Uphold the Agreement instead of rushing to step in…

In a recent judgment, the Supreme Court of India advised courts in the country to first ensure that the remedies provided for in an agreement, pertaining to the appointment of an Arbitrator, must first be exhausted, before the court appoints an arbitrator. The Court held that the terms of the agreement should be adhered to and given effect as closely as possible. 

Whatever be the name, it is the intent that matters! Consortium/JV is an AOP and liable to pay Income Tax…

The Authority for Advance Ruling held that a joint venture can be treated as an association of persons (AOP) and is liable to be assessed as such under the Income Tax Act, 1961(“ITA”) when all the partners of J.V. have joined in for common purpose on their own volition to produce income which is shared in certain ratio. It was held that the fact that payments from the client get credited in the respective Bank accounts of the J.V. members will not be of much help to the applicant, because it is a J.V

You are an idiot only if you can prove it!!

According to the Supreme Court, “An idiot is one who is of non-sane memory from his birth, by a perpetual infirmity, without lucid intervals: and those are said to be idiots who cannot count upto 20, or tell the days of the week or who do not know their fathers or mothers or the like”. Based on the Evidence Act, the court further held that it was for the accused to prove they were idiots or otherwise of unsound mind. It is not understood how a person who fits into the definition can be burdened with onus of proof!!

If a person can prove that he/she is an idiot, can you truly call them an idiot??

Trainees are not employees…at least not for PF

The Supreme Court has held that Trainees/ Apprentices are not employees under the Employees Provident Fund and Miscellaneous Provisions Act, 1952 and have no right to employment. An employer is not liable to pay Provident Fund contribution for them.

Better safe than sorry! Importance of Corporate House Keeping…

A US company (Petitioner) filed a petition for winding up a Joint Venture Company (JVC) on just and equitable grounds under the Companies Act, 1956 because there was total deadlock on joint venture and management of the JVC. The Petitioner claimed being a 50% shareholder in the JVC since the original shareholder (also a US company) was merged into the petitioner company and hence ceased to exist.

The JVC and the other shareholder objected to the maintainability of the petition on several grounds including that the Petitioner was not a shareholder on the JVC’s register and, therefore, had no standing to maintain the petition for winding up; that the registered holder of 50% of the equity share capital of the JVC is the original JV Partner, which has ceased to exist; that at no point of time, any application for transfer of share certificates and/or substitution of the name of the Petitioner had been made; that the assignment of shares to the Petitioner was without the consent of the JVC and the other partner and therefore was contrary to the Shareholders Agreement and could not be given effect to.

The term "contributory" means every person liable to contribute to the assets of a company in the event of its being wound up, and includes the holder of any shares which are fully paid-up.

The Petitioner argued that the JVC as well as the shareholder had all along accepted the Petitioner as shareholder and that there was no ''assignment'' as contemplated under the Shareholders Agreement and, therefore, no consent of JVC and/or other shareholder was required. The Petitioner also asserted that it has stepped into the shoes of the original JV Partner, which has ceased to exist and was entitled to maintain a petition for winding up of the Company.

Therefore, the question before the Court was whether the Petitioner who was not a promoter and whose name was not entered in the Register of Shareholders/ Members can maintain the petition as a contributory?

The Court held that the petition is not maintainable by the petitioner in the capacity as a contributory because of the stipulation in Section 439 (4) (b) of the Companies Act. This section provides that a contributory shall not be entitled to present a petition for winding up a company unless the shares in respect of which he is a contributory, or some of them, either were originally allotted to him or have been held by him, and registered in his name, for at least six months during the eighteen months immediately before the commencement of the winding up, or have devolved on him through the death of a former holder.

Another interesting question which arose was –Can the original shareholding company which got merged with the petitioner and therefore ceased to exist   can be said to have died? And can it be said that the shares have devolved on the Petitioner through the death of former holder? According to the Petitioner the merger in the petitioner of the original shareholder the latter had effectively met its “civil death”, and its shares had then devolved upon the petitioner.

The Court held that use of the word ‘death’ normally applies to the death of a natural person and not of corporate entities.

This judgment seems to be a first dealing with the subject and highlights the importance of complying with technical requirements, like ensuring that the shares are issued and registered appropriately to protect the interests of the concerned party. Those who sleep over their rights may lose it.

Certainly a ‘Person’ in its own right! German Partnership firm eligible for Treaty Benefits

The Mumbai Bench of the Income Tax Appellate Tribunal (“ITAT”) held that a Limited Partnership Firm with the suffix “GmbH and Co. Kg”, incorporated under the law of Germany, is a “person” as defined in the India-Germany Double Taxation Avoidance Agreement (DTAA) because it is assessed for “Trade Tax” in Germany and would be entitled to benefits under the India-Germany Tax Treaty. 

Mere illusion? Of course not! The loss is “actual” says the Apex Court… Sanctity of the Production Sharing Contract

In a recent Judgment the Supreme Court of India had the occasion to examine Production Sharing Contract (PSC) with certain special provisions under the Income Tax Act, to see whether certain ‘translations’ (such as currency gains and losses) fall within the scope of Section 42 and will be guided by the terms of the PSC?

The Court observed that PSC is a contract in which the Central Government is not only a party; rather it is a partner in the process. Such contracts are required to be placed before each House of Parliament under Section 42. PSC has an independent accounting regime which includes tax treatment of costs, expenses, incomes, profits etc. It prescribes a separate rule of accounting. In normal accounting, in the case of fixed assets, when currency fluctuation results in exchange loss, an addition is made to the value of the asset for depreciation. However, under the PSC, instead of increasing the value of expenditure incurred on account of currency variation in the expenses itself, the E&P Contractor is required to book losses separately. "PSC accounting" obliterated the difference between capital and revenue expenditure. Therefore, PSC represented an independent regime. The shares of the Government and the contractors were also determined on that basis

It was held that expenses deductible under Section 42 had to be determined as per the PSC. This implied that expenses had to be accounted for, only as contemplated by the PSC. If so read, it is clear that the primary object of the PSC is to ensure a fair "take" to the Government. The said "take" comprised of profit oil, royalty, cesses and taxes.

The capital contribution had to be converted under the PSC at one rate whereas the expenditure had to be converted at a different rate. This exercise resulted into loss/profit on conversion. The question before the Court was whether translation losses are illusory or real? According to the Department, they are illusory losses. The Court held that they are not illusory losses, but actual losses and held in favour of the E&P Contractor.

A much-needed shot-in-the-arm! Overseas investment in Hospitals

In keeping with ‘Health as High priority’, the RBI has allowed Registered Trusts and Societies which have set up hospital(s) in India to make investment in the same sector in a Joint Venture or Wholly Owned Subsidiary outside India, with prior approval. 

Look before you leap! RBI plays the good watchdog…

To safeguard the interest of the unsuspecting common man against unscrupulous conmen, the RBI has issued caution against lottery and other fictitious money-circulation schemes designed to lure/defraud the public. The caution basically reiterates that remittances in any form, towards participation in lottery / lottery-like schemes, functioning under different names, such as money-circulation-scheme or remittances for purposes of securing prize money/awards etc. is prohibited under Foreign Exchange Management Act, 1999. 

The ‘Magic Lamp of Alladin’ grants yet another wish! Mobile banking gets official nod

Modernisation of Banking sector and Payment Systems in India has certainly come a long way from Cash based systems to Card based and now moving towards virtual accounts and e-payments. (Refer the August Edition of our Newsletter) As always the magic of the market-place where Consumer is King has led to launching of new services in the form of Internet Banking, Mobile Banking, National Electronic Funds Transfer (NEFT) and Cheque Truncation System.

The Payment and Settlement Systems Act, 2007 designated the Reserve Bank of India (RBI) authorised to regulate and supervise payment systems in India.

Moving forward on the matter, the RBI has recently issued the operative guidelines for mobile banking transactions enabling bank customers in India to transfer funds from an account in one bank to any other account in the same or any other bank on real time basis, irrespective of the mobile network a customer has subscribed to.

According to the RBI, a transaction limit of INR 2,500 should be imposed per mobile banking transaction. This is subject to an overall cap of Rs 5,000 per day, per customer, it said. Banks may also put in place monthly transaction limits depending on each bank’s own risk perception regarding any individual customer.

The Guidelines require the banks to devise/have an effective mechanism by way of risk-mitigation measures like fraud checks, AML checks etc depending based on the bank’s own risk perception unless specifically mandated by the Reserve Bank.

Yet another instance of Regulator turning Facilitator!

The much-awaited makeover…Indian Companies Act in its proposed New ‘Avatar’

As the Government of India reportedly plans introducing the Companies Bill, 2008 in Parliament, hopes for a long overdue modernisation of company law seem close to fulfilment.

The review/redrafting of the Companies Bill was carried out by an Expert Committee through a consultative process, by eliciting views of various Ministries, Departments and Government Regulators.

Primarily intended to revitalise the Corporate reality of emergent India the Bill aims to bring it at par with the international best practices geared towards fostering/facilitating entrepreneurship, investment and growth.

The Bill, with its thrust on Good Corporate Governance, is expected to emphasise:

·   Stronger protection of the rights of minority stake-holders; responsible self-regulation with disclosures and accountability; substitution of government control over internal corporate processes and decisions by shareholder control.

·   A new entity in the form of One-Person Company.

·   Retains the concept of Producer Companies, while providing a more stringent regime for ‘not-for–profit’ companies to check misuse.

·   Expansion of e-Governance initiative of the Ministry of Corporate Affairs (MCA-21) to all processes of compliances and also provide access to corporate data through internet to all stakeholders, round the clock.

·   Relaxation of extant restrictions which limit the number of partners in entities (e.g. partnership firms, banking companies)to a maximum 100 - with no ceiling as to professions regulated by Special Acts.

·   Mandatory consolidation of financial statements of subsidiaries with those of holding companies.

·   Single forum for approval of M&As along with concept of ‘deemed approval’ in certain situations.

·   Revised framework for insolvency, including rehabilitation, winding-up and liquidation of companies, based on models suggested by the United Nations Commission on International Trade Law (UNCITRAL).

·   Consolidation of fora for dealing with rehabilitation of companies, their liquidation and winding up in the single forum of National Company Law Tribunal with appeal to National Company Law Appellate Tribunal. Special Courts to deal with offences under the Bill.

From Dependence to Inter-Dependence…The changing dynamics of Defence Procuremt

In keeping with the overall leitmotif of India’s economic and technological sophistication, the Ministry of Defence has unveiled the much-awaited revised policy for defence purchases.

Effective September 1, 2008, Defence Procurement Policy or DPP 2008, envisages the long-term goal of indigenisation of India’s defence requirements. Towards this, the policy provides for a private company to have an industrial licence only if stipulated under the licensing requirement for the defence industry, issued by the ministry of commerce.

The salient distinguishing feature of DPP 2008 over DPP 2006 is the introduction of “Banking of defence offsets”. This needs to be understood against the background of the emerging reality of India with its own captive market for defence products, is fast becoming an attractive and favoured destination to forge strategic alliances towards more cost-effective production. Banking of offset credits will allow foreign vendors to bank credit and claim it as an offset against defence contract(s) signed subsequently.

Additionally the policy provides that where the foreign vendor in collaboration with its Indian JV partner is bidding for a defence procurement contract and offers indigenously developed product, to an extent of at least 50%, there the offset obligation would not be applicable. It is legitimately expected that this Win-Win proposition will secure greater engagement of global industries in promotion of indigenous defence industry in India.

Unadulterated Abundance… ‘Reliance’ on Nature’s Bounty

Graphically described as a “huge factory set-up on the sea bed 7000-8000 feet under water”, with “temperatures close to freezing” and “run entirely with robots” it is truly a gigantic leap forward towards the country’s energy security. This ambitious project is attributable to Reliance Industries Ltd which has commercially started pumping oil from its field in the Krishna-Godavari basin off the Andhra coast.

It is expected that from an initial flow of 5,000 barrels a day, the total oil and gas output from the field could potentially rise to 5,50,000 barrels a day in 18 to 24 months. Pegged at about 40 per cent of the current indigenous production in India, the project is clearly poised towards enhancing India’s energy security as well as substantial savings on oil import bills for the country.

No wonder this is claimed to be the fastest exploration and production effort in any deep water basin in the world!

Equally gratifying is the dawning awareness that the country has even more hydrocarbon treasure-troves waiting to be discovered deep below the eastern seabed!

Indeed a heart-warming thought! 

Quick. Qualitative. Quasi-Judicial…

The ‘Alternative’ Route to Dispute Resolution

Long-acknowledged as a wonderfully effective mechanism for settling international commercial disputes, the ‘Permanent Court of Arbitration’ (PCA), is slated to establish its branch facility on Indian soil soon. The Union Cabinet recently gave its nod for setting up of a “Regional Facility (RF) of the PCA for South Asia” in New Delhi.  The RF is envisaged to provide same services as the parent body based at The Hague, Netherlands.

Established under the 1899 Convention for the Pacific Settlement of International Disputes, the PCA took initial shape at the first Hague Peace Conference. The 1899 Convention was revised in 1907 at the second Hague Peace Conference. India had acceded to the Convention on July 29, 1950.

Clearly a positive step in the right direction, it is reasonable to hold that of the proposed RF would become a veritable platform for Dispute Resolution, national and international in a speedy and cost-effective manner.