In an earlier post, I had discussed the Madras High Court judgment in Colgate Palmolive v. Anchor, where the Court adopted a new approach to the issue of comparative advertising. The judgment is important for one more reason. It appears to hold that in order to issue a temporary injunction, the Court need not always look at whether the plaintiff has suffered irreparable injury.
The relevant paragraph in the judgment is as follows:
74. Therefore, on the analogy of the same principle, this Court is also competent to issue appropriate interim orders, in the light of the finding that the respondent is guilty of unfair trade practice, by projecting their product as the only product containing 3 ingredients and as the first product to provide all round protection. Even by their own admission, the claim of the respondent as being the ONLY and FIRST toothpaste is not intended to convey the meaning that it does. Therefore the plaintiffs have a prima facie case. Since it is in public interest not to permit the respondent to continue with such a misleading claim, the balance of convenience is not in favour of the respondent. Applying the test laid down in para 24 (vii) of the decision of the Apex Court in Colgate Palmolive case, it is clear that when public interest is involved, the question of allowing the wrong to continue on the ground that it can be adequately compensated in terms of money, does not arise.
Thus, it appears that in the view of the High Court, a finding of irreparable injury is not necessary if the public interest is being violated. Typically, the plaintiff must necessarily show irreparable injury before he is granted a temporary injunction. It remains to be seen whether the view of the Madras High Court is adopted by any other High Court.
A recent decision of a Division Bench (Justices Vikramjit Sen and Bhayana) of the Delhi High Court in Ford Motor Co. v. C.R. Borman is perhaps the first decision to examine the concept of dilution in Section 29 (4) of the Trademarks Act, 1999. The decision is particularly important for its holding that ‘dilution’ under the Section does not require a finding of confusion. I have posted a note on Spicy IP discussing the case.
The judgment presents the following picture of 'dilution' under Section 29 (4):
Section 29 (4) is an exception to the general scheme of the Act which requires the “likelihood of confusion” approach. ‘Dilution’ under the Section does not require a finding of confusion.
In the ultimate analysis, mere similarity of marks and the fact that a mark has a reputation in India are not sufficient. There must be proof of unfair advantage in trial.
While the Court did not lay down exhaustively the test for determining when a mark can be said to have a “reputation”, it does have the merit of equating the concepts of “marks with reputation” and “well-known marks”. The legal tests for the two are presumably the same.
A analysis of the concept of dilution under common law and a comparison with the position under the statutory framework is provided by Dr. Dev Gangjee in an article available on SSRN.
Shantanu Naravane has posted on an important decision (CIT v. Daga Capital) of a Special Bench of the Income Tax Appellate Tribunal dealing with several aspects of Section 14A of the Income Tax Act. His note on the decision (which included a dissenting opinion by the vice-president) is available here.
In an earlier post, I had mentioned that the Madras High Court had decided a case involving claims of commercial disparagement through comparative advertising. I have now been able to access the judgment, and it raises several difficult questions (and provides equally difficult answers) on the law relating to “puffery”. In another post dealing with the issue earlier, based on a judgment by the Delhi High Court, I had suggested that “Merely puffing one’s goods is not actionable, unless this results in slander of the plaintiff’s goods.” The Madras High Court judgment (Colgate Palmolive v. Anchor, O.A. Nos. 493 and 494 of 2008 in C.S. No. 451 of 2008) takes a different view.
The judgment of the Madras High Court makes use of the Consumer Protection Act, 1986; indicating that a comparative advertising claim involves not just the rights of the two parties but also the interests of the consumers. The Judge mention, “I have my own doubts regarding the applicability of English decisions to the issue of disparaging advertisements.”Importantly, the Court stated (para 67 of the judgment):
The law as it developed from the decision of the Calcutta High Court in Reckitt Colman v. M.P.Ramachandran upto Godrej Sara Lee case(Delhi High Court), on the basis of English precedents, recognises the right of producers to puff their own products even with untrue claims, but without denigrating or slandering each other's product. But the recognition of this right of the producers, would be to de-recognise the rights of the consumers guaranteed under the Consumer Protection Act,1986. To permit 2 rival traders to indulge in puffery, without denigrating each other's product, would benefit both of them, but would leave the consumer helpless. If on the other hand, the falsity of the claim of a trader about the quality and utility value of his product, is exposed by his rival, the consumer stands to benefit, by the knowledge derived out of such exposure. After all, in a free market economy, the products will find their place, as water would finds its level, provided the consumers are well informed. Consumer education, in a country with limited resources and a low literacy level, is possible only by allowing a free play for the trade rivals in the advertising arena, so that each exposes the other and the consumer thereby derives a fringe benefit. Therefore, it is only on the touchstone of public interest that such advertisements are to be tested. This is why the Supreme court held in Tata Press case that "Public at large is benefited by the information made available through the advertisement." As a matter of fact the very basis of the law relating to Trade Marks is also the protection of public interest only, since the courts think of an unweary purchaser, who may buy a spurious product on the mistaken impression that it was brand 'x'. The same logic should form the basis for an action in respect of disparaging advertisements also.
Further, the Court went on to the following 7 principles in relation to the law on comparative advertising (para 68 of the judgment):
(a) Publication of advertisements being free commercial speech, is protected by Article 19(1) (a) of the Constitution, as per the dictum of the Apex Court in Tata Press case.
(b) There are a few restrictions on the aforesaid right, which would satisfy the test of reasonableness under Article 19(2). These restrictions could be traced to the definition of the term "unfair trade practice" in Section 36 A of the Monopolies and Restrictive Trade Practices Act, 1969 and Section 2(1)(r) of the Consumer Protection Act, 1986.
(c) Therefore, only if a case of disparaging advertisement falls within the definition of the term "unfair trade practice", an action may lie. It would lie before a Consumer Forum, at the instance of a consumer or a group of consumers or a voluntary consumer association or even the Central or the State Government (see the definition of the word "complainant" under Section 2(1)(b) of the Consumer Protection Act). It may even lie before the MRTP Commission. (or the Competition Commission after it is constituted).
(d) An action may lie against such an advertisement before a civil court both at the instance of a manufacturer or marketer and at the instance of a consumer (since Section 3 makes the Consumer Protection Act an additional law and not a law in derogation of any other law), provided that the advertisement in question contains a false representation coming within the 4 corners of sub-clauses (i) to (x) of Clause (1) of Section 2(1)(r) of the Consumer Protection Act.
(e) A careful scrutiny of all the sub-clauses in Section 2(1)(r) of the Consumer Protection Act would show that 4 types of representations are categorised as "unfair trade practices" namely (1) false representations falling under sub-clauses (i), (ii) and (iii); (2) representations which may not necessarily be false but are nevertheless incorrect coming under sub-clauses (iv) and (v); (3) warranty or guarantee coming under sub-clauses (vii) and (viii); and (4) false or misleading representations falling under sub-clauses (vi), (ix) and (x). If an advertisement contains a false representation within the meaning of sub clauses (i) to (iii) or an incorrect representation within the meaning of sub clauses (iv) and (v) or a warranty or guarantee within the meaning of sub clauses (vii) and (viii) or a false or misleading representation or fact within the meaning of sub clauses (vii), (ix) and (x) of Clause (1) of Section 2(1)(r) of the Consumer Protection Act, then an action may lie.
(f) In the light of the above statutory prescription, it is doubtful if false claims by traders, about the superiority of their products, either simplicitor or in comparison with the products of their rivals, is permissible in law. In other words, the law as it stands today, does not appear to tolerate puffery anymore. I do not know if "Puffing" which is only a twin sister of "bluffing", permitted by English courts in the past, still has the sanction of law even in England, after the advent of 'legacy regulators' such as CAP, Oftel, Ofcom, Clearcast etc., and the issue of The Control of Misleading Advertisement Regulations,1988 (as amended by Regulations of 2000) and the enactment of the Communications Act, 2003.
(g) An advertisement which tends to enlighten the consumer either by exposing the falsity or misleading nature of the claim made by the trade rival or by presenting a comparison of the merits (or demerits) of their respective products, is for the public good and hence cannot be taken to be an actionable wrong, unless 2 tests are satisfied namely (i) that it is motivated by malice and (ii) that it is also false. This is on account of the fact that a competitor is more well equipped to make such an exposure than anyone else and hence the benefit that would flow to the society at large on account of such exposure, would always outweigh the loss of business for the person affected. If 2 trade rivals indulge in puffery without hitting each other, the consumer is misled by both, unless there is increased awareness or Governmental intervention. On the other hand, if both are restrained from either making false representations/incorrect representations/ misleading representations or issuing unintended warranties (as defined as unfair trade practice under the Consumer Protection Act), then the consumer stands to gain. Similarly, permitting 2 trade rivals to expose each other in a truthful manner, will also result in consumer education.
(Emphasis supplied)
The impact of this decision is that comparative advertising claims are to be looked at taking into account the principles of “unfair trade practice” and the Consumer Protection Act. At first glance, the following points arise:
Is there not a separate tort of commercial disparagement? Why is the content of that tort to be determined by the Consumer Protection Act and not independently?
If “puffing” a product does indeed lead to harming the interests of consumers, why not leave that for a separate action by a consumer? Why give an additional ground to the competitor?
The judgment does not cite the latest decision of the Delhi High Court in Reckitt Benckiser v. Hindustan Lever, 2008 (38) PTC 139 (Del), which appeared to maintain that mere puffery is not actionable. It considers the line of cases upto Godrej Sara Lee, 2006 (32) PTC 307 (Del). It then goes on to disagree with this string of cases on the issue of puffery. It is worth mentioning that the judgments which allowed puffery did so in the context of tort claims between competitors. They did not in any way sanction puffery if it violated statutory provisions of the Consumer Protection Act. They drew a clear line in viewing the tort separately. The Madras judgment does not provide a sound reason as to why this distinction should not be maintained.
In view of the judgment, it will be useful if the Supreme Court admits an appeal and resolves the conflict among the High Courts (preferably, going the Delhi way).
(Update: I have posted on this judgment on Spicy IP. The post is linked here)
Last week, the Supreme Court in the case of CIT v. India Cine Agencies pronounced upon an important issue in taxation, namely, the meaning of the term “manufacture”. Essentially, the question was whether the conversion of Jumbo rolls of photographic films into small flats and rolls in desired sizes amounted to “manufacture”. The assessee had filed an appeal contending that the above process was equivalent to “manufacture”.
The Court (per Pasayat J.) expressed the position in the following words:
Manufacture implies a change but every change is not manufacture, yet every change of an article is the result of treatment, labour and manipulation. Naturally, manufacture is the end result of one or more processes through which the original commodities are made to pass. The nature and extent of processing may vary from one class to another. There may be several stages of processing, a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. Whenever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. But it is only when the change or a series of changes takes the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place. Process in manufacture or in relation to manufacture implies not only the production but also various stages through which the raw material is subjected to change by different operations. It is the cumulative effect of the various processes to which the raw material is subjected to that the manufactured product emerges. Therefore, each step towards such production would be a process in relation to the manufacture. Where any particular process is so integrally connected with the ultimate production of goods that but for that process processing of goods would be impossible or commercially inexpedient, that process is one in relation to the manufacture (emphasis added).
The Court then proceeded to allow the assessee’s appeal. Thus, according to the Supreme Court, conversion of Jumbo photographic rolls into small rolls does amount to manufacture. Intriguingly, only a few months ago, a Special Bench of the Income Tax Appellate Tribunal held (relying on the same test) that pasteurization of milk was not a process which amounted to manufacture. It remains to be seen whether this is the correct conclusion, especially given this judgment of the Supreme Court.
The Delhi High Court recently decided an interesting point relating to the interpretation of arbitration agreements in SIEL Ltd. v. Prime Industries (OMP 419 and 468 / 2006). The relevant facts are straightforward.
A contract between the parties contained the following arbitration clause.
18. ARBITRATION
All disputes between the parties hereto arising out of this agreement shall be referred to an arbitrator appointed by Indian Council of Arbitration, New Delhi, and the provisions of the Indian Arbitration Act for the time being in force shall be applicable to such reference. Such reference will be decided as per the rules of Indian Council of Arbitration. The award decision so given shall be final and binding upon the parties.
According to this clause, disputes between the parties were to be referred to arbitration under the Rules of the Indian Council of Arbitration (ICA). Rule 20 (b) of the ICA Rules mandated that where the dispute involved a sum greater that Rs. 50 lakhs, a panel of three arbitrators would be formed to adjudicate upon the dispute. In the facts of the case, a dispute arose between the parties involving a sum of greater than Rs. 50 lakhs. However, the ICA did not form a three-member panel; but referred the dispute to a Sole Arbitrator. Presumably, the reason for this was that the arbitration clause referred to “an arbitrator”. This was taken to mean “one arbitrator”; and the phrase “rules of the Indian Council of Arbitration” was reasoned to be subject to this requirement of “an arbitrator”. The award of the arbitrator was challenged before the Delhi High Court on grounds of improper constitution of the tribunal; and the Court had to decide whether the applicable rules of the ICA would be subject to the phrase “an arbitrator”.
It might appear that the argument in relation to “an arbitrator” is highly legalistic; and “an arbitrator” should be understood as “an arbitrator or arbitrators”. However, it is worth noticing that ordinarily, most arbitration agreements refer the dispute to “arbitration” and not to “an arbitrator”. Indeed, the standard clause recommended by the ICA itself uses the term “arbitration”. In view of this, it is possible to contend that the use of “an arbitrator” was a clear expression of contrary intent.
It does not appear from a reading of this judgment that this line of argument for deciphering the arties’ intent was put before the Court. The Court held (relying on an Orissa High Court decision in Gayatri Projects v. State of Orissa):
The term an arbitrator is to be understood in the context of the parties' desire for arbitration; the parties further wanted the arbitration to be in accordance with the ICA rules, which envisaged that in such claims, the tribunal was to be of three arbitrators. This was also the initial understanding of ICA, which for inexplicable reasons, later stated that the parties had agreed to a sole arbitrator. Prime Industries has been unable to point to any material or letter, in support of such consent, which can be the only justification, in terms of Rule 21(b) of the ICA rules. Apart from these, the court cannot overlook the fact that at the contract formation stage, the parties had access to ICA rules, which stipulated that such claims were to be adjudicated by three arbitrators. The parties, or one of them, proceeded to agree to arbitration, on the premise of decision by three arbitrators, as embodied in Rule 21(b) cannot be ruled out. As against this, the contentions of Prime Industries Ltd. that the term in Clause 18 is to be understood as an intention to have a sole arbitrator, are weaker. Not only is the evidence contrary to that understanding, but also the fact that the expression an arbitrator cannot be torn out of context; it would mean adjudication through arbitration, or simply, a generic reference to alternative dispute resolution through arbitration, in accordance with rules of ICA.
In view of the above reasons, the court is of opinion that SIEL has established that composition of the arbitral tribunal was not in accordance with the agreement between the parties, which incorporated Rule 21(b); the parties did not agree to decision by a sole arbitrator.
While the Court noted that the parties had access to the ICA Rules, it did not take into consideration the effect of the deviation of the arbitration clause in the agreement from the “standard” arbitration clause recommended by the ICA. It appears that once a reference is made to any institutional rules of arbitration, the Court will try to construe any ambivalent terms in the arbitration agreement in harmony with the Rules referred to. Thus, if parties intend any modifications to those Rules, the wording in the arbitration clause must be unambiguous and must not permit of an interpretation in harmony with the Rules.
Earler on this blog, I briefly discussed the concept of "umbrella clauses" in international investment treaty arbitration. I had stated:
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.
This issue is addressed in the latest issue of Arbitration International (Volume 24, Issue 3) in an article by Professor Crawford. Professor Crawford had an extremely important role to play in framing the International Law Commission's Draft Articles on State Responsibility, and is among the foremost international law scholars. His article is an important contribution to the literature on the subject. Unfortunately, I have not come across a free-access internet link to his article. Nonetheless, Professor Crawford had dealt with the same subject in a lecture on "Treaty and Contract in Investment Arbitration", which is available here.
A digest of several recent income-tax cases decided by Courts and Tribunals in India is available on the website of the Mumbai ITAT Bar Association. The Digest is linked here.
On Spicy IP, I recently posted two posts (linked here and here) discussing the recent judgment of Justice Ravindra Bhat of the Delhi High Court in Chancellor Masters of Oxford v. Narendra Publishing. The posts dealt with the standard of originality required under Indian law, and also with the requirement of a “prima facie’ case for the purpose of granting a temporary injunction. The following is what I said on prima facie cases:
(For the discussion on the meaning of “prima facie” case, I am particularly indebted to a paper by Shantanu Naravane and V. Niranjan, 4th year students at the NationalLawSchool of India University, Bangalore, which is presently under review by a leading journal. Unfortunately, the paper is not available online.)
Under English law, the leading case on the requirements for granting a temporary injunction was the American Cyanamid case (House of Lords). According to Lord Diplock’s speech, a “prima facie” case would be made out if the plaintiff raised a “serious question to be tried”. All that was required was that this “serious question” test be satisfied – it was not necessary for the plaintiff to demonstrate a reasonable possibility of success at trial. A “serious question” was considered to be any question which was not “frivolous or vexatious”. This was a low burden – as long as the plaintiff’s case was not frivolous or vexatious, the requirement of a prima facie case would be made out. The merits of a parties case are not to be considered at this stage under the Cyanamid test. Now, it is arguable that the English position has changed and a greater burden is posed on the plaintiff according to the Series 5 Software (1996 C.L.C. 631). According to Series 5, in order to establish a prima facie case, the relative strengths of the claims of the parties can also be looked at. Nonetheless, Series 5 is a Court of Appeal decision, while Cyanamid is a case decided by the House of Lords. English Courts have therefore shown reluctance to go along with Series 5, and the recent approach seems to indicate that Cyanamid is in general still the law in England.
I now turn to the Indian position. The Supreme Court has pronounced on the relevance of the Cyanamid test several times; unfortunately, the Supreme Court decisions have not been exceptionally clear. For instance, in Wander Ltd. v. Antox (1990) SCC (Supp) 727, the Court appeared to approve the Cyanamid “serious question test; however, it did not express a clear opinion on the issue. In Power Control Appliances v. Sumeet Machines, the Supreme Court relied upon Cyanamid (which does not require the plaintiff to demonstrate a reasonable probability of success) and also on a 1957 Madras High Court decision (K. Aboobacker v. Nanikram Maherchand, 1957 (2) Madras LJ 573) which said that reasonable probability of success was a major factor in deciding whether a prima facie case was made out. The Court did not clarify how it could rely on these two directly contradictory lines of reasoning. This confused state of affairs caused several High Courts to cite Cyanamid but resort to a comparison of the relative strengths of the claims of the parties. In Colgate Palmolive v. Hindustan Lever, the Supreme Court approved of the decision in Series 5, but it clarified that Series 5 must not be read changing the Cyanamid position. The Court also said that the no opinion should be expressed on the merits; yet, the relative strength of the parties’ claims should not be ignored. It appears that the only way to reconcile all these observations is to consider the relative merits of the parties’ cases as one of the factors in determining the balance of convenience, and not in assessing whether a prima facie case is made out.
However, this was not the final word. In a recent pronouncement in M. Gurudas v. Rasaranjan, the Court again went back to the “serious question” test. In Cyanamid, a serious question was considered to be a question which was not merely frivolous or vexation. In Gurudas, however, the Court considered a serious question to be a something more than a “mere triable issue”. One of the most recent decisions discussing this whole area of law is the Cipla decision of the Delhi High Court. On this blog (Spicy IP), the Cipla decision has been extensively covered. It is important because of its introduction of “public interest” as a factor in granting interim injunctions in patent cases. However, even from the point of view of the general law on “prima facie case” in injunctions, the decision is important. In the words of the Court, “… the courts should follow the approach indicated in American Cyanamid…The first aspect to be considered is whether the plaintiff had an arguable case…”
So where does that leave Indian law? I would argue that given the reasoning of Gurudas,the Indian law on “prima facie case” is that there must be a serious question raised by the plaintiff; in the sense that the plaintiff’s claim must not be vexatious, and that there should be some possibility of success. I would read Gurudas as moving away from the Series 5 approach and closer to Cyanamid. If the plaintiff can show that he has some possibility of success and that his claim is not vexatious, then he must be held to have satisfied the requirement of “prima facie” case. There should not be a comparative examination of the respective merits of the parties’ claims/arguments – that examination is a matter best left for the trial stage. What is relevant is the possibility of success, not the probability. The relative strengths of the parties’ cases should be used as a “tipping factor” in case it is difficult to establish in whose favour the balance of convenience lies. This – in my opinion, based on the existing case law and the rationale behind grant of temporary injunctions – is the correct position of law in India.
The full posts are available on Spicy IP at the above links. What I have argued is not the only possible way of reconciling all the cases on the point. There is a strong case that Colgate should not be read together with Gurudas. One can also argue that despite Gurudas, Colgate would still govern interim injunctions in IP matters. Nonetheless, I believe that an approach closer to Cyanamid is favourable.
In an earlier post, I had discussed the arguments in the Golf in Dubaicase before the Authority for Advanced Rulings. The case revolved around the interesting issue of the degree of permanence required for a permanent establishment. When does a “place of business” become a “fixed place of business”? In this post, I will look at the decision of the AAR.
The AAR held:
The Golf course can be held to be a “place of business” during the days when the golf tournament is conducted. Having regard to the nature of business, even the short duration during which business is carried out is sufficient to render the course a “place of business”.
However, “taking an overall view, we are unable to hold that by organizing and conducting golf tournament at the Delhi or Bangalore Golf Course for a week’s duration without repetition thereof the applicant has carried on business through a fixed place in India. On the basis of a solitary or isolated activity during the year, it is difficult to infer the existence of PE within the meaning of Article 5.1 of the Treaty.”
For a place of business to become a “fixed” place, there must be a degree of regularity. Mere intention to hold future tournaments is not sufficient – there must be something more concrete than mere intention.
Thus, the decision does recognize that the nature of business activity is relevant in determining whether a particular location is a “place of business”. At the same time, there must be a certain pattern of regularity discernible before the place of business can be termed a fixed place of business. Thus, assuming that the golf tournaments are held at the same location for a number of years, it is possible to conclude that the golf course would be treated as a “fixed place of business” as it would be possible to demonstrate a pattern of regularity. As the Authority rightly notes, “The example of a salesman erecting a sales-stand regularly every week in three markets in Netherlands is not apt because in the case of salesman, the weekly visit is indicative of regularity, whereas in the present case the element of regularity is absent.”
In a decision on provisional measures in the Occidental Petroleum case, the ICSID held that it had the power to award provisional measures even before determining its jurisdiction, if it was satisfied prima facie that it did have jurisdiction. In an earlier post covering that decision, I had noted the conclusion of the ICSID tribunal that “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.” In the recently published decision on provisional measures in Railroad Development Corporation v. Republic of Guatemala, the Tribunal has reiterated that it can grant provisional measures at any stage of the proceedings. It appears that a settled body of case-law points to the fact that the ICSID can grant provisional measures even before determining its jurisdiction.
The provisional measures decision in Railroad Development Corporation v. Guatemala is significant for one more reason. The Claimant had requested for an interim order directing the Respondent to preserve “all documents” in the Respondent’s possession, custody or control “relating to” matters connected with some listed matters. The Respondent on the other hand argued that the test for whether interim orders should be made or not under the ICSID was of urgent necessity coupled with a determination of the balance of convenience. The question was – how was this test to be applied to questions relating to protection of documents? The Respondent argued that the Claimant’s request was exceptionally broad. It contended that a request to preserve all documents “relating to” some of the aspects of the dispute was essentially a “US-style pre-trial discovery ‘fishing expedition which has no place in international arbitration…” It was contended that a broad request requiring the Respondent to preserve “all documents relating to” the specified matters was exceptionally broad and cast an undue burden on the Respondent. It argued that common-law standards of discovery should not be imposed on civil-law countries. In its Reply, the Claimant said that its request was not unduly burdensome and it was fair to include “all documents” reasonably “related to” the listed matters. In any event, the legitimate expectations of claimants from common-law countries ought to be protected.
The Tribunal held, “The conclusion of Professor Schreuer (based on the travaux of the ICSID Convention) is that ‘provisional measures will only be appropriate where a question cannot wait the outcome of the award on the merits…’ This seems a reasonable conclusion but it does not imply that the necessity must be ‘absolute’ or that the Tribunal not act unless such a high threshold of necessity exists. Since no qualifications to the power of an ICSID tribunal to recommend provisional measures found their way in the text of the ICSID Convention, the standard to be applied is one of reasonableness, after consideration of all the circumstances of the request and after taking into account the rights to be protected and their susceptibility to irreversible damage should the tribunal fail to issue a recommendation. Based on this standard … the Claimant has not shown that circumstances exist which would justify a recommendation of provisional measures.”
The decision suggests that a determination of this necessity is not to be based on considerations of what the approach taken in other legal systems (either common-law or civil law) is; rather, the determination must be based on an objective consideration of the facts. It must be seen whether the request is necessary from an objective viewpoint looking purely at the facts of the dispute and not at the background of the parties to the dispute.
In Bell Group v. Westpac, decided late last month by an Australian Court (Supreme Court of Western Australia, first instance), Owen J. dealt with several issues of interest to company lawyers. A lot of the discussion focuses on the duties of directors; including the duty to act in the best interests of the company and the duty to avoid conflicts of interest. I will comment on some aspects of the judgment in another post later, as I have not yet managed to read the entire judgment.
The factual background does seem extremely complex. It will be interesting to note that the judgment runs to 9762 paragraphs. Yes, nine thousand seven hundred and sixty-two. It also has 24 schedules and more than 500 footnotes (including “William Shakespeare, ‘Timon of Athens’, III v 96”). The judge notes the several difficulties he faced in the trial, saying (paras 9761-9762), “From time to time during the last five years I felt as if I were confined to an oubliette. There were occasions on which I thought the task of completing this case might be sempiternal. Fortunately, I have not yet been called upon to confront the infinite and, better still, a nepenthe beckons. Part of the nepenthe (which may even bear that name) is likely to involve a yeast-based substance. It will most certainly involve a complete avoidance of making decisions and writing judgments.”
On the legal issues involved, at first glance, the judgment appears to contain a deep analysis of the nature of the duty of directors to act in the best interests of the company. The Corporate Law and Governance Blog highlights the following paragraph in this connection (paragraph 4395):
It is, in my view, incorrect to read the phrases ‘acting in the best interests of the company’ and ‘acting in the best interests of the shareholders’ as if they meant exactly the same thing. To do so is to misconceive the true nature of the fiduciary relationship between a director and the company. And it ignores the range of other interests that might (again, depending on the circumstances of the company and the nature of the power to be exercised) legitimately be considered. On the other hand, it is almost axiomatic to say that that the content of the duty may (and usually will) include a consideration of the interests of shareholders. But it does not follow that in determining the content of the duty to act in the interests of the company, the concerns of shareholders are the only ones to which attention need be directed or that the legitimate interests of other groups can safely be ignored.
The judgment itself is accessible here; and an analysis on the Corporate Law and Governance blog is found here.
A recent decision of the Authority for Advanced Rulings (In Re Golf in Dubai, A.A.R. No. 770/2008) answers some interesting questions dealing with the concept of a “permanent establishment”. The AAR was called upon to decide the tax liability in India of a foreign company carrying out short-term business activities in India on a regular basis. Can a foreign company carrying out activities in India on a sporadic basis be said to have a permanent establishment in India? What exactly is a “fixed place of business” in India? What is the degree of permanence required before a place of business can be characterized as “fixed”? The decision is particularly interesting because of the detailed description of the arguments on both sides. In this post, I will look at some of the arguments advanced in the case; and the subsequent post will look at how the AAR dealt with those arguments.
The facts
The Applicant was an ‘event-organization’ company registered in the UAE. It was engaged in the business of promoting golf nationally as well as internationally by way of organizing golf tournaments in different countries. Accordingly, the applicant organized two golf tournaments in India. In order to organize the tournaments, the applicant entered into a formal ‘venue agreement’ with the Delhi Golf Club. It agreed to pay the golf club a fee of US$ 80000 in consideration of granting of the right to use the premises of the Club to host a golf tournament. The tournament itself was to be sponsored by an Indian company named EMAAR-MGF. A formal sponsorship agreement was also entered into between the applicant and EMAAR-MGF presumably to host golf tournaments for a future period of three years.
The golf tournaments in 2008 were organised on a ‘remote’ basis, by hiring independent third part local contractors and suppliers. These independent contractors were compensated for their services, and the total payment (after withholding tax) was made by the applicant to the independent contractors. The applicant intended to continue organizing the gold tournaments in future years as well.
The applicant received income from the Indian sponsors EMAAR-MGF for organizing the golf tournaments. This was (in accordance with the sponsorship agreement) on account of expenses incurred, management fee, and income from sale of merchandise at the venue.
The questions before the AAR
The applicant sought an advance ruling on, inter alia, the following questions:
1. Whether the Applicant could be deemed to have a Permanent Establishment (“PE”) in India in terms of Article 5 India-UAE DTAA?
2. Whether the Delhi Golf Club could be deemed to be an agency PE of the applicant in India?
The questions raise important considerations relating to the degree of ‘permanence’ latent in the concept of PEs. Detailed arguments were advanced before the authority.
The arguments of the Applicant
The Applicant argued on the following lines:
The Applicant did not have a fixed place of business through which the business of the applicant is wholly or partly carried on in India.
‘Fixed place of business’ connotes a specific geographic location of the enterprise. The activities at the location must be carried out for more than a temporary period, say for more than six months.
The so-called business of ‘organizing golf tournaments’ lasted only 6-7 days; and the required degree of permanence was absent.
Additionally, there can be no ‘service PE’ in the facts of the case as the Applicant’s employees or other personnel never stayed in India for furnishing services.
There can be no ‘agency PE’ as the third party contractors involved were independent contractors who were acting in the ordinary course of their business.
The Revenue’s arguments
The arguments for the Revenue proceeded on the following lines:
The Applicant does have a PE in India under Article 5(1) of the DTAA.
The Applicant proposes to organize similar golf tournaments in India on a regular basis. Tournaments are planned in 2009 and 2010 also. Thus, there a pattern of regularity in holding such events is discernible.
As such, the golf courses must be taken to be the PE of the Applicant in India.
If an enterprise has a certain amount of space at its disposal which is used for the business activities, it is sufficient to constitute a “place of business” (OECD Commentaries; paras 4, 4.1 and 4.6).
“Maintaining the same pitch in a market place for a weekly market” would be sufficient to constitute a “fixed place of business” (Klaus Vogel). Analogously, in the present case, considering the fact that regular annual tournaments were planned, there was enough of a regularity to constitute a “fixed place of business”.
The short period where the place of business is not the only consideration. It was inherent in the nature of the business itself that the place would be used for short durations. Therefore, the relevant consideration is not the quantum of time but the presence of a pattern of regularity. For this point, the authority of Klaus Vogel was relied upon.
The Applicant’s reply
The Applicant in reply made the following strong points:
The Revenue’s argument is based on the premise that the very same golf courses would be used in future tournaments in 2009 and 2010 as well. But the sponsorship agreement dealing with future events is merely one going to the organization of future events; it does not in any way cast any obligation on the Delhi Golf Club to make the Club’s course available for future tournaments. In fact the Club was not even a party to the sponsorship agreement. Given this factor, it cannot be said that the course is a “fixed place of business”.
The test laid down by the Andhra Pradesh High Court in the Vishakhapatnam Port Trust case 144 ITR 146 mandated the existence of a substantial element of an “enduring or permanent nature”.
Non-exclusive and limited access to the space of the Club’s course cannot be enough to constitute a PE.
(From this, it is clear that the basic clash between the parties was over the question of when a “place of business” can be regarded as a “fixed place of business” and therefore, a permanent establishment. Ordinarily, “fixed” might be said to involve temporal considerations. However, the actual requirements of duration must – it would appear – be dependant on the nature of the business. What is “fixed” for one type of business need not be “fixed” for another type of business. In Part II of this post, I will analyse the decision of the Tribunal; and will look at the requirements for categorizing a place of business as a “fixed” place of business.)
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