'Excepted matters' in arbitration agreements

In BSNL v. Motorola (MANU/SC/2008/1274, Civil Appeal No. 5645/2008), the Supreme Court clarified the position of law with respect to the interpretation of “excepted matters” in arbitration agreements. The Court was concerned with interpreting an arbitration clause which stipulated, “In the event of any question, dispute or difference arising under this agreement or in connection there-with (except as to the matters, the decision to which is specifically provided under this agreement), the same shall be referred to the sole arbitration…” The agreement between the parties went on to make a provision for liquidated damages for certain breaches.

A dispute arose between the parties, and it was of such a nature that the compensation would be in accordance with the clause providing for liquidated damages. On this basis, it was argued that the dispute was of such a nature as would fall under the “excepted matters”, because of the specific provision in the agreement. Therefore (it was contended) there was no valid arbitration agreement between the parties in respect of the particular dispute.

The Supreme Court however rejected this argument. It was held that there is a distinction between computation of liquidated damages, and fixation of liability. For any computation of liquidated damages to take place, the liability must be established in the first place. The “excepted matters” were those for which a decision was specifically provided in the agreement. A decision was provided in relation to determining liquidated damages – this, however, went to computation of amount of damages and not to the fixation of liability. Therefore, it was held that a dispute as to whether or not a breach has occurred would be within the purview of the arbitration clause.

In reaching this conclusion, the Supreme Court distinguished its earlier judgment in Vishwanath Sood v. Union of India (MANU/SC/0646/1989) on the ground that in that case, the agreement had provided for a complete machinery for settlement of disputes, including a machinery for fixation of the liability. Thus, the position seems to be that “excepted matters” clauses will be construed strictly; and the Courts will prefer an interpretation narrowing the scope of “excepted matters”.

The Court also touched upon another important issue. The clause in the agreement providing for the computation of damages provided that the appellant would calculate the amount of damages in accordance with the agreed formula. The appellant had contended that the quantum of liquidated damages decided by the appellant, even if it is exorbitant and contrary to the formula, would be final and could not be challenged. The Supreme Court rejected this argument as well, saying that such an argument would mean that the agreement was contrary to Section 28 (agreement in restraint of legal proceedings is void) and Section 74 (compensation for breach of contract where penalty is stipulated) of the Indian Contract Act.

In this connection, it is worth noting that although Section 28 does allow for an exception in the case of arbitration agreements, a provision stating that a certain person shall compute damages in accordance with a formula cannot be regarded as an ‘arbitration’ proceeding. In K.K. Modi v. K.N. Modi (AIR 1998 SC 1297), the Supreme Court had made clear the distinction between an arbitration and an expert determination – the provision relating to the computation of damages in accordance with a given formula would be a ‘determination’ and not an ‘arbitration’.

Scope of this Blog...

Till now, this blog has not had a particular scope – I have been looking at several areas of law in general. However, I now intend to concentrate on some specific areas in greater depth. I will be looking at commercial law issues; focusing particularly, though not exclusively, on arbitration and taxation. There will be posts on other areas, but not very often...

Further developments in Death Penalty Jurisprudence: Away from Sharaddananda?

It seems that a judgment of the Supreme Court delivered earlier this month may further influence the post-Sharaddananda debate on the death penalty. A recent post on this blog dealing with the three-Judge decision in Swamy Sharaddananda suggested that the Court – even while sticking to the ‘rarest of the rare’ standard – had made the made the death penalty extremely hard to apply in practice. In that case, a difference of opinion between Justices Sinha and Katju had led to the matter being referred to the Bench. One of the factors influencing Justice Sinha was the fact that the conclusion of guilt in Swamy Sharaddananda was based solely on circumstantial evidence. While agreeing that the nature of evidence is generally irrelevant once guilt beyond reasonable doubt was established; Justice Sinha nonetheless suggested that given the special circumstances of the death penalty, it ought not to be imposed if the conviction is based solely on circumstantial evidence. (Of course, Justice Sinha did not intend this to be an unalterable rule).

The three-Judge Bench appeared to have endorsed Justice Sinha’s stance. It said, “Katju J. in his order passed in this appeal said that he did not agree with the decision in Aloke Nath Dutta in that it held that death sentence was not to be awarded in a case of circumstantial evidence. Katju J. may be right that there can not be an absolute rule excluding death sentence in all cases of circumstantial evidence (though in Aloke Nath Dutta it is said `normally' and not as an absolute rule). But there is no denying the illustrations cited by Sinha J. which are a matter of fact...” Besides this observation too, it is clear that the larger Bench was extremely suspicious of the application of the death penalty.

Nonetheless, a recent two Judge decision in Shivaji v. State of Maharashtra of a bench consisting of Justice Pasayat and Justice Sharma states, “The plea that in a case of circumstantial evidence death should not be awarded is without any logic… That has nothing to do with the question of sentence as has been observed by this Court in various cases while awarding death sentence. The mitigating circumstances and the aggravating circumstances have to be balanced. In the balance sheet of such circumstances, the fact that the case rests on circumstantial evidence has no role to play.” (Emphasis added).

Justice Pasayat counters Justice Sinha’a argument about the special nature of the death penalty by saying “In fact in most of the cases where death sentence are awarded for rape and murder and the like, there is practically no scope for having an eye witness.” This might well be true. However, what is rather surprising is that Justice Pasayat does not even cite the three-Judge decision in Sharaddananda. The law as to the application of capital punishment as expounded by him does not seem to be affected at all by Sharaddananda.

So, what is the position then? To what extent has Sharaddananda really changed our understanding of the law in India? It appears that we might well have to wait for the next decision by another (even larger?) Bench…

Delhi High Court: Scrabulous

The decision of the Delhi High Court in the ‘Scrabulous’ matter is now out. This was a case where the makers of the popular game ‘Scrabble’ – Mattel – had sued two Indian entrepreneurs who developed the popular ‘Scrabulous’ game, alleging trademark and copyright infringement.

The Delhi High Court has issued an injunction on the trademark aspect – the defendants will no longer be able to brand their product as ‘Scrabulous’ or as anything bearing a resemblance with ‘Scrabble’. However, the Court held – in a decision which might be important in Indian law because of the enunciation of the ‘idea-expression dichotomy’ – that there is no copyright in Mattel’s board game for a number of reasons. Thus, the defendants will be able to market their version of the game, as long as they refrain from calling it ‘Scrabble’ or ‘Scrabulous’ or something analogous.

An initial post on the judgment on the SpicyIP blog is linked here. I will put up another post on the decision, as also on the “idea-expression” dichotomy in Indian law, in a few days.

Arbitral Tribunals and Interim Reliefs - an ICSID decision

The power of an arbitral tribunal to grant interim relief has not been free from controversy. A particular difficulty arises in more complicated cases, where the jurisdiction of the tribunal itself is uncertain. When a challenge has been made to the jurisdiction of the tribunal, can it decide upon granting interim measures prior to deciding on its jurisdiction? Of course, it will be desirable for issues of jurisdiction to be sorted out first – often, however, to rule on jurisdiction will require a complex legal analysis by the tribunal. Interim measures are most likely to be asked for in urgent cases; in such cases, waiting for a complex analysis of jurisdiction may well defeat the purpose of asking for interim injunctions. On the other hand, one may very well wonder how a tribunal can have the power to grant any relief at all – whether interim or not – without first determining its own jurisdiction.

The ICSID Tribunal recently touched upon this issue – which is one of considerable commercial significance – in its decision on provisional measures in Occident Petroleum v. Ecuador (ICSID Case No. ARB/06/11) (the full text is available on the ICSID website). The Tribunal seems to have taken into account the competing considerations which have been noted earlier in this post, and it concluded “Whilst the Tribunal need not definitely satisfy itself that it has jurisdiction in respect of the merits of the case at issue for purposes of ruling upon the requested provisional measures, it will not order such measures unless there is, prima facie, a basis upon which the Tribunal’s jurisdiction might be established.” Thus, the Tribunal seems to have preferred a middle-path, agreeing that while jurisdiction need not be conclusively determined prior to deciding on provisional measure, a prima facie case for jurisdiction should nonetheless be established. The Tribunal also noted that it had the power under Article 47 of the ICSID Convention to order provisional measures, although the text of the Article only uses the word ‘recommend’. Nonetheless, several decisions have held that the ‘recommendation’ would be binding on the parties.

Additionally, the Tribunal also laid down the test for grant of provisional measures – circumstances in which provisional measures will be granted are those in which the measures are necessary to preserve a party’s rights, and where the need is urgent in order to avoid irreparable injury (underlining present in original text of decision).

It might appear that this test makes a grant of an interim injunction by an arbitral tribunal more likely than a grant of an interim injunction by a Court. The test proposed by the Tribunal only looks at the (a) existence of prima facie jurisdiction, (b) the necessity of the interim measure from the point of view of preserving a party’s rights. This necessity may be measured by reference to the urgency of the need to avoid irreparable injury. Under common law principles dealing with the issuing of interim injunctions, Courts have to consider the factors of (a) the existence of a prima facie case (as opposed to a prima facie satisfaction of jurisdiction), (b) irreparable injury and (c) balance of convenience. While the requirement of balance of convenience may be factored in to the need and the urgency (although even this is unclear), it is at least arguable that the ICSID has moved away from the common law requirement of a prima facie case.

It remains to be seen whether this decision will affect the practice of other arbitral institutions.

Interesting perspectives on the 'Activism' debate

Earlier on this blog, I had referred to the debate over judicial activism in India. In this connection, two articles by two former Justices of the Supreme Court of India provide valuable insights.

Justice Srikrishna in “Skinning a Cat” [published in the SCC (Journal)] puts forward the case that against judicial activism. He writes, “Fortunately, the fervour for judicial activism, which engulfed the courts during the third and fourth decades seems to be ebbing with the progressive realisation that it is preferable to tread the "highways" of justice instead of resorting to the "bye-lanes" of activism in the hope of expeditiously reaching the goal of justice. As I have pointed out, deviation from the well-trodden path frequently leads to wholly unjust outcomes…” Justice Ruma Pal responds to Justice Srikrishna’s attack on activism in a paper available as a working paper of the Centre for Advanced Study for India (Judicial Oversight or Overreach: The role of the Judiciary in Modern India”).

The debate between the two former Justices is particularly interesting because they have made ‘pro’ and ‘anti’ activism arguments based on the Indian context. The arguments are not merely theoretical, but concentrate on the working of the Supreme Court, and the desirability of activism in the Indian legal landscape. Justice Srikrishna’s article is available here, and Justice Ruma Pal’s essay is available here.

The MCOCA as an anti-terrorism law?

In State of Maharashtra v. Bharat Shah, MANU/SC/2008/1237, a 3-Judge Bench of the Supreme Court of India reversed a judgment of the Bombay High Court concerned with the constitutionality of certain provisions of the Maharashtra Control of Organised Crime Act, 1999 (“MCOCA”). The judgment by Justice Mukundakam Sharma upheld the constitutionality of Sections 13 to 16 of the MCOCA, which deal with interception of wire, electronic or oral communication. The Sections were challenged on the grounds of violation of Article 21 (the right to life includes the right to privacy, and interception of communication violates this right); and also on grounds of competence. The Court held, “The objects and reasons read with the contents of (the MCOCA) would indicate that the subject matter of the Act is maintaining public order and prevention by police of commission of serious offences affecting public order and, therefore… it will be relatable to Entry 1 and 2 of List II…” Sections 2, 3 and 4 of the MCOCA were also upheld.

Interestingly, Section 2 of the MCOCA was challenged before the Bombay High Court earlier in Zameer Ahmed v. State of Maharashtra, W.P. No. 1136/2007 (Bombay High Court). That challenge arose in the context of an attempt by the State of Maharashtra to apply the MCOCA against alleged perpetrators of the July 11, 2006, Mumbai train blasts. Section 2(e) of the MCOCA refers to “insurgency”, and it was contended that the State legislature had no power to enact on matters of insurgency. The Bombay High Court in rejected this argument, upholding the constitutionality of Section 2 on grounds that in pith and substance, the law is within the competence of the State legislature. Additionally, the Court also ruled that there was no repugnance between the MCOCA and the central Unlawful Activities Prevention Act. An appeal against this judgment was admitted by the Supreme Court, and is pending final hearing. While admitting the appeal, the Supreme Court also stayed the trial in the train blasts case.

It remains to be seen whether the Supreme Court’s judgment in Bharat Shah which clearly holds the MCOCA to be (in pith and substance) within the competence of the State legislature will be held conclusive on the “insurgency” challenge. Of course, it might be contended that the Court in Bharat Shah was not concerned with that particular argument – nonetheless, it would appear that the “insurgency” argument can also be rejected on grounds of pith and substance.

The issue of whether the MCOCA (which has spawned similar legislations in several states) can be applied in ‘terrorism’ cases presents complex legal questions. The constitutionality of the MCOCA assumes greater significance in light of the recent bomb blasts in Delhi, and the debate of having tougher anti-terrorism laws.

Tax Implications of Demergers

(This post was initially posted on the Indian Corporate Law blog linked here)

Generally, the gains arising from a demerger are exempt from capital gains tax; while those arising from a slump sale are not. But, then, what exactly is a ‘demerger’ for the purposes of the exemption from capital gains tax? Can a demerger ever be characterized as a ‘slump sale’? Several Sections of the Income Tax Act, 1961 deal with these issues.

The statutory provisions in the Income Tax Act:

A. Section 2(19AA) says that a ‘demerger’ means a transfer pursuant to a scheme under Sections 391-394 of the Companies Act1956 (by a demerged company of its one or more undertakings to any resulting company) such that a list of seven conditions enumerated in separate clauses is fulfilled. Clause [iv] is particularly relevant for the present discussion. It says that the resulting company must issue, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis.

B. A slump sale is defined in Section 2(42C) to mean the transfer of one or more undertakings as a result of the sale for a lump-sum consideration without values being assigned to independent assets and liabilities.

C. According to Section 45, any profits or gains arising from the transfer of a capital asset are chargeable to capital gains tax.

D. Under Section 47(vii), the provisions of Section 45 do not apply to a transfer in a demerger of a capital asset by the demerged company to a resulting company if the resulting company is an Indian company.

E. Under Section 50-B, capital gains arising from slump sales are chargeable to tax. The capital gains from such slum sales are to be calculated by subtracting the net worth of the undertaking that is transferred from the lump-sum consideration (as per Explanations 1 and 2 to the Section.

In short, if a transfer is a demerger under the Income Tax Act, capital gains liability would not arise. If it is a slump sale, such liability would arise. For the transfer to be a ‘demerger’, the conditions mentioned in Section 2(19AA) must be complied. But what happens when one or more of the conditions are irrelevant to a particular transaction? How this may happen is exemplified by the facts of the complex case of Avaya Global Connect v. ACIT, ITA No.832/Mum/07 (the judgment is available on the website of the Mumbai ITAT Bar Association here).

The Facts:

The assessee ‘A’ was a company having two divisions – ‘B’ and ‘T’. ‘T’ was transferred by ‘A’ to ‘I’, an Indian company. For this transfer, a scheme of arrangement filed before the Bombay High Court provided, “… ‘T’ without any further act, instrument or deed… shall stand vested in or deemed to be vested in ‘I’ as a going concern…” Significantly, the scheme went on to say “Upon the demerger of ‘T’ into ‘I’, ‘I’ would not pay consideration either to ‘A’ or to the shareholders of ‘A’…” (Emphasis supplied.) The Bombay High Court sanctioned this scheme. The value of the assets taken over by ‘I’ was less than the value of the liabilities; and ‘A’ showed the difference in the capital reserve account in the balance sheet. A question arose as to whether the gains which accrued to the assessee (as it had transferred more liabilities than assets) would be chargeable to capital gains.

The claims:

The Department took the view that the scheme would not qualify as a demerger; on the basis that clause [iv] mentioned above was not satisfied. The assessee contended that clause [iv] was inapplicable to the case, as the clause would have effect only when there was some consideration for the transfer. In the case, the value of its liabilities exceeded its assets, leading to negative net worth. Therefore, there was no consideration for the transfer – as a practical matter, it was impossible for there to be any consideration. As there was no consideration whatsoever, the question of complying with clause [iv] would not arise. Without prejudice, it was argued by the assessee that the transfer could not have been a slump sale given that no lump-sum consideration was paid. Further, it was contended that there being no sale consideration received in respect of the transfer, no question of computing capital gains arose.

The AO and the CIT (Appeals) however rejected these contentions. It was held that the transaction was a slump sale. The assessee had not received consideration as such; yet it had transferred liabilities in excess of assets and had credited the difference to its capital reserve account. This was sufficient to constitute consideration received on account of the transfer; and the assessee was liable to pay capital gains tax.

The issues before the Tribunal:

Essentially, the Tribunal faced the following questions:

A. Was the transfer to be characterized as a ‘demerger’ for the purposes of the Income Tax Act, 1961?

B. If not, could it be referred to as a slump sale? If it was a slump sale, would there be any capital gain on facts (considering the negative net worth of the assessee and the fact that no actual consideration was received)?

C. What would be the position if the transfer was categorized as neither a demerger nor a slump sale?

The decision:

A. The Tribunal agreed with the lower authorities that there was no ‘demerger’ in the present case. It was held that the legislature must be presumed to have foreseen all practical possibilities while adding the conditions. The fact that there was no consideration whatsoever (as a matter of practical impossibility) would not be sufficient to hold that the condition was inapplicable.

B. The Tribunal then went on to hold that it is only a transfer as a result of a sale which can be considered as a slump sale. The presence of a money consideration is essential for a sale. Also, when a Court sanctions a scheme under the Companies Act, the transfer in pursuance of that scheme would be not be a result of sale, but would be a result of the operation of law.

C. Essentially, the capital asset which was transferred in the case was a going concern. It would not be possible to “… conceptualize the cost of acquisition of … a going concern (or) the date of acquisition thereof…” As such, it was held that the computation provisions of the Act in Section 48 would fail in the given factual matrix. In such a scenario, no capital gains could be levied. Accordingly, the assessee’s appeal was allowed.

The significance:

From the point of view of the corporate world, the judgment serves to highlight an important point. Merely because a transfer is carried out in accordance with a scheme for a demerger under the Companies Act sanctioned by the competent High Court, the transfer will not be characterized as a demerger for the purposes of taxation. At the same time, such a transfer will not be a slump sale; and liability to capital gains will depend on whether or not the provisions for computation of capital gains would be workable. The safer course, it appears, would be to ensure that the requirements for a demerger under tax laws are complied with in the first place.

New debates on the foundations of Judicial Review

It is now generally known that in the past few months, there have been increasing calls for checks on the “activism” of the Indian Supreme Court. Many of the arguments against activism proceed on the lines that the Court is trespassing into the mandate of a democratically elected legislature; and this is undesirable. It might appear that the notion of “judicial review” itself is “anti-democratic”; and therefore must be exercised in the rarest of cases. A recent article in the Harvard Law Review by Prof. Richard Fallon looks at the debate on the democratic foundations of judicial review. Prof. Fallon puts forward a justification for judicial review; seeking to counter what appears to be a persuasive case against review developed by Prof. Jeremy Waldron in the Yale Law Journal. The Fallon-Waldron debate will surely spark further analysis in the area, reproduce a portion of the abstract of Prof. Fallon's article below:

“In developing this case for judicial review, Professor Fallon proceeds by confronting recent, influential, philosophically probing arguments against judicial review by Professor Jeremy Waldron. Professor Fallon concedes arguendo that, as Professor Waldron argues, courts are no better than legislatures at defining rights correctly, but maintains that the crucial question is not whether courts or legislatures are less likely to err, but which kinds of errors are most important to avoid — those that result in rights being overprotected or those that result in rights being infringed. Insofar as judicial review can be designed to prevent errors in just one direction, involving failures to protect rights adequately, then judicial review may be supportable even if courts are no better than legislatures at identifying rights correctly. Professor Fallon also argues, contra Professor Waldron, that judicial review can actually contribute to the political legitimacy of an otherwise democratic scheme of government when the demands of political legitimacy are understood correctly.”

Professor Fallon’s article (Harvard Law Review) is available here, and Jeremy Waldron’s article (Yale Law Journal) is available here.

Turning back to the Indian debate, a note posted on the Law and Other Things blog makes for an interesting read. It details the points raised by Mr. Harish Salve, Senior Advocate in a lecture in Oxford. The note was posted a few months ago; but in the light of new theoretical debates surrounding the concept of judicial review itself, will make an informative read. The post is available here.

Taxation of non-residents: Attribution to PEs and Transfer Pricing principles

(The following post was initially posted on the Indian Corporate Law blog here)

The Bombay High Court recently answered important questions pertaining to international taxation in SET Satellite Singapore v. Deputy Director, Income Tax (International Taxation) [ITA no. 944/2007; reported in MANU/MH/0739/2008. The Court followed the Supreme Court’s decision in Morgan Stanley, reported in (2007) 292 ITR 416 (SC); and the decision would be a welcome one to foreign enterprises carrying on business activities in India.

The facts:

The Appellant-assessee, SET Satellite (Singapore) Pte Ltd. was a resident of Singapore and carried on certain activities in India through its dependent agent SET India (P) Ltd. It submitted before the Indian tax authorities (at the time of filing its tax return disclosing ‘nil’ income) that it did not have any tax liability in India because it did not have any Permanent Establishment in India and that its dependent agent was remunerated on an arm’s-length basis. A revised return was filed later disclosing a certain sum as income, but without prejudice to the contention that there arose no tax liability in India. However, the Assessing Officer determined that the assessee was liable to tax in India; and assessed the assessee’s income including income from marketing fees as well as advertisements collected in India. Further, the assessee’s income was held to have included the subscription fees received from cable operators by its Indian dependent agent. In an appeal preferred by the assessee against the AO’s order before the CIT (Appeals), it was held that in view of Article 7(2) of the India-Singapore DTAA and considering that the dependent agent was remunerated at an arm’s-length basis, no profits would be taxable in the hands of the assessee. Nonetheless, the CIT (Appeals) held that there was no reason to interfere with the AO’s order in view of the revised return filed by the assessee. Appeals were filed by the Revenue as well as the assessee before the ITAT (Mumbai) against the order of the CIT (Appeals).

The case before the Tribunal:

The Tribunal proceeded to consider the question, “Whether… the learned CIT (Appeals) erred in holding that since the assessee has remunerated the agent on the arm’s-length principle, no further profits of the assessee could be taxed in India other than the profits earned by the dependent agent?” The Tribunal proceeded to record that since SET (India) was a dependent agent of the assessee in India, the assessee was deemed to have a PE in India. The Tribunal then held, “… in addition to the taxability of the Dependent Agent in respect of the remuneration earned by them, which is in accordance with the domestic law and which has nothing to do with the taxability of the foreign enterprise… the foreign enterprise is also taxable in India in terms of the provisions of Article 7 of the (India-Singapore) Tax Treaty, in respect of the profits attributable to the dependent agent permanent establishment.” (Emphasis supplied). The Tribunal came to the conclusion that “the tax liability of a foreign enterprise, in respect of its dependent agency permanent establishment, is not extinguished by making an arms length payment to the dependent agent.” Consequently, the appeal filed by the Revenue was allowed. The assessee filed an appeal before the Bombay High Court against this order.

The High Court decision:

That the major issues before the High Court were in relation to the tax liability in India of a non-resident, when the non-resident has a dependent agent in India. The High Court framed three questions of law – the main one being, “Whether having taxed the dependent agent on the fair value of the activities in India, the same could be taxed again in the hands of the non-resident as being income attributable to the deemed permanent establishment?” The relevant provision of the India-Singapore DTAA which had a bearing on the issues was Article 7. According to Article 7(1), if a foreign resident carries on business in India through a PE, then only so much of its profits as are attributable directly or indirectly to the PE may be taxed in India. Article 7(2) provides for a formula to determine this attribution of income.

On behalf of the assessee, it was contended before the High Court that in view of Articles 7(1) and 7(2), the requirement is to ascertain the arm’s length price. In other words, if the activities in India were carried on not by a PE but by an independent enterprise, what would have been the amount charged for the activities by the enterprise? If this “arm’s length” price is paid by the foreign resident to its dependent agent PE, then no further part of its profits can be attributed to the PE, and nothing further would be liable to tax in India. Additionally, the assessee also relied on the Supreme Court’s decision in Morgan Stanley. The Supreme Court had observed there, “… provided that an associated enterprise (that also constitutes a PE) is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise… nothing further would be left to attribute to the PE.”

At first glance, the link between attribution of profits and transfer pricing principles (such as arm’s length price) may not be apparent. Nonetheless, a deeper examination would indicate that the logic behind the argument is convincing. Essentially, if a ‘proper’ amount is paid by the foreign resident to its Indian dependent agent PE, then a ‘proper’ amount is anyway taxable in India in the hands of the PE. No income is escaping the tax net in such cases. In such circumstances, there is no need to further tax the profits of the foreign enterprise; because any further taxation would merely be double taxation. Whether an amount is ‘proper’ or not would depend on whether it has been calculated on an arm’s length basis. In Morgan Stanley, the Supreme Court explained, “(The PE’s) profits are determined on the basis as if it is an independent enterprise. The profits of the PE are determined on the basis of what an independent enterprise under similar circumstances might be expected to derive on its own.” In this context, it is worth noting that transfer pricing provisions are often looked upon as anti-avoidance measures. If a ‘proper’ or arm’s length price is being paid to an Indian PE, it is clear that questions of avoidance would not arise. Thus, it seems logical to conclude that if an arm’s length remuneration is being provided by a foreign enterprise to its dependent agent PE, nothing further ought to be attributed to the PE (particularly because the Revenue in the case was not questioning the fact that an arm’s length price had been paid).

The Bombay High Court agreed with the assessee’s submissions, and reversed the ITAT order. The order of the CIT (Appeals) was restored, except for the portion of the order which went against the assessee. In conclusion, it appears clear that if the transactions between a foreign enterprise and its Indian dependent agent PE are carried on at an arm’s length basis, nothing would be left to be attributed to the PE besides the arm’s length remuneration paid to it by the foreign enterprise. Several recent controversies (including the Hutch-Vodafone issue discussed on the Indian Corporate Law blog and on this blog earlier) indicate that the Indian tax authorities have been seeking to cast their net as wide as possible. The judicial approach followed by the Bombay High Court in this case signals that all such fishing expeditions cannot be tolerated in view of fundamental principles regarding to international taxation. Only time can tell whether the same approach will be taken by the Court in other situations.

Supreme Court stays proceedings in E-Bay/Bajaj case

In earlier posts on this blog, found here and here, I had discussed a decision of the Delhi High Court on the penal provisions of the Information Technology Act, and on the issue of criminal liability of online service providers. In an appeal against the Delhi judgment, the Supreme Court is stated to have stayed proceedings in the case. An Economic Times report on the Supreme Court’s action is found here.

A Victory for Open-Source?

In a ruling which may have an important impact on open-source software, the Federal circuit Court in the United States recently ruled that creators of open-source works continue to retain a right in their works despite the fact that they have “given away” their works for free.

A New York Times report on the decision is reproduced below:

"The decision legitimizes the use of commercial contracts for the distribution of computer software and digital artistic works for the public good. The court ruling also bolsters the open-source movement by easing the concerns of large organizations about relying on free software from hobbyists and hackers who have freely contributed time and energy without pay.

It also has implications for the Creative Commons license, a framework for modifying and sharing creative works that was developed in 2002 by Larry Lessig, a law professor at Stanford.

That license is now used widely by organizations like M.I.T. for distributing courseware, and Wikipedia, the Web-based encyclopedia. In March, the rock band Nine Inch Nails released a collection of musical tracks under a Creative Commons license.

...

The appeals court decision reverses a San Francisco federal court ruling over the misappropriation of a software program by a company that publishes model train hobbyist software.

...

In March 2006, Robert G. Jacobsen, a physics professor at the University of California, Berkeley, filed a lawsuit against Mr. Katzer claiming that his company was distributing a commercial software program that had taken software code from the Java Model Railroad Interface project and was redistributing the program without the credits required as part of the open-source license it was distributed under.

The decision to appeal the lower court ruling, which said that the terms of the open-source contract were overly broad, was intensely debated within the free software movement. Some open-source advocates had worried that a loss before the appeals court would have been a disaster for the community, which has grown as an economic force during the last quarter century..."

(I must thank the reading and assignment list of Osgoode Hall Law School IP Professor G. D'Agostino for bringing this issue to my attention!)

'Strict Scrutiny' in Indian judicial review?

In an earlier post on this blog, I had discussed how the Supreme Court’s approach in Ashoka Kumara Thakur might have been altered had it considered adopting the ‘strict scrutiny’ standard of review.

In a case reported just before the decision in Ashoka Kumara Thakur, Justice Sinha did in fact apply the strict scrutiny standard to test the validity of certain laws. So, there appears to be a conflict between these two decisions. In this connection, in an article published in the JILI, Mr. Tarunabh Khaitan analyses the judgments, and argues for a harmonious reading of the two. Mr. Khaitan argues that Thakur’s rejection of a rigourous standard of review must be limited to affirmative action cases. If this argument is to be accepted, an interesting result would emerge – a standard of review adopted from American decisions will be applicable in India, except in the context in which it is applied in the United States. This is so because in the United States, a strict scrutiny standard is used in reviewing – mainly – affirmative actions cases.

Mr. Khaitan’s article is found here.