CCI-CAT SPAT

In a recent development the competition commission of India (CCI) has moved an appeal before the Supreme Court against the Competition Appellate tribunal (CAT). The dispute arose when the CAT halted an investigation carried out by CCI pursuant to a complaint lodged by Jindal Steel. It was the case of Jindal steel that SAIL and Indian Railways were engaged in a cartel like behaviour. S. 19(1)(a) confers power on the CCI to inquire into any alleged contravention of S.3 (anti- competitive agreement) and S.4 (abuse of dominant position) either suo moto or on a receipt of a complain from any other person. The matter before the Supreme Court could give rise to interesting questions of law as to the specific powers conferred to the CCI and the CAT under the Competition Act, 2002. This post discusses some of the legal aspects that may arise before the Honourable Supreme Court.


The issue before the Supreme Court would be whether the CAT has powers to halt an investigation carried out by the CCI. Interestingly the CAT did not find a place in the statute as it was originally drafted in 2002. The CAT was only brought about by the Competition (Amendment) Act, 2007 through the incorporation of Chapter VIIA. One of the arguments in this regard could be that the intention of the legislature from the very inception of the Act was to confer all the investigative powers on the CCI and the introduction of the CAT was only to exclude the jurisdiction of the High Court for a faster disposal of competition matters (an appeal from the CAT directly lies before the Supreme Court as u/s 53T). Nevertheless a closer analysis of the relevant provisions of the Act also reveals that CAT has superseded its powers.

S. 53A(1)(a) stipulates that the central government shall by notification establish a Competition Appellate Tribunal to hear appeals against any direction issued or decisions made or order passed by the commission under sub- section (2) and (6) of section 26,S. 27,S. 28,S. 31,S. 32,S. 33, S.38,S. 39, S.43,S. 43A,S.. 44,S. 45 and S. 46 of the act. In this regard it is worthwhile to examine some of the orders/directions that the CCI may pass under the above mentioned sections. S. 26(2) states that if the CCI finds no prima facie case after the receipt of any complains or information, it shall “close the matter” and pass necessary orders. Similarly S. 27 stipulates that CCI may pass appropriate orders if “after the inquiry” it finds a certain agreement in contravention of S. 3 & S. 4 of the Act. Further s. 33 confers power on the CCI to pass interim orders incase it finds “during the course of inquiry” that prima facie an anti-competitive practise is being carried out by the party against whom an allegation has been made. It is evident from S. 26 and S. 27 read with S. 53A (1)(a) that the jurisdiction of the CAT can be invoked only when the CCI has concluded the inquiry and passed any orders or directions. S. 33 read with S. 53A (1)(a) does provide the CAT with the power to hear appeals during the course of the inquiry, but that is only in cases where the CCI has passed an interim order. The CAT has no power under any of the provisions of the Act to intervene prematurely and halt any investigation carried out by the CCI. In case the Supreme Court finds otherwise, it would then necessarily require a legislative correction. As in principle the CCI being the regulator under the Act just as SEBI, IRDA etc. under their respective statutes should have the power to decide whether to investigate in a given case or not, otherwise the CCI will be stripped of all its powers and will end up as a toothless body.

BEYOND THE SAMSUNG JUDGEMENT

Beyond the Samsung judgment: An analysis by the Special Bench Tribunal Ruling in the case ITO v. Prasad Production Ltd.

In another recent judgment which put to rest the ambiguity in the interpretation of Section 195 of the Income Tax Act, 1961, a special bench constituted under section 255(3) of the Income Tax Act, 1961 ruled in favour of the assessee holding that section 195 of the said Act would apply only if the sum received was chargeable in India. Furthermore if the payer had a bona fide belief that he is not liable to tax he is under no obligation to follow the procedure in section 195 of the Act except comply with the RBI manual. The bench further held that section 195(2) was not mandatory in character as the CBDT circular had provided for an alternative procedure.
This case was similar to the recently decided Samsung case of the Karnataka High Court. The bench however after detailed analysis of the Samsung case diverted from the same stating that the Karnataka High Court had sub-silentio disregarded the CBDT Circular of July 2009 which prescribed an alternate procedure for remittance to a foreign entity without applying to the Assessing Officer for a No Objection Certificate. Further it was also per incurium as several precedents of the High courts and Supreme Court had been disregarded by the High Court.
In the present case the assessee company had been awarded a contract by the government of Andhra Pradesh to establish an IMAX theatre at Hyderabad. The assessee company entered into an agreement with IMAX ltd, Canada for the subsequent purchase, of equipment, maintenance and installation for which a certain consideration was remitted without withholding tax. The Assessing Officer concluded that the amount remitted was for the service provided by IMAX, Canada thereby qualifying it under section 9(vii) of the Act. The bench ruled that the sum remitted was auxiliary to the sale of the equipment and not independent services thereby not qualifying it under section 9. Further the Bench relied on a number of precedents and the decision in the Mahindra case whereby the pre-requisite of section 195(2) was held to be the chargeability of the sum remitted.
It is interesting to note that the Special bench debated in detail on the applicability of section 195 in consonance with the most cited Supreme Court judgments like the Transmission case; et al. It further made a detailed analysis of the binding nature of precedents for tribunals to follow keeping in mind the necessity for a thorough reasoning encompassed by different courts of law and their interpretation of the same. The bench systematically interpreted the different judgments in consonance with the principles governing tax law in India. In its considered decision it concluded that the tax payer had the first right to determine the chargeability of the sum of money being remitted, thereby enhancing the power of the tax payer.

Perspectives on Government Outsourcing and Private Contractors

Outsourcing of sovereign duties to private contractors is not novel to the government of developed economies especially the United States of America. However, this concept is relatively new to the India government, but is fast catching up in the wake of increased workload and the absence of trained employees. In a recent development last year the Indian government decided to hire private professionals to scrutinise companies registered with the RoC inorder to increase the scrutiny of corporate financial statements and ensure better regulatory compliance. Such a move would naturally lead to the question of transparency and accountability of these private professionals. In light of this, a recent article published by Edward Rubin titled ‘the possibilities and limitations of privatization’ in 123 Harv. L. Rev. 890 (2010) is of great importance.

Rubin in his article has reviewed the book “Government by Contract: Outsourcing and American Democracy”. Rubin analyses and brings out the debate surrounding government outsourcing in four broad sub- parts as discussed under:

Historical Perspective: Privatization
Rubin whilst analysing the essays in the book points out that critiques of privatization which revolve around the point of stringent demarcation of Public-Private duties are simplistic and highly flawed. Rubin in support of the above assertion cites several historical evidences to suggest that historically, there was no function which was inherently public.

Critiques of Privatization
The author conceptualizes the problem through a contemporary example i.e. use of private contractors by the U.S. in Afghanistan and Iraq. These Private contractors were engaged in paramilitary activities, worked on surveillance and planning. Ironically, the U.S. government appointed another private party to monitor the above mentioned private contractors. The author points that out that such a model imposes several problems. Firstly, there does not exist any competitive bidding (prime reason for the efficiency of private players) in the allocation of these private contractors as there are hardly any non-government for such works. Secondly, the private employees cannot be monitored as they lie outside the hierarchical structure which is fundamental in any government set up. Finally, legal and moral norms cannot be imposed due to lack of democratic accountability.

Proposed Reforms of the Privatization Process
Whilst analysing the essays in the book Rubin puts forth the suggestion of the scholars in three broad categories:
Constitutional Reforms:
Rubin points out that the scholars suggest an expanded role of the judiciary in the monitoring of private contractors in light of the fact that the executive and the legislature has failed to do so. However, Rubin underlines the impediments before the judiciary in doing so. One of the looming impediments before the judiciary is the restricted interpretation of the State Action Doctrine. The doctrine stipulates that the due process doctrine can only be applied to private contractors if they are deemed to be “state actors”. As Rubin points out, the current position of law limits the finding that a private contractor can only be deemed to be a “state actor” if it is performing public functions which are traditionally done by the sovereign for or on behalf of the people.
Such concerns also exist in India as the scope of judicial review (rights based, administrative or constitution compliance review) is limited to “state action” alone. However theoretically if there is to be a change in this regard, it would still be pragmatically impossible as the Indian judiciary is already burdened with pending cases.
Statutory Reforms:
As Rubin rightly points out that several authors have recommended statutory changes inorder to bring transparency and accountability on the part of the private contractors. One of the changes recommended is to the Freedom of Information Act (FOIA), so as to make it applicable to private contractors. Such a reform can be undertaken in India as well through the newly enacted Right to Information Act (RTI).
Common Law Reforms:
The other measure proposed by eminent scholars is in the form of common law reforms. It stipulates that the judiciary should ensure that contractual terms are used to import public values such as fairness, transparency and accountability into the realm of private contracting.

Criticism to these Reforms
However, there are several authors who disagree with the above stated reforms. According to these authors such reforms would be unnecessary and would create complexities in an already complex area of government outsourcing and private contracting. Further, it would lead to an environment of uncertainty, a situation which is detrimental to the efficiency of private players. These authors point out that the solution lies in firstly; discontinuing the rigidity with the civil services exam so as to enable the government to hire well trained employees and secondly, expand the federal monitoring system.
It seems that in the coming years India would be rapidly moving towards a similar phenomenon of privatization where the government’s role would be that of an enabler. Hence, it would be useful to learn from the experiences of already developed jurisdictions on this subject.

Fineprits of The Union Budget: Changes in The Income Tax Act

The finance bill, 2010 as expected has brought about certain changes to the income tax act, 1961. The two important changes vide clause 3 and clause 4 of the finance bill to S.2(15) and S. 9 respectively are discussed in this post.

Definition of “charitable purpose”

S. 2(15) of the IT act defines charitable purpose to include “relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility”. However the proviso to the section stipulates that the “advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity”.

Clause 3 of the Finance Bill, 2010 has retrospectively added(applicable from 1st April, 2009) a further proviso stipulating that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to in S. 2(15) is ten lakhs or less in the previous year. The legislative intent seems to be novel as it seeks to remove the hardship on charitable institutions who receive a meager amount for their activities inorder to maintain and provide basic infrastructure. However, clarity needs to sought as to whether the term “receipts” is to understood as per the method of accounting followed by the assesse or whether it is “receipt” in the ordinary sense of the word.

Taxability of Non-Residents

Whereas residents are taxed on their worldwide income as under S 5(1) of the IT act, non –residents are only taxed on income received or deemed to be received or accrues or deemed to accrue in India i.e. the territorial nexus principle as under S. 5(2) of the IT act. Further, S. 9 of the act stipulates income that is deemed to accrue or arise in India. The finance act, 1976 introduced the source rule under S.9 vide the insertion of clause (v), (vi) and (vii) in sub clause 1. The intention of the legislature was to bring to tax interest, royalty and technical fees through a legal fiction created under S.9 of the act, even in cases where the service is provided outside India as long as they are utilized in India. In essence, the source rule stipulates that situs of the rendering of the service is irrelevant. The situs of the payer and the utilization of the service are the relevant ingredients in determining the taxability of the above mentioned services.

However, the supreme court in Ishikawajima-Harima Heavy Industries Ltd., Vs DIT (2007) [158 Taxman 259] held that inspite of the legal fiction created under S. 9 it was decisive to show that there is sufficient territorial nexus between the income and the territory of India. The legislature further attempted to clarify the point on the source rule, hence it introduced an Explanation to sub section (2) of S.9 vide the Finance Act, 2007. However again in a recent decision the Karnataka High Court in Jindal Thermal Power Company Ltd. vs DCIT (TDS), [2009] 182 Taxman 252 held that the Explanation provided as per the Finance Act, 2007 was insufficient in its present form and thereby followed the judgment of the Honorable Supreme Court in Ishikawajima.

Hence, inorder to clarify the legislative intent and overcome the judicial decisions on the point the Finance Bill, 2010 vide clause 4 has introduced a retrospective amendment (w.e.f- 1st June, 1976). The amendment seeks to remove the earlier Explanation as provided by the Finance Act, 2007. Clause 4 of the Finance Bill reads as under:
“ the income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) of section 9 and shall be included in his total income, whether or not,
(a) the non-resident has a residence or place of business or business connection in India; or
(b) the non-resident has rendered services in India.”

However the constitutional validity of this clause may be open to challenge as it invalidates the territorial nexus principle.


The author wishes to acknowledge the inputs received from Avantika Govil, 3rd Year Student at School of Law, Christ University.

Interpretation of Contracts: U.S. Context

In my previous post, the interpretation of commercial contract was outlined in light of the decisions of the supreme court of India. Interestingly Steven J Burton in his latest book: Elements of Contract Interpretation discusses the effective tools of contract interpretation in the United States. The author points out three different theories of contract interpretation generally followed in the U.S. The theories are discussed as under:

1. Literalism
This theory is similar to the ‘ordinary meaning test’ in the Indian context. It posits that ambiguous words in the contract are to be assigned their literal meaning i.e. their dictionary meanings. This theory can be criticised on the ground that generally dictionary would assign two or more meanings to a given word; in that case the context has to be perused into inorder to determine the correct literal meaning. Literalism expressly disregards the use of the context and hence, there seems to be an inherent fallacy in this theory.

2. Objectivism
This theory posits that in determining an ambiguous clause in a contract the entire contract should be read as a whole. Under this theory due regard is also given to the relation between the parties, the circumstances prevailing at the time of conclusion of the contract and the entire purpose of the contract. The following observation of the court of appeals in Kass v. Kass is apposite here:

“.......in deciding whether an agreement is ambiguous courts should examine the entire contract and consider the relation of the parties and the circumstances under which it was executed. Particular words should be considered, not as if isolated from the context, but in the light of the obligation as a whole and the intention of the parties manifested thereby. Form should not prevail over substance and a sensible meaning should be sought.”

3. Subjectivism
This theory is akin to the “subjective intent” test under most international commercial agreements such as the Convention on the International Sale of Goods (CISG). This element of contractual interpretation posits that the subjective intent of a party should be taken into consideration if the other party or a reasonable man under the same circumstances could not have been unaware of that intent.

Conclusion:
On a thorough analysis Steve finds “objectivism” as the most preferred tool of contractual interpretation.

Interpretation of Commercial Contracts

In a recent case Novartis Vaccines & Diagnostics Inc. v. Aventis Pharma Limited (dated 11.12.2009), the Bombay High Court has once again enumerated the principle of interpretation of commercial contracts. Justice Mohta while re-affirming his earlier observations in the Reliance Natural Resources Ltd.v. Reliance Industries Limited (2007 (Supp.) Bom. C.R. 925) further laid down the following principles for the interpretation of a commercial contract:

1. Ordinary Meaning: This principle essentially signifies that the words in the contract are to be construed in their ordinary and popular sense. The underlining principle being that parties to a contract, as reasonable men must have intended to use the word in its commonly used sense.

2. Business Like Interpretation: It signifies that a commercial contract must be interpreted in a manner which conforms with sound commercial principles and good business sense. In this regard Lord Diplock's observationin Antaios Cia Navieras SA V Salen Rederierna ((1984) 3 All ER 229) is apposite:
"If a detailed semantic and syntactical analysis of words in a
commercial contract is going to lead to a conclusion that flouts business common
sense, it must be made to yield to business common sense."

3. Commercial Object: This principle is based on a rather well established rule that the "the contract should be read as a whole" in light of the purpose of the contract.

4. Construction to Avoid Unreasonable Results: If the wording of a clause is ambiguous, and one reading produces a fairer result than the alternative, the reasonable interpretation should be adopted. It is to be presumed that the parties, as reasonable men, would have intended to include reasonable stipulation in their contract.

The traces of these principles can also be found in the apex court's recent decision in Vimal Chand Ghevarchand Jain & ors.v. Ramakant Eknath Jajoo (2009 (5) SCALE 59).

Further Relaxation of FDI Norms

In a recent press release the ministry of commerce and industry has further relaxed the norms with regard to foreign direct investment(FDI).
Status Quo:
At present projects which involve a total cost of less than Rs. 600 crore are approved by the Finance Minister. Projects which involve a total cost of more than Rs. 600 is placed before the Cabinet Committee on Economic Affairs (CCEA) for approval.
Change:
The press release mandates that only projects which involve a total cost of more than Rs 1200 will require the prior approval of the CCEA.
The government's further liberalization, the policy is expected to save time and efforts of the FIPB/CCEA and further expedite foreign investment inflow.

Voluntary Guidelines, MCA

Last year December the "corporate week" was conducted by the ministry of corporate affairs(MCA). The "corporate week" was a unique initiative by the MCA to showcase the contribution of the corporate sector in the social and economic development of the country.

Mr. Khursheed while delivering his formal speech on the occasion pointed out the challenges before the country and the global community. As for the country: Mr. Khursheed pointed out that there were urgent development issues like poverty, illiteracy, malnutrition etc. As for the global community: Mr. Khursheed underlined the menace of climate change.

Mr. Khursheed proposed a collaborative solution to the above mentioned challenges. In this regard the following part of the speech is apposite:

"The scale of these challenges warrant a collaborative solution in which the Government, the business sector, the civil society organizations and the common citizens need to partner. The Ministry of Corporate Affairs is addressing these issues by providing an enabling environment in which the corporate sector can not only grow and flourish but also bring more and more sections of the society within its value-generation process. It is with this objective in view that the Ministry has chosen the theme of India Corporate Week , 2009 as 'Corporate Sector and Inclusive Growth'. "

It is in light of this objective, the ministry introduced the voluntary guidelines on corporate governance and voluntary guidelines on corporate social responsibility. In the upcoming posts I shall be discussing both the guidelines in detail.

The entire speech is available here http://www.mca.gov.in/Ministry/Minister.html

About the blog

Hello Readers
I intend to fill this space up with a host of interesting and important issues relating to Indian law or laws which effect India. I assure that the comments posted on this blog would be well researched. The idea is to create awareness about the latest legal developments. Legal materials are mostly hidden under the garb of expensive books and databases. The blog is an attempt towards making legal materials easily accessible.