Links of Interest: Glenmark (meaning of 'work') and Digest of Cases

1. Shantanu Naravane has discussed the recent judgment of the Bombay High Court in Glenmark here. The decision deals with the meaning of work under Section 194C of the Income Tax Act, 1961. A summary of the decision is available on ITAT Online here, and the judgment can be downloaded from the same link. Justice Chandrachud laid down the test as follows:

“A contract for sale has hence to be distinguished from a contract of work. Whether a particular agreement falls within one or the other category depends upon the object and intent of the parties, as evidenced by the terms of the contract, the circumstances in which it was entered into and the custom of the trade. The substance of the matter and not the form is what is of importance. If a contract involves the sale of movable property as movable property, it would constitute a contract for sale. On the other hand, if the contract primarily involves carrying on of work involving labour and service and the use of materials is incidental to the execution of the work, the contract would constitute a contract of work and labour. One of the circumstances which is of relevance is whether the article which has to be delivered has an identifiable existence prior to its delivery to the purchaser upon the payment of a price. If the article has an identifiable existence prior to its delivery to the purchaser, and when the title to the property vests with the purchaser only upon delivery, that is an important indicator to suggest that the contract is a contract for sale and not a contract for work.”

2. The ITAT Online digest of cases for March 2010 is available here.

Setting aside an Arbitral Award: Limitation and Fresh Grounds

Bar & Bench reports that the Satyam-Venture dispute is now likely to be back before the Supreme Court. Following the controversial decision of the Supreme Court of India in Venture Global v. Satyam, (2008) 4 SCC 190, the Supreme Court had subjected even foreign awards to challenge u/s 34 of the Arbitration and Conciliation Act, 1996. Dipen Sabharwal of White & Case has discussed the ruling here.

Bar & Bench discusses the subsequent developments as follows:

“… Pursuant to the Supreme Court judgment, the matter was remanded to the Hyderabad Civil Court. While the matter was pending before the Hyderabad Civil court, the Chairman of Satyam, Ramalinga Raju confessed to a major fraud by his January 7, 2009 letter. Later, Tech Mahindra bid for Satyam and was rebranded as Mahindra Satyam. Venture then moved a petition before the Civil Court seeking to bring on record various documents and pleadings regarding the fraud arising out of the Ramalinga Raju’s letter and sought to challenge the foreign arbitral award on the basis of Raju’s letter. The Civil Court allowed Venture’s petition. Mahindra Satyam filed an appeal before the High Court. The Division Bench of the A.P. High Court speaking through Justice V.V.S. Rao in a detailed judgment held that the statement made by Ramalinga Raju and the subsequent details of investigation have no nexus whatsoever with the foreign arbitral award and are therefore irrelevant for evaluating the validity of the foreign arbitral award in favour of Satyam. The High Court also held that Venture’s application was time barred. The Arbitration Act gives a party only 90 days to file a petition to challenge an Award. Venture had filed a petition almost three years after the Award was delivered. The Court held that a party challenging the Arbitral Award cannot file an amendment or introduce fresh facts on record after the time limit for challenging the Award has expired. The High Court also held that the party is precluded from raising fresh grounds in the challenge proceedings before the Civil Court, which were not raised before the Arbitrator.”

The judgment of the High Court seems to be based on the principle laid down by a Division Bench of the Bombay High Court in Vastu Invest & Holdings Pvt. Ltd. v Gujarat Lease Financing, that, “a ground not initially raised in the petition to challenge the award would not be permitted to be subsequently raised by the amendment if the application for amendment itself was beyond the limitation fixed for filing the petition challenging the award”. The judgment is available here.

Forum Non Conveniens: When is the natural forum not the appropriate forum?

A recent decision on the England & Wales High Court – Cecil v. Bayat – elucidates the position of law in relation to one aspect of the doctrine of forum non conveniens. The law on the point is usefully summarised in the case, and the following discussion draws heavily from the judgment..

The leading case on forum non conveniens in English law is Spiliada Maritime v. Cansulex, [1987] AC 460. The principles of Spiliada have been recently summarised in Cherney v. Deripaska. Briefly, in cases where the English Court’s jurisdiction is in dispute, the plaintiff must demonstrate that English Courts are “clearly the appropriate forum”. The “natural forum” is that forum with which the proposed action has the “most real and substantial connection”. Relevant factors in determining this most real and substantial connection are those concerning convenience of the parties, expenses, governing law, details about the transactions etc. If England is the natural forum, then it will also be “clearly the appropriate forum”, and English Courts will proceed with the matter. However, even if England is not the natural forum, English Courts will proceed with the matter where the actual natural forum is such that “justice cannot be achieved there”. This legal position emerges from reading Spiliada along with decisions such as The Abidin Daver, [1984] AC 398 (and more recently In Alberta Inc. v. Katanga Mining, [2008] EWHC 2679). Next in the development of law in this regard must be considered the case of Banco Atlantico v British Bank of the Middle East [1990] 2 Lloyd's Rep 504, which expanded the meaning of the phrase “justice cannot be achieved there”. In that case, Lord Bingham held that a party who had a “good arguable claim” under the proper law could not be made to litigate in a jurisdiction where its claims would be summarily rejected. In the facts of that case, the natural forum was UAE, and the proper law was Spanish law. However, the Court held that UAE did not have a developed conflict of laws system and would not apply Spanish law. Consequently, in UAE, the claim would be summarily dismissed. In this context, the Court overturned the lower decision staying English proceedings.

In sum, the natural forum - which is to be found on the basis of the most real and substantial connection - is presumed to be clearly the most appropriate forum; but this presumption does not hold if the actual natural forum is one where justice cannot be achieved. The position this far is summarised in Cecil v. Bayat thus: “A claimant must establish a factor that makes England appropriate, or an otherwise natural forum inappropriate or unavailable, by "cogent evidence". But this does not involve a mini-trial, nor does it involve reaching a conclusion on the balance of probabilities. Where a claimant asserts that another forum is not available because of the risk that something will happen, this does not need to be proved on the balance of probabilities. Rather, the claimant must show on cogent evidence that there is a "real risk" of it happening…”

In a subsequent post, I will examine some other aspects of the Court’s ruling in Cecil v. Bayat.

Porrits & Spencer: Reaffirming Form over Substance

I had previously highlighted the decision of the Punjab and Haryana High Court in Porrits & Spencer here. I have discussed the decision in more detail on Indian Corporate Law. The post is available here.

Inter-state Trade and Commerce: Atiabari and Automobile Transport to be reconsidered

The law on inter-state trade and commerce has been elaborately discussed by Niranjan in an article in the Indian Journal of Constitutional Law. His article is available here.

Niranjan’s argument, summed up in his concluding remarks in the article, is:

"(The development of law in this area) was visible in three distinct phases. It began in Atiabari where the Court evolved the first limitation to the language of Article 301, to substantially reduce the scope of its application, by holding that it applied only to ‘direct and immediate restrictions’ on the ‘movement of trade’. Automobile went further, and evolved the theory of compensatory and regulatory measures. After Atiabari and Automobile, therefore, the Court’s interpretation of Article 301 strongly favoured the Provinces – only a law which directly and immediately restricted an aspect of trade intimately connected to transportation would be struck down, and that too only if it failed to benefit trade. Even this law could be saved with Presidential consent… The legacy of the first phase was precisely defining the fundamental premise of a compensatory tax, i.e. the doctrine of proportionality. In other words, a tax is compensatory only if it benefits trade, and it is entirely outside the purview of Article 301 only if it is compensatory. Structural consistency, however, is something that the second and third phases of Supreme Court jurisprudence cannot boast of, largely because of ignoring this fundamental premise. By holding that every law passed under a certain legislative field is compensatory (Entry 56, List II), Bolani Ores and Tourist Corporation wrongly assumed that a law could be adjudged to be compensatory without reference to the quantum of exaction or benefit, the first inroad into the premise of proportionality. It was, however, merely the tip of the iceberg. Bhagatram and Bihar Chamber of Commerce were next, expressly rejecting the idea that proportionality was required for a tax to be compensatory. The last distortion, introduced by Hansa Corporation and Geo Miller, was by far the most absurd, suggesting that a tax is compensatory if it compensates the ‘State’ for loss of revenue. Thus, what had begun in Automobile as the simple proposition that ‘a tax is compensatory if it proportionately benefits trade’ was changed to ‘a taxing entry is compensatory, regardless of the law passed under it’, and then to ‘a tax which does not benefit trade proportionately is still compensatory’, and then to ‘a tax is compensatory if it benefits the State’. Jindal rightly overruled Bhagatram and Bihar Chamber of Commerce… Jindal, therefore, has ensured that “provincial autonomy” is not a licence to ignore canons of interpretation or the provisions of the Constitution. As a matter of evaluation, Provincial autonomy is not significantly curtailed even after Jindal – the State can now pass any law which it could after Automobile, so that only a blatantly discriminatory law or one which substantially affects the movement of trade will be subject to scrutiny. This is clearly not an excessive fetter on provincial legislative autonomy, since it ensures that the object of Part XIII, i.e. the economic unity of the country is not frustrated."

As Jindal affirmed, Atiabari (5 Judges) as interpreted in Automobile Transport (7 Judges) is the law of the land on the point. However, these two cases did not settle all the questions on the point – and a set of ten questions was again referred to the Constitution Bench recently. On 16^th April, 2010, the Constitution Bench of Justices S.H. Kapadia, Altamas Kabir, B. Sudershan Reddy, P. Sathasivam, and S.S. Nijjar has referred the matter to an even larger Bench; for reconsideration of the judgments in Atiabari and Automobile Transport. The order of the 5 Judge Constitution Bench of the Court in Jindal Stainless v. State of Haryana, dated 16^th April 2010, states:

“Applying the tests laid down in the aforestated two cases, i.e., Keshav Mills Co. Ltd. and Central Board of Dawoodi Bohra Community (supra), we find that on number of aspects a larger Bench of this Court needs to revisit the interpretation of Part XIII of the Constitution including the various tests propounded in the judgments of the Constitution Bench of this Court in the aforestated two cases, namely, Atiabari Tea Co. and Automobile Transport (Rajasthan) Ltd. (supra). Some of these aspects which need consideration by larger Bench of this Court may be briefly enumerated. Interplay/interrelationship between Article 304(a) and Article 304(b). The significance of the word "and" between Article 304(a) and (b). The significance of the non obstante clause in Article 304. The balancing of freedom of trade and commerce in Article 301 vis-`-vis the States' authority to levy taxes under Article 245 and Article 246 of the Constitution read with the appropriate legislative Entries in the Seventh Schedule, particularly in the context of movement of trade and commerce. Whether Article 304(a) and Article 304(b) deal with different subjects? Whether the impugned taxation law to be valid under Article 304(a) must also fulfil the conditions mentioned in Article 304(b), including Presidential assent? Whether the word "restrictions" in Article 302 and in Article 304(b) includes tax laws? Whether validity of a law impugned as violative of Article 301 should be judged only in the light of the test of non-discrimination? Does Article 303 circumscribe Article 301? Whether "internal goods" would come under Article 304(b) and "external goods" under Article 304(a)? Whether "per se test" propounded in Atiabari's case (supra) should or should not be rejected? Whether tax simpliciter constitutes a restriction under Part XIII of the Constitution? Whether the word "restriction" in Article 304(b) includes tax laws? Is taxation justiciable? Whether the "working test" laid down in Atiabari makes a tax law per se violative of Article 301? Inter-relationship between Article 19(1)(g) and Article 301 of the Constitution? These are some of the questions which warrant reconsideration of the judgments in Atiabari Tea Co. Ltd and Automobile Transport (Rajasthan) Ltd. (supra) by a larger Bench of this Court… For the aforestated reasons, let this batch of cases be put before Hon'ble Chief Justice of India for constituting a suitable larger Bench for reconsideration of the judgments of this Court in Atiabari Tea Co. and Automobile Transport (Rajasthan) Ltd. (supra).” 

A detailed analysis of the law on the point will follow subsequently.

Substance-over-form: Recent UK Approach

In most debates around avoidance/evasion distinction, reference is made to the classic English cases. In this background, it might be useful to consider the latest approach of the English Courts to tax planning activities. The latest case on the point appears to be Commissioners for HM Revenue & Customs v. Tower MCashback LLP. This case however relies on the statement of the law on the point in the judgment of Arden LJ in John Astall v. HM Revenue & Customs, [2009] EWCA Civ 1010. Justice Arden analysed the recent case law carefully, and discussed in detail the recent judicial approach.

It was stressed in the judgment that the question is to be answered not by beginning with pre-conceived ideas about the legitimacy or illegitimacy of tax avoidance, but rather by beginning with the rules of statutory interpretation. “The essence of the new approach was to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description.”

The Court then explained cases such as Inland Revenue v. Burmah Oil Co Ltd., 1982 SC (HL) 114, Furniss v. Dawson [1984] AC 474, and Carreras Group Ltd v. Stamp Commissioner, [2004] STC 1377. Broadly speaking, in these cases, it had been held that tax-saving steps inserted into a transaction without any other commercial purpose do not prevent the composite transaction from falling within a charge to tax. In the words of the Court, “Thus in the Burmah case, a series of circular payments which left the taxpayer company in exactly the same financial position as before was not regarded as giving rise to a "loss" within the meaning of the legislation. In Furniss, the transfer of shares to a subsidiary as part of a planned scheme immediately to transfer them to an outside purchaser was regarded as a taxable disposition to the outside purchaser rather than an exempt transfer to a group company. In Carreras the transfer of shares in exchange for a debenture with a view to its redemption a fortnight later was not regarded as an exempt transfer in exchange for the debenture but rather as an exchange for money. In each case the court looked at the overall effect of the composite transactions by which the taxpayer company in Burmah suffered no loss, the shares in Furniss passed into the hands of the outside purchaser and the vendors in Carreras received cash. On the true construction of the relevant provisions of the statute, the elements inserted into the transactions without any commercial purpose were treated as having no significance...” Importantly, the Court then went on to clarify, “Cases such as these gave rise to a view that, in the application of any taxing statute, transactions or elements of transactions which had no commercial purpose were to be disregarded. But that is going too far.” 

Thus, merely because in Furniss a certain form was disregarded does not mean that Furniss is authority for a general substance-over-form view. In sum, the question is not so much about whether Courts should adopt a substance-over-form approach or a form-over-substance approach – the real question to ask is what approach the particular statutory provision at issue requires. And this is to be answered not by reference to judicial anti-avoidance techniques, but by reference to the rules of statutory interpretation.

Appeals in Temporary Injunction matters: Standard of review

In an earlier post, pointing to two linked posts on Spicy IP, I had highlighted the Indian law on temporary injunctions, under which it is not entirely clear whether Indian Courts should follow the test laid down by Lord Diplock in American Cynamid, or whether they should follow the modified approach of Series 5. The difference between the two approaches can be narrowed down to the understanding of what ‘prima facie case’ involves – is it a case where a victory on merits is possible, or is it a case where a victory on merits is probable? I had argued that the Indian case-law can be read as moving away from the latter (Series 5) approach back to the former (Cynamid) one.

One more important question is – assume that the Court of first instance has granted an injunction (or has refused to grant an injunction) and the matter is appealed. What is the test to be used by the appellate Court? Ordinarily, one would have thought that a complete review can be undertaken as to whether the Court of first instance adopted the correct legal test; and substantial deference can be given to the trial Court’s factual conclusions. A recent decision of the Supreme Court however opens the door for an argument that substantial deference should be given to the lower Court on both questions of law, as well as questions of fact. The Supreme Court stated in Skyline Education v. S.L. Vaswani, (2010) 2 SCC 142, “… once the Court of first instance exercises its discretion to grant or refuse to grant relief of temporary injunction and the said exercise f discretion is based upon objective consideration of the material placed before the court and is supported by cogent reasons, the appellate court will be loath to interfere simply because ona  de novo consideration of the matter it is possible for the appellate court to form a different opinion on the issues of prima facie case, balance of convenience, irreparable injury and the equity…” Notably, the Court does not clarify whether it is referring to reconsideration of the factual issues only, or of the legal issues too. Ordinarily, this would not create much difficulty – the legal standard would be presumably certain. It is submitted that the paragraph in Skyline extracted above should be read to refer to reconsideration of only the factual issues.

Azadi and McDowell again: P&H High Court

I have previously discussed the relationship between Azadi Bachao Andolan and McDowell, and had concluded that the relationship between the two cases is as held by the Bombay High Court in Akshay Textiles, that “…the ratio of McDowell as understood by the Supreme Court in Azadi Bachao Andolan is the law, considering that that is how the Supreme Court understood the ratio decidendi of the judgment in McDowell…” The same view is evidently taken by the AAR in E*Trade Mauritius. This position has been confirmed by the Punjab and Haryana High Court in Porrits & Spencer v. CIT. The relevant observations are as follows:

“The argument of the learned counsel for the revenue-respondent based on the judgment rendered in the case of McDowell & Co. Ltd. (supra) cannot be accepted because the judgment rendered by Hon’ble Mr. Justice O. Chinnappa Reddy in McDowell’s case has been explained in detail by the later judgment of Hon’ble the Supreme Court in the case of Azadi Bachao Andolan (supra). It is well settled that if a smaller Bench of Hon’ble the Supreme Court has lateron explained its earlier larger Bench then the later judgment is binding on the High Court. In that regard reliance may be placed on a Full Bench judgment of this Court rendered in the case of State of Punjab v. Teja Singh, (1971) 78 PLR 433. Speaking for the Bench, Hon’ble Mr. Justice S.S. Sandhawalia observed as under:- “Now it is trite learning to say that when an earlier judgment of the Supreme Court is analysed and considered by a latter Bench of that Court then the view taken by the latter as to the true ratio of the earlier case is authoritative. In any case latter view is binding on the High Courts.”

Section 195: Special Bench refuses to follow Samsung

Previously on the blog, we have extensively discussed the questions around TDS under Section 195, the implications of the Supreme Court decision in Transmission, and the correctness of the judgment of the Karnataka High Court in Samsung. As noted by Shantanu in this post, the Delhi High Court appeared to have taken a different view, although the Delhi judgment is not entirely clear on the point.

A Special Bench of the Tribunal has now expressly disagreed and has refused to follow the decision in Samsung. The decision of the Special Bench, ITO v. Prasad Production, is available here.

The Tribunal held that the law laid down by the Supreme Court is that liability to deduct at source under Section 195 arises only when the sum paid is chargeable. Importantly, the Special Bench then negated the Revenue’s argument that even though chargeability was essential, the assessee could not decide on the chargeability himself, and was bound to deduct tax in every case unless an application was made before the Revenue. This line of argument was rejected, and the Special Bench noted, “… in our view, it is the payer who is the first person to decide whether the payment he is making bears any income character or not…” Consequently, the Tribunal came to the conclusions, first, that if the payer’s bona fide belief is that no part of the payment would be chargeable, then the question of withholding u/S 195 does not arise at all. Secondly, if the payer’s bona fide belief is that the whole of the payment is chargeable, then deduction u/S 195 must be made. Thirdly, if the payer’s bona fide belief is that only a part of the payment is chargeable, then he can make an application u/s 195(2). If he does not make such an application, then he will have to deduct tax on the whole payment.

The issue will hopefully be conclusively settled in the by the Supreme Court.
 

3rd Annual NLSIR Symposium: Indian Corporate Law and Governance - April 10 and 11, 2010

The NLSIR Symposium, scheduled for 10 and 11 April at the NLS campus in Bangalore, will feature several important topics in corporate law and tax. The schedule for the symposium is indicated below. Readers interested in attending may contact us by email (mihircn-at-gmail-dot-com) as soon as possible, since on-campus accommodation is subject to availability.

SCHEDULE

3^rd NLSIR SYMPOSIUM

Indian Corporate Law and Corporate Governance: At the Crossroads

Presidential Address (April 10, 09:00): Hon'ble Mr. Justice A.K. Ganguly, Supreme Court of India 

Session I

The Corporate Veil and Tax Planning

April 10 – 10.00-13.00

Panel

Ms. Bijal Ajinkya, Nishith Desai Associates (Theme TBA)

Mr. Padam Khincha, Khincha & Co. (The Corporation as a Tax Planning Measure)

Mr. Udaya Holla, Senior Advocate* (Theme TBA)

Mr. Sanjit Rajayer, NLSIU (The Existence and Relevance of the McDowell Rule: An Analysis of Substance-over-form and the use of the Corporate Vehicle in Tax Planning)

Moderator: Mr. Nishith Desai, Nishith Desai Associates

*Subject to confirmation

Vice-Chancellor's Lunch in Honour of the Guest of Honour Hon'ble Justice Ganguly 

Session II

The Role of the Independent Director and the Statutory Auditor in Modern Corporate Governance

April 10 – 14:00 – 17:00

Panel

Mr. V. Umakanth, National University of Singapore (Aspects of Corporate Governance)

Mr. Somashekhar Sundaresan, Jyoti Sagar Associates (Theme TBA)

Professor Sandeep Parekh, IIM Ahmedabad (Role of Independent Directors – Lessons from Satyam)

Ms. Priyoma Majumdar and Ms. Sadapurna Mukherjee, NALSAR (Excessive Executive Remuneration)

Moderator: Mr. Shishir Vayttaden, Luthra & Luthra 

1800-1830: Departure for Banquet

Session III

Session 3: Company Adjudication and Tribunalisation of Justice

April 11 – 09:30 – 12:30

Panel

Mr. Vivek Reddy, Advocate (The Constitutionality of Tribunalisation)

Ms. Kristin van Zwieten, University of Oxford (The adjudication debate – courts versus tribunals: lessons from corporate insolvency law)

Mr. Aditya Sondhi, Advocate (Theme TBA)

Nathan Rehn and Ami Galani, Jindal Global Law School (Related-Party Transactions: Empowering Boards and Minority Shareholders to Prevent Abuses)

Moderator: Mr. V. Umakanth

Session IV

Session 4 – The Road Ahead for Indian Corporate and Commercial Law

April 11 – 14:00-17:00

Panel

Mr. T.P. Ostwal, Ostwal & Associates (Anti-Abuse Mechanisms in the Direct Tax Code: A Comparative Study)

Mr. Siddharth Raja, Narasappa, Doraswamy and Raja (Holding-Subsidiary Matrix, Overseas Corporate Bodies, Entrenchment: Does the new Bill Improve on the 1956 Act?)

Mr. Sandip Bhagat, S&R Associates (The New Companies Bill: Some Practical Considerations)

            Mr. Shishir Vayttaden, Luthra & Luthra (Aspects of Securities and Takeover law)