contentsmy best wishes to you all! regards cs ranjeet pandey president, icsi message from the...

CONTENTS

Printed and Published by B P Bhargava on behalf of Vidhimaan Publishers Pvt. Ltd. Printed at Millenium Offset (P.) Ltd., A-49, Naraina Industrial Area, Phase-I, Delhi and Published at 158 Basant Enclave, Palam Road, New Delhi 110057. Editor : B P Bhargava.Correspondence:Send your Articles at email id : [email protected] non receipt of issue email id : [email protected] feedback email id : [email protected] subscription price Rs.1200/- (January - December, 2019), send your cheque in favour of Vidhimaan Publishers Private Limited, at Krishna Law House, 128, Municipal Market, Super Bazar Compound, Connaught Place, New Delhi-110001. Tel.: 011-23417866, 64566061Disclaimer: The views and opinions expressed in the Journal are those of the author alone and should not be taken to reflect either the views or the policy of the organisation to which they belong to or employed, publisher, editor or the Institute of Company Secretaries of India (ICSI). The publisher, editor/s, authors and ICSI will not at all be responsible in respect of anything and the consequences of anything done or omitted to be done by any person in reliance upon the contents of this journal. This disclaimer applies to all, whether subscriber to the journal or not. Material in this Journal should not be reproduced whether in part or whole without the written consent of the publisher. © Copyright with the Institute of Company Secretaries of India

MESSAGE FROM THE PRESIDENT 3

ARTICLES

l Corporate Governance 4

l Partnership 9

l Exploring New Beneficial Income-Tax Structure : Cause for Corporate Restructuring

13

l Indian Perspective of Doctrine of Competence

16

KNOWLEDGE UPDATE

COMPANY LAW

l Re-Constitution of NCLT, Allahabad Bench 8l Designation of Courts as Special Courts

under the Companies Act, 20138

FOREIGN EXCHANGE MANAGEMENT LAWl Foreign Exchange Management (Non-Debt

Instruments) (Amendment) Rules, 20198

l Foreign Exchange Management (Export of Goods and Services) (Amendment) Regulations, 2019

8

INSOLVENCY AND BANKRUPTCY LAWl Insolvency and Bankruptcy Code

(Amendment) Ordinance, 20198

l Shri Sudhaker Shukla Appointed as Whole Time Member of the Insolvency and Bankruptcy Board of India with effect from 14th November, 2019

19

SEBI LAWl Securities and Exchange Board of India (Issue

of Capital and Disclosure Requirements) (Fifth Amendment) Regulations, 2019

19

l Review of investment norms for mutual funds for investment in debt and money market instruments

19

l Securities and Exchange Board of India (Foreign Portfolio Investors) (Amendment) Regulations, 2019

19

CASE LAW 20

January 2020 | Student Professionals Today3

“We will open the book. Its pages are blank. We are going to put words on them ourselves. The book is called Opportunity and its first chapter

is New Year’s Day.”

– Edith Lovejoy Pierce

Dear Students,

At the outset, I extend my sincere and heartiest best wishes to all of you as we move into new ray of hope and promise with the beginning of the year 2020.

God has gifted us another new year which is full of exciting opportunities. I wish this New Year brings with itself the happiest and most beautiful times for you and give you the courage to triumph over your vices and embrace the virtues.

Opportunities flow continuously, keeping pace with the changing business, technological and regulatory environment. As you are aware, the role of Company Secretaries involves both static and dynamic aspects. While the static role involves routine compliances, the dynamic role extends to business strategy, Board room dynamism, Governance aspects, drafting, familiarity with the functions that lie complementary with the profession of Company Secretaries, economic concept of business etc. Since the static role will eventually be taken over by technology and artificial intelligence, the mandate is to enhance the dynamic skills required for the profession.

Recently, the Institute organized Yuvotsav 2020: 20th National Conference of Student Company Secretaries at Kolkata; the first mega event for the students to commemorate the occasion of 157th Birth anniversary of Swami Vivekananda. Competitions like debates, creative writing, elocution, moot courts, etc. were conducted therein. While focusing your core attention towards striving for academic excellence, I would urge you to take part in the extra circular activities organized by the Institute from time to time for the overall development of your personality. Not only will this enrich you with the skills required in your roles as Company Secretaries but will also lead to improved academic performance and at the same time provide productive breaks.

Friends, I understand that the schedule of CS Examinations for December, 2019 was disturbed due to certain unavoidable circumstances; both for you as Examinees and for us as the Institute organizing it. It would not be an exaggeration to share with you that the efforts placed by the Institute in each session of Examinations for their smooth conduct is beyond words. That said, I would like to thank all of you for your patience and support and for portraying true professionalism even before having gained the degree during this trying phase. I hope that you sail through this journey of becoming Company Secretaries and portray yourself as true professionals in the future as well.

This being my last communication with you as President of the Institute, I feel a great sense of contentment that during the year gone by we have succeeded in taking the Institute to new heights especially in terms of career opportunities. At this juncture, I would take this opportunity to advice the students, the future governance professionals to develop a vision and foresight towards the changes and its impact on the profession and to develop skills as per business mandates.

My best wishes to you all!

Regards CS Ranjeet Pandey

President, ICSI

MESSAGE FROM THE PRESIDENT


Sahil Gautam Mehta – Student, CS Professional Program

Email ID : [email protected]

Corporate Governance

This article explains concept of Corporate Governance.

Introduction

In the past few decades, there has been a huge increase in the number of scandals because of the failure of Corporate Governance. The higher authorities of the organization neglected the business ethics completely and tried to window dress the financial statements of the entity which led to manipulating the figures and showing wrong profits. Various unethical means and methods were adopted which is totally unacceptable. Auditors also played a major role by getting involved in such unethical practices and not reporting such transactions to those charged with governance or such other higher authority who should be informed of such malpractices immediately. The major reason for introducing into the concept of Corporate Governance was because of big scandals in companies like Enron, Crazy Eddie and so on.

Meaning1

Before understanding the concept of Corporate Governance, let us keep an eye on Governance. Governance refers to all the means and mechanism that will enable multiple stakeholders in an enterprise to have an organized mechanism for evaluating options, setting direction and monitoring compliance and performance , in order to satisfy specific enterprise objectives.

Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially

1. https://www.investopedia.com/terms/c/corporategovernance.asp

involves balancing the interests of a company’s many stakeholders such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community. Since corporate governance also provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

Mechanisms2

Internal mechanism - Internal controls are the most important mechanism in any organization. These controls monitor the day to day activities of the organization and take corrective actions when the business is running on the wrong track. These objectives include smooth operations, clearly defined reporting lines and performance measurement systems.

External mechanism - External control mechanisms are controlled by those outside an organization and serve the objectives of entities such as regulators, governments, trade unions and financial institutions. External mechanisms are often imposed on organizations by external stakeholders in the forms of union contracts or regulatory guidelines. External organizations, such as industry associations, suggest guidelines for best practices, and businesses can choose to follow these guidelines or ignore them.

2.https://smallbusiness.chron.com/three-types-corporate-governance-mechanisms-66711.html



Independent audit - An independent external audit of a corporation’s financial statements is part of the overall corporate governance structure. It helps to determine the correct financial performance of the corporation. This exercise gives a broad but limited view of the organization’s internal working mechanisms and future outlook.

Objectives

It seeks to achieve following objectives:

To place a stable and effective board capable of taking independent and objective decisions at the helm of affairs

That the Board is balanced as regards the representation of adequate number of non-executive and independent directors who will take care of the interests and wellbeing of all the stakeholders

To adopt transparent procedures and practices and arrive at decisions on the strength of adequate information

To place an effective machinery to sub serve the concerns of stakeholders

To keep the shareholders informed of relevant developments impacting the company

To effectively and regularly monitor the functioning of the management team and

That the Board remains in effective control of the affairs of the company at all times. The overall endeavour of the Board should be to take the organisation forward, to maximise long-term gains and stakeholders’ wealth.

Essential pillars of Corporate Governance

Accountability To be accountable for all kind of non-compliance

Transparency To ensure that nothing has been kept as a secret

Responsibility To be responsible for the duties and abide by the rules and regulations

Fairness To treat everyone in a just and fair manner

Benefits of Corporate Governance

1) It ensures corporate success and economic growth.

2) It maintains investors’ confidence, as a result of which, company can raise capital efficiently and effectively.

3) It lowers the capital cost.

4) It brings about a positive impact on the share price.

5) It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization.

6) It also minimizes wastages, corruption, risks and mismanagement.

7) It helps in brand formation and development.

8) It ensures organization is managed in a manner that fits the best interests of all.

Securities and Exchange Board of India (Listing of Disclosure Requirements) Regulations, 2018:

Applicability - These regulations shall apply to the listed entity who has listed any of the following designated securities on recognized stock exchange(s):

Specified securities listed on main board or SME Exchange or Institutional trading platform

Non-convertible debt securities, non-convertible redeemable preference shares, perpetual debt instrument, perpetual non-cumulative preference shares

Indian depository receipts

Securitized debt instruments

Security receipts

Units issued by mutual funds



Any other securities as may be specified by the Board.

Broad features

Time Limit to comply with other provisions of the regulations has been given for 90 days, i.e., it became effective from 1st December, 2015

The regulations have provided broad principles for periodic disclosures by the listed entities and also have incorporated the principles for corporate governance they have been formed on the lined with Organisation for Economic Co-operation and Development (OECD).

The Regulations have been structured and designed in such a way so that they are aligned with Companies Act, 2013.

In order to avoid any sort of confusion or overlapping, pre-listing as well as post listing requirements have been incorporated in the Listing Regulations.

Obligations which are applicable to specific types of securities have been incorporated in separate chapters.

Types

Substantive Provisions

Procedural Requirements

Common Obligations of Listed Entities - This part deals with the obligations and responsibilities upon all the listed entities. A responsibility has been cast upon Key Managerial Personnel (KMP’S), Directors, and Promoters that they shall comply with responsibilities or obligations assigned to them under the regulations. The following are the common obligations on listed entities :

• Regulation 6 - Compliance Officer And his Obligations - A listed entity shall appoint

a qualified Company Secretary as the compliance officer. The Compliance officer so appointed shall be responsible for ensuring conformity with regulatory compliance, co-ordination and reporting to the Board, ensuring that correct procedures have been followed that would result in correctness of information filed by listed entity under the regulations and monitoring email address of grievance redressal division.

• Regulation 7 - Share Transfer Agent- The listed entity shall appoint a share transfer agent or manage the share transfer facility in house.

Other Regulations - Regulation 24 lays down requirements with respect to subsidiary of listed companies. Atleast one Independent director on Board shall be a director on Board of unlisted material subsidiary. The management of the unlisted subsidiary shall periodically bring to the notice of the board of directors of the listed entity, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary. A listed entity shall not dispose of shares in its material subsidiary resulting in reduction of its shareholding (either on its own or together with other subsidiaries) to less than 50 per cent or cease the exercise of control over the subsidiary without passing a special resolution in its general meeting except in cases where such divestment is made under a scheme of arrangement duly approved by a court/tribunal. Selling, disposing and leasing of assets amounting to more than 20% of the assets of the material subsidiary on an aggregate basis during a financial year shall require prior approval of shareholders by way of special resolution, unless the sale/disposal/lease is made under a scheme of arrangement duly approved by a court/tribunal.



Quarterly compliances - Listed entity

Regulation Heading What to be filed Due Date13(3) Grievance

redressal mechanism

A statement giving the number of investor complaints pending at the beginning of the quarter, those received during the quarter, disposed of during the quarter and those remaining unresolved at the end of the quarter

Within 21 days from the end of each quarter

27(2) Other Corporate

Governance requirements

Quarterly compliance report Within 15 days from close of quarter

31(1) Holding of specified securities

and shareholding

pattern

A statement showing holding of securities and shareholding pattern separately for each class of securities

(a) One day prior to listing of its securities on the stock exchange(s);

(b) On a quarterly basis, within 21 days from the end of each quarter; and,

(c) Within 10days of any capital restructuring of the listed entity resulting in a change exceeding 2 % per cent of the total paid-up share capital.

33(3) Financial results

Quarterly and year-to-date standalone financial results

Within 45 days of end of each quarter, other than the last quarter.

32(1) Statement of deviation(s)

or variation(s)

For public issue, rights issue, preferential issue , etc.

Quarterly basis

Types of Committees

Types of Committees

Audit Committee

Stakeholder Relationship COmmittee

Risk Management Committee

Nomination and Remuneration

Commitee


Principles of Corporate Governance

• Rights and equitable treatment of shareholders - To respect the shareholder’s rights and help them exercise their rights openly and effectively.

• Interests of other stakeholders - To consider the interests of stakeholders, internal as well as external.

• Role and responsibilities of the Board - To have skills and understanding to challenge and review the performance of the management.

• Integrity and ethical behavior - Integrity is the most important requirement in any organization. Ethical behaviour is characterized by honesty, fairness and equity in interpersonal, professional and academic relationships and in research and scholarly activities. Ethical behaviour respects the dignity, diversity and rights of individuals and groups of people. To develop a code of conduct for the ethical performance of the organization.

• Disclosure and transparency - To disclose all the important information which the stakeholders should be informed of and to not hide anything material from the stakeholders. To install a transparent machinery into the place to treat everyone at par and part of the same family.

Conclusion

It is essential that good governance practices must be effectively implemented and voluntary adoption of ethical code of business conduct. It increases the confidence of the investors and attract more investment from foreign companies. An organization with good corporate governance sustains for a longer time. Corporate governance is a great pillar of any organization. Compliance are costly but non-compliances are costlier. So, a good corporate governance not only helps in complying laws and regulations but also helps to save money.

l The views expressed are personal views of the author and do not necessarily reflect those of the Institute.


KNOWLEDGE UPDATECompany Law

Re-Constitution of NCLT, Allahabad Bench

Central Government, vide Order File No. 10/03/2019-NCLT dated 7th December 2019, has re-constituted NCLT, Allahabad Bench by appointing Mr. Justice (Retd.) Rajesh Dayal Khare, as a Member (Judicial).

Designation of Courts as Special Courts under the Companies Act, 2013

Central Government, vide Notification No. S.O. 4570(E) dated 19th December 2019, with the concurrence of the Chief Justices of the High Court of Uttarakhand, Nainital and High Court of Jammu and Kashmir, has designated courts as Special Courts under the Companies Act, 2013.

Foreign Exchange Management Law

Foreign Exchange Management (Non-Debt Instruments) (Amendment) Rules, 2019

Central Government, vide Notification No. S.O. 4355(E) dated 5th December 2019, has amended the Foreign Exchange Management (Non-debt Instruments) Rules.

Foreign Exchange Management (Export of Goods and Services) (Amendment) Regulations, 2019

RBI, vide Notification No. FEMA 23(R)/(2)/2019-RB dated 3rd December 2019, has amended the Foreign Exchange Management (Export of Goods & Services) Regulations, 2015.

Insolvency and Bankruptcy Law

Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019

The President of India promulgated on Insolvency and Bankruptcy Code (Amendment) Ordinance, 2019 on 28th December, 2019 to make amendments in the Insolvency and Bankruptcy Code, 2016 (Code). The amendments aim to remove certain difficulties being faced during insolvency resolution process to realise the objects of the Code and to further ease doing of business.


Aswin D M – Student, CS Professional Program


Partnership

This article explains concept of Partnership.

Nature of Partnership

Partnership is a form of business organization, where two or more persons join together for jointly carrying on some business. It is an improvement over the ‘Sole-trade business’, where one single individual with his own resources, skill and effort carries on his own business. Due to the limitation of resources of only a single person being involved in the sole-trade business, a larger business requiring more investments and resources than available to a sole-trader, cannot be thought of in such a form

of business organization. In partnership, on the other hand, a number of persons could pool their resources and efforts and could start a much larger business, than could be afforded by any of these partners individually. In case of loss the burden gets divided amongst various partners in a Partnership.

Comparison Between Partnership and Company

The difference between partnership and company can be understood as follows :

Basis Partnership Company

Legal Status A firm is not a legal entity. Therefore, it has no legal identity distinct from the personalities of its constituent members

A company is considered a separate legal entity distinct from its members.

Agency In a firm All the partners are an agent for each other, as well as of the firm

In a company, a member is not an agent of any other member nor the company. A member’s actions do not bind either

Distribution of Profits The profits of a firm must be distributed among the partners according to the terms stated in the partnership deed

There are no compulsions to distribute its profits among its members. A portion of the profits becomes distributable among the shareholders when dividends are declared


Partnership

Extent of Liability In a partnership, the liability of the partners is unlimited. This means that every partner is liable for the debts of a firm incurred during the business of the firm. These debts may be recovered the partner’s private property if the joint estate is insufficient to meet the needs entirely

In a company that is limited by shares, the liability of a shareholder is limited to the amount, if any, unpaid on his shares. In the case of a guarantee company, the responsibility is limited to the amount for which the shareholder has agreed to be liable. However, there may be companies where the liability of a member is unlimited

Property The firm’s property is that which is called a “Joint Estate” of all the partners. It does not belong to anybody distinct in law from its members

In a company, its properties are separated from that of its members who can receive it back only in the form of a dividend or a refund of the capital

Management If there is no express agreement formed to the contrary, all the partners of the firm are entitled to participate in the control

Company members are not entitled to participate in management unless they are appointed as a director. In such a case, they may participate. Members, however, enjoy the right of attending general meetings and voting where they can decide specific questions such as the election of directors, appointment of auditors etc

Duration of existence If no contracts are existing to the contrary, death, retirement or an insolvency of a partner that results in the dissolution of a firm

A company has the advantage of having perpetual succession

The firm cannot file legal proceedings against any third party for any situation. For example, if the client has not paid his dues to the firm, the firm cannot sue him if it is unregistered.

An unregistered firm cannot fail a case against a partner for any reason (like mismanagement, theft etc.)

A partner of an unregistered firm cannot file a suit against one of the other partners either.

Registration of Partnership Firm

As per the Partnership Act 1932, it is not compulsory to register a partnership firm. The firm does not have a separate legal identity and registration will not alter this fact. However, registration is the definite proof of the existence of the firm and its legality.

Non-registration of a firm has some real-life legal consequences for the partners and the firm itself. So it is always advisable to draw up a written partnership deed and register the firm with the Registrar of Firms. The consequences of not doing so are as follows :


Procedure of Registration

According to the India Partnership Act 1932, there is no time limit as such for the registration of a firm. The firm can be registered on the date when it is incorporated or any such date after so. The requisite fees and fines must be paid. The procedure for such a registration is as follows :

Application to the Registrar of Firms in the prescribed form (Form A). Nowadays this facility is even available online. Such an application must contain certain basic details about the firm such as :

l Name of the Partnership Firm

l Name and address of all partners

l Place of business (address of main and branch offices)

l Duration of the partnership

l Date of joining of partners

l Date of commencement of business

The duly signed copy of the Partnership Deed (which contains all the terms and conditions) must be filled with the registrar

Deposit/pay the necessary fees and stamp duties

Once the registrar approves the application, the firm will be entered into the records. And the registrar will also issue a certificate of incorporation.

Provision related to Interest & Remuneration to Partners Under Section 40(b) of the Income-tax Act, 1961

Section 40(b) of Income-tax Act places some restrictions and conditions on the deductions of expenses available to an assessee assessable as a partnership firm in relation to the remuneration and interest payable to the partners of such firm. The deductions regarding salary to partners and any payment of interest to partners cannot exceed the monetary limits specified under section 40(b) and

are available subject to the fulfillment of conditions mentioned therein.

Conditions for Claiming Deduction

The following conditions must be satisfied before claiming any deduction in respect of salary/remuneration or interest payable to partner by a partnership firm :

Partner to be paid interest & remuneration must be a working partner - The partners of a partnership firm whose accounts are to be credited with the salary, remuneration, commission, and bonus or by whatever name called, by the firm, must be working partners and not the silent partners. Working partner in general terms means the partner who is actively engaged in the business of the partnership firm and is not a partner for merely enjoying the profits/benefits of the partnership business. If a partner is not a working partner then remuneration to such partner will not be eligible for deduction as per section 40(b) of Income-tax Act 1961. Explanation 4 to section 40(b) provides meaning of working partner as an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner.

Remuneration or interest to partners must be authorized by the partnership deed - As per section 40(b) only that salary, remuneration, bonus, commission etc., payable to working partners or any payment of interest payable to any partner will be allowed as deduction only if it is authorized by the partnership deed. If the partnership deed does not contain such provisions then the deductions may be disallowed if the same is claimed by the partnership firm.

Quantification of remuneration to partners in partnership deed is must - CBDT in its circular no. 739 dated 25/03/1996 have clarified that no deduction under section 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration.

Partnership


Thus quantification of remuneration is required to be there in the partnership deed for it to be considered as authorized by the partnership deed and to avoid any disallowance under section 40(b).

However In CIT v. Anil Hardware Store [2010] 323 ITR 368 (HP) where remuneration clause in partnership deed was in line with section 40(b) and It was contended on behalf of the revenue that in respect of the profits upto Rs.75,000/-, even in the partnership deed, the word “upto Rs.50,000/- or 90% of the book profits” have been used which shows that the partnership deed does not exactly determine the remuneration of the partners. But it was held that “The CBDT circular referred to above lays down two conditions. Either the amount of remuneration payable should be specified or the manner of quantifying the remuneration should be specified. In the present case, the manner of fixing the remuneration of the partners has been specified.” Hence deduction was allowed.

No interest & remuneration to partner to be allowed which relates to any period falling prior to the date of such partnership deed - As per section 40(b)(iii) the remuneration will be allowed as deduction only for that period onwards where from the partnership deed authorizes such remuneration. Thus if a Partnership deed is executed on 01-04-2009 which doesn’t authorizes payment of remuneration to the partners and subsequently the deed is amended by a subordinate partnership deed to provide for such authorization on 01-04-2010 then remuneration to partners will not be allowed for period between 01-04-2009 to 01-04-2010 since during that period it is not authorized by the deed.

Remuneration to Partners exceeding the limit to be disallowed

As per section 40(b)(v) any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners

during the previous year exceeds the aggregate amount computed as hereunder will be disallowed (i) on the first Rs.3,00,000 of the book-profit or in case of a loss Rs.1,50,000 or at the rate of 90 per cent. of the book-profit, whichever is more; and (ii) on the balance of the book-profit at the rate of 60 per cent.

Explanation 3 to section 40(b) defines “book-profit” as to mean the net profit, as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit.

Interest to any partner exceeding 12 per cent to be disallowed

As per Section 40(b)(iv) any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of 12[twelve] per cent simple interest per annum shall be disallowed. Thus payment of any simple interest to any partner is allowed only to the extent of 12 per cent per annum as deduction as per section 40(b). Even if the partnership deed authorizes any payment of higher rate of interest than 12 per cent to any partner, the excess of interest will not be deducted.

It is here to be noted that where remuneration/salary etc., is allowable only to the working partners as per section 40(b)(iii) but payment of interest not exceeding 12 per cent per annum is allowable to any partner whether working or not, since the word any partner is used in 40(b)(iv).


Partnership


Introduction

Domestic as well as foreign companies are liable to pay corporate tax under the Income-tax Act, 1961 (‘the Act’). While a domestic company is taxed on its global income, a foreign company is only taxed on the income earned within India, i.e., is being accrued or arise or received in India. For the purpose of calculation of taxes under Income tax act, the types of companies can be defined as under :

Domestic Company - Domestic company means an Indian company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income.

Foreign Company - Foreign company is one which is incorporated outside India and has control and management located outside India.

Income-tax slab for domestic companies

Total Turnover or Gross Receipts (Rs.) Tax Rate

The amount does not exceed Rs.400 crores in F.Y. 2017-18

25%

The amount exceeds Rs.400 crores in F.Y. 2017-18

30%

Manufacturing company incorporated on or after 1st October 2019 (optional tax rate)

15%

Companies which do not avail any exemption/incentive (optional tax rate)

22%

Add : Surcharge (as applicable) + Health and Education Cess @4%Note: Benefit of Rebate under section 87A not available.Minimum alternate tax (‘MAT‘) rate has been reduced from existing 18.5% to 15%.

Exploring New Beneficial Income-Tax Structure : Cause for Corporate Restructuring

Aditya Mahesh Tillu – Student, CS Professional program


This article explores corporate restructuring recently announced by the Finance Ministry

Companies opting for Optional Tax Rate will not be required to pay MAT.

Taxation aspects of Corporate RestructuringCarry forward and set off of accumulated loss and unabsorbed depreciation allowance

Under Section 72A of the Act, a special provision is made which relaxes the provision relating to carrying forward and set off of accumulated business loss and unabsorbed depreciation allowance in certain cases of amalgamation. Where there has been an amalgamation of a company owning an industrial undertaking or a ship or a hotel with another company, or an amalgamation of a banking company referred to in clause (c) of section 5 of the Banking Regulations Act, 1949 with a specified bank, or one or more public sector company or companies engaged in the business of operation of aircraft with one or more public sector company or companies engaged in similar business, then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or; as the case may be, allowance for depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set-off and carry forward of loss and allowance for depreciation shall apply accordingly.

It is to be noted that as unabsorbed losses of the amalgamating company are deemed to be the losses for the previous year in which the amalgamation was effected, the amalgamated company will have the right to carry forward the loss for a period of eight assessment years immediately succeeding the assessment year relevant to the previous year in which the amalgamation was effected. However, the above relaxations shall not be allowed in the



assessment of the amalgamated company unless -

(a) the amalgamated company (i) has been engaged in the business in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years;

(ii) has held continuously as on date of the amalgamation at least three fourth of the book value of fixed assets held by it two years prior to the date of amalgamation;

(b) the amalgamated company (i) holds continuously for a minimum of five years from the date of amalgamation at least three fourths of the book value of fixed assets of the amalgamating company acquired in a scheme of amalgamation; (ii) continues the business of the amalgamating company for a minimum period of five years from the date of amalgamation; and (iii) fulfills such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose. It further provides that in case where any of the above conditions are not complied with, the set off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be the income of amalgamated company chargeable to tax for the year in which such conditions are not complied with.

Capital gains tax

Capital gains tax is leviable if there arises capital gain due to transfer of capital assets. The word ‘transfer’ under section 2(47) of the Act includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law or in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment or any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) or any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in

any other manner whatsoever) which has the effect of transferring or enabling the enjoyment of any immovable property.

Under section 47(vi) and (vii), transfer does not include any transfer in a scheme of amalgamation of a capital asset by the amalgamating company to the amalgamated company if the latter is an Indian company. From the assessment year 1993-94 any transfer of shares in an Indian company held by a foreign company to another foreign company in pursuance of a scheme of amalgamation between the two foreign companies will not be regarded as ‘transfer’ for the purpose of levying tax on capital gains. This provision will apply only if at least twenty five percent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company and such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated.

Further, the term transfer also does not include any transfer by a shareholder in a scheme of amalgamation of a capital asset being a share or the shares held by him in the amalgamating company if the transfer is made in consideration of the allotment to him of any share or the shares in the amalgamated company and the amalgamated company is an Indian company. Even in the absence of Section 47(vii), a shareholder is not liable to pay any capital gains tax since an amalgamation does not include exchange or relinquishment of the assets. Amalgamation does not involve an exchange or relinquishment of shares by amalgamating company. However, no benefit will be available under Section 47(vii) if the shareholders of amalgamating company are allotted something more than share in the amalgamated company, viz., bonds or debentures.

Amortisation of preliminary expenses

The benefit of amortisation of preliminary expenses under section 35D are ordinarily available only to the assessee who incurred the expenditure. However, the benefit will not be lost in case the undertaking of an Indian company which is entitled to the amortisation is transferred to another Indian company in a scheme of amalgamation within the 10 years/5 years period of amortisation. In that event the deduction in respect of previous year in which the amalgamation takes place and the following



previous year within the 10 years/5 years period will be allowed to the amalgamated company and not to the amalgamating company.

Capital expenditure on scientific research

In the case of an amalgamation if the amalgamating company transfers to the amalgamated company, which is an Indian company, any asset representing capital expenditure on scientific research, provision of section 35 of the Act would apply to the amalgamated company as they would have applied to amalgamating company if the latter had not transferred the asset.

Expenditure on amalgamation

Section 35DD of the Act provides that where an assessee being an Indian company incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place.

Expenditure for obtaining licence to operate telecommunication services

The provisions of the section 35ABB of the Act relating to deduction of expenditure, incurred for obtaining licence to operate communication services shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not transferred the licence.

Cause for RestructuringSome of the largest companies that have thousands of crores lying on their balance sheets in the form of unused MAT credit are looking to go for setting up new companies, demergering current ones or exploring to go for a slump sale.

Many conglomerates and companies are looking to create strategies and structures around utilizing unused Minimum Alternate Tax (MAT) credit lying on their books and also availing lower corporate tax rates.

These companies basically want to utilize the MAT credit but also not let go of lower tax rates. MAT credit is something similar to advance tax paid and could be set off against future tax liabilities arising for the company.

Ways being Explored

Creating two buckets for companies that have MAT credit and the ones that do not. Many companies and conglomerates are looking to restructure their business in way that they can use MAT credit in one vertical while the other could avail the lower tax rate.

Many companies that have entities in SEZ (Special Economic Zones), it makes sense to create a separate entity and another companies that are not in area where sunset clause has set in.

Several companies are looking for slump sale or demerger so that they can utilize the MAT credit and also benefit from lower tax regime. The important thing over here would be there has to be a commercial reason for this and such structuring should not be merely for tax purposes or else it could attract GAAR (General Anti-avoidance Rule).

Examples

A company in a service industry has six subsidiaries with four in Special Economic Zones (SEZs) while two outside of it. A restructuring is being planned whereby the four companies in SEZs would form one entity while the other two would be spun into different company. The company hopes that by doing this it could use MAT credit in the SEZ entity, while move from 30 per cent to 22 per cent.

Another conglomerate that has huge MAT credit is looking to hive off a part of it as `slump sale. However it could lead to capital gain tax additionally.

Conclusion

There will be a wide scope of corporate restructuring after introduction of new income tax rates. However, the Government’s clarification on MAT credit spoilt party for several companies who were hoping to go avail both benefits. The Central Board of Direct Taxes said that companies that opt for new tax rate will lose out on MAT credit lying on their books. It also clarified that the companies would also not be allowed to carry forward additional depreciation if they choose to accept those new tax rates.



Shubham Phophalia – Student, CS Professional Program


Indian Perspective of Doctrine of Competence

This article unveils Indian perspective of doctrine of competence as envisaged in the Arbitration and Conciliation Act, 1996

Introduction

Arbitration is a form of alternative dispute resolution where the dispute is resolved outside the court. Here the parties decide to refer the dispute to a third party (one or more person), the arbitrator, and agree to be bound by his decision. So, the arbitrator has the jurisdiction to decide the dispute put forward to him by such parties. The arbitrator not only decides the disputes of the parties but he may also rule on its own jurisdiction on any objections with respect to the existence or validity of the arbitration agreement. This is known as the ‘competence-competence’ doctrine. The general principle of arbitration is that the arbitrator or the arbitration tribunal has power to determine its own jurisdiction to basically facilitate the arbitration proceedings. Generally, the power to resolve jurisdictional disputes has been conferred to all adjudicative bodies so that they can function without undue external interference and is essential to their autonomy. Secondly, this principle is particularly important in the international arbitration, where the desire of the commercial parties is to avoid litigation in one another’s home courts, and instead to have all of their disputes, including jurisdictional disputes, resolved in a neutral forum or tribunal. The main purpose behind going for arbitration is to have our commercial disputes resolved outside court which is flexible, cost-effective and saves time and hardship. But a party to an arbitration agreement would be able to frustrate or delay the arbitration merely by challenging the jurisdiction and insisting upon judicial determination of that challenge. This

will frustrate the very purpose of arbitration and is the biggest threat to modern commercial arbitration. There will be delay, hardship and costs incurred will be high. This is why the doctrine of competence is applied and tribunal is allowed to decide its own jurisdictional issues.

However, the fact that a tribunal can determine its own jurisdiction does not give it exclusive power to do so and certainly does not prevent an enforcing court that is not at the seat of the arbitration from re-examining the tribunal’s jurisdiction. As a leading textbook on international arbitration states:

“Arbitrators cannot be sole judges of their jurisdiction. That would be neither logical nor acceptable. In fact, the real purpose of the [competence-competence] rule is in no way to leave the question of the arbitrators’ jurisdiction in the hands of the arbitrators alone. Their jurisdiction must instead be reviewed by the courts if an action is brought to set aside or to enforce the award.”

As Saville L.J. also stated in a speech at Middle Temple Hall on July 8, 1996: “Question of the jurisdiction of the tribunal cannot be left (unless the parties agreed) to the tribunal itself, for that would be a classic case of pulling oneself up by one’s own bootstraps”… the arbitrator cannot, in all situations, be the sole authority to decide upon the “existence” of the arbitration clause.

Competence of arbitral tribunal to rule on its jurisdiction

Section 16 of the Arbitration and Conciliation Act,


1996 states that the Arbitral Tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose, (a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and (b) a decision by the Arbitral Tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

An arbitration clause is generally contained in a contract so as to make sure that any disputes arising out of the contract would be referred to arbitration .when contracts are made by institutions through the lengthy process if tendering, disputes have often arisen whether a contract at all arose. A question may then arise whether this type of dispute, that is, whether a contract has arisen, can be referred to arbitration. The matter is quite clearly debatable. Section 16 confers this jurisdiction on the Arbitral Tribunal itself by making it competent to rule on its own jurisdiction. It may also decide objections with respect to the existence or validity of the arbitration agreement.

Earlier to this provision one of the views was that the court should decide this matter. If the decision was in the affirmative, the arbitrator could proceed with the matter, otherwise the matter ended. The court would get jurisdiction. The other possible view was that the arbitrator may decide the preliminary question as well. If his decision was not according to law, it could be brought before the court. The Supreme Court has considered this course to be proper that the preliminary question should also be decided by the arbitration. In a matter of this kind, the Court observed as follows:

“The general law of arbitration, either English or Indian, does not prevent the arbitrators from deciding questions of their own jurisdiction provisionally or tentatively and to proceed to make their awards on that basis, though their provisional or tentative decision would be subject to the final decision by the court. If the court takes the contrary view their award will not be given effect to.”

The Supreme Court has reiterated that the arbitral

tribunal’s authority under section 16 is not confined to the width of its jurisdiction but goes to the very root of it. The court further reiterated that it can also decide whether it has been improperly constituted by nomination under the section.

Section 16(1) empowers arbitral tribunal to decide: (i) the question as to its jurisdiction, and (ii) the objection as to the existence or validity of the arbitration agreement. The competence to decide questions of jurisdictions is available to statutory tribunals where they are functioning under the Act. Ruma Pal, J of the Supreme Court cited an observation of the Supreme Court to the effect that the arbitral tribunal’s authority under section 16 is not confined to the width of its jurisdiction but goes to the very root of its jurisdiction.

Applicability

Decision of the arbitrator about jurisdiction is not amenable to writ petition - The arbitrator has the power to decide about its own jurisdiction and such decision is not amenable to writ jurisdiction. The application relating to competence of arbitral tribunal was rejected. The aggrieved party by circumventing the statutory provision cannot invoke writ jurisdiction. The court exercising writ jurisdiction cannot exercise powers de hors provision of Arbitration Act and restrain arbitrator from proceeding with arbitration proceedings.

The arbitral tribunal will have the jurisdiction to decide all the matters as envisaged in section 16. Against the order passed by the sole arbitrator petitioner challenging the jurisdiction of the respondent as a sole arbitrator and challenging his appointment as a sole arbitrator, it is held that the writ petition under articles 226 and 227 of the Constitution against the said order is not maintainable and/ or the same is not required to be entertained. The only remedy available to the petitioner is to wait till the award is passed by the sole arbitrator and to challenge the same under section 34 of the Act.

Jurisdiction of Chief Justice to decide the question of existence of arbitration agreement - The Chief Justice of India or his nominee has jurisdiction to decide the question of existence of arbitration agreement. Section 11(6) does not take



away the jurisdiction of Chief Justice of India or his designate, if need be, to decide the question of the existence of the arbitration agreement. Section 11(6) does not declare that except the arbitral tribunal none else can determine such a question. Merely because the Act permits the arbitrator to decide this question, it does not necessarily follow that at the stage of section 11 of the Act, the Chief Justice of India or his designate cannot decide as to the existence of the arbitration clause.

The section corresponds to article 16 of the UNCITRAL Model Law and article 21 of the UNICTRAL Arbitration Rules. While article 16 of the Model Law says that the arbitral tribunal shall have power to rule on these questions. Such powers given to the arbitral tribunal is also referred to as ‘Kompetenz-Kompetenz.’

In Al Naimi v. Press Agency, the Court cited the decision of Judge Humphrey Lloyd with approval, in the case Birse Construction Ltd. v. St. David Ltd., where he opined that in deciding a section 9 application, the Court first has to be satisfied that there exists an arbitration agreement. It was held that just because a provision such as section 30 exists, does not mean that it is mandatory for the court to defer a dispute as to the existence or validity of the arbitration agreement to the arbitral tribunal. He further held that such a dispute is likely to be referred to the tribunal in cases where an application under section 9 has been made only where the court is ‘virtually certain’ that an arbitration agreement exists or if the dispute is only about the ambit or scope of the arbitration agreement. He reasoned that in all other cases, even if the dispute is referred to the tribunal, it is likely that the award on jurisdiction will be appealed before the court under section 67 of the Act. According to the learned judge, this would cause unnecessary delay and expense to the parties since there would, in effect, be two hearings: the first before the arbitrator under section 30 of the English Arbitration Act and the second before the court on a challenge under section 67. He concluded therefore, that the best course in such cases would be for the court itself to decide upon the jurisdiction of the arbitrator and then proceed to decide upon the application made under section

9.37 Similarly, in the case of Capes (Hatherden) Ltd. v Western Arable Services Ltd., the Court observed that there are two prerequisites to be fulfilled in order for the court to grant an order of stay under section 9: there must be an arbitration agreement, and the dispute must fall within the scope of that agreement. The Court opined that these questions should be decided by the court and not the arbitrators unless “there are practical and economic reasons for leaving these matters to the arbitrators or where the dispute is only as to the scope of the arbitration agreement and there is a very strong case for holding that the dispute falls within it.” In Indian law too, interpretation by the courts of certain provisions of the Indian Arbitration Act have resulted in a watering down of the competence-competence powers embodied in section 16. A landmark judgment in this regard is that of SBP & Co. v. Patel Engineering Ltd., where the interpretation of sections 11(6) and 11(7) by the Supreme Court had serious ramifications on the competence-competence powers of the arbitrators under section 16. Section 11(4), (5) and (6) provide for court intervention where the procedure envisaged by the parties for constituting the arbitral tribunal breaks down or where no procedure is provided for and the parties cannot agree upon the same. In such a case, these provisions provide that the Chief Justice may be petitioned to make an appointment. Further, section 11(7) provides that the decision of the Chief Justice in this regard would be final. In the Patel Engineering case, it was held by the majority that the power exercised by the Chief Justice under section 11 is a judicial power and not an administrative power. From this conclusion, the court further reasoned that since section 11(7) provides that the decision of the Chief Justice in the appointment of the arbitrator was “final”, his decision as to the existence of an arbitration agreement and the jurisdiction of the tribunal, which he would have to look in to in order to make the appointment, is also “final” within the meaning of section 11(7). Therefore, in all cases where the Chief Justice constitutes the tribunal in accordance with section 11(6), the tribunal cannot rule on the issue of jurisdiction and validity of the arbitration agreement if the Chief Justice has already made a ruling on the same.



The decision of the majority in this case was laden with infirmities. This interpretation by the Court of section 11 contravened the legislative intent with respect to section 16. Section 5 of the Act clearly seeks to restrict the ambit of the courts’ interference into arbitral proceedings. It provides that judicial intervention should be restricted and is permissible only when provided for explicitly under the provisions of the Act. However, the decision of the majority in the Patel Engineering case is not in consonance with the intention of the legislators as found in section 5.

Conclusion

The hypothesis presumed by me, is the application of the doctrine of competence a valid application under or according to Arbitration and Conciliation Act can be now answered in a ‘yes’ as justified above. The challenges on the jurisdiction of an arbitral tribunal should be interpreted according to the legal framework established under the act so as to maintain the integrity and efficiency of arbitration, and to avoid unhelpful behavior. Pursuit of these aims in turn requires giving priority to the role of the tribunal. To this end, this project has helped me to understand that the court should adopt a prima facie review standard when dealing with an application to stay litigation proceedings brought in breach of an arbitration agreement. It further argues that in the ordinary course, a court dealing with a challenge to a tribunal’s decision on jurisdiction should adopt a review, and not a rehearing, approach. Both should work hand in hand.

But it has been common that there exist a tension between the courts and arbitration and this tension is the inevitable consequence of the judicial responsibility, The Act unreservedly issues a clear directive to assure arbitration as an efficient dispute settlement mechanism. It confers broad powers on arbitral tribunals with respect to determining their jurisdiction but along with that it also has the limitations of an international model law, so that fine tuning the points of intersection between the roles of the court and the tribunal has to take place outside of its literal text.


KNOWLEDGE UPDATE


Insolvency and Bankruptcy Law

Shri Sudhaker Shukla Appointed as Whole Time Member of the Insolvency and Bankruptcy Board of India with effect from 14th November, 2019

Central Government, vide Notification No. S.O. 4479(E) dated 13th December 2019, has appointed Shri Sudhaker Shukla, as Whole Time Member of the Insolvency and Bankruptcy Board of India with effect from 14th November, 2019, i.e. date of assumption of the charge for the period of five years or upto his attainment of sixty-five years of age or until further orders, whichever is the earlier.

SEBI Law

Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Fifth Amendment) Regulations, 2019

SEBI, vide Notification No. SEBI/LAD-NRO/GN/2019/42 dated 6th December 2019, has amended the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018.

Review of investment norms for mutual funds for investment in debt and money market instruments

SEBI, vide Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/152 dated 10th December 2019, has reviewed the investment norms for mutual funds for investment in debt and money market instruments and modified the Para E of SEBI Circular No. SEBI/HO/IMD/DF2/CIR/P/2019/104 dated October 1, 2019.

Securities and Exchange Board of India (Foreign Portfolio Investors) (Amendment) Regulations, 2019

SEBI, vide Notification No. No. SEBI/LAD-NRO/GN/2019/44 dated 19th December 2019, has amended the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014.

KNOWLEDGE UPDATECASE LAWS

Insolvency and Bankruptcy Code, 2016

The termination of the agreement by the applicant during the moratorium declared under clause (d) of sub-section (1) of section 14 was not legally tenable as declared by the Adjudicating Authority.

Where the action of the applicant terminating the agreement during the moratorium violates clause (d) of sub–Section (1) of section 14 as the interest created in favour of the corporate debtor by virtue of the agreement has been taken away on which the whole of the business of the corporate debtor was dependent, the termination of the agreement by the applicant is liable to be declared null and void and stands set aside by the Adjudicating Authority- Pepsico India Holdings (P.) Ltd. v. V Nagarajan, National Company Law Tribunal, Chennai, Ma/ 174/2018 in CP/564/IB)/CB/2017 dated 28th May 2019.

Committee of creditors shall comprise all financial creditors and must be construed as one and cannot be segmented class wise particularly for the purpose of computation of voting share.

The Committee of creditors, taking into consideration sub-section (2) of section 21, shall comprise all financial creditors and must be construed as one and cannot be segmented class wise particularly for the purpose of computation of voting share - IDBI Bank Ltd. v. Jaypee Infratech Ltd., National Company Law Tribunal, New Delhi Bench, CA.495(PB)/2019 With CA NO.223/ALD/2018 & CA.No.266/ALD/2018 in CP No.(IB)77/ALD/2017 dated 24th May 2019.

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