Wednesday, April 27, 2011
Mr Ghemawat points out that many indicators of global integration are surprisingly low. Only 2% of students are at universities outside their home countries; and only 3% of people live outside their country of birth. Only 7% of rice is traded across borders. Only 7% of directors of S&P 500 companies are foreigners—and, according to a study a few years ago, less than 1% of all American companies have any foreign operations. Exports are equivalent to only 20% of global GDP. Some of the most vital arteries of globalisation are badly clogged: air travel is restricted by bilateral treaties and ocean shipping is dominated by cartels.
Far from “ripping through people’s lives”, as Arundhati Roy, an Indian writer, claims, globalisation is shaped by familiar things, such as distance and cultural ties. Mr Ghemawat argues that two otherwise identical countries will engage in 42% more trade if they share a common language than if they do not, 47% more if both belong to a trading block, 114% more if they have a common currency and 188% more if they have a common colonial past.
What about the “new economy” of free-flowing capital and borderless information? Here Mr Ghemawat’s figures are even more striking. Foreign direct investment (FDI) accounts for only 9% of all fixed investment. Less than 20% of venture capital is deployed outside the fund’s home country. Only 20% of shares traded on stockmarkets are owned by foreign investors. Less than 20% of internet traffic crosses national borders.
A Division Bench of the Supreme Court today declared that the User Development Fee [“UDF”] charged by the private operators of the Mumbai and Delhi airports is ultra vires. The judgment, reported as Consumer Online Foundation v Union of India, contains several observations that are crucial in ascertaining the proper scope of the public-private model [“PP”] in the aviation sector. This post set out two entirely distinct issues the Court considered, one of which is likely to prove important in subsequent disputes.
The structure of aviation regulation in India is found in the Airports Authority of India Act, 1994 [“AAI Act”]¸ which created the AAI, and provides in s. 12 that it is to exercise a variety of functions, such as planning runways, air safety services, facilities at airports etc. When the Government decided to adopt the PP Model in developing the Bombay and Delhi airports, two amendments were made to the AII Act. In 2003, s. 12A was added to provide that the AAI may “in the public interest or interest of better management of airports” make a lease of the premises of an airport and assign to the lessee some of its functions under s. 12. S. 22A was also added, and provided in gist that the AAI could, with the approval of the Central Government, levy development fees. This provision was amended in 2008 when the Airports Economic Regulatory Authority Act, 2008 [“AERA Act”] was enacted, to provide that AREA would determine the rates of the UDF. In 2006, the AAI, acting under s. 12, leased out the Delhi and Bombay airports to DIAL and MIAL respectively. On 9 February, 2009, the Government of India conveyed its approval of UDF rates to DIAL and MIAL, and UDF has been levied ever since. The Delhi High Court rejected a challenge to the legality of the levy.
The dispute before the Supreme Court turned on a close analysis of statutory language, which it is necessary to set out before the issues can be described. The relevant provisions are s. 12A(4) and s. 22A. Both versions of s. 22A are set out, for the minor differences in language potentially produce a different construction altogether.
12A. Lease by the authority.--(1) Notwithstanding anything contained in this Act, the Authority may, in the public interest or in the interest of better management of airports, make a lease of the premises of an airport (including buildings and structures thereon and appertaining thereto) to carry out some of its functions under section 12 as the Authority may deem fit:
Provided that such lease shall not affect the functions of the Authority under section 12 which relates to air traffic service or watch and ward at airports and civil enclaves
(4) The lessee, who has been assigned any function of the Authority under sub-section (1), shall have all the powers of the Authority necessary for the performance of such function in terms of the lease.
S. 22A before 2008 amendment
S. 22A as amended in 2008
22A. Power of Authority to levy development fees at airports. -- The Authority may, after the previous approval of the Central Government in this behalf, levy on, and collect from, the embarking passengers at an airport, the development fees at the rate as may be prescribed and such fees shall be credited to the Authority and shall be regulated and utilized in the prescribed manner, for the purposes of-
(a) funding or financing the costs of upgradation, expansion or development of the airport at which the fees is collected; or
(b) establishment or development of a new airport in lieu of the airport referred to in clause (a); or
(c) investment in the equity in respect of shares to be subscribed by the Authority in companies engaged in establishing, owning, developing, operating or maintaining a private airport in lieu of the…
22A. Power of Authority to levy development fees at airports.-- The Authority may,--
(i) after the previous approval of the Central Government in this behalf, levy on, and collect from, the embarking passengers at an airport other than the major airports referred to in clause (h) of section 2 of the Airports Economic Regulatory Authority of India Act, 3 2008 the development fees at the rate as may be prescribed;
(ii) levy on, and collect from, the embarking passengers at major airports referred to in clause (h) of section 2 of the Airports Economic Regulatory Authority of India Act, 2008 the development fees at the rate as may be determined under clause (b) of sub-section (1) of Section 13 of the Airports Economic Regulatory Authority of India Act, 2008, and such fees shall be credited to the Authority and shall be regulated and utilized in the prescribed manner, for the purposes of--
Two issues arose – first, is a private operator, as a matter of law competent under s. 12A(4) to levy UDF and secondly, in any event, can UDF be levied before rates are prescribed by the competent authority. It is convenient to begin with the second issue. The Court held that the levy of UDF is not consideration for services provided, but a “compulsory exaction of money by the Government” with the result that the requirements of Art. 265 had to be complied with. A powerful reason the Court gave for this conclusion is s. 22 of the AAI Act, which provides that the AAI may collect “charges and rent” from inter alia passengers for facilities offered to them. The Court said that the power in s. 22A to levy UDF is over and above the charges and rent, indicating that it was not intended to be levied for consideration, but was “really in the nature of a cess or tax for generating revenue for the specific purposes mentioned in … s. 22A”. It is for this reason, the Court held, that Parliament had to enact legislation specifically authorising the AAI to levy UDF, and therefore UDF could not be levied except strictly in accordance with the condition laid down in s. 22A. S. 22A, as the extract above indicates, requires that UDF must be levied “at such rates as may be determined” by AERA. The Court found that a letter by the Ministry of Civil Aviation giving approval to DIAL and MIAL is therefore insufficient, and that the levy was ultra vires because it preceded the determination of the rate by AREA. It distinguished judgments cited by MIAL and DIAL holding that while the existence of a power is not affected by the failure to make rules, that conclusion is displaced when the statute makes it a precondition for the exercise of the power, and that taxing statutes must be construed strictly. Since AERA had subsequently determined rates for the Delhi airport, DIAL has been permitted to continue to levy UDF but has been directed to place its collections prior to the determination with AAI.
The first issue – whether private operators are competent to levy the fee - is considerably more difficult. The Supreme Court’s reasoning on this aspect of the case rests crucially on its finding that UDF must not only be utilised for the purposes indicated in s. 22A above, but may not be levied or collected for any other purpose. It is convenient to refer to the three purposes in s. 22A as Purpose A, B and C. The Union of India’s case was that s. 12A(4) provides that the lessee is entitled to exercise “all” the powers of the AAI necessary to discharge the functions assigned to it, of which management, upgradation and modernisation were part. Since AAI had the power to levy UDF under s. 22A, it was said to follow that the private operators have it too. The Supreme Court rejected this contention on the basis that while the AAI may use the UDF collected for any of the purposes in s. 22A, it can assign only the power to collect UDF for Purpose A above to the private operators. The Court held that Purpose B (establishing a new airport in lieu of the existing airport) and Purpose C (investment…) cannot be assigned to the operators because:
… the function of establishment and development of a new airport in lieu of an existing airport and the function of establishing a private airport are exclusive functions of the Airports Authority under the 2004 Act, and these statutory functions cannot be assigned by the Airports Authority under lease to a lessee under Section 12A of the Act, the lease agreements, namely, the OMDA and the State Support agreement could not make a provision conferring the right on the lessee to levy and collect development fees for the purpose of discharging these statutory functions of the Airports Authority
While the Court’s construction of s. 22A is certainly a plausible one, it is submitted, with respect, that it is not clear that the “purposes” enumerated in s. 22A qualify levy and collection as well as utilisation. Although a comma precedes the words “for the purpose of” which may therefore be taken to qualify both utilisation and collection, it is significant that those words follow the expression “such fees shall be credited to…and utilised in the prescribed manner…” It is possible that the legislature only intended to provide that UDF, collected with the approval of the Centre and at the rates determined, shall be regulated and utilised for the enumerated purposes. Not adopting this construction leads to the curious result that the lessee who operates the airport is not empowered to collect UDF even on behalf of the AAI to be held for those purposes. Moreover, a comparison of s. 22A prior to 2008 with the present version reinforces the impression that the purposes only govern utilisation.
More significantly, it is difficult, with respect, to completely reconcile the Court’s conclusion on the two issues. If, as it held on the first issue, private operators have no power whatsoever to levy UDF since Purposes B and Purpose C cannot be assigned to them, the fact that AERA determined rates cannot change the result. The Court appears to reconcile the two conclusions by suggesting that the UDF now levied by DIAL is traceable not to s. 12(4) but has been “assigned” to it by the AAI under s. 22A - and that it is generally confined to Purpose A. Yet, the language of ss. 12 and 22 indicate, with respect, that the AAI can only assign a “function” it is required to discharge under s. 12, and that any power the private operator needs to discharge it will have to be traced to s. 12(4).
Tuesday, April 26, 2011
Richter Holding (a Cyprus company) and West Globe Limited acquired 100% shares in Finsider International Company Limited (registered in the UK). Finsider in turn held 51% shares in Sesa Goa Limited, an Indian company. The Indian tax authorities sought to tax the transaction under the head of capital gains, and sought further information from the parties. In turn, Richter Holding filed a writ petition before the Karnataka High Court.
Richter Holding relied on the Vodafone Case to argue that acquisition of shares in an offshore company does not amount to acquisition of immovable property or control of management in an Indian company, and “it is only an incident of ownership of the shares in a company which flows out of holding of shares”. Moreover, it was argued that controlling interest in a company is not identifiable as a distinct asset capable of being held. The tax authorities, on the other hand, argued that the transaction resulted in an indirect transfer of 51% interest held by Finsider in Sesa Goa, which is subject to Indian taxation.
In its judgment, the Karnataka High Court refused to be drawn into the merits of the taxation dispute. The court left it to Richter Holding to urge contentions on the merit of taxation before the authorities. It also found that the agreement produced before the court was insufficient to determine the exact nature of the transaction. Most importantly, the court allowed the tax authority to lift the corporate veil to ascertain the true transaction:
It may be necessary for the fact finding authority to lift the corporate veil to look into the real nature of [the] transaction to ascertain virtual facts. It is also to be ascertained whether [the] petitioner, as a majority share holder, enjoys the power by way of interest and capital gains in the assets of the company and whether transfer of shares in the case on hand includes indirect transfer of assets and interest in the company.There has been a great amount of discussion regarding the Richter judgment by commentators (here, here and here).
The aspect that deserves greater attention is that the Karnataka High Court demonstrates a keen interest in lifting the corporate veil. This has a number of implications. First, the Richter Holding Case extends even further the scope of the principles laid down in the Vodafone Case. For example, in Vodafone the Bombay High Court did not consider lifting the corporate veil to impose taxation in case of indirect transfers, as we have previously noted. In that sense, the Richter Holding Case arguably provides an additional ground to the tax authorities to tax indirect transfers. Second, it is not clear from the judgment itself whether the tax authorities advanced the argument regarding lifting the corporate veil and, if so, how it was countered by Richter Holding. Third, the Karnataka High Court appears to have readily permitted lifting the corporate veil without at all alluding to the jurisprudence on the subject-matter. Generally, courts defer to the sanctity of the corporate form as a separate legal personality and are slow to lift the corporate veil, as evidenced by Adams v. Cape Industries, unless one of the established grounds exist.
From a macro-perspective, the legal position seems to have been confounded even further, as a column on MoneyControl notes:
… While, the intention of the legislature to tax such transactions is clear, the implications under the current income tax law become critical for completed transactions and existing structures. Notices alleging liability to tax on such indirect transfers have already been issued to Sanofi, Tata, Vedanta, SABmiller, Cadbury etc. and appear to be a growing trend.
The changed approach of the tax department and the consequent uncertainty of taxation is creating apprehensions in the minds of the investors. Tax risks are increasingly being discussed at the time of concluding deals and are a cause of great concern. In the meantime, deal makers are opting for mechanisms like escrow accounts, insurance policy, etc. to conclude transactions already in pipeline.
However the prevailing tax uncertainty coupled with aggressive tax approach adopted by revenue authorities does not augur well for new investments into India. The actual impact of aggressive tax policies on inbound investment will need assessment and perhaps a relook, given the huge investment needs particularly in infrastructure sector.
As one moves ahead, the next hurdle to be crossed is the mechanism and basis of computing gains arising as a result of the transaction being taxable in India. This is going to be the next bout of litigation in case the tax authorities view is eventually upheld by the Courts.
Monday, April 25, 2011
Now there is a proposal (reported here and here) to provide some relaxations to SWFs both under the FII Regulations as well as the Takeover Regulations. While this is expected to increase the flow of funds from SWFs into India, there are also questions raised as to the need for separate treatment of SWFs as a category of foreign investors, as this debate suggests.
Saturday, April 23, 2011
Friday, April 22, 2011
To a supplier or, more generally, to any commercial entity involved in the initial stages of a supply chain, protecting itself in the event of the bankruptcy or change in constitution of its principal buyers is a matter of great importance. It is therefore commonplace to find clauses in a contract creating, for example, a unilateral right to terminate in the event of change of control. Similarly, several devices are used to try to gain an advantage over other creditors in the event of bankruptcy, especially in a business that involves a substantial level of supply on credit. Of these, the most well-known mechanism is the “Romalpa clause” – a retention of title clause that provides that property in the goods does not pass until full payment is received. The recent decision of the UK Court of Appeal in Bulbinder Singh v Jet Star Retail demonstrates some of the limitations of such clause, particularly because of the buyer's implied authority to dispose of the goods.
Mr. Singh was engaged in the business of manufacturing clothing under the trade name of Isher Fashions UK [“Isher”] and was also in time the sole shareholder of Jet Star, a retailer of fashion garments. Isher supplied a large quantity of clothing to Jet Star until 2008, when Jet Star found itself unable to pay many of its suppliers. A winding-up petition was filed by some of its other creditors, and it was placed in administration on November 19, 2008. Nevertheless, it continued to trade between 20 and 24 November, and sold in that period a significant quantity of stock supplied by Isher Fashions. The contract between Isher Fashions and Jet Star contained a retention of title clause, which it is useful to set out in full:
6.2 Isher Fashions shall retain property, title and ownership of the Products until it has received payment in full in cash or cleared funds of all sums due and/or owing for all Products supplied to the Customer by Isher Fashions under this Contract and any other agreement between Isher Fashions and the Customer.
If the Customer
. . .
7.1.4 . . . has a bankruptcy petition presented against it, has appointed in respect of it or any of its assets a liquidator, . . . receiver, administrative receiver, administrator or similar officer . . . then Isher Fashions shall have the right, without prejudice to any other remedies, to exercise any or all of the following rights:
. . .
7.1.9 Isher Fashions may require the customer not to re‑sell or part with the possession of any Products owned by Isher Fashions until the Customer has paid in full all sums due to Isher Fashions under this Contract or any other agreement with the Customer
Isher Fashions had not exercised its right under Clause 7.1.4. at the relevant time. Nevertheless, it brought a claim against Jet Star for conversion. It had to be conceded that a buyer, in these circumstances, has implied authority to dispose of the goods although title has not passed – the nature of the relationship between a supplier and a buyer makes that conclusion inevitable. Isher Fashions suggested, however, that a retention of title clause is analogous to an agreement for a floating charge. If this premise is established, it would follow that that implied authority to dispose of goods automatically terminates when the buyer is placed in administration, for it is well established that an instrument that creates a floating charge prevents a company from disposing of its assets “outside the ordinary course of its business.” A detailed analysis of the scope of this expression is available in Etherton J.’s judgment in Ashborder BV v Green Gas, in which it was accepted that a transaction by a company that is intended to or has the effect of bringing its business to an end is outside the ordinary course of its business. Thus, this suggestion, if well-founded, would have considerably strengthened the effectiveness of a retention of title clause.
In Bulbinder Singh, Moore-Bick LJ agreed that the ordinary course of business test has been correctly formulated but held that there is no effective analogy between a retention of title clause and a floating charge. For one, the scope of a retention of title clause depends, in the ultimate analysis, on the intention of the parties as manifest in the particular contractual context, and it is misleading to suggest that every such clause has the same effect. For example, the provision in clause 7.1.4 (extracted above) that the seller is entitled to withdraw the buyer’s authority to sell is itself a conclusive indication that the buyer, in the absence of the seller taking such action, does have that authority. In other words, if it is the case that insolvency automatically terminates implied authority, clause 7.1.4 would have been unnecessary. Moore-Bick LJ held that this is the reason the analogy between a floating charge and a retention of title clause breaks down:
The parties clearly had in mind, therefore, that the buyer might be permitted to continue to deal with the goods even after it had become insolvent or (as here) had gone into administration. In my view that is an important distinction between this contract and a debenture creating a simple floating charge and one which has significant implications for the scope of the buyer’s authority to dispose of the goods. It is an important feature of a floating charge that it crystallises on the insolvency of the debtor and thereby provides the creditor with the protection he seeks. Under this contract, by contrast, the protection provided by the retention of title clause is contingent on the decision of Isher Fashions to withdraw the buyer’s authority to deal with the goods. I do not think, therefore, that one can draw a direct analogy between the two [emphasis mine].
It followed in Bulbinder Singh that the buyer’s authority to dispose of goods was not limited by the ordinary course of business test.
This decision is an important reminder that the step from a Romalpa clause to automatic limitations on implied authority to dispose is often one too many. The result may be different if the retention of title clause, unlike in Bulbinder Singh, provides not only that title is retained, but that authority to re-sell or dispose is terminated in advance of a seller's notice to that effect, on the event of administration.
Thursday, April 21, 2011
There has been an extensive debate on this issue lately:
Discussion on The Firm – Corporate Law in India;SEBI’s view is consistent with the approach it previously adopted in the order pertaining to the MCX Exchange where it found buyback arrangements in securities of a company to be unenforceable under law (although options do carry certain material differences with plain-vanilla forward contracts). In that case, SEBI went into a fairly detailed analysis of the law on the topic.
A column by Ashwin Mathew on The Firm – Corporate Law in India; and
Comments by Sandeep Parekh.
The immediate question is whether the Cairn Energy case would represent a precedent as far as SEBI’s regulatory opinion is concerned. If so, similar directives can be expected in other cases where agreements contain put and call options and pre-emption clauses. The position is likely to be resolved only when there is a definitive ruling from an appellate body if SEBI’s stance were to be challenged. A similar saga played out in the past when SEBI adopted a stringent stance on the meaning of “control” under the Takeover Regulations, and the matter appears to have been resolved, at least temporarily, after the judgment of the Securities Appellate Tribunal (SAT) in the Subhkam Case.
Wednesday, April 20, 2011
Thursday, April 14, 2011
This case note analyzes the decision of the Supreme Court of India in Iridium India Telecom Ltd. v. Motorola Incorporated & Ors (AIR 2011 SC 20,  160 Comp Cas 147). The decision is momentous as it clarifies the position under Indian law that a legal person such as a company is capable of having mens rea. It is an important step in promoting the use of criminal sanctions to regulate corporate behavior.
At the same time, it is crucial to note that the Supreme Court stops short of ruling convincingly on the methods by which mens rea of a company can be proved. It places reliance on the anthropomorphic approach of the English courts in Tesco Supermarkets Ltd. v. Nattrass ( AC 153 (HL)) without in any way considering the subsequent crucial development in the form of the more flexible approach in Meridian Global Funds Management Asia Ltd. v. Securities Commission ( 2 AC 500 (PC)). Similarly, the Supreme Court does not conclusively deal with the effect of Risk Factors in determining the existence of ‘deception’ as an ingredient of an offence of cheating due to misrepresentation in a private placement offering document. Of course, the Supreme Court was concerned only with an appeal on preliminary aspects relating to an order of quashing under section 482 of the Code of Criminal Procedure, 1973.
In this note, the authors argue that while Iridium must hold the field on the ability of a company to have mens rea, its rulings on the other aspects must be accepted in measured terms only as possible guidance for further specific judicial determination.
On April 7, 2011, the Allahabad High Court vacated its stay, and this order is now accessible through eLegalix (Writ Petition No.11702 (MB) of 2010). While vacating the stay, the High Court has not ruled on any questions of law, particularly relating to the scope of a public offering of securities as compared to a private placement. The decision has been based largely on the conduct of Sahara in evading the requests of SEBI for providing further information regarding the names and addresses of investors to whom securities have been issued. The court offers some guidance regarding the types of information that can be sought by SEBI, and rules that the information needs to be provided within a reasonable time frame.
A report in today’s Mint discussed the impact (or lack thereof) of the High Court order on the offering of securities by the entities involved.
Tuesday, April 12, 2011
This is a welcome move as it prevents harassment of innocent directors who have been kept in the dark by managements. The Circular, however, does not go as far as proposals discussed in the context of the Companies Bill, 2009 that call for complete immunity to independent directors from prosecution. By conferring discretion on the ROC (to be exercised in an informed manner), the Circular adopts a principles-based approached by avoiding the rigidity involved in complete immunity. This would continue to spur non-executive directors to perform their role diligently, but at the same time protect them against prosecution risks in the event of their innocence.
Monday, April 11, 2011
Since companies were situated in various states, the scheme required the approval of the High Courts at Bombay, Calcutta, Madras, Gujarat and Delhi. While the Gujarat High Court refused to bless the scheme, all the other High Courts sanctioned it, with the Delhi High Court’s order being issued a few days ago, on March 29, 2011. The purpose of this post is to highlight the different approaches adopted by the Gujarat and Delhi High Courts on the same scheme.
In December 2010, the Gujarat High Court delivered its judgment refusing to sanction the scheme. Specifically, the court found that the transaction did not fall within the scope of “arrangement” within the provisions of the Companies Act as the transaction was considered to be a gift due to the lack of consideration. The court found the existence of a number of other grounds to reject the scheme, primarily because the transaction would result in a loss to the revenue. The memos from KPMG and Ernst & Young contain a discussion of the arguments put forth by the parties and the decision of the Gujarat High Court.
The decision of the Gujarat High Court appears to have taken the M&A fraternity by surprise as the court not only provided a restrictive interpretation to a scheme of arrangement under section 391, but also seemed to confers immense powers to tax authorities to object to the scheme at the outset. This was a setback of sorts because sections 391 to 394 of the Companies Act provide sufficient flexibility to companies to carry out mergers, demergers, reconstructions and other similar forms of transaction albeit with shareholder (and sometimes creditor) approvals and under the supervision of the court. In fact, court schemes have become quite popular in India to implement restructurings, and more so than in other Commonwealth jurisdictions such as the U.K. and Singapore where similar statutory provisions exist. It is no surprise, therefore, that Vodafone Essar preferred an appeal from the decision of the single judge of the Gujarat High Court to a division bench, which is understood to be pending.
On the other hand, the Delhi High Court was concerned with the same scheme, but approved it despite objections by the tax authorities. At the same time, the court reserved certain powers to the revenue that therefore operates as a midway path adopted by the Court. In its decision, the Delhi High Court accepted the wide amplitude of the expression “arrangement”. The Court examined the lexicographic scope of the expression by noting that the expression “arrangement” is not defined in the Companies Act. [Note: However, section 390 does define “arrangement”, although only in inclusive and illustrative terms.] Even a transaction that does not involve payment of consideration can fall within the scope of an arrangement, and it does not matter that the transferor companies are effectively giving up the assets for free. The Court had this to say:
The Income Tax Department cannot conceivably have the same interest in the company proposing the scheme as the shareholders of that company. And, to my mind, the Income Tax Department is also not in any sort of loco parentis to the shareholders of the transferor companies who have unanimously agreed to transfer their assts without recompense, nor are they the guardians of their interests, and therefore, the Income Tax Department cannot be heard to plead that the scheme must be thrown out because, in its opinion, the Scheme operates as a confiscation of the transferor shareholders rights. The essence of the idea of confiscation is the taking away or abstraction of something from someone without his consent. Once there is consent, there can be no confiscation.Furthermore, the court did not accept the arguments of the tax authorities regarding the accounting and tax matters pertaining to the scheme. It found that the object of the scheme was not merely to avoid tax. The Delhi High Court, however, clarified that it was only concerned with sanction of the scheme and was not ruling on the merits of accounting and taxation of the scheme. The via media adopted by the court was to accord sanction to the Scheme of Arrangement under Section 391 and 394 of the Companies Act, 1956 while reserving the right of the income tax authorities to determine any tax liability.
The Gujarat and Delhi High Courts have adopted somewhat contrasting approaches. The Gujarat High Court examined the taxability of the demerger transaction in detail and also whether the transaction was effected as a matter of tax planning. The Delhi High Court, on the other hand, merely confined the scope of its jurisdiction to an examination of the typical factors considered in schemes, including public interest, but reserved powers to the tax authorities to subsequently pursue their tax determination. In that sense, parties seeking sanction of the scheme will necessarily have to assume the risk of adverse determination by the tax authorities. The Delhi High Court’s approach introduces greater predictability in schemes of arrangement by more closely circumscribing the court’s jurisdiction.
Given the varying approaches, it is natural to expect some level of clarity on the issue. Perhaps when the Gujarat High Court is considering the matter on appeal, it will have the benefit of the Delhi High Court judgment and will have the opportunity to consider both approaches before deciding the issue.