VHVK E Newsletter February 2023

Relationship with creditor not a bar to presenting Insolvency Resolution Plan

Allegations against a related party of a creditor whose Insolvency Resolution Plan (IPR) is approved require further investigation. In Trimex Industries Pvt Ltd v Sathavahana Ispat Ltd,₁ a 3-member bench of the National Company Law Tribunal (NCLT) held there is no bar to a creditor’s related party presenting a Resolution Plan for a debtor. In the appeal filed against this order, the National Company Law Appellate Tribunal ruled the allegations leveled against the creditor and its related party must be investigated by NCLT.₂

Trimex Industries Pvt Ltd, an operational creditor of Sathavahana Ispat Ltd, alleged collusion and unfair practices in the acquisition of the financial debts of Sathavahana Ispat by a group of companies controlled by Prithvi Raj Jindal. The group acquired the financial debts at roughly a third of the outstanding balance (Rs 553 crores for a total balance of over Rs 1,600 crores). Subsequently, the group was also awarded a maintenance contract for the corporate debtor for Rs 226 crores. Another issue was the Insolvency Resolution Professional handling Sathavahana Ispat had earlier held a senior position with the Prithvi Raj Jindal group.

Rejecting the allegations against the creditor and its affiliates, NCLT held Prithvi Raj Jindal group’s Insolvency Resolution Plan could be considered along with the other plans that had been received. NCLT noted the bar under the Insolvency & Bankruptcy Code (IBC) only prevented related parties of corporate debtors from presenting Resolution Plans. Subsequent to NCLT’s decision, the IRP (against whom conflict of interests are alleged) confirmed Prithvi Raj Jindal group’s plan as “successful” and the same was duly approved by the Committee of Creditors as required under IBC.

In deciding the appeal preferred by Trimex against NCLT order, the Appellate Tribunal permitted Trimex to raise the issues about the Prithvi Raj Jindal group before the NCLT where it had filed a new application to set aside the choice of the group’s Insolvency Resolution Plan for Sathavahana Ispat. The outcome in the case will be crucial for creditors that attempt to acquire the assets of debtors at low valuations through insolvency proceedings.

Standard clauses cannot be applied mechanically against consumers

An exclusion clause in a insurance policy cannot be invoked to deny a claim when the insurer was aware of non-compliance and continued to accept premium under the policy. In delivering this ruling in Texco Marketing Pvt Ltd v Tata AIG General Insurance Co Ltd,₃ the Supreme Court re-emphasized the unequal positions of parties in standard form contracts, where one party (seller/service provider) dictates the contract and the buyer-consumer has little option to negotiate the terms.

In Texco Marketing, the standard policy excluded basement spaces from insurance cover. Yet Tata AIG issued the policy after inspecting the shop located in basement. It regularly received premium payments from the client. These facts were noted by the surveyor that inspected the shop premises when the insurance claim was filed. However, Tata AIG rejected the claim relying on the exclusion of basements in the insurance policy.

On the facts, the Supreme Court affirmed Tata AIG’s liability to pay the insurance claim. In doing so, the Court reiterated the need for caution in interpreting standard form contracts. Such contracts are often one-sided – in favour of the more dominant party that prepares the contract.

Statutory dues must be included in Insolvency Resolution Plans

In Sales Tax Officer v Rainbow Papers Ltd,₄ the Supreme Court ruled that Insolvency Resolution Plans that fail to consider corporate debtors’ statutory dues (in this case, sales tax dues) cannot be approved under the Insolvency & Bankruptcy Code, 2016 (IBC) (section 31). Providing for payment of statutory dues in resolution plans is essential even if no formal claim is submitted by the concerned authorities in response to advertisements issued by Insolvency Resolution Professionals (IRP).

In Rainbow Papers, the Sales Tax Officer submitted a claim for ~ Rs 47 crores beyond the time permitted in the advertisement inviting claims. Apparently for this reason, the Insolvency Resolution Professional treated the tax dues as “waived;” on this basis, he proceeded to finalize the Resolution Plan. As a result, the sales tax dues of the corporate debtor were not included in the plan.

Allowing the appeal filed by the Sales Tax Officer, the Supreme Court pointed out that statutory dues are secured debt both under IBC (section 3) and Gujarat Value Added Tax Act, 2003 (section 48). As such, they require consideration even in the absence of formal claim submission by the authorities during insolvency proceedings and these claims can be idenfied from debtors’ accounting records. Failure to consider statutory dues will vitiate Insolvency Resolution Plans.

Frozen parathas different from roti or chapati, attract higher GST

In re Vadilal Industries Ltd, the Gujarat GST Appellate Authority for Advance Ruling (AAAR) held frozen parathas cannot be grouped with roti and chapati; accordingly, they attract higher GST – 18 percent.₅ The ruling continues with the inconsistent practice of tax authorities with some states differentiating common food items and subjecting more recent “convenience” versions to higher tax.

In holding that parathas differ from roti and chapati, Gujarat AAAR pointed out the ingredients in parathas are more than just wheat and water. Also frozen parathas need thawing and heating before they can be eaten. With similar reasoning, Tamil Nadu GST Authority for Advance Ruling held in 2021 that batter for making idli and dosa attract higher tax when sold in dry form.₆ This approach, apparently, views recent “convenience” versions of common food items as luxury or premium commodities and subjects them to higher rate (18 percent).

Per contra in 2018, Maharashtra Advance Ruling Authority determined In re Signature International Foods India Pvt Ltd ₇ that all types of Indian bread, by whatever name called, would be classified as roti and taxed at the lower rate of 5 percent applicable to food items. This is a more progressive and taxpayer-friendly approach; it recognizes developments in the market and people’s food habits, and that variations in product names that are a common phenomenon. It is a fact “convenience” foods have become important part in contemporary families’ diet with both spouses working full-time and lacking time for elaborate food preparation.

Google subject to penalty and injunction for anti-competitive practices

Competition Commission of India upheld complaints filed against Google and its affiliates for engaging in anti-competitive practices and abuse of market dominance. With this ruling in XYZ v Alphabet Inc,₈ the Commission levied penalty of Rs 936 crores and also granted injunctive relief (“cease and desist” orders) against Google and affiliates.

On complaints filed by apps developers and sellers of digital goods on Android devices, Competition Commission ordered an investigation against Google and its affiliates. The main complaints were:

• App developer had to route all sales of digital goods through Google’s payment system
• App developer-owners must only use Google Play’s Billing System (GPBS), not just for apps and digital products (e.g. music, video, games) sold through Google Play Store, but also for in-app purchases made by customers after downloading/purchasing apps from Google Play Store.In addition to the penalty (Rs 936.44 crores), Competition Commission passed orders against Google and affiliates to discontinue the anti-competitive practices. In particular, Google/affiliates must:
• permit app owners to use other payment service providers
• not restrict app owners from communicating with app owners
• refrain from imposing unfair/unreasonable conditions on app ownersThe outcome against Google and affiliates is an important milestone in promoting a fairer marketplace. Intervention by the Competition Commission can check abusive conduct by large companies – in particular Big Tech – that routinely impose unreasonable terms on smaller companies that have little option but to do business through Big Tech.

Freeze lifted for Xiaomi bank deposits attached for transfer pricing dispute

Karnataka High Court in Xiaomi Technology India Pvt Ltd v Dy Commissioner of Income Tax₉ conditionally vacated the attachment (freezing) of the bank deposits of Xiaomi, the Chinese maker of cellphones. The attachment was ordered against the backdrop of a pending dispute on transfer pricing by Xiaomi’s Indian subsidiary and its payments to its overseas parent and an affiliate.

Income Tax officials seek to exclude royalty payments made by Xiaomi India to its Chinese parent and a US affiliate in computing the company’s taxable profits. Income Tax officials issued a notice to this effect on 30 July 2022 and Xiaomi India submitted a detailed reply shortly thereafter – on 10 August 2022. Yet the next day – 11 August 2022 – IT officials passed orders attaching bank deposits of Rs 3,700 crores held by Xiaomi India.

Challenging the attachment order, Xiaomi India pointed out the disputed tax amount was minuscule and disproportionate – only about 20 percent of the bank deposits. Also the attachment order was passed without application of mind and there was no risk of non-recovery of tax as Xiaomi has large operations in India and owns valuable assets. Accepting the pleas, Karnataka High Court vacated the attachment subject to the condition that the funds could not be remitted abroad. However, Xiaomi India could obtain overdraft against the bank deposits to make overseas remittances.