IN TOUCH IN TUNEIssue II March, 2017 With the Developments in Law and Business

Fiscal Roadmap

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CONTENTS

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COMPAT Orders CCI to Investigate Uber For

an alleged Abuse of Dominance

Significant Deals

From The Founder’s Desk

Data Encryption and Privacy Laws in India

Not So Neutral About Net Neutrality

Captive Power Generation and the Proposed

Amendment

Taxation of OIDAR Services : Recent

Amendments and Impacts

Lack of Attendance Equals Loss of

Directorship

2015 Bilateral Investment Treaty Model

Investor Friendly

Exclusivity In CGD Network And Competition

Concerns

Mergers In India : Stamp Duty Woes Set to

Continue

Indemnity : The Shield To Contracts

All rights reserved. This disclaimer governs the use of this newsletter. HSA Advocates retains the copyright of all the material published. No part/section

can be reproduced in any form without prior written permission from the copyright holder. The views expressed in the publication do not necessarily

reflect the views of the firm. The newsletter should not be construed as a legal opinion of the firm on any subject.

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Feature Article : Fiscal Roadmap 2017-18

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Editorial Board

Amitabh Sharma

Managing Partner

Aparajit Bhattacharya

Partner

Anjan Dasgupta

Partner

Aninda Pal

Partner

Amrita Narayan

Associate Partner

Avijeet Lala

Partner

Megha Arora

Partner

Ramya Hariharan

Partner

Bharat Sharma

Partner

Soumya Kanti De Mallik

Associate Partner

AWARDS

RECOGNITIONS

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From The Founder’s Desk Last year began with the launch of “HSA vision 2021”. While the philosophical bedrock of our vision remained the same, however, the institutional structure needed to be recalibrated to enable the significantly larger planned team strength, new management and leadership collegium. Already this vision has seen traction with a near doubling of our partnership collegium, a significantly larger team strength and re-structured management. With several experienced and recognized senior practitioners coming on board, our practice areas have matured and deepened tremendously. “HSA vision 2021”, has been carefully crafted and strategically built to create a knowledge based foundation on which the firm will grow and be increasingly recognized as a thought leader in our chosen areas of practice.

HSA’s newsletter, In Touch, In Tune is yet another channel that showcases our knowledge driven approach. Our attorneys have invested considerable time and research to put together insightful thoughts, which will showcase an analysis of significant developments to help you decipher the impact of these events on your business and operations.

The featured article in this edition is on Budget 2017, which highlights the significant announcements made by the Hon’ble Finance Minister in his Budget speech on February 1, 2017. HSA views the Budget as growth and development oriented, giving a huge impetus to the infrastructure sector, tax sops to start-ups, MSMEs etc.,and also significant measures to check the menace of black money and the resultant corrupt practices. These factors boost investor confidence and facilitate ease of doing business in India. The FM also made a clear indication that Goods and Service Tax laws would be rolled out this year, thereby sending positive signals to the industry.

I am confident that this second edition of In Touch, In Tune will initiate intellectual discussions on diverse topics that will, in turn, help us understand your businesses better. We will con-tinue to use our depth of experience and knowledge leadership to deliver value to clients, as well as be the plank that will differentiate us.

Hemant SahaiFounding Partner

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HSA is advising the International Finance

Corporation (IFC) and the Inland Water-

ways Authority of India on a first of a kind, pilot project, for the development of inland waterways terminals through private participation at Garden Reach in Kolkata and Kalughat and Gaighat in Patna. This first of a kind model will act as a precedent and will be replicated for devel-opment of inland waterways terminals across India.

HSA is advising International Finance Corporation (IFC) on the development of 6 healthcare facilities in Bhubaneswar, Odisha to be developed on Public Private Partnership (PPP) basis. Patients nominat-ed by the Government of Odisha would be provided healthcare services at conces-sional rates. Krishna Institute of Medical Sciences has been declared as the selected bidder.

HSA is advising International Finance Corporation (IFC) on the development of healthcare facilities for the elderly on a PPP basis in Dhaka, Bangladesh. The proposed healthcare facility focusses on the develop-ment of healthcare facilities in Bangladesh with special focus on geriatric care and auxiliary activities for the elderly.

HSA is advising Kutch Railway Company

Limited ( between Rail Vikas Nigam Limited, Government of Gujarat, Kandla Port Trust, Mundra Port & SEZ Limited and Government of Gujarat) on the expansion of a broad gauge rail link connectivity between Palanpur to Gandhidham (approx. 300 km) in the state of Gujarat.

HSA advised the Government of Goa for the development of the first major green-field airport project to be developed on PPP basis at Mopa, Goa. HSA assisted in structuring the PPP, advising the Authority on bankability and on the legal framework on greenfield airports, preparing the bid

Projects, Energy & Infrastructures

Significant Deals

documents, responding to queries from bidders, evaluation of the bids at the RFQ and RFP stages and execution of the concession agreement. GMR Airports Limited was declared as the selected bidder for development of the greenfield airport.

HSA advised Statkraft BLP Solar

Solutions on the EPC Contract and O&M Contract for a solar power project to be located at Karnataka.

HSA advised Ostro Energy Private Limit-

ed in relation to an EPC contract for a 50 MW Solar PV Project in the state of Telan-gana.

HSA advised NITI Aayog on the draft Concession Agreement for the rehabilita-tion and upgradation of a two lane plus paved /shard shoulder road project from 24.800 km of NH-75 (Gwalior-Jhansi Section) to 19.00 km upto Ghongha Village (Dabra-Singhpur Road) via. Bilua village (Length 19.00 km.) in the State of Madhya Pradesh on Design-Build-Finance-Oper-ate-Transfer (DBFOT) basis.

HSA advised NITI Aayog on the Draft Concession Agreement for the develop-ment of Four / Six Laning of Solapur– Bijapur of NH-13 (New NH no. 52) from 0.00 km to 110.542 km in the state of Maharashtra on Design-Build-Finance-Op-erate-Transfer (DBFOT) basis.

HSA advised NITI Aayog on draft conces-sion agreement for the development, operation and maintenance of Sri Gangan-agar – Pacca Saharna section of SH – 36 through PPP on DBFOT Toll Basis.

Corporate Commercial and M&A

HSA advised ReNew Power Ventures

Limited on the acquisitions of various renewable energy (wind and solar)

projects across the states of Gujarat (Shruti Power) and Rajasthan (Vikram Solar and four related entities), aggregating more than 72 MW (for wind and solar).

HSA advised Ostro Energy on the acquisi-tions of various renewable energy (solar) projects across the state of Telangana (Prathamesh), aggregating more than 50 MW (for solar).

HSA advised Hero Group (Rockman Industries Limited) on the acquisition of Moldex Composites Private Limited, a leading global Formula 1 automotive component manufacturer.

HSA advised Siguler Guff (Avigo Venture Investments and Metmin) on divestment of their majority equity stake in Rinac India Limited.

HSA advised Altra Industrial Motion

Corp (through Hebert Smith Freehills, Germany) on the indirect acquisition of GKN Land Systems Private Limited.

Lender's legal counsel to PTC India

Finacial Services Limited on two independent financing transactions in relation to (i) a 22.4 MW wind based power project in Kurnool District, Andhra Pradesh at an estimated cost of INR 1170 million and (ii) a 50 MW solar based power project in Betul District, Madhya Pradesh at an estimated cost of INR 3000 million (includ-ing working capital lender i.e. State Bank of Mysore). Lender's legal counsel to State Bank of

Hyderabad for financing the develop-ment of 2-laning of the 46.98 km Garra Waraseoni Tumsar road up to Maharashtra border in the state of Madhya Pradesh on DBFOT model at an estimated cost of INR 537.5 million.

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Business & Finance

a joint venture company

Borrower's Legal Counsel to Fujin Wind

Parks Private Limited for financing of 46 MW Wind Power Project in the state of Andhra Pradesh at an estimated cost of INR 2960 million.

Lender’s Legal Counsel to State Bank of

India on two independent financing transactions in relation to (i) construc-tion of a mall cum commercial real estate project named “Esplanade Mall” by Safari Retreats Private Limited and (ii) on refinancing of thermal power station at Khaperkheda of Maharashtra State Power Generation Company Limited.

Lender’s Legal Counsel to Deutsche

Bank in respect of term loan extended to Prestige Estates Projects Limited for development of residential projects. Lender’s Legal Counsel to Rural Electrifi-

cation Corporation Limited in respect of additional cost overrun extended to Teesta Urja Limited for its hydroelectric power project located in the north district of Sikkim.

Lender’s Legal Counsel to Lenders’

Consortium led by Power Finance

Corporation Limited on cost overrun funding extended to KSK Mahanadi Power Company Limited for its coal based thermal power plant at District Janjgir Champa, Chhattisgarh.

Lender’s Legal Counsel to YES Bank

Limited, on two independent financing transactions in respect of (i) term loan financing extended to Caddie Hotels Private Limited for funding pertaining to hotels “Novotel” and “Pullman” and (ii) term loan extended to Fortis Hospitals Limited.

Lender’s Legal Counsel to L&T Finance

Limited in respect of infrastructure financing extended to Continuum Wind Energy (India) Private Limited for its wind power project at Rajkot, Gujarat.

Lender’s Legal Counsel to Union Bank of

India, in respect of third cost overrun extended to Teesta Urja Limited for its hydroelectric power project located in the north district of Sikkim.

Dispute Resolution

Represented West Bengal State

Electricity Distribution Company

Limited (WBSEDCL) before APTEL. Indian Railways require power for running their trains across India and have been taking power from the distribution companies in different states as a consumer for this purpose. Recently, the Indian Railways approached CERC for a declaration that it is entitled under the Indian electricity laws to carry out distribu-tion of electricity in different states for meeting its own requirement of power for stations, residential colonies and offices. Such declaration was made by CERC, which is being challenged by WBSEDCL.

Represented Damodar Valley Corpo-

ration before Jharkhand Electricity Regulatory Commission. The petition has been filed jointly by two of the companies involved in distributing electricity in the state of Jharkhand to develop a roadmap that allows the two companies to share their cross-subsidy burden for ensuring cheaper electricity to consumers.

Represented Renew Power, Ostro

Energy, CLP India, Mytrah, Orange

Renewable, Hero Future and Green-

ko before Rajasthan Electricity Regula-tory Commission. Over approximately the last two years, on a regular basis, instructions are being received by the wind energy generators (WEG) from the State Load Despatch Centre (‘SLDC’) to back down generation. Such instructions are not a one-off and are regularly being issued by the SLDC in contravention of the provisions of Electricity Act, 2003. As a result of such arbitrary backing down instructions, the WEGs are facing huge generation and financial losses, especially during the high wind season. As per the existing legal and regulatory frame-work, WEGs are a must run plant and are not subject to merit order dispatch principles. Despite such being the

statutory mandate, the “must-run” status accorded to the WEG’s is not being respected by the SLDC and heavy backing down is being imposed on them especially in the high wind season (May to August) when almost 65% of the annual revenue is generated by the WEGs. Perturbed by the regular backing down instructions issued by the SLDC in violation of the statutory provisions, 7 renowned renewable energy compa-nies (including their group companies), namely, Renew Power, Ostro Energy, CLP India, Mytrah, Orange Renewable, Hero Future and Greenko who are the key players in the renewable energy sector, have approached the RERC seeking a declaration that the backing down instructions being issued by the SLDC are arbitrary and illegal. Direc-tions are also being sought against the SLDC to comply with the Regulations and not to issue directions for backing down generation of the involved 19 Wind Power Projects as they are must run plants.

Represented Vizhinjam International

Seaport Limited (VISL) before Nation-al Green Tribunal, Principal Bench. Under the Indian environmental laws, all major projects require environmen-tal clearance from the concerned minis-try after rigorous examination of the impact of the project on the environ-ment. The present assignment was critical for the development of port sector in India as it involved defending the development of the very first deep water trans-shipment container port in India, which was challenged on the ground that the environmental clear-ance for the port was not issued proper-ly and did not take into account the impact on nearby coastline.

The matter also raised an important legal issue on the power of a statutory tribunal to carry out functions of judicial review in relation to any delegated legislation framed by the government under different environ-mental statutes.

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Maritime cargo for India is offloaded in Sri Lanka, Singapore, Dubai and Salalah, from where they are brought into India in smaller ships. The Vizhinjam port with its natural depth can accommodate large mother ships, carrying cargo on interna-tional shipping routes and thereby allow trans-shipment and bulk cargo breaking in India which, will greatly reduce the cost of maritime cargo for Indian exporters and importers. The present port will act as a gateway port to the country and aid overall economic development of the region and the country.

Represented Hindustan Power Projects

Ltd. and EMCO Ltd. before the Gujarat Electricity Regulatory Commission. This matter deals with the charges that can be levied by solar power companies from distribution companies, who buy power from the solar power companies to supply to their consumers.

The Indian government has introduced various initiatives for encouraging the development and use of renewable energy – including solar power.

Sale of power by generating companies to distribution companies is regulated by the sectoral regulator, including the price at which power is sold to the discoms. The present matter relates to the state of Gujarat where the regulator had fixed the price of solar power for two categories of companies – one availing accelerated depreciation on the project and thereby being entitled to deductions on the profits (AD tariff), the other for companies forming special purpose vehicles who are not interested in availing depreciation (non-AD tariff). Disputes arose between the distribution and generating compa-nies since the regulator had not indicated the non-AD tariff in the operational part of its order. Discoms claimed that solar companies could therefore charge only AD tariff. Judgment of the Supreme Court puts to rest the ambiguity. The Supreme Court has clarified that the order of the regulator has to be read to give both options to the solar developers.

The aforesaid issue is vital to the renewa-ble energy sector and impacts all solar

project developers who have devel-oped projects on a SPV basis.

Represented Khuzemabhai Syedna

Taher Saifuddin Saheb before

Bombay High Court. The suit was filed by Khuzaima Qutbuddin against Mufaddal Saifuddin inter alia seeking declaration that he is the 53rd Dai al Mutlaq (spiritual leader of the Dawoodi Bohra Community) after the 52nd Dai al Mutlaq, Syedna Mohammed Burhanuudin who passed away on 17th January 2014. During the pendency of the trial, the Plaintiff expired. The son of the Plaintiff is now claiming to be appointed by his father as his successor and as the 54th Daial a Mutlaq has filed an application in the Bombay High Court, requesting the court to allow him to continue the suit. It is the case of the Defend-ant that the suit has abated in view of the fact that the right to a religious office is a personal right which stood extinguished on the death of the Plaintiff. The applica-tion is pending hearing in the Bombay High Court.

Represented Larsen & Toubro in Coal Appellate Tribunal for Electrici-ty before APTEL. We managed to secure supply of adequate quantum of coal throughout the term of the Power Purchase Agreement (PPA) (i.e., 25 years from commercial operation) which has been allowed by the APTEL by way of exercise of regulatory powers in absence of unequivocal provisions in the Power Purchase Agreement (PPA). This is one of the first matters where regulatory power was exercised to provide a solution to a generating company which faced shortfall in supply of domestic coal.

The matter involved immense finan-cial implication as the shortfall of coal entailed direct implication on capacity of generation. The matter has in a way created a precedent for a Case 2 project whereby developer of a project can ensure continuous

adequate quantum of coal for a thermal project.

Represented Kale Logistics before the Airports Economic Regulatory Appeallate Authority (AERAAT). M/s Kale Logistics is providing certain Electronic Data Interchange Services (EDI Services) in Mumbai Airport to enable its users to process cargo related documentation online and / or track movement of cargo shipments to and from the Mumbai airport. It is a platform that allows persons involved in the movement and handling of air cargo to track cargo movement from its point of origin till its final destina-tion. The Airports Economic Regulatory Authority (AERA), which is responsi-ble to fix airport charges for the Mumbai airport has initially proceed-ed to treat all revenue generated by Kale Logistics as part of airport charg-es on the basis that such services formed part of the cargo handling functions of the airport operator. However, AERA finally reconsidered the position and came to the finding that such EDI services were not part of airport operations and this excluded the charges from airport charges. HSA played an extensive role in advising Kale on the legal approach in the matter and making detailed submis-sions for AERA.

The matter is of significant impor-tance from the perspective of airport economic regulation as it helped in developing ground rules and jurispru-dence on whether entities who provide services to the airport opera-tors to enhance their efficiency in carrying out essential airport opera-tions would also be subject to the jurisdiction of the regulator. The view has been finally taken by AERA depending on the nature of the service, and not solely on the fact that it relates to airport operations.

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The Union Budget 2017 was present-ed in the backdrop of demonetization and passage of the Constitutional GST bill. It was therefore, expected to bring in big bang reforms giving a fillip to the economy. The Budget 2017 has been hailed the industry as a balanced and a good budget giving equal weightage to agriculture, poverty alleviation, rural areas on the one hand has also provided necessary impetus to infrastructure, start-ups, and real estate. We have, in this article, highlighted the key announce-ments made in Budget 2017 by the Hon’ble Finance Minister.

Infrastructure sector

It is a globally accepted principle that growth of infrastructure is imperative to the growth of the economy of a country. This Government has consistently supported infrastructure growth of India. The last year’s Budget 2016 emphasized on development of roads and highways and had allocat-ed huge Budgetary funds to the said sector.

Continuing the goods work, Budget 2017 announced a record budgetary allocation of INR 3,96,135 lakh crores towards development of Infrastruc-ture with special focus on roads and highways, solar and civil aviation.

FDI & Regulatory

On the Foreign Direct Investment (“FDI”) reforms, the Budget 2017 has proposed to abolish Foreign Invest-ment Promotion Board (“FIPB”) in 2017-18. This considering that over 90% of FDI inflows are now through

the automatic route.

In a major relief to Foreign Institution-al Investors, the provisions of indirect transfer of assets would not be appli-cable to Foreign Portfolio Investors (“FPIs”) Category I and II in respect of sale of shares or redemption of units to their non-resident investors. This move would increase investment in stock market in India.

On the resolution of disputes in infrastructure related construction contracts, PPP and public utility contracts, it has been proposed to amend the Arbitration & Conciliation Act, 1996 to incorporate relevant mechanisms for dispute resolution in the infra space.

Also integration and consolidation of Central Public Sector Enterprises especially in the oil and gas sector has been proposed. It is proposed to create an integrated public sector oil major to compete with international and domestic private sector oil and gas companies.

Although, bountiful direct tax propos-als were announced in tune with the ten themes of the Budget 2017, however, as expected no major indirect tax proposals were announced in light to the implemen-tation of GST shortly

To strengthen the banks and the banking sector generally, an alloca-tion of INR 10,000 crores for recapitali-sation of banks with promise to provide additional allocation was announced.

Digital Economy/Cashless Economy

One of the objects of demonetization of large currency of INR 500 and INR.1000 in November 2016, was to discourage cash transactions and encourage a cashless / digital econo-my. This serves a twin purpose of curbing creation of black money and expands the tax base resulting in higher collection of tax.

The Budget 2017 proposed a number of measures to promote the digital economy in the country such as Refer-ral Bonus Scheme for individuals and a cashback scheme for merchants to promote the usage of BHIM app for digital payments, and the launch of Aadhar pay to benefit those without a debit card.

Further, to promote cashless transac-tions, the FM proposed that business expenses incurred in cash exceeding INR 10,000 will not be allowed as deduction towards business expendi-ture. Cash donations exceeding INR 2000 will be taxable in the hands of the political parties. Also, in order to claim exemption in respect of dona-tions, political parties are required to file their income tax return within the prescribed date. Cash transactions above INR 3 lakhs will not be permit-ted, other than certain specified trans-actions. In order to encourage cashless transaction for small businesses presumptive tax rate has been reduced from 8% to 6% in respect of receipts received through banking channels or electronic payment.

Feature Article : Fiscal Roadmap 2017-18

Nand KishorehoororehoorehoPartner

ticleaturat re Articleticle :

Anshul sharmaar aaaarrmaha aarmahaAssociates

Rashi ShrekhaAssociate

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Startups

The Budget continues to encourage startups as most of the proposals laid out in the Budget aim at easing the operational challenges being faced by start-ups. The condition of continuous holding of 51% of voting rights by original promoters for carry forward of losses in respect of start-ups has been relaxed subject to the condition that the holding of the original promoter/promoters continues. Also, the profit linked deduction available to start-ups for 3 years out of 5 years has been changed to 3 years out of 7 years, giving start-ups more time and flexibility to choose their 3 year tax holiday. Further, carry forward of MAT credit has now been permitted up to a period of 15 years instead of 10 years at present. For MSMEs with an annual turnover of up to INR 50 crores the income tax rate has been reduced to 25% from the current applicable rate of 30%.

Real Estate and affordable housing

The Budget 2017 has attempted to revive the real estate sector most impacted by the demonetization. Rural affordable housing has been granted infrastructure status enabling such projects to avail tax benefits. On the capital gains taxes, the period to reckon long term gains has been reduced from 3 years to 2 years and the indexation dates have also been advanced. Builders treating unsold housing units as stock in trade have been exempted from payment of tax on notional annual rent for 1 year. For Joint Development Agreements, the capital gains tax on transfer of land by the owner is proposed to be deferred till the completion of the project. These steps should give impetus to the real estate sector.

Banking and Finance

Due to demonetization, credit growth has hit an all-time-low of 5% and has resulted in substantial increase in the liquidity of the banks. Recapitaliza-tion of PSU banks by INR 10,000 crores

under Indradhanush scheme and increase in provisioning for NPA from 7.5% to 8.5% will provide some relief to PSU banks which are saddled with stressed assets. Measures such as inclusion of NBFC as QIB, extension of concessional withholding for foreign entity for ECB and Bonds (including masala bonds) from 30-06-2017 to 30-06-2020 will strengthen the capital market and channelize investment. Proposed refinancing by National Housing Bank of individual housing loans of about INR 20,000 crore in 2017-18 will be a welcome move for housing finance.

Tax proposals

Direct taxes

The FM did not tinker with the corpo-rate tax rates which was retained at 30 per cent. However, in order to give impetus to Micro, Medium and Small Enterprises (MSME), the tax rate was cut to 25% provided the total turno-ver of the enterprise is less than INR 50 crores per annum.

Minimum Alternative Tax (“MAT”) of 18.5% continued despite strong demand from the industry to abolish the same.

On the personal tax front, the Budget provided partial relief to the low to medium income category by reduc-ing the rates from 10% to 5% in respect of the slab INR 250,000 – INR 500,000. However, in order to make good the loss of revenue, the FM proposed a levy of surcharge of 10% in respect of income exceeding INR 50 lakhs but not exceeding INR 1 crores.

The Budget did not announce postponement of (“GAAR”) and (“POEM”), two major anti avoidance measures. With effect from April 1, 2017, these two measures would be fully effective.

Indirect taxes

There was no change in either the median rates of Excise or Service tax.

Clearly, the Government is hinting that Goods and Service Tax (“GST”) is inevitable and would be introduced this year shortly.

There has been no change in the customs duty rate.

On the tax dispute resolution side, the Advance Ruling Authority under the Excise, Customs and Service tax laws have been merged with that of the Income tax law thereby providing a single forum for all Central tax laws.

HSA' Assessment

Budget 2017 can be seen as taking forward the development agenda of this Government. In that sense this is a well-balanced and a good budget. The initiative to curb black money and to promote digitalization of transac-tion is one of the highlights of this Budget and the Government must be commended for taking such a bold and a progressive step.

Though on the downside, the ration-alization of corporate tax was expect-ed and more so since the Hon’ble Finance Minister had promised bring-ing down the tax rates to 25 % in due course. As a result, India continues to be one of the high tax jurisdiction and along with an imposing 15% Dividend Deduction Tax makes investment in India a very expensive proposition for investors.

The date for rolling out of the GST was not announced, continuing the suspense and uncertainty over the new legislation.

On the fiscal side, as per the Economic Survey, the Government would be in a position to achieve fiscal deficit target of 3.5% in 2016-17. Despite heavy budgetary allocation and given the backdrop of uncertain oil price and lower exports on account of Brexit and US new President’s protectionist policies, the FM was confident of arresting the fiscal deficit to 3.2%, which is a positive take away.

COMPAT orders CCI to investigate Uber for an alleged Abuse of Dominance

The recent decision of Competition Appel-late Tribunal (“COMPAT”) in the matter of M/s Meru Travel Solutions Pvt. Ltd. vs Uber India Systems Pvt. Ltd. & Ors referring the complaint of Meru, which had been earlier rejected by Competition Commission of India (“CCI”), for further investigation, highlights certain important issues in competition jurisprudence.

Meru Travel Solutions Pvt. Ltd ('Meru'), which is engaged in the business of radio taxi service in India had approached the CCI in 2015 against the Uber Group alleging that Uber, owing to its deep pockets had resorted to numerous anti-competitive practices to strengthen its dominant position in the radio taxi services market in the National Capital Region (NCR) area. Meru had also alleged that Uber was offering huge discounts in addition to already reduced tariffs to consumers and high incentives to retain drivers at the cost of losing INR 204/- per trip. According to Meru, Uber’s policy of charging prices below cost with an objec-tive to eliminate competitors and recoup investment at a later stage amounted to predatory pricing. Uber’s policy was based solely to gain the loyalty of the taxi owners and to prevent passengers/customers from obtaining radio taxi services from other such operators. Meru also alleged that Uber was entering into exclusive contracts with taxi owners whereby the taxi drivers were restrained from getting attached to any other competing radio taxi operators’ network. In support of its complaint, Meru claimed that pursuant to such predatory pricing by Uber, Meru’s market share had diminished from 18% in December 2013 to about 11% in Septem-ber 2015, whereas Uber’s market share had increased from nowhere to a market share of about 50%.

To establish Uber’s dominant position, Meru had relied upon two market research reports prepared by New Age TechSci Research Pvt. Ltd. (“the TechSci report”) and 6Wresearch (“the 6Wresearch

report”).

After hearing both Meru and Uber, the CCI took a prima facie view that the relevant geographic market for the radio taxi services was Delhi as opposed to NCR, and that Uber did not enjoy a dominant position in the Delhi market since there is a vibrant and dynamic radio taxi service market in Delhi consisting of several service providers considering the fluctuat-ing market share figures of various players. CCI also observed that the radio taxi services market in Delhi is competitive in nature and Uber does not appear to be holding a dominant position in the relevant market. Therefore, CCI was primarily guided by the market share of Uber to conclude that it did not enjoy a dominant position. Accordingly, the complaint was dismissed at the prelimi-nary stage without any further investiga-tion into the matter by the DG Investiga-tion.

Meru challenged CCI’s order dismissing its complaint before the Appellate Authority. COMPAT has set aside the order of CCI and remanded the matter to CCI for investiga-tion. The observations made by COMPAT in its judgment are of significant impor-tance and reiterate some of the basic parameters for defining dominance, and at the same time the expected role of CCI in dealing with complaints at the initial stages while taking a prima facie view on the admission of complaints. Some of the important takeaways from the judgment are:-

is dominant in a particular market is notnecessarily dependent on the market share of the entity in such market. It may be determined on the basis of other factors such as size and resources of the enterprise, size of the competitors, economic power of the enterprise includ-ing commercial advantages over competi-tors and such other factors indicated in Section 19 of the Competition Act. In this case, the COMPAT looked at the ultimate parent companies that had set up Uber in India, their financial position worldwide and the funding made available to Uber in India.

anti-competitive conduct, a deeper determinative exercise either on the relevant market or the existence of anti-competitive conditions may not be required to take a preliminary view to refer the matter for further investigation.

provided by the informant has conflicting inputs should not necessarily be a ground for rejecting such information. The Commission should weigh the informa-tion independently for forming its opinion.

The first issue is of significant importance for competition jurisprudence. The judgment of COMPAT underlines the fact that market share is only one of the tools to consider dominance, and that even new entrants in a market may come under the scanner of CCI, if the promotional tools/ incentives introduced by them are not justified in terms of costing combined with the size and economic power of such entity or its promoters in other markets, whether domestic or in other jurisdictions.

Shuchi SinghAssociate

Sakya ChaudhuriPartner

AT orders CCI to

Ikleen Kaur Associate

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Data Encryption and Privacy Laws in India – A Commentary on the WhatsApp Matters

On April 5, 2016, the creators of WhatsApp promised full end-to-end encryption to all users who would update to the latest version of the app. Simply put, end-to-end encryption by WhatsApp ensures only the user and the person they are communicating with can read what is sent, and nobody in between can read or decipher those communications, not even WhatsApp.

The National Security Controversy

While end-to-end encryption has been lauded for being the epitome of user privacy, there have been national security concerns in India over its introduction. In June 2016, Sudhir Yadav, a Haryana based activist filed a petition seeking a ban on WhatsApp in India on the ground that its end-to-end encryption compromises national security by allowing terrorists a means of communication that is impossi-ble to intercept. His petition stated that “Even if WhatsApp was asked to break through an individual’s message to hand over the data to the government, it too would fail as it does not have the decryp-tion key either.”

Applicable Legal Framework

India lacks any specific legislation on encryption per se. In his petition, Sudhir Yadav argued violation of Section 5(2) of the Indian Telegraph Act, 1885, Rule 419A of the Indian Telegraph Rules, 1951, Section 69 of the Information Technology Act, 2000 and the Information Technolo-gy (Procedure and Safeguards for Interception, Monitoring and Decryption of Information) Rules 2009, all of which give the Government the power to direct interception of messages under certain situations, such as a public emergency or in the interest of national security. The petition also stated that as per the license requirements for provision of internet services, private parties in India cannot use an encryption limit higher than 40 bits without permission from the Govern-ment but this was challenged on the ground that such limit is applicable only

to internet service providers and telecom service providers. Then there is also Section 84A of the Information Technolo-gy Act, 2000 which gives the Central Government the authority to frame any rules on the use and regulation of encryp-tion. However, no existing rules have been framed by the Central Government under this section.

Judgment

Without going into the merits of the case, the Supreme Court dismissed the petition on June 29, 2016, directing Sudhir Gupta to approach the appropriate forum. WhatsApp, not being a party to the petition, was not impleaded.

The Data Privacy Controversy

Following Sudhir Yadav’s petition, two students, Karmanya Singh Sareen and Shreya Sethi filed a petition in the Delhi High Court on August 30, 2016 express-ing concerns about changes in WhatsApp’s revised terms of use and privacy policy that was released on August 25, 2016 following its acquisition by Facebook. Under the revised privacy policy, WhatsApp declared its intention to share its users’ personal information, including their phone numbers, with its new parent company, Facebook. WhatsApp had given its users a 30-day period to opt out of the new privacy policy which expired on September 25, 2016.

It was contended in the petition that the proposed change in the privacy policy of WhatsApp amounted to infringement of the Right to Privacy guaranteed under Article 21 of the Constitution of India.

Applicable Legal Framework

Other than the Right to Privacy which was contended to be a Constitutional right, there were arguments around Section 10A of the Information Technology Act, 2000 which validates electronic contracts. It was argued on behalf of WhatsApp that

clickwrap contracts1 will be recognized in India under Section 10A and therefore, since consent was already taken from the users in the clickwrap format in relation to information sharing with Facebook, no law or user privacy was violated in this regard.

Judgment

The contention based on the Right to Privacy was rejected as invalid since the legal position regarding the existence of the fundamental right to privacy is yet to be authoritatively decided. The matter was therefore, disposed of by the High Court on September 23, 2016 with three directions to protect the interest of the users of WhatsApp:

i) If the users opt for completely deleting “WhatsApp” account before 25.09.2016, the information/data/details of such users should be deleted completely from “WhatsApp” servers and the same shall not be shared with the “Facebook” or any one of its group companies.

ii) So far as the users who opt to remain in “WhatsApp” are concerned, the existing information/data/details of such users upto 25.09.2016 shall not be shared with “Facebook” or any one of its group companies.

iii) The respondent Nos.1 (i.e. Union of India) and 5 (i.e. Telecom Regulatory Authority of India) shall consider the issues regarding the functioning of the Internet Messaging Applications like “WhatsApp” and take an appropriate decision at the earliest as to whether it is feasible to bring the same under the statutory regulatory framework.

Conclusion

Although both the WhatsApp matters have been dismissed, the concerns remain. There is clearly a legal vacuum in this area and Internet Messaging Applica-tions like WhatsApp continue to remain unlicensed and unregulated under the

ters

Debarupa Agarwalalr allarwwaa AAgapa allarwwaarAAgapaSenior Associate

Da

Bharat SharmaB raBhB raBha a Shat ShharBB raBharaat ShharPartner

08

______________________________ 1A clickwrap contract is a type of contract that is widely used with software licenses and online transac-tions in which a user must agree to terms and conditions prior to using the product or service. The format and content of clickwrap agreements vary by vendor. However, most clickwrap agreements require the consent of end users by clicking an “OK”, “I Accept” or “I Agree” button on a pop-up window or a dialog box. The user may reject the agreement by clicking the “Cancel” button or closing the window. Once rejected, the user is unable to use the service or product. A clickwrap contract is also known as a clickwrap license or clickthrough contract.

laws of India. As has been highlighted in both the above matters, now is a good time to establish a statutory regulatory framework to govern the same as matters of national security and user privacy, at the end of the day, are not trivial matters to be ignored by the State.

09

The first half of 2016 was almost witness to a progressive partnership between Facebook and Reliance Communications in India to offer the Free Basics service. However, the deal could not be complet-ed due to the order passed by the Telecom Regulatory Authority of India (“TRAI”) on February 8, 2016, which effectively brought the concept of ‘net neutrality’ into the limelight.

The term “net neutrality” refers to the principle that application/ service provid-ers shall treat all internet traffic on an equal basis, without making exceptions based on type, origin, destination of the content or means of its transmission. TRAI’s Order and subsequent consulta-tion papers promoting net neutrality caused a split between two opposing camps, one for and the other against net neutrality. Free Basics service was constructed around the principle of zero rating implying that Reliance Communi-cations would offer to its users the ability to browse certain applications, like Facebook, without charging money for data consumed, i.e., making the brows-ing of such websites/ applications essen-tially free of cost to the users. The Free Basics service, thus, opposed the ethics of net neutrality.

While on one hand, it is argued that allowing differential pricing, which implies charging one price for users to download or access some content, but a different price for other content, would hinder free play of market forces and subsequently limit the number of options for users by providing an advan-tage to certain service/ application providers over others. However, on the other hand, a strong case for differential pricing had been put forth by the Cellular Operators Association of India (“COAI”) in its various letters to TRAI. It was contended on behalf of the service/ application providers that differential pricing would increase the audience for mobile services in due course.

TRAI is the first regulator worldwide to

Not So Neutral About Net Neutrality

have provided a holistic ruling in favour of net neutrality and banning differential pricing of content, while its contempo-rary regulators in the USA and EU have preferred a case-by-case approach. TRAI propagates non-discriminatory access and claims that allowing service/ applica-tion providers, like Reliance/ Airtel/ Facebook, to define the kind of access would be like allowing the user’s internet experience to be shaped for him/her. TRAI’s Order safeguards the trendy start-up/developing app market by ban- ning practices such as zero rating by paying a fee like in the case of platforms like Airtel Zero which provide an unfair competitive advantage to application providers that have sufficient profit margin to spare on paying such fees as compared to start-ups, thus, instantly placing start-ups at a distinct disadvan-tage against these application providers.

In its pre-consultation papers on net neutrality, TRAI made a mild attempt to avoid suggestions of overtly strict regula-tions so as to encourage free play of market forces while continuing under the broad ambit of net neutrality. In its pre-consultation paper on net neutrality, it suggested certain steps for enforce-ment of the principles of net neutrality such as core principles of net neutrality shall be made part of conditions prece-dent for obtaining a license. TRAI proposed that whenever a new tariff is introduced it should be tested against the principles of net neutrality. TRAI also emphasized the need for net neutrality to maintain user privacy and national security. In its consultation paper on net neutrality released on January 4, 2017, TRAI stated that there exist prohibitions on the practices of blocking, throttling and paid prioritization that are “known to harm the Open Internet” in the USA. Following suit, TRAI suggested similar approaches keeping in view the core principles of net neutrality that imply, being treated without discriminationBased on the responses to its consulta-

tion paper on differential pricing for data services and in an attempt to promote non-discriminatory access of content to users of the internet, TRAI issued the Prohibition of Discriminatory Tariffs for Data Services Regulations, 2016 (“Regu-

lations”), according to which: “No service provider shall offer or charge discrimina-tory tariffs for data services on the basis of content and no service provider shall enter into any arrangement, agreement or contract, by whatever name called, with any person, natural or legal, that has the effect of discriminatory tariffs for data services being offered or charged to the consumer on the basis of content. Provid-ed that this regulation shall not apply to tariffs for data services over closed electronic communications networks (“CECN”), unless such tariffs are offered or charged by the service provider for the purpose of evading the prohibition in this regulation.” These Regulations define “content” as including all content, applications, services and any other data, including its end-point information, that can be accessed or transmitted over the internet.

After witnessing the various unsuccessful attempts at implementing zero rating/ differential pricing principles like Airtel Zero and the Free Basics service, the question then is whether the telecom sector in India is to be viewed solely from a commercial perspective or as a right of the citizens to equality in access of content? While there is still much to be conferred regarding the economics of differential pricing, however, given the consultation papers authored by TRAI, it is clear that it suggests maintaining a policy of net neutrality while restricting differential pricing for content on the internet specifically to intranet/ CECNs. However, TRAI will review its Order in the first half of 2018. Until then, we will have to wait and see whether the Order that effectively annulled the deal between Facebook and Reliance Communications for the provision of Free Basics service is revised and whether we will be witness to this or other such partnerships in the future.

Deepak ThakurAssociate Partner

Devina Naranggra gN ggaangra NNarna N gggaangraNNarna NAssociate

10

Captive Power Generation and The Proposed Legal Amendments

Existing Regulations

Generation of electricity is a de-licensed activity under the Electricity Act, 2003 (Act). The Act allows a person to construct, operate and maintain a captive generating plant and dedicated transmission lines without obtaining a licence under the Act. Further, the Central Government by the Electricity (Removal of Difficulty) Fifth Order, 2005 has clarified that a generating company or a person setting-up a captive generat-ing plant shall not be required to obtain license under the Act for establishing, operating or maintaining a dedicated transmission line, if such company or person complies with: (i) the grid code and standards of grid connectivity; (ii) technical standards for construction of electrical lines; (iii) system of operation of such a dedicated transmission line as per the norms of system operation of the concerned State Load Despatch Centre (SLDC) or Regional Load Despatch Centre (RLDC); and (iv) the directions of concerned SLDC or RLDC regarding operation of the dedicated transmission line.

The Central Government has notified the Electricity Rules, 2005 (Rules), which lay down, inter-alia, the criteria for a “gener-ating plant” to qualify as a “captive generating plant” under the Act.

Some of the key requirements regarding operation of the dedicated transmission lines are: (i) the plant should be set-up primarily for captive consumption and a minimum of 51% (fifty-one percent) of the total power generated, on annual basis should be used for captive consumption and at least 26% (twenty-six percent) ownership of such plant must be vest with captive users; and (ii) in case of a generating station owned by a company formed as special purpose

vehicle, only a unit or some units may be declared as captive, and accordingly, the tests above are applicable to such units only i.e., the users of such units should use a minimum of 51% (fifty-one percent) of the power generated from such units for captive consumption and should collectively hold not less than 26% (twenty-six percent) of the propor-tionate equity of the company which can be attributed to such units. If the minimum percentage of captive use is not complied within any year, then the entire electricity generated from the plant shall be treated as non-captive use.

“Captive user” has been defined to mean end-user of the electricity generated in a captive generating plant. In case of a power plant set-up by a registered cooperative society, the conditions mentioned above dealing with minimum shareholding and consump-tion of electricity are required to be satisfied collectively by the members of the co-operative society. In case of association of persons, the captive users are required to hold not less than 26% (twenty-six percent) of the ownership of the plant in aggregate and such captive users must consume not less than 51% (fifty-one percent) of the electricity generated, determined on an annual basis, in proportion to their shares in ownership of the power plant within a variation not exceeding 10% (ten percent).

Proposed Amendment

The Ministry of Power vide its letter dated October 06, 2015 has proposed amendments to the Rules relating to captive power plants and invited comments/suggestions from stakehold-ers (Proposed Amendment).

It is not possible at this stage to foresee with certainty as to what would be the exact language of the amended Rules and its impact on structuring of captive

plants. Therefore, any view at this stage can be expressed only on the basis of the express language of the Proposed Amendment. The position may change in the event the language / content of the Proposed Amendment is altered in its final notified version.In the proposed amendment, the defini-tion of 'ownership' is restricted to and only addresses “equity share capital”. It therefore precludes preference shares from the applicability of rules. Hence, a structure with a small equity base and balance funding through preference shares and/or debentures could be possible. The Proposed Amendment seeks equal treatment for all equity shareholders by preventing any differential /inferior treatment of equity shares held by captive users. In this regard, the proposed amendment requires that equity shares to be held by captive users must carry full rights, e.g., voting, dividends, capital appreciation, etc. However, it does not restrict a company from raising its capital through prefer-ence shares. The proposed change requires 26% (twenty-six percentage) ownership of the “paid-up equity share capital”. Therefore, the ownership by the captive users will have to be maintained at 26% (twenty-six percentage) or more of the total value of the equity capital. Equity structures with different face value of shares will not be tenable as ownership, if the proposed amendment to the Rules is accepted in the present form. The Rules, once amended, will apply prospectively from the date of notifica-tion of the Proposed Amendment. Therefore, any agreement before such date will not be brought under the amended rules. However, if the status of a captive plant undergoes a change from captive to non-captive plant, then the generating station in order to recoup its position to captive plant will be required to meet the conditions under the amended rules.

Megha Arora Partner

Ajoy HaldereHa ereraldldeHa ererldeHaPartner

11

Taxation of OIDAR Services- Recent Amendments and Impacts

CBEC has recently issued a series of notifications, namely Notification Nos. 46/2016-ST, 47/2016-ST, 48/2016-ST and 49/2016-ST all dated 9th November, 2016, with an intention to capture the cross border service transactions where the delivery of services is essentially facilitated by information technology over the internet. These notifications came into effect from 1st December 2016.

Services involving provision of information or data, retrievable or otherwise, in electronic form through a computer network known as Online Information Database Access and Retrieval Services (“OIDAR Service”) is taxable. Prior to the amendment, the import of such services [i.e. provision of such services from a person located abroad (non-taxable territory) to a person located in India (taxable territory)] was not taxable, as place of provision of such service, as per Rule 9(b) of Place of Provision of Service Rules, 2012 (“POPS”), was the location of service provider.

The latest notifications have been issued with an intent to bring these type of servic-es under the ambit of service tax.

Taxability of OIDAR services prior to the amendment

Earlier, as per Rule 9 of POPS, the place of provision of services pertaining to OIDAR services was deemed to be the place where the service provider is located. As in case of import of OIDAR services, the place of provision of services was always outside India, there was no occasion to tax such import of OIDAR services. In other words, import of OIDAR services did not qualify as taxable services and accordingly, no service tax was payable on such services.Similarly, in case of import of OIDAR servic-es by individuals, governmental authori-ties, local authorities for purposes other than business, commerce or profession was exempted vide Notification No.

25/2012-ST dated 20.06.2012 at Sr. No. 34(a).

Thus, import of OIDAR services, whether for business or commerce or otherwise was not subjected to service tax. Considering the huge amount of monies being spent owing to increased use and consumption of online services for advertisements, promotion of products, downloading of technical information, e-books etc., the Central Government decided to bring into the service tax net the above services by suitably amending the various provisions of the service tax laws.

Amendment to the Service tax laws

With a view of bringing clarity to the coverage and scope of services, the existing definition of OIDAR service has been substituted with a new and expan-sive definition, which specifies the follow-ing services to be included within its ambit viz.: advertising on the internet;

provision of e-books, movie, music, software

cgfnfgng networks or internet;

or otherwise, to any person, in electronic form through a computer network;

television shows, music, etc.);

1. Clause (b) of Rule 9 of 1POPS has been omitted. As a result, place of provision of services in case of OIDAR services shall be determined as per Rule 3 of POPS i.e. the OIDAR services shall be deemed to have been provided in the location of service recipient i.e. India. Thus, import of OIDAR has been rendered taxable in India.

Notification No. 25/2012-ST dated 20.06.2012 @Sr. 34(a) has been amended2 to withdraw the exemption provided to

individuals, government, local authority in respect of import of OIDAR services, where such import was for non-commercial, non-business and non-professional purposes.

The Service Tax Rules, 1994 has been amended to designate Government, local authority, individuals etc. receiving OIDAR services imported from outside India for non-commercial purposes as “non-asses-see online recipient”.

Taxability of OIDAR services post

amendment

As a result of the above series of amend-ments, import of OIDAR services is now taxable in India. Further, by virtue of Notifi-cation No. 30/2012-ST dated 20.06.2012, the recipient of services is liable to discharge service tax on reverse charge mechanism.

Having said this, Notification No. 30/2012-ST has also been amended so as to exclude non-assessee online recipient. Thus, in case of import of OIDAR by individ-uals, government, local authority for non-commercial purposes, the service tax would be levied on forward charge mecha-nism i.e. the service provider located outside India would be liable to pay the service tax.

Interestingly, the service tax rules have been amended in order to enable a person situated outside India and providing OIDAR services to obtain registration with service tax department. This is the most radical step for collecting tax from persons/ service providers residing outside India. Alternatively, in a case where such non-res-ident service providers are represented in India, such representatives shall be liable for paying service tax, or the non-resident service provider may appoint a person in India for the purposes of payment of service tax. Non-resident service providers would be required to file half-yearly return

Akashdeep SinghSenior Associate

Nand KishorePartner

12

and comply with other procedural requirements under the service tax laws. Also such service providers would be subject to statutory audit from time to time.

Impact of the amendments

The above amendments enable the Government to levy service tax on import of OIDAR services, which hitherto were outside the ambit of such levy. Historically, the levy of service tax has been restricted to services provided for advancement of business, commerce and profession. Services provided to individu-als, Government, local authorities in relation to non-commercial, non-busi-ness or non-professional has always been kept out of the service tax net by provid-ing exemption. However, the above amendments bring the OIDAR services imported by individuals, for personal use like downloading e-books, music, videos whether for entertainment or for educa-tional purposes, under the ambit of service tax, though such levy of tax is on the service provider and not on the recipi-ent of such services.

Having said this, import of OIDAR services for business purposes could be treated as input services by the importer of such services and credit could be claimed of the said tax by setting off against output tax liability. Thus, service tax would be a pass through in the hands of persons involved in business or commercial activities. However, in case of import by individuals for personal use such an option would not be available. As a result, the service tax would be a cost and would render such online purchases dearer.

Win-win situation for Government and

Indian service providers

Impact of above amendment is far-reach-ing. It will certainly augment the tax revenue of Central Government, as till now such import of OIDAR was not taxable.

The other significant impact would be the availability of export benefits to Indian OIDAR service providers located in India, except the State of Jammu and Kashmir. Going by the amendments made in POPS, the place of provision of OIDAR services shall be decided as per main part of Rule 3

of POPS instead of clause (b) of Rule 9 of POPS. Being so, place of provision of OIDAR services shall invariably be the location of the service recipient. In the changed scenario, provision of OIDAR services by a service provider located in India to any person outside India would qualify as export of services, subject to other conditions specified in Rule 6A of the Service Tax Rules, 1994. By changing place of provision from location of service provider (under Rule 9(b) of POPS) to location of service recipient, Central Government is not only in a position to tax the import of OIDAR Services, but also enable the OIDAR service providers situated in India to export their services and avail various export benefits which were not available to them earlier.

Possible challenges in implementing

the amendments

Section 64 of the Finance Act, 1994 provides that the law pertaining to service tax shall be applicable to the territory of India, except the State of Jammu and Kashmir. One of the challeng-es in implementing the forward charge levy of service tax on non-resident OIDAR would be whether the provisions of the service tax law would be applicable to persons located outside the territory of India. If the answer to the above question is in the negative, then can the amend-ments be struck down as invalid on the grounds of inability to enforce them outside the territory of India.

Article 245 (2) of the Constitution of India makes it amply clear that “No law made by Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation”. Thus, any statute/legislation cannot be questioned on the ground that it has extra-territorial operation. The Supreme Court examined the issue of “extraterritorial jurisdiction" in Pannalal Nandlal vs CIT3 and Electronics Corporation of India vs CIT4. In the Pannalal case, the Apex Court held that the Constitution of India does permit lawmakers to enact a tax law which can have extraterritorial jurisdiction. Accord-ingly, it held that even a non-resident is required to file the return of income in India.

In the Electronics Corporation case (supra), it was held that though, the

general principle is that laws made in one country cannot have operation in any other country, the court of a country pronouncing the law can still enforce an extraterritorial law to the extent provided. However, the requirement is that the provocation for the law must be found in India (that is, some nexus has to be there in India).Relevant extract of the judgment is reproduced as under: “8.…while the enforcement of the law cannot be contemplated in a foreign State, it can, nonetheless, be enforced by the courts of the enacting State to the degree that is permissible with the machinery available to them. They will not be regarded by such courts as invalid on the ground of such extra-territoriality.” Thus, the present amendments in respect of import of OIDAR services cannot be declared invalid on the grounds of having extra territorial operation as cause, provocation or aspects dealing with it have arisen within the territory of India.

Having said this, the service tax authori-ties would still face the challenge in levying and collecting tax from OIDAR service providers located outside India, who do not have a representative in India. It is not clear as to how the authorities would recover the tax in case of a default by such service providers.

_________________________________

1Notification No.48/2016-ST dated November 9, 2016 2Notification No. 47/2016-ST dated November 9, 2016341 ITR 76 (SC); (1961) 2 SCR 354183 ITR 43(SC); 1989 Supp (2) SCC 642

13

Lack of Attendance Equals Loss of Directorship

A company is not a natural person. Its affairs are managed by persons appointed by the members of the company known as “Directors”. One of the primary duties of each Director of a company is to act in the best interest and for the benefit of the company and he is required to do so with due care and skill.

Although it is difficult to list down exhaus-tively all the duties and responsibilities of a Director, the legislature, to ensure good corporate governance, has laid down certain obligations on Directors, non-com-pliance of which would result in monetary penal action against the offending Director himself, and in some cases, vacating of his office.

Section 283 of the erstwhile Companies Act,1956 dealt with various circumstances in which the office of a Director of a company becomes vacant; Section 167 of the Companies Act, 2013 has replaced this section with effect from 1st April, 2014. These circumstances are, however, not exhaustive and the Articles of Association of the company may provide for additional grounds on which the office of a Director may become vacant.

One of the most relevant changes brought about by Section 167 of the Companies Act, 2013 pertains to the absence of a Director from Board meetings and this resulting in vacating his office. Under the Companies Act, 1956, the office of a Director became vacant if he absented himself from three consecutive meetings of the Board of Directors of the company or from all meetings of the Board for a continuous period of three months (whichever is longer), without obtaining leave of absence from the Board. Now, under the Companies Act, 2013 the office of a Director becomes vacant when he absents himself from all meetings of the Board of Directors of the company held during a period of 12 months, with or without seeking leave of absence from the Board. The period of 12 months is to be calculated from the date of the first

Board meeting held immediately after the meeting attended by the concerned Director.

The sole objective of this provision is, and has been, to avoid a Director having a casual approach towards the business of the company and ensuring that a Director is involved in the management of the company. For the sake of convenience, the Companies Act, 2013 allows a Director to attend meetings even through video conferencing or other audio-visual means, although certain matters cannot be dealt with in any meeting through video-confer-encing or other audio visual means, and a Director would therefore need to be mindful of these restrictions when relying on his ability to be present only through such virtul means.

While on the face of it, the amended position regarding a Director’s absence from meetings of the Board of Directors leading to the vacation of his office appears to have become more relaxed, under the Companies Act, 1956 a Director could technically have remained absent from meetings of the Board of Directors of a company indefinitely, so long as leave of absence was taken from the Board of Directors once every three months. However, under the Companies Act, 2013, this is no longer possible.

While Section 167 of the Companies Act, 2013 does not specifically clarify as to whether the vacation of office of a Director, if he absents himself from all the meetings of the Board of Directors, held during a period of 12 months, is automatic or whether a notice of removal is required to be served on such Director, judgements passed under the Companies Act, 1956 could be relied on for clarity.

The Delhi High Court in the case of Bharat Bhushan vs. H.B. Portfolio Leasing Ltd1. while dealing with a situation under Section 283 (g) of the Companies Act, 1956 similar to Section 167 of the Companies Act 2013, where a Director absented

himself from 3 consecutive Board meetings without obtaining leave of absence, held that no show-cause notice was required to be served on such Director before he is deemed to have vacated his office. The vacation of his office is automat-ic. It thus emanates that a Director would automatically vacate his office if he remains absent from all the meetings of the Board of Directors held during a period of 12 months, with or without seeking leave of absence from the Board.

However, a Director could challenge his automatic vacation from directorship on the ground that the notice of such meetings were not served on him.

The Company Law Board in the case of Mr. Arun Kumar Goyal & Ors vs. Aar Kay Chemicals Pvt. Ltd2. held that in order to attract automatic cessation of the office of a Director, it must be shown that he has absented himself for three consecutive Board meetings without obtaining leave of absence from the Board. It must also be shown by the Company that notices of such meetings were in fact served upon the Director and that despite such notice he failed to attend the Board meeting.

Thus, if the automatic vacation of office is challenged by the Director and the company is unable to prove that notice of the Board meetings were served on him, then in that event, automatic vacation is not permissible.

While the burden lies on the companyto prove that notices were served on the Director and that valid meetings were in fact held, to avoid any disputes, it is prudent for a Director to inquire with the company regarding Board meetings, if not held for long periods of time, in view of the fact that under Section 173 of the Compa-nies Act, 2013, a company is required to hold 4 Board meetings every year in such a manner that not more than 120 days should intervene between 2 consecutive meetings.

Amrita Narayan

Associate PartnerMurtaza Kachwallaaw aawaallawKaachwa Ka aawaallawachwa KSenior Associate

14

As a Director has several powers that could directly affect, not only the company in question, but third parties as well, if a person who knows that the office of Director held by him has become vacant, continues to function as a Director, he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both. To summarize, the legislature has made the requirement of Directors attending meetings more stringent, to ensure that Directors are more involved in the management of the company and thereby fulfil their primary duty of acting in the best interest of, and for the benefit of the company. Directors of a company are now required to attend at least one meeting every 12 months and cannot absent themselves from all meetings of the Board of Directors by merely seeking leave of absence. Violation of this obligation would result in automatic termination of their directorship in such company.

_________________________

11992) 74 Comp Cases 20 (DEL)22015 SCC OnLine CLB 18

15

2015 Bilateral Investment Treaty Model – Investor Friendly

Introduction : The Indian Government in its drive to attract foreign investment in India is making reforms in various laws. The 2015 Model Bilateral Investment Treaty (“2015 Model”) is one of the latest in the series to showcase India as a premier investor friendly country. Invest-ment arbitrations have become a popular method for enforcing an investor’s rights against a government under the relevant treaties.

Bilateral Investment Treaty(ies) or (“BIT’s”) are agreements between two countries to facilitate and promote business interests by companies based in either country. From 1994, India has entered into close to 83 BITs globally. Since its first BIT with the United Kingdom, India’s economic demands and international relations have been constantly evolving, which has also resulted in changes in the Model BITs.

Prior to the 2015 Model, India followed the 2003 Model Bilateral Investment Treaty (“2003 Model”), which was viewed as an extremely basic and investor friend-ly treaty. However, serious need was felt to revisit the 2003 Model, when India faced its first adverse arbitral award arising out of the India – Australia BIT in the White Industries1 case. The award was a turning point in the BIT programme as it opened up a series of issues in the 2003 Model and since then almost 17 investors have issued arbitration notices against India. The 2003 Model, which till then was considered as extremely investor friendly, had now turned out to be detrimental for the country, on account of enormous liability arising out of these actions. Another pitfall for the 2003 Model was the award passed by the Permanent Court of Arbitration (“PCA”) in the dispute between Devas Multimedia and Antrix Corporation Ltd. for 672 million USD against India, where it held the Indian Government liable to pay compen-sation to the tune of 40 percent of invest-ment made by foreign investors of Devas, where India was found in breach of the

India-Mauritius Bilateral Investment Protection Agreement on two main grounds viz. violation of the FET clause, as well as for expropriation of the investor’s foreign investment, while holding that the Indian Government’s actions in 2011 amounted to expropriation as a result of which the country had breached its treaty commitments to accord fair and equita-ble treatment to Devas' foreign investors. Thus, this award further added to the concerns of a disturbing series of decisions against India. As a reaction, therefore, and with a view to protect itself from future liabilities, the Indian Govern-ment decided to review the 2003 Model.

As of December, 2015, the Indian Govern-ment came out with the 2015 Model proposing to renegotiate the BITs it had already entered into in line with the 2015 Model draft, which comes across as a reactionary measure and an attempt that the Indian regulatory system would automatically become more efficient, in the interest of avoiding future investment treaty claims. By way of the 2015 Model the Indian Government has tried its best to maintain the balance between the rights of the investors as well as those of the state.

In our view, however, certain concerns continue to remain, which may defeat the very purpose of parties entering into a BIT thereby failing to achieve the target of being ‘investor friendly’.

The 2015 Model has introduced concepts such as enterprise: White Industries Australia Limited vs. Republic of India [Award dated 30th November, 2011] but also specified and limited the scope of other definitions in order to move away from vagueness.

Investment: Additional requirments were specified to the term investment in order to limit the scope to leave no chance for ambiguity. The term invest-

ment excludes: - (i) portfolio investments; (ii) government-owned debt securities; (iii) pre-operational expenditure; (iv) claims of money arising from commercial contracts, orders or judgments in judicial arbitration proceedings; (v) goodwill; (vi) brand value; (vii) market share; and (viii) other intangible rights in order to make the definition crisper and more specific. Thus, the 2015 Model adopts an ‘enterprise based’ definition of invest-ment whereby only foreign enterprises legally constituted in India can bring a BIT claim. However, assets held by the foreign enterprise have been included in the definition of investment.

Expropriation: The 2015 Model limits the scope of expropriation, not only by expressly setting out what constitutes direct and indirect expropriation, but also by clarifying that mere economic impact does not by itself constitute expropria-tion. Under the 2015 Model, to determine whether expropriation has occurred, factors such as: (i) the duration of the measures undertaken by the host state;(ii) the nature of such measures; (iii) the basis of substantial deprivation of the funda-mental attributes of property in the investment, should be considered. This is an attempt to protect the states' regulato-ry powers by clarifying that non-discrimi-natory regulatory measures aimed at protecting legitimate public interests or for public purposes would not constitute expropriation.

Obligations on investors: Unlike the 2003 Model, the 2015 Model imposes certain obligations on investors such as: (i) compliance with the applicable law of the host state in relation to the acquisi-tion, management, operation and dispo-sition of investments; (ii) not indulging in corrupt practices; (iii) paying any tax liabilities; and (iv) making appropriate disclosure under the applicable law.

Removal of Most Favored Nation

(MFN) clause: The MFN clause contained

Bitika KaurAssociate

Vaidehi NaikVVVVV deVaidehVVVaVaidehSenior Associate

16

in most BITs sentered into by India came under scrutiny after the matter of White Industries. In this case, the investor successfully invoked the MFN clause in the India-Australia BIT in order to import a clause into the India-Kuwait BIT so that it could invoke the right to be provided an effective means of asserting claims and enforcing rights. As such, the initial draft of the 2015 Model BIT contained no most-favoured nation clause in order to prevent parties from borrowing clauses contained in other BITs, which means that investors will not be able to rely on beneficial provisions under the BITs.

Introduction of the compensation

clause: A clause dealing with compensa-tion for losses has been inserted. Under this clause, investors are assured of non-discriminatory treatment with respect to measures adopted by the host state in relation to losses suffered by investments in the host state in excep-tional circumstances (eg. during war, armed conflict, civil strife and national emergencies).

Standard of Treatment of investments/

alternate approach to FET obligations:

The 2015 Model has attempted to lay down minimum requirements with regard to the treatment of investments by prohibiting violations of customary international law. The threshold for determining whether there has been a breach of customary international law has been kept fairly high by using phrases such as "fundamental breach of due process of law", "targeted discrimination on manifestly unjustified grounds" and "manifestly abusive treatment". This provision therefore seeks to balance the protection of investors/investments with the need for state regulation.

Modifications to the dispute resolu-

tionmechanism: Several amendments have been made to the dispute resolution mechanism by detailing: (i) the scope of application of the dispute resolution clause; (ii) the impact of proceedings under different international agreements; (iii) the conditions precedent for invoking the dispute resolution clause; and (iv) the applicable timelines and procedures for the constitution of arbitral tribunals. In addition, first, claims will have to be submitted to the relevant domestic court or administrative body within one year of the date on which the investor first

acquired, or should have acquired, knowl-edge of the measure in question. A claim can be filed under the BIT only after exhausting such remedies or where five years have passed since the dispute was brought before the domestic court or administrative body and no resolution has been reached. This provision will not apply where no domestic legal remedy could reasonably provide relief in respect of the measure in question.

Further, after receipt of a notice of dispute, the parties must try to resolve the dispute amicably for at least six months before submitting a claim to arbitration. In addition, a claim to arbitra-tion can be submitted only where (i) no more than six years have elapsed from the date on which the disputing investor first learned, or should have learned, of the measure in question; or (ii) no more than one year has elapsed since the conclusion of domestic proceedings, where applica-ble.

International Centre for Settlement of

Investment Disputes(“ICSID”): Signifi-cantly, until now, BITs entered into by India did not refer ICSID, as India is not a party to the ICSID. However, the Law Commission recommended that reference to ICSID and its additional facilities (applicable where only one of the parties is a signatory to the ICSID Convention) be included, as this may benefit Indian investors abroad seeking to bring a claim against a party to the ICSID Convention. Accordingly, the dispute resolution mechanism contained in the 2015 Model (as well as the United Nations Commission on International Trade Law Rules) allows the ICSID Convention to be applied to matters such as (i) consent to arbitration (ii) the appointment of arbitrators; and (iii) the conduct of arbitration proceedings, where applicable.In addition, the Model BIT exhaustively outlines detailed param-eters to prevent conflicts of interest and resolve challenges to the appointment of arbitrators.

Amendments to governing law: Under the 2003 Model, investment was governed by the laws of the host country. While, under the 2015 Model, the govern-ing law in relation to the interpretation of a BIT is the BIT itself, followed by the general principles of international public law which relate to the interpretation of

BITs.Amendments to finality and enforce-

ment of awards: The 2015 Model makes the tribunal awards binding only on the disputing parties and that each contract-ing state must provide for enforcement of the award in its territory in accordance with its law. In relation o India, this means that an enforceable BIT award is akin to any other arbitral award and can poten-tially be set aside if it does not meet the requirements set out under the Arbitra-tion and Conciliation Act, 1996.

Provision for state-to-state dispute

settlement: 2003 Model did not contain a state-to-state dispute settlement mech-anism, however, the 2015 Model incorpo-rates a detailed dispute resolution mech-anism for disputes between contracting states in relation to the interpretation or application of the 2015 Model or compli-ance with obligations by way of arbitra-tion.

Denial of benefits: In accordance with the 2015 Model, a party to the treaty may deny the benefits therein to: (i) an invest-ment or investor owned or controlled (directly or indirectly) by persons of a non-party or of the denying party; or (ii) an investment or investor that has been established or restructured with the primary purpose of gaining access to the dispute resolution mechanisms provided in the 2015 Model. The inclusion of the denial of benefit clause is consist-ent with other international investment treaties which have sought to discourage treaty shopping and encourage invest-ment in the host state.

To sum up, the 2015 Model is a major departure as well as a more comprehen-sive and detailed model treaty, as opposed to the 2003 Model. However, the purposes for which BITs are drafted seems to be negatively affected by the changes introduced by 2015 Model.

Effect on India’s negotiating abilities:

In spite of these major changes, the 2015 Model yet suffers from the most funda-mental drawback i.e. its continued dependence on the Indian judicial system, by repeated references to the need for ‘exhaustion of local remedies’. Historically, it is a widely accepted fact that foreign investors deter from making investments in India due to the numerous challenges they face on account of delay

17

and quality of adjudication in our judicial system. Thus, a model which stresses on enduring faith in the Indian judicial system, seems quite impractical. Assum-ing, that commercial courts set up under the recently enacted Commercial Courts Act, 2015 would most likely adjudicate on the claims under BITs, even then the six year waiting period will not prove to be quite attractive and investor friendly to the prospective BIT partners and their investors.

With the Government taking steps to promote India as a global business hub through its ‘Make in India’ campaign, it is important to take steps to attract long-term foreign investments which squarely depend on the provisions of BITs and the kind of business environment they offer. The 2015 Model appears to be a step-back from the Government’s pro-investment stance and in attempting to draft a more balanced agreement, the Government has tilted the scales heavily in its favour. The 2015 Model’s litmus test will now lie in our Government’s ability to re-negotiate existing treaties in line with India’s economic goals and interests.

_______________________________________________ 1White Industries Australia Limited vs. Republic of India [Award dated 30th November, 2011].

18

Exclusivity In CGD Network and Competition Concerns

City Gas Distribution (“CGD”) networks and pipelines for carrying natural gas and petroleum are essential facilities. Laying of CGD network is authorized by the Petroleum and Natural Gas Board (“Board”) under the Petroleum and Natural Gas Regulatory Board Act, 2006 (PNGRB). The CGD network developer enjoys natural monopoly due to the cost of creating CGD network/ pipelines, usage, availability of space and various factors. Person laying CGD network is entitled to exclusive use of the network for a specified period. Section 20(4) of the PNGRB Act empowers the Board to decide on the period of exclusivity to lay, build, operate or expand a city or local natural gas distribution network. The Board has issued regulations (“CGD

Regulations”) which prescribes the period of exclusivity to be three years or five years. Once the period of exclusivity comes to an end, the CGD network is to be declared as a common carrier or contract carrier, which means that access to the CGD network will be available to third party users for supplying natural gas. The transportation charges for usage of the network by third parties is determined by the Board. Accordingly, the Board had sought to determine the network charges for Indraprastha Gas Limited (“IGL”) as a CGD network. However, this was challenged by IGL wherein the Supreme Court ultimately decided that the Board has no power to determine the network charges of CGD network operator under the PNGRB Act and the Board can only determine the charges for common carrier or contract carrier.

This raises interesting issues in terms of the scope of competition and level playing field amongst CGD network developers and third party suppliers through the CGD network after expiry of exclusivity period. Considering the fact that the pricing of supply of gas by a CGD network developer is not subject to any scrutiny by the Board, the develop-er has the ability and statutory protec-

tion to charge any price that it wants (subject to normal economic princi-ples of price-demand ratio) from the consumer and thereby recover majori-ty of the cost of the network in the initial years. However, once the period of exclusivity comes to an end, the develop-er can then claim transportation charges according to the depreciated value of the network, which may be much higher than the cost that has already been recovered by him during the exclusivity period, thereby subjecting his competi-tors to higher transportation charges.

At the same time, since the CGD network developer has already recovered a major portion of the network cost, it can discount this cost from its own cost of supply, and thus remain more competi-tive than a third party supplier. This will ultimately act as an entry barrier for a third party supplier since on the one hand he has to end up paying higher transportation charges and on the other, he will not be in a position to match the discounted price of supply by the CGD network developer.

While one of the stated purposes of the PNGRB Act is to protect consumer interest and promote competition, the law as it stands, in fact does not have adequate mechanism to check anti-com-petitive conduct by CGD network developers. The position would be very different, if the Board has the ability to check the extent to which network costs are recovered as part of gas price. Of course, the fact remains that the period of exclusivity is provided to ensure that the developer who is investing significant amounts in building the CGD network can commercially exploit the market in the initial years. However, there should be a mechanism to ensure that network pricing in such case remains neutral at the end of the exclusivity period.

With the Competition Commission of India at the helm of issues affecting competition, it may consider developing

appropriate guidelines in this respect in consultation with the Board, to ensure fair and proper disclosure of network costs during exclusivity period to prevent overcharging to consumers. While the CGD network developer is entitled to commercially exploit the network in the initial years, it cannot be allowed to profit on natural gas, which is a natural resource, at the cost of consumers.

Sakya ChaudhuriPartner

Shivam SinhaaaaSinnham S aanhaSAssociate

19

Mergers in India: Stamp Duty woes set to continue

Stamp duty in India has always been a tricky area, especially in the context of mergers and acquisitions where stamp duty is not only one of the major consid-erations in structuring a transaction but also a key compliance requirement. Stamp duty on Court approved schemes of mergers and amalgama-tions, is especially controversial. Most states now levy stamp duty on schemes of mergers and this has been established through a host of judicial precedents. As there are no uniform stamp duty charges, multiple stamp duties may arise from the same transac-tion. In such a situation, it is only fair to expect set-off, remission or deduction of stamp duty paid under an order sanctioning a scheme of merger passed by one High Court against stamp duty payable under an order passed by another court for the same scheme of merger in situations where the registered offices of the transferor and the transferee are situated in two different states. This is on the basis that the scheme sanctioned between the two companies is one and the same document chargeable to stamp duty irrespective of the fact that the order sanctioning the scheme may have been passed by two different High Courts. However, a setback to this line of reasoning stems from the matter of Chief Controlling Revenue Authority vs. Reliance Industries Limited1, decided by the Bombay High Court on March 31, 2016, in which it has refused set-off of stamp duty payable on a scheme of amalgamation of Reliance Petroleum Limited (RPL, having its registered office in the state of Gujarat) into Reliance Industries Limited (RIL, having its registered office in the state of Mahar-ashtra).

The judgment

Under the scheme, the assets, liabili-ties and entire undertaking of RPL were to be transferred to and vested in RIL. As the registered offices of RPL and RIL were in different states, the High Courts of both the states passed separate orders sanctioning the scheme. Subsequent to the order passed by the Gujarat High Court, RIL paid stamp duty of INR .10 crores in Gujarat. RIL claimed set-off against the Rs.10 crores that it had already paid in Gujarat and contended that it was liable to pay only INR.15 crores as stamp duty in Maharashtra instead of the full stamp duty of INR 25 crores. This contention was refused by the revenue authorities of Maharashtra and they demanded the full stamp duty. Following a series of appeals, the revenue authorities of Maharashtra referred this matter to the Bombay High Court for adjudication.

The key issues that were considered by the Court related to determining (a) what constitutes the document charge-able to stamp duty – the scheme of amalgamation or the court order effect-ing the transfer, (b) whether the orders of different courts sanctioning the scheme are “incidental” as the instru-ment liable to stamp duty is the scheme alone and, (c) whether Section 19 of the Bombay Stamp Act, 1958, which provides for set-off/rebate of stamp duty could be invoked in the present case.

Upon analysis of the above issues, the Court held that a scheme of amalgama-tion between two companies is not the document chargeable to stamp duty, rather it is the order passed by the court which effects the transfer, which is the document chargeable to stamp duty. The orders of different courts sanction-ing the scheme are not “incidental” orders – each order is an “instrument”

chargeable to stamp duty. The Court further held that when the orders are passed in different states, Section 19 will not apply as the order in respect of a company in a state is passed within that state itself and not outside the state.

Repercussions

Along with the obvious repercussions of this judgment such as huge amount of costs that might now be imposed on mergers, it also introduc-es other difficulties. For example, uncertainty may arise when stamp duty is paid on a court order in one state while the scheme is pending sanction of the High Court of say, the state where the transferee’s registered office is situated. If the scheme is not approved, then no transfer can take place but stamp duty would already have been paid, since stamp duty has to be paid on or before execution. Further, if other courts of the country also take a similar view relying on the said judgment, it will only encourage the negative trend of chargeability of multiple instruments in different states. This may discourage consolidation of business. Companies should, therefore, take preventive measures to minimize stamp duty exposure by (a) considering stamp duty implications at the structuring stage itself to avoid any last moment surprise at execution, and (b) shifting their registered office or executing documents in a state with favourable stamp duty rates. As a complete overhaul of stamp duty provisions is nothing but wishful thinking, this is the most that companies can do at the moment.

_______________________________

1Civil Reference No. 1 of 2007 in Writ Petition No. 1293 of 2007 in Reference Application No. 8 of 2005.

Ramya HariharanPartner

Debarupa AgarwalaADe upa AgaDebDebarueb Agupa AAgaeDebarueb ruupa AAgaSenior Associate

20

Indemnity – The Shield to Contracts

An indemnity clause is found in almost all contracts. Parties quite often are unaware of the implications of an indemnity clause and this article to an extent apprises readers of the implications.

In case a party (let’s say a breaching party) commits a breach of a contract, the other party (let’s say the non-breaching party) can file a suit for breach of contract for damages (or otherwise) against the breaching party. This action is independ-ent of relief under indemnity. Thus, logical-ly, an indemnity action must necessarily be more advantageous to the non-breaching party, thus mandating its presence in a contract.

Advantages Of Indemnity In Contracts

Glimpses of certain advantages:1) Firstly, in action for damages, all that a non-breaching party can recover is more or less direct losses viz. losses which have a direct nexus with the breach. In an indem-nity action, what is recoverable are also consequential losses for instance, loss of profit, etc.2) Secondly, a non-breaching party (not having recourse to indemnity) is required to take steps to mitigate losses and if he hasn’t, such losses cannot be recovered. Indemnity affords the non-breaching party an escape from this stipulation. 3) Thirdly, in an action for damages, the non-breaching party must provide that he has suffered losses. In an indemnity action, the moment the liability of the breaching party is crystalized, even though the non-breaching party has not actually suffered losses, the non-breaching party can look towards the breaching party to take steps to safeguard the non-breaching party from suffering losses.4) Lastly, an action for damages does not arise in case a third party has taken out an action against the non-breaching party, where such an action has been occasioned for a breach committed by the breaching

party of the contract entered into by the breaching party with the non-breaching party. Thus, indemnity is quite important and is subject matter of negotiations.

Indemnity From An Indemnifying

Party’s Perspective

If reader is an indemnifying party, he should look into the following aspects below is a glimpse and more safety net could be negotiated:

1. There should be limitation on quantum of liability. For instance, small claims / claims which are not material of indemnity should not be claimed – ordinarily known as de minimus claims. Further, indemnify-ing party should only be intimated once claims have reached over de minimus and is aggregated to an agreed amount - ordinarily known as filling the basket. Lastly, there must be an aggregate limita-tion ordinarily not exceeding the quantum of monies actually received by the indem-nified party under the contract. These limitations not only protect indemnifying parties but also save management time.

2. In case the indemnity is linked to representation and warranties provided by the indemnifying party, then should be qualified by (a) materiality; and (b) knowl-edge, which can be bifurcated as actual, constructive and imputed – actual knowl-edge is preferred. Additionally, the entity whose knowledge is relevant must also be determined).

3) Indemnity action should not be open ended. A good thumb rule is that for tax claims, it should be limited to the opening of books of accounts as stipulated in the Income Tax laws. In the same vein, time limit for ordinary actions must be limited to the limitation laws.

4) Control of third party claims should be

provided so that indemnity losses are curtailed.

5) Payment of indemnity should not be as a matter of right. Accordingly, if the payment is contested, only once the liability is non-appealable, should the payment liability be triggered. 6) He must qualify that any and all actionsunder the contract must necessarily be initiated through the qualified indemnity provisions. This is because, the limitations must necessarily extend to an action of damages, as otherwise the indemnified party may instead of going through the indemnity route embark on action for damages which does not suffer such limitations.

Indemnity From An Indemnified Party’s

Perspective

The reader is an indemnified party, he should look into the following aspects – below is a glimpse and more safety net could be negotiated:1) As a starting point, there is a role reversal, where the points which are voiced by the indemnifying party should be diluted considerably in order to give an upper hand to the indemnified party.2) As indemnity could be identified as income, the indemnified party must ask for a tax gross up.3) In case the indemnity action is found upon a fraud or wilful default of the indem-nifying party, then and in such a case, all limitations on an indemnity action should necessarily not apply.4) In case there are specific cases which are not subject to any limitation, then that should be recorded in the contract. These specific indemnities would then not be subject to any limitations. From the above, it can be seen that an indemnity clause is a shield as well as a sword and accordingly needs careful deliberation before it finds mention in a contract. Remember there is no indemnityin case of ignorance.

Ritika PillaiAssociate

d to Contracts

Bharat SharmaaaS amahaarmmSh amaarmmShPartner

Aninda PalPartner

21

HSA Advocates’ partner Mr. Sakya Singha Chaudhuri was

invited as one of the speakers at the 3rd International Com-

petition Law Conference which was held on November 12,

2016. The theme of this session was ‘Competition Law And Sectoral Regulators: Interdependence Or Overlap?’ He shared the dias with Mr. Anand Pathak, Partner, P&A Law Offices, Dr. M. S. Sahoo, Chairman, Insolvency and Bankruptcy Board of India, Mr. Rakesh Nath, Ex-Technical Member, Appellate Tribunal for Electricity, Mr. Kuldip Singh, Ex-Member, Telecom Dispute Settlement and Appellate Tribunal and Mr. S. Machendranathan, Chairperson, Airport Economic Regulatory Authority of India. The session laid emphasis on the need for an effective framework to govern the interplay between sectoral regulators and the dedicated compe-tition regulator, the Competition Commission of India.

HSA Advocates acted as Academic Partner to TERI University

in organizing a Capacity Building Programme on “Electricity

Law, Reforms and Practice”.

The programme was held at TERI University, Vasant Kunj campus, New Delhi between September 1-3, 2016. The participants included Secretaries and officials from various Electricity Regula-tory Commissions and representatives from public & private sector utilities. Sakya Singha Chaudhuri and Avijeet Lala, Part-ners at HSA played key roles in organizing the event and also acted as resource persons who conducted lectures on several topics.

HSA Reminisce

HSA Advocates'’ Associate Partner Nilesh Chandra was invited

to conduct an Interactive Session at University of Petroleum

and Energy Studies, Dehradun.

He spoke at length highlighting his expertise in the Project Finance space, sharing Experiences from the Corporate World on September 12, 2016.

HSA Advocate Partners, Anjan Dasgupta and K K Tiwari were

on panel for the Staff Training event at the Punjab & Sind

Bank’s Mumbai office held on the October 26, 2016.

Anjan spoke in detail about the Companies Act, 2013, whilst K.K. Tiwari deliberated on the importance of documentation.

HSA Advocates partner, Nand Kishore, spoken at The Deccan

Chamber’s of Commerce Industries and Agriculture seminar

on on Good & Service Tax (GST).

The seminar took place in Pune on January 24, 2017 where Nand Kishore participated as one of the panel experts talking about GST at length.

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