7th nani palakhiwala memorial final
TRANSCRIPT
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Inspiring Will of Shri Nani A. Palkhivala (16-1-1920 — 11-12-2002)
When I die ...Give my sight to the man who has never seen a sunrise.
Give my heart to one who has known the agony of the heart.
Give my blood to a youth pulled from the wreckage of a car so that he might live to see his grandchildren play.
Let my kidneys drain the poison from another’s body.
Let my bones be used to make a crippled child walk.
Burn what is left of me and scatter the ashes to the wind to let the flowers grow.
If you must bury something, let it be my faults and my prejudices against my fellowmen.
Give my sins to the Devil.
Give my soul to the God.
If you wish to remember me, do it with a kind deed or word to someone who needs you.
If you do all l’ve asked, I’ll live forever.
Nani A. Palkhivala
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Shri N. A. Palkhivala was born on January 16, 1920 in Mumbai. He took his M. A. degree with Honours in English from the Mumbai University in 1942.
He was a Professor of Law at the Government Law College, Mumbai, for many years and was appointed as the Tagore Professor of Law at the Calcutta University.
He was a Member of the First Law Commission of India (1955) and also of the Second Law Commission (1958).
In September 1977, Mr. Palkhivala was appointed Ambassador of India to the United States of America.
In April 1978 the Lawrence University, Wisconsin (USA), conferred on Mr. Palkhivala, the Honorary Degree of Law with the following citation :–
“...As India’s leading author, scholar, teacher and practitioner of constitutional law you have defended the individual, be he prince or pauper, against the state; you have championed free speech and an unfettered press; you have protected the autonomy of the religious and educational institutions of the minorities; you have fought for the preservation of independent social organisations and multiple centres of civic power.... Never more did you live your principles than during the recent 18 month ordeal which India went through in what was called “The Emergency,”.... Under the shadow of near tyranny, at great risk and some cost, you raised the torch of freedom....”
Mr. Palkhivala was the author of ‘The Law and Practice of Income Tax’, which is the standard reference book on the subject. In 1984, ‘We, the People’ and ‘We, the Nation’ were published which contain extracts from his speeches and writings of over three decades. This volume also includes extracts from his speeches on the Union Budget, and an incisive analysis of the public policies of India.
He has argued a number of landmark cases in the Courts of India and abroad.
Mr. Palkhivala successfully argued before the Supreme Court, the cases which affirmed the Fundamental Rights of minorities to establish and administer educational and religious institutions of their choice, and to choose the language in which education should be imparted.
Mr. Palkhivala had many activities outside the immediate sphere of his work. He was the President of the Forum of Free Enterprise, Chairman of The Leslie Sawhny Programme of Training for Democracy, The A. D. Shroff Memorial Trust, The Lotus Trust, and the Income Tax Appellate Tribunal Bar Association, Bombay and a Trustee of other charitable trusts.
The Government of India awarded Shri N. A. Palkhivala with the Padmavibhushan on 26th January, 1998.
He was also felicitated with the Life time achievement award by the Governor of Maharashtra, His Excellency Shri P. C. Alexander at a function organised by the All India Association of Industries (AIAI) on 15th April, 1999.
Hon’ble Shri Atal Bihari Vajpayee, the then Prime Minister of India released a commemorative postage stamp in memory of late Shri N. A. Palkhivala on 16-1-2004 in Mumbai.
Shri N. A. PAlkhivAlA – A legeNd
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C o n t e n t s
About the All India Federation of Tax Practitioners ............................ 5
About Income Tax Appellate Tribunal Bar Association...................... 10
Messages ..................................................................................................11
List of Participating Colleges ................................................................24
Memoirs of the Late Shri N. A. Palkhivala ........................................26
6th Nani Palkhivala Memorial Research Paper Competition .............33
Synopsis of the Case Study ...................................................................62
Judges of the Competition ....................................................................64
Acknowledgments ..................................................................................66
Organizing Committee ...........................................................................67
Message from the General Secretary ....................................................70
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ABoUt ALL InDIA FeDeRAtIon oF tAX PRACtItIoneRs
1. Birth of the Federation
Inspired by the ideology to have a common platform for all those who practice taxation laws, irrespective of their individual affiliations and to enable them to share the benefits of their learning, experience and knowledge, eminent professionals from the fields of Direct and Indirect Taxes conceived the idea of establishing an all India body for the tax practitioners.
The seeds of Federation were sown at Mumbai at the First All India Conference on Taxation organized by The Chamber of Tax Consultants, under the able Presidentship of Shri B. C. Joshi, Advocate. This was the First historical conference by The Chamber of Tax Consultants, Mumbai while celebrating its Golden Jubilee year. More than 852 delegates from all the parts of the country were present. It was at the opening ceremony of this National Conference on 11-11-1976 that the doyens of the Professionals Christened the Association in the presence of Former Chief Justice of India, Hon’ble Justice J. C. Shah and distinguished Jurist Shri N. A. Palkhivala. Shri N. C. Mehta, Chartered Accountant, Mumbai, was appointed as Founder President and Shri P. C. Joshi was appointed as Secretary General. The Federation has completed 34 years of its purposeful existence.
2. objects
The cherished objects as enshrined in the Constitution of the Federation can briefly be stated as:
i. To provide an effective forum for the discussion of matters pertaining to tax laws, other laws, accountancy and their administration, for the collection, dissemination of information relating thereto, for the development of better understanding and co-operation amongst the members, tax administration, tax payers and all others concerned.
ii. To strive and work for independence of Quasi-Judicial Authorities, Appellate Authorities, the Settlement Commissions, Tribunals, Authority for Advance Ruling, Courts, or other similar Authorities;
iii. To make representations, file petitions and appear before the Tax Authorities, Tribunal and Courts in the matters of public interest and cases of importance to professionals and assessees in general;
About AiftP
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iv. To design and arrange activities to enhance the image of the profession in the society;
v. To carry out activities to develop and promote high ethical standards for the professionals.
vi. To promote and encourage friendly feelings, fraternity, unity and co-operation amongst the members and to inculcate feelings of brotherhood in them;
vii. To publish journals, books, bulletins, pamphlets, leaflets and magazines or any periodicals.
3. HeadOfficeandZones
With the generous contributions by its members the Federation has been able to own, establish, run a full-fledged and a well equipped Head Office at 215, Rewa Chambers, 31, New Marine Lines, Mumbai 400 020. The total strength of National Executive Committee Members is 55, headed by a National President, with a Deputy President, Five Vice Presidents and Five Joint Secretaries, (one from each zone) apart from the Secretary General, Treasurer and 43 of the elected body executive members. The Deputy President takes over as the National President in the next term. The term is two calendar years. Presently the President is Shri M. L. Patodi, Advocate, Kota and Shri S. K. Poddar, Advocate, Ranchi is the Deputy President. Our eminent Past Presidents are Shri N. C. Mehta, C.A., Mumbai (1978-83), Shri B. C. Joshi, Advocate, Mumbai (1984-90), Late Shri L. M. Mahurkar, Nagpur (1991-93), Shri P. C. Joshi, Advocate, Mumbai (1994-96). Late Shri Sukumar Bhattacharya, Kolkata (1997-99), Shri N. M. Ranka, Sr. Advocate, Jaipur (2000-02), Dr. K. Shivaram, Advocate, Mumbai (2003-05) Shri V. Ramachandran, Sr. Advocate, Chennai (2006 & 07) and Shri Bharatji Agrawal, Sr. Advocate, Allahabad (2008 & 09).
For efficient functioning, for ease of administration and to give wider representation, the AIFTP is divided into five zones namely Central Zone, Eastern Zone, Northern Zone, Southern Zone and Western Zone. Each Zone is headed by a Chairman supported by Vice Chairman, 2 Secretaries and Treasurer as Office Bearers. The term of the Zonal Office Bearers and Managing Committee coincide with the terms of the National Executive Committee.
4. Members
The membership of the Federation includes Advocates, Solicitors, Chartered Accountants and Tax Practitioners, practicing Direct or Indirect Taxes, from all States in the Country. Its member enjoy a strong bond of fellowship leading to fraternal brotherhood amongst
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professionals. The Federation is the symbol and spirit of national integration. As of today the Federation is the only professional organisation of our country which has 115 Professional Associations, from 18 states as its affiliated members and more than 4,700 individual as life members. Life membership Fee is Rs. 2,500/-. The membership is spread in 26 States and 4 Union Territories. It also has on its roll, Associate and Corporate Members. It is a unique association at the national level.
5. Journal
The Federation publishes a monthly Journal covering the latest reported & unreported decisions of the Supreme Court, High Courts and Income Tax Appellate Tribunals including the articles, opinions and latest developments on direct and indirect taxes by experts in the field. The unique feature is that every quarter, it publish the gist of important case laws published in 33 Tax Magazines from all over the country. The journal is sent to members on an additional annual subscription of Rs. 400/- and Rs. 1,000/- for three years and to Non-Members at Rs. 600/- per year and Rs. 1,500/- for three years.
6. Aiftp times
The Federation publishes a monthly newsletter called AIFTP TIMES which is sent to all the members free of charge. This newsletter contains important notifications, circulars and other topical information apart from various activities of the Federation. Eastern Zone also publishes AIFTP Times East.
7. Website/Library
The AIFTP website at www.aiftponline.org is an informative source for the members. The website is regularly updated by a team of dedicated professionals. It has its library at Mahalaxmi Income-tax office.
8. Representations and Publications
The Federation has been making Representations to focus the grievances of trade, industry and professionals. It regularly sends Pre and Post Budget Memorandums. Many of the suggestions and the recommendations are accepted. The Kar Vivad Samadhan Scheme, 1998 was suggested by our Federation. In order to get tax laws simplified and rational has filed more than 20 Writ Petitions in public interest. Representations are made to the Central and State Governments and higher tax administration for redressal of grievances and simplification of tax laws. It regularly publishes books in simple language and question answer format at a low cost. It has published more than 24 books.
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9. Conventions & seminars
The Association Members jointly with the Federation organize National Seminars, Conferences and Conventions in various parts of the Country to update its members. More than 10-12 Seminars are organised in a year. The Zones are active in organizing one day seminars, study circles, RRC, etc. in association with various local associations. The aim is to cultivate the strong bond of fraternity amongst members and professionals.
A unique feature of the Federation is that the faculties, chairmen, trustees, office bearers and members of the National Executive and Zonal Committees pay a registration fee and bear their own travel and stay expenses. They serve with dedication, devotion and generously contribute to ‘BUILD THE NATION’. Since 1994, the Federation has installed ‘RANKA BEST TAX SEMINAR’ competition. Since 2005, The Ranka Charitable Trust has installed Ranka Best Zone Chairman award. National Convention is held every second year. Many Chief Justices of India, Judges of the Supreme Court and High Courts have inaugurated the conferences, appreciated and applauded efforts and activities of the Federation.
10. Release of Commemorative Postage stamp in Memory of shri n. A. Palkhivala
We are pleased that, as per the request of the Federation, Government of India has released Commemorative Postage Stamp in Memory of Shri N. A. Palkhivala on 16th January, 2004. The then Hon’ble Prime Minister of India, Shri Atal Bihari Vajpayee released the stamp.
11. nani Palkhivala Memorial national tax Moot Court Competition & Research Paper Competition
For the development of the Tax Bar, we have started the “Nani Palkhivala Memorial National Tax Moot Court Competition” and “Research in Tax Laws” in the banner of “Palkhivala Foundation” at Mumbai, wherein every year students from more than 25 leading law colleges of India are participating in the competition and more than 50 Law Colleges are participating in the Research Competition. Since 2009, Federation is also organising “Shri Rajaram Agrawal Memorial National Tax Moot Court Competition” at Allahabad.
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12. First International tax Conference
All India Federation of Tax Practitioners in association with Asia Oceania Tax Consultants Association (AOTCA) has organized the First International Tax Conference at Mumbai from 19th to 21st November, 2009, representing 14 countries wherein 105 delegates enrolled, including 55 foreign delegates.
13. Achievements
Federation has voluntarily adopted the code of ethics in its Constitution for its members. Ethics are a way of life. The Federation is affiliated to the Asia Oceania Tax Consultants’ Association, Japan. The Federation has organised a successful International Study Tour in the month of May 2004 and May 2007.
Today, the Federation is considered a national integration of tax professionals of India. We have many eminent professionals as our members, some have been elevated to be Judges of the High Courts, Supreme Court and Tribunals. Most of the leading Senior Advocates who practice on Direct, Indirect Taxes, many past Presidents of Institutes of Chartered Accountants of India, Chairman and member of Bar Councils of various states, leading Lawyers, Chartered Accountants and Tax Practitioners of our country are esteemed members. We have great potential and ability to grow as a global association. The Federation is making an honest attempt to develop a strong Tax Bar for our country, which will be able to compete in International Tax Practice.
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About itAt BAr ASSociAtioN
ABoUt InCoMe tAX APPeLLAte tRIBUnAL BAR AssoCIAtIon
The Income Tax Appellate Tribunal Bar Association was established on 18th November 1965. Amongst those who held the office of President were Shri G. A. Gaitonde erstwhile President of the Income Tax Appellate Tribunal and Shri N. A. Palkhivala who had the longest tenure from the year 1967 till his demise in 2002. Thereafter Shri Y. P. Trivedi, Sr. Advocate served as a President up to December, 2006, Shri S. E. Dastur, Sr. Advocate served as a President from January, 2007 to December, 2008 and Shri Dinesh Vyas, Sr. Advocate has been elected as President of the ITAT Bar Association, Mumbai in January, 2009.
The present strength of the ITAT Bar Association is 450. Its members include Advocates, Chartered Accountants and Tax Practitioners practicing before the Income Tax Appellate Tribunal.
The ITAT Bar Association has one of the most well-equipped law libraries in Mumbai. More than 25 magazines and journals covering tax and allied subjects are available. Its premises are fully air-conditioned. The library was initially funded by Shri Chunilal Karsandas, a past member and has been subsequently supported by the D. M. Harish Foundation. A magnanimous donation from Shri S. E. Dastur enabled the ITAT Bar Association to set up a separate section on International Law dedicated to late Shri R. J. Kolah.
The ITAT Bar Association plays an active role in matters of vital importance to the Institution. It makes representations to the concerned authorities. The Income Tax Appellate Tribunal has always enjoyed judicial independence. When there was a threat of interference from the Executive in the administration of justice, the ITAT Bar Association filed a public interest petition before the Bombay High Court. The recent judgment of the Supreme Court in ITAT vs. V. K. Agarwal (1999) 235 ITR 175 (SC) contempt proceedings is the outcome of the Public Interest Petition filed by the Association. On another occasion, there was a move to shift the head quarters of the ITAT to Delhi. It was mainly due to the representations and efforts of the ITAT Bar Association that the Government was persuaded against taking this step and the headquarters continued in Mumbai. Again, when there was a proposal to constitute 5 additional Benches of Income-Tax Appellate Tribunal at Navi Mumbai it was the ITAT Bar Association which strongly opposed and convinced the Government that setting up additional Benches at Navi Mumbai was not in the interest of the tax payers or the Government. This would not have been possible but for the PIL filed by the ITAT Bar Association before the Bombay High Court. It is of significance that not only did the Govt. accept this suggestion but allotted additional space previously occupied by the All India Radio to the Income Tax Appellate Tribunal so that the five additional Benches now function alongside the then existing 5 Benches on the same floor.
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The President of India, Smt. Pratibha Devisingh Patil, is happy to know that the All India Federation of Tax Practitioners (AIFTP) and the Income Tax Appellate Tribunal (ITAT) Bar Association in association with the Moot Coutt Association of the Government Law College, Mumbai is organising the 7th Nani Palkhivala Memorial National Tax Moot Court Competition 2010 from October 7-9, 2010.
The President extends her warm greetings and felicitations to the organisers and the participants and wishes the event every success.
Officer on Special Duty (PR)
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Hon’ble Vice President of India is glad to know that the All India
Federation of Tax Practitioners (AIFTP) and the Income Tax Appellate
Tribunal (ITAT) Bar Association in association with the Government Law
College — Moot Court Association, Mumbai is organizing the 7th Nani
Palkhivala Memorial National Tax Moot Court Competition from 7th to
9th October, 2010.
Vice President of India extends his greetings and good wishes to
the organizers and the participants and wishes the National Tax Moot
Court Competition all success.
Ashok Dewan
New Delhi 6th September, 2010
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“To become a good advocate you need yourself equipped with the good presentation skills. To improve your skills practice is required in presenting your case and arguing which is a big challenge for a developing student at the college level. A student of law cannot just stick only to the theoretical teaching and hence law institutions host Moot Court Competitions.
With Moot Court on your resume, an employer knows that you have been learning to form and communicate legal arguments for a year or more; if you’ve already spent a lot of time in law school on these tasks, that’s less time the firm will have to invest in your learning and more time you can spend practicing law.
Even if you’re not thinking ofajob at a large firm, Moot Court can be quite useful as you’ll become increasingly more comfortable formulating arguments and expressing them in front of judges. If you feel that your public speaking skills need some work, Moot Court is a great place to hone them.
On a more personal level, participating in Moot Court can also provide a unique bonding experience for you and your team and give you a mini-support system during law school.”
I am sure, as always, the 7th Nani A.Palkivala Memorial National Tax Moot Court Competition, 2010 organised by All India Federation of Tax Practitioners and the Income Tax Appellate Tribunal Bar Association in association with the Government Law College, Mumbai will be a great success.
Justice Vijay Daga
September 12, 2010
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I am very happy to note that the 7th Nani Palkhivala Memorial
Moot Court Competition and the 6th Nani Palkhivala Research Paper
Competition are being organized from 7th to 9th October, 2010. Such
moot courts are necessary to encourage the aspiring lawyers to showcase
and hone their talents so that they are fully prepared when they enter
the legal profession. It is a step in the right direction and congratulations
are due to the Government Law College, Mumbai, a premier educational
institution for the study of Law, the All India Federation of Tax
Practitioners and the Income Tax, Appellate Tribunal Bar Association,
Mumbai for taking interest in such events in the larger interests of the
legal profession in lndia.
I wish all the participants all the best. May the best team win.
R. V. easwar
President ITAT
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I am happy to note that the 7th Nani Palkhivala Memorial National Tax
Moot Court Competition is being organised from 7th to 9th October, 2010. Moot
Courts provide an excellent opportunity to law students who are aspiring to excel
themselves in the taxation branch as lawyers. Such training would enrich the tax
bar associations in future, in the form of having young and talented graduates into
its stream. Moot Court competition is being held under the auspices of All India
Federation of Tax Practitioners and ITAT Bar Association, in association with the
Government Law College.
It is noticed that the Moot Court competitions are held in a very
organised manner, by maintaining high standards, which would surely benefit the
participants. I wish them all the very best.
Yours sincerely
D. Manmohan
Vice President
08-09-2010
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“Precious Lessons for Young Lawyers”
The Income Tax Appellate Tribunal Bar Association is happy to associate with the
Government Law College in organising Nani A. Palkhivala Memorial National Tax Moot
Court Competition for the year 2010. Without doubt, Mr. Palkhivala is the best role
model for a young mooter and an aspiring lawyer. I had the great fortune and the proud
privilege of being associated as a junior to Mr. Palkhivala for a long period extending
over three decades. However, the family relations dated back to the early nineteen forties
when he and my father studied law in our own Government Law College at the same
time.
For Mr. Palkhivala, tax law was the main turf and the pitch where he played the game
of his life. It was not only his passion but also his bread and butter. It was tax law
with which he made his beginning and his big name. Next to his home and office the
maximum time of his life was spent in the courtrooms and corridors of the Income Tax
Appellate Tribunal in Mumbai. It is for his contribution to the growth and development
of tax laws that he will be remembered the most in India. In short, tax law was his
Karma Bhoomi.
For the benefit of young mooters let me recall that extensive reading and ever-expanding
knowledge are the prerequisites of a successful lawyer and Mr. Palkhivala implemented
this principle in its totality. He extensively read not only law and constitutional law, but
also several other laws on a regular basis. He mastered the fundamental laws such as
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jurisprudence and interpretation of statutes. He once advised me that tax cases are better
won with not-tax legal material and not just with tax material and I have followed this
advice with significant benefit in my practice. Mr. Palkhivala never studied a statutory
enactment in isolation on a stand alone basis but as a part of a broad legal network and
this brought out much wider and deeper meaning and understanding of that particular
enactment. A substantial part of his library and books which he gifted me over past few
years included law books from virtually every branch of law. The wide range of his law
books display the width of his mental horizon and the depth of his brilliant mind. This
is what a young lawyer should try to emulate.
Many precious lessons could be learnt from Mr. Palkhivala’s legal career. In all his legal
battles, Mr. Palkhivala had a clear and consistent strategy. He would deeply analyse
the facts, compartmentalize the legal issues and on that basis would formulate the
proposition that he wanted the Court to accept. This intellectual ability with gifted and
persuasive advocacy worked as magic and did wonders year after year; whether it be
the Supreme Court or the High Courts or Tribunals all over India. His advocacy was
extremely convincing, based on respect for the Court and devoid of any arrogance and
more importantly, administered firmly but with humility. Many times in the Courts,
during the replies of the other side, he would give me precious hints on Court craft and
conduct, chief among them being never to offend the Judges and lose temper in the
Courts.
I am very happy to record that my legal journey began as a student at the Government
Law College and specially as the Secretary of our Moot Court Association in the year
1966-67 and has currently taken me to the Presidentship of the Income Tax Appellate
Tribunal Bar Association and which on the way, gave me the rare privilege of authoring
the Ninth Edition of “Kanga, Palkhivala & Vyas – The law and Practice of Income
Tax”, which to start with, was the baby of Mr. N. A. Palkhivala, in whose memory this
National Tax Moot Court Competition is being held. I am sure that every young lawyer
will benefit immensely and reach great legal heights if he follows in the footsteps of Mr.
Palkhivala. I wish a great success for Nani A. Palkhivala Memorial National Tax Moot
Court Competition, 2010.
September 29, 2010
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AIFTP has been very active since decades in organizing tax seminars, workshops
and other programmes of continuing education for tax practitioners and in creating
awareness among the tax payers of their rights and obligations. With an objective to
widen the scope amongst the future generation too, AIFTP is organizing the 7th Nani
Palkhivala Memorial National Tax Moot Court Competition jointly with Income Tax
Appellate Tribunal Bar Association and Government Law College, Mumbai. In the
globalised economy and cross-border commercial transactions, international taxation — a
relatively less familiar subject, has assumed enormous dimensions and great relevance.
Therefore, the topic selected — “Cross-border Business Reorganisation - The
Indian Perspective” for the competition is of wide importance where the students will
gain the experience by presenting papers with special reference to the proposed Direct
Tax Code. There is more and more interaction between professionals across the political
borders and these interactions give all of us opportunities to learn from each other and
share each other’s perspectives on problems. Action without vision is simply passing
time. Action with vision is making a positive difference. I am sure that the presentation
of research papers and discussion with the participation of the different Law Colleges’
students and the experts of the topic, will certainly clear many lingering doubts and open
up new vistas of thought and action. I am sure that it would be a good experience to the
participants and they would be benefited with the experts’ comments too.
I send my good wishes for the success of the National Moot Court Competition
and hope it will contribute to more and more co-operation between the Law students
and senior professionals across the world.
M. L. Patodi
National President, AIFTP
September 18, 2010
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HAs tHe nAnI A. PALKHIVALA MeMoRIAL nAtIonAL tAX Moot CoURt CoMPetItIon ACHIeVeD tHe DesIReD oBJeCt oF PRoMotInG YoUnG LAWYeRs to JoIn tHe tAX BAR AnD sPReAD tHe VALUe AnD etHICs FoLLoWeD BY sHRI nAnI A. PALKHIVALA?
2nd October being the birthday of Mahatma Gandhi, as a tribute to the father of our nation, we desired to hold the 7th Nani Palkhivala National Tax Moot Court Competition on the said day. However, as we had our National Tax Conference in Chennai, we could not hold the Moot Court Competition in Mumbai on the same day, therefore, we thought of writing this message. 16th January, 2004 was a memorable day in the history of the Federation. On this auspicious day the then Prime Minister of India, Hon’ble Atal Bihari Vajpayee, released a commemorative postage stamp in Mumbai which was dedicated to Shri N. A. Palkhivala. In his speech the Prime Minister stated as under:-
“In those dark days, the battle for democracy was fought by many people in many different ways. Many of us in politics under the leadership of Jayaprakash Narayanan fought it in prisons. But I have no doubt that one of the finest battles was fought in the court rooms and that fighter was Nani Palkhivala.”
This great contribution of Shri Palkhivala for preserving the basic structure of the Constitution of India will be remembered for ever. We as citizens of our country are always indebted to Shri Palkhivala. This inspired us to hold the Palkhivala Memorial National Tax Moot Court Competition through which we can spread awareness among law students about the contribution of Shri Palkhivala to the development of our country. When we started the Moot Court Competition in the year 2004, I as the President of the All India Federation of Tax Practitioners and Shri Y. P. Trivedi as President of ITAT Bar Association assured the then Principal of Government Law College, Mumbai, Mrs. P. R. Rao and Prof. Sanjay Kadam, that we would organize the Palkhivala Memorial National Tax Moot Court Competition for atleast five years. In my first message, I had stated that “by organizing the National Tax Moot Court we intended to achieve twin objects; firstly we will be remembering one of the greatest lawyer of our country for his contribution to the development of law and preserving the sanctity of our Constitution and secondly, we are bringing awareness
All India Federation of Tax Practitioners(Registered with Registrar of Society, Charity Commissioner & Income Tax Authorities)Regd. Office : 215, Rewa Chambers, 31, New Marine Lines, Mumbai 400 020.Tel.: +91-22-22006342 • Fax: +91-22-22006343 E-mail: [email protected] • Website: www.aiftponline.orgLibrary : Mahalaxmi Chambers, Income Tax Office, 2nd Floor, Mumbai - 400 034.
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amongst the law students about the values and ethics practiced by Shri N. A. Palkhivala which will help to develop the Tax Bar of International Standards”.
Thereafter, successive Presidents of the Federation, Shri V. Ramachandran from Chennai, Shri Bharatji Agrawal from Allahabad and Shri M. L. Patodi from Kota and similarly, Presidents of the ITAT Bar Association, Mumbai Shri S. E. Dastur and Shri Dinesh Vyas and the Committee Members of both the organizations have whole heartedly supported the Palkhivala Memorial Tax Moot Court Competition. While inaugurating the 5th Nani Palkhivala Tax Moot Court Competition Hon’ble Justice F. I. Rebello, Chief Justice of the Allahabad High Court, (Then as Judge of Bombay High Court) desired that we should continue this educational programme year after year. I am pleased to state that with the co-operation of our professional colleagues, Hon’ble Members of ITAT and Judges of the Bombay High Court, this year we will be completing seven successive years of this National Tax Moot Court Competition. We have tried to improve the competition year after year. We have been informed by the students that this is one of the most prestigious Moot Court Competitions in the country, wherein students representing all the leading law colleges desire to participate. It gives immense satisfaction to all of us who are associated with this educational programme to hear from students that this competition has generated interest amongst law students to study tax law. We are pleased to state that the “Nani Palkhivala Memorial Tax Research Paper” which was started in the year 2005, is getting a very good response year after year. This year, we have requested 121 Law colleges of our Country to contribute to the research paper on the subject of “Cross-border Business Reorganization – The Indian Perspective”
To the best of my information, the ITAT Bar Association, Mumbai and the All India Federation of Tax Practitioners are the only professional organizations in the country which have made a sincere attempt to develop the future Tax Bar by organizing a National Tax Moot Court Competition and also by encouraging law students to write a research paper on Direct Taxes. This is the only Moot Court Competition in our country which is judged by tax professionals, members of the ITAT, judges of the High Court and the Apex Court, and which is held in the court rooms of the ITAT. In the last seven years, law students have had the opportunity of listening to the views of the judges of the Apex Court, Chief Justices and other Judges of High Courts, Members of the Tribunal and leading professionals. The best team, best speaker and second best team have also had the opportunity of getting internships with leading Sr. Advocates and leading Law Firms. Best research papers are published in the journal of AIFTP, www.itatonline.org as well as in International Tax Magazines. We are pleased to state that for conducting this educational programme for the last seven years an amount of around ` 52,00,000/- (Rupees Fifty Two Lakhs) was spent. However, we are of the opinion that only a few students are participating in this educational programme, though we desired that a
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larger number of law students participated. We will be happy to receive feedbacks from students, professors and professionals, with innovative educational programmes where a larger number of students will be more interested in and wherein at least more than 500 law students can participate and take advantage.
Whether we continue this Moot Court Competition or not, we desire to organize at least one educational programme in a year dedicated in the fond memory of Shri Nani A. Palkhivala for the benefit of law students in association with law colleges and law students which will benefit a large section of law students.
I feel honoured and satisfied that I along with Professor Sanjay Kadam had the privilege of being associated with all the seven Nani Palkhivala Memorial National Tax Moot Court Competitions, interacting with law students and making an attempt to promote young professionals to the tax practice.
Hon’ble President Shri R. V. Easwar, Hon’ble Vice President Shri D. Manmohan and other Hon’ble Members of the ITAT deserve special appreciation. Without their co-operation and help, it would not have been possible to organize the Palkhivala Memorial National Tax Moot Court Competition year after year.
This educational programme is the team work of the ITAT Bar Association and the All India Federation of Tax Practitioners and Government Law College. We desire to acknowledge the contribution of all those who have helped us directly or indirectly in organizing this Moot Court Competition. We will be failing in our duty if we don’t acknowledge the support and contribution of Shri B. A. Palkhivala for organizing this Moot Court Competition year after year.
We wish all the best to the General Secretary Mr. Raunak Shah, Assistant General Secretary Mr. Rubin Vakil, and the committee members of the Moot Court Committee for organizing this Moot Court Competition very sincerely and professionally. This experience will definitely help them in their professional life.
Dr. K. shivaram Chairman, (Palkhivala Foundation & Research Committee) (Past President) 2nd October, 2010
22
From 1855 to 2010, these 156 years personify the genesis of an Institution which started its journey as a series of lectures on law after court hours, to becoming one of the finest in field of imparting legal education in India. This Institution par excellence, called, Government Law College, Mumbai has, since its inception, played a pivotal role in shaping the legal psyche of our Nation. Some of the greatest legal luminaries owe their success to this Institution.
Mooting has evolved as an integral part of the legal curriculum of the world. It provides an opportunity for students to experience the feel of court room atmosphere. This exciting and challenging platform where students present and argue their cases is an enjoyable method of practical training. Apart from honing their advocacy skills, moot court training also builds confidence and character and equips law students with essential skills to survive in the real world.
The Moot Court Association of Government Law College has devoted itself solely to the cause of promoting and encouraging the activity of Mooting. Each year, student members of the Moot Court Association meticulously plan and organize City-level, State-level, National and International moot court competitions.
A befitting tribute to the legendary Late Mr. Nani A. Palkhivala, the Nani Plakhivala Memorial National Tax Moot Court Competition has been successfully organized year after year by the Moot Court Association of Government Law College in association with the All India Federation of Tax Practitioners’ and the Income Tax Appellate Tribunal Bar Association. It is the first moot court competition in the country, based exclusively on the subject of Taxation laws. I would like to extend my heartfelt gratitude to Hon’ble Mr. Justice B. N. Srikrishna, Former Judge, Supreme Court of India, Hon’ble Mr. Justice P. B. Majmudar, Judge, Bombay High Court and Hon’ble Mr. Justice R. M. Savant, Judge, Bombay High Court for consenting to preside over the Final Rounds of the Competition. I would also like to thank the Hon’ble Members of the Income Tax Appellate Tribunal for granting us the permission to conduct the Rounds of the Competition at the Income Tax Appellate Tribunal and for graciously sparing time to judge the Rounds of the Competition. I would also like to extend my gratitude to the All India Federation of Tax Practitioners’ and the Income Tax Appellate Tribunal Bar Association whose constant encouragement and inspiring support has been integral to the success of this Competition.
I would like to commend the perseverance and dedication of the members of the Moot Court Association whose tireless efforts have ensured the success of this Competition, time and again.
In conclusion, I wish all the participating teams all the very best for the Competition and hope they enjoy the hospitality and warmth of the students of Government Law College I am confident that this competition will be a grand success and a rewarding experience for the students.
Dr. smt. M. V. Kagalkar Principal, Government Law College
from the PriNciPAl’S deSk
23
The Moot Court Association (MCA) of Government Law College, Mumbai is proud to host the “7th edition of the nani Palkivala Memorial national tax Moot Court Competition” in association with the All India Federation of Tax Practitioners and the Income Tax Appellate Tribunal.
The MCA of Government Law College has always worked with the objective of ensuring that aspiring law students are provided with a
platform to learn and procure practical knowledge concerning the various arenas of the law. With the same perspective, the Nani Palkhivala Memorial National Tax Moot Court Competition was initiated as a stepping stone by MCA.
The Nani Palkhivala Memorial National Tax Moot Court Competition has been held year after year, with a view that law students from various colleges across India, gather under one shelter and garner inspiration and insights into the insurmountable contributions made by Shri. Nani Palkhivala in the legal field.
As the Chairman of the Moot Court Association, I have had the privilege to over-see the previous six editions of this Moot Court Competition and it is with immense pride that I say that this Competition has scaled newer heights with each passing edition.
I take this opportunity to express my deep gratitude to Dr. Shivram, Chairman, Nani Palkhivala Foundation and Research Committee for his support and encouragement. I would also like to thank the Hon’ble Mr. Justice B.R. Srikrishna, Hon’ble Mr. Justice P.B. Majmudar, Hon’ble Mr. Justice R.M. Savant for consenting to preside over the Final Rounds of this Moot Court Competition. I extend my gratitude to the President and Members of the Income Tax Appellate Tribunal for generously granting us the permission to conduct the Rounds of this Moot Court Competition in the Tribunal and also judge the Rounds of the Competition. On behalf of the Moot Court Association, I would like to sincerely thank the Principal of Government Law College, Dr. Mrs. M. V. Kagalkar for her sincere cooperation and undying faith in us.
I wish the participating teams luck in their endeavor.
Their enthusiasm, commitment and thirst for knowledge, is the foremost reason for the success of this prestigious competition, year after year.
Prof. sanjay V. KadamChairman, Moot Court Association
from the chAirmAN’S deSk
24
Amity Law School, Delhi
Army Institute of Law, Mohali
Campus Law Centre II, Faculty of Law, University of Delhi, Delhi
Dr. Ambedkar Government Law College, Chennai
Faculty of Law, University of Allahabad, Allahabad
GH Raisoni Law School, Nagpur
Government Law College, Mumbai
Gujarat National Law University, Gandhinagar
ILS Law College, Pune
Kerela Law Education Society, College of Law
NALSAR University, Hyderabad
National Law Institute University, Bhopal
National Law School of India University, Bangalore
National Law University, Jodhpur
PArticiPAtiNg collegeS
List of Participating Colleges in the 7th nani Palkhivala Memorial national tax Moot Court Competition, 2010
25
New Law College, Bharati Vidyapeeth University, Pune
Pravin Gandhi College of Law, Mumbai
Rajiv Gandhi National University of Law, Patiala
Rajiv Gandhi School of Intellectual Property Law, IIT Kharakpur, West Bengal
School of Excellency in Law, Chennai
School of Law, Christ University, Bangalore
School of Law, Sastra University, Thanjavur
Symbiosis School of Law, Pune
The National University of Advances Legal Studies, Kochi
The West Bengal National University Of Judicial Sciences, Kolkata
University Institute of Legal Studies, Punjab University
26
memoirS of the lAte Shri N. A. PAlkhivAlA
Nani Palkhivala....
In his own words....
27
NANI PALKHIVALA - THE AWE - INSPIRING ECONOMIST
“We keep on tackling breezily fifty-year problems with five-year plans, staffed by two-year officials, working with one-year appropriations, fondly hoping that somehow the laws of economics will be suspended because we are Indians”
“Bad economics may temporarily be good politics; but politics should be behind a fiscal law, and not in front of it”
“The best definition of ‘inflation’ is the simplest: When government spends more than it gets, and labour gets more than
it gives, the empty feeling in your pocket is inflation.”
“You can no more expect a nation to have economic strength and growth by mere budgetary allocations than you can expect a child to grow up cultured and healthy because his father has set apart amounts to be spent on his education and medical care”
“The easy style of socialism mistakes Amiri Hatao for Garibi Hatao; it aims at leveling down and not leveling up; it is content to satisfy the pangs of envy when it cannot satisfy the pangs of hunger; and since it cannot create income or wealth, it plans for poverty and equal distribution of misery.”
“Gross national happiness should have been given priority over gross national
product.”
NANI PALKHIVALA - THE ASTUTE CRITIC
“Among the nations of the world, India ranks very high in innate intelligence, but abysmally low in wisdom.”
“Indian democracy has reached its nadir because in our average politician we have a sordid amalgam of lack of intellect with lack of character and lack of knowledge.”
With Sohrab P. Godrej, at the launch of the book
Nani Palkhivala, Selected Writings. (1999)
28
“We, as a nation have some fine qualities, but a sense of value of time is not one of them.”
“The bane of India is the plethora of politicians and the paucity of statesmen.”
“We have too much government and too little administration; too many public servants and too little public service; too many controls and too little welfare; too many laws and too little justice”
“Today the university student is aware that what he knows does not count in the examination half as much as WHO he knows”
“A nation progresses gloriously when knowledge and power are combined in the same individual. It faces a grave crisis when some have knowledge and others have power”
“We must get away from the fallacy of -the legal solubility of all problems.”
NANI PALKHIVALA - THE TAX CONNOISSEUR
“It is a truism, and like most truisms often forgotten, that taxes, like water, have a
tendency to find the lowest level. In the last analysis, almost all taxes ultimately hit the
common man.”
“Every budget contains a cartload of
figures in black and white – but the stark
figures represent the myriad lights and
shades of India’s life, the contrasting tones
of poverty and wealth, and of bread so
dear and flesh and blood so cheap, the
deep tints of adventure and enterprise
and man’s ageless struggle for a brighter
morn.
With T. Sadasivam and Bharat Ratna recipient M.
Subbulakshmi at the Dadabhai Naoroji Memorial
Prize Fund’s function. (1994)
Delivering one of his legendary budget speeches to
the multitudes gathered at Brabourne Stadium.
29
“Our people, like any other, fall into three segments:
1. Those who would be honest, however heavy the burden;
2. Those who would be dishonest, however light the burden; and
3. Those (and they constitute the overwhelming majority) who are basically not dishonest but the nature of whose response to the law is conditioned by the quality of the law.
Our tax legislation ignores the first class, is preoccupied with the second, and alienates the third.”
“There are several socialist countries in the world, but India is the only country where income-tax and wealth tax can together amount to more than the total income.”
NANI PALKHIVALA - THE CONSTITUTIONAL LEGEND
“The constitution is not a jellyfish; it is
a highly evolved organism. It has an
identity and integrity of its own, the
evocative Preamble being its identity
card. It cannot be made to lose its
identity in the process of amendment.”
“The Constitution was meant to impart
such a momentum to the living spirit of
the rule of law that democracy and civil
liberty may survive in India beyond our
own times and in the days when our
place will know us no more.”
Leaving the Supreme Court with, from left,
Ravinder Narain, Tehmton R. Andhyarujina
and Jimm
Nagesh feeding Nani a slice of cake at his 75th
birthday. To his left, M. R. Pai and M. A. Rane.
(1995)
30
“The Constitution is a part of the great heritage of every Indian. Its founding fathers
wanted to ensure that even while India remained poor in per capita income, it should be rich in individual freedom.”
“Ours is a noble Constitution, worked in an ignoble spirit.”
NANI PALKHIVALA - THE TRUE INDIAN
“We have millions of Bengalis, millions of Maharashtrians, millions of Tamils – but very few Indians.”
“Democracy involves the co-operation of all perceptive citizens in the active work of running the country. It means payment to the state, not only in taxes but in time and thought...”
“It is unfortunate that our government keeps the nation’s most outstanding men out, standing.”
“The nagging question which will not go away is - is India a collection of communities or is it a nation? In other words, is India a state without a nation? Unfortunately, the most pronounced trait of the Indian politician is to put himself first, his own party second, and his country figures nowhere in his calculations.”
“A democracy without discipline is a democracy without a future”
“A nation’s strength lies not so much in its wealth as in its character. A nation with a future has to be a nation with character. It is when character saps that you have the phenomenon of widespread evasion.”
“Perhaps there is no other country on earth which has in such ample measure all enterprise and skills needed to create national wealth, and which takes such deliberate and endless pains to restrict and hamper its creation.”
Receiving his Doctor of Laws from William
G. Bowen, president of Princeton University.
(1978)
31
32
33
reSeArch PAPer comPetitioN
6th nani Palkhivala Memorial Research Paper Competition, 2010
The All India Federation of Tax Practitioners (AIFTP) and the Income Tax Appellate Tribunal (ITAT) Bar Association in association with the Government Law College, Mumbai is pleased to announce the 6th Nani Palkhivala Memorial Research Paper Competition.
The topic for this year’s Research Paper is:
‘Cross-border business reorganization – The Indian Perspective’
• Comparative Study
• Legal structuring
• Tax implication (Direct tax)
• Regulatory framework
• Reference to Proposed Direct Tax Code
Students may refer to the following Publications as guidelines for the Research Paper:
• International Fiscal Association – Cahier 2010
• Mergers and Acquisitions by Bombay Chartered Accountants Society
• CCH/Butterworths Publications
• Income Tax Act, 1961
Each article can be authored by a maximum of two authors. The entries will be judged by a panel of eminent judges. The three best articles will be awarded cash prizes, along with a certificate of merit and a medal. The winning research paper will be published in the AIFTP Journal, on the ITAT website and in other leading tax magazines.
We are extremely pleased by the wide participation that the Research Paper Competition has been receiving year on year and even this year’s edition of the Competition has received 30 entries.
Winners of the Research Paper Competition
1st Place – Aniket Singhania, Vaibhav Shukla (ILS Law Collge, Pune)
2nd Place – Gautam Ahuja, Shubra Sharma (ILS Law College, Pune)
3rd Place – Bhargavy Ramesh, Shreyas B. Bhushan (National University of Advanced Legal Studies, Kochi)
34
WiNNiNg reSeArch PAPer
“croSS-Border BuSiNeSS
reorgANizAtioN
– the iNdiAN PerSPective”
by : Aniket Singhania & vaibhav Shukla
35
IntRoDUCtIon
“Economic Liberalization in India” started from 1991 which aimed at integration of
national economy with “market oriented globalised economy”. The real opening of
the economy started with the industrial policy 1991 whereby “continuity with change”
was emphasized and main thrust was on relaxation in industrial licensing, foreign
investments, transfer of foreign technology, joint ventures etc.
Historically, capital has flown to countries offering better returns, protection and certainty
in terms of policies and regulations. Recently, emerging markets are not just experiencing
outbound deals; there is also a lot of hindrance by western firms in acquiring targets in
these markets.1 “This will be the century of the emerging market”, Goldman Sachs, Chief
Financial Officer, David Viniar, told investors. The whole concatenation depicting a shift
of economic activities and capital flow constitutes the much talked about abstraction
known as “Globalization”. Globalization is one of the serious challenges for tax policy
makers, as the consequences of globalization are not restricted by the physical boundaries
of countries and domestic legislation. With globalization Indian companies are looking
forward to drive cost lower, innovate speedily and increase their international presence,
which may help insulate from the vagaries of domestic market and to spread the risk.
United Nations Conference on Trade and Development (UNCTAD) Report on World
Investment prospects survey 2009-11 states India would continue to remain among
the top five attractive destinations for foreign investors during the next two years.2
Contemporaneous economic reforms by the Indian government and restructuring by
Indian companies to attain global scale have resulted in sharp rise in merger and
amalgamation activity in recent years. Progressive deregulation in sectors such as
banking, insurance, power, aviation and housing, and policy rationalization in others,
such as broadcasting, telecommunications and media, coupled with the government’s
decision to exit non strategic areas through divestment/ disinvestment has further
triggered cross border business reorganization.
According to survey, India is one of the top four markets for cross border reorganization.
The top four includes greater China (49%), North America (29%), South East Asia
1 “Changing directions: Cross Border acquisition by emerging market firms” in New York Times Dated March 15th 2010; “Corporate deal makers head to emerging markets” published in New York Times on March 3rd 2010.
2 http://www.forum4finance.com/2010/03/03/foreign-cos-fees-for-work-sent-to-india-not-taxable-aar/aar
36
(27%) and India (22%). However Asian bidders are concerned by issues of bribery
and corruption and undisclosed liabilities in India.3 The World Investment Report
2000categorically states that most of the growth in international production has been
through cross border M&A’s rather than Greenfield Investment.4
ReCent CRoss BoRDeR ReoRGAnIsAtIon:
Cross Border M&A totals US$ 84.5 billion for year to- date 2010, a 79% increase over the
same period last year. By number of deals, cross border transactions are up just 6% for
the year. A $10.7 billion bid for Zain Africa by Indian based telecomm provider, Bharti
Airtel and Norwegian Fertilizer producer Yara International’s proposed acquisition of US
based Terra industries contributed to the cross border total, which accounts for 32% of
world wide activity, compared to 24% last year at this time.5 India’s Reliance Industries
sweetened its November offer to take control of Lyondell Basell industries to US$ 14.5
billion.6 Last year Ford decided to put two iconic British brands Jaguar and Land Rover,
on sale and Tata motors emerged as the preferred buyer. Tata motors will finally have
access to the global market despite the ten year presence in the domestic car market.
Tata Steel acquired the UK based Corus group for a reported US $ 12,000 million.7
MeAnInG:
In words of Justice Chandrachud; corporate reorganization is one of the means that can
be employed to meet the challenges which confront business. A Cross border business
reorganization is an arrangement between organizations in different countries. Such
corporate combinations play an important role in the global economy as they facilitate
free flow of capital across borders , enhance competition and globalised business.
3 www.mergermarket.com/pdf/MercerKroll Asian Cross border report Aug 2010.pdf
4 See World Investment report- “Cross Border Merger, Acquisitions and Development (2000)”, United Nations (Geneva).
5 Developing Nations Setting Torrid Pace for Mergers by Heather Timmons and Vikash bajaj published March 03, 2010 in New York Times. http://www.nytimes.com/2010/03/04/business/global/04emerge.html?_r=1&dbk
6 Reliance said to raise Lyondell Bid to US $ 14.5 Billion (Update 4) By Jonathan Keehner and John Duce- February 2nd 2010 05:25 EST
7 Piya Singh “Making Corus Work”, http://www.businessworld.in/index.php/TATA-CORUS.html
37
Merger, Amalgamation, Acquisition, Joint Venture, Takeovers and Slump sale of assets
are few methods of cross border reorganization. In common parlance, amalgamation is a
corporate legal process by which one company is absorbed into another company or two
or more companies are amalgamated into a new entity. A merger on the other hand is
fusion or absorption of a company into another. For Indian tax purposes, both the terms
“amalgamation” and “merger” are used synonymously.
International M&A may often necessitate the transfer of shareholding interest of foreign
holding companies in its Indian subsidiary or Joint Venture companies. The multinational
trade agenda and WTO have been facilitating easy and free flow of capital technology and
money across the world, thereby enhancing cross border reorganization.
ReGULAtoRY FRAMeWoRK:
Indian legal system regulates and governs various aspects of a cross border reorganization
by a set of laws. The relevant laws that may be implicated in a cross border M&A are the
Companies Act, 1956, the Foreign Investment policy of the Government of India along
with the press notes and clarificatory circulars issued by the department of investment
policy and promotion; Foreign Exchange Management Act, 1999 (FEMA) and regulations
made thereunder, including circulars and notifications issued by the RBI from time
to time, the Securities and Exchange Board of India Act, 1992 and regulations made
thereunder (SEBI laws) ; Income Tax Act, 1961 and the Competition Act, 2002 etc.8
CoMPAnY LAW:
Cross border M&A, both the amalgamating company or companies and the amalgamated
(i.e. survivor) company are required to comply with the requirements specified in Section
391-394 of the Companies Act, which, inter alia, require the approval of a High court
and of the Central government. Section 394 and 394A of the Act set forth the powers
of the High Court and provide for the court to give notice to the Central Government in
connection with amalgamation of companies.9
8 Sridharan & Pandian, “Guide to Takeover and Mergers”, 2nd Edition, 2006, Wadhwa Publications.
9 A.Ramaiya, “Guide to the Companies Act“, 16th Edition, 2006, Wadhwa and Company, Nagpur.
38
Pursuant to Section 394(4)(b) of the Companies Act the “transferee company” must be a
company within the meaning of the Companies Act (i.e. an Indian company); however, a
“transferor company” may be any body corporate, whether a company within a meaning
of Companies Act or not. A “body corporate” includes a company incorporated outside
India.10
As to the approval of the shareholders under Section 372A, if the investment by the
Indian company in the foreign company exceeds 60% of the paid up share capital and
free reserves of the Indian company or 100% of free reserves of the Indian company,
whichever is more, than the Indian company is required to obtain the prior approval of
the shareholders vide a special resolution.11
Some cases have held that the transfer of shares in accordance with a scheme under
section 391-6 of the act does not constitute a transfer for the purpose of the act.12 In
the case of Moschip Semiconductor technology Limited13, the High Court of the state
of Andhra Pradesh, dealing with the amalgamation of an Indian company (as the
transferee) and a foreign company governed by the laws of California (as the transferor),
held that, under Section 1108 of the California Corporation Code and in contrast to the
provisions of Indian law, the surviving company could be either a domestic company
or a foreign company. In the above matter, the court observed that “in these days of
liberal globalization, a liberal view is expected to be taken enabling such a scheme of
arrangement for amalgamation between a domestic company and a foreign company and
there is every need for suitable modification of the law in that direction.” The court also
stated that a scheme involving a foreign and an Indian company would be subject to laws
of both the countries. Notwithstanding the High Court’s dicta, currently in a merger or
amalgamation of an Indian company and a foreign company, the transferee company (i.e.
surviving entity) must be an Indian company.
10 Section 394(4) of the Companies Act specifically states that the transferee company shall be a company as defined under the companies act and the transferor company can be a body corporate, which includes a foreign company.
11 An “arrangement” includes a reorganization of the share capital of the Company by the consolidation of shares of different classes, or by the division of shares in two shares of different classes or by both those methods. [Section 390(b) of the Companies Act, 1956.]
12 CIT v. Rashiklal Maneklal, 177 ITR 198; CIT v. Amin, 106 ITR 368, CIT v. MCTM Corporation, 22 ITR 524.
13 1 Company Law Journal 307 (2005)
39
The Companies bill, 2009 seeks to bring significant changes with respect to mergers
and acquisitions. The proposed changes deal with the creation of a single forum for
the approval of M&A’s shortening the merger process between two small companies
or between the holding company and its wholly owned subsidiary company, merger
of Indian companies with foreign companies and vice versa where the consideration
may be discharged by way of cash or through Indian depository receipts or any
combination thereof, etc. The bill has introduced the concept of purchase of minority
shareholding in the company. Where an acquirer, who has acquired 90% or more
shareholding in the company, desires to acquire balance shareholding in the company,
the bill provides for notifying the company of the acquirer’s intention of acquiring the
remaining shareholding in the company, and sets out the process for acquisition of
the balance shareholding in the company. The bill has also introduced the concept of
registered valuers for all valuations required to be done under any of the provisions
of the bill.
seCURItY LAWs:
If the issuing company is a listed company and makes a preferential allotment of shares
to the acquirer, such an allotment would generally be exempt from the Public Offer
provision of the SEBI (Substantial Acquisition and Takeovers) regulations, 1997 (SEBI
Takeover Code) provide that the disclosure requirement as prescribed in Regulation
3(1)(c) of the SEBI Takeover Regulations are fulfilled. The listing Agreement requires
inter alia filing of the scheme of arrangement with the Stock Exchange prior to filing
application with the High Court for seeking approval of the scheme of arrangement.
Further upon completion of the acquisition and within 21 days from the issuance of
shares to the shareholders of the target company, a detailed report in the prescribed
format would have to be filed with SEBI. If the Indian company that is issuing its shares
to the shareholders of the foreign company as consideration for acquiring shares of the
foreign company is listed on the Stock exchange in India, then it will be required to
comply with the guidelines for preferential allotment under the SEBI (Disclosure and
Investment Protection) Guidelines, 2000. Securities Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2009 deals with the issue of specified
securities and preferential allotment regulations.
After a global merger between Eaton Industries Inc.(EII) and Aeroquip Vickers(AVI) ,
EII came to hold 51% shares in Vickers system international limited (VSIL), a publicly
40
listed companies incorporated in India. It was held in Eaton Industries case 14 that the
SEBI Takeover Code would not get triggered since there was ample proof to suggest that
there had been a merger of EII with AVI under the laws of the state of Ohio in the US
and indirect acquisition of controlling interest of VSIL was purely a fallout and incidental
to the global restructuring arrangement.
SEBI has directed, vide Circular dated 15th April, 2010, the modification of the listing
agreement focusing on certain deviations from accounting standards commonly carried
out as part of scheme of mergers.15
Japanese drug maker, Daiichi Sankyo Companies Limited, which owns India’s biggest
drug firm, Ranbaxy Laboratories Limited, has won the open offer price war with
Hyderabad based Zenotech Laboratories Limited in a Supreme Court. India’s Apex
Court has struck down ruling by the Securities Appellate Tribunal (SAT), thus allowing
DAIICHI to launch an open offer for a 20% stake in Zenotech at Rs. 113.62 per share.16
The Takeover Regulations Advisory committee under the chairmanship of C. Achuthan,
in its report to the SEBI17, has proposed sweeping changes on critical issues, including the
open offer trigger, offer size, indirect acquisition, exemption from open offer obligations,
calculating the offer prize and competing offers.18 The renewed Takeover Code would have
certain changes such as increasing the period for making a competing bid, prohibiting
acquirers from being represented in the board of Target Company, and permitting any
competing acquirer to negotiate and acquire the shares tendered to the other competing
acquirer, at the same price that was offered by him to the public.19 Vedanta’s Takeover
offer for Cairn energy has raised some questions because it comes in wake of impending
changes to a SEBI Takeover Regulations that may make it potentially difficult for the
acquirers to structure transactions.20
14 http://www.sebi.gov.in/satorders/Eaton.html
15 http://www.sebi.gov.in/circulars/2010/cfddilcir01.pdf
16 http://www.tadingmarkets.com/news/stock-alert/dskyf_rbxlf_sc-clears-daiichi-s-offer-for-zenotech-1031135.html
17 Report Of The Takeover Regulations Advisory Committee under the Chairmanship of Mr. C. Achuthan, July 19, 2010 www.sebi.gov.in/commreport/tracreport.pdf
18 “Indian Takeover Regulation- under reformed and over modified” by Sandeep Parekh W.P.NO. 2009/11/06 published on November 2009, IIM Ahmedabad.
19 “Decoding the New Takeover Code” by Shobhana Subramanian posted on July 20, 2010 at the Financial Express.
20 “New Takeover Code: Is it achievable for corporate india?” published on july 20, 2010 Source: CNBC-TV18 11:10 pm
41
tAXAtIon:
The tax law consists of the body of rules of public law that affect the activities and
reciprocal interest of a political community and the members opposing it as distinguished
from relationships between individuals in the sphere of private law.21
The first step in any reorganization activity is to explore leveraging local country
operations for cash management and repatriation advantages, the companies should also
be looking at the availability of asset basis set up structure for tax purposes and keeping
a keen eye on valuable tax attributes in M&A targets, including the net operating losses,
foreign tax credits and tax holidays.
As per the provisions of the IT Act, capital gains tax would be levied on such transactions
when capital asset are transferred. From the definition of “transfer” it is clear that if
merger, amalgamation, demerger or any sort of restructuring results in transfer of capital
asset, it would lead to a taxable event.
The various ways of restructuring which has tax implication is explained herein:
Sale of shares:
Capital gains and security transaction tax- the sale of shares is subject to capital gains
tax in India. Additionally, Securities Transaction Tax (STT) may be payable if the sale
transaction for the equity shares is through a recognized stock exchange in India. The
STT has to be paid by the purchaser/ seller of the securities. Nonresident investors are
entitled to benefit from currency fluctuation adjustments when calculating long term
capital gains on a sale of shares of an Indian company purchased in foreign currency. In
case the transaction is liable to STT, long term capital gains arising on transfer of equity
shares are exempted from tax.
Transfer taxes: the transfer of shares (other than those in dematerialized form) is subject
to transfer taxes i.e. stamp duty.
21 “Basic Principle of Income tax law” by Justice R. K. Abichandan.
42
Sale of Assets:
slump sale:22 The sale of a business undertaking23 is on a slump sale basis when
the entire business is transferred as a going concern for a lump sum consideration.
Consideration in excess of the net worth of the business is taxed as capital gains. A slump
sale is generally not subject to Vat or sales tax in India, as the sale is of entire business
and not of individual assets or goods. This position has been upheld by various courts
in India.24 Transfer taxes: the transfer of assets by way of a slump sale would attract
stamp duty.
Itemized sale: This happens when individual assets or liabilities of a business are
transferred for a separately stated consideration.
Capital Assets: The tax implication for the transfer of capital assets (including net
current asset other than stock in trade) depend on their eligibility for depreciation. In
a case of asset on which no depreciation is allowed, consideration in excess of the cost
of acquisition and improvement is chargeable to tax as capital gains. In case of asset
on which depreciation has been allowed25, the consideration is deducted from the tax
return down value of the block of assets, resulting in a lower claim for tax depreciation
subsequently. If the unamortized amount of respective block of assets is less than the
consideration received, or the block of asset ceases to exist (i.e. there are no assets of
that category), the difference is treated as short term capital gains. If all the assets in a
block of assets are transferred and the consideration is less than the unamortized amount
of the block of assets, the difference is treated as a short term capital loss and could be
set off against capital gains arising in upto 8 succeeding years.
stock in trade: Any gains or shortfalls on the transfer of stock in trade are considered
as business income or loss. Business losses can be set off against income under any head
of income arising in that year. If the current year income is not adequate, business losses
can be carried forward to set off against business profits for eight succeeding year.
22 Section 2(42C) of Income Tax Act, 1961.
23 Explanation 1 to section 2(19AA) of Income tax Act, 1961 defines the term “undertaking” in the context of merger to include “any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual asset and liabilities or any combinations thereof not constituting a business activity.”
24 Shri Ram Sahay v. CST (1963) 14 STT (ALD), Coromandel fertilizers Limited v. State of A. P. (112 STC 7)
25 Section 50 of Income Tax Act, 1961
43
Intangibles (Goodwill and Brands among others): The tax treatment for
intangible capital assets would be identical to that of the tangible capital asset, as already
discussed.
transfer taxes: It would be identical to those under slump sale with respect to itemized
sale.
Liabilities: Gains or transfer of liabilities are taxable as business income in the hands
of transferor.
Merger and Amalgamation:
Under the Income Tax Act, 1961 a non resident is taxed in India, inter alia, on income
that is “deemed to accrue or arise in India”. This deeming provision in Section 9(1) is
intended to tax income earned by a non resident through “business connection” in India
or through any asset or source of income in India of thorough the transfer of any capital
asset situated in India. The current legislation provides for taxation of gains arising
out of transfer of the legal ownership of the capital asset in the form of sale, exchange,
relinquishment, extinguishment of any right wherein or compulsory acquisition under
any law. Section 926 deems gains arising from transfer of capital assets situated in India
to accrue or arise in India. In the cross border transfer involving transfer of shares
normally the situs of the capital asset provides the safe guide to decide as to which of
the contracting states has the power to tax such income subject to the relevant tax treaty.
India may have treaties with any of the country under Indian tax laws.27
26 Section 9 of the Income Tax Act, 1961 – income deemed to accrue or arise India.
27 Section 90 of Income Tax Act, 1961 : AGREEMENT WITH FOREIGN COUNTRIES
(1) The Central Government may enter into an agreement with the Government of any country outside India -
(a) For the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country, or
(b) For the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or
(c) For exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or
(d) For recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.
(2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.
44
The DTAA provides for the chargeability based on receipt and accrual, residential
status. As there is no clear definition of income and taxability thereof which is accepted
internationally, an income may become liable to tax in two countries. If the two countries
do not have DTAA, domestic law of the country will apply. In case of India Section 91 of
the IT Act will apply The Income Tax officer has the power to determine the reasonable
amount of profit accruing or arising in India if it appeared to him that a resident has
transferred his Indian source income. Article XXIV of GATT specifically recognizes
regional arrangements as an exception to the multilateral system. The concept of levy of
tax on a transfer of beneficial ownership in a cross border transfer is not provided for
in the current tax legislation, but the revenue authorities are of the view that in a cross
border transaction the value of the transaction includes valuation for the Indian entity as
well and, accordingly, the overseas entity which has a business connection in India.
Amalgamation is merger of one or more companies with another or merger of two or
more companies to form a new company, in such a way that all assets and liabilities of
the amalgamating company becomes assets and liabilities of the amalgamated company
and shareholders not less than 75% in value of the shares in the amalgamating company
or companies become the shareholders of the amalgamated company.28
In the case of Commissioner of Income tax v. Mrs. Grace Collis & Another29 the supreme
court has held that, “extinguishment of any right in any capital asset” under the definition
of “transfer” would include the extinguishment of the right of the holders of shares in an
28 Section 2(1B) of the ITA defines amalgamation as, “Amalgamation in relation to one or more companies means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that:
(i) All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of amalgamation.
(ii) All the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of amalgamation.
(iii) Shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (other than shares held therein immediately before the amalgamation or by a nominee for the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of distribution of such property to the other company after the winding up of the first-mentioned company.”
29 (2001) 248 ITR 323 (SC)
45
amalgamating company, which would be distinct from and independent of the transfer of
capital assets itself. Hence, the right of the shareholders of the amalgamating company
in the capital asset i.e. the shares, stands extinguished upon the amalgamation of the
amalgamating company with the amalgamated company and this constitutes a transfer
under section 2(47) of the IT Act.
Benefits of taxation in respect to cross border mergers and amalgamations under Income
Tax Act, 1961:
No tax is to be charged on capital gain arising on scheme of amalgamation.
Section 47(vi): Any transfer in a scheme of amalgamation, of a capital asset by the
amalgamating company to the amalgamated company is an Indian company.
Section 47(via): Any transfer in a scheme of amalgamation, of a capital asset being a
share or shares held in an Indian company, by the amalgamating foreign company to the
amalgamated foreign company if :
(i) At least 25% of shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company.
(ii) Such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated.
Section 47(vii) : any transfer by a shareholder in a scheme of amalgamation, of a capital
asset being a share or shares held by him in the amalgamating company if :
(i) The transfer is made in contravention of the allotment to him of any share or shares in the amalgamated company.
(ii) The amalgamated company is an Indian company.
Section 79: carry forward and set off of losses in case of a company not being the
company in which the public are substantially interested, no loss incurred in a any year
prior to the previous year shall be carried forward and off against the income of previous
year unless –
(a) on the last day of the previous year the shares of the company carrying not less than 51% shares of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred.
Section 72A(2) : provisions relating to carry forward and set off accumulated loss and
unabsorbed depreciation allowances in amalgamation or demergers.
46
No tax exemption is provided under the IT Act, 1961, in case of amalgamation of an
Indian co. into a foreign company wherein the resultant amalgamated company is a
foreign company. The test of residence is based on either place of effective management
or place of central control and management. It is therefore argued that a company
incorporated outside India will be treated as resident in India if its “place of effective
management” is situated in India.
With the Ruling in the case of CIT v. Visakhapatnam Port trust30, the Judiciary
reemphasized the importance of international tax jurisprudence aligned with OECD
standard modules, while interpreting tax matters in Indian courts. In Deputy
Commissioner of Income Tax v. ITC31 it was held that interpretation of a DTAA must be
in consonance with the principle of international law.
DIReCt tAX CoDe:
The Finance Act 2007 and 2008 have brought amendments to provisions of income
tax with retrospective effects in order to increase tax revenues from cross border M&A
transactions.32 The growing international transaction has led to numerous tax disputes in
the world. So international tax jurisprudence requires legitimate tax planning.33 In 1935,
the House of Lord’s famously observed in IRC v. Duke of Westminster34 that “every man
is entitled to order his affairs” in order to minimize his liability to tax. It was ruled that
while tax avoidance is legal, tax evasion is not. Traditionally, India followed Westminster
rule that tax avoidance is legal and that a citizen is entitled to the benefit of the letter
of the law, even if result is manifestly contrary to its spirit. This seems rather well
established, until Justice Chinappa “concurring” opinion in Mc Dowell v. CTO that the
“ghost” of the duke of Westminster must be “exorcised” and that any device intended to
avoid tax liability is illegal.
30 (1983) 144 ITR 146 (A.P.)
31 ITA No.s 970, 971 and 973/Cal/1998
32 K.R.Girish and Himanshu Patel, KPMG, “Deals: India wants more taxes from cross-border M&A”, February 19, 2008, International Tax Review.
33 The Coming of Age of International Tax Jurisprudence in India, 2006, High Tech Tax Institute by Nishisth Desai Associates.
34 (1936) AC 1.
47
The revenue authorities are exploring the possibility of generating tax from cross border
reorganization resulting in the transfer of beneficial interest of the Indian company.
This is on the basis of substance theory that the country has a right to claim tax on the
profit generated from the business carried out in India. By introducing DTC, Government
widens scope of anti abuse provisions in IT Act.35
Under 1961 Act, foreign Companies were regarded as “Resident of India” only if their
control and management was wholly situated India. The DTC has modified this and now
a foreign company will be treated as “Resident of India” if its control and management
is wholly or partly situated in India. Treating a foreign company as “Resident of India”
would have serious tax implications as its world income would be taxable in India.36
Moreover it would be subject to Dividend Distribution Tax etc.
It is provided that even income arising from Indirect Transfer of capital asset in India,
would be deemed to accrue or arise in India.37 The DTC continues present position
regarding Business Reorganization that they should be tax neutral. One important
beneficial provision is that the successor will be allowed the benefit of accumulated losses
of the predecessor of business provided stipulated conditions are satisfied. The DTC also
would abolish distinction between long and short term capital gains, as well as security
transaction tax (a tax levied on stock exchange transactions).
The CBDT – Circular No. 333 dated 2nd April, 1982 that in case of conflict in the
provisions of the agreement for tax avoidance of double taxation and the Income Tax
Act, the provisions contained in the Agreement for DTAA will prevail. Neither the treaty
nor the Code shall have a preferential status by reason of it being treaty or law; and (b)
the provision which later in time shall prevail. In effect, the accepted principle under
International Taxation and current law that treaty provisions will override the Income
Tax act has been altered. As the DTC would be later in time than most of treaties, it
will override such treaties.38 This will cause great hardship to many Indian and foreign
companies having cross border transactions and result in considerable tax litigations.
35 “Govt widens scope of anti-abuse provisions in I-T Act” by Abhineet Kumar & Sidhartha / Mumbai March 4, 2010 available at http://www.business-standard.com/india/storypage.php?autono=387459
36 “Decoding the direct tax code” Published on Tuesday, 22 Sep 2009, www. .bloombergutv.com.
37 Revised Discussion Paper on the Direct Taxes Code, June 2010, Central Board of Direct Taxes, Department of Revenue, Ministry of Finance.http://finmin.nic.in/Dtcode/RevisedDiscussionPaper.pdf
38 Section 258 of the DTC
48
Controlled Foreign corporations (CFCs) recommendation of the Kelkar working
Committee report on Tax reforms in India39 brought an international tax concept in
India. A provision including taxation of CFC income is proposed for the first time in DTC.
Under these provisions, passive income earned by a foreign company controlled directly
or indirectly by a resident in India, if such income is not distributed to shareholders,
will be deemed to have been distributed and be taxable in India in the hands of resident
shareholders as dividend received from the foreign company.
The DTC would introduce a GAAR40 to deal with specific instances where a taxpayer
enters into an arrangement, the main purpose of which is to obtain a tax benefit and the
arrangement is entered into or carried on in a manner not normally employed for bona
fide business purposes, is not at arm’s length, abuses the provisions of the DTC or lacks
economic substance. The proposed GAAR does not distinguish between tax mitigation
and tax avoidance, with the result that any arrangement to obtain a tax benefit could be
deemed to be an impermissible avoidance agreement. Central Board of Direct Taxes issue
guidelines to provide for the circumstances and thresholds under which GAAR could be
invoked. Further the Dispute Resolution Panel would be made available when the GAAR
is invoked against a taxpayer.
A general treaty override would render India’s tax treaties redundant and would violate
the spirit and intent of Vienna conventions; the revised discussion paper indicates that
DTC would be amended to provide for a limited tax treaty override; i.e. it would apply
only when the GAAR or CFC provisions are invoked or when branch profits tax is
levied.
FoReIGn eXCHAnGe LAWs:
The Foreign Direct Investment Policy of India41 needs to be followed when any foreign
company acquires an Indian company. FDI is completely prohibited in certain sectors
such as gambling and betting, lottery business, atomic energy, retail trading and
agricultural or plantation activities.42
39 CONSULTATION PAPER TASK FORCE ON DIRECT TAXES headed by Mr. Vijay kelkar. http://finmin.nic.in/kelkar/Full_Report.pdf
40 “Revised Discussion Paper on Direct Taxes Code” issued Deloitte India Tax Alert - 18 June 2010
41 “Ready Reckoner on Investing in India”, http://dipp.nic.in/
42 “Policy On Foreign Direct Investment In India”, www.sethassociates.com/policy-on-foreign-direct-investment.html
49
InBoUnD CRoss BoRDeR M&A In InDIA AnD FeMA LAWs:
It has been observed that oversees companies find it far more economical to acquire
existing setups rather than opt for organic growth e.g. the beginning of 2007 saw the
signing of the largest Inbound deal in India’s history, Vodafone’s $ 11.1 billion acquisition
of a controlling interest in Hutchisson Essar. Foreign investment in India i.e. investment
in India by a “person resident outside India” (“non-resident”)43 is governed by FEMA
20.44 For the purpose of FEMA 20, investment in India by a non-resident can be in
respective schedules as under:
Investment under foreign Direct Investment scheme (“The FDI Scheme”); Investment
by Foreign institutional investors (“FIIs”) under the Portfolio Investment Scheme;
Investment by NRIs/OBCs under the portfolio Investment Scheme; Purchase and sale
of shares by NRIs/OCBs on non-repatriation basis; Purchase and sale of securities other
than shares and convertible debentures of an Indian company by a non-resident.
ReGULAtIon oF oUtBoUnD CRossBoRDeR M&A tRAnsACtIons UnDeR FeMA LAWs:
There are only certain special circumstances under which an Indian company is permitted
to make investments in a foreign company. An Indian party is not permitted to make
any direct investment in a foreign entity engaged in real estate business banking business
without the prior approval of RBI.45 Routes available to an Indian company which intends
to invest in a foreign company are:46
43 The term “person resident outside India” is defined as meaning “a person who is not resident in India” under Section 2 (w) of FEMA. Person’ is defined under Section 2 (u) of FEMA. Section 2 (v) of FEMA defines “person resident in India”.
44 Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000.
45 Regulation 5 Of FEMA 19 [Foreign Exchange Management ( Transfer and Issue of any foreign security) Regulations, 2000.]
46 As a governmental report has observed, India permits FDI in nearly all activities under automatic route except for ownership restrictions in certain industries on strategic and security grounds. See “A Comprehensive Manual for Foreign Direct Investment-Policy & Procedures” issued by Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India, available at www.dipp.nic.in/manual/manual_11_05.pdf
50
Direct Investment in Joint Venture/Wholly Owned Subsidiary; Without seeking prior
approval of RBI subject to conditions stated in Regulation 6 FEMA 19; Regulation 6
(3) FEMA 19 provides Direct Investment must be made only from sources stated;47
Investment in a fore ign company by ADR/GDR share swap or exchange;48 RBI approval
in special cases;49 Direct Investment by capitalization; Transfer by way of sale of shares
of a JWC/WOS;50 Pledge of shares of joint ventures and Wholly Owned subsidiaries.51
Obligation of Indian Parties, provided under Regulation 15 FEMA 19 can also be
stated.
The Press Notes are announced by Ministry of Commerce and Industry. The ministry
issued Press note 2, 2009 and Press Note 3, 2009, which deals with calculation of
foreign investment in downstream entities and requirement for Foreign Investment
Promotion Board (FIPB) approval in relation to transfer of ownership or control in
sectoral cap companies. These Press Notes raised certain key issues, including with
respect to the downstream investment. In March 2000, The Ministry of Finance came
out with Guidelines for Overseas Business acquisitions by Indian companies engaged in
Information Technology, Pharmaceuticals, Biotechnology, Entertainment software through
ADR/GDR stock swap.52
CoMPetItIon LAW
The Competition Act, 2002 embodies the principles laid down under Article 38 and
Article 39 of the Constitution of India, which state that the motive behind all economic
activities must be to honour the common good, and prevent concentration of wealth.53
47 Regulation 10 FEMA 19.
48 Regulation 8 FEMA 19.
49 Regulation 9 FEMA 19
50 Regulation 16 FEMA 19
51 Regulation 17 FEMA 19
52 http://finmin.nic.in/the_ministry/dept_eco._affairs/index.html
53 The Preamble of The Competition Act, 2002 - An Act to provide, keeping in view of the economic development of the country, for the establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India, and for matters connected therewith or incidental thereto.
51
Anti-competitive agreements can either be in vertical or in horizontal combinations.
Vertical restraints include cartels, bid-rigging etc. Horizontal restraints can be in the form
of tie-in arrangements, refusal to deal and maintenance of resale price.54 The Competition
Act, 2002 has overridden the Monopolies and restrictive Trade Practices Act, 1969 in
India, which provides for regulations to curb restraints and promote fair competition in
the market.
Section 3 of the Competition Act, 2002 governs anti-competitive agreements and
prohibits: “agreements involving production, supply, distribution, storage, acquisition
or control of goods or provision of services, which cause or are likely to cause an
‘appreciable adverse effect on competition’ in India.”
The Act prohibits the abuse of dominant position by an enterprise.55 It defines
‘combination’ by providing threshold limits in terms assets and turnover, rendering it a
little restrictive in scope.56 The Competition Act prohibits enterprises from entering into
agreements that cause or are likely to cause an “appreciable adverse effect on competition
within the relevant market in India”.57
Section 32 of the Competition Act explicitly allows the Competition Commission to
examine a combination already in effect outside India and pass orders against it, provided
that it has an ‘appreciable adverse effect’ on competition in India. This power is extremely
wide and allows the Competition Commission to extend its jurisdiction beyond the Indian
shores and declare any qualifying foreign merger or acquisition as void.58
Globalization and the growth in such cross border mergers have thrown up major
challenges to competition authorities around the world.59 Commission of India is still
54 Dr. J.C. Verma, “Corporate Mergers, Amalgamations and Takeovers- Concept, Practice and Procedure”, 5th Edition, 2008, Bharat Law House, New Delhi.
55 Section 4 of the Competition Act, 2002
56 Section 5 of the Competition Act, 2002
57 Section 6 of the Competition Act, 2002
58 “Taxmann’s Guide to Competition Act”, as amended by Competition (Amendment) Act, 2007”, Taxmann Allied Services (P) Ltd., 2007
59 Mario Monti , Address at the Whitman International Lecture Series, (May 2001) as cited in Barbara Crutchfield George, Lynn Vivian and Kathleen Lacey, Increasing Extraterritorial Intrusion of European Union Authority into U.S Business Mergers and Competition Practices: U.S Multinational Businesses underestimate the strength of the European Commission from G.E-Honeywell to Microsoft, 19 Connect. J.Int’l Law 571 (2004).
52
finding its feet in so far as trade regulation in the country is concerned. The control of
mergers is one such aspect which the Commission shall encounter in the near future.60
The powers of merger review of CCI thus impacts the feasibility of certain deals61. The
Competition Act, 2002 has been inspired by the UNCITRAL Model Law and the US Anti-
Trust Laws. But since the market conditions are very different in India, the US anti-trust
law and European community merger control regulation concepts may not be interpreted
or applied in the same way.
CAse stUDY:
E*Trade Mauritius Case:
The Authority of Advance Rulings has issued its ruling in the matter of E*Trade
Mauritius Case62; and the Ruling essentially follows the decision of the Supreme Court in
Azadi Bachao Andolan.63 Under domestic law, the gains from this transfer (gains arising
through the transfer of a capital asset situate in India) would be chargeable under Section
9 of the Income Tax Act. Having a tax residency certificate in Mauritius, the applicant
claimed the benefit of Article 13(4) of the Indo-Mauritius DTAA. Under Azadi Bachao
case, the applicant would clearly be entitled to the benefit of the DTAA; and the gains
would be taxable only in the residence country, Mauritius.
The Revenue however contended before the AAR, that “there is scope and sufficient
reason to infer that the capital gain from the transaction arises in the hands of the US
entity which holds the applicant company. In other words, the beneficial ownership vests
with the US company which according to the department has played a crucial role in
the entire transaction. Though the legal ownership ostensibly resides with the applicant,
the real and beneficial owner of the capital gains is the US Company which controls the
applicant and the applicant company is merely a façade made use of by the US holding
Company to avoid capital gains tax in India.”
60 Ben Rayment, Chrisopher, David Bailey, ‘Editor’s Introduction’, (2009), Competition Law Journal, Vol
61 The Competition Act, 2002 represents a clean break with the former competition law regime: a modern competition law inspired by the laws on restrictive agreements and dominant firm conduct, as well as merger regulation, in jurisdictions with long-standing enforcement records, most notably the European Union.
62 A.A.R. No.826 of 2009; Available at http://rulings.co.in/it-rulings/ruling/display/
63 Union of India and Anothers v. Azadi Bachao Andolan and Another, (2003) 263 ITR 706 (SC)
53
The AAR analysed the decision in Azadi Bachao, and ruled, “…the Supreme Court found
no legal taboo against ‘treaty shopping’ … if a resident of a third country, in order
to take advantage of the tax reliefs and economic benefits arising from the operation
of a Treaty between other countries through a conduit entity set up by it, the legal
transactions entered into by that conduit entity cannot be declared invalid. The motive
behind setting up such conduit companies and doing business through them in a country
having beneficial tax treaty provisions was held to be not material to judge the legality
or validity of the transactions.”
Vodafone Case:
The whole controversy in the case of Vodafone is about the taxability of transfer of share
capital of the Indian entity. Generally the transfer of shares of a non-resident company
to another non-resident is not subject to tax in India. But the revenue department is of
the view that this transfer represents transfer of beneficial interest of the shares of the
India company and hence, it will be subject to tax.
On the contrary Vodafone’s argument is that there is no sale of shares of the Indian
company and what it had acquired is a company incorporated in Cayman Islands which
in turn holds the Indian entity. Hence, the transaction is not subject to tax in India.
The transaction created on “real link” between India and Vodafone so as to bring the
consideration to tax in line with the effects doctrine which is the principle of international
law which postulates that state can impose liabilities on a non resident if the nonresident
conduct its operation in such a manner which affects the state.
Though the Mumbai High Court did not pronounce a ruling on merits, it has made
observations that there was a prima facie transfer of ‘controlling interest’ in the Indian
company as a result of the sale of the Cayman entity’s shares. In their opinion this was
prima facie a capital asset situated in India. Hence, capital gains tax has to be paid in
India. However, the Court left the question of chargeability of the transaction for the tax
department to determine in normal course.
The ruling will impact future global M&A transactions involving assets situated in India.
Accordingly, the tax implications on account of transfer of an indirect controlling interest
in any Indian subsidiary/joint venture pursuant to a global restructuring/reorganization
would need to be examined carefully.64
64 “Cross Border Transactions- An Indian tax and regulatory update” a report by Deloitte.
54
Star India Private Limited Case:
In this case, three Star TV companies incorporated in the British Virgin Islands decided
to amalgamate with the Star TV Indian entity, known as Star India Pvt. Ltd. [“STPL”].
The reason offered was that it was to the commercial advantage of Star TV to consolidate
its holdings in one company. Before the AAR, the Revenue argued that approving this
merger would have adverse consequences on the Revenue, and more importantly that
the AAR should itself decline to answer the question since the transaction was designed
to avoid tax. The power of the AAR to answer a reference is circumscribed by s. 245R
of the ITA, which provides that the “Authority shall not allow the application” where the
question raised in the application relates to a “transaction which is designed prima facie
for the avoidance of income tax”.
The authority held a dicta that: “A design to avoid the tax within the meaning of clause
(iii) of the proviso to Section 245 R(2) apparently covers such of the transactions which
are sham or nominal or which would lead to the inescapable inference of a contrived
device solely with a view to avoid the tax. The corollary thereto is that there is no real
and genuine business purpose other than tax avoidance behind such transaction.” In this
case, the test was satisfied by the business purpose of consolidating various entities into
one entity, which achieves “synergies of operation and enhanced operational flexibility.”
Dana Corporation Case:
A recent ruling by India’s Authority of Advance Ruling (AAR) to Dana Corporation
(Applicant) on the issue of whether a transfer of shares held in Indian companies to a
group company under a US reorganization plan would be taxable under the provisions
of Indian Tax Laws (ITL). The AAR held that the transaction should not be taxable in
India under the provisions of the ITL, as there was no consideration payable on the share
transfer. In the absence of any consideration, it is not possible to compute the taxable
capital gains and the subsequent tax liability. The AAR also held that even though the
transfer was an international transaction between associated enterprises (AE), as there
was no income arising, transfer pricing (TP) provisions could not be applied to determine
the taxable gain based on arm’s length principles.65
65 “India issues advance ruling on capital gains tax implications of an intra group share transfer” by E&Y published on 17 December 2009 as International Tax Alert.
55
India’s Authority for Advance Rulings (AAR) in the case of Amiantit International
Holding Limited 66 also ruled on 23 February 2010 that a proposed transfer of shares
in an Indian company between two nonresidents would not be subject to capital gains
tax. The ruling also reaffirms that India’s transfer pricing provisions do not apply where
income is per se not liable to tax.
The Timken Company’s case67 is a landmark judgment setting at rest the controversy
MAT is not applicable to a foreign company with no presence or PE in India. The
Authority concluded that provisions of MAT will not apply to foreign companies because
the definition of ‘Company’ in section 2(17) in the context of section 115JB should be
read to exclude foreign company.
CoMPARAtIVe stUDY:
There has been many recent developments in the competition and taxation laws of
various countries. The tax is a deciding factor for any cross border reorganization and
so all the countries should try to have a favorable tax environment. US international tax
reform proposals limit company’s ability to defer tax on foreign earnings until repatriated.
UK and Japan reforms made participation exemption for foreign source income. German
tax reforms had tightening of thin capitalization / earnings stripping rules.
United States
US have a well established set of rules governing the cross border reorganization
activities. The two primary relevant federal securities laws in US that has to be complied,
are the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act
of 1934 (the “Exchange Act”), including the rules and regulations promulgated by the
Securities and Exchange Commission (the “SEC”).
The anti-trust laws consist of Clayton Act and Shearman Act which prohibits
unreasonable restraint of trade, attempts to monopolize and monopolization. The Hart-
Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) is the statute governing
the procedural aspects of the government’s right to review of mergers and acquisitions.
66 A.A.R. No. 817/2009; Avaiable at http://rulings.co.in/it-rulings/ruling/display/.
67 A.A.R. No. 836/2009; Avaiable at http://rulings.co.in/it-rulings/ruling/display/.
56
The Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”), the
primary administrative agencies responsible for U.S. antitrust law enforcement, temper
their enforcement efforts by employing a reasonableness test that considers “the degree
of conflict with foreign law or articulated foreign economic policies”.68
Internal Revenue Code of 1986, as amended (Code), is provided by the federal
government, generally by the Internal Revenue Service (IRS) in revenue rulings, revenue
procedures, private letter rulings, announcements, notices and Treasury Department
regulations, and by the courts. This code provides for tax laws in US. Section 267 of
their internal revenue code (IRC) exempt US corporate entity in some cases relating to
taxation aspect relating to a merger and acquisition.69
A U.S. target is taxed on income of a foreign subsidiary on receipt of a dividend from
the subsidiary, but under the Subpart F rules, Subpart F income earned by a controlled
foreign corporation (CFC) may be currently included in the income of the U.S. target
that is a U.S. Shareholder of the CFC, even if the income is not distributed by the CFC.
A U.S. shareholder is a U.S. person that owns stock that is at least 10 percent (by vote)
of the foreign corporation. A U.S. target may be subject to taxation and interest charges
resulting from owning stock in a passive foreign investment company (PFIC).
Singapore
Income is taxed in Singapore in accordance with the provisions of the Income Tax
Act (Chapter 134) and the Economic Expansion Incentives (Relief from Income Tax)
Act (Chapter 86). Singapore has also signed a Comprehensive Economic Cooperation
Agreement (“CECA”) with India. This CECA governs trades in goods and services,
promotion of bilateral investments and cooperation in various other areas. Singapore too
has a favorable tax treaty with India. As per Article 25 of the Indo Singapore DTAA, the
Indian company would be able to claim underlying tax credit in India for the taxes paid
in Singapore on the profits from which such dividends are declared.70
68 “Capturing Opportunity and Controlling Legal Risk : India’s US–Bound Deals in Challenging Times” Published in Halsbury’s Law sponsored by LexisNexis.
69 Taxation of Cross Border Mergers and Acquisitions 2010 Edition United states by KPMG; http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/Tax-MA-2010/MA_CROSS-BORDER_2010_United_States.pdf
70 Taxation of Cross Border mergers and Acquisition Singapore 2010 Edition by KPMG available at http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/Tax-MA-2010/MA_Cross-Border_2010_Singapore.pdf
57
The draft legislation for the amalgamation of companies has been put forward in the
Income Tax (Amendment) Bill 2009, which has yet to be enacted. The proposed tax
framework only applies to a qualifying amalgamation. Singapore transfer pricing guidance
is very similar to the Organization for Economic Cooperation and Development (OECD)
transfer pricing principles.
United Kingdom
Finance Act 2009 and Corporation Tax Act 2009,71 which are likely to have a considerable
impact on U.K. acquisition structuring. The existing Treasury consent regime (whereby
certain transactions involving a foreign body corporate may be unlawful without prior
consent) is replaced with a reporting requirement for large transactions from 1 July 2009.
Minor changes have been made to the U.K. controlled foreign company (CFC) rules from
1 July 2009 over a two-year transitional period.
Where an acquisition is effected by the purchase of shares in exchange for the issue to
the seller of shares or loan stock in the purchaser, the gain may be rolled over into the
new shares or loan stock, thus enabling the seller to defer the U.K. capital gains tax
liability. U.K.’s controlled foreign companies (CFC) legislation is designed to prevent U.K.
companies from accumulating profits offshore in low-tax countries.
In EU Deferral of tax on capital gains on the capital assets transferred and shared
received in consideration in qualifying transaction. But such relief can be claimed
only when the asset become connected with local permanent establishment of the
amalgamating company. Apart from this, domestic law will be effective in connecting
with carry forward of losses.72
European competition law is governed primarily by Articles 85 and 86 of the Treaty
Establishing the European Community. Article 85 is designed primarily to achieve the
same goal as the Sherman Act in U.S. legislation insofar as it prohibits all agreements
and concerted practices that affect trade among E.U. members and which have as their
main objective the prevention, restriction or distortion of competition. Article 86 is
71 Taxation of Cross Border Mergers and Acquisitions 2010 Edition United Kingdom by KPMG available at http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/Tax-MA-2010/MA_CROSS-BORDER_2010_United_Kingdom.pdf
72 COMMON CONSOLIDATED CORPORATE TAX BASE WORKING GROUP (CCCTB WG) : “Issues related to business reorganizations Meeting” to be held on 12th September 2006, Working Report of the European Commission.
58
73 Eleanor M. Fox, “Monopolization and Dominance in the United States and The European Community: Efficiency, Opportunity and Fairness”, 61 Notre Dame Law Review (1986), pp. 981-995, at p. 994
74 “Challenges of Structuring Business Integrations in India” by Todd Landau, Dwaraknath Narasimhan, and Indraneel Roy Chaudhury Reprinted from Tax Notes Int’l, March 16, 2009, p. 991
75 “The Cost of Pride: Why Do Firms from Developing Countries Bid Higher?” by Ole-Kristian Hope University of Toronto submitted in Joseph L. Rothman school of Management on January 8, 2010.
designed to meet the policy objectives of the Clayton Act in that it prohibits the abuse
of a dominant market position through unfair trading conditions, pricing, limiting
production, tying and dumping.73
So, India has followed the footsteps of the developed economy by tax reforms and other
regulatory developments. US, UK and Singapore seems to have a friendly environment
for mergers and acquisitions by Indian companies.
ConCLUsIon:
“Marriage of two lame ducks will not give birth to a race horse.” Any acquisition
whether one where an Indian company acquires a foreign company or where a foreign
company acquires an Indian company, cannot be accomplished unless the procedural
requirements prescribed by the law of the land are fulfilled. With the recent global
trends of M&A and India being a favorite destination,74 the country may regain the
status of being the “Golden Bird”. Even the wholly European Takeover of Arcellor by
Mittal steel, orchestrated by Indian born Lakshmi Mittal, drew the local support of the
Indian government, with the Indian Commerce Minister Kamal Nath publicly imploring
the French Government to recognize that “Globalization is not just a one way street”.
The foreign company under New Economic Policy of the government and foreign
exchange laws has been allowed to acquire a controlling interest an Indian company.
Merely acquiring substantial shares in an Indian company cannot be said to be against
public interest or public policy. So the proposed acquisition by Reliance Industries of
Lyondell Basell and Bharti Airtel of Zain Telecomm headlines a frenzy of cross border
reorganization in Indian economy. It is a national pride for the developing world
countries to acquire a foreign firm.75
George Bernard Shaw said, “we are made wise not by the recollection of our past, but
by the responsibility to our future” and the future of India is bright indeed with the tax
reforms and a good regulatory framework.
59
BIBLoGRAPHY
ARtICLes:
- ”Changing directions: cross Border acquisition by emerging market firms” in New York Times Dated March 15th 2010; “Corporate deal makers head to emerging markets” published in New York Times on March 3rd 2010
- Developing Nations Setting Torrid Pace for Mergers by Heather Timmons and Vikash bajaj published March 03, 2010 in New York Times.. http://www.nytimes.com/2010/03/04/business/global/04emerge.html?_r=1&dbk
- Reliance said to raise Lyondell Bid to US $ 14.5 Billion (Update 4) By Jonathan Keehner and John Duce- February 2nd 2010 05:25 EST
- Piya Singh “Making Corus Work” , http://www.businessworld.in/index.php/TATA-CORUS.html http://www.tadingmarkets.com/news/stock-alert/dskyf_rbxlf_sc-clears-daiichi-s-offer-for-zenotech-1031135.html
- Indian Takeover Regulation- under reformed and over modified” by Sandeep Parekh W.P.NO. 2009/11/06 published on November 2009, IIM Ahmedabad.
- Decoding the New Takeover Code” by Shobhana Subramanian posted on July 20, 2010 at the Financial Express
- New Takeover Code: Is it achievable for corporate india?” published on july 20, 2010 Source: CNBC-TV18 11:10 pm
- K.R.Girish and Himanshu Patel, KPMG, “Deals: India wants more taxes from cross-border M&A”, February 19, 2008, International Tax Review.
- The Coming of Age of International Tax Jurisprudence in India, 2006, High Tech Tax Institute by Nishisth Desai Associates.
- Govt widens scope of anti-abuse provisions in I-T Act” by Abhineet Kumar & Sidhartha / Mumbai March 4, 2010 available at http://www.business-standard.com/india/storypage.php?autono=387459
- ”Decoding the direct tax code” Published on Tuesday, 22 Sep 2009, www. .bloombergutv.com.
Policy On Foreign Direct Investment In India”, www.sethassociates.com/policy-on-foreign-direct-investment.html
- India issues advance ruling on capital gains tax implications of an intra group share transfer” by E&Y published on 17 December 2009 as International Tax Alert.
- ”Capturing Opportunity and Controlling Legal Risk : India’s US–Bound Deals in Challenging Times” Published in Halsbury’s Law sponsored by LexisNexis”Capturing
60
Opportunity and Controlling Legal Risk : India’s US–Bound Deals in Challenging Times” Published in Halsbury’s Law sponsored by LexisNexis
- Taxation of Cross Border Mergers and Acquisitions 2010 Edition United states by KPMG; http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/Tax-MA-2010/MA_CROSS-BORDER_2010_United_States.pdf
- Eleanor M. Fox, “Monopolization and Dominance in the United States and The European Community: Efficiency, Opportunity and Fairness”’, 61 Notre Dame Law Review (1986), pp. 981-995, at p. 994
- ”Challenges of Structuring Business Integrations in India” by Todd Landau, Dwaraknath Narasimhan, and Indraneel Roy Chaudhury Reprinted from Tax Notes Int’l, March 16, 2009, p. 991
- ”The Cost of Pride: Why Do Firms from Developing Countries Bid Higher?” by Ole-Kristian Hope University of Toronto submitted in Joseph L. Rothman school of Management on January 8, 2010.
BooKs:
Sridharan & Pandian, “Guide to Takeover and Mergers”, 2nd Edition, 2006, Wadhwa
Publications.
A.Ramaiya, “Guide to the Companies Act”, 16th Edition, 2006, Wadhwa and Company,
Nagpur
Dr. J.C. Verma, “Corporate Mergers, Amalgamations and Takeovers- Concept, Practice
and Procedure”, 5th Edition, 2008, Bharat Law House, New Delhi
Taxmann’s Guide to Competition Act”, as amended by Competition (Amendment) Act,
2007”,Taxmann Allied Services (P) Ltd., 2007
“Taxmann’s Guide to Indian income Tax” as amended by Finance Act, 2008, Taxmann
Allied services (P.) Ltd, 2008
Ben Rayment, Chrisopher, David Bailey, ‘Editor’s Introduction’, (2009), Competition Law
Journal.
DoCUMents
World Investment report- “Cross Border Merger, Acquisitions and Development (2000)”,
United Nations (Geneva).
Report Of The Takeover Regulations Advisory Committee under the Chairmanship of Mr.
C. Achuthan, July 19, 2010 www.sebi.gov.in/commreport/tracreport.pdf
61
“Basic Principle of Income tax law” by Justice R.K. Abichandan.
Revised Discussion Paper on the Direct Taxes Code, June 2010, Central Board of Direct
Taxes, Department of Revenue, Ministry of Finance.
CONSULTATION PAPER TASK FORCE ON DIRECT TAXES headed by Mr. Vijay kelkar
http://finmin.nic.in/kelkar/Full_Report.pdf
“Ready Reckoner on Investing in India”, http://dipp.nic.in/
COMMON CONSOLIDATED CORPORATE TAX BASE WORKING GROUP (CCCTB WG):
“Issues related to business reorganizations Meeting” to be held on 12th September 2006,
Working Report of the European Commission.
CAses
CIT v. Rashiklal Maneklal, 177 ITR 198; CIT v. Amin, 106 ITR 368, CIT v. MCTM
Corporation, 22 ITR 524
Moschip Semi Conductor Technology Limted case : 1 Company Law Journal 307
(2005)
Eaton Industries case : http://www.sebi.gov.in/satorders/Eaton.html
Union of India and Anothers v. Azadi Bachao Andolan and Another, (2003) 263 ITR
706 (SC)
Commissioner of Income tax v. Mrs. Grace Collis & Another, (2001) 248 ITR 323 (SC)
CIT v. Visakhapatnam Port trust, (1983) 144 ITR 146 (A.P.)
Deputy Commissioner of Income Tax v. ITC, ITA No.s 970, 971 and 973/Cal/1998.
IRC v. Duke of Westminster,
Mc Dowell v. CTO
E*Trade Mauritius Case, A.A.R. No.826 of 2009; Available at http://rulings.co.in/it-
rulings/ruling/display/
Star India Private Limited Case
Dana Corporation Case
Amiantit International Holding Limited, A.A.R. No. 817/2009; Avaiable at http://rulings.
co.in/it-rulings/ruling/display/
Timken Company’s case, A.A.R. No. 836/2009; Avaiable at http://rulings.co.in/it-rulings/
ruling/display/
62
SyNoPSiS of the cASe Study
CIt v. LoHA & CeMent
Loha & Cement is a partnership firm registered in United Kingdom which
provided (i) engineering services and (ii) management consultancy services to various
persons in India. Loha does not have any permanent establishment or a fixed place of
business in India. Loha was thus providing offshore services i.e. services that have been
provided from UK directly without any deputation of personal in India.
In United Kingdom, a partnership firm is not liable to tax and the income of the firm is
charged to income tax in the hands of the partners of the form for their respective share
in the firm. Loha further took the stand that the receipts from rendering services in India
are not chargeable to tax in India.
Impugned action:
Loha filed the return of income in India for the relevant assessment year declaring nil
income and claimed refund of the taxes which had been deducted at source. Loha, the
assessee, claimed that the receipts would not be taxable in India both under the Income
Tax Act, 1961 as well as the Indo-UK DTAA.
Orderof theAssessingOfficer:
The AO rejected the assessee’s claim and concluded that income from both engineering
services and management consultancy services would be taxable in India both under the
Act and the Indo-UK DTAA.
order of the Commissioner (Appeals) order:
The Commissioner (Appeals) confirmed the order of the AO and dismissed the appeal
of the assessee.
63
order of the Income tax Appellate tribunal:
The Tribunal allowed the Appeal of the assessee and held that income is not taxable in India.
§ As regards engineering service – Under A.15 of DTAA the income would be taxable only in UK as a partnership firm is treated as a pass through entity for the purpose of taxation in UK. Even if A.15 does not apply, under A.7 income is not taxable in India since the firm does not have a permanent establishment in India. Further the Tribunal did not consider taxability under the Act as exemption was granted under the Treaty.
§ As regards Management consultancy services – The Tribunal held that the services do not accrue or arise in India as the firm did not have a Permanent Establishment in India therefore are not taxable in India.
Issue at hand:
The CIT appealed in Bombay HC against the order of the ITAT. Issues raised:
i. Does the DTAA apply to the Assessee?
ii. Does Artice 15 of DTAA apply to the Assessee?
iii. Does Article 7 of DTAA apply to the Assessee
iv. Whether fees for technical services are chargeable to tax under the IT act?
v. Whether assessee can claim benefit partly under the Act and partly under the DTAA in the same assessment year?
vi. In addition, the assessee filed a writ petition challenging the constitutional validity of the insertion of the Explanation under section 9 (2) through the Finance Act, 2010 and the retrospective applicability of the said Explanation.
64
JudgeS of the comPetitioN
Preliminary Rounds of Argument
Hon’ble Mr. Pramod KumarHon’ble Mr. T. R. Sood
Hon’ble Mr. A. L. GehlotHon’ble Mr. J. S. Reddy
Hon’ble Mr. R. S. Padvekar
Members of the ITAT, Mumbai
Professionals
Judges for the 6th nani Palkhivala Memorial Research Paper Competition, 2010
Hon’ble Mr. Pramod Kumar, Member, ITAT
Mr. Hiro Rai, Advocate
Hon’ble Mr. R. K. PandaHon’ble Mrs. Asha V. Raghavan
Hon’ble Mr. B. RamakotiahHon’ble Mr. Rajendra SinghHon’ble Mr. Vijay Pal Rao
Mrs. Aarti Sathe
Mr. Ajay Singh
Mr. Atul Jasani
Mr. D. Bafna
Mr. Harish N. Motiwalla
Mr. K. Gopal
Mr. M. Subramaniam
Mr. Madhur Agrawal
Mr. Niraj Sheth
Mr. Nishant Thakkar
Mr. Nitesh Joshi
Mr. Paras Savla
Mr. Parag Vyas
Mr. Rahul Hakani
Mr. S. N. Inamdar
Mr. Sameer Dalal
Judges for the 7th nani Palkhivala Memorial national tax Moot Court Competition, 2010
65
Quarter-Final Rounds
Final Rounds of Argument
Hon’ble Mr. Justice B. N. Srikrishna, Former Judge, Supreme Court of India
Hon’ble Mr. Justice P. B. Majmudar, Judge, Bombay High Court
Hon’ble Mr. Justice R. M. Savant, Judge, Bombay High Court
Mrs. Arati Vissanji
Mrs. Bijal Ajinkya
Mr. B. V. Jhaveri
Mr. Harish N. Motiwalla
Mr. Hiro Rai
Mr. Kishor Karia
Mr. Percy Pardiwala
Mr. Pradeep Kapasi
Mr. Subhash Shetty
Mr. Vikram Nankani
Mr. Vipul Joshi
Mr. Vispi T. Patel
semi Final Rounds of Argument
Hon’ble M. D. Manmohan
Hon’ble Mr. R. S. Syal
Hon’ble Mr. D. K. Aggarwal
Hon’ble Mr. P. M. Jagtap
Hon’ble Mr. Vasudevan
Hon’ble Mr. Pramod Kumar
Judges for the Memorials
Hon’ble Mr. D. Manmohan, Vice President, ITAT
Hon’ble Mr. R. S. Syal, Member, ITAT
Mr. Niraj Sheth, Advocate
Author of the Case study and Bench Memorial Mr. Madhur Agrawal
66AckNoWledgemeNtS
Acknowledgements
The AIFTP, ITAT Bar Association and the Moot Court Association of Government Law College, express, their sincere gratitude for their active support and co-operation in making this competition a reality.AIFTP (Western Zone)AIFTP (South Zone)AIFTP (North Zone)AIFTP (Central Zone)Ajay SekhriArun SatheAurobindo Pooniah Kuala Lumpur , MalaysiaBCAS FoundationErnst and Young Private Ltd.Farrokh V. Irani Gordhandas Kapadia Memorial TrustGirish M. Dave Economic Law PraticeH.C. BhatiaInternal Bureau of Fiscal Documentation (IBFD) Kuala Lumpur, Malaysia.J.K. RankaK.J. Chandran Poras KakaPrice Waterhouse Coopers P. DanielSatish ModiR.K. Jhunjhunwala FoundationRajesh S. KadakiaRajeev D. WagleySanjay R. ParikhShailesh Kapadia Memorial TrustMs Zia Mody Partner AZBPATRoN MEMBERS foR MooT CoURT CoMPETITIoNB.A. Palkhivala.Hiro RaiK. ShivaramM.L. PatodiPradip KapasiPercy PardiwalaRajesh KapadiaS.N. InamdarSunil M. LalaSpecial Thanks.Hon’ble Mr. R.V. Easwar President ITAT.Hon’ble Mr. D. Manmohan, Vice President (MZ) ITAT,and other Hon’ble Members of ITAT, for granting us permission to use the Court Rooms at the ITAT Mumbai for the competition.
67
orgANiziNg committee
ALL InDIA FeDeRAtIon oF tAX PRACtItIoneRs
(PALKHIVALA FoUnDAtIon &
ReseARCH CoMMIttee)
InCoMe tAX APPeLLAte tRIBUnAL
BAR AssoCIAtIon, MUMBAI
Moot CoURt AssoCIAtIon, GoVeRnMent LAW CoLLeGe,
MUMBAI
Chairman Dr. K. Shivaram
Vice-Chairman Mrs. Nikita Badheka
Ex-officio Shri M. L. Patodi Shri S. K. Poddar Dr. Ashok Saraf Shri H. C. Bhatia Shri J. D. Nankani Shri M. D. Sodani Shri P. V. Subba Rao Shri J. K. Ranka
national executive Committee Members
Shri Harish N. Motiwalla Shri Narayan Prasad Jain Shri P. M. Chopra Shri P. V. S. S. Prasad Mrs. Premlata Bansal Shri Kishor Vanjara Shri Sanjay Kumar
Members Mrs. Arati Vissanji Shri Arun P. Sathe Shri Atul Jasani Shri Chirag Parekh Shri Deepak R. Shah Dr. P. Daniel Shri K. Gopal Shri Pravin Veera Shri Subhash Shetty Shri Sujeeth Karkal Shri Vikram Nankani Shri Vinayak Patkar Shri Vipul Joshi Shri Yatin Desai
President
Shri Dinesh Vyas
Vice President
Dr. K. Shivaram
Vice President
Shri Arun Sathe
Hon. secretary
Shri Hiro Rai
Hon. secretary
Shri Vipul Joshi
Hon. treasurer
Shri Haresh P. Shah
Imm. Past President
Shri S. E. Dastur
Members
Mrs. Arati Vissanji
Shri C. C. Dalal
Shri D. J. Thakkar
Shri Kishor B. Karia
Shri P. J. Pardiwala
Shri P. N. Shah
Shri Porus F. Kaka
Shri S. N. Inamdar
Shri Subhash S. Shetty
Ms. Usha Dalal
Shri Vinay Pathak
Principal
Dr. Smt. M. V. Kagalkar
Chairman,
Prof. Sanjay Kadam
General secretary
Mr. Raunak Shah
Asst. General secretary
Mr. Rubin Vakil
treasurer
Mr. Yuvraj Choksy
Asst. treasurer
Ms. Komal Modi
secretaries
Mr. Siddharth Bafna
Mr. Ashish Sodhani
Mr. Raunak Kapoor
Ms. Juhi Mathur
Mooting & Research
Co-ordinator
Ms. Riva Shah
secretary Co-ordination
Ms. Saloni Lakhia
Public Relations Head
Ms. Tanaya Shah
Marketing Head
Mr. Hrushi Narvekar
68
orgANiziNg committee
Aadya Bajpai
Aarohee Gursale
Abhisheeka Patro
Ajinkya Potdar
Akanksha Agarwal
Almitra Gupta
Amal Irfan
Amal Sethi
Amanda Rebello
Amer Ahmad
Ameya Naik
Amrita Vyas
Aniesh Jadhav
Anjali Goklani
Ankit Jhaveri
Anuja Shah
Anuradha Panchmatia
Aparna Bagree
Ashana Mishra
Ashana Shaparia
Ayaan Patel
Ayushi Anandapara
Bhagyashree Madhekar
Bhakti Mehta
Bhanu Garg
Bhargavi Gadre
Chesta Mehta
Chritharth Palli
Deepa Mistry
Deesha Kanbar
Devaki Naik
Devvrat Periwal
Divya Hazra
Divya Kothari
Garema Srivastav
Gathi Prakash
Harekrishna Ashar
Hema Naik
Ila Haldia
Jay Shah
Juhi Bhojani
Kamreen Hazarika
Kanupriya Kejriwal
Karishma Mehta
Khadija Loharchawlwala
Kim Dsouza
Kritika Mathur
Krutika Chitre
Madhavi Doshi
Malhar Zatakia
Manali Kshirsagar
Manali Sangoli
Mansi Shetty
Miloni Shah
MeMBeRs oF tHe Moot CoURt AssoCIAtIon, GoVeRnMent LAW CoLLeGe
69
Nehal Wagle
Nikkita Johal
Nishit Maru
Pankhuri Upadhyay
Paranasi Singala
Paridhi Shroff
Pavitra Kacholia
Persis Sidhva
Pranay Aggarwal
Praval Arora
Prerna Shankar
Rajni Singh
Ratul Das
Rayeez Sheikh
Rima Desai
Ritwik Kumar
Rohan Singh
Rudhrani Rathore
Saanya Bajaj
Sana Shaikh
Satyam Sancheti
Shamika Joglekar
Shanelle Irani
Shivanee Srivastav
Shivi Sanyam
Shreya Ramesh
Shruti Sundarajan
Shubhangi Sharma
Sneha Shah
Suhani Dhanki
Suraj Sanap
Surbhi Shekhawat
Suruchi Kotoky
Sushmita Sengar
Tanya Goveas
Uttara Srinivasan
Varsha Nagare
Vedika Lakhotia
Vidhushi Agnihotri
Zahabia Rajkotwala
Zeel Shah
70
It is indeed a privilege and honour for the Government Law College to host the 7th Nani Palkhivala Memorial National Tax Moot Court Competition in memory of the Late Mr. Nani A. Palkhivala.
As aspiring law students, we adore, applaud, respect and draw inspiration from the man who was Nani Palkhivala. Although we are a part of a generation that has not witnessed the legendary Nani Palkhivala through his innumerable achievements, we stand in awe of his legal acumen, principles of ethics and the sheer significance of the cases which he argued, that literally changed the course of Indian legal history. Despite his titanic stature, his humble attitude, his love for his country and his pure simplicity makes him an exemplary role model for every aspiring lawyer.
The Nani Palkhivala Memorial National Tax Moot Court Competition organized in association with the Income Tax Appellate Tribunal Bar Association and the All India Federation of Tax Practitioners is a fitting tribute to the legacy of one of the foremost legal luminaries of the world. The Competition enjoys the distinction of being India’s first moot court competition based exclusively on the subject of Taxation Law, and the only one that gives the participants an opportunity to argue at the Income Tax Appellate Tribunal before sitting Members of the ITAT. The increasing success achieved by the Competition year after year since its inception in 2004 is due to the untiring efforts of several individuals.
We would like to thank Hon’ble Mr. R.V. Easwar, President, Income Tax Appellate Tribunal and Hon’ble Mr. D. Manmohan, Vice-President, Income Tax Appellate Tribunal for gracing the Inaugural Ceremony of the Competition as the Chief Guest and the Guest of Honour respectively.
We would like to express my deepest gratitude to Hon’ble Mr. Justice B.N. Srikrishna, Hon’ble Mr. Justice P.B. Majmudar, and Hon’ble Mr. Justice R.M. Savant for presiding over the Final Rounds of Argument of the competition.
We would like to thank Hon’ble Mr. R.V. Easwar, President, Income Tax Appellate Tribunal for granting us permission to conduct the Rounds of the competition at the Income Tax Appellate Tribunal. We would also like to sincerely thank Hon’ble Mr. Pramod Kumar and all the Members of the Income Tax Appellate Tribunal, Mumbai for judging the rounds of the competition and for their constant support and encouragement.
MessAGe FRoM tHe GeneRAL seCRetARY AnD
Asst. GeneRAL seCRetARY,
Moot CoURt AssoCIAtIon
meSSAge
71
We would like to extend my gratitude to Mr. Dinesh Vyas, President, ITAT Bar Association for his guidance and encouragement. I would also like to thank Mr. M.L. Patodi, National President, All India Federation of Tax Practitioners for the support that he has extended to the competition.
We would like to extend our sincere gratitude to Dr. K. Shivaram, Chairman, Palkhivala Foundation and Research Committee and Vice President, ITAT Bar Association. It is due to his unfailing support and enthusiasm that the competition has been able to grow from strength to strength every year.
We would like to extend our gratitude to Mr. Madhur Agrawal for drafting the case study and the bench memorandum for the competition, and helping us at various stages of the competition.
We would like to thank Hon’ble Mr. Pramod Kumar and Mr. Hiro Rai for sparing their valuable time and judging the 6th Nani Palkhivala Memorial Research Paper Competition, 2010. The competition received an overwhelming response this year. We would also like to thank Hon’ble Mr. D. Manmohan, Hon’ble Mr. R. S. Syal and Mr. Niraj Sheth for assessing the Memorials of the participating teams.
The constant guidance of Dr. Smt. M.V. Kagalkar, Principal, Government Law College has proved to be of immeasurable value to the Moot Court Association. We would particularly like to thank Professor Sanjay Kadam, Chairman, Moot Court Association. It is his faith and belief that inspires us to work harder. His unstinting support is a pillar of strength to all the members of the Association.
Lastly, we would like to thank every member of the Moot Court Association. The dedication and perseverance of the members have contributed immensely to ensure the success of the competition. We would like to especially thank the Office Bearers of the Association - Siddharth Bafna, Ashish Sodhani, Raunak Kapoor, Yuvraj Choksy, Riva Shah, Hrushi Narvekar, Juhi Mathur, Komal Modi, Saloni Lakhia and Tanaya Shah. Their contribution has been vital in making this competition a reality.
We wish all participants the very best of luck, and hope that they have a wonderful mooting experience at the competition.
Raunak shah Rubin Vakil General Secretary Asst. General Secretary Moot Court Association Moot Court Association
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