Supreme Court on Fringe Benefit Tax

The Supreme Court recently decided the first case on the Fringe Benefit Tax under the Income Tax Act. I reproduce a post by Shantanu Naravane posted on the Indian Corporate Law blog. The original post is found here.

Ever since its introduction by the 2005 Finance Act, the concept of Fringe Benefit Taxes [“FBT”] has spawned several controversies. However, the first judicial consideration of its provisions is the recent decision of the Supreme Court in R & B Falcon (A) Pty. Ltd. v. CIT (Appeal (civil) 3326 of 2008).

The Appellant was a company incorporated in Australia, and was engaged in the business of providing mobile offshore drilling rig (MODR) along with crew on a day rate charter hire basis to drill offshore wells. By virtue of an agreement with ONGC for supplying MODR along with equipment and offshore crew, the employees of the Appellant were to work on the MODR on commuter basis. An employee worked on MODR for 28 days, (on-days) alternated by a 28 days field break, (off-days) when he stayed at the place of his residence. The members of the crew were residents of various countries and were transported from their home country to the MODR in two laps: (i) from the nearest designated base city at the place of residence in the home country to a designated city in India; and (ii) from that city in India to MODR through helicopter especially hired by the applicant for this purpose. On the completion of 28 days they were transported back from MODR to the designated base city in their home country in the same manner. The Appellant provided free air tickets of economy class for lap (i) of the journey, and the corresponding return leg, while not paying any conveyance/transportation allowance. The question was whether this provision of free transport was liable to taxation under the FBT regime.

U/s. 115WB(1)(a), a fringe benefit means a consideration for employment provided by way of any ‘privilege, service, facility or amenity … provided by an employer, whether by way of reimbursement or otherwise, to his employees’. S. 115WB(1)(b) also includes ‘any free or concessional ticket provided by the employer for private journeys of his employees of their family members’ as a fringe benefit. S. 115WB(2) deems certain expenditures to be fringe benefits, of which two expenditures relevant for the purposes of this issue are ‘conveyance’ and ‘tour and travel (including foreign travel)’. Finally, s. 115WB(3) provides that for the purposes of sub-section (1), privilege, service, facility or amenity shall not include any allowance provided by the employer ‘for journeys by their employees from their residence to the place of work, or such place of work to the place of residence’.

The crux of the issue was whether the exemption to FBT provided under sub-section (3) could be availed of in this case. Before the Authority for Advance Rulings [“AAR”], the Respondents (Tax Department) contended that:

(a) the exemption under sub-section (3) was only in respect of sub-section (1) and since the tickets here fell within sub-section (2), no exemption could be claimed;

(b) in any event, for the purposes of the section, the ‘residence’ would be the residence on the rig, and not their actual residence; and

(c) the provision applied only to employees resident in India, and since the employees here lived abroad, the exemption could not be claimed by them.

The AAR held that ‘residence’ would not include residence on the rig, and refers to the actual residence. However, they upheld contentions (a) & (c), and held that FBT could be charged. This decision was reversed in appeal by the Supreme Court.

The Court upheld contention (a), holding that sub-section (3) was an exception only to sub-section (1) and not (2). However, they also pointed out that this holding should not be interpreted in such a way as to render sub-section (3) nugatory. If the only expenditures on transport formed part of sub-section (2), sub-section (3) would be denuded of all meaning, since there would be no taxable benefit under sub-section (1), which was being exempted under sub-section (3). Thus, in order to give effect to sub-section (3), they held that all expenditures other than ‘conveyance’ and ‘tour and travel’ would be included under the term ‘or otherwise’ used in sub-section (1). Thus, although the Court agreed with the decision of the AAR on the scope of sub-section (3), they re-interpreted sub-section (1) to include the tickets provided within its ambit. The Court also reversed the decision of the AAR that the employees needed to be Indian residents for the exemption to apply, on the grounds that such an interpretation would be iniquitous and did not follow from the section.

However, one additional contention was also raised before the Supreme Court, i.e. for the purpose of falling within the exemption under sub-section (3), the allowance has to be for regular journeys, and not for periodical journeys like the ones being undertaken here. The Court chose not to answer the question since the argument had not been raised before the AAR and no evidence was on record as to the nature of the payments made. However, an examination of the AAR decision seems to suggest that if this issue were to arise in the future, the argument would be rejected. Sub-section (3) only talks about a journey from ‘residence’ to ‘place of work’. The AAR categorically stated that the term connotes a permanent residence and “not a place where a person is required to stay for a short duration in connection with his duties like the stay at the rig”. Thus, it decided that in the facts at hand here, the homes of the employees, wherever situated, would be their ‘residence’ for the purposes of sub-section (3). Now, if that is accepted, there seems no rationale for allowing an exemption if the transport from the residence is daily, and not allowing it if it is on a bi-monthly basis. At best, a requirement of periodicity can be imposed, given the object of the section. But that requirement too, had been satisfied here. Thus, it seems highly probable that the requirement of daily commuting is not required under sub-section (3).

In arriving at its decision, the Court repeatedly asserted the object of introducing the FBT, and reiterated the importance of using that object as a guiding principle in interpreting the relevant provisions. Thus, apart from the obvious precendential value of the decision, it also assumes significance as laying down some of the guiding principles for future decisions on FBT-related issues.

Supreme Court on Non-registration of FIRs

On 8^th August, a Supreme Court Bench took a strict view of non-registration of FIRs by police officers. This was after an order passed in July, an analysis of which is found on the Law and Other Things blog here.

In the latest order (8th August), the Supreme Court used quite strong language. It stated, “the Chief Judicial Magistrate/Chief Metropolitan Magistrate, as the case may be, shall take action in a case of inaction upon filing of complaint petition and give direction to institute the case within the time directed in the said order failing which the Chief Judicial Magistrate/Chief Metropolitan Magistrate, as the case may be, shall not only initiate action against the delinquent police officer but punish them suitably by sending them to jail, in case the cause shown is found to be unsatisfactory. Apart from this, the Chief Judicial Magistrate/Chief Metropolitan Magistrate, as the case may be, shall report the matter to the disciplinary authority at once by fax as well upon receipt of which the disciplinary authority shall suspend the concerned police officer immediately in contemplation of departmental proceeding…” (emphasis added).

It is noteworthy that the earlier order stated that the Magistrate ‘would be justified’ – that has now changed to ‘shall’. The matter is not posted for hearing later this month.

A Move away from the UNCITRAL Model Arbitration Law?

In a note prepared for a meeting of the Legal Discussion group at the NLSIU, Shantanu Naravane raises some complex issues arising in arbitration law after the recent Supreme Court decision in Venture Engineering. I reproduce the gist of his note below:

The decision in Venture Global Engineering v. Satyam Computer Services is relevant not only due to its obvious extension of previous decisions like Bhatia International, but also because of it forming a part of a growing trend in Indian Arbitration law.

Prior to this decision, there were two decisions of the Supreme Court in 2002-03 which attracted attention due to far-reaching implications for arbitration in India. Under the Arbitration Act, Part I deals with general provisions relating to arbitration, and Part II deals with enforcement of foreign arbitral awards. Part I contains Section 34 which deals with grounds on which an arbitral award may be challenged. One of these grounds is that the award can be set aside if it conflicts with the ‘public policy’ of India.

In Bhatia International, the question arose whether the general provisions contained in Part I (the issue was the grant of interim relief under Sections 9 and 17) apply to ‘foreign awards’ too. The Court opined that in certain cases, provisions of Part I of the Act would apply with equal force to even foreign awards, given the structure of the Act, and the gap in the law that would result if this interpretation were not accepted. Prior to the decision in the ONGC case, public policy had been interpreted to mean some fundamental notion of justice or some principle fundamental to India (Renusagar v. GE). This interpretation (of Renusagar) is also consonance with the UNCITRAL Model Law, which the Act seeks to incorporate into India (Preamble). In ONGC, however, the Court held that in addition to the criteria for public policy in Renusagar, even the violation of substantive provisions of law would suffice. Subsequent interpretations of this decision have led to public policy being interpreted to include ‘misinterpretations of decisions’ and ‘contractual breaches’. This is clearly in contradiction to the interpretation of ‘public policy’ in international arbitration practice.

In Venture Global, these two decisions (of Bhatia International and ONGC) seem to have merged to take India further away from the UNCITRAL Model Law and international arbitration practice. The question was whether Section 34 applies to foreign awards. The Court relied on Bhatia International and held that it did. It held that, as per the decision in Bhatia International, unless otherwise agreed by the parties, the whole of Part I applies to foreign awards. Thus, foreign awards can also be tested on the touchstone of Section 34. This seems rather suspect, given that Part II contains an independent Section 48, on conditions for the enforcement of foreign awards.

Supreme Court on Interpretation of Documents

The Supreme Court in Faqir Chand Gulati v. Uppal Agencies recently decided an interesting question pertaining to the interpretation of documents. The question before the Supreme Court was regarding the interpretative values of the title of a document. In short, the Court was called upon to decide whether an agreement titled “Collaboration Agreement” can be construed to not be a joint venture / collaboration agreement but an agreement for services.

The issue arose out of a building-development agreement entered into between an owner of a plot of land and a builder. The agreement was described as a “Joint Venture Agreement”. Under the agreement, the plot owner agreed to provide a plot of land, and the builder agreed to construct an apartment on that land after demolishing the existing structure. In the apartment, one flat would be allotted to the plot-owner and the builder would sell the other flats to third parties. There were other mutual rights and obligations created between the parties. A question arose under the Consumer Protection Act, as to whether the plot-owner was a ‘consumer’. The National Consumer Commission held that as the agreement was a collaboration agreement, it must be treated as a joint venture. That being the case, no services were rendered to the plot-owner; and he could not be treated as a consumer. Reversing the decision, the Supreme Court held that mere use of the terms “Collaboration Agreement” or “Joint Venture Agreement” would not render an agreement a joint venture. The substance of the agreement must be looked at; and the title of the document is merely indicative of the substance. However, the actual substance may be different from what the title says; and in such cases, the title of the document would not be of great relevance in determining the true nature of the agreement. Indeed, even if the words “joint venture” are used in the title of the document as well as in the body of the document, it would be open to the Courts to arrive at the conclusion that the agreement was not really a joint venture. The Court then went on to hold on the facts of the case that the agreement was merely a contract for services; consequently, the plot-owner was a consumer under the Consumer Protection Act.

The decision is important because of the observations in the decision in relation to the interpretation of documents. It might be arguable that the Court came to this decision because of the rationale of the Consumer Protection Act. However, the language of the decision seems to indicate that the decision is applicable across fields. The broad nature of the observations suggests that the legal form of an agreement is irrelevant in cases of interpretation of documents, and all that matters is the substance of the document.

(Note: The last sentence of this post must be qualified - the legal form is not irrelevant. See this post for a clarification. It will be best to confine the decision to its specific facts in light of the Consumer Protection Act)

'Public Interest' in Temporary Injunctions?

Generally, while granting temporary injunctions, a Court is guided by three factors:
- Whether the plaintiff is able to establish a prima facie case?
- Whether the denial of an injunction will cause irreparable injury to the plaintiff?
- Whether the balance of convenience lies in favour of the plaintiff?

Once these three questions are answered affirmatively, the Court can grant a temporary injunction to the plaintiff; restraining the defendant from performing certain acts until the conclusion of the suit. The usual understanding has been that only these three factors are to be considered in deciding whether to grant a temporary injunction or not; although the content of these three factors is debatable.

A Single Judge of the Delhi High Court had recently given a judgment in Roche v. Cipla, refusing the plaintiff a temporary injunction on grounds of public interest. It is unclear under which of the three heads listed above ‘public interest’ falls under. This view is now being challenged in appeal before a Division Bench of the Delhi High Court. Among the various prongs of argument, a strong one (and one of particular relevance in patent cases) is that allowing for a ‘public interest’ consideration in granting temporary injunctions essentially means that the Courts will be making compulsory licensing norms contrary to Indian patent jurisprudence.

A detailed discussion of the arguments before the Division Bench is found on the Spicy IP blog here. The decision of the Division Bench is eagerly awaited, as it might change our understanding of the principles involved in the grant of temporary injunctions – particularly in patent-related cases.

Vodafone Income Tax case - Bombay HC arguments

The Hutch-Vodafone tax controversy presently pending before the Bombay High Court can have important legal implications not just for Vodafone (which faces a US$2 Billion tax bill) and the Indian Revenue (which stands to gain an opportunity for taxing several similar transactions); but may have an impact on several other players. For instance, the decision of the Court is likely to affect and decisions on investments in India by foreign investors; and may well have an impact on domestic tax-payers in the form of re-igniting the “substance versus form” debate in Indian tax administration. The importance of the issues led to long arguments in the Bombay High Court over a period of over ten days before a Bench headed by Justice Radhakrishnan. Senior Advocate Iqbal Chagla appeared for Vodafone; while Additional Solicitor General M. Parasaran appeared for the Department of Income Tax. A detailed discussion of the issue will be posted once the judgment is out. Presently, this post will note the arguments of both sides in brief.

The dispute arose because of the acquisition of shares in a Mauritius company by Vodafone from Hutchinson. The Income Tax Department’s claim is that the capital gains derived by Hutchinson through this transaction are taxable in India; because the shares of the Mauritius entity were valuable only because the Mauritius company held shares in an Indian mobile operator, Hutch Essar. Thus, the Department claims, what has actually been transferred is the controlling interest in an Indian entity – Hutch Essar; and the transaction is not one of a simple sale of shares in a Mauritius company.

The capital gains arising out of a sale of a capital asset situate in India are taxable under S. 9 of the Indian Income Tax Act, 1961. Accordingly, the Department issued a show-cause notice to Vodafone for failing to withhold tax at source while making payment to Hutchinson. The Finance Act, 2008, introduced a further retrospective change in law casting liability on Vodafone. Vodafone filed a petition before the Bombay High Court challenging the constitutional validity of the retrospective change introduced by the Finance Act, 2008; and also the validity of the show-cause notice.

Vodafone’s arguments in the Court proceeded at the following levels:

The retrospective change in law is constitutionally invalid as it is arbitrary under Article 14.

In any event, the transaction being a sale of shares of a Mauritius entity, there has been no transfer of a capital asset situate in India. Therefore, the question of application of S. 9 of the Income Tax Act does not arise.

In any event, the provisions of the Income Tax Act dealing with deduction of tax at source do not apply to non-resident companies. That being the case, even if the capital gains accruing in the hands of Hutchinson are deemed to be taxable in India, Vodafone does not have any liability to deduct tax at source. The word ‘person’ occurring in S. 195 of the Act must be construed to mean ‘resident’; as any other reading will lead to an extra-territorial application of the act.

The Department in its oral arguments argued the following:

The petition is not maintainable at the stage of show-cause notice because it is premature and because Vodafone has an alternative remedy in terms of departmental appeals and appeals under the Income Tax Act once the assessment proceedings are over.

The transfer of the sale of the Mauritius shares has in fact resulted in the transfer of a capital asset situate in India. In fact, the parties intended to achieve this result; in light of the fact that they sought the approval of the Indian Foreign Investment Promotion Board (FIPB) before the transaction; which was unnecessary had no transfer of a capital asset situate in India been contemplated.

No distinction can be drawn between residents and non-residents in the matter of withholding tax at source. The word ‘person’ cannot be read as ‘resident’; as that would be reading down a procedural section which is a tool for recovery of tax.

On the maintainability issue, it is hard to see which alternative forum Vodafone could have approached given that the constitutionality of a statute is called in question. While there appears to be some merit in the argument that the petition for quashing the show-cause notice is premature, it appears that the Court is unlikely to accept this plea either, particularly since detailed hearings were heard on the merits. On the merits, the Department’s strongest point was that the arrangement had been referred to the FIPB. To this, the Senior Advocate for Vodafone stated that the matter was referred to the FIPB merely as a precaution and not as a legal necessity. It will be interesting to find out what view the Court will take of the matter on this issue; particularly given that the learned ASG stated that the Department was not alleging any fraud or evasion. Now, if the Court takes this statement to mean that this was only a case of tax avoidance, the ratio of the Supreme Court’s judgment in Azadi Bachao Andolan might preclude the Bombay High Court from looking at the substance of the transaction while ignoring the form. Thus, it appears that the Court ought to hold that there has been no transfer of a capital asset situate in India; and consequently no question of tax liability arises. The judgment may be out in a few weeks, and the views of the Judges will be awaited with interest by several tax consultants. Another discussion of the arguments can be found on the Indian Corporate Law blog here.

(Update: The judgment is now out, and not quite as I predicted. See this post.)

Comparative Advertising and Commercial Disparagement

Among the most litigated areas in tort law today is the tort of commercial disparagement. This area has deep links with intellectual property laws, and with matters related to civil procedure such as temporary injunctions. The principles on the basis of which temporary injunctions are granted might seem clear; but there is great difficulty in applying those principles to particular fact situations. The principles themselves may be undergoing modification, as would appear from the arguments on whether ‘public interest’ is a factor to be considered in granting temporary injunctions (Hoffman v. Cipla, Delhi High Court, judgment of Justice Ravindra Bhat). I will put up a post on this aspect shortly; presently I will concentrate on the recent judgments of the Delhi High Court (Reckitt Benckiser v. Hindustan Lever, Justice Badar Durrez Ahmed) on the legal requirements for establishing commercial disparagement in cases of comparative advertising. A post analyzing these judgments in some detail is found on the Indian Corporate Law blog here; and in this note, I am merely summarizing the legal principles arising from the case.

It appears that for succeeding in a claim of commercial disparagement in cases of comparative advertising, the following must be kept in mind:

- A link between the product shown in the advertisement, and the plaintiff’s product must be established.

- In determining whether such a link exists, the Courts must adopt the test of “an average person of imperfect recollection” which is usually adopted in passing off cases.

- Importantly, this hypothetical average person of imperfect recollection must be picked from the target group of users of the product sought to be slandered or disparaged. Thus, this hypothetical person is not just the average reasonable person; but is one from the intended target group which is sought to be drawn away from the plaintiff’s products to the defendant’s products. “The comparison must be from the perspective of an average person with imperfect recollection but, that person must be picked from the category of users of the product allegedly sought to be disparaged or slandered.”

- A tradesman is entitled to declare that his goods are the best in the world; and that they are better than his competitor’s goods – even if such declarations are untrue. In doing so, however, he may not say that the competitor’s goods are bad.

- The intent and the manner in which the defendant’s goods are advertised is relevant. “If the manner is ridiculing or the condemning product of the competitor then it amounts to disparaging but if the manner is only to show one's product better or best without derogating other's product then that is not actionable.” Merely puffing one’s goods is not actionable, unless this results in slander of the plaintiff’s goods. Further, “Generic disparagement of a rival product without specifically identifying or pinpointing the rival product is equally objectionable.”

Thus, the test of the ‘hypothetical average person with imperfect recollection picked from the target group’ seems to be gaining currency. An important judgment is expected from the Madras High Court in the coming weeks, and it remains to be seen whether the above tests attain greater judicial sanctity.

"Offences by Companies"

One reader has sent me some interesting comments on the earlier post on this blog (found here) about the Avnish Bajaj case. He disagrees with the conclusion that the Managing Director can be prosecuted even in the absence of the company on various grounds.

For instance, Anil Hada was preceded by a larger three Judge Bench in C.V. Parekh, whose ratio has been watered down by smaller Benches. The Delhi High Court perhaps ought to have relied on the ratio of C.V. Parekh itself, instead of considering later judgments of smaller Benches. C.V. Parekh can be used in support of the proposition that for a prosecution of the person in-charge of and responsible to the company (under ‘offences by companies’ provisions such as S. 85 Information Technology Act or S. 141 Negotiable Instruments Act), it is essential that the company itself must be an accused. Furthermore, Anil Hada was a case where there was a legal bar under the SICA to prosecute the company. There was no such bar in the Avnish Bajaj case. Thus, Anil Hada can be distinguished on facts.

These comments make it clear that it might be perhaps necessary to have a re-look at the issue of whether an officer of a company can be prosecuted under “Offences by Companies” provisions found on many Acts without the company also being prosecuted; instead of treating Avnish Bajaj as the last word on the issue. Indeed, the matter has been referred to a 3 Judge Bench of the Supreme Court.

A Change in Indian Death Penalty Jurisprudence?

A 3 Judge Bench of the Supreme Court recently gave its judgment in the Swamy Sharaddananda case. The case was referred to the 3 Judge Bench after a Bench of Justice S.B. Sinha and Justice Katju was unable to agree whether the appellant deserved the death penalty. The 3 Judge Bench (B.N Agrawal, G.S. Singhvi and A. Alam JJ.) agreed with Justice Sinha in not awarding the death penalty to the appellant. Nonetheless, certain observations in the judgment seem to signal a shift in India’s death penalty jurisprudence.

The judgment of 3 Judge Bench states that the “rarest of the rare” test prescribed in Bachchan Singh’s case was diluted by Machchi Singh’s case. Nonetheless, the specific categories stated in Machchi Singh need not necessarily be the most suitable categories, and the “rarest of the rare” formula continues to apply. The judgment then goes on to say that the “rarest of the rare” must be measured not only in qualitative but also in quantitative terms. Thus, as general crime levels have been worsening since Machchi Singh’s case, the categories of “rarest of the rare” should also change accordingly and, therefore, all the categories specified in Machchi Singh need not fit in with “rarest of the rare” today – a lot of the categories are no longer as rare. The observations made in the judgment in this regard make it virtually impossible for a sentence of death to be imposed.

Thus, while making it difficult to impose the death penalty in practice, the Court went on to deal with the sentence of life. The Court said, “The answer lies in breaking this standardisation that, in practice, renders the sentence of life imprisonment equal to imprisonment for a period of no more than 14 years; in making it clear that the sentence of life imprisonment when awarded as a substitute for death penalty would be carried out strictly as directed by the Court. This Court, therefore, must lay down a good and sound legal basis for putting the punishment of imprisonment for life, awarded as substitute for death penalty, beyond any remission…” Thus, the Court held that it could direct the accused to be sentenced to imprisonment for life with no chance of remission.

It was however contended that in any event, the executive power of remission under S. 433 of the Criminal Procedure Code could not be interfered with by the Courts. The Court noted, “Before us it was submitted that just as the Court could not direct the appropriate government for granting remission to a convicted prisoner, it was not open to the Court to direct the appropriate government not to consider the case of a convict for grant of remission in sentence. It was contended that giving punishment for an offence was indeed a judicial function but once the judgment was pronounced and punishment awarded the matter no longer remained in the hands of the Court. The execution of the punishment passed into the hands of the executive and under the scheme of the statute the Court had no control over the execution. In our view, the submission is wholly misconceived.” The Court then clarified that it was not referring to the pardon powers under the Constitution, but only to the remission powers under the code.

The Court’s decision is likely to create difficulties in the application of the death penalty. Also, it raises interesting concerns in the executive-judiciary relationship; as it seems arguable (after Maru Ram’s case) that the power to grant a remission is in fact an executive power. In such a situation, the basis for judicial interference by restricting this executive power is unclear.

A discussion on the case on the Law and Other Things blog is found here.

Supreme Court on Locus Standi for winding-up petitions

The Indian Supreme Court recently decided a case dealing with the locus standi of a contributory to bring a petition for winding up of a company. The following is taken from the Indian Corporate Law blog, available originally here:

Recently, the Supreme Court of India in Severn Trent Inc. v. Chloro Controls (India) Pvt. Ltd. [(2008) 4 SCC 130] dealt with an interesting point of law related to the locus standi of a contributory to file a petition for winding up.

The facts of the case are clear. Chloro Controls (India) Private Limited and Capital Controls Delaware Company, Inc. set up joint venture company, Capital Controls India Private Ltd. Later on, Capital Controls Delaware merged into Severn Trent Water Purification Co. Inc., and pursuant to the merger agreement, Capital Controls (Delaware) went out of existence. The authorised capital of the Indian joint venture company was Rs. 75,00,000 divided into 7,50,000 equity shares of Rs. 10/- each. Capital Controls Delaware (now Severn Trent) held 50% of the equity share capital of the company. The other 50% of the shareholding of the company was held by Chloro Controls (India) Private Limited. Even after the merger between Severn Trent and Capital Controls Delaware, the name of Severn Trent was not entered into the register of Capital Controls (India). Severn Trent terminated the Joint Venture Agreement vide its letter dated July 21, 2004 due to alleged breaches committed by Chloro Controls (India) Private Limited. In the termination notice, Severn Trent called upon the other shareholder to take steps for winding up of the company. When no such steps were taken, Severn Trent filed a petition for winding up on just and equitable grounds. This petition was contested by Capital Controls (India) as well as by Chloro Controls (India). Among various other grounds, the respondents also objected to the maintainability of the petition.

It was contended that Severn Trent was not a shareholder on the company’s register and, therefore, had no standing to maintain the petition for winding up. It was further contended that at no point of time was any application for transfer of share certificates and/or substitution of the name of Severn Trent made. Severn Trent, on the other hand, asserted that it had stepped into the shoes of Capital Control (Delaware), and was entitled to file a petition for winding up. The Company Judge allowed the petition, and an appeal was preferred before the Division Bench of the Bombay High Court. The Division Bench held that the petition was not maintainable on the grounds of Severn Trent being a contributory, but remanded the matter to the Company Judge to decide whether Severn Trent could file the petition on the grounds of its being a creditor. Appeals were filed against this order before the Supreme Court. In the Supreme Court, it was argued that although Severn Trent was a contributory, it was still not entitled to bring a petition for winding up because certain essential conditions were not complied with.

The issue before the Supreme Court called for an interpretation of Section 439(4)(b) of the Companies Act, 1956. Under this Section, a contributory is not entitled to present a petition for winding up unless the shares in respect of which he is a contributory, or some of them, (a) were originally allotted to him; or (b) were held by him and registered in his name for a certain period; or (c) devolved on him through the death of a former holder. Severn Trent did not dispute that category (a) was inapplicable in the case; but argued that it should be held to have conformed to categories (b) and (c). Essentially, the contention was that the requirement of the shares having to be “registered in his name” was not a mandatory requirement, and could be waived in certain circumstances. Otherwise, a company (particularly in cases where two groups of shareholders are severely hostile to each other) could prevent a contributory from bringing a petition for winding up by simply refusing to register the shares in the name of the contributory. Alternatively, Severn Trent argued that the shares could be deemed to have devolved upon it through the “death” of the former holder. After the merger between Capital Control (Delaware) and Severn Trent, the former had effectively met its “civil death”, and its shares had then devolved upon the latter.

The Court relied on a string of English decision beginning from In Re a Company [(1894) 2 Ch. 394] to negate these contentions. The Court held that the plain language of Section 439 could not be modified or read down; and to come under category (b), it was essential that the shares should be held by the contributory and registered in his name. Section 439(4) was held to be a complete code in this respect, leaving no room for equitable considerations to be used to allow a petition in cases where a strict reading of the provisions would not allow one. Adverting to Severn Trent’s contention that the company could simply refuse to register the shares in the name of the contributory, the Court stated, “… if there is omission, default or illegal action on the part of the Company in not registering the name of the contributory even though he/it can be said to be a contributory by holding the shares… the law provides a remedy.” And as Severn Trent had not availed of any such remedy, the Court held that the maxim ‘in equity, what ought to have been done must be taken as having been done’ was inapplicable. The Court also held that the category (c) listed above – “devolved on him through the death of former holder” – would be applicable only to personal representative in his individual capacity and not to corporate entity or juristic personality. Further, it was stated that the word ‘death’ normally applies to the death of a natural person. Severn Trent’s appeal was accordingly dismissed. As to the issue of its locus standi as a creditor, the matter was sent back to the Company Judge.

This case is significant because it is perhaps the only clear Supreme Court decision on the issue of locus standi of a contributory to bring a petition for winding up. The case now conclusively settles that Section 439(4) is an exhaustive code on the subject of winding up by contributories; and in order to present a petition for winding up, a contributory must be able to bring itself within the wordings of the categories mentioned in Section 439(4)(b); with all the categories being construed according to a strict literal meaning.

The Long Arm of the Law: Criminal liability in cyberspace

The decision of a Single Judge of the Delhi High Court in Avinash Bajaj v. State (decided on 29^th May 2008) is one of the first decisions relating to the penal provisions of the Information Technology Act; and may be stated to be the only authority on the point of the criminal liability of online service providers. The issue before the Court was whether an online marketplace provider, Bazee/E-Bay (“the company”), and its Managing Director could be stated to have committed any offence because a pornographic video was listed / advertised on a website maintained by the company. The facts of the case as disclosed in the Chargesheet are straightforward, and (the case being a quashing petition under Section 482 of the Criminal Procedure Code) are relatively uncontested.

The Petitioner was the Managing Director of Bazee, a company which provided an online marketplace where sellers could list their goods, and buyers could decide whether they were interested in buying any goods. If a buyer wished to purchase a particular good, he could inform the seller of the same, and the seller would independently sell the goods to the buyer. An online payment facility was also provided by Bazee, where Bazee charged a commission of Rs. 3 per transaction (being charges involved in banking fees). It was found that an advertisement for a pornographic video was listed on the website of Bazee, with a listing titled “DPS Girls having fun”; and the safety filters of Bazee failed to detect this listing. However, manual checks revealed the possibility of pornographic material being listed, and within the period of a couple of days, the listing was removed from the website by Bazee. Nonetheless, within the time period on which the listing was available, a small number of buyers purchased the videos. Bazee was later taken over by E-Bay. The prosecution filed a Chargesheet against the then Managing Director of Bazee, alleging that he had committed offences under Section 292 of the Indian Penal Code (advertisement/sale of obscene objects) and Section 67 of the Information Technology Act (causing publication of obscene objects on the internet). A summoning order was issued by the competent Court against the accused; and the accused filed a petition under Section 482 before the Delhi High Court seeking the quashing of the summoning order.

It is interesting to note that the company itself was neither an accused not a party before the Court; yet, the Court (in dealing with the MD’s liability) reached important legal conclusions vis-à-vis the company. In the High Court, S. Murlidhar J. reached various findings on the issues before him, which may be summarized as follows:

- First, the listed video itself was ‘obscene’.

- Secondly, In view of the fact that an advertisement of obscene material was listed on its website, the company could be stated to have committed offences under Section 292 of the Indian Penal Code and under Section 67 of the Information Technology Act.

- Thirdly, No case was made out against the Managing Director of the Company under the Indian Penal Code, as there was no concept of vicarious liability under the Code. The Managing Director could, however, be proceeded against under the Information Technology Act in view of Section 85 (“Offences by Companies”) thereof; despite the fact that the company was not proceeded against.

The first conclusion was essentially one of fact. The third conclusion seems justified in view of the on Supreme Court’s decision in Anil Hada’s case. It is the second conclusion which might appear a bit problematic. The Court effectively stated that by allowing an online platform for dissemination of information of products, the company itself was actually advertising and causing the products to be sold.

This conclusion can have great impact on the nascent law dealing with criminal liability on the internet. In practical terms, the Court’s conclusion effectively means that every website which allows users to post online information about any content must ensure that transactions dealing with the content itself are not illegal. The sheer volume of line transactions, and the impossibility of checking every online post / listing, is not a defence. And failure to meet this stringent quality-control check can result in criminal liability on the company maintaining the website.

It is submitted that the Court may have imposed too strict a standard on online service providers; and the decision – although well-intentioned – may have undesirable consequences in the era of global transactions, where the internet is fast becoming a necessary tool for and of commerce. The Court may have failed to distinguish between primary offenders and unwitting facilitators; and has imposed too strict a burden on e-commerce and related activities.

Nonetheless, as the judgment itself point out, it is essential for an adequate regulatory framework to deal with such situations.

The Supreme Court judgment in Thakur

The Supreme Court of India recently upheld the validity of the Central Educational Institutions (Reservations in Admissions) Act, 2006 (Ashoka Kumar Thakur v. Union of India). In my opinion, although none of the Judges agree with this view, the issue could have been examined in terms of the application of foreign law to constitutional interpretation. There is a growing debate in academic circles on the relevance of foreign law to constitutional interpretation, and I have argued elsewhere that certain principles developed in American affirmative action cases might have been usefully applied in the Indian case. These concepts include 'strict scrutiny' and 'narrow tailoring'. If those concepts were in fact applied in the Ashoka Kumar Thakur case, it appears that the validity of the CEIRAA could not have been sustained. I will leave the question of whether strict scrutiny standards ought to have been applied or not to a later post. Here, I will point out how the Supreme Court's analysis might have been different had those standards been applied.

Had strict scrutiny been applied, the Court would have had to see whether the law was 'narrowly tailored' to meet a 'compelling state interest'. While there might be a compelling state interest in remedying the present effects of past discrimination, the CEIRAA was not tailored narrowly enough.

First, other systems of relief, such as credits instead of quotas, were not considered before enacting the CEIRAA. Caste-neutral alternatives were not considered. For instance, quotas based on economic considerations could have been implemented. No doubt, the requirement of narrow tailoring “does not require exhaustion of every conceivable race-neutral alternative...” (Grutter v. Bollinger, US Supreme Court). While this might be true, it is important to note that it is widely considered that quotas are the most extreme form of affirmative action. It is impossible to say that reservations will always be needed – in fact, if they were to be needed ceaselessly, that would be the surest indication that they were not effective in remedying past discrimination.

Secondly, the CEIRAA results in disproportionate benefits to the beneficiaries. In the words of arguably India’s greatest advocate, Nani Palkhivala, reservation policies deliberately shut their eyes to the fact that “… there were crores of backward individuals in forward castes, and crores of forward individuals in backward castes…” There is no reason to give similar treatment to all individuals in a particular caste. Even if the creamy layer is excluded, it is not necessary that everyone else should be entitled to the same benefit. Furthermore, once it is clear that the compelling state interest sought to be protected was to remedy past discrimination, narrow tailoring would require that the benefits of reservations must be proportional to the discrimination suffered by the particular caste. With respect to OBC reservations, there was no attempt made by the Union of India before the Supreme Court to show how and why all the ‘backward castes’ must be treated equally. It is nobody’s case that every caste forming part of the other backward classes faced the same amount of discrimination in the past – the Union of India did not contend this at all. That being the case, it is clear that allowing all OBCs to take the benefit of reservations will result in disproportionate benefit to some OBC sections.

Thirdly, the CEIRAA has no durational limitation. Without any indication of how long the reservation under the CEIRAA is to last, the CEIRAA cannot be said to be narrowly tailored. It is impossible to say that reservations will always be needed – in fact, if they were to be needed ceaselessly, that would be the surest indication that they were not effective in remedying past discrimination.

Fourthly, there are doubts as to the factual data on the basis of which the Government decided to extend the benefit of reservations. For instance, it was argued that a 27% quota for OBCs in higher education as contemplated under the CEIRAA was unjustified as the Government had no data as to the actual under-representation of OBCs.

An excellent discussion of the case is found in Mr. Vivek Reddy’s post (“The Eight Fatal Sins of Ashoka Kumar Thakur”) on the Law and Other Things blog here.

Introduction

Welcome! This blog is essentially devoted to discussing and analysing legal developments in different areas of law. There is no specific focus on any single area of law as such; the posts on this blog will cover various subject matters related to the legal field.