It is a common practice in District Courts that whenever the party (Specifically Husband) gets any final or interim order passed by the Magistrate against him under the Protection of Women from Domestic Violence Act, 2005 (Hereinafter “the DV Act”), he immediately rushes to file an appeal against the said order before the Court of Session under Section 29. Section 29 provides that an appeal shall lie to the Court of Session within thirty days from the date on which the order made by the Magistrate is served on the aggrieved person or the respondent, as the case may be, whichever is later. It is to be noted that with this appeal, the husband also files an application seeking stay on execution of the order of the Magistrate during the pendency of the appeal”. Here, the Court of Session, after hearing the flamboyant arguments of the Counsel and without self-contemplation of its vires to pass order for interim relief, passes the interim order for staying execution of the order of Magistrate during the pendency of appeal under Section 29.

Thus, the substantial question of law in relation to Section 29 of DV Act, that can eminently be emanated here is:

“Whether the Court of Session has any power under Section 29 of the DV Act to pass any interim order granting interim relief to any party during the pendency of the appeal?”

And in particular:

“Whether the Court of Session, during the pendency of the appeal under Section 29 of the DV Act, has any power to stay either interim or final order of maintenance passed by the Magistrate?”

Since there are hardly any judgement in which the said questions have been adjudicated, thus it incumbent on the authors to scan the anatomy of the said questions. The said question seems easy from outside since it has been the general practice in the District court to file appeal against the interim order and get stay from the Session Court. However, answer to the said question has many sheds. It has always been difficult to answer the question that whether power of the court to pass the order of final relief automatically includes the implied power to stay the order passed by lower court?

There are various judgements speaking on both the sides. There are some judgements which have held that power of the court to pass final relief automatically implies the power to provide interim relief. However, some judgements, have held that if court or tribunal is the creature of the statute, and if statute does not confer express power on the court to pass order of interim relief then the court will possess no power to pass the same.

Judgements which held that Court has implied power to grant stay/interim relief:

In Polini v. Grey, [1879] 12 Ch. D. 438 Lord Jessel M.R. said about the powers of the Court of Appeal to grant stay at page 443:

“It appears to me on principle that the Court ought to possess that jurisdiction, because the principle which underlies all orders for the preservation of property pending litigation is this, that the successful party, is to reap the fruits of that litigation, and not obtain merely a barren success. That principle, as it appears to me, applies as much to the Court of first instance before the first trial, and to the Court of Appeal before the second trial, as to. the Court of last instance before the hearing of the final appeal”.

The Hon’ble Supreme Court in the case of ITO, Cannanore vs. M.K. Mohammad Kunhi, AIR 1969 SC 430 held that the income tax appellate tribunal has implied powers to grant stay, although no such power has been expressly granted to it by the Income Tax Act. It further held that It could well be said that when s. 254 confers appellate jurisdiction, it impliedly grants the power of doing all such acts, or employing such means, as are essentially necessary to its execution and that the statutory power carries with it the duty in proper cases to make such orders for staying proceedings as will prevent the appeal if successful from being rendered nugatory.

The Hon’ble Supreme Court in the case of Savitri vs. Govind Singh Rawat AIR 1986 SC 984 held that the power conferred on the Magistrate under Section 125Cr.P.C. to grant maintenance to the wife implies the power to grant interim maintenance during the pendency of the proceeding, otherwise she may starve during this period.

However, one cannot lose sight of the law laid down in the Sakiri Vasu vs State of UP, (2008) 2 SCC 409

“It is well-settled that when a power is given to an authority to do something it includes such incidental or implied powers which would ensure the proper doing of that thing. In other words, when any power is expressly granted by the statute, there is impliedly included in the grant, even without special mention, every power and every control the denial of which would render the grant itself ineffective. Thus where an Act confers jurisdiction it impliedly also grants the power of doing all such acts or employ such means as are essentially necessary to its execution.”

Judgements which held that Court has no power to grant stay/interim relief if not specifically conferred by statue:

The Hon’ble Supreme Court in the case of Bindeshwari Prasad Singh v. Kali Singh, (1977) 1 SCC 57, which was a decision as to the jurisdiction of a Magistrate to review or recall his order, held that in the absence of any specific power in the Code of Criminal Procedure, the Magistrate was not entitled to exercise such a power. It was also  held that unlike Section 151 of the Civil Procedure Code, which vests the civil courts and certain tribunals with inherent powers, the subordinate criminal courts has no such inherent power, since there is no provision in the Code of Criminal Procedure empowering such powers.

The Hon’ble Supreme Court in the case of Morgan Stanley Mutual Fund Vs. Kartick Das [(1994) 4 SCC 225], was considering the scope of the provisions of the Consumer Protection Act, 1986. On construction of Section 14 of the said Act, this Court came to the conclusion that there was no power under the Act to grant any interim relief, even of an ad interim nature. The Hon’ble Apex court upon deciding the matter, observed as follows:

“……… If the jurisdiction of the Forum to grant relief is confined to the four clauses mentioned under Section 14, it passes our comprehension as to how an interim injunction could ever be granted disregarding even the balance of convenience.”

Also, the reference can be sought to the decision of the Hon’ble Punjab and Haryana High Court in Sham lal v. State Election Commission, AIR 1997 P&H 164, wherein, the Court observed that:

“If the legislature had so desired, nothing prevented it from conferring statutory power upon the Election Tribunal to grant interim stay or injunction or restraint order during the pendency of the election petition.”

Accordingly, the Court went on to hold that the Election Tribunal did not have the power to pass any order of injunction or stay which would impede the implementation of the result of election.

The Hon’ble Supreme Court in the case of Super Cassetts Industries Ltd vs Music Broadcast Pvt. Ltd, AIR 2012 SC 2144

39. As has been held by this Court in innumerable cases, a Tribunal is a creature of Statute and can exercise only such powers as are vested in it by the Statute…”

It is to be noted to the said reasoning, Chelameswar, J. concurring with the bench added the following:

4. In the context of Courts adjudicating civil disputes, the jurisdiction and powers necessary to effectively exercise the jurisdiction, such as, securing the presence of defendants / respondents or witnesses, granting of interim orders etc., and the method and manner of enforcement of a decision or a decree, are matters elaborately dealt by the Code of Civil Procedure. Similarly, the Code of Criminal Procedure contains provisions necessary for the exercise of the jurisdiction of the Criminal Courts. While the Code of Civil Procedure, under Section 151, recognizes the existence of inherent powers in all Civil Courts, the Code of Criminal Procedure recognises all such inherent powers only in the High Court under Section 482.

5. Therefore, the jurisdiction and authority of not only the Tribunals, but also the Courts are structured by the statutory grants and limitations.

Analysis of Section 29 of DV Act: Whether it contains the implied power to grant stay:

Before examining the said question, it is inevitable to cast a shadow on Section 29 of the DV Act:

Section 29: Appeal.—There shall lie an appeal to the Court of Session within thirty days from the date on which the order made by the Magistrate is served on the aggrieved person or the respondent, as the case may be, whichever is later.

Section 29 makes it apparent that appeal can lie to Court of Session, either against the final or interim order passed by the Magistrate under the DV Act. However, it is silent upon the power of the Court of Session to pass any interim order during the course of pending appeal against the order passed by Magistrate under the DV Act while such power is expressly conferred on the Magistrate under Section 23.

 A correct answer to both the stated questions would depend upon how the DV Act of 2005 and the Code of Criminal Procedure, 1973 is to be viewed and interpreted. It is relevant to note here that the DV Act constitute a complete code for the matters arising under it.

The Hon’ble Supreme Court in the case of Shalu Ojha v. Prashant Ojha, (2015) 2 SCC 99 doubted the power of the Session Court in granting the interim relief in any form though did not adjudicate the issue in detail because the same was not raised by the parties in that case. The extract of the relevant observation of the Hon’ble Supreme Court in the Shalu Ojha case is provided hereinbelow:

“Questioning the correctness of the Magistrate’s order in granting the maintenance of Rs.2.5 lakhs per month the respondent carried the matter in appeal under Section 29 to the Sessions Court and sought stay of the execution of the order of the Magistrate during the pendency of the appeal. Whether the Sessions Court in exercise of its jurisdiction under Section 29 of the Act has any power to pass interim orders staying the execution of the order appealed before it is a matter to be examined in an appropriate case. We only note that there is no express grant of power conferred on the Sessions Court while such power is expressly conferred on the Magistrate under Section 23. Apart from that, the power to grant interim orders is not always inherent in every Court. Such powers are either expressly conferred or implied in certain circumstances. This Court in Super Cassettes Industries Limited v. Music Broadcast Private Limited, (2012) 5 SCC 488, examined this question in detail. At any rate, we do not propose to decide whether the Sessions Court has the power to grant interim order such as the one sought by the respondent herein during the pendency of his appeal, for that issue has not been argued before us.”

It is relevant to note that there are two types of courts. One is he court which are the creation of the Constitution and Second the courts which are the creation of the Statute. Courts which are the creation of Constitution possess inherent power in them even if the same has not been conferred by any statute. However, Court which are creation of Statute does not contain the inherent power but only limited implied power/incidental power unless the same has specifically conferred on them by the Statute.  Though these implied powers/ incidental powers can only be confined to grant adjournment, order the effective investigation in case of Section 156 (3) CrPC, to hear the early hearing applications so as to support the main case. However, the same cannot go to the extent of passing the order of stay. It is to be noted that Court of Session is the creature of statute. It is a well settled law that any court or tribunal which is a creature of statute does not get any implied power automatically until the same has been conferred on it by the said statute either expressly or in form of inherent power. The Domestic Violence Act vide Section 23 postulates power to grant interim relief only upon the magistrate, therefore, the Court of Session cannot assume the said power and grant any sort of interim relief under Section 29 of the Act against the interim or final order passed by the Magistrate.

Thus, an analysis of the aforementioned decisions of the Apex court and the principles of statutory interpretation reveals that the Session Court, in the absence of any express conferment of power or of inherent power by statute i.e. either the DV Act or the Code of Criminal Procedure, 1973, cannot grant an interim relief under Section 29 of the DV Act. It is submitted that the Session Court is a Court created under Section 9 of the CrPC, and being a creature of statute, its powers are confined to the powers given to it under general Code of Criminal Procedure, 1973 and special enactments like the DV Act for present purpose. It is relevant to note that Section 29 conferred certain limited powers to Session Court to hear the appeal from the order passed by the Magistrate. The same is procedural in nature and does not vest the Session Court with any kind of substantive power to grant interim orders under Section 29 of the DV Act. It is emphasised that if the legislature had so desired, nothing prevented it from conferring the power upon the Court of Session to grant interim relief.

Though the law is yet not settled due to non-adjudication of the said issue in any of the cases and the Court of Session is still using the power to grant interim relief to parties during the pendency of appeal under Section 29. However, the authors have fond hope that the same will be settled soon by the Hon’ble Supreme Court in the interest of justice.

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Pawan Reley is Advocate, Supreme Court of India

Sajal Awasthi  is Advocate, Delhi High Court

Looking back at 2020

When India closed its borders and went into a strict lockdown in March 2020, it created an air of uncertainty regarding the nation’s growth. High performing start-ups were suddenly dealing with plummeting revenues with e-commerce facing zero revenues during the first few months of the lockdown. Many start-ups had to shelve plans to raise external funding with meaningful mark-ups. Key regulatory changes that restricted foreign investment from countries that shared land borders with India was an added complexity to navigate. Particularly those trying to survive with follow-on funding from existing investors on the cap table were hit by the restriction. 

In the face of such bleak realities, ongoing deals were expected to hit pause but they instead rushed to closure with ferocity. New deals in Q1 were being evaluated albeit cautiously and slowly. The next two quarters from July to December more than compensated for the temporary lag in deal-making. All players from founders to law firms were unexpectedly busy closing deals of all sizes – from seed stage to unicorns. While edtech stole the show (with Byju’s and Unacademy’s big ticket fund raises and UpGrad’s strategic acquisitions) several sectors got their fair share of action from virtual reality  (Avataar.me’s fund raise from Sequoia Capital) to start-ups that help local businesses create online stores (Lightspeed Venture Partners and Matrix Partners investment in in Dukaan). 

Interestingly, while the number of new start-ups declined (falling from approximately 3,500 in 2019 to around a mere 1,000 in 2020), 2020 saw a record-breaking number of eleven new unicorns. Overall, the Indian start-up ecosystem saw 924 deals close in 2020 (14 per cent higher than 2019) with deal value of USD 11.5 billion. These are healthy figures to contend with, especially against what we faced in Q1 of 2020. What’s more promising is that funding and deal count are expected to surge even higher for 2021 signalling a great year for lawyers in the venture capital space.

VC Lawyers – the Way Forward 

Against the background of these promising projections for the surge in venture capital deal-making, lawyers assume a significant role in turning these to reality. We’ve identified three key characteristics that will help us scale and meet client expectations – keeping it simple, white over red flags, and staying present.

(i) Simplifying Complexity

Over the years we’ve come to realise that 100 pager agreements are rarely necessary for large ticket deals let alone early stage venture capital funding. It is critical for us to shift to simplified, standardised and concise documentation that protects parties from actual risks. There is certainly a need to move away from seemingly grave but largely academic protections  such as extensive indemnities, especially for early stage companies with lean operations and few employees. 

Moreover, this simplicity should also extend to communication during the course of the deal, especially negotiations. In our experience, breaking down key legal concepts for clients who, being outside the legal realm, are not always well-versed with legal jargon is crucial to effective lawyering.  

Further, while clients do not always experience how different clauses play out in the life of an investment, lawyers are specialists who are engaged when disputes arise and these disputes often stem from unfortunate loopholes in the documentation. Instead of parking too many issues to be resolved directly by clients (which may also sour investor-founder relationships), lawyers should ideally draw from their experience to determine what’s worth fighting for and where it might help to meet mid-way in the first instance of a dispute.

(ii) Risk Assessment

Given the fast paced nature of VC transactions, lawyers will need to be more pragmatic while identifying issues and assessing risk levels as part of their diligence. Even when a long list of issues is revealed through our thorough diligence, we must not lose sight that investors are keen on proceeding with the transaction with their exposure mitigated if not completely resolved, and therefore should steer clear of applying a one-size-fits-all approach when solving these issues. While not all problems can be easily remedied, having genuine enthusiasm to see the deal to closure brings out a collaborative spirit to resolve issues – in the midst identifying and waving red flags through the life of the transaction, we must remember to raise white flags too. 

(iii) Staying Present

Most importantly, there is utmost value in being present, especially so while we’re all working remotely through this pandemic. Albert Mehrabian, a pioneer researcher of body language back in the 1950’s, found that the total impact of a message is about 7 percent verbal and 38 percent vocal (including tone of voice, inflection, and other sounds) and 55 percent nonverbal. While many corporate professionals have transitioned easily from in-person meetings to video conferences, we’ve noticed lawyers (ourselves included) are still hesitant, almost reluctant, to turn on video on negotiation calls.  Possibly because lawyers use some of this time to multi-task to keep all clients happy given that everyone has a number of live transactions at any given point. 

As we continue to close deals of all ticket sizes entirely remotely for at least the foreseeable future, reading the room is fundamental to steer negotiations with favourable outcomes. Our key learning here has been that the only way to achieve this is to recalibrate our minds. This is an impossible goal to achieve if we continue to disable video and multi-task on calls, simultaneously reviewing drafts, raising invoices, filling timesheets and the like. 

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Archana Rajaram is Founder & Managing Partner, Rajaram Legal. She advises several venture capital investors in their investments and exits. 

Priya Makhijani is Senior Associate at Rajaram Legal. 

________________

This article has been published in partnership with Forbes India and first appeared on forbesindia.com:

https://www.forbesindia.com/article/legalpowerlist2020/the-indian-vc-industry-priya-makhijani-archana-rajaram/66227/1

The Supreme Court in the case Vellanki Frame Works vs. Commercial Tax Officer, decided by the bench of Justice AM Khanwilkar  and Justice Dinesh Maheshwari on January 13, 2021, dealt with the question whether sales pertaining in the factual circumstances arose in the purview of import of goods into the territory of India and qualify for exemption under Section 5(2) of the Central Sales Tax (CST) Act, 1956.

The Supreme Court upheld the decision rendered by the Telangana High Court which held that transfer of goods (coils) after filing bill of entry (BoE) is not sale in course of import but an ‘interstate sale’ even if it is under principal-agent relationship or sale and thus, liable to Central Sales Tax. The Apex Court considered in detail the definition of Importer as well as the nature of transaction by applying the principles laid down in the case K. Gopinathan Nair and Ors. v. State of Kerala and finally examined the issue in the context of Article 286 of the Constitution of India, along with relevant provisions of the Central Sales Tax Act and Customs Act by observing that sale in the course of import carries three essential features – (i) that there must be a sale; (ii) that goods must actually be imported into the territory of India; and (iii) that the sale must be part and parcel of the import.

On the aspect of consciously opting of a Writ Jurisdiction by the Assessee instead of availing the statutory appeal, the Court refused to relegate the matter to the appeal forum and went on to note that an extraordinary writ jurisdiction cannot be utilized by a litigant only to take chance and since the High Court had already made an observation on merits in the Writ Petition, the Supreme Court showed no hesitating in upholding the decision. The Court in conclusion also remarked that “A litigation cannot be allowed to be unendingly kept alive at the choice of a litigant”.

The author feels that the Apex Court is correct in noting the importance to curb the misuse of Writ Jurisdiction by litigants specially by assesses in such cases. However, one school of thought which cannot be ignored and which has also been taken in in various decisions time and again in the past, would be for the courts to simply not entertain such Writ Petitions and in that background, the High Court should have not given its opinion on the merits of the case and should have asked the parties to approach the appropriate statutory authority. Having said so, once the High Court has made its observation on merits and against that the Special Leave Petition has been preferred, it would have been difficult for the Apex Court to undo such observations and to ask the authority to decide the matter afresh.

Brief Background

This Special Leave Petition arises out of the decision in Writ Petition Nos. 2552 of 2013 and 6258 of 2013 whereby, the Telangana High Court on 18.12.2014 had upheld the assessment orders dated 20.01.2010 and 18.05.2010 passed by the Commercial Tax Officer (CTO), Chinawaltair Circle which had held that the transactions in question were not the sales in the course of import but had been inter-state sales, liable to Central Sales Tax and denied the exemption claimed under Section 5(2) of the Central Sales Tax Act, 1956 while granting time to the appellant to produce the prescribed C-Forms to the assessing authority for availing the benefit of concessional rate of tax.

This case pertains to seven transactions of similar nature form the subject matter of these appeals; one relating to the assessment for the year 2005-06 and others relating to the assessment for the year 2006-07. The common salient features of all these transactions had been that they were for the supply of timber from a foreign country and were allegedly executed in a manner that the supplier (party number 1) sold the goods in question to the first buyer (party number 2) and delivered them at the port of shipment. Thereafter, while the goods were in transit on high seas, party number 2 transferred the goods to the appellant (who was party number 3 in these transactions) by endorsing the bill of lading in favour of the appellant. Thereafter, the appellant allegedly transferred them to the end-buyer (party number 4) by endorsing the bill of lading in favour of the end-buyer.

When the goods reached the port at Visakhapatnam, the appellant filed a bill of entry for warehousing and thereafter, filed another bill of entry (BoE) for home consumption (ex-bond). On the basis of such bills of entry, the assessee was assessed for customs duty. The assessee claimed that since it only acted as an agent of the end-buyers while filing the bills of entry and since the sales of the goods in question to the end-buyers were more like the sales taking place in the course of import of goods into the territory of India, it was eligible for exemption from payment of sales tax by virtue of Section 5(2). During assessment for AYs 2005-06 & 2006-07, the Commercial Tax Officer (CTO) denied the benefit of exemption vide orders dated January 20, 2010 and May 18, 2010 on the following grounds that –

Against the said order, the assessee filed a writ before the High Court of Telangana, wherein the issue as follows: (i) as to whether the CTO before whom the dealer had filed returns under CST Act was having authority to pass the assessment order in the absence of authorisation from the Deputy Commissioner; (ii) the extent, scope and contours of judicial review of assessment order in the writ jurisdiction; (iii) as to whether the sale by appellant to Radha was an inter-state sale for the appellant having filed the bill of entry and having been assessed to customs duty; (iv) as to whether the sale in favour of Radha occasioned movement of goods into the country; (v) as to whether the procedure prescribed for duty free shop was applicable to the present case; and (vi) as to whether the appellant was entitled to be granted time to submit C-Forms?

The High Court in short rejected the contention that the appellant had only acted as an agent of the respective end-buyers while filing the bills of entry at the port of destination while the court also affirmed the assessment order and ruled that customs duty could be assessed only on the importer of goods since sale by the assessee to the end-buyer could have only been affected after the goods were cleared for home consumption having accepted the departments contention that payment of custom duty was conclusive of import having ended. After examining the Customs Act in relation to goods on importation, clearance of goods for home consumption as also the requirements of Bill of Entry (Electronic Declaration) Regulation, 1995 as well as the entries in bills of entry, the court came to the finding that the sale of goods by the appellant to end-buyer would only effectuate after the goods were cleared for home consumption and thus, appellant had imported the goods. Infact, the court also noted that the name of appellant was shows as importer and that there was no reference to Radha (the end buyer).

On the point of writ petition, judicial review of assessment order in writ jurisdiction, the High Court took note of the extensive arguments on behalf of the appellant as regards nature of transaction with reference to quadripartite agreement and endorsement of bill of lading by the importer in favor of the appellant and subsequently by the appellant in favor of Radha (end-buyer) while the goods were on high seas as also the argument that there was no finding against genuineness of the endorsements on the bill of lading. The High Court observed that the appellant had invoked writ jurisdiction against the assessment order without availing the statutory remedy of appeal and also pointed out that though certiorari was the appropriate remedy in challenge to a quasi-judicial order, the appellant had sought a writ of mandamus. The High Court further observed that it was not even the case of the appellant that the first respondent had failed to perform a statutory duty or that the appellant’s legal rights were adversely affected and therefore, the appellant was not entitled to a writ of mandamus. The High Court, thereafter, pointed out the limited parameters within which the validity of assessment orders and findings therein could be examined in certiorari jurisdiction.

In this background, the assessee’s appeal before the Supreme Court.

The main Issue involved was whether the sales in high seas took place in the course of the import of the goods into the territory of India and qualify for exemption u/s 5(2) of the CST Act as also.

Arguments raised by the Appellant/ Petitioner Counsel before the Supreme Court

The counsel for the appellant contended that the sale in question, being in the nature of “sale in the course of import”, is not taxable under the CST Act and that the sale in question, having not occasioned movement of goods between two States within India, is not an “inter-State sale” under Section 3(a) of the CST Act and rather, this sale has occasioned movement of goods from outside India into India.

The Counsel for the Appellant also referred to Article 286 of the Constitution of India while pointing out that the said Article prohibits the State Government from imposing Sales tax on sales made in the course of import or export.

The counsel even referred to Section 5 of the CST Act by referring to sub-section (2) and claimed that the sale of goods is deemed to take place in the course of import of the goods into the territory of India only if the sale occasions such import or is effected by a transfer of document of title to the goods before they have crossed the customs frontiers of India. The counsel relied on Section 3 of the CST Act and the decision of this Court in the case of State of Maharashtra v. Embee Corporation, Bombay[1]  to submit that the terms ‘sale occasioning movement of goods’ and ‘sale occasioning import of goods’ carry the same meaning insofar as Sections 3 and 5 of the CST Act are concerned and that the words “sale of goods” in Section 3 and the words “contract of sale” in Section 4(2) of the CST Act have been assigned the same meaning, which is wider to the meaning of sale in the general law.

The counsel also referred to Tata Iron and Steel Co. Ltd., Bombay v. S.R. Sarkar and Ors.[2] submitting that where sale occasions movement of goods and sale occasions import of goods, the contract of sale or a covenant of a contract of sale triggers the movement from either one State to another or from outside India into India.

The counsel also submitted that the essential ingredients of high sea sales in accordance with Section 5(2) of the CST Act would be of the transfer of document of title and transfer of goods to be made while the goods are on high seas. He relied on J.V. Gokal & Co. (Private) Ltd. v. Assistant Collector of Sales-Tax (Inspection) and Ors.[3] and Minerals & Metals Trading Corporation of India Ltd. v. Sales Tax Officer and Ors.[4] to focus on aspect that transfer of bill of lading is the same as transfer of title in goods.

He further relied on State of Travancore-Cochin and Ors. v. Shanmugha Vilas Cashewnut Factory, Quilon[5] and argued that in this case the goods moved into India from outside as a result of the quadripartite agreement; that the inter-State movement within India was only a part of one whole integrated transaction of sale; that when a part of integrated import transaction involves movement of goods within India, the department cannot selectively question only one part of the transaction and that privity of party cannot be ignored.

Further, on the aspect of sale, he submitted that issuance of debit note on a later date is of no consequence and it merely includes transfer of goods. Thus, the endorsement of bill of lading and its date are the only relevant factor for determining “sale” under Section 5(2) of CST Act.  

On the aspect of Writ Jurisdiction, the counsel contended that even though High Court was not inclined to reappreciate its evidence, has made finding on facts rather than relegating the matter to appellate authority and prays to contest the matter in a statutory appeal by relying upon Star Paper Mills Ltd. v. Union of India and Ors.[6]

Arguments raised by the Department / Respondent before the Supreme Court

The Counsel contended that conjoint reading of the agreements sought to be relied upon by the appellant and the appellant’s dealing with the goods before the customs frontier at

Visakhapatnam, make it clear that the alleged agency agreement between the appellant and Radha (end-buyer) was a sham and nominal document, drawn only for the purpose of evasion of tax liability under the CST Act and that the agency had no role to play in the import transaction. It was submitted that documents presented by the appellant before the customs frontier at Visakhapatnam could not have shown Radha as the real importer since the high seas sale agreement designated appellant as the buyer. He further contends that reading the agreements in question and the real intent behind them, coupled with filing of bill of entry by the appellant, shows that the appellant alone was the importer.

Further, he contends that delivery of goods to Radha by the appellant and their movement from Visakhapatnam (in the State of Andhra Pradesh) on way to Lucknow (in the State of Uttar Pradesh) constituted an inter-State sale and hence, the appellant has rightly been held liable to tax for this inter-State sale.

Thus, main argument raised by the counsel for the Respondent is that appellant alone cleared the goods from the customs area after filing the respective bills of entry and thereafter raised debit notes showing sales to the end-buyers and that such sales having taken place only after the goods crossing the customs frontiers of India and the end-buyers being situated outside the State of Andhra Pradesh to whom the goods were dispatched, the sales in question had only been inter-State sales.

Supreme Court Observation:

The Apex Court first determined that ‘sale in the course of import’ carries three essential features – (i) that there must be a sale; (ii) that goods must actually be imported into the territory of India; and (iii) that the sale must be part and parcel of the import. The Court referred to the case of J.V Gokal and Co. wherein the Court examined the questions as to what does the phrase “in the course of the import of the goods into the territory of India” convey by referring to the findings in Shanmugha Vilas Cashew Nut Factory case which made following observations:

“.. The course of the import of the goods may be said to begin when the goods enter their import journey i.e. when they cross the customs barrier of the foreign country and end when they cross the customs barrier of the importing country”.

The relied upon case also took note of the observation made by Justice Das who had expressed his minority judgment but agreed with the majority while holding that “ Such sales or purchases, by delivery of shipping documents while the goods are on the high seas on their import journey were and are well recognized species of transactions done every day on a large scale in big commercial towns like Bombay and Calcutta and are indeed the necessary and concomitant incidents of foreign trade. To hold that these sales or purchases do not take place ‘in the course of’ import or export but are to be regarded as purely ordinary local or home transactions distinct from foreign trade, is to ignore the realities of the situation. Such a construction will permit the imposition of tax by a State over and above the customs duty or export duty levied by Parliament. Such double taxation on the same lot of goods will increase the price of the goods and, in the case of export, may prevent the exporters from competing in the world market and, in the case of import, will put a greater burden on the consumers. This will eventually hamper and prejudicially affect our foreign trade and will bring about precisely that calamity which it is the intention and purpose of our Constitution to prevent.”

The relied upon case thereafter summarized the legal position in its Para 11 which read as “ The legal position vis-a-vis the import-sale can be summarized thus: (1) The course of import of goods starts at a point when the goods cross the customs barrier of the foreign country and ends at a point in the importing country after the goods cross the customs barrier; (2) the sale which occasions the import is a sale in the course of import; (3) a purchase by an importer of goods when they are on the high seas by payment against shipping documents is also a purchase in the course of import, and (4) a sale by an importer of goods, after the property in the goods passed to him either after the receipt of the documents of title against payment or otherwise, to a third party by a similar process is also a sale in the course of import” before concluding that  that the sales in question took place in the course of imports of goods into India.

The Apex Court also relied upon Minerals & Metals case which also relied upon J.V Gokal and Co. and observed that “The judgment states that it is well settled in the commercial world that a bill of lading represents the goods and the transfer of it operates as the transfer of goods. The delivery of the bill of lading while the goods are afloat is equivalent to the delivery of the goods themselves” thereby, treating sale in reference as that in the course of import.  The Supreme Court also emphasized on the decision in Embee Corporation which held that the terms ‘sale occasioning movement of goods’ and ‘sale occasioning import of goods’ in Sections 3 and 5 of the CST Act carry the same meaning.

It also observes that sale or purchase of goods under section 3 of the CST Act shall deemed to have taken place in the course of inter-State trade or commerce if the sale or purchase – (a) occasions the movement of goods from one State to another; or (b) is effected by a transfer of documents of title to the goods during their movement from one State to another. Further, section 5 provides the basic principles for determining as to when a sale or purchase of goods takes place in the course of import or export.

The Apex Court then distinguishes the decisions relied on by the Petitioner in Hotel Ashoka (Indian Tourist Development Corporation Ltd.). v. Asst Commr of Commercial Taxes & Anr, Tata Iron & Steel Co. Ltd., Bombay v. S.R. Sarkar & Ors. and State of Maharashtra v. Embee Corporation, Bombay on factual grounds.

The Court relied on the principles laid down in K. Gopinathan Nair and Ors. v. State of Kerala[7] and stated that the same would apply to the present case. The propositions in context of sale or purchase which were deemed to be imports were laid down as under:

(1) The sale or the purchase, as the case may be, must actually take place.

(2) Such sale or purchase in India must itself occasion such import, and not vice versa i.e. import should not occasion such sale.

(3) The goods must have entered the import stream when they are subjected to sale or purchase.

(4) The import of the goods concerned must be effected as a direct result of the sale or purchase transaction concerned.

(5) The course of import can be taken to have continued till the imported goods reach the local users only if the import has commenced through the agreement between foreign exporter and an intermediary who does not act on his own in the transaction with the foreign exporter and who in his turn does not sell as principal the imported goods to the local users.

(6) There must be either a single sale which itself causes the import or is in the progress or process of import or though there may appear to be two sale transactions they are so integrally interconnected that they almost resemble one transaction so that the movement of goods from a foreign country to India can be ascribed to such a composite well-integrated transaction consisting of two transactions dovetailing into each other.

(7) A sale or purchase can be treated to be in the course of import if there is a direct privity of contract between the Indian importer and the foreign exporter and the intermediary through which such import is effected merely acts as an agent or a contractor for and on behalf of the Indian importer.

(8) The transaction in substance must be such that the canalizing agency or the intermediary agency through which the imports are effected into India so as to reach the ultimate local users appears only as a mere name lender through whom it is the local importercum- local user who masquerades.”

The Court while making a note that when the goods reached the port at Vishakapatnam, the appellant carried out proceedings under Customs Act and filed a bill of entry for warehousing and thereafter, bill of entry for home consumption and only on this basis, custom duty was assessed. Post this, the goods were moved from Andhra Pradesh to other states where end buyers were situated, however, the goods were not cleared by the end-buyers after paying the requisite customs duties. In this background and applying aforementioned principles, the court held that appellant had acted merely as an intermediary or name-lender through whom the import was effected and merely acted as an agent for and on behalf of the Indian importer that is, the end-buyer. The Court also observed that the significant facts of the present case could not have been overlooked as the appellant had merely filed the bill of entry for warehousing and the bill of entry for home consumption and that before the customs authorities there was no suggestion that the goods in question had already been transferred, on high seas, to the alleged real importer.

The Apex Court agreed with High Court findings that the inclusive definition of “importer” in Section 2(26) of the Customs Act cannot be used to usurp the identity of an importer from the person who filed the bill of entry; and the person in whose name the bill of entry is filed, does not cease to be an importer. In this case, the name of the appellant was reflected as importer in the Import General Manifest (IGM) of the vessel/s that brought the goods in question to the port at Visakhapatnam. The High Court examined the entire process relating to the arrival of goods as cargo in a vessel and filing of IGM as also the contents of the bill of entry and has pointed out that the cargo declaration form, an essential part of IGM, was required to carry, amongst others, the particulars of bill of lading and the name of consignee/importer. After finding that the name of the appellant was reflected as importer in IGM, the High Court has observed that if the alleged second high seas sale had taken place, the IGM would have reflected the name of the last high seas sale purchaser as the importer and if there was any bonafide omission, the IGM would have necessitated amendment because only the last purchaser of the goods on high seas could have been the importer/consignee. The High Court has also observed that there was no material on record to show that either the IGM contained the name of end-buyer as the importer/consignee or that the same was subsequently amended in terms of Section 30(3) of the Customs Act. The Court note that these had been the pivotal reasons for which the High Court rejected the suggestion of second high seas sales in favour of the end-buyers and held that the only attempt of the appellant had been to avoid inter-State sales under the CST Act. In the given facts, the High Court specifically recorded the findings that the sale of goods by appellant to the end-buyers had not been high seas sales; and such sales could have been effected only after the appellant was assessed to customs duty and had cleared the goods for home consumption.

The Supreme Court noted that the effect of raising debit notes by the appellant on the end-buyers has its own bearing as the appellant had admittedly raised such debit notes on the end-buyers but only after having cleared the goods by filing the bill of entry for home consumption. Once the suggestion about the second high seas sales is not accepted and it is found that the appellant had been the importer of goods and had cleared them for home consumption, the natural consequence of raising of such debit notes on the end-buyers situated in different States and movement of goods to such end-buyers would be to take these transactions in the category of inter-State sales in terms of Section 3(a) of the CST Act.

In this background, the court held that the appellant was not entitled to the exemption of Section 5(2) of the CST Act and has rightly been held liable for tax over inter-State sales. It held that the High Court was right to hold that, once the appellant got released the goods after filing the bill of entry for home consumption, the import stream dried up and the goods got mixed in the local goods. Any movement of the goods thereafter was bound to be a sale under Section 3(a) of the CST Act; and such movement being from the State of Andhra Pradesh to other State would have been a matter of inter-State sale.

On the aspect of an alternative remedy, the Court held that the assessee despite being aware of the availability of remedy of statutory appeal, consciously chose to file writ petitions against the assessment orders aforesaid and consciously contested the entire matter in the High Court. The High Court, even after noticing the framework of certiorari jurisdiction, examined the merits of the case thoroughly and even examined the submission made for the first time in writ petitions that the import of goods was occasioned by the sales in question. After having consciously invoked the writ jurisdiction of the High Court and having contested the matter on merits, the appellant cannot now be allowed to reopen the matter on appeal. The Supreme Court added that litigation cannot be allowed to be unendingly kept alive at the choice of a litigant. With respect to the position in Star Paper Mills Ltd., the Court did not apply the position in this case on the ground that there were analysis of the material placed on record. The Court held in simple words that-

“extraordinary writ jurisdiction cannot be utilised by a litigant only to take chance and then to seek recourse to the other remedy after failing in its attempt on the basic merits of the case before the High Court. A litigation cannot be allowed to be unendingly kept alive at the choice of a litigant.”

The Apex Court thus held that, claimed exemption under Section 5(2) of the CST Act has rightly been denied to the appellant and the HC has been justified in dismissing the writ petitions filed by the appellant.

In conclusion, the SC observed that the deposited made by the Petitioner of an amount of Rs. 7.07 lakhs with the Department is to be adjusted against the dues of the assessee.

On the said basis, the assessee’s appeals were dismissed.

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The author, after doing his Bachelors in Law, pursued Masters in Law from the National University of Singapore. He is currently an Associate in the Dispute Resolution Practice at AZB and Partners, Delhi.

[1] (1997) 7 SCC 190

[2] AIR 1961 SC 65

[3] (1960) 2 SCR 852

[4] (1998) 7 SCC 19

[5] AIR 1953 SC 333

[6] 1995 Supp (4) SCC 674

[7] (1997) 10 SCC 1

The Indian startup ecosystem has grown significantly over the last 5 years. As the Startup Ecosystem Report 2020 suggests, as opposed to 29000 startups in 2015, presently there are more than 55,000 startups to date out of which more than 3,200 startups have raised $63 Billion in funding in the last five years alone. While the ecosystem may seem to have come a long way, but the aforesaid numbers also raise some eyebrows since the funded companies constitute less than 6% of the total startup sector and most of the growth that was seen was during the bloom period between 2015 to 2017. 

No doubt that 2020 witnessed unprecedented and uncertain times because of which capital infusion has been on a decline as compared to last years, but there are other financial and psychological factors as well which deserve specific attention. The investor community overall seems to have adopted a more reasoned and cautious approach towards their spending. This change in the investor perspective has been visible in the latest investment cycle and transactions where we have witnessed investors focus greatly on the compliance and regulatory side of business, keep a close tab on expenditure and outflows, give greater weightage to sustainable/ more realistic goals like EBITDA/achievement of economies of scale as opposed to projections on gross revenues and size of target user audience etc. It is upon the new age promoters to realise that given the huge money in play in this ecosystem there is a lot to lose for the investors and hence they must respond to the critical challenges faced by the investor and adopt measures to strengthen investor confidence, more so given the change in investment trends that have been witnessed post the outbreak of COVID. 

Previously in early and growth stage startup, some of the main criteria for investment were the promoter profile, technological reach and addressable market size. However, whilst passionate promoters who are focussed on building unique solutions are key to a successful startup, investors are now placing greater weightage on legal and compliance aspects of business prior to taking the call on investing. 

Frankly, given the fact that most startup’s financial statements are in negative given the heavy cash burn, there isn’t much to evaluate for an investor in that regard. Further, most startups in India are technology based and are operating in very challenging or uncertain regulatory environments or in sectors where there is no law or the laws have not caught up with the advent of technology such as med-tech, fin-tech, quizzing/gaming, fantasy sports, e-pharmacies etc. Therefore, the legal validation of the business model, inter se arrangement between the founders, measures adopted to protect intellectual property, ESOP and non-compete arrangements, license from authorities etc. are some of the key factors which are pre-examined and relied upon by the investors these days in order to determine the seriousness/credibility of the promoters and also ensure security of their investment from business continuity perspective in the uncertain regulatory environment.   

Ever since the boom in the innovation based startup sector, one often wondered how the valuation of these companies with such high cash burn, negative financials and weak P&Ls obtained such mammoth valuations. The reason for the same is that the methodology for valuing mature companies i.e. asset approach, income approach & market approach are not of much relevance for valuing startups since they, by their nature and stage, are future driven and hence, the methodology used is often the adjusted cash flow method which was based on future projections and potential market capture and monetisation potential. Because of the COVID and lockdowns, the startups (barring a few sectors) experienced a slump in revenues and sales figures as consumption patterns had changed radically and there was low demand for products/services, which has led to change in business projections and plans impacting the valuation of the business. Not only that, given the financial stress in the market and the decreased liquidity, there is also an increased realisation amongst the investor community that startup valuations need to be looked at more conservatively based on firm business plans and budgets which are achievable in the near future with a focus on monetisation. 

Another related shift in the startup investment ecosystem has been to opt for milestone based tranched investment rather than single one shot capital deployment which allows investors to hedge risk by deploying the investments in tranches and therefore de-risking the investment in part. As opposed to purely time based milestones, we have witnessed that investor are setting operations and busines expansion based milestones be it in terms of actual revenue generation, active subscriber based customer acquisition or geographical expansion with utilisation numbers. This investment strategy enables investors to closely monitor the financial progress of the company by keeping a tab on expenses and giving them shorter runway to achieve business growth in real terms and recognize the viability of business model early on without putting the entire capital at risk upfront. Even in the investment documents, one can notice protective covenants around periodic furnishing of information, right to conduct financial audit, stringent budget guidelines, stricter enforcement and damages in case of breach of promoter representations and valuation adjustments in the event the milestones are not achieved within the stipulated time period. 

The messaging from the investor community as to the path ahead to be adopted by the entrepreneurs going forward in order to have access to capital seems loud and clear, i.e. “avoiding compliances and legal checks until the day I get funding” will not work because for securing investor’s money, the company needs to be safe and protected from the regulatory changes and challenges and in respect of its risk exposure in contractual arrangement. Thus, in order to be “investment ready”, the entrepreneurs must engage with lawyers at a profound level to validate their business model from a legal perspective which can withstand the ever-disruptive and dynamic regulatory environment and to stitch together the contractual arrangement with the various stakeholders that the companies interact with to de-risk itself and limit the liability exposure. Further, the promoters need to be true to their promises and make only true and achievable representations while singing investment documents and be frugal towards making only reasonable and necessary expenditures to optimise business operations, else the investors will utilise the contractual provisions to withhold capital deployment and make valuation adjustments to increase their stake at a later date and take over operations if the promoters repeatedly deflect from achieving time based targeted growth.     

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Burgeon Law is a new-age boutique law firm that provides a one-stop legal solution to emerging companies, incubators, accelerators, angel investors, family offices and venture capital/ private equity funds. 

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This article has been published in partnership with Forbes India and first appeared forbesindia.com:

https://www.forbesindia.com/article/legalpowerlist2020/disputesproofing-and-compliance-readiness-not-optional-for-startups-in-2021-burgeon-law/66367/1

The golden rule for criminal jurisprudence is that accused is presumed to be innocent unless proven guilty for the charged offence. The accuser / prosecution has to discharge the “burden of proof” beyond reasonable doubt to establish the guilt of the accused whereas an accused has to discharge the “burden of proof” on preponderance of probabilities to create reasonable doubt. This emanates from the above-stated golden rule, which in corollary implies that a reasonable doubt benefits the accused.

The phrase “burden of proof” refers to the obligation of accuser / prosecution or accused to establish facts material for the case in particular. The “burden of proof”, whether discharged or not depends on multitude of facts brought to the notice of the Court. These facts may be held to be “proved”, “not proved” or “disproved”. The test to judge if a fact has been “proved”, “not proved” or “disproved” is that of a prudent man. It has to be assumed by a Court from the point of view of a hypothetical prudent man, if a particular fact brought to the notice of the Court is so probable that it must have happened or may / may not have happened or could not have happened. It is from this point of view that a Court has to state if a particular fact is “proved” i.e. it must have happened, or “not proved” i.e. may / may not have happened or “disproved” i.e. could not have happened.

An exception has been made to this general rule by way of statutes providing for statutory presumptions. The Supreme Court of India has been presented with several challenges qua provisions in several statutes which provide for presumptions to be drawn against accused persons, which are covered by judgments rendered in VD Jhangan v. State of UP [1], Veeraswami v. Union of India [2], PN Krishna Lal v. Govt. of Kerala [3] & Kusum Exports v. Sharma Carpets [4] wherein it has been observed that the statutory presumptions are constitutional with a caveat that, at first, the accuser / prosecution has to establish existence of all foundational facts on preponderance of probabilities.  

The jurisprudence qua the “burden of proof” on accused emanates from Sections 101 to 106 of the Indian Evidence Act, 1872 (hereinafter referred to as “IEA”). This jurisprudence, predominantly, as it emerged during research, evolved qua Section 105 of IEA which is reiterated herein below:-

Section 105 IEA

“Burden of proving that cause of accused comes within exceptions. – When a person is accused of any offence, the burden of proving the existence of circumstances bringing the case within any of the General Exceptions in the Indian Penal Code, (45 of 1860), or within any special exception or proviso contained in any other part of the same Code, or in any law defining the offence, is upon him, and the Court shall presume the absence of such circumstances. …”

This section was discussed by Rangoon High Court in its judgment in King Emperor v. U Damapala [5] (Rangoon High Court) wherein it was observed that,

“There has been in some quarters much confusion as to the meaning of the words “the burden of proof”. In criminal cases the burden of proof, using the phrase in its strictest sense, is always upon the prosecution and never shifts whatever the evidence may be during the progress of the case: if on a review of all the evidence the prosecution has failed to establish the guilt of the accused beyond reasonable doubt, he is entitled to be acquitted. ….

Now, it is not for the prosecution to examine all the possible defences which might be put forward on behalf of an accused person and to prove that none of them applies….

…the test is not whether the accused has proved beyond all reasonable doubt that he comes within any exception to the Indian Penal Code, but whether in setting up his defence he has established a reasonable doubt in the case for the prosecution and has thereby earned his right to an acquittal.”

This judgment placed reliance on the judgment of House of Lords rendered in Woolmington v. Director of Public Prosecutions [6], in which it was observed that, 

“.. Juries are always told that, if conviction there is to be, the prosecution must prove the case beyond reasonable doubt. This statement cannot mean that in order to be acquitted the prisoner must “satisfy” the jury. This is the law as laid down in the Court of Criminal Appeal in Rex v. Davies (2), the headnote of which correctly states that where intent is an ingredient of a crime there is no onus on the defendant to prove that the act alleged was accidental. Throughout the web of the English Criminal Law one golden thread is always to be seen, that it is the duty of the prosecution to prove the prisoner’s guilt subject to what I have already said as to the defence of insanity and subject also to any statutory exception. If, at the end of and on the whole of the case, there is a reasonable doubt, created by the evidence given by either the prosecution or the prisoner, as to whether the prisoner killed the deceased with a malicious intention, the prosecution has not made out the case and the prisoner is entitled to an acquittal.”

Subsequently, a bench of seven judges of Allahabad High Court in Emperor v. Parbhoo [7], dealt with the question that,

“Whether having regard to Section 96 of the Indian Penal Code and Section 105 of the Indian Evidence Act, in a case in which any general exception in the Indian Penal Code is pleaded by an accused person and evidence is adduced to support such plea, but such evidence fails to satisfy the court affirmatively of the existence of circumstances bringing the case within the general exception pleaded, the accused person is entitled to be acquitted if upon a consideration of the evidence as a whole (including the evidence given in support of the plea of the said general exception) a reasonable doubt is created in the mind of the court whether the accused person is or is not entitled to the benefit of the said exception?”

This question was answered in affirmative by a majority of 4:3, the excerpts of opinions expressed in this judgment are reiterated below:-

by Majority (Iqbal Ahmed C.J.)

“.. The question referred formed the subject of consideration by a Full Bench of the Rangoon High Court in King – Emperor v. U Damapala (1) and it was held that even if the evidence adduced by the accused fails to prove the existence of circumstances bringing the case within the exception pleaded, the accused is entitled to be acquitted if, upon a consideration of the evidence both for the prosecution and the defence, the court is left in a state of reasonable doubt as to whether the accused persons is or is not entitled to the benefit of the exception pleaded. The Full Bench followed the recent English case in the House of Lords of Woolmington v. Director of Public Prosecutions (1) and held that that decision was in no way inconsistent with the law in British India and the principles laid down in that decision formed a valuable guide to the correct interpretation of section 105 of the Indian Evidence Act. ….

…..

To my mind the concluding portion of section 105 means no more than this, that in considering the evidence for the defence relating to an “exception” or “proviso” pleaded by the accused the court must start with the assumption that circumstances bringing the case within the “exception” or “proviso” do not exist. It must then decide whether the burden of proof has or has not been discharged by the accused. If it answers the question in the affirmative it must give effect to its conclusion by acquitting the accused or punishing him for the lesser offence. If, on the other hand, it holds that the burden has not been discharged, it cannot from that conclusion jump to the further conclusion that the existence of circumstances bringing the case within the exception or proviso has been disproved. All that it can do in such a case is to hold that those circumstances are “not proved”. It would be noted that section 3 draws a distinction between the words “proved”, “disproved” and “not proved”. It enacts that “a fact is said not to be proved when it is neither proved nor disproved”. The burden of bringing his case within an “exception” or “proviso” is put on the accused by section 105, but there is no provision in the Act to justify the conclusion that the failure to discharge that burden is tantamount to disproof of the existence of circumstances bringing the case withing the “exception” or “proviso” pleaded.

……

My answer to the question referred, therefore, is that the accused person is entitled to be acquitted, if upon a consideration of the evidence as a whole (including the evidence given in support of the plea of the said general exception) a reasonable doubt is created in the mind of the court whether the accused person is or is not entitled to the benefit of the said exception. …”

by Minority (Allsop J.)

“… This reference has arisen out of the decision of the Rangoon High Court in King – Emperor v. U Damapala (I), which was based in part upon the decision of the House of Lords in Woolmington’s case (2), The Rangoon High Court seems to have held that the provisions of section 105 of the Indian Evidence Act meant only that the accused was bound to produce some evidence and that, after the production of the evidence, if the court remained in doubt, it would hold that the accused had not proved that he acted on self defence, but would still go back to the original burden upon the prosecution and hold that prosecution had failed to prove that the accused had not acted in exercise of the right of private defence and would, therefore, give the accused the benefit of the doubt. With the greatest deference to the learned Judges who decided that case it seems to me that they have laid down a proposition which would imply that a court in the same proceeding could record two contradictory findings upon a fact in issue in that proceeding. ……………..

For the reasons which I have given, my answer to the question would be that an accused person is not entitled to the benefit of any exception merely because there is a reasonable doubt in the mind of the court about the existence of circumstances bringing the case within the exception. As I have already explained, I think that the meaning of the sections of the Indian Evidence Act is that every issue of fact has to be proved by one or other party, the burden of proof being laid on that party, and that the non-production of evidence or production of insufficient evidence by that party would lead the court to decide the issue of fact against him. In my judgment there is a distinction between proof and the mere adduction of evidence. I do not think that it is justifiable to hold that the burden of proof is on one party until he adduces evidence and then shifts to the other party. I think each issue must be decided at the conclusion of the proceedings once and for all. If the court says that the burden of proving the absence of circumstances which would justify the accused in pleading the protection of a general exception is upon the prosecution, then in the absence of any evidence one way or the other or any pleading on the part of the accused, the prosecution would fail and the accused would be entitled to an acquittal – a result which I consider would in many cases lead to a grave failure of justice. I do not think it is possible, under the provisions of the Indian Evidence Act to hold that the prosecution, in the absence of evidence of circumstances which would entitle the accused to an acquittal on the ground that he was protected by a general exception, would be entitled to get him convicted and that, on the other hand, the production of inconclusive evidence by the defence would mean that he was entitled to an acquittal because the production of that evidence would throw the burden on the other side.”

The judgment rendered in Emperor v. Parbhoo (Supra) was later upheld by a bench of nine judges of Allahabad High Court in Rishi Kesh Singh & Others v. State [8] with minority only giving partial modification to the statement of law laid down in Emperor v. Parbhoo (Supra). These judgments govern the statement of law on “burden of proof” on accused, which provides that the Court has to test if the prosecution discharged its “burden of proof” beyond reasonable doubt, irrespective if a material fact introduced by accused was “proved” or “not proved” the fact on preponderance of probability.

The Protection of Children from Sexual Offences Act, 2012 (hereinafter referred to as “POCSO”) defines offences under Sections 3 (penetrative sexual assault), 5 (aggravated penetrative sexual assault), 7 (sexual assault), 9 (aggravated sexual assault) & 11 (sexual harassment). Further, POCSO provides for presumption to be drawn against an accused, thereby mandating reverse burden of proof on accused, under Sections 29 & 30 of POCSO. These provisions are reiterated herein below:-

Section 29 POCSO

“Presumption as to certain offences. – Where a person is prosecuted for committing or abetting or attempting to commit any offence under sections 3, 5, 7 and section 9 of this Act, the Special Court shall presume, that such person has committed or abetted or attempted to commit the offence, as the case may be unless the contrary is proved.”

Section 30 POCSO

“Presumption of culpable mental state. – (1) In any prosecution for any offence under this Act which requires a culpable mental state on the part of the accused, the Special Court shall presume the existence of such mental state but it shall be a defence for the accused to prove the fact that he has no such mental state with respect to the act charged as an offence in that prosecution.

(2) for the purposes of this section, a fact is said to be proved only when the Special Court believes it to exist beyond reasonable doubt and not merely when its existence is established by a preponderance of probability.

Explanation. – In this section, “culpable mental state” includes intention, motive, knowledge of a fact and the belief in, or reason to believe, a fact.”

A reading of the above-reiterated two provisions reveals that Section 30 of POCSO, additionally, provides for presumption against the mental state of accused and puts further additional “burden of proof” on accused to establish beyond reasonable doubt a fact which dislodges the presumption against mental state of accused.

The above-stated provisions of POCSO are pari materia with Sections 54 & 35 of the Narcotic Drugs and Psychotropic Substances Act, 1985 (hereinafter referred to as “NDPSA”). A challenge was put to validity of provisions of Sections 54 & 35 of NDPSA which was taken to Supreme Court of India in Noor Aga v. State of Punjab [9] in which matter, qua Section 35, it was observed that,

“58. Sections 35 and 54 of the Act, no doubt, raise presumptions with regards to the culpable mental state on the part of the accused as also place the burden of proof in this behalf on the accused; but a bare perusal of the said provision would clearly show that presumption would operate in the trial of the accused only in the event the circumstances contained therein are fully satisfied. An initial burden exists upon the prosecution and only when it stands satisfied, would the legal burden shift. Even then, the standard of proof required for the accused to prove his innocence is not as high as that of the prosecution. Whereas the standard of proof required to prove the guilt of the accused on the prosecution is “beyond all reasonable doubt” but it is “preponderance of probability” on the accused. If the prosecution fails to prove the foundational facts so as to attract the rigors of Section 35 of the Act, the actus reus which is possession of contraband by the accused cannot be said to have been established.”

However, the judgment in Noor Aga (Supra) does not discuss the implication of putting an additional “burden of proof” on accused i.e. to dislodge the presumption against mental state of accused by proving a fact beyond reasonable doubt.

The judgment rendered in Noor Aga (Supra) is sub-silentio of statement of law rendered in Emperor v. Parbhoo (Supra) and Rishi Kesh Singh & Others v. State (Supra). Despite that, the judgment rendered in Noor Aga (Supra) is identified as the basis for rejecting the challenge to Sections 29 & 30 of POCSO as can be observed from the judgments rendered in In re Secretary to the Government of India Ministry of Law and Justice and Ors [10] by the Gauhati High Court and in David v. State of Kerala [11] by the Kerala High Court. The judgment rendered in David (Supra) was, subsequently, discussed by the Kerala High Court in Justin v. Union of India[12] in which it was observed that –

“65. …. The presumptive provision with reserve burden of proof, does not sanction conviction on basis of preponderance of probability. Section 35(2) provides that a fact can be said to have been proved if it is established beyond reasonable doubt and not on preponderance of probability. To hold that, the right of the accused to a fair trial could not be whittled down under the Act, Supreme Court relied on the decision in Noor Aga’s case (supra). In the above case, on facts, Supreme Court found that prosecution failed to establish the foundation facts beyond all reasonable doubt and consequently, the accused was acquitted. …..

…..

67.       …      In David v. State of Kerala ((2020) 5 KLT 92), learned Single Judge of this Court had occasion to consider the scope of presumption and the duty of the prosecution, to establish the foundational facts. It was held that the standard proof of innocence that is expected from the accused in a case under the POCSO Act was only on the touchstone of preponderance of probability. Section 30 of POCSO clarifies that the culpable state of mind on the part of accused was to be proved by the accused beyond reasonable doubt and not merely on the preponderance of probability, such requirement was absent in section 29 of the POCSO Act …….”

In this view, the dictum of the superior Courts in India qua Section 30(2) of POCSO is also sub-silentio of statement of law rendered in Emperor v. Parbhoo (Supra) and Rishi Kesh Singh & Others v. State (Supra). Therefore, Section 30(2) of POCSO is liable to be challenged to be declared ultra vires as it disables the accused from arguing that prosecution has failed to discharge its “burden of proof” beyond reasonable doubt on basis of fact(s) which is / are introduced by accused but “not proved” beyond reasonable doubt.

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The author is a post-graduate of Indian Law Institute, New Delhi (2015) & graduate of National Law University, Jodhpur (2012), practicing as an independent legal professional in Delhi. He is also an Advocate-on-Record at the Supreme Court of India.

[1] (1966) 3 SCR 736

[2] (1991) 3 SCC 655

[3] 1995 Supp (2) SCC 187

[4] (2009) 2 SCC 513

[5] ILR 1936 (14) 666

[6] (1935) AC 462

[7] ILR (1941) All 843

[8] AIR 1970 All 51 (FB)

[9] (2008) 16 SCC 417

[10] (2017) 3 Gauhati Law Reports 50

[11] 2020 Cri LJ 3995

[12] W.P. (C) No. 15564 of 2017 before Kerala High Court (Ernakulum Bench) decided on 07.10.2020

Recently there was a controversy involving Mukhtar Ansari, the BSP MLA from Uttar Pradesh who is currently lodged in a jail in Punjab. The controversy arose when the State of U.P. filed a Writ Petition against the State of Punjab under Article 32 of the Constitution of India seeking his transfer from Punjab to Uttar Pradesh. It has brought to the fore a few significant substantial questions of law in relation to the interpretation of the Constitution of India:

Turning to the first question, it is relevant to note that it is a well settled law that when a person is not an “aggrieved person” (except in cases of Public Interest Litigation), the person is not competent to file Writ Petition challenging the action. However, before we cast a shadow on the question that whether “State” comes under the ambit of “aggrieved person”, it is vital to find out whether State comes under the ambit of “person” per se. The word “person” is not defined under the Indian Constitution, not even under its definition clause enumerated under Article 366. Though, According to Article 367, the definition provided under General Clauses Act, 1897 can be taken into consideration. Section 3 (42) of the General Clauses Act, 1897 defined person as “person shall include any company or association or body of individuals, whether incorporated or not”. 

Further, the Hon’ble Supreme Court in the case of Krishnan & Anr. vs Krishnaveni & Anr, (1997) 4 SC 241, analyzing the revision power of the High Court under Section 397 of CrPC, held that, by implication the State stands excluded from the purview of the word ‘person’ for the purposes of limiting its right to avail the revisional power of the High Court under Section 397 (1) of the code for the reason that the State, being the prosecutor of the offender, is enjoined to conduct prosecution on behalf of the society and to take such remedial steps as it deems proper. 

Further, the question that who is an “aggrieved person” who can file writ petition was elaborately dealt in the case of Jasbhai Motibhai Desai Vs Roshan Kumar, (1976) 1 SCC 671 where the Hon’ble Supreme Court observed, which is as follows: 

“Whether the applicant is a person whose legal right has been infringed? Has he suffered a legal wrong or injury, in the sense that his interest, recognised by law has been prejudicially and directly affected by the act or omission of the authority, complained of? Is he a person who has suffered a legal grievance, a person “against whom a decision has been pronounced which has wrongfully deprived him of something or wrongfully refused him something, or wrongfully affected his title to something”? Has he a special and substantial grievance of his own beyond some grievance or inconvenience suffered by him in common with the rest of the public? Was he entitled to object and be heard by the authority before it took the impugned action? If so, was he prejudicially affected in the exercise of that right by the act of usurpation of jurisdiction on the part of the authority? Is the statute, in the context of which the scope of-the words “person aggrieved” is being considered. a social welfare measure designed to lay down ethical or professional standards of conduct for the community? Or is it a statute dealing with private rights of particular individuals?”

The said case also nowhere stated that “State” can come under the ambit of “aggrieved person”. It is submitted that the Hon’ble Supreme Court hardly had any occasion to scrutinize the relevant judicial pronouncement on that score. Further, no judicial pronouncement of the High Court in this regard too has been traced by me. Though there are cases decided by the Hon’ble Supreme Court of India where the writ was filed by the State Government before Hon’ble High Court and Supreme Court against independent public body such as Election Commission and Hon’ble High Court decided the controversy involved. Matter was taken by Hon’ble Supreme Court though there was no adjudication of the present issues raised [Reference:  Election Commission Vs State of Haryana, 1984 (Supp.) SCC 104 (Para. 4); State of M.P. Vs Babulal, (1977) 2 SCC 435; State of Orissa Vs UOI, 1995 (Supp-2) SCC 154]. Thus, the said cases cannot be taken as precedent for present purpose.

I, being the student of Constitution Law, understand that limiting the scope of “aggrieved person” under Article 32 or Article 226 is an orthodox view but it still continues to be a general rule. I learnt that exceptions on specific grounds have been admitted in some cases but those were “exceptions”.

Turning to the second question, it is relevant to note that the remedy provided under Article 32 can be exhausted only for the enforcement of fundamental rights. Thus, the existence of a fundamental right and the infringement thereof, are the foundation of the exercise of the jurisdiction under Article 32.

Article 32 of the Constitution of India is meant to ensure observance of the rule of law and prevent abuse or misuse of power. It is designed to ensure that each and every authority in the State, including the Government, acts bona-fide and within the limits of its powers and that when a court is satisfied that there is an abuse or misuse of power, it is incumbent on the court to afford justice to the individual (S. Pratap Singh Vs. State of Punjab, AIR 1964 SC 72). The fundamental right to move the Hon’ble Supreme Court can be appropriately described as the cornerstone of the democratic edifice raised by the Constitution.  The Hon’ble Supreme Court in the case of Prem Chand Garg vs. Excise Commissioner, U.P., AIR 1963 SC 996 held that in discharging duties assigned to the court, the Supreme Court has to play the role of a ‘sentinel on the qui vive’ and it must always regard it as it’s solemn duty to protect the said fundamental rights ‘zealously and vigilantly’.

It must be remembered that the right to move the Supreme Court guaranteed under Clause (1) of Article 32 is subject to conditions of “appropriate proceedings”. Article 32 (1) provides: “The right to move the Supreme Court by “appropriate proceedings” for the enforcement of the rights conferred by this part is guaranteed. There is no freedom to move the Supreme Court by all sorts of proceedings, but only by way of “appropriate proceedings”. What does “appropriate proceedings” mean? This has reference to Clause (2) of Article 32. Only those proceedings are appropriate which invoke, by the original petition the jurisdiction of the Supreme Court to issue, according to the nature of the case, writs or orders or directions of the types described in clause (2) of Article 32. It was held in the case of Bandhua Mukti Morcha vs. Union of India, (1984) 3SCC 161 that the expression ‘appropriate proceedings’ has reference to the proceedings which may be appropriate having regard to the nature of the order, direction or which the petitioner seeks to obtain from the court. The appropriateness of the proceedings would depend upon the particular writ or order which he claims, and it is in the sense that the right has been conferred on the citizen to move the Supreme Court by appropriate proceedings. The Supreme Court further clarifies that there is ‘no limitation’ in regard to the kind of proceedings, envisaged in clause (1) of the Article except that the proceedings must be appropriate, and the requirement of appropriateness must be judged in the light of the purpose for which the proceedings is to be undertaken, namely, enforcement of fundamental right. The word ‘appropriate’ does not refer to any form, but to the purpose of the proceedings and therefore so long as the purpose of the proceedings is enforcement of fundamental rights, it is appropriate and when it relates to the enforcement of the fundamental rights of the poor, disabled or ignorant by a public-spirited person, even a letter addressed by him (to the court) can legitimately be regarded as an “appropriate proceeding”.

According to the Indian Constitutional framework and basic jurisprudence laid behind this, it is evident that ‘State’ (Government in present case) does not enjoy any ‘right’ except as given under Article 131 of the Constitution of India. It enjoys ‘power’. It, in the exercise of its power, protects the rights and liberties of the people. Since it does not enjoy any ‘right’ except as mentioned under Article 131, thus, the question of violation of its right does not arise.

However, sometimes it is possible that the legal rights of a State (a legal entity under Article 300) would be affected by another legal entity. So far as another State of Union of India is concerned, the remedy, in such cases, is exclusively laid down in Article 131 by the suit before Supreme Court. Thus, the recourse of Article 131 can be taken when its right is violated by another State instrumentality [Reference: State of Rajasthan Vs UOI, AIR 1977 SC 1361 (Paras. 106, 114, 117, 133, 157, 165, 188, 192); State of Karnataka Vs UOI, AIR 1978 SC 68 (Paras. 141,149, 195, 203). 

However, there are a few instances where the Hon’ble Supreme Court entertained a writ petition under Article 32 where no question of infringement of a fundamental right was involved. The Supreme Court in the case of Aruna Shanbaug vs UOI, AIR 2011 SC 1290 entertained a writ petition under Article 32 on the ground that the case involved issue of law. The Supreme Court in the case of D.C. Wadhwa vs State of Bihar, AIR 1987 SC 579 entertained the writ petition under Article 32 on the ground it involved the question of law relating to interpretation of the Constitution of India. Recently the Hon’ble Supreme Court in its judgement dated 13.11.2019 in the case of Shrimanth Balasaheb Patil Vs. Hon’ble Speaker, Karnataka Legislative Assembly And Others, WP 992 of 2019 entertained the Writ Petition filed by 14 MLAs of Karnataka against the decision of the Karnataka Legislative Assembly even where there was no violation of fundamental rights. 

However, the said instances are confined to the petition filed by the individuals or persons and not by the State itself. The jurisprudence behind Article 32 and Article 226 has always been “Writ petition by the people against State” and not “Writ Petition by the State against the People or against another State”. It was an act of great wisdom and foresight on the part of the Constitutional makers to introduce the writ system in India under Article 32 and Article 226 and thus, constitutes the Supreme Court and High Courts into guardians of the people’s legal rights and not that of the “State’s”. Thus, it will be interesting to see in the coming time if the Hon’ble Supreme Court lays down the law in relation to the writ petition filed by the State against other State government.

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Pawan Reley is an advocate practicing at the Supreme Court of India. 

If fortune favours the bold, the deal makers of 2020 may just know who to thank for all the business: the bold. The markets last year barely mirrored the other challenges of the year. Our personal experience with deal processes across sectors: lockdowns yes, slowdowns, not really. 

Regulatory liberalisation, pragmatic deal parties and decisive negotiators have parts in the momentum.  Private equity dry powder and opportunistic movement aside, it was the sheer will to bring investment that inched deals toward a close.

As lawyers there are lessons in it for us. Being at the forefront of M&A and greenfield investments, taking our seats across negotiation tables, we are somewhere responsible for generating economic activity. 

Will we ditch some of our traditional process-allegiances in favour of  “getting the deal done”? It is our call to take how bold we can be when it comes to choosing what is best for our client. 

But all other significant actors seem to be getting on with the program. Take for instance the Reserve Bank of India (RBI), the Department for Promotion of Industry and Internal Trade (DIPPT), the Foreign Investment Promotion Board (FIPB) and then the investors and promoters themselves. 

Foreign Direct Investment (FDI) inflows for the preceding fiscal were affirmative of growing foreign investor confidence in India. The government has moved in line with the goal of keeping this confidence on a high and supporting the ease of doing business. 

Foreign investment in India is currently governed by the Foreign Exchange Management (Non-debt instruments) Rules, 2019 and the consolidated FDI Policy 2020. These regulations have undergone several relaxations over the years.

If we focus just on payment structures, there is an oft-prevailing market practice in cross-border transactions where investors withhold payment for indemnity. In India, this practice suffered under the old rules where a foreign investor had to pay the purchase consideration upfront to the Indian counterparty, and also seek RBI approval for escrow arrangements.

The RBI relaxed the rules to (1) allow deferred payment of purchase consideration, and (2) to settle payment through an escrow arrangement and/or to adjust it towards any indemnity claim. Investors can defer 25 per cent of the consideration for 18 months from the date of signing the transfer agreement. Deferring the payment of consideration also helps the non-resident investor in structuring their payment in cross border transactions. Earlier, this structuring was subject to RBI approval. 

While implementing such structures, it is imperative to comply with the pricing norms: the total consideration finally paid by a foreign investor/buyer must comply with the pricing guidelines.  

Another welcome step by the regulator was to allow warrants and partly paid shares (PPS) as eligible capital instruments for FDI purposes. For sectors in which the government allows FDI under the automatic route, Indian companies can issue warrants and PPS to non-residents subject to certain conditions. 

Yet another initiative on the DIPPT’s part was the Start-up India Scheme. Should a start-up be eligible to register under the scheme, it opens doors to benefits such as tax holidays, simplified compliances via self-certification, their investors exempt from capital gains tax, easy exits and winding up for start-ups, and other shots in the arm. 

The Ministry of Corporate Affairs also stepped in vide the  Companies (Share Capital and Debentures) Third Amendment Rules 2016 to provide for issuing ESOPs to start-up promoters. 

With this amendment, the promoters of start-ups are not only able to maintain respectable shareholding in the company, but they also continue to have skin in the game which acts as a driving force for them to work harder. 

The relaxations are a welcome step, albeit, in my opinion, with some potential for finetuning. The period of deferral of payment by foreign investors is not currently achieving the greatest possible ease of business. The period of 18 months starts from the date of transfer agreement. In my view, the clock should start from when the sale transaction concludes. This will provide the non-resident investor ideal time, whereas currently it may reduce in a large way. 

The lag between the execution date and the closing date varies case to case, depending on the nature of conditions precedent. In my experience, however, there is usually a large lag. 

An area where regulatory perception may have been disadvantaged by defensiveness, where mindful analysis was called for was the Press Note 3. 

Amidst border conflicts with the neighbouring countries, the DPIIT introduced press note 3 of 2020 (PN 3). The intent was to be “curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic”. PN 3 mandates that any investment from an entity of a country which shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, requires prior government approval. 

PN 3 has posed lot of challenges for the private equity and venture capital world. There’s lack of clarity on what amounts to beneficial ownership. The multitude of its interpretations floating in the market are only causing applications by foreign investors to fall into a blackhole. clarity and guidance  is required on the definition of beneficial ownership.

Macro-economic factors apart, in my experience deal parties have also entered a new season in their stances. Their approach to several aspects of the transaction documents is far too pragmatic in contrast to what we have witnessed in the past.

Promoters have started recognising basic protections that find favour with the investors. Whereas investors may not be very flexible given their obligations under their fund documents. 

In their turn, investors now recognise the importance of incentivising promoters. They see the importance of creating an environment conducive for the promoters, to achieve the desired deal outcome. Issuance of ESOPs has its place as the best incentive to employees. Unfortunately, the Companies Act did not permit this incentive for the promoters. The way around this hurdle was to structure such incentives into each transaction, until the MCA amendment we mentioned above that allowed ESOPs to start-up promoters. 

The writing on the wall is clear. All stakeholders are leaning towards easing instead of dragging investment negotiations. And lawyers may do well to join in. For instance, deal parties increasingly honouring mutual trust and cooperation based investment terms, in response to certain common asks from the other side.

Lawyers are bound by the mandate to accomplish the best for their client. However, in doing so, pragmatism is often lost, and negotiations are unnecessarily dragged thereby affecting the overall deal timelines. I think it is important for a lawyer to also advise their client on what is market practice and whether the ask is reasonable or unreasonable. 

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Siddharth Mody is a Partner, in Mumbai, in the corporate practice of a leading Indian law firm. 

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This article has been published in partnership with Forbes India and first appeared forbesindia.com:

https://www.forbesindia.com/article/legalpowerlist2020/ma-and-investments-2021-siddharth-mody/66229/1

The Competition Commission of India (CCI) recently released a market study on the telecom sector in India discussing the evolution of the competitive structure in the market over time. Such a market study comes soon after the announcement of market studies and reviews to be undertaken in certain key sectors and markets important for the development of the economy as well as society, such as pharmaceuticals, key infrastructure sectors such as airports, railways, ports, and electricity, as well as private equity investments. While such market studies and reviews are underway, the CCI has previously released policy notes and market studies in important sectors such as healthcare and e-commerce, amongst others.

Considering such market studies are formulated pursuant to consultations with key stakeholders such as market participants, consumer groups, and research institutes, amongst others, a market study helps the CCI to understand the commercial practicalities of markets, weigh the same against the objectives and provisions of the Competition Act, 2002, and arrive at optimal positions that account for commercial interest, consumer interest as well as give fillip to competition in markets. Such initiatives by the CCI, a sector agnostic regulator, signals the regulator becoming a mature regulator which seeks to understand the markets it regulates as opposed to regulating markets it has no understanding of, where regulatory actions act as hindrance to commerce. Such efforts of the CCI to shift towards becoming a more business friendly regulator, intervening appropriately only in instances where intervention is actually merited, are laudable.

Market studies don’t just help the regulator understand the market better, they also help key stakeholders understand the thought process of the regulator and help such stakeholders to assist the CCI. In such light, the move of the CCI to undertake and release a market study on the telecom sector, which has seen substantial churn over the years, is of significant importance. The events following the declaration of lockdowns as part of governmental efforts to combat COVID19 highlighted more than ever that a well-functioning telecom sector, which offers quality of service, is of key importance to sustain commerce and economic activity while also ensuring that social interactions do not cease altogether when combating an anomaly of the nature of COVID19. Very importantly, advancements in technology in the telecom sector helped ensure that the administration of justice does not cease, as courts across India rapidly moved to an online functioning process. The aforesaid does not begin to account for the possibilities that 5G technology has to offer, and would not have been possible without the technological advancements till date.

Therefore, the question arises, how does the competition regulator assess such an important sector which has seen many competitors exit the market over-time? The CCI took note of several key metrics on the basis of which many of its observations are premised. It was noted that while the consumer base, Minutes of Use and data usage by consumers had increased vastly over time, the average revenue per user had decreased by a factor of almost 18, and net profit margins have been seen to have fallen to as low as 0.5%. The same is a very unique phenomenon since the number of telecom operators has reduced substantially over the years, however, profit margins have not gone up even in the face of increased usage of the offerings of such a reduced number of service providers. 

In light of such market dynamics, the CCI noted that the disruptive market entry of Reliance Jio had led to the incumbents approaching the Telecom Regulatory Authority of India (TRAI) to institute a floor price i.e. a minimum price below which no operator could provide its services. In such regard, the CCI had, at that juncture, advised TRAI to refrain from such a move as the same also runs the possible risk of complacence on the part of telecom operators who are not incentivized to compete in light of ensured profitability. Subsequently, by way of the present market study, the CCI is attempting to adopt a nuanced view of the circumstances. One very important aspect of the market study related to the aspect of price competition and non-price competition in the telecom sector, as it existed previously, and such competition in the present and near future.

It was noted that there is significant parity in prices across operators, therefore, non-price factors of competition assume significant importance. While it was acknowledged that the average consumer remains price sensitive, the CCI was of the view that other factors such as quality of service, data speeds and the phenomenon of bundling of services of different natures and offering premium services to consumers will significantly influence consumer choice in terms of choice of operator. Bundled offerings, specifically, were noted to be the factor that will drive differentiation in the market. Such bundled offerings can be seen in various forms across operators, such as tie-ups with Over-The-Top (OTT) media platforms, amongst others, in order to offer exclusive benefits and content which is offered at zero cost to users. Not only do such bundled offerings help consumers gain an expanded and better quality of service, it also provides an opportunity for telecom operators to devise unique monetization schemes to help increase profitability.

However, in the background of such evolution of services offered, the role of the CCI and prudence on its part becomes of utmost importance. During the evolution of services in such a manner, there are various parties that interact in respect of delivery to the end consumer. These include not just the telecom service provider but also OTT media platforms which telecom operators may tie up with, content delivery networks that provide geographically distributed servers in order to assist with efficient delivery of content, payment gateways that facilitate transactions undertaken by the consumer, and any other entity that may be involved in providing a service which is a part of the bundle offered to the consumers. It would be of utmost importance to ensure that no entity at any of the vertical levels operates in an abusive manner that prejudices competition in the market place and results in harm to other market players in an undue manner.

To appreciate such concerns of anti-competitive conduct, at the level of telecom operators, it needs to be noted that the Herfindahl-Hirschman Index – a tool used to measure market concentration and determine competitiveness in a market, has continued to increase over time and is now at a level that suggests a high degree of concentration, and resultantly, potential market power in the hands of the telecom operators. At downstream levels, vertical integration can be seen in the form of telecom operators investing in content creation companies (for instance, Reliance Jio’s acquisition of shareholding in Balaji Telefilms which, in turn, owns an OTT platform), launch of media platforms which integrate a wide variety of entertainment content, news content, music content, etc. (for instance, Airtel Xstream, JioTV, JioNews, amongst others).

However, such vertical integration and consolidation require appropriate structuring and approaches such that the CCI does not have apprehensions of anti-competitive conduct while also ensuring that the commercial objectives of the transacting parties are not unduly diminished or diluted. It needs to be noted that vertical integration and consolidation, by themselves, need not lead to appreciable adverse effects on competition, the threshold set out by the Competition Act, 2002 to determine the permissibility of any conduct. The CCI, as a mature regulator trying to ensure competition in markets while also not impeding ease of doing business, ought to keep the aforesaid in mind while assessing the competitive effects of such evolving market practices considering it observed in the present study that there is a possibility of anti-competitive conduct from such integration which requires deeper scrutiny. 

For instance, the CCI took note of reports claiming that certain broadband services providers routed data traffic in such a manner that faster speeds were provided to specific services. The employment of such practices by telecom service providers, if the same are alleged to be employed, would require scrutiny to assess whether the same have resulted in contraventions of the rules of competition such as the prohibition on abuse of dominance as contained in Section 4 of the Competition Act, 2002. However, the CCI would be well advised to take action only when egregious distortions of the competitive structure and violations of rules of competition are observed considering the rapidly changing market structure accompanied by the financial turmoil seen in the telecom markets owing to various factors. 

Further, considering the uncharted territories, the CCI and TRAI would have to work in harmony with each other as relevant regulators for the telecom sector, and in accordance with the provisions of the Competition Act, 2002 and TRAI Act, 1997 and the decision of the Supreme Court regarding the jurisdictional conflict which arose between the two regulators previously.

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Rudresh Singh is Partner, L&L Partners

Aaditya Ranbir Sahgal is Associate, L&L Partners

The general reaction to litigation finance in India has been in the ‘doubtful’ domain on account of the dearth of news, data or propagators of the same. Moreover, it has met with an opinion, without basis, of being illegal or against public policy.

However, this is not true. Litigation finance has always found place and acceptance in India. The common law torts and crimes of maintenance and champerty were never in force as special laws in India. Consequently, a fair agreement to supply funds to carry on a suit in consideration for a share in the litigation proceeds has never been considered void, or against public policy in India. This was confirmed by jurisprudence spanning over centuries, from 1876 to 2018.

On the other hand, if an Indian court finds that a funding agreement is extortionate, unconscionable or inequitable, it may refuse to give effect to it under section 23 of the Contract Act, 1872, on the ground that it is against public policy. This raised the question as to what makes a Litigation Finance Agreement (LFA) unfair, extortionate, unconscionable or inequitable. 

The answer is subjective and varies from case-to-case. However, some common principles that emerge from jurisprudence are that the funding agreement will be invalidated and/or held unenforceable if an agreement is shown to have been entered into for an improper object or to encourage litigation (which on the face of it) is unrighteous; or where a lawyer funded its client’s dispute; or where the funder had influence over the judge; or where the funder misled the claimant about the expected expenses or failed to prove that it had incurred any expenses

The courts have also considered other principles with respect to the LFA. For instance, an uplift in the total return due to the funder, depending on the length of the litigation and the funder’s participation has been accepted; and the waterfall clause under a non-recourse funding agreement has been accepted as an equitable assignment of the litigation proceeds to the funder. 

The courts have also recognised the ability of (i) the defendant to claim costs against the funder in the main proceedings. However, Courts have held that even in cases where the funder has supreme control and manages the entire litigation, the defendant has no privity to initiate a separate claim (outside the funded claim) to recover unrecovered costs from the funder; (ii) the funder to make allowance to the litigant for their support during the pendency of the litigation; and to have an option in the LFA to choose between a portion of the litigation proceeds or an uplift on the funded costs, after the outcome of the litigation.

Further, as the returns of the financier are also relevant in judging the fairness of a financing agreement; in assessing fairness of returns, courts consider the ‘commercial value’ of the claim. While there is no legal definition of the ‘commercial value’, the courts have explained that the commercial value of the claim can be estimated by the parties in advance of the result by weighing probabilities which includes assessing which of the claims of the litigant are “highly probable to succeed” and which have a “little chance of success”. The courts have also found such assessment as reasonable and confirmed the parties’ shrewd estimate of the chances of succeeding in the litigation.  

Furthermore, while it is lawful for a plaintiff to assign the benefit which he may obtain under the decree on to the funder, courts have clarified that there cannot be an assignment of the claim itself. This is because a “mere right to sue” or a “right of action for recovering damages” is not assignable under Indian law. All that the deed of assignment can confer upon the assignee is the right to the fruits of the litigation. However, this aforesaid limitation to assignment is not applicable when the subject matter of assignment is debt or receivables. In those cases, a financer has the ability to seek the transfer of the debt or receivable either by securitisation or factoring. This includes transfer of the incidental right to make claims to recover the debt or receivables. 

Significantly, the courts have also confirmed that there is no difference in this position if the litigation proceeds come into existence by the virtue of a decree or a compromise, or if the litigation proceeds obtained from a compromise comprised of moveable or immovables other than the suit property. The courts have also recognised the funder’s interest in the litigation proceeds as a contingent interest, subject to the litigation, for supply of funds required to carry out the litigation. 

Indian law additionally recognises the ability of the financier to control and manage the litigation by (a) requiring the funder’s consent before settling the case; or (b) the financier looking after the litigation by engaging lawyers, securing the records, paying the lawyers, and everything that a litigant would do otherwise; or (c) the financier managing the litigation under an irrevocable power of attorney and having “supreme control” or “virtual control” of the proceedings, including the power to receive the litigation proceeds and distributing to the litigant his share; and the litigant only occasionally seeing the pleaders.

Further, with regards to the consequences of entering into an LFA, amendments by states like Maharashtra, Madras (present day Tamil Nadu), Madhya Pradesh and Odisha to the Civil Procedure Code, 1908 (“CPC”), make express provisions recognising and providing rules in relation to litigation finance. 

Despite this rich jurisprudential history of litigation finance in India, this sector has been largely unorganised and undeveloped. However, this is fast changing on account of (a) Improvement of speed and procedure: Beginning in 2015, India has seen rapid reforms to its commercial litigation and arbitration; (b) Growth of international disputes market: With growing liberalisation and commercialisation, India has seen tremendous growth in the international dispute market; (c) Mass action claims developing in India: In recent years, the Indian market has been hit with a number of frauds and scams, especially in the banking sector, that have eroded the investments and deposits of thousands of people. These incidents are potential mass claims waiting to be filed, collectively worth billions of dollars; (d) Conducive insolvency regime: Recent amendments to the Liquidation Process Regulations under the Insolvency and Bankruptcy Code have brought in changes that potentially open further doors to litigation funding in India; (e) Global enforcement and debt recovery: Since India is a party to the New York Convention on enforcement of arbitral awards and has reciprocal enforcement arrangements for court decrees with UK, Singapore, UAE, New Zealand, Malaysia and Hong Kong, Indian awards and decrees can be enforced globally. 

Correspondingly, the Indian market has been a busy participant in the growing international litigation finance industry. Recognising the ripe conditions in the Indian market as well as the support for it in Indian law, global players have come together to form the Indian Association for Litigation Finance (IALF), an association with a vision and mission to create self-regulations for, and promote knowledge-development of litigation finance in India.

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Prateek Bagaria is a partner at Singularity Legal and is an international disputes specialist with a decade of experience in complex commercial cross-border disputes. He spearheaded the foundation of the IALF and possesses the domain expertise in advising funders and litigants seeking litigation finance. 

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This article has been published in partnership with Forbes India and first appeared forbesindia.com.

https://www.forbesindia.com/article/legalpowerlist2020/litigation-finance-in-india-an-overview-by-prateek-bagaria/65967/1

“AI is likely to be either the best or worst thing to happen to humanity” – Stephen Hawking. This conundrum is a very real one today where on one hand we enjoy the assistance provided by Alexa and Siri, like the thought that someday in the near future  our watch will be telling us that we are going to have a cardiac arrest in an hour, enjoy the thought of our home being warm and coffee brewing when we get home etc, and on the other hand rue the fact that Amazon and Facebook keep pushing products in our face depending on our browsing and purchase histories and more so the fact that our lives are now being monitored right from what we are watching on Netflix to what we are buying, eating, messaging, talking and considering. The big question that people of my generation are now considering is whether technology is dumbing us down where we have forgotten to reason, research, consider and then decide or has it made our lives so much easier thereby freeing up our time and bandwidth to pursue more meaningful things, whether social media has made us more unsocial and we are now documenting our lives rather than living them.

While we still battle with this, the progress in technology continues for what I like to believe is the betterment of mankind, and the age of information is supposed to precede the space age — as may also be seen from Elon Musk likely to pip Jeff Bezos to be the new richest man in the world! I echo the thoughts of Rodney Brooks, the world-renowned Roboticist, “artificial intelligence is a tool, not a threat”. Not only does AI substantially aid in reducing workload, but it also provides objectivity and structured outcome – one which aids and assists humans to deliver proficiently within a short span of time. From the fear evoked by the likes of the Terminator franchise and Person of Interest to the sweet considerations of Wall E!

Definition of AI and intersection with IP

The birth of AI dates back to 1956 when the term was coined by John McCarthy at the Dartmouth Summer Research Project aimed at developing the concepts around ‘thinking machines’.

As per Oxford Learner’s Dictionary, artificial intelligence is ‘the study and development of computer systems that can copy intelligent human behaviour’[1] – this covers machine and deep learning within its purview.  

Intellectual property (‘IP’) is the intangible creation and innovation of the human intellect, covering AI within its umbrella. The protection and enforcement of AI itself along with the work created by AI intersects with intellectual property rights. As an example, let’s consider WALL-E again. From the coding to the appearance of the robot to evaluating who are the authors and owners of the work created by WALL-E, inter alia, are facets of IP laws. Albeit the laws governing AI and protection thereof are still in the amateur stage, the nuances and complexities relating to AI and IP is a burning topic of discussion. I have tried to cover a few of the issues herein under.

Copyright and AI

The deliberation on the protection of a copyrightable work created by a non-human surfaced with the famous case of ‘monkey-selfie’[2], where it said that while monkeys can take selfies, only a human can copyright. The case was not finally decided as it was settled out of court. However, the copyright laws of most (if not all) countries are fairly straight on this aspect so far. Indian law particularly states that copyrights can be owned ONLY by a ‘natural person’ – which of course includes companies, firms, partnerships within its purview.

The potential issues right now are two-fold: One, if an AI creates an original piece of work (literary, artistic, photographic, etc) without human intervention then who would be the copyright owner – the natural person who wrote the code and created the AI or the person who owns the AI? The second aspect would be if an AI plagiarises or infringes another’s copyright without any ‘human instigation’ then who is to be punished? I would assume that this would depend upon the terms of the contract between the coder/creator of the AI and the buyer, so fairly straight forward. We, at this point, are assuming that AI will always be created as well as owned by a natural person. If this scenario changes with the progress in technology, then we may have to look at amending laws. 

Trademarks and AI

With the advent of the AI era in marketing and product branding, we can already witness a downfall in the consumer’s decision-making during online shopping. E-commerce companies are using AI to recommend products to the buyers by analyzing their search history, buying profile, past purchases, etc. Trademarks are source identifiers that help the consumer identify the brand they like/trust and wish to buy from. With the advance of AI, brand owners fear that consumers may be deprived of their choice thereby affecting the brand value and sales. A notable case in the United Kingdom dealt with a similar challenge. In the case of Cosmetic Warriors Ltd and Lush Ltd v. Amazon.co.uk Ltd[3], the claimants brought an action against Amazon alleging that Amazon infringed the trademark rights in their mark ‘Lush’. In the instant case, the claimants were successful in proving that Amazon used their mark ‘Lush’ without their consent. Amazon had bid for the word ‘Lush’ with Google AdWords service; hence, whenever a consumer would search the products under the brand ‘Lush’ on Google search engine, an advert would show that ‘Lush’ products are available on Amazon, whereas, Amazon does not sell ‘Lush’ products and whenever a consumer would click on the said advert similar products will be exhibited on the Amazon website (but not ‘Lush’ products). Additionally, if a customer directly goes to Amazon website and searches for ‘Lush’ products, similar products will be shown, instead of a message that no ‘Lush’ products are available.

Looking at how much AI can control choices of customers and maneuver their decision-making; such cases are likely to be on a rise in the near future, unless, the elephant in the room is addressed and loopholes are plugged by forming and implementing relevant policies.

Patent and AI

A patent grants an exclusive right to its holder over an invention and the rights holder is entitled to exclude others from making, selling, or even using the patented invention for a limited term.

As per the information of World Intellectual Property Office, innovators and researchers have filed applications for nearly 340,000 AI-related inventions and published over 1.6 million scientific publications[4]. India has been no exception and witnessed several AI-related patent applications in the last few years. It would be fair to state that scrutiny and processing of applications filed for AI-related work have not been an easy ride for officials due to the uncertainty in the law. As per the Indian Patents Act 1970, there is no set criterion which lays out the extent of human intervention required in a process or product established by AI. That said, under the present provisions, patent protection is offered to the first and true inventor, the same being a ‘natural person’.

The obvious sets of questions are of the ownership and the liability arising out of the action of AI and dealing with the objection of non-obviousness of the innovation to the person skilled in the art.  The question of liability arising from an act of AI continues to be of grave concern. Considering that AI is unable to hold rights in its creation, therefore, AI appears to be quite helpless when it comes to giving consent to third-parties and a similar issue comes with assigning its rights. Unfortunately, the law is in the grey area and the ambiguities pose multiple challenges and concerns relating to the protection and enforcement of the process/product created by AI.

Conclusion

It is apparent as daylight that the changes in the regulations have not been abreast with the dynamic developments in the technology field. Given the significant presence of AI in our daily lives, it is indeed the need of the hour to relook at our existing laws, which will require remodeling after due consideration and comments from the stakeholders. It is essential that our laws are geared well enough for us to enjoy the benefits of technology without it affecting our rights.

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Gunjan Paharia is Managing Partner at ZeusIP Advocates LLP.

[1] https://www.oxfordlearnersdictionaries.com/definition/english/artificial-intelligence?q=artificial+intelligence

[2] https://cdn.ca9.uscourts.gov/datastore/opinions/2018/04/23/16-15469.pdf

[3] https://www.bailii.org/ew/cases/EWHC/Ch/2014/181.html

[4] https://www.wipo.int/edocs/pubdocs/en/wipo_pub_1055.pdf

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This article has been published in partnership with Forbes India and first appeared on forbesindia.com:

https://www.forbesindia.com/article/legalpowerlist2020/intersection-of-artificial-intelligence-and-ipr-gunjan-paharia/65843/1

Four years ago, in a short, cutting address, Fali S. Nariman exhorted arbitration practitioners to never stop thinking about ways to improve arbitration. Arbitration, and how it is conducted, he remarked, “is a subject that needs perennial scrutiny”. Mr. Nariman then recalled this story often attributed to eminent arbitrator, Prof. William W. Park – “[T]here is a sign in the window of a shoe repair shop in downtown Boston. It is run by a Greek immigrant who is fed up with customer complaints. So, he put up the following sign in a triangle connecting three expressions – one, Fast Service; the other, Low Price; and third, High Quality. Beneath that, he had written: ‘Pick any Two’. All three can never go together. That is the tragedy of international commercial arbitration.” This statement has long held true for the state of India-seated arbitrations also, and perhaps more so when the underlying disputes are domestic.

It is difficult to see any silver lining in the situation created by the onset of COVID-19. However, for practitioners of arbitration in India, these ongoing circumstances have created a viable opportunity to set ourselves in pursuit of that elusive triangle which Park and Nariman mention and in that process work towards reversing a great tragedy. 

India-seated arbitrations have tended to be as procedurally complicated as court proceedings. This is well acknowledged by the legal community. Yet, there has not been any noticeable change in our approach to arbitral proceedings. It  is an issue which is often mentioned but never appropriately addressed in practice. In any other ‘routine’ year, popular discourse in this field would have been instead limited only to matters of streamlining arbitral jurisprudence. Further, a direction to hold arguments by video conference would have found curt resistance by way of preliminary objections founded on assertions of violation of the parties’ right to a ‘full’ opportunity to present their case. The pandemic compelled Indian practitioners, within a matter of days, to readjust our approach to a major aspect of dispute resolution, oral hearings. In a country where preferences have oscillated heavily in favour of physical hearings, be it litigation or arbitration, parties began placing confidence in virtual options. While this may be more applicable, for the moment, to those India-seated arbitrations that have an international element, there is a lot in this experience that we can borrow and emulate while conducting domestic arbitrations as well.

I may not be misunderstood as proposing virtual or remote hearings to be a complete alternative to physical hearings when conducting arbitrations. Virtual hearings have not yet equalled in-person hearings in terms of the advantages that the latter provide to practitioners in making oral arguments. Rather, the point that I wish to make here was most aptly expressed by Darius J. Khambata earlier this year during a conversation (with Adrian Winstanley) organised by the Mumbai Centre for International Arbitration – “One would hope in 6 to 8 months time, when some sanity returns to all of this, the physical hearing would be restored to its rightful place, which is just the one part of an arbitration. It should not be all dominating; it should not be all-pervasive. Just that last final hearing [for] there is great value in having a face-to-face contact with the tribunal, and for the tribunal to actually see the lawyer it is dealing with.”

It is true that for the most part this has largely been followed in the practice of international arbitrations conducted under the aegis of leading institutions, and yet, the costs involved have continued to be high. However, in the Indian context, several factors can assist in meeting the goal of providing fast service, low price and high quality when conducting the proceedings. India has no dearth of skilled and well-trained commercial lawyers today. Having the second largest population of lawyers outside of the United States further ensures that, to a great extent, lawyers consistently compete to provide affordable services. The present times have also witnessed the judiciary, institutions and law offices augmenting e-infrastructure and facilities, leading to significantly reduced travel costs and enhanced efficiency in collaboration and productivity. 

As many of us have learnt, there is more to arbitration and technology than projectors, transcription services and electronic filings (as a follow-up formality). Case management conferences, production of documents and document discoveries can, in several cases, be more effectively held by way of virtual means. Further, the sheer number and range of third-party services available to organise various stages of arbitration proceedings now also allow the tribunal and parties to determine the extent to which virtual options can be availed given the circumstances. The procedure can be tailor-made not only to match time and cost expectations but to also address disparities in the technical abilities of parties and practitioners.

There are huge prospects for younger lawyers to come up and contribute to this process. Some in the Indian arbitration community are already taking a lead. For instance, the Indian Arbitration Forum (IAF) issued the IAF Protocol on Virtual Hearings for Arbitrations in September 2020 which consolidates the good practices that parties may adopt while conducting an arbitration. A little earlier, in June, a very thorough and comprehensive practical guide was issued by MNLU Mumbai’s Centre for Arbitration and Research which serves as a great starting point for deeper discussions on this topic. In this background, all that is required for Indian practitioners to stand out is to willingly adopt the best practices while conducting domestic arbitrations in the same manner as they would an international, institutional arbitration. 

In addition, a little change in our attitudes can go a long way in this pursuit of the elusive triangle – we need to break the habit of appearing in arbitrations occasionally, only when time and our court appearances permit. We also need to stop equating arbitration proceedings with proceedings in a civil suit. Old habits die hard, and if that be the case, ‘virtual procedures’ may just be the shot we need so badly!

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Prateek is the Founder & Principal of EPA Law Offices, where he also leads the Litigation & Dispute Resolution as well as the Insolvency & Bankruptcy Practices.

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This article has been published in partnership with Forbes India and first appeared on forbesindia.com:

https://www.forbesindia.com/article/legalpowerlist2020/indian-arbitration-commencing-our-pursuit-of-the-elusive-triangle-prateek-mishra/65391/1