Op EdsOP. ED.

   

One of the rights guaranteed under the Universal Declaration of Human Rights, 19481 is the right to seek, receive and impart information and ideas through any media and regardless of frontiers. However, the rise of nationalism and protectionism globally is leading to the internet splintering into smaller parts, each of which is governed differently and therefore referred to as the splinternet. Instead of a single global internet, this would lead to multiple national or regional networks that do not speak to each other or possibly even are unable to due to incompatible technologies. Concerns around the splinternet include fragmented online market places (making it harder for companies to reach their target audiences) and the evolution of different business and compliance standards around data management, protection, and transactions. This presents new risks and compliance challenges for companies operating in multiple countries.

A good starting point for addressing potential risks and compliance concerns is understanding the evolution of internet regulation.

The free flow of data defined the early internet. However, eventually, jurisdictions started blocking certain sites, apps, and products due to their nature of work, content hosting, or simply because they originated from a hostile nation. Businesses no longer have unfettered access to the information, and Governments are increasingly restricting online content and apps. Most recently, we have seen Russia and various western nations block each other’s content from being made available within their national boundaries.2 The calls for Russian domains to be revoked altogether, which would have effectively taken Russia off the internet, were also made to ICANN (Internet Corporation for Assigned Names and Numbers), albeit unsuccessfully.3

However, there has also generally been a rise in internet regulation globally across jurisdictions, especially concerning cross-border digital transactions, which has led to measures such as data localisation mandates. Consequently, Governments are effectively restoring the role of national borders in the digital economy.

Over 71% of jurisdictions have data privacy legislation, and another 9% are in the process of drafting one. In many countries, these legislations also govern their citizens’ data privacy. These laws can increase market entry costs for foreign businesses, making it counterproductive for business investments as the mounting compliance costs may override expected profits. Specifically, in the case of new businesses such as digital assets, the splinternet may impact how these assets are taxed, resulting in an uneven playing field for businesses and increased compliance costs for foreign entities. Further, many businesses also tend to rely upon centralised global data centres, which may particularly impact such businesses.

Source: <https://unctad.org/page/data-protection-and-privacy-legislation-worldwide>

Therefore, it is essential for businesses dealing with data across multiple regions to actively start thinking about how these upcoming trends of internet regulation may hit their operations.

Managing your operations in the splinternet era

To ascertain the risks from the splinternet to your operations, businesses should consider the following questions:

1. Does the business have an international data strategy?

2. Does the business have a streamlined process and periodic assessments to respond to global regulatory changes?

3. Does the business effectively manage data processing and storage for data related to subjects based in the EU, China, Russia and other regions which have strong regulatory policies?

4. Does the business have a position and process to respond to local law enforcement data requests, including requests regarding content moderation?

While most businesses would have a constantly evolving position on these issues, it is important to consistently and periodically take stock and assess the businesses’ international compliance and operations plan.

While businesses strive for global standards, they must consider the unique legal and compliance needs of the countries they operate in. Below are some suggestions to consider:

(a) Proactive audits: Undertake audits across key relevant geographies to assess the legal landscape and the ongoing compliance and risks.

(b) Expert legal advice: Ensure the organisation has access to experienced legal and compliance professionals in all geographies of interest who can help navigate the complexities of the law and suggest compliant business solutions.

(c) Assess business models: Be prepared to revisit business models and the supporting processes such as data collection, storage, and monetisation. This can pose particular challenges for single product/ service companies that sell on a licence basis or for businesses that are volumes driven.

(d) Consider the cost of legal due diligence and ongoing compliance: This can be done at the market entry planning stage, including market research on the current legal landscape and estimation of ongoing compliance costs.

(e) Set up local infrastructure and ops to comply with regulations: While this may dent the unique selling proposition of some enterprises as “operate-from-anywhere-businesses”, it can ensure sustenance of operations.

(f) Develop a robust risk management strategy: Appoint a dedicated compliance officer depending on the company’s size and scope of its operations.

(g) Establish clear communication channels: Effective communication between various business units is vital for awareness of and compliance with the latest regulations. MNCs, specifically, should monitor their compliance programs on an ongoing basis and leverage digital tools to aid this.

(h) Access to an ecosystem of disputes lawyers: Content/data laws can be conflicting depending on the jurisdiction of residence and where the online activity took place. Furthermore, countries have conflicting opinions on the ambit of these regulations to restrict freedom of speech or data privacy. As internet laws continue to evolve, a rise in disputes over their interpretation is likely. Therefore, building an in-house disputes team or gaining access to external counsels may nip these issues in the bud.

Conclusion

Dealing with the splinternet requires organisations to have a flexible and adaptable business strategy. It is important for businesses to continuously evaluate their positions and undertake the various measures outlined to ensure compliance and avoid disputes that may threaten the business itself. While businesses may not be in a position to effectively respond to widespread content takedown based on purely national interests such as the ones related to the Russia-Ukraine situation, they must adapt to regulatory changes regarding data protection, localisation and content regulations, which will only continue to see widespread adoption across more nations.


† Counsel with the Technology, Media, and Telecom Practice, Trilegal.

†† Senior Manager, Business Development at Trilegal. Author can be reached at  Akanksha.Bisen@trilegal.com.

1. Universal Declaration of Human Rights, 1948.

2. <https://www.technologyreview.com/2022/03/17/1047352/russia-splinternet-risk/>.

3. <https://www.techspot.com/news/93658-icann-rejects-request-ukraine-kick-russia-off-internet.html>.

Case BriefsSupreme Court

Supreme Court: On being apprised of 30 years-long delay in execution of an Arbitration Award, the Division Bench comprising M.R. Shah and B.V. Nagarathna, JJ., directed the Chief Justice of Allahabad High Court to constitute a Special Arrears Committee to address the issue of the long delay in commercial cases. The Court also directed the State government to consider constituting additional commercial courts in the four districts of Gautam Budh Nagar, Meerut, Agra, and Lucknow.

In the instant case, the Arbitration Award had been passed in the year 1992 and the execution petition was filed in the year 2003, however, much to the Court’s surprise, the matter was still pending. Calling it a glaring example of frustrating the arbitration proceedings under the Arbitration Act, the Bench expressed,

“It is very unfortunate that even after a period of 30 years, the party in whose favour the Award is passed is not in a position to enjoy the fruit of the litigation/Award. Even the execution petition is also pending for more than 19 years. This is a very sorry state of affairs that even the execution proceedings to execute the Award passed under the Arbitration Act are pending for more than 20 years.”

Noticing that the statutory mandate requires the commercial dispute to be decided and disposed of at the earliest, i.e., within a year, the Court, by an earlier order, had held that if the Award, under the Arbitration Act, is not executed at the earliest, it will frustrate the purpose and object of the Arbitration Act as well as the Commercial Courts Act.

By an order dated 01-04-2022, the Court had asked the Allahabad High Court to submit a report indicating the status of pendency of commercial cases. Pursuant to the said order the High Court had filed the Status Report with respect to the pending execution petitions in the State of Uttar Pradesh, to execute the Awards, both under the Arbitration Act, 1940 and under the Arbitration and Conciliation Act, 1996 as well as the statement showing the total number of applications pending under Section 34 of the Act, 1996 in the State as well as the statement showing the total number of execution petitions to execute the Award both under Section 37 of the Arbitration Act, 1940 and under the 1996 Act pending in the Commercial Courts in the State.

The Status Report revealed the following:

  • About 30,154 execution petitions are pending with various District Courts/ Regular Courts in the State of U.P. and the oldest one is of the year 1981.
  • Similarly, in the Commercial Courts, 13,367 execution petitions/ applications are reported to be pending and the oldest one seems to be of the year 2002.
  • As on 31-03-2022, approximately 10,436 execution petitions/applications under Section 34 of the Arbitration Act are reported to be pending before the Regular Courts (non-commercial courts) with the oldest one of the year 1987.
  • About 1,209 execution petitions/applications are pending before the Commercial Courts and the oldest one seems to be of the year 1998.

The Court had asked the High Court to prepare a road-map and to take a call as to how the problem of the pendency of the execution petitions/applications to execute the Awards passed under the 1940 Act and 1996 Act and the applications under Section 34 are decided/disposed of at the earliest, so that the ultimate object and purpose of the Arbitration Act and Commercial Courts Act is achieved. Additionally, the Court requested the Chief Justice of the High Court to constitute a Special Arrears Committee of the Judges of the High Court and invite the suggestions and formulate a mechanism to tackle with the problem of arrears.

The Court remarked,

“If, the commercial disputes are not decided/ disposed of at the earliest, it may ultimately affect the economy of the country and may spoil the business relations between the parties.”  

However, no committee was constituted in spite of clear directions by the Court and the Court had to adjourn the matter to next day. Similarly, no sincere efforts were shown by the High Court in preparing the required road map, which made the Court to observe,

“It is reported that now the Special Arrears Committee has been constituted only yesterday.  Our earlier order dated 28.04.2022 was very clear and there was no ambiguity at all. Despite the above, for whatever reason, the Special Arrears Committee has not been constituted till yesterday and the same has been constituted only after yesterday’s hearing. We were not satisfied at all with the report submitted by the High Court yesterday (18.05.2022) and the road-map and the action proposed in tackling the arrears so far as the commercial matters are concerned.”

Interestingly, the Court noted that from the constitution of the Special Arrears Committee to make suggestions and formulate a mechanism to tackle with the problem of arrears, only the judges from the Allahabad Bench of the High Court were involved and none of the Judges from the Lucknow Bench was part of the Committee. Therefore, the Court directed the Chief Justice to reconstitute the Committee by including the judges from Lucknow Bench as well, since a large number of commercial matters were pending within the jurisdiction of the Lucknow Bench also.

On the suggestions to create additional commercial courts in the four districts of Gautam Budh Nagar, Meerut, Agra and Lucknow where the pendency of such cases is comparatively larger, the Court directed the State Government to consider the proposal and take a final decision within a period of four weeks.

The matter is listed on 12-07-2022 for further hearing.[Chopra Fabricators and Manufacturers Pvt. Ltd. v. Bharat Pumps and Compressors Ltd., 2022 SCC OnLine SC 711, order dated 19-05-2022]


Appearance by:

For Petitioner(s): Mr. Rakesh U. Upadhyay, Advocate Mr. Rishabh Kumar Pandey, Advocate Ms. Aarti Upadhyay Mishra, AOR Mr. Pawanshree Agrawal, AOR Mr. Aneesh Mittal, Advocate Ms. Soumya Dhankani, Advocate Mr. Shaunik Gupta, Advocate

For Respondent(s): Mr. Nikhil Goel, Advocate Mr. Yashvardhan, Advocate Mr. Apoorv Shukla, AOR Ms. Smita Kant, Advocate Prabhleen Kana, Advocate Ms. Kritika Nagpal, Advocate Mr. Nitin Mishra, AOR Ms. Madhavi Divan, ASG Ms. Garima Prashad, Sr. Advocate


Kamini Sharma, Editorial Assistant has reported this brief.

Legal RoundUpSupreme Court Roundups

 

“Women are subject to a patriarchal mindset that regards them as primary caregivers and homemakers and thus, they are burdened with an unequal share of family responsibilities. Measures to ensure substantive equality for women factor in not only those disadvantages which operate to restrict access to the workplace but equally those which continue to operate once a woman has gained access to the workplace.”

Justice Dr. DY Chandrachud

SK Nausad Rahaman v. Union of India

2022 SCC OnLine SC 297


TOP STORIES


All India Bar Exams| From 1/4th negative marking to limiting the validity of Bar exam for three years; SC issues notice to BCI to respond to suggestions

“The right to practice a profession, also being a fundamental right, a balance has to be maintained between the same and the requirement to monitor the legal profession for its better ethics.”

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POCSO| Is investigation of disclosure of victim’s identity permissible without Magistrate’s permission? SC gives split verdict

The bench of Indira Banerjee and JK Maheshwari, JJ has given split verdict on the issue as to whether the Special Court is debarred from taking cognizance of an offence under Section 23 of the Protection of Children from Sexual Offences Act, 2012 (POCSO Act) and obliged to discharge the accused under Section 227 CrPC, only because of want of permission of the jurisdictional Magistrate to the police, to investigate into the offence.

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Supreme Court fixes outer limit for claiming COVID-19 death compensation; Claims to be filed within 90 days from now on

The Court agreed with the submission that by now all genuine claimants must have approached the authorities by establishing their claims and that if there is no outer time limit fixed, then the process of receiving the claims would go endless and, in that case, there is all possibility of submitting false claims.

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Women burdened with an unequal share of family responsibilities yet discriminated at workplace; State must consider family life while framing any policy

Speaking about the systemic discrimination on account of gender at the workplace which encapsulates the patriarchal construction that permeates all aspects of a woman’s being from the outset, including reproduction, sexuality and private choices, within an unjust structure, the bench of Dr. DY Chandrachud* and Vikram Nath, JJ has observed that it becomes necessary for the Government to adopt policies through which it produces substantive equality of opportunity as distinct from a formal equality for women in the workplace.

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Issue of accommodation in a Domestic Violence dispute between husband and wife shall not affect landlord’s right to get possession of his property

The Court was hearing an appeal against the Delhi High Court verdict [2021 SCC OnLine Del 2109] wherein the Trial Court’s order granting the possession of the suit property on favour of the landlord was upheld. The appellant wife, in the present case, had challenged the Trail Court’s order on the ground that her husband should provide her accommodation as per the Domestic Violence Act, 2005.

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‘IBC’s object is not to kill the company’; Builder’s Insolvency Proceedings closed as 82 out of 128 home buyers choose possession over refund/compensation

“If the original applicants and the majority of the home buyers are not permitted to close the CIRP proceedings, it would have a drastic consequence on the home buyers of real estate project.”

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Permanent Injunction can’t be granted against true owner once the title dispute is settled

Supreme Court reverses three concurrent findings.

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EXPLAINED


Which law to prevail if provisions of Bihar Public Works Contracts Disputes Arbitration Tribunal Act, 2008 are in conflict with the Arbitration and Conciliation Act, 1996?

Can step-children claim property right in mother’s mehar after her death? Does a registered mehar deed become unenforceable for being nominal?

Can employees appointed for fixed period in temporary unit be absorbed/regularised by creating supernumerary posts?

Compensation under Section 4 of Employee’s Compensation Act, 1923 to be awarded from the date of accident or the date of Commissioner’s order? 

Can voluntary retiree seek retrospective promotion as a matter of right? 

Can State discriminate between persons having experience in home State from those having experience in other States? Is there any intelligible differentia?


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7-year-old’s “brutal” rape and murder: SC commutes Death sentence; No premature release/remission during 30 years’ LI as “conscience of the society cannot be ignored”

“The heinous nature of crime like that of present one, in brutal rape and murder of a seven-year-old girl child, definitely discloses aggravating circumstances, particularly when the manner of its commission shows depravity and shocks the conscience. But,…”

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Refusal to continue to execute a contract unless reciprocal promises are performed by the other party is not abandonment of contract

“A party to a contract may abandon his rights under the contract leading to a plea of waiver by the other party, but there is no question of abandoning an obligation.”

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Where post import, factum of sale isn’t disputed, no exemption from market fee can be claimed under Karnataka Agricultural Produce Marketing Act of 1966

“It is the sale within the market area that attracts levy of market fee, and not the first purchase that was outside the market area.”

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Confiscation of Truck loaded with cow progeny despite acquittal in criminal proceedings amounts to arbitrary deprivation of property

“…to deprive any person of their property, it is necessary for the State, inter-alia, to establish that the property was illegally obtained or is part of the proceeds of crime or the deprivation is warranted for public purpose or public interest.”

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Promotion cannot be granted retrospectively to give benefit and seniority from the date of notional vacancy

The bench of Sanjay Kishan Kaul and MM Sundresh*, JJ has observed that a right to promotion and subsequent benefits and seniority would arise only with respect to the rules governing the said promotion, and not a different set of rules which might apply to a promoted post facilitating further promotion which is governed by a different set of rules.

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Supreme Court lays down detailed guidelines for leave to defend in summary suits

Grant of leave to defend is the ordinary rule and denial is an exception.

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APMCs liable to pay service tax under the category of ‘renting of immovable property service’

“In a taxing statute, it is the plain language of the provision that has to be preferred”.

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Consent award cannot be the basis to determine compensation in other acquisition, especially, when there are other evidences on record

In case of a consent award, one is required to consider the circumstances under which the consent award was passed and the parties agreed to accept the compensation at a particular rate.

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“A bus by bus, a mini-bus by mini-bus and not bus by a mini-bus” isn’t a correct way to interpret the expression “same nature”

The Division Bench comprising of K.M. Joseph and Pamidighantam Sri Narasimha*, JJ., held that Rule 174(2)(c) of the Kerala Motor Vehicle Rules,1989 is valid and salutary and does not go beyond the scope of Section 83 of the MV Act, 1988. While interpreting the expression “same nature” the Bench observed that such expressions are better kept open ended to enable courts to subserve the needs of changing circumstances.

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Clarification vis-à-vis substantial alteration of commercial agreement; SC considers legality of retrospective application of modifications in agreement

The Division Bench comprising of Ajay Rastogi and Abhay S. Oka, JJ., held that a modification changing tariff for inadvertent drawal from temporary supply rate to the regular supply rate cannot be considered to be a mere clarification and is rather a substantial alteration which cannot be made applicable retrospectively.

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Withdrawal of  Inter-Commissionerate Transfers not invalid but Recruitment Rules 2016 may be revisited to accommodate posting of spouses, disabled persons and compassionate grounds

The bench of Dr. DY Chandrachud* and Vikram Nath, JJ has upheld the Kerala High Court verdict that had held that the Central Excise and Customs Commissionerates Inspector (Central Excise, Preventive Officer and Examiner) Group ‘B’ Posts Recruitment Rules 2016 (RR 2016) withdrawing the Inter-Commissionerate Transfers (ICTs) is not invalid as ICTs would violate the unique identity of each cadre envisaged under Rule 5 of RR 2016.

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Is Railway’s decision to disqualify persons with history of lasik surgery for the post of constables (RPF) just and reasonable?

Supreme Court directs constitution of experts committee to answer.

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Eligibility Criteria fixed by UGC must be followed by all Universities

“… prescribing the eligibility criteria shall not be left to the sweet will of the search committee. It may lead to arbitrariness and different search committees in absence of any statutory guidelines and/or   prescription, may prescribe different eligibility criteria.”

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HC spends 9 months on deciding appeal from an ‘unappealable’ adjournment order. SC imposes Rs. 5 Lakhs exemplary cost on litigant for wasting ‘precious judicial time’

“Such unwarranted proceedings at the behest of the parties who can afford to bear the expenses of such litigations, must be discouraged.”

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SC reiterates the duties of Competent Authority and Court while issuing and testing externment orders

“An Order of Externment is an extraordinary measure which should be used sparingly”.

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Declaration under the Income Declaration Scheme cannot lead to non-declarant’s immunity from taxation

The protection given, is to the declarant, and for a limited purpose.

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OLX Frauds| SC sets aside P&H HC order directing deletion and re-listing of OLX advertisements with proofs

In recent years, in Districts of Gurugram, Faridabad, Rewari, Palwal and Mewat, hundreds of FIRs have been registered, in which accused persons, by using OLX platform, have given various advertisements regarding sale of gold (in different form) or sale of vehicles like motorcycle or car at cheaper price or asking for professional service like architect or accountants have allured many innocent persons and thus, have committed the offence of cheating and forgery.

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[Bomikhal Flyover Collapse] Is permanent debarment of guilty contractor too harsh? What makes an order a pre-determined one? Supreme Court answers

“Merely because the show cause notice was issued after the inquiry committee report was considered and thereafter the State Government took the decision to initiate proceedings for blacklisting, that by itself it cannot be said that the order of blacklisting was predetermined as observed by the High Court.”

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Murder convict seeks remission of sentence on the ground of being 100% visually impaired. Can disability be a ground for remission? SC answers

The appellant had contended that since he is visually impaired to the extent of suffering permanently from 100% blindness and that was not a result of any voluntary act of the prisoner, the aforementioned provision would come to his aid for consideration of his case for release from serving out the remaining sentence.

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SC allows RPSC to go ahead with RAS Mains Exam; Candidates challenging Pre exam result allowed to sit in Mains

In a breather to the candidates challenging the RAS Pre-examination result, the bench of KM Joseph and Hrishikesh Roy, JJ has confirmed the Rajasthan High Court’s division bench directing Rajasthan Public Service Commission (RPSC) to go ahead with the RAS/RTS Combined Competitive Examination-2021 mains examination. It has, however, allowed the 243 candidates, who had approached the Courts, to sit in the Mains Examination to be conducted on March 20-21, 2022.

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‘Business to business’ dispute not a consumer dispute

The bench of L. Nageswara Rao and BR Gavai*, JJ interpreted the true scope of a “consumer” in terms of Section 2(1)(d) of the Consumer Protection Act, 1986 and has held that the ‘business to business’ disputes cannot be construed as consumer disputes.

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Frivolous petitions defeating the noble object behind PILs and burdening SC and HCs; Bonafides of Litigants must be examined carefully

“Although the jurisprudence of Public Interest Litigation has matured, many claims filed in the Courts are sometimes immature.”

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Mere allegation of bias is not fatal to disciplinary inquiry unless supported by materials

Non-supply of demanded documents is not sufficient to challenge a disciplinary inquiry unless it is showed what prejudice has been caused due to non-supply.

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Law on filing false affidavit: Can defaulter get benefit of equity? Read what made the Supreme Court reverse concurrent findings of Courts

“Once an affidavit has been filed which is on the face of it false to the knowledge of the executants, no benefit can be claimed on the ground that delivery of possession was given.”

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‘Lotteries’ a species of ‘betting and gambling’; States Legislatures competent to levy tax

High Courts of Kerala and Karnataka were wrong in holding so as the Legislatures of the State of Karnataka and Kerala were fully competent to enact the impugned Acts and levy taxes on the activity of ‘betting and gambling’ being organised and conducted in the said respective States, including lotteries conducted by the Government of India or the Government of any State.

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Interchangeability of unfilled posts of SC/ST category can be done only by the department concerned, not by appointing authority

Also, rejection of claims of appellants by the departmental authorities relying upon wrong instructions or mentioning incorrect fact of withdrawal of Policy letter would not confer any right to appellants to claim the reliefs.

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Trap party recovers tainted currency notes from Tax Officer accused of demanding bribe. Supreme Court acquitted the officer in spite of proved recovery

In an interesting case relating to corruption, the Division Bench of Ajay Rastogi and Abhay S. Oka*, JJ., acquitted a Commercial Tax Officer in spite of proved recovery of tainted currency notes from her. The Bench observed that though the recovery was proved in the absence of demand being conclusively proved conviction cannot be made under Sections 7 and 13(1)(d) read with Section 13(2) of the PC Act.

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Borrower’s offer to pay Rs.71 lakhs as a purchaser of mortgaged property will not discharge him from entire outstanding liability of approx 1.8 crores

The Division Bench of M. R. Shah* and Sanjiv Khanna, JJ., held that  the entire liability outstanding against the borrower could not be discharged on making the payment i.e. Rs.65.65 lakhs against the total dues Rs.1,85,37,218.80 and that the Division Bench of the High Court had erred in directing to release the mortgaged property/secured property and to handover the possession along with the original title deeds to the borrower on payment of a total sum of Rs.65.65 lakhs only.

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Irregular Disciplinary Enquiry: Court cannot reinstate employee as such; Matter must be remanded to Enquiry Officer/Disciplinary Authority

In a case where it is found that the enquiry is not conducted properly and/or the same is in violation of the principles of natural justice, the Court cannot reinstate the employee as such and the matter is to be remanded to the Enquiry Officer/Disciplinary Authority to proceed further with the enquiry from the stage of violation of principles of natural justice is noticed.

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How will the higher Court know why review jurisdiction was exercised? Courts must mention what was that error apparent on the face of the record

“Unless such reasons are given and unless what was that error apparent on the face of the record is stated and mentioned in the order, the higher forum would not be in a position to know what has weighed with the Court while exercising the review jurisdiction and what was that error apparent on the face of the record.”

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Arakonam Naval Station dispute: Supreme Court puts a stop to over 3 decades long commercial dispute

“By going into the minute details of the evidence led before the learned Sole Arbitrator with a magnifying glass and the findings returned thereon, the Appellate Court has clearly transgressed the limitations placed on it.”

Read more…

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Is amount spent by pharmaceutical companies in gifting freebies to the doctors “business expenditure” under IT Act when act of accepting freebies by doctors is an offence? SC answers

“…the statutory regime requiring that a thing be done in a certain manner, also implies (even in the absence of any express terms), that the other forms of doing it are impermissible.”

Read more…


Supreme Court Cases


2022 SCC Vol. 1 Part 2

In this part, read a very pertinent decision of the Supreme Court, Amazon.com NV Investment Holdings LLC v. Future Retail Ltd.2021 SCC OnLine SC 557 wherein while holding that an award passed by Emergency Arbitrator is enforceable under the Arbitration and Conciliation Act, 1996, a Division Bench of R.F. Nariman and B.R. Gavai, JJ. has ruled in favour of Amazon in the infamous Future-Amazon dispute. It has been held that the interim award in favour of Amazon, passed by the Emergency Arbitrator appointed under the Arbitration Rules of the Singapore International Arbitration Centre is enforceable under the Indian Arbitration Act.

2022 SCC Vol. 1 Part 3

In this part read the Supreme Court decision in Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Ltd.,(2022) 1 SCC 401, wherein the Court while the Adjudicating authority has the authority to disapprove the resolution plan approved by the Committee of Creditors (CoC), it cannot modify the same.

2022 SCC Vol. 2 Part 1

In this part read a very important matter, wherein a relative committed rape on the prosecutrix and none of the family members believed her and in fact beat her up when she narrated the incident, Supreme Court found it unfortunate that even the sister-in-law (Jethani) and mother-in-law though being women did not support the prosecutrix. [Phool Singh v. State of Madhya Pradesh, 2021 SCC OnLine SC 1153]

2022 SCC Vol. 2 Part 2


Case BriefsSupreme Court

Supreme Court: The bench of L. Nageswara Rao and BR Gavai*, JJ interpreted the true scope of a “consumer” in terms of Section 2(1)(d) of the Consumer Protection Act, 1986 and has held that the ‘business to business’ disputes cannot be construed as consumer disputes. The entire Act revolves around “business-to-consumer” disputes and not for “business-to-business” disputes.

Analysis

Section 2(1)(d) of the said Act is in two parts.

  1. Section 2(1)(d)(i) of the said Act deals with buying of goods.
  2. Section 2(1)(d)(ii) of the said Act is with respect to hiring of services.

By the 1993 Amendment Act, wherever the word “hires” was used, the same was substituted by the words “hires or avails of”.  By the said 1993 Amendment Act, insofar as Section 2(1)(d)(i) is concerned, an Explanation was provided to the effect that ‘commercial purpose’ does not include use by a consumer of goods bought and used by him exclusively for the purpose of earning his livelihood by means of self-employment. Hence, though the original Act of 1986 excluded a person from the ambit of definition of the term ‘consumer’ whenever such purchases were made for commercial purpose; by the Explanation, which is an exception to an exception, even if a person made purchases for ‘commercial purpose’, he was included in the definition of the term ‘consumer’, if such a person bought and used such goods exclusively for earning his livelihood by means of self-employment.

By the 2002 Amendment Act, the legislature has done two things.

  1. It has kept the commercial transactions, insofar as the services are concerned, beyond the ambit of the term ‘consumer’ and brought it in parity with Section 2(1)(d)(i), wherein a person, who bought such goods for resale or for any commercial purpose, was already out of the ambit of the term ‘consumer’.
  2. The legislature did was that even if a person availed of the commercial services, if the services availed by him were exclusively for the purposes of earning his livelihood by means of self-employment, he would still be a ‘consumer’ for the purposes of the said Act.

Thus, a person who availed of services for commercial purpose exclusively for the purposes of earning his livelihood by means of self-employment was kept out of the term ‘commercial purpose’ and brought into the ambit of ‘consumer’, by bringing him on par with similarly circumstanced person, who bought and used goods exclusively for the purposes of earning his livelihood by means of self-employment.

“If a person buys goods for commercial purpose or avails services for commercial purpose, though ordinarily, he would have been out of the ambit of the term ‘consumer’, by virtue of Explanation, which is now common to both Sections 2(1)(d)(i) and 2(1)(d)(ii), he would still come within the ambit of the term ‘consumer’, if purchase of such goods or availing of such services was exclusively for the   purposes of earning his livelihood by means of self-employment.”

The upshot of the above-mentioned discussion led to the conclusion that when a person avails a service for a commercial purpose, to come within the meaning of ‘consumer’ as defined in the said Act, he will have to establish that the services were availed exclusively for the purposes of earning his livelihood by means of self-employment. There cannot be any straitjacket formula and such a question will have to be decided in the facts of each case, depending upon the evidence placed on record.

Ruling

The Court was deciding the case where NCDRC has come to a finding that the appellant had opened an account with the respondent-Bank, took overdraft facility to expand his business profits, and subsequently from time to time the overdraft facility was enhanced so as to further expand his business and increase his profits.

The Court affirmed the said ruling and observed that the relations between the appellant and the respondent is purely “business to business” relationship. As such, transactions would clearly come within the ambit of ‘commercial purpose’. It cannot be said that the services were availed “exclusively for the purposes of earning his livelihood” “by means of self-employment”.

[Shrikant G. Mantri v. Punjab National Bank, 2022 SCC OnLine SC 218, decided on 22.02.2022]


*Judgment by: Justice BR Gavai


Counsels

For appellant: Senior Advocate Shyam Divan

For respondent: Senior Advocate Dushyant Dave

Case BriefsHigh Courts

Delhi High Court: Asha Menon, J., emphasized the law on territorial jurisdiction while addressing the present matter.

Present petition was filed impugning the order of Additional District Judge.

Petitioner was the defendant before the Trial Court. Respondent had filed a suit against the petitioner/defendant for the recovery of a sum of Rs 28, 43, 209.68/.

The claim of the respondent was that it was a well-known manufacturer providing a portfolio of solutions for packaged power, diversified generation, electrical control and safety and energy optimization.

Petitioner/defendant was the regional stockists and distributors, who were appointed to procure/buy goods being traded by the respondent/plaintiff and supply them to wholesalers and retailers of the respondent/plaintiff in the market, who, in turn, would sell the same to the consumers.

Further the respondent/plaintiff claimed that a running current account was maintained with the petitioner/defendant against which a statement of account/ledger was regularly maintained by it in the normal course of business.

A sum of Rs 28,43, 209.68 was due and payable by the petitioner/defendant. Hence the present suit was filed.

Petitioner/Defendant’s counsel, Deepika Mishra submitted that Trial Court had fallen into error in determining its jurisdiction as it relied on English case law that the ‘debtor must seek the creditor’, whereas it was bound to follow Section 20 of the Civil Procedure Code, 1908.

Section 20 clearly provides that a Court within whose local limits the cause of action, “wholly or in part”, arises, would have territorial jurisdiction to try the suit.

The registered office of the petitioner/defendant was in West Bengal.

Petitioner/Defendant’s counsel submitted that the invoice itself recorded a Kolkata address. The warehouse was also stated to be located in West Bengal and therefore, the goods were neither dispatched from Delhi nor the invoices were raised at Delhi. counsel for the respondent/plaintiff pointed to the “subject to jurisdiction of court of Delhi only” clause in the invoices. There does not appear to have been any demurrer by the petitioner/defendant against this clause.

Hence, in light of Section 20 of CPC, the Court found some strength in the contention of respondent/plaintiff that on the basis of the ‘place of work’ of the petitioner/defendant, as well as the part cause of action of supply of goods, both reflected jurisdiction of the West Bengal courts.

However, the respondent/plaintiff has also claimed that payments were to be received in Delhi and therefore, part cause of action has arisen in Delhi and as such, the clause in the invoices referred to hereinabove did not confer jurisdiction at a place which had no jurisdiction.

In Court’s opinion, the suit could be filed at Delhi and Trial Court had not committed any error in answering the preliminary issue.

Bench stated that, when the part cause of action had arisen on account of the payments made by the petitioner/defendant directly into the bank account of respondent/plaintiff, even if these were not on regular basis, and there is nothing to show that the place of payment had been fixed, even without following the principle that the ‘debtor must seek out the creditor’, it was clear that the Delhi Courts have jurisdiction to try the suit and the invoice does not vest jurisdiction in a court which had no jurisdiction at all.

In view of the foregoing discussion, the High Court found no merit in the petition. [Auto Movers v. Luminous Power Technologies (P) Ltd.,  2021 SCC OnLine Del 4387, 16-09-2021]


Advocates before the Court:

For the petitioner: Deepika Mishra, Advocate

For the respondent: Pallav Saxena, Deepak Chawla, Aruj Dhingra and Neeraj Malik, Advocates

Case BriefsSupreme Court

Supreme Court: Interpreting the true scope of Section 80-IA(5) of the Income Tax Act, 1961, the bench of L. Nageswara Rao* and Vineet Saran, JJ has held that the scope of sub-section (5) of Section 80- IA of the Act is limited to determination of quantum of deduction under sub-section (1) of Section 80-IA of the Act by treating ‘eligible business’ as the ‘only source of income’.

Provision in question

Sub-section (1) and sub-section (5) of Section 80-IA which are relevant for these Appeals are as under:

“80-IA. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.— (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent. of the profits and gains derived from such business for ten consecutive assessment years.

* * * *

(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of subsection (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.”

The essential ingredients of Section 80-IA (1) of the Act are:

  1. a) the ‘gross total income’ of an assessee should include profits and gains;
  2. b) those profits and gains are derived by an undertaking or an enterprise from a business referred to in subsection (4);
  3. c) the assessee is entitled for deduction of an amount equal to 100% of the profits and gains derived from such business for 10 consecutive assessment years; and
  4. d) in computing the ‘total income’ of the Assessee, such deduction shall be allowed.

The import of Section 80-IA is that the ‘total income’ of an assessee is computed by taking into account the allowable deduction of the profits and gains derived from the ‘eligible business’.

Background

In the case at hand, the ‘gross total income’ of the Assessee for the assessment year 2002-03 was less than the quantum of deduction determined under Section 80-IA of the Act. The Assessee contended that income from all other heads including ‘income from other sources’, in addition to ‘business income’, have to be taken into account for the purpose of allowing the deductions available to the Assessee, subject to the ceiling of ‘gross total income’. The Appellate Authority was of the view that there is no limitation on deduction admissible under Section 80-IA of the Act to income under the head ‘business’ only.

The Court was hearing a case where the Revenue had argued that sub-section (5) of Section 80-IA refers to computation of quantum of deduction being limited from ‘eligible business’ by taking it as the only source of income.

“… the language of sub-section (5) makes it clear that deduction contemplated in sub-section (1) is only with respect to the income from ‘eligible business’ which indicates that there is a cap in sub-section (1) that the deduction cannot exceed the ‘business income’.”

On the other hand, the Assessee had argued that sub-section (5) pertains only to determination of the quantum of deduction under sub-section (1) by treating the ‘eligible business’ as the only source of income.

The claim of the Assessee was that in computing its ‘total income’, deductions available to it have to be set-off against the ‘gross total income’, while the Revenue contends that it is only the ‘business income’ which has to be taken into account for the purpose of setting-off the deductions under Sections 80-IA and 80-IB of the Act

Analysis and conclusion

In Synco Industries Ltd. v. Assessing Officer, Income Tax, Mumbai, (2008) 4 SCC 22, the Supreme Court was concerned with Section 80-I of the Act. Section 80-I(6), which is in pari materia to Section 80-IA(5), is as follows:

“ 80-I(6) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powered craft to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under subsection (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the hotel or the business of repairs to ocean-going vessels or other powered craft were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.”

It was held in Synco Industries that

  • for the purpose of calculating the deduction under Section 80-I, loss sustained in other divisions or units cannot be taken into account as sub-section (6) contemplates that only profits from the industrial undertaking shall be taken into account as it was the only source of income.
  • Section 80-I(6) of the Act dealt with actual computation of deduction whereas Section 80-I(1) of the Act dealt with the treatment to be given to such deductions in order to arrive at the total income of the assessee.

In CIT (Central), Madras v. Canara Workshops (P) Ltd., Kodialball, Mangalore, (1986) 3 SCC 538, the question that arose for consideration before this Court related to computation of the profits for the purpose of deduction under Section 80-E, as it then existed, after setting off the loss incurred by the assessee in the manufacture of alloy steels. Section 80-E of the Act, as it then existed, permitted deductions in respect of profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule. It was argued on behalf of the Revenue that the profits from the automobile ancillaries industry of the assessee must be reduced by the loss suffered by the assessee in the manufacture of alloy steels.

The Court was, however, not in agreement with the submissions made by the Revenue. It was, hence, held that the profits and gains by an industry entitled to benefit under Section 80-E cannot be reduced by the loss suffered by any other industry or industries owned by the assessee.

Referring to the aforesaid authorities, the Court held that

“… Sub-section (5) cannot be pressed into service for reading a limitation of the deduction under sub-section (1) only to ‘business income’.”

[CIT v. Reliance Energy Ltd., 2021 SCC OnLine SC 349, decided on 28.04.2021]


Judgment by: Justice L. Nageswara Rao 

Know Thy Judge| Justice L. Nageswara Rao

For Revenue: Senior Advocate Arijit Prasad

For Assessee: Senior Advocate Ajay Vohra

Op EdsOP. ED.

Background

Section 27 of the Contract Act, 18721 (ICA) dealing with agreement in restraint of trade states as under:

(1) Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void.

Exception 1.― Saving of agreement not to carry on business of which goodwill is sold–

One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits; so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein:

Provided that such limits appear to the Court reasonable, regard being had to the nature of the business.

It thus provides that an agreement restraining a person from carrying on a lawful profession, trade or business is void to that extent. However, an agreement not to carry on within specified local limits, a business similar to the business of which goodwill is sold, can be enforced, provided the limits of restraint are reasonable.

The provision regarding restraint of trade has been lifted from David D. Field’s Draft Code for New York which was based upon the old English doctrine of restraint of trade, as prevailing in ancient times. While construing the provisions of Section 27, the High Courts in India have held that neither the test of reasonableness nor the principle that the restraint being partial or reasonable are applicable to a case governed by Section 27 of the Contract Act, unless it falls within the exception.

The original draft of the Law Commission did not contain any provision regarding restraint of trade. But the provision of Section 27 was introduced afterwards at the time of enactment, the main object being to protect trade in India. The Law Commission in its Thirteenth Report2 had recommended that the provision should be suitably amended to allow such restrictions and all contracts in restraint of trade, general or partial, as were reasonable, in the interest of the parties as well as of the public. However, no action had been taken on the said recommendation.

Scope

The section is general in nature, and declares all agreements in restraint of trade void, pro tanto, except in the case specified in the exception. The section lays down a very rigid rule invalidating restraints, not only general restraints but also partial ones, and also restricts the exception of narrow local limits.

Broadly, agreements in restraint of trade are those in which one or both parties limit their freedom to work or carry on their profession or business in some way. Such agreements are often criticised because they conflict with public interest, and because they are unfair in unduly restricting personal freedom.

In a sense, every promise relating to business dealings operates as a restraint of trade, because it restricts the promisor’s future liability. It is the restraint which is “unreasonably detrimental to a freely competitive private economy”. (Farnsworth, Contracts, 3rd edn., p. 331). Further Lord Birkenhead laid down two tests to decide whether an agreement is in restraint of trade. They are:

(a) Whether it is reasonable as between parties.

(b) Whether it is consistent with the intent of public.

The Delhi High Court in Modicare Ltd. v. Gautam Bali2, has explained the validity of Section 27 of ICA as:

  1. Section 27 of the Contract Act makes void i.e. unenforceable, every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind. Thus, even if the defendants or any of them, under their agreement with the plaintiff, had undertaken not to carry on or be involved in any capacity in any business competing with the business of the plaintiff, even after leaving employment with/association of the plaintiff, the said agreement, owing to Section 27 supra, would be void and unenforceable and the plaintiff on the basis thereof could not have restrained any of the defendants from carrying on any business or vocation, even if the one which the defendant had agreed not to carry on. I find it incongruous that the law, on the one hand would disable a plaintiff from enforcing a contract where the defendant had voluntarily agreed not to do something, by going to the extent of declaring such contract void, but on the other hand, enable the same plaintiff to the same relief under the law of tort. To hold so, would make the law look like an ass.
  2. Section 27, contained in a legislation of the year 1872, on promulgation of the Constitution of India in the year 1950, conferring the right to practice any profession or to carry on any occupation, trade or business, the status of a fundamental right, under Article 19(1)(g) thereof, today has a different connotation. Article 19(6) only clarifies that nothing contained in clause (g) shall affect the operation of any existing law or prevent the State from making any law, imposing in the interest of general public, reasonable restrictions on the exercise of right conferred by the said clause. Thus, restrictions, in the interest of general public and if reasonable, to the fundamental right to practice any profession or to carry on any occupation, trade or business, can be imposed only by law. The law of tort of unreasonable interference in carrying on business, in view of Section 27 of the Contract Act in force since 1872, was not the existing law within the meaning of Article 19(6) of the Constitution.

 Restrictive nature of covenants in the agreement

A contract may have several covenants, which may be positive, negative, general or partial. In contacts containing negative obligations, the restraint is direct. When a positive obligation limits freedom, it imposes an indirect restraint and can be equally restrictive or unreasonable as a negative obligation.

The principle of restraint of trade and restrictive nature of covenants in agreements have been elucidated by several courts in a plethora of judgments. In Navigators Logistics Ltd. v. Kashif Qureshi3, the Delhi High Court has explained the validity of Section 27, ICA as:

  1. Section 27 of the Contract Act is as under:

* * *

  1. The interpretation of Section 27 of the Contract Act is not res integra.

56. Applying the aforesaid law to the facts of the present case, it is found that as per the plaintiff also, there was no fixed term for which either of Defendants 1 to 8 had agreed to serve the plaintiff. The clause in the employment contract claimed by the plaintiff also is to the effect that Defendants 1 to 8, for a period of one year after ceasing to be the employee of the plaintiff, to not compete with the plaintiff. Such a clause in the employment contract, as per the judgments aforesaid of the Supreme Court, is void under Section 27 of the Contract Act. Once the clause is void, there can be no injunction or damages in lieu of injunction on the basis thereof.

The High Court of Delhi in Arvinder Singh v. Lal Pathlabs (P) Ltd.4, has explained the principle of Section 27, ICA as under:

  1. As per Section 27 of the Contract Act every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind is to that extend void. It is the exception which protects from being void such an agreement provided the conditions envisaged by the exceptions are satisfied. The condition for the exception is that if the goodwill of a business has been sold, an agreement to refrain from carrying on similar business, if it appears to the Court to be reasonable, would be protected and would be enforced.
  1. The words “profession” “trade” and “business” used in Section 27 are specific words and we see no scope to give meaning to the word profession applying the rule of noscitur a sociis.
  1.  The reasoning of the learned Single Judge is obviously on the basis that the activity of a profession is akin to that of a business, for if this was not the reasoning, the exception to Section 27 of the Contract Act would not even apply. Such agreements not to carry on business if goodwill of a business is sold, subject to the restriction being reasonable, are alone carved out from the general embargo embossed by Section 27 of the Contract Act.
  1. The sweep of the span of the injunction to prohibit the appellants to carry on their profession as pathologist or radiologist in any manner whatsoever would render the appellants incapable of working as a pathologist or radiologist in any capacity whatsoever, and this would be contrary to Section 27 of the Contract Act.

In Percept D’Mark (India) (P) Ltd. v. Zaheer Khan5, the Supreme Court explained the provisions of Section 27, ICA as under:

  1. If the negative covenant or obligation under Clause 31(b) is sought to be enforced beyond the term i.e. if it is enforced as against a contract entered into on 20-11-2003 which came into effect on 1-12-2003, then it constitutes an unlawful restriction on Respondent 1’s freedom to enter into fiduciary relationships with persons of his choice, and a compulsion on him to forcibly enter into a fresh contract with the appellant even though he has fully performed the previous contract, and is, therefore, a restraint of trade which is void under Section 27 of the Contract Act.
  2. Under Section 27 of the Contract Act: (a) a restrictive covenant extending beyond the term of the contract is void and not enforceable; (b) the doctrine of restraint of trade does not apply during the continuance of the contract for employment and it applies only when the contract comes to an end; and (c) As held by this Court in Gujarat Bottling Co. Ltd. v. Coca Cola Co.6, this doctrine is not confined only to contracts of employment, but is also applicable to all other contracts.

Construing the section in its literal terms, the section only deals with agreements which operate as a total bar to the exercise of a lawful business, and does not cover agreements which merely restrain freedom of action in actual exercise of a lawful business. The above principle was emphasised by the Supreme Court in Gujarat Bottling Co. Ltd. v. Coca Cola Co.7, as:

  1. There is a growing trend to regulate distribution of goods and services through franchise agreements providing for grant of franchise by the franchiser on certain terms and conditions to the franchisee. Such agreements often incorporate a condition that the franchisee shall not deal with competing goods. Such a condition restricting the right of the franchisee to deal with competing goods is for facilitating the distribution of the goods of the franchiser and it cannot be regarded as in restraint of trade.
  1. If the negative stipulation contained in paragraph 14 of the 1993 Agreement is considered in the light of the observations in Esso Petroleum Co. Ltd. v. Harper’s Garage (Stourport) Ltd.8, it will be found that the 1993 Agreement is an agreement for grant of franchise by Coca Cola to GBC to manufacture, bottle, sell and distribute the various beverages for which the trade marks were acquired by Coca Cola. The 1993 Agreement is thus a commercial agreement whereunder both the parties have undertaken obligations for promoting the trade in beverages for their mutual benefit. The purpose underlying paragraph 14 of the said agreement is to promote the trade and the negative stipulation under challenge seeks to achieve the said purpose by requiring GBC to wholeheartedly apply to promoting the sale of the products of Coca Cola. In that context, it is also relevant to mention that the said negative stipulation operates only during the period the agreement is in operation because of the express use of the words “during the subsistence of this agreement including the period of one year as contemplated in paragraph 21” in paragraph 14. Except in cases where the contract is wholly one sided, normally the doctrine of restraint of trade is not attracted in cases where the restriction is to operate during the period the contract is subsisting and it applies in respect of a restriction which operates after the termination of the contract.
  1. Shri Shanti Bhushan has submitted that these observations must be confined only to contracts of employment and that this principle does not apply to other contracts. We are unable to agree. We find no rational basis for confining this principle to a contract for employment and excluding its application to other contracts. The underlying principle governing contracts in restraint of trade is the same and as a matter of fact that courts take a more restricted and less favourable view in respect of a covenant entered into between an employer and an employee as compared to a covenant between a vendor and a purchaser or partnership agreements. 
  1. Since the negative stipulation in paragraph 14 of the 1993 Agreement is confined in its application to the period of subsistence of the agreement and the restriction imposed therein is operative only during the period the 1993 Agreement is subsisting, the said stipulation cannot be held to be in restraint of trade so as to attract the bar of Section 27 of the Contract Act. We are, therefore, unable to uphold the contention of Shri Shanti Bhushan that the negative stipulation contained in paragraph 14 of the 1993 Agreement, being in restraint of trade, is void under Section 27 of the Contract Act.

In Niranjan Shankar Golikari v. Century Spg. and Mfg. Co. Ltd.9, the Supreme Court held that restraint of trade may be good if shown to be reasonably necessary for freedom of trade. The Court has held thus:

  1. As to what constitutes restraint of trade is summarised in Halsbury’s Laws of England (3rd edn.), Vol. 38, at p. 15 and onwards. It is a general principle of the common law that a person is entitled to exercise his lawful trade or calling as and when he wills and the law has always regarded jealously any interference with trade, even at the risk of interference with freedom of contract as it is public policy to oppose all restraints upon liberty of individual action which are injurious to the interests of the State. This principle is not confined to restraint of trade in the ordinary meaning of the word “trade” and includes restraints on the right of being employed …The rule now is that restraints whether general or partial may be good if they are reasonable. A restraint upon freedom of contract must be shown to be reasonably necessary for the purpose of freedom of trade. A restraint reasonably necessary for the protection of the covenantee must prevail unless some specific ground of public policy can be clearly established against it … A person may be restrained from carrying on his trade by reason of an agreement voluntarily entered into by him with that object. In such a case the general principle of freedom of trade must be applied with due regard to the principle that public policy requires for men of full age and understanding the utmost freedom of contract and that it is public policy to allow a trader to dispose of his business to successor by whom it may be efficiently carried on and to afford to an employer an unrestricted choice of able assistants and the opportunity to instruct them in his trade and its secrets without fear of their becoming his competitors (Fitch Dewes10). Where an agreement is challenged on the ground of its being a restraint of trade the onus is upon the party supporting the contract to show that the restraint is reasonably necessary to protect his interests. Once, this onus is discharged, the onus of showing that the restraint is nevertheless injurious to the public is upon the party attacking the contract.

 Recently, the Delhi High Court in Aakash Educational Services Ltd. v. Sahib Sital Singh Bajwa11, reiterated the position of law on the scope of enforceability of negative covenants in a commercial contract, holding that once a contract is terminated, a negative covenant thereunder to restrict the trade, business or profession of any party is hit by Section 27 of ICA. The court also held that while such negative covenants may be legal during the subsistence or currency of the contract, however, post termination of the contract, barring exceptional cases, they will be unenforceable.

Partnership contracts 

A number of exceptions to Section 27, ICA have been incorporated in the Partnership Act 1932 (IPA), keeping in view the overall importance of the common partnership business. Such exceptions pertain to agreements between partners in four situations:

(a) during continuance of business;

(b) at the time of any partner ceasing to be a partner;

(c) at time of dissolution of the firm; and

(d) on sale of goodwill of the firm.

Section 11 of IPA authorises the partners to determine their mutual rights and duties themselves trough a mutual agreement, which may be express or implied. The section further explains that an agreement, whereby it is agreed that a partner shall not carry-on business other than that of the firm while he is a partner, is valid.

As per Section 36, IPA, when a partner ceases to be a partner in the firm and his accounts are settled, he may be required to make an agreement that after he ceases to be a partner, he shall not carry on any business similar to that of the firm within a specified period or within specified local limits. Such an agreement tends to protect the interest of partners still continuing the business, and therefore held to be valid.

Section 54 of IPA states that on dissolution of the firm, some of the partners may procure an agreement from other partner(s), the latter agreeing not to carry on business similar to that of a firm. Such an agreement shall also be valid provided the local limits or the limit of time in respect of which the restrictions are imposed, are reasonable.

As per Section 55, on the sale of goodwill there may be an agreement between the partners and the buyer of goodwill, that the partners shall not carry on any business similar to that of the firm within a specified period or within specified local limits. Such an agreement has been held to be valid.

In Hukmi Chand v. Jaipur Ice & Oil Mills Co.12, the Jaipur Bench of Rajasthan High Court has upheld the validity of the agreement entered into between a retiring partner and the other partners, wherein the former sold his share of goodwill and agreed not to carry on similar business on the adjoining plot of land, which came to his share. The Court further held that the burden of proof that the restrictions imposed in any agreement of restraint of trade are reasonable, is on the party which pleads them as reasonable. 

Contracts of service

There are also several cases where restraints are placed on personal service during the subsistence of personal service contract, and it has held that such restraint would be reasonable only during the period of such contacts and not beyond that.

 The Delhi High Court in K.D. Campus (P) Ltd. v. Metis Eduventures (P) Ltd. India13, has held that once the employer has treated the employment contract of the employee as terminated, then he cannot proceed to enforce any negative covenant as against the employee. The Court held as under:

  1. In the present case the contract of employment has admittedly been prematurely terminated. According to the plaintiff, unilaterally and illegally by the defendants No. 2 to 8. It is not the case of the plaintiff that the plaintiff, notwithstanding such unilateral and illegal termination of the contract of employment by the defendants No. 2 to 8, is continuing to treat the defendants No. 2 to 8 as in the employment of the plaintiff or is continuing to pay the emoluments which the plaintiff under the contract had agreed to pay to the defendants No. 2 to 8. Rather, it is the plea of the defendants No. 2 to 8 that their past emoluments, for the period for which they served the plaintiff, were also not paid and which compelled them to look for employment elsewhere. Once the plaintiff itself is treating the contract of employment with each of the defendants No. 2 to 8 as terminated and has stopped performing his obligations under the said contract to the defendants No 2 to 8, in my view the present case would fall in the genre of employer seeking to enforce the negative covenant after the termination of service and which is not permissible in law. 
  1. In my opinion, it is only during the period for which the employee continues to serve the employer and receives emoluments from the employer can the employer enforce the negative covenant unless it is shown that the enforcement of negative covenant beyond the period of wrongful repudiation of the contract is necessary to protect the interest of the employer. However, such restraint can be to protect any proprietary right of the employer and not to prevent competition. 
  1. The plaintiff in the present case has indeed not shown any proprietary right which may be infringed by Defendants 2 to 8 joining employment elsewhere or by indulging in the activity of teaching. Moreover, Defendants 2 to 6 who are teachers cannot be expected to teach any subject other than that in which they are qualified to teach and it is also not the plea that they are capable of getting employment elsewhere in any other capacity. We are today living in an age where employment avenues are scarce and if Defendants 2 to 8 are restrained as sought, they would necessarily be driven to idleness and a state of penury.

In Superintendence Co. of India (P) Ltd. v. Krishan Murgai14, the Supreme Court has also affirmed that any negative covenant beyond the termination of the service is void. The Court has held as under:

  1. Under Section 27 of the Contract Act, a service covenant extended beyond the termination of the service is void. Not a single Indian decision has been brought to our notice where an injunction has been granted against an employee after the termination of his employment.
  2. On a true construction of Clause 10 of the agreement, the negative covenant not to serve elsewhere or enter into a competitive business does not, in my view, arise when the employee does not leave the services but is dismissed from service. Wrongful dismissal is a repudiation of contract of service which relieves the employee of the restrictive covenant.

 Protection of trade secrets and confidential information

 In an employment contract, the employer has trade secrets and business connections, worthy of protection. In case of restraints in contracts of employment, it is necessary to show that employee has entered into a contract with a customer, or has trade secrets of the employer. An employer can lawfully prohibit his employee from accepting any position, after determination of his employment, where the employee is likely to utilise the information of trade secrets acquired by him. 

Trade combinations

 Agreements between traders to combine and regulate their business for the purpose of promoting their common interest are not considered to be against public policy and consequently not in restraint of trade. The main objective of making such agreement is to avoid competition between themselves by mechanism such as fixing minimum process, pooling their resources, regulating supply of goods and services, pooling profits and distributing the same as per some agreed formula. Similarly, if two or more persons agree to jointly carry on their business and avoid competition among themselves or even to monopolise the trade, is nothing but doing lawful act of promoting their commercial interest, and the same is valid.

Though an agreement between persons to regulate their own trade is valid, a bare agreement in restraint of competition is void. Such an agreement would be valid if it is ancillary to their commercial interest and is also consistent to public interest.

 Solus agreements

 There may be agreements where one party is to deal exclusively with the product of a particular producer or manufacturer and not to deal with any other person. Such agreements are called solus or exclusive dealing agreements. For example, a buyer of a certain commodity may agree that he will purchase all his requirements from a particular manufacturer only, or vice-versa. The validity of such agreements depends on the object of the parties. Such a type of agreement would be valid if it is reasonable for benefiting the parties to the agreement, and if such agreement aims at putting undue restrictions by one party on the other with an objective to monopolise trade, then such an agreement is void.

Exception – Sale of goodwill

Regarding the exception to the section relating to sale of goodwill, when a person sells the goodwill of his business, he may give an undertaking to the buyer of the goodwill that he will not carry on that kind of business of which the goodwill is being sold. Such an agreement puts a restraint on the seller of the goodwill, but the same is valid for the purpose of protection of interest of the buyer of goodwill, for which he has paid the consideration. When there is no sale of goodwill of a business, an agreement not to carry on such business would be against public policy and therefore void. Therefore, the scope of exception to Section 27 is limited. Further it would operate only so long as the buyer or a person deriving title from him carries on a business for lifetime. Further, the restrictive covenant would strand extinguished when the goodwill comes to an end.


  Advocate and a qualified Chartered Accountant, presently practising at Supreme Court and Delhi High Court.

1 <http://www.scconline.com/DocumentLink/47U3hio9>.

2 <http://www.scconline.com/DocumentLink/PAfjro2g>.

2 2019 SCC OnLine Del 10511

3 2018 SCC OnLine Del 11321.

4 2015 SCC OnLine Del 8337

5 (2006) 4 SCC 227.

6 (1995) 5 SCC 545

7 (1995) 5 SCC 545

8 1968 AC 269 : (1967) 2 WLR 871.

9 (1967) 2 SCR 378

10 (1921) 2 AC 158.

11 2020 SCC OnLine Del 1719

12 1980 SCC OnLine Raj 58

13 2018 SCC OnLine Del 13366

14 (1981) 2 SCC 246.

Compliance Checklist
Op EdsOP. ED.

Memorandum of Association is charter document of a company, a proof of the company’s identity. It defines the very purpose of a company’s existence. Every company whether for business or charitable purposes has to be incorporated with memorandum of association. Every member to the memorandum is assumed to have read the contents of the memorandum. A company cannot assume any business outside the purview of its memorandum. The memorandum contains the clause relating to the name of the company, registered office, objects, liability, capital and subscription.

In the lifetime of a company, it may so happen that there is a need to change the name of the company. Change of name of the company would be required due to change in business activity or operations of the company, change association with the holding company, change in name of the holding company (in India or abroad), etc. Under the Companies Act, 2013 (the Act), there is a specific procedure for changing the name of the company. This article provides a comprehensive compliance checklist for the procedure for change of name of the company (not by conversion of public company into private company or vice versa).

In Pioneer Protective Glass Fibre (P) Ltd. v. Fibre Glass Pilkington Ltd.[1], it was held that on a change of its name of a company, it does not stand dissolved nor any new company comes into existence. It follows that after change of its name, if any legal proceeding is commenced or instituted by a company in its old name, it would be a case of mere misdescription and not a case of initiation of a proceeding by a person not in existence.

In Wasava Tyres v. Printers (Mysore) Ltd.[2], it was held that the consequences of plaintiff company becoming a public limited company was of no consequence insofar as the rights and obligations of the company were concerned, nor did it render defective any legal proceedings by or against it, by virtue of the provisions of Section 23(3) of the Companies Act, 1956.

  1. Applicable provisions with respect to the name of company.—According to Section 4 of the Act, the name of the company should be, with the last word “limited” in the case of a public limited company, or the last words “private limited” in the case of a private limited company. However, the said provisions are not applicable to a company registered under Section 8 of the Act. A company shall not be registered with a name which contains: (a) any word or expression which is likely to give the impression that the company is in any way connected with, or having the patronage of, the Central Government, any State Government, or any local authority, corporation or body constituted by the Central Government or any State Government under any law for the time being in force; or (b) such word or expression, as may be prescribed—unless the previous approval of the Central Government has been obtained for the use of any such word or expression.
  2. Applicable provisions w.r.t. change of name of company.—Any change in the name of a company shall be subject to the provisions of sub-sections (2) and (3) of Section 4 of the Act and shall not have effect except with the approval of the Central Government (powers delegated to Registrar of Companies) in writing. However, no such approval shall be necessary where the only change in the name of the company is the deletion therefrom, or addition thereto, of the word “private”, consequent on the conversion of any one class of companies to another class in accordance with the provisions of this Act.
  3. Application for name availability.—A person may make an application, in such form and manner and accompanied by such fee, as may be prescribed, to the Registrar for the reservation of a name set out in the application as—(a) the name of the proposed company; or (b) the name to which the company proposes to change its name. Upon receipt of the said name application, the Registrar may, on the basis of information and documents furnished along with the application, reserve the name for a period of 20 days from the date of approval or such other period as may be prescribed. In case of an application for reservation of name or for change of its name by an existing company, the Registrar may reserve the name for a period of 60 days from the date of approval.

     According to Rule 9 of the Companies (Incorporation) Rules, 2014, an application for reservation of name shall be made through the web service available at <www.mca.gov.in> by using web service SPICe+ (Simplified pro forma for incorporating company electronically plus: INC-32), and for change of name by using web service RUN (Reserve Unique Name) along with fee as provided in the Companies (Registration Offices and Fees) Rules, 2014, which may either be approved or rejected, as the case may be, by the Registrar, Central Registration Centre after allowing resubmission of such web form within 15 days for rectification of the defects, if any.

  1. Board approval.—The agenda for change of name of the company shall be first approved or transacted by the Board of Directors of the company. A Board meeting shall be duly convened in accordance with the provisions of Section 173 of the Act after giving proper notice, ensuring presence of quorum and passing of the resolution with requisite majority. According to Rule 29 of the Companies (Incorporation) Rules, 2014, the change of name shall not be allowed to a company which has not filed annual returns or financial statements due for filing with the Registrar or which has failed to pay or repay matured deposits or debentures or interest thereon. However, the change of name shall be allowed upon filing necessary documents or payment or repayment of matured deposits or debentures or interest thereon as the case may be. Along with the application, the Board may submit the said declaration to that effect.
  2. Application for name reservation.—After confirming the above conditions and passing a Board resolution to the effect, the Board of Directors shall make an application through the reserve unique name (RUN) facility provided by the Ministry of Corporate Affairs on its portal. Depending upon the reasons for change of name of the company, the company shall submit an application for change of name, resolution passed by Board of Directors for change of name, declaration w.r.t. compliance of Rule 29 of the Companies (Incorporation) Rules, 2014, details of change of name of holding company (if applicable), revised certificate of incorporation of holding company (if applicable), resolution of joint venture company (if applicable), NOC/resolution of person own the trade mark of the new name, note for change of name of the company (e.g. change in regulations under SEBI/ IRDA), etc.
  3. Some important pointers for making name application.—(a) the name stated in memorandum shall not be identical with or resemble too nearly to the name of an existing company registered under this Act or any previous company law; (b) the chosen name shall not constitute an offence under any law for the time-being in force; (c) the name is not undesirable in the opinion of the Central Government (powers delegated to Registrar of Companies); (d) the name should not contain any words or expressions which give an impression that the company is connected with or receives patronage from the Central Government, any State Government, or any local authority, corporation or body constituted by the Central Government or any State Government under any law for the time-being in force; (e) the name should not be prohibited under the Emblems and Names (Prevention of Improper Use) Act, 1950; (f) the name should not include a registered trade mark in its name, unless the owner of the trade mark has consented to usage of the same; (g) the name should not be identical to the name of LLP; and (h) the Board of Directors shall ensure compliance of Rules 8, 8-A, 8-B of the Companies (Incorporation) Rules, 2014.
  4. Name approval from Central Government.—An application for change of its name by an existing company, the Registrar may reserve the name for a period of 60 days from the date of approval. In this period, the company shall obtain the approval of the shareholders. In closely held private companies or public companies, the shareholders’ meeting can be called by passing a circular resolution or in other cases, a Board meeting may be called and convened. The name approval letter shall be placed before the Board and the shareholders’ meeting shall be called in accordance with the provisions of the Act and articles of association of the company.
  5. Shareholder Approval.—Any alteration in the memorandum of association requires the approval of the shareholders by way of a special resolution. Such approval may be sought either at an extraordinary general meeting or an annual general meeting. The said special resolution shall be filed through e-form MGT-14 within 30 days of passing of the resolution with the Registrar of Companies. The attachments to e-form MGT-14 shall be: (i) notice and explanatory statement of the shareholders’ meeting; (ii) shorter notice consent of shareholders, if applicable; (iii) an application, highlighting the reasons for change of name; (iv) name approval letter received from the MCA; (v) declaration by chairman, where the shareholder meeting was held through video conferencing and other audio visual means (if applicable); and (vi) copy of memorandum of association.
  6. Application to Central Government.—After filing e-form MGT-14 with the MCA, the company shall then file e-form INC-24 with the MCA. The said e-form relates to “application for approval of Central Government for change of name”. The attachments to e-form MGT-14 shall be: (i) notice and explanatory statement of the shareholders’ meeting; (ii) shorter notice consent of shareholders, if applicable; (iii) name approval letter received from MCA; (iv) certified true copy of minutes of the general meeting of the members where the special resolution was passed for change of name of the company; (v) declaration with respect to the compliance of Rule 29 of the Companies (Incorporation) Rules, 2014; and (vi) copy of any approval order obtained from the authorities concerned (such as RBI, IRDA, SEBI, etc.) or the Department concerned.
  7. Registration of the new name of the company.—After perusal of the e-forms and attachments, the Registrar of Companies shall register the new name of the company and will issue a fresh certificate of incorporation in form INC-25 for the company. The change in the name of the company shall be complete and effective only on the issue of such a certificate.
  8. Compliances post change of name.—After the name change procedure is complete i.e. after receiving the certificate of incorporation with the new name, following compliances shall be conducted; (i) each and every copy of the memorandum of association should reflect the change of name as approved by the Registrar of Companies; (ii) the company should print its new name along with the old name on all letterheads, bills, documents and records; (iii) new name along with old name needs to be displayed outside the registered office; (iv) all relevant bank accounts, licences from different authorities need to be updated with the new name; and (v) in case of a listed company, the old name and the new name should be displayed for a continuous period of 1 year from the date of name change on its website.

Gaurav N Pingle, Practising Company Secretary, Pune. He can be reached at gp@csgauravpingle.com.

[This article was first published in the Practical Lawyer Magazine, March Issue 2021. Republished with the kind permission of Eastern Book Company.]

[1] 1984 SCC OnLine Cal 171

[2] 2006 SCC OnLine Kar 679.

Op EdsOP. ED.

Human rights is increasingly occupying an important position with respect to a good corporate life, performance indicator and social responsibility. In the last decade, there has been an increased focus on the ramifications of the actions of business entities on individuals, communities and the environment.

However, despite the increasing discourse on the impact of business on human rights, effective attempts to check human rights violations in the supply chains and activities of corporations have remained limited. There continues to exist a gap between the policies being framed on business and human rights and its effective practical implementation. The cause for the same can be attributed to the lack of the political will, in some States, to strictly regulate human rights violations by business entities.

This lack of political backing to a binding business and human rights framework, particularly in developing countries, is largely a result of the economic considerations of the States, and their inclination to incentivise foreign investments in their territory by providing lenient investor obligations, labour markets and regulatory frameworks.

Let us analyse some recent developments on business and human rights, with particular reference to the Indian scenario.

Developments in Law

As against the traditional understanding that business and human rights are unconnected aspects of law and practice, in recent times, international community has growingly become aware of the impact of the actions of business entities on enjoyment of human rights. In 2011, the United Nations Guiding Principles of Business and Human Rights (UNGPs) acknowledged the duty and responsibility of States and corporations, to respect and protect human rights.[1] The principles articulated by the UNGPs stand as its three pillars: (i) State duty to protect; (ii) corporate responsibility to respect; and (iii) access to remedy.

The UN Working Group on Business and Human Rights had urged all States to develop a national action plan on business and human rights, such that they can effectively implement the UNGPs in their territories. For the same, the Working Group developed a “guidance note,” which stipulated four criteria for developing the national action plans: (i) the plan must based upon the UNGPs; (ii) it must reflect the State’s actual and potential business related human rights abuses; (iii) it must be inclusive and transparent; and (iv) it must be regularly reviewed and updated. Several States have already formulated their national action plans to implement the UNGPs in their respective States.

While India announced in 2018 that it will be formulating a National Action Plan on Business and Human Rights, the same is still to be finalised and released. The Ministry of Corporate Affairs, which is steering the process of formulating the National Action Plan, was undertaking consultations and accepting comments from stakeholders till March 2020, and the document must be in its final stage now.[2]

The National Action Plan will be expected to target several issues that are prevalent in India, such as dispossession and rehabilitation of communities, child labour, bonded labour, health and safety of workers, favourable working conditions, social protections, among others. Importantly, the most problematic issue with respect to regulating activities of businesses in India is that around 90 per cent of the labour works in the informal sector.[3] Employers of informal labourers are often aloof of voluntary commitments to corporate social responsibility.

Therefore, for the policies to be effectively put into practice, they must be devised in a manner to bring the informal labourers under the ambit of its protection. Unless the same is done, the policies framed by the State will effectively only be protecting 10 per cent of the workforce in India. It is also very important for the National Action Plan to emphasise on the need to ensure access to remedies to all the victims of business-related human rights violations.

Incidentally, in 2019, the Ministry of Corporate Affairs had revised the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011 (NVGs) and formulated the National Guidelines on Responsible Business Conduct (Ngrbc). The revision of the guidelines was made with the intention to urge businesses to actualise the UNGPs in letter and spirit.[4] However, all these guidelines only provide for voluntary commitments, and unless the same is replaced with mandatory compliance requirements, it will continue to serve mere lip service, without bringing about any effective change. An effective business and human rights framework will require accountability and enforceability of the principles enshrined in the UNGPs.

The United Nations Human Rights Council (Unhrc), in another move to regulate business and human rights, has also been attempting to devise a legally binding instrument to regulate, in international human rights law, the activities of transnational corporations and other business enterprises.[5] State parties to the instrument will be required to regulate effectively the activities of all business enterprises domiciled within their territory or jurisdiction, including those of a transnational character. This would include ensuring that business, in its territory, undertake human rights due diligence, respect all internationally recognised human rights and prevent and mitigate human rights abuses throughout their operations.

Another development is the Hague Rules on Business and Human Rights Arbitration, which was also formulated recently with the objective of imparting a set of rules for arbitration in relation to business and human rights disputes.[6] The intention of the Hague rules is to subscribe to the application of the third pillar of the UNGPs which secures the access to remedy. It will be interesting how States and corporations respond to these developments in the coming years.

Position in Bilateral Investment Treaty Framework

The lack of political will on part of the States to regulate human rights compliances of corporations can be understood from the fact that traditionally investment treaties have failed to impose any obligation upon the investors, with respect to environment protection, labour and human rights. Moreover, while some recent treaties do have provisions relating to investor compliances/obligations, they merely call for a bona fide commitment to corporate social responsibility standards, without providing any enforceability of the compliances. The Indian Model Bilateral Investment Treaty (BIT), 2015 can be a good example for the same. Article 12 of the Model BIT reads as:

“Investors and their enterprises operating within its territory of each party shall endeavour to voluntarily incorporate internationally recognised standards of corporate social responsibility in their practices and internal policies, such as statements of principle that have been endorsed or are supported by the parties. These principles may address issues such as labour, the environment, human rights, community relations and anti-corruption.”

Therefore, as evident, the Indian Model BIT only calls for a voluntary endeavour to respect human rights, and does not stipulate a binding obligation to that regard. To put the same in context, a comparison can be drawn to the more efficient investor obligations that can be found in the Southern African Development Community (SADC) Model BIT, 2012. The SADC Model BIT stipulates, in concrete terms, that the investors and/or investments are mandatorily required to respect the international environmental, labour and human rights obligations binding on the host State.

As it is becoming increasingly evident that transnational businesses can have a major impact on environment and human rights in the host State, States should negotiate treaties that are more balanced between the States and investors, and provide for investor compliances as jurisdictional prerequisites in investment treaties.

Impact of Covid-19 Pandemic

The pandemic, as we know, has caused major economic disruptions and destabilised the global economy. At its peak, extended travel limitations and broken supply chains had led to significant drop in the prospects of several business entities and corporations. Compromised supply chains and economic losses, as a chain reaction, caused several corporations resort to harsh measures to keep themselves afloat, such as discriminate laying off of workers, altering of working cultures and cutting on due diligence cost.[7]

The UN Working Group on Business and Human Rights, in its statement on the ramifications of the pandemic, had acknowledged that the actions of corporations are, directly or indirectly, affecting the rights of their employees, contract workers and individuals involved in their supply chains.[8] The pandemic brought to light the issues pertaining to the right to health, equality, livelihood, safety and favourable conditions to work of the workers.[9] While States undertook several relief measures,[10] and urged corporations to continue to provide safety and recourses on a non-discriminatory basis, the lack of adequate protection against violations of labour and human rights was manifest.

As States embark on economic recovery, it is imperative that they strike an equilibrium between safeguarding health, reducing economic and social disruption, and respecting human rights. As a response to the pandemic, efforts must be taken to impose stricter guidelines on human rights impact assessments, grievance mechanisms, and other due diligence obligations of corporations, such that the three pillars of the UNGP can be effectively reinforced. Particularly, the temptations to resort to lenient labour regulations and investor compliances, to aid, economic recovery and incentives investments must be resisted. For instance, the ordinances passed to suspend certain labour laws for a period of next three years, in several Indian States, was heavily criticised by human rights activists as being a clear departure from India’s commitment to the UNGP.[11] Developing countries are particularly susceptible to such a trend, and if not checked, it might limit progress on business and human rights regulations.

Conclusion

It is the duty of businesses to conduct human rights due diligence within their supply chains and operations. To ensure that the business effectively perform their duties, the States must provide adequate regulations and check mechanisms. Therefore, both States and corporations must cooperate and ensure a healthy corporate environment in the country, which is respectful of the internationally accepted human rights and UNGPs. In conclusion, it can be said that the increasing discourse on business and human rights is a positive sign, only time will tell if the same is effectively put in practice.


Bhumesh Verma is Managing Partner at Corp Comm Legal and can be contacted at bhumesh.verma@corpcommlegal.in. Abhishar Vidyarthi, Student Researcher and can be contacted at avividyarthi@gmail.com.

[1]United Nations Guiding Principles on Business and Human Rights, 2011, <https://www.ohchr.org/documents/publications/guidingprinciplesbusinesshr_en.pdf>.

[2] National Action Plan, <https://www.mca.gov.in/Ministry/pdf/NationalPlanBusinessHumanRight
_13022019.pdf
>.

[3]Employment in Informal Sector and Conditions of Informal Employment, 2013, <https:// labour.gov.in/ sites/default/files/Report%20vol%204%20final.pdf>.

[4]National Guidelines on Responsible Business Conduct, 2019, <https://www.mca.gov.in/ Ministry/pdf/NationalGuildeline_15032019.pdf>.

[5]Legally binding instrument to regulate, in international human rights law, the activities of transnational corporations and other business enterprises, 2020, <https://www.ohchr.org/Documents/HRBodies/HRCouncil/WGTransCorp/Session6/OEIGWG_Chair-Rapporteur_second_revised_draft_LBI_on_TNCs_and_OBEs_with_respect_to_Human_Rights.pdf>.

[6] Hague Rules on Business and Human Rights Arbitration, 2019, <https://www.cilc.nl/project/the-hague-rules-on-business-and-human-rights-arbitration/>.

[7] Howard Levitt, Some employers may be using pandemic as excuse to fire employees protected by human rights codes, Financial Post (21-4-2020), <https://financialpost.com/executive/careers/some-employers-may-be-using-pandemic-as-excuse-to-fire-employees-protected-by-human-rights-codes>.

[8] Statement by the UN Working Group on Business and Human Rights, <https://www.ohchr.org/EN/NewsEvents/Pages/DisplayNews.aspx?NewsID=25837&LangID=E>.

[9]      Respecting Human Rights in the time of the Covid-19 Pandemic, 16-4-2020, <https://www.ihrb.org/focus-areas/covid-19/report-respecting-human-rights-in-the-time-of-covid19>.

[10] Measures, such as stimulus packages, tax reliefs, wage subsidies, etc., were undertaken in order to safeguard businesses, and thereby, restrict the hardships from trickling down to the workers. One of the best examples of the same can be seen in the form of Canada Emergency Wage Subsidy, wherein, to protect the Canadian workforce, the eligible businesses were provided up to 75 per cent of employer salaries; Jamie Golombek, Wage subsidy programs for employers: Canada’s Covid-19 response plan, <https://www.cibc.com/content/dam/personal_banking/advice_centre/tax-savings/covid-wage-subsidy-en.pdf/>. Similarly, corporations were urged to continue to provide access to accurate informations, paid sick/preventive leaves, payments to hourly waged staff, emergency supplies on a non-discriminative basis, etc.

[11]Ashima Obhan and Bambi Bhalla, Suspension of Labour Laws Amidst Covid-19, <https://www.mondaq.com/india/employment-and-workforce-wellbeing/935398/suspension-of-labour-laws-amidst-covid-19>.

Op EdsOP. ED.

In the backdrop of the pandemic, much discussion on the Insolvency and Bankruptcy Code, 2016[1] (the Code) has revolved around whether creditors should continue to have a right to commence insolvency proceedings. However, the pandemic induced lockdowns and the recession that has followed have also raised important questions pertaining to the rights of resolution applicants (RA). The scheme of the Code is such that when insolvency resolution proceedings are initiated against a corporate debtor (CD), a committee of its creditors (CoC) calls for bids from parties who may be interested in taking over or purchasing the assets or business of that company. The party whose bid is accepted is the successful RA under the Code.

Expectedly, after the pandemic, financial pressures have mounted not only on companies who have debts due to banks and other lenders, but also on such RAs. To successfully buy the assets and businesses of CDs, an RA would have to infuse sizable sums of money. Generally, this money is arranged for in two to three different ways. One source of funds is the cash in hand that the RA may have. A second is the revenues that can be generated from the business and assets of the CD. A third is fresh debt raised from the market to pay off the institutional lenders of the CD. In the present recession-hit economy, it is only natural that all these sources of funds would be under some stress. Therefore, it is likely that RAs may no longer want to purchase companies that they were interested in before the lockdown. To cut the long story short, RAs may want to withdraw from the corporate insolvency resolution process (CIRP). Pertinently though, the question of withdrawal from the CIRP is not relevant only in the context of a recession-hit economy. It is an independent question of law that needs to be answered sooner rather than later.

It is in this context that a recent decision of the National Company Law Appellate Tribunal (NCLAT) in Kundan Care Products v. Amit Gupta[2] assumes significance. The NCLAT held that a successful RA is not entitled to withdraw a resolution plan (the plan). The appellant, Kundan Care, had emerged as the successful RA in the CIRP of Astonfield Solar (Gujarat) Pvt. Ltd. (Astonfield). Although Kundan Care’s plan had been accepted by the CoC on, it was yet to be approved by the NCLT. In the meantime, Kundan Care approached the NCLT to withdraw its plan, on the grounds that the plan had been rendered commercially unviable due to delay in concluding the CIRP. The NCLT rejected this application, prompting Kundan Care to prefer an appeal.

Before the NCLAT, Kundan Care argued that the Code does not contain any provision to compel specific performance of the plan. As a corollary, an application to withdraw a plan found to be unviable had to be permitted.

The NCLAT not only declined to grant permission to withdraw, but also held that “the argument advanced on behalf of the appellant that there is no provision in the  Insolvency and Bankruptcy Code compelling specific performance of resolution plan by the successful resolution applicant has to be repelled”. The NCLAT provided four distinct reasons for the same:

 (a) First, that the Code had no specific provision permitting withdrawal of accepted plans.

(b) Second, once the plan was approved, it became a binding contract between the parties, which “is not a contract of personal service which may be legally unenforceable”.

(c) Third, the RA would be estopped from “wiggling out” of the liabilities flowing from the resolution plan.

(d) Fourth, the assets of the CD were bound to deplete during the time consumed by the CIRP process, and if this were accepted as a ground for withdrawal, every RA would “walk out with impunity”.

The overarching rationale behind the decision was that any withdrawal by the RA could bring about “disastrous consequences” for the CD, and push the CD into liquidation. The NCLAT also observed that by permitting withdrawal, it would be interfering with the commercial wisdom of the CoC. This decision was then carried in appeal before the Supreme Court, which was pleased to grant an ad interim stay on the judgment.

Necessarily, this question will now be resolved by the Supreme Court. However, there are several legal issues that subliminally undercut the decision of the NCLAT, and which we believe merit a widespread discussion..

No specific provision permitting withdrawal

 The absence of a specific provision in the Code permitting withdrawal only means that the NCLT lacks the jurisdiction to entertain an application for withdrawal. This is borne out by the decision in Educomp Solutions Ltd. v. Ebix Singapore Pte. Ltd.[3], where the NCLAT held that the adjudicating authority had no jurisdiction to entertain an application for the withdrawal of a plan after it had been approved.

However, this does not mean the withdrawal of a resolution plan is always prohibited by the Code. Let us consider a scenario, as in the present case, where the plan is yet to be approved by the NCLT. Section 31 of the Code needs the adjudicating authority to assess whether a plan may be implemented efficiently, before approving the plan. An RA who at the outset suggests that it may no longer be in a position to abide by the plan on account of a downturn in the economy or otherwise, would be a prime indicator of the fact that the plan may not be successfully implemented. In such cases, the plan ought to be rejected by the NCLT. In effect, even without considering a separate application for withdrawal, the NCLT can indirectly permit the RA to withdraw.

A separate application for withdrawal is not needed because the Code envisages liquidation as the solution in such situations. Sections 33(3) and (4) clearly stipulate that where a plan has been contravened, the adjudicating authority “shall pass a liquidation order”, upon application by an aggrieved party. Thus, instead of compelling an unwilling RA to perform a plan, the Code rightly considers liquidation as an efficacious alternative to the CIRP. Liquidation also follows when CIRP fails.

The NCLAT’s suggestion that liquidation would necessarily be a worse outcome, that has to be avoided at all costs, is not borne out by the Code. In fact, sale of assets in liquidation in a time-bound fashion may be more effective than protracted litigation to compel an RA to abide by the plan.

Resolution Plan is a binding contract capable of specific performance

 By holding that withdrawal cannot be permitted, the NCLAT in Kundan Care[4] effectively holds that the NCLT has the power to compel an RA to specifically perform a plan. This is directly contrary to the NCLAT’s own decision in Metalyst Forging Ltd. v. Deccan Value Investors LP[5], where the NCLAT observed as follows:

“In the aforesaid background, the adjudicating authority (National Company Law Tribunal), Mumbai Bench rightly observed that the Insolvency and Bankruptcy Code do(es) not confer any power and jurisdiction on the adjudicating authority to compel specific performance of a plan by an unwilling resolution applicant ”.

It is now a well-settled position in law that specific performance may only be awarded of a contract[6]. Whether a plan is a contract is itself ambiguous. The scheme of the Code is such that various RAs who may be interested in the assets of a CD submit their plans to the resolution professional of the CD, who in turn places them before the CoC. By an internally decided mechanism, this Committee then selects one of the plans as the successful plan.

Following this logic, the two parties to the contract would have to be the CoC and the RA.  Were the plan a “contract”, it would only bind the parties thereto. However, Section 31 makes it clear that the plan is a document in rem – it binds every stakeholder of the CD, including those who may not have consented to the plan. Moreover, for there to be a concluded contract there must be an offer and an acceptance. In a CIRP though, the mere acceptance of one of a plan, does not amount to an acceptance of the offer. This is simply because a plan comes into force and becomes legally binding only if it is approved by the NCLT. No concluded contract comes to be only on the CoC selecting a plan.

Further, the transaction covered under the plan indicates that it is not truly a “contract” at all. Under a plan, the consideration that flows to the RA is control over the CD.  However, the CD does not belong to the CoC – under company law, the CD is owned by its shareholders. It is a settled position in law that a party cannot pass a better title than what she possesses. Therefore, conventionally the CoC would have no authority to transfer the CD. Ownership and control would have to be passed by shareholders themselves, either as parties to the contract or at the behest of the CoC. However, this is evidently not the case in a plan. Therefore, the power given to the CoC to “transfer” the Company is only statutory and not contractual in nature.

In any case, even if a plan is assumed to be a concluded contract, it is not one of which specific performance can be awarded. Under Section 14(b) of the Specific Relief Act, a resolution plan would be a contract which needs constant supervision by the court and is thus, not capable of specific performance. Suppose, for a moment, that the CD operated a restaurant chain and was taken over by an RA in the CIRP. The plan submitted by the RA envisioned that 30% of the revenues earned through the restaurant business every year would be used to pay off the debts of the CD. In the current climate, the RA no longer wants to proceed with adding a restaurant chain to its line of businesses. To compel the RA to specifically perform this contract would mean that he would necessarily have to operate a chain of restaurants, do business and garner revenues. These are obligations that no court can constantly supervise. Similarly, when a plan envisages that an RA will raise fresh debt to finance the older debts of the CD, a court cannot compel him to take a loan. Therefore, we say that even if a plan were assumed to be a contract, it is not one of which specific performance can be readily awarded by a civil court.

 Estoppel

 The other prominent reason provided by the NCLAT to repel Kundan Care’s submissions was that it was barred by estoppel from withdrawing the plan. At the outset, it is seen that the decision is internally inconsistent on this point. As we have seen above, the NCLAT considers the plan to be a concluded contract. Once that is so, it is doubtful whether a question of estoppel can arise –– estoppel is a doctrine which enforces promises when there is no contract, on the basis that the other party has relied upon the promise and acted to his detriment. When there is a contractual relationship, remedies would presumably exist under the contract and estoppel would not coexist.

In any case, there are other reasons why estoppel cannot apply here. First, the courts have previously had the occasion to observe that the highest bidder in an auction is not estopped from retracting his bid.[7] Rightly so, because this is not a scenario where an equitable intervention is warranted. When an auction fails, property may be reauctioned or the bidder may be sued for damages or, as in the present case, the company may be liquidated. This, as stated, is also the scheme of the Code, which provides for liquidation of companies where plans cannot be successfully implemented. Second, injuncting an RA from withdrawing on the grounds of estoppel, would be tantamount to indirectly awarding specific performance of a contract that is not capable of specific performance.

 Conclusion

 Based on our opinion on the issues that arise in this context, we contend that the decision of the NCLAT in Kundan Care[8] is incorrect and deserves to be revisited. Otherwise, we might find ourselves in a situation where struggling businesses are handed over to unwilling RAs, who are looking for every opportunity to exit. These outcomes may well be counterproductive. Moreover, there is also the associated question of refund of performance guarantees and/or earnest money deposits usually provided by RAs along with the plan. This is an independent question, which too will have to be considered by the SC when it revisits Kundan Care[9]. For the paucity of space though, we have not examined it in this piece.


Advocate, Bombay High Court. Graduated from National Law School of India University, Bangalore, BCL from University of Oxford. Works in the chambers of Mr Shyam Kapadia.

‡ Advocate, Bombay High Court. Graduated from National Law School of India University, Bangalore. Works in the chambers of Sr. Advocate Mr Venkatesh Dhond.

[1] Insolvency and Bankruptcy Code, 2016

[2] 2020 SCC OnLine NCLAT 670

[3] 2020 SCC OnLine NCLAT 592

[4] 2020 SCC OnLine NCLAT 670.

[5] 2020 SCC OnLine NCLAT 837.

[6] Kerala Financial Corpn. v. Vincent Paul, (2011) 4 SCC 171 and Amrit Lal Suri v. C.P. Gupta, 1990 SCC OnLine Del 87

[7] Vishal Builders (P) Ltd. v. Delhi Development Authority, 1977 SCC OnLine Del 29  and Shakharamseth Employees Union v. ICICI Bank Limited, 2009 SCC OnLine Bom 1707

[8] 2020 SCC OnLine NCLAT 670.

[9] Ibid.

Reserve Bank of India
Hot Off The PressNews

Reserve Bank had announced in the Statement on Developmental and Regulatory Policies dated October 09, 2020, that the Real Time Gross Settlement System (RTGS) will be available round the clock on all days of the year. Accordingly, RTGS 24x7x365 was launched with effect from 00:30 hours on December 14, 2020.

India became one of the few countries in the world to operate its RTGS system round the clock throughout the year. This comes within a year of operationalising NEFT 24×7 by the Reserve Bank.

RTGS, which began its operations on March 26, 2004, with a soft launch involving four banks, presently handles 6.35 lakh transactions daily for a value of ₹4.17 lakh crore across 237 participant banks. The average ticket size for RTGS in November 2020 was ₹57.96 lakh making it a truly large-value payment system. RTGS uses ISO 20022 format which is the best-in-class messaging standard for financial transactions. The feature of positive confirmation for credit to beneficiary accounts is also available in RTGS.

Round the clock availability of RTGS will provide extended flexibility to businesses for effecting payments and will enable the introduction of additional settlement cycles in ancillary payment systems. This can also be leveraged to enhance operations of Indian financial markets and cross-border payments.


Reserve Bank of India

[Press Release dt. 09-12-2020]

Case BriefsHigh Courts

Madras High Court: G.R. Swaminathan, J., directed the confiscated goods to be released on a provisional basis noting the delay on the part of Authorities in the adjudication of the matter.

Petitioner a dealer registered under the Goods and Services Tax Act who imports toys from China. It also purchases goods from Delhi-based dealers.

Dealer’s Stand

Dealer’s state that the returns till March 2020 have been filed and there are no arrears. Due to the lockdown restrictions amidst the pandemic, the business was shut down since April, 2020.

Following the partial lifting of restrictions, the petitioner reopened the business. Superintendent, CGST conducted a search at the petitioner’s place of business.

After the search operation, mahazar was drawn which was followed by a seizure order.

The said orders of seizure and prohibition issued by respondent 3 have been put to a challenge.

Analysis & Decision

Bench while addressing and analysing the issue, stated that,

Lord Atkin in his celebrated dissent in Liversidge v. Anderson, (1942) AC 206, proclaimed that laws speak the same language in war as in peace and that the words have only one meaning.

Likewise, laws speak the same language during normal as well as in pandemic times.

“…contemporary imperatives demand that courts, whenever possible, ought to adopt that approach which will kick- start the economy.”

Court also referred to Section 67 (1) and (2) of the Central Goods and Services Tax Act, 2017 which talks about the Power of inspection, search and seizure.

Supreme Court in ITO v. Lakhmani Mewal Das, (1976) 3 SCC 757, held that 

“…the existence of the belief can be challenged by the assessee but not the sufficiency of reasons for the belief. The expression “reason to believe” does not mean a purely subjective satisfaction on the part of the officer. It must be held in good faith. It cannot be merely a pretence. It is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section.”

Evading GST

In the present matter, the impugned proceedings were initiated based on the intelligence developed by CGST (HPU), Madurai that the petitioner is evading GST by mis-declaring the goods while importing.

It has been shown that the stock register was not maintained at the petitioner’s place of business, hence the Court doesn’t want to quash the seizure order, through the order of prohibition has to be necessarily interfered with.

No show-cause notice to date after the lapse of 40 days was issued.

In view of the above, Court stated that the respondent may not be in a hurry, they can afford to wait. Officials who get their salaries in the first week of every month may not be conscious of the cost of delays in such cases.

Further, the Court added that Adjudication proceedings may go on for months. That is why the statute provides for the provisional release of the detained goods.

Therefore, the Court directed the respondents to release the goods on a provisional basis and on taking a personal bond with a payment of Rs 2 lakhs.

While parting with its decision, Bench stated in regard to the Chinese products that,

“…general market is flooded with Chinese goods. The public must make a conscious choice to encourage swadeshi products.”

“The Indian entrepreneur must rise to the occasion. He must ask himself as to why the chinese products are preferred and he must come out with alternatives. There must be no compromise in quality. At the same time, the price factor should also be borne in mind.”

Petition was partly allowed in the above terms. [Tvl.Rising International Co. v. Commr. of Central GST and Central Excise,  2020 SCC OnLine Mad 2951, decided on 06-10-2020]

OP. ED.SCC Journal Section Archives

Introduction

Much like sovereign democracy, corporate democracy plays to the will of the majority. The majority rule enforces a contractual bargain among shareholders that puts collective decision-making ahead of individual interests. By placing business decisions in the hands of the Board of Directors, it introduces an element of efficiency. However, what is to prevent a tyranny of the majority that steamrolls minority shareholders? Here, company law intervenes to moderate the behaviour of dominant shareholders to ensure they do not adversely affect the interests of the minority. Minority shareholders can resort to various remedies under company law, such as oppression, prejudice and mismanagement, to restore the balance of power.

While Indian company law has incorporated versions of shareholder remedies since the mid-20th century, the design of the remedies as they currently operate finds place in Sections 241 and 242 of the Companies Act, 2013 (“the 2013 Act”). No sooner than these provisions took effect,[1] they faced a litmus test in one of India’s fiercest corporate battles in recent times. On 24-10-2016, the Board of Tata Sons Ltd., the holding company of the revered Tata group of companies, ousted its Executive Chairman, Mr Cyrus Mistry, from the position. The Shapoorji Pallonji group, of which Mr Mistry is a part, is a minority shareholder in Tata Sons. The group promptly initiated action under Sections 241 and 242 of the 2013 Act against Tata Sons and its controlling shareholders, being two Tata trusts.

The Shapoorji Pallonji group challenged various decisions taken by Tata Sons. These included several business decisions taken in various Tata group companies (referred to as “legacy issues”), the amendments to the articles of association of the holding company Tata Sons to enhance the powers of the Tata shareholders and ultimately the removal of Mr Mistry as the Executive Chairman and thereafter as a Director of Tata Sons. While the dispute was pending adjudication, Tata Sons converted itself from a public company into a private one, a matter also contested legally. After marathon hearings, the Mumbai Bench of the National Company Law Tribunal (“NCLT”) issued a 368-page ruling[2] declining to grant any relief to the minority shareholders.

[Read more]


†  Associate Professor, Faculty of Law, National University of Singapore. I would like to thank Souryaditya Sen for research assistance. Errors or omissions remain mine.

** This Article was first published in Supreme Court Cases. It has been reproduced with the kind permission of Eastern Book Company

[1]  Ministry of Corporate Affairs, Government of India, Notification S.O. 1934(E) dated 1-6-2016 (being also the effective date).

Case BriefsHigh Courts

Karnataka High Court: A Division Bench of Alok Aradhe and H.T. Narendra Prasad, JJ. set aside the decision of the Income Tax Appellate Tribunal in favour of the assessee.

The present appeal was filed under Section 260-A of the Income Tax Act, 1961 (IT Act) wherein an order passed by the Income Tax Appellate Tribunal (ITAT) was challenged.

The substantial question under deliberation was:

If the ITAT was correct coming to the decision that deductions which fall under Section 10-B of IT Act the can be computed without setting off of brought forward business losses and unabsorbed depreciation?

The Court relied on the decision in CIT v. Yokogawa (India) Ltd., 2016 SCC OnLine SC 1491 and held that the decision of the Tribunal in the said matter was incorrect. Therefore, the above-mentioned question was answered in favour of the assessee.[Commissioner of Income Tax v.  Mind Tree Consulting Ltd., I.T.A No. 50 of 2013, decided on 17-08-2020]

Case BriefsInternational Courts

Caribbean Court of Justice (CCJ): A Five Judge Bench comprising of Saunders (President) and Wit, Hayton, Anderson, and Rajnauth-Lee, JJ. awarded only vindicatory damages to the appellant as they could only prove breach of their constitutional right and no consequential damage thereto.

There was an indictment unsealed in the United States of America whereby the appellant was charged with securities fraud, evasion of taxes, money laundering and conspiracy to commit those offences to which the respondent were directed to search the offices of the appellant in order to prevent the destruction of evidence under the Treaty on Mutual Legal Assistance and International Co-operation Act, 2014.

It was stated by the appellant that only the copy of the search warrant was read to him but neither was he given a copy of the same nor the inventory of the item seized along with denial of the appellant into its office during the search which was unreasonably oppressive and thus was the breach of Section 18 of said Act as it interfered with its privacy guaranteed under Sections 9 and 14 of the Constitution which consequently led to the closing down of the business. It was argued by the respondents that when the trade license of the appellant’s company was suspended it was neither challenged nor renewed which eventually led to the closing of the business.

The Court came to the conclusion that the search was excessive but not oppressive and appellant has failed to prove a link as to how the breach harmed their business and hadn’t been for the search conducted still the appellant couldn’t have continued their business due to the suspended license. Also, the appellant overestimated the value of their business by 80% when they asked for the respective damages which clearly cannot be allowed. Accordingly, the appeal was partly allowed by awarding the appellant vindicatory damages in lieu of breach of their constitutional rights. [Titan International Securities INC v. Attorney General of Belize, [2018] CCJ 28 (AJ), dated 17-10-2018]

Legislation UpdatesNotifications

G.S.R. 681(E).- In exercise of the powers conferred by sub-section (3) of Section 11 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on the recommendations of the Council, and on being satisfied that it is necessary so to do for the purpose of clarifying the scope and applicability of the notification of the Government of India, in the Ministry of Finance (Department of Revenue) No. 11/2017- Central Tax (Rate), dated the 28th June, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, sub-section (i), vide number G.S.R. 690(E), dated the 28th June, 2017, hereby inserts following Explanation in the said notification, in the Table, against serial number 3, in column (3), in item (vi), namely:

Explanation. – For the purposes of this item, the term ‘business’ shall not include any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.”.

2. This notification shall come into force with effect from 27th of July, 2018.

[F. No.354/13/2018-TRU]

Note: The Principal Notification No. 11/2017-Central Tax (Rate), dated 28th June, 2017, was published in the Gazette of India, Extraordinary, vide number G.S.R. 690 (E), dated 28th June, 2017 and was last amended by notification No. 1/2018- Central Tax (Rate), dated 25th January, 2018 vide number G.S.R. 64(E), dated 25th January, 2018.

[Notification No. 17/2018-Central Tax (Rate)]

Ministry of Finance

Op EdsOP. ED.

In the present day modern digital era, privacy has attracted the attention of many policymakers, Judges, and scholars. The digital environment has granted access to the entire world on a click, but has also exposed us to snooping eyes of the government and private individuals. It is in this context that the right to privacy plays a crucial role. With the aim of having a regulatory policy in place to protect all European Union (EU) citizens from any violation of personal data and privacy, the EU Parliament enacted the General Data Protection Regulation[1] (GDPR) on 14-4-2016[2], repealing the previous Directive 95/46/EC (old Directive).

This article aims to discuss the provisions of the GDPR and explore the impact on the Indian businesses. GDPR is important to be studied in the Indian context carefully for two reasons. Firstly, it has extraterritorial application (discussed below), thereby, affecting the interests of several Indian businesses operating within the EU. Secondly, GDPR has set international standards with respect to data protection regime in the global digital era. The principles embodied in the GDPR have been referred extensively in the judgment of K.S. Puttaswamy v. Union of India (Privacy judgment).[3] Even the Data (Privacy and Protection) Bill, 2017[4] introduced in the Lok Sabha follows the same framework as the GDPR and can be seen as the “summary” of GDPR.

Justice Chandrachud, in his judgment, acknowledged the internet usage to have increased exponentially and the individuals leave “electronic tracks”.[5] The tracks (including food habits, preferences), even though “inconsequential”, he notes that disclose who the user is and his/her interests. The age of information and its concomitants such as cookies, big data, data mining, and has given birth to complex issues for privacy. He focused on the centrality of individual’s autonomy, consent, and transparency. Similarly, Justice Kaul stressed on increasing invasion of privacy due to new technology, and gave support to principle in GDPR with respect to restrictions on “profiling” and “right to be forgotten”.[6]

This article is divided into four parts. In Part I, we discuss the categories of information covered under the phrase “personal data” and protected under the GDPR. In Part II, we discuss the scope of the GDPR and how Indian businesses would be covered due to the extraterritorial application of GDPR. In Part III, we talk about the extensive number of obligations imposed on the covered entities. Finally, in Part IV, we analyse the other impacts of the GDPR on the non-EU businesses.

I. Information covered under “personal data”

GDPR affords protection to information that falls within the ambit of “personal data”. “Personal data” was given a very broad definition in the old direction and the same has been carried forward in the GDPR. It is defined as “any information relating to an identified or identifiable natural person”[7]. A person can be identified by way of “a name, an identification number, location data, an online identifier or … factors specific to the physical, physiological, genetic, mental, economic, cultural or social identity of that natural person”[8]. The definition covers both “objective” (e.g., biometric data, presence of a substance in a patient’s blood) and “subjective” data (e.g., individual’s opinion, assessment of an employee, assessment of the reliability of borrowers). The data can be either false or true. It can be in any format (e.g. alphabetical, numerical, graphical, photographical or acoustic). For example, customer preferences, customer’s recorded voice in telephone banking, images taken by video surveillance, etc., they all constitute “personal data”. The only qualifier is that the data (or its combination) in the possession of the entity must be comprehensive enough to “identify” an individual. For instance, ordinarily, a very common family name might not to be sufficient to identify anyone, but the same family name used within a specific organisation (for example, a school) might be sufficient to identify the individual.[9] However, it is worth noting that anonymous or anonymised data is not “personal data” and hence is not covered by data protection regime, therefore, allowing free exchange of data where identification of individual is not possible.

II. Scope of GDPR

GDPR covers all EU “established” entities and certain non-EU “established” entities. Under the former, if an entity is operating in the EU through one of its “establishment[s]” (e.g. sales office or representative), and is processing the data of EU data subjects, irrespective of whether the processing is occurring in the EU or not, is covered under the ambit of the GDPR.[10] Under the extraterritorial application, a non-EU “established” entities, would be covered only if it is performing either of the following—

1.Offering goods and services to EU subjects

If a non-EU entity is directing its business activities towards the EU residents, and, in the process of doing so, is collecting personal data of the data subjects, then the entity would be covered under GDPR. The test is whether the entity envisages to offer goods and services to an EU resident. In deciding whether the activities are “directed” at EU residents or not, various factors would have to be considered, such as the intention of the non-EU entity, currency of the trade and the language used (with the possibility of placing the order in the local language of the target EU resident). Setting up a website merely accessible to EU residents is not covered.[11] This approach reflects the decision taken by the European Court of Justice in Weltimmo Sro v. Nemzeti Adatvédelmi és Informácioszabadsag Hatoság, where the Court factored in the use of the Hungarian language on the website.[12]

2. Monitoring behaviour of EU data subjects

This condition is, especially, designed to cover those entities that collect personal data on the internet for the purposes of profiling individuals, taking decisions regarding him/her, or for analysis or prediction of their personal preferences, attitudes and usage behaviours. As per the recitals of GDPR, under certain circumstances, personal data would also cover “cookie”[13] identifiers and IP addresses[14]. This can have widespread ramification for numerous entities that use cookies on their websites to gauge customer preference and usage pattern. A decision from the UK High Court in Vidal-Hall v. Google Inc. exemplifies similar understanding.[15] The Court in this case had held that browser-generated information (BGI) included IP addresses, websites visited, advertisements opened, among other things collected by Google through cookies constituted “personal data”.[16] This would have a huge impact on “how [businesses] collect, use and store private information, and what risk management controls are in place to protect them against potentially costly litigation”.[17]

III. Obligations on controller and/or processors under GDPR

GDPR classifies the entities into two categories — controller and processor. A controller is an entity that “determines the purposes and means of the processing of personal data”.[18] An entity processing the personal data on behalf of a controller is a processor.[19]

The majority of the obligations are imposed on the controller, however, it might be required to discharge these obligations through the processor. For instance, a controller employs another entity (processor) to process the consumer data collected by it. Now, if a data subject requests the controller to have access to the information relating to him, then the controller would direct the processor retrieve the data and send the same to the controller. The processor would be obliged to adhere to the controller’s directions.

Few of the important obligations that have been imposed on controller/processor to regulate privacy are mentioned below—

1. Strengthened consent requirements

GDPR has strengthened the requirements of consent, giving the data subjects control over whether or not their personal data will be processed. Consent from a data subject must be free, specific, informed, and with an explicit indication of their wishes (either by a statement or clear affirmative action).[20] The data subject has the right to withdraw their consent at any time,[21] and hence command a high degree of control. One of the major changes introduced is that it puts the burden of proof on the controller to prove that the data subject had given consent of data processing for a specified purpose.[22] Further, if the consent is obtained through a contractual agreement, then the consent for data processing must be distinguishable in appearance with the other parts of the agreement.[23]

2. Requirement of providing information to data subjects

If a controller is collecting information of a data subject, then an information notice must be provided to the latter. This notice must specify identity and contact details of the controller, purpose of data processing, period for which the data will be sorted, existence of various rights, recipients of the personal data, any other information necessary to guarantee fair processing of personal data, etc.[24] These conditions do not differ substantially from the old Directive.

3. Breach and notification

In case of personal data breach, the controller is responsible to report the matter to the appropriate supervisory authority without any delay and where feasible within 72 hours from the time of being aware of the same.[25] This obligation is not applicable if it is unlikely to result in a risk to the rights and freedoms of natural persons. If the breach poses high risk to the rights and freedoms of the individuals, then the controller has the obligation to inform the data subjects regarding the same “without any undue delay” after first becoming aware of the data breach.[26]

However, an obligation to inform the data subjects does not arise in three cases.[27] First, where the controller adopts technological protection measures, rendering the information breached as incomprehensible to the unauthorised person. Second, when the controller has undertaken certain measures to eliminate the risk; for instance, the controller immediately identifies and takes an action against the person concerned.[28] Third, in case the controller is required to be involved in a “disproportionate effort” (indicative factors such as number of subjects and age of the data), then a public notice or similar measures must be issued to inform the data subjects of the breach.[29]

4. Stronger rights given to data subjects

GDPR has strengthened the existing rights of the data subjects and introduced new rights as well. The subjects have a right to access the data possessed by the controller. The controllers must, upon request, confirm if they are processing an individual’s personal data, provide a copy of the data, and provide supporting explanatory materials. In certain circumstances, the subjects have the right to object to specific types of processing such as for research/statistical purposes, and for direct marketing, among others. The subjects have a new right of data portability, making it easier to transmit personal data between service providers.[30] GDPR not only fortifies the right to be forgotten, as recognised in Google Spain case[31] but also expressly acknowledges the counterbalance aspects and factors such as freedom of expression.[32]

5. Duty to undertake data protection measures

The controller/processor is required to implement appropriate technical and organisational measures, such as pseudonymisation[33] and encryption[34], in an effective manner and to integrate necessary safeguards in the processing to comply with the GDPR obligations and protect the rights of data subjects.[35]

6. Data protection impact assessment

Similar to the old Directive, GDPR mandates the controller to conduct an impact assessment for new technologies that pose high risk to the rights and freedoms of data subjects. This obligation is triggered only in cases where there is a systematic and extensive processing activities based on automated processing, large scale processing of sensitive data or criminal convictions, and monitoring of public areas. The controller is obliged to conduct an impact assessment of the envisaged processing on the protection of personal data.[36]

7. Appointment of Data Protection Officer

The business entities (controllers and processors) covered under GDPR are required to appoint a Data Protection Officer (DPO). This obligation is triggered if, (i) the core activities of the entity (as defined below) involves processing operations engaged in regular and systematic monitoring of data subjects; or (ii) there is large scale processing of special categories of data or data regarding criminal conviction. The Working Party 29 Guidelines[37] indicate that the core activities also include businesses whose data processing operations are “inextricable” to its core activities (e.g. processing of patients’ information by a hospital). However, if the processing is merely “necessary” or “essential” to the organisation, then it does not have the obligation to appoint DPO (e.g. storing information of salaries of an organisation’s employees). The designated representative will be the point of contact for the organisation including being subject to enforcement proceedings in the event of non-compliance by the controller or processor. However, this does not mean that the DPO will be personally liable for non-compliance of the duties of controller/processor.

8. Obligations specific to the processor

The processors will have to abide by the contract with the controller and comply with any other EU or member State’s law. The contract between the two must state that the processor can only carry out processing activities on the basis of written instructions from the controller. Processor has the responsibility to see that the personnel authorised to process the data has signed confidentiality agreements. The contract obliges the processor to delete/return the data to the controller after expiry of the contract. The processor must also provide all requisite information to the controller for demonstrating compliance with all its obligations.

IV. Other impacts on non-EU (including Indian) businesses

1. Allowing businesses to expand across borders

GDPR will help Indian businesses to expand their business operations from one or few EU countries to other member States. Under the old Directive, if an Indian company having its operations in Germany wanted to expand to another member State such as France, then the proprietor would have to deal with different regulators, within the local laws (French), for various data processing activities. This would add costs of obtaining legal advice and possibly make changes to business models in order to enter the new market. This had a prohibitive effect, especially in cases where few member States required the businesses to pay notification fees for processing data.

To ease business operations, GDPR has implemented a “one-stop-shop” mechanism. If an entity is engaging in cross-border processing of personal data (i.e. processing or its effect on data subjects takes place in more than one member State), it would have to identify one “lead” supervisory authority for the purposes of compliance. This selection would depend on the place where the main decisions regarding purpose and means of processing is taken, constituting its central administration, that will act as the lead supervisory authority.[38]

2. GDPR will help in the growth of new and small entrants in the market

As per GDPR, the citizens have a right to data portability.[39] It will allow them to move their personal data from one service provider to another. For instance, earlier if a new business wanted to enter in a specific market where there were big corporations already in place, the consumers might not want to shift to the new service provider, as their entire data is registered on the previous existing service providers’ database. Due to the data portability right now being available, the consumers would be able to easily shift to new service providers.

3. GDPR will help in improvement of international cooperation

GDPR has streamlined the process of data transfer to other countries. It provides for an “adequacy decision” — an acknowledgement given at EU level to a non-EU country that adequate protection is afforded to data subjects in its domestic law or international commitments.[40] If an adequacy decision has not been passed in favour of a country, then data transfer can take place on the basis of binding corporate rules. The standard corporate rules incorporate provisions requiring the data recipient to adhere to the EU standards of data protection. If there is neither an adequacy decision nor any binding corporate rules, data transfer can take place on the basis of very narrow exceptions. These exceptions cannot be invoked on a regular basis. They can only be used for a limited amount of data and number of subjects, and for compelling legitimate interests of the controller.[41]

4. Enhanced responsibility on knowledge process outsourcings

Under the GDPR, certain differentiated responsibilities have been imposed on both, controllers and processors. Under the old Directive, the data subjects had no right of remedy against the processors. However, GDPR provides that if the processor violates any of the provisions, then it will be deemed to be a controller in respect of the liability provisions.[42] These provisions puts numerous Indian businesses engaging in knowledge process outsourcing (KPO) at risk for liability.

GDPR is bound to give jitters to Indian businesses looking to expand their operations to the EU. In the long term, one can expect these norms to be imported to India as GDPR has taken the lead by setting high industry standards. The Privacy judgment[43] is just a start towards a safer tomorrow for the data subjects and a tougher one for the businesses.

——————————-

* 5th year students, BBA LLB, O.P. Jindal Global University, Sonipat.

[1]  Regulation on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation), Regulation (EU) 2016/679.

[2]  The GDPR will come into force on 25-5-2018.

[3]  (2017) 10 SCC 1, p. 252 of Justice Chandrachud’s judgment. The Report of group of experts referred to by Justice Chandrachud heavily relies on the EU Data Protection Regimes.

[4]  The Data (Privacy and Protection) Bill, 2017, Bill No. 100 of 2017, available at <http://164.100.47.4/BillsTexts/LSBillTexts/Asintroduced/889LS%20AS.pdf>.

[5]  Justice Chandrachud, (2017) 10 SCC 1, 196, 197.

[6]  Justice Kaul, (2017) 10 SCC 1, p. 7, 8, 35, 36.

[7]  Art. 4 of the GDPR.

[8]  Art. 4 of the GDPR.

[9]  Art. 29, Data Protection Working Party, Opinion 4/2007 on the concept of Personal Data, 01248/07/EN.

[10]  Google Spain SL v. Agencia Española de Protecci?n de Datos, 2014 QB 1022 : (2014) 3 WLR 659, also available at <http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX: 62012CJ0131&from=EN>.

[11]  Recital 23 of the GDPR.

[12]  (2016) 1 WLR 863, also available at <http://curia.europa.eu/juris/document/document.jsf?docid =168944&doclang=EN>.

[13]  Cookie is a message that is stored in the browser of the person who is storing a particular website. This message is sent to the server of the same website every time the person visits it again. Cookies are used to modify the content of the website in accordance with the previous behaviour of the person.

[14]  Recital 30 of the GDPR.

[15]  (2015) 1 WLR 4934 : 2015 EWCA Civ 311, available at <https://www.judiciary.gov.uk/wp-content/uploads/2015/03/google-v-vidal-hall-judgment.pdf>.

[16]  Para 115 of the judgment.

[17]  Aon Risk Solutions, Data privacy: New ruling may change the game for companies’ cyber exposures, available at <http://www.aon.com/attachments/risk-services/Google-vs-Vidal-Hall-Cyber-News-Alerts-Final.pdf>.

[18]  Art. 4(7) of the GDPR.

[19]  Art. 4(8) of the GDPR.

[20]  Art. 4(11) of the GDPR.

[21]  Art. 7(3) of the GDPR.

[22]  Art. 7(1) of the GDPR.

[23]  Art. 7(2) of the GDPR.

[24]  Art. 13(1) of the GDPR.

[25]  Art. 33(1) of the GDPR.

[26]  Art. 34(1) of the GDPR.

[27]  Art. 34(3) of the GDPR.

[28]  Guidelines on personal data breach notification under Regulation 2016/679.

[29]  Art. 34(3) of the GDPR.

[30]  Art. 17 of the GDPR.

[31]  2014 QB 1022 : (2014) 3 WLR 659, also available at: <http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:62012CJ0131&from=EN>.

[32]  Art. 17(3)(a) of the GDPR.

[33]  “Pseudonymisation” of data means substituting any of the identifying characteristics of data with a pseudonym, which prevents the data subject to be directly identified.

[34]  Encryption converts the data into a secret code. To access the data, a password is required.

[35]  Art. 32(1) of the GDPR.

[36]  Art. 35 of the GDPR.

[37]  The guidelines were formed under the previous EU data Regulation of 1995. It has continued to exist under GDPR as well.

[38]  Art. 51(3) of the GDPR.

[39]  Art. 20 of the GDPR.

[40]  Art. 45 of the GDPR.

[41]  Recital 113 of the GDPR.

[42]  Art. 28(10) of the GDPR.

[43]  (2017) 10 SCC 1.