Scope of Interference by Courts in an Arbitral Award
Moratorium Period vis-a-vis Assets of Personal Guarantors
Commercial Courts Act – Recent Amendments
Liquidated Damages – Implications under the Goods & Services Tax Laws
Liquidated damages (“LD”) mean a fixed or pre-determined sum that is required to be paid upon breach of a contract, which may arise due to non-fulfilment of the obligations, delay in fulfilling the obligations or abandonment or termination etc. Hence, LD damages are directly connected to the actual injury and losses incurred by a party due to failure or delay in performance of obligations under the contract by either party. These LD clauses/ obligations are prevalent in construction contracts where the provisions relating to timely and milestone performance of the project are incorporated. For instance, EPC onshore/ offshore sub-contracts have milestone-based implementation, hence any delay in execution / completion of the same causes huge losses to the project owners. LDs cover this contingency.
Commercially, the LDs are considered to be a measure of compensation for a pre-determined loss arising out of breach of contract. However, in a recent matter of In re Maharashtra State Power Generation Company Limited dated May 18, 2018, the Authority for Advance Ruling, Maharashtra (“Authority”) under GST ruled that the amount of LD deducted from the payments made to the contractor/ vendors would amount to supply of service by the project owner / Taxpayer. The said ruling along with the factual background is discussed hereunder:
Factual Background
The Taxpayer approached the Authority under Section 97 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) seeking an advance ruling on levy of GST on the amount of LD deducted from the contract price agreed with the contractors/ vendors. The main issue for this ruling was as to: (i) whether the LD would be treated as ‘sale’; and (ii) whether this would be liable to GST as separate from the contract value/ price. The Taxpayer relied upon the ruling in GSTR 2003/11 issued by the Australian Tax Office under the Australian Goods and Services Tax Act, 1999, wherein the deduction from the contract price was held to be towards deficiency in the provision of services, and therefore the same would not attract GST. Also, reliance was placed in the matter of Commissioner of C. Ex., Chandigarh-I v. H.F.C.L. (Wireless Division) reported as 2015 (11) TMI 893 – CESTAT- New Delhi, wherein it was held that if a taxpayer is liable to pay a lesser amount than the generically agreed price as a result of a clause stipulating variation in the price, on account of liability to ‘liquidated damages’ on account of delay in delivery of manufactured goods then such resultant price would be the ‘transaction value’. Further, the Taxpayer submitted before the Authority that the provision of such a clause in the contract is to ensure that the completion of the project does not get delayed.
Observations of Authority
The Authority observed that contract price and LD are two distinct aspects of the contract, and deduction of LD from the contract price merely facilitates the settlement of accounts. The Taxpayer contended that LD helps in mitigating the impact of higher costs in form of interest during construction and administrative charges. Taxpayer further contended that it was never its intention to get supplies/ project delayed nor did the contractors want to make delay and thereby causing it to tolerate. Therefore, LD could not be termed as service provided to the contractor. However, the Authority observed that the provision of LD in the contract is squarely covered by the clause (e) of the Para 5 of the Schedule II annexed to the CGST Act. The said entry provides that ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’, shall be treated as supply of services. The Authority ruled that the amount of LD deducted from the payments made to the contractor/ vendors is income in the hands of the Taxpayer and would amount to supply of service by the Taxpayer. Accordingly, the Authority held this would be classified under Heading 9997, and GST at the rate of 18 percent would be levied on the amount of LD deducted from the contract price.
Conclusion
While the said ruling is binding on the Taxpayer and the Revenue in respect of the particular issue in question, the same may have a persuasive precedential value. Also, it may have a bearing on how the clauses relating to LD is negotiated in contracts in the future.
Aureus’ New Office – Defence Colony
Run Up to the Budget 2018-19
Amendments in FDI Policy – January, 2018
Viineet V. Srivastav & Astha Srivastava
The following amendments have been introduced by Department of Industrial Policy and Promotion (DIPP) in the Foreign Direct Investment (FDI) regime on January 10, 2018:
100% FDI in single brand retail
The prevailing FDI policy allowed 49% FDI through the automatic route and beyond 49% and upto 100% through the Government approval route in single brand retail trade (SBRT) sector, the said limit has been increased to 100% through automatic route.
Single brand retailing entities would be allowed to begin incremental sourcing of goods from India for global operations during the first 5 years from the first day of the opening of the first store against the mandatory sourcing requirement of 30 percent purchases from India. After completion of the said 5 year period, the entities would be required to meet the mandatory sourcing requirement of 30 percent purchases from India.
A non-resident trading entity or entities, whether owner of the brand or otherwise, would be permitted to undertake SBRT in the country for the specific brand, either directly by the brand owner or through a legally tenable agreement executed between the Indian entity undertaking SBRT and the brand owner.
Civil Aviation
Foreign airlines have been permitted to invest upto 49% in Air India under approval route, subject to the following conditions:
FDI in Air India including that of foreign airline(s) shall not exceed 49% either directly or indirectly
Substantial ownership and control of Air India would continue to vest in Indian Nationals.
Construction Development
It has been clarified that since real-estate broking service does not amount to real estate business, therefore the same would be eligible for 100% FDI through automatic route.
Power Exchanges
While the existing FDI policy provided for 49% FDI through automatic route in Power Exchanges registered under the Central Electricity Regulatory Commission (Power Market) Regulations, 2010, however, Foreign Portfolio Investors (FPI) / Foreign Institutional Investors (FII) purchases were restricted to the secondary market only. Accordingly, the Government has allowed FPIs/FIIs to invest in Power Exchanges in the primary market as well.
Other Approval Requirements under FDI Policy
Issue of shares against non-cash considerations like pre-incorporation expenses, import of machinery etc. would be permitted under automatic route in case of sectors under automatic route.
FDI in an Indian company engaged only in the activity of investing in other Indian companies or LLPs and in Core Investing Companies would be aligned with the FDI provisions in the “Other Financial Services” category. Accordingly, if the said investor companies in India are regulated by any financial sector regulator, then foreign investment upto 100% under automatic route would be allowed and if they are not regulated by any Financial Sector Regulator or where only part is regulated or where there is doubt regarding the regulatory oversight, foreign investment up to 100% would be allowed under approval route, subject to conditions including minimum capitalization requirement, as may be decided by the Government.
Competent Authority for examining FDI proposals from countries of concern
The competent authority for dealing with FDI proposals will be the Department of Industrial Policy and Promotion (DIPP) for investments in automatic route sectors requiring approval only on the matter of investment being from Countries of Concern. The competent authority would be concerned Administartine Department/ Ministry in the case of investments made in sectors requiring government approval and also requiring security clearance with respect to Countries of Concern.
Pharmaceuticals
With respect to the Pharmaceuticals industry, it has been decided to change the definition of medical devices under the existing policy. Further, the existing policy provided that medical devices with respect to FDI policy would be defined with reference to the Drugs and Cosmetics Act and since the definition in the FDI policy is complete in itself, it has been decided to do away with this reference to the Drugs and Cosmetics Act.
Prohibition of restrictive conditions regarding audit firms:
In cases where the foreign investor specifies a particular auditor/ auditing firm having international network for the Indian investee company, then audit of such company would take place in the form of a joint audit in which one of the auditors should not be from the same network.
A New Corporate Adjudicatory Forum – The National Company Law Tribunal
The Ministry of Corporate Affairs has constituted the National Company Law Tribunal (“NCLT”) vide notification S.O. 1935(E) with effect from 1st June 2016.
As per the above referenced notification the NCLT shall be initially functioning with eleven Benches – two at New Delhi and one each at Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata and Mumbai. The principal bench of NCLT shall be at New Delhi.
The NCLT is intended to provide a consolidated and single forum to adjudicate upon all corporate matters and disputes. The Company Law Board stands dissolved from the date of the from 1st June 2016, and all matters pending before the CLB shall stand transferred to NCLT.
In fact, subject to further notifications, once the NCLT is fully functional it shall also replace:
- Board of Industrial and Financial Reconstruction; and
- Appellate Authority for Industrial and Financial Reconstruction.
Further, the jurisdiction and powers relating to reduction of share capital winding up, restructuring, compromise or arrangement (merger/demerger), and other such provisions, currently vested in the High Courts shall also be conferred in favour of the NCLT.
At present only certain provisions of the Companies Act, 2013 relating to powers of the NCLT have been notified, which include the power to:
- entertain any claims of prejudicial or oppressive conduct of an enterprise and pass any order that may deem fit in such cases;
- investigate into of the ownership of the company and pass any order against a Company incorporated by providing false information by fraud, misrepresentation or suppression of material fact;
- grant approval for alteration of Articles of a Company (provided that such alteration should change its nature from public to private);
- provide approval for issuance of redeemable preference shares by a Company;
- call annual general meeting, meetings of members in specified cases;
- remove the auditor suo moto or on application made by the Central Government;
- remove directors in accordance with the provisions contained therein;
- investigate into of the ownership of the company;
- freeze the assets or impose restrictions on the securities held by a Company pending an inquiry and/or investigation; and
- entertain a petition in the event a Company fails to redeem the debentures or pay interest on them.
In addition to the above, shareholders and creditors can now file class action suits against the company for breaching the provisions of the Act. In so far as enforcement is concerned, NCLT also may ask for assistance from the Chief Metropolitan Magistrate to enforce its decree against the company or persons connected with the order. An appeal at the first instance against the order of the NCLT shall lie before the National Company Law Appellate Tribunal, and a second appeal may be filed before the Supreme Court.
The Draft Insolvency and Bankruptcy Code, has also conferred NCLT with wide powers in relation to matters concerning revival and rehabilitation of sick companies, and liquidation process of companies. However, the said statute is yet to be notified and made effective.
The Government is notifying the provisions relating to NCLT in a phased manner. As highlighted earlier, a number of the Companies Act, 2013 provisions related to mergers, amalgamations and restructuring are yet to be notified. In addition a number of rules and regulations will also need to be notified to make it completely operational.