VHVK E Newsletter February 2020
February 2020
Volume IV Issue1
VHVK Law Bulletin
In this first issue of VHVK Law Bulletin for 2020, webring you trending developments in business and corporate law. The subjects covered in this issue are (a) Supreme Court’s clarification on the jurisdiction of commercial courts in immovable property disputes, (b) Company Law Appellate Tribunal rules against merger of Limited Liability Partnerships (LLP) with companies, (c) SEBI Appellate Tribunal upholds penalty for failure to disclose information, but reduces amount, (d) Authority for Advance Ruling (AAR) upholds capital gains tax exemption for Mauritius entities, (e) Data Protection Bill introduced in Parliament, and (f) Karnataka High Court applies restricted limitation period for challenging compensation awards for land acquisition.
Commercial courts’ jurisdiction in immovable property disputes
For disputes involving immovable property to qualify for commercial courts’ jurisdiction, the property must be in actual use for commercial purposes. In interpreting the Commercial Courts Act, 2015 in Ambalal Sarabhai Enterprises Ltd v K S Infraspace LLP1 the Supreme Court of India adopted this stricter approach that treats future plans for the property as not material. The ruling can inhibit commercial courts from entertaining suits relating to immovable property.
In Ambalal Sarabhai, a purchaser under an agreement for sale of immovable property failed to complete the transaction through registration of the deed of conveyance. The seller/landowner approached the Commercial Court for remedy. In effect, the seller sought specific performance of the contract for sale of the land. The buyer (defendant in the suit) challenged the jurisdiction of the commercial court, contending the land was not currently in use for commercial purposes. For commercial courts’ jurisdiction in property disputes, actual use of the property for commercial or business purpose is the condition under the Commercial Courts Act.
Agreeing with the buyer and holding that commercial court lacked jurisdiction, the Supreme Court noted that neither the agreement of sale for the property nor the pleadings filed in court indicated commercial use of the property. Mere plan to use an immovable property for business purposes in future could not be a ground for commercial courts to entertain suit brought by the aggrieved seller. The fact that the transaction was between two commercial entities did not, apparently, receive much attention in arriving at the decision.
With theruling from the Supreme Court, it would be harder to bring immovable property disputes in commercial courts merely because the transaction is commercial in character, as opposed to private transactions by a family or individual to purchase/sell property for personal use. In the absence of possible legislative clarification in the future through amendment to the Commercial Courts Act, a potential gateway is to include terms in contracts clarifying the commercial character of the transaction.
LLP cannot merge with company, NCLAT clarifies
In Regional Director, Southern Region v Real Image LLP2 National Company Law Appellate Tribunal ruled that Limited Liability Partnerships (LLP) governed by the Limited Liability Partnerships Act, 2008, cannot merge with companies under the Companies Act, 2013. In the absence of a specific enabling provisionin the Companies Act, 2013for such a merger, tribunals cannot sanction them. NCLAT reversed the decision of the Chennai bench of the National Company Law Tribunal (NCLT)approving the merger between a LLP and a company.
Limited Liability Partnerships (LLP) and companies are two distinctive types of business entities, governed by different set of principles and legislation. They cater to different business criteria, an important one being tax. Salary paid to LLP partners is allowable as a deduction for the firm, and this facility can help LLPs in tax planning. Yet, although LLP and company have important differences, they are both business vehicles. Adopting a business-friendly, liberal approach, Chennai bench of NCLT sanctioned the merger of LLP with company. This was opposed by the government, which carried the matter in appeal to the Appellate Tribunal.
Upholding the objections of the government, NCLAT overturned the decision of the Chennai bench. With this, it would be necessary for a LLP to first register as a company under the Companies Act, 2013, before attempting merger with a company. In its appeal, the government merely relied on the absence of any enabling provision in the statute and did not advance any arguments about substantive difficulties or problems (for example, avoiding taxes or increased risk for creditors) a merger between LLP and company might cause. NCLAT endorsed the doctrinal approach advocated by the government and negatived the merger.
SEBI Appellate Tribunal upholds non-disclosure penalty, reduces amount
In Electrosteel Steels Limited v. SEBI,3 the Securities Appellate Tribunal (SAT) upheld penalty SEBI levied (SEBI) for failure to disclose material information in its offer document. The material information concerned the rejection of an application for useof forest land for mining. Affirming that the information material SAT, however, substantially reduced the penalty amount for the merchant banks that managed the public issue and the issuing company.
Electrosteel made a public offering of shares in 2016, and its offer document did not disclose that its application for use of forest land for iron ore extraction had been declined. The question was whether information about the rejection was material under SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2009(since superseded by 2018 regulations). The rule on disclosure of material information by listed companies aims to help investors make informed decisions.
For the failure to disclose, SEBI levied a penalty of Rs. 1 crore each on the 3 merchant banksthat managed the public issue and the same penalty also on the issuing company. In addition, penalty of Rs. 50 lakhs was levied on the parent of the issuing company. In the appeal filed against the penalties, SAT upheld that information about rejection of application for land use was material. But it found the penalty, levied at the maximum of the scale on the merchant bankers and the issuer, excessive. SAT, accordingly, reduced the penalty amount to Rs. 50 lakhs for the issuing company and a total of Rs. 50 lakhs for the three merchant bankers, combined. There was no interference with the penalty of Rs. 50 lakhs levied on the issuer’s parent company.
Mauritius entity entitled to exemption from capital gains tax
Reaffirming income tax benefits for foreign enterprises using Mauritius as the jurisdiction of domicile for doing business in India, the Authority for Advance Ruling (AAR) for income tax upheld the exemption available under the Double Taxation Avoidance Agreement (DTAA) India has with Mauritius. The ruling was given In the matter of Becton Dickinson (Mauritius) Ltd 4 that involved a corporate restructuring. Under the DTAA, Mauritius-based entities are exempt from capital gains tax on transfer of their assets in India, including shares and securities. To avail the exemption, Mauritius entities must provide a Tax Residency Certificate and a Global Business License (GBL 1) from Mauritius.
The corporate restructuring transaction for which AAR upheld tax exemption was initiated by Becton Dickinson, a US-based company. The US parent held shares in its Indian subsidiary through a Mauritius entity that is also owned by it. Use of Mauritius-based subsidiaries iscommon in international investments in India and it is designed to take advantage of the capital gains tax exemption available under India’s tax treaty with Mauritius.
In the proposed restructuring, shares of Becton Dickinson’s Indian subsidiary would be transferred from the Mauritius subsidiary to another subsidiary in Singapore. In resisting Becton Dickinson’s efforts to benefit from the tax exemption available under the DTAA, income tax authorities argued that the beneficial interest in the shares was held by the US parent which also exercised actual control over the subsidiary in India. For these reasons, it was urged that the Mauritius subsidiary was not material and the claim for tax exemption based on Mauritius residency must be denied.
Rejecting the plea of the income tax department, the Authority for Advance Ruling confirmed that Becton Dickinson Mauritius qualifies for tax exemption under the double taxation agreement. In coming to this conclusion, the Authority took into consideration that Becton Dickinson Mauritius was in compliance with the applicable conditions – namely, possession of Tax Residency Certificate and Global Business License in Mauritius.
It is significant thatIndian income tax authorities continue with efforts to deny Mauritius entities tax exemption under the DTAA, despite Supreme Court resolving the matter in Union Of India v Azadi BachaoAndolan, wayback in 2003.5 Rejecting the nationalistic challenge to the tax exemption, the Supreme Court upheld the validity of the exemption in view of India’s taxation treaty with Mauritius. If the government is keen to deny the tax benefit, a workable option would be to withdraw the exemption currently available under the tax treaty with Mauritius. Obviously, the government is not willing to take this step which would conflict with its stated policy to welcome overseas investments into India. Hence, the lack of clarity continues.
Government introduces Personal Data Protection Bill in Lok Sabha
The government introduced the Personal Data Protection Bill, 20196 in the Lok Sabha on 10 December 2019. The bill responds to the increasing business practice to collect personal data from customers and the importance of safeguarding the data, to check violation of privacy and possibility of misuse. The proposals include the creation of a regulatory authority.
With digitization of information now a fact of life and rapid growth in e-commerce that is digitalin character, companies gain access to important information about customers. The information includes names, addresses, bank account and credit card details, and also sensitive information about health and economic conditions. The rising threat of hacking of data stored by companies makes people’s personal informationvulnerable.
The developments are the impetus for the government to step in with legislation to protect the personal data of individuals and families. The regulatory initiative in India is in keeping with international trends. Important features of the proposed legislation are outlined below.
- Regulation will apply to the following:
- Entities, mainly companies,processing data in India
- Entities based outside India but processing data related to business in India, and
- Entities outside India processing data related to any activity that involves profiling people within India
- Entities must obtain consent from users for processing their data, and consent must be in compliance with applicable standards
- Entities governed by the regulations must prepare a “privacy by design” policy that describes their business practices and the technical systems they use for protecting personal data, the preventive strategies they adopt to protect data, and how individuals’ interests are accounted for in data-processing
- Government may direct entities collecting/processing data to share with tithe data on anonymized basis, for improving service delivery or policy development
- Transfer of data outside India and storage outside India will be subject to regulation
- Financial data, health condition and biometric information, genetic data and data indicating religious/political beliefs, sexual orientation or caste/tribe status are considered sensitive and are subject to stricter standards
- Data Protection Authority of India and Appellate Authority are to be established
The proposed law recognizes the value data possesses and the security risks in collecting, processing and storing data, given the trends in online hacking and violation of data safety. Making improvements in systems and standards in data collection and management can strengthen integrity in the process. The measures can strengthen general sensitivity to data protection and integrity.
Shorter limitation to challenge compensation for land acquisition, Karnataka High Court rules
In Deputy Commissioner v S V Global Mills Ltd7 the High Court of Karnataka refused to entertain a belated appeal filed by the state government to challenge the compensation awarded for acquisition of land. The award of compensation and appeal against the award were governed by the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013that restricts court’s power to condone delay. Applying the statutory restriction, the High Court rejected the government’s appeal against an award of more than Rs. 207 crores for the lands acquired under the new Land Acquisition Act.
To assure better compensation for owners of lands acquired for public purposes and promote fair and efficient resolution of disputes, the new Act provides for payment of higher amounts of compensation for land acquired and also lays down strict timeframes for completinglegal proceedings connected with the acquisition. The scheme aims to protect the interests of landowners who lose their property without their consent, under compulsory acquisition. To challenge compensation awards made under the Act, appeals must be filed within 60 days of receiving the award. Court can condone a delay of up to 60 days in filing the appeal (section 74), subject to providing reasonable explanation for the delay. In effect, no appeal can be filed more than 120 days from the award.
In S V Mills, theappeal filed by the government had a total delay of 134 days. This was 74 days more than the period of 60 days the court can condone under the Right to Fair Compensation and Transparency in LandAcquisition, Rehabilitation and Resettlement Act, 2013. In explaining the delay, the government stated there had been problems in internal communication among different officials and the Bangalore BruhatMahanagaraPalike (BBMP). In its application, the government relied on the Limitation Act, 1963 (section 5) to argue that the additional delay could be condoned under the general law.
Referring to the established law on the subject, the court rejected the plea and refused to condone the delay. In dealing with delay in special proceedings governed by separate legislation, the general principle under the Limitation Act is inapplicable. S V Mills’ case stresses the need for timely action in questioning awards of compensation for land acquisition.
VHVK Law Bulletin is issued for information purposes only and does not constitute legal advice. For more information on any of the material covered here and/or their implications for your situation, please obtain competent legal advice.