What are the principles on which DTAAs are to be interpreted? Do the usual principles of interpretation of tax statutes continue to apply? Or are there any special rules to be applied, given that a DTAA is a treaty between two sovereign states? In an article available on the ITAT bar association website, Mr. S.E. Dastur, Senior Advocate, provides the answers to these important questions. In concluding his article, Mr. Dastur highlights the general approach of the Courts in interpreting legal provisions in the face of two contrasting rules of interpretation. In Mr. Dastur’s words:
“I believe that the rules of interpretation are in a way elastic enough for a judge to be able to support the view which he thinks will further the cause of justice by citing an appropriate rule of interpretation. If a judge wants to go strictly by the written word he would cite the rule enunciated by Rowlatt J. in Cape Brandy Syndicate v. IR 1921 (1) KB 64, approved by the Supreme Court in CIT v. Ajax Products Ltd. 55 ITR 741, 747, which requires that in a tax law one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing to be implied. One can only look at the language used. In Jiwandas v. CIT 4 ITC 40 it was stated that one cannot extend the scope of a statute by analogy or place upon it what is called a beneficent or equitable construction in order to prevent a real or supposed anomaly.
There is, on the other hand, the directly opposite rule of construction whereunder a judge is exhorted to supplement the written word so as to give force and life to the intention of the legislature though he must not alter the material of which the fabric is woven but he should iron out the creases. By invoking these principles the Supreme Court of India in CIT v. Bhattachargee (1979) 118 ITR 461 held that in section 245M of the Act the term “assessee” would encompass the department as well! This was done undoubtedly to avoid a result which would have been unjust to the Revenue. In CIT v. J. H. Gotla (1985) 156 ITR 323 (SC) the boot was, as it were, on the other foot. A literal interpretation would have resulted in a patent injustice to the assessee. In the process the Court observed that where the plain literal interpretation of a statutory provision produces a manifestly unjust result, which could never have been intended by the legislature, the Court might modify the language used by the legislature so as to achieve its intention. To this approach a strict constructionist judge would say that it is not for the Court to make good the lacuna in the legislation.
This contrasting approach is very tellingly illustrated by two decisions of the High Court at Bombay — the gap between the two decisions being just five years. In Elphinstone Spinning and Weaving Mills v. CIT (1955) 28 ITR 811 (Bom) the Court observed that where the language was clear and not capable of any other construction, then, however illogical the position, however, absurd the result, however much the construction put may defeat the object of the Legislature, the statute must be construed according to the plain language used by the Legislature. On the other hand inCIT v. Kishoresinh Kalyansinh Solanki (1960) 39 ITR 522 (Bom) the same Court observed that the rule of literal interpretation cannot be adhered to if it leads to manifest absurdity.
The pity is that what is “manifest” to one judge is often obscure to another. Therein lies the strength and weakness of rules of interpretation and provide bread, butter and large helpings of jam to the legal fraternity!”
The full article, which discusses several issues related to the interpretation of DTAAs (including "forum shopping", "double non-taxation", "life of a treaty", "aids in construing tax treaties" etc. is available on the ITAT bar association website linked here.
The draft of the National Innovation Bill, 2008 is available here. The Bill contains some interesting provisions in relation to the protection of trade secrets, and I have written two posts on Spicy IP covering these provisions. The posts are linked here and here.
The rule of Hadley v. Baxendale is taken to be a fundamental rule in the law of contracts. The principle of Hadley v. Baxendale has been applied across several jurisdictions. The principle has been so well established that one might be forgiven for assuming the principle to admit of no relaxations. In a recent decision in Transfield Shipping v. Mercator Shipping, the House of Lords considered an important aspect of the rule in Hadley v. Baxendale.
“Is the rule that a party may recover losses which were foreseeable ("not unlikely") an external rule of law, imposed upon the parties to every contract in default of express provision to the contrary, or is it a prima facie assumption about what the parties may be taken to have intended, no doubt applicable in the great majority of cases but capable of rebuttal in cases in which the context, surrounding circumstances or general understanding in the relevant market shows that a party would not reasonably have been regarded as assuming responsibility for such losses?” In other words, is an express provision regarding damages necessary for non-application of the Hadley v. Baxendale rule? Or can parties argue that the rule is only a presumption regarding the intention of the parties – which, given other evidence, could be displaced?
The House of Lords concluded that the rules were not inflexible rules. They were not external rules of law, but merely expressions of presumed intent. The Lords reasoned that if it were possible to derogate from the rule by express provision, on principle, the rule could not be anything but a statement of presumed intent. If it were a statement of presumed intent, then nothing ought to preclude parties from rebutting the presumption and arguing that there was a different intention of the parties.
It will be interesting to see how Indian Courts will decide a similar issue. Section 73 of the Indian Contract Act says, “When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.” The wording of the clause seems to suggest that this is intended to be an external rule of law and not a statement of presumed intent of the parties. Further, Section 74 does not say that the amount of liquidated damages shall be payable. It says “… whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.” So here too, there seems to be an external criterion to adjudge on the quantum of damages, and matters are not left to the intention of the parties. In this context, it might well be that the Indian judiciary takes a different approach to the issue.
In a recent judgment in Hashem v. Shayif, Justice Munby of the England and Wales High Court considered in depth several cases on the corporate veil issue, and concluded that for the veil to be lifted; that defendant must have control of the entity, and there must have been some impropriety.
Now, although Adams v. Cape [1991] 1 All ER 929 rejected the ‘single economic entity’ argument, it left open the door for agency-based arguments. In this context, ‘agency’ would mean not just a formal contractual relationship but also a ‘factual’ agency. It needs to be considered, then, whether the Justice Munby’s judgment closes the door on agency-type arguments as well because of the insistence on impropriety. Further, at times, Courts have relied on an “interests of justice” rationale to lift the veil. Hashem v. Shayif categorically rejects this approach.
The important conclusions reached by the Justice Munby are as follows [in paragraphs 159 to 164 of the judgment]:
Ownership and control of the company are not sufficient to justify the piercing of the corporate veil.
The Courts cannot pierce the corporate veil merely because it is thought to be in the interests of justice.
The veil can be pierced only if there is some impropriety.
Again, mere existence of impropriety is also not sufficient. The impropriety must be linked to the use of the company structure to avoid or conceal liability.
It is essential to show both control and impropriety in the sense mentioned in point 4.
The test for lifting the veil is – is the company a façade at the relevant time? Whether it is a façade or not is determined by factors 1 to 5. If the answer is “no, it is not a facade”, the veil cannot be lifted at all.
Further, Justice Munby notes that whenever the Courts have lifted the corporate veil, “… the wrongdoer controlled the company, which he used as a façade or device to facilitate and cover up his own wrongdoing … in each of these cases there were present the twin features of control and impropriety.”Thus it would appear that the only way in which the veil can be lifted in by proving the existence of a façade. Agency-type arguments (such as “the company so habitually acts according to the wishes of the defendant that it is should be treated as an alter-ego”) are not sufficient to lift the veil because of the element of “impropriety”. Indeed, specific agency-based arguments were raised before the Court – Justice Munby however said that for any question of lifting the veil, the above factors were the essential test.
Leading authorities including Gower, Palmer and Pennington suggest several grounds on which the veil has been lifted. These include ‘evasion of obligations’, ‘protection of public interest’, ‘abuse of corporate form’, ‘countering fraud, sharp practice and oppression’, ‘disguise of the controlling hand’, ‘substance over form doctrines’ etc. Can all these categories be collapsed into a single category of ‘fraud/sham’?
Also, Courts are often unclear when they use the phrase “lifting the corporate veil”. In a seminal article in the Modern Law Review (May 1990), Prof. S. Ottolenghi characterized judicial action in “corporate veil” cases to be of four types:
Peeping behind the veil – merely for the purpose of looking at the controlling persons and for nothing more. This is done in seeing whether a company is a “wholly-owned subsidiary”, an “associated enterprise” etc.
Penetrating the veil – for the purpose of fastening liability on the shareholders for the acts of the company or for granting shareholders direct interest in a company’s assets. This does not mean that the company is treated as non-existent; but that despite the company being existent, certain factors require the Court to directly look at the shareholders.
Extending the veil – lifting the veil over one company and then pulling it down to include another entity in the same veil. This is the approach in both ‘single economic entity’ and ‘factual-agency’ arguments.
Ignoring the veil – entirely ignoring the existence of the company as a ‘façade’ or a ‘sham’.
(Note: Until here, this note is an abridged version of an earlier note on the Indian Corporate Law blog. The following three paragraphs try to see how far Justice Munby was correct in relying on an earlier House of Lords judgment)
Hashem v. Shayif relies on several cases to support the “no lifting unless façade” approach, but quite prominently on an observation by Lord Keith in the House of Lords decision in Woolfson v. Strathclyde Regional Council that “it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere façade concealing the true facts.” In my view, this statement – when read in its proper context – does not support Hashem v. Shayif’s conclusions.
In Woolfson, the judgment itself notes, “The appellants’ argument before the lands carried on in the premises was truly that of the appellants, which Campbell conducted as their agents… Before the Second Division this line of argument was abandoned.” Thus, the Court was not required to consider agency-based arguments at all. That left the Court with the arguments of ‘single economic entity’ and ‘façade’. It is in this context that the Court held that a façade was a necessary requirement for lifting the corporate veil.
Woolfson rejected the ‘single economic entity’ argument – that does not mean that it negated agency-based arguments also. The distinction between these two kinds of arguments is in fact strengthened by Adams v. Cape Industries, which rejected the ‘single economic entity’ rationale expressly, but rejected the agency arguments only on the grounds that a factual agency was not established. Thus, the position arising from Adams is that a group of companies cannot be treated as one on the sole ground that the companies are part of the same economic group. However, if it can be established that a company habitually acts according to the wishes of one shareholder, then a factual agency can very well be established. This would allow the Courts to life the corporate veil. In other words, a ‘single economic entity’ argument is based on the premise that two or more companies are part of one economic group; while a ‘factual agency’ argument is based on the degree of control over a company by another (legal or natural) person. Rejection of one argument does not mean rejection of the other.
It appears that this aspect escaped Justice Munby’s attention. A further note on this – and on the interpretation of Adams v. Cape – will be posted shortly. But it does appear that Justice Munby's decision should be confined to the 4th category named by Prof. Ottolenghi, and not be applied to the other categories.
In a recent decision in Enron Corp. v. Argentina (ISCID Case ARB/01/3), available on the ICSID website here, an ad-hoc Committee of the ICSID considered an important issue related to the enforcement of arbitral awards. Under Article 52 of the ICSID Convention, either party may request for the annulment of an ICSID award on certain listed grounds. Under Article 52 (5), an ad-hoc Committee may “if it considers that the circumstances so require, stay enforcement of the award pending its decisions.” In the Enron v. Argentina case, the Committee was called upon to interpret this provision – in particular, although the Committee could grant a stay against enforcement of the award pending a decision on the annulment proceedings, could it grant a stay subject to certain conditions?
The Committee noted that various tribunals had previously assumed that the Committee could grant a stay subject to conditions. However, the Committee thought it fit to consider the matter in depth, considering that the argument that no conditions could be imposed on a stay was a novel argument. The Committee approached the matter from the viewpoint of Articles 31 and 32 of the Vienna Convention on the Law of Treaties. It correctly noted that it is immaterial whether the Respondent state was a party to the VCLT, and Articles 31 and 32 of the VCLT also form part of customary international law. The Committee went on to hold that as the ICSID Convention was silent as to whether conditional stays could be granted, it was open to consider the issue in light of the object and purpose behind the stay provisions.
It was held that stay provisions were included in the ICSID Convention in order to ensure that the ad-hoc committee could properly balance the rights of the parties. In certain cases, it would be impossible to properly balance the rights of parties without granting conditional stays – not granting the stay would severely prejudice one party; while granting an unconditional stay would prejudice the rights of the other party. In such a situation, in order to not allow the object of the stay provisions to be frustrated in such cases, it was necessary to interpret the power to grant stays as including the power to grant conditional stays.
An interesting argument was put forward by Argentina – the preliminary draft of the ICSID Convention contained a special provision for granting of provisional measures in stay of enforcement proceedings, but the actual draft of the Convention did not have this provision. It was contended that this meant that the intention of the drafters was to not allow for any measures other that those specifically mentioned – a ‘stay’ was mentioned; a ‘conditional stay’ was not. However, it would appear that this argument would be true only if (a) the term ‘stay’ itself did not include ‘conditional stay’ and (b) the inference suggested by Argentina was the actual reason for the modification of the draft. With respect to (a), it appears that the Argentinian argument would succeed insofar as it stated that no conditional stay could be granted under any provision other than the stay provision – it does not, however, show that ‘stay’ itself cannot be interpreted as including ‘conditional stay’. Furhter, point (b) – which was the stance taken by the Committee – is also strong, as the decision notes that the inference drawn by Argentina is not strongly substantiated according to the travaux preparatoire. Additionally, the Committee notes, “…the lack of a power to recommend provisional measures under Article 47 could arguably support the conclusion that Article 52(5) must be given a broader, rather than a narrower interpretation, since the ad hoc committee’s power to balance the rights of the parties pending the annulment proceedings would depend solely on Article 52(5).”
One more consideration in this regard can be the general rule of interpretation of treaties which suggests that the practice of states can be a relevant factor in the interpretation of treaties. As a simple example, the UN Charter has been interpreted to mean that a “veto” of a Security Council Resolution by a permanent member means not “absence of positive vote” but “negative vote”. Thus, when a permanent member abstains, it is deemed to have not vetoed the resolution. This interpretation is based on the practice of states. Similarly, in the facts of the instant case, more that 10 similar disputes had arisen – and in not even one of them was an objection taken by any of the states that Tribunals could not grant conditional stays. This could be taken to mean that state practice accepted the interpretation that “stay” includes “conditional stay”. This factor is particularly heightened in the case of the ICSID – as the Committee noted – because of the heightened necessity for stability and predictability.
In Dilip N. Shroff v. JCIT, The Supreme Court had held that in light of the fact that an order imposing a penalty under Section 271(1)(c) of the Income Tax Act is quasi-criminal in nature, the burden lies on the income tax authorities to establish that the assessee had consciously concealed his income. However, in a three-Judge decision in Union of India v. Dharmendra Textiles, it has been held that Dilip Shroff was wrongly decided.
In Dharmendra Textiles, while considering Section 11AC of the Excise Act (which corresponds to Section 271), the Supreme Court has held that Dilip Shroff's case did not consider the weight of Section 276C of the Income Tax Act. Further, the Court reasoned that the enactment of Section 271(1)(c) (when read in light of its Explanations) was clearly to protect the interests of the revenue. Under Section 276C, willful concealment is an essential requirement; but the scheme of Section 271 indicates that it was not the legislative intent to put the burden on the Revenue.
Accordingly, Dilip Shroff has been overruled, and the assessee will now find it harder to fight against penalty proceedings.
A friend sent me an interesting link, and I could not resist putting it up, just to add a touch of humour to this blog... (thanks, Karishma).
Talking about frivolous lawsuits, a man in Nebraska filed a suit against God (!!!), seeking a permanent injunction against "death, destruction and terrorisation... (sic)" caused by God. The suit was dismissed... because... "there can never be service effectuated on the defendant..."
For those who refuse to believe that this actually happened, here is a link to a BBC report.
In my earlier post on the issue of commercial disparagement and comparative advertising, I had stated that "puffing" of one's goods is, on its own, not sufficient to constitute the wrong of comparative advertising. I also mentioned that a Madras High Court judgment was expected on the issue.
Well, it appears from some reports that the judgment is out, and the Court has held that in some circumstances "puffing" may constitute an actionable wrong. I will post a detailed analysis on going through the judgment - I have been unable to access the judgment itself so far.
(Note: The detailed post has now been posted here.)
On the Spicy IP blog, I have posted a note on the decision of the Delhi High Court in the Scrabble v. Scrabulous matter. The Court - in an extremely well-researched and nicely written decision - held that Scrabble was not something which enjoyed the protection of copyright law. Thus, the Agarwalla brothers did not violate any copyright; and could continue with their version of the game. However, they could not call it 'Scrabulous', because 'Scrabble' was entitled to trademark protection; and Scrabulous infringed this.
Overall, leaving aside what I perceive to be a minor flaw, the decision does a great deal - it clarifies the Indian position on 'originality'; it is bound to become the leading authority on the 'doctrine of merger'; it explains the intricate Section 15 of the Copyright Act very well; and it does a good job at analysing the law surrounding 'generic' marks.
(This post continues a discussion on the decision of the ICSID tribunal in Occidental Petroleum v. Ecuador (ICSID Case No. ARB/06/11; Part I of the note had looked at the attitude of the ICSID tribunal on questions where its jurisdiction needs to be determined vis-à-vis competing jurisdiction of domestic Courts. This concluding Part II will look at the ICSID attitude on the requirement for a cooling-off period before arbitration.)
The relevant Treaty in its dispute resolution clause required a six-month waiting period after the dispute arose before it was submitted to arbitration. The rationale behind this was to give the parties an opportunity to settle the dispute without requiring an adversarial procedure. The Respondent state argued that the waiting period was mandatory and was a true jurisdictional requirement. The Claimant on the other hand argued that the requirement was a procedural one which could be waived. The Tribunal seems to have decided on a factual point as to when the dispute actually arose. Nonetheless, the Tribunal also subscribed to the position of law that the waiting period was not mandatory. The Tribunal took note of the fact that the waiting period was essentially to allow parties to reach a negotiated settlement. On the facts of the case, it was noted that the chances of negotiated settlement being reached were rather bleak. Therefore, it was held that even if on facts the dispute had arisen less than six months ago, it was not essential to wait for the period stated in the treaty to expire. The dispute could be submitted to arbitration even before that, provided that attempts at reaching a negotiated settlement would be futile.
One may wonder why the Tribunal did not tackle the issue with the same “literal interpretation” approach as it did in dismissing the Respondent’s first objection (see Part I of this note). One answer may be that the two documents in question were different – in the first case, the Tribunal had to interpret a contract; in the second case as seen in this post, the Tribunal had to interpret a treaty.
(This post was initially posted on the Indian Corporate Law blog linked here)
In a meeting earlier today, the SEBI Board took several decisions which may have an important impact.
1. The Board decided to encourage promotion of dedicated exchanges/platforms for trading of securities for small and medium enterprises. Enterprises with a post issue paid up capital of less that Rs. 25 crore would be listed on such exchanges/platforms.
2. In a move which may have important implications, the Board stated, "Currently a person, along with persons acting in concert, can hold up to 5% of shares in a recognized stock exchange. In order to encourage competition in the exchange space, the Board decided to enhance this limit from 5% to 15% in
respect of six categories of shareholders, namely, public financial institutions, stock exchanges, depositories, clearing corporations, banks and insurance companies."
3. The Board decided to review the framework governing foreign institutional investors. Among other things, it “… undertook a limited review of the FII regime in respect of overseas derivative instruments, popularly known as PNs. This review was due in terms of the decision that was taken along with the decision taken in October 2007. It decided to do away with restrictions on issue of PNs by FIIs against securities, including derivatives, as underlying.”
The SEBI release is available here. The implications of this decision are analysed by Mr. Sandeep Parekh, former Executive Director SEBI and currently a visiting faculty at IIM Ahmedabad on his blog linked here. A Business Standard Report is available here.
A recent edition of the British Tax Review contains an interesting analysis of DTAAs from the perspective of developing countries. The article offers a law-and-economics analysis of the Supreme Court's decision in Azadi Bachao Andolan, and discusses the interpretation of anti-avoidance provisions in the context of DTAAs.
The full citation of the article is: Eduardo Baistrocchi, "The Use and Interpretation of Tax Treaties in the Emerging World: Theory and Implications" British Tax Review, No. 4, 2008. The article can be downloaded from SSRN, linked here.
(In Part I of this note, I will deal with one interesting aspect emerging out of the recent ICSID decision in Occidental Petroleum v. Ecuador; particularly, with the attitude of the ICSID tribunal on questions where its jurisdiction needs to be determined vis-à-vis competing jurisdiction of domestic Courts. Part II will deal with another aspect of the case – also jurisdictional – which deals with the interpretation of clauses requiring a “cooling-off period” before approaching an arbitral institution. These two posts deal with the tribunal's decision on Jurisdiction. An earlier decision on Provisional Measures was discussed on this blog earlier.)
The proliferation of BITs has meant that disputes between foreign investors and host states can be of two typical kinds – (a) alleged breaches of BIT provisions (such as violation of the Most-Favoured-Nation principle, violation of the standard ‘fair and equitable treatment’ clause etc. and (b) alleged breaches of contract (such as violation of the specific terms of the contract between an investor and the host state). Typically, the first category would fall under the domain of international investment law, and the second category of disputes would be resolved by the domestic law of contracts.
While the above formulation appears to be a clear enough division between treaties on the one hand and contracts on the other, problems arise because of a standard clause which is found in almost all BITs. This clause – the “umbrella clause” – essentially requires one contracting state to “observe any obligations it may have entered into with regard to investments of nationals or companies of the other contracting state…” This clause tends to blur the line between contract and treaty. A contract is also an obligation on the host state – does the umbrella clause then mean that breach of the contract is to be construed as a breach of the BIT as well? Two decisions of the ICSID in SGS v. Pakistan (ICSID Case No. ARB/01/13) and SGS v. Philippines (ICSID Case No. ARB/02/6) have taken diametrically opposite viewpoints on this issue. Since the two decisions, debate in international law and arbitration law on the issue has only intensified.
A distinction between treaty and contract claims affects the jurisdiction of arbitral tribunals to adjudicate on the issues between the parties. The jurisprudence of the ICSID is rather confusing on the issue of if, when, and to what extent, the ICSID will yield to the jurisdiction of domestic Courts by categorizing certain claims as ‘contractual’.
In a decision which illustrates the most recent line taken by the ICSID in adjudicating on claims where its jurisdiction needs to be determined vis-à-vis the jurisdiction of domestic Courts, the ICSID tribunal in Occidental Petroleum v. Ecuador (ICSID Case No. ARB/06/11) was called upon to adjudicate upon a contention by the Respondent state that certain disputes arising under a contractual agreement (called the ‘Participation Contract’) fell outside the jurisdiction of the ICSID, and would have to be litigated in Ecuadorian courts.
The relevant BIT contained a clause saying that “investment disputes” would be subject to arbitration in case 6 months have elapsed from the occurrence of the dispute without any settlement being reached.
A clause of the Participation Contract under which the dispute arose stated, “In the event of controversies which may arise as a result of this Participation Contract, in accordance with Ecuadorian law, the Contractor expressly waives its right… to have recourse to any national or foreign jurisdictional body not provided for in this Participation Contract, or to arbitration not recognized by Ecuadorian law or provided for by this contract.”
It was argued by the Respondent state (Ecuador) that this clause constituted an “unequivocal waiver of arbitration”; and narrowed the scope of the arbitration clause in the BIT. The ICSID rejected this argument emphatically, saying “That is simply not what the clause says.” The Tribunal reasoned that if the parties wanted to reject ISCID arbitration, they could have done so in clear and unequivocal language. Presumably, the wording should have expressly said “No ICSID arbitration”.
It is noteworthy that arbitral institutions are often willing to assume jurisdiction in cases of words like “such arbitration as is appropriate for these disputes”. They do not insist on clearly naming the institution (although naming the institution is obviously desirable). What, then, is (in law) the reason for requiring clauses of exclusion of jurisdiction to be any more express? The sanctity of the BIT regime, perhaps?
The ICSID tribunal does suggest one additional reason. It goes on to say the BIT, once it was ratified by Ecuador, became part of the law of Ecuador. Hence, the ICSID arbitration was not an arbitration not recognized by Ecuadorian law. Therefore, the clause in the contract did not apply at all. Perhaps, one would be able to counter this line of reasoning by arguing on the basis of the wording of the clause, particularly on the effect of the words “… waives its right…to have recourse to any national or foreign jurisdictional body not provided for in this Participation Contract, or to arbitration not recognized by Ecuadorian law or provided for by this contract.” I will not go into those details here.
What is noteworthy is that the decision seems to suggest that the ICSID is not willing to ‘cede’ too much territory to domestic courts. If this line of reasoning is followed, perhaps the SGS-type “umbrella clause cases” could also be resolved by holding that an umbrella clause would convert contract-claims into treaty-claims.
In an earlier post on this blog analyzing the decision of the Bombay High Court in the SET Satellite case, I had stated that transfer pricing provisions are often looked upon as anti-avoidance measures. An interesting question which arises then is whether a motive to avoid tax is essential for invoking transfer pricing provisions.
ITAT online reports that the Bangalore Bench of the Income Tax Appellate Tribunal in Philips Software v. ACIT has held that while the motive to avoid tax need not be invoked at the time of initiating transfer pricing provisions, it is required to be shown at the stage of making the assessment, and the AO has to show that the assessee manipulated prices to shift profits outside India.
An earlier post on the Indian Corporate Law blog by Mr. V. Umakanth had looked at some theoretical arguments about whether insider trading should be banned at all. Generally, as the post noted, allowing insider trading does seem “outlandish”. Nonetheless, newer arguments against the prohibition on insider trading do continue to appear in academic works. Of course, this work is not specific to the Indian context, but is rather general in nature.
For instance, an abstract of an article by Professor Robert McGee published in the Journal of Business Ethics (Volume 77, issue 2, 2008) says:
“Insider trading has received a bad name in recent decades. The popular press makes it sound like an evil practice where those who engage in it are totally devoid of ethical principles. Yet not all insider trading is unethical and some studies have concluded that certain kinds of insider trading are actually beneficial to the greater investment community. Some scholars in philosophy, law and economics have disputed whether insider trading should be punished at all while others assert that it should be illegal in all cases. This paper explores the nature of insider trading and analyzes the issues to determine the positive and negative aspects of insider trading, and how policy should be changed. The best hope would be for studies to be made that isolate the individuals or groups who are fraudulently harmed by insider trading. If any such groups exist, then clearly worded legislation could be passed to prevent any fraud from being committed against these individuals and groups, while allowing non-fraudulent transactions to be completed without fear of prosecution. Until it can be clearly determined that someone is fraudulently harmed by insider trading, there should be no law or regulation restricting the practice, since such restrictions violate individual rights and will likely have a negative market reaction.”
Another article published in the Review of Finance (May 2008) seeks to draw a linkage between share repurchases and insider trading. It argues that wherever share repurchases are allowed, insider trading should also be allowed as a logical corollary. The reasoning is evident from the abstract, which states “This paper considers share repurchases as the way long-termshareholders preserve their ability to use corporate informationfor speculative purposes when insider trading regulation isenforced. This use of corporate information increases the adverseselection losses of short-term shareholders. Thus, buy-backprograms reduce their incentive to invest in stocks that backthe most productive technology, leading to a socially inefficientequilibrium. It follows that insider trading should not be bannedwhen share repurchases are allowed. More generally, the paperargues that the regulation of insider trading and repurchasescan not be considered in isolation, and analyzes their interplay.”
The Delhi High Court is hearing arguments on a case dealing with the constitutionality of Section 377 of the Indian Penal Code. Lawyers Collective is posting excellent minutes of the arguments before the Court, available here.
The minutes point to (another) rather strange submission by the Union of India. The Union had originally sought to argue on grounds of morality. Now, in an extremely strange argument, the Union relied on A.K. Gopalan to argue that restrictions on Article 21 cannot be challenged if enacted by a valid law. Rather strange, given the numerous judgments on "procedure established by law" in Article 21.
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