Petition on Composition of the Securities Appellate Tribunal

(The following guest post is contributed by Amit Agrawal, Advocate, regarding a petition filed before the Delhi High Court. Amit is representing the petitioner, although the litigation and its outcome will likely have a broader impact)

A public interest litigation (PIL) has recently been filed before the Delhi High Court inter alia questioning the functioning of the Securities Appellate Tribunal (SAT) in the absence of its Presiding Officer (PO), and the on-going selection process of a member of SAT. It was covered briefly hereand here.

Soon after the retirement of former Karnataka Chief Justice Sodhi on 28 November last year, the Central Government on 5 December 2011 directedthe senior member of SAT to preside over the sittings. Since then, SAT, in the absence of a judicial member, has been entertaining and disposing of the matters. SEBI Act, 1992 requires SAT to comprise three members, and the PO has to be a former Chief Justice of a High Court or a former Judge of the Supreme Court. It is contended that the presence of such a person is not optional but mandatory for valid functioning of the tribunal, and till appointment of a PO the proceedings of SAT should come to a halt.

Such an argument is based on two reasons. First is the mandate of the statute itself. Section 15P of SEBI Act, 1992 reads:

“[I]f, for reasons other than temporary absence, any vacancy occurs in the office of the Presiding Officer or any other member of a securities appellate tribunal, then the Central Government shall appoint another person in accordance with the provisions of this Act to fill the vacancy and the proceedings may be continued before the Securities Appellate Tribunal from the stage at which the vacancy is filled”.

The Central Government, treating the absence of PO as ‘temporary absence’, directed under applicable rules that the senior member of SAT should act as temporary/officiating presiding officer. It is contended that such a rule is not attracted for the absence of the PO in the instant case is not of a temporary nature. The absence, which entitles appointment of a new person can only be in case of certainty regarding non-resumption of work by the previous person. In such case, the absence is a ‘vacancy’ not being a temporary absence. Such vacancy may arise on account of four reasons i.e. resignation, retirement, death or removal.

Second, it is contended that the order dated 5 December 2011 in so far as it directs the continuance of adjudication process by a board comprising only of (technical) ‘members’ both of whom are former bureaucrats (being a former Indian Revenue Service Officer and former Indian Legal Service Officer) is violative of constitutional provisions enshrining the principles of rule of law, separation of powers, independence of judiciary and law declared by the Supreme Court. Reliance in this regard is inter aliaplaced on the judgement of the Constitution Bench of the Supreme Court in Union of India v. R Gandhi (2010) 11 SCC 1 given in the context of setting up of NCLT/NCLAT, and recent judgment of Namit Sharma v. Union of India dated 13 September 2012 in the context of Right to Information Act. It is contended that SAT in certain ways substitutes (even though in law it cannot) the jurisdiction of a High Court as appeals lie directly to Supreme Court, therefore it must resemble a forum of exacting status and not a bureaucratic board.

The petition does not challenge the validity of orders passed by such a two-member tribunal during the period following the retirement of Justice Sodhi. It proceeds on the basis of - thus far no further.

The selection process initiated by issuance of a circulardated 30.08.2012 due to ensuing retirement of one of the current members of SAT on 27 December 2012 has also been challenged in the PIL. Under the provisions of the applicable rules the committee for selection of a ‘member’ of SAT comprises of 3 persons i.e. Presiding Officer of SAT, RBI Governor (or his nominee), and Finance Secretary/Secretary, Department of Economic Affairs. It is stated that ‘Presiding Officer’, to be a part of the selection committee, cannot be any ‘officiating presiding officer’ but has to be a former Chief Justice of a High Court or a Judge of the Supreme Court, and such a provision serves the purpose of judicial consultation in the matters of appointment of members of tribunals (which are equivalent to courts in terms of their function). Continuance of the selection process, without any judicial consultation, is argued to be an invasion on independence of judiciary. To illustrate, SEBI functions under the aegis of Ministry of Finance. A majority of the SEBI’s Board is appointed by Ministry of Finance. SEBI is a major litigant before SAT. Therefore, a free hand to Ministry of Finance in appointment of members of the tribunal is susceptible to great mischief and in these circumstances the need for judicial consultation is pronounced. The on-going selection process is also contended to be geared towards civil servants as it contains not a single word as to how non-civil servants can apply. It perhaps cannot be anyone’s case that civil services form the sole repository of experts in securities markets. The Standing Committee on Finance in para 31 of its reportpresented to Parliament had also noted previously that selection of Members of SAT is by and large restricted to or weighed towards selecting retired civil servants. It is contended that tribunal posts are not to be treated like post retirement havens for former civil servants.  

The matter was adjourned on the last date of hearing with a directionto Central Government to expedite the selection of the PO.

(The above guest post must be read with the caution that it may not be the most objective account of the matter because of where I stand during the court hearings. I accepted the invitation to write the above post even though the matter is still pending since the matter raises purely questions of law and has no disputed facts.)

- Amit Agrawal

The Constitution Bench elides repugnance and occupied field

That the title of this post is a part of Indian constitutional law is explained by the fact that the validity of tax and commercial legislation is often challenged on the ground that it conflicts with a similar legislation enacted by another legislature. Often the challenge is on the basis of legislative competence, and this requires a careful analysis of not only the words of Schedule VII, but of the principlesupon which legislative power is distributed in India.

Until 7 May, 2012, it was taken for granted that the doctrines of occupied field and repugnance are as different as chalk and cheese. The easiest way of explaining the difference is to say that occupied field is concerned with the existence of legislative power, while repugnance is concerned with the exercise of legislative power that is shown or assumed to exist. In more precise terms, the doctrine of repugnance, found in article 254 of the Constitution, is that a State legislation which is repugnant to a law enacted by Parliament is void to the extent of repugnance. Some doubts about the scope of art 254 arose on account of the words “with respect to one of the matters enumerated in the Concurrent List”. A close analysis of these words demonstrates that the “comma” is placed after the words “competentto enact” rather than “an existing law”, suggesting that article 254 is confined to Central legislation in the Concurrent List only in respect of pre-1950 legislation. But the Supreme Court rejected this interpretation in many cases, notably VK Sharma v State of Karnataka AIR 1990 SC 2072, and held that article 254 is applicable only to a conflict between a State and a Central legislation enacted under the same entry in the Concurrent List.

While there are, of course, two views about whether this is correct or not, two basic propositions about repugnance were never questioned even in this line of case law: (i) repugnance arises only if there is an actual conflict between two legislations, one enacted by the State Legislature and the other by Parliament, both of which were competent to do so; and (ii) the State law is void only to the extent of repugnance, subject to art 254(2).

Occupied field, on the other hand, has nothing at all to do with a conflict between two laws. It is perhaps an unfortunate expression because it is used in precisely this sense in the jurisprudence of other countries. But in India it simply a compendious way of referring to a few legislative entries in List II of Schedule VII, which are expressly made “subject” to a corresponding Entry in List I or List III. The two most important instances of such entries are Entry 24, List II (“Industries”, made subject to Entry 52, List I, which provides that Parliament may declare, by law, that the control of a certain industry by the Union is in the public interest) and Entry 23, List II (Mines and mineral development, made subject to Entry 54 List I, which provides that Parliament may by law declare that the control of mines and mineral development by the Union is in the public interest). By making such a declaration in a legislation (for example the Essential Commodities Act or the MMRDA), Parliament acquires legislative competence over what would otherwise be a field of State legislation, and the State is entirely denuded of legislative competence. It is apparent that no question of repugnance arises: if a field is validly occupied, that field ceases to form part of the State List. As one judge put it, that field is “subtracted” from the State List and “added” to the Union List.

One controversy that arose in occupied field litigation was whether Parliament could occupy a field by simply making a declaration. For example, suppose Parliament declares in the MMRDA that mines and mineral development under the control of the Union is expedient in the public interest, but merely provides in the operative part that “the mining sector shall comply with such rules as may be notified by the Competent Authority”, and the competent authority notifies no such rules. A concern was expressed that if occupied field is invoked in this way, neither the State (because it cannot), nor the Union (because it does not) legislates for that sector, leading to a “legislative vacuum”. In the leading Entry 54 cases (Hingir Rampur Coal Co, MA Tulloch and Baijnath Kedia), the Supreme Court held that this is irrelevant, because Entry 54 denudes the States of competence the moment the declaration is made by Parliament. But some leading Entry 52 cases, particularly Belsund Sugar and Ishwari Khetan, suggested otherwise. This apparent conflict was not really a conflict – without going into more detail than is necessary, the difference is explained by the fact that the Supreme Court had previously construed the substance of Entry 52 more narrowly (and correctly) than it did Entry 54 (see Tika Ramji affirmed in a judgment rich in scholarship by Ruma Pal, J., in ITC v AMPC, over Pattnaik, J’s dissent).

It is crucial to note thatnone of this had anything to do with repugnance. The controversy over “mere declaration” versus “actual legislation” was at all times confined to the few entries in the Constitution that expressly permit Parliament to occupy a State field. Indeed, when the point was argued in relation to repugnance, the Supreme Court authoritatively held in Tika Ramji (para 18) that “repugnancy must exist in fact, and not depend merely on a possibility”. Conceptually, it is submitted that this is correct – the Constitution has two mechanisms to deal with legislative conflicts: one deals with who has the power to enact a law in a certain field of legislation in List II (ordinarily the State, unless the Centre occupies the field in the manner specified in the corresponding entry in List I) and the other with what happens when two legislatures, both of which have the power to enact laws, enact conflicting laws (repugnance). Indeed, repugnance presupposes that both laws have been enacted by competent legislatures – thus, if the State of Tamil Nadu imposes income tax, and this is in conflict with the Income Tax Act, 1961, it is unnecessary to resort to art 254, because the Tamil Nadu Act is void ab initio for the legislature lacks competence. On the other hand, if the State of Tamil Nadu enacts the Sales Tax Act, and Parliament enacts the Central Excise Act, and it is argued that the two legislations somehow conflict, the solution is article 254 (conceptually – in practice, article 254 would be unavailable because of VK Sharma and one would have to resort to the non-obstante clause in article 246). But if the Centre has not enacted the Central Excise Act, and it is sought to be shown that the Tamil Nadu legislature still lacks the power to enact it, there can be no question of repugnance. That contention can succeed only if it is shown that: (i) “tax on sale of goods” is not in the State List or (ii)the Centre has validly occupied the field of “tax on sale of goods” (which it can never do, it is not expressly subject to a List I entry) or (iii) the Tamil Nadu Act is, in pith and substance, not within “tax on sale of goods”. Repugnance, it is submitted, can never arise when there is only one law in operation.

Having said that, there is no doubt that this apparent conflict in the occupied field cases on the need for actual legislation as opposed to a mere declaration is an important one, and ought to have been decided by the Supreme Court. Unfortunately, the Supreme Court, with respect, picked the wrong case, when it decided State of Kerala v Mar Appraem Kuri on 7 May, 2012. Simplifying the facts, the Centre enacted the Chit Funds Act, 1982 [“the Central Act”] which would become operative in the State of Kerala upon the issue of a notification under s 1(3) of the Central Act, and the State of Kerala enacted the Kerala Chitties Act, 1975. The Centre did not notify the Central Act in the State of Kerala. The result was that there was only one law in force in the State of Kerala – the Kerala Act. Chit funds filed a writ petition in the Kerala High Court and managed to persuade a Division Bench that the Kerala Act was repugnant to the un-notified Central Act. The State of Kerala appealed. The Supreme Court referred the matter to a Constitution Bench.

Surprisingly, the Constitution Bench accepted the contention of the chit funds that even an un-notified Central law attracts art 254. The Chief Justice gives two reasons for this conclusion: (i) article 254 uses the verb “made” and the form “making” - the “making” of a law is complete on enactment, even before the law is notified and (ii) Parliament, by enacting the Central Act, intended “to occupy the entire field falling in Entry 7 of List III” and therefore the State Legislature is denuded of legislative competence unless article 254(2) is applicable.

With great respect, it is submitted that this decision is incorrect and unfortunately conflates occupied field and repugnance. First, the verb “made” is used, as senior counsel rightly submitted in oral argument, not to indicate when a law becomes repugnant, but to identify the law which must independently be shown to be repugnant. Secondly, the conceptual distinction between repugnance and occupied field – or between the existence of legislative power and its exercise – is at the heart of the Constitution’s distribution of legislative powers. To hold that a mechanism intended to solve conflicts arising out of the latter is in fact applicable because the field is occupied is, it is respectfully submitted, unfortunate.

The second reason the Court gives is an illustration of why it may be dangerous to use the expression “occupied field” – in the law of other countries, notably America, it is possible for the Federal legislature to oust the Provincial Legislature’s legislative competence by “evincing an intention” to enact a complete code. This is sometimes called “occupied field”. That conception of occupied field has no place at all in Indian constitutional law. This is clear not only as a matter of concept, but also from a number of Supreme Court authorities, particularly Tika Ramji.

The final point is that the Chief Justice rejected the State of Kerala’s reliance on paragraph 18 of Tika Ramji by relying on MA Tulloch, which had held that a mere declaration can denude the State Legislature of legislative competence. Once again, it is submitted with respect that the error is to confuse occupied field with repugnance – MA Tulloch held that occupied fieldunder Entry 54 only requires a declaration. It did not hold, and could not have held, that a mere declaration suffices for repugnanceunder art 254.

Since it is unlikely that the Supreme Court will revisit this issue, this judgment will fundamentally alter Indian constitutional law on the distribution of legislative power, with significant consequences for virtually every area of law in which Parliament or the States have legislated.

Singur Land Act Held to be Unconstitutional

Last year, the West Bengal legislature enacted the Singur Land Rehabilitation and Development Act, 2011 with a view to return land to the owners from whom it was previously acquired for purpose of establishing a manufacturing plant for Tata Motors. Since the project was stalled and subsequently relocated to another state, the issue pertains to the manner in which the land is to be dealt with.

The constitutional validity of the Singur Land Act was challenged by Tata Motors. Although it was upheld by a single judge of the Calcutta High court, it was found to be unconstitutional on appeal by a division bench, which pronounced its judgment last week.

The judgment, dated 22 June 2012, can be accessed through JUDIS – Tata Motors & Anr. v. The State of West Bengal & Ors. (Coram: Justice Pinaki Chandra Ghose & Justice Mrinal Kanti Chaudhuri).

While the primary issue relates to constitutional validity and legislative competence (essentially the repugnancy of the Singur Land Act with the central legislation being the Land Acquisition Act), it brings to the fore various legal (as well as political) issues involved in land acquisition for industrial development. The following are key extracts from the judgment of the division bench:

After analyzing the arguments and decisions cited on behalf of the State and the parties we come to the conclusion and hold that both the Acts i.e. L.A. Act and present Singur Act come within the same field i.e. within the Entry 42 of List III.

Applying the tests laid down by the Court the question is now whether the law enacted by the State Government i.e. Singur Land Rehabilitation & Development Act, 2011 and the Land Acquisition Act, 1894 can go together and whether the impugned Act is repugnant to Land Acquisition Act, 1894.

…

It appears to us that applying all these tests we have come to the conclusion that Singur Act speaks about acquisition. We have also compared the Act with that of the Land Acquisition Act and it appears to us that the Act has failed to come over the test laid down by the Supreme Court in several decisions. It appears to us that there is clear and direct inconsistency between the Land Acquisition Act and the Singur Land Rehabilitation and Development Act, 2011, and, in our considered opinion, such inconsistency is absolutely irreconcilable.

It further appears to us that the inconsistency is such between the provisions of the two Acts that it would be direct collision with each other and it is impossible to obey the one without disobeying the other. …

…

In these circumstances, we have to hold that the Singur Land Rehabilitation & Development Act, 2011 is held to be unconstitutional and void since it is without having assent from the President of India.

The court, however, stayed the operation of the judgment for two months to enable aggrieved parties to go on appeal.

Retailers Assoc. v. Union: Bombay High Court on Service Tax

In a previous post, I had briefly mentioned the judgment of a Division Bench (D.Y. Chandrachud and  A.V.Mohta, JJ.) the Bombay High Court, where the constitutional validity of service tax on renting of immovable property was upheld. The judgment (Retailers Association v. Union of India) is available on the Bombay High Court website (linked here). A perusal of the judgment shows that three separate challenges were urged before the Court:

(i) The essence of a “service tax” is the rendering of a service or of a value addition, and in the case of renting of immovable property, no service element is involved; consequently, the charge must fail

(ii) The impugned levy fell under Entry 49, List II, and was outside the legislative competence of Parliament

(iii)  In any case, levying the tax retrospectively from 1^st June 2007 was unconstitutional

After discussing the relevant Supreme Court decisions on the point, the High Court noted “the settled principle of law is that a tax on lands and buildings is a tax on the general ownership of lands and buildings. In order that a tax must fall under Entry 49 of List II, the tax must be one directly on lands and buildings. A tax which is levied on the income which is received from lands or buildings is not a tax on lands or buildings. A tax levied on an activity or service rendered on or in connection with lands and buildings does not fall within the description of a tax on lands and buildings.” The Court next examined the charging section, Section 66 of the Finance Act, 1994. It noted that the charge was on “taxable services”. Looking at the character of the impugned levy, it was held “The charge of tax is on a taxable service. The measure of tax is the gross amount charged by the service provider. The charge of tax is not on lands or buildings as a unit nor is the tax on lands or buildings. To be a tax on lands and buildings under Entry 49 of List II, the tax must be directly a tax on lands and buildings. That is not the true character of an impost on taxable services.” The measure of the tax may be the rental income; that does not mean that the nature of the tax is itself a tax on land.

Next, turning to the argument that there is no “service” involved in mere renting, the Court held that when Parliament legislates on a matter, it is open to Parliament to make assessments of fact on the basis of which a legislation can be drafted. Importantly – and perhaps, in a comment of wider constitutional significance – the Court held, “An underlying assessment of fact by Parliament on the basis of which a law has been enacted cannot be amenable to judicial review absent a case of manifest arbitrariness.” Apart from this, the Court noted that it is open to Parliament to enact deeming fictions as well. The only limitation on the exercise of the power is that the Legislature cannot by deeming fiction “transgress upon a constitutional restriction or a field of legislation that is reserved to another legislature.” Considering in this case that there was no transgression into List II, there was no question of there being any limitation on the power of Parliament to treat renting as a service. The Court explained, “Once the Court comes to the conclusion that the law is not a law with respect to the legislative entry of taxes on land and buildings, the field of the legislation would necessarily fall within List I and more particularly, the residuary entry of List I. The levy of tax on a taxable service provided or to be provided to any person, by any other person, by the renting of immovable property is based on a considered determination by Parliament that such transactions do in fact involve an element of service. The fact that the service which is provided may not, to the Petitioners, accord with what is commonly regarded as a service would not militate against the validity of the legislation.”

Insofar as the challenge on the basis of retrospectivity is concerned, the Court noted the legislative history, by which it could fairly be said that the retrospective amendment was curative / validating, and intended to bring out the true intent of Parliament in enacting the Finance Act 2007. The amendment was intended to remove the basis of Delhi high Court’s the ruling in Home Retail, and was a permissible exercise of legislative power. (The test for judging the validity of such laws has been laid down by the Supreme Court in several cases – see this post, for a brief discussion. When compared to some other exercises of retrospective taxation, the impugned amendment in this case is quite benign!) 

The judgment of the Bombay High Court contains a careful analysis of the law in relation to all the three contentions; and the decision rests on a strong principled basis. The issue is pending in the Supreme Court in Home Retail, but it seems unlikely on the basis of the law as it currently stands that the Supreme Curt will take a different view.

Developments in Taxation: Constitutionality of Service Tax; and Tax Planning through the "Mauritius Route"

The Bombay High Court has, in the past few weeks, decided two important issues: one pertaining to direct taxation, and the other to indirect.

A Division Bench headed by Justice D.Y. Chandrachud has upheld the constitutional validity of service tax on renting of immovable property, as reported by Legally India. The arguments raised by the Petitioners were primarily that a “service” tax on renting of immovable property was in substance a tax on land and building, and was within the competence of the State Legislature under Entry 49, List II. The Union of India, on the other hand, contended that a tax on land and building (Entry 49, List II) was different from a tax on income arising from land and building, and on services pertaining to land and building. It was further contended that as long as there was no transgression into List II, it was open for Parliament to artificially define a taxable “service”.

Insofar as this challenge is concerned, the issue really turns on the scope of Entry 49. In Assistant Commissioner of Urban Land Tax v. Buckingham & Carnatic Co., [1970] 1 SCR 268, it was held that to fall under Entry 49, List II, two tests must be satisfied. First, the tax must be directly imposed on land/buildings. Secondly, the tax must bear a definite relation to the land and buildings. In the case of tax on renting of immovable property, the tax may be one bearing a definite relationship to land/buildings, but is the tax really imposed directly on land and buildings? Further, in State of West Bengal v. Kesoram Industries, (2004) 10 SCC 201, the Supreme Court also clarified the earlier decision in India Cements v. State of Tamil Nadu, and in this context observed, “There is a clear distinction between 'tax directly on land' and 'tax on income arising from land'.” A tax on renting of immovable property would perhaps be closer to the latter, and not the former.

On the direct tax front, a bench headed by Justice J.P. Devadhar had cast doubts on the efficacy of the “Mauritius route” in tax planning, in Aditya Birla Nuvo v. Union of India. The Court appears to have read down the judgment of the Supreme Court in Azadi Bachao Andolan. The facts are summarized by ITAT Online thus:

“Idea Cellular Ltd, an Indian company, was set up as a joint venture company pursuant to a JV agreement between AT&T Corp, USA, and the Birla Group. As provided by the agreement 49% of Idea Cellular’s equity was allotted to AT&T Mauritius, being 100% subsidiary & “permitted transferee” of AT&T, USA. Though the shares were allotted to AT&T Mauritius, all rights of voting, management, right to sell etc were vested in AT&T USA (subsequently known as “New Cingular Wireless Services Inc, USA” (“NCWS”). Subsequently, Tata Industries was inducted as a joint venture partner in Idea Cellular. Thereafter, 50% of the shares of Idea Cellular held by AT&T Mauritius were sold by AT&T Mauritius to Aditya Birla Nuvo (nominee of the Birla group) and 100% of the shares of AT&T Mauritius (which held the balance 50% of the shares of Idea Cellular) were sold by NCWS to Tata Industries. Aditya Birla Nuvo obtained a NOC u/s 195(2) permitting it to remit the sale consideration to AT&T Mauritius without TDS. The Court had to consider the validity of three proceedings initiated by the AO (i) Order u/s 163 treating Aditya Birla Nuvo as agent of NCWS USA on the ground that though the transferor was AT&T Mauritius, the gains from sale of the Idea Cellular shares was taxable in the hands of NCWS USA, (ii) Order u/s 163 treating Tata Industries as agent of NCWS USA on the ground that though the shares of AT&T Mauritius were purchased, effectively the underlying shares of Idea Cellular were purchased and (iii) Notice u/s 148 asking NCWS to file a return in respect of the gains arising from (indirect) transfer of the Idea Cellular shares…”

The essential question, in the words of the Court, was “whether the ICL shares were owned by AT&T Mauritius or by NCWS (USA).” The Revenue contended that the shares were owned by NCWS (USA), and not by the Mauritius company. It was contended by the assessee that the shares were owned by the Mauritius company, and an enquiry as to the “real” ownership would amount to lifting the corporate veil over a company which had a tax residency certificate in Mauritius. This (the assessee argued) was not permissible in view of the Supreme Court decision in Azadi Bachao Andolan.

The Court distinguished Azadi, by holding that in Azadi, the ownership of shares itself was not in issue. In the present case (the Court reasoned), “It is AT&T USA which has subscribed to and owned 49% equity shares (later on reduced to 32.91%) of the JVC under the JVA. It is at the instance of AT&T USA the shares subscribed were issued in the name of its 100% subsidiary as a permitted transferee. It is AT&T USA as a shareholder of the JVC, entered into a Shareholders Agreement wherein the shareholding was reduced with the induction of the Tata Group.  It is AT&T USA which has agreed with the other joint venture partner that irrespective of issuance of the shares in the name of a permitted transferee, all rights relating to those shares including the right to sell the shares shall vest in AT&T USA. Therefore, in the facts of the present case, where the investments are made by AT&T USA and not by AT&T Mauritius, the ratio laid down by the Apex court in the case of Azadi Bachao Andolan (supra) would not apply…” Casting doubts on the effectiveness of structuring investments through “permitted transferees”, the Court held “Once it is prima facie established that the investments in the shares of the JVC were made by AT&T USA and the allotment of shares in the name of AT&T Mauritius was as a permitted transferee of AT&T USA, then the fact that AT&T Mauritius held a Tax Residence Certificate issued by the Republic of Mauritius and that certificate was valid on the date of sale of ICL shares would become wholly irrelevant. Since the shares of the JVC were subscribed and owned by AT&T USA as a joint venture partner and AT&T USA had agreed to sell the shares of ICL along with AT&T Mauritius to Indian Rayon by a Sale and Purchase Agreement dated 28th September 2005, the amount of sale consideration received by AT&T USA through AT&T Mauritius would be taxable in the hands of the AT&T USA (now represented by NCWS).”

UDF at Mumbai and Delhi airports

A Division Bench of the Supreme Court today declared that the User Development Fee [“UDF”] charged by the private operators of the Mumbai and Delhi airports is ultra vires. The judgment, reported as Consumer Online Foundation v Union of India, contains several observations that are crucial in ascertaining the proper scope of the public-private model [“PP”] in the aviation sector. This post set out two entirely distinct issues the Court considered, one of which is likely to prove important in subsequent disputes.

The structure of aviation regulation in India is found in the Airports Authority of India Act, 1994 [“AAI Act”]¸ which created the AAI, and provides in s. 12 that it is to exercise a variety of functions, such as planning runways, air safety services, facilities at airports etc. When the Government decided to adopt the PP Model in developing the Bombay and Delhi airports, two amendments were made to the AII Act. In 2003, s. 12A was added to provide that the AAI may “in the public interest or interest of better management of airports” make a lease of the premises of an airport and assign to the lessee some of its functions under s. 12. S. 22A was also added, and provided in gist that the AAI could, with the approval of the Central Government, levy development fees. This provision was amended in 2008 when the Airports Economic Regulatory Authority Act, 2008 [“AERA Act”] was enacted, to provide that AREA would determine the rates of the UDF. In 2006, the AAI, acting under s. 12, leased out the Delhi and Bombay airports to DIAL and MIAL respectively. On 9 February, 2009, the Government of India conveyed its approval of UDF rates to DIAL and MIAL, and UDF has been levied ever since. The Delhi High Court rejected a challenge to the legality of the levy.

The dispute before the Supreme Court turned on a close analysis of statutory language, which it is necessary to set out before the issues can be described. The relevant provisions are s. 12A(4) and s. 22A. Both versions of s. 22A are set out, for the minor differences in language potentially produce a different construction altogether.

12A. Lease by the authority.--(1) Notwithstanding anything contained in this Act, the Authority may, in the public interest or in the interest of better management of airports, make a lease of the premises of an airport (including buildings and structures thereon and appertaining thereto) to carry out some of its functions under section 12 as the Authority may deem fit:

Provided that such lease shall not affect the functions of the Authority under section 12 which relates to air traffic service or watch and ward at airports and civil enclaves

…

(4) The lessee, who has been assigned any function of the Authority under sub-section (1), shall have all the powers of the Authority necessary for the performance of such function in terms of the lease.

S. 22A before 2008 amendment

S. 22A as amended in 2008

22A. Power of Authority to levy development fees at airports. -- The Authority may, after the previous approval of the Central Government in this behalf, levy on, and collect from, the embarking passengers at an airport, the development fees at the rate as may be prescribed and such fees shall be credited to the Authority and shall be regulated and utilized in the prescribed manner, for the purposes of- (a) funding or financing the costs of upgradation, expansion or development of the airport at which the fees is collected; or (b) establishment or development of a new airport in lieu of the airport referred to in clause (a); or (c) investment in the equity in respect of shares to be subscribed by the Authority in companies engaged in establishing, owning, developing, operating or maintaining a private airport in lieu of the…

22A. Power of Authority to levy development fees at airports.-- The Authority may,-- (i) after the previous approval of the Central Government in this behalf, levy on, and collect from, the embarking passengers at an airport other than the major airports referred to in clause (h) of section 2 of the Airports Economic Regulatory Authority of India Act, 3 2008 the development fees at the rate as may be prescribed; (ii) levy on, and collect from, the embarking passengers at major airports referred to in clause (h) of section 2 of the Airports Economic Regulatory Authority of India Act, 2008 the development fees at the rate as may be determined under clause (b) of sub-section (1) of Section 13 of the Airports Economic Regulatory Authority of India Act, 2008, and such fees shall be credited to the Authority and shall be regulated and utilized in the prescribed manner, for the purposes of-- …

Two issues arose – first, is a private operator, as a matter of law competent under s. 12A(4) to levy UDF and secondly, in any event, can UDF be levied before rates are prescribed by the competent authority. It is convenient to begin with the second issue. The Court held that the levy of UDF is not consideration for services provided, but a “compulsory exaction of money by the Government” with the result that the requirements of Art. 265 had to be complied with. A powerful reason the Court gave for this conclusion is s. 22 of the AAI Act, which provides that the AAI may collect “charges and rent” from inter alia passengers for facilities offered to them. The Court said that the power in s. 22A to levy UDF is over and above the charges and rent, indicating that it was not intended to be levied for consideration, but was “really in the nature of a cess or tax for generating revenue for the specific purposes mentioned in … s. 22A”. It is for this reason, the Court held, that Parliament had to enact legislation specifically authorising the AAI to levy UDF, and therefore UDF could not be levied except strictly in accordance with the condition laid down in s. 22A. S. 22A, as the extract above indicates, requires that UDF must be levied “at such rates as may be determined” by AERA. The Court found that a letter by the Ministry of Civil Aviation giving approval to DIAL and MIAL is therefore insufficient, and that the levy was ultra vires because it preceded the determination of the rate by AREA. It distinguished judgments cited by MIAL and DIAL holding that while the existence of a power is not affected by the failure to make rules, that conclusion is displaced when the statute makes it a precondition for the exercise of the power, and that taxing statutes must be construed strictly. Since AERA had subsequently determined rates for the Delhi airport, DIAL has been permitted to continue to levy UDF but has been directed to place its collections prior to the determination with AAI.

The first issue – whether private operators are competent to levy the fee - is considerably more difficult. The Supreme Court’s reasoning on this aspect of the case rests crucially on its finding that UDF must not only be utilised for the purposes indicated in s. 22A above, but may not be levied or collected for any other purpose. It is convenient to refer to the three purposes in s. 22A as Purpose A, B and C. The Union of India’s case was that s. 12A(4) provides that the lessee is entitled to exercise “all” the powers of the AAI necessary to discharge the functions assigned to it, of which management, upgradation and modernisation were part. Since AAI had the power to levy UDF under s. 22A, it was said to follow that the private operators have it too. The Supreme Court rejected this contention on the basis that while the AAI may use the UDF collected for any of the purposes in s. 22A, it can assign only the power to collect UDF for Purpose A above to the private operators. The Court held that Purpose B (establishing a new airport in lieu of the existing airport) and Purpose C (investment…) cannot be assigned to the operators because:

… the function of establishment and development of a new airport in lieu of an existing airport and the function of establishing a private airport are exclusive functions of the Airports Authority under the 2004 Act, and these statutory functions cannot be assigned by the Airports Authority under lease to a lessee under Section 12A of the Act, the lease agreements, namely, the OMDA and the State Support agreement could not make a provision conferring the right on the lessee to levy and collect development fees for the purpose of discharging these statutory functions of the Airports Authority

While the Court’s construction of s. 22A is certainly a plausible one, it is submitted, with respect, that it is not clear that the “purposes” enumerated in s. 22A qualify levy and collection as well as utilisation. Although a comma precedes the words “for the purpose of” which may therefore be taken to qualify both utilisation and collection, it is significant that those words follow the expression “such fees shall be credited to…and utilised in the prescribed manner…” It is possible that the legislature only intended to provide that UDF, collected with the approval of the Centre and at the rates determined, shall be regulated and utilised for the enumerated purposes. Not adopting this construction leads to the curious result that the lessee who operates the airport is not empowered to collect UDF even on behalf of the AAI to be held for those purposes. Moreover, a comparison of s. 22A prior to 2008 with the present version reinforces the impression that the purposes only govern utilisation.

More significantly, it is difficult, with respect, to completely reconcile the Court’s conclusion on the two issues. If, as it held on the first issue, private operators have no power whatsoever to levy UDF since Purposes B and Purpose C cannot be assigned to them, the fact that AERA determined rates cannot change the result. The Court appears to reconcile the two conclusions by suggesting that the UDF now levied by DIAL is traceable not to s. 12(4) but has been “assigned” to it by the AAI under s. 22A - and that it is generally confined to Purpose A. Yet, the language of ss. 12 and 22 indicate, with respect, that the AAI can only assign a “function” it is required to discharge under s. 12, and that any power the private operator needs to discharge it will have to be traced to s. 12(4).

Some of these uncertainties may be addressed when AERA makes a rate determination for MIAL. Reports on the case are available here and here.

Territorial Nexus Revisited: GVK Industries v. Union of India

We have previously discussed issues surrounding the application of the “territorial nexus” doctrine to income tax law in several posts (here, here, here and here). In its recent decision in GVK Industries v. Union of India, a Constitution Bench of the Supreme Court has confirmed that the doctrine applies to Parliamentary laws. The precise question of the constitutionality of Section 9(1)(vii) of the Income Tax Act, 1961 was not answered by the Constitution bench.

In GVK, the following questions were referred to the Constitution bench:

(1) Is the Parliament constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on, or effect(s) in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians?

(2) Does the Parliament have the powers to legislate "for" any territory, other than the territory of India or any part of it?

The Court explained the constitutional scheme by holding, “The grant of the power to legislate, to the Parliament, in Clause (1) of Article 245 comes with a limitation that arises out of the very purpose for which it has been constituted. That purpose is to continuously, and forever be acting in the interests of the people of India. It is a primordial condition and limitation… Clause (2) of Article 245 carves out a specific exception that a law made by Parliament, pursuant to Clause (1) of Article 245, for the whole or any part of the territory of India may not be invalidated on the ground that such a law may need to be operated extraterritorially. Nothing more.” It was specifically held that any laws enacted by Parliament with respect to “extra- territorial aspects or causes” which have “no impact on or nexus with India” would be ultra vires Article 245 of the Constitution of India.

In a few Tribunal decisions such as Ashapura Minichem (discussed here and here), there were remarks that the doctrine of territorial nexus may not necessarily be relevant in tax laws (“It is thus fallacious to proceed on the basis that territorial nexus to a tax jurisdiction being sine qua non to taxability in a jurisdiction is a normal international practice in all systems. This school of thought is now specifically supported by the retrospective amendment to section 9”). GVK impliedly confirms that those observations must be read in their context. The issue of whether in particular Section 9(1)(vii) especially after the recent amendments satisfies the nexus requirements, is still unanswered. As Ashapur Minichem held, the “render + utilize” formula of Ishikawajima and Clifford Chance is now statutorily overridden by the Finance Act, 2010. Perhaps, Courts may now again insist on a factual “live link” to be established before the provisions of S. 9(1)(vii) can be invoked.

A Level Playing Field and Public Interest

One of the striking features of the Indian economy post-1991 is the conception it has of a level playing field as between Government and private enterprises. It should be noted that this cuts both ways, for while there are commercial advantages for certain Government entities, others are required as part of Government policy to bear losses that a private enterprise in that position would choose not to bear. While the law governing this relationship has not been fully tested, the Delhi High Court last week had occasion to consider it in the context of a dispute in the aviation sector. The judgment of the First Bench in Federation of Indian Airlines v Union of India is available here.

The case arose out of set of circulars issued by the Director-General of Civil Aviation that, in gist, purported to require that “ground-handling” services in the six major airports in the country be handled exclusively by the airport operator, or by subsidiaries or joint venture partners of the national carrier (National Aviation Co. Ltd.). In other words, it prohibited private airlines from undertaking ground-handling services, and the object was said to be the protection of national security in light of the heightened risk of terrorist activity. There is no doubt that these services are an integral part of the airline business, not only because of their significant impact on consumer satisfaction, but also because of the enhancement of an airline's ability to secure its equipment. The Federation’s case therefore was that this circular was ultra vires inter alia s. 5A of the Aircraft Act, 1934, and ex facie unconstitutional, because it conferred an unfair advantage on airport operators (AAI or an AAI JV partner) and on the national airline.

The first of these issues raised a point of statutory construction that is likely to prove influential. It is necessary to reproduce s. 5A in its entirety:

5A. Power to issue directions. - (1) The Director- General of Civil Aviation or any other officer specially empowered in this behalf by the Central Government may, from time to time, by order, issue directions, consistent with the provisions of this Act and the rules made thereunder, with respect to any of the matters specified in [clauses (aa), (b), (c), (e), (f), (g), (ga), (gb), (gc)], (h), (i), (m) and (qq) of sub-section (2) of section 5, to any person or persons using any aerodrome or engaged in the aircraft operations, air traffic control, maintenance and operation of aerodrome, communication, navigation, surveillance and air traffic management facilities and safeguarding civil aviation against acts of unlawful interference], in any case where the Director-General of Civil Aviation or such other officer is satisfied that in the interests of the security of India or for securing the safety of aircraft operations it is necessary so to do [emphasis added].

For convenient analysis, it may be noted that s. 5A for the purpose of this controversy consists of three distinct parts – first, that the DGCA (or authorised officer) may issue directions “consistent with the provisions of this Act…”; secondly, those directions may be issued “with respect to any of the matters specified in…” and finally, “in any case where the DGCA… is satisfied that in the interests of security...”. The first impression one has of this provision is that the three conditions are cumulative, and not alternative. It is also difficult to take the view that the expression "with respect to any of the matters..." qualifies "consistent with the provisions..." because that construction denudes one or the other of meaning. Thus, the Federation argued that the DGCA circular is ultra vires s. 5A because it did not fulfill the second condition, as it was not shown that the circular was traceable to one of the provisions specified in s. 5A. The Delhi High Court rejected this contention, after referring to the uncontroversial principle that a provision in a statute must be construed “contextually”. The Court found two elements in the context that were said to militate against the view that every direction under s. 5A must arise out of one of the enumerated provisions. First, their Lordships held that the words “in any case” used in the opening part of the third condition are an indication that the provision is to be construed widely – to wit, “in all cases” where the security of India is involved, regardless of the applicability of one of the specific provisions enumerated. Secondly, their Lordships referred to s. 4A of the Act, which provides that the DGCA shall perform “safety oversight”.

With respect, it is submitted that this analysis of s. 5A, and in particular, of the expression “in any case”, may require reconsideration. To substantiate the proposition that “in any case” must be construed widely, the Delhi High Court cited the judgment in Lalu Prasad Yadav v State of Bihar, where the Supreme Court did indeed observe that “in any case” means “in all cases”. However, it is important to notice that the Supreme Court was dealing with the meaning of “in any case” in s. 378 of the Code of Criminal Procedure, 1973, which provides inter alia that the State Government may, “in any case”, direct the Public Prosecutor to present an appeal against acquittal. It is difficult to imagine that the legislature intended a similarly wide meaning to attach to the expression in s. 5A of the Aircraft Act, especially because the specific provisions enumerated in the second condition are not exhaustive - indicating that the power was consciously confined to a set of carefully defined circumstances. That impression is strengthened by the fact that s. 5 provides that the Central Government (not the DGCA) may make rules in general regulating the possession, use etc of aircraft. It is therefore submitted, with respect, that while “in any case” often means “in all cases”, that conclusion depends ultimately on whether the legislature purposefully confined what appears to be a general provision or did so merely by way of abundant caution. Similarly, s. 4A does not seem to be of assistance, since the "safety oversight" in question is "in respect of matters specified in this Act."

The second point - on constitutionality - is similarly likely to be of general importance. The Court repelled a challenge to the vires of the circular on the grounds of Art. 14 and 19(1)(g), holding essentially that the court will be slow to interfere with matters of policy, and will not substitute its view of what is desirable policy for that of the Government. That is especially so when the ground of restriction is national security, as it was in this case. The following observations are apposite:

The factum of security cannot be gone into by court of law and more so when specific aspects have been dwelled upon and delved into by the Bureau of Civil Aviation Security. The security of a country is paramount. It is in the interest of the nation. There is no question of any kind of competition between the commercial interest and the security spectrum. The plea that in the name of security the commercial interest of the petitioners is infringed or abridged does not merit consideration and in any case this Court cannot sit in appeal over the same

Interestingly, the Court also rejected a legitimate expectation challenge, holding that legitimate expectation is itself subject to a change of policy that is reviewable only on Wednesbury principles.