In India, insolvency has become a preferred mode for creditors to enforce theirrights under a contract and/or a statute. The Insolvency and Bankruptcy Code, 2016 recognises these rights primarily for two types of creditors, financial and operational.
On admission of an application filed by any such creditor, the corporate insolvency resolution process commences. An order of initiation of the process declares the corporate to be insolvent against the world at large. Thus, such a judgment passed under the insolvency jurisdiction is a judgment in rem.
Under the Code, rights for a financial creditor become enforceable only on the existence of a default (Section 7 of the Code). However, for an operational creditor, in addition to the existence of default (Section 8 of the Code read with Section 9 of
the Code), non-existence of pre-existing dispute (Section 9 of the Code) is also to
Pendency of arbitral proceedings have a direct impact on the satisfaction of these tests. This article attempts to surface the extent of impact of such arbitration proceedings/disputes on the insolvency jurisdiction.
The impact of arbitral proceedings concerning determination of dispute under the
Code is quite clear. Dispute is defined under Section 5(6) of the Code to include a suit or arbitration proceeding relating to (a) existence of the amount of debt; (b) quality of goods or services; (c) breach of a representation or warranty. The Supreme Court in the case of Mobilox Innovation v. Kirusa Software, (2018) 1 SCC 353 while interpreting this provision has also recognised that pendency of arbitral proceedings with regar to the aforementioned or any other related ground amount to dispute under the Code. (See paragraph 54)
Default is non-payment of a whole or part of debt which has become due and payable. With regard to the impact of arbitral proceedings concerning ascertainment of default, the issue to be considered is whether determination of default (a) right in rem i.e. rights that bind the world large (b) right in personam i.e. inter-se rights (c) subordinate rights i.e. in personam rights subordinate to rights in rem. This is of relevance as rights in personam and subordinate rights are held to be arbitrable disputes as against pure rights in rem. These heads of rights were recognized by the Supreme Court in the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd, (2011) 5 SCC 532 in relation to arbitrability of intellectual property disputes (See paragraphs 37, 38)
2 The Supreme Court in the case of Kotak Venture v Indus Biotech Private Limited, [Arb P (Civil) 48 of 2019 with Civil Appeal No. 1070 of 2021 decided on 26/03/2021] has held that mere filing of the petition and its pendency before admission, cannot be construed a proceeding in rem and the same can be considered as a proceeding in rem only once the Adjudicating Authority recorded a finding of default and admitted a petition under the Code. Thus, one can safely conclude that determination of default is not a right in rem as it relates to the creditor(s) who have approached theAdjudicating Authority.
As a result, existence of dispute and ascertainment of default under the Code is an arbitral dispute and in my view would be in the nature of a subordinate right.
The law during the earlier days seems to have been that pendency of arbitral proceedings does not impact the initiation of corporate insolvency resolution process in a proceeding initiated by a financial creditor. In this regard, reference is made to the judgment of Adjudicating Authority, Delhi in the case of Reliance
Commercial Finance Limited v. Ved Cellulose Limited, (IB)156(PB)/2017; State Bank of India v. Sukam Power Limited, (IB)540(PB)/2017; (IB)1049/KB/2018; Shalby v. Dr. Pranav Shah (IA 285/17 in CP(IB) 123 of 2017).
However, then came the case of Indus Biotech Private Limited v Kotak India Venture Fund-I [IA No.3597/2019 in CP (IB) No.3077/2019] passed by Adjudicating
Authority, Mumbai. The application under Section 7 of the Code filed by Kotak
India Venture Fund-I was basis non-payment of Rs.367,08,56,503.00p by Indus Biotech Private Limited on account of invocation of right of redemption by Kotak Group under the share subscription agreement. Due to non-compliances by Indus
Biotech, it proposed to convert the Optionally Convertible Redeemable Preference
Shares invested by the Kotak Group into equity shares. The dispute centred around (a) the valuation of the Kotak’s Optionally Convertible Redeemable Preference Shares; (b) the right of the Kotak to redeem such Optionally Convertible
Redeemable Preference Shares when it had participated in the process to convert its
Optionally Convertible Redeemable Preference Shares into equity shares of the Indus Biotech; and (c) fixing of the Qualified Initial Public Offering date. Indus in this case preferred an application under Section 8 of the Arbitration and Conciliation
Act to refer the disputes to arbitration. The Adjudicating Authority, Mumbai while observing that the disputes raised were important determinates for ascertaining existence of default, it held that it was not satisfied that a default had occurred. Additionally, the Adjudicating Authority held 3 that “… … The invocation of arbitration in a case like this seems to be justified.” (See paragraph 5.14) The Adjudicating Authority, Mumbai while allowing the application under Section 8 of the Arbitration and Conciliation Act and dismissing the application under Section 7 of the Code also held that the Code mandates the Adjudicating Authority to ascertain and record satisfaction as to the occurrence of default before admitting the application. (See paragraphs 5.12, 5.13, 5.15, 5.16)
The judgment of Adjudicating Authority, Mumbai was challenged before the Honourable Supreme Court. Connected with it was an arbitration petition seeking appointment of an arbitrator to adjudicate upon the disputes that have arisen between Indus Biotech and the Kotak Group.
The Honourable Supreme Court upheld the decision of Adjudicating Authority,
Mumbai. With regard to the effect of filing of an application for reference of disputes under Section 8 of the Arbitration and Conciliation Act in a proceeding of insolvency initiated by a financial creditor under Section 7 of the Code, the Honourable Supreme Court observed that an application under Section 8 of the Arbitration and Conciliation Act would be maintainable in a situation where the petition under Section 7 of the Code is yet to be admitted. However, in a case where the application under Section 7 has already been admitted an application to refer disputes to arbitration would not be maintainable. Additionally, it was observed that in such a case, the Adjudicating Authority would be duty bound to first decide the application under Section 7 of the Code by recording a satisfaction with regard to there being default or not, even if the application under Section 8 of Act, 1996 is kept along for consideration. (See paragraph 27)
Thus, in the author’s view the Indus Biotech Case recognised the pendency of arbitral disputes impacting the existence of default in an application under Section 7 of the Code. It also recognised the maintainability of an application under Section 8 of the
Arbitration and Conciliation Act where an application under Section 7 of the Code is pending admission.
To conclude, (i) arbitral disputes impact applications under Section 7 and Section 9 of the Code; (ii) determination of default under the Code and existence of dispute under the Code are not in rem rights and are subordinate rights (iii) determinates of existence of default under the Code are arbitral disputes (iv) application under 4 Section 8 of the Arbitration and Conciliation Act, 1996 are maintainable prior to admission of an application under Section 7 of the Code.Ms. Eshna Kumar is an Advocate with commercial litigation before the Supreme Court of India, High Court of Delhi, National Company Law Tribunal, National Company Law Appellate Tribunal and other tribunals primarily relating to commercial matters. She regularly appears before various arbitral tribunals.
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Electricity connection cannot be denied only because dispute regarding ownership of land is pending: Gujarat High Court
The bench of Justice Supehia noted that the Petitioners were owners of the concerned agricultural land for which electricity was sought. However, it was observed that the electricity was denied on the ground that the Petitioners were illegally occupying Government land.
The Gujarat High Court in the case Yogesh Lakhmanbhai Chovatiya v/s PGVCL Through the Deputy Manager observed and has clarified that occupiers of a land cannot be denied electricity connection only because a dispute regarding ownership of the land is pending.
The bench comprising of Justice AS Supehia observed and referred to a division bench judgment stating that right and title and ownership or right of occupancy has no nexus with grant of electrical connection to a consumer.
In the present case, the petitioner current occupiers of the land and submitted that they were denied an electricity connection only because the land that they were occupying was in the name of the Government. However, the proceedings were initiated by the Mamlatdar against them u/s 61 of the Gujarat Land Revenue Code for removal of encroachment. Further, to bolster their contention, it was relied by the petitioner on an order of the High Court and Sec 43 of the Electricity Act, 2003 which mandates the supply of electricity to any occupier or owner of premises.
The Petitioners could be said to be ‘occupier’ of the land in question and the connection could not be denied by the Respondent.
The bench of Justice Supehia noted that the Petitioners were owners of the concerned agricultural land for which electricity was sought. However, it was observed that the electricity was denied on the ground that the Petitioners were illegally occupying Government land.
Further, the bench of Justice Supehia concluded while perusing Sec 43 that the provision stipulated that the licensee shall supply electricity to those premises where the application had been filed by the owner or the occupier. Consequently, a reference was made to the order of the Division Bench of the High Court in LPA No. 91/2010 wherein it was observed:
The Court stated that such power being not vested under the law with the company and as the company cannot decide the disputed question of right and title and this court is of the view that ownership or right of occupancy has no nexus with grant of electrical connection to a consumer.
While keeping in view of the aforesaid provisions, it was directed by Justice Supehia that the Respondent-Company to supply electricity connection to the Petitioners in the premises of the property at the earliest in accordance with the list maintained by the name containing the names of the Petitioners in the list.
ANALYSIANG SECTION 194R OF THE INCOME TAX ACT
Recently, Section 194 R was inserted by the Finance Act 2022, which came into effect on July 1st, 2022. CBDT made certain recommendations via Circular 12 from the day of the addition of this section, it has become highly debatable. Before touching the issues of this section, we need to understand the legal provision of section 194 R.
In simple terms, the new section mandates a person who is responsible for providing any benefit or perquisite to a resident to deduct tax at source at 10% of the value or aggregate value of such benefit or perquisite before providing such benefit or perquisite. The benefit or perquisite may or may not be convertible into money, but it must result from such resident’s business or professional activities. As per this section, tax will be deducted by business or profession on any benefits or perquisites of a person who is residing in India. The benefit or perquisite can be in the form of cash or kind, or partially in cash and partially in kind. Tax deduction will be 10 percent if the aggregate value doesn’t exceed INR 20,000. In such a case, tax will not be deducted. Such conditions will not be applicable in If the turnover of business doesn’t exceed INR One Crore, If the turnover of the profession doesn’t exceed INR fifty lakhs, For instance, if a person is a sales agent and he exceeds the target allotted by the company and receives a new car worth INR 5, 00,000/-the value of INR 5,00,000 will be taxed under the head of Profit.
The intention of this section is to expand the scope of deducting tax on benefits or perquisites and to increase transparency in the reporting of benefits and perquisites received by an individual. Because this particular incentive is in kind rather than cash, recipients of such kinds of transactions do not include it in their income tax return. As a result, inaccurate income information is provided. Such an incentive or bonus in kind ought to ideally be reported as income under the 1961 Income-tax Act (ITA). Also, according to Section 28(iv) of the ITA, any benefit or perk received from a business or profession, whether convertible into money or not, must be reported as business income in the hands of the receiver. Now Section 194(R) gives the right to the payee to deduct the amount, whether in cash or kind, arising out of business promotion.
The terms “benefits and perquisites” are not defined under the IT act. If they receive any such perquisites or incentives, whether in cash or in kind, they must deduct TDS. In cases where the benefit is wholly in kind, the person providing such a benefit or perquisite is required to pay TDS on the value of such benefit or perquisite out of his own pocket. In this case, benefits and perquisites are determined as per the value of the purchased price and manufactured price. However, no taxes to be deducted u/s 194R on sales discount, cash discount, or rebate are allowed to customers.
In the matter of ACIT Vs Solvay Pharma India Ltd, the court held that free samples provided by the pharmaceutical company for promotion purposes would be taxable income. As such, free samples cannot be treated as a freebie. The complimentary sample of medication serves solely to demonstrate its effectiveness and to win the doctors’ confidence in the high quality of the pharmaceuticals. Again, this cannot be regarded as gifts given to doctors as they are intended to promote the company’s goods. The pharmaceutical corporation, which manufactures and markets pharmaceutical products, can only increase sales and brand recognition by hosting seminars and conferences and educating medical professionals about recent advances in therapeutics and other medical fields. Since there are daily advancements in the fields of medicine and therapy taking place throughout the globe, it is crucial for doctors to stay current in order to give accurate patient diagnosis and treatment. The main goal of these conferences and seminars is to keep doctors up to date on the most recent advancements in medicine, which is advantageous for both the pharmaceutical industry and the doctors treating patients. Free medication samples provided to doctors by pharmaceutical corporations cannot be considered freebies in light of the aforementioned value.
Hence, under such circumstances, for such a sales effort, the pharmaceutical company may deduct its expenses. The promotion would, however, be taxable income in the hands of the receiver, and the pharmaceutical company would need to deduct TDS on it.
Another question that pops up is that in the case of gifts and perks received on special occasions like birthdays, marriages, and festivals, under such circumstances, Section 194R will only be applied if they arise out of business or profession.
As we know, we are heading towards digitalisation. There are many social media influencers who are playing a crucial role in marketing strategy. Income received by an influencer is calculated by deducting expenditure incurred on their business. Filming costs, such as cameras, microphones, and other equipment; subscription and software licencing fees; internet and communication costs; home office costs, such as rent and utilities; office supplies; business costs, such as travel or transportation costs; and others are examples of what can be written off as a social media influencer. To illustrate how Section 194 R will be applicable in such a situation, let’s consider Nandini is a social media influencer. She received an offer from a company for product promotion in another city. She charged her fee of Rs 88,000 and the travel expense incurred by her was Rs 25,000. Here, the company will reimburse her travel expenses. So, the travel expenditure incurred by the company is covered under the benefits and perquisites provided to Nandini. Hence, TDS is to be deducted under section 194R at the rate of 10%, i.e., Rs 2500 is deductible from the fees payable to Nandini.
There is no further requirement to check whether the amount is taxable in the hands of the recipient or under which section it is taxable. The Supreme Court took the same view in the case of PILCOM vs. CIT in reference to the deduction of tax under Section 194E. It was held by the Hon’ble Supreme Court that tax is to be deducted under section 194E at a specific rate indicated therein, and there is no need to see the taxability under DTAA or the rate of taxability in the hands of the non-resident.
In the matter of ACIT Vs Solvay Pharma India Ltd, the court held that free samples provided by the pharmaceutical company for promotion purposes would be taxable income. As such, free samples cannot be treated as a freebie. The complimentary sample of medication serves solely to demonstrate its effectiveness and to win the doctors’ confidence in the high quality of the pharmaceuticals. Again, this cannot be regarded as gifts given to doctors as they are intended to promote the company’s goods. The pharmaceutical corporation, which manufactures and markets pharmaceutical products, can only increase sales and brand recognition by hosting seminars and conferences and educating medical professionals about recent advances in therapeutics and other medical fields. Since there are daily advancements in the fields of medicine and therapy taking place throughout the globe, it is crucial for doctors to stay current in order to give accurate patient diagnosis and treatment.
GUJARAT HIGH COURT: WRIT PETITION FILED AGAINST PRIVATE UNIVERSITY NOT MAINTAINABLE, REMEDY FOR ALLEGED ARBITRARY TERMINATION LIES UNDER CIVIL LAW.
The Gujarat High Court in the case Shambhavi Kumari v/s Sabarmati University & 3 other(s) observed and has declined to intervene in a writ petition seeking reinstatement with full back wages and benefits filed by an Assistant Professor against a private university, Sabarmati University.
The bench comprising of Justice Bhargav Karia observed and has clarified that the dispute regarding termination was ‘in the realm of a private contract’ and therefore, held that if on the part of the respondent, there is an alleged arbitrary action, the same would give cause to the petitioner to initiate civil action before the Civil Court but in the facts of the present case, the writ petition would not be maintainable against the private educational institution governed by the Gujarat Private Universities Act, 2009.
In the present case, the petitioner was given a three months’ notice starting August 2013, allegedly without any reason. Consequently. Earlier, an application was filled by the petitioner before the Gujarat Affiliated Colleges Service Tribunal and thereafter, withdrew the application to file the writ before the High Court.
It was contested by the respondents that the petition was not maintainable on the ground that the University was a private University and did not fall within the term ‘State’ under Article 12 of the Constitution of India. Therefore, the employment conditions of the Petitioner would not bring her services within the realm of ‘duty or public function.’
It was observed that the petitioner, per contra, insisted that the University was established under the Gujarat Private Universities Act, 2009. However, Universities were established to provide quality and industry relevant higher education and for related matters and hence, it could not be said that the Universities were not performing public duty. It was directed by the State Government and pervasive control over the functioning of it as was mentioned in Sec 31-35 of Chapter VI of the Act. Reliance was placed on Janet Jeyapaul vs. SRM University and ors. where the Top Court had held that the writ petition was maintainable against the deemed university and whose functions were governed by the UGC Act, 1956.
The bench of Justice Karia, while taking stock of the contentions referred to Mukesh Bhavarlal Bhandari and ors vs. Dr. Nagesh Bhandari and ors where the Coordinate Bench of the High Court in similar circumstances had reiterated that merely because the activity of the said research institute ensures to the benefit of the Indian public, it cannot be a guiding factor to determine the character of the Institute and bring the same within the sweep of ‘public duty or public function.
It was observed that the High Court also rejected the reference to Janet Jeyapaul since in the instant case and held that in the realm of a private contract, the Petitioner termination was to be decided.
Further, it was observed that it is not necessary to go into the merits of the case with regard to the issue of show-cause notice for providing an opportunity of hearing resulting into breach of principle of natural justice and weather the action of the respondent University is unfair or not because all such disputes essentially are in the realm of private contract.
Accordingly, the bench dismissed the petition.
Gujarat HC Quashes Reinstatement Order: Industrial Dispute Act| Person Working In The Capacity Of ‘Consultant’ Cannot Be Deemed ‘Workman’
The Gujarat High Court In the case Santram Spinners Limited v/s Babubhai Magandas Patel observed and has struck down the order of the Labour Court which had held that the Respondent-workman was entitled to reinstatement along with 20% back wages in the Petitioner-institute. Thus, the High Court, after perusing, Form No. 16A which pertains to Tax Deducted at Source, concluded that the Respondent was being paid consultant fees and not a salary and the same had been ignored by the Labour Court.
The bench comprising of Justice Sandeep Bhatt noted that the Respondent had raised an industrial dispute, inter alia, claiming that he was working in the company of the Petitioner as a Technical Maintenance In-Charge while the respondent earning a salary of INR 9,000 per month. Thereafter, it was alleged by him that he was terminated orally in 1997. Consequently, the Labour Court ruled in his favour and ordered reinstatement and back wages.
It was submitted by the petitioner that the Respondent did not fall within the definition of the term ‘workman’ in Sec 2(s) since he was employed as a Maintenance Consultant, receiving consultant fees and not a salary and the respondent had failed to produce any documentary evidence such as TDS statement, appointment letter, bills to bolster his contention.
Further, it was also averred by the petitioner that the relevant documentary evidence was absent. It was stated that Form 16A was produced to show that if the Respondent was a consultant, then there was no need to deduct TDS. It was observed that the Form No. 26K was disagreed by the Labour Court, which was produced by the Company to show that the tax was deducted from fees for technical or professional services.
The bench comprising of Justice Bhatt firstly observed that the Respondent had admitted that he had no evidence with him to prove that he was working as a ‘workman’ in the Company of the Petitioner that his salary was fixed at INR 9,000 per month. It was stated by the Manager of the Company that the Respondent was rendering services as a consultant raising his Vouchers/bills regularly and being paid through cheque. As per the Bench, there was ‘ample evidence’ to prove that that the Respondent was employed as a technical consultant.
Justice Bhatt stated that it is pertinent to note that the learned Labour Court has committed gross error in holding that those documents are complicated and thus, the learned Labour Court has also erred in giving findings that since TDS is deducted by the petitioner company and therefore, the respondent is workman, who is serving in the petitioner institute and in my opinion, this finding of the learned Labour Court is against the settled proposition of law and is highly erroneous.
Therefore, the High Court affirmed that there was no evidence that the Respondent had been working for more than 240 days during the year preceding termination.
Accordingly, the High Court struck down the award of the Labour Court.
GUJARAT HIGH COURT QUASHES REINSTATEMENT ORDER: PERSON WORKING IN SUPERVISORY CAPACITY CANNOT RISE “INDUSTRAIL DISPUTE”
The Gujarat High Court in the case Gujarat Insecticides Ltd. & 1 other(s) v/s Presiding Officer & 2 others observed and has reiterated that a person working in “supervisory” capacity cannot raise an industrial dispute under the Industrial Disputes Act, 1947.
The bench comprising of Justice AY Kogje observed and further made it clear that while deciding whether such person is a workman or not, the Labour Court ought to carefully consider the evidence placed on record and there is no exhaustive list of work to differentiate between the management employee and the Workman.
In the present case, the Petitioner Company averred that the Respondent was working in the non-workman category and engaged in the ‘supervisory category’ and was drawing salary of more than INR 1600. Therefore, the dispute was not an industrial dispute within Section 2(s) of the Act, 1947.
It was insisted by the Respondent that he had worked with the company as a Maintenance Engineer and the duties assigned to him were of the nature of a workman’s duties as per the ID Act. The respondent was wrongly terminated by way of termination and without any procedure established by law and as such, was entitled back wages.
It was observed that the high court took into consideration the Respondent’s appointment letter and witness depositions regarding the nature of work performed by him to conclude that the Respondent in Grade-9 was indeed discharging duty of Maintenance Engineer. It was also specified by the depositions that the hierarchical grading in the petitioner-company as per which, the employees above Grade-7 were of the Management Cadre.
The High Court observed that the Labour Court has completely disregarded this evidence, which according to this Court is most relevant for the purpose of deciding the status of workman and the Labour Court has proceeded that the petitioner-company ought to have produced evidence in the nature of whether the respondent-workman has sanctioned any leave, sanctioned any overtime or prepared any gate passes for employees to go home or has made any ordered or Appointment dismissal. Thus, when the Labour Court, instead of referring to this evidence already on record to establish the nature of work of the respondent and has decided to chase the evidence which is not on record and then on the basis that such evidence not being on record, it was concluded that in the definition of workman, the workman will be covered, this is where, in the opinion of the Court, perversity has crept in.
Accordingly, the bench quashed the impugned order. Therefore, seeing the passage of time, it was held by the High Court that the allowances paid u/s 17B of the Act should not be recovered by the Petitioner company.
COURT CALLS FOR SENSITIZATION OF POLICE: DELHI RIOTS SITE PLANS PREPARED CASUALLY, S.65B CERTIFICATE NOT FILLED FOR DIGITALLY SOURCED EVIDENCE
The Court while dealing with a case related to 2020 Delhi riots, a city Court has called for sensitisation of investigating officers (IOs) on making the photos obtained from digital sources as admissible in evidence by filing a certificate under section 65B of Indian Evidence Act, 1872.
The bench comprising of Additional Sessions Judge Pulastya Pramachala observed and thus ordered that whenever, photographs are filed from digital sources it is needless to say that a certificate under Section 65-B of I.E. Act, is must to make those photographs admissible for the purpose of evidence. However, all the IOs are required to be sensitized this respect as well and it is high time to control the casual and callous approach of any IO.
It was also observed that court expressed displeasure over “casually prepared site plans” by stating that preparation of the same were not even expected in cases triable by the Metropolitan Magistrates.
Adding to it, the Judge stated that unfortunately this kind of site plan has been filed in such a serious case involving session triable case. Moreover, from the documents filed on the record, the court find that certain photographs have been placed, but without any certificate under Section 65-B of Indian Evidence Act.
In the present case, the court was dealing with an FIR registered on the complaint of one Salim Khan wherein it was stated by him that his spare parts and barber shop shop was looted and was put on fire during riots.
It was admitted by one of the accused Dharmender that his involvement in the matter and he, with other co-accused was seen carrying the carton of Rooh Afzah from the warehouse of a complainant in another FIR.
The Court stated that a serious re-look over the quality of evidence/documents place on the record in the case, is required by senior officer with all serious attention.
Further, the court added that in this case the ld. DCP (North East) is requested to go through the records and to submit his report, if the prosecution is to be carried on, on the basis of other materials and same site plan as placed on the record.
As in future, the Special Public Prosecutor undertook to be much careful.
Accordingly, the Court listed the matter for further hearing on August 17.
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