MERGERS AND ACQUISITIONS
1.Eaton Corporations vs. Chairman, Securities and Exchange Board of India 18 July, 2001
Merger between two oversees companies resulting in indirect acquisition of Indian subsidiary and approved under the foreign law falls under exemption provided under regulation 3(1) (j) and therefore order by SEBI to comply with regulation 12 does not hold good.
Eaton Corporation is a company incorporated and existing under the laws of the State of Ohio, in the United States of America. Eaton Industries Inc., also incorporated in Ohio, was its wholly -owned subsidiary. Eaton Industries Inc., pursuance to an Agreement and Plan of Merger, merged with another company namely Aeroquip Vickers Inc. which is also incorporated under the laws of the State of Ohio. Aeroquip Vickers Inc. has a wholly-owned subsidiary by the name Aeroquip Corporation, incorporated and existing under the laws of the State of Michigan in the United States of America. The said Aeroquip Corporation has a fully owned subsidiary by the name Vickers Inc. Said Vickers Inc. incorporated under the laws of the State of Delaware in the United States of America holds 51 per cent in the share capital of its subsidiary namely Vickers System International Ltd. (VSIL), which is a public company incorporated in India, under the Companies Act, 1956. Eaton corporation subsidiary i.e., Eaton Industries merged with Aeroquip Vickers Inc. and it continued to exist and became the wholly- owned subsidiary of Eaton Corporation. As a result, name of its subsidiaries underwent change – the name of Aeroquip Corporation changed to Eaton Aeroquip Inc., Vickers Inc. changed to Eaton Hydraulics.
Respondent felt that the control over VSIL has undergone huge changes and thereby attracting the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (the Regulations). The respondent concluded that Eaton Corporation has acquired control over VSIL without making a public announcement to acquire shares from the shareholders of VSIL in terms of regulation 12 of the Regulations. The respondent submits that the announcement ought to have been made within 4 days from the date the parties entered into agreement in terms of regulation 14(1) and 14(3) of the Regulations. Accordingly, the respondent vide order dated 24-4-2001 directed the appellant to make a public announcement within 30 days from the date of the order to acquire shares from the shareholders of VSIL in accordance with the relevant provisions of the regulations.
Counsel on the side of appellant argued that the merger has the required approval of state of Ohio and in light of automatic exemption available under regulation 3(1) (j) (ii), the requirements under various regulations are not attracted. The second line of argument submitted was that if there arises any automatic change in the controlling interest, as a result of change in the ownership of the ultimate holding company, that should not be considered as To have caused an acquisition of shares or control in the subsidiary for the reason that a company is a separate legal entity from its shareholders and as long as the holding company entity as such has not changed, controlling interest in the subsidiary remains unchanged. Additionally, the counsel submitted that the provisions of SEBI act is confined to the territory of India and therefore the respondent is not empowered to pass an order directing the appellant, which is an overseas company, to comply with the same, that an order which is not legally enforceable.
Respondents argued that automatic exemption provided under regulation 3(1)(j)(ii) is applicable to the mergers and acquisitions of the target company located in India but in the present case the merger has taken place in USA and therefore the regulation would not be applied. Moreover, as per the respondent the said merger has resulted in change in control of the target company and therefore the shareholders and investors ought to have been a chance to either continue or exist and therefore, compliance under regulation 12 becomes necessary.
The court after considering the arguments of each party accepted to the fact that Aeroquip Vickers Inc. which was the ultimate holding company of VSIL, became a subsidiary of the Eaton Corporation as a result of the merger of Eaton Industries, its 100 per cent subsidiary, with the said Aeroquip Vickers Inc. it is also clear that the merger has been effectuated in the country which permits this merger and thus has approval from the laws of state of Ohio. Further, the court ruled that there has been an indirect acquisition over VSIL owing to the merger between said entities even if there being no direct acquisition of shares of VSIL by Eaton Corporation. Regulation 12 when read together with regulation 2(b) takes into account indirect acquisition as well and therefore as in the present case where the acquisition is by way of chain of subsidiaries would attract the provisions of Regualtion12. However, regulation 3(10 exempts certain kind of acquisition from the purview of regualtion10, 11 and 12. Court referred to the specific exemption as provided under regulation 3(1) (j) reads as under:-
Regulation 3(1)-(j) pursuant to a scheme:
(i) Framed under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986);
(ii) Of arrangement or reconstruction including amalgamation or merger or demerger under any law or regulation, Indian or foreign;”
As already mentioned, that the said merger has the approval of the laws of the State of Ohio. In these circumstances the survival of Aeroquip Vickers Inc. being the transferee-company as a 100 per cent subsidiary of the appellant, cannot be considered as a factor which would take off the case from the purview of regulation 3(1)(j)(ii). From the fact evidencing merger of Eaton Industries with Aeroquip Vickers Inc. under the laws of the State of Ohio and as a result Aeroquip Vickers Inc. becoming the subsidiary of the appellant, it is clear that the instant case is covered under the automatic exemption available under regulation 3(1)(j)(ii). Since the present case is a clear case falling under exemption of regulation 3, the order directing to make public announcement as per regulation 12 does not hold good.
2.Hindustan Lever Employees Union vs. Hindustan Lever Limited (1995) Supp. 1 SCC 499
Merely because a foreign shareholder acquires 51% shares in an Indian company it cannot be said that this is against public interest or public policy.
The facts revolve around the merger of two big companies- one is Hindustan Lever Limited (HLL), a subsidiary of Uni Lever (UL), London based multi-national company, and other Tata Oil Mills Company Ltd. (In brief ‘TOMCO’) the first Indian company found in 1917 and public since 1957. The merger was challenged before high court on the grounds that the merger suffers from statutory violation, procedural irregularities of provision of the Act to ignoring effect of the provisions of Monopolies & Restrictive Trade Practices Act, 1969 under valuation of Shares, its preferential allotment on less than the market price to the multi-national, failure to protect the interest of employees of both the companies and above all being violative of public interest. High court found no material in the arguments of petitioner and the accordingly the scheme of merger was approved by the court.
The important question that was raised in the case was whether the company court has applied its mind to public interest involved in merger. The decision may vary when merger is between two Indian companies and when it is between subsidiaries of the foreign company. It is not the interest of shareholders or the employees only but the interest of society which may have to be examined. And a scheme valid and good may yet be bad if it is against public interest. Section 394 of the previous act casts an obligation on the court to be satisfied that the scheme for amalgamation or merger was not contrary to public interest. In amalgamation of companies, the courts have evolved the principle of, ‘prudent business management test’ or that the scheme should not be a device to evade law. But when the court is concerned with a scheme of merger with a subsidiary of a foreign company then the test is not only whether the scheme shall result in maximizing profits of the shareholders or whether the interest of employees was protected but it has to ensure that merger shall not result in impeding promotion of industry or shall obstruct growth of national economy.
It was contended that because of the scheme of merger, the shareholding of UL was reduced from 51% to 49% and further, immoveable assets of TOMCO, except those which are specifically excluded, shall stand, transferred to HLL. Another objection raised that was violating public interest was that there were only two renowned companies manufacturing soaps and detergents and the merger of such big companies would result in in creating virtual monopoly in favour of HLL which could result not only in deterioration of quality, but in escalation of price.
Under Section 29 of the Foreign Exchange Regulation Act (as it stood originally), a perstui resident outside India or a company (other than banking companies) which was not incorporated in India or in which the non- resident interest was more 40%, could not carry on business in India Or establish in India a branch office or other place of business. Nor could such a person or company acquire the whole or any part of any undertaking in India of any company carrying on any trade, commerce or industry or purchase the shares in India of any such company. The object of Section, 29, inter alia was to ensure that a company (other than banking company) in which the non-resident interest was more than 40% must reduce in to a level not exceeding 40% But, now this restriction of 40% has been removed by an amendment by the Act of 1993. A company in which non-resident interest is more than 40% can carry on business without having to obtain permission from the Reserve Bank of India. The underlying idea of this liberalization is clear.
Non-resident persons were being invited to invest in India and/or in Indian companies. If any non-resident invests in Indian company, it is but natural that dividends payable by an Indian company will be enjoyed by the non-resident. All other rights that a shareholder enjoys by virtue of the shareholding will be enjoyed by the non-resident. Merely because a foreign shareholder acquires 51% shares in an Indian company it cannot be said that this is against public interest or public policy.
In this connection it should also be noticed that Section 11 of Foreign Exchange Regulations Act,
1973 which had empowered the Reserve Bank to put restrictions on transfer of any asset in India to a person resident outside India or a person intending to become resident outside India, has now been repealed with effect from 8.1.1993 by the Amending Act of 1993. Here again the intention of the legislature is quite clear. The entire object is to allow the non-residents to do business in India and to deal with assets in India with greater freedom.
In view of all these, it is difficult for us to uphold the contention that the Scheme of Amalgamation is against public interest. Merely because 51% of the shares of HLL are being given to a foreign company, the Scheme cannot be said to be against public interest. The Foreign Exchange Regulation Act has been amended specifically to encourage foreign participation in business in India. The bar to haying more than 40% shares in an Indian Company by a non-resident has been hefted. The Amending Act of 1973 is not under challenge. In order to give greater freedom to the companies for doing business in India, the MRTP Act has been amended. Prior approval of Government of India is not a necessary for amalgamation of companies any more.
NATIONAL AND INTERNATIONAL ARBITRATION
1.Venture Global Engineering v. Satyam Computer Services Ltd., (2008) 4 SCC 190
Court must look into the Indian public policy to determine if the arbitral award was induced by way of fraud or corruption. Therefore, if there are material facts which were intentionally suppressed during the passing of arbitral award would constitute an act of fraud and the party attempting to set aside an arbitral award will be allowed to introduce new facts and material.
Venture global engineering(appellant) having its principal office in Michigan, USA, entered into a Shareholders Agreement and a Joint Venture Agreement on 20th October, 1999 with Satyam Computer Services (first respondent), for the purpose of establishing a company called Satyam Venture Engineering Services (the second respondent). As per the terms of the agreement, the appellant and the first respondent each held 50 per cent shareholding in the second respondent.
One of the terms contained therein stipulates certain ‘events of defaults’ and in the event of default; non-defaulting shareholder has the option to purchase the defaulter’s shares at book value or cause immediate dissolution and liquidation of the second respondent.(Article VIII)
In the year 2000, the second respondent entered into an agreement with TRW and they agreed to sub-contract the automotive engineering works to the second respondent. The first respondent levied US $3 an hour towards administrative charges. According to first respondent, they retained US $859,899 from the TRW receipts. The appellant disputed the same and alleged that Satyam retained a total of US $2,188,000, and also alleged concealment and dereliction of duty as a joint venture partner. Thus, disputes cropped-up and were referred to arbitration. The award was given by sole arbitrator on 03.04.2006 directing the appellant to transfer its entire shareholding in second respondent to first respondent. The appellant challenged this order before trial court and the suit was dismissed on the ground that foreign awards cannot be challenged under section 34 of arbitration and conciliation act, 1996. Later the appeal was made to high court but the appeal was dismissed and accordingly special leave petition was filed before Supreme Court and in 2008 the court held that foreign awards can be challenged under section 34 of the act. The court remanded the case to the trial court and directed that the parties were to maintain status quo with respect to transfer of shares.
Meanwhile, first respondent confessed that the balance sheets of the first respondent had been fraudulently inflated to the tune of Rs.7, 080/- crores. As a result, Price Waterhouse Cooper (PWC), auditors of the first respondent, declared that the financial statements could no longer be considered accurate or reliable. In light of this, appellant the appellant filed an interim application before the Trial Court to bring certain facts on record and also filed additional pleadings in respect of the same under Order VIII Rule 9 of the Civil Procedure Code, 1908. Trial court allowed the application, first respondent challenged this order before high court and the “high court held that a reading of Section 34(1) and (3) of the ABC, 1996 indicates that a party could only set aside the arbitral award if an application for the same is made within a period of 3 months (extendable by another 30 days) from the date of making the award; whereas in the present case the new grounds of challenge are sought to be brought after the limitation period.” Further, the court held that the petition for additional pleading is not maintainable under Order VIII of Civil Procedure Code.
The additional facts which the appellant wanted to introduce included –
(a) Details of exaggeration of the financial statements and accounts;
(B) extracts of investigations by SEBI and CBI into the “Satyam Scam”;
(c) Government ordered inspections of Satyam affairs;
(d) Confessions of Mr. Raju on the diversion of funds and other such criminal activities in relation to Satyam’s business.
Supreme Court held that an amendment to bring additional suppressed facts on record would be allowed as long as following conditions are fulfilled. Firstly, the court held that the leave to amend the grounds may be granted as per section 34 of the act if it is made within stipulated time and only if the peculiar circumstances of the case and interest of justice demands. The Court rejected Satyam’s contention that the expression “making of the award” must be narrowly confined to mean any fraud committed before the Arbitrator in the course of the proceedings, anterior to the delivery of the Award and not what transpired subsequently. The Court instead held that because such facts were suppressed and not in the public domain, they could not have been included in the original pleadings by Venture, thus such facts, which would have been relevant to the arbitrator’s final determination, should now be allowed to be used to set aside the Arbitral Award. The Court therefore observed that the expression “making of the award” will have to be read in conjunction with whether the Award “was induced or affected by fraud”.
Secondly, the court looked into the element of fraud whether present in the instant case. The court looked into the additional pleadings and the court found that the additional facts would have been relevant to the deliberation of the Arbitrator prior to delivery of the Award Therefore, the Court looked to the facts and found that the concealment / suppression of such facts about Satyam’s financial records and books constituted fraud and that the Award was induced and / or affected by such fraud.
Lastly, the court held that any award that is induced or affected by fraud or corruption would be contrary to the public policy of India. In the present case, it seemed that the Award was contrary to the interests of justice because certain vital information was concealed from the Arbitrator and therefore, was not taken into consideration in the making of the Award. Therefore, the said actions run counter to the Indian public policy
2.Enercon (India) Private Limited vs. Enercon GMBH and Anr. (2014) 5 SCC 1
The dispute began in the year 2008 when Enercon (India) was established pursuant to an agreement between appellants (members of one family) and Enercon GMBH. Dispute arises as a result of non-delivery of certain supplies and it was alleged that the dispute is governed by the Intellectual Property License Agreement (IPLA) but the appellants contended that IPLA was not concluded and since the arbitration clause was in IPLA, it did not bind the parties.
It is important to note that parallel proceedings were initiated by both the parties, the appellants and Enercon India initiated proceedings before the Bombay High court as well as Daman court contending that the arbitration clause is not binding since the agreement was not concluded between the parties. Enercon Germany, on the other hand, initiated proceedings under section 45 of Indian arbitration act before Indian court to commence arbitration proceedings. Further, application was also made to English High court asking it to constitute arbitral tribunal as per the provisions of IPLA. However, the English court refused to entertain the application on the ground of pending proceeding in India.
The first argument revolves around the validity of arbitration agreement. The appellant submitted that since the agreement between the parties was not concluded and therefore the arbitration agreement cannot be said to be in existence. The respondent on the other side contended that the only requirement to constitute valid arbitration agreement is an ‘intention between the parties to arbitrate.’ The Supreme Court referring to section 16 uphold the concept of severability of arbitration clause from the underlying contract and held that the substantive agreement and the arbitration agreement formed two separate contracts and the legitimacy and validity of the latter could not be affected even if one claims that the former is void or voidable or unconcluded. The court referred to the heads of the agreement where the parties have agreed to be bound by the arbitration agreement. The court held that the parties have clear intention to resolve the dispute via arbitration and therefore the parties must proceed with arbitration.
Further, the appellant contented on ground of ‘unworkability of arbitration agreement’ that since the agreement provided for three member arbitral tribunal whereas the procedure provided under the agreement is only for two arbitrators. The Supreme Court held that courts must adopt a pragmatic, reasonable business person’s approach (and not a technical approach) while interpreting or construing an arbitration agreement and must strive to make a seemingly unworkable arbitration agreement workable. Therefore, if the parties have expressed their intention to arbitrate as per section 7 or 44 of the act then in that case the court must strive to make the clauses workable.
The appellant in order to the seat of arbitration referred to the principle of ‘closest connection test’ and the court thus relied on the judgment of Naviera Amazonica Peruana S.A. v Compania Internacional De Seguros Del Peru (1988) 1 Lloyd’s Rep 116 (CA)
to determine the seat of arbitration. The court held that while choosing Indian law to be applicable law in all aspects of agreement and particularly arbitration, the presumption from the conduct of the parties could only be to keep the seat of arbitration in India.
Lastly, Bombay high court ruled that though London was not seat of arbitration yet the English courts could have concurrent jurisdiction since the venue of arbitration was London. The Supreme Court disagreed with the findings of high court and held that the once the seat of arbitration has been established then only the courts where the seat has been decided should have supervisory power over the arbitration proceedings. If two different courts from different jurisdictions are allowed concurrent powers then it would frustrate the very purpose of arbitration.
1.WABCO India Ltd. Vs. Deputy Commissioner of Income Tax, Chennai W.A.No.884 of 2018 and C.M.P.Nos.8825 and 7726 of 2018
An Indian company cannot be considered as an agent of its non-resident shareholders in relation to the overseas transfer of its shares.
WABCO India Ltd (taxpayer in the present case) is a company engaged in the business of designing, manufacturing and marketing conventional braking products, advance braking systems and other related air assisted products and systems. It is pertinent to note here that 75% of the shares of the Taxpayer were held by a holding company based in the United Kingdom and balance in public domain. In the year 2014, Clayton transferred its entire shareholding in the WABCO to a group company in Singapore. In exchange for shares of the taxpayer the holding company received 50, 55, 05, 000 shares of Singapore Co. valued at approximately INR 2347 Crores leading to capital gains to the tune of INR 2147 Crores (approx.) in the hands of Hold Co. A show-cause notice was issued under section 163(c) of ITA to taxpayer to substantiate why it shouldn’t be treated as an agent of holding co. in accordance with provisions of section 160 to 163 of the ITA. It was asserted in the SCN that that the place of effective management of Hold Co. was found to be the United Kingdom but Hold Co. had created a paper transaction to obtain the benefits of the India-Netherlands Double Taxation Avoidance Agreement. On the basis of this, it was argued that by the tax authorities that the Transaction had resulted in a tax liability amounting to around INR 429 Crores (approx.) in the hands of Hold Co. and a draft assessment order was issued to this effect. It was the contention of the tax authorities that these capital gains had directly arisen as a result of consideration received from the taxpayer. The taxpayer filed a writ petition under article 226 before Singh bench of High Court which was dismissed and directed the taxpayer to reply to reply to the SCN within 6 months of the dismissal of this writ petition. Therefore, The Taxpayer filed an intra-court appeal against the order of dismissal of this writ petition.
Taxpayer contended that show cause notice issued lacked jurisdiction as the pre-condition for issuance of notice under section 163(1) (c) of ITA has not been fulfilled. In the instant case, the non-resident seller, i.e., Holding Co. was not in receipt of any money from the Taxpayer which is required under Section 163 (1) (c) of the ITA. The Madras High Court relied on the judgment of the Supreme Court of India in the case of Clagget Brachi Co. Ltd. v. CIT, where it was held that it was open to an Income Tax Officer to assess either a non-resident taxpayer or to assess the agent of such non-resident taxpayer. However, once an assessment had been made on one, there could be no assessment on the other. In the present case, as per the facts a draft assessment order had already been issued to Hold Co. regarding its capital gains tax liability arising from the Transaction, and subsequently, a SCN was also issued to the Taxpayer in respect of the same tax liability in its capacity as an agent of Hold Co. The High Court was further informed that this draft assessment order had been finalized and a final assessment order had been issued under Section 143(3) read with Section 144C of the ITA. Further, the court relied on the judgment of Delhi High court in General Electric Co. and another v. Deputy Director of Income Tax and ors, revolving around the same set of facts. In this case, shares of an Indian company were transferred to a Luxembourg company. A show cause was issued to the Indian Company and subsequently it was proposed to treat the Indian Company as the representative assesse or agent of the non-resident taxpayer. The writ petition by the taxpayer challenged this show cause notice. The Revenue contended that the matter was still at the show cause notice stage and hence, the writ petition was premature. Delhi High court struck down the Show cause notice on the ground that Indian entity cannot be a representative assesse of the transferor.
The conclusion was based on the fact that (a) the transaction involved a transfer of shares to a third party situated outside India; (b) the Indian company had no role in the transfer and (c) merely because those shares related to the Indian company, that would not make the Indian company as agent of the foreign company which had made the capital gains.
Madras high court confirmed to the decision of Delhi High court in this case and accordingly set aside the show cause notice issued by authority.
2.Union of India vs. U.A.E. Exchange Centre (2020) SC OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 9775 OF 2011
Activities performed by the Indian liaison offices of the UAE entity were ‘preparatory and auxiliary’ in nature and hence does not constitute permanent establishment. Therefore, no income is said to have accrued to the liaison office established in India.
U.A.E. exchange centre is a company incorporated in the U.A.E. engaged in providing service of remitting funds to India to NRIs in UAE. For business in India, the company has established liaison offices in India after obtaining prior approval from Reserve Bank of India as per Foreign Exchange Regulation Act, 1973 (now FEMA). There were two business models under which funds collected from NRIs were remitted to India. First mode is telegraphic transfer in which the liaison office has no role to play and in the second mode which is physical dispatch of instruments, the liaison office downloads the particulars of remittances, print it and then courier it to the beneficiaries in India.
The company was filing NIL returns from 1998-1999 until 2003-04 but when doubts were expressed by revenue, the company applied before Authority for advance ruling to seek clarification ‘whether any income is accrued / deemed to be accrued in India from the activities carried out by the Company in India’
AAR- the AAR ruled that income of the Taxpayer was deemed to have accrued in India on the basis that it had a ‘business connection’ in terms of section 9(1) of the Tax Act in so far as activities set out in Mode B are concerned. The AAR observed that without the activities of the Indian liaison office, the transaction of remittance would not be complete.
DELHI HIGH COURT- The High Court held that although liaison office comes within the inclusive list of fixed places of business under Article 5(2)(c)of UAE Tax Treaty, it is subject to exclusions under Article 5(3) including fixed places of business maintained solely for carrying out activities which are ‘preparatory and auxiliary’ in nature. The High Court concluded that the activities performed under Mode B were merely ‘preparatory and auxiliary’ in nature.
SUPREME COURT- the SC noted that as per the nature of activities allowed for under the RBI permission, the liaison offices were only allowed to provide service of and incidental to delivery of cheques / drafts drawn on bank in India. They were not allowed to perform business activities such as (i) entering into a contract with any party in India; (ii) rendering consultancy or any other service directly or indirectly with or without consideration to anyone in India; (iii) borrowing or lending any money from or to any person in India without RBI’s permission. Thus, it was amply clear that the liaison offices in India were not to undertake any other activity of trading (commercial or industrial) or enter into any business contracts in its own name in India. On this basis, the SC concluded that the nature of activities conducted by the liaison offices as circumscribed by the RBI constituted ‘preparatory and auxiliary’ in character, and hence outside the purview of PE.
1.Sajal Dutta vs. Reserve Bank of India and Ors.(2016) GA No. 360 of 2007
WP No. 1157 of 2004 (regulatory approval and clearance-if NRI wants to invest in India)
The brief facts of the case are that Ruby General Hospital, set up as an initiative by two brothers-one is Sajal (the petitioner in the present case) and Kamal (one of the respondent) and friend of Kamal- Binod. Both kamal and binod are permanent residents of USA. Sajal always resided in Kolkata. The hospital started functioning around April, 1995. An application was made to the Secretary, Department of Industrial Development, Ministry of Industry on 31st May, 1993 for approval of Foreign Non-resident Indian Investment in the public company which owned the hospital and it was stated that NRI shareholding in the company would be subjected to the ceiling of 88.88% of total shareholding and was to be on repatriable basis. Sajal wanted the investment to be on repatriable basis but Kamal, being a doctor was interested in sending to the company second hand medical equipments to be used in the hospital. The value of the equipment’s was stated to be as Rs.3, 05, 53, 290/-. Kamal wanted this money to be treated as share application money on the basis of which shares in the company would be allotted to him. This in the foreign exchange parlance is termed as investment on a “non-repatriable basis” because equipment’s were imported into India with allotment of shares. There was no outflow of foreign exchange from this country.
The Secretary to the Department of Industrial Development, Ministry of Industry on 06.08.1993 granted approval for foreign equity participation subject to the ceiling as purported under the application. Between September, 1992 and October, 1995 second hand medical equipments were caused to be exported by Kamal and were duly imported by the company. Sajal’s grievance was that no foreign exchange was remitted. On 22nd March, 1997, Reserve Bank of India granted approval to the company under Section 19(1) (d) of the Foreign Exchange Regulation Act, 1973 (FERA) now repealed, to issue 30, 55, 329 equity shares of Rs.10/- each to Kamal against the importation of the said medical equipments, on non-repatriable basis.
The relationship began to deteriorate between the brothers and kamal was removed from the position of managing director on 7.02.1996 and therefore, RBI granted the permission to issue shares to shares in 1997 as mentioned above. Sajal assumed the control of company and filed a writ petition challenging the permission granted by RBI to allot shares to Kamal. This is his third writ petition against the approval by RBI which the bank has confirmed.
There were several issues raised in the case but we are concerned with the order of the RBI and to which the court was of the opinion that if one shareholder is claiming shares on the basis of importation of second hand machinery, it is likely to alter the shareholding percentage of other shareholders. In this company there are principally only two shareholders. Allotment of shares to Kamal would have tipped the balance of control of the Company in the favour of Sajal. Therefore, Sajal was likely to be directly affected by the allotment of shares to Kamal. Therefore, even after deletion of the name of the company, continuance of the proceeding by Sajal was permissible. In other words, the Reserve Bank of India may have given permission to the company to import medical equipment on its application. It also may have allowed the company to issue shares to Kamal on a non-repatriable basis for financing this equipment. Undoubtedly, the Company would be affected by any decision of the Reserve Bank of India to grant licence or to revoke it. The court relied on the judgment by the Supreme Court in LIC v. Escorts Limited (1986) 1 SCC 264, it was held by the court that the Reserve Bank of India is the sole judge of whether the licence is to be granted or not and no other authority can take this burden upon itself. But, on examination of the above facts the licence to import was vitally connected with the shareholding of Kamal Kr. Datta and the percentage shareholding of his brother Sajal Datta. If the number of shares issued to Kamal increased on the basis of importation of those items, the percentage shareholding of Sajal was likely to fall. Therefore, both the company and its principal shareholders Kamal and Sajal had an interest in the grant of the licence or revocation of it, by the Reserve Bank of India. Further referring to the above mentioned judgment, the court opined that the Reserve Bank of India, like other creatures of the Constitution and the Statutes is amenable to a writ of mandamus commanding it to do its duty. In the two previous writ applications orders were passed by this court directing the Reserve Bank of India to consider the issue of grant or revocation of grant of licence upon hearing Kamal and Sajal. Therefore, both the brothers had the right to approach the court complaining of failure on the part of the Reserve Bank of India to discharge this duty, by refusing to pass an order or by passing a wrong order.
2.Federation of Association of…… vs. Union of India 2005 (79) DRJ 426
The policy in question in the present case relates to the concept of ‘cash and carry wholesale trade.’ The policy was framed in the year 1997 in the form of guidelines with the purpose to assist FIPB to consider the proposals. As per Para 8 of the guidelines in respect of trading business, 100% FDI is permitted in case of trading companies for cash and carry wholesale trading and FDI up to 100% is also permitted for E-Commerce activities subject to certain conditions, but such companies are to engage only in business to business (for short, `B2B sales’) E-Commerce and not in retail trading. This aspect has been referred to since the concept of B2B trading is really the main issue, which arises for consideration in the present dispute.
Metro Cash & Carry Pvt. Ltd., which is an Indian company and Metro Cash & Carry GmbH, which is a foreign Corporation. This group was granted permission for establishing a State of the Art Cash and Carry Complex for food and non-food products at urban locations. The approval was, however, made subject to the condition that the company would need to ensure that selling of the products stocked by it is to retailers who would possess sales-tax registration and not to consumers. This Press Release further clarified that there is no retail trade permitted and cash and carry wholesale business is for sale to retailers having valid sales-tax registration.
This B2B sales is alleged by the petitioners to be amounting to permission to dealing of goods unconnected with business and sub-version of the policy since this B2B sales concept formed only a part of the policy in respect of E-Commerce trade specifically. Further the entire emphasis of the petitioners was that the GOI was wrongly interpreting the terminology of ‘cash and carry wholesale trade’.
The government, as per the court, framed the policy and as such the relevant authority to interpret the terms is the government only and therefore the petitioners can hardly have a complaint about the same.
The concept of B2B trade is that the goods are purchased by the business for further resale or for use in house or for its customers. Thus, the contention of the respondents is correct that a specialized meaning has been acquired to this concept. The concept of setting such wholesale outlets is also different.
Wholesale trade is not in the nature of retail trading outlets located within the city where the customers can walk in with the family to purchase any item. Thus, checks and balances are provided to qualify for B2B sales. So, if a customer of a retailer requires a particular good, the retailer can go to such centres for purchasing it rather than keeping a large inventory of all the goods. It is, thus, more a world concept of wholesale business. The agreements are entered into with the businesses after verifying that they have a sales-tax registration or a valid trade license. Anyone cannot walk into the wholesale centres, but it is the people with photo identity cards of the businesses, which are normally two in number, who would be entitled to go and purchase the relevant goods. In this process of purchase, it is open for the businesses not only to purchase goods which have to be further sold, but also utilize for requirements and promotion of its business. The agreement itself clearly stipulates that the purchase made is for resale, commercial business or industrial use only. Checks and balances have been provided for this purpose. Thus, business sales are included in this irrespective of the quantity of sales.
The petitioners, therefore, cannot be permitted to seek to contend that the Government must adopt the traditional definition of wholesale trade and retail trade and is precluded from adopting the international definition whether it be of WTO or otherwise. This being the position, it is the stand of the Government, which has to be given the greatest weight in such matters.
CORPORATE AND COMMERCIAL LITIGATION
1.Life Insurance Corporation of India vs. Escorts Ltd. & Ors. 1984 SCR (3) 643, 1984 SCALE (1)821
The case pertains to non-resident investment portfolio scheme existing under the previous Foreign Exchange Regulation Act, 1973. The scheme allowed non-resident company owned and in which beneficial interest of at least 60% vested in non-residents individuals of Indian Origin to invest in the shares of Indian Companies. Investment was allowed to the extent of 1% of paid up equity shares of such Indian Companies subjected to a ceiling of 5%. Under the scheme, 13 company all of them owned by Caparo Group Limited invested in Escorts Limited (Indian Company). It is important to note here that 60% of the shares of Caparo Group Limited were held by the trust whose beneficiaries were swraj Paul and his family members (all were non-resident individual of Indian origin).
The investment by 13 companies of caparo group were challenged on the ground that it was an attempt to circumvent the prescribed ceiling of 1% investment under the scheme and therefore it is important to lift the corporate veil in order to determine the interests of Mr. Swraj Paul.
Supreme Court referred to the ruling laid down in Solomon case wherein it was observed that once the company has been incorporated, it acquired independent and legal personality distinct from the members. It was also noted that corporate veil be lifted in certain exceptional circumstances. Eventually, the courts observed that for a limited extent i.e., to ascertain the nationality or origin of shareholder, lifting of corporate veil would become necessary. It is not necessary to ascertain the individual identity of each of its shareholders. In the present case, the court held that merely because more than 60% of the shares of the foreign investor companies were held by a trust of which Mr. Swraj Paul and the members of his family were beneficiaries, could not deny the companies the facility of the scheme on the basis that the permission granted was illegal.
The court enumerated a number of situations where the veil may be lifted such as fraud or improper conduct is intended to be prevented, or a taxing statute or a beneficent statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern. The court further ruled that it is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of the public interest, the effect on parties who may be affected etc. The court said that in the present case, the requirement to lift the corporate veil cannot go beyond what has been prescribed under Foreign Exchange Regulation Act and the Portfolio Investment Scheme. Since the object of the Act is to conserve and regulate the flow of foreign exchange and the object of the scheme is to attract non-resident investors of Indian nationality or origin to invest in shares of Indian companies. Therefore, in the present case also it is necessary to find out the nationality or origin of the shareholders of the foreign companies seeking to invest in shares of Indian companies and not to explore the individual identity of the shareholders.
2.Commissioner of customs, Bangalore vs. GM exports and ors. 2015 (6)ABR 802
A common question is raised before the Supreme Court in this case which pertains to whether anti-dumping duty imposed with respect to imports made during the period between the expiry of the provisional anti-dumping duty and the imposition of the final anti-dumping duty is legal and valid.
Facts are taken from the case of Harsh International v. Commissioner of Customs, (Civil Appeal No. 5119 of 2012); a public notice was issued by the Designated Authority on 6th august, 2001 initiating proceedings in regard to the import of Vitrified/Porcelain tiles originating in or exported from the People’s Republic of China and the United Arab Emirates. The Designated Authority issued preliminary findings on 3rd December, 2001. Pursuant to which, the Union Government imposed, by a notification dated 2nd May, 2002, a provisional antidumping duty under Section 9A(2) of the Customs Tariff Act read with Rules 13 and 20 of the Antidumping Rules.
The Designated Authority submitted its final findings on 4th February, 2003 concluded that material injury has been resulted to the domestic industry and therefore recommended that antidumping duty should be imposed. The Union Government issued a notification on 1st May, 2003 imposing a final antidumping duty with effect from the date of the imposition of the provisional antidumping duty i.e. 2nd May, 2002. The question before the Court is as to whether the Central Government was within its jurisdiction in imposing a final antidumping duty between 2nd November, 2002 and 30th April, 2003. This, according to the assessee, is the “gap period” when the provisional duty had come to an end by efflux of six months until a final notification was issued by the Union Government on 1st May, 2003. Similar question was raised before the Kerala high court and both Bombay high court (in the aforesaid case) and Kerala High Court held that anti-dumping duty can be charged for the gap period.
The major contention raised was that Rule 20(2)(a) should be interpreted in the light of the WTO Agreement, and so interpreted would necessarily be interpreted as meaning only the period for which the provisional duty is levied, and not beyond. Further, it was argued that the levy of anti-dumping duty is not automatic and is only levied by the Central Government taking into account a series of complex economic factors. This being so, the continuity of such levy can only be for the period indicated in the provisional duty levy notification and not beyond. It was also argued that, on a true construction of Rule 20(2) (a), the said rule merely validates a provisional duty already levied, and nothing beyond.
The court relied on number of judgments to construe correct approach to the construction of statute made in response to an international treaty obligation by member nation. It is important to mention that neither sub-section (2) nor sub-section (6) of section 9A authorizes the Central Government, either expressly or by necessary implication, to make rules and/or to levy anti-dumping duty with retrospective effect. This is in contrast with sub-section (3) which expressly so authorizes the Central Government in the circumstances mentioned in the sub-section. Any duty levied by a final duty notification during the interregnum period would necessarily amount to a retrospective levy of duty for the reason that such period is not covered by the provisional duty notification, being beyond 6 months. This would therefore render sub-rule (2) (a) ultra vires Section 9A. A construction which is both in consonance with international law and treaty obligations, which Article 51(c) of the Constitution states as a directive principle of State policy; and with the application of the doctrine of harmonious construction is to be preferred to a narrow doctrinaire meaning which would lead to the Rule being read in such a manner that it is ultra vires the parent statute.
Supreme Court held that the final anti-dumping duty only incorporates the provisional anti-dumping duty within itself, but in the manner provided by Rule 13 of Anti-dumping rules. As per Rule 13, provisional anti-dumping rule will remain in force for a period of 6 months only which can be extended up to 9 months. Thus, it is clear that such incorporation can only be the period up to which the provisional duty can be levied and not beyond. Thus understood, it is clear that both literally, and in keeping with the object sought to be achieved – that is the making of laws in conformity with the WTO Agreement, there can be no levy of anti-dumping duty in the “gap” or interregnum period between the lapse of the provisional duty and the imposition of the final duty.
1.The Regional Provident Fund Commissioner (II) West Bengal v. Vivekananda Vidyamandir & Ors. CIVIL APPEAL NO(s). 6221 OF 2011
Mandatory contributions as per The Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 need to be made with respect to eligible employees at the rate of 12% of basic wages, dearness allowance and retaining allowance. The employees are required to make an equal and matching contribution. Eligible employees are those who (a) earn basic wages up to INR 15,000 (approx. US$215) per month, (b) continue to hold PF account based on their previous employment, or (c) international workers (as defined in the EPF Act).
The court in the instant case finally ruled in regard of the common question of law raised since 2013 regarding if the special allowances paid by an establishment to its employees would fall under within the expression ‘basic wages’ under section 2(b)(ii) read with section 6 of the act for computation of deduction towards provident fund.
The Supreme Court relied on the judgment by the apex court in year 1962 in the case of Bridge & Roof Co. (India) Ltd. v. Union of India “only such allowances not payable by all concerns or may not be earned by all employees of the concern that would stand excluded from deduction.” Basis this legal position, the SC reiterated in the case of Manipal Academy of Higher Education v. Provident Fund Commissioner, the principle of universality, stating that “(a) where the wage is universally, necessarily and ordinarily paid to all, across the board such emoluments are basic wages; (b) where the payment is available to be specially paid to those who avail of the opportunity is not basic wages; and conversely, any payment by way of special incentive or work is not basic wages.”
The SC relying on the above propositions held in the present case that “in order that the amount goes beyond the basic wages, it has to be shown that the workman concerned had become eligible to get this extra amount beyond the normal work which he was otherwise required to put in.” It further said that “the wage structure and the components of salary have been examined on facts, both by the authority and the appellate authority under the [EPF] Act, who have arrived at a factual conclusion that the allowances in question were essentially a part of the basic wage camouflaged as part of an allowance so as to avoid deduction and contribution accordingly to the provident fund account of the employees.”
With this judgment, Supreme Court clarified the position on whether allowances paid to employees as part of total salary, base salary or cost to company would be subjected to PF contributions. Accordingly, the employers will be required to review their existing compensation structure and determine increased PF liabilities for its domestic employees as well as international workers. The position regarding domestic employees is clear that the employer’s liability to make PF contributions would not extend beyond the current limit of 12% of Rs. 15,000 (approx. US$ 215) per month (until such time the limit is increased), although this monetary limit does not apply to international workers and hence the risks for that category may be higher.
2.Arnab Bose vs. DCIT T.A No. 176/Kol/2016
No tax to be levied on the salary of non-resident remitted by foreign employers in Indian NRE account.
The assessee is a non-resident individual and for the Assessment Year under appeal i.e. 2012-13 return was filed electronically declaring total income of Rs.35, 07, 446/- as income from salaries with a residential status as NRE. Assessee is engaged for his service as Captain of the ship in a Foreign Shipping company (Crew). The assessee was paid Rs.38,26,820/- which was credited in his NRE account after conversion of US dollar in India for which necessary FRC (Foreign Remittance Certificate) from Standard Chartered Bank, Mumbai have been submitted.
It was contended by the assesse that the above income was received from outside India in foreign currency and, therefore, claimed as exempt. The assessee stated that he used to get his contract to do service with foreign shipping company. According to the assessee, he has to float on foreign water to render services during the course of voyage and accordingly when he was staying for more than 182 days outside India or on foreign water, his residential status need to be treated as ‘Non-resident’ as per provision of law and so his salary income which are received in the NRE account remitted from outside India in converted foreign currency shall not be eligible to tax u/s 5 of the Act.
The issue that need consideration is whether the salary earned by the assessee outside India but received it in India at the first instance can be taxed in India under the provisions of the Income-tax Act, 1961.
The court referred to CBDT Circular No. 13/2017 dated 11.4.2017 and a careful reading of the circular shows that salary accrued to a non-resident seafarer for services rendered outside India on a foreign going ship (with Indian flag or foreign flag) shall not be included in the total income merely because the said salary has been credited in the NRE account maintained with an Indian bank by the seafarer. Remittances of salary into NRE Account maintained with an Indian Bank by a seafarer could be of two types: (i) Employer directly crediting salary to the NRE Account maintained with an Indian Bank by the seafarer; (ii) Employer directly crediting salary to the account maintained outside India by the seafarer and the seafarer transferring such money to NRE account maintained by him in India. The latter remittance would be outside the purview of provisions of section 5(2)(a) of the Act, as what is remitted is not “salary income” but a mere transfer of assessee’s fund from one bank account to another which does not give rise to “Income”.
Therefore, in the instant case, the employer has directly credited the salary, for services rendered outside India, into the NRE bank account of the seafarer in India. However, the aforesaid Circular is vague in as much as it does not specify as to whether the Circular covers either of the situations or both the situations contemplated above. So the court gave the benefit of doubt to the assessee by holding that the Circular covers both the situations referred to above. The result of such interpretation of the Circular would be that the provisions of Sec.5 (2) (a) of the Act is rendered redundant.
Regulatory Approvals and Clearances
Internet and mobile association of India vs. RBI (2020) Writ Petition (Civil) No.528 of 2018
Reserve Bank of India issued a “statement on developmental and regulatory policies on April 5, 2018 directed that the entities regulated by RBI not to deal with or provide services to any individual or business entities dealing with or settling virtual currencies and (ii) to exit the relationship, if they already have one, with such individuals or business entities, dealing with or settling virtual currencies.
Following this statement, a circular was also issued by RBI on April 06, 2018 in exercise of powers conferred to it by section 35A read with section 36(1) (a) and section 56 of the banking regulation act, 1949 and section 45JA and 45L of the reserve bank of India, 1934and section 10(2) read with section 18 of the payment and settlement systems act, 2007.
The present writ petition is filed to challenge the statement and circular issued by RBI.
The court in 180 long judgment held that while the RBI has the power to regulate Virtual Currencies, the prohibition imposed through the April 2018 circular is disproportionate, and, therefore, ultra vires the Constitution. In the court’s belief, in the absence of any legislative proscription, the business of dealing in these currencies ought to be treated as a legitimate trade that is protected by the fundamental right to carry on any occupation, trade or business under Article 19(1) (g) of the constitution of India. The court was of the opinion that RBI by imposing a wholesale moratorium on the provision of banking services to these dealers, unreasonably impinged on what is called a valid vocation, by going beyond the limitations as permitted under Article 19(6) of the constitution.
The Court recognized in its judgment, the circular, issued on 6 April 2018, was a culmination of a series of measures undertaken by the RBI concerning the regulation of VCs. But there is no law in force at the time that banned the use of virtual currency and that made them trading in them illegal. Although the draft bill is in circulation yet not being made a law the RBI circular tries to put an end to the use of virtual currency by severing the ties between the crypto currency market and formal Indian economy.
1.Union of India vs. R. Gandhi (2010) CIVIL APPEAL NO.3067 OF 2004
In the present case, the president of Madras Bar Association challenged constitutional validity of Chapters 1B and 1C of the Companies Act, 1956(‘Act’ for short) inserted by Companies (Second Amendment) Act 2002 (‘Amendment Act’ for short) providing for the constitution of National Company Law Tribunal (‘NCLT’ or ‘Tribunal’) and National Company Law Appellate Tribunal (‘NCLAT’ or ‘Appellate Tribunal’).
Madras Bar Association raised following contentions-
- Parliament does not have the legislative competence to vest intrinsic judicial functions that have been traditionally performed by the High Courts.
- The constitution of the National Company Law Tribunal and transferring the entire company jurisdiction of the High Court to the Tribunal which is not under the control of the Judiciary is violative of the doctrine of separation of powers and independence of the Judiciary which are parts of the basic structure of the Constitution.
- Article 323B Clause (2) of the constitution enumerates the matters in regard to which Tribunals can be constituted. The said list is exhaustive and not illustrative. The list does not provide for constitution of Tribunal for insolvency, revival and restructuring of the company.
The court in this case popularly known as judgment 2010 held that-
- Creation of Tribunal and vesting in them, the powers and jurisdiction exercised by the High Court in regard to company law matters, were not unconstitutional.
- Parts 1B and 1C of the Act were found to be unconstitutional; however, they may be made operational by making suitable amendments.
Though the judgment came in the year 2010 upholding the constitutional validity NCLT and NCLAT, these two bodies were not made functional immediately thereafter. As per the observation of Supreme Court in the aforesaid judgment, changes were incorporated in the scheme of NCLT under the companies act, 2013.
2.Madras bar Association vs. Union of India (2015) WRIT PETITION (C) NO. 1072 OF 2013
Although 2010 judgment tried to remove some disparities yet a petition was filed before the Supreme Court alleging notwithstanding various directions were given by the court in 2010 judgment, the new provisions in the Companies Act, 2013 were almost on the same lines as were incorporated in the Act, 1956 and, therefore, these provisions suffer from the vice of unconstitutionality as well on the application of the ratio in 2010 judgment.
Hence the 2015 judgment is an effort to examine the provisions of 2013 act and to check whether it adheres to the ruling in 2010 judgment. The court made its observations on three principal issues.
Constitutional validity of NCLT and NCLAT– the Court essentially reiterated its decision in R. Gandhi on the ground that all arguments pertaining to constitutionality were already addressed by the Court in that case and it “specifically rejected the contention that transferring judicial function, traditionally performed by the Courts, to the Tribunals offended the basic structure of the Constitution”.
Qualifications and Other Terms of the President and Members of the NCLT as well as Chairman and Members of NCLAT- in order to maintain principles of independence of judiciary and separation of powers, certain provisions of companies act were held invalid as suffering from unconstitutionality. Also, the court observed that only officers who are holding the ranks of Secretaries or Additional Secretaries alone can be considered for appointment as Technical members of the National Company Law Tribunal and only persons having ability, integrity, standing and special knowledge and professional experience of not less than fifteen years in industrial finance, industrial management, industrial reconstruction, investment and accountancy, may however be considered as persons having expertise in rehabilitation/ revival of Companies and therefore, eligible for being considered for appointment as Technical Members.
Selection Committee for appointment of President /Chairperson /Members.– The 2013 Act provided for a 5-member committee without a casting vote to the Chief Justice of India (or nominee) which was found at fault by the Constitution Bench in 2010 judgment. The Court specifically opined that instead of 5 members Selection Committee, it should be 4member Selection Committee and even the composition of such a Selection Committee was mandated as was previously done in 2010 judgment.