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Intermediary Guidelines and Digital Media Ethics Code: Shifting Paradigm of Social & Digital Media Platforms

It has been just over six months since the IT (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (the “Rules“) have been notified. However, these six months have been nothing short of a roller coaster ride for the (Internet) Intermediaries and Digital Media platforms, especially Social Media platforms who have tried to muddle through the slew of compliance obligations now imposed through these eccentric Rules. Notwithstanding, some of them had to face the wrath of the Government and even Courts for the delay in adherence.

On this topic, we are trying to stitch together a series of articles covering the entire gamut of the Rules, including their objective, applicability, impact, and the key issues around some of the rules being declared unconstitutional, etc.

In our first article, we analyse the timeline, objectives, and applicability of these Rules through some of the definitions provided under the Rules and the IT Act.

Tracing the Roots of the Digital Media Ethics Code 

The initiation of this endeavour can be tracked down to July 26, 2018, when a Calling Attention Motion was introduced in the Rajya Sabha on the misuse of social media and spread of fake news, whereby the Minister of Electronics and Information Technology conveyed the Government’s intent to strengthen the existing legal framework and make social media platforms accountable under the law. Thereafter, the first draft of the proposed amendments to the Intermediary Guidelines, The Information Technology (Intermediary Guidelines (Amendment) Rules) 2018, was published for public comments on December 24, 2018.

In the same year, the Supreme Court in Prajwala v. Union of India[1] directed the Union Government to form necessary guidelines or Statement of Procedures (SOPs) to curb child pornography online. An ad-hoc committee of the Rajya Sabha studied the issue of pornography on social media and its effects on children and the society and laid its report recommending the facilitation of identification of the first originator of such contents in February 2020.

In another matter, the Supreme Court of India on October 15 2020, issued a notice to the Union Government seeking its response on a PIL to regulate OTT Platforms. The Union Government subsequently on November 9 2020, made a notification bringing digital and online media under the ambit of the Ministry of Information and Broadcasting, thereby giving the Ministry the power to regulate OTT Platforms.

On February 25, 2021, the Union Government notified the much-anticipated Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021, bringing various digital entities under its purview and imposing new compliances to regulate them.

 

Objectives of the Digital Media Ethics Code

The rising internet and social media penetration in India raises concerns of transparency, disinformation and misuse of such technologies. The Rules address these concerns and bring accountability to social and digital media platforms by mandating the setting up of a grievance redressal mechanism that adheres to statutory timeframes. The Rules also address the legal lacuna surrounding the regulation of OTT platforms and the content available on them and introduces a three-tier content regulation mechanism.

Key definitions and the applicability of the Digital Media Ethics Code

The Rules add on extensively to the 2011 Intermediary Guidelines and also introduce new terms and definitions. To understand the Rules and the compliances thereunder in a holistic manner, it becomes imperative to learn the key terms and definitions. This also addresses concerns of applicability of the Rules to different entities, as they prescribe different sets of compliances to different categories of entities.

Key definitions:

Digital Media as per Rule 2(1)(i) are digitised content that can be transmitted over the internet or computer networks, including content received, stored, transmitted, edited or processed by

  • an intermediary; or
  • a publisher of news and current affairs content or a publisher of online curated content.

This broadly includes every content available online and every content that can be transmitted over the internet.

Grievance as per Rule 2(1)(j) includes any complaint, whether regarding any content, any duties of an intermediary or publisher under the Act, or other matters pertaining to the computer resource of an intermediary or publisher as the case may be.

Intermediary has not been defined in the Rules, but as per S. 2(1)(w) of the IT Act, intermediary, with respect to any particular electronic record, is any person who on behalf of another person receives, stores or transmits that record or provides any service with respect to that record and includes telecom service providers, network service providers, internet service providers, web-hosting service providers, search engines, online payment sites, online-auction sites, online-market places and cyber cafes.

The first part of the definition lays down that an Intermediary with respect to an electronic record, is any person that receives, stores or transmits that electronic record on behalf of another person.

An entity becomes an intermediary for a particular electronic record if that record is received by, stored in or transmitted through the entity on behalf of a third party. However, as the clause does not use the term “collect” with respect to an electronic record, any data that entities may collect, including IP Addresses, device information, etc., do not fall within the definition’s purview. Hence the entities would not be considered as intermediaries for such data.

Moreover, the second part of the definition lays down that those entities that provide any service with respect to an electronic record would be intermediaries. However, what constitutes “service” has been a key point of discussion in prior cases. In Christian Louboutin Sas v. Nakul Bajaj[2], the Court not only held that the nature of the service offered by an entity would determine whether it falls under the ambit of the definition, but also went on to hold that when the involvement of an entity is more than that of merely an intermediary, i.e., it actively takes part in the use of such record, it might lose safe harbour protection under S. 79 of the Act.

The definition also includes telecom service providers, network service providers, internet service providers, web-hosting service providers, search engines, online payment sites, online-auction sites, online-market places, and cyber cafes as intermediaries. In Satish N v. State of Karnataka[3], it was held that taxi aggregators like Uber are also intermediaries with respect to the data they store. Therefore, Telecom Service Providers like Airtel, Vi, Jio, etc., Network Service Providers like Reliance Jio, BSNL, MTNL, etc., Internet Service Providers like ACT Fibernet, Hathaway, etc., Search Engines like Google, Bing, etc., Online Payment gateways like Razorpay, Billdesk etc., Online Auction Sites like eBay, eAuction India, etc., Online Market Places like Flipkart, Amazon etc. are all considered intermediaries.

Social Media Intermediaries as per Rule 2(1)(w) is an intermediary which primarily or solely enables online interaction between two or more users and allows them to create, upload, share, disseminate, modify or access information using its services. This includes platforms like Tumblr, Flickr, Diaspora, Ello, etc.

Significant Social Media Intermediaries as per Rule 2(1)(v) is a social media intermediary having number of registered users in India above such threshold as notified by the Central Government. Currently, the threshold is 5 million users. Platforms that fall under this category would be Facebook, Twitter, Instagram, YouTube, Snapchat, LinkedIn, WhatsApp, Telegram etc.

News & current affairs content as per Rule 2(1)(m) includes newly received or noteworthy content, including analysis, especially about recent events primarily of socio-political, economic or cultural nature, made available over the internet or computer networks, and any digital media shall be news and current affairs content where the context, substance, purpose, import and meaning of such information is in the nature of news and current affairs content. Therefore, news pieces reported by newspapers or news agencies, shared online, on social media, or on digital media platforms are news & current affairs content. This includes contents of such nature created by any person and shared through social media platforms like WhatsApp, Facebook, Twitter etc. Digital content discussing news and the latest happenings will also come under the purview of this definition.

Newspaper as per Rule 2(1)(n) as a periodical of loosely folded sheets usually printed on newsprint and brought out daily or at least once in a week, containing information on current events, public news or comments on public news. Newspapers like The Hindu, Times of India etc. will fall under this category.

News aggregator as per Rule 2(1)(o) is an entity performing a significant role in determining the news and current affairs content being made available, makes available to users a computer resource that enable such users to access such news and current affairs content which is aggregated, curated and presented by such entity. This includes platforms like Inshorts, Dailyhunt etc.

Online curated content as per Rule 2(1)(1) is any curated catalogue of audio-visual content, other than news and current affairs content, which is owned by, licensed to or contracted to be transmitted by a publisher of online curated content, and made available on demand, including but not limited through subscription, over the internet or computer networks, and includes films, audio visual programmes, documentaries, television programmes, serials, podcasts and other such content. This includes movies and shows available on OTT platforms like Netflix, Prime Video, Disney+Hotstar etc.

Publisher of News and Current Affairs Content as per Rule 2(1)(t) includes online paper, news portal, news aggregator, news agency and such other entities, which publishes news and current affairs. This would include websites/apps such as The Wire, The News Minute, Scroll.in, Dkoding.in, The Print, The Citizen, LiveLaw, Inshorts etc.

While the Rules do not include the regular newspapers or replica e-papers of these newspapers, as they come under the Press Council Act, news websites such as Hindustantimes.com, IndianExpress.com, thehindu.com are covered under the Rules, and the Union Government clarified the same on June 10, 2021. The clarification stated that websites of organisations having traditional newspapers and digital news portals/websites of traditional TV Organisations come under the ambit of the Rules.

This does not include news and current affairs reported or posted by laymen or ordinary citizens online, as the scope is limited only to news publishing agencies.

Publisher of Online Curated Content as per Rule 2(1)(u) is a publisher who performs a significant role in determining the online curated content being made available and enables users’ access to such content via internet or computer networks. Such transmission of online currented content shall be in the course of systematic business or commercial activity. This includes all OTT platforms, including Netflix, Prime Video, Voot, Lionsgate, Disney+Hotstar, etc.

The Digital Media Ethics Code Challenged in Court

Part III of the IT Rules has been challenged by many persons in various High Courts. News platforms including The Wire, The Quint, and AltNews moved to the Delhi High Court, alleging that online news platforms do not fall under the purview of Section 87 of the IT Act, under which these Rules are made as the section is only applicable to intermediaries. Section 69A is also limited to intermediaries and government agencies. It is alleged that since such publishers are not intermediaries, they do not fall under the purview of the IT Rules.

A similar petition was moved by LiveLaw, a legal news reporting website before the Kerala High Court, alleging that the Rules violated Articles 13, 14, 19(1)(a), 19(1)(g), and 21 of the Constitution and the IT Act.[4] The petitioners contended that the Rules had brought Digital News Media under the purview of the Press Council of India Act and the Cable Television Networks (Regulation) Act, 1995, without amending either of the two legislations. They also alleged that the rules were undoing the procedural safeguards formed by the Supreme Court in the Shreya Singhal[5] case. In this regard, the Kerala High Court has ordered that no coercive action is to be taken against the petitioner as interim relief.

Recently, the Bombay High Court in Agij Promotion of Nineteenonea v. Union of India[6] delivered an interim order staying Rules 9(1) and 9(3), which provides for publishers’ compliance with the Code of Ethics, and the three tier self-regulation system respectively. The Court found Rule 9(1) prima facie an intrusion of Art. 19(1)(a).

Legality & Enforceability of the Digital Media Ethics Code

Even though six months have passed since the Rules came into force, the legality and enforceability of the Rules are still in question. While most intermediaries, including social media and significant social media intermediaries, have at least partly complied with the Rules, the same cannot be said for publishers of news and current affairs content and online curated content. This will have to wait until the challenges to its legality and constitutionality are settled by Courts.

References:

[1] 2018 SCC OnLine SC 3419.

[2] 2018 (76) PTC 508 (Del).

[3] ILR 2017 KARNATAKA 735.

[4] https://www.livelaw.in/top-stories/kerala-high-court-new-it-rules-orders-no-coercive-action-issues-notice-on-livelaws-plea-170983

[5] (2013) 12 SCC 73.

[6] Agij Promotion of Nineteenonea v. Union of India, WRIT PETITION (L.) NO.14172 of 2021.

Image Credits: 

Photo by Jeremy Bezanger on Unsplash

 

Even though six months have passed since the Rules came into force, the legality and enforceability of the Rules are still in question. While most intermediaries, including social media and significant social media intermediaries, have at least partly complied with the Rules, the same cannot be said for publishers of news and current affairs content and online curated content. This will have to wait until the challenges to its legality and constitutionality are settled by Courts.

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Small Entity Status- Can Foreign Companies Claim It?

The government of India has been aggressively pushing for the development and promotion of entrepreneurship in the country. In the Intellectual Property Domain, various concessions have been made for small and upcoming entities. Organizations claiming a ”small entity” status or a “start-up” status while applying for registration are entitled to some additional benefits pertaining to fees and filing requirements.  Here, we briefly look upon the small entity status as per the Indian patent and design rules. 

Intellectual Property Related Government Initiatives to Encourage Small Entities & Startups

In 2020, the Scheme for Facilitating Start-ups Intellectual Property Protection, was launched as an experimental initiative to encourage start-ups to develop and protect their intellectual property, which was extended for a period of three years (April 1, 2020 – March 31, 2023).

Further, the Patent (Amendment) Rules, 2020[1] were notified on October 19, 2020 to simplify the procedure of submitting priority applications and their translations and filing of working statements under form 27. These changes were introduced in consequence to the Delhi High Court’s order in the case of Shamnd Bashir v UOI[2], that resulted in a stakeholder’s consultation.

On November 4, 2020 the Ministry of commerce and Industry[3], notified Patents (2nd Amendment) Rules, 2020[4], making additional filing and prosecution concessions for start-ups and small entities.  The status of start-ups was discussed critically, extending their life for up to ten years. These amendments are set to make protection of intellectual property affordable to every category and class of business. Finally, the government also notified Design Amendment Rules 2021,[5] which recognized start-ups as applicants. The current Locarno classification system[6] and simplified fee structure were introduced specifically to benefit small entities.

 

Categorization of ‘Entities’

 

1.1 Natural Person

Under the Indian Patent Act, natural person includes an individual human being. In this context, the patent application can be filed in the name of one or a group of individuals. Here, the inventorship and ownership lies solely with the inventor and he is entitled to:

  1. Sell
  2. Transfer
  3. License, or
  4. Commercialize their patent as per their want.

1.2 Small Entity

The Indian Patents Rule, 2003 under Rule 2(fa)[7] define ‘small entity’ as:

  • in case of an enterprise engaged in the manufacture or production of goods, an enterprise where the investment in plant and machinery does not exceed the limit specified for a medium enterprise under clause (a) of sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006); and
  • in case of an enterprise engaged in providing or rendering of services, an enterprise where the investment in equipment is not more than the limit specified for medium enterprises under clause (b) of sub-section (1) of Section 7 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006).

In calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other things as may be specified by notification under the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006), shall be excluded.

1.3 Start up:

A start-up is an entity recognized as a ‘startup’ by the competent authority under the Startup India initiative and fulfills all the criteria for the same.

A foreign entity shall fall under the category of start-up if it fulfills the criteria of turnover and specified period of incorporation/registration, and submission of a valid declaration to that effect as per the provisions of Start-up India initiative. (In calculating the turnover, reference rates of foreign currency of Reserve Bank of India shall prevail.)

As per the Notification of Department of Promotion of Industry and Internal Trade[8], an entity is considered a start-up  

  1. Up to a period of ten years from the date of incorporation/ registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
  1. Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded one hundred crore rupees.
  2. Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.

How to apply for Small Entity Status in India:

 

Any business can apply for the status of small entity under the MSME Development Act, 2006 at udyamregistration.gov.in. Subsequent to a successful registration the business shall be issued a Udyam registration certificate, that can be furnished as proof for availing various government subsidies and benefits. 

A foreign company can also register as an MSME on the same government portal. However, as a preceding step such a company shall register itself as per the provisions of the Companies Act, 2013[9].

Any Indian entity wishing to declare themselves as small entity for the purpose of Patent registration has to furnish the following documents:

  1. Form 28 of the Indian Patent Act:
  2. Proof of Registration Under MSME Act 2006 (Micro, small and medium enterprise development Act, 2006).
  3. Form 1 of the Indian Patent Act (if Fresh Patent Application is being filed).

Any Indian entity wishing to declare themselves as small entity for the purpose of Design registration:

  1. For an Indian entity to claim the status of small entity, it must be registered under the MSME Development Act, 2006.
  2. To file an application as a start-up, the entity should be recognized as startup by a competent authority under the Union government’s Start-up India Initiative.

 

Can a Foreign Company claim Small Entity Status in India?

On a plain interpretation of the requirements under the Patent rules and Design rules, it is clear that a foreign enterprise can claim the status of a small entity or a start-up, provided it is registered and incorporated in India and is engaged in the manufacture of goods and services as specified in the first schedule of the 2006 Act.[10]

Under the MSME Development Act, 2006 an enterprise is defined as:

enterprise” means an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (55 of 1951) or engaged in providing or rendering of any service or services;[11]

With an objective to incentivize the incorporation of OPC (One Person Companies), the Ministry of Corporate Affairs amended the Companies (Incorporation) Rules. The move empowers OPCs to grow without any restrictions on paid up capital and turnover, thereby facilitating their conversion into any other type of company at any time. Additionally, reducing the residency limit for an Indian citizen to set up an OPC from 182 days to 120 days and also allowing Non-Resident Indians (NRIs) to incorporate OPCs in India has paved the way for foreign entities to enter Indian markets[12] [13].

 

Application Process for Small Entity Status in India? (Foreign Company):

Patent Rules

A foreign applicant seeking the status of ‘small entity’ for the purpose of filing patent in India, has to submit duly filled Form 28[14], along with the requisite documents of proof.

As per the requirements of Form 28, a foreign applicant has to attach evidentiary documents that verify their status as ‘small entity’ for the want of Rule 2 (fa) of the Patent Rules, 2003. For this purpose, the said documents can include a certified copy of financial statement from a Chartered Accountant, that proves that the investment in plant and machinery and the annual turnover of the entity on the date of filing the application does not exceed the limitations specifications under the MSME Development Act, 2006.

Design Rules

For the purpose of recognitions as a start-up the foreign entity should satisfy the following criteria:

  1. The entity must be a private limited company, limited liability partnership, or partnership firm.
  2. Its turnover at any point during the course of its business (from inception) should not exceed INR 100 crores (approximately USD 13.7 million as on date)
  3. The entity would be considered a start-up only for a period of 10 years from the date of incorporation.
  4. An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Start-up”

For a foreign entity to claim the benefit of being a start-up, an affidavit (which under Indian practices would need to be notarized, although this has not been explicitly mentioned in the Amendment Rules) along with supporting documents must be submitted at the time of filing the application[15], to be submitted with Form 24[16] of the Designs Rules.

References:

[1] https://pib.gov.in/Pressreleaseshare.aspx?PRID=1668081

[2] writ petition No. WPC- 5590

https://www.scconline.com/blog/post/2020/10/28/patents-amendment-rules-2020-patentee-would-get-flexibility-to-file-a-single-form-27-in-respect-of-a-single-or-multiple-related-patents/

[3] https://ipindia.gov.in/writereaddata/Portal/Images/pdf/Patents__2nd_Amendment__Rules__2020.pdf

[4] https://ipindia.gov.in/writereaddata/Portal/Images/pdf/Patents__2nd_Amendment__Rules__2020.pdf

[5] https://www.foxmandal.in/wp-content/uploads/2021/08/Indian-Designs-Amendment-Rules-2021.pdf

[6] https://www.wipo.int/classifications/locarno/locpub/en/fr/

[7] https://ipindia.gov.in/writereaddata/Portal/IPORule/1_70_1_The_Patents_Rules_2003_-_Updated_till_1st_Dec_2017-_with_all_Forms.pdf

[8] https://dpncindia.com/blog/wp-content/uploads/2019/02/DIPP-Notification-dated-19-Feb-2019.pdf

[9] https://www.indiacode.nic.in/show-data?actid=AC_CEN_22_29_00008_201318_1517807327856&sectionId=185&sectionno=2&orderno=2

[10] https://www.startupindia.gov.in/content/sih/en/bloglist/blogs/How-a-foreign-national-from-China-can-start-and-register-company-in-India.html

[11] https://www.indiacode.nic.in/show-data?actid=AC_CEN_46_77_00002_200627_1517807324919&sectionId=9884&sectionno=2&orderno=2

[12] http://164.100.117.97/WriteReadData/userfiles/Notification%201.pdf

[13] http://164.100.117.97/WriteReadData/userfiles/Notification%202.pdf

[14] https://ipindia.gov.in/writereaddata/Portal/IPOFormUpload/1_40_1/form-28.pdf

[15] https://www.foxmandal.in/wp-content/uploads/2021/08/Indian-Designs-Amendment-Rules-2021.pdf

[16] https://www.ipindia.gov.in/writereaddata/Portal/IPOFormUpload/1_109_1/Form_24.pdf

Image Credits: Photo by Startup Stock Photos from Pexels

 

On a plain interpretation of the requirements under the Patent rules and Design rules, it is clear that a foreign enterprise can claim the status of a small entity or a start-up, provided it incorporates itself under the relevant schemes and statutes and is able to furnish documents for proof to the same effect

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Education in India: Time to Connect the Dots and Look at the Big Picture

In the last few days, I read news reports that are seemingly unrelated on the surface. However, I think there exists a deeper connection for those willing to think outside the box. I thought I would use this article to articulate my thoughts on the connections and their possible implications for India. 

India’s New Education Policy expected to gain traction

The first item was about various initiatives announced by the Union government on the first anniversary of India’s National Education Policy (NEP). While internationalization, multiple entry/exit options, and digital education will be key pillars, one other important component is to enable students to pursue first-year Engineering courses in Indian languages.

In the context of the broad-brush changes envisioned to India’s education system, it is time to rethink the role of the UGC as a body that enables the nation’s higher education system in ways beyond disbursing funds to be recognized universities. There also ought to be more harmony between the various Boards that govern school education. The roles of bodies responsible for governing professional education in India- e.g., AICTE, NMC (which replaced the MCI), ICAI, ICSI, ICWAI, Bar Council of India etc. should also be redefined to ensure that India’s professionals remain in tune with the needs of a fast-changing world.

English will play an important role in our continued growth

The second report that caught my attention was on two main points made by Mr. Narayana Murthy (the Founder of Infosys), in a recent media interaction. He stated that it is high time that English be formally acknowledged and designated as India’s official link language, and greater emphasis is given to its teaching and learning in Indian schools. He said that his opinion is based on his first-hand knowledge of many technically qualified students in Bangalore/Karnataka who lose out in the job market largely because they lack a certain expected level of proficiency in English.

In the same interview, Mr. Murthy went on to say that on a priority basis, India needs overseas universities and vocational educational institutions to set up facilities in India to train students and teachers in key areas like nursing. This too makes sense because our healthcare infrastructure needs massive upgrades- and human resources will be critical.

China’s tightening regulations threaten its US$100 Billion EdTechc industry

The third report was on China’s recent decision to tightly regulate its online tutoring companies. The new rules bar online tutoring ventures from going public or raising foreign capital. There are also restrictions on the number of hours for which tutors can teach during weekends and vacations. In fact, the rules go so far as to make online tutorial businesses “not for profit”.

Different views have been expressed on why Chinese authorities have taken this step. Some see it as a means to reduce the cost of children’s education- and thus encourage couples to have more children. They point to this as a logical enabler of the recent relaxations in China’s two-child policy. Others view it as a step designed to clip the wings of Chinese tech companies that are deeply entrenched in many consumer segments, and have, over the past decade, acquired significant financial muscle.

To put into perspective the size of Chinese EdTech companies, consider this data point: Byju’s, arguably India’s largest EdTech company, was valued at over US$16.5 Billion as of mid-June 2021. Despite this high valuation, Byju’s would have been smaller than the top 5 Chinese EdTech players (on the basis of valuations that existed before the recent draconian rules came into effect).

Implications for India

The majority of China’s EdTech ventures are financed through significant venture capital investments from the west. Analysts expect that China’s sudden actions will, at least in the short run, divert capital to other locations. India could be a potential beneficiary because it already fosters a large EdTech ecosystem.

Given our demographics, we have a significant domestic market for education across all levels- primary, secondary, and college. Since digital education will likely become the norm, this space is ripe for newfangled innovations in the days ahead. If online education can bridge the gaps that employers currently perceive in our fresh graduates, unemployability rates shall notably decline. . This will not only contribute directly to our GDP but also indirectly stimulate innovation and entrepreneurship.

India has a large technical skill base. Some of these resources can easily be harnessed to develop next-gen education solutions using cutting-edge technologies such as AI, ML, Language Processing, Augmented Reality, etc. To begin with, Indian start-ups can build, test, and scale EdTech platforms and solutions for our domestic market. Over time, these can be refined and repurposed for global markets. Similarly, features built for the global market can be adapted to Indian markets, thus creating a virtual cycle. Such a trend will not only proffer legs to implementing India’s NEP but will also enable us as a society to improve access to education to underprivileged sections of the society. This is critical to sustaining our growth on the path of socio-economic development.

By taking the right decisions now, we can attract capital, talent, and world-famous institutional brands to this critical sector. EdTech in India has the potential to become a powerful engine of growth for our services sector. Done right, I have no doubt that in a few years, India can become a “Vishwaguru” not just in the spiritual sense, but also literally.

PS: As with many other sectors in India, the legal framework that governs education too needs to be made more contemporary and relevant, but that’s for another time.

Image Credits: Photo by Nikhita S on Unsplash

By taking the right decisions now, we can attract capital, talent and world-famous institutional brands to this critical sector. EdTech in India has the potential to become a powerful engine of growth for our services sector. Done right, I have no doubt that in a few years, India can become a “Vishwaguru” not just in the spiritual sense, but also literally.

 

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Sports and Business: Long Term Thinking is Vital for Success in Both

India’s sportspersons have returned to India after a fantastic performance at the Tokyo Olympic Games. Neeraj Chopra’s javelin throw gave India its first ever gold medal in athletics (and second in an individual event). Weightlifter Mirabai Chanu and wrestler Ravi Dahiya won us two silver medals, while boxer Lovlina Borgohain, badminton player P V Sindhu, wrestler Bajrang Punia and the men’s hockey team won bronze medals. Our overall tally of 7 medals is the highest at any Olympics. Overall, a very creditable performance the nation should be proud of.

As a proud Indian, I too am hopeful that the exposure and “big stage” experience gained by our sportspersons in Tokyo, combined with better training, practice infrastructure and facilities will help India better its 2021 performance. However, I worry about the flurry of speculative discussions in the media about how many medals India will win at the 2024 Paris Olympic Games.

The media is full of expert analysis and recommendations on what the government and sports federations need to do to ensure a higher medal tally in 2024. Sportsperson I am not; nor am I a seer. Therefore, I do not know what individuals and teams need to sustainably enhance their performance and win medals for India in the future. But I do know that ad hoc actions will not suffice.

A structured, long-term approach is essential for sustaining success in sports and business

I see a clear parallel between the world of sports and the corporate world, with which I am more familiar. No matter how talented and skilled an individual athlete or player is, skills alone are not enough to win him/her a medal. They need the right coaching, top quality training facilities, regular opportunities to compete with the world’s best, the right nutrition, inputs on biomechanics, mental conditioning etc. Having all this also does not guarantee a medal-winning performance, because, on the day, anything can happen.

Similarly, individual brilliance or an innovative new idea or product alone will not guarantee success in business. India needs to strengthen its ecosystem for business, with a particular emphasis on startups and young ventures. Coaching and mentoring to give better shape to business ideas, access to risk capital, support during the early stages of the business, tax breaks, the right kinds of sector-specific laws and regulations that will help businesses become viable sooner are all elements of what our business ecosystem requires.

Just as world-class sports infrastructure cannot come up in every state or city in the next year or two, incubators cannot come up everywhere. Junior talent identification and nurturing programs too can take 8-10 years to produce top-class sportspeople who are ready to compete on the global stage. Even if physical infrastructure comes up, finding equally qualified coaches for all locations will not be easy.

Although we know that Artificial Intelligence, Cybersecurity, Clean Energy, Electric Vehicles etc. are all critical emerging areas, it is naïve to expect that overnight India will become a leader in these sectors. The same is true of our performance in sports as well. Countries prioritize participation in those sporting events that afford them their best chances of winning medals; India is no exception. This same thinking needs to be applied to business as well. The first step is to mindfully identify sectors that are critical to our future- for example, clean energy, healthcare, space, drones, defence equipment (aircraft carriers, submarines, 6th generation fighter aircraft, anti-missile systems), electronic chips etc.

Then, just as countries identify individuals with promise in the “priority sports”, the government of India (and the private sector) must identify/agree on ventures with the potential to become world-class and nurture them. Within the national business ecosystem, smaller regional ecosystems need to be created across the country, based on resource availability and other strategic considerations. Individual states must compete with each other to build such ecosystems and attract the best entrepreneurial talent. Doing all this will definitely give India a stronger and more vibrant domestic industry, besides acting as prime movers for overall socio-economic development, employment generation and GDP growth.

Spotting and nurturing young talent in various sports must be part of our education system

Also, our education system has focused on academics, with sports and other activities labeled as “extra-curricular”. This needs to change in two ways. First, right from the primary school level, children must be encouraged to participate in different sporting activities. Trained teachers and specialist staff must spot talent and at the right ages, enable specialized training. This obviously must be done with the parents’ active cooperation. Second, for super talented children who wish to pursue sports as a possible career option, specialized institutions must be set up (either by state/central governments or in PPP mode). Children in these institutions must be given extra coaching and training, while also being allowed to pursue a basic level of academics that will help them once their sporting careers end. Seasoned athletes must be invited to train at these facilities so that young aspirants can learn and benchmark against the country’s best. The National Education Policy 2020 seeks to make sports and physical fitness more central to school education, but the proof of the pudding lies in the eating. Only time will tell how seriously this is taken in a country that values grades and marks over excellence in a chosen field.

Concerted action is essential not just for a US$5 Trillion economy but also a richer medal haul in the future

Winning in sports is not easy- and neither is succeeding in business. If we are not quick to act, flight of entrepreneurial talent to other countries is a distinct possibility, and in time, our businesses (and athletes) may end up competing with rivals who also had their origins in India- and could perhaps have been part of our sports contingents and GDP. What is worse, we may be ranked as poorly on innovation in critical areas as we have been in world sports.

Just as countries identify individuals with promise in the “priority sports”, the government of India (and the private sector) must identify/agree on ventures with the potential to become world-class and nurture them. 

 

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Force Majeure: Evolution of Jurisprudence in India Post COVID-19

The extraordinary outbreak of the Covid19 pandemic has had staggering effects on the economy, health and commerce of about 110 nations across the globe. Even after almost a year, the situation is far from normal. In addition to the massive pressure on the health and medical segments, several other unprecedented factors played crucial part in the whole system, economy, commerce, or business. Given the present situation of disruption of supply chaindisruption of assured manpower, uncertainty of future planning, inadequacy of security as well as the forced restraints in free commercial activities, numerous commercial contracts have either been interrupted, delayed or cancelled. The present situation has thrown light on several important questions with respect to the jurisprudence of the force majeure clause in various commercial contracts or frustration of contracts 

 

Force Majeure Typically in Law

 

The term force majeure which seems to have been borrowed from the Code Napoleon had received interpretation in several decisions of the English Courts in earlier years. In Matsoukis v. Priestman and Co.[i] . Justice Bailhache opined that force majeure would include strikes and break-down of machinery but not bad weather, or football matches, or a funeral. In Lebeeaupin v. Crispin[ii] Justice McCardie had observed: “A force majeure clause should be construed in each case with a close attention to the words which precede or follow it, and with due regard to the nature and general terms of the contract. The effect of the clause may vary with each instrument.”

In the Indian context, the Supreme Court has considered, interpreted and decided the events of force majeure in various judicial precedents, inter-alia from Satyabrata Ghosh vs Mugneeram Bangur[iii] to Energy watchdog vs CERC[iv] The Court has maintained a strict yet flexible approach towards the concept of force majeure and frustration of contracts. In the case of Alopi Prashad and Sons vs. UOI[v] the Supreme court had observed that commercial hardship shall not be a just and reasonable ground to support frustration of contract and excuse performance.

As we find in the commercial world, contracting parties have generally been incorporating the force majeure clause in their contracts since ages, to absolve themselves of any liability arising out of events beyond their reasonable control. However, in this discussion we would focus the force majeure arising out of Covid-19 pandemic.

 

COVID 19 and Application of Force Majeure

 

There was a difference of opinions and questions were raised over the fact that some contracts though having a force majeure clause, do not stress on the word ‘pandemic’, ‘epidemic’, ‘disease’ etc. , while majority of the contracting parties rely on the general phrase ‘any other unforeseeable event, not under the control of either of the parties.’

 
Executive Interpretation:
 

Alike the private sector, the Government contracts and the Public Sector transactions also started suffering on account of the pandemic and declaration of lockdown throughout the country. To address the situation fairly, the Ministry of Home Affairs came out with Notification No. F. 18/4/2020 PPD dated 19-02-2020 with respect to Manual for Procurement of Goods, 2017 declaring that the interruptions in supply chain due to Covid 19 from China or any other country shall be covered under the ambit of force majeure, and that force majeure shall be invoked whenever considered appropriate following the due process of law.

While the power of the Ministry to bring certain events within the ambit of force majeure under clause 9.7.7 of the Manual for Procurement of Goods, 2017 by a simple notification, may be a different issue, but as it appears, by this notification the Corona Pandemic was brought within the meaning of force majeure as defined in the Manual for Procurement of Goods, 2017 and tacitly, this event certainly becomes applicable in respect of all government and/or public sector contracts irrespective of application of the Manual for Procurement of Goods, 2017.  It may be noted that this Memorandum of 19th February 2020 was issued prior to Covid-19 affecting operations in India, recognizing the difficulty faced by the contracting parties regarding import of materials from other countries which were impacted by the pandemic.

Similarly, on account of various representations and submissions made by various Renewable Energy (RE) Developers and RE Associations, and considering the prevailing situation, the Ministry of New and Renewable Energy vide Office Memorandum No. 283/18/2020-GRID SOLAR dated March 20, 2020 declared Covid-19 as a force majeure event. The Ministry vide the said order granted time extensions in scheduled commissioning date of RE projects, in light of disruption of supply chain due to the pandemic.

The Ministry of Roads Transport and Highways also in its Circular dated 18.05.2020 inter-alia classified the pandemic as a force majeure event. In addition, the Ministry of Home Affairs by its Order no. 40-3/2020(D) dated 24 March 2020 expressed that the country was threatened with the spread of Covid 19 virus and therefore has considered to take effective measures to prevent its spread across the country and therefore in exercise of powers under section 10(2)(I) of the Disasters Management Act 2005 issued various guidelines for immediate implementation. Subsequently, by Office Memorandum dated 13 May 2020 the Ministry of Finance, Department of Expenditure referred to its earlier memorandum dated 19 February 2020 and also referred to the Manual of Procurement and recognized inter-alia that in view of the prevailing restrictions, it may not be possible for the parties to the contract to fulfill contractual obligations. Therefore, after fulfilling due procedure and wherever applicable, parties to the contract could invoke force majeure clause for all construction / works contracts, goods and services contracts, and PPP contracts with Government Agencies up to a certain period and subject to certain conditions. Therefore, officially the Government of India recognized Covid-19 Pandemic as an event of force majeure applicable in relation to contracts with Government Agencies, in effect resulting inclusion of Public Sector Undertakings also.

While the specific acceptance of force majeure in relation to Government sector contracts may not have any binding effect on the contracts outside the scope of the explicit instances or in relation to purely private contracts between two private parties, they probably offered an explanatory value to bring Covid 19 and the forced restraints imposed on account of lockdowns, within the ambit of force majeure.  

 
Judicial Interpretation:
 

In the Indian judicial scenario the court would rely on the terms of force majeure clause in the contracts or on principles of frustration under section 56 of the Contract Act. This means, unless there is compelling evidence for non-performance of contract the courts do not favor parties resorting to frustration or termination of contract. On account of the enormous devastative effects the Pandemic created on the commercial and economic environment in the country, different Courts had to come forward and grant relief to different contracting parties who were severely affected by the Pandemic.

The Delhi High Court considered the matter in June 2020 in the case of MEP Infrastructure Developers Ltd vs. South Delhi Municipal Corporation and Ors[vi]. The court essentially relied on the Ministry of Roads Transport and Highways (MORTH) circular and observed that:

27(i) The respondent Corporation itself referred to Circular dated 19.02.2020 which notified that the COVID-19 pandemic was a force majeure occurrence. In effect, the force majeure clause under the agreement immediately becomes applicable and the notice for the same would not be necessary. That being the position, a strict timeline under the agreement would be put in abeyance as the ground realities had substantially altered and performance of the contract would not be feasible till restoration of the pre-force majeure conditions.” 

The court also expounded on the continuous nature of the force majeure event and held that the subsequent lockdown relaxations given by the central government and the state government shall not amount to abatement of the force majeure event, at least in respect to major contracts such as road construction projects. The court also identified the distinct effects of the lockdown, independent of the effects of the pandemic and its implications on various contracts which many be affected by the force majeure conditions.  

In the case of Standard Retail vs G.S Global Corp Pvt. Ltd[vii] steel importers had approached the Bombay High Court seeking restraint on encashment of letters of credit provided to Korean exporters in view of the COVID-19 pandemic and the lockdown declared by the Central/State Government citing that the contracts between the parties were unenforceable on account of frustration, impossibility, and impracticability. The Bombay High court by its order dated 8 April 2020 rejected the plea inter-alia on the grounds: 

  1. The Letters of Credit are an independent transaction with the Bank and the Bank is not concerned with underlying disputes between the buyers and the sellers.
  2. The Force Majeure clause in the present contracts is applicable only to one respondent and cannot come to the aid of the Petitioners.
  3. The contract terms are on Cost and Freight basis (CFR) and the respondent had complied with its obligations and performed its part of the contracts and the goods had already been shipped from South Korea. The fact that the Petitioners would not be able to perform its obligations so far as its own purchasers are concerned and/or it would suffer damages, is not a factor which can be considered and held against the Respondent.

The court also observed that:  

“The Notifications/Advisories relied upon by the respondent suggested that the distribution of steel has been declared as an essential service. There are no restrictions on its movement and all ports and port related activities including the movement of vehicles and manpower, operations of Container Freight Station and warehouses and offices of Custom Houses Agents have also been declared as essential services. The Notification of the Director General of Shipping, Mumbai, states that there would be no container detention charges on import and export shipments during the lockdown period.

In any event, the lockdown would be for a limited period and the lockdown cannot come to the rescue of the Petitioners so as to resile from its contractual obligations with the Respondent No. 1 of making payments”.

Therefore, even if the event is a force majeure, contracts may not be avoided if the event does not affect performance of the entire contract or affect every aspects of any contract. The event has to be specific to the failure.

In the Halliburton case[viii] , decided on May 29, 2020, the Delhi High court was of an unequivocal opinion that:

“62. The question as to whether COVID-19 would justify non-performance or breach of a contract has to be examined on the facts and circumstances of each case. Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition. The Court would have to assess the conduct of the parties prior to the outbreak, the deadlines that were imposed in the contract, the steps that were to be taken, the various compliances that were required to be made and only then assess as to whether, genuinely, a party was prevented or is able to justify its non- performance due to the epidemic/pandemic”.

Further, while discussing the scope of the force majeure clause in contracts it was observed by the court that:

“Para 63. It is the settled position in law that a Force Majeure clause is to be interpreted narrowly and not broadly. Parties ought to be compelled to adhere to contractual terms and conditions and excusing non-performance would be only in exceptional situations. As observed in Energy Watchdog it is not in the domain of Courts to absolve parties from performing their part of the contract. It is also not the duty of Courts to provide a shelter for justifying non- performance. There has to be a ‘real reason’ and a ‘real justification’ which the Court would consider in order to invoke a Force Majeure clause”.

The Madras High Court in the case of Tuticorin Stevedores’ Association vs The Government of India[ix], dated 14 September 2020, observed that the question as to whether on account of the pandemic outbreak of Covid-19, the parties can invoke the principle of force majeure need not detain us. The calamitous impact and disruption caused by Covid-19 on the economic front has been recognized by the Government itself.

In Confederation for Concessionaire Welfare & Ors. vs Airports Authority of India & Anr[x] the Hon’ble Delhi High Court observed on 17 February 2021 inter-alia that the court has perused the clauses relating to Force Majeure. There can be no doubt that the pandemic is a force majeure event. Since the Petitioners wish to terminate/exit from their respective agreements, while directing completion of pleadings and while the issues are under examination by this Court, there is a need to reduce the risk to both parties as simply postponing the exit by the Petitioners would also make it impossible for the AAI to re-allot the spaces to willing concessionaires and the outstanding against the Petitioners would continue to mount. Accordingly, as an interim measure the Hon’ble Court directed certain processes to be followed.

In another case of Ramanand vs. Dr. Girish Soni RC.[xi], an application came under consideration of the Delhi High Court which raised various issues relating to suspension of payment of rent by tenants owing to the COVID-19 lockdown crisis and the legal questions surrounding the same. By order dated 21-5-2020 the Delhi High court while determining whether lease agreements are covered under the ambit of section 32 and section 56 of the Act and even though it was held that suspension of rent on the grounds of force majeure is not permissible under the circumstances, the court allowed relaxation in the schedule of payment of the outstanding rent owing to the lockdown.

The Hon’ble Supreme Court in the case of Parvasi Legal Cell and Ors. Vs Union of India and Ors., observed that the pandemic was an ‘unusual’ situation, that had impacted the economy globally. This case revolved around the liability of the airlines to compensate passengers who faced cancellation of flights due to government-imposed lockdowns and restrictions on inter-state and international travels. The court relied on the office memorandum issued by the Ministry of Civil Aviation dated 16th April 2020 to dispose of the petition.

In the case of Transcon Iconia Pvt. Ltd v ICICI Bank[xii], the Bombay High Court while determining whether moratorium period would be excluded for NPA classification observed inter alia as under:

‘38… the period of the moratorium during which there is a lockdown will not be reckoned by ICICI Bank for the purposes of computation of the 90-day NPA declaration period. As currently advised, therefore, the period of 1st March 2020 until 31st May 2020 during which there is a lockdown will stand excluded from the 90-day NPA declaration computation until — and this is the condition — the lockdown is lifted’.

Yet, in another judgment passed in R. Narayan v. State of Tamil Nadu & Ors.[xiii] the Madras High Court directed the Municipal Corporation to waive the license fee for running a shop at a bus stand, and observed that:

“…this Court would be justified in treating the “lock down” as a force majeure event which will relieve the licensee from performing his obligation to the corresponding extent.” The Court also observed that … “The respondents (The Government of Tamil Nadu & Ors.) themselves have chosen to treat the lock down restrictions as a force majeure event. But they have relieved the licensees from the obligation to pay the fees only for two months. The reason for granting waiver for the months of April and May would equally hold good for the entire “total lockdown” period.”

Therefore, as it appears, most of the High Courts relied on the government orders that classified pandemic as force majeure, although the relief granted in each case has been subjected to restraint based on the accompanying facts and circumstances. The common observation however remained that the Covid-19 pandemic is a force majeure event.

 

Key Takeaways

 

Hence, it can be summarized that, commercial hardship shall not be a just and reasonable ground to support frustration of contract and excuse performance. The Courts have no general inclination to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events. Parties are at an obligation to complete their part of the contract against all odds, within a reasonable and practical limit. However, where the contract itself either impliedly or expressly contains a term according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under Section 32 of the Act. If, however, frustration is to take place de hors the contract, it will be governed by Section 56.

The following preliminary conditions are emerging to be sine quo non to invoke covid-19 as a valid defense for non-performance:

  1. The contract is rendered impossible to perform: To establish pandemic as a force majeure occurrence de hors the contract the parties must demonstrate how the pandemic has disturbed the fundamental basis on which the obligations and agreements of the parties rested [Naihati Jute Mills Ltd. Vs Khayaliram Jagannath[xiv]]. This principle was also adequately elaborated upon by the Bombay High Court in Standard Retail vs G.S Global Corp Pvt. Ltd. A mere invocation of the force majeure clause in light of the pandemic does not absolve the parties from discharging their contractual obligations. A prima facie case has to be built justifying the reason for inability and seeking such an exemption.
  1. Prior conduct of the parties: While pleading the defense of force majeure, it is highly pertinent for the concerned party to ensure that, prior to the outbreak of the pandemic, the party was discharging its functions in a bona fide manner within the stipulated conditions of the contract. Additionally, as enumerated in the Halliburton case by the Delhi High Court, the concerned party should have demonstrated a bona fide attempt at undertaking all reasonable measures to execute its obligations in light of the situation and was genuinely prevented to act upon the same due to the collateral effects of the pandemic.
  1. Collection of documents capable of corroborating the claim of force majeure: It is crucial for the party invoking the force majeure clause to corroborate their claims with valid documents applicable to the specific instance, given the unusual and unprecedented situation. In the present scenario, these documents can include the abovementioned government circulars and guidelines, local medical reports, news reports, announcements etc. It needs to be kept in mind that generic documents howsoever crucial they may be, might not be enough in any specific case. While citing such documents, the affected party also has a duty to carry out a due diligence to ensure such exemptions and relaxations are strictly applicable to their case as observed in Standard Retail vs G.S Global Corp Pvt. Ltd.

 

No Straitjacket Formula                     

 

As can be summarized, different Courts in India have upheld the defense of frustration of contract and the defense of force majeure sparingly in every case. Even though the Covid 19 pandemic and its consequent lockdown can be generally covered under the ambit of force majeure, but there can’t be any straitjacket formula and its invocation strictly and solely shall depend upon the facts of each case, previous conduct of the parties and the prevailing circumstances in the specific scenario. If there are alternate modes of performing contractual obligations, the liable party shall not have the luxury to hide behind the comfort of doctrine of frustration or the doctrine of force majeure and absolve themselves of their duties. Accordingly, it would need a very careful examination of the whole situation before any ground is taken for avoidance of obligations under a concluded contract.

References:

[i] (1915) 1 K.B. 681

[ii] (1920) 2 K.B. 714

[iii] [1954 SCR 310]

[iv] [(2017)14 SCC 18].

[v] [1960 (2) SCR 793]

[vi] W.P.(C) 2241/2020

[vii] Commercial Arbitration Petition (l) no. 404 of 2020

[viii] Halliburton Offshore Services Inc. v. Vedanta Ltd. O.M.P (I) (COMM.) No. 88/2020 & I.As. 3696-3697/2020

[ix] WP(MD)No.6818 of 2020 and WMP(MD)No.6217 of 2020

[x] W.P.(C) 2204/2021 & CM APPL.6421-22/202

[xi] REV447/2017

[xii] 2020 SCC OnLine Bom 626

[xiii] Case No.19596 of 2020 and W.M.P.(MD)Nos.16318 & 16320 of 2020

[xiv] AIR 1968 SC 552

Image Credits: Photo by Medienstürmer on Unsplash

The Courts have no general inclination to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events. Parties are at an obligation to complete their part of the contract against all odds, within a reasonable and practical limit.

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India Needs New Regulations - But Simplification of Compliance is Just as Critical

In earlier posts, I have touched upon the need for Indian laws to be updated to better reflect the current environment and foreseeable changes to it brought about by various forces, primarily technology-led innovation. This is not just because of the need to plug legal loopholes that are exploited to the nation’s detriment but also with the objectives of streamlining compliance and better enforcement.

 

Recently, the union government did exactly this when it announced a new set of rules to govern the operations of drones in India. A new draft of the Drone Rules, 2021, now out for public consultation, will, when approved and notified, replace the UAS Rules, 2021, which were announced in March 2021. The fact that the government has come out with a new set of rules within 4 months of issuing the earlier version is a welcome sign of change, as it signals recognition of a rapidly-changing environment as well as the importance of timely and appropriate responses.

Changes are aimed at simplification and less regulatory control

The new rules are remarkable for other reasons as well. At about 15 pages in length, the new rules are only a tenth of the earlier rules. The changes are not limited to the form; there are substantive changes too. The new rules seek to do away with a large number of approvals (e.g., Unique Authorization Number, Unique Prototype Identification Number etc.).  Licensing for micro drones for non-commercial use has been done away with. Recognizing the immense potential for drones to revolutionize our society and economy, the government proposes to develop “drone corridors” for cargo delivery. Prior authorization of drone-related R&D organizations is being removed. A drone promotion council is to be set up, in order to create a business-friendly regulatory regime that spurs innovation and use of drones. All this augurs well for the development of a robust drone ecosystem in India.

Implementing the “spirit” of underlying regulations is vital

The change to the drone rules is a welcome step- just as the consolidation of 29 of the country’s labour laws into four Codes during 2019 and 2020 was. But rationalization becomes futile if there is no element of reform- e.g., doing away with requirements that have outlived their utility or need significant changes to remain relevant in the current environment? There were many expectations around the Labour Codes, but in the months that followed, it is fair to say that there was also much disillusionment amongst industry stakeholders because sticky issues, such as the distinction between “employees” and “workers”, payment of overtime, role of facilitator-cum-inspector etc., remained.

Simplifying compliance is necessary to improve “ease of doing business” further

The World Bank’s 2020 “ease of doing business” report ranks India 63rd; we were ranked 130 in 2016. The 2020 report considered three areas: business regulatory reforms (starting a business, paying taxes, resolving insolvency etc.); contracting with the government, and employing workers. 

But there are miles to go before we sleep. To ensure that India’s entrepreneurial energies and creative intelligence are directed to areas that will be critical in the years to come- e.g., space, AI, robotics, electric vehicles, clean energy etc. all need new regulations or revamp of existing legislations and rules. But this alone will not suffice. Implementing the spirit, and not just the letter of the law and rules and the simplification of regulatory compliance are important angles that government must pay attention to. These are going to be key determinants in improving our “ease of doing business”.

 

Technology is a necessary enabler but it is not sufficient

All regulatory filings- whether for approvals or compliance- should ideally be enabled in digital format. Digital dashboards in the government and other regulatory bodies should facilitate real-time monitoring. Only exceptions or violations should need further actions. To be sure, the government has initiated some steps in this direction- e,g., “faceless” interactions between business and the Income Tax authorities with the intention to reduce human interventions and thus, the possibility of corruption. But if the underlying income tax portal itself is not working properly, as was widely reported soon after it was launched, the desired outcomes will not be achieved.

Moreover, it is not just about having the right technology platforms in place. It is equally critical to bring about a mindset change in the administrative machinery that helps political leadership formulate policy and thereafter, enable implementation and performance monitoring.

Given India’s large domestic market and attractiveness as a base for exports, we as a nation stand on the threshold of a phase of significant economic growth. Many Indian entrepreneurs are establishing businesses overseas; this means that the benefits of jobs, tax revenues and IPR creation all move to other jurisdictions. The longer anachronistic and irrelevant laws remain on our books, and the harder regulatory compliance remains, the more we stand to lose. In a world where global investment flows, trade and supply chains are facing significant change under the influence of numerous forces, it would truly be unfortunate if India loses out largely because of continued difficulties in regulatory compliance.

Image Credits: Photo by Medienstürmer on Unsplash

The longer anachronistic and irrelevant laws remain on our books, and the harder regulatory compliance remains, the more we stand to lose. In a world where global investment flows, trade and supply chains are facing significant change under the influence of numerous forces, it would truly be unfortunate if India loses out largely because of continued difficulties in regulatory compliance.

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Tax Alert: Latest COVID-19 Related Relaxations and Exemptions Issued by the Government

In view of the prevailing COVID-19 pandemic situation in the country, resulting in hardship and difficulty vis-à-vis complying with various due dates under the Indian Income tax Act, 1961 (‘the Act’) and causing severe impact on the cash flows, the Central Board of Direct Taxes (‘CBDT’) has time and again issued relevant Notifications, Circulars and Press Releases extending the due date w.r.t  various direct tax compliances.

 

Updated as on 13th July 2021

 

In the table below, we have summarized the key Notifications and Circulars issued by the CBDT, which has extended the due dates of various direct tax compliances under the Act:

Sr No

Compliance Particulars

Original Due Date

Extended Due Date[1]

1

Objections to Dispute Resolution Panel (DRP) and Assessing officer under section 144C

01 June 2021

31 August 2021 (note 1)

2

Statement of Deduction of Tax for the last quarter of the Financial Year 2020-21

31 May 2021

15 July 2021

3

Certificate of Tax Deducted at Source in Form 16

15 June 2021

31 July 2021

4

Statement of income paid or credited in Form 64D by Investment Fund to its unit holders for Financial Year 2020-2021

15 June 2021

15 July 2021

5

Statement of income paid or credited in Form 64C by Investment Fund to its unit holders for Financial Year 2020-2021

30 June 2021

31 July 2021

6

The application under Section 10(23C), 12AB, 35(1)(i i)/(iia)/(iii) and 80G of the Act in Form No. 10Af Form No.10AB. for registration/ provisional registration/ intimation/ approval/ provisional approval of Trusts/ Institutions/ Research Associations

30 June 2021

31 August 2021

7

Compliances for claiming exemption under provisions contained in sections 54 to 54GB

01 April 2021 to 29 September 2021

01 April 2021 to 30 September 2021

8

Quarterly Statement in Form 15CC to be furnished by Authorized Dealer in respect of foreign remittances made for quarter ended 30th June 2021

15 July 2021

31 July 2021

9

Equalization Levy Statement in Form 1 for Financial Year 2020-21

30 June 2021

31 July 2021

10

Time Limit for processing Equalization Levy return

30 September 2021

11

Annual Statement in Form 3CEK to be furnished under section 9A(5) by Eligible Investment Fund

29 June 2021

31 July 2021

12

Uploading declaration received from recipients in Form No 15G / 15H for quarter ended 30th June 2021

15 July 2021

31 August 2021

13

Exercising of option under section 245M(1) in Form No. 34BB for withdrawing application before Settlement Commission

27 June 2021

31 July 2021

14

Last date of linking of Aadhar with PAN under section 139AA

31 March 2021

30 September 2021

15

Last date of payment under Vivad se Vishwas (without additional amount)

31 August 2021

16

Last date of payment under Vivad se Vishwas (with additional amount)

31 October 2021

17

Time Limit for passing assessment / reassessment order

31 March 2021

30 September 2021

18

Time Limit for passing penalty order

30 September 2021

19

Due date for furnishing Return of Income – Non Audit Case

31 July 2021

30 September 2021

20

Due date for furnishing Tax Audit Report

30 September 2021

31 October 2021

21

Due date for furnishing Transfer Pricing Audit

31 October 2021

30 November 2021

22

Due date for furnishing Return of Income – Audit case

31 October 2021

30 November 2021

23

Due date for furnishing Return of Income where Transfer Pricing is applicable

30 November 2021

31 December 2021

24

Belated / Revised return for Assessment Year 2021-22

31 December 2021

31 January 2022

Note:

1) If the last date allowed u/s. 144C is later than 31 August 2021 then such a later date shall prevail.

 

References:

[1] Notification No 74/2021 & 75/2021 and Circular No 9/2021 dated 20 May 2021 and 12/2021 dated 25 June 2021

Image Credits: Photo by Nataliya Vaitkevich from Pexels

We have summarized the key notifications and circulars issued by the CBDT, extending the due dates of various direct tax compliances under the Act.

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Tax Alert: New Rules for Determining Taxability on Reconstitution of Firms

The Central Board of Direct Taxes (CBDT), vide notification[1] dated 2nd July 2021, has inserted a new sub-rule 5 under Rule 8AA of the Income-tax Rules, 1962 (Rules) which deals with the characterisation of capital gains under section 45(4) of the Act. The CBDT has also notified Rule 8AB, which deals with the attribution of income taxable under section 45(4) of the Act to the capital assets remaining with the specified entity. Additionally, the CBDT, vide circular[2] dated 2nd July 2021, has also issued guidelines for practical application of provisions under section 9B and section 45(4) of the Act.
Background
Finance Act, 2021 had inserted a new section 9B under the Income-tax Act, 1961 (Act) which provides that where a specified person[3] receives any capital asset or stock in trade or both from a specified entity [4] on dissolution or reconstitution of such specified entity, then such specified entity shall be deemed to have transferred such capital asset or stock in trade, or both, in the year in which such capital asset or stock in trade or both are received by the specified person and shall be chargeable to tax as income of the specified entity in that year, under the head “Profits and gains of business or profession” or under the head “Capital gains”, as the case may be. It is also provided that fair market value (FMV) of such capital asset or stock in trade, shall be deemed to be the full value of consideration as a result of such deemed transfer. Further, Finance Act, 2021 had also substituted the provisions of section 45(4) of the Act, which now provides that where a specified person receives any money or capital asset or both from a specified entity in connection with the reconstitution of such specified entity, then any profits or gains arising from such receipt by the specified person shall be chargeable to tax as income of the specified entity under the head “Capital gains” in that year. The amount chargeable to tax under section 45(4) of the Act shall be calculated as per the below-mentioned formula. A = B + C – D where, A = Income chargeable to tax under section 45(4) of the Act B = Value of any money received by the specified person C = Amount of FMV of the capital asset received by the specified person D = Amount of balance in the capital account [represented in any manner (excluding increase due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset)] of the specified person in the books of account of the specified entity at the time of reconstitution. It is also clarified that the provisions of section 45(4) shall operate in addition to the provisions of section 9B and accordingly the taxation under these provisions need to be worked out independently. The Finance Act, 2021 has also inserted a new clause (iii) under section 48 of the Act (deduction from the full value of consideration) which provides that the amount of income chargeable to tax under section 45(4) which is attributable to the capital asset being transferred by the specified entity shall be calculated in the prescribed manner. It may be noted that the above-mentioned provisions are applicable w.r.e.f 1 April 2021 i.e. from the tax year 2020-21 onwards.
Notification/Circular
The Central Board of Direct Taxes (CBDT), vide notification[1] dated 2nd July 2021, has inserted a new sub-rule 5 under Rule 8AA of the Income-tax Rules, 1962 (Rules) which deals with the characterisation of capital gains under section 45(4) of the Act. The CBDT has also notified Rule 8AB, which deals with the attribution of income taxable under section 45(4) of the Act to the capital assets remaining with the specified entity. Additionally, the CBDT, vide circular[2] dated 2nd July 2021, has also issued guidelines for practical application of provisions under section 9B and section 45(4) of the Act. This tax alert summarizes the notification and guidelines issued by the CBDT as under: In order to avoid double taxation of the same amount, the provisions of section 45(4) r.w.s 48(iii) of the Act requires that the amount taxed under section 45(4) of the Act should be attributed to the remaining capital asset(s) of the specified entity, such that when these capital asset(s) get transferred in the future, the amount attributed to such capital asset(s) gets reduced from the full value of consideration.
Capital Gains Charged under Section 45(4)

It is further clarified that the revaluation of an asset or valuation of self-generated asset or goodwill does not entitle the specified entity for deprecation on such increased value. 

The specified entity is required to furnish, electronically, the details of the amount attributed to the capital asset remaining with the specified entity in Form No 5C on or before the due date as prescribed under section 139(1) of the Act.

 
Applicability of Attribution Rule (Rule 8AB) to Capital Assets Forming Part of Block of Assets

 

It was observed that the current provisions provide attribution of capital gains under section 45(4) of the Act only for the purpose of section 48 of the Act. It may be noted that provisions of section 48 apply to capital assets that do not form part of block of assets.

Accordingly, in order to provide clarity and remove the difficulty, the CBDT has stated that the attribution rule i.e. Rule 8AB of the Rules shall also apply in relation to capital assets forming part of the block of assets.

It is further clarified that the amount attributed under Rule 8AB of the Rules shall be reduced from the full value of the consideration received or accruing as a result of the subsequent transfer and accordingly net consideration shall be reduced from the written-down value (WDV) of the block of assets under section 43(6)(c) of the Act or for the purpose of calculating capital gains under section 50 of the Act.

 
Characterization of capital gains under section 45(4) of the Act

 

The CBDT has notified Rule 8AA(5) under the Rules which provides for characterization of the nature of capital gains (i.e. long term or short term) under section 45(4) of the Act. It provides that where the amount of capital gains chargeable under section 45(4) is attributed to short term capital asset, capital asset forming part of a block of assets or capital asset, being self-generated asset or goodwill, then the capital gains under section 45(4) shall be deemed to be from the transfer of short-term capital asset; otherwise, it shall be deemed to be transferred from long term capital asset.

 
Examples under the Guidelines

 

In order to better understand the provisions, few examples have been given in the guidelines:

 
Example 1

 

Facts

There are three equal partners A, B and C in a Firm ‘FR’ having a capital balance of INR 10 lacs each. The details of capital assets held by the firm are as under.

Partner ‘A’ wishes to exit and accordingly the firm decides to give him INR 11 lacs of money and Land ‘U’ to settle his capital balance.

 

Tax Implications

A. Under section 9B of the Act

It shall be deemed that the Firm ‘FR’ has transferred the Land ‘U’ to Partner ‘A’ and accordingly an amount of INR 35 lakhs (50 – 15) shall be chargeable to tax in the hands of ‘FR’ under the head capital gains as long-term capital gains and a tax liability of INR 7 lakhs (assuming no surcharge or cess) shall be payable.

For Partner ‘A’, the cost of acquisition Land ‘U’ would thus be INR 50 lakhs.

B. Accounting in the books of Firm ‘FR’

The net book profit after tax of INR 33 lakhs (computed as amount of capital gains without indexation INR 40 lakhs less tax of INR 7 lakhs) shall be credited to each Partner’s capital account i.e. INR 11 lakhs each.

Pursuant to the above, the capital balance of Partner ‘A’ would increase to INR 21 lakhs (10+11).

C. Under section 45(4) of the Act

Capital gains in the hands of the firm shall be calculated as per the afore-mentioned formula.

Capital Gains under Section 45(4)

The capital gains of INR 40 lakhs shall be chargeable to tax in the hands of Firm ‘FR’ in addition to INR 35 lakhs chargeable under section 9B of the Act.

D. Attribution of capital gains as per Rule 8AB of the Rules to the remaining capital assets

Characterization of capital gains under section 45(4) of the Act

Subsequently, when the Land ‘S’ or Land ‘T’ would be transferred by the Firm ‘FR’, the amount of attribution would get reduced from the full value of consideration as per the provisions of section 48(iii) of the Act.

E. Characterization of capital gains

Since the amount of INR 40 lakhs charged to tax under section 45(4) of the Act has been attributed to Land ‘S’ and Land ‘T’, being long term capital assets, such amount shall be chargeable as long term capital gains as per Rule 8AA(5) of the Rules.

 

Example 2

 

Facts

The facts of Example 2 are the same as in Example 1 with a modification that the Firm ‘FR’ sells the Land ‘U’ at FMV of INR 50 lakhs to an outsider and on the exit of Partner ‘A’, the Firm decides to give him INR 61 lakhs to settle his capital balance.

 

Tax Implications

A. Under section 9B and section 45 of the Act

Since neither ‘capital asset’ nor ‘stock in trade’ have been distributed to Partner ‘A’, the provisions of section 9B of the Act do not get triggered. However, the Firm would be liable to normal capital gains tax on the sale of Land ‘U’. Accordingly, an amount of INR 35 lakhs (50 – 15) shall be chargeable to tax in the hands of ‘FR’ under the head capital gains as long-term capital gains and tax liability of INR 7 lakhs (assuming no surcharge or cess) shall be payable.

B. Under section 45(4) of the Act

Capital gains in the hands of the firm shall be calculated as per the afore-mentioned formula.

Characterization of capital gains under section 45(4) of the Act

The capital gains of INR 40 lakhs shall be chargeable to tax in the hands of Firm ‘FR’ under section 45(4) of the Act.

C. Attribution of capital gains as per Rule 8AB of the Rules to the remaining capital assets

Characterization of capital gains under section 45(4) of the Act

Subsequently, when the Land ‘S’ or Land ‘T’ would be transferred by the Firm ‘FR’, the amount of attribution would get reduced from full value of consideration as per the provisions of section 48(iii) of the Act.

D. Characterization of capital gains

Since the amount of INR 40 lakhs charged to tax under section 45(4) of the Act has been attributed to Land ‘S’ and Land ‘T’, being long term capital assets, such amount shall be chargeable as long term capital gains as per Rule 8AA(5) of the Rules.

In effect, the final result in both Example 1 and 2 would be same due to operation of section 9B of the Act.

 

Example 3

 

Facts

There are three equal partners A, B and C in a Firm ‘FR’ having capital balance of INR 100 lacs each. The details of capital assets held by the firm are as under.

Characterization of capital gains under section 45(4) of the Act

Partner ‘A’ wishes to exit and accordingly the firm decides to give him INR 75 lacs in money and Land ‘S’ to settle his capital balance.

 

Tax Implications

A. Under section 9B of the Act

It shall be deemed that the Firm ‘FR’ has transferred the Land ‘S’ to Partner ‘A’. However, since the full value of consideration is equal to indexed cost of acquisition, there would be no capital gain tax in the hands of the Firm.

For Partner ‘A’, the cost of acquisition would be INR 45 lakhs.

B. Accounting in the books of Firm ‘FR’

The net book profit after tax of INR 15 lakhs (computed as amount of capital gains without indexation) shall be credited to each Partners capital account i.e. INR 5 lakhs each.

Pursuant to above, the capital balance of Partner ‘A’ would increase to INR 105 lakhs (100+5).

C. Under section 45(4) of the Act

Capital gains in the hands of the firm shall be calculated as per afore-mentioned formula.

Characterization of Capital Gain - Circular No. 14 of 2021 - Tax Circular - CBDT

The capital gains of INR 15 lakhs shall be chargeable to tax in the hands of Firm ‘FR’. 

D. Attribution of capital gains as per Rule 8AB of the Rules to the remaining capital assets

d) Attribution of capital gains as per Rule 8AB of the Rules to the remaining capital assets

Subsequently, when the Firm transfers ‘Patent’ or ‘Goodwill’, the amount of attribution would get reduced from full value of consideration as per the provisions of section 48(iii) or section 43(6)(c) or section 50 of the Act, as the case may be.

It may also be noted that for the purpose of computing depreciation under section 32 of the Act, the WDV of the block of asset of which ‘Patent’ is a part, shall remain INR 45 lakhs only and should not be increased to INR 60 Lakhs. Similarly, no depreciation would be allowed on self-generated ‘Goodwill’.

E. Characterization of capital gains

Since the amount of INR 15 lakhs charged to tax under section 45(4) of the Act has been attributed to asset forming block of asset i.e. Patent and to self-generated Goodwill, such amount shall be chargeable as short term capital gains as per Rule 8AA(5) of the Rules.

 
FM Comments

 

The detailed guidelines and notification issued by the CBDT is indeed a welcome move and shall certainly help in addressing various concerns of the taxpayers. However, beyond the 3 specific Examples illustrated, in our view, there would be certain other issues which may require similar deliberation and clarification.

It is pertinent to note that the substituted provisions 45(4) and section 9B of the Act are applicable w.r.e.f. 1 April 2021 (i.e. from tax year 2020-21 onwards), whereas the rules for attribution of income and its characterization have been notified on 2 July 2021. The notification is silent with respect to the date of its applicability.

Generally, such notifications come into force on the date of its publication in the Official Gazette, unless the effective date of its applicability is already provided in the notification itself. CBDT, while notifying Rule 8AA(5) and Rule 8AB, has not provided any ‘effective applicable date’ for the same and accordingly it may be inferred that such Rules are to be made effective from 2 July 2021. Thus, the question which may arise is whether Rule 8AA(5) and Rule 8AB would be applicable to the reconstitution of specified entities that have already been undertaken between 1 April 2020 to 1 July 2021.

It may further be noted that the earlier provisions of section 45(4) provided that the transfer of a capital asset on the dissolution of a firm was made chargeable to tax as the income of the firm. But the distribution of money on dissolution was neither chargeable to tax in the hands of the firm nor in the hands of the recipient Partner.

However, the new provisions of section 45(4) state that distribution of money or capital asset exceeding the balance in the capital account of Partner would now be chargeable to tax under the head “capital gains”. Accordingly, the new provisions create a charge of capital tax on the distribution of money. It may be noted that, generally, ‘money’ or ‘currency’ is not considered as a ‘capital asset’ and accordingly the issue which may arise is that whether the distribution of money could be taxed under the head ‘capital gains’ as there is no transfer of capital asset.

It is also pertinent to note that the attribution rules under Rule 8AB of the Rules would lead to a premature collection of the taxes by the Government, the benefit of which may or may not be obtained by the specified entity.

The specified entity would get the benefit of attribution only when they transfer the remaining capital assets subsequently, which is a contingent event, that may or may not happen. Further, in a case where the excess payment chargeable to tax under section 45(4) of the Act, relates to the valuation of self-generated goodwill, then the entity may not be able to claim the benefit of attribution unless the entity hives off its business undertaking, which is highly unlikely. Another interesting question that would arise is how the specified entity would be eligible to claim the benefit of attribution where remaining capital assets are transferred under tax-neutral arrangements.

Moreover, in a scenario, where the aggregate value of money received by the specified person exceeds the balance in his capital account and it does not relate to the revaluation of any capital assets, then the following issues may arise:

  • Characterization of capital gains as ‘Short-term’ or Long-term’ as no attribution of income would be made by the specified entity to the remaining capital assets under Rule 8AB.
  • Such excess payment may have been made by a specified entity due to other business reasons such as payment for non-compete, etc. Accordingly, the deductibility of such excess amount while computing the taxable income of the specified person, would be a challenge.

Going forward, it would be imperative for specified entities to carefully assess the impact of the above provisions while carrying out any reconstitution activity in order to avoid double taxation.

References: [1] “specified person” means a person, who is a partner of a firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any previous year. [2] “specified entity” means a firm or other association of persons or body of individuals (not being a company or a co-operative society). [3] Notification No. 76/2021 [4] Circular No. 14 of 2021 Image Credits: Photo by Nataliya Vaitkevich from Pexels

It is pertinent to note that the substituted provisions 45(4) and section 9B of the Act are applicable w.r.e.f. 1 April 2021 (i.e. from tax year 2020-21 onwards), whereas the rules for attribution of income and its characterization have been notified on 2 July 2021. The notification is silent with respect to the date of its applicability.

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Tax Alert: Clarifications on Section 194Q-TDS on Purchase of Goods

The Central Board of Direct Taxes (CBDT) introduced a new Section 194Q in Finance Act, 2021, which is effective from 01st July 2021, for withholding tax at source on payments made for the purchase of goods.

The provision of Section 194Q states that:

  • Any person, being a Buyer, having a turnover or gross receipts exceeding INR 10 crores during the preceding financial year;
  • While making payment of any sum to any resident (Seller) for purchase of any goods of the value, where the aggregate of such value exceeds INR 50 lakhs in the previous year
  • Shall at the time of credit of such sum to the account of the Seller or at the time of payment, whichever is earlier, deduct an amount equal to 0.1% percent as income tax.

The above provision is not applicable, where:

  • Tax is deductible under any other provision of the Act; or
  • Tax is collectible under the provision of section 206C of the Act, other than transactions covered u/s. 206C(1H) therein.

The CBDT has received several representations with respect to practical challenges that may arise in the implementation of section 194Q. To address the difficulties that may arise, the CBDT has issued Circular No 13[1] of 2021 providing various clarifications regarding section 194Q.

194Q is not applicable in the following situations:

As per the Circular, ambiguity is removed on the applicability of section 194Q in a number of cases. CBDT has clarified that section 194Q is not applicable in the following situations:

  • Transactions relating to securities and commodities, which are carried through recognized stock exchanges, including exchanges that are located in the International Financial Service Centre.
  • Transactions in electricity, renewable energy certificates, or energy certificates traded through registered power exchanges.
  • Payments by non-resident Buyers unless if the purchase of goods is not effectively connected with the Permanent Establishment / fixed place of business of such non-resident in India.
  • On purchase of goods from a Seller whose income is exempt from tax. Similarly, it is clarified that tax collection at source (TCS) provisions under section 206C (1H) of the Act would not be applicable if the Buyer’s income is exempt from tax. However, these exemptions would not be applicable if only part of the Seller’s/Buyer’s income is exempt.
  • In the year of incorporation of the Buyer, the threshold of INR 10 crore would not be satisfied.
  • Transactions, where either payment or credit for the transaction happened before 1st July 2021.
  • TDS would not be applicable on the GST amount if the GST amount is separately indicated in the invoice. However, in the case of advance payments, the TDS under section 194Q will have to be discharged on the entire amount, as it is not possible to identify the GST component.

Calculation related clarifications

  • It has been clarified that for calculating the threshold of INR 50 lakhs in respect of a particular Seller, the transaction for the whole FY 2021-22 shall be considered, starting from 1st April 2021 and not from 1st July 2021.
  • For computing threshold of INR 10 crore in respect of the Buyer, only business turnover or gross receipts from business activities is to be considered. As such, turnover or gross receipts from non-business activities would not require to be taken into consideration.
  • In case of purchase returns, the TDS deducted on such purchases under section 194Q shall need to be adjusted against subsequent purchases from the same Seller, if the money is refunded by the Seller to the Buyer. However, no adjustment will be required in cases where the purchase return is replaced by goods by the Seller.

The interplay between sections 194O, 194Q, and 206C(1H) of the Act:

  • If Section 194O is applicable on any particular transaction, then Section 194Q shall not be applicable;
  • If both section 194O and section 194Q are applicable, then section 194O will prevail;
  • Section 206C(1H) is not applicable if TDS is deductible u/s. 194O or Sec 194Q;
  • If both sections 194O and 206C(1H) are applicable, then 194O shall prevail. Even if TCS is collected by the Seller still tax deduction responsibility of the E-commerce operator under section 194O cannot be condoned; this is because the prescribed tax rate under section 194O is higher than the prescribed tax rate u/s. 206C(1H);
  • If both sections 194Q and 206C(1H) are applicable, then section 194Q shall prevail. However, for ease of business, if TCS under section 206C(1H) has already been collected by the Seller then section 194Q would not be applicable; this is because the prescribed tax rate for deduction under section 194O and the prescribed tax rate for collection under section 206C(1H) are the same.

Comments:

This Circular is an extremely welcome one and has several important clarifications that have been issued by the CBDT before the enactment of the provisions of sections 194Q and 206C(1H). The Circular provides clarity vis-à-vis the scope of the relevant provisions, calculation of thresholds, interplay between overlapping provisions etc.

However, there are still some niggling doubts that prevail, requiring further clarity. For instance, while calculating the threshold of turnover or gross receipts of INR 10 crore w.r.t the Buyer, whether the amount considered should include or exclude the GST component.  

Also, it would help if it is prescribed for the Seller to obtain a “no deduction” declaration from the Buyer w.r.t TDS under section 194Q, in a situation where both sections 194Q and section 206C(1H) are jointly applicable on the same transaction and tax has already been collected and paid under section 206C(1H) by the Seller.

References

[1] Circular No 13 of 2021 dated 30th June 2021 (F No. 370142/26/2021 – TPL

 

Image Credits: Photo by Kelly Sikkema on Unsplash

This Circular is an extremely welcome one and has several important clarifications that have been issued by the CBDT before the enactment of the provisions of sections 194Q and 206C(1H). The Circular provides clarity vis-à-vis the scope of the relevant provisions, calculation of thresholds, interplay between overlapping provisions etc.

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Unshackling the Education Sector - A Surefire Way to Accelerate Development

“Education is the most powerful weapon which you can use to change the world”, said former South African President Nelson Mandela. I believe his prescient observation is timeless in its relevance. In the world that we live in, there are two major factors that will shape how education will be consumed in the future. The first is the reality of ever-increasing digitization. The second is the huge changes to lifestyles forced upon us in the wake of the COVID-19 pandemic.  

In many ways, these two are closely intertwined in the context of education. We as a nation today stand on the threshold of a historic opportunity to transform our education system. The New Education Policy has set the ball rolling, but much more needs to be done to enable our institutions to deliver the kind of education that our nation needs. This is especially true for higher education. We have hundreds of universities and higher education institutions (HEIs) that cater to the entire gamut of academic fields. But the fact that even the best of our HEIs do not rank among the top 100 globally is telling. By comparison, several Chinese universities do- and have got there only in the past decade.  

Innovations around the world, powered by digital technologies, are enabling better remote teaching and learning experiences. In India, mobile/internet penetration is increasing rapidly and becoming ever more affordable. Together, these are powerful forces of change. For many courses, virtual classes can easily be conducted by teachers from their homes- provided they are equipped with the right digital infrastructure. Students too can attend these classes from the comfort of their homes. Of course, for certain courses such as Medicine, Engineering, Agriculture, etc. it may not be possible to fully replicate the experience of a laboratory or a field- although I think sooner rather than later, Augmented Reality will enable even this gap to be bridged. This means that unlike in the past, universities and HEIs no longer need large areas of land to build physical classrooms or other on-campus facilities. 

Given India’s legacy of teaching in English and the relatively lower fees and costs of living, our universities have, for the past many decades, attracted students from Africa and Middle Eastern countries who pursue various undergraduate and post-graduate degrees. To be fair, some of this is also the result of “education diplomacy”. Why not take advantage of this and work towards making India the education hub of the world for the new era? Given India’s own linguistic diversity and the needs of foreign students, multilingual support too can be provided digitally, to improve learning outcomes and hence increase the attractiveness of our HEIs.  

We have the talent to develop the right curricula and teaching methods. Just a few weeks back, Ranjit Disale, a government school teacher from Maharashtra won the Global Teacher Prize for his revolutionary contributions to the education of girls by leveraging QR code technology. There must be hundreds of other teachers in our HEIs with innovative ideas on how to enhance learning efficacy in their subjects.  

If asset-light, “virtual-only”, for-profit HEIs are permitted, private capital will more legally and transparently be attracted to the education sector. Investors such as PE funds will be more willing to fund the development of next-generation technology-based delivery infrastructure, hiring quality teachers, and development of new, digitally deliverable content that enables students to develop core knowledge as well as critical thinking skills and gain exposure to emerging fields that will become more and more important for India and the world. These knowledge assets can be used to scale up the education venture, thus lowering the risk for capital providers.  

 

Allowing asset-light virtual universities to be established in specific disciplines will also address the challenge of a shortage of qualified and motivated faculty. By allowing faculty to teach courses on multiple platforms, even students affiliated with different HEIs can get access to top-notch teaching. Digital content can be updated more easily, without the costs associated with printing, distributing, and updating physical textbooks. 

Naturally, such a massive transformation will need a radical change in the mindset of parents, teachers, and students. It will also need changes to the laws that govern the country’s education sector. Under India’s Constitution, education was originally a State subject. In 1976, the 42nd Amendment transferred some aspects to the Concurrent list. Visionary state governments can take the lead in amending the necessary regulations or enacting new legislation so that the education sector is able to attract adequate capital and has the ability to innovate around new courses, curricula, delivery models, testing mechanisms, etc.  

The pre-condition that Universities/HEIs can only be permitted when those who wish to set up such institutions have adequate land available is a major structural impediment. This is especially true for courses where there is no need for laboratories or hospitals etc. Per prevailing law, even private education institutions in India are supposed to be “non-profit”. But the reality is very different- and this is what breeds corruption. Trusts are set up to acquire large land banks on the outskirts of cities ostensibly to establish a school or college/university campus. The funds used to acquire these large tracts of land sometimes have questionable provenance. If the HEI clicks, well and good. If the institution does not gather the desired traction, that’s no big deal either. Over a period of time, these land banks are used for commercial or residential projects.  

In cities that have grown rapidly in the last decade or two (Bangalore is an example), educational institutions whose campuses were established say 20 years ago, are now located in the middle of the metropolitan area. These institutions shift to new areas on the outskirts. The prime real estate thus freed up in the city centre is used for other projects. In some cases, developers build a school as part of a large gated community, thus seeking to satisfy the conditions of land grant or conversion.  

Such new-age virtual universities can benefit students from India as well as overseas and allow underprivileged students to access high-quality education. Even in the current setup, there are several examples of talent from underprivileged backgrounds coming up with innovative ideas. Imagine what might be unleashed when virtual universities are able to channelize the creative energies of millions more of the world’s youth!  

 

Image Credits: Photo by Mohammad Shahhosseini on Unsplash

Even in the current set-up, there are several examples of talent from underprivileged backgrounds coming up with innovative ideas. Imagine what might be unleashed when virtual universities are able to channelize the creative energies of millions more of the world’s youth!  

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