the registered design and copyright of the plaintiff as well as passing off and unfair competition.

Referring to the principles laid down in Rookes v. Barnard and Cassell & Co. Limited v. Broome[2], the Court held that the nature and quantum of the damages to be awarded has a direct nexus with the degree of mala fide conduct and that granting of exemplary damages was validated in a case where a defendant deliberately infringes upon the rights of a person, knowing that profit he will gain from the wrongful conduct will probably exceed the damages payable to the victim.

The Court went on to lay down a set of guidelines that should be followed for the purpose of granting damages in intellectual property infringement cases, which is directly linked to the degree of mala fide conduct.

[1] Koninlijke Philips N.V. v. Amazestore, CS (COMM) 737/2016, I. A. 7469/2016, CS (COMM) 1170/2016, I.A. 2685/2017 and 16768/2018, decided on April 22, 2019.
[2] Rookes v. Barnard and Cassell & Co. Limited v. Broome, [1964] 1 All ER 367.

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Delhi High Court grants First Ever Dynamic Injunction to Curb Online Piracy

Published In:Inter Alia - Quarterly Edition - July 2019 [ English ]

UTV Software Communications Limited & Ors., being ‘owners’ of cinematographic films, filed eight copyright infringement suits against 30 known websites, certain unnamed defendants, Internet Service Providers (‘ISPs’), MEITY, and DoT for communicating their original content / cinematographic works to the public, without authorization.

At the very outset, the Delhi High Court by way of its order dated April 10, 2019 had held that online piracy ought not to be treated any differently than the infringement taking place in the physical world, especially as the Copyright Act does not make any such distinction. The Court, while analyzing the issue of rogue websites, observed that a qualitative approach should be adopted and also laid down factors to be considered before classifying a particular website as a ‘rogue’ website, key factors being: (i) whether the primary purpose of the website was to commit copyright infringement, (ii) whether details of the registrants were masked, (iii) whether there was ‘silence or inaction’ after receipt of copyright infringement notices from owners, and (iv) whether the website contains any instructions to circumvent measures that disable access to such websites. In view of the factors mentioned above, the Court found the defendant websites to be in fact ‘rogue’ websites.

The Court also considered the issue of ‘hydra headed’ websites, which on being blocked, multiply and resurface as alphanumeric or mirror websites. To overcome this problem, the Court referred to a judgment of the Singapore High Court in the case of Disney Enterprise v. Ml Limited,[1] and adopted the concept of dynamic injunction under its inherent and discretionary powers available under Section 151 of the Code of Civil Procedure, 1908 (‘CPC’), which would allow the plaintiffs to simply implead additional mirror websites to the original suit for injunction by way of an interlocutory application under the CPC, as opposed to filing a fresh suit. The plaintiffs were also directed to file an affidavit confirming that the newly impleaded website is a mirror / redirect / alphanumeric website (i.e., has the same content as an injuncted rogue website) with sufficient supporting evidence.

The Court thus passed a decree of permanent injunction against the defendant websites and further directed the ISPs to block all access to the defendant websites and further directed the DoT and MEITY to explore possibilities of framing a policy which will serve to caution and warn website users of the potential copyright infringement resulting from downloading and viewing pirated content and further fine them if they violate said warnings.

The present case is significant not only as it provides a guideline for identifying rogue websites, but also as it provides a roadmap for strategies that can be implemented to (i) reduce the burden of copyright owners who are aggrieved by such ‘hydra-headed’ infringing websites in the short term, and (ii) discourage access and use of pirated content by website users in the long term.

[1] Disney Enterprise v. Ml Limited, (2018) SGHC 206.

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Bombay HC rules on Copyright Infringement by ‘Over The Top’ Services

Published In:Inter Alia - Quarterly Edition - July 2019 [ English ]

The Bombay High Court, by its decision passed on April 23, 2019[1] dealt with the issue of whether certain ‘over the top’ services provided by Wynk through its software platform amounted to copyright infringement of Tips Industries’ copyrights in certain sound recordings and also whether Wynk, was entitled to invoke the provisions of statutory licensing under Section 31D of the Copyright Act, 1957 (‘Copyright Act’) for internet broadcasting. Following services were provided through the Wynk App: (a) downloading of sound recordings by users on their devices upon payment of a monthly rental fee (and retaining access to the same without an internet connection during the rental period), (b) purchase of sound recordings of Tips Industries, for a flat fee (and retaining access to the same without an internet connection, in perpetuity), and (c) on demand streaming services where sound recordings were made available over the internet, which could be accessed through any device connected to the internet on the Wynk App.

Wynk continued to make Tips Industries’ sound recordings available to its users even after the authorization granted by Tips Industries for use of its sound recordings had lapsed. After analyzing Section 14(1)(e) of the Copyright Act in detail, the Bombay High Court held that Wynk’s actions amounted to copyright infringement. The Court held that the outright purchase/download services provided by Wynk amounted to a sale of the sound recording and also the temporary rental option amounted to commercial rental of the sound recording, thereby infringing the exclusive rights of Tips Industries. The Court also held that Wynk’s services were of a commercial nature and hence were not covered by the fair dealing exceptions. On the issue of statutory licensing, the Court held that since the right to sell and/or commercially rent sound recordings are distinct and separate rights which are different from the right to communicate the sound recording to the public, Wynk cannot exercise a statutory license right under Section 31D in relation to the download and purchase features of the services provided by them (which amount to sale and / or commercial rental). The Court clarified that the statutory license regime under the Copyright Act only applies to “broadcasting” rights that fall under the exclusive right to “communicate the work to the public”.

The Court thereafter held that Wynk would not fall within the purview of broadcast organizations that are eligible to be granted a statutory license since Wynk was an internet broadcasting organization. The Court observed that the statutory licensing scheme under the Copyright Act is only applicable for radio and television broadcasting organizations. This conclusion was reached based on the language of Section 31-D of the Copyright Act read with Rule 29 of the Copyright Rules, 2013, which specifically mention only radio and television broadcasting. Further, the provisions of the Copyright Act presuppose the fixing of royalty rates by the Intellectual Property Appellate Board before a statutory license can be granted. However, the Court noted that royalties for internet broadcasting have not yet been fixed and, therefore, a statutory license could in fact not be granted to internet broadcasting organizations.

[1] Tips Industries Limited v. Wynk Music Limited, Notice of Motion (L) No. 197 of 2018 in Commercial Suit IP (L) No. 114 of 2018 and Notice of Motion (L) No. 198 of 2018 in Commercial Suit IP (L) No. 113 of 2018.

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Supreme Court on Ineligibility to be Appointed as Arbitrators

Published In:Inter Alia - Quarterly Edition - July 2019 [ English ]

The Supreme Court of India (‘SC’) had previously, in the matter of TRF Limited v. Energo Engineering Projects Limited[1] (‘TRF’) held that a person, who is ineligible to be appointed as an arbitrator under Section 12(5) of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), cannot appoint an arbitrator in his or her stead. By its decision dated April 16, 2019,[2] the SC has extended the applicability of its decision in TRF and ruled that parties may place reliance on the decision in TRF, even if such proceedings were initiated prior to the decision in TRF, but after Section 12(5) of the Arbitration Act came into force on October 23, 2015.

[1] (2017) 8 SCC 377.
[2] Bharat Broadband Network Limited v. United Telecoms Limited, 2019 SCC Online SC 547.

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Supreme Court Rules on Benami Transactions

Published In:Inter Alia - Quarterly Edition - July 2019 [ English ]

The SC on May 9, 2019[1] has set aside an order of the Madras High Court, wherein it had been held that the transaction to purchase the properties that formed the subject-matter of the dispute was benami in nature, given that part of the sale consideration was paid by another person at the time of the purchase of the property. The SC noted that the following circumstances should be taken into consideration: (i) the source of the purchase money; (ii) the nature and possession of the property, after the purchase; (iii) the motive, if any, for giving the transaction a benami colour; (iv) the position of the parties and the relationship, if any, between the claimant and the alleged benamidar; (v) the custody of the title deeds after the sale; and (vi) the conduct of the parties concerned in dealing with the property after the sale. The SC held that the burden of proving that a particular sale is benami and that the apparent purchaser is not the real owner, always rests on the person making such an assertion.

The SC, while considering whether it was open for the defendant to take the plea that the purchase made in the name of the wife or children was for their benefit, noted that under Section 3 of the Benami Transaction (Prohibition) Act, 1988 (‘BTA’), there was a presumption that a transaction made in the name of the wife and children is for their benefit. However, by way of the Benami Amendment Act, 2016, Section 3(2) of the BTA, which provided for the said statutory presumption, was omitted. In light of the above, the SC noted that the provisions of the BTA were not applicable retrospectively and therefore, the said 2016 amendment would not apply in the present case as the sale deed was executed much prior in time.

[1] Mangathai Ammal v. Rajeswari, 2019 SCC Online SC 717.

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The Horizontal/Vertical Dichotomy Presented by the Dual Distribution Model

Published In:Inter Alia Special Edition- Competition Law - August 2019 [ English ]

Introduction

Deploying an efficient distribution strategy is essential for enterprises to sell their products / provide services to its customers. Often, a manufacturer’s distribution strategy may involve multiple channels of distribution, i.e., multi-channel distribution. This helps enterprises make their products/services more widely available and concurrently adds to the convenience of the consumers who have multiple options to make their purchases. Manufacturers often choose to sell through a distribution network and simultaneously supply goods to their customers directly – this is referred to as a dual distribution model.

It is common practice for manufacturers of white goods, electronic gadgets, apparel, footwear, accessories, etc., to distribute their products through multiple channels including: (i) company showrooms (directly to consumers); (ii) multi-brand retail stores (through retailers); and (iii) e-commerce platforms. Such strategies are becoming increasingly common for a number of reasons, including developments in e-commerce and third -party logistics, which encourage manufacturers to engage in direct sales in addition to the conventional distribution channel through distributors. Consequently, an enterprise may act as both a supplier and competitor to its distributors. From a competition law perspective, this gives rise to the question whether such arrangements between a manufacturer and its own distributors, which are typically characterized as arrangements across the vertical supply chain, could also be characterized as horizontal arrangements given the competitive nature of their relationship. The characterization of a manufacturer as being both in a horizontal competitive relationship with its own distributors, as well as being part of the vertical supply chain may result in such arrangements being analyzed as a potential cartel arrangements, in addition to vertical restraints. This has obvious repercussions in how these arrangements are reviewed under competition law.

Under the Competition Act, 2002 (‘Act’), certain anti-competitive agreements such as agreements between or among competitors (horizontal agreements, including cartels) and agreements between enterprises or persons at different stages or levels of the production chain (vertical agreements) are prohibited. While horizontal agreements, barring joint efficiency enhancing joint ventures, are presumed to cause an appreciable adverse effect on competition (‘AAEC’), vertical agreements often serve legitimate business purposes and are therefore assessed under the ‘rule of reason’ approach.

For example, consider a case where a manufacturer adopts a dual distribution model, and enters into an exclusive distribution agreement (in terms of territory, customers or products) with its distributors in the vertical supply chain, and simultaneously sells its products directly to customers through its website. Since the exclusive distributor potentially competes with the manufacturer who makes direct online sales to customers, it is possible that an otherwise typical vertical ‘exclusivity’ arrangement, between manufacturer and its distributor, may also be viewed as a horizontal market allocation arrangement and be presumed to cause AAEC. By the same token, if a distributor accepts a resale price suggestion by the manufacturer, it may also be construed as horizontal price-fixing arrangement.

Treatment of Dual Distribution under the Competition Act, 2002

These unique situations give rise to the dilemma of whether to categorize the agreement between the manufacturer and its third-party retailer as a horizontal or vertical agreement.

There is no explicit guidance by the Competition Commission of India (‘CCI’) on the treatment of dual distribution agreements within the framework of regulation of anti-competitive agreements under the Act. While CCI is yet to examine issues arising out of dual distribution arrangements, in a recent decision relating to the zinc chloride batteries segment in India (‘Batteries Case’),[1] CCI found a similar relation between Panasonic (manufacturer-supplier) and Godrej (buyer-reseller) to be an anti-competitive horizontal agreement. Importantly, one of the factors that distinguishes the Batteries Case from a typical dual distribution arrangement was that while Godrej procured batteries from Panasonic, it eventually sold them in the market under its own brand. Hence, CCI noted that from a demand-side perspective, consumers viewed the products of Godrej and Panasonic to be interchangeable and thus considered their relation to be horizontal in nature. Accordingly, it appears that CCI regarded demand-side substitutability as the key determinant in characterizing the nature of their agreement. Notably, the agreement between Godrej and Panasonic was not a typical dual distribution agreement, wherein the reseller merely acts as a distributor and does not sell under its own brand.

Treatment of dual distribution in jurisdictions other than India

In most mature jurisdictions, horizontal restraints are likely to be assessed under the ‘per se’ rule[2]   and vertical restraints, since they often serve legitimate business practices are therefore assessed under the ‘rule of reason’ approach that entails an inquiry of anti-competitive harm. The European Commission (‘EC’) assesses dual distribution agreements under the ‘rule of reason’ approach, as opposed to the assessment of vertical agreements entered into between competitors, which are examined under the Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements. The European Commission’s Guidelines on Vertical Restraints (‘EC Vertical Guidelines’) acknowledges that while assessing a ‘dual distribution model, i.e. the manufacturer of particular goods also acts as a distributor of the goods in competition with independent distributors of his goods, any potential impact on the competitive relationship between the manufacturer and retailer at the retail level is of lesser importance than the potential impact of the vertical supply agreement  on competition in general at the manufacturing or retail level.’.

In the United States (‘US’), in a class action antitrust suit against Baskin-Robbins Ice Cream Company (‘BR’)[3], certain franchisees of BR, inter alia, alleged that the dual distribution model adopted by BR involved an unlawful horizontal market allocation. Notably, BR’s distribution model involved licensing its trademarks and formulae to independent area franchisors to produce its ice cream and establish franchised stores, thereby comprising a vertical agreement. At the same time, BR also operated as an area franchisor itself, thereby acting as a competitor vis-à-vis the other area franchisors. The United States Court of Appeals (9th Circuit) (‘USCA-9’) observed that ‘when a manufacturer acts on its own, in pursuing its own market strategy, it is seeking to compete with other manufacturers by imposing what may be defended as reasonable vertical restraints.’ Furthermore, in the absence of a clear precedent on the applicability of the ‘per se’ rule to dual distribution agreements, the USCA-9 examined the actual competitive impact (applying the ‘rule of reason’ approach) of the dual distribution model of BR. Ultimately, the USCA-9 noted that the dual distribution model may have fostered inter-brand competition, resulting in BR’s expansion into new geographic markets as a vigorous competitor. Aligned with this approach, the majority of the courts in the US have classified dual distribution as a form of vertical restraint. However, in 2016, the Federal Trade Commission (‘FTC’) re-initiated the debate when it started an inquiry on the exchange of pricing information (an invitation to collude) between a manufacturer and its distributor in a dual distribution model, alleging it to be a horizontal agreement.[4] Ultimately, the parties entered into a settlement with the FTC and there was no in-depth inquiry into the matter that could have suggested if there was to be a deviation from the ‘rule of reason’ approach being followed in US.

A similar issue was placed before the Competition Appeal Court of South Africa (‘CACSA’) in The Competition Commission v. South African Breweries Limited & Ors.[5] In this case, South African Breweries Limited (‘SAB’) deployed a dual distribution model wherein its products were sold through its wholly owned depots as well as appointed dealers (‘ADs’). The Competition Commission of South Africa contended before the CACSA that by way of this arrangement, SAB had indulged in market allocation, as it had appointed its ADs as exclusive distributors for various territories, while continuing to operate its own depots as well. Interestingly, the CACSA observed that but for the supply agreement between SAB and the ADs, the ADs would not have been able to compete with SAB. In other words, the horizontal element of the arrangement was only incidental to the arrangement. Accordingly, the CACSA noted that ‘the evidence indicates that the relationship between the parties is primarily a vertical one. Although there is also a horizontal component, the latter component is incidental to, and flows from, the vertical agreement.’ Eventually, the CACSA overturned the Competition Commission of South Africa’s decision, which had assumed SAB’s relation with its ADs as anti-competitive and constituting a horizontal agreement.

Conclusion

Clearly, the characterization of an agreement as horizontal or vertical significantly impacts its competition analysis. If CCI were to treat an agreement as horizontal, it will apply the ‘per se’ test and the onus would lie on the defendant to prove its innocence. A vertical agreement would be assessed under the ‘rule of reason’ approach and the onus to examine the effects of the agreement on the market would lie on CCI. It appears that globally, authorities are inclined towards assessing dual distribution models using the ‘rule of reason’ approach. This is because the dual distribution model presents various pro-competitive benefits to the enterprise(s) as well as the consumers, which may not be achievable solely through a single distribution strategy. Most importantly, adopting a dual or multi-channel distribution strategy increases the manufacturer’s ability to compete in the market, thereby promoting inter-brand competition and leading to improved consumer welfare.

Dual and multi-channel distribution models are increasingly common in Indian markets and CCI has already received multiple complaints[6] from distributors of manufactures who sell their products through online channels as well as through independent distributors. CCI is likely to face potential anti-competitive issues emerging from these arrangements and will need to follow an objective approach in assessing dual distribution arrangements. In view of the jurisprudence of more mature antitrust jurisdictions as well as the range of pro-competitive effects arising from dual distribution agreements, CCI should also adopt a similar approach of assessing such agreements under the ‘rule of reason’ approach. Treating dual distribution arrangements as horizontal agreements could potentially result in a legitimate vertical agreement with pro-competitive benefits being treated as a horizontal agreements, thereby leading to adverse consequences for enterprises.

Since CCI’s views on dual distribution remain largely untested, enterprises need to be more careful while entering into agreements with their distributors or contract manufacturers. A key takeaway from the Batteries Case, for enterprises operating a dual or multi-channel distribution model, is that the agreements should unambiguously spell out the vertical relationship with their distributors / suppliers.

[1] Suo Moto Case No. 3 of 2017. This case is presently under appeal before the National Company Law Appellate Tribunal.
[2] The authority presumes anti-competitive harm without an inquiry or analysis.
[3] Krehl v. basin Robbins Ice Cream Company 664 F.2d 1348, (9th Cir 1982).
[4] In re: Fortiline, LLC (FTC Matter/file number 151 0000).
[5] Case No: 129/Cac/Apr14 (2015).
[6] M/s K.C. Marketing v. OPPO Mobiles MU Private Limited (Case No. 34 of 2018); M/s Karni Communication Private Limited & Anr. v. Haicheng Vivo Mobiile (India) Private Limited (Case No. 35 of 2018).

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CCI orders investigation into abuse of dominance allegations against Google

Published In:Inter Alia Special Edition- Competition Law - August 2019 [ English ]

On April 16, 2019, CCI ordered an investigation into the information filed by three consumers of Android based smartphones in India, namely Mr. Umar Javeed, Ms. Sukarma Thapar and Mr. Aaqib Javeed (‘Informants’) against Google LLC and Google India Private Limited (collectively, referred to as ‘Google’).[1] The allegations in the information were under Section 4 of the Act and related to Google’s Android operating system, which is an open-source, mobile operating system (‘Android OS’) installed by original equipment manufacturers of smartphones and tablets (‘OEMs’).

The key allegations in the information related mainly to two agreements, i.e., the Mobile Application Distribution Agreement (‘MADA’), and the Anti Fragmentation Agreement (‘AFA’), which were entered into by the OEMs of Android OS with Google. Under the AFA, OEMs were restricted from developing and marketing the incompatible modified version of Android OS, Android forks, on other devices, which is alleged to restrict access to potentially superior versions of Android OS. AFA is a pre-condition to signing the MADA. It was further alleged that while signing the MADA is optional, OEMs are required to pre-install Google’s own applications in order to get any part of Google Mobile Services (‘GMS’), i.e., Google applications like Maps, Gmail and Youtube, thereby hindering development of rival applications.

For the purpose of assessment, CCI prima facie delineated the following relevant markets: ‘market for licensable smart mobile device operating systems in India’, ‘app stores for android mobile operating systems’ and ‘general web search service’ and found Google to be prima facie dominant in these markets. Separately, CCI also noted that each application like online hosting platform, browser, map, could be a separate relevant market.

CCI issued an order under Section 26(1) of the Act, instructing the Director General (‘DG’) to investigate Google on the allegations made in the information, based on the following factors:

i.       AFA: According to CCI, conditions under the AFA, prima facie seem to reduce the ability and incentive of OEMs to develop and sell alternative versions of Android OS, in contravention of Section 4(2)(b) of the Act, i.e., limiting technical or scientific development relating to goods and services to the prejudice of consumers; and

ii.     MADA: According to CCI, conditions under the MADA, i.e., mandatory pre-installation of GMS suite, prima facie seem to amount to imposition of unfair condition on the OEMs in contravention of Section 4(2)(a)(i) of the Act.

[1] Case no. 39 of 2018

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CCI Dismissed Allegations of Anti-competitive Agreement against Haicheng Vivo Mobile (India) Private Limited, Vivo Mobile India Private Limited and Vivo Communication Technology Company Limited

Published In:Inter Alia Special Edition- Competition Law - August 2019 [ English ]

On June 19, 2019, CCI dismissed allegations against Haicheng Vivo Mobile (India) Private Limited (‘Vivo India’), Vivo Mobile India Private Limited (‘Vivo Co.’), and Vivo Communication Technology Company Limited (‘Vivo Tech’) (collectively, referred to as ‘Vivo Companies’).[1] The information was filed by M/s Karni Communication Private Limited and M/s Karni Telnet Private Limited (the filing parties hereinafter referred to as ‘Karni’) who had entered into a distributorship agreement to sell mobile phones under the brand name ‘Vivo’. Karni alleged that Vivo imposed vertical restraints on its distributors in the form of: (i) restricting online sales by distributors; (ii) allocating territories for their dealers; (iii) imposing penalties on distributors in the event of market infiltration; and (iv) mandating a minimum operating price policy (‘MOP’), which amounts to minimum resale price maintenance (‘RPM’). To assess the allegations, CCI considered the market for ‘smartphones in India’.

CCI’s dismissed the allegations under Section 3(4) of the Act and observed the following:

i.     Vivo’s Lack of Market Power: CCI observed that Vivo Companies did not appear to command a position which could have enough influencing power to adversely affect competition in India. It was contended that Vivo Companies were controlled by BBK Electronics Corporation (‘BBK Group’), which owns four mobile phone selling brands in India, i.e., Oppo, Vivo, OnePlus and Realme. Accordingly, it was further contended market share of the Vivo Companies should include the market share of all brands controlled by BBK Group. CCI did not find any evidence of controlling influence by BBK Group on Vivo since: (i)Vivo India was held by two individuals, i.e., Mr. Hexi and Mr. Tangwensheng (holding 99.9% and 0.01%, respectively). Similarly, Vivo Co.’s shares were held by Multi Accord Limited (solely held by Lucky City International Limited) and Ms. Aruna Sharma; and (ii) BBK Group does not have any directors on the board of directors of any of the Vivo Companies, thereby resulting in autonomy in decision making. CCI further observed that Vivo had an independent marketing team and competed in the market for sale and distribution of smartphones in India with other BBK Groups brands. Accordingly, the market shares of Vivo Companies should not include market shares of Oppo, OnePlus and Realme.

ii.     No Restriction on Online Sales: CCI held that the restriction on distributors to sell products through online portals, does not directly withhold the supply of Vivo products in the market, and consumers have the option to buy such products through online platforms such as Flipkart, Amazon and Vivo’s website. Further, the ‘Primary Distribution Agreement’ between Vivo India and Vivo Co. was with respect to offline sales only and not online sales of products. Considering Vivo India did not have rights for online sales, the question of restriction on online sales by Vivo India in the secondary agreement with sub-distributors did not arise. Additionally, CCI noted that there were no exit barriers in the market and the complainants could opt out of distributorship if the terms were not agreeable. Therefore, this allegation was also dismissed.

iii.     No Allocation of Territory: CCI observed that the distributors were not restricted from dealing with other brands either within or outside the allocated territory. In this case, the territory allocation did not appear to cause or was unlikely to cause AAEC in the market for sale and distribution of smart phones in India. CCI relied on M/s K.C. Marketing v. OPPO Mobiles MU Private Limited[2] to ascertain this.

iv.      No Imposition of RPM through MOP: CCI noted that there were several players in the market for sale and distribution of smart phones in India and there were sufficient number of distributors/retailers from whom the consumers could purchase Vivo smart phones (online and offline). The imposition of RPM through the MOP Policy did not appear to cause or was unlikely to cause AAEC in the market for sale and distribution of smartphones in India since there was intense inter-brand competition in the said market. Further, it was observed that there were no entry/ exit barriers or foreclosure of competition. Accordingly, this allegation was not founded.

CCI also observed that in addition to the allegations under Section 3(4) of the Act, Karni in a subsequent submission to CCI also alleged that the Vivo Companies were facilitating a cartel at the retailer level under the aegis of the All India Mobile Retailers Association (‘AIMRA’), in violation of Section 3(3) of the Act. However, in the absence of any evidence to prove such an allegation and considering that no retailers or AIMRA had been impleaded in the matter, this allegation was also dismissed by CCI.

[1] Case no. 35 of 2018
[2] Case No. 34 of 2018

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CCI Penalises Jalgaon District Medicine Dealers Association and its Office Bearers for the Imposition of PIS charges on Pharmaceutical Companies

Published In:Inter Alia Special Edition- Competition Law - August 2019 [ English ]

On June 20, 2019, CCI penalised Jalgaon District Medicine Dealers Association (‘JDMDA’) as well as its office bearers, i.e., the President and Secretary of JDMDA ( JDMDA and its office bearers are together referred to as ‘Parties’) on an information filed by Mr. Nadie Jauhri alleging anti-competitive conduct by that JMDA. CCI levied a penalty of Rs 80,185 (approx. USD 1200) on JDMDA for imposing a mandatory condition on pharmaceutical companies to pay Product Information Service charges (‘PIS’), which ultimately resulted in the limiting the supply of drugs in the market.[1]

PIS is in the nature of a fee charged by chemists and druggists associations for introducing a new product/drug launched by the pharmaceutical companies in the bulletins/ newsletters published by such associations. In return, the said associations publish the information and circulate it among all the dealers, distributors, etc.

CCI has previously in Santuka Associates Pvt. Limited v. AIOCD and others[2] (‘Santuka Case’), held that while collection of PIS charges may be beneficial for drug manufacturers, making the payment of PIS charges ‘mandatory’ resulted in denial of market access and limited the supply of drugs in the market, in violation of Section 3(3)(b) of the Act. Mandatory PIS effectively amounted to requiring permission of the associations to launch any new drugs. CCI then issued a public notice on January 31, 2014 directing the Chemists and Druggist Association to discontinue practice of mandating collection of PIS.

Given the above, CCI finally considered: (i) whether the PIS charges by JDMDA were mandatory/compulsory in nature; and (ii) if yes, whether office bearers of JDMDA were responsible for the violation of Section 48 of the Act.

On the first issue, after considering the statements of the witnesses and documentary evidence (emails, letters between JDMDA and pharmaceutical companies) part of the DG report, CCI concluded that JDMDA was imposing PIS charges mandatorily on the pharmaceutical companies. Accordingly, JDMDA was found to be limiting and controlling the supply of drugs in contravention of Section 3(3)(b) read with Section 3(1) of the Act. On the second issue, while the DG investigated fourteen office bearers of JDMDA, only the President and Secretary were considered to be in-charge of the day-to-day affairs of JDMDA. Thus, CCI penalised them at 10% of their average income for three financial years (FY 2013-16) under Section 48 of the Act.

Notably, the JDMA had also initiated connected proceedings before the Delhi High Court (‘DHC’) in W.P. (C) No. 11163 of 2015 challenging the prima facie order passed under Section 26(1) of the Act. Since the DHC has directed CCI to take no coercive steps against Parties, till the continuation of proceedings before it, implementation of CCI’s order is subject to the outcome of the proceedings before DHC.

[1] Case no. 61 of 2015
[2] Case No. 20 of 2011

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CCI Dismissed a Complaint Alleging Abuse of Dominance by the Indian Railways

Published In:Inter Alia Special Edition- Competition Law - August 2019 [ English ]

On June 28, 2019, CCI dismissed an information filed by Consumer Educational and Research Society (‘IP-1’) and its member, Ms. Parul Choudhary (‘IP-2’) (collectively, referred to as ‘IPs’), against Union of India, Ministry of Railways (‘MoR’) and the Indian Railway Catering and Tourism Corporation Limited (‘IRCTC’) (collectively, referred to as ‘Indian Railways’) alleging contravention of the provisions of Section 4 of the Act.[1]

The allegation in the information pertained to Indian Railways abusing its alleged dominant position in the railways sector in India and challenged the ticket refund rules as being arbitrary, unjust and against public interest. The IPs alleged that the rule regarding refund under the Railway Passengers (Cancellation of Tickets and Refund of Fare) Rules, 2015 (‘Refund Rules’), empowered the Indian Railways to forfeit the full ticket fare even in cases where the passengers fail to cancel the ticket for reasons attributable solely to the Indian Railways and/or circumstances beyond the control of the passenger.

CCI first noted and agreed that as a result of the statutory and regulatory framework, Indian Railways is dominant in the market of ‘transportation of passengers through railways across India’, but dismissed the information on the ground that no anti-competitive conduct could be said to have arisen for the allegations made. The Refund Rules have been notified in the Gazette by the Central Government in exercise of its powers under the provisions of the Railways Act, 1989 and if there is deficiency in service on part of Indian Railways, IPs can initiate action before an appropriate forum. CCI however mentioned that the Indian Railways may consider reviewing the existing rules of refund of fare and make them more consumer friendly.

[1] Case no. 20 of 2019

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CCI Dismisses Information against Bentley Systems for Violation of Sections 3 and 4 of the Competition Act

Published In:Inter Alia Special Edition- Competition Law - August 2019 [ English ]

On July 2, 2019, CCI passed an order dismissing an information filed by SOWiL Limited (‘Sowil’), a consultancy, against Bentley Systems India Pvt. Ltd. (‘Bentley’) alleging, inter alia, contravention of the provisions of Sections 3 and 4 of the Act. Sowil provides consultancy in preliminary planning, feasibility studies, traffic studies, railway works, bridges, structures and tunneling.[1] Bentley is a subsidiary of Bentley Systems, Incorporated, registered in the United States of America, and is engaged in the business of providing software solutions to engineers, architects, etc. for design construction, and allied operation of infrastructure.

Sowil had purchased certain software from Bentley and had also entered into a ‘SELECT Agreement’ with Bentley, which enabled Sowil to acquire licensing privileges and services. Sowil primarily alleged that the SELECT agreement imposed a condition to compulsorily renew all licenses, even in a case where Sowil wished to renew three out of the eight licenses it owned because of financial difficulties. Further, to prove dominant position of Bentley, Sowil submitted that: (i) Bentley has a market share of more than 80% in the field of providing ‘software services to more than 170 countries’, without defining a specific relevant market in the information; and (ii) purchase of Bentley’s softwares is a mandatory pre-condition to participate in the tenders floated by State Government and Central Government agencies including Railways, National Highways Authority of India and Rail Vikas Nigam Limited etc.

CCI dismissed the information on the following grounds:

i.      No Anti-Competitive Agreement: CCI held that under Section 3(3) of the Act, only agreements entered into between entities involved in similar trade of goods and services can be tested. Considering Sowil had purchased licenses over Bentley’s software, this arrangement could not qualify as a horizontal relationship. Further, since the licensing services availed by Sowil were in the capacity as a captive consumer, the arrangement could also not be an agreement entered into between entities at different stages/levels of the production chain.

ii.      Test under Section 4: To test violation of Section 4 of the Act, CCI defined the relevant market as the ‘supply of computer-aided design (CAD) software services in civil engineering works in India’, bearing in mind that CAD software used in different fields are not substitutable and the software used by Sowil is related to designing for use in civil construction. CCI held that in this relevant market, Bentley was not in a dominant position considering that there were many competitors in the market providing CAD disabling (e.g., AutoDesk, Carlson, Site3D, SierraSoft, Trimble etc.).

iii.     Other Allegations to Prove Dominance: After considering the tenders and documents relied on by Sowil, CCI concluded that they did not support Sowil’s allegation that only Bentley’s software have to be used to qualify for participation in the tender process as a pre-condition, since the tenders allowed other products viz., AutoDesk’s Civil 3D or other similar software for designing of railway projects without any exclusivity.

[1] Case no. 8 of 2019

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CCI Launches Investigation against Maruti Suzuki over Dealer Discounting Practices

Published In:Inter Alia Special Edition- Competition Law - August 2019 [ English ]

Background                 

On July 4, 2019, CCI passed an order under Section 26(1) of the Act, ordering investigation against Maruti Suziki India Limited (‘MSIL’). CCI had taken suo moto cognizance in this matter, on receiving an anonymous e-mail sent by certain dealers of MSIL in the west region in India (State of Maharashtra – except Mumbai and Goa) alleging RPM against MSIL. As per the anonymous e-mail, MSIL was restricting its dealers from giving discounts over and above a specified quantum. If a dealer was found exceeding this quantum, the dealership was penalised.

Allegations

It was alleged that: (i) MSIL appointed an agency for the purpose of mystery shopping to check whether any dealer was giving discounts in excess of the specified quantum and the ‘Mystery Shopping Audit Report’ was sent to dealers asking them to justify why an additional discount may have been given in a particular case; (ii) in case a dealer was not able to justify this to the satisfaction of MSIL, a penalty  was levied; (iii) the penalised dealer(s) was asked to deposit a cheque in the name of a MSIL dealer in Pune, Maharashtra; (iv) the money collected was utilised by MSIL for various expenses, as decided by the management; and (v) a similar discount control policy was implemented by MSIL across India – especially in cities where there were more than four to five dealers.

CCI’s preliminary inquiry and MSIL’s submissions

CCI sought certain information from MSIL and held a preliminary conference with MSIL. MSIL stated that it exercises no control over the dealers and has no agreement with or directive to the dealers in relation to discounts. MSIL placed on record the dealership agreements with its dealers to demonstrate that there were no clauses in these agreements, which involve discount control policy and MSIL encourages its dealers to offer discounts, as they deem fit. MSIL also demonstrated that in certain cases, dealers offered discounts more than the ‘consumer offers’ (run by MSIL from time to time). In relation to the allegation on penalties, MSIL stated that the penalties relate to schemes and guidelines that ensure customer satisfaction and compliance of such guidelines is monitored by MSIL since MSIL, too, contributes to these schemes (and they were not entirely borne out by dealer margins). MSIL also filed an affidavit stating that MSIL does not levy any penalty or discount control policy and simply communicates the understanding by and among the dealers.

Findings of CCI on existence of an RPM

CCI found MSIL to be a market leader in the ‘passenger cars segment in India’, with a market share of more than 50%. Notably, this observation of CCI was based on a newspaper report of April, 2018. CCI noted that: (i) while the dealership agreements do not contain any clause(s) in relation to the discount control policy, there appears to be an informal directive from MSIL to its dealers to not offer discounts over and above a specified quantum decided by MSIL; (ii) while MSIL gave instances where cars were sold by certain dealers below the ‘consumer offer’ price, these instances pertained to only nine dealers in the western regions, while MSIL has 2627 dealers across India Thus, the instances were too small to rule out RPM; and (iii) CCI was not satisfied with MSIL’s argument that mystery shopping agencies were appointed by dealers to ensure maintenance of quality standards and consumer satisfaction and that MSIL had no role in their employment, given that MSIL itself has stated that it is discharging the role of an independent third party in ensuring compliance of Sales Operating Procedure (‘SOP’) among dealers.

Basis the above, CCI came to the conclusion that the matter did merit a detailed investigation by the DG and passed an order under Section 26(1) of the Act.

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NCLAT Dismisses Appeal Filed Challenging the Shell-BG Combination

Published In:Inter Alia Special Edition- Competition Law - August 2019 [ English ]

On July 2, 2019, the National Company Law Appellate Tribunal (‘NCLAT’) dismissed an appeal filed by Mr. Piyush Joshi (‘Appellant’), a third party alleging CCI’s inaction on the information(s) submitted by the Appellant regarding the acquisition of BG Group Plc by Royal Dutch Shell Plc (‘Combination’).[1] The Combination was duly considered and approved by CCI, as not likely to cause any AAEC vide order dated September 17, 2015(‘Order’)[2].

The Appellant filed an information with CCI after the Combination was already approved, alleging that the parties to the Combination had not provided complete  information on the relevant markets involved in the Combination, along with allegations under Section 4 of the Act. The Appellant further alleged that CCI failed to follow the procedure under sections 29 and 30 of the Act (as per which CCI is required to issue a show-cause notice to the parties to the combination, only if CCI is of the prima facie opinion that the combination is likely to cause AAEC), in order to conduct a thorough assessment of a proposed combination.

NCLAT dismissed the appeal and made the following observations:

i.       Procedure Adopted by CCI: NCLAT held that the procedure under sections 29 and 30 of the Act is initiated by CCI only if it first forms a prima facie opinion that a combination has or is likely to cause AAEC. Appreciating the fact that CCI had not formed a prima facie opinion on AAEC in this case, NCLAT held that there is no procedural violation by CCI in approving the Combination without issuing a show cause notice to the parties to the Combination under sections 29 and 30 of the Act.

ii.      Allegations on Abuse of Dominance Cannot be Considered at the time of Approving the Combination: While hearing the Informant on merits of his information, NCLAT held that allegations regarding abuse of dominance under Section 4 can only be heard by CCI after the stage of approval of the Combination under Section 6 of the Act. Therefore, CCI’s dismissal of the information was also upheld by the NCLAT since it could not have been required to assess Section 4 violations while at the stage of approval of the proposed Combination under Section 6 of the Act.

iii.     Maintainability of the appeal and locus standi of the Appellant: NCLAT held that it can hear and dispose of appeals under Section 53B of the Act against any ‘direction issued or decision made or order passed’ by CCI under the relevant provisions under Section 53A(a) of the Act. NCLAT noted that the Appellant did not file the appeal against the Order and that CCI did not consider the information since it had already approved the Combination (‘Intimation’). Considering this, NCLAT held that this Intimation by CCI did not qualify as a ‘direction issued or decision made or order passed’ and was therefore not a valid ground for appeal under Section 53B read with Section 53A(a) of the Act.

iv.      NCLAT also held that the Appellant failed to show that the Combination resulted in AAEC.

[1] TA (AT) (Competition) No. 32 of 2017

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The Arbitration and Conciliation (Amendment) Act, 2019 – Key Highlights

On August 9, 2019, the President of India gave his assent to the amendments to the Arbitration and Conciliation Act, 1996 (‘Act’) and the same has been published in the Official Gazette of India. Some of the key highlights of the Arbitration and Conciliation (Amendment) Act, 2019 (‘Amendment Act’) are set out below:

i.       Arbitral Institution

Section 1(ca) has been introduced to define an ‘arbitral institution’ as an arbitral institution designated by the Supreme Court or a High Court under the Act.

ii.      Appointment of Arbitrators under Section 11

The Amendment Act empowers the Supreme Court (in the case of an international commercial arbitration) and the High Court (in cases other than international commercial arbitration) to designate arbitral institutions for the purpose of appointment of arbitrators. Such arbitral institutions will be graded by the Arbitration Council of India (discussed below). Where a graded arbitral institution is not available, the Chief Justice of the concerned High Court may maintain a panel of arbitrators for discharging the functions and duties of the arbitral institution.

In the absence of a procedure to appoint an arbitrator or failure of such procedure under the agreement, the appointment will be made by the arbitral institution designated by the Supreme Court or the High Court, as the case may be. The application for appointment of an arbitrator will be disposed of by the arbitral institution within a period of thirty days from the date of service of notice on the opposite party. The arbitral institution will determine the fees of the arbitral tribunal and the manner of its payment to the arbitral tribunal subject to the rates specified in the Fourth Schedule to the Act.

iii.     Arbitration Council

Part 1A has introduced the concept of an Arbitration Council of India (‘Council’), which will be established by a notification by the Central Government, and will have its headquarters in Delhi. The composition of the Council will include a Chairperson who is a Judge of the Supreme Court/ Chief Justice of a High Court/Judge of a High Court or an eminent person, having special knowledge and experience in the conduct or administration of arbitration, who will be appointed by the Central Government in consultation with the Chief Justice of India. The other Members of the Council will include an eminent arbitration practitioner and an eminent academician. The ex-officio Members of the Council will include the Secretary to the Government of India in the Department of Legal Affairs, Ministry of Law and Justice and Secretary to the Government of India in the Department of Expenditure, Ministry of Finance or their respective representatives not below the rank of Joint Secretary.  One representative of a recognised body of commerce and industry will be a part time member.

The Council will, inter alia, promote and encourage arbitration, mediation, conciliation or other alternative dispute resolution mechanisms and for that purpose, will frame policy and guidelines for the establishment, operation and maintenance of uniform professional standards in respect of all matters relating to arbitration. The Council will also frame policies governing the grading of arbitral institutions and arbitrators and recognise professional institutes providing accreditation of arbitrators.

iv.      Grading of Arbitral Institutions and Arbitrators

The Council will make grading of arbitral institutions on the basis of criteria relating to infrastructure, quality and calibre of arbitrators, performance and compliance of time limits for disposal of domestic or international commercial arbitrations, in such manner as may be specified by the regulations under the Act. The qualifications, experience and norms for accreditation of arbitrators will be such as specified in the Eighth Schedule to the Act.

v.       Timelines under the Amendment Act

•        Completion of pleadings: Section 23 has been amended to state that the statement of claim and defence must be completed within a period of six months from the date the arbitrator or all the arbitrators (as the case may be) received notice, in writing, of their appointment.

•        Arbitral award: In cases other than international commercial arbitration, the award will be made by the arbitral tribunal within a period of twelve months from the date of completion of pleadings. In the case of international commercial arbitrations, the award may be made as expeditiously as possible and endeavour may be made to dispose of the matter within a period of twelve months from the date of completion of pleadings.

•        Extension of time: Where an application for extension of time is pending, the mandate of the arbitrator will continue till the disposal of the said application.

vi.      Amendment to Section 34

Section 34 of the Act replaces the words “furnishes proof that”, with “establishes on the basis of the record of the arbitral tribunal that”, to clarify that the parties must rely on the record before the arbitral tribunal alone at the time of challenge of an award.

vii.     Amendment to Section 45

Section 45 of the Act, under Part II (power of Courts to refer the matter to arbitration unless it finds that the arbitration agreement is null and void, inoperative and incapable of being performed) has been amended to substitute the words “unless it finds”, with the words “unless it prima facie finds”.

viii.    Qualifications and Experience of Arbitrators

A person will not be qualified to be an arbitrator unless he is/ has been: (i) an advocate within the meaning of the Advocates Act, 1961 having ten years of practice experience as an advocate; (ii) a chartered accountant within the meaning of the Chartered Accountants Act, 1949 having ten years of experience; (iii) a cost accountant within the meaning of the Cost and Works Accountants Act, 1959 having ten years of experience; (iv) a company secretary within the meaning of the Company Secretaries Act,1980 having ten years of experience; (v) an officer of the Indian Legal Service; (vi) an officer with law degree having ten years of experience in the legal matters in the Government, autonomous body, public sector undertaking or at a senior level managerial position in private sector; (vii) an officer with engineering degree having ten years of experience as an engineer in the Government, autonomous body, public sector undertaking or at a senior level managerial position in the private sector or self-employed; (viii) an officer having senior level experience of administration in the Central Government or State Government or having experience of senior level management of a public sector undertaking or a Government company or a private company of repute; or (ix) a person having educational qualification at degree level with ten years of experience in a scientific or technical stream in the fields of telecom, information technology, intellectual property rights or other specialized areas in the Government, autonomous body, public sector undertaking or a senior level managerial position in a private sector, as the case may be.

The Schedule also prescribes general norms applicable to arbitrators, including the following:

•       The arbitrator must be impartial and neutral and avoid entering into any financial business or other relationship that is likely to affect impartiality or might reasonably create an appearance of partiality or bias amongst the parties;

•      The arbitrator must be conversant with the Constitution of India, principles of natural justice, equity, common and customary laws, commercial laws, labour laws, law of torts, making and enforcing the arbitral awards, domestic and international legal system on arbitration and international  best  practices; and

•        The arbitrator should be capable of suggesting, recommending or writing a reasoned and enforceable arbitral award in any dispute which comes before him for adjudication.

ix.      Confidentiality of the Arbitration Proceedings

The arbitrator, the arbitral institution and the parties to the arbitration agreement must maintain confidentiality of all arbitral proceedings except the award where its disclosure is necessary for the purpose of implementation and enforcement of award.

x.       Application of the Arbitration and Conciliation (Amendment) Act, 2015

It has been clarified that unless the parties otherwise agree, the amendments made to the Act by the Arbitration and Conciliation (Amendment) Act, 2015 will not apply to the arbitral proceedings which commenced before the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 i.e., October 23, 2015. This overrules the position laid down by the Supreme Court in BCCI v. Kochi Cricket Private Limited[1].

[1] (2018) 6 SCC 287

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