IBC – Income Tax: Face off.

It is now settled by the Hon’ble Supreme Court that provisions of Insolvency and Bankruptcy Code (IBC) will prevail over provisions of Income Tax Act, 1961 (IT Act) to the extent inconsistent. Of the many interesting aspects emerging as the IBC law matures, a question that often arises is whether tax proceedings can continue during the period of moratorium when the corporate debtor (CD) is under resolution. This is in context of Section 14 of IBC which prescribes that on the insolvency commencement date, the Adjudicating Authority is required to declare moratorium for prohibiting, amongst others, the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority during the resolution period. The National Company Law Appellate Tribunal (NCLAT), in the matter of Mohan Lal Jain, In the capacity of Liquidator of Kaliber Associates Pvt. Ltd. Vs. Income Tax Officer, has fairly settled that there is no bar in making assessment during the period of moratorium. However, order cannot be enforced-meaning thereby that recovery of tax pursuant to the order cannot be made. The claim of the tax authorities will form part of the claim before the Resolution Professional. This position is logical considering that all parties are required to make their claim before the Resolution Professional as on the insolvency commencement date. Determination of tax claim would thus necessitate conclusion of tax proceedings during the resolution period.

Another interesting tax aspect is regarding applicability of Withholding Tax (WHT) on transfer of property of a CD in liquidation. Ordinarily, transfer of immoveable property entails TDS of 1% under Section 194IA of the IT Act. The NCLAT in case of Om Prakash Agrawal Liquidator-S.Kumars Nationwide Limited Vs. CCIT (TDS), has held that TDS under Section 194IA of IT Act, is an advance capital gain tax, recovered through transferee on priority over other creditors of the company. The priority of distribution of liquidation proceeds amongst the various stake holders is mandated under Section 53 of IBC which is a non-obstante provision overriding any other law enacted by the Parliament or any State Legislature. Hence, no TDS is warranted since it would run contrary to the waterfall mechanism provided under Section 53 of IBC. This principle will hold good for other Income tax deductions, as applicable during liquidation process.

Such developments reinforce the need for a holistic understating of inter-connected laws, oversight of which can have significant legal and financial implications.

Contributed by Yatin Sharma. Yatin can be reached at yatin.sharma@aureuslaw.com

Interest free loans held to be ‘financial debt’ under IBC

Recently, on July 26, 2021, a Division Bench of the Supreme Court pronounced a judgement[1] upholding that interest free loans would fall under the definition of ‘financial debt’ as defined under section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC).

Facts leading to Supreme Court’s decision

M/s Sameer Sales Private Limited (Original Lender), advanced a term loan of INR 1.60 crores to its sister concern, M/s Samtex Desinz Pvt. Ltd. (Corporate Debtor) for a period of two years for working capital requirement. The Original Lender assigned the outstanding loan to M/S Orator Marketing Pvt. Ltd. (Appellant).

The Appellant filed an application under section 7 of IBC for initiation of corporate insolvency resolution process (CIRP) against the Corporate Debtor. The adjudicating authority (AA) rejected the section 7 application vide its order dated February 1, 2020. While rejecting the application, the AA held that neither the loan agreement has any provision regarding the payment of interest nor there is any supporting evidence/document to establish applicable rate of interest to be paid on the said loan. Also, that the Appellant failed to prove that the loan was disbursed against consideration for time value of money, particularly when it has been affirmed that no interest has been paid and was not payable at any point of time. For this, the AA relied on the appellate tribunal’s decision of Dr. B.V.S. Lakshmi vs. Geometrix Laser Solutions Private Limited[2].

Further, the AA relied on the decision of appellate tribunal in the case of  Shreyans Realtors Private Limited & Anr. vs. Saroj Realtors & Developers Private Limited,[3] to observe that when corporate debtor never accepts the component of interest and has given no undertaking to repay the loan with interest, then such debt cannot be termed as ‘financial debt’ under section 5(8) of IBC.

Being aggrieved by the order of the AA, the Appellant preferred an appeal before the appellate tribunal. In appeal, the order of AA was confirmed, and accordingly, the appeal was dismissed. Against the said order of appellate tribunal, the Appellant preferred appeal before the Apex Court.

Apex Court’s Order

Apex Court referred to the definition of ‘financial debt’ as contained in section 5(8) of IBC to observe that the same cannot be read in isolation, without considering other relevant definitions. It then proceeded to discuss the definitions of ‘claim’ in section 3(6), ‘corporate debtor’ in section 3(8), ‘creditor’ in section 3(10), ‘debt’ in section 3(11), ‘default’ in section 3(12), ‘financial creditor’ in section 5(7) and, provisions of  sections 6 and 7 of the IBC.

Section 5(8) defines ‘financial debt’ to mean ‘a debt along with interest, if any, which is disbursed against the consideration of the time value of money and includes money borrowed against the payment of interest’. Basis the same, the Apex Court observed that the orders of AA and appellate tribunal are flawed as they  have overlooked the words ‘if any’, which the legislature, could not have intended to be otiose.

Apex Court proceeded to observe that ‘financial debt’ means outstanding principal due in respect of a loan and would also include interest thereon, if any interest were payable thereon. If there is no interest payable on the loan, only the outstanding principal would qualify as a ‘financial debt’.

Also, the court observed that both the appellate tribunal and AA have failed to notice clause(f) of section 5(8), which provides that ‘financial debt’ includes any amount raised under any other transaction, having the commercial effect of borrowing.

Apex Court also referred to the decision of Pioneer Urban Land and Infrastructure Ltd. Vs. Union of India,[4]where it was held that even individuals who were debenture holders and fixed deposit holders, are financial creditors who could initiate the CIRP.

Basis the aforesaid observations, the Apex Court held that ‘money borrowed against payment of interest’ is one type of financial debt, among various kinds of financial debt as enumerated under section 5(8)(a) to section 5(8)(i) of IBC. Also, that  the definition of ‘financial debt’ in section 5(8) of the IBC does not expressly exclude an interest free loan. Hence, the Apex Court held that ‘financial debt’ would have to be construed to include interest free loans advanced to finance the business operations of a corporate body.


This decision is solely based on the interpretation of term ‘if any’ as contained alongside ‘interest’ in the definition of ‘financial debt’ under section 5(8). However, the phrase ‘time value of money’ was not discussed. Essentially, this phrase assumes that money, for what it is worth today, would be more in future. Therefore, the question remains as to what constitutes ‘time value of money’ in an interest free loan. The Apex Court’s decision has not elaborated on this aspect.

Contributed by Manish Parmar. Manish can be reached at manish.parmar@aureuslaw.com.

Views are personal.

[1] M/s Orator Marketing Private Limited vs. M/s Samtex Desinz Private Limited, Civil Appeal No. 2231/2021

[2] Company Appeal (AT) (Insolvency) No. 38 of 2017

[3] Company Appeal (AT) (Insolvency) No.311 of 2018

[4] (2019) 8 SCC 416

Amendment proposed to E-Commerce Rules, 2020

Recently on June 21, 2021, the Government has proposed amendments to the Consumer Protection (E-Commerce) Rules, 2020 (“E-Commerce Rules, 2020”). Notification states that since July, 2020,[1] the Government has received several representations from aggrieved consumers, traders and associations complaining against widespread cheating and unfair trade practices being observed in e-commerce ecosystem. Hence, certain amendments have been proposed to bring transparency in the e-commerce platforms and further strengthen the regulatory regime to curb the prevalent unfair trade practices.

E-Commerce Rules, 2020 regulate all goods and services bought and/or sold over a digital / electronic network, and applies to all models of e-commerce, including marketplace and inventory models of e-commerce, retail e-commerce. Non-compliance with the E-Commerce Rules, 2020 is construed as violation of the Consumer Protection Act, 2019 and attracts penal provisions contained therein. It contains strict guidelines inter alia to regulate price manipulation, ensure compulsory display of details related to country of origin of the product, return, refund, exchange, warranty, delivery and shipment, quality control to enable the consumers make an informed decision at a pre-purchase stage.

In the above background, I have discussed the proposed amendments under the following heads.

Widening the definition of ‘e-commerce entity’

Proposed amendment includes entities via which the platforms undertake the last mile delivery of goods and services to their customers. This may warrant e-commerce companies to ensure that the vendors undertaking last mile delivery of goods and services are compliant with the E-Commerce Rules, 2020 as well. Also, requirement of appointment of nodal officers have been extended to e-commerce entities which are limited liability partnerships and partnership firms.

Concept of ‘cross selling’ introduced

‘Cross selling’ implies sale of goods or services which are related / complimentary to a purchase made by a consumer from an e- commerce entity, and the same is indicated or advertised therein with an intent to maximise the revenue of such e-commerce entity. Proposed amendment intends to prevent dissemination of manipulative advertisement / information by such entities, and aims to promote domestic goods.

Ban on ‘Flash Sales’

‘Flash sale’ has been defined to mean a sale at significantly reduced prices, high discounts or any other such promotions or attractive offers for a predetermined time on selective goods and services or otherwise with an intent to attract large number of consumers. Proposed amendment intends to prevent instant / unannounced sales that maybe manipulated to give advantage or preferential treatment to a particular seller or a group of sellers. Initially, the proposal indicated a blanket ban on all flash sales but a clarification was issued subsequently to exempt ‘conventional’ flash sales. However, what constitutes ‘conventional flash sales’ have not been specified.

Ban on misleading advertisements

Proposal provides that no e-commerce entity shall allow any display or promotion of misleading advertisement whether in the course of business on its platform or otherwise. This may include any advertisements on price, quality and guarantee of goods and services, and potentially impact the online advertising by such entities.

Requirement of country of origin

Proposal to mandate the e-commerce entities to display the country of origin in respect of goods being imported into India. This requirement is in line with the declarations mandated for imported products under the Packaged Commodity Rules, 2011[2]. However, this may be challenging for entities given that products displayed on the e-commerce / website are manufactured at multiple locations across the globe. Hence, it may not be possible to pre-empt the ‘country of origin’ for such products while displaying such products on the e-commerce platform / website.

Fall-back liability introduced

A marketplace e-commerce entity shall be subject to a fall-back liability where a seller registered on its platform fails to deliver the goods or services due to their negligent conduct, omission or commission of any act by such seller.

Ban on sale by related entities

Related entities of marketplace e-commerce entities have been proposed to be banned from selling on such platform. This may impact the business model of various such entities having stake in sellers registered on their platforms.

Strict compliance timeline

Proposed amendment requires every e-commerce entity to provide information under its control or possession, or assistance to the government agency for investigative or protective or cyber security purposes within seventy-two hours of the receipt of an order. This may increase the cost towards meeting this compliance of maintaining and sharing requisite data with govt. agencies.

Department of Consumer Affairs has invited views and comments on the aforesaid amendments proposed to E-Commerce Rules, 2020 by July 21, 2021.

Contributed by Manish Parmar. Manish can be reached at manish.parmar@aureuslaw.com.

Views are personal.

[1] E-Commerce Rules, 2020 were introduced with effect from July 23, 2020

[2] This requirement was introduced in 2018

Fate of pending challenge(s) to arbitral awards upon approval of resolution plan under IBC

An award-holder of an arbitral proceeding is naturally under the impression that she has a rightful  claim to the amounts having been arbitrated upon and awarded to her.  However, what if, before the award has actually been paid out, the opposite contestant to the arbitration (known in technical legal language as ‘award-debtor’) goes into insolvency?  Does the award-holder have any rights to continue to claim the amount due to it (as decided under arbitrations)?  What happens if a resolution plan is accepted by the NCLT, and the award-debtor had never filed its claim before the Resolution Professional (being under the impression that the arbitral award being enforceable in a Court of law need not be claimed before an RP)?

An arbitral award holder is usually considered to be an ‘Operational Creditor’ under the Insolvency & Bankruptcy Code of India (“IBC”).

On May 7, 2021, the Calcutta High Court answered these questions.[1]  Being an important facet impacting both Insolvency and the Arbitration laws, we have brought forward the nuances via this article.

Relevant facts leading to the judgment dated May 7, 2021 being passed by the Calcutta High Court

Sirpur Paper Mills Limited (“Petitioner”) was an award debtor in an arbitration proceeding with I.K. Merchants Pvt. Ltd. (“Respondent”). The Petitioner challenged the said award on October 31, 2008 under section 34 of the Arbitration & Conciliation Act, 1996 (“A&C Act”) before the Calcutta High Court. The impugned award was automatically stayed upon filing of the application under section 34 of the 1996 Act as it stood prior to amendment of 2016, which came into effect from October 23, 2015.

During the pendency of section 34 application, an application for commencement of corporate insolvency resolution process (“CIRP”) came to be filed against the Petitioner before the jurisdictional NCLT in the year 2017. Subsequently, CIRP was admitted on September 18, 2017 and a RP was appointed on the same day. RP made the public announcement on September 25, 2017 inviting claims from the creditors of the Petitioner company. The Respondent i.e. the award holder did not submit its claim with RP within the time granted under the public announcement. Pursuant to collation of claims received from various creditors, RP invited resolution plans from eligible resolution applicants, which came to be finally approved by NCLT on July 19, 2018. This order of the NCLT came to be further challenged before the appellate tribunal in multiple proceedings, and was only later confirmed by the National Company Law Appellate Tribunal, Delhi.

In the midst of the above, the Petitioner prayed before the Calcutta High Court that the pending section 34 application should not be kept in abeyance as IBC proceedings have been invoked and are in the process of completion. To this, the Court vide its order dated January 10, 2020 held that CIRP cannot be used to defeat a dispute which existed prior to initiation of the CIRP and rejected the Petitioner’s prayer. It further held that the Respondent (the award-holder) could not have filed a claim before the NCLT since there was no final or adjudicated claim on the date of initiation of the CIRP against the Petitioner (the award-debtor).

With the resolution plan having been confirmed by the NCLAT, the successful resolution applicant commenced the process of taking over the Petitioner company as per the provisions of IBC.

Present proceedings

The Petitioner again approached the Court praying that the present proceeding under section 34 of the A&C Act, has become infructuous by reason of its management (the award-debtor) being taken over by a new entity following the approval of a resolution plan by NCLT under IBC.

Petitioner’s arguments

Petitioner relied on the section 31 of IBC to contend that an approved resolution plan is binding on the corporate debtor and its employees, members and other stakeholders. In this regard, reliance was place on a decision of the Supreme Court in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta[2]. It was further contended that a successful resolution applicant cannot be faced with undecided claims after the resolution plan has been accepted.

The Petitioner also argued that its debts stand extinguished except to the extent of the debts which have been taken over by the resolution applicant under the approved resolution plan.[3]

Respondent’s arguments

Respondent raised the issue of res judicata by highlighting that the same arguments were made by the Petitioner earlier as well on two occasions, which came to be decided by the court, and such orders were not under challenge.

It submitted that as per the law prevailing prior to 2016 amendment to the A&C Act. upon filing of the application under section 34 of the A&C Act in October 2008, the award was automatically stayed and the Respondent could not submit its claim[4] under IBC.

Court’s observation & findings

On the issue of res judicata

The Court observed that Supreme Court’s decision in Essar and more recently in Edelweiss[5], constitutes a significant and subsequent development of the law in relation to the fate of existing claims during and after CIRP. This would clearly constitute a sufficient reason for the Court to revisit its earlier judgment of January 10, 2020. In Essar and in Edelweiss, the Supreme Court had held that once a resolution plan is approved, a creditor cannot initiate proceedings for recovery of claims which are not part such resolution plan. Basis the same, the Court rejected the Respondent’s argument on res judicata by observing the following:

“12. A decision-making process must be attuned to a dynamic legal landscape shaped by legislative intervention and judicial pronouncements. The most predictable aspect of law is its constant evolution. It would hence be judicial short-sightedness, even stubbornness, to hold on to a view when the law, in the meantime, has transformed into a different avatar.”

In view of the aforesaid, the Court recorded that question of maintainability of the application under Section 34 of the A&C Act can be considered at any point of time on the legal aspect and particularly on the pronouncement of a decision relevant to the matter.

Law laid down by Supreme Court in Essar

In the aforesaid decision, the Supreme Court had considered questions relating to the role of resolution applicants, RPs and committee of creditors constituted under IBC as well as the jurisdiction of NCLT and the NCLAT with regard to resolution plans that have been approved by the Committee of Creditors.

The view of the Supreme Court was that the successful resolution applicant who takes over the business of the corporate debtor must start running the business of the corporate debtor on a “fresh slate”. This was reiterated in the Edelweiss, where the Supreme Court while considering section 31 of IBC, held that once the Resolution Plan is approved by the NCLT, it shall be binding on the corporate debtor and its employees, members etc. Since revival of the corporate debtor is one of the dominant purposes of IBC, the Supreme Court was of the view that any debt which does not form a part of the approved Resolution Plan shall stand extinguished and no person will be entitled to initiate or continue any proceeding in respect of such claim.

Whether the Respondent could have lodged and pursued its claim before the NCLT pending section 34 proceedings

The Respondent had contended that there was no scope for the it to approach NCLT since the impugned award was automatically stayed upon filing of the application under section 34 of the 1996 Act as it stood prior to amendment of 2016, which came into effect from 23rd October, 2015.

In this regard, the Court cited the law laid down by the Board of Control for Cricket in India vs. Kochi Cricket Private Limited[6], to observe that Section 34 applications which were pending at the time of the judgment in Kochi Cricket would also be governed by the new section 36 of the A&C Act, as amended. Hence, the Respondent was not rendered immobile in pursuing its claim under IBC by virtue of pendency of section 34 application.

It observed that the facts of the case would show that the Respondent had ample opportunity to approach NCLT for appropriate relief, and hence was under an obligation to take active steps under IBC instead of waiting for adjudication of section 34 application under the A&C Act.

Final order

The Court followed the law as crystallised by the Supreme Court in Essar and Edelweiss to hold that pre-existing and undecided claims which have not featured in the collation of claims by RP shall be treated as extinguished upon approval of the resolution plan under section 31 of IBC. In relation to the same, the Court observed as under:

“This can be seen as a necessary and an inevitable fallout of the IBC in order to prevent, in the words of the Supreme Court, a “hydra head popping up” and rendering uncertain the running of the business of a corporate debtor by a successful resolution applicant. In essence, an operational creditor who fails to lodge a claim in the CIRP literally missed boarding the claims-bus for chasing the fruits of an Award even where a challenge to the Award is pending in a Civil Court.”

In view of the aforesaid discussions, the Court ordered the pending application under section 34 of the A&C Act to be rendered infructuous upon approval of resolution plan under section 31 of IBC.


As is evident from facts of the present case, the Petitioner company as a corporate debtor was successfully revived by way of CIRP and was handed over to another entity as a ‘going concern’. Taking note of the same, the Court upheld the principle imbibed under IBC that the prime objective of CIRP is revival of the corporate debtor and a successful resolution applicant should not be saddled with legacy claims or debts. This holds true in view of the new law relating to challenge to arbitral awards, where the award is not automatically stayed upon filing of section 34 application, it would be advisable for the award holders to file their claims with RP within stipulated time. The law relating to challenge to an arbitral award (as it stands today) stipulates that the court may only grant stay upon filing of a separate application. In this regard, the court has the discretion to fasten a condition while granting stay of an award or grant an unconditional stay. In such a case, the award holder would be constrained to file its claim before RP. Accordingly, the claims shall stand extinguished where either the claims have not been submitted to RP or the same have been held to be non-admissible before resolution plan is approved.

However, where the CIRP fails and order for liquidation of the corporate debtor is passed, the principle that corporate debtor should have a ‘fresh start’ as is in the case of successful resolution, may not hold true. This is because of the fact that in liquidation, the assets of corporate debtor are monetised in order to meet the outstanding claims of creditors and business of the corporate debtor is not transferred as a ‘going concern’. Hence, the fate of pending challenge to arbitral awards as claim(s) against a company under liquidation under IBC remains to be seen.

Contributed by Manish Parmar. Manish can be reached at manish.parmar@aureuslaw.com.

Views are personal.

[1] Sirpur Paper Mills Limited vs. I.K. Merchants Pvt. Ltd.; A.P. 550 of 2008

[2] 2020) 8 SCC 531

[3] Cases relied on – Gaurav Dalmia vs. Reserve Bank of India & Ors.; 2020 SCC Online Cal 668, Axis Bank Limited vs. Gaurav Dalmia MANU/WB/0739/2020; Sumitra Devi Shah & Ors. vs. Tata Steel BSL Limited; 2021 SCC Online Cal 114

[4] Relied on Board of Control for Cricket in India vs. Kochi Cricket Private Limited; (2018) 6 SCC 287 and Government of India vs. Vedanta Limited (Formerly Cairn India Limited); (2020) 10 SCC 1 for the proposition that amendments will only have prospective application.

[5] Ghanshyam Mishra and Sons Private Limited vs. Edelweiss Asset Reconstruction Company Limited; 2021 SCC OnLine SC 313

[6] (2018) 6 SCC 287

From Yatin’s Desk: The Faceless Assessment – Principles of Natural Justice

Imbibe technology – this has been the mantra of the Governments for years now. In context of income tax laws, while the first chapter can be dedicated to use of technology for tax compliances, we have now ushered into the more delicate phase of transforming assessments, appeals and the likes to a faceless regime through use of technology. Whatever be the reason – whether for sake of transparency, ease of business, minimizing interaction with authorities, mapping accountability, or simply cleaning the system, there is no doubt that the change is desirable. However, if not implemented within the realms of Natural Justice, this will be a recipe of unwanted litigation.  Also, in view of our system of laws and constitutional provisions, non-observance of principles of Natural Justice will spell failure of this novel system.

The scheme of Faceless Assessment

The legislature has enshrined a detailed procedure for conduct of faceless assessment under the provisions[1] of the Income Tax Act, 1961 (‘Act’). The National Faceless Assessment Centre (‘NFAC’), as the nodal wing of tax administration, acts as the fulcrum for the conduct of assessment, coordinating between the taxpayer and other wings comprising of assessment units, the review units and the technical units, each bestowed with specific functions.

As part of the procedure, faceless assessment requires the assessment unit to make in writing a draft assessment order, either accepting income returned by the taxpayer or making variation to the said income, providing therein details of penalty proceeding to be initiated, if any. The assessment unit is required to consider all the relevant material available on record while making the draft assessment order. A copy of such order is sent to the NFAC. The NFAC upon examining the draft assessment order may decide to:

  • Finalize the assessment in case no variation prejudicial to the interest of assessee is proposed as per the draft assessment order, serve such order and notice for initiating penalty proceedings, if any, to the taxpayer, along with the demand notice, or
  • Provide an opportunity to the taxpayer, in case any variation prejudicial to the interest of taxpayer is proposed, by serving a notice calling upon him to show-cause as to why the proposed variation should not be made; or
  • Assign the draft assessment order to a review unit for conducting review of such order.

Where the taxpayer has received the show-cause notice, he may furnish his response to the NFAC within the stipulated timelines which thereafter is required to be considered by the assessment unit. The assessment unit is required to make a revised draft assessment order and send it to NFAC after taking into account the response furnished by the taxpayer.

NFAC, upon receiving the revised draft assessment order would proceed to finalise the assessment as per the revised draft assessment order and serve a copy of such order and notice for initiating penalty proceedings, if any, to the taxpayer.

As is notable from the aforesaid procedure, the law requires issuance of a show-cause notice (‘SCN’) to the taxpayer where any variation is proposed to the income declared, prior to issuance of final assessment order.

What if procedure is not followed?

It is being witnessed that in many cases, the NFAC has proceeded to issue final assessment orders with variation without issuance of SCN. In some cases, where SCN has been issued and objections filed by the taxpayer, the taxpayer is still denied the opportunity of personal hearing even where requested by the taxpayer. The question that arises is how tenable is the action of the tax authorities and what legal remedy do the taxpayers have?

The classical approach will be to file an appeal with the first appellate level i.e. Commissioner (Appeals) and work through the prolonged spell of litigation over years. Even if one reconciles to this fate, an impediment to such approach is the requirement to pay 20% of the disputed tax upfront for grant of stay of balance tax demand as per the prevailing CBDT directions. This has material impact on the cash flows of taxpayers which are anyway squeezed given the prevailing conditions. Thus, for taxpayers willing to explore unconventional opportunity, it may be worthwhile to examine the writ jurisdiction of the High Courts under Article 226 of the Constitution.

Writ jurisdiction of High Court in tax matters

Article 226 of the Constitution confers wide powers to High Courts to issue writs. The remedy of writ is not absolute but discretionary in character. If the High Court is satisfied that the aggrieved party has an adequate or suitable relief elsewhere, it can refuse to exercise its jurisdiction.[2] The Court, in extraordinary circumstances, may exercise the power if it concludes that there has been a breach of principles of natural justice or procedure required for decision has not been adopted. Thus, the normal rule is that a writ petition under Article 226 of the Constitution ought not to be entertained if alternate statutory remedies are available, except in cases falling within the well-defined exceptions.  In this regard, the Supreme Court in Commissioner of Income Tax and Others vs. Chhabil Dass Agarwal[3], observed as follows:

‘19. Thus, while it can be said that this Court has recognized some exceptions to the rule of alternative remedy, i.e., where the statutory authority has not acted in accordance with the provisions of the enactment in question, or in defiance of the fundamental principles of judicial procedure, or has resorted to invoke the provisions which are repealed, or when an order has been passed in total violation of the principles of natural justice, the proposition laid down in Thansingh Nathmal case, Titagarh Paper Mills case and other similar judgments that the High Court will not entertain a petition under Article 226 of the Constitution if an effective alternative remedy is available to the aggrieved person or the statute under which the action complained of has been taken itself contains a mechanism for redressal of grievance still holds the field. Therefore, when a statutory forum is created by law for redressal of grievances, a writ petition should not be entertained ignoring the statutory dispensation.’

Therefore, extraordinary circumstances meeting the prerequisite for exercise of writ jurisdiction of the High Court arise where statutory authorities have not acted in accordance with the provisions of the enactment, or in defiance of the judicial procedure, or when an order has been passed in total violation of the principles of natural justice.

In context of the faceless assessment scheme, provisions of the Act specifically require issuance of a SCN where any variation is proposed to the income declared. These provisions cannot be considered redundant or insignificant. These embody the basis right of fair hearing to the taxpayer and adherence to principle of natural justice. The basic principle of natural justice requires the authority to give the affected party reasonable notice. Such notice must specify the grounds on the basis of which an action is proposed to be taken so as to enable the noticee to defend himself.  In this regard, it will be useful to take note of the observation of the Supreme Court in the case of UMC Technologies Private Limited versus Food Corporation of India and Anr.[4] as under:

“13. At the outset, it must be noted that it is the first principle of civilised jurisprudence that a person against whom any action is sought to be taken or whose right or interests are being affected should be given a reasonable opportunity to defend himself. The basic principle of natural justice is that before adjudication starts, the authority concerned should give to the affected party a notice of the case against him so that he can defend himself. Such notice should be adequate and the grounds necessitating action and the penalty/action proposed should be mentioned specifically and unambiguously. An order travelling beyond the bounds of notice is impermissible and without jurisdiction to that extent. This Court in Nasir Ahmad v. Assistant Custodian General, Evacuee Property, Lucknow and Anr.,1 has held that it is essential for the notice to specify the particular grounds on the basis of which an action is proposed to be taken so as to enable the noticee to answer the case against him. If these conditions are not satisfied, the person cannot be said to have been granted any reasonable opportunity of being heard.”

More specifically, the Supreme Court in the case of Gokak Patel Volkart Limited vs Collector Of Central Excise[5], while examining the provision of section 11A of the Central Excises and Salt Act, 1944 containing specific provisions for issuance of SCN for recovery of duty of excise observed as under:

“The provisions of Section 11A (1) and (2) make it clear that the statutory scheme is that in the situations covered by the sub-section (1), a notice of show cause has to be issued and sub-section (2) requires that the cause shown by way of representation has to be considered by the prescribed authority and then only the mount has to be determined. The scheme is in consonance with the rules of natural justice. An opportunity to be heard is intended to be afforded to the person who is likely to be prejudiced when the order is made, before making the order thereof. Notice is thus a condition precedent to demand under sub-section (2). In the instant case, compliance with this statutory requirement has not been made, and, therefore, the demand is in contravention of the statutory provision.”

Thus, it appears that failure of NFAC to issue SCN, enabling the taxpayer to contest such action would clearly fall short of the threshold of natural justice. In the circumstances, it will be a strong case to contest that the statutory authority has not acted in accordance with the specific provisions of the Act. There in non-adherence to the judicial procedure and principles which are considered to be a bedrock of a common law based civilized society. There is thus, blatant infringement of the right of the taxpayer under the Act in so far as there is denial of the opportunity to contest the variations proposed before issuance of final order.

Persuasive jurisprudence

In somewhat comparable provisions prescribed in relation to matters[6] which are subject to the jurisdiction of Dispute Resolution Panel (‘DRP’), section 144C of the Act require the Assessing Officer to issue a draft assessment order wherein variation is proposed which is prejudicial to the interest of the taxpayer. This is to enable the taxpayer file objection contesting the variation before the DRP, prior to issuance of final order.

In the past, there have been a number of instances wherein the Assessing Officers have proceeded to issue the final order, overlooking the specific requirement to issue a draft order. In such cases, the taxpayers have often exercised the writ jurisdiction of the courts challenging failure to adhere to the mandatory requirement of section 144C i.e. the obligation to first pass a draft assessment order to enable filing of objections before the DRP. In such cases, the courts have held that failure to follow mandatory procedures prescribed in statute could not be termed as mere procedural irregularity and thus cannot be cured. The orders thus passed are contrary to, and in violation of, the mandatory provisions of the Act, and would result in invalidation of the final assessment order, demand notice and penalty proceedings.

This position of law is now fairly established across jurisdictions, indicatively as held in the case of Zuari Cement Ltd[7], Vijay Television[8], Turner International[9], JCB India[10], etc.

Significantly, in a direct case relating to the faceless assessment scheme, a writ petition has been filed before the Delhi High Court in the case of K L Trading Corporation vs National E-Assessment Centre Delhi & Anr[11]. In the matter, the taxpayer has challenged the action of the tax authorities wherein a final order with variation has been issued without prior issuance of the SCN. The taxpayer has contested that there has been a breach of the principles of natural justice which stands engrafted in the faceless assessment scheme. The Court has found prima-facie merit in the petition and admitted the same for further hearing. On similar issues, a writ has been admitted by the Delhi High Court in the case of SAS Fininvest LLP v National E-Assessment Centre Income Tax Department, New Delhi[12]

In yet another matter, in Magick Woods Exports Private Limited v National e-Assessment Centre, Delhi.[13], the Madras High Court in a recent writ petition set aside the order passed in violation of principles of natural justice. The impugned order was assailed on the ground that it was passed contrary to the principles of natural justice. In response to SCN issued upon the taxpayer accompanied by a draft assessment order, the petitioner has sought an adjournment on the ground that the petitioner is collating materials necessary to substantiate its stand. However, the impugned order of assessment was passed without taking note of the request of the petitioner for adjournment. The request for adjournment had also not been rejected. The court observed that there has been apparent violation of principles of natural justice. The court accordingly directed the tax authorities to enable the online portal to receive the objections, hear the petitioner and complete the assessment in accordance with law.

The way ahead

As we move toward completion of the annual tax assessment cycle, one can expect some misadventure from the tax authorities who may, consciously or ignorantly, err in finalizing tax assessment with income variation in haste, without providing opportunity in the manner prescribed. Taxpayers need to carefully weigh their options for challenging the assessment orders. Writ petition before jurisdictional High Court can be looked at as the preferable option where the principles of natural justice have been violated. Where successfully contested, in the best-case scenarios, invalidation of final assessment order, demand notice and consequential penalty proceedings would put an end to the rigours of lengthy litigation, or to the least a direction from the court to rehear the objections, limitation permitting.

Contributed by Yatin Sharma. Yatin can be reached at yatin.sharma@aureuslaw.com

[1] Sec 144B of the Act

[2] Constitution Benches of the Supreme Court in K.S. Rashid and Sons vs. Income Tax Investigation Commission, AIR 1954 SC 207

[3] 2014 (1) SCC 603

[4] Civil Appeal No. 3687 of 2020

[5] 1987 AIR 1161

[6] Orders wherein variation arises consequence of Transfer Pricing orders and assessment of non-residents.

[7] Zuari Cement Ltd. V. ACIT (decision dated 21st February 2013 in WP(C) No.5557/2012)

[8] Vijay Television (P) Ltd. Vs. Dispute Resolution Panel & Ors. (2014) 369 ITR 0113 (Mad)

[9] Turner International India (P) Ltd. Vs. Deputy Commissioner of Income Tax

[10] Jcb India Ltd. Vs. Deputy Commissioner of Income Tax (2017) 298 CTR 0558 (Del)

[11] W.P.(C) 4774/2021

[12] W.P.(C) 5087/2021, Order dated 04.05.2021

[13] W.P. No.10693/2021, Order dated 28.04.2021

From Yatin’s Desk: Taxation of Dividend Income of Non-Residents – Most Favored Nation Clause under Indian Tax Treaties

The Indian domestic tax laws in relation to taxation of dividend income were amended by the Finance Act of 2020 restoring taxability of dividend income distributed by companies to the classical system of taxation of such income in the hands of the shareholder. Prior to this amendment, for some time, dividend distributed by a company was subject to dividend distribution tax (‘DDT’) in the hands of the company and exempt in the hands of the shareholder. DDT paid by the company, arguably, did not enjoy benefit of lower withholding tax (‘WHT’) rate prescribed under Double Tax Avoidance Agreements (‘DTAA’), though during the last few years prior to the amendment now made, attempts had been made by taxpayers to claim the DTAA rates; an issue which is currently sub judice.

The change has once again brought the relevance of DTAAs to forefront given that DTAAs in most case prescribe a lower rate of WHT vis-à-vis the WHT rate of 20% applicable on dividend income in the hands of non-resident under the domestic tax law. Generally, application of a WHT rate prescribed under a DTAA is simple and straight forward. However, applying WHT rate where DTAAs have a Most Favored Nation (‘MFN’) clause has its nuances which have from time to time been examined by Indian courts.

In this respect, the Delhi High Court in a recent case of Concentrix Service Netherlands B.V. vs Deputy Commissioner of Income Tax & Anr.[1] (‘Concentrix’) had the occasion to examine applicability of MFN clause under the India-Netherlands DTAA in context of WHT rate applicable on dividend income received by the Dutch parent company from its India subsidiary. Under Article 10 of the India-Netherlands DTAA, dividend received by a resident of one country from the payer of the other resident country is subject to 10% WHT. However the protocol provides a MFN clause stating that in respect of dividend, interest, royalties and fee for technical services (‘FTS’), if after signing of the DTAA, under any Convention or Agreement between India and a third State which is a member of the OECD, India limits its taxation at source on such income to a rate lower or a scope more restricted than the rate or scope provided for in India – Netherlands DTAA, the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention. Simply put, if the provision of another DTAA subsequently entered between India and OECD member country is beneficial to the stated nature of payments, the same would apply notwithstanding the provisions of India-Netherlands DTAA.

Taxpayer’s Contention

In Concentric, the taxpayer had applied for a WHT order before the tax authorities seeking 5% WHT rate (as against 10% prescribed under India-Netherlands DTAA) in relation to divided income taking the benefit of MFN clause and applying the rates applicable under India-Slovenia[2], India – Lithuania[3] and India – Columbia[4] DTAA. It was contended that since India has executed DTAAs with such other countries which were members of OECD, the lower rate, or the restricted scope in the DTAA executed between India and such other country would automatically apply to India-Netherlands DTAA.  This is considering the protocol which inter alia stated that the protocol “shall form part an integral part of the Convention” i.e., the subject DTAA.

In support of this plea, reliance was placed on the judgements in the case of Steria (India) Ltd. vs. Commissioner of Income-tax-VI[5], Apollo Tyres Ltd. vs. Commissioner of Income Tax, International Taxation[6].

Tax Authorities Contention

The tax authorities however contested the claim putting forth the following argument:

  • that the protocol appended to the India-Netherlands DTAA providing benefit of the lower rate of WHT or a scope more restricted would be available only if the country with which India enters into a DTAA was a member of the OECD at the time of the execution of the India-Netherlands DTAA, and
  • the DTAAs with such third States were entered while such States were OECD member countries.

India’s DTAA with Slovenia, Lithuania and Columbia were executed prior to such countries becoming OECD member countries. Since none of the countries, i.e., Slovenia, Lithuania, and Columbia were members of the OECD, on the date when such States executed DTAAs with India, protocol appended to the DTAA would have no applicability.

The Ruling

The Court however ruled in favour of taxpayer holding that:

  • the protocol forms an integral part of the DTAA and therefore no separate notification is required, insofar as the applicability of provisions of the protocol is concerned,
  • the state of affairs i.e. the point of time when the third State should be a member of OECD, should exist not necessarily at the time when the subject DTAA (India – Netherlands DTAA) was executed but when a request is made by the taxpayer or deductee for issuance of a lower rate withholding tax certificate.

The Court went on to draw reference to the decree issued by the Kingdom of Netherlands on 28.02.2012[7] wherein it was thus specified:

“Slovenia became a member of the OECD on 21 July 2010. Under the most favored nation clause in the Protocol to the Convention, this event has the effect that, with retroactive effect to July 21, 2010, a rate of 5 per cent will apply to participation dividends paid by a company resident in the Netherlands to a body resident in India.”

The Court made an important observation regarding principle of “Common Interpretation” to be adopted by courts of the contracting States. This would ensure that Conventions/DTAAs are applied efficiently and fairly so that there is consistency in the interpretation of the provisions by the tax authority and courts of the concerned contracting State. The Court accordingly accepted application of WHT rate of 5% prescribed under the DTAA with Slovenia, applying the MFN clause.

Insight for taxpayers

The court ruling reinforces importance of MFN clauses in DTAAs which, if applied judiciously, present significant opportunity of tax saving. The ruling provides credence to the application of MFN clause under DTAAs with countries such as Netherland, France, Sweden, Hungry and Switzerland enabling application of lower rate of WHT of 5% on dividend payment as against the 10% prescribed under the respective DTAAs. The MFN clause also aids in reading down the scope of certain categories of income, more specifically FTS in DTAA such as with France, Sweden, Hungry, Belgium and Spain, restricting taxability in the state of residence only in case of a permanent establishment in the country of source.

Appropriate application of MFN clause also becomes important considering that the resident State may allow credit of tax payable in the country only to the extent of appropriate tax applicable under DTAA. For instance, Indian DTAAs such as with Netherlands and France prescribe a period of three years within which application for refund of excess tax levied at source should be filed. Further, applications for the refund of the excess amount of tax will have to be lodged with the authority of the State having levied the tax. This makes it critical to evaluate impact of MFN clause under the applicable DTAA.

It is also relevant to take note that the Finance Act of 2020 has materially amended provisions relating to filing of income tax returns by non-residents. As per the current provisions, a non-resident taxpayer will mandatorily be required to file an Indian tax return where lower WHT rates as prescribe under DTAA are applied in respect of income in the nature of royalty/FTS (taxable on gross basis), interest or dividend. Dispensation to file the tax return is available only where WHT has been deducted at the rate prescribed under the domestic tax law. A non-compliance has penal implications.

Given the significance of MFN clause under DTAAs and the opportunity such clause offers to reduce the tax cost, taxpayers will be well advised to evaluate MFN clause under the relevant DTAA while at the same time ensuring timely fiscal compliance to remain on the right side of law.

Contributed by Yatin Sharma. Yatin can be reached at yatin.sharma@aureuslaw.com

[1] W.P.(C) 9051/2020, judgement dated 22 April 2021

[2] DTAA executed between India and Slovenia; which came into force on 17.02.2005 and was notified on 31.05.20

[3] DTAA executed between India and Lithuania; which came into force on 10.07.2012 and was notified on 25.07.2012

[4] DTAA executed between India and Columbia; which came into force on 07.07.2014 and was notified on 23.09.2014

[5] [2016] 386 ITR 390 (Delhi)

[6] [2018] 92 taxmann.com 166 (Karnataka)

[7] [No. IFZ 2012/54M, Tax Treaties, India], published on 13.03.2012

Anti – Dumping Duty in India – A Primer

This offering from Aureus Law Partners seeks to present a primer on Anti-Dumping Laws and procedure in India. Anti-Dumping Duties (“ADD“) are imposed to counter dumping of goods or articles in India causing material injury to the domestic industry. Hence, the imposition of ADD is driven from Government’s intent to provide expeditious relief to the domestic producers from the trade-distorting phenomenon of dumping.

ADD measures are different from the ‘Safeguard’ measures where the requirement to establish ‘material injury’ is more stringent, and when duties of safeguard are imposed, Exchequer may also be required to pay compensation to the trading countries. For the purposes of this article, we have limited ourselves to law and procedure relating to ADD in India.

Legal Framework

Member nations of the World Trade Organisation have agreed to the General Agreement on Tariffs and Trade of 1994 (“GATT”). As per Article VI of GATT, 1994 read with Anti-Dumping Agreement, WTO member states can impose anti-dumping measures subject to conditions.[1]

Indian laws were amended with effect from January 1, 1995 to align the national law with the Article VI of GATT and specific agreements between the member nations.

Sections 9A, 9B and 9C of the Customs Tariff Act, 1975 (“Tariff Act”) as amended in 1995 and the Customs Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and for Determination of Injury) Rules, 1995 (“ADD Rules”) framed thereunder constitute the legal basis for anti-dumping investigations and for the levy of anti-dumping duties.

Currently, given the slowdown faced by the domestic industry due to the COVID pandemic and ensuing decrease in cross-border trade, there has been upward trend in imposing ADD on several items of import. In 2021 itself, the Ministry of Finance until March 11 has issued more than 10 notifications imposing ADD on several items of import (primarily from China PR).

What is ‘Dumping’

Dumping occurs when the ‘Export Price’ of goods imported into India is less than the ‘Normal Value’ of ‘like articles’ sold in the domestic market of the exporter. The ‘Normal Value’ refers to the comparable price at which the ‘product under consideration’ (“PUC”) are sold, in the ordinary course of trade, in the domestic market of the exporter.

The ‘Export Price’ of goods imported into India /PUC is the price paid or payable for the goods by the primary independent buyer. Principles governing the determination of “export Price’ include – (i) Arm’s Length Transaction; (ii) Resale price to an independent buyer[2]; and (iii) Price determined on a reasonable basis[3].

‘Margin of Dumping’ refers to the difference between the Normal Value of the like article and the Export Price of the PUC. These are normally determined on the basis of – (i) a comparison of weighted average Normal Value with a weighted average of prices of comparable export transactions; or (ii) a comparison of ‘Normal Value’ and ‘Export Price’ on a transaction to transaction basis[4].

The ‘Export Price’ and the ‘Normal Value’ of the PUC are to be compared at the same level of trade i.e. ex-factory price, for sales effected during the nearest possible time. Due consideration is also made for differences that affect price comparability of a domestic sale and an export sale. These factors, inter alia, include – (i) physical characteristics; (ii) levels of trade; (iii) quantity; (iv) taxation; (v) conditions and terms of sale.

It is pertinent to note that the said factors are only indicative and any other factor which can be demonstrated to have an effect on the price comparability, may be considered.

Injury to the Domestic Industry

The Indian domestic producer must show that dumped imports of PUC are causing or are threatening to cause ‘material injury’ to the Indian ‘Domestic Industry’[5].

Broadly, the principles governing the determination of ‘material injury’ because of alleged dumping are – (i) PUC has been exported to India from the subject country below its ‘Normal Value’; (ii) Domestic Industry has suffered ‘material injury’; and (iii) There is a casual link between the alleged dumping and ‘material injury’ caused to the Domestic Industry. Also, the analysis of ‘material injury’ is undertaken by following two methods:

Volume Effect

Examination of volume of the dumped imports, including the extent to which there has been or is likely to be a significant increase in the volume of dumped imports. These may be either in absolute terms or in relation to production or consumption in India, and its effect on the Domestic Industry.

Price Effect

The effect of dumped articles on prices in the Indian domestic market including price-undercutting, price depression or preventing increase in price which otherwise would have increased.

Investigation for imposing ADD

An investigation for alleged dumping may be initiated by the Designated Authority upon an application made by or on behalf of Domestic Industry.[6] Following two conditions are pre requisites for a valid application to be considered by the Designated Authority:

  • Application must be supported by domestic producers accounting for not less than 25% of total production of the like article in India; and
  • Domestic producers supporting the application must account for more than 50% of total production of like article by those opposing the application.

Miscellaneous Provisions

Termination of Investigation

  • Request in writing from the Domestic Industry at whose instance the investigation was initiated;
  • No sufficient evidence of dumping or injury;
  • If the Margin of Dumping is less than 2% of the Export Price;
  • If the volume of dumped imports from a country is less than 3% of the total imports of the like article into India or the volume of dumped imports collectively from all such countries is less than 7% of the total imports;
  • Injury is negligible.

Retrospective imposition of ADD

  • If there is a history of dumping which caused the injury or that the importer was, or, should have been aware that the exporter practices dumping and that such dumping would cause injury, and
  • If the injury is caused by massive dumping, in a relatively short time, so as to seriously undermine the remedial effect of anti-dumping duty.

Such retrospective application will not go beyond 90 days of the date of imposition of provisional duty.

Refund of collected duty

  • If the imposed ADD on the basis of final findings is higher than the provisional duty (already imposed and collected), the difference shall not be collected;
  • If the final ADD is less than the provisional duty (already imposed and collected), the difference shall be refunded;
  • If the provisional duty is withdrawn based on a negative final finding, then the provisional duty already collected shall be refunded.

Contributed by Manish Parmar. Manish can be reached at manish.parmar@aureuslaw.com.

Views are personal.

[1] Pursuant to investigation in accordance with the Agreement, a determination is made (a) that dumping is occurring, (b) that the domestic industry producing the like product in the importing country is suffering material injury, and (c) that there is a causal link between the two. In addition to substantive rules governing the determination of dumping, injury, and causal link, the Agreement sets forth detailed procedural rules for the initiation and conduct of investigations, the imposition of measures, and the duration and review of measures.

[2] If there is no export price or the export price is not reliable because of association or a compensatory arrangement between the exporter and the importer or a third party, the export price may be determined on the basis of the price at which the imported articles are first resold to an independent buyer.

[3] If the PUC are not resold as above or not resold in the same condition as imported, their export price may be determined on a reasonable basis.

[4] Introduced after the Uruguay Round.

[5] Rule 2(b) of ADD Rules.

[6] Under Rule 5(4) of ADD Rules, the Designated Authority may also initiate investigation suo motu based on information received from Customs authorities or any other person.