LEGAL DIGEST
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Escorts arbitration appeal dismissed
The Supreme Court has dismissed the appeal of Escorts Ltd, ruling that the arbitration award made in the US against it was final and binding. Universal Tractor Holding LLC and Escorts Agri Machinery Inc, a subsidiary of Escorts Ltd, were holding shares in Beever Creek Holdings. There was an agreement by which Universal sold its shareholding in Beever to Escorts Agri. The latter defaulted in payment leading to a suit in North Carolina. It was later referred to arbitration, which went against Escorts Agri. Escorts companies had merged, and the Indian company objected to the execution of the award in India.
The Delhi High Court rejected the objection, against which the firm moved the Supreme Court. It rejected that argument of Escorts that Universal ought to have proceeded for confirmation of the award under the US law and then come to India for execution. The judgment pointed out that the requirement of “ double exequatur”, as pleaded, has been dispensed with in the New York Convention and the Indian Arbitration and Conciliation Act.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Guidelines on compensation
In road accident claims under the Motor Vehicles Act, the statutory schedule for calculating compensation need not be scrupulously followed by tribunals and courts, the Supreme Court stated in the judgment, Reshma Kumari vs Madan Mohan.
There were differing views among Supreme Court judges for over a decade about the second schedule of the Act. Some judgements held the view that the table for calculating damages was “unworkable”. Some other decisions maintained that the schedule was a good guide for computing compensation. Despite this raging controversy, Parliament had failed to make amendments in the law for two decades. In view of the differences, this case was referred to a larger bench for a final view. In this judgment, the three- judge bench analysed earlier judgments of the Supreme Court and laid down a set of guidelines for arriving at a fair figure for damages under various situations, like when the accident was caused by negligence (Section 166) and when ‘ no- fault liability’ is invoked ( Section 163- A). The court asked all forums below to follow the new guidelines and those laid down in its 2009 judgment in Sarla Verma vs Delhi Transport Corporation, setting to rest the contrary views.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Bharat Petroleum evicted
The Supreme Court last week ordered eviction of public sector Bharat Petroleum Corporation, which was paying ₹ 400 a month to its Mumbai landlord since 1955, and allowed the landlord to take criminal action against the firm for inducting rank outsiders in collusion with its dealer.
The oil giant argued that it had a right to renew the lease under the Burmah Shell ( Acquisition of Undertakings in India) Act, 1976. It further argued that under the lease deed also, it had a right to get renewal of the lease for 30 years. Dismissing its appeal with costs, the judgment emphasised that the company could not claim any further renewal even under the Act beyond 2005.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Insurer to pay for loss of eye
The Supreme Court last week set aside the rulings of the National Consumer Commission and the Chhattisgarh state consumer commission and awarded ₹ 7 lakh with interest to a person who had lost sight in one eye when he fell down while playing. In this case, Sandeep Chourasia vs New India Assurance Co, the company argued that the insured person had no eyesight from his birth. When this was disputed, a medical team conducted investigation which stated that the “ loss of vision could have been caused by fall while playing”. The commissions did not rely on the expert evidence and rejected the claim. On appeal, the Supreme Court stated that the commissions committed “ serious error” by not accepting the medical report. It ruled that the insurance policy, called Janata Gramin Vyaktigat Durghatana, covered the accident of this nature.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Temporary hands get paid
The Supreme Court has ordered compensatory payment to workers of Bajaj Auto Ltd who had alleged that they were kept on temporary basis for several years denying permanent status. They alleged unfair labour practices under the Maharashtra law.
According to them, they were engaged in 1990; yet they were offered employment only for seven months each year and after the expiry of the period, their services used to be terminated. This was violation of the Model Standing Orders in the Industrial Employment ( Standing Orders) Act. The company contested and stated that they were engaged to meet targets, on temporary basis, with the consent of the trade union. The industrial court stated that the employees had clearly been continued for years but were not granted the status or privilege of permanency. It asked the management to pay sums calculated by the court.
The appeal of the company was dismissed by the Bombay High Court with adverse remarks against it. In its final appeal, the Supreme Court modified the order of the industrial court and reduced the payment.
MJ ANTONY
THINKSTOCK
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Need clear platform to publish disclosures
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The ongoing discussion on disclosure of material information by issuers of securities in India just got a new facet. The United States Securities and Exchange Commission (SEC) has issued a public report embracing social media and networking sites.
such as Facebook and Twitter, as acceptable means of disseminating information, making it clear usage of such networks would need to be compliant with regulations barring selective disclosure.
The Securities and Exchange Board of India ( SEBI), too, is grappling with how to regulate selective disclosure of information in the Indian market — most of this concern is centered on the primary market for new issuance of securities. Increasingly, SEBI is getting concerned about selective disclosure to large and institutional investors in securities offerings —for example, in the form of research reports and marketing presentations —while rest of the investors have to rely on disclosures in the official offer documents for securities offerings.
As a concept, disclosure of information in India is covered by multiple regulations.
Regulations governing issuance of securities also lightly govern issuance of research reports published around the time of securities offerings. Observation letters issued by SEBI upon review of draft offer documents generally state that marketing material should not contain information extraneous to the contents of the offer documents. However, this is an area light on clarity, considering the depth and detail in which international developments in this space came under the scanner when Eliot Spitzer took Wall Street by storm with his prosecution of securities research and marketing practices in the US.
Even less clear is the area of disclosure of price- sensitive material information about companies that are already listed. The listing agreement ( between the listed companies and the stock exchanges) regulates this area. Material developments and decisions taken by boards of listed companies are required to be intimated to stock exchanges for dissemination to the market. SEBI has historically made numerous interventions by issuing directions under Sections 11 and 11B of the SEBI Act to listed companies that made disclosures or failed to make disclosures about developments in their businesses not to access markets until further orders.
Most of these interventions have been based on the charge of fraudulent and unfair practices in the securities market, aimed at artificially moving and manipulating market price of the securities of the issuer. However, what remains elusive is clarity on what should be disclosed, when it should be disclosed, and what means maybe adopted for disclosures.
Currently, statements to stock exchanges are the only means envisaged.
Of course, information published in the annual report along with the financial statements would also be regarded as having been disclosed, but whether an interview from a CEO to a widely read newspaper, also published on the issuer’s website, would constitute an official publication, would not beget a confident and assured response either way. If stock exchanges are the primary platform, imagine the information flow exchanges would have to contend with, if every issuer were to play safe and send everything they wanted in the public domain to the exchanges. Indeed, there is abuse of this platform, too. Listed companies are known to send their version of litigation to stock exchanges, giving the market aone- sided picture of developments, with counter- parties having no say in presenting their side to the public, defeating the very objective of this dissemination platform.
There is yet another dimension.
Regulations governing insider trading prohibit disclosure of “ unpublished” price- sensitive information by insiders in listed companies to third parties. The term “ published” is defined as publication by the listed company, but these regulations, too, do not get into the medium of publication.
This leaves open the legality of conducting due diligence into a listed company before taking it over, and even if one were desirous of making a public disclosure, there would need to be an assurance that a publication on the company’s website, or a publication of an interview in a widely read newspaper, would indeed render the information to be “ published”.
The regulator’s firm and clear official view on these issues is not known to the market. Routinely, every time a newspaper reports a development, regardless of its accuracy, stock exchanges routinely ask the listed company to confirm the news.
If the news cannot be confirmed for sheer lack of certainty, the company would reply that nothing that warrants disclosure has occurred. The braver ones deny outright. And, indeed, weeks later, when the news becomes truly accurate and certain, the official disclosure comes out.
The development from the Securities and Exchange Commission is that it has now said it would embrace disclosures made on social media as effective publication, so long as the company is able to demonstrate that the publication of the information was “ reasonably designed to provide broad, non- exclusionary distribution of information to the public”.
The Securities and Exchange Commission has simply asked for advance intimation to the market that acertain platform would be used for dissemination, say the official Facebook page.
It is high time India had regulatory clarity on the medium for publication and disclosure of information.
(The author is a partner of JSA, Advocates &Solicitors. The views expressed herein are his own.) somasekhar@ jsalaw. com
The Securities and Exchange Board of India is grappling with how to regulate selective disclosure of information in the Indian market — most of this concern is centered on the primary market for new issuance
of securities BS FILE PHOTO
WITHOUT CONTEMPT
SOMASEKHAR SUNDARESAN
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R& D issues in transfer pricing clarified
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Transfer Pricing ( TP) Provisions were introduced in India by the Finance Act, 2001. The TP Provisions were introduced with an intent to protect India’s right to collect a fair share of tax in respect of cross- border transactions. In simpler terms, TP provisions were introduced to ensure that an international transaction between two associated enterprises is made at arm’s length price, so that both the countries involved get a proper share of profits in their respective jurisdiction.
Considerable time has elapsed since these provisions were introduced, but it appears that they are still at a nascent stage. Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations ( OECD) recognises that “ transfer pricing is not an exact science; it will not always be possible to determine the single correct arm’s length price ….. Also the choice of methodology for establishing arm’s length transfer pricing will not often be unambiguously clear. In a difficult transfer pricing situation, because of the complexity of the facts to be evaluated, even the best intentioned taxpayer can make an honest mistake. Moreover, even the best- intentioned tax examiner may draw the wrong conclusion from the facts.” In an area of uncertainty, tax authorities tend to take a view which is favourable to the revenue department. As a result, for the last many years, transfer pricing adjustments have been made in India which go to astronomical figures and the taxpayers have to face serious consequences.
It is, therefore, essential that to the extent possible individual judgment should be curtailed so that taxpayers may not suffer and cordial relations prevail between government and foreign enterprises.
However, no proficient effort has been made by the government so far to address the contentious issues faced by taxpayers.
Of late, the Central Board of Direct Taxes ( CBDT) has come out with two circulars on transfer pricing.
The gist of the circulars is given below:
Application of profit split method ( PSM) – Circular No. 02/ 2013 dated March 26, 2013 Since there is no correlation between cost incurred on research and development ( R& D) activities and return on an intangible developed through R& D activities, the use of transfer pricing methods ( like the transactional net margin method) that seek to estimate the value of intangible based on cost of intangible development ( R& D cost), plus a return, is generally discouraged.
In a case where the transfer pricing officer ( TPO) is of the view that PSM cannot be applied to determine the arm’s length price of international transactions involving intangibles due to nonavailability of information and reliable data, he must record reasons for non- applicability of PSM before considering TNMM or comparable uncontrolled price method ( CUP) as most appropriate method, depending upon facts and circumstances of the case.
TPO may consider TNMM or CUP method as appropriate method by selecting comparables engaged in development of intangibles in the same line of business and make upward adjustments taking into account transfer of intangibles without additional remuneration, location savings and location- specific advantages.
Contract R& D services with insignificant risk - Circular No. 03/ 2013 dated 26.03.2013 There is divergence of views among field officers and taxpayers regarding the functional profile of development centres engaged in contract R& D services for the purposes of transfer pricing audit. Taxpayers insist that they are contract R& D service providers with insignificant risk. TPOs treat them as full or significant risk- bearing entities.
CBDT has clarified that a development centre in India may be treated as a contract R& D service provider with insignificant risk if the prescribed conditions are cumulatively complied with. The circular also lists the required conditions to be followed. The point to be appreciated is that the government has started looking into the problems which these circulars have depicted. Hopefully, some more clarifications will come out that will address the contentious TP issues.
It will not be out of place to mention that the ambiguous provisions relating to transfer pricing coupled with enormous authority and discretion vested in transfer pricing officers have led to an unbearable situation for taxpayers.
The figures will speak for themselves. In FY 2011- 12, it has been reported that adjustments have been made to the tune of ₹ 44,5OO crore. It is also common knowledge that the institution of dispute resolution panel, which was specifically created to address the TP issues, has only added to the woes of taxpayers.
Therefore, it is strongly felt that CBDT should issue more clarifications on disputed and debatable issues, so that tax litigation is reduced to a reasonable level. This will certainly prove to be a positive step in attracting foreign investment to India.
The article has been co- authored by Alok Gupta e- mail: hp. agrawal@ sskmin. com a. gupta@ sskmin. com
THINKSTOCK
FOREIGN ENTERPRISE
HP AGRAWAL
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Cyprus debt funds halt remittances from India
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SACHIN P MAMPATTA
Mumbai, 7 April
Cyprus- registered funds that invest in Indian debt instruments are refraining from taking their redeemed investments back to the island nation. Fears over safety of their money, following the economic turmoil in Cyprus, which prompted the nation to impose haircuts on bank accounts, raise taxes and introduce capital controls, are forcing funds to stop remittances to that country. These funds are private equity entities and institutions.
“There is some uncertainty over the safety of the money sent to the country. People are adopting a wait and- watch approach,” said Pranay Bhatia, partner, Economic Laws Practice.
Cyprus, in accordance with the conditions set by the International Monetary Fund and European Union for a € 10- billion bailout package, had agreed to impose a tax on bank deposits in the country. This means that some of the country’s depositors would have lost a portion of their money. The nation also increased the tax ( special defence contribution) on interest on deposits paid to Cyprus tax residents from 15 per cent to 30 per cent.
So, while interest income coming into Cyprus from India would only be taxed at 10 per cent, once it is deposited in Cyprus, any additional interest generated on such a deposit from within Cyprus faces higher taxes.
Also, corporate tax in Cyprus had been raised from 10 per cent to 12.5 per cent. Capital controls or restrictions on money flows have also been imposed.
All these have prompted these foreign funds to keep their money in India for the moment. Suresh V Swamy, executive director, tax & regulatory services at PricewaterhouseCoopers, said: “ Funds based out of Cyprus are cautious in remitting money to the country. Their preference is to park money in their rupee accounts to the extent they are able to reinvest in India, until some clarity emerges on the situation in Cyprus.” This aversion to Cyprus is in stark contrast to the situation when foreign funds with a focus on debt investments would base their operations out of Cyprus to take advantage of a treaty with India, which entitles them to a lower rate of tax on interest income.
The lower withholding tax on such income at 10 per cent compared to 15 per cent in Singapore and 40 per cent in Mauritius was a reason for the nation’s popularity.
Now, as Cyrpus’ popularity among foreign investors wanes, some entities are looking to route their redeemed money through other taxfriendly nations for foreign funds.
DEBT DEBACLE Why did debt funds come through Cyprus?
[1]Lower withholding tax on interest income makes this an attractive jurisdiction for debtoriented funds What has changed?
[1]Financial crises in the country means that bank accounts take a hair cut [1]Country has also raised various domestic taxes Whats happening now?
[1]Investors are not sending money back to their base in Cyprus [1]New investors are shying away from setting up establishment in the country
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