by Zen Webnet | Jan 5, 2024 | Blog
Article by Neelam Dahiya
Artificial Intelligence (AI) has emerged as a transformative force across various industries, and its impact on intellectual property, particularly trademarks, is becoming increasingly significant. In the Indian context, where technological advancements are rapidly evolving, understanding the interplay between AI and trademarks is crucial for businesses and legal professionals alike.
AI and Trademarks in India:
- AI and legal concept: A trademark is a way of identifying a business. Trademarks are mainly used to connect branding to consumer buying behaviour. However, with the emergence of artificial intelligence (AI) in the online world, some traditional concepts may become less relevant, such as “imperfect recollection,” “confusion,” and “trademark-to-trademark” comparisons based on their phonetic, conceptual, or visual impact. This is because AI has reduced the number of product options for individual consumers. E-commerce platforms are now using AI algorithms to suggest products based on the customer’s search history, demographic, preferences, past purchases, etc.
- Trademark Creation and AI: AI algorithms have the capability to generate creative content, including logos and brand names. This raises questions about the eligibility of AI generated trademarks for protection under Indian law. Indian trademark law requires trademarks to be distinctive and capable of distinguishing its goods or services of one entity from another. Determining the distinctiveness of AI-generated marks poses a unique challenge.
- Ownership and Inventorship: Traditional trademark creation involves human creativity but AI challenges this paradigm. In India, the question of ownership and inventorship becomes complex when AI systems autonomously generate trademarks. Current legal frameworks may need adaptation to address issues of attribution and ownership, ensuring a fair and clear delineation of rights in AI- generated trademarks.
- Trademark Examination and AI: The examination process by the Trade Marks Registry involves assessing the distinctiveness of a mark. Integrating AI tools into this process can enhance efficiency and accuracy, streamlining the registration process. India’s intellectual property offices are gradually embracing technology, and the incorporation of AI in the examination of trademarks may expedite the overall registration procedure.
- Trademark Infringement and AI: With the rise of AI-generated content, monitoring trademark infringement becomes more challenging. AI can be used to detect unauthorized use of trademark online, assisting businesses in protecting their brand integrity.
- Legal Challenges and Ethical Considerations: As AI becomes more integrated into trademark landscape, legal challenges and ethical considerations arise. Balancing innovation with the protection of intellectual property requires thoughtful legal frameworks. India’s legal community is actively engaging with these challenges, aiming to strike a balance that encourages technological advancements while upholding the principles of fairness and protection.
Conclusion:
The convergence of AI and trademarks in India presents both opportunities and challenges. Adapting legal frameworks to accommodate AI-generated trademarks, addressing ownership issues, and leveraging AI for efficient trademark examination are pivotal steps. As India continues its journey into the digital age, a harmonious integration of AI and trademark law will be essential to foster innovation while preserving the rights of businesses and creators.
by Zen Webnet | Jan 4, 2024 | Blog
Article by Jagatjeet Singh
Introduction
Perjury, “an act or an instance of a person’s deliberately making materially false or misleading statements while under oath”[1], though not defined under Indian statutes is a crime referred to as ‘False evidence’. The offence of False evidence is dealt in Chapter XI of the Indian Penal Code, 1860 (hereinafter referred to as ‘IPC’). The said Chapter is titled ‘False Evidence and Offences Against Public Justice’. This article aims to explore the law and procedure the offence of Perjury both in India and comparable common law jurisdictions, in light of conflicting judicial pronouncements.
Offence of Perjury in India
Section 191[2] of Chapter XI of IPC deals with the offence of giving false evidence which is when a person who is under oath or express provisions of law required to state the truth, makes a false statement or any statement that the said person does not believe to be true is known as giving false evidence. The punishment for giving such false evidence before a judicial proceeding is up to 7 (seven) years and a fine as enumerated in Section 193[3] of IPC. The said offence is non-cognizable, meaning thereby that the said offence can neither be investigated upon nor an FIR registered by the police without express permission or direction from the court.
The procedure for registering and investigating the offence of Perjury is enumerated in Section 340 of the Code of Criminal Procedure, 1973 (hereinafter referred to as “CrPC”) and dealt in detail by the Hon’ble Supreme Court of India in case title ‘Pritish Vs. State of Maharashtra and Ors.’[4]. At the first instance any party or person may move an Application under Section 340 of the Code of Criminal Procedure, 1973 before the judicial forum where such perjury has been committed. The said judicial forum then must conduct a preliminary enquiry onto the prima facie existence of perjury without serving upon or calling the alleged accused. The accused has no legal right to be heard at this stage. The apex court has in the case titled Pritish (Supra) held that the Application under Section 340 of CrPC is comparable to an Application under Section 154 of CrPC before the police for registration of an FIR wherein the accused until an FIR is registered has no legal right to be heard.
The concerned judicial forum must on the documents before it decide the existence of perjury. In case the judicial forum decides the existence of perjury, the judicial forum must then make a complaint in writing under Section 340 of CrPC to the concerned Magistrate of first class. The said Magistrate shall receive the said Complaint under Section 343 of CrPC and act upon it under Sections 238 to 240 of CrPC. The Magistrate shall examine the complaint, hear the accused and then make its judicial mind as to if the allegations are groundless or with ground. The Magistrate may either discharge or charge the accused with the offence of perjury based upon the complaint, documents and its examination of the accused.
United Kingdom
Unlike in India, the United Kingdom, a fellow common law system, has a separate criminal statute that deals with the offence of Perjury. The Perjury Act of 1911 was enacted on 29.06.1911 to consolidate and simplify Perjury and kindred offences. The offence of Perjury is defined as when ‘any person lawfully sworn as a witness wilfully makes a statement material in that proceeding, which he knows to be false or does not believe to be true, he shall be guilty of perjury’. The said definition finds similarity to the one in the Indian Penal Code which does not come as a surprise as the Indian Penal Code of 1860 is a British era law. The offence of Perjury in the United Kingdom is also punishable with imprisonment of 7 (seven years).
United States of America
The United States of America, another common law jurisdiction, has a dual legal structure. Federal statutes govern the entire country along with state statutes which govern a particular. Thus, the laws of perjury differ from state to state, however the federal statutes of Perjury are the same throughout the country. Several federal statutes criminalize perjury and related offences however the most common statutes are 18 U.S.C. Sections 1001, 1621 and 1623. Section 1621 is the traditional perjury statute that prosecutes perjury committed before the legislative, administrative or judicial bodies. Section 1623, enacted in 1970, specifically deals with false statements before Federal Courts and grand juries. The Supreme Court of USA in case titled ‘Hubbard v. United States’[5] held that Sections 1621 and 1623 can apply to and penalize false statements made before the judiciary. The Supreme Court also held that the False Statement Statute, 18 U.S.C. Section 1001 was inapplicable to false statements made before the judiciary. However, the United States Congress in 1996 amended the 18 U.S.C. Section 1001 restoring the statute’s ability to prosecute false statements made to both the legislative and the judicial branches of the government.
Future of Offence of Perjury in India
The Indian legislative in one of the landmark events since the India’s Independence in 1947 has brought forward three bills to replace the archaic and aging British era laws, the Indian Penal Code, 1860, the Code of Criminal Procedure, 1973 and the Indian Evidence Act, 1872. The new bills do not have a law of perjury however the same is still characterized under the Chapter False Evidence and other Offences against the Public Justice, the sections are identical to the ones in the Indian Penal Code.
The offence of Perjury is a commonplace in the Indian judicial system. Even though most pleading before a judicial forum mandates an affidavit[6] in support of such a pleading, the affidavits are taken lightly by the litigant and the judicial system. The Indian Judiciary has over the years voices its concern to police the offence of perjury citing the tremendous volume of pendency and the inability of the legal system to handle the said offence.
However, the Indian judiciary in the recent times, have come heavy on the offence of Perjury citing it a serious criminal offence and one which shall invite strict adverse action[7]. A division bench of the High Court of Meghalaya headed by the Chief Justice while hearing an appeal of conviction made the observation that ‘Unless Indian judges get serious with litigants and witnesses, the present trend of false affidavits being filed, and false evidence being given may one day render the judiciary irrelevant’[8].
It is thus imperative that the offence of Perjury, which may not seem as the most heinous crime, shall be prosecuted and enforced as to protect the sanctity of the judicial system and to ensure that any statement made by a person under oath is always true and a person does not get away with making false statements to mislead the judiciary.
[1] Black Law Dictionary
[2] Whoever, being legally bound by an oath or by an express provision of law to state the truth or being bound by law to make a declaration upon any subject, makes any statement which is false, and which he either knows or believes to be false or does not believe to be true, is said to give false evidence.
[3] Whoever intentionally gives false evidence in any of a judicial proceeding, or fabricates false evidence for the purpose of being used in any stage of a judicial proceeding, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine;
[4] (2002) 1 SCC 253
[5] 115 S.Ct. 1754 & n,15 (1995)
[6] An affidavit is also a sworn statement made to a particular effect and making false declaration on an affidavit also constitutes the offence of Perjury under Section 191 and 193 of IPC
[7] M/s Gokaldas Paper Products v. M/s Lilliput Kidswear Ltd. & Anr. 2023 LiveLaw (Del) 314
[8] King Victor Ch. Marak vs. State of Meghalaya Crl. A. No. 30 of 2022
by Zen Webnet | Jan 3, 2024 | Blog
Article by Preeti Puri
Understanding provisions relating to withholding tax on payment to non residents is vital for businesses and individuals engaged in cross-border transactions. Adhering to TDS provisions not only ensures compliance with tax regulations but also contributes to building a transparent and trustworthy global financial system. As businesses continue to operate in an increasingly interconnected world, staying informed about TDS requirements for non-resident payments is essential for sustainable and responsible financial management.
Section 195 of the Income-tax Act 1961 outlines provisions for tax deductions when making payments, excluding salary, to a non-resident individual (not a company) or a foreign company. As per section 2(23A) of The Income Tax Act 1961, foreign company means which is not a domestic company.
Definition of Non Resident
Section 2(30) of the Income Tax Act, 1961, defines a non-resident as an individual who does not qualify as a “resident.”As per Section 2(42) resident means a person who is resident in India within the meaning of Section 6.
As per Section 6 of Income tax Act 1961, an individual is said to be a resident in the tax year if he/she is:
- physically present in India for a period of 182 days or more in the tax year (182-day rule), or
- physically present in India for a period of 60 days or more during the relevant tax year and 365 days or more in aggregate in four preceding tax years (60-day rule).
The Finance Act, 2020, effective from the Assessment Year 2021-22, had modified the aforementioned provision. It stipulates that the period of 60 days mentioned in second condition will be substituted with 120 days if an Indian citizen or a person of Indian origin has a total income, excluding income from foreign sources, of an amount exceeding Rs. 15 lakhs in the previous year. Income from foreign sources refers to income accruing or arising outside India (excluding income derived from a business controlled in or a profession set up in India).
However in the case of an Indian citizen or a person of Indian origin whose total income, other than income from foreign sources is less than 15 lakhs , 60 days as mentioned in second condition above will get substituted with 182 days.
Section 195 – Applicability and Provision
A bare reading of Section 195 from the Income tax Act 1961
Section 195(1)
Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest [(not being interest referred to in section 194LB or section 194LC or section 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” ) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :
Section 195(2)
Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application [in such form and manner to the Assessing Officer, to determine in such manner, as may be prescribed], the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.
Analysis of Provisions of Section 195
1. Meaning of Person :- Person responsible for deducting withholding tax u/s 195 can be :-
- Individual
- Hindu Undivided Family (HUF)
- Firm or LLP
- Company
- Association of Person
- Body of Individuals
2. Nature of Payment :-
(a) Any interest excluding interest referred to in Section 194LB (Income by way of interest from Infrastructure Debt Fund ) 194LC (Interest income from Indian Company or Business Trust ) 194LD ( Income by way of interest on certain bonds and Government securities)
(b) Any other sum chargeable under the provisions of this Act (not being income chargeable under the head Salaries)
3. When To Deduct TDS u/s 195
Tds would be deducted at the time of credit of such income to the account of payee or at the time of payment whichever is earlier.
4. Sum Chargeable under the provisions of Act
Section 195 is applicable only if that income is chargeable to tax in India. The nature of payments can be payment on account services rendered by non- resident or sale of goods. It can be in the nature of interest, royalty, technical services or any other income chargeable to tax in India.
Withholding Tax Rate u/s 195
If the payment to non- resident or to a foreign company is chargeable to Income tax in India, then withholding tax has to be deducted in accordance with rates in force.
According to Section 2(37A)(iii) , Rates In force means-:
- Finance Act of the relevant previous year
- As per the rates prescribed in Double taxation Avoiadance Agreement (DTAA)
So tax would be deducted in accordance with tax rates as per the Finance Act of the relevant year or as per the rate of DTAA whichever is more beneficial to the assessee. It is to important to mention that surcharge and Education cess are not required to be added in case of rates mentioned in DTAA.
TDS rates u/s 195 on various categories of income are prescribed below :-
| Particulars |
Rate |
| Income from the investment made by an NRI (Interest/Dividend) |
20% |
| Long-term capital gain from listed equity shares and units of equity oriented mutual funds covered u/s 112A |
10% |
| Any other Long tyerm capital gain |
20% |
| Short-term capital gains arising on transfer of equity shares through recognized stock exchange covered u/s 111A |
15% |
| Interest payable by the Government or an Indian entity on funds borrowed in a foreign currency. |
20% |
| Royalty and Fees for technical services payable by the Government or an Indian concern |
20% |
| Winnings from card games, lotteries , cross word puzzles , horse races, online games |
30% |
| Any other Income |
30% |
Section 206AA of the Income Tax Act 1961 requires every taxpayer whether resident or non resident who receives taxable income to furnish their PAN to the payer of such income. If they do not submit their PAN no , they were subject to a higher rate of TDS . The non-residents were having difficulty as they didn’t have PAN.Therefore Finance Act 2016 has relaxed the applicability of section 206AA in case of payment made to non-residents. Section 206AA will not apply to non-residents furnishing the following details to the payer :
- The payee shall furnish all the key details like name, contact numbers and email ID.
- They have to provide the address of the country in which they reside.
- The payee has to furnish Tax Residency Certificate of his native country if the country provides for the issuance of the Tax Residency Certificate.
- Tax Identification Number either in the country of residence or India. If it is not available, then a unique number needs to be provided for identification in the country of residence.
Consequences in the event of Non-Compliance with Section 195
If the TDS is either not deducted or not deducted in compliance with Section 195 of the Income Tax Act, 1961, the individual responsible for the payment will be obligated to remit the applicable tax, along with any interest and penalties imposed by the Income Tax Department. The consequences of not adhering to the provisions of Section 195 of the Income tax Act 1961 are outlined as follows
- Disallowance of Expenses :- If TDS u/s 195 is not deducted , it will lead to disallowance of expense u/s Section 40(a)(i)of the Income tax Act.
- Payment of Interest u/s 201 :- In case TDS u/s 195 is not deposited by the specified due date then as per the provisions of Section 201, interest at a rate of 1.5% per month or any part thereof will be imposed from the date of deduction to the date of deposit.
- Penalty u/s 221(1) :– Further penalty u/s 221(1) shall be imposed of such an amount as the Assessing Officer may impose. Nevertheless, the penalty is limited and cannot exceed the outstanding tax amount.
Conclusion
In conclusion, TDS on payments to non-residents is a crucial aspect of tax compliance, ensuring that the Indian tax authorities collect their due share from income earned by non-residents within the country. Payers must be diligent in understanding the provisions of Section 195 and fulfill their obligations to deduct taxes at source. Likewise, non-residents should be aware of the documentation requirements and seek professional advice to navigate the complexities of cross-border transactions. A comprehensive understanding of these regulations is essential for fostering transparency and adherence to legal norms in the realm of international financial transactions.
by Zen Webnet | Jan 2, 2024 | Blog
Article by Shailja Agrahary
Introduction
The Equalisation Levy was initially introduced in India in 2016 under the Finance Act, 2016. It refers to the tax imposed on the consideration received or receivable for specified services, e-commerce supplies, or services. This levy is set at a rate of 6% on the amount of consideration received by a Non-Resident for the specified services provided.
Subsequently, the Finance Act of 2020 brought amendments in the Finance Act 2016 by introducing a new Section 165A. This addition expanded the scope of the Equalisation Levy. Under this new provision, the Equalisation Levy is now applied at a rate of 2% on the consideration received or receivable by an e-commerce operator from an e-commerce supply or services provided to specified persons.
Important Definitions
- E-commerce operator means a non-resident who owns, operates or manages digital or electronic platform for online sale of goods or services or both.
- E-commerce supply or services means online sale of goods or services or both facilitated by the e-commerce operator.
- Specified Services means online advertisement, digital advertising space or any other services with respect to online advertisement and includes services as notified by the Central Government in this behalf.
- Permanent Establishment means a fixed place of business through which the business of the enterprise is wholly or partly carried on.
Charge of Equalisation Levy under Section 165 of the Finance Act, 2016
As mentioned above, Equalisation Levy shall be charged @6% of the amount of consideration received or receivable by the Non-Resident for the specified services rendered.
The Following conditions must be met for charging of Equalisation Levy under section-165 of the Act.
- E-commerce operator shall be the Non- Resident having no Permanent Establishment in India shall receive the consideration amount for the specified services rendered.
- Specified services shall be provided by the E-commerce operator to
- Person resident in India and carrying business or profession
- Non-resident having permanent establishment in India.
Non-Applicability of Equalisation Levy under Section 165 of the Finance Act, 2016
Equalisation Levy shall not be charged if,
- E-commerce operator being a non-resident providing specified services has a permanent establishment in India and services are effectively connected with such permanent establishment
- The aggregate amount of consideration received or receivable shall not exceed Rs. 1 lakh during the previous year.
- Consideration is made for the purpose of Business or Profession
Charge of Equalisation Levy under Section 165A of the Finance Act, 2016
As mentioned above, Equalisation Levy shall be charged @2% of the amount of consideration received or receivable by an e-commerce operator for e-commerce supply or services made or provided.
The Following conditions must be met for charging of Equalisation Levy under section-165A of the Act.
- E-commerce operator shall be the non-resident having no Permanent Establishment in India.
- E-commerce supply or services shall be provided to
- Person resident in India or
- Non- Resident in the specified circumstances as referred in sub section (3) or
- Who buys goods or services using internet protocol address located in India
Meaning of specified circumstances*
- “specified circumstances” mean
- Sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement though internet protocol address located in India; and
- Sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India.
- Consideration received or receivable from e-commerce supply or services shall include—
- consideration for sale of goods irrespective of whether the e-commerce operator owns the goods, so, however, that it shall not include consideration for sale of such goods which are owned by a person resident in India or by a permanent establishment in India of a person non-resident in India, if sale of such goods is effectively connected with such permanent establishment
- consideration for provision of services irrespective of whether service is provided or facilitated by the e-commerce operator, so, however, that it shall not include consideration for provision of services which are provided by a person resident in India or by permanent establishment in India of a person non-resident in India, if provision of such services is effectively connected with such permanent establishment.
Non-Applicability of Equalisation Levy under Section 165A of the Finance Act, 2016
Equalisation Levy shall not be charged if,
- E-commerce operator has a permanent establishment in India and e-commerce supply or services are connected with such permanent establishment.
- Equalisation Levy covered under section 165.
- Sales, Turnover or Gross Receipts of the e-commerce operator from providing e-commerce supply or services is less than Rs. 2 crores.
Collection and Recovery of Equalisation Levy under Section 166 of the Finance Act, 2016 for the specified services.
It is the responsibility of every person being a resident in India and carrying business or profession or a non-resident person having permanent establishment in India to deduct Equalisation levy at the rate as specified under section 165 and shall deposit the same to the Central Government by the 7th day of the following month in which it was deducted. A person who fails to deposit the same within time shall pay the simple interest at the rate of 1% of such levy for every month or part of the month.
Collection and Recovery of Equalisation Levy under Section 166A of the Finance Act, 2016 for E-commerce supply or services.
An Assessee shall pay the Equalisation levy to the Central Government as deducted under section 165A in the following manner. In case of failure, he is required to pay simple interest at the rate of 1% of such levy for every month or part of the month.
| Serial Number |
Quarter Ended of Financial Year |
Due Date of Deposit |
| 1 |
30th June |
7th July |
| 2 |
30th September |
7th October |
| 3 |
31st December |
7th January |
| 4 |
31st March |
31st March |
Furnishing of Statement under Section 167 of the Finance Act, 2016
Every E-commerce operator shall furnish the statement electronically to the Assessing Officer in respect of specified services or e-commerce supply or services during the financial year on or before 30th June immediately following the financial year. Such statement shall be furnish in Form No. 1 as per Rule 5 of Equalisation Levy Rules, 2016. Failure to furnish such statement will result in penalty of Rs. 100 for each day during which the failure continue.
Example
Krishna Ltd, an Indian company engaged in the manufacturing and trading of shoes, aimed to boost its export sales by launching an extensive advertising campaign in the international market. For online advertising, the company enlisted the services of Google Inc, a USA-based company having no permanent establishment in India. In the fiscal year 2021-22, Krishna Ltd paid Rs. 30 lakhs for these services. Let’s discuss the tax and TDS implications for both Krishna Ltd and Google Inc.
Tax Implications
According to the tax regulations, an Equalisation Levy is applicable at a rate of 6% on the consideration exceeding Rs. 1 lakh received by a non-resident entity having no permanent establishment in India. In this scenario, the payment is made by Krishna Ltd, an Indian resident engaged in business or profession, to Google Inc, a non-resident company having no permanent establishment in India, for the provision of online advertising services.
This transaction falls under the purview of Equalisation Levy at a rate of 6%, as outlined in Section 165 of the Finance Act, 2016. Consequently, Krishna Ltd is obligated to deduct an Equalisation Levy of Rs. 1.8 lakhs, which is 6% of the Rs. 30 lakhs paid to Google Inc for its online advertising services.
by Zen Webnet | Jan 1, 2024 | Blog
Article by Prateek Dhir and Mohit Kandpal
Introduction
The recent judgement pronounced by the Delhi High Court in the case of Tomorrow Sales Agency Private Limited v. SBS Holdings, Inc. and Ors.[1], is being hailed as a favorable step towards third party funding of arbitration in India. This article discusses the concept of third-party funding for arbitration proceedings and why it is considered as a progressive measure for the arbitration regime.
Third party funding is a practice where a party unrelated to the dispute would extend financial support to one of the disputing parties (generally, the claimants). This support lent by the funding party is usually motivated by monetary gains or sometimes even by the cause for which the parties to the dispute stand. The monetary support provided by the funding parties is usually an investment that they make and as returns of their investment, they would receive a share in the award, if favorable to the party they had funded. The third-party funders are usually banks, hedge funds, insurance companies or sometimes can even be an individual.
In India, there is a lack of legislation to govern or regulate the practice of third-party funding and thus, the practice is flourishing unregulated and is usually governed by the terms of the contract as agreed between the funding party & the party receiving the funds. Considering a lack of legislation on the issue, the Supreme Court of India has also noted that there appears to be no restriction on third parties funding the litigation and getting repaid after the outcome of the litigation. Third Party Litigation Funding/Legal Financing agreements are not prohibited. However, the lawyers are prohibited from funding the litigation on their client’s behalf.[2]
When we talk about profit sharing in a favourable arbitration award, a pertinent question comes to mind of what happens in the cases of unfavourable arbitration awards. The way the funding party derives a benefit from favourable awards, should they also be liable to bear the costs of unfavourable awards? The Hon’ble Delhi High Court has deliberated into this question at some length in the case of Tomorrow Sales (supra).
Brief facts
Tomorrow Sales Agency Private Limited (hereinafter referred as “TSA“) registered as a non-banking financial company, entered into a Bespoke funding agreement (hereinafter referred as “BFA’) dated 20.12.2018 with the claimants, to provide financial funding for an arbitration administered by the Singapore International Arbitration Centre (“SIAC“). The claimants were unsuccessful in its claims during the arbitration and the award dated 22.12.2022 (“Arbitral Award”) was passed against the Claimants. Subsequently, the respondent in the arbitration, SBS Holdings Inc. (hereafter “SBS“) filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (“A&C Act“), being OMP(I)(COMM) 71/2023, before the Delhi High Court, seeking interim measures to secure the amount awarded to SBS in terms of the award. The Single Judge of the Hon’ble Delhi High Court issued the interim order dated 07.03.2023 (“impugned order”) wherein TSA was directed to disclose on affidavit their fixed assets and bank accounts along with the credit balance held by them in India or any other jurisdiction. Further, TSA was restrained from creating any third-party interest/right/title in respect of any of their unencumbered immovable assets to the extent of the sum awarded in favour of SBS in terms of the Arbitral Award. The instant order was challenged by the third-party funder (TSA) under Section 37 of the Act before the Division Bench of the Hon’ble Delhi High Court vide intra-court appeal being FAO(OS)(COMM)59/2023. The Hon’ble Division Bench vide its judgment dated 29.05.2023 allowed the appeal and set aside the impugned order to the extent, requiring TSA to disclose its assets, furnish security for the amount awarded in terms of the Arbitral Award and restraining it from alienating or encumbering its assets.
Analysis by the Division Bench
- Impleading non-signatories to be bound by the arbitration –
The Court observed that Consent is the corner stone of arbitration. Consent of the parties to be bound by the award of the arbitral tribunal and an agreement to that effect is the basis of enforcing any award. Absent any agreement to the said effect, any award against a party would be without jurisdiction. Impleading non-signatories into the arbitration is an exception to the said concept of express consent, wherein consent is implied, and even non-signatories are bound by the arbitration agreement by imputing their consent to the said agreement.[3].
However, the Court observed that, it was not the case where SBS sought to bind the third party i.e., TSA to the arbitration clause and compel it to arbitrate. Instead, SBS sought to enforce the award against TSA in a case where TSA was not even a party to those arbitral proceedings. The Court was of the view that, a third party may be bound by the arbitral award only if it has been compelled to arbitrate and is a party to the arbitration proceedings. The Court remarked that even a signatory to an arbitration agreement against whom an arbitration agreement is not invoked and is not joined as a party to the arbitral proceedings, would not be bound by the arbitral award rendered pursuant to the said proceedings.
- Parties were to abide by the SIAC Rules –
The Court noted that the parties had agreed to be bound by the procedure under the aegis of SIAC. The SIAC rules under Rules 7.1 & 7.8 provided for joinder of non-parties to an arbitration provided the conditions mentioned therein were satisfied. The Court observed that since the rules which bound the parties did not allow for joining of TSA as a party to the arbitration, SBS could not now seek to compel TSA to be bound by it.
The Hon’ble Court further referred to, the SIAC Practice Note dated 31.03.2017 issued by SIAC regarding ‘Disclosure’ and ‘Costs’ and noted that the funding arrangements are required to be disclosed to the Arbitral Tribunal and that the Arbitral Tribunal had the power under SIAC rules to order disclosure regarding existence of any funding relationship. Further, the Court duly noted that the practice note enabled the Arbitral Tribunal to consider the funding arrangement while awarding costs. The Hon’ble Court duly observed that although the Arbitral Tribunal may allocate costs amongst the parties, it could not award costs against a third-party funder.
- Section 9 relief against non-party to the arbitration –
Another pertinent observation of the court was that under the arbitral award, there was no obligation of TSA to pay any amount. The Court observed that Section 36(1) of the A&C Act provides that the arbitral award shall be enforced in accordance with the provisions of the Code of Civil Procedure, 1908 in the same manner as if it was a decree of the court. It is trite law that a decree is to be executed in its term and it is not open for the executing court to go behind the decree. The Court was of the view that since this award was not against TSA, it cannot be considered as a judgement-debtor under the arbitral award. Further it also noted that, the relief under section 9 of the Arbitration Act is available only in aid of the enforcement of arbitral award and since the instant award cannot be executed against TSA, application under Section 9 of the Arbitration & Conciliation Act, for securing the amount in dispute against TSA, was not maintainable.
- Terms of the agreement entered between TSA & the Claimant –
TSA was bound only by the BFA entered into between TSA & the claimants to provide financial assistance to them. Article 1 of the BFA sets out the purpose & scope of funding which is to provide funding to the lawyers on behalf of the Claimants for pursuing the claims. Further, it was on a non-recourse basis which meant that if the claims are not successful then TSA could not recover the amount it has financed. The Hon’ble Court noted that Article 7 of the BFA further provided that the BFA would cease to be in effect if the Claimants could not prevail in the arbitration proceedings. The Court observed that, none of the clauses of the BFA put any obligation upon TSA to fund an adverse award.
- Disparate view of Division Bench on the reliance placed by the Ld. Single Judge–
The learned Single Judge had referred to the decisions in the cases of Arkin Borchard Line Ltd. & Ors.[4], & Excalibur Ventures LLC v. Texas Keystone Inc and Ors.[5], the said decisions were in exercise of powers conferred under Section 51(1) and (3) of the Supreme Court Act, 1981, which expressly empowered certain courts in the United Kingdom to determine by whom and to what extent the costs are to be paid. The Division Bench observed that the Supreme Court Act, 1981 is now called the Senior Courts Act, 1981 and Civil Procedure Rules (CPR) were enacted for exercise of the powers under Section 51 of the Senior Courts Act 1981. Further, it was observed that Rule 46.2 of the Civil Procedure Rules, 1998 provides for the procedure for costs orders in favour of or against non-parties. The said rule also provides that the third party is required to be afforded a reasonable opportunity to attend hearing at which the Court would consider the matter for the purpose of determination of the question of costs. The Hon’ble Division Bench further stated that there are no rules applicable to proceedings in this court for awarding costs against third parties. There is no procedure for impleading third parties for the limited purpose of determining the costs. The Ld. Division Bench duly observed that in circumstances as such, it was difficult to accept that the procedure contemplated under Civil Procedure Rules, 1998 in the United Kingdom, for the purpose of imposing costs on non-party(ies), is applicable to civil proceedings in India.
The Hon’ble Division Bench further observed that the reliance of the Learned Single Judge to the case of Gemini Bay Transcription Pvt Ltd vs Integrated Sales Service Ltd[6] was misplaced, as in the said case non-signatory who had sought to resist the enforcement of an arbitral award, was a party to the arbitral proceedings and the arbitral award in that case was directed against the said non-signatory. Thus, the said decision had no application in the present matter. After consideration to the aforesaid the Division Bench remarked that permitting enforcement of an arbitral award against a non-party which has not accepted any such risk, is neither desirable nor permissible and that it would be counterproductive to introduce an element of uncertainty by mulcting third party funders with a liability which they have not agreed to bear.
Conclusion
In the instant judgement, the court has emphasized the significance of third-party funding for the arbitration regime as the cost for pursuing claims in arbitration are significant. In such a situation, to have a level playing field for all parties and to ensure access to justice, it becomes essential to have an ecosystem that supports third-party funding of disputes. This ensures that financial inequality does not result in inequity or injustice to the claims of those who might lack the financial means to pursue them. It is imperative to mention here that the judgement is based upon the specific facts & circumstances of the instant case and does not settle the principles of law concerning liability of third-party funders. The Hon’ble Court has also acknowledged that there needs to be certainty concerning the liability of third-party funders in the arbitration regime. Therefore, a legislation that deals with the rights & liabilities of the third-party funders and also the other concerns such as the extent of involvement, influence that the party exerts over the process of dispute resolution, would be a welcome move on the part of the legislature.
[1] 2023 SCC OnLine Del 3191
[2] Bar Council of India v. A.K. Balaji, (2018) 5 SCC 379
[3] Chloro Controls (India) (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641
[4] [2005] WLR 3055
[5] [2015] EWHC 566 (Comm)
[6] (2022) 1 SCC 753
