Final Newsletter December 2023Download

In December 2021, a paper published by the Institute for Energy Economics and Financial Analysis (IEEFA) and JMK Research stated that despite having numerous benefits, certain new restrictions have been imposed on the banking of power of renewable energy (“RE”) which is expected to inhibit the growth of the rooftop and open-access solar market, and potentially slow progress towards India’s national target of 450 GW of installed renewable capacity by 2030.  

Banking of power is a system in which a generating plant supplies power to the grid, without planning to sell it. Instead, the plant holds the option to draw back the power from the grid within a certain time and against the charges specified under relevant regulations. This concept was first introduced in Tamil Nadu in 1986 and its working is akin to a customer savings bank account.

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Key benefits of banking provisions for RE

  1. It is an effective mechanism to utilize excess RE generation.
  2. In the case of solar and wind power, banking can help manage intermittency and ensure a reliable power supply.
  3. Banking can also provide financial benefits to the discoms (i.e., distribution companies) which can generate additional revenue by levying banking charges.

Despite the above-mentioned benefits, over the last couple of years, governments are issuing restrictive banking notifications for renewable energy projects. Due to this, discoms are limiting their banking provisions considering the looming danger of losing high-ticket commercial and industrial clients to alternative RE power procurement models.

Restrictions Imposed by the Central Government

The Ministry of Power issued the Electricity (Promoting Renewable Energy through Green Energy Open Access) Rules which came into force in June 2022. The said rules allowed banking on a monthly basis only for open-access consumers. Moreover, the quantum of banked energy by the said consumers shall not exceed 10% of the total annual consumption of electricity from the distribution licensee by the consumers.

Restrictions Imposed by various State Governments

Certain RE-rich states (such as those included in the following table) have reduced the banking period from a year to a month, while others have completely withdrawn banking facilities for RE.

The rule-makers and discoms justify the new restrictions on the following grounds:

  1. Reduced costs: The capital expenditure required for setting up solar power plants was reduced due to sophisticated and efficient technological advancements in relevant equipment. This in turn reduces the per unit cost of electricity generation. Discoms opine that to settle excess energy banked by developers, excess power at tariffs has to be bought which is ultimately linked to average power purchase costs causing them to lose money.
  2. Ministry of New and Renewable Energy (MNRE): The said ministry set up the target to achieve 175GW of RE installed capacity by 2022. States that have achieved 85 to 90 per cent of the said target plan to withdraw the banking facility made available for open access projects. This will ultimately lead to higher per unit electricity costs for consumers.
  3. Power procurement costs: Discoms are facing higher power procurement costs due to the difference caused by consumers drawing on banked energy during peak demand periods while injecting power during off-peak periods since the cost of power procurement during peak periods is higher.

Will India be able to meet its Clean Energy targets by 2030?

Although the points raised by discoms are valid, the national target of 450 GW GW of installed renewable capacity by 2030 seems far-fetched as it requires about INR 1.5 to 2 lakh crore annual investment whereas the actual investment in the renewable sector is estimated to be at a mere INR 75,000 crore.

Considering the gap in demand and supply, a committee of the Indian Parliament suggested the Federal Government consider imposing a “Renewable Finance Obligation for banks and financial institutions” to ensure the inflow of the requisite investment.[3] Certain other recommendations were made under the said report, as follows:

  1. Governments may set “green bank” systems that focus on ensuring low-cost capital for RE projects;
  2. MNRE may explore alternative financing mechanisms such as Infrastructure Development Fund, Infrastructure Investment Trusts, Alternate Investment Funds, Green/Masala Bonds and crowdfunding;
  3. India’s specialised public sector financial institution, the Indian Renewable Energy Development Agency should be given a special window for borrowing from the Reserve Bank of India (RBI) at repo rate to ensure the availability of low-cost financial resources for the RE sector.

Significant Takeaways

During peak summer and windy seasons, there is a high potential for excess RE generation which can later be utilised with the use of a banking facility. However, in the absence of the same and added restrictions on monthly banking of power, excess generation continues to remain underutilised. Thus, the Indian RE sector is faced with a major setback at such an early stage of its development.

As per the observations of the standing committee, the unique realities of the RE sector must be given due consideration while formulating a framework relating to financing and investments in the sector. Currently, RE projects are at the risk of being categorised as non-performing assets since revenue generation from RE is not uniform throughout the year considering its seasonality & intermittency.

Now, the RBI must consider lifting the INR 30 crore limit imposed on loans for RE projects since it is evidently not sufficient to fund mid and large-sized RE projects in India. An Energy Economist from the Institute for Energy Economics and Financial Analysis opined that as per the International Energy Agency’s India Energy Outlook 2021, India would require USD 110 billion annually to raise RE deployment, and network expansion which is three times the current annual investment i.e., USD 40 billion.[4]

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Disclaimer: The content of this piece published by White & Brief Advocates & Solicitors is intended for informational purposes exclusively and is not intended to be a piece of legal advice on any subject matter. By viewing and reading the information, the reader understands there is no attorney-client relationship between the reader and the publisher. The contents of this informational piece shall not be used as a substitute for professional legal advice from a licensed attorney, and readers are encouraged to consult legal counsel on any specific legal questions they may have concerning a specific situation.


[1] Delhi Electricity Regulatory Commission

[2] Karnataka Electricity Regulatory Commission

[3] Standing Committee on Energy (2021-22), Seventeenth Lok Sabha, Ministry of New and Renewable Energy, Twenty First Report on Financial Constraints in Renewable Energy Sector, Available here.

[4] IEEFA: India Must Invest in Sustainable Energy Choices, Bloomberg Markets,

Recently, the High Court of Himachal Pradesh, in the case of BMD Pvt. Ltd., opined on whether a Petition under Section 11 of the Arbitration & Conciliation Act, 1996 (“the Act”) would be non-maintainable before the Court after filing of an application under Section 13 of the Act to challenge the appointment of an arbitrator.

Indian courts have constantly reiterated that the principle of party autonomy is the brooding and guiding spirit of arbitration.[2] In the instant case, the Court aimed to balance the scope of judicial review on an application under Section 3 of the Act, therein the petitioner prayed for termination of the mandate of the arbitrator and, approached this Court in the instant proceedings, under S. 11 of the Act, praying for appointment of another arbitrator.

Background of the Dispute

The parties of the instant case are embroiled in a web of judicial applications under the Act ensued by their initial association in 2011 for the execution of a hydroelectric project in Himachal Pradesh. The Respondent extended a sum of INR 6 to the Petitioner as an upfront premium which was then followed by a project report. However, in this report, it was found that the proposed plan is technically and financially unviable which prompted the Respondent to seek a refund of the said premium from the Petitioner.

On Petitioner’s continued disregard towards the Respondent’s request for a refund, the Respondent served a legal notice in 2019 indicating that it shall be treated as a notice of initiation of arbitration proceedings (under the terms of the underlying contract) if the upfront premium along is not refunded within 15 days from the date of the said notice.

In 2020, a Section 11 (6) application was filed by the Petitioner to request the appointment of an arbitrator which was then followed by a Section 13 application on the part of the Respondent to challenge the appointment of the arbitrator.

Arguments Posed by the Parties

The Petitioner, arguing in favour of the Sec 11 application, submitted that the unilateral appointment made by the Respondents is invalid in law as the Petitioner had previously informed the Respondent that it is going to approach the Court for the Himachal Pradesh High Court for appointment of the arbitrator.

Whereas the Respondent challenged the maintainability of the Petitioner’s Section 11 application before the Court on the grounds that it has already filed a Section 13(2) application, challenging the appointment of the arbitrator chosen by the Respondent, therefore, it is estopped from filing the said application for appointment of the arbitrator. It further claimed that due to the Petitioner’s lack of response to the Respondent’s arbitration notice, the Petitioner can only challenge the arbitrator under Section 13 of the Act.

Rule

Section 11 (6) of the ActWhere, under an appointment procedure agreed upon by the parties,
a.       A party fails to act as required under that procedure; […]
A party may request the Chief Justice or any person or institution designated by him to take the necessary measure, unless the agreement on the appointed procedure provides other means for securing the appointment.
Section 12 of the ActGrounds of challenging an appointment and the circumstances in which a party may challenge an arbitrator.
Section 13 of the ActChallenge Procedure – […] (2) Failing any agreement referred in sub-section (1) {it states that the parties are free to agree on a procedure challenging an arbitrator}, a party who intends to challenge an arbitrator, shall, within 15 days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of circumstances referred to in sub-section (3) of Section 12, send a written statement of the reasons for the challenge to the arbitral tribunal.

Issues Discussed

  1. Maintainability of Section 11(6) Application

The Court explained that the Petitioner’s lack of response to the Respondent’s arbitration notice within the stipulated time can be understood as its deemed consent to the appointment of the arbitrator indicated in the said notice by the Respondent.

Relying its understanding upon the precedent set in the SP Singla case[1], the Court is of the opinion that the party which failed to object/respond to the notice of appointment of an arbitrator within 30 days, the party estopped itself from laying a challenge to the appointment of an arbitrator, once it had given deemed consent to the same, by not responding/objecting within the stipulated time.

  1. Maintainability of Section 11 Application considering the pending Section 13 Application

The terms of the underlying contract expressly provided that the concerned parties shall endeavour to settle any disputes amongst themselves, at the first instance, through mutual negotiations, which shall then be followed by referring the matter to arbitration as per the provisions of the Act.

Relying on the Honourable Supreme Court’s decisions set in the SP Singla Construction case[1] and Swadesh Kumar Agarwal case[2], the Court held that once parties have invoked arbitration proceedings and an arbitrator has been appointed, subsequent applications under Sec. 11(6) of the Act shall not be maintainable considering that it has consented to the arbitrator’s appointment via submission of an application to terminate the arbitrator’s appointment under Sec. 13 of the Act.

  1. Whether the Court can exercise its powers under Section 11 of the Act where the arbitrator is already appointed and whether the appellant be left to raise challenges at an appropriate stage in terms of remedies available in law.

After the close perusal in the case of Antrix Corporation Limited v. Devas Multimedia Private Ltd. (2014) 11 SCC 560, and S.P. Singla (supra) the Hon’ble SC held that after the appointment of an Arbitrator is made, the remedy of the aggrieved party is not under Sec. 11(6) but such remedy lies under Sec(s) 12 and 13 of the Arbitration Act. If any party is dissatisfied or aggrieved by the arbitrator's appointment in terms of the agreement by another party/parties, his remedy would be by way of a petition under Section 13 of the Act and, thereafter, filing an application for challenging the award under Sec. 34 of the Act.

Read more: Latest Posts by White & Brief

Final Decision of the Court

In the instant case, the dispute was referred to arbitration after making due efforts to settle through mutual negotiations. Also, as previously stated, the arbitration notice issued by the Petitioner clearly states the name of the arbitrator it wishes to appoint.

Law clearly states that any challenge to the tribunal’s jurisdiction shall be made before it under Section 13(3) of the Act. It further clarifies, under sub-section (2), that the tribunal may continue proceedings and pronounce an award in case the Section 13(3) challenge does not survive. Moreover, precedent has categorically clarified [1] that after the appointment of an arbitrator, the remedy of an aggrieved party does not lie under Section 11(6)[2] but under Section(s) 12[3] and 13[4] of the Act.

Final Takeaways & Insights

The decision in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Limited[5], has gone a long way in clearing various legal hurdles in the appointment of arbitrators under the prevailing law. Initially, the courts played a key role in the appointment of arbitrators under Section 11 of the Act, however, now, arbitration institutions have taken over.

In the case on hand, the aggrieved party subjected itself to the tribunal’s jurisdiction by making an application under Section 13 of the Act. The Court’s judgment in the instant case can be taken as a precedent by individuals and entities engaged in an arbitration agreement or proceeding to ensure thorough appreciation of the terms applicable for the appointment of the tribunal under their contract.

In the future, courts are likely to handle such cases while balancing the need to ensure the independence and objectivity of arbitrators with the fundamental principle of arbitration agreements and the court's limited ability to interfere with the parties' stated bargain as set forth in the arbitration agreement.

Merely a month after the Ministry of Consumer Affairs, Food & Public Distribution posited that the wholesale price of Edible Oils in India has decreased, the Government has urged manufacturers to slash prices again.

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Market Temperament

In April, Indonesia, the world’s biggest exporter of palm oil, halted shipments, to restrain the hiking prices of edible oils. This ban was introduced when the global market was already struggling to import oil from the war in Ukraine. Considering that India is the largest importer of cooking oil from Southeast Asian countries, it experienced the highest impact of the Indonesian ban. However, on the inducement of Indonesian lawmakers, the ban was lifted after three weeks.

Due to the lifting of the ban on palm oil export, cooking or edible oil prices in the Indian market are set to decrease. Indian manufacturers use palm oil in a multitude of household products such as soaps, cosmetics, processed foods and biofuel. Therefore, the immobility caused by market circumstances had led to myriad issues for manufacturers and customers.

Windfall Taxation

The invasion of Ukraine by Russia has caused crude oil prices to reach new highs, and there has been talks in the markets about imposing a one-time "windfall tax" on oil and gas businesses due to the unprecedented profits witnessed by market players in the energy sector. In order to deal with the windfall profits earned by companies the government had two options: either raise dividend yield or impose a windfall tax. with no surprize the government  chose the second option, which helped them to limit the fiscal deficit.

On July 1, the government enacted windfall gain taxes on domestic crude oil production as well as the export of petrol, diesel, and aviation turbine fuel (ATF)[1]. Additionally, it requires exporters to first satisfy the needs of the domestic market before supplying the export demand. According to a report[2], if the windfall taxes were applied to crude output alone, they would bring in an estimated Rs 65,600 crore in income, while the taxes on export goods would bring in an additional Rs 52,700 crore. Therefore, the money collected through windfall taxes can be used by the government to offset its losses.

Post windfall tax, the reported margin on gasoline and diesel has decreased to almost loss-making levels, while the reported margin on crude and aviation fuel has fallen below 15-year averages. In the last few weeks, there has been a reasonably large decline in crude prices as well as margins for important refined products due to growing concerns about oil consumption as recession fears intensify.

Will Prices Shoot due to this?

The irony of this well-meaning tax rate revision made by the GST Council is the manufacturer’s inability to attain a refund of the ITC which will eventually lead to a price hike. In relation to edible oils, the ITC on account of inputs is higher than the amount of GST charged on account of outward supplies of the goods. Therefore, the inability to attain the refund of the higher GST amount paid would trigger liquidity blockages and additional monetary burden on manufacturers.

International Take

Besides India, other nations are also experiencing the levy of windfall taxes. Recently, Hungary announced its intent to levy windfall taxes on additional profits earned by various sectors, including energy firms, for a two-year period to fund subsidies.[3] UK and Spain are also resorting to implication of windfall taxes to minimise food and fuel bills of their citizens[4]. With the rising global demand for edible oil and alternatives like palm oil, Indonesians, predicting a domestic shortage on account of the enhanced profit-making potential the international market, froze palm oil exports thereby further shooting the international demand and cost.

Following a drop in international rates and with Indonesia removing its export levy on all palm oil products until August 31, edible oil manufacturers in India will be able to pass on the benefits of softer global prices to final customers. The government reduced the windfall tax on gasoline, diesel, jet fuel, and crude oil. The additional tax of Rs 23,250 per tonne on domestically produced crude oil has been reduced to Rs 17,000 per tonne.[5]

Significant Takeaways

In India, at the first instance, the domestic oil and gas producers have seen a sharp rise in profits. The strain on people's wallets is growing along with the price of crude oil. However, oil and gas businesses all over the world are making money while government exchequers are bleeding and these advances are the result of the geopolitical environment rather than any changes in their operations. A final decision on this matter would, however, be taken by the competent authority at an appropriate time.

Disclaimer: The content of this piece published by White & Brief Advocates & Solicitors is intended for informational purposes exclusively and is not intended to be a piece of legal advice on any subject matter. By viewing and reading the information, the reader understands there is no attorney-client relationship between the reader and the publisher. The contents of this informational piece shall not be used as a substitute for professional legal advice from a licensed attorney, and readers are encouraged to consult legal counsel on any specific legal questions they may have concerning a specific situation.


[1]India cuts windfall taxes on fuel exports as global prices fall’, The Economic Times. Available here.

[2] ‘Govt slashes windfall tax on fuel export, domestic crude oil’, Press Trust of India. Available here.

[3] ‘Govt considers windfall tax on oil and gas giants’, Hindustan Times. Available here.

[4] Ibid.

[5] Govt cuts windfall tax on fuel export, raises levy on domestic crude oil, Business Standard, Available here.

Recently, the Cabinet Committee on Economic Affairs extended the deadline for furnishing final mega certificates to tax authorities from 10 years to 13 years from the date of import, for ten provisional power projects as indicated in the Policy.[1] The office memorandum bearing no. A-3/2015-IPC (Vol-III) dated April 7, 2022, was introduced by the Ministry of Power (“the Ministry”) to this effect.

The Government stipulated that during the extended period, bids for mega power plants (combination of intermittent renewable energy, storage and conventional power) will be invited in co-ordination with the Ministry of New & Renewable Energy (“MNRE”) and Solar Energy Corporation of India Limited (“SECI”) who would further participate in such bids to secure Power Purchase Agreements (“PPAs”).

Before we understand the amendment, let's first discuss the evolution of this Policy and its importance.

Market Position and Consumer Demand

The Indian public sector lacked adequate resources to match the incremental generational requirement of additional coal mining. To plug this gap, the Ministry is exploring the possibility of setting up mega power projects with the help of private sector players thereby attracting domestic and foreign private investment from eager investors.

Another pertinent issue faced by the Indian Government in the power sector relates to its geography. While the authorities identified locations in eastern, central and coastal India endowed with naturally occurring coal and hydel power capacity, the highest demand for power in southern India. The geographical demand-supply conundrum faced by authorities demands the establishment of mega power projects to tackle the increasing demand for power on the most viable route.    

When the private power policy was initiated during 1991-92, the Ministry envisaged that to improve the power supply, it would require setting up more than 10,000 MW of capacity every year in the next few years. Moreover, the fuel for such thermal power plants i.e., coal is located mainly in eastern and central India, whereas the hydel power potential is concentrated in the northeast and north but a higher demand for power is in the south and the west. It is, therefore, obvious that unless mega power projects are set up in the region having coal and hydel potential, it would be difficult to tackle the increasing demand for power on the most viable route. Establishing mega projects in the coastal regions based on imported coal also poses a feasible option.

Regulatory Changes in the Energy Sector

Pertinently, during the launch of the private power policy in 1992, the Ministry found that India requires to set up more than 10,000 megawatts of capacity each year to improve power supply in the coming years.

The public sector front lacked resources for putting up the required additional coal mining capacity to match the incremental generation requirement. Therefore, the Ministry has been exploring the possibility of setting up mega power projects through the private sector route to attract domestic and foreign private investment and the response so far has been positive.

At this juncture, it is important to note that the government amended the Mega Power Policy in 2009 to smoothen the application process to attain final mega certificates.[2]

The said modifications endow benefit of the Policy to the power projects of the following capacity:

Thermal Power Plantswith a capacity of 1000 MW or moreor 700 MW if the plant is located in Jammu & Kashmir, Sikkim, Arunachal Pradesh, Assam, Meghalaya, Manipur, Mizoram, Nagaland and Tripura.
Hydel Power Plantswith a capacity of 500 MW or moreor 350 MW if the plant is in the states of J&K, Sikkim, Arunachal Pradesh, Assam, Meghalaya, Manipur, Mizoram, Nagaland and Tripura

B. Widening the scope of the Policy

i. The benefits enjoyed by stakeholders under the said Policy are extended to brownfield expansion projects.

ii. The benefits are to be extended to brownfield expansion projects too.

C. Interstate sale of power for achieving mega power project status has been removed.

D. The mega power projects would have to tie up power supply with power distribution companies/utilities through long-term PPA in accordance with the National Electricity Policy 2005 & Tariff Policy 2006.

E. ICB for procurement of equipment for mega projects are not required if the requisite quantum of power has been tied up or the project has been awarded through tariff-based competitive bidding. 

F. The present exemption of 15% price preference available to domestic bidders in cost-plus projects of PSU would continue. However, the price preference would not apply to tariff-based competitively bid projects of PSU.

Extension of Deadline to Apply for Mega Power Project Certification    

Prior to the recent amendment, the Policy only allowed a period of 120 months or 10 years from the date of import for businesses to apply for and furnish final mega certificates to the tax authorities as against the provisional mega projects. Now, the Cabinet has officially extended the said deadline by 3 years for ten partly / wholly commissioned provisional mega power plants.                                                             

Reproduced hereinbelow is the list of 10 (ten) provisional mega power projects to which the aforesaid amendment is applicable and which have been commissioned/partly commissioned so far:    

Sr. No.Name of the ProjectProject Capacity (MW)
1.Baradhara Thermal Power Plant (“TPP”) (2X600 MW), Janjgir-Champa, Chhattisgarh1200
2.Anuppur TPP (2X600 MW), M.P.1200
3.Uchpinde TPP (4x360 MW), Janjgir-Champa, Chhattisgarh1440
4.Cuddalore TPP (2x600 MW), Tamil Nadu1200
5.Lalitpur TPP (3x660 MW), Uttar Pradesh1980
6.Vishakhapatnam TPP (2x520 MW) Andhra Pradesh1040
7.Nellore TPP (2x660 MW), Andhra Pradesh1320
8.Raikheda TPP (2x685MW), Raipur, Chhattisgarh1370
9.Binj Kote TPP (4x300 MW), Raigarh, Chhattisgarh1200
10.Janjgir-Champa, Akaltara TPP: U-2&5 (2x600MW), Chhattisgarh1200

Key Takeaways

The extension of time granted to businesses for furnishing final mega certificate is a thoughtful action welcomed by the concerned industry players. The extension thus granted will enable developers to competitively bid for further Power Purchase Agreements and enjoy the applicable tax exemptions under the Policy. The increased liquidity at the behest of the developers will boost the power sector’s growth in India and revive the stressed power assets.

The government will also invite bids for firm power (a combination of intermittent renewable energy, storage, and conventional power) during this extended period in coordination with the MNRE and Solar Energy Corporation of India Limited. Moreover, the ten notified mega projects will be expected to participate in firm power bids to secure PPAs.

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[1] Clause- I of Para- I of Amendment to Mega Power Policy, 2009 (“the Policy”) for Provisional Mega Power Projects dated April 12, 2017.

[2] Ministry of Power vide notification dated 14th December 2009

Five years ago, the GST regime implemented a unified tax system in India. Yet the experience of the industry players is a shade different. Businesses witnessed roadblocks in cohesive implementation of the provisions and faced issues typically arising from a dis-jointed regulatory system. While concerns during the implementation of a unified law are natural irrespective of jurisdiction, its continued prevalence indicates a need for increased emphasis on the smooth execution of appropriate regulations.

Recently, the Honourable Supreme Court (“the Court”) was once again faced with a double taxation case; this time, relating to the levy of GST on ocean freight charged on imported goods. In the case of Union of India vs Mohit Minerals Pvt Ltd (“Mohit Minerals”)[1], the primary issue dealt with by the Court was whether the government can charge Integrated GST (“IGST”) on ocean freight paid by the foreign seller to a foreign shipping line on a reverse charge mechanism in India.

The Court held the tax levy on ocean freight based on Reverse Charge Mechanism (“RCM”) violative of the principle of composite supply.[2] A supply of goods and services is considered to be composite when it involves two or more goods and services. However, only a natural bundling of goods and services in the course of business can be deemed to be a composite supply. In the instant case, the supply of sea transportation service and the imported goods on board can be classified as a composite supply since the said services are naturally bundled in the due course of business involving a CIF contract.

Background of the Dispute

The matter was initially brought before a Division Bench of the Gujarat High Court in which the counsel for Mohit Minerals highlighted the erroneous IGST levy on ocean freight under Notification No. 01/2017-ST[3] although it had already paid the 5% tax on the reverse charge mechanism on ocean freight service as per Notification No. 8/2017[4].

After due appreciation of arguments advanced and evidence filed by the parties, the bench set aside the added IGST liability imposed on Mohit Minerals and also held the said notifications ultra vires the provisions of the IGST Act, 2017.[5]

Aggrieved by this decision, the Union of India filed a Special Leave Petition before the Supreme Court, under Article 136 of the Constitution of India, challenging the constitutionality of certain notifications of the Central Government. The Court deliberated upon the same and addressed larger issues of composite supply and cooperative federalism.

Double Taxation and Composite Supply

The transaction involved three parties; the seller and the shipping line located in a non-taxable jurisdiction, and an Indian importer. It was carried out in two main phases:

Phase 1: Between foreign exporter and Mohit Minerals (Indian importer)

The Indian importer is liable to pay IGST on the transaction value of goods (inclusive of freight and insurance) under S. 5(1) of IGST Act read with S. 3(7) & 3(8) of the Customs Tariff Act.

Phase 2: Between the foreign exporter and the shipping line

Based on the principle of composite supply under S. 2(30) of the CGST Act[6], the tax liability on the same under S. 8 of the said Act[7] will be applicable only on the ‘principal supply’. Therefore, in the instant case, the tax can be levied on the service of supply of goods (transportation service will be considered a part of the same in a CIF contract).

Union of India: It claimed that the two phases of the transaction i.e., the contract between the foreign shipping line and the foreign exporter are distinct and independent of the contract between the foreign exporter and the Indian importer. Further, it argued that the levy of IGST on ocean freight while also charging tax on a CIF value basis cannot be construed as double taxation as they are from independent transactions.

Mohit Minerals: It argued that the two phases cannot be deemed as separate transactions and that Notification No. 10/2017 cannot be sustained under Section 5(4) of the IGST Act[8] which provides that integrated tax on supplies made by an unregistered supplier to a registered person shall be paid by such person on an RCM basis as a recipient of the supply.

Supreme Court’s ruling: The concept of composite supply was introduced to prevent dissection of various elements of transactions and double taxation. In the instant case, the shipping service forms a part of the supply of goods since the contract between the parties was on a CIF basis. It upheld Gujarat High Court’s order and held that levying IGST on ocean freight will be violative of the concept of composite supply. Where an Indian importer is liable to pay IGST on composite supply in a CIF contract, a separate levy for the ‘supply of services’ by shipping line would be a violation of Section 8 of the CGST Act.

Validity of Notifications

The subject-matter transaction is a CIF contract which constitutes an inter-state supply which can be subject to IGST where the importer would be the recipient of the shipping service under Notification No. 10/2017. The said notification read with Notification No. 8/2017[9] prescribes 5% IGST on ocean freight which is calculated as 10% of the CIF value.

Union of India: It claimed that the said notifications do not refer to Section 5 of the IGST Act, however, it is settled law that once a power is available to grant or identify the taxable person, taxable event, rate and measure, non-reference of the source of power will not vitiate its exercise and application in the instant case.

Mohit Minerals: It contended that the said notification is ultra vires the IGST Act. It claimed that since the power to issue the said notification flows from Section 5(3), IGST Act, the Government can only specify the categories of goods and services on which it intends to levy tax on an RCM basis.

Supreme Court’s ruling: Upholding the Gujarat High Court judgement, the Court explained that along with the power to specify goods and services, the Government also has the power to specify a class of registered persons as a recipient of the supply. Therefore, the said notifications cannot be invalidated due to alleged failure to identify a taxable person and on a charge of excessive delegation while prescribing 10% of CIF value as taxable value.

Nature of GST Council Recommendations

The Government has, in the spirit of cooperative federalism, replaced multiple central and state tax laws with GST laws to promote ease of doing business in India. With the same objective under the 101st Constitutional Amendment Act, 2016, the GST Council is formulated with central and state representation.

The Supreme Court held that the Government, while exercising its rule-making powers under the law, is bound by the GST Council recommendations. Nevertheless, the said recommendations made under Article 279A (4) cannot be said to be binding on the legislature’s power to enact primary legislation.

Final Takeaways & Insights

The Court finally upheld the Gujarat High Court’s judgement stating that the impugned notifications are liable to be struck down since IGST is already paid on the ocean freight that makes a part of the value of imported goods. It explained that the Government cannot seek payment of additional taxes from an importer beyond the contract between the foreign shipping line and foreign exporter. A separate levy on the Indian importer for the ‘supply of services’ by the shipping line would violate Section 8 of the CGST Act.

The issue of double taxation on ocean freight for importing goods on a CIF basis is problematic in terms of liquidity. However, because of the Court’s ruling, importers can now claim a refund of IGST paid towards ocean freight from the exchequer provided they have not claimed any input tax credit. This judgement is a gesture welcomed by importers and affected taxpayers considering the decrease of cash burden in the backdrop of an economic market predicted to experience a slowdown in the upcoming years.[10] Affected entities are likely to make judicious use of this window of opportunity to review, audit and amend their tax filings to claim benefits.


[1] Union of India vs Mohit Minerals Pvt Ltd, AIR 2018 SC 5318.

[2] Section 2(30) read with Section 8 of the Central Goods and Services Tax Act, 2017.

[3] Notification No. 01/2017-ST, dated 12 January 2017.

[4]  Notification No.8/2017- Integrated Tax (Rate) dated 28 June 2017.

[5] Mohit Minerals Pvt LTd v. Union of India & Anr, C/SCA/726/2018.

[6] Section 2(30), Central Goods and Services Tax Act, 2017, “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

[7] Section 8, CGST Act, Tax liability on composite and mixed supplies, The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:—

  1. a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and
  2. a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.

[8] Section 5(4), IGST Act, Levy and collection of tax, The integrated tax in respect of the supply of taxable goods or services or both by a supplier, who is not registered, to a registered person shall be paid by such person on reverse charge basis as the recipient and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

[9] Notification No.8/2017- Integrated Tax (Rate) dated 28 June 2017.

[10] “Prospects of an economic rebound in India are firming up as GDT is set to expand by 9.4% in FY 2021-22 and reverting to 8.1% in FY 2022-23, before moderating to 5.5% in FY 2023-24.”, OECD Economic Outook, Volume 2021 Issue 2.

Recently, as a massive move, the Inter-Ministerial Committee (“IMC”) of the Ministry of Road Transport and Highways (Highways Section) of the Government of India (“the Ministry”) in its meeting held on April 1, 2022, concurred with the proposal permitting a change of ownership from 2 (two) years to 1 (one) year after the commercial operation date (“COD”).

Subsequently, a circular bearing no. NH- 24028/14/2014-H (Vol Il) (E-134863) (“the Circular”) dated May 23, 2022, regarding the change in ownership clauses in the Model Concession Agreement (“the Agreement or MCA”) of BOT (Toll) projects was introduced.

Before getting into the peculiarities of the circular, let us get a brief idea of what is BOT (Toll) Project.

WHAT IS A BOT (TOLL) PROJECT?

The National Highway Authority of India (“NHAI”) has adopted primarily 4 (four) types of national highway projects in the public-private partnership model, as follows:

Sr. No.Type of highway modelsBrief Explanation
1.BOT (Toll)This model is a public-private partnership in which the private developers/operators, invest in toll-able highway projects and are entitled to collect and retain toll revenue for the tenure of the project concession period. The private developer/operator, who eventually becomes a concessionaire, is responsible for the design, development, operation, and maintenance (O&M) of the project for the entire concession period after it is developed and put to commercial use. On the expiry of the concession period, the facility is transferred to the authority (NHAI).
2.BOT (Annuity)In this model, responsibility for the design, development, and O&M of the road project for the entire concession period is vested with the concessionaire for the Project. But, unlike the BOT (Toll) projects, the revenue of the Concessionaire is generated through annuity payments by NHAI during the concession period.
3.Hybrid Annuity Model (HAM)In this model, 40% of the project cost is paid by the government or as construction support or grant to the private developer. The rest is funded by the successful bidder during the construction period. Even for these projects, the revenue of the Concessionaire is generated through annuity payments by NHAI during the concession period.
4.Toll Operate Transfer (TOT)In this model, the right of collection and appropriation of toll for selected operational national highway projects constructed through public funding are mandatorily assigned to concessionaires for a pre-determined concession period against upfront payment for a lumpsum amount to NHAI.

KEY STAKEHOLDERS AND TYPICAL CONTRACTUAL STRUCTURE

The key stakeholders and typical contractual structure for a toll road project can be diagrammatically represented as below:

FEATURES OF A BOT (TOLL) PROJECT

Circular and the Relevant Clauses of a BOT (Toll) Agreement

Definition of “Change in Ownership”

Original- Clause 1.1 read with Article 48 of the Agreement which defines the term “Change in Ownership” states that “a transfer of the direct and/or indirect legal or beneficial ownership of any shares, or securities convertible holding of the {Selected bidder / Consortium Members}, together with {it’s/their} Associates, in the total Equity to decline below 51% (fifty-one per cent) thereof During Construction Period and two years thereafter; provided that any material variation (as compared) to the representation made by the Concessionaire during the bidding process for the purposes of meeting the minimum conditions of eligibility or for evaluation of its application or Bid, as the case may be) in the proportion of the equity holding of {the selected bidder/any Consortium Member} to the total Equity, if it occurs prior to completion of a period two years after COD, shall constitute Change in Ownership”;

Amendment-The said Circular reduces the period of the constitution of change in ownership from 2 (two) years (as stated in the definition above) to 1 (one) year after COD.

Sub-clause 5.3.1 of Clause 5.3 (Obligations relating to Change in Ownership) of Article 5[1] of the MCA

Original- The aforesaid sub-clause states that the concessionaire shall not undertake or permit any Change in Ownership, except with the prior approval of the authority.

Amendment- The Circular amends Clause 5.3.1 to include a few conditions for the approval from the authority for undertaking Change in Ownership. The conditions are as follows:

Point (k) of sub-clause 7.1 (Representations and Warranties of the Concessionaire) of Article 7[3]

Original- The aforesaid clause states that “the Concessionaire shall at no time undertake or permit any Change in Ownership except in accordance with the provisions of Clause 5.3 and that the {selected bidder/Consortium Members), together with {its/their} Associates, hold not less than 51% (fifty-one per cent) of its issued and paid-up Equity as on the date of this Agreement, and that no member of the Consortium whose technical and financial capacity was evaluated for the purposes of pre-qualification and short-listing in response to the Request for Qualification shall hold less than 26% (twenty-six per cent) of Equity during the Construction Period and two years thereafter; Provided further that any such request made under Clause 5.3, shall at the option of the Authority, be required to be accompanied by a suitable no objection letter from the Senior Lenders.”

Amendment- The Circular reduces the said period of 2 (two) years to 1 (one) year for holding 51% and 26% equity, respectively, during the construction period and thereafter, in the case of consortium members.

Key Takeaways

Over the last decade, the Government continued making efforts to revive the BOT model. In fact, in the current Financial Year, multiple projects under the said model would be opened for bidding.

Considering the above-discussed amendment of transferring ownership on the expiry of one year after the commercial operation date, monetization of such projects by the promoters by disposing of their stake is likely to have a positive impact on their ability to undertake more projects.  

Whilst this appears to be the main objective behind the amendment, neither NHAI nor the lenders would allow any change in ownership during the construction period, since that is the most important aspect of the project, that is, the SPV, which is the successful bidder, is owned and controlled by the promoters, whose experience in the road construction and their financial status, form the basis of being qualified to take up the project. The extension beyond one year after the construction period is intended to achieve consistency and stability in the operation of the project, after the expiry of which dilution of the promoters’ stake in the SPV would not affect the project highway, its operation and maintenance and generation of revenue from the project, and thus, such dilution is not likely to hamper the interests of NHAI or the lenders.

Disclaimer: The information contained in this newsletter does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available herein are for general information purposes only.


[1] Article 5 deals with Obligations of the Concessionaire.

[2] Punch List shall mean document prepared by the contractor that lists any work that is not complete, or not completed correctly. 

[3] Article 7 deals with Representations and Warranties.

The Supreme Court, in a recent case of criminal breach of trust under Section 405, Indian Penal Code, 1860 (“IPC”) observed that entrustment of property is sine qua non to attract charges under the said section. The case was brought before the Court by the owner of M/s J K Waste Recycling Private Limited (“Petitioner”) who is involved in the business of processing waste plastic material as against a Hyderabad-based company, M/s Ramkey Reclamation and Recycling Private Limited (“Respondent”), after floating a tender inviting bids for plastic recycling.

Background of the dispute

The parties started off with a mutual agreement to conduct two test recycling runs with raw materials sourced by the Respondent before it buys three plants from the Petitioner. While the two test runs were successful, the Petitioner experienced a loss of machine infrastructure during the third cycle to the tune of INR 62,00,000. 

The Petitioner, in its FIR to the Khandala Police Station, complained that due to the wet and peculiar smelling waste material provided by the Respondent and the subsequent formation of sulfuric acid during its processing, various machinery broke down and the Petitioner avoided a fatal fire by a thread. 

The case surfaced before the Supreme Court due to the Petitioner’s appeal against the Bombay High Court’s order.

Analysis of the Supreme Court

The Supreme Court supporting the High Court’s decision in its judgement clarified that one can attract the offence of criminal breach of trust under Section 405 only where the accused has been entrusted with property, and the said property had dishonestly been misappropriated or converted by the accused for its own use.


To determine whether the materials on record indicated an offence amounting to criminal breach of trust, the High Court of Bombay referred to its judgment in State of Haryana v. Bhajan Lal, wherein it analysed the circumstances in which a first information report (FIR) can be legally quashed and came up with a list of reasonably applicable circumstances. It held that the instant case falls under the scenario prescribed under Point no. 6 of the said list which is reproduced hereunder for easy reference.

“Where there is an express legal bar engrafted in any of the provisions of the Code or the concerned Act (under which a criminal proceeding is instituted) to the institution and continuance of the proceedings and/or where there is a specific provision in the Code or the concerned Act, providing efficacious redress for the grievance of the aggrieved party.”

Finally, referring to its judgment in Dalip Kaur & Ors. vs. Jagnar Singh & Ors., (2009) 14 SCC 696, the Supreme Court found that, prima facie, the fundamental components of the offence of cheating were missing. 

As far as the Respondent’s alleged negligent conduct with respect to fire is concerned, the Court held that the instant case does not fulfil the prescribed requirement under Section 285 of IPC which states that the accused must have handled fire or any combustible matter in a rash or negligent manner to endanger human life. The act of recycling waste plastic material and the act of supplying the same by Respondent’s cannot be construed as having been done with fire or any combustible material. In fact, the Court explained that the Respondent cannot be said to have committed a criminal breach of trust merely based on the supply since the act of supplying the same is not negligently or harshly done to endanger human life. 

In light of the abovementioned reasonings, the honourable Supreme Court dismissed the Petitioner’s Special Leave Petition before it and held that the Bombay High Court’s judgment is well reasoned and does not call for interference as it has adequately clarified that its order does not limit Respondent No. 2 in any way to initiate proceedings against the Petitioner for any grievance permissible under law. 

Final Takeaways

Unfavourable information regarding business partners, gained at any time, is a signal to move on in certain cases. The Petitioner ought to have a lookout for ways to identify materials that cannot be recycled considering the adverse effects of processing foreign materials at its plant. In the absence of adequate evidence showcasing otherwise, the Court cannot charge any person with the offence of criminal breach of trust unless the said person manipulated fire or any combustible matter negligently.

Parties involved in criminal breach of trust, cheating, and criminal misappropriation cases can now refer to the precedent set by the honourable Court in the instant case to analyse relevant case facts and evidence to strategically attain a favourable outcome of a dispute.


In the last quarter, the global economic market witnessed a manifestation of the effect digital assets and Web 3.0 have had on the overall market cash flow.

Venture capital investments in fintech and crypto projects native to the metaverse and Web 3.0 have already touched USD 10 billion globally.[1] The majority of the investments were made in crypto and non-fungible token (NFT) exchanges, decentralized financial applications, and token issuers.[2]

Currently, Indian stakeholders are grappling with the issue of inadequate regulation in the Web 3.0 space. Indian policymakers have not developed a law for regulating Web 3.0 despite it being in the pipeline for more than two years. Although tax implications and advertising standards have been deliberated upon and decided, the lacuna in the Indian legal regime needs the attention of stakeholders and lawmakers. During the Web 2.0 phase, India was unable to participate in policy making for internet governance due to limited consumption heft and foreign innovation.

Today, India is striving to position itself as an authority in the blockchain space by leveraging the local brainpower and consumer base. While NFTs indeed emerged as an extension of celebrity identities in India, today its presence is felt across industries. Entities such as GaurdianLink, MakeMyTrip and Lakme Fashion Week are also dabbling into NFT collectibles. However, the prevailing regulatory grey zones in the intellectual property laws, finance rules, securities laws and cybercrime laws call for the immediate action of Indian policymakers to implement enabling and safeguarding provisions. Given the lack of regulations and policy grey zones, investing in digital assets such as NFT is fraught with challenges, requiring careful consideration and due diligence.

Challenges of NFT Transactions

Protections under Intellectual Property Law

NFT are cryptographic assets on a blockchain. Creators in the Web 3.0 space can attain a license for recreation and use from the copyright owner of the original artwork. However, the original NFT owner retains the copyright in the original digital asset. Essentially, the license enables an NFT license to manipulate and capitalize on the artwork digitally. On the other hand, the original NFT owner can invest and capitalize on the growth of the NFT through existing brand identities such as trademarks, logos, characters, books, movies, music, illustrations, etc.

In layman’s terms, even if you manage to buy an NFT license, you are still not automatically permitted to manipulate the artwork licensed or sell anything related to the said NFT. The original owner’s consent plays a key role in establishing the scope and nature of the rights enjoyed by an NFT license owner.

It is pertinent to design an NFT license agreement to fit your specific needs despite there being certain boilerplate smart contracts being used by key industry players.  In exercising the IP rights by NFT owners, any transfer, sub-licensing or assignment and terms for such transfer, sub-license or assignment must be chalked out with specific attention to the terms of the original license. In certain cases, original owners may limit the scope of control over modification of the original digital asset and what may be combined with the said digital asset.

For instance, NFTs can be created in multiple layers within the same artwork, where each layer is made by different artists and then individually tokenized. Furthermore, it can also be programmed to change its layers based on certain triggers. These characteristic features of NFTs may lead to some undesired usage of the original owner’s IP that can only be prevented by explicit limitations in the smart contract which governs the digital asset’s usage.

Under the Copyright Act, 1957, for any assignment of copyright to be valid, such assignment will have to necessarily be in writing and signed by the assignor or his/her duly authorized agent, specifying the rights, duration and territorial extent of such assignment. NFT owners can, in addition to ownership rights, include terms on how subsequent purchasers may attain ownership of the subject matter NFT and select the marketplaces (open, curated or proprietary) on which their NFT can be resold.

The NFT license can prescribe specify the rights and restrictions on displaying, copying and usage of the NFTs. A general use license usually assigns a worldwide, non-exclusive, non-transferable, royalty-free license to use, copy and display the same, whereas a commercial use license can be crafted to allow the purchaser to commercially exploit the NFT. NFT owners and creators can also opt to include terms prescribing fees and royalties associated with the initial and subsequent sale of the NFT.

Applicability of other Indian Laws

Decentralized finance (De-Fi) is under threat of fraudulent and money laundering activities due to the nature of blockchain technologies. De-Fi-related hacks have hiked 2.7 times in 2021 from 2020.[3] From human trafficking and terrorist financing to drug trading, cryptographic money laundering has harrowing effects. The highly lucrative market for NFTs coupled with anonymity could potentially become an avenue for money laundering and other illegal funds transfers, if not already. At present, there is no generally accepted standard for monitoring the flow of assets in the digital space despite the potentially catastrophic risks it may result in.

The Prevention of Money Laundering Act, 2002 prohibits all forms of private cryptocurrencies. However, it fails to prescribe the technologies that fall under the scope of the term “cryptocurrencies” and what aspects of the same will constitute a violation of the law. However, the Ministry of Corporate Affairs as of 24 March 2021 mandated all listed and unlisted companies to declare all cryptographic transactions in their balance sheets effective 01 April 2021 by inserting item (xi) in Paragraph 5 of Schedule III, Part II of the Companies Act, 2013. On the other hand, policymakers need to notify virtual asset providers as “Reporting Entities” under the Prevention of Money Laundering Act, 2002 and stipulations to upgrade reporting requirements needs to be prescribed.

In a recent case of Hitesh Bhatia v. Mr. Kumar Vivekanand[4], the Delhi High Court, in dealing with cryptocurrency transactions, held that cryptocurrency transactions shall comply with the general laws in India such as Prevention of Money Laundering Act, 2002, Indian Penal Code, Narcotic Drugs and Psychotropic Substances Act, 1985, Foreign Exchange Management Act, 1999, Tax laws and all RBI regulations relating to Know Your Customer, Combating of Financing of Terrorism compliance guidelines[5], and Anti-Money Laundering requirements. While the Court did not adjudicate on the issue of the legality of cryptocurrencies, the observations made in the instant case pave a path for effective navigation of regulatory discourse associated with such complex technologies and will by extension apply to NFT transactions as well.

Cybersecurity and Data Privacy

It is reported that cryptocurrencies worth USD 5.2 billion could be stolen in 2022.[6] Hackers use stolen private keys and passwords attained through security breaches caused by software bugs to access crypto funds. While establishment of identity will create more secure platforms for virtual interactions, private players face uncertainty due to the ever-evolving data privacy regulations and their enforcement owing to the nascent stage at which the law currently. Another concern that arises is the loss of data since all data is stored virtually. A blockchain may be operated anonymously, thereby increasing the risk of compromised and hacked accounts resulting in long-lasting damage and loss of data for account-holders. In such a situation, the ability to anonymously operate the blockchain becomes a problematic feature.

Industry stakeholders will need to conduct background checks to verify the integrity of the seller’s ownership rights and the authenticity of the online marketplace. Players are advised to conduct transactions only with verified sellers on reputed platforms.

Insights and Takeaways

At the moment, from a regulatory perspective, policymakers are split-minded, but it is clear more policies to incentivize digital assets are needed. The first step toward a novel framework to regulate NFTs is the creation of a definition. The definition needs to be wide enough to accommodate the various sub-classes of virtual assets that currently exist and may be invented in the future.

It is at this juncture that Indian entities such as the RBI, SEBI and the Ministry of Finance can undertake joint regulation of the NFT space and position India as an industry standard-setting nation. A coordinated approach will also ensure that the convoluted issues relating to crypto-assets are adequately addressed. These entities, in consultation with the legislature and industry experts, can deliberate regulatory concerns and introduce forward-thinking policies and protocols.

Until the implementation of appropriate NFT regulations and policies in India, stakeholders will do well to be mindful of potential pitfalls in transacting in NFTs and should consider taking adequate protective steps, such as conducting thorough client / customer due diligence to ensure the legitimacy of the transacting party and title in NFT assets and ensuring detailed contractual terms tailored to their unique needs instead of solely relying on boilerplate smart contracts available on mainstream platforms.


[1] Venture Capitalists Catch Crypto Fever, Stampeding Towards Web 3.0, NDTC Profit.

[2] Ibid.

[3] “DeFi Has Accounted for Over 75% of Crypto Hacks in 2021”, CoinDesk.

[4] Hitesh Bhatia v. Mr. Kumar Vivekanand, Case No. 3207/2020.

[5] Master circular of RBI dated July 1, 2013.

[6] “DeFi-fo-fum: hackers find new ways to gobble up crypto”, Economic Times.

The use of Unified Payments Interface (UPI) in public offers was introduced in Novermber 2018 with effect from July 01, 2019.

In December 2021, the National Payments Corporation of India (NPCI) increased the per transaction limit for UPI from ₹2 lakhs to ₹5 lakhs for UPI based Application Supported by Blocked Amount (ASBA) in Initial Public Offers (IPOs).

In March 2022, the NPCI conducted system audits across various market intermediaries and found that more than 80% of these market players are ready to accept the increased limit.

SEBI revised the bid limit from ₹2 lakhs to ₹5 lakhs for UPI- based ASBA in IPOs that will open on or after May 01, 2022.

SEBI has stated that all retail investors applying in Public Issues where the application amount is up to 5 Lakhs shall use UPI and also provide their UPI ID in bid- cum-application form to be submitted with any of the following entities:

SEBI-hikes-UPI-limit-in-IPOsDownload

The Limited Liability Partnership (Amendment) Act, 2021 (“LLP Amendment Act”) received the assent of the President of India on August 13, 2021. The LLP Amendment Act will now come into effect from April 1, 2022, vide notification issued by the Ministry of Corporate Affairs (“MCA”) bearing no. S.O. 621 (E) dated February 11, 2022 (“Notification”). The LLP Amendment Act aims to improve ease of doing business for limited liability partnerships (“LLPs”) by decriminalizing offences, introducing small LLPs and start-up LLPs, enabling compounding of offences, establishing special courts and appointing adjudicating officers, amongst other amendments. Another pertinent aim of the LLP Amendment Act is to incentivize unorganized business enterprises to an organized incorporated structure, while creating ‘congenial business climate based on trust and compliances’, as stated in the Report of the Company Law Committee on Decriminalization of the Limited Liability Partnership Act 2008 (“Report”), issued in January 2021.

An analysis of the changes brought by the LLP Amendment Act was published by us on November 16, 2021, which can be accessed here.

Pursuant to the Notification and as an update to our previous post on the subject, we have placed hereunder the key changes brought about by the LLP Amendment Act and the Limited Liability Partnership (Second Amendment) Rules, 2022 (“LLP Amendment Rules”):

Decriminalization of Offences

The Limited Liability Partnership Act, 2008 (“LLP Act”), contained 24 (twenty-four) penal provisions, which has now been reduced to 22 (twenty-two) penal provisions while also reducing the maximum penalty from Rs. 5,00,000/- (Rupees Five Lakhs only) to Rs. 1,00,000/- (Rupees One Lakh only). These changes were made to remove criminality and prosecution for any technical or procedural omission or non-compliance in the ordinary course of business. Additionally, Section 76A has been introduced by the LLP Amendment Act for the appointment of officers not below the rank of registrar, as adjudicating officers for adjudication of penalties, and laying down the provision for appeal against the order of such adjudicating officers and also to provide procedures for such adjudications and appeal. The decriminalization of offences and appointment of adjudicating officers while providing ease of doing business, will ensure more flexibility to LLPs, improved corporate compliance and faster adjudication of penalties.

Further, out of the 22 (twenty-two) penal provisions: (i) 12 (twelve) offences will be adjudicated by an in-house adjudication mechanism, (ii) 7 (seven) will be compoundable offences and (iii) 3 (three) will be non-compoundable offences. The 12 (twelve) offences brought under the in-house adjudication mechanism is as follows:

Introduction of Small LLPs

The LLP Amendment Act introduced the concept of small LLPs in line with the concept of small companies under the Companies Act, 2013 (“Companies Act”) for the creation of a class of LLPs which would be subject to lesser compliances, fees and penalties, helping reduce the burden of compliance and associated costs for start-up LLPs and small businesses. Small LLPs have been defined as LLPs having contribution not exceeding Rs. 25,00,000/- (Rupees Twenty-Five Lakhs only) and a turnover for the immediately preceding financial year not exceeding Rs. 40,00,000/- (Rupees Forty Lakhs only). Pursuant to the Section 76A (3) introduced by the LLP Amendment Act, small LLPs will be liable to lesser penalties i.e., half the penalty specified under the relevant provision, subject to a maximum penalty of Rs. 1,00,000/- (Rupees One Lakh only) for such small LLPs and Rs. 50,000/- (Rupees Fifty Thousand only) for every partner or designated partner or any other person, as the case may be. The introduction of small LLPs will be a lucrative model for smaller unregulated businesses providing greater flexibility and equal opportunity, while also providing such entrepreneurs with greater flexibility and protection from compliances and penalties under the LLP Act.

Compounding of Offences

Section 39 of the LLP Act has been amended to provide the principles for compounding of offences, manner, procedure, and effect of compounding on pending prosecutions in the trial courts, in line with Section 441 of the Companies Act. Accordingly, offences under the LLP Act which is punishable with ‘fine only’, will shift to the in-house adjudication mechanism (IAM) instead of being treated as criminal offences and the Regional Directors (“RDs”) or any other officer not below the rank of a RD, duly authorised by the Central Government, have been authorized to compound such offences for a sum not exceeding the maximum fine prescribed for such offences and not less than the minimum fine prescribed for such offences.

Establishment of Special Courts

The LLP Amendment Act has introduced Sections 67A enabling the Central Government to establish special courts for the purpose of providing speedy trial of offences and has introduced Sections 67B and 67C to deal with procedure and powers of the Special Courts along with appeals and revisions.

The special court will consist of a single judge:

  1. holding office as Sessions Judge or Additional Sessions Judge, in case of offences punishable under the LLP Act with imprisonment of three years or more; and
  2. a Metropolitan Magistrate or a Judicial Magistrate of the first class, in the case of other offences, who shall be appointed by the Central Government with the concurrence of the Chief Justice of the High Court.

Further Section 77 has been amended and the powers of Judicial Magistrate of the first class or Metropolitan Magistrate have been transferred to special court which will have the power to impose punishment under Section 30 of the LLP Act. Also, all the criminal cases pending against the LLPs, its partners, designated partners, and any person concerned will be transferred to the Special Court under Section 67A. The LLP Amendment Act has introduced Section 77A empowering special courts to take cognizance of any offence punishable under the Act on a complaint in writing made by registrar or any officer not below the rank of registrar duly authorized for such purpose. Until such time the special courts are designated and established, special courts in terms of Section 435 of the Companies Act have been designated as special courts for the purpose of trial of offences punishable under the LLP Act and a Court of Sessions or the Court of Metropolitan Magistrate or a Judicial Magistrate of the first class, as the case may be, exercising jurisdiction over the area has been designated as special courts for criminal offences. Such special courts will be instrumental in reducing the burden of pending cases in courts and faster disposal of cases.

Auditing and Accounting Standards for LLPs

Since more and more companies are converting to LLPs and with a view to augment the financial reporting and disclosure standards of LLPs, the LLP Amendment Act now empowers the Central Government to prescribe accounting and auditing standards for certain classes of LLPs in consultation with the National Financial Reporting Authority. While LLPs already enjoy reduced compliance requirements, the aforesaid amendment will bring better transparency in the financial affairs of LLPs.

LLP Amendment Rules

The MCA recently notified the LLP Amendment Rules vide notification dated March 4, 2022, whereby several clerical and procedural amendments were made for easing compliances for LLPs. The major amendments prescribed therein are detailed below:

Apart from the aforementioned amendments, various forms given below have been substituted / updated for easy usage:

Final Takeaways

Regulatory stance regarding LLPs is a mix of strict and soft touch. On one hand, the government extended certain stern company law provisions to LLPs on February 17, 2021, such as disqualification of partners / designated partners on failure to file Annual Returns for 3 (three) years; identification of significant beneficial owner of the LLP; restricted limit of maximum number of partnerships for partners / designated partners and enabling of regulatory power to inspect books and documents and undertake investigation. On the other hand, the government is also keen to make the LLP structure lucrative for stakeholders and with the amendments introduced vide the LLP Amendment Act and the LLP Amendment Rules, it is clear that the government’s intent is to enable ease of doing business for LLPs. The introduction of small LLPs and start-up LLPs, decriminalization, relaxed penalty regime, compounding of contraventions, as well as prescribed procedural efficiencies will attract more entrepreneurs and investors from the unorganized sector into the fold of LLPs and allow them to work in a business-friendly environment with lesser compliance requirements and greater flexibility.

Industry stakeholders need to evaluate the ideal structure for incorporation based on their needs as the LLP structure personifies both simplification and even standardization of compliances vis-à-vis companies. That said, only time will tell the efficacy of LLPs, in line with the evolving business environment, changing regulatory stance and different stakeholder interests.

 DISCLAIMER:

The views and opinions expressed in this article are those of the author alone. This article is for general information purposes only and should not be construed as legal advice or be a substitute for legal counsel on any subject matter. No reader should act or rely on any information contained in this article, without first seeking appropriate legal or other professional advice.

Our Tax & Customs Associate Partner, Prateek Bansal was quoted in today's edition of BusinessLine 
Click on the article to read on: 
https://lnkd.in/gxysG32h 
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On August 13, 2021, the Limited Liability Partnership (Amendment) Act, 2021 (“LLP Amendment Act”) received the assent of the President of India. The LLP Amendment Act aims to improve ease of doing business for limited liability partnerships (“LLPs”) by decriminalizing several minor, technical or procedural violations under the Limited Liability Partnership Act, 2008 (“LLP Act”). The Ministry of Corporate Affairs ("MCA”) has, vide its notification bearing no. S.O. 621 (E) dated February 11, 2022, notified April 1, 2022 as the effective date for the provisions of the LLP Amendment Act.

Further, in exercise of the powers conferred under Section 76A of the LLP Act, the MCA has, vide notification bearing no. S.O. 622 (E) dated February 11, 2022, appointed registrar of companies (“ROCs”) as adjudicating officers for adjudication of penalties under the LLP Act with effect from April 1, 2022. It was also clarified that appeals, if any, is to be filed before the regional directors (“RDs”) having jurisdiction over the ROCs and such appeal is to be disposed off by the RDs in accordance with notification published by the MCA vide: (i) G.S.R. 887(E) dated December 16, 2011, (ii) G.S.R. 763(E) dated October 15, 2012, (iii) G.S.R. 832(E) dated November 3, 2015 and (iv) S.O. 2652(E) dated July 25, 2019.

The LLP Amendment Act reduces the total number of penal provisions from 24 (twenty four) to 22 (twenty two), out of which: (i) the newly introduced in-house adjudication mechanism will adjudicate upon 12 (twelve) offences by imposing only monetary penalties, (ii) 7 (seven) offences will be compoundable and (iii) 3 (three) offences will be non-compoundable. The LLP Amendment Act also introduces the concept of small LLPs and start-up LLPs in order to incentivize such class of LLPs by making them liable to pay lesser penalties in the event of default, subject to a maximum of Rs. 1,00,000/- (Rupees One Lakh only) for such LLPs and Rs. 50,000/- (Rupees Fifty Thousand only) for every partner or designated partner or any other person, as the case may be.

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The Ministry of Corporate Affairs (“MCA”), on September 23, 2021, had directed the Registrar of Companies (RoCs) to accord approval for extension of time by 2 (two) months, i.e. till November 30, 2021, for holding of annual general meeting (“AGM”) for the financial year 2020-2021 ended on March 31, 2021. In furtherance of the aforesaid extension in holding of AGM and in the interest of the stakeholders,the MCA has decided to charge only normal fees upto December 31, 2021 for filing of financial statements and annual returns, to be filed in the respective e-forms, for the financial year ended on March 31, 2021. The exempted e-forms are as follows:

Sr. No.FormParticulars
1.AOC-4Form for filing financial statement and other documents with the registrar
2.AOC-4 (CFS)Form for filing consolidated financial statements and other documents with the registrar for NBFCs
3.AOC-4 XBRLForm for filing XBRL document in respect of financial statement and other documents by a company with the registrar
4.AOC-4 Non-XBRLForm for filing financial statement and other documents with the registrar
5.MGT-7Form for filing annual return by a company
6.MGT-7AForm for filing annual return by a one person company and a small company

The aforesaid extension of the timeline has been notified by MCA vide its General Circular no. 17/2021 dated October 29, 2021.

It may be noted that pursuant to sub clause (4) of Section 92 of the Companies Act, 2013, the annual return (Form MGT-7/MGT-7A) is to be filed within 60 (sixty) days from the date on which the AGM is held or should have been held. Therefore, in line with the extension of time for holding AGM till November 30, 2021, a company holding its AGM on November 30, 2021 (or a company failing to hold AGM by November 30, 2021) should be able to file Form MGT-7/MGT-7A by January 29, 2022 in accordance with the time period specified under the Companies Act, 2013, without having to pay any additional fees. MCA needs to provide a clarification in this regard and until such time, normal charges for filing Form MGT-7/ MGT-7A will be applicable only till December 31, 2021.

The Ministry of Corporate Affairs ("MCA"), owing to the 'challenges faced by limited liability partnerships due to COVID-19 pandemic' and in response to the representation received from stakeholders, has vide its General Circular No. 16/2021 dated October 26, 2021 extended the timeline for filing statement of account and solvency in Form 8 under Section 34 (3) of the Limited Liability Partnership Act, 2008 till December 30, 2021. Further, the MCA has exempted such limited liability partnerships from paying any additional payments for delay in filing the statement of account and solvency till December 30, 2021.

The above decision is in furtherance of the Government's continued efforts to facilitate India Inc.'s ease of running businesses, in the wake of the ongoing COVID-19 pandemic.

The Customs, Excise and Service Tax Appellate Tribunal (“CESTAT”)’s Kolkata Bench vide order dated August 27, 2021, in the matter of M/s. RNB Carbides & Ferro Alloys Private Limited  has decisively upheld refund entitlements to the assessees against the claim of recovery by the revenue department of “erroneous refunds” and has provided useful clarifications regarding the point of sale of goods and inclusion of freight charges in the assessable value of goods for the purposes of excise duty calculation.

Table of Contents

Brief Facts of the Case:

The assessees were engaged in the manufacture and sale of Ferro Alloys, Ferro Silicon and Ferro Slag and its factory units were located within the State of Meghalaya which enjoyed the benefit of Central Excise duty exemptions under Notification No. 32/99-CE dated 08.07.1999 (“Original Notification”), which was later amended by certain Subsequent Notification. The Original Notification operated by way of refund, where under the assessee first paid the central excise duty leviable and thereafter received refund. In this case, the assesee had self-assessed the duty on clearances, paid the applicable excise duty and then filed the refund claims. The said refund claims were processed and granted but subsequently, the assessee’s books of accounts were scrutinized upon which the revenue department objected to the inclusion of freight charges in the assessable value of goods.

It was the revenue department’s case that the assessee had overvalued its products by including freight charges which ought not to have been included under Section 4(1) of the Central Excise Act, 1944 read with Rule 5 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (“Rules”). Several Show Cause Notices were issued against the assessees for recovering the alleged excess refunds. Further, numerous rounds of cross-litigation followed whereby the revenue department claimed that the assessee had suppressed the fact that outward freight was included in the assessable value and that it had also “mis-declared the Place of Removal leading to over valuation of assessable value for claiming excess refund.” The revenue department relied on the CESTAT’s earlier judgment in Montage Enterprises Pvt. Ltd.4 and Aditya Birla Chemicals India Ltd 5.

The assesee in turn, inter alia, contended that the relevant contracts/purchase orders for sale of finished products stipulated FOR destination prices and that the act of sale occurred at the buyers’ premises and therefore, duty had been paid correctly considering the value of goods inclusive of transportation charges up to the buyers’ premises. The assessee relied on the Supreme Court judgement passed in Roofit Industries Limited  and Ispat Industries Limited .

Reliance was also placed on Circular No. 1065/4/2018-CX dated 08.06.2018, which stated that in case of a contract providing FOR sale, assessable value had to be determined by including all costs up to the point of sale, which in this case was the buyers’ premises. The assessee also contended that even if the transportation charges were not includible for the purpose of Central Excise valuation, the Department was bound to refund the duty paid thereon.

Issues:

The central issues that came before CESTAT was:

  1. Whether the assessee had correctly availed the benefit of Original Notification and was righteous in considering freight charges for calculating assessable value of excise goods when the sale was supposed to be completed on delivery and acceptance by buyer and if not, then whether the revenue department was entitled to recover the refunds already granted claiming it to be a case of “erroneous refund”?

Findings and Judgement:

The CESTAT acknowledged that the contracts/ purchase orders in the instant case were ‘door delivery’ at all-inclusive prices and noted that the purchasers reserved the right to inspection and to not accept the goods if found to be sub-par and that the assessee thereby bore the intermittent risk of loss and/or damages. The CESTAT further examined the definition of “sale” under Section 2(h) of the Central Excise Act, 1944 (“Act”) and noted that under the Act, sale takes place only upon transfer of the possession of the goods by the manufacturer to the buyer which occurred at the buyers’ premises in the present case and therefore rejected the revenue department’s claim that place of removal / point of sale cannot be buyer’s place.

Hence, it was concluded that the invocation of Rule 5 by the revenue department was misplaced because the said Rule applied to cases only where goods were sold at the place of removal but were to be delivered elsewhere, which was inapplicable in this case. Further, CESTAT observed that the assessee’s case fell within the purview of the exception to the aforesaid Rule 5 and that in light of Rule 7 read with Rule 11, the assessable value of the goods was the price charged by the assessee at the place of sale indicating that all charges up to the place of sale are includible, including freight.

The CESTAT upheld the precedential value of Roofit Industries Limited and dismissed the revenue department’s claim regarding the recovery of amount already refunded by considering it as an “erroneous refund” under Section 11A of the Act and stated that  the refund already sanctioned by relying on the judicial legal precedents as well as the clarifications issued by the Central Excise Board cannot be termed as “erroneous” as further confirmed in Gauhati High Court’s Judgement in the case of Topcem India vs. Union of India 2021 (376) ELT 573.

Further, the CESTAT confirmed the assessee’s contentions that even if the assessee had paid higher Central Excise duty than was leviable, the Department was not at liberty to retain any part of such excess amount collected as duty because it can retain only those sums which represent the actual duty leviable under a statute and therefore, any excess amount collected as duty ought to be refunded. Reiterating its own observations in Aditya Birla Chemicals, CESTAT highlighted that “..the duty amount paid legally as well as the amount legally not payable but paid, both were entitled for refund if the refund claim was filed as per law.” In light of the above contentions, the appeals filed by the revenue department were dismissed and since the issue was decided on merits, the limitation aspect was also not considered.

W&B Take:

This judgement has far-reaching effects on the refund rights of the concerned assessees who were hitherto affected by ultra vires show cause notices issued by the revenue department. Stakeholders can consider undertaking normal litigation route (adjudication and appellate) or, the writ route to challenge these arbitrary demand notices seeking to recover allegedly granted “erroneous” refund under Section 11A.

For any queries, please contact:

VINEET NAGLA
Partner
Head – Taxation
vineet.nagla@whiteandbrief.com

PRATEEK BANSAL
Associate Partner
prateek.bansal@whiteandbrief.com

The Limited Liability Partnership (“LLP”) structure is a specialised hybrid business vehicle combining the benefits of a regulated company and providing the flexibility of a partnership firm. Amongst other advantages, it has the advantage of limiting the individual liability of its partners as against the business entity akin to a company and at the same time permitting relaxed discretion for internal governance vide the LLP agreement while generally enjoying lesser compliance burden.

The Government has been systematically carrying out legislative reforms to incentivise the entrepreneurial endeavours of the unorganized sector and to promote a favourable business environment to spur innovation and economic activity in the country. Accordingly, The Report of the Company Law Committee on Decriminalization of the Limited Liability Partnership Act, 2008 (“Report”) dated January 4, 2021, recommended reforms to the Limited Liability Partnership Act, 2008 (“Act”) and thereafter, the Union Cabinet on July 28, 2021, announced its decision to amend the Act for the first time since the Act came into effect in 2009.

Given the above decision, the Limited Liability Partnership (Amendment) Bill, 2021, was passed by both Rajya Sabha and Lok Sabha, and subsequently received the President’s assent on August 13, 2021, thereby attaining the status of the Limited Liability Partnership (Amendment) Act, 2021 (‘Amendment Act’).

With the focus to provide greater ease of doing business to LLPs and to decriminalize compoundable offences involving “minor, procedural or technical violations”, the Amendment Act gives further impetus to the viability of the LLP structure by introducing the changes.

The amendments can be categorized as follows:

1. In-house Adjudication Mechanism

As stated in the Report, the rationale behind decriminalization is that ordinarily an act which is punishable with a fine, contains an element of “mens rea” i.e. a guilty mind which is usually affiliated with serious and pre-meditated fraudulent acts, and are typically tried by a criminal courtHowever, bona fide business-related omissions, technical and minor violations that do not involve mens rea should not be treated with criminal convictions and instead be subjected to civil penalties enforced through an in-house adjudication mechanism.

In view of the above, the Amendment Act offsets criminal liability and decriminalizes the following offences as detailed below by prescribing only civil liability in the form of monetary penalties under the in-house adjudication mechanism:

Sr. No.SectionsDescription/Comments
1.Section 10 - Punishment for contravention of Sections 7 and 9 Description: Contravention relating to general obligations of designated partners. Comment: While completely omitting contravention under Section 8, the Amendment Act, decriminalises punishments under Sections 7 and 9 by prescribing monetary penalties. 
2.Section 13 - Registered office of LLP and change therein Description: Contravention pertaining to registered office of the LLP and change therein. Comment: The Amendment Act decriminalises the offence under Section 13 by prescribing monetary penalties. 
3.Section 17 - Change of name of LLPDescription: Failure to comply with the directions of the Central Government in relation to change of name of LLP. Comment: Section 17 has been overhauled by prescribing procedural provisions that enable an existing company, LLP or proprietor to notify the Central Government of the resemblance in a LLPs name that was incorporated subsequently. Further, the Amendment Act also eradicates the punishment for failure to change the name of LLP on the direction of the Central Government by stipulating that a different name will be auto-allotted to the LLP by the Central Government instead of penal consequences. The Section also provides the LLP with an option to subsequently change its name by following the prescribed provisions. 
4.Section 21 - Publication of name and limited liability Description: Failure to display basic information regarding LLP on invoices, official correspondences and publications. Comment: The Amendment Act decriminalises the offence under Section 21 by prescribing monetary penalty. 
5.Section 25 - Registration of changes in partners Description: Failure to notify registrar regarding changes in the partners of the LLP within stipulated time. Comment: The Amendment Act decriminalises the offence under Section 25 by prescribing monetary penalty. 
6.Section 34 - Maintenance of books of account, other records and audit, etc.  Description: As stated in the Report, Section 34 provides for two different compliances, namely: §  ‘Maintenance of books of accounts as prescribed at the registered office and regular preparations of accounts and its audit in line with the prescribed rules.§  Filing of a Statement of Account and Solvency within a period of six months from the end of each financial year.’Comment: Since the first compliance is meant for ensuring financial discipline and integrity of financial data, the punishment for failure in complying with Sections 34 (1), (2) and (4) requires no change and any defaulting LLP and every defaulting designated partner of such LLP shall be punishable with fine.However, non-filing of financial statements i.e., Statement of Account and Solvency within the prescribed time is altered to a civil liability being a procedural violation and hence a LLP that fails to comply with the provisions of Section 34 (3) shall be liable to pay penalty.
7.Section 35 - Annual return Description: Non-filing of Annual Return. Comment: The Amendment Act decriminalises the offence under Section 35 by prescribing monetary penalty. 
8.Section 60 - Compromise, or arrangement of LLPsDescription: Non-filing of the order of Tribunal within the prescribed time.Comment: The Amendment Act decriminalises the offence under Section 60 by prescribing monetary penalty.
9.Section 62 - Provisions for facilitating reconstruction or amalgamation of LLPsDescription: Non-filing of the order of Tribunal within the prescribed time.Comment: While decriminalising the offence under this Section by prescribing monetary penalty, an important clarification in the form of explanation (ii) has been introduced stating that ‘a LLP shall not be amalgamated with a company’. The aforesaid amendment has put to rest the long overdue clarification regarding amalgamation of a LLP with company. Accordingly, a LLP intending to amalgamate with a company will necessarily have to convert itself into a company.
10.Section 73 – Non compliance of any order passed by TribunalDescription: Penalty for failure to comply with any order passed by the Tribunal. Comment: The Amendment Act has omitted the Section in entirety by relying on the Tribunal’s power to invoke its contempt jurisdiction in the event of failure to comply with the order passed by the Tribunal. 
11.Section 74 – General penaltiesDescription: General penal provision for instances where no penalty or punishment is provided for contravention Comment: The Amendment Act decriminalises the offence under Section 60 by prescribing monetary penalty. 

Further, the Amendment Act has reduced the maximum penalty from Rs. 5,00,000/- (Rupees Five Lakhs only) to Rs. 1,00,000/- (Rupees One Lakh only) for LLPs and Rs. 50,000/- (Rupees Fifty Thousand only) for designated partners. Such reduced penalties will prove to be a financial relief for LLPs with default on procedural lapses.

The Government has, however, maintained the status quo for serious non-compliances which involves an element of fraud, deceit, injury to public interest and wrongful dealings in line with the extant provisions of the Act. Furthermore, the Amendment Act extends the imprisonment provision from two years to five years for every person guilty of fraud under Section 30 of the Act.

2. Introduction of New Concepts & Contemporary Amendments

The Amendment Act introduces “Small LLPs” akin to “Small Companies” under the Companies Act, 2013 (“Act, 2013”) to attain the same underlying principles of extending compliance relaxations and fee reductions to small scale/start-up businesses for facilitating ease of business and incentivising corporate compliances.

The structural machinery of LLPs owing to their inherent flexibility is often employed by micro and small enterprises as a preferred business structure. The legislative intent of Small LLP is to create a class of LLPs that is subject to lesser compliances, lesser fees, to reduced cost of compliance and further to subject such class of LLPs to lesser penalties in the event of default.

Section 2 (ta) of the Amendment Act stipulates that “small limited liability partnership” means a LLP:

  1. the contribution of which, does not exceed twenty-five lakh rupees or such higher amount, not exceeding five crore rupees, as may be prescribed: and
  2. the turnover of which, as per the Statement of Accounts and Solvency for the immediately preceding financial year, does not exceed forty lakh rupees or such higher amount, not exceeding fifty crore rupees, as may be prescribed: or
  3. which meets such other requirements as may be prescribed, 

and fulfils such terms and conditions as may be prescribed.

Accordingly, Section 69 of the Act containing the provisions of the payment of additional fee is also amended indicating that a different fee or additional fee may be prescribed for different classes of LLPs or for different documents or returns required to be filed under the Act or rules made thereunder.

Further, it is also exclusively provided under Section 76A that, if a penalty is payable for non-compliance of any of the provisions of this Act by a Small LLP or a start-up LLP (“Start-up LLP”) or by its partner or designated partner or any other person in respect of such LLP, then such LLP or its partner or designated partner or any other person, shall be liable to a penalty which shall be one-half of the penalty specified in such provisions subject to a maximum of one lakh rupees for LLP and fifty thousand rupees for every partner or designated partner or any other person, as the case may be. For the sake of clarity, Start-up LLP is explained to mean a LLP incorporated under the Act and recognised as such in accordance with the notifications issued by the Central Government from time to time.

Reduced fees and penal consequences would not only reduce the cost of compliances for LLPs falling under the category of Small LLPs but will also incentivize the micro and small enterprises to corporatize their business. Therefore, the efficiency posed by Small LLPs will be lucrative for interested stakeholders looking to structure and scale their businesses with lesser compliance costs.

3. Revising References of Companies Act, 2013

The Amendment Act substitutes all references to the erstwhile Companies Act, 1956 with the Act, 2013.

Section 7 of the Act prescribes that every LLP shall have at least one resident Designated Partner. The Amendment Act revises the residency requirement contained therein from erstwhile one hundred and eighty-two days to one hundred and twenty days during the financial year. Reduction in number of days to qualify as ‘resident in India’ will be an added advantage to individuals or entities resident outside India intending to become a resident designated partner in LLPs given that 100% (one hundred percent) FDI is now permitted in specified LLPs under the extant FDI regulations. Furthermore, the aforesaid amendment will be beneficial to those designated partners facing difficulty due the travel restrictions imposed owing to the COVID-19 pandemic and will provide an added relief to designated partners facing difficulties in maintaining residential status under the Act.

4. Insertion of Section 34A - Accounting and auditing standards.

The Amendment Act grants power to the Central Government to prescribe accounting and auditing standards for a class or classes of LLPs vide Section 34A in consultation with the National Financial Reporting Authority and the Institute of Chartered Accountants of India. The accounting and auditing standards will usher enhanced financial discipline for the LLPs and bring about transparency commensurate with best practices to attract enhanced commercial and investor interest.

5. Overhaul of Section 39 - Compounding of offences

With the object of ‘delineating principles for compounding of offences, manner and procedure thereof and effect of compounding on pending prosecutions in the trial courts’ as stated in the Report, the Amendment Act amends Section 39 by substituting the said Section entirely with a modified Section thereby incorporating in the Act the principles of compounding and procedures as prescribed under Section 441 of the Act, 2013.

Accordingly, the Regional Director or any other officer not below the rank of Regional Director recognised by the Central Government will be authorised to compound any offence under the Act which is punishable with only fine. Compounding will not be allowed for an offence committed by an LLP or its partner or its designated partner within three years from the date on which a similar offence committed by it or them was compounded. Any second or subsequent offence committed after the expiry of the period of three years from the date on which the offence was previously compounded, shall be deemed to be the first offence.

5. Establishment of Special Courts 

The Amendment Act introduces a new judicial regime under Sections 67A, 67B and 67C spearheaded by Special Courts to be established by the Central Government for swifter dispute resolution for LLPs and also amends provisions related to appeals under Section 72. This will significantly drive ease of doing business for involved stakeholders along with bringing efficiency, transparency, and much-needed certainty for providing speedy trial of offences under the Act.

The Special Court shall consist of a single judge:

  1. holding office as Sessions Judge or Additional Sessions Judge, in case of offences punishable under the Act with imprisonment of three years or more; and
  2. a Metropolitan Magistrate or a Judicial Magistrate of the first class, in the case of other offences, who shall be appointed by the Central Government with the concurrence of the Chief Justice of the High Court.

Procedure and powers of Special Courts along with appeals and revisions are further postulated under Sections 67B and 67C.

6. Introduction of Registration offices - Section 68A 

To exercise the power and discharging functions conferred on the Central Government and for the purpose of registration of LLPs under this Act, the Central Government, by notification has been empowered to establish such number of registration offices at such places as it thinks fit and to specify the jurisdiction. This move is aimed at decongesting the extant offices of the registrar of companies who is at present responsible to oversee the administrative functions for both companies and LLPs.

7. Omission of certain provisions

Section 18 which relates to an application for direction to change the name in certain circumstances; Section 73 which relates to penalty on non-compliance of any order passed by Tribunal; and Section 81 which relates to transitional provisions are omitted from the Act owing to duplication and/or redundancy.

These were some of the major amendments brought in by the Amendment Act. By virtue of the amendments, it can be seen that the Government has initiated a beneficial overhaul of the existing LLP regime by introducing ease of compliance for honest and ethical entrepreneurs and opening gateways to foster a healthy business environment. Given that one of the eligibility conditions under the Start-up India Action Plan is that a start-up should be incorporated as a private limited company, registered partnership firm or a LLP, the regulatory changes concerning LLPs will catalyse interests to formalize emerging business operations as LLPs and simultaneously promote domestic individual entrepreneurship.

Decriminalization and a comparatively relaxed penalty regime brought in by flexibility to compound minor contraventions and policy infrastructure for speedy dispute resolution will foster the ease of living for law-abiding LLPs. While the amendments are forward-looking, the Government has failed to regularise the debenture issuance for LLPs in contrast to the Report which envisaged that an LLP may issue secured non-convertible debentures to specified bodies corporate or trusts which are regulated by the Securities and Exchange Board of India and the Reserve Bank of India. The inability of LLPs to issue non-convertible debentures and access to debt markets, at variance with companies, will continue to pose as a major impediment in raising capital under the current regime.

LLPs, akin to any other legitimized business structure will require a responsive regulatory regime matching global best practices. While the industry reaction to most of the amendments is welcoming, we will have to see if the Government continues to proactively evolve the LLP regulations to retain and foster its commercial relevancy.

By Mr. Manu Varghese (Partner – Head of General Corporate & Commercial)
and Mr. Jones Vaidya (Associate) on September 7, 2021

The Gauhati High Court (“HC”) vide its judgement dated August 12, 2021, in the matter of M/s Jyothy Labs Ltd. has decisively answered question regarding eligibility of concerned taxpayers to requisition fixation of special rate of refund in respect of manufactured goods in the aftermath of the Supreme Court’s VVF judgement.

Table of Contents

Brief Facts of the Case:

The petitioner M/s Jyothy Labs Ltd. had established a manufacturing unit within the Northeastern Region. As per the Northeastern Industrial Policy, the petitioner was earlier entitled to an exemption to excise duty vide the Original Notification (Notification No.32/99-CE dated 18.07.1999) which was later curtailed by the Subsequent Notification (notification No. 31/2008-CE dated 10.06.2008) thereby diminishing the refund entitlement while allowing the assesses to have a special rate fixed depending on value addition in each case. The Subsequent Notification was thereafter challenged by the petitioner, resulting into a High Court order in its favor.

To denote finality, the Hon’ble Supreme Court (“SC”) vide its common order dated 22.04.2020 in VVF Ltd  (“VVF”) upheld the constitutional validity of the Subsequent Notifications based on public interest and revenue interest. The SC inter alia held that pending refund applications for related cases are to be decided as per the Subsequent Notifications.

In the aforesaid background, the petitioner in the current case had to finetune its refund entitlements in line with the Subsequent Notification. It is the petitioner’s case that under the Subsequent Notifications, the manufacturer is given the option to apply to the jurisdictional Commissioner of Central Excise for fixation of a special rate representing the actual value addition in respect of eligible goods manufactured. Also, the time provided for filing such application for fixing of the special rate is provided thereunder as 30th September of that given financial year, but the petitioners argued that due to the unsettled legal position, they were unable to request for a special rate of refund and hence should presently not be barred considering inadvertent circumstances.

Therefore, post the VVF Judgement, the petitioner submitted an application on 18.05.2020 before the Commissioner of Central Excise and GST, Guwahati making a request for fixation of a special rate. As the applications of the petitioner were not entertained and the department invoked the attachment of some properties of the petitioner, the petitioner approached the Gauhati HC by way of a Writ Petition. The petitioner contended that the requirement of requesting for fixation of a special rate in respect of the value addition to the manufactured goods had arisen only after the VVF judgment of the Supreme Court and that the dominant purpose of the Subsequent Notification was intended to bestow a legal right on the assessee to opt for special rate.

Issues:

The central issues that came before the Gauhati HC were:

1.     Whether under the Subsequent Notification, the manufacturers have an option to not avail the rates contained in the notifications and whether they have a legal right to request the authorities for fixation of a special rate as per the actual value additions to the manufactured goods?

2.     Whether such applications requesting for fixation of a special rate are to be made within 30th September of the given financial year as prescribed under the Subsequent Notification, and hence are now time barred?

Findings and Judgement:

The HC took note that once the occasion had again arisen for the petitioner to seek for fixation of a special rate, the application for such request was made immediately. It was therefore held that the petitioner cannot be prevented from claiming its legal right for fixation of a special rate as the timeline provisions were merely incorporated to streamline the process.

The HC also observed that even if there would have been an earlier determination of such special rate, the same would have remained ineffective and un-implementable till SC had finally decided the issue and further the relevance of such determination would again be dependent on the outcome of the appeal that was pending before SC.

Further, the HC noted that the respondent GST Department did not raise any apprehensions on the ground that such applications had to be submitted prior to 30th September of the given financial year. Thus, the HC stated that on the principle of constructive res-judicata, the ground for rejecting such application because it was not submitted within prescribed timeline was not available to the respondent authorities. The HC thus directed the Principal Commissioner, GST, Guwahati to consider the application of the petitioner seeking for fixation of a special rate of refund based on the actual value addition to the manufactured goods during the given financial year and decide the same as per law and on merits.

W&B Take:

While the VVF judgment directed the revenue department to dispose pending refund applications as per the Subsequent Notifications, it is critical to note that the applications seeking fixation of special rate for many affected assessees were not pending in cases where the assessees had not filed the said applications.

In this situation, the Gauhati HC judgement is a welcome step reinforcing the right of the assessees to claim special rate of excise refund based on actual value addition. It shall be highly beneficial for not just North-Eastern assessees but affected stakeholders in other regions as well (Kutch and Jammu) where the applications for fixation of special rate of refund may be preferred. It is imperative that the impacted assessees move swiftly to file application with the jurisdictional authorities within a reasonable time to avail the legally upheld benefit of special rate of refund for their manufactured goods.

For any queries, please contact:

VINEET NAGLA
Partner
Head – Taxation
vineet.nagla@whiteandbrief.com

PRATEEK BANSAL
Associate Partner
Taxation
prateek.bansal@whiteandbrief.com

In her budget speech dated February 1, 2021, the Hon’ble Finance Minister Ms. Nirmala Sitharaman, had announced the Government’s intent to review the existing customs exemption notifications issued over the years after conducting extensive industry consultations. Accordingly, certain Customs’ exemptions have been identified for the purpose of reassessment.

Certain goods (largely falling under Notification no. 50/2017-Customs dated 30.06.2017) have been specified for review, and the list illustratively includes crude glycerine for manufacturing of soaps, specified lifesaving drugs, prescribed fabrics, sports related equipment, machinery/equipment for treatment of leather, magnetron for microwave manufacturing, specified parts for Printed Circuit Boards, parts of set-top box, routers and broadband modem, artificial kidney, contraceptives, magnetic tapes, photographic, filming, sound recording and radio equipment, parts/raw material for manufacture of goods supplied for off-shore oil exploration, specified machinery/parts covered in textile industry amongst others.

Importers, exporters, domestic industry, trade associations, all stakeholders, especially in international trade, and the public at large are invited to give pertinent views on the subject for consideration by the Government, in the format prescribed, latest by August 10, 2021. Click here to visit the web page for viewing the list of exemptions under review and for submitting your suggestions.

We encourage you to peruse the list and the associated line items and examine its impact on your business. It will be imperative to strategize over business / sector specific concerns to put forward an adequate representation before the Government in order to avoid any increase in overall tax cost.

Parties:
M/s. Silpi Industries etc. v. Kerala State Road Transport Corporation & Anr. etc.
[CIVIL APPEAL NOS.1570-1578 OF 2021]
M/s. Khyaati Engineering v. Prodigy Hydro Power Pvt. Ltd.
[CIVIL APPEAL NOS.1620-1622 OF 2021]
Date of Judgement: June 29, 2021
Authority: Supreme Court

  1. Whether the provisions of Indian Limitation Act, 1963 is applicable to arbitration proceedings initiated under Section 18(3) of Micro, Small and Medium Enterprises Development Act, 2006? and
  2. Whether counter claim is maintainable in such arbitration proceedings?

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