Canada Trust Co.: GAAR and Canada

The supreme court of Canada had the opportunity to interpret the GAAR provisions in 2005 in two companion cases namely, Mathew v. Canada [2005] SCC 55 and The Queen v. Canada Trustco Mortgage Company [2005] SCC 54. In this post I shall discuss the Trustco case and in a subsequent post I shall discuss the recent ruling of the Canadian Supreme Court in Lipson v. Canada [2009] SCC 1 which interprets Trustco.


In Trustco the court laid down a three step test for invoking the GAAR provisons embodied u/s 245 of the Canadian Income Tax Act. These three steps can be simply put as under:

1. Whether there is a “tax benefit” arising from a “transaction” u/s 245(1) and 245(2)?

2. Whether the “transaction” is an “avoidance transaction” as under s. 245(3) i.e. the transaction is not being arranged primarily for bona fide purpose other than to obtain tax benefit?

3. Whether the avoidance transaction is abusive as u/s 245(4)

The court noted that all the three ingredients as stated above needs to be fulfilled before invoking the GAAR provisions. However, the question arises as to what is a tax benefit? What qualifies as an avoidance transaction? When is an avoidance transaction abusive? These questions are critical in understanding the scope and ambit of the GAAR provisions u/s 245.

Tax Benefit

A plain reading of S. 245(1) suggests that a “tax benefit” is one which leads to a “reduction, avoidance or deferral of tax” or “an increase in a refund of tax or other amount” paid under the Act. It seems fairly clear that the amount of “tax benefit” is inconsequential for the purposes of s. 245(1). In Trustco the court noted that inorder to determine whether there arises a “tax benefit” in a given transaction, the “alternative arrangement approach” can also be adopted. Simply put, suppose to achieve a desired business purpose, an enterprise has the option to adopt two distinct models say A and B. Now assume the enterprise adopts model B. Subsequently on a closer scrutiny it is found that if the enterprise had adopted model A instead of model B its tax incidence would have been higher. In such a case the enterprise can be said to have obtained a “tax benefit” as per the “alternative arrangement approach” test.

Avoidance Transaction

In my earlier post I had discussed avoidance transaction u/s 245(3) and stated that GAAR provisions are not attracted in a case where the transaction “may reasonably be considered to have been made for bona fide purposes”. The investigation u/s 245(3) proceeds on the assumption that a transaction can have both tax and non tax purpose. In trustco the court held that a transaction is deemed to be an “avoidance transaction” if its “primary purpose” is to obtain tax benefit (this is contrary to the “only purpose” approach as asserted in my previous post). It would be safe to conclude that this is the correct interpretation of S. 245(3).The ruling of the court also suggests that S. 245(3) is similar to “main purpose” test under the Indian Direct Tax Code.

Abusive Tax Avoidance

The scheme of the GAAR provisions suggests that an avoidance transaction can only be disregarded if it is abusive. In trustco the court stated that what amounts to an abusive tax avoidance is a mixed question of law and fact. In essence the court stated that if a transaction defeats the object and spirit of any of the provisions of the Income Tax Act read as a whole then it would qualify as an “abusive tax avoidance” transaction.

Burden of Proof

S. 114 of the Indian Direct Tax Code presumes that a transaction is undertaken for the “main purposes” of obtaining a tax benefit i.e. the burden of proof lies with the taxpayer to show otherwise. However, the case is slightly different under the Canadian GAAR provisions. In trustco the court noted that for test (1) and (2) the burden lies on the taxpayer whereas for test (3) the burden lies on the department/minister. Simply put, the taxpayer has to show that (a) there is no tax benefit obtained and (b) the transaction was not contemplated primarily for tax purposes. Whereas the department has to prove that the transaction was an abusive tax avoidance transaction i.e. if the existence of abusive tax avoidance is unclear the benefit of the doubt goes to the taxpayer. The Canadian GAAR provisions seems to be fairly well balanced in terms of the burden of both the parties unlike the DTC.


An overall reading of Trustco suggests that:

1. The objective of the GAAR provisions is to draw a line between legitimate tax minimization and abusive tax avoidance and to this extent the principles enunciated in Westminister are not wholly dead.

2. The GAAR provisions under the DTC are far wider than its Canadian counter part, in the sense that the DTC does not require an inquiry as to whether a tax avoidance is abusive or not. Once it is shown under the DTC that the “main purpose” of the transaction is to obtain a tax benefit, the transaction can be disregarded.

3. The GAAR provisions under the DTC are tilted in favour of the department as opposed to the Canadian provisions, which is fairly well balanced.

GST Conference: Reminder

School of Law, Christ University in collaboration with Lakshmikumaran & Sridharan are organizing a Conference on GST on 26 June 2010 between 8:30am and 5:15pm.



SCHOOL OF LAW, CHRIST UNIVERSITY

in collaboration with

LAKSHMI KUMARAN & SRIDHARAN



CONFERENCE ON GST

on

SATURDAY, 26 JUNE 2010



SCHEDULE

DetailsTime

Registration08:30 – 9:00

Inauguration 09:00 – 9:30

Session I09:30 – 10:45

10:45 – 11:00 Tea break

11:00 – 12:45

Lunch 12:45 – 13:45 Ivy Hall

Session II13:45 – 15:05

15:05 – 15:20 Tea break

15:20 – 17:05

Valedictory 17:05 – 17:15





SESSION I - INTERPLAY BETWEEN THE STATE TAX LAWS AND GST



09:35 - 10:00 Mr. Pradeep Singh Kharola, I.A.S, Commissioner of Commercial Taxes - Current taxes vis-a-vis GST: The way forward

10:05 – 10:30 Mr. S. Venkataramani, Tax practitioner - The GST Discussion & the 13th Finance Commission

10:35 – 10:45 Mt. Kushal Gupta, Student, SLCU – Taxability of immovable property under GST



11:05 – 11:30 Mr. B.T. Manohar, FKCCI Chairman - Implications of GST on Trade.

11:35 – 12:00 Mr. Sanjay Dhariwal, Tax Practitioner- Implications of GST on Industries

12:05 – 12: 15 Mr. Ankit Mishra, Student, SLCU – GST and Inter – State transactions: India’s options

12:15 – 12:45 Q & A

SESSION II - INTERPLAY BETWEEN THE CENTRAL TAX LAWS AND GST



13:55 – 14:20 Mr. V. Raghuraman, Partner, Raghuraman & Chythanya, Advocates - Overview of Central Taxes and GST.

14:25 – 14:50 Mr. Nagendra Kumar, LTU Commissioner - Administrational Issues

14:55 – 15:05 Mr. Gautam Chawla, Student, SLCU - GST – Constitutional Challenges



15: 25 – 15:50 Mr. G. Shivadass, Partner, L&S - Intergovernmental Issues

15:55 – 16:20 Mr. Praveen, Senior Manager, PricewaterhouseCoopers P. Ltd.

16:25 – 16:35 Ms. Sheeba, Student, SLCU – Finance sharing between the Centre and State

16:35 – 17:05 Q & A

GAAR and Canada

In an earlier post I had discussed the GAAR provisions under the Direct tax code 2009. In this post I shall look into the GAAR provisions of Canada which is incorporated under S. 245 of the Canadian Income Tax Act (“Act). S. 245 of the Act was introduced with effect from 13 Sep 1988 as a response to the decision of the Canadian Supreme Court in Stubart Investments Limited v. The Queen ( [1984] CTC 294). In Stubart although the court rejected the traditional “strict interpretation” approach to the interpretation of tax statutes, it re affirmed the traditional approach adopted in C.I.R. v. Duke of Westminster ( [1936] AC 1 (HC)) that tax consequences should be based on the legal character of transactions and relationship regardless of their economic or commercial substance.

The relevant provisions of S. 245 of the Act read as under:


(2) [General anti-avoidance provision] Where a transaction is an

avoidance transaction, the tax consequences to a person shall be

determined as is reasonable in the circumstances in order to deny a tax

benefit that, but for this section, would result, directly or indirectly, from

that transaction or from a series of transactions that includes that

transaction.


(3) [Avoidance transaction] An avoidance transaction means any

transaction


(a) that, but for this section, would result, directly or indirectly, in a

tax benefit, unless the transaction may reasonably be considered to

have been undertaken or arranged primarily for bona fide purposes

other than to obtain the tax benefit; or


(b) that is part of a series of transactions, which series, but for this

section, would result, directly or indirectly, in a tax benefit, unless

the transaction may reasonably be considered to have been

undertaken or arranged primarily for bona fide purposes other than to

obtain the tax benefit.


(4) [Where s. (2) does not apply] For greater certainty, subsection (2)

does not apply to a transaction where it may reasonably be considered that

the transaction would not result directly or indirectly in a misuse of the

provisions of this Act or an abuse having regard to the provisions of this

Act, other than this section, read as a whole.


S. 245(3) stipulates the transactions which are deemed to be avoidance transactions for which consequences would follow as u/s S. 254(2) read with 245(5) [ S. 245(5) is not quoted above]. A Conjunctive reading of 245(3)(a) and 245(3)(b) suggests that an anti- avoidance transaction is one which is made “only” to obtain a tax benefit. More importantly, a literal interpretation of S. 245(4) would suggest that the other provisions of the Act have to be looked into before the GAAR provisions are invoked. In contrast S. 113(14), DTC, 2009 categorizes any transaction whose ‘main purpose’ is to obtain tax benefit as impermissible avoidance arrangement. Evidently, in this regard the GAAR provisions under the DTC are of wider import than S. 245 of the Canadian Income Tax Act. Further, S. 113 (14) (c) of the DTC stipulates that a transaction which “lacks commercial substance” in any manner may be deemed as impermissible avoidance arrangement. If one peruses S. 113 (17) of the DTC which defines the term “lacks Commercial substance” it would leave no iota of doubt that GAAR provisions under the DTC are far more wider than its Canadian counterpart. It is also worth noticing that the Canadian IT Act does not presume any transaction to be for the “main purpose” of obtaining a tax benefit unlike S. 114(1) in the DTC. However, all these points will need consideration at the backdrop of some leading cases.

In my next post I shall discuss some leading Canadian cases on this point and examine the practical application of S. 245 of the Canadian IT Act.

Review on taxation of Non-Profit Organisations under certain provisions of the Direct Tax Code

Through the years, Institutions and Trusts have received special privileges by the Indian Government in the form of deductions and exemptions. However with the advent of the Direct Tax Code, the Government seeks to decrease its leniency towards these Non-Profit Organisations. The first proposal under the Direct tax Code has been examined and revised to accommodate some of the concerns arising under them.
On the reading of the DTC, the clarity of the inclusive definition under ' charitable purposes' is hard to miss as they substantially alter the wider definitions under the existing Income Tax Act, 1961. The IT Act 1961, allowed a wider import to the terms used under the definition of charitable purpose. However the DTC on one hand seeks to restrict 'charitable purposes' to include relief to the poor, advancement of education, provisions for medical relief and on the other hand enhances the definition by including preservation of the environment, monuments; or places or objects of artistic or historical interest and advancement of any other object of general public utility. The implication of such a provision is that it will restrict the nature of NPO’s for specific purposes. In consonance with the wider definition under the prevailing law several NPO’s have been established for the general activities within the ambit of charitable purposes. Since the DTC specifies the scope of activities within the ambit of charitable purposes, several NGO’s will have to alter their nature. Such a specific inclusive definition will result in unnecessary hardship for several NPO’s and may result in confusion and trivial litigation on the interpretation of such restrictive terms. It is pertinent to note that unlike the Direct Tax Code, under the present Act, 'general public utility' includes any institution set up for promoting trade and commerce which is encompassed within the ambit of 'charitable purposes' as it is believed that such an activity promotes common good through enhancement of business. Such a restriction under the DTC will jeopardise the position of several such trusts and institutions as it seeks to completely prohibit “any activity in nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business…irrespective of the nature of use, application or retention of the income from such activity”. In consonance with the strict application of the taxing structure, the DTC has laid the burden on these institutions to prove that all such charitable purposes are‘actually’carried out and that the beneficiaries are the general public. One of the effects of such an exacting liability will prevent any such trust or institution from avoiding tax and carrying out activities for its own profits and interests. However the other possible effect could be that under the existing law the NPO’s which are allowed to carry on incidental business will be liable to be taxed as gross receipts under the DTC even though the entire income may be used for charitable purposes. This proposition by the code would clearly invalidate the judgment of the Apex Court in CIT v. Thanthi Trust which recognises income from incidental business under section 11.

Under s.11 of the existing Act, NPO’s are allowed to maintain their surplus income and carry it forward to the succeeding years without limitations. The law also allows them to accumulate or set aside an income for a specific purpose. With a view of restraining such an accumulation over a determined period of time, the DTC proposes to allow either 15% of the surplus or 10% or gross receipts, whichever is higher, to be utilised within three years from the end of the relevant financial year. Such a provision can be viewed in two ways. Firstly it can be presumed that such a provision would enhance the functioning of the NPO’s so that they make use of the funds so received within a definite period of time thereby preventing the mischief under the existing law. On the flipside such a provision may prohibit certain NPO’s on utilising their funds for specific savings. Illustrating further, if an NPO which accumulates or sets aside a part of their surplus for future benefits would have to pay a tax of 15% on the same if such is not utilised within the period prescribed by the code. This would in effect limit the capability of the NPO in the advancement of its chosen sphere of charitable purpose. Certain savings made by NPO’s would also be in jeopardy as it would become liable to tax after a period of three years. The DTC has also clearly demarcated a prohibited form of investment for NPO’s, however without specifying the nature of such assets. For instance the code fails to specify the nature and scope of financial assets. Further it becomes pertinent to analyse whether the segregation of deductions available to donors under section 72 benefits the NPO’s more than the existing provision under s.35AC which provides for a 100% deduction. Segregation in deductions would create a difference in the capabilities of different NPO’s to provide deductions thereby preventing the capitalisation of funds at an equal footing.

It is necessary to understand that NPO's play a significant role in the aiding the society. Therefore it creates an even higher burden on the Government to implement changes which would create incentives for NPO's.Pursuant to the above observations it is necessary to determine which provisions would benefit the NPO’s and to what extent they would provide a better structure over the existing Act. In my opinion it is necessary to review the applicability of the proposed provisions by consulting existing NGO's so that it creates a balance between the tax code and its subsequent effect on these institutions and trusts.
For the benefit of comparative review, both the first proposal of the Direct Tax Code and the subsequent revised code has been attached.

Revised DTC and GAAR

The revised discussion paper on the Direct Tax Code proposes the following safeguards for invoking GAAR provisions:

i) The Central Board of Direct Taxes will issue guidelines to provide for the circumstances under which GAAR may be invoked.

ii) GAAR provisions will be invoked only in respect of an arrangement where tax avoidance is beyond a specified threshold limit.

iii) The forum of Dispute Resolution Panel (DRP) would be available where GAAR provisions are invoked.
 
I had earlier discussed GAAR provisions under the DTC here.

Revised DTC and FIIs

The Revised discussion paper on the Direct Tax Code is available here. The discussion paper proposes to characterize the income of FIIs arising from the sale and purchase of shares as "capital gains" (para 3.5). The rationale is based on the reasoning in Fidelity Northstar Fund. I have discussed fidelity here. I shall discuss the other aspects of the Revised Discussion paper in some later posts.

News Update: FIIs and Tax

Early reports on the second Direct Tax Code draft suggests that the income of Foreign Institutional Investors from sale and purchase of shares would be charged under the head "capital gains" (Courtsey: CNBC). In an earlier post on this blog I had discussed the issue of taxability of FIIs. I shall post my views on this issue once the draft code is available.

Amiantit International Holding Limited: No capital gains on transfer of shares without consideration

In another interesting decision favouring the Assessee, the AAR concluded that there was to be no tax deducted as Capital gains on the transfer of shares held of an Indian Company by two or more non-resident companies without any consideration or without any such consideration which could not be valued at money’s worth. The AAR in the case Amiantit International Holding Limited, elaborated that since no profit could be accounted for by such a transfer of shares, the revenue could not make such a transaction liable to tax. The Tribunal based its decision on the settled law (CIT vs B.C. Srinivasa Setty) that s.45, the charging section and s.48, the computation section of the Income Tax Act, 1961 have to be read in conjunction. Therefore based on its findings, it concluded that since no profit or gain could have accrued or arisen in such a transaction and since the same could not be quantified, it was not taxable in nature.

In the instant case the Applicant, an investment company owned shares in several Indian as well as European and Latin American Companies. Subsequently the Applicant decided on a restructuring process to improve its economic and business holdings. As part of the restructuring process it decided to transfer all international investments in Pipe 2 manufacturing to its Wholly Owned Subsidiary in Cyprus. All shares held by the Applicant in the three Indian Companies proposed to be contributed to the Cyprus WOS without receiving any consideration for the same by an agreement signed outside India. The revenue raised the contention that such a transfer was not without consideration as it was for gaining business advantage through transactions in the future. It is pertinent to note that the fundamental question before the tribunal was whether there was any accrual of income within the ambit of such a transaction which was subsequently answered in the negative.

In order to understand the deductions made by the tribunal it is necessary to review the two provisions governing Capital gains. s.45 states “Any profits or gains arising from the transfer of a capital asset effected...be chargeable to income-tax under the head “Capital gains”. Further s.48 states “the income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset…”.When these two sections are read in conjunction it becomes apparent that there can be no computation of tax unless there is an accrual income in the form of profits or gains. Based on this deduction the Tribunal went on to further elaborate the necessity of accrual of profits and gains as being a quantifiable part of the term income within the ambit of a business transaction. It disregarded the contentions of the Revenue stating that there was no possible means of calculating a real income based on a hypothetical presumption of benefits which could arise by the restructuring process. Such an accrual of income is necessarily to be determined on the day the transaction took place. Since there existed no consideration in money’s worth, no capital gains could be charged. The Tribunal went on to reiterate the principle laid down in the Dana Corporation case that the provisions of Transfer Pricing under s. 92 were not applicable in the present instance as there was no income had arisen, there could be no computation of the same. Therefore the second contention of the Revenue was also rejected by the AAR.

Pursuant to the above, it is interesting to note that this case has successfully managed to put forth certain decisive principles encompassing all such transactions. In my view, a correct interpretation of the taxing provisions has been taken by the AAR as it prevents the Revenue from taxing innocent Companies entering into such transactions for restructuring purposes. The Tribunal has been correct in holding that if during the time of the transaction there was no consideration which could be quantified; it would be unfair for the Revenue to levy taxes based on presumptions of business gain in the future. Not only would such Companies be at a disadvantage but it would also deter foreign investors as every time such a transaction for restructuring were to take place, non-resident companies would have to pay Capital gains on an undetermined hypothetical amount irrespective of any gains. In another interesting perspective, this judgment also concurs with the view taken by the Supreme Court in the Azadi Bachao Andolan case thereby reiterating that if a transaction is“commercially”justifiable, any incidence of tax exemption would not render it being an evasion of tax.

Pertinent to note is the Finance Bill 2010 which through its amendment vide s.56(2) (viiA) states that in any such transfer without any consideration, tax will be imposed on the recepient as Income from Other Sources.

Direct Tax Code 2009 and GAAR

Although it is fairly well settled under the Indian tax jurisprudence that tax avoidance is legal but tax evasion is not, the dividing line between the two has always been extremely thin and blurred. In Mcdowell v. Commercial Tax officer [AIR 1986 SC 649], Justice Chinappa Reddy while delivering a minority opinion had further blurred the distinction between tax avoidance and tax evasion. However, a smaller bench of the Supreme court in Azadi Bachao Andolan [(2003) 263 ITR 706] correctly did not endorse the minority view in Mcdowell, holding clearly that a man has every right to structure his business in a manner that would reduce his tax liability. Having said that in my humble view Azadi may be per incuriam as in Mcdowell, interestingly the majority might have concurred with some of the findings of Justice Chinnappa Reddy (para. 26&27 of the Mcdowell Judgement is relevant) making the latter a binding precedent.


It is widely believed that both the decisions would be rendered inconsequential if the provisions relating to the General Anti Avoidance Rules (GAAR) as incorporated in the Direct Tax Code Bill, 2009 are brought into force. In this post I shall discuss some of the provisions relating to GAAR in the Direct Tax Code and in some later posts I shall also look into the provisions of GAAR as it exists in some matured jurisdictions such as Canada, Britain, France etc.

The intent of incorporating the GAAR can be best explained by the relying on the discussion paper released by the department last year. The following remarks from the paper may be relevant:

24.1 Tax avoidance, like tax evasion, seriously undermines the achievements of the public finance objective of collecting revenues in an efficient, equitable and effective manner…………………….there is a strong general presumption in the literature on tax policy that all tax avoidance, like tax evasion, is economically undesirable and inequitable. On considerations of economic efficiency and fiscal justice, a taxpayer should not be allowed to use legal constructions or transactions to violate horizontal equity.



The intent echoes the sentiment of Justice Chinappa Reddy in Mcdowells and is in line with the aggressive tax policy undertaken by the department in recent times [See Generally: Geoffrey T. Loomer, The Vodafone Essar Dispute: Inadequate Tax Principles Create Difficult Choices For India, 21(1) NLSI. Rev. 89 (2009)] . Although the intent may be questionable or noble, the actual provisions relating to GAAR seems to be untenable.



S. 112(1) stipulates that the revenue may declare “any arrangement as an impermissible avoidance arrangement”. At first blush this clause seems to be very wide and gives blatant discretionary powers to the revenue. S. 112 not only empowers the revenue to declare “any” arrangement as impermissible but also gives it the power to disregard the arrangement, treat the parties who are connected to each other as one and the same person, re-characterising any equity into debt or vice versa and so on. Further, S. 113 (14) defines impermissible avoidance arrangement as under:


“impermissible avoidance arrangement means a step in, or a part or whole of, an arrangement, whose main purpose is to obtain a tax benefit and it,-

(a) creates rights, or obligations, which would not normally be created between persons dealing at arm's length;

(b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Code;

(c) lacks commercial substance, in whole or in part; or

(d) is entered into, or carried out, by means, or in a manner, which would not

normally be employed for bonafide purposes;

Conventional wisdom would suggest that S. 113 (14) imposes a limitation on the word “any” in S. 112 i.e. to say that the GAAR only gets triggered when the ingredients of S. 113 (14) are satisfied in a given case. But the interpretation can also be that S. 113 (14) is not exhaustive and the revenue may treat “any” other transaction as an impermissible avoidance arrangement even though it might not expressly fall within the ambit of S. 113(14). The discussion paper supports the former interpretation i.e. S. 113(14) imposes a restriction on the word “any” in S. 112. This interpretation is however rendered meaningless if one refers to S. 114 (1) which stipulates that an arrangement shall be presumed to have been entered for the main purpose of obtaining a tax benefit unless the contrary is shown by the person obtaining such a benefit. The effect of S. 114 (1) is fairly simple; the revenue might deem “any” arrangement to be for the main purpose of obtaining a tax benefit and if the assesse is unable to prove anything to the contrary the revenue would then be free to undertake the consequences as laid down in S. 112 even if the ingredients of S. 113 (14) are not expressly met.

Readers may also refer to a post written by Mihir here.

Event: Conference on GST

SCHOOL OF LAW, CHRIST UNIVERSITY, BANGALORE


in collaboration with

LAKSHMI KUMARAN & SRIDHARAN, BANGALORE

invite you to the

CONFERENCE ON GST

on

SATURDAY, 26 JUNE 2010



Dear Sir / Madam:


Greetings from School of Law, Christ University and Lakshmi Kumaran & Sridharan.

The replacement of the state taxes by the Value Added Tax in 2005 marked a significant step forward in the reform of domestic trade taxes in India. Buoyed by the success of the State VAT, the Centre and the States have now embarked on the design and implementation of the perfect solution alluded to in the Bagchi Report. As announced by the Empowered Committee of State Finance Ministers in November 2007, the solution is to take the form of a ‘Dual’ Goods and Services Tax (GST), to be levied concurrently by both levels of Government. The Conference is an endeavor to discuss the political, social and economic character of GST and its impact on different sectors of the economy, and households in different social and economic strata of the nation.

The objective of this Conference is to bring about a multidisciplinary discussion on the subject so as to explore the implications of GST in India. Broadly the Conference has been divided into two themes – the Interplay between the State Tax Laws and GST and the Interplay between the Central Tax Laws and GST.

The themes will be discussed in two sessions. Each session will constitute of a Tax practitioner, a Senior Chartered Accountant, a Government Official (Commissioner / Additional commissioner of Sales Tax) and a representative from the Industry (Consulting firms / Manufacturers).


The confirmed speakers include:

Mr. B.T. Manohar, FKCCI Chairman

Mr.S. Venkataramani, Tax practitioner

Mr. Pradeep Singh Kharola, I.A.S, Commissioner of Commercial Taxes

Mr. V. Raghuraman, Advocate, Partner, Raghuraman & Chythanya, Advocates

Mr. G. Shivadass, Partner, Lakshmi Kumaran & Sridharan, Bangalore

Mr. Nagendra Kumar, LTU Commissioner


The Conference will be held at Christ University Auditorium between 9:30am and 6pm on Saturday, 26 June 2010. Kindly confirm your participation by indicating the number of heads attending latest by Tuesday, 22 June 2010 by emailing at the below mentioned addresses. A nominal registration fee is being charged based on the following table. The registration fee is payable in cash on the Registration Desk between 8:30am and 9:30am on the Conference Day.

Category Amount

Professionals / CA’s Rs. 1500 per delegate

Academicians and Research Scholars Rs. 1000 per delegate

Students Rs. 250 per delegate


For registration or any further queries, please feel free to write back or contact the Student Coordinators at:
Prarthna Kedia Shambhavi

+91 99868 92464 +91 99457 85819
prarthana.kedia@law.christuniversity.in
shambhavi@law.christuniversity.in

SAIL v. Jindal Steel: A Historical Judgement

In an earlier post I had discussed the existing spat between the Competition Commission of India (“CCI”) and the Competition Appeallate tribunal (“Compat”). In this post I shall look into the genesis of this dispute i.e. the Compat’s decision in SAIL v. Jindal Steel dated 15th Feb, 2010. The decision is historical in some senses as it lays down the foundation for the Supreme Court to examine some key questions relating to the Competition Act, 2002 for the first time since it became operational in May last year.
Sometime in October last year Jindal steel made a complain to the CCI alleging that SAIL had entered into anti competitive agreements and/or had also abused its dominant position. Pursuant to this complain the CCI had asked SAIL to communicate its views on this matter within two weeks. SAIL had asked for an extension which was denied by the CCI. In the meantime based on the information produced by Jindal, the CCI was satisfied that there existed a prima facie case against SAIL and therefore decided to the refer the matter to the Director General (“DG”) for further investigation [This procedure is prescribed by S. 26(1) of the Act]. It is against this “direction” of the CCI that SAIL preferred an appeal before Compat. Based on the merits of the dispute two questions had arisen before Compat ; (i) Whether the appeallant (SAIL) had been provided with a reasonable opportunity to be heard and (ii) Whether the CCI was under any legal obligation to record its reasons as to why there existed a prima facie case against the appeallant. Both the questions were answered in favour of the appeallant. But the case seems to be of immense legal significance because of two preliminary questions that had arisen before Compat; (i) Whether the appeal was maintainable and (ii) Whether the CCI can be impleaded as a party in the case.

Maintainability

Both Jindal and CCI had contented that the appeal cannot be maintained as only a “direction” was made under s. 26(1) of the Act to the DG to conduct further inquiries and since the CCI had not reached any conclusion on the alleged complain there was no question of Compat exercising its appellate jurisdiction. Rejecting this contention the Compat held that under S. 53A(1) it had the jurisdiction to hear an appeal even against a “direction” under S. 26(1). The reason afforded by Compat in this regard was that S. 53(A)(1) confers power on it to hear appeals against “any direction or decision made or order passed” by the CCI. In this regard compat noted that the use of the word “any” exemplifies the wide powers conferred on it by the legislature. The compat further noted that the use of the word “or” between the words “direction” and “decision” manifests that the clause under 53A(1) is disjunctive in nature. In other words an appeal can be made even against a mere “direction” of the CCI. In my humble view the literal interpretation of the clause by compat may be correct but the eventual finding is against the scheme of the Act. It is submitted that S. 53(A)(1) of the Act requires legislative correction. This can be done by incorporating an exclusionary clause under S. 53(A)(1) stating that the Compat would not have any jurisdiction pending the completion of any inquiry by the CCI. Such a clause would deter vexatious litigation and be administratively efficacious.

Impleadment

In so far as the impleading of the CCI is concerned, the Compat after a perusal of S. 35, 53S and 53T of the Act noted that the former can only be impleaded as a party when it conducts a suo moto inquiry u/s 19(1) of the Act. The reason being that the CCI does not play any adversarial role, instead its role is only limited to that of an investigative nature.

The CCI has preferred an appeal before the Supreme Court against the finding of the Compat primarily on the maintainability issue.

Amendments required in Indian Arbitration and Conciliation Act

Government’s proposal to amend the Arbitration and Conciliation Act comes out at a time when Arbitration laws across the globe (Australia, UK, Eastern Europe) are experiencing an overhaul. This comes at a time when our law has seen decisions like the Bhatia’s and the Saw pipes which were retrogressive, and made the law look very different from what it reflected back in 1996. The amendments have been proposed to the Act in almost all the crucial areas right from its application to interventions by the courts. In this post I would like to point out the need of understanding two concepts in the realm of ADR in India, in the way they are so understood internationally.

The proposed amendment to Section 2(2) of the Act inserts the word ‘only’ into the Section. It reads “This part shall apply only where the place of Arbitration is in India”. The amendment is aimed to cease the discussion as to the applicability of Part I to arbitrations which happen outside India, but it does leave a scope of mischief by using the word place instead of seat. Most of the legal regimes in the context of Arbitration use the words place and seat interchangeably. Even the UNCITRAL Model Law seems to use the word place. The difference between venue and seat of arbitration is well recognized in International Commercial Arbitration and it is the seat to which a substantive legal significance is attached, the venue being a mere locale where proceedings may be carried on account of convenience. The Act also lacks provisions which may help to determine as to where an award is made (in cases where it is signed by arbitrators in respective countries, telephone, emails etc.) so it does not endeavor to address the difference between venue and seat. This difference may not be well understood in the scheme of the Act and may cause, or restrict the application of the Act as lex loci arbitri in certain cases.

Also, the concept of mediation and conciliation is understood interchangeably across legal regimes. Part III of the Act deals with conciliation but does not refer to mediation. After the amendment to S.89 of the CPC, courts can refer certain disputes to mediation where it appears that there exists an element of a settlement which may be acceptable to the parties. Extending the provisions of Part III of the Act to mediation referred to by a court would address different issues which are encountered in court annexed mediations.

M&A Under The Competition Act: Reasons For Delay in Notification

It has been more than year since S.3 and S. 4 of the competition act, 2002 dealing with anti competitive agreements and abuse of dominant position respectively were notified by the MCA. However, S. 5 and S. 6 of the act dealing with mergers& acquisitions is still to become operational. This post looks at some of the reasons why both the sections dealing with M&A have not been notified.


M&A under the act: A Brief Overview

S.6(1) of the act prohibits any person or enterprise from entering into a combination which has an “appreciable adverse effect” on competition in India (Note, S. 32 also confers the CCI with extra territorial powers) . Further, S. 6(2) stipulates that any enterprise which to enter into a combination (as prescribed in s. 5 of the act) shall give notice to the CCI furnishing details of the proposed merger within thirty days of (i) approval of the merger by the board of directors of the concerned enterprise or (ii) execution of any agreement relating to acquisitions referred to in clause 5(a) & (b) of the act. S. 6(2A) provides a period of 210 days to the CCI to complete the investigation relating to such combinations (if the CCI is unable to come to any conclusion within this period then the combination is deemed to be approved)

S.5 of the Act lays down the transactions which will qualify as combinations for the purposes of the Act. The following is the threshold limit for mergers and amalgamation:

• transactions among Indian companies with combined assets of Rs. 1000 crores or Rs 3000 crores in turnover of the merged entity;

• cross-border transactions involving both Indian and foreign companies with combined assets of $500 million or $1.5 billion in turnover; and

• transactions that have a territorial nexus with India, where the acquirer has $125 million in assets or $375 million in turnover in India.
The following is the threshold limit for acquiring groups:
• Rs 1000 crores in assets and Rs 3000 crores in turnover in India respectively;

• assets in excess of $2 billion; or

• turnover of more than $6 billion outside India
Once any transaction reaches the threshold limit as specified in S.5, the enterprise has to take recourse to the procedure laid down u/s 6 of the Act. S. 5 and S. 6 are primarily ex ante whereas S.3 and s. 4 are ex post facto.


Some Reasons for non notification

The reasons for non notification are directly related to the concerns expressed by the Industry with regard to the provisions relating to M&A under the Act. The following are the suggestions and concerns expressed by FICCI:

• The breadth of Section 5 is so wide that it would require notification of transactions that constitute an increase in shareholding by a promoter of a listed public company (including possible internal reorganizations within a corporate group). It is important to note that these transactions are exempted under the SEBI Takeover Code.


• Section 5 be modified and a single sales/turnover test be adopted along the following lines:


I.
a) Combined world-wide turnover of the parties to the “combination” in excess of Rs.
______________; and
b) each of at least 2 of the parties to the “combination” must have turnover in India in excess of
Rs. ___________;


• Section 6(2)(b) of the Act uses the term “other document” and essentially an execution of such “other document” triggers an obligation to notify the Competition Commission. It is important to clarify that the mere execution of a non-disclosure agreement or a letter of intent or memorandum of understanding (and other similar documents that do not constitute the definitive acquisition agreement) will not trigger the notification requirement. There are cost implications as well because if a non-binding letter of intent were to trigger a notification requirement, the notifying parties would need to pay filing fees of Rs. 20 lakhs, in addition to the devastating impact that such a notification would cause in terms of loss of confidentiality in respect of such a transaction.


• All types of intra-group combinations, mergers, demergers, reorganizations and other similar transactions should be specifically exempted from the notification procedure and appropriate clauses should be incorporated in sub-regulation 5(2) of the Regulations. These transactions do not have any competitive impact on the market for assessment under the Competition Act, Section 6.


• The maximum turnaround time for CCI should be reduced from 210 days to 90 days. To compare anti-trust laws prevalent globally, either the notification is optional as is the case in UK and Australia or the review period is short, where notification is mandatory, for example, in USA review period is 30 days.

(Readers would note that the above mentioned points have been compiled from the article available here)

Apart from this it seems that there would also be a regulatory overlap in the Banking, Insurance and Telecom sector among others. As presently M&A in these sectors are regulated by sector specific regulators such as the RBI, IRDA and TRAI. The article here is useful.