Government Dues under IBC: Paschimanchal Vidyut OR Rainbow Papers?

The import of Supreme Court Decisions in case of Paschimanchal Vidyut Vitran Nigam Ltd. versus Raman Ispat Private Limited & Ors. and State Tax Officer v. Rainbow Papers Ltd. is that statutory/government dues may constitute secured creditors consequent to specific provision under the applicable law creating a charge on the assets of the corporate debtor. The case of Rainbow Paper (earlier of the two decisions) dealt with Sec. 48 of the Gujarat VAT Act which contains specific provision to the effect that “any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer, or as the case maybe, such person.” Similar provisions exist under Sec. 82 of the CGST Act, 2017 and Sec 142A of the Customs Act, 1962 and therefore dues under such laws would have the same fate. However, this may not imply an across-the-board application for all statutory dues, particularly under the Income Tax Act which does not appear to contain a similar provision for creating a charge over assets of the taxpayer against dues. The nature of statutory dues, whether secured or otherwise, will need to be determined on a case-to-case basis.

However, the aforesaid two decisions of the Apex Court appear to have created an ambiguity whether statutory dues, even where secured, should be regarded under the category of ‘secured creditor’ [Sec 53(1)(b)] or as a separate class of Government Dues [Sec. 53(1)(e)] as specifically provided in the liquidation waterfall. The ambiguity arises on account of contrary observations of the Court in the aforesaid orders.

In Paschimanchal Vidyut decision (later of the two decisions), the Court observed that: “The Gujarat Value Added Tax Act, 2003 no doubt creates a charge in respect of amounts due and payable or arrears. It would be possible to hold [in the absence of a specific enumeration of government dues as in the present case, in Section 53(1)(e)] that the State is to be treated as a ‘secured creditor’. However, the separate and distinct treatment of amounts payable to secured creditor on the one hand, and dues payable to the government on the other clearly signifies Parliament’s intention to treat the latter differently – and in the present case, having lower priority. As noticed earlier, this intention is also evident from a reading of the preamble to the Act itself.”

Contrary to the above, in Rainbow Papers decision against which a review petition was preferred but dismissed, the Court observed that “Section 48 of the GVAT Act is not contrary to or inconsistent with Section 53 or any other provisions of the IBC. Under Section 53(1)(b)(ii), the debts owed to a secured creditor, which would include the State under the GVAT Act, are to rank equally with other specified debts including debts on account of workman’s dues for a period of 24 months preceding the liquidation commencement date.”

The Apex Court has considered the priority of secured statutory dues under the liquidation waterfall differently, and the ambiguity may now only be resolved by consideration of the issue by a larger bench of the Court. Until then, stakeholders will have to confront the uncertainty around the matter.

Having regard to the broader objective of IBC, there is enough literature to suggest that the framework of IBC laws favor waiver of government dues in pursuit of reviving viable businesses and promoting economic growth. However, over time concerns have been raised by statutory authorities that benevolent provisions have been misused and their interests completely ignored in resolution plans. A balance may therefore need to be drawn. Perhaps an option could consider secured government dues higher in priority [Sec 53(1)(b)] in case of liquidation whereas lower in priority [Sec. 53(1)(e)] in case of successful resolution. The IBBI, which has typically been proactive, needs to step in and address the lacuna in law by advancing suitable amendment in law, preferably as early as in the winter session of parliament, to resolve this debate. Leaving this impasse as an exercise of interpretation of law by the SC, which can be rather time consuming, will be counterproductive and only lead to uncertainty, costs, and litigation.

Contributed by Yatin Sharma. Yatin can be reached at

Fallout of Supreme Court Nestle SA decision (Most Favored Nation Import in DTAA)

The Supreme Court (SC), as the ultimate judicial authority, has stated the law of land concerning application of Most-Favored-Nation (MFN) clause as contained in the Protocol of India’s Double Taxation Avoidance Agreements (DTAAs) with some of the OECD member countries (Netherland, France and Switzerland). It is now settled by the court that the benefit of MFN provision in protocol to DTAA for reduction of rate of tax at source on dividend, interest, royalties or fee for technical services (FTS), or restrictive scope of FTS based on concession (“make available clause”) given under DTAA with other OECD member country does not have an automatic application. The benefit must be extended through appropriate notification by the government. The road ahead is now clear and for all to follow. However, the decision has far-reaching implications for numerous taxpayers who have over the years benefited by taking a non-taxable position basis restrictive scope of FTS by importing the “make available” clause or lower WHT rate from other DTAAs.

The development thus requires course correction and proactive remedial evaluation by the taxpayers to mitigate continuing exposure arising from past positions.

Implication for payer of income – Payers who may have taken a non-taxable position with regard to FTS payments to non-resident (in light of MFN “make available” import) or applied lower WHT rate on the strength of a withholding tax order issued by the revenue authorities would arguably have adequate grounds to defend against any penal consequence of incorrect/non withholding of taxes.  However, the exposure may potentially arise if the revenue authorities pursue the payer in the capacity of a representative assessee/agent should the recovery from the recipient not be possible.

On the other hand, payers who may have claimed the benefit suo-motu will have reason to be concerned and could potentially face consequences of failure to deduct/short deduction which may include recovery of tax, interest and penalty. While one may argue against levy of penalty considering the issue was settled only by the SC by reversing the favorable decisions of lower courts, this may entail a prolonged legal battle. The payers may need to consider a look back period of at least 7 years from the end of relevant financial year, taking cue from the limitation period prescribed for passing order holding an assessee in default for withholding tax non-compliance in relation to domestic payment.

Concern may also arise regarding potential disallowance of expense, specifically where no WHT has been deducted, in ongoing proceedings or a potential risk of reopening of assessment on account of wrongful claim of deduction.

Implication for recipient of income – The law is well established that the primary obligation to pay taxes is that of the recipient of income. The failure of the payer to withhold taxes as appropriate does not absolve the recipient to declare and pay appropriate taxes. Under reporting of income or short payment of tax consequent to application of lower WHT rate, on the strength of MFN provisions pre-SC decision, will thus very likely attract departmental scrutiny. The potential action could be rectification of past order as a consequence of SC judgment or reopening of past years due to escapement of income, subject to period of limitation. The revenue authorities can rectify past orders suo-motu or on application of the taxpayer up to a period of 4 years from the end of financial year in which the order, subject of rectification is passed. On the other hand, reassessment notices can be issued up to a period of 6 years from the end of relevant assessment years in case of AY 2021-22 and prior years, and 10 years for subsequent years (3 years where income escaped is less than 50 lacs).

Given the risk, taxpayers must evaluate the exposure and strategies a remediation plan proactively rather than adopt a reactive mode. For instance, a taxpayer may be better off filing a suo-motu application for rectification where possible, explore declaration through an updated return for tax years not picked for scrutiny assessment or voluntarily compute and discharge tax liability, etc. rather than wait for adversarial departmental action such as reassessment notices for detailed scrutiny or notice deeming assessee in default. A proactive approach will enable ring-fence the exposure toward tax, interest and penalty. There are other nuances that may need to be considered ie. for instance, whether any reassessment notices merely on account of wrong application of WHT rate would at all pass the primary test of “escapement of income” for any action of reassessment.

The CBDT had issued Circular No. 3/2022, dated 3rd February 2022 clarifying its position that beneficial provision of certain OECD treaty member countries cannot be automatically imported in other treaties such as with The Netherlands, France, the Swiss Confederation, Sweden, Spain and Hungary by reason of MFN clause in Protocol without specific notification. The position was aggressively defended by the revenue authorities before the SC with success. Having thus reached so far, it is unlikely that the revenue authorities will let this success pass only as an academic win without milking the opportunity to garner additional tax resource. In this light, taxpayers impacted by the ruling, whether as a person responsible for deducting tax or recipient of income, must evaluate the options and formulate a sound strategy of remediation rather than react to uncertainties.

Yatin Sharma and Abhishek Dutta.

Supreme Court holds right of redemption of mortgaged property is extinguished upon publication of the auction notice under SARFAESI Act, 2002

The Hon’ble Supreme Court in the case of CELIR LL BAFNA MOTORS (MUMBAI) PVT. LTD. & ORS. has in a significant ruling held that consequent to amendment of section 13(8) of SARFAESI Act, 2002 w.e.f. 1-9-2016, the right of redemption of mortgagor stands extinguished upon publication of the auction notice.

The pre amended Section 13(8) of the Act provided that if the dues of the secured creditor together with all costs, charges and expenses incurred by borrower/ mortgager are tendered to the secured creditor at any time before the date fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured creditor, and no further step shall be taken by him for transfer or sale of that secured asset. The position of law thus emerged that the mortgager has the right to redeem the mortgaged property anytime till the transfer was completed in favour of the auction purchaser through the process of registration of the sale certificate and delivery of possession of the secured asset. The provision was in consonance with section 60 of the Transfer of Property Act, 1882 which read with section 17 of the Indian Registration Act, 1908 provides a mortgagor the right to redeem the mortgaged property before the execution of the conveyance and registration of transfer of the mortgagor’s interest in the property by registered instrument.

The law was amended in 2016 which now provides that:

“ Where the amount of dues of the secured creditor together with all costs, charges and expenses incurred by him is tendered to the secured creditor at any time before the date of publication of notice for public auction or inviting quotations or tender from public or private treaty for transfer by way of lease, assignment or sale of the secured assets”,

The secured assets shall not be transferred by way of lease assignment or sale by the secured creditor and steps taken by the secured creditor for transfer by way of lease or assignment or sale of the assets before tendering of such amount under this sub-section, no further step shall be taken.

There has been considerable debate on the implications of the amendment with courts taking divergent views. Some courts holding favorably had ruled that the even after the 2016 amendment, the right of redemption would continue till the execution of a conveyance i.e. issuance of sale certificate in favour of the auction purchaser.

Bringing the differing views to rest, the Apex court has ruled that under the provisions of amended section 13(8) of the SARFAESI Act, the right of the borrower to redeem the secured asset stands extinguished on the very date of publication of the notice for public auction under Rule 9(1) of The Security Interest (Enforcement) Rules, 2002. The right of redemption available to the borrower under the emended law is drastically curtailed and would be available only till the date of publication of the notice and not till the completion of the sale or transfer of the secured asset in favor of the auction purchaser. The court has further observed that once the auction notice is published in accordance with Section 13(8) of the SARFAESI Act, the right of redemption of mortgage is not available to the borrower unless and until the auction is held to be bad and illegal in the facts of the case.

The Apex Court has overruled the position of law laid by the Telangana High Court in the case of Concern Readymix and Amme Srisailam and Punjab and Haryana High Court in the case of Pal Alloys and Metal India Private Limited while affirming the position of law laid by the Andhra Pradesh High Court in Sri Sai Annadhatha Polymers and Telangana High Court in the case of K.V.V. Prasad Rao Gupta.

The law now settled by the Apex Court has far-reaching implications for borrowers/mortgagers who now stand subjected to dispossession of the mortgaged property if not redeemed or settled before the publication of notice for public auction. A timely intervention by the borrowers now becomes imperative to safeguard their interest.

Contributed by Yatin Sharma. Yatin can be reached at

Angel Tax – Changes In Indian Taxation Landscape

Hello Readers,

As you may be aware, the Finance Act 2012 had introduced provision of section 56(2(viib) of the Income Tax Act, 1961.  Via this newsletter, we bring to you the salient features of the recent changes to the scheme introduced.

To give a context, the provision of section 56(2)(viib) intended to tax consideration received by closely held companies from residents for issue of shares that exceeds the face value of share. The provision covered consideration exceeding the fair market value of shares. The provision was made applicable only to residents with specific carveout for consideration for shares issued by a venture capital undertaking from a venture capital company, venture capital fund, specified fund or class of persons as notified. The provision was introduced as an anti-abuse measure to prevent circulation of unaccounted domestic money through share sale-purchase transactions. The Finance Act, 2023 has however extended the applicability of the provision to all categories of person, thereby bringing within the purview issuance of shares to non-resident.

Considering wide impact of the amendment, the government has by way of Notification No. 29/2023 dated 24 May 2023 excluded investment made by the following categories of foreign investors from applicability of the provisions:

  • Government and Government related investors, international or multilateral organizations and entities controlled by the Government or where direct or indirect government ownership is seventy-five percent or more;
  • Banks or Entities involved in Insurance Business;
  • Entities resident of 21 specified jurisdictions which are registered with SEBI as Category-I Foreign Portfolio Investors; endowment funds associated with a university, hospitals or charities; pension funds; Broad Based Pooled Investment Vehicle or fund where the number of investors is more than fifty (other than hedge fund or a fund which employs diverse or complex trading strategies). The specified jurisdictions notably exclude Singapore and Mauritius.

Further, as a result of the above amendment, representations were received from various stakeholders raising concerns that genuine non-resident investors may have to face undue hardship in matters related to valuation of shares etc. To address the concerns, the government has on 26 May 2023 issued draft notification for public comments proposing changes to the valuation rules as prescribed under Rule 11UA of the Income Tax Rules on the aspect of determining the fair valuation of the shares to assuage the concerns of various stakeholders.

Rule 11UA of the Income Tax Rules currently prescribes valuation based discounted cash flow (DCF) or net asset value (NAV) method. As per the draft rules, in addition to NAV and DCF method, the following are proposed for recognition as fair valuation:

  • where consideration is received by a venture capital undertaking for issue of shares, from a venture capital fund or a venture capital company or a specified fund, the price of the equity shares corresponding to such consideration will be regarded as the fair market value of the equity shares provided the consideration has been received within a period of ninety days of the date of issue of shares which are the subject matter of valuation.
  • where any consideration is received by a company for issue of shares, from any notified entity, the price of the equity shares corresponding to such consideration will be regarded as the fair market value of the equity shares provided the consideration from notified entity has been received within a period of ninety days of the date of issue of shares which are the subject matter of valuation.
  • Further in relation to consideration received from a non-resident, the fair market value of the unquoted equity shares can be additionally determined by a merchant banker in accordance with any of the following methods:
    • Comparable Company Multiple Method;
    • Probability Weighted Expected Return Method;
    • Option Pricing Method;
    • Milestone Analysis Method;
    • Replacement Cost Methods.

The proposed Rules further provide a safe harbor of 10 percent to accommodate variation between issue price and fair valuation determined as per prescribed valuation methods.

We will keep you updated as and when any further changes occur in this space. Thank you for your time. Till we meet again.

Best regards,

Research Desk at Aureus Law Partners

Should you have any queries, please feel free to reach out to our Practice Leader – Tax at

Tax Compliances Update for Charitable Trust in India


In India, existing Trusts were required to apply for registration/approval on or before 30 June 2021. However, on consideration of difficulties in the electronic filing of Form No. l0A, the Central Board of Direct Taxes (the Board) extended the due date for filing Form No. 10A in such cases to 25 November 2022 (Refer: Circular No. 22 of 2022 dated 1 November 2022). Such registration/approval are valid for a period of 5 years. Thus, existing Trusts are required to apply for fresh registration/approval and once the registration/approval is granted it is valid for five years.

New Trusts are required to apply for provisional registration/approval at least one month prior to the commencement of the previous year relevant to the assessment year from which the said registration/approval is sought. Such provisional registration/approval is valid for a maximum period of three years.

Provisionally registered/approved Trusts again need to apply for regular registration/approval in Form No. 10AB at least six months prior to the expiry of the period of provisional registration/approval or within six months of the commencement of activities, whichever is earlier. This registration/approval is valid for a period of five years.

Clarifications issued

On consideration of difficulties in electronic filing of Form No. 10AB the Board extended the due date for electronic filing to 30 September 2022 (Refer: Circular No 8 of 2022 dated 31 March 2022).

The Trusts once approved/registered for five years are required to apply at least six months prior to the expiry of the period of five years.

Deduction under section 80G of the Act in respect of a donation made by a donor to a fund or institution would be allowed to the donor only if a statement of such donations is furnished by the donee in Form 10BD. The certificate of such donation is required to be provided in Form No. 10BE. Further, Form No. 10BD and Form No. 10BE are required to be furnished on or before the 31st May immediately following the financial year in which the donation is received.

Finance Act, 2023 has, inter aIia, amended section 115TD of the Act, so as to provide that the accreted income of the Trusts not applying for registration/ approval, within the specified time, would be made liable to tax in accordance with the provisions of section 115TD of the Act. This amendment has come into effect from 01.04.2023 and therefore applies to assessment year 2023-24 and subsequent assessment years.

Extension of dates for filing

for Registration and Approvals

Several Trusts could not apply for registration/ approval within the required time due to genuine reasons. This led to rejection of applications simply on the ground that these were delayed.

In order to mitigate genuine hardship in such cases the Board has extended the due date of making an application till 30 September 2023 for both Forms 10A and 10AB.

The extension of due date as mentioned would also apply in case of all pending applications. Hence, in cases where the Trust has already made an application in Form No. 10AB but such application has been furnished after 30 September 2022 and where the Principal Commissioner or Commissioner has not passed an order before the issuance of this Circular, pending application in Form No. 10AB may be treated as a valid application. Also, in cases where the Trust had already made an application and the Principal Commissioner or Commissioner has rejected it only on account of delay, the Trust would be allowed to furnish a fresh application.

It has also been clarified that provisional registration of a Trust shall be effective from the assessment year relevant to the previous year in which the application is made and would be valid for a period of three assessment years.

for submission of Statement of Donation / Certification of donation

In consequence of the above, an extension has also been granted to the due date for furnishing of statement of donation / certificate of donation in respect of the donations received during the financial year 2022-23 to 30 June 2023.

for submission of Statement of Accumulation/Deemed Application

Finance Act, 2023 provides that Statement of Accumulation is required to be furnished at least two months prior to the due date of furnishing return of income.

The due date for furnishing the option for deemed Application of Income has been prescribed at least two months prior to the due date of furnishing return of income.

Now it has been clarified that the Statement of Accumulation would be required to be furnished at least two months prior to the due date of furnishing Return of Income so that it may be taken into account while auditing the books of account. However, the Accumulation/Deemed Application shall not be denied to a Trust as long as the Statement of Accumulation/Deemed Application is furnished on or before the due date of furnishing the return.

One of the conditions required to be fulfilled by the Trusts to be eligible to claim exemption is that where the total income of any Trust exceeds the maximum amount which is not chargeable to income-tax in any previous year, it is required to get its accounts audited.

It has also been clarified that account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account would be acceptable as mode of payment of taxes in addition to UPI and electronic transfers.

From the Aureus Law Partners’ research desk.  Published on 29 May 2023. 

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PE / VC Financing – A Broad Practice Process Perspective


According to Jame Koloski Morries, “Venture capital is defined as providing seed, startup, and first stage financing and also funding expansion of companies that have already demonstrated their business potential but do not yet have access to the public securities market or to credit-oriented institutional funding sources, Venture Capital also provides management in leveraged buyout financing”.

Venture Capital (VC) firms bring to the table expertise regarding the business in which it is investing, as well as managerial capability, aside from the funds required.

Not only is VC fund invested in businesses that use new technology to produce new products, they will typically, continuously involve themselves with the investments by way of providing managerial and other support.

While it is commonly understood that the VC investments are made in equity of the target entity, it is often seen that VCs insist on a modified instruments, often in the form of Compulsorily or Optionally Convertible Debentures or Preference Shares, etc.  Depending on the nature of the business and appetite of the VC firm in that business, it is possible that other creative instruments for investment may also be used.   Ordinarily, debt instruments ensure a running yield on the portfolio of the venture capitalists, and hence, may be considered safer by the VC, apart from providing a liquidity preference above equity holdings.

Venture Capitalists finance high risk-return ventures. Some of the ventures yield very high return in order to compensate for the heavy risks related to the ventures at the time of exit.  It depends on what the exit is defined as, however, typically a VC would retain several rights of exit upon the happening of specific occurrences.

Since VC funds invest on the basis of the business plan, when the business may not exist in the ground, they take a significant project risk. Private equity funds, however, come in when the business has taken off.  They prefer to invest in the growth of the business, when proof of concept is established, and scalability of the business is clear. Thus, VC funds can be viewed as ‘seed capital’, while PE funds can be viewed as “growth capital”.

The definition of the two types of funds under SEBI (Alternate Investment Funds) Regulations, 2012 is as follows:

  • “Private equity fund” means an Alternative Investment Fund which invests primarily in equity or equity linked instruments or partnership interests of investee companies according to the stated objective of the fund.
  • “Venture capital fund” means an Alternative Investment Fund which invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model.

Investments by both PE and VC Firms are illiquid investments. While a PE would invest in the expectation of an IPO, most VC Firms do not remain in the target entity till the IPO stage.

PE funds may even invest post public issue or at the time of public issue of the target. These are called Private Investment in Public Equity (PIPE).  While the VC funds may not have a clear investment horizon and may be in the target entity for a longer investment horizon.  However, PE funds typically have a shorter investment horizon – anywhere between 5 – 7 years would be a typical time period.

Angel Funds, VC Funds and PE Funds are essentially progressions in terms of project risk, investment liquidity and stages in the life cycle of the business. Angels normally enter a business at the lowest valuations with PEs entering at the highest valuation amongst the three kinds of investors (Angel, PE and VC).

The Process

Normally, upon deal origination (which may depend on the internal policies of the VC firm, and the area of interest that they may have), the step that follow is roll out of a Term Sheet. It is entirely possible that the VC move to Evaluation or Due Diligence before rolling out the Term Sheet.  In case the business is absolutely new then the an evaluation into the quality of the entrepreneur is undertaken, before appraising the characteristics of the product, market or technology. Most venture capitalists ask for a business plan to make an assessment of the possible risk and expected return on the venture.  Oftentimes, the above procedure runs in parallel with the negotiation on a draft Term Sheet.

Thereafter, the process of Valuation may commence. Investment valuation is a specialised process, where various factors are considered including but not limited to the entrepreneur’s track record, the product itself, and whether it is innovating, overall economic scenario, unique proposition of the venture, size of the market and so on and so forth.

Assuming that the aforesaid steps are accomplished and an acceptable Term Sheet has been signed, the next step would be Deal Structuring.

Once the venture has been evaluated as viable, the venture capitalist and the investment company negotiate the terms of the deal, i.e., the amount, form and price of the investment. This process is termed as deal structuring. The discussions would also include protective covenants and earn-out arrangements. Covenants include the venture capitalists’ right to control the target company and to change its management if needed, buy back arrangements, acquisition, making Initial Public Offerings (IPOs), etc.  Discussions and agreement entered into would specify the entrepreneur’s equity share and the objectives to be achieved.  Various rights are retained by the VC, including that of replacement of the management in case the objectives are not met, or in case of specific circumstances arising.

The next important question, apart from the day to day operations and the VC Firm’s level of intervention in it is that of exit.  There could be:

  • Initial Public Offerings (IPOs)
  • Acquisition by Another Company
  • Buyback or Repurchase of the Venture Capitalist’s Share by the Investee Company / Promotors
  • Purchase of VC Firm’s Share by a Third Party

From a process perspective, the following stages are key:

Sourcing of proposal:  PE / VC funds receive proposals from Investment Banks as well as from the targets directly.  Most funds may not wish to directly engage with the promotors, especially when the promotors do not have a significant track records, and would prefer to pursue proposals that are initiated by Investment Bankers.

  • Initial contact / flier / pitch:  This refers to the stage when the Investment Bank or the promotor sends out a pithy flier, which may be just a page or two, outlining the bare details of the project – essentially, the issuer, the business and the nature of the proposed transaction.
  • Non-Disclosure Agreement:  If the fund is interested, they would seek further information by way of emails or by way of discussions.  To cover the subject matter and to ensure no possible leakages, a non-disclosure agreement is typically signed by the parties.
  • Information memorandum: Post the non-disclosure agreement, an Information Memorandum is shared between the parties. This may contain the following:
    • Highlights
    • Executive Summary
    • Promoter background
    • Industry background, regulatory environment, market structure and competitors
    • Key drivers of success in the business and the overall value chain
    • Company background, its management team and clients
    • Business model of the company
    • Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis of the company vis-à-vis the chosen business model
    • Capital expenditure plan and proposed means of financing
    • Revenue model and strengths / uncertainties associated with each stream of revenue
    • Cost and Margin structure
    • Historical financials
    • Projected financials for about 5 years, or longer for long gestation projects
    • Patents or any intangible assets owned by the company
    • Key successes of the company
    • Litigation or tax issues associated with the company or its promoters
    • Proposed transaction, including purpose of mobilisation, size of mobilisation, proposed dilution and the valuation.
    • Justification for valuation
    • Risks associated with the investment
    • Likely exit possibilities for the investor
    • Time frame, or any other key aspect not covered above

This document is required to be professionally prepared in the interest of completeness and should ordinarily be vetted by professionals who would be assisting in the transaction should it go forward.

  • Management presentation
  • Initial Due Diligence
  • Preliminary investment note:  This is typically prepared by the internal team of the fund, and is a document private to the fund.
  • Non-Binding Letter of Intent:  Post the above, a Non-Binding Letter of Intent is issued by the fund outlining the nature of the investment, the kind of instrument, key parameters, investment conditions, amounts and other terms.  The LoI would also outline the key liquidity events, time frame, board representation, expected stake, costs and who is to bear them.  Any specific area of concern may also be addressed in such an LoI.
  • Final Due Diligence (FDD): FDD occurs on several parameters including commercial, financial and legal.  Legal DD would normally cover the following:
    • Incorporation certificate and various registrations obtained by the company
    • Licences and approvals required for doing business, scheduled expiry date of each of these, likely terms of renewal on expiry, any permissions not obtained by the company, reasons therefor, and the implications in terms of costs, penalties and culpability of owners / managers
    • Approvals required for the proposed PE transaction within the company, from other business owners, from regulatory authorities and from any other commercial partners
    • Review of the memorandum and articles of association including confirmation that all changes to date are suitable reflected in them
    • Changes that will need to be incorporated in the memorandum and articles as part of the proposed transaction
    • Non-compete agreements executed by the company and their validity and duration
    • Claims made against the company by any party, the status of these claims with various authorities and relative strength of the parties to the claims
    • Meetings of the board and share-holders, the dates on which they were held and the compliance with regulatory requirements
    • Filing of annual returns, resolutions and other forms with the Registrar of Companies (ROC) and other regulatory authorities
    • Material contracts executed by the company for financing, sourcing etc. and especially contracts the company has made with owners or senior management of the company
    • Standard terms of employment with employees, and special arrangements made with senior management of the company
    • Confirmation of ownership of key assets reported by the company
    • Adequacy of insurance taken on the assets and other contingencies, the insurers, key clauses in the insurance policy, pending insurance claims, impact of claims on future premia payable on those insurance policies etc.
    • Patents, trademarks, brands, copyrights, industrial secrets, proprietary software and other intangible assets of the company, the certifications of their ownership and validity, measures taken to protect them, and any further steps to be taken on these matters if the proposed transaction goes through
    • Cases against the promoters or senior management, whether related to the business of the company or otherwise, and their status in relevant courts or with regulatory authorities.
  • Final Investment Memorandum: This document covers all the areas through the Information Memorandum, and findings of the FDD, as well as valuations.  All the approvals and closing steps are also discussed in the Final Investment Memorandum.  This document is ordinarily discussed in the meeting of the directors / partners, and the authorised signatory for signing the Term Sheet is then decided and authorised.
  • Term Sheet: Term Sheet can be seen as a binding LoI as opposed to a Non Binding LoI containing the details therein as well as addressing any other issues that may need to be addressed pursuant to the aforesaid steps.  The Term Sheet is then binding on the fund, while containing the term for which it would remain firm.
  • Closure of the deal: After the term sheet is signed, and before the fund releases the money to the company, various other processes need to be completed, such as:
    • Drafting and execution of subscription agreement outlining the respective parties’ rights and obligations
    • Making relevant changes in memorandum and articles of association and other agreements with various parties, as may have been decided
    • Permission of Cabinet Committee on Economic Affairs, SEBI, RBI, Ministry of Finance, relevant Ministry for that industry, state government, local authorities etc.
    • Obtaining any no-objection certificates that may have been highlighted as part of the legal due diligence
    • If the transaction structure provides for any escrow arrangements or other guarantees, then effecting the same
    • If the deal is subject to any changes in the financial structure of the company including fresh borrowings, then obtaining firm commitments for the same and concluding the relevant documentation

There may be conditions subsequent and precedent as well that need to be fulfilled upon or before closure of the deal.

Key Investment Conditions

Certain investment conditions are typically addressed by the Funds in the course of the deal.  These are:

  • Board Seat
  • Right to change management
  • Lock in of Promotors / Management
  • ESOPs
  • Assured Returns
  • Veto Rights
  • Right of First Refusal
  • Right of First Offer
  • Right to MIS
  • Right to Audit
  • IPO Facilitation

The aforesaid conditions are incorporated into the deal by way of various documents such as Share Subscription, Share Holders, Share Purchase Agreements.  The Memorandum and Articles of the Company are also amended in keeping with the transaction structure.

For the purposes of this article, one confines oneself to the practice aspects of PE / VC transactions.  Of course there are other nuances, such as taxation, regulations of AIFs by SEBI, and the entire ecosystem surrounding them, which may form a part of another offering from Aureus Law Partners.

Till then.

From the Aureus Law Partners’ research desk. 

For queries:

TDS/TCS Amendments in Income Tax laws

The Union Budget of India for the year 2023-24 (the Budget) has introduced various circumstances in which taxes are to be withheld  / collected by the payer.   Several taxpayers / citizens have approached us to understand the import and application of these amendments from time to time post the Budget speech.  This post seeks to provide an explanation to  such queries.

Tax Collection at Source Amendments

TCS rates on remittances made from India

Effective 1 July 2023, TCS would be required to be effected at the rate of 20% as against the existing rate of 5% for remittances under Liberalised Remittance Scheme (LRS) and overseas tour package. However, the TCS rate on remittances made for medical and education purposes in excess of INR 7 lakh continues to be at 5%. Further, in case remittance in excess of INR 7 lakh is made for educational purpose out of loan obtained from financial institution, the TCS rate of 0.5% remains unchanged.

Tax Deduction at Source (TDS) Amendments:

Benefit of tax treaty rate extended to specified income earned by non-residents

A non-residents in India when earning income from mutual fund units suffers a deduction of tax at source by the payer at the rate of 20%. From 1 April 2023, should the non-resident provide a Tax Residency Certificate to the payer, then the payer may discharge the TDS at the treaty rate.

Tax to be deducted on interest on specified securities

From  1 April 2023,  tax would be deducted on the interest payable on listed securities in dematerialized form.

Income from online Gaming.

From 1 July 2023 a payer needs to deduct tax at the rate of 30% on the ‘net winnings’ in the user account at the end of the Financial Year (FY) or at the time of withdrawal by the user. The method for computing the net winnings is yet to be prescribed.

It appears that treaty benefit for non-residents would not be available and the entire net winnings would be liable for tax deduction.

Clarification for tax deductibility on benefits/ perquisites

It has been clarified that the tax is to be deducted whether the benefit or perquisite is in cash or in kind or partly in cash and partly in kind.

Entry of Foreign Law Firms into India

The Bar Council of India (BCI) has notified on 13 March 2023 rules regarding entry of foreign lawyers and law firms in India.  The rules, christened the Bar Council of India Rules for Registration and Regulation of Foreign Lawyers and Foreign Law Firms in India, 2022, essentially allow foreign lawyers and law firms to practice in India in non-litigation areas.  

Specifically, law practice in India is being opened up in the field of practice of foreign law; diverse international legal issues in non-litigious matters and in international arbitration cases.  The foreign law firms are being allowed to assist “foreign clients”.   They may undertake work for a person, firm, company, corporation, trust, society etc. who/which is having an address or principal office or head office in a foreign country in any international arbitration case which is conducted in India and in such arbitration case foreign law may or may not be involved.

All foreign lawyers are required to be registered with the Bar Council of India.

Exception has been created for Foreign Firms operating on ‘fly in and fly’ out basis. Registration with BCI is not mandatory for such foreign lawyers or foreign law firms who operate on a ‘fly in and fly out basis’ for the purpose of giving legal advice to the client in India regarding foreign law and on diverse international legal issues. Such foreign lawyer or foreign law firm who operate on ‘fly in and fly out basis’ do not maintain an office in India for the purpose of such practice and such practice in India for one or more periods does not, in aggregate, exceed 60 days in any period of 12 months.

Registered foreign law firms and lawyers can also:

  • Open up law offices.
  • Engage and procure legal expertise of one or more Indian advocates registered as foreign lawyers.
  • Procure the legal expertise of any advocate enrolled with any State Bar Council in India on any subject relating to Indian laws.
  • Enter into a partnership with one or more foreign lawyers or foreign law firms registered in India under these Rules.

BCI may also refuse to register any foreign lawyer or law firm if in the opinion of the Council, the number of Foreign Lawyers or Foreign Law Firms of any particular Foreign country registered in India is likely to become disproportionate to the number of Indian Lawyers or Indian Law Firms registered or allowed to practice law in the corresponding foreign country.

At the cost of repetition:

  • Foreign lawyers and firms shall not be permitted to appear before any courts, tribunals or other statutory or regulatory authorities.
  • They shall be allowed to practice on transactional work/corporate work such as joint ventures, mergers and acquisitions, intellectual property matters, drafting of contracts and other related matters on reciprocal basis.
  • They shall not be involved or permitted to do any work pertaining to conveyancing of property, title investigation or other similar work.
  • They may do work, transact business, give advice and opinion concerning the laws of the country of primary qualification.
  • They may provide legal advice and appear as a lawyer for a person, firm, company, corporation, trust, society etc which has an address in a foreign country in any international arbitration case which is conducted in India and in such arbitration case where foreign law may or may not be involved
  • They may provide legal advice and appear as a lawyer before bodies other than courts, tribunals, boards, statutory authorities who are not legally entitled to take evidence on oath, in which knowledge of foreign law of the country of primary qualification is essential.
  • They may provide legal advice concerning the laws of the country of primary qualification and on diverse international legal issues. This shall not include representation or the preparation of documents regarding procedures before an Indian court, tribunal or any other authority competent to record evidence on oath.
  • An advocate enrolled with any State Bar Council in India and who is a partner or associate in any foreign law firm can only take up non-litigious matters and advise on laws of countries other than India.

As with any rule/regulation, there are certain open areas under these rules as well.  However, we have not editorialised on those here.  Those may be a topic of more granular discussions, should the need arise.

From the research desk at Aureus Law Partners.  Queries may be addressed to  

SC Ruling in Rainbow Papers Limited– The debate on priority of Statutory Dues under IBC

The decision of the Hon’ble Supreme Court in the case of STATE TAX OFFICER (1) v RAINBOW PAPERS LIMITED rendered under the Insolvency and Bankruptcy Code (IBC) has ruled on a significant aspect of priority of Government dues. The Court has held that statutory dues under Gujarat VAT Act (GVAT Act) are secured creditors and would require consideration as such in the resolution plan. It was this held that Sec. 48 of the GVAT Act which states that-

“any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer, or as the case maybe, such person

is not contrary to or inconsistent with Sec. 53 or any other provisions of the IBC. The Court further held that a resolution plan which does not confirm to the provisions of Sec. 31(2) of the IBC inter-alia prescribing payment of dues of operational creditors, dissenting financial creditors, etc. would not be binding on the parties to whom a debt in respect of dues arising under any law is owed. Such resolution plan ought to be rejected. The Court has also held that the time period of submitting the claims as prescribed under the IBC are not mandatory but only directory.

The decision of the court has raised considerable apprehensions, and rightly so, on the aspect of priority of settlement of statutory dues under the IBC.

SC Observations

The SC has made certain observation suggesting that if the corporate debtor is unable to pay statutory dues to the government and there is no plan to dissipate the debts, the corporate debtor would need to be liquidated and its assets sold. In this respect, the court observed as under:

“52. If the Resolution Plan ignores the statutory demands payable to any State Government or a legal authority, altogether, the Adjudicating Authority is bound to reject the Resolution Plan.

  1. In other words, if a company is unable to pay its debts, which should include its statutory dues to the Government and/or other authorities and there is no plan which contemplates dissipation of those debts in a phased manner, uniform proportional reduction, the company would necessarily have to be liquidated and its assets sold and distributed in the manner stipulated in Section 53 of the IBC.
  2. In our considered view, the Committee of Creditors, which might include financial institutions and other financial creditors, cannot secure their own dues at the cost of statutory dues owed to any Government or Governmental Authority or for that matter, any other dues.”

The aforesaid observations, considered in isolation have far reaching implication. However, it would be reasonable to infer that such observation will have to be regarded in the context of the issue before hand. The court having held that statutory dues were secured creditors (by virtue of operation of law), such debts require consideration in the same light as other secured creditors. It is only if the resolution plan does not contemplate dissipation of such debts in the manner specified u/s 53 would the question of liquidation of the company arise. Reading beyond the context would render relevant provisions of the IBC and principles established over time nugatory which cannot be the intent.

Statutory dues are unsecured operational debts unless secured by operation of law

It is settled law that statutory dues are operational debts. This is also clear from the definition contained u/s 5(21) of IBC which defines ‘operational debt’ as under:

 “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;

Such operational debts can however be ‘secured’ if a security interest is created on such debts. Sec. 2(31) of IBC defines “security interest” to means:

 “right, title or interest or a claim to property, created in favour of, or provided for a secured creditor by a transaction which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance or any other agreement or arrangement securing payment or performance of any obligation of any person”:

Security interest in relation to a debt thus implies creating a “right, title or interest or a claim to property”. Generally, assessment of statutory dues by government authorities does not create an automatic interest in the property of the debtor, unless mandated under law as was the case under Gujarat VAT Act under consideration by the SC or by specific action. Though the decision has been rendered in context of Sec. 48 of the Gujarat VAT Act, it has direct bearing on government dues under statutes which similarly create a charge over assets of the taxpayer.

Illustratively, similar provisions are specified u/s 82 of the CGST Act, 2017 and Sec. 142A of the Customs Act, 1962 which read as under:

Section 82 of the CGST Act, 2017:

“Tax to be first charge on property.- Notwithstanding anything to the contrary contained in any law for the time being in force, save as otherwise provided in the Insolvency and Bankruptcy Code, 2016, any amount payable by a taxable person or any other person on account of tax, interest or penalty which he is liable to pay to the Government shall be a first charge on the property of such taxable person or such person.”

Section 142A of the Customs Act, 1962

“Liability under Act to be first charge – Notwithstanding anything to the contrary contained in any Central Act or State Act, any amount of duty, penalty, interest or any other sum payable by an assessee or any other person under this Act, shall, save as otherwise provided in section 529A of the Companies Act, 1956 (1 of 1956), the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of 1993) and the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002 and the Insolvency and Bankruptcy Code, 2016 be the first charge on the property of the assessee or the person, as the case may be.”

The import of the aforesaid provisions under the GST and Customs laws is the classification of statutory dues as ‘secured debts’, and therefore a priority on distribution of assets as secured debts u/s 53 of IBC. However, the ruling cannot be regarded as laying the general proposition having application to all government and statutory dues. Nature of statutory dues will need to be examined on a case-to-case basis in light of specific legislative act.

Nature of Income tax dues

Income tax dues generally constitute a significant component of claims under a resolution process. Under the Income tax law, manner of recovery of taxes is provided u/s 222 of the Income Tax Act, 1961. As per the provisions, where the assessee is in default in making payment of taxes, the Tax Recovery Officer (TRO) can proceed to recover the taxes by way of attachment and sale of moveable or immovable property of the taxpayer. Such attachment requires positive action of the TRO as per prescribed rules. Till such process is set in motion, there may not be any question with regard to income tax dues being regarded as secured debts. Even where recovery of taxes is secured by attachment of property, it is argued that such act of attachment does not create ‘a right, title or interest or a claim to a property’ and hence income tax dues will stay outside the purview of ‘secured debts’.

The fine distinction between an attachment of property and charge created over the property was explained by the Gujarat High Court in Shree Radhekrushna Ginning and Pressing Pvt. ltd. Versus State of Gujarat (CA no. 5413 of 2022). The court explained as under:

“12 We take this opportunity to explain the effect of attachment and also the effect of charge. In Mulla’s Civil Procedure Code, 8th Edn., the law as applicable in India is thus summarised (p. 187):

“Attachment creates no charge or lien upon the attached property. It merely prevents and avoids private alienations; it does not confer any title on the attaching creditors. There is nothing in any of the provisions of the Code which in terms makes the attaching creditor a secured creditor or creates any charge or lien in his favour over the property attached. But an attaching creditor acquires, by virtue of the attachment, a right to have the attached property kept in custodia legis for the satisfaction of his debt, and an unlawful interference with that right constitutes an actionable wrong.”      

13 The Privy Council in Moti Lal v. Karrabuldin (1897) I.L.R. 25 Cal. 179, p.c. where Lord Hobhouse stated (p. 185):

“Attachment, however, only prevents alienation, it does not confer title.”

14 Similarly, in the Calcutta Full Bench case of Frederick Peacock v. Madan Gopal (1902) I.L.R. 29 Cal. 428, F.B. Sir Francis Maclean, in delivering the judgment of the Full Bench, says (p. 431):

“I think, therefore, it must be taken that the attaching creditor here did not obtain by his attachment any charge or lien upon the attached property, and if so, no question as to the Official Assignee only taking the property of the insolvent subject to any equities affecting it, can arise.”

And Mr. Justice Ghose says (p. 483):

“I am clearly of opinion that the attaching creditor did not acquire any title or charge upon the property by reason of the attachment in question.”


Thus, upon attachment of a property, the taxpayer is only debarred from dealing with the attached property except with the permission of TRO. It does not create security interest in favour of the income tax authorities. The proposition that income tax is not secured debts also find favor from various judicial pronouncement on the subject. Illustratively, in Bombay Stock Exchange v. V.S. Kandalganonkar & Ors. one of the points in controversy was whether the Income Tax Department can claim priority over the debts vis-a-vis Bombay Stock Exchange, which was a secured creditor. The Hon’ble Supreme Court held that the Income Tax Act does not provide for any paramountcy of dues by way of income-tax. In such background, it held that stock exchange being a secured creditor, will have precedence over the claim of dues made by way of income-tax by the Income Tax Department. Accordingly, the Bombay Stock Exchange being a secured creditor, would have priority over Government dues.

It thus seems clear that dues under Income tax Act do not create a charge on the assets of the taxpayer and therefore are outside the debate of being regarded as secured creditors for the purpose of waterfall distribution.

Concluding remarks

The jurisprudence developed over years indicate that tax dues towards the government generally have priority only over debts owed to unsecured creditors and such preferential right is not available over secured creditor. However, where the matter pertains to IBC, the waterfall distribution as regards the government dues is subordinate to even unsecured financial debts, workmen dues and wages. The position clarified by the Supreme Court categorizing government dues (protected by charge over assets of the taxpayer) as ‘secured debts’ has put a spanner bearing significant implication on the priority of stakeholders entitled to waterfall distribution.

While it seems certain that the statutory authorities will now approach with full force to exercise their claim in light of the judgement, it also opens a debate on the fate of numerous corporate resolutions which may have not regarded specific categories of government dues as ‘secured creditors. Perhaps the period of limitation to appeal against the resolution plans may come as a savior.

The variance amongst laws with respect to creation of charge over the property of the taxpayer has created uncertainty. There seems no justification for such differentiation in context of matters under IBC. The preamble to the Insolvency and Bankruptcy Code specifies the objective to include “alteration in the order of priority of payment of Government dues”. However, the categorization of statutory dues as ‘secured creditor’ would appear contrary to such objective necessitating a prompt legislative intervention to settle the debate.

Contributed by Yatin Sharma and Abhishek Dutta. 

Yatin can be reached at

Moratorium under IBC and Tax Proceedings

Has the Supreme Court (SC) in SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS legitimised tax proceedings during the period of moratorium set under the Insolvency & Bankruptcy Code?

Rendered in context of the custom law, in the aforesaid matter, SC has held that IBC would prevail over the Customs Act, to the extent that once moratorium is imposed in terms of sections 14 or 33(5) of the IBC, the respondent authority only has a limited jurisdiction to assess/determine the quantum of customs duty and other levies. The respondent authority does not have the power to initiate recovery of dues by means of sale/confiscation, as provided under the Customs Act. The Court observed that issuance of demand notices to seek enforcement of custom dues during the moratorium period would clearly violate the provisions of Sections 14 or 33(5) of the IBC, as the demand notices are an initiation of legal proceedings against the Corporate Debtor (CD). Thus, the SC has fairly settled that recovery of tax dues cannot be made, otherwise than in the manner prescribed under IBC.

However, what is noteworthy is further examination of the powers which the tax authority can exercise during the moratorium period under the IBC. The court has importantly observed that authorities could however initiate assessment or re-assessment of the duties and other levies. The Resolution Professional has an obligation to ensure that assessment is legal, and he has sufficient power to question any assessment, if he finds the same to be excessive. The court relied on the ratio of the judgement in S.V. Kondaskar v. V.M. Deshpande, AIR 1972 SC 878, wherein the court had held that the authorities can only take steps to determine the tax, interest, fines or any penalty which is due. However, the authority cannot enforce a claim for recovery or levy of interest on the tax due during the period of moratorium.

There has been varying positions vis-à-vis initiating or continuing tax proceeding during the period of moratorium. For instance, the Calcutta HC in SREI Equipment Finance Ltd. vs. Additional/Joint/Deputy/Assistant Commissioner of Income Tax and others has held that tax proceeding cannot be continued during moratorium. However, given the ratio of the ruling, moratorium for prohibiting initiation or continuation of tax proceedings will now have limited bearing.

In my personal view, continuation of tax proceedings already initiated against the CD before admission under IBC is rational since this is necessary to quantify the legitimate claim of the authorities under a process which has already been set in motion. However, what it does not address is the practicality of contesting the demand before appellate authorities during the time bound CIRP period. It is not uncommon for the tax authorities to make high pitched demands only to be quashed or revised pursuant to appellate relief, and therefore right quantification for admitting a claim assumes importance. As regards initiation of new proceedings, moratorium is a calm period providing the CD a window to restructure in a financially viable manner. Granting the Revenue Authorities opportunity to initiate new assessment proceedings and raise new claim not contemplated before initiation of CIRP may however not be in the spirit of law. It is desirable that the law be clarified to accommodate such distinction in light of moratorium provisions.

Contributed by Yatin Sharma with Abhishek Dutta. Yatin can be reached at