by Zen Webnet | Mar 26, 2024 | Blog
Article by Ankur Mishra & Akash Singh
Introduction
Under Section 29A of the Arbitration and Conciliation Act, 1996 (“Act”), awards in matters other than international commercial arbitration shall be made by the arbitral tribunal within a period of twelve months from the date of completion of pleadings. These stipulations as to timelines for completion of arbitral proceedings are intended to sensitize the parties and the Arbitral Tribunal to aim for culmination of the arbitration proceedings expeditiously.[1] In cases where award is not made within the stipulated period of twelve months, Section 29A of the Act prescribes two modes for extension of the mandate of the arbitral tribunal. Firstly, the parties under Section 29A(3) of the Act may with consent extend the period for making of award by a further period not exceeding six months. Secondly, the Court may under Section 29(4) read with Section 29(5) of the Act either prior to or after the expiry of the stipulated time period extend the time period within which award is required to be made by the arbitral tribunal. The word ‘extend’ means to enlarge, expand, lengthen, prolong, to carry out further than its original limit.[2] Such extension of mandate of the arbitral tribunal by the Court is on application by any of the parties and may be granted only for sufficient cause and on such terms and conditions as may be imposed by the Court.
In a recent judgment titled “Larsen and Toubro Limited v. IIC Limited, (“L&T v. IIC”) Hon’ble Delhi High Court was called upon to decide the requirement of consent by the parties in exercise of power by the Court to extend the time period for making arbitral award under Section 29A(4) of the Act. In L&T v. IIC, party to the arbitration i.e. IIC had undergone insolvency proceedings and liquidator had been appointed towards the same. L&T had sought the consent of the IICL’s Liquidator for a six-month extension of the Arbitral Tribunal’s mandate under Section 29A(3) of the Act. However, no such consent was granted by IICL’s Liquidators. Being aggrieved, L&T had approached the Hon’ble Delhi High Court seeking extension of the mandate of the Tribunal in terms of Section 29A(4) of the Act. The Hon’ble Delhi High Court has ruled that the Court is empowered under Section 29A(4) of the Act to extend the mandate of the arbitral tribunal even in absence of consent by the parties to the arbitration. Accordingly, the Hon’ble Delhi High Court extended the mandate of the Arbitral Tribunal.
Difference between extension of mandate under Section 29A(3) and Section 29(4) of the Act
From a contextual reading of the sections, it is evident that the remedies under Section 29A of the Act for extension of time period, namely Section 29A(3) and Section 29A(4) of the Act, have their own sphere and does not control the meaning and the exercise of the other. At the outset, Section 29A(3) of the Act allows the parties to extend the mandate of arbitral tribunal “for a further period not exceeding six months” meaning that said act of extension under Sub-section (3) is required to be executed during the subsistence of the twelve months. Whereas, the Court may extend the time period under Section 29A(4) either prior to or after the expiry of the time period stipulated in Section 29A(1) or extended period under Section 29A(3) of the Act. Thus, the sole remedy for extension of mandate after expiry of the period specified in Section 29A(1) of the Act is by way of an application before the Court under Section 29A(4) of the Act. As for extension of time before expiry of the period of twelve months stipulated in Section 29A(1), Section 29A provides that extension of time period by parties under Section 29A(3) can only be taken before application is made under Section 29A(4) of the Act seeking extension of period by the Court. This is borne from the difference in the wordings of Section 29A(3) and Section 29A(4) wherein Section 29A(3) provides for extension of period specified in Section 29A(1) i.e. twelve months while Section 29A(4) provides for extension of period specified in sub-section (1) or the extended period specified under sub-section (3). In Hiran Valiiyakkil Lal v. Vineeth M.V.[3], Hon’ble Kerala High Court negatived the contention that the mandate of the arbitrator can be extended by the Court under sub-section (4) only in cases where the period for passing the award by the arbitral tribunal is extended for a period not exceeding six month by the parties, by consent, as provided under subsection (3) of Section 29A of the Act.
Scope of Power of Court to extend the mandate under Section 29A(4) of the Act
In L&T vs. IIC, the Hon’ble Delhi High Court reiterated that Section 29A(4) of the Act contemplates two situations: where the mandate is not extended and the time of 12 months has expired as per sub-section (1) or where the mandate has been extended for a further six months by consent of parties under Section 29A(3) of the Act. The Hon’ble Delhi High Court ruled that in either of the two situations, the Court has the power to extend the mandate of the Arbitral Tribunal. The Hon’ble Delhi High Court also ruled that there is no limitation on the power of the Court to extend the mandate of the Arbitral Tribunal on the basis that consent for extension of mandate has not been given by one of the parties to the arbitration. However, the exercise of power to extend the mandate is subject the arbitral proceedings being pending at the time of the application.[4]
The Hon’ble Delhi High Court has observed that there can be many instances where a party may not be able to give its consent for extension of the mandate of the arbitral tribunal. The Court under Section 29A(4) of the Act is not powerless to extend the mandate of the arbitral tribunal on mere non-giving of the consent by the parties. In Satnam Global Infrasprojects Ltd v. BHEL,[5] it was held by the Hon’ble Calcutta High Court that the timelines under Section 29A of the Act cast a responsibility on the parties not only to obtain consent from the other; but also on the other party to communicate the refusal (to give consent) during the subsistence of the mandate. Thus, one party cannot be held responsible for slipping of the timelines particularly where the other party does not communicate a clear and unequivocal “no consent”.
Sufficient Cause and not Consent: Ingredient for Extension of Mandate under Section 29A(4) of the Act
Under Section 29A(4) read with Section 29A(5) of the Act, the mandate of the arbitral tribunal may be extended by the Court ‘only’ for sufficient cause and on terms and conditions imposed by the Court. In Wadia Techno-Engineering Services Limited,[6] (“Wadia”) the Hon’ble Delhi High Court has observed that to read the requirement of consent in Section 29A(4) of the Act would make the requirement of sufficient cause irrelevant and the adjudication by the Court unnecessary. In H.P. Singh[7], the Hon’ble Jammu & Kashmir High Court observed that the power conferred to the Court for extension of time, obviously, it would require application of judicial mind which is an attribute of a Court and not required nor contemplated when the extension of time is made by the parties by consent. Thus, before directing any extension of the period under Sub-section (4), the Court has to be satisfied with the genuineness and sufficiency of the cause for extension of period put forth by the applicant and the Court may allow extension by imposing such terms and conditions as the Court may deem fit. Thus, it was held in H.P. Singh that, extension of time by the Court under Section 29(A)(4) of the Act can be done by application of judicial mind, which invariably would require that the Court has to be satisfied with the sufficiency of cause for extension of the mandate of the arbitral tribunal. The Court under Section 29A(4) of the Act is not bound to grant extension of mandate of the arbitral tribunal, if the cause projected is frivolous, vexatious, belated and hopelessly time barred or merely to prolong the arbitral process unnecessarily. The Courts under Section 29A of the Act are required to determine the attributability of delay[8] and whether parties have diligently proceed with their claims. In most cases, the need for extension of mandate arises after applications for amendment[9], challenge to jurisdiction and extension of time for filing of Statement of Claim or Statement of Defense due to voluminous documentation[10].
Given that sufficient cause is a common phrase used under different statutes, its interpretation has to be guided by the import and scope of enquiry under Section 29A of the Act. The scope of proceedings under Section 29A of the Act is limited to what is sufficient cause for extension of mandate of the arbitral tribunal vis-à-vis expeditious culmination of arbitral proceedings. Correspondingly, the only ground for removal of the Arbitrator under Section 29A of the Act can be the failure of the Arbitrator to proceed expeditiously in the adjudication process.[11] Sufficient Cause has been defined as the presence of legal and adequate reasons as may be necessary to answer the purpose intended. The sufficient cause should be such as it would persuade the court, in exercise of its judicial discretion, to treat the delay as an excusable one.[12] It means a cause for which a party could not be blamed for his absence. A party should not have acted with negligence or lack of bona fides.[13] The expression “sufficient cause” necessarily implies an element of sincerity, bona fide and reasonableness.[14]
Conclusion
A recourse to Court under Section 29A for the purpose of extension of mandate is a common occurrence for arbitration proceedings in India. The judgment of Hon’ble Delhi High Court in L&T vs. IIC has clarified the difference between extension of mandate under Section 29A(3) and Section 29A(4) of the Act and that the consent of the parties or lack thereof would not impede the power of the Court to extend the mandate of the arbitral tribunal in case the Court is satisfied that sufficient cause exists for the same. The judgment offers clarity in circumstances where consent for extension of mandate of arbitral tribunal is withheld or denied by one party. Parties are thus advised to apprise themselves in advance as to whether the other party is capable of giving consent owing to reasons such as insolvency proceedings etc and make arrangements for approaching the Court for extension of mandate under Section 29A(4) of the Act.
[1] NCC Ltd v. Union of India, 2018 SCC OnLine Del 12699
[2] Mitra’s Legal and Commercial Dictionary, 6th Edition
[3] Hiran Valiiyakkil Lal v. Vineeth M.V. and Others, 2023 SCC OnLine Ker 5151
[4] Powergrid Corporation of India Limited v. SPML Infra Limited, 2023 SCC OnLine Del 8324. Also See Suryadev Alloys and Power Pvt Ltd v. Govindraja Textiles Pvt Ltd, 2020 SCC OnLine Mad 7858.
[5] Satnam Global Infraprojects Limited v. Bharat Heavy Electricals Limited, 2023 SCC OnLine Cal 4668
[6] Wadia Techno-Engineering Services Limited (2023 SCC OnLine Del 2990)
[7] H.P. Singh v. G. M. Northern Railways and Others, 2023 SCC OnLine J&K 1255.
[8] Puneet solanki and another v. Sapsi electronics pvt ltd, 2018 SCC OnLine Del 10619
[9] ASF insignia Sez P. ltd v. Punj Lloyd Ltd, 2017 SCConline Del 10124
[10] International Trenching Pvt. Ltd v. Power Grid Corporation of India Ltd 2017 SCC OnLine Del 10801
[11] NCC Ltd v. Union of India, 2018 SCC OnLine Del 12699
[12] Balwant Singh v. Jagdish Singh, (2010) 8 SCC 685
[13] Basawaraj v. Land Acquisition Officer, (2013) 14 SCC 81
[14] Sankaran Pillai v. V.P. Venuguduswami, (1999) 6 SCC 396
by Zen Webnet | Mar 26, 2024 | Blog
Article by Tanushri Sharma
Introduction:
E-commerce’s exponential expansion in India has fundamentally transformed how individuals engage in shopping and commercial transactions. With the ongoing growth of the digital marketplace, it is imperative to consider the legal implications related to online operations and provide sufficient consumer safeguarding.
In the fast-paced realm of digital commerce, the landscape of e-commerce in India is continually shaped by a complex web of legal considerations. Scrutinizing this intricate legal framework is essential to unravel the nuances governing online business operations. Moreover, as the e-commerce industry expands exponentially, a forward-looking perspective becomes imperative, especially concerning the future of consumer protection. This exploration delves into the legal intricacies surrounding e-commerce in India, shedding light on the current regulatory landscape, and envisioning the trajectory of consumer safeguards in an ever-evolving digital marketplace.
E-commerce has witnessed exponential growth in India, transforming the way businesses operate and consumers shop. With the surge in online transactions, the legal framework governing e-commerce plays a pivotal role in ensuring a fair and secure environment for both businesses and consumers. In this article, we delve into the existing legal landscape of e-commerce in India, examining the current regulatory framework and envisioning the future of consumer protection.
Need and Significance of Consumer Protection:
Consumer Protection refers to safeguarding customers against various unfair trade practices, to prevent exploitation and regulate business misconduct that could harm their rights and interests in competitive marketplaces. To maximise profits and revenues, many businessmen abuse consumers by offering goods of poorer quality at greater costs. They engage in unfair trading methods such as adulteration, hoarding, black-marketing, etc. This method not only denies consumers the opportunity to receive fair compensation for their money but also exposes them to the possibility of economic exploitation by large corporations who prioritise their profits over the well-being of consumers. Therefore, in situations where corporations may intentionally or inadvertently exploit the rights and interests of citizens by prioritising their profits over the well-being of the country’s economy, it becomes crucial to have strong measures in place for consumer protection. This is not only to safeguard buyers from unscrupulous sellers but also to establish fair global standards and promote sustained growth for the Indian economy.
Hence, consumer protection is essential for various reasons, one of which is facilitating business transactions. This favourable position enables them to simply exploit the consumers.
Ensuring that commercial organisations adhere to social and ethical responsibilities, ii. Raising awareness among individuals, iii. Guaranteeing consumer satisfaction, iv. Ensuring fairness and equality in society, v. Upholding the idea of trusteeship, vi. Supporting the survival and growth of businesses.
The “Consumer Protection Mechanism” is essential for safeguarding consumers’ rights in the global market and promoting the social, ethical, and professional responsibility of businesses, thereby fostering healthy business growth and success.
“Consumer Protection Act, 2019 aims to promote and safeguard certain specified rights, including the 1) right to safety 2) Freedom of Information 3) Freedom of Choice 4) Right to a fair hearing 5) Right to seek redressal and 6) Right to consumer education. The Act was enacted with the primary aim of enhancing consumer protection”.[1]
Emerging Legal Issues in E-commerce:
With the ongoing evolution of e-commerce, emerging legal concerns are becoming increasingly prominent. The important consequences for e-commerce companies in India, include requiring them to take further steps to verify the authenticity of the products available on their platforms. Data privacy and security problems are becoming more significant legal matters in the field of e-commerce. The lack of comprehensive laws on data protection gives rise to concerns about the gathering, retention, and utilization of consumer data. E-commerce enterprises are required to comply with current data protection standards and establish additional safeguards to secure user data. Furthermore, the issue of intellectual property rights is progressively emerging as a legal matter in the realm of e-commerce. E-commerce platforms must ensure they refrain from violating third-party intellectual property rights, including trademarks and copyrights.
Current legal framework:
- Information Technology Act, 2000: The Information Technology Act forms the bedrock of e-commerce regulation in India. It provides legal recognition for electronic transactions and outlines the responsibilities of intermediaries, shielding them from liability for the actions of users. However, the Act does not comprehensively address the nuances of e-commerce, necessitating additional regulations.
- Consumer Protection Act, 2019: The Consumer Protection Act, 2019, brought significant changes to the consumer protection landscape. It introduced provisions specifically addressing e-commerce transactions, holding platforms accountable for the authenticity of products, and ensuring prompt resolution of consumer grievances. However, effective implementation remains a challenge.
- Goods and Services Tax (GST): The implementation of GST has streamlined taxation for e-commerce transactions, bringing uniformity to the tax structure. While it has simplified compliance for businesses, challenges persist in ensuring seamless implementation across diverse states.
- Cybersecurity and Data Protection: Strong cybersecurity becomes more important as e-commerce increases. To comply with the Digital Personal Data Protection Act and other legislation, e-commerce enterprises must implement strong cybersecurity measures to safeguard the integrity and confidentiality of their data. Protecting sensitive financial data requires secure implementation.
Furthermore, the act requires organisations to designate data protection officers, ensuring robust cybersecurity efforts. With so much personal data processed daily in e-commerce, privacy concerns are significant. To address privacy concerns, e-commerce enterprises should adopt privacy-by-design principles. Privacy considerations must be included in product and service development from concept to completion. To comply with data protection laws, users should get explicit privacy policies outlining the extent and purpose of data processing. To prevent data breaches, e-commerce enterprises should invest in worker training to promote a culture of privacy and data security.
- Intellectual property rights: As e-commerce evolves, the Trademarks Act, of 1999 addresses domain name, counterfeiting, and online brand infringement. E-commerce platforms must enforce trademark rights more carefully to avoid trademark misuse. As digital marketing evolves, legal precedents for keyword and comparative advertising must be reviewed often.
The Copyright Act, of 1957 secures copyright protection for digital creations, computer programs, and databases. E-commerce platforms must manage user-generated content, licence contracts, and middlemen’s liability for copyright-protected content published on their platforms. Maintaining a balance between content producer rights and user-generated content is a challenge in the ever-changing digital landscape.
Challenges and Gaps:
- Data Protection and Privacy: E-commerce platforms deal with vast amounts of sensitive consumer data. India is in the process of finalizing a comprehensive data protection law, but until then, there are concerns about the misuse of personal information, requiring urgent attention.
- Counterfeiting and Fraud: The proliferation of counterfeit products and online fraud poses a threat to consumers. Strengthening mechanisms to verify seller identities, enhancing product authentication, and implementing stringent penalties for fraudulent activities are imperative.
- Cross-Border Transactions: E-commerce often involves cross-border transactions, necessitating a robust framework for international trade. Addressing issues related to jurisdiction, dispute resolution, and harmonizing regulations with global standards is crucial for a seamless e-commerce experience.
Envisioning the Future of Consumer Protection:
- Stricter Regulatory Oversight: The regulatory framework must evolve to keep pace with the dynamic nature of e-commerce. Stricter oversight, periodic audits, and proactive measures to identify and address emerging challenges can fortify consumer protection.
- Technology Integration: Leveraging technology such as artificial intelligence and blockchain can enhance product authentication, fraud detection, and dispute resolution. Integrating these technologies into the regulatory framework can elevate the security and reliability of e-commerce platforms.
- Capacity Building and Awareness: Empowering consumers with knowledge about their rights and responsibilities is crucial. Additionally, capacity building for law enforcement agencies, judiciary, and e-commerce platforms will contribute to more effective enforcement of regulations.
- Collaboration with Stakeholders: Building partnerships between government bodies, industry players, and consumer advocacy groups can foster a collaborative approach to address challenges. Regular dialogues can lead to the formulation of policies that balance the interests of all stakeholders.
Conclusion:
As India’s e-commerce landscape continues to evolve, a robust legal framework is essential to ensure the protection of consumer rights. Addressing the current gaps, embracing technological advancements, and fostering collaboration among stakeholders will contribute to a sustainable and consumer-friendly e-commerce ecosystem in the future.
These challenges include deceptive product and service descriptions in remote contracts, privacy and security concerns regarding consumers’ information, copyright and trademark issues, standard contract format problems, and jurisdictional disputes arising from e-commerce transactions. Therefore, it is essential to assess the effectiveness of the Indian Consumer Protection Act, 2019 in addressing the issues related to consumer protection in e-commerce transactions.
The implications of future e-commerce rules in India are of great importance to both business and consumers. By implementing a strong regulatory framework and ensuring efficient enforcement, it is feasible to cultivate a secure and user-friendly online marketplace. India can establish itself as a worldwide frontrunner in e-commerce regulation and consumer protection by consistently revising laws, tackling growing obstacles, and capitalizing on technical progress.
[1] Sec 6 of India Consumer Protection Act, 1986.Available at http://www.ncdrc.nic.in/1_1. html (Last Accessed on July 28, 2012).
by Zen Webnet | Mar 26, 2024 | Blog
Article by Tanushri Sharma
“A company is a legal entity that is created by law, and it is not a physical or tangible entity.” “It lacks both consciousness and a physical form.” A living being possesses a cognitive faculty capable of acquiring knowledge and forming intentions, as well as physical appendages to execute those intentions. However, a company lacks these abilities and must rely on the actions of individuals. Therefore, the company’s operations must be entrusted to human representatives, specifically referred to as Directors, who collectively form the Board of Directors. According to “Section 2(34) of the Companies Act, 2013”, ‘A director means a director appointed to the Board of a company.’ Additionally, “Section 2(10) of the Companies Act, 2013”, states ‘Board of Directors or Board, about a company, means the collective body of the directors of the company.’
The directors of companies are obligated to fulfil certain obligations and bear liabilities as stipulated Under “Section 166 of the Companies Act, 2013”, including the following:
- Acting with utmost integrity and good faith is essential for a company director, aiming to promote the company’s objectives.
- A director is obligated to prioritize the best interests of the company, taking into consideration the well-being of its employees, shareholders, the community, and the preservation of the environment. This duty extends beyond mere profit considerations to encompass broader societal and environmental concerns.
- Adherence to Powers the Memorandum of Association (MOA) outlines a company’s permissible actions, while the Articles of Association (AOA) specify the powers granted to its directors. Directors must ensure compliance with the boundaries set by both documents.
- Executing his duties with diligence, care, and skill is imperative for a director, who must exercise independent judgment in making decisions. This entails a responsibility to carry out his role carefully and thoughtfully, avoiding negligence and ensuring that his actions are in the best interest of the company.
- A director must steer clear of situations where there is a direct or potential conflict of interest with the company. It is paramount to avoid any circumstances that may compromise objectivity or create conflicting loyalties between personal interests and those of the company.
- Maintain Confidentiality Directors, with access to critical information about a company’s operations and finances, must keep such information confidential. Sharing this information is only permissible if it benefits the company.
- Directors are strictly prohibited from seeking or obtaining any undue gain or advantage for themselves, their relatives, partners, or associates. This prohibition extends to preventing any actions that might give rise to suspicions of favouritism or impropriety.
- Regular Meeting Attendance Directors are expected to attend as many board meetings as possible. Any director absent for more than three meetings in a calendar year will face automatic termination from the board.
- The director is expressly prohibited from transferring or assigning his office to another person. This provision safeguards the stability and continuity of leadership within the company, preventing the arbitrary transfer of responsibilities to individuals who may not meet the requisite qualifications or standards.
- Directors are tasked with establishing effective systems to ensure compliance with all relevant laws, confirming the adequacy and functionality of such systems.
The Act outlines specific liabilities that directors may incur following a company’s incorporation, contributing to the regulation of their conduct.
- Personal Liability, a concept defined as holding an individual accountable for their actions, is typically not transferred from a company to its director. However, the Companies Act of 2013 introduces certain conditions under which such personal liability may be imposed, particularly concerning fiduciary responsibilities.
- Tax Liability: “Section 179 of the Income Tax Act 1961” stipulates that if dues from a private company become unrecoverable or the tax assessed is deemed unrecoverable, directors may be jointly liable for the same. The director must prove that the company’s default did not result from any breach of duty on their part.
- False Statements: Directors making false statements regarding their company may be personally liable unless they can demonstrate that these statements were made in good faith or publicly retract their consent to the falsehood.
- Company Debts: Directors are generally not personally liable for a company’s debts unless it can be proven that the debts arise from fraudulent activities undertaken by the director.
- Fraudulent Business Conduct: Personal liability may be imposed on a director engaged in activities contrary to the company’s interests, especially if such actions are malicious.
- Liability Regarding Shareholding: In the event of a company’s bankruptcy or liquidation, a director’s personal stakes and shareholding may lead to personal liability.
Criminal Liability can also be incurred under specific circumstances:
- Dishonoured Cheques: Directors knowingly signing dishonoured cheques may face criminal liability for abetting financial fraud.
- Directors may be held criminally liable for breaches of labour laws if such breaches occur under their supervision or instructions.
- Vicarious Liability stipulates that an individual may personally bear liability for the wrongful acts of another, but the Supreme Court[1] clarifies that a director cannot be held liable on behalf of the company without statutory backing. Specific liability can be imposed only if there is substantial evidence of active involvement in wrongdoing.
Conclusion
In addition to adhering to the responsibilities outlined in the Companies Act, a director is obligated to comply with duties stipulated in various other statutes. Given the pivotal and demanding nature of this role, directors must comprehend these duties fully. As a protective measure, directors should prudently engage in negotiations regarding indemnification clauses within shareholder and director agreements.
Understanding the significance of their position, directors should approach the negotiation of indemnification clauses with care. These clauses serve as a crucial protective mechanism for directors, offering them a shield against potential legal risks and ensuring their financial security. A well-crafted indemnity clause, resulting from careful negotiation, should encompass comprehensive coverage. This coverage includes indemnification for any legal proceedings initiated by third parties, encompassing both the costs associated with legal defence and any liabilities incurred throughout the legal process.
In essence, a properly negotiated indemnity clause acts as a robust safeguard, fortifying directors against potential legal challenges and reinforcing their ability to fulfil their duties with confidence. This underscores the need for directors to proactively engage in discussions regarding indemnification clauses, as these negotiations are integral to preserving their legal and financial well-being in the complex landscape of corporate governance.
[1] Iridium India Telecom Limited v. Motorola Inc (2011) 1 SCC 74
by Zen Webnet | Mar 26, 2024 | Blog
Article by Smita Singh and Manpreet Kaur
Typically, a corporate guarantee is an arrangement within the group companies wherein an associate entity agrees to act as a guarantor for its group entity while securing finance/ loans/ debts from a financial institution. These arrangements are executed either without any consideration or with a nominal commission on the total loan amount.
The taxability of corporate guarantee has been an issue of tussle for a long time, however the issue of valuation arising has become complex due to amendment in Rule 28(2) of the CGST Rules[1] prescribing the deemed valuation of the service by way of issuance of corporate guarantee.
Till date, the companies were fighting the battle of non-taxability of corporate guarantee on the argument that there is no underlying service involved in the issuance of corporate guarantee, however, the Government jumped off the issue and directly notified the deemed valuation rules for the service of issuance of corporate guarantee. Making it clear that there was never an intention to not tax the corporate guarantee and the missing piece of the puzzle at least from the exchequers point of view was not identification of underlying supply but the valuation of service only.
However, it is pertinent to note that under direct tax laws and OECD[2] guidelines, issuance of corporate guarantee is treated as a ‘shareholders’ activities’ or ‘quasi-capital activity’[3] and not in the nature of ‘provision of services’; thus, qualifying the issuance of corporate guarantee as ‘provision of service’ under the GST law is not in consonance with the Income tax provisions. Such different positions in different tax legislations indeed creates more confusion in the industry.
On the recommendations made in the 52nd GST Council Meeting, the Government vide the Notification[4] notified Rule 28(2) of the CGST Rules in terms of which value of supply by way of issuance of corporate guarantee is deemed to be 1% of the amount of such guarantee offered or the actual consideration, whichever is higher. Moreover, vide the Circular[5], it was also clarified that such valuation rule shall apply even when the corporate guarantees are issued without consideration.
Thus, the intention of the Government is amply clear to tax the corporate guarantee irrespective of the consideration involvement. However, apart from the issue of taxability, there are other inter-connected issues such as ‘time of supply’, ‘value of the guarantee offered’, and ‘periodicity of payments’ which are propelling to take off.
While providing for the deemed valuation in Rule 28(2) of the CGST Act, it has been mentioned that the value of service by way of providing corporate guarantee is 1% of the ‘guarantee offered’. Now, as an industry practice, guarantee does not only include the principal amount of the loan granted, but may also include interest, penalty (if any), other charges etc. Since the meaning of ‘guarantee offered’ has not been defined in the GST laws there seems to exist anomaly, whether in finalising the amount of ‘guarantee offered’ will include only the principal amount or include other charges such as interest, penalty, and other charges as well.
It is further important to note that a blanket valuation of 1% of guarantee offered may not be feasible in some cases. For example, in a scenario wherein loan is sanctioned for INR 100 crore and equivalent guarantee is provided by the related entity. However, the company ends up in utilising only INR 50 crores of the total sanctioned amount and the balance INR 50 crores is never disbursed. In such a case, applying the deemed valuation on the whole sum of sanction amount of loan i.e., INR 100 crore might not be justifiable as the same was never disbursed to the company and hence, corporate guarantee for such amount would never get triggered. With these ambiguities around the scope of ‘guarantee offered’ in place, the tussle between the government and taxpayer is imminent since there are likely chances that the revenue authorities may consider the meaning of ‘guarantee offered’ to include maximum amount to increase the valuation and hence, the taxes. Undoubtedly, by leaving the definition of ‘guarantee offered’ open-ended with uncapped amount, the Government has paved way for an impending litigation revolving around valuation of ‘corporate guarantee’.
Another issue in line is related to the taxability of the additional corporate guarantee offered by the company to the same bank or financial institution. Generally, companies’ top-up their existing loans with additional amount and subsequently, their related entity also provides additional corporate guarantee for such additional amount including the ongoing loan. In such cases, whether the definition of ‘guarantee offered’ will include only the additional amount covered or the whole amount of corporate guarantee. Ideally, it should be only the additional amount, however, in absence of clarity, the interpretation adopted by taxpayers and revenue authorities may vary.
Determination of the time of supply is another pertinent issue which needs to be addressed while making the tax payment on the service of issuance of corporate guarantee. As contracts for corporate guarantee are continuous contract, i.e., guarantee is triggered at the time of payment of instalment. The question that arises here is whether the time of supply of corporate guarantee will be the effective date of the agreement entered or the time period as and when the corporate guarantee is triggered i.e. the due of payment of instalment. With this uncertainty in place with respect to time of supply, the time of payment of tax is a critical issue that needs immediate attention.
Thus, it is apparent that the Government has notified the valuation rule in a haste to settle the issue pertaining to taxability of corporate guarantee without considering the practical implications on the industry. In fact, it will not be wrong to say that in the urge of settling one issue related to taxability of corporate guarantee by way of notifying valuation rule, the Government has sown the seed for many issues which will crop into litigation in no time if not clarified at the earliest.
[1] The Central Goods and Services Tax Rules, 2017
[2] Organisation for Economic Co-operation and Development
[3] Micro Ink Limited Vs. ACIT (ITA No. 2873/Ahd/10)
[4] Notification No. 52/2023- CT, dated October 26, 2023
[5] Circular No. 204/16/2023-GST dated October 27, 2023
by Zen Webnet | Mar 19, 2024 | Blog
– Intellectual Property Group, S&A Law Offices
On March 16, 2024, the Indian Patent Office has posted the Patent (Amendment) Rules 2024 on its official website. The said draft amendment was first made available to public for feedback and objections on August 23, 2023. It is now notified in the official Gazette on March 15, 2024, thus, the same are now deemed to have taken effect.
Major changes:
Statement of Commercial Working of Patents on Form 27: as per amended Rule 131, Working Statement is now required to be submitted once in respect of each patent for every period of three financial years and shall be furnished within six months from the expiry of each such period. Now, a further extension upto 3 months can be requested on Form 4.
Form 3: The deadline for filing statement relating to application/s filed outside India with same or substantially the same invention (family details) as required under Section 8 is reduced from six months from the date of filing to three months from date of issuance of first statement of objections under Rules 24B(3) or 24C(8) or two months from the date of communication from the Controller if required under Section 8(2). The said deadline is extendible by 3 months upon request made on Form 4. Further, for Section 8(2) requirement of office actions, amendments to claims, etc., the Controller may, use accessible and available databases.
Divisional Application: Applicant may file one or more further applications under Section 16 including for inventions disclosed in provisional or complete specifications or a further application filed under Section 16.
Form 18: Time period for making a request for examination is now reduced from forty-eight months to thirty-one months from earliest priority date.
Grace Period under Section 31: as per new Rule 29A, to avail the grace period u/S. 31, a new Form 31 is introduced with official fee.
Opposition proceedings: Procedure for consideration of representations in pre-grant oppositions including changes in timeframes – now, the representation is to be considered by the Controller and to be notified to the opponent in case no prima facie case is made out OR notify to the applicant in case prima facie case is made out within one month. If opponent requests for hearing, the Controller shall pass an order within one month after giving opponents an opportunity to be heard. Timeline to file evidence has been reduced from three months to two months.
Form 8A: New Form introduced to issue a certificate of inventorship under Rule 70 A to an inventor upon request.
Renewal fees: Ten percent reduction in renewal fee if the same is paid in advance for at least four years period.
Petition under Rule 137: It will be not be applicable for matters related to- (i) extension of time or condonation of delay under sub-rule (5) of rule 12; (ii) clause (i) of sub-rule (4) and sub-rule (6) of rule 20; (iii) rule 21; (iv) sub-rules (1), (5) and (6) of rule 24B; (v) sub-rules (10) and (11) of rule 24C; (vi) sub-rul (4) of Rule 55; (vii) sub-rule (1A) of rule 80; (viii) sub-rules (1) and (2) of rule 130; (ix) sub-rule(2) of rule 131.
Petition under Rule 138: Time prescribed may be extended or any delay may be condoned by the Controller for a period of upto six months, upon a request made in Form 4. Such request may be made any number of times within the specified period of six months.
Additionally, the requisite details and format of Form 1, Form 3, Form 4, Form 8A, and Form 27 have been revised.
Link to Gazette Notification – Patent (Amendment) Rules 2024
