An overview of design law in India

April 7, 2024

This article has been written by Mustafa Khan pursuing a course on How to Use AI to Grow Your Legal Practice from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

In Indian intellectual property rights circles, the industry’s designs are seen as significant in ensuring that some industrial creatives have the chance to get identified. The mechanism of the law came about after the failure of the Patents and Designs Protection Act of 1872, which was in charge of protecting the millions of investments that went into products. Thus, the process of globalisation through the years has been the evolution of India into a WTO member in 1995 and the passing of the Design Act of 2000. It aimed to go beyond only fulfilling international responsibilities and relying on existing laws. On the contrary, it was loaded with scientific innovations as well as maintaining the status quo through provisions that protect industrial designs.

The provisions of Section 47 stand to be one of the most critical contributing factors investigated in Designs Act enforcement. No less, the central government response is on this part of the implementation with the enactment of the Design Rules of 2001 on the 11th day of May. This was revised in 2008, in 2013, and, also, reviewed little after 4 years. In every remaking of the regulations and laws of industrial design, it has been more precise. December 2021 saw the conclusion of the last rules of this legal regime, by the Government of India through the Designs (Amendment) Rules under DIPP. The amendment was for retroactive application but from the date of notification. [check] Now the amendment can be recalled, which was made in 2014 through the Designs (Amendment) Rules. This last paragraph concentrates on the effects of this last amendment and tries to clarify the concept of Indian law on industrial designs and the rights and duties of the industrialist.

Overview of design law in India

Think of a scenario where your phone’s contours, the ornamental designs on your sari and brand logos are not shielded by law. That, my friend, was the situation for design in India not so long ago. However, do not worry; design law has stitched its way into the constant of Indian jurisprudence, guarding creative creativity and encouraging innovation. Let us now embark on a tour through this intriguing domain, tracing the historical roots and unveiling the recent changes due to the Designs (Amendment) Rules, 2021.

Historical perspective of design law

The year 1872 saw the advent of design protection in India with the Patent and Designs Act, which was introduced to safeguard designs. By recognising the increasing importance of protecting original works, especially in the 18th century, this legislative move paved the way for acknowledging the value existing within design innovation. The Design Act came into operation with its enactment, which defined a new era in design protection law dedicated to India by consolidating and refining it after centuries. This legal framework evolved through various treaties until eventually receiving universal recognition as part of what constitutes intellectual property rights internationally. Largely designed to promote innovation in various fields, this legislation has proven to be quite dynamic since 2008, when it underwent a significant change through the Designs Amendment Rules that introduced an elaborate categorization system corresponding to international standards. The Design Act aimed to strike a balance between protecting the rights of designers and fostering innovation. By granting exclusive rights to the creators of original designs, the Act incentivized creativity and artistic expression. It also established a registration system for designs, providing legal recognition and protection for registered designs. This system helped prevent the unauthorised use or imitation of registered designs, ensuring fair competition and safeguarding the economic interests of designers.

The Design Act provided a much-needed boost to India’s design industry, encouraging designers to innovate and create with confidence. It fostered a culture of respect for design rights and promoted the recognition of design as an essential aspect of intellectual property. Moreover, the Act aligned India’s design protection laws with international standards, facilitating trade and collaboration with other countries.

Overall, the Design Act played a pivotal role in shaping India’s design landscape. It laid the foundation for a robust and dynamic design industry, contributing to economic growth and competitiveness. By protecting the rights of designers and promoting creativity, the Act has left an enduring legacy of design protection in India. Apart from legal complexities, the very core of the Design Act of 2000 as amended lies in its undying determination to foster and encourage creative pursuits within the industrial environment.

Evolution of the Designs (Amendment) Rules, 2021

The Designs (Amendment) Rules 2021, published on January 3, represent one of the great steps in design law. These amendments provide for the classification of articles in design applications based on their current version, the International Classification for Industrial Designs (Locarno Classification), published by the WIPO. Significantly, the applicants are allowed to cite the 13th Edition of Locarno Classification, which becomes effective from January 2021 until WIPO releases a new classification. The updated Locarno classification comprises 32 classes and 217 subclasses, coupled with lucid notes that help improve the accuracy of the design classification. With the Amendment Rules, a fair and inclusive paradigm is brought into play regarding start-ups, small entities & natural persons, as design regulation applies to them in equal terms.

Key changes brought in by the Amendment Rules

The Designs (Amendment) Rules 2021 affect various aspects of how creators of different pieces of art and design maintain their creative designs. The key changes brought in by the Amendment Rules are as follows:

Speaking the global language of design

Before this amendment, designers had issues like relationships with other designers who spoke different languages. However, amendments apply to the latest version of Locarno classification, which is a universally accepted language for design that facilitates international collaborations and comparisons for protection.

Startups take centre stage

This amendment targets “startups” who are given preferential treatment. Reduced charges made it easier for designs to be protected. This supports innovativeness and empowers future design kingpins.

Fees get a friendly redesign

The amendment brought good news to everyone in it; individuals, startups and small entities. Given a deal with a significant discount following a change in rate plan. It is creativity not broken by the bank that everyone should show according to this amendment.

Paperless power

The amendment has provisions that also welcome the digital age and electronically file a document. This, therefore, means that the designer can simply do a one-click submission of their design application using this paperless power and not only does it ease time and resources but also supports transparency as well as convenience.

Clarity is key

The amendment wanted not to use complicated legalese words, definitions and procedures for clarification, so the design registration process became more approachable. Therefore, the amendment is designed to help explain matters in simple English so you can release your creative talent.

Thus, the Design (Amendment) Rules of 2021 emerge as a very progressive design culture in India. The evolution encompasses the design applications’ filing process and reduced fees that create a favourable environment for the increased registration of designs. The uniformity of the applied classes and subclasses of the Locarno Classification published by WIPO provides clarity about differentiating technical design works that comply with international standards. It is especially useful for small entities, including start-ups as the amendment makes it cheaper and provides simple guidelines.

Comparative analysis with early design rules

The path of design law in India has had its fair share of revisions, each erasing and reducing the patterns for the protection of creative minds. The Designs (Amendment) Rules 2021 are a great evolution and it has become inevitable to compare them with their old versions to analyse their effects on creators or innovators. Let us then put on our legal spectacles and begin this comparison.

Classification conundrum

Before the changes, battling through the classification system was like trying to understand hieroglyphics. The tenth edition of the Locarno classification, which was narrow and unsuitable, was not also suitable for international coordination or discrimination. The 2021 Rules introduce the thirteenth edition, providing a wider lexicon for design expression in tandem with other countries and enabling cross-country comparisons more effortlessly. This coordination not only simplifies foreign partnerships but also improves transparency and predictability for applicants.

Startups soar

The former government gave very little comfort to budding entrepreneurs. The 2021 Rules, appreciating the central role that start-ups play in driving innovation, developed specific categories and lowered registration fees. This special support works as a launch pad, advancing the fledgling business into the design protection stage and enriching diverse voices in the world of design.

Fee flexibility

The charges that were presented earlier possessed a long ascent for people and small organisations. The amendments present forward-thinking policies that provide generous fee deductions for these groups. Actually, the move democratises design protection, which makes it affordable and attractive for many people to join the design network. Think of it as a figurative elimination or removal of barriers in the sense that more diverse creators can now exhibit their talent for better design.

Efficiency encompassed

The pre-amendment process, which relied on the paper mode of making institutions, had resembled a maze. The 2021 Rules integrate the digital era by allowing “electronic filing of papers,” making them easier to access and read. This fastens the application process, relieves administrative costs, and encourages public oversight. Seeing mountains of paperwork replaced with a few clicks, the new rules create an image of efficiency and convenience for applicants and the Design Office.

Clarity canvas

The previous regulations, in some situations, looked like an enigma inside a riddle. The amendments seek to promote clarity by redefining the terms and putting the process in order. Consider it an instruction manual with features that allow applicants to enjoy registration for designing without struggle. This helps to promote accessibility and lower ambiguity while striving towards a stronger and more inclusive regime on design protection.

Beyond the brushstrokes

Although these amendments present an optimistic picture, there are hurdles to overcome. Some of the critical strokes that need to be executed are increasing awareness among stakeholders, building a proper legal framework and facilitating collaboration with other intellectual property laws. As law students, our function must be to unravel the intricacies of such changes and their possible repercussions so that we can push for better reforms.

Issues associated with the amendments

With each passing day, the design law in India is becoming more dynamic and with it comes the Designs (Amendment) of 2021 that acts as a bit of hopeful scenery but there are still quite a few blemishes on this canvas. As law students, it is our duty not only to applaud what has been realised but also to spell out the challenges and concerns that are likely ahead of those amendments. The Amendment Act introduces several noteworthy improvements. Firstly, it expands the definition of “design” to encompass a broader range of creative expressions, including graphical user interfaces and typographic arrangements. This aligns with the evolving nature of design and ensures that emerging forms of creativity are adequately protected. Additionally, the Act provides for the registration of design applications with provisional specifications, allowing designers to secure priority while they refine their designs. This provision offers greater flexibility and encourages innovation.

However, there are certain areas where the Amendment Act falls short. One major concern is the exclusion of spare parts from the scope of design protection. Spare parts often incorporate distinctive designs and play a crucial role in the overall functionality and aesthetic appeal of products. By excluding them, the Act creates a loophole that could potentially undermine the protection of design rights. Another challenge is the lack of clarity regarding the threshold of originality required for design registration. The Act does not provide specific guidelines or criteria to determine when a design is considered to be original. This ambiguity leaves room for subjective interpretations and may lead to inconsistencies in the registration process. Furthermore, the Amendment Act does not address the issue of design piracy effectively. While it introduces enhanced penalties for infringement, the absence of stringent measures to combat counterfeiting and unauthorised reproduction remains a significant concern. Design piracy poses a serious threat to the creative industries, and stronger enforcement mechanisms are necessary to safeguard the rights of designers. In light of these challenges, it is essential for policymakers, legal professionals, and design communities to engage in thoughtful discussions and work towards further improvements to the design law. By addressing the aforementioned concerns and implementing comprehensive reforms, India can foster a robust design ecosystem that encourages innovation, protects intellectual property rights, and promotes economic growth.

Industry feedback and responses

The fact states that reception to the Designs (Amendment) Rules of 2021 in the industry has mostly been positive. The implementation of the last Locarno classification is considered a positive trend, simplifying the filing procedure for designs related to newly developed goods. The division of start-ups as particular category applicants and the fees craze allotted to small bodies have received admiration. Unfortunately, concerns still prevail as regards the fine application of these rules, particularly in establishing design rights for certain categories.

Potential resolutions and recommendations

Correcting the issues that have been identified requires well-defined recommendations from the Designs Office for comprehension of interpretations. Especially as to guidance regarding application in classifying designs, new provisions It is recommended to reconsider the interpretation given by the Designs Office for GUI as per new rules. Secondly, continuous interaction between industry members is critical in addressing practical and timely implementation challenges during their enactment and developing appropriate remedies.

In conclusion, the Designs (Amendment) Rules 2021 mark a lot of modifications in design law within India. This, however, only after reaching the right amount by carefully implementing these amendments along with consistent evaluation and adjustment to ensure that they effectively volunteer in enhancing design activity and provide adequate protection for designs within Indian law.

Recommendations for stakeholders

The Designs (Amendment) Rules of 2021 have created a new landscape for design law in India with both opportunities and challenges. While we are aspiring legal minds, our responsibility does not stop at analysis but continues to give concrete suggestions for various stakeholders operating in this dynamic environment.

Suggestions for designers and applicants

Embrace the digital realm

Seamlessly incorporate e-filing processes and look for online resources to leverage the benefits that this new process will bring, just as one learns new art tools for more creativity.

Seek clarity

Get rid of ambiguities in legislation by consulting lawyers, since law application depends on it as much as art appreciation before the unveiling of a masterpiece.

Stay informed

Keep track of the industry forums and legal bulletins on updated interpretations, and at the same time, have awareness of parallels regarding art trends and techniques.

Explore the startup advantage

If there is the opportunity of eligibility, one can benefit from the reduced fees and support; and timely design protection being regarded as a grant is financially available for startups towards the display of artistic work at famous exhibitions.

Balance novelty and originality

While attempting to be creative, keep in mind that you meet more stringent requirements relative to novelty and originality, possibly trying a professional for broad prior art searches like distinctness and the absence of infringement in the art.

Guidance for legal practitioners

Lawyers should gain deeper insight into the case law, amendments and international trends to provide refined legal advice. Law advocates assist in bridging the communication gap between designers and the legal system by simplifying complex legal terms and translating them into understandable terms It is incumbent upon one to broaden the definitions of “startup” and refine analysis on novelty and originality to encourage wider participation. It encourages fair competition. Also, technology should be embraced as it integrates e-filing platforms and other digital tools into practice to streamline client service and improve productivity. Application of current technology to manage documents, submissions and laws easily. Collaboration with colleagues and regulatory authorities in pursuit of the amendments and harmonisation of the design laws with other intellectual property laws is geared towards having a consistent and more effective legal framework for design protection.

Insights for regulatory authorities

Prioritise clarity

Let’s engage in detail the clarifications and guidelines for the doubtful and unclear provisions; we want to decrease the number of argumentation-based disputes, provide transparency, conduct a correct assessment and thus have clear instructions and rubrics for the artists.

Bridge the digital divide

Develop training and introduce electronic filing platforms, which will be available to all as one of the methods of solving the digital divide. Similar to training workshops and user-friendly online platforms, these approaches need to be considered as much as creating tutorials for creative artists with low digital literacy. Initiate channels of communication with stakeholders for getting feedback and handling issues, as well as use a commonality approach in amendments by holding regular meetings between artists, organisers and lawyers to voice out concerns.

Conclusion

Adoption of the Designs (Amendment) Rules, 2021, into the Indian design law scenario is a great move to adopt international standards. The inclusion of the newest version of the Locarno Classification, taking into account start-ups as a particular category and also decreasing the costs for small companies, all show the wish to make a more simple and democratic design registration process. The good sides for these amendments in the industrial sector are creation and employment but this should be checked to avoid the establishment of wrong ideas. Implementation deliberately and continuously is important to ensure the achievement of expected results as well as the rules to stimulate the design activity or else to hold designs secure in India. Ties with the stakeholders, i.e., designers, applicants, lawyers and regulatory bodies, will greatly play a role in resolving the issues and establishing a perfect framework for the ultimate results. The foreseeable future of the design law in India seems bright, as it will create a nourishing environment enabling the development of emerging design enterprises. From the analysed rules of the modifications, it is found that the cause of the amendments is to improve the efficiency of the ‘Industrial Design’ registration system in India. Within the Design Act 2000, “startups” are covered under the ambit and the safeguarding scope has been widened, plus the fees for startups have been reduced, which is an encouragement for increased design activities. The introduction of the Locarno classification by the Indian Design Laws is commendable, as the country’s legal system follows world standards.

References

Swadeshi Cotton Mills v. Union of India (1981) : case analysis

Rachit Garg

April 7, 2024

This article has been written by Suryanshi Bothra. It discusses in depth all aspects of the Swadeshi Cotton Mills v. Union of India. The Supreme Court’s interpretation of the principles guiding administrative decision-making played an important role in promoting fairness. It established clear precedence in cases of industrial takeovers. This case set clear rules for how to govern the relationship between the state and its citizens.

Table of Contents

Introduction

The Swadeshi Cotton Mills Case, or Swadeshi Cotton Mills Company Limited & Anr. vs. Union of India & Ors (1981) is a landmark case in India. Significant constitutional and industrial law issues were dealt with in the case. It is cited in many major discussions about the balance between governmental authority, industrial regulations, and individual property rights. The dispute arose under Section 18A, Section 18AA(1) and Section 18F of the Industries (Development and Regulation) Act, 1951. Section 18A empowered the Central Section 18F Government to take over the management of industrial undertakings in special circumstances. Section 18AA(1) and Section 18F of the Act were majorly disputed in the case. Section 18 AA (1) provides for taking over the management of the Company without any investigation. According to the Act, the Central Government or some person or body of persons authorised by the Central Government can take over the Company. This can be done in cases where the funds are diverted, encumbrances are created, and reckless investments are made by the person in charge. Section 18F provides for the cancellation of an order that is made under Section 18A. Cancellation can occur in case the purpose of the issued order is fulfilled by the owner.

The case involves a critical examination of the meaning and applicability of the rules of natural justice. Its interplay with the public interest and individual interest is extensively discussed. The judgement also delves into the complexity of the need for prompt governmental action and the essential requirement of providing a fair hearing. Moreover, how this complexity affects industries and those affected by the government actions at the pre-takeover stage. The decision made a lasting impact on the understanding of the application of natural justice in India. The case also underscored the judiciary’s role in safeguarding fundamental rights. It also sheds light on the judiciary’s role in ensuring accountability in the exercise of executive authority.

Details of Swadeshi Cotton Mills v. Union of India (1981)

Case Name

Swadeshi Cotton Mills Company Limited & Anr. vs. Union of India & Ors (1981)

Case No.

Civil Appeals Nos. 1629, 1857 and 2087

Judgement date

13 January, 1981

Parties to the case

Appellant

Swadeshi Cotton Mills

Respondent

Union of India

Represented by

Appellant

In CA 1629- F.S. Nariman and S.D. Parekh, Senie Advocates (V.D. Mehta, Lalit Bhasin, Vinay Bhasin and Vineet Kumar, Advocates, with him)

In CA 1857- V.M. Tarkunde, Senior Advocate (S. Ganesh, K. Vasdev and TS.N. Chari, Advocates, with him)

Respondent

Soli J. Sorabjee, Additional Solicitor-General and Girish Chandra for Respondent (UOI) (CA 1629

Equivalent Citations

1981 AIR 818; 1981 SCR (2) 533; 1981 SCC (1) 664; 1981 SCALE (1)90

Type of case

Civil Appeal

Court

Supreme Court of India

Act Involved

Industries (Development and Regulation) Act, 1951

Provisions and statutes involved

Section 15, Section 18A, Section 18 AA and Section 18F of the Industries (Development and Regulation) Act, 1951

Bench:

R. S. Sarkaria, D. A. Desai, J., O. Chinnappa Reddy, J.

Author of the Judgement

The majority judgement was delivered by Justice R. S. Sarkaria for himself and Justice D.A. Desai.

Dissenting opinion

The minority part was delivered by Justice Chinnappa Reddy.

Background of Swadeshi Cotton Mills v. Union of India (1981)

Swadeshi Cotton Mills was established in 1946 in Kanpur. It started as a single textile facility. The Company strategically expanded its operations between 1956 and 1973. It set up and acquired five more facilities in Pondicherry, Naini, Udaipur, Maunath Bhanjan, and Rae Bareilly. Each of these units was separately registered and complied with the provisions of Section 10 of the Industries (Development and Regulation) Act, 1951.

Additionally, the Company also held 97% shares of Swadeshi Mining and Manufacturing Company Ltd. The Company earned a substantial income from investments in its subsidiary and other shares and securities. Between 1957 and 1973, Swadeshi Cotton Mills witnessed significant financial progress. It marked substantial growth in key financial indicators such as fixed assets, reserves, and surplus. From 1957 to 1974, the Company’s reserves and surplus grew from ₹2.3 crores to ₹4.3 crores, and the Company’s fixed assets grew from ₹5.8 crores to ₹19 crores. However, this remarkable expansion of the Company’s asset base didn’t last long. It started with a marginal decrease in the fixed assets in the subsequent fiscal year (1976-77). From April 1973, the Company started maintaining different books for all its businesses and assets. They did the same for assets, including six industrial undertakings. After an audit, the consolidated accounts were presented to the investors and shareholders.

By 1976, the Company had suffered a significant loss of ₹294.82 lakhs. Furthermore, by 1977, the Company reported a loss of ₹200.34 lakhs. Due to these losses, the Company incurred several encumbrances on its fixed assets. Some notable encumbrances included those on all the six industrial undertakings. Mainly on the units in Pondicherry, Maunath Bhanjan, Udaipur, and Kanpur (ICICI). These encumbrances were in the form of loans, credit, and fund allocations. There was even a Company-wide encumbrance on diesel-generating sets. The total encumbrances grew to ₹322.41 lakhs by 1978. These were created to pay wages, provide gratuity funding and fulfil bank dues. This showed the poor condition of the Company, where they could not even generate working capital.

Facts of the case

On April 13, 1978, the Indian Government issued an order under clause (a) of sub-Section (1) of Section 18AA of the Industries (Development and Regulation) Act. This Section empowers the Central Government to immediately intervene and take control of the management of the industrial unit by itself or by some person or body of persons authorised by it if the management of an industrial undertaking jeopardises the Company’s functioning. Clause (1) of Section 18AA provides that if any irresponsible financial practices are noticed in the Company’s management or any risky investments are made, assets encumbered, or funds diverted, which affects the production of articles, and immediate action is required, Central Government can without investigation take control over the management of the industrial unit by itself, some person, or body of persons authorised by Central Government. In the present case, the primary reason for the order was the creation of encumbrances on its assets, which affected the production of the industry. The Central Government authorised the National Textile Corporation Limited to take over the management of the six industrial undertakings of Swadeshi Cotton Mills by passing an order. The Order also specified a few terms and conditions.

These terms included the following conditions:

Compliance with government directions
Five-year tenure for the authorised person, in this case, the national textile corporation.
The Central Government may terminate the appointment of the authorised person earlier if they deem it necessary. This order was to come into effect on the date of its publication in the Official Gazette.

On April 19, 1978, three petitioners filed a writ petition under Article 226 of the Constitution of India. It challenged the validity of the government order authorising the takeover. The first petitioner was Swadeshi Cotton Mills Company Ltd., through its Joint Secretary, Shri Bhim Singh Gupta, its Managing Director. The second was Dr Rajaram Jaipuria; the third was its subsidiary, Swadeshi Mining and Manufacturing Company. The case went through various stages of hearings and referrals in the High Court. It ultimately reached a full bench of five judges in the Delhi High Court. The full bench considered a few questions:

Whether compliance with the audi alteram partem principle should be applied while construing Section 18AA of the Industries Development and Regulation Act,1951?
Whether hearing is to be given to the parties who would be affected by the order to be passed before the passing of the order?
Whether a hearing can be given after the order is passed and whether the order passed under the said Section is vitiated by not giving such a hearing?

The Delhi High Court judgement came with a majority and a minority opinion. There were dissenting opinions on the interpretation of Section 18AA of the Industries (Development and Regulation) Act, 1951. The High Court interpreted Section 18AA(1)(a)(b) to exclude the Section 18AA requirement of giving a prior hearing to the party affected by the order. Section 18F was noted for providing a post-decisional hearing to the owner of the industrial undertaking.

The High Court judgement emphasised that as per Section 18AA, taking over the management of a company or its undertakings is not considered flawed. Additionally, the absence of a prior hearing too is justified. The government’s order was upheld by the High Court. On the other hand, the minority opinion stated that a prior hearing was necessary. Citing the principles of natural justice, the dissenting judges claimed that it was essential that the affected parties get a chance to present their cases before passing an order under Section 18AA.

The dissenting judge observed that the denial of a prior hearing wouldn’t be remedied by a post-decisional hearing. Giving a prior hearing to the owner was essential. Passing an order under Section 18-AA requires giving a pre-decisional hearing. They also stated that the second question of the post-decisional hearing would not arise. They believed granting a subsequent hearing could not replace the need for a prior hearing. The minority judges felt that the Court should ensure while moderating the relief that the order is kept alive only until the making of the fresh order. They should also keep the public interest in mind while ensuring that a full and complete hearing is provided. The Court should review all the circumstances of the takeover. They should also focus on the preservation and maintenance of the property when a decision is pending.

The five-judge bench discussed the above-mentioned matters of law. After deciding the reference case, the case was reheard on merits by the full bench of three judges.. The bench consisted of three learned judges. Chief Justice Deshpande, Justice Anand, and Justice M. L. Jain were on the bench. The challenge to the validity of the impugned order failed. However, the writ petition succeeded in part. It succeeded in protecting certain aspects of the impugned order to take over the corporate entity of the Company, the corporate entity of the subsidiary and its assets, the petition was allowed and the respondents, the Union of India and the authorised person were directed to release from its control and custody and/or deliver possession of any assets or property of the Company which were not referable to the industrial undertakings.

The Government and National Textile Corporation were restrained from interfering. They were not allowed to intervene with the corporate entity and assets outside the scope of the impugned order. Swadeshi Cotton Mills obtained a certificate under Article 133 of the Constitution, which indicated that the case was suitable for appeal to the Supreme Court. The Delhi High Court on July 12, 1979, granted a similar certificate to the Union of India and the National Textile Corporation Ltd., as well. Civil Appeals 1629, 2087, and 1857 of 1979 were filed in the Supreme Court by the Company, the Union of India, and the National Textile Corporation, respectively. All three appeals were disposed of by the Court by a single judgement in 1981.

Issues

The issues accepted by the Court were as follows:

Whether it is necessary to follow the rules of natural justice to give a hearing to the owner of an undertaking before issuing an order of takeover under Section 18AA?
Whether the provisions of Section 18AA and Section 18F impliedly exclude the rules of natural justice?

Arguments of the parties in Swadeshi Cotton Mills v. Union of India (1981)

Appellant’s Arguments

Shri Nariman represented the Appellants. He presented an analysis of the language, structure, or explanation of Sections 18AA and 18F and emphasised that there is no indication in the Sections to exclude the application of natural justice principles. It is neither expressed nor implied. The mere use of the term “immediate” in Section 18AA(1)(a) does not imply a legislative intent to completely disregard the audi alteram partem rule. He interprets that it allows for action without a prior investigation under Section 15.

The word “immediate” in clause (a) has been used in contradistinction to ‘investigation’. According to Section 18AA, action can be taken without prior investigation under Section 15 in special circumstances. These circumstances could be the following.

If there is evidence in the possession of the Government, that the assets of the Company are being unfairly utilised by doing any of the three things mentioned in clause (a).
The undertaking has remained closed for at least three months, and the condition of the plant and machinery is such that it is possible to restart it.

The term ‘immediate’ is used only in clause (a) of Section 18AA(1). It is absent in clause (b) of the same Section. He claimed that the use of the word “immediate” in Section 18AA(1)(a) only dispenses with the investigation under Section 15 and not with the principle of audi alterm partem. He claimed that the marginal heading of Section 18AA supports this interpretation of the said statute. The Statement of Objects and Reasons of the Amendment Bill in 1971 further supports the interpretation by the Appellants. The Appellants also point out how it is peculiar to exclude the principle of natural justice from one clause.

He goes on to emphasise the need for pre-decisional hearings. The learned counsel contends that the High Court’s suggestion of excluding the audi alteram partem rule at the pre-takeover stage under Section 15 contradicts the precedent set by this Court in Keshav Mills and Ambalal’s case. Shri Nariman highlights the Keshav Mills case to argue that if the rule of natural justice applies even after a full investigation, it should be observed when there has been no investigation. He puts special emphasis on the need for a pre-decisional hearing in cases of administrative actions. In cases where the consequences are grave and prejudicial to the rights of one entity, the need for a pre-decisional hearing increases. He discusses how urgency should not be the reason for Courts to assume that the legislation intended to exclude even a minimal hearing. Taking this argument forward, he argues that the government had enough time to give short notice to the Company. This would have enabled them to present a case in a fair hearing. He points out that the government’s evidence for passing the order was not disclosed to the Appellant until after the filing of the writ petition. He argued that situational modifications should have been made even if urgent action was required. These attempts should have been taken by the government to ensure fairness. Advocating for the need for a hearing, they said that the Appellant should have been provided an opportunity to explain the adverse findings.

Section 18F deals with the Central Government’s authority to annul a takeover. Two conditions are specified for the annulment in the Section 18F. The first condition states that there can be an annulment when the purpose of Section 18 A has been fulfilled. The second condition is if in some other case, there is no need for the order to stay in place. With the help of Section 18F, they tried to prove that post decisional hearing was not meant to replace a pre-decisional hearing. The use of the term “any other reason” applies only to the post-takeover circumstances. “Any other reason” does not include reasons related to pre-takeover circumstances. According to the act, complying with Section 18F, an order of cancellation is meant to be prospective. The language of the Section suggestively prohibits any inquiry into the circumstances leading to the takeover. The aggrieved person is not entitled to demonstrate that the order was void ab initio.

Respondent’s arguments

Shri Soli Sorabji, the Solicitor-General, was the counsel for the Union of India. He argued that the application of the audi alteram partem rule is implicitly displaced. He looked closely at Section 18AA and examined its language, structure, context, and purpose. He claimed that Section 18AA addresses situations that demand immediate preventive action. Additionally, he stated that the primary objective of that statute is to prevent the decline in production of the particular commodity. The purpose of the order was not to punish the owner. He believed that the order aimed to safeguard the industries and consumers from the problems that might arise from a decline in production. He also brought up the ideas of public interest. He contended that the matter under Section 18AA extends beyond the government and the management. Along with the interests of the consumer and the community, the order also aimed to protect the interests of the workers. He asserted that the subject matter eliminated the need for providing a prior hearing. The learned counsel objected to the claim that there should be an interval between the issuance of an order and its enforcement. He claimed that the enforcement should be immediate. Section 18AA is designed to ensure immediate preventive action. The Section aimed to address emergent situations.

Another part of the Respondent’s argument dealt with the principles of natural justice. He argued that a modified form of the natural justice rule is incorporated in Section 18F. According to his interpretation, that Section allows the owner to contest the original order. If they feel aggrieved under Section 18AA, they could challenge the order in a post-decisional hearing. Therefore, Sorabji contends that due to the presence of the natural justice principle in Section 18F, the important part of the principle is not entirely displaced. He also highlights how Section 18F does not prescribe a specific timeframe. He argues that for an effective application of natural justice principles, it is essential that the post-decisional hearing be provided within a reasonable timeframe. He later acknowledges that the Central Government exercises quasi-judicial functions under Section 18F. This Section provides the government with the authority to handle applications seeking quick relief fairly.

Judgement of the court

Firstly, the Court took upon the question of what the term ‘immediacy’ signifies. They rejected the contention that the term is not open to judicial review. The Court examined what that term could imply in these circumstances. The bench claimed that immediacy could not be the only ground to infringe individual property rights, and they cited multiple case laws to support this claim. The Court then provided an interpretation for Section 18AA. It held that Section 18AA(1) cannot be universally interpreted to exclude the application of the audi alteram partem rule. Using this interpretation, the Court believed that it was essential to ensure fair play in action before passing the impugned order. However, the Court refrained from quashing the impugned order. It directed the Central Government to provide a complete, fair, and effective hearing to the aggrieved owner. The Court insisted that the aggrieved party get a fair hearing within a reasonable timeframe. It highlighted that a review of all relevant materials and circumstances was essential. Only after a complete review should the Court take any fresh decision.

Later, the Court took up the question of the investigating committee’s report. They found that the committee didn’t need to furnish a copy to the owners and management. They also said that the government was under no obligation to provide the report before passing an order of takeover. The Appellants already knew the grounds on which the government had passed the order under Section 18AA. They also knew of the government’s considerations. The Company even tried to negotiate with the government proves that they had information on actions regarding the possible takeover of their undertakings. The Company requested some time to obtain the necessary funds to restart the mill. Upon this request, the government had given the Appellants additional time. The majority decision prevailed. It allowed the appeals and directed the Central Government to conduct a fair hearing within a specified time frame.

Cases cited in the judgement

Keshav Mills Company Ltd. v. Union of India

This case was cited by the Court to claim the High Court misunderstood or misapplied the principles of Keshav Mills (1972) in this case. This citation is part of an argument challenging the High Court’s interpretation of what public good entails. The interpretation of the connection between public good and its role in natural justice was also examined. The correct legal position of this case is restated by the Court. It also clarifies the Court’s stance on the timing of providing a hearing. It discusses when should the affected party be given a hearing in the context of takeover proceedings under the Industries (Development and Regulation) Act (I.D.R. Act). The case also deals with the question of furnishing a copy of the investigation report. It stated that the right to receive a copy of the investigation report is not confined to the pre-investigation stage. Keshav Mills recognized that it may be necessary to allow the affected owner a chance to present their case, even in the post-investigation stage. It suggested that an opportunity should be given before making an order of takeover under Section 18A.

Mohinder Singh Gill v. Election Commissioner of India

Mohinder Singh Gill v. Election Commissioner of India (1977) is used as a precedent in the Swadeshi Mills case. It is used in the context of the right to a fair hearing, even in situations requiring urgent action. Justice V. R. Krishna Iyer, in the Mohinder Singh Gill case, articulated the principles of natural justice. He discussed their application in situations where there is a tension between the need for speedy action and a duty to act fairly. The Court mentions “fair play in action.” is the essence of natural justice. This principle reflects that administrative power should not eclipse fairness and transparency. Additionally, it stated that executive justice should not result in unilateral injustice. The judgement in Mohinder Singh Gill stressed that fairness is a flexible and pragmatic concept. It should not be treated as a rigid abstraction. The Court added one unique and important aspect in the judgement. It emphasised that in situations requiring immediacy, they can limit the time for a hearing. However, a denial of a fair hearing should not be permissible.

A. K. Kraipak v. Union of India

A. K. Kraipak v. Union of India (1969) highlights the principles of natural justice. It talks about the need and enforcement of natural justice principles especially in the context of administrative actions and decisions. The case emphasises the abolition of the supposed distinction between quasi-judicial and administrative decisions. The Court in Kraipak explicitly stated that the rules of natural justice should apply to administrative inquiries. The Court discusses many far-reaching consequences of an unjust decision in an administrative inquiry. These effects may transcend just a quasi-judicial inquiry. The case clarifies that the rules of natural justice can only operate in areas not covered by any law validly made. It claims that if a statutory provision excludes the application of the rules of natural justice, the Court cannot ignore the mandate of the Legislature. This provides a framework for determining when natural justice principles are applicable.

Maneka Gandhi v. Union of India

The Maneka Gandhi v. Union of India(1978) case highlights the ‘audi alteram partem’ rule as a highly effective principle. It recognises that the principle was devised by the Courts to ensure a just decision. It acts as a system of checks and balances against the abuse or misuse of power. By citing this case, the Court sought to underscore the vital application of this natural justice principle. It was established that, in emergent situations requiring immediate action, the preliminary action should be followed by a full remedial hearing.

Dissenting opinion in Swadeshi Cotton Mills v. Union of India (1981)

Justice Reddy’s dissenting opinion revolves around the question of the applicability of the principles of natural justice. He discusses its applicability in cases involving the takeover of industrial undertakings. He acknowledges that natural justice is a fundamental principle in decision-making functions. Judicial, quasi-judicial, and administrative all of these are discussed in his opinion. The dissenting judge suggested the need for a distinction between the application of natural justice principles. It questioned the balance underscored by Section 18AA concerning fundamental liberties and its application to vested interests. According to him, in a socialist, secular, and democratic republic country like India, it is the responsibility of the Constitution to recognize the primacy of public welfare. He states that public welfare takes preeminence over private interests. In cases of urgency, especially where public interest is involved, preventive action may be necessary. In these cases, the principle of natural justice may not be observed. Justice Reddy cites Ridge v. Baldwin to further his argument that natural justice may not be as rigorously applied in situations where the public interest is of utmost importance. However, he did mention that if a government decision is challenged, it is the responsibility of the state to provide substantial grounds and reasons for its course of action.

He emphasised that the implication of natural justice is presumptive. He believes that it may be excluded by the express words of the statute or necessary intent. Justice Reddy refers to Annie G. Phillips v. Commissioner of Internal Revenue; John H. Fahey v. Paul Mallonee; etc. to distinguish cases where only property rights are involved. He distinguishes them from cases involving civil and political rights. He used these to argue that in cases that specifically involve property rights, the applicability of natural justice can be impacted. The judge disagrees with the notion that Section 18F merely provides for the cancellation of the order. Justice Reddy highlights the remedy available to the affected parties through Section 18F. He argues that it offers a post-decisional review. According to him, this makes it a sufficient substitute for pre-decisional natural justice.

Natural Justice and Fundamental Legal Maxims

Principles of natural justice are those rules which have been laid down by the Courts to protect the basic rights of individuals against arbitrary procedures. They provide minimum protection against the rules and laws that may be adopted by a judicial, quasi-judicial and administrative authority while making an order affecting those rights. These rules are intended to prevent injustice. The rules of natural justice do not supplant the law of the land. They are there only to supplement it. Natural justice is deeply rooted in traditions and is the essence of fair adjudication. They are ranked as fundamental. There are two major Natural Justice Principles, Both principles are mentioned below:

Nemo judex in sua causa

It means no one should be a judge in their own cause. According to this principle, the decision-makers should be impartial. They should not have any personal or financial interest in the matter. Also, they shouldn’t have any preconceived notions about the parties involved or the subject matter. This principle is also known as the rule against bias. Another important natural justice principle is audi alteram partem. This rule has been widely discussed in the present case (i.e., Swadeshi Cotton Mills case).

Audi alteram partem

Audi alteram partem means “listen to the other side”. According to the principle, no person should be judged without a fair hearing. Every party is allowed to respond to the evidence against them. This natural justice principle has its roots in ancient history. The principle is said to have been referred to in Medea, where he claimed that it is unjust to decide without a full hearing. Bhagwati, J., in Maneka Gandhi’s case also advocated for this rule. He further clarifies that it was devised by the Courts to ensure that a statutory authority arrives at a just decision. It ensures that the acts by the government are not arbitrary, and it is calculated to act as a healthy check on the abuse or misuse of power. He, therefore, concluded that the reach of the principle should not be narrowed, and its applicability should not be circumscribed. Earlier it was thought that natural justice principles only apply to judicial or quasi-judicial proceedings. However, in Dr. Bina pani Die’s case, the Court held that this principle would apply even to an administrative order.

Impact of the judgment in Swadeshi Cotton Mills v. Union of India (1981)

The judgement contributes to the protection of the individual rights of those affected by the government’s actions. It protects the industries against arbitrary and unreasonable administrative actions. The case also sets a precedent protecting the rights of shareholders who are affected by the government’s decision. The Court intended that this case ensure that the government’s power to take over a company must be exercised judiciously. The case insists on a balance between fairness for individuals and the propagation of public interest. The essential requirement for relevant material to safeguard individuals from unjust government decisions is also highlighted in the case. It contributed significantly to the ongoing development of administrative law and jurisprudence in India. It added to the body of legal principles existing in place to take preventive immediate actions even in situations of encroachment of individual rights. While also helping shape the relationship between the state and individuals in the context of administrative actions.

The case placed the burden of proof on the state. It underscored the idea that the government must justify its actions and the Company should also be allowed to justify the findings. The Court also, in a way, determined which circumstances would be considered when determining if an industry was taken over for the public good. This case also helped the Court clarify the role of the judiciary in administrative matters. It emphasised that the judiciary is not expected to substitute its judgement for that of the government. It made a precedent that the judiciary is tasked with assessing the legality and procedural propriety of administrative actions. The case also insisted on a connection between the relevant material considered by the government and the subsequent action taken. It provides an opening that allows companies to seek predecisional hearings. It strikes the perfect balance while respecting the executive’s authority. These steps ensure that there is a rational nexus between the information or evidence considered and the decision made by the government.

Conclusion

The Supreme Court’s interpretation of the principles guiding administrative decision-making played an important role in promoting fairness. The emphasis on coherence with the public interest provides a framework for evaluating the legality of government action. The decisions need to be rooted in relevant material. This ensures procedural propriety of governmental actions. The case ensures that a balance between executive discretion and judicial review is maintained. The judiciary’s role in upholding the rule of law and providing justice in individual property rights matters is highlighted in the case. The application of natural justice principles must be flexible and adapted to the specific circumstances of each case. An opportunity for affected parties to present their case is promoted. It guarantees fairness in cases of industrial takeover. The Swadeshi Cotton Mills case played a significant role in shaping the evolution of legal standards. It established clear precedence in cases of industrial takeovers. The precedent set clear rules for how to govern the relationship between the state and its citizens.

Frequently Asked Questions (FAQs)

What is the Swadeshi Cotton Mills Company Limited Acquisition and Transfer of Undertakings Act 1986?

It was an Act to provide for the acquisition and transfer of certain textile undertakings of the Swadeshi Cotton Mills Company Limited. It was passed to secure the proper management of such undertakings. It was to subserve the interests of the general public. It was done to ensure the continued manufacture, production and distribution of different varieties of cloth and yarn. It gave effect to the policy of the State towards securing the principles specified in clauses (b) and (c) of Article 39 of the Constitution.

What is the history of Swadeshi mills?

What is the doctrine of post-decisional hearing?

Post-decisional hearings provide the aggrieved party with an opportunity to be heard. This opportunity is provided to the aggrieved parties after the decision is already taken. This doctrine is designed for cases of administrative action in urgent situations. It is related to the broader concept of natural justice. The doctrine is also known as a remedial hearing. It ensures procedural fairness for all parties involved in the conflict. The principle recognises that it may be impractical to provide a hearing before a decision is made in some situations. The doctrine of post-decisional hearing is also known as a remedial hearing.

What is natural justice?

Principles of natural justice are those rules laid down by the Courts to protect the basic rights of individuals against arbitrary procedures. They provide minimum protection against the rules and laws that may be adopted by a judicial, quasi-judicial and administrative authority while making an order affecting those rights. These rules are intended to prevent injustice. The rules of natural justice do not supplant the law of the land. They are there only to supplement it. Natural justice is deeply rooted in traditions and is the essence of fair adjudication. They are ranked as fundamental.

What is audi alteram partem?

Audi alteram partem means ‘listen to the other side’. According to the principle, no person should be judged without a fair hearing. Every party is allowed to respond to the evidence against them. This natural justice principle has its roots in ancient history. This rule includes the following. 1. Right to notice 2. Right to present case and evidence 3. Right to rebut adverse evidence 4. Right to cross-examination 5. Right to legal representation 6. Disclosure of evidence to the party 7. Showing the report of enquiry to the other party 8. Reasoned decisions or speaking orders

What is nemo judex in sua causa?

It means no one should be a judge in their own cause. According to this principle, the decision-makers should be impartial. They should not have any personal or financial interest in the matter. Also, they should not have any preconceived notions about the parties involved or the subject matter. This principle is also known as the rule against bias. This rule plays an important role in administrative proceedings. Any administrator exercising adjudicatory powers should not have any personal or proprietary interest in the outcome of the proceedings, or there should not be any reasonable ground for believing that there was the likelihood of bias in the given decision.

References

https://blog.ipleadein/critical-analysis-principle-duty-act-fairly-decided-keshav-mills-co-ltd-v-union-india/

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An overview of GST in Indian real estate sector

Vanshika Kapoor

April 7, 2024

This article has been written by Aman Kumar Pandey and Pawan Kumar.

This article has been edited and published by Shashwat Kaushik.

Table of Contents

Introduction

The real estate sector is among the widely acknowledged sectors. It is very crucial for the growth and development of the Indian economy, as it holds the second position in terms of employment generation after the agricultural sector in India. The real estate sector can be subdivided into four further sectors, which include retail, housing, commercial and hospitality.

The tax structure that existed before the commencement of GST was filled with complexity, which included Value Added Tax (VAT), service tax, stamp duty, registration fees, and local body taxes. The complexity of the previous tax system caused inefficiency and cost burden on the real estate sector. The opaque structure cast a shadow on the transparency of the real estate sector, which reduced people’s faith in investing.

The Goods and Services Tax (GST) was implemented on July 1, 2017 by removing a complex and shattered tax structure for central as well as state taxes. In India, goods and services are classified into different tax slabs, such as 5%, 12%, 18%, and 28%, respectively. Commodities that are essential in nature are generally exempt from GST, whereas gold and job work related to diamonds have a low rate of GST. A compensation cess is being levied on demerit goods and several luxury items.

GST affected the real estate sector to a great extent by reducing the prices of properties due to the reduction of tax rates. There was a further reduction of the tax rates, as the rate of GST till March 2019 for Affordable and Non-Affordable Residential Under-Construction Properties was 8% and 12%, respectively, with the benefit of Input Tax Credit (ITC), but the rates from April 2019 for Affordable and Non-Affordable Residential Under-Construction Properties were reduced to 1% and 5%, respectively, without ITC.

In this article, we have comprehensively discussed how GST has impacted the Indian real estate sector.

Application of GST in Indian real estate sector

Sale of land

As per Paragraph 5 of Schedule III of the Central Goods and Services Tax Act, 2017, the sale of land is neither a supply of goods nor a supply of services, so no GST will be applicable.

Sale of building

If there is a ready-to-move-in property along with the issuance of its completion certificate or the building obtains its first occupancy, or whichever is earlier, in that case, GST will not be applicable on the sale of the building.

For instance, a building is an under-construction commercial property for which one buyer made an advance payment to book one of the units under his own name. If the construction of that building is completed and the unit is transferred to the buyer, in that case, GST will be applicable to that building at the rate of 18%. Now, if any unit is being sold, the value of land and building will be included, and we cannot bifurcate the value of land and building separately.

GST is not applicable on the land because we have already paid the stamp duty on that land. The reason why the government has decided that whenever there is a sale of a building, GST will not be computed on the one-third value is based on the assumption that the one-third value (33% of the total value) belongs to the land, so it will be excluded from the computation. Suppose GST is applicable at the rate of 18%, then the one-third value of the land will be excluded, and the net GST liability will be at the rate of 12%. But such a methodology of excluding the value of the land from the total value of the building is not entirely justifiable because places where the value of the land is much higher than the structure or the building that has been constructed on that land will not serve the purpose of computing GST accurately on that building or will not be able to exclude the accurate value of the land for the computation of GST.

Affordable residential property

Metropolitan cities: If affordable residential housing property (under construction property) is located in metropolitan cities like Delhi (including the National Capital Region), Mumbai (including the Mumbai Metropolitan Region), Chennai, Hyderabad, Kolkata and Bangalore with a carpet area of up to 60 square metres and a purchase value of up to 45 lacs, then GST will be applicable at the rate of 1%, including projects that come under the scheme of Pradhan Mantri Awas Yojana (PMAY).

Non-metropolitan cities: If affordable residential property (under construction property) is located in non-metropolitan cities with a carpet area of up to 90 square metres and a purchase value of up to 45 lacs, then GST will be applicable at the rate of 1%.

NOTE: Any builder who indulges in the construction of such property is not entitled to avail the benefit of the Input Tax Credit (ITC).

In this article, we have further discussed what Input Tax Credit is and its implications for the Indian real estate sector.

If the builder purchases the raw materials for the construction of such property from the supplier, the GST charged by the supplier on such purchase cannot avail the builder of the benefit of ITC.

There is also one condition that 80% of the purchase should be from the registered supplier, and the GST would be applicable as per the GST rate of those materials, but in the case of cement, GST will be applicable at the rate of 28%. If the builder fails to follow the condition, then he will be liable to pay GST at the rate of 28% on all the materials on the Reverse Charge Mechanism.

Non-affordable residential property

In such properties, GST will be applicable at a 5% rate. Under Non-Affordable residential property also, builders cannot avail themselves of the benefit of ITC.

Rent

GST does not attract any rent collected from properties used for residential purposes by a registered person. But GST will be applicable at a rate of 18% if the property is rented out for some commercial purpose to a tenant who is a registered person. The landlord also needs to pay GST at the rate of 18% on the rent collected from the commercial property if he is a registered person.

According to Section 22 of the CGST Act, a person needs to register himself under GST if his aggregate annual turnover surpasses Rs. 20 Lakh in a financial year.

Maintenance charges

GST shall be applicable at the rate of 18% if the flat owners are paying at least Rs 7500 or more as maintenance charges and if the annual turnover of the housing society or Resident Welfare Association (RWA) is more than Rs 20 lacs. Both conditions should be fulfilled for the application of GST.

Housing societies and Resident Welfare Associations can avail themselves of ITC if they pay taxes on the purchase of capital goods such as generators, which are to be used in residential societies, goods such as sanitary or hardware items and even services like repair or maintenance.

Works contract services

A work contract has been defined under Section 2 (119) of the Central Goods and Services Tax Act, 2017. Works contract services are usually a combination of material and labour, which cannot be bifurcated as they are naturally bundled. In Paragraph 6 (a) of Schedule II of the Central Goods and Services Tax Act, 2017, work contract services have been considered a composite supply.

Whenever there are two or more supplies of goods and services in conjunction with each other and which are by nature in a bundle wherein one of the supplies is treated as a principal supply, it is known as a composite supply (Section 2 (30) of the CGST Act). Therefore, Works Contract Services is a composite supply wherein both material and labour are included and cannot be supplied separately.

According to the general rule of Section 17 (5) (c) of the CGST Act, when works contract services are provided by the contractor with respect to the construction of an immovable property (excluding plant and machinery), the builder or developer cannot avail the benefit of ITC. But if the input service is used by the contractor for further supply of works contract service, the contractor can avail of the benefit of ITC.

Likewise, as per the general rule of Section 17 (5) (d) of the CGST Act, goods or services (or both) used with respect to the construction of an immovable property (excluding plant and machinery) by a taxable person for his own use cannot avail the benefit of Input Tax Credit. But the benefit of ITC can be availed of by the contractor if such goods, services or both are used in the course of business or for further business purposes.

Input Tax Credit (ITC)

ITC, a core feature of GST, empowers businesses to offset the GST they have already paid on inputs against their final GST bill. ITC eliminates the dreaded “tax-on-tax” domino effect, ensuring that only actual value added is taxed at each stage.

The term ITC has been defined under Section 2(63), which is a critical element of GST; it allows businesses to set off the taxes they have already paid at the time of purchase against the final tax invoice. This mechanism completely eliminates the previous tax system’s cascading effect, which benefits both businesses and customers.

If a manufacturer pays a tax of Rs 30,000 on his product, and if he has already paid a sum of Rs 25000 as input tax for the purchase of raw materials that were used for the production of the product, then he only needs to pay Rs 5,000 to the government as output tax.

The provisions for ITC have precisely been highlighted under Sections 16 to 21 of the CGST Act 2017.

Section 16 deals with who is eligible to claim ITC under the given conditions and what is the time prescribed to claim ITC.
Section 17 specifies the goods or services that are used for both business and non-business purposes or in the case of taxable and non-taxable supplies. It also provides a list of items that are ineligible for ITC.
Section 18 talks about special incidents where ITC can be claimed.
Section 19 deals with the rules of ITC related to job work.
Sections 20 and 21 specify the provisions of ITC regarding input service distributors.

Earlier in the real estate sector, developers could potentially save on taxes by taking advantage of ITC, but in the 34^th meeting of the GST Council, it was decided that builders or developers cannot avail of the benefit of ITC under the new tax rates for the real estate sector.

Comparative study

As we have so far discussed regarding the significant impact of GST on the real estate sector in India. Therefore, it becomes necessary to compare the GST real estate tax regime with any country, so in this article, we have compared it with Australia because it is one of the developed nations that follows the GST tax system.

Through this analysis, we can get a broad and diversified idea about the GST regime that is being followed in both countries. In India, we follow a dual GST model in which the GST gets divided between the central and the state, whereas, in Australia, it is the responsibility of the Australian tax office to collect the GST and then distribute it to the states.

We can say that even though India and Australia have different approaches to their GST regimes, which may vary, both countries aim to increase their economic growth by enhancing their tax efficiency. There is a lot that both countries can learn from each other.

There is a federal system that is being followed in both countries, where the centre and the state share taxation responsibility. Along with this, both countries have the potential for economic growth in the upcoming years. These similarities make the GST comparison between both nations more relevant.

In India, GST was introduced a few years ago, in 2017, whereas in Australia, it has been implemented since 2000. With India having a multi-tiered GST system for different goods and services, the tax slab of India includes rates of 5%, 12%, 18%, and 28%. On the other hand, Australia only has a single GST rate, i.e. 10% for all goods and services. In India, the goods and services which are exempted from GST fall under a single list that is being provided through Notification No. 12/2017- Central Tax and are being treated in the same manner, but in Australia, goods and services exempted from GST fall either in the category of GST-free or Input-taxed and are being treated accordingly.

The main objective behind this analysis is that we can discuss the real estate GST regimes of both countries. In fact, both the Indian and Australian GST regimes have certain flaws that need to be addressed and can potentially look after each other’s GST regimes:

In Australia, a GST of 10% applies to all commercial properties for the purpose of sale (according to Division 40), whereas the GST regime in India for commercial properties is 18%. Lowering the GST rates in India on the sale of commercial property can encourage the construction of more commercial property, which can lead to an increase in the economic growth of the country.
In India, the GST structure does not allow developers or builders to claim the benefit of ITC, whereas, Australia has a very smooth mechanism for claiming ITC, which helps to lower the construction cost and provide the property to the customers at a lower price.
In Australia, the current rate on the sale of newly constructed residential properties is 10%, which is relatively high as compared to the Indian tax regime, which is 1% and 5% for affordable and non-affordable residential properties, respectively, that are under construction. Reducing the rates can help to reduce the price of the property and provide it at a more affordable rate to the buyers.

Both countries can make their GST regime more effective for the real estate sector by learning from each other and working on the potential areas that require improvement.

Disputes or challenges

Disputes or challenges with respect to Input Tax Credit (ITC) normally arise when the authority denies claiming ITC due to any discrepancies in documentation, non-compliance with GST rules or classification issues. There is a case that addresses the same issue related to ITC.

M/S Safari Retreat Private Limited & Anr. vs. Chief Commissioner Of Central Goods And Service Tax & Ors.

Facts of the case

In this case, the petitioner is indulged in carrying on the business of constructing shopping malls to let out to multiple tenants and lessees. Materials and other inputs in the form of cement, sand, steel, aluminium, wires, lifts, escalators, air conditioning plants, etc. were purchased by the petitioner in large quantities and services in the form of consultancy services, architectural services, legal and professional services, etc. were received by the petitioner for the construction of the shopping mall. All these goods, as well as services that were used for the construction, are taxable under the CGST Act and SGST Act (The Odisha Goods and Services Tax Act, 2017), and therefore, the petitioner had to pay a huge amount of GST and accumulated ITC of Rs. 34,40,18,028/- on the purchase of such goods and the services availed. To utilise the ITC to set off the CGST and OGST liabilities, which were payable on the rents received by the petitioner from the tenants, approached the revenue authority in this regard. However, the revenue authority told the petitioner to deposit the CGST and OGST without utilising ITC by relying on the restrictions placed under Section 17(5)(d) and also told the petitioner about the penal consequences if it did not do so. So, the petitioner ended up paying a huge amount of CGST and OGST.

Issues raised in the case

Whether the petitioner can avail of the benefit of ITC that has been accumulated on the purchase of inputs for the construction of the shopping mall that is intended to be let out?

Arguments put forth

From the petitioner’s side

The objective of the CGST Act was to avoid the cascading effect of numerous indirect taxes.
As per Section 16 of the CGST Act and OGST Act, the petitioner, being a registered person, is entitled to avail the benefit of the ITC, which is accumulated on the purchase of inputs and services availed for the construction of the shopping mall intended to be let out.
The consequence of denying the benefit of ITC would be an inevitable increase in the cost that the consumer has to bear at the end of the day and ultimately render the building uncompetitive compared to previously existing similar built-up units, which would also be violative of the fundamental right of the petitioner to carry on a business that is enshrined under Article 19(1)(g) of the Constitution.
There will be a fresh stream of GST revenues for the government from the rents generated by the building. The denial of input credit in such a situation would be completely arbitrary, oppressive and unjust. It would directly oppose the prime objective of GST itself.
The denial of ITC with respect to a building that is intended to be let out would be considered treating it like a building that is intended to be sold. Treating these two types of buildings like one for the purpose of GST is contrary to the fundamental principles regarding the classification of subject matter for the tax levy and, hence, violative of Article 14 of the Constitution.
To allow ITC to a builder who sells a building pre-issue of completion certificate while denying ITC to a person like the petitioner is clearly arbitrary and discriminatory.
A narrow interpretation of Section 17(5)(d) of the CGST and OGST Act leads to double taxation, first on the inputs used for the construction of the shopping mall and second on the rental income generated by the same mall.
The interpretation of Section 17(5)(d) of the CGST Act and OGST Act leads to a conclusion that, as per the circumstances of the present case, the petitioner is not entitled to avail ITC while paying CGST and OGST on rent received from multiple tenants of the shopping mall without breaking the tax chain, which patently goes against the intention of the Legislature and frustrates the objective of the Legislature for enacting the CGST Act and OGST Act.
The shopping mall that the petitioner is constructing is not “intended for sale,” not even “on his own account,” but “intended for letting out.”

From the respondent’s side:

The taxpayer cannot claim ITC without any authority under the law. Restrictions to avail the benefit of input credit accrued under the current law are reasonable and equally applicable to taxpayers. Rule or Act can not be changed or amended as per the suitability of the taxpayer, which usually differs from person to person.
The taxpayer must adhere to the restrictions that are prescribed under Section 17(5)(d) of the CGST or OGST Act since the taxpayer cannot challenge such restrictions by saying they are violative of their fundamental rights enshrined under Articles 14 and 19(1)(g) of the Constitution.
The petitioner is omitting the conditions and restrictions that are prescribed for registered taxpayers while interpreting the provisions of Section 16. Under CGST or OGST Act and Rules framed there, it is stated that the Registrant should follow the Act and Rule only to the degree of their suitability.
The taxpayer cannot avail of the credits accrued due to the supply of goods and services in the form of inputs used to construct the shopping mall as a vested right for paying the GST on the rent collected, which is an output taxable supply from the said property.
Restricting the flow of ITC also exists under Section 16(1), which authorises the Central Government to impose restrictions and conditions on taking advantage of input credit, which showcases the intention of the legislation that ITC may not always be allowed, either partially or fully. ITC has been denied for some transactions under Section 17 of the CGST and OGST Act. So, in order to allow flexibility, the Act provides for imposing such conditions and restrictions on the availability of input credit.
In the previous tax regime, input credits were available for the final product with regard to only certain taxes or duties. In the entire supply chain, GST is only applicable to value addition and, therefore, avoids the cascading effect of indirect taxes. So, under the erstwhile tax regime, less ITC was available to taxpayers along the entire supply chain than in the present GST regime. The transitional provisions under the GST provide adequate input credit for taxes accrued in the previous tax regime to all the taxpayers in the present GST regime.
Certain conditions and restrictions mentioned under Section 17(5)(d) of the CGST Act prescribe the denial of input tax credit to a particular class of taxpayers, which means that the legislation, under its wisdom, has decided that the input tax credit of taxes that can be availed of as ITC and the taxes where ITC cannot be availed “as policy call of the government,” which has been given effect through legislation, cannot be attained through judicial review.

Judgement of the Court

The Honorable Orissa High Court, while considering the case and the provisions of Section 17(5)(d) of the CGST and OGST Act, 2017, held that the narrow interpretation that has been adopted by the department frustrates the objective of the Act and is not required to be accepted since the petitioner has to pay the huge amount without any reason. Since the petitioner is using the property to let out on which he is covered under GST and not using it for his own purpose, even then, he is paying a huge amount of GST for which he is not accountable. If the petitioner is required to pay GST on the rental income arising from the investment on which he has paid GST, he can avail of the input tax credit on the GST. Further, the court did not accept the prayer to hold the provisions of Section 17(5)(d) of the CGST Act to be ultra vires.

Present status of the case

The Department has preferred an appeal before the Hon’ble Supreme Court of India against the judgement given by the Hon’ble Orissa High Court. Presently, the Apex Court has reserved the judgement (Civil Appeal No.- 2948/2023 & Date of Order-12/10/2023).

Indian laws for real estate sector

The Indian real estate sector is a complex and ever-evolving landscape, governed by a number of laws and regulations. These laws aim to protect the interests of buyers, sellers, and investors and to ensure the smooth functioning of the sector.

Key laws governing the real estate sector in India include:

The Real Estate (Regulation and Development) Act, 2016 (RERA)

This landmark legislation was enacted to address the rampant malpractices in the real estate sector in India. It establishes a Real Estate Regulatory Authority (RERA) in each state, which is responsible for registering and regulating real estate projects. RERA aims to protect the interests of homebuyers by ensuring that developers disclose all relevant information about their projects, including project plans, construction timelines, and financial details. It also provides homebuyers with a grievance redressal mechanism in case of any disputes with developers.

The Transfer of Property Act, 1882

This law governs the transfer of ownership of immovable property in India. It provides a legal framework for the sale, purchase, and gifting of property. The Act sets out the formalities required for a valid transfer of property, including registration of property documents and payment of stamp duty. It also protects the rights of buyers and sellers by providing for remedies in cases of breach of contract or fraud.

The Indian Contract Act, 1872

This law governs contracts in India, including contracts for the sale and purchase of real estate. It provides a legal framework for the formation, terms, and enforcement of contracts. The Act sets out the essential elements of a valid contract, including offer, acceptance, consideration, and legality of purpose. It also provides for remedies in cases of breach of contract, such as damages, specific performance, and injunctions.

The Land Acquisition Act, 1894

This law provides for the acquisition of land by the government for public purposes, such as infrastructure projects, housing, and urban development. The Act sets out the procedure for land acquisition, including the process of notification, compensation, and rehabilitation of affected landowners. It also provides for the rights of landowners in the event of compulsory land acquisition, including the right to fair compensation and the right to challenge the acquisition in court.

The Environment Protection Act, 1986

This law aims to protect the environment and prevent environmental pollution. It imposes restrictions on the development of land in ecologically sensitive areas and requires developers to obtain environmental clearances before commencing construction. The Act also provides for the regulation of air and water pollution, hazardous waste management, and the conservation of forests and wildlife.

The Benami Transactions (Prohibition) Act, 1988

This law prohibits benami transactions, which are transactions where the real owner of a property is different from the person whose name appears on the property documents. The Act aims to prevent the use of benami transactions for illegal purposes, such as tax evasion and money laundering. It provides for the confiscation of benami properties and penalties for individuals involved in benami transactions.

These are just a few of the many laws that govern the real estate sector in India. It is important for buyers, sellers, and investors to be aware of these laws and to comply with them in order to protect their interests and avoid legal complications.

In addition to the above laws, there are also a number of state-specific laws and regulations that govern the real estate sector. These laws may vary from state to state, so it is important to be aware of the laws applicable in the state where you are buying, selling, or investing in real estate.

The Indian real estate sector has witnessed significant growth in recent years, and this growth is expected to continue in the coming years. However, the sector is also facing a number of challenges, such as the high cost of land, the shortage of affordable housing, and the need for better infrastructure. To address these challenges, the government has taken a number of steps, such as introducing RERA, providing subsidies for affordable housing, and investing in infrastructure development.

The Indian real estate sector is poised for continued growth in the coming years. By being aware of the laws and regulations governing the sector, buyers, sellers, and investors can protect their interests and take advantage of the opportunities that the sector offers.

Conclusion

The tax structure that existed before the commencement of GST was filled with complexity, which caused inefficiency and a cost burden on the real estate sector. There was a need for a new tax structure and eventually, we got GST, which was implemented on July 1, 2017 by removing a complex and shattered tax structure. The introduction of GST affected the real estate sector to a great extent.

Previously, in the real estate sector, developers could save on taxes by availing of the benefit of ITC, but in the 34^th meeting of the GST Council, it was decided that builders or developers cannot take advantage of ITC under the new tax rates.

Further, we have analysed the implications of GST, especially in the real estate sector of India and Australia, where we got a broad idea about the GST regime that is being followed in both countries. Both countries follow a federal system, wherein the centre and the state share taxation responsibility. Moreover, we have also discussed that the GST regime of both countries has certain flaws that need to be addressed and can be improved by looking at each other’s tax structures.

We have also analysed a case wherein the issue involved was whether the petitioner could avail of the benefit of ITC that has been accumulated on the purchase of inputs for the construction of the shopping mall that is intended to be let out. Wherein the Hon’ble Orissa High Court ruled in favour of the petitioner. The opposite party preferred an appeal in the Hon’ble Supreme Court of India. But the Supreme Court has reserved the judgement.

References

Brief about deceptively similar trademarks in pharmaceutical industry

Vanshika Kapoor

April 6, 2024

This article has been written by Abhinaba Datta pursuing a Diploma in Intellectual Property, Media and Entertainment Laws course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Table of Contents

Introduction

Imagine you visited a pharmacy in dire need of paracetamol, putting your trust in the well-known brand “Crocin,” but accidentally ended up purchasing “Cromin,” a paracetamol from an unknown brand due to its resemblance in name or logo. Although it might seem like a minor error, it has an effect on our entire community as well as on the individual purchasing the medicine. Often, we come across cases of similar trademarks, which lessens the distinctive value of a trademark. These are known as deceptively similar trademarks; they occur when a company attempts to deceive the public and profit from the goodwill and brand value established by a well-known company.

The application of a trademark to serve as a tool to distinguish between products gets diluted, leading to confusion among the public. This article aims to showcase the complexities of this issue by shedding light on some real-world examples, the effects it has on our society and certain remedial measures that can be taken to minimise the effect. By understanding the nuances of deceptively similar trademarks in the pharmaceutical world, we can collectively strive for a safer, more regulated and more transparent landscape where the well-being of the public is prioritised over all other considerations.

Trademarks in the pharmaceutical industry

Trademarks play a crucial role in the pharmaceutical industry; they serve as a tool for companies to distinguish their products from their competitors and build brand recognition. A trademark is defined under Section 2(1)(i)(viii)(zb) of the Trade Marks Acts of 1999, as a mark capable of being represented graphically and which is capable of distinguishing the goods or services of one person from those of others and may include the shape of goods, their packaging and a combination of colours.

Trademarks consist of unique markings of symbols, numerals, letters or a combination of all these elements. Non-conventional trademarks such as shape marks, colour marks and holograms are also quite common in the pharmaceutical industry because they are crucial as they help to distinguish goods that may be similar in shape, substance or appearance.

A trademark helps in protecting a pharmaceutical product’s distinctive feature, for example; the colour or shape of pills. This ensures that when generic substitutes hit the market, the original brand stays true to itself.

Pharmaceutical companies are granted exclusive rights and legal ownership through trademark registration. By safeguarding the brand against unethical usage, it stops rival companies from taking advantage of the well-known status of established companies.

Trademark registration encourages pharmaceutical companies to invest in research and development, as their products are safeguarded from any misuse. The exclusive rights that trademark registration grants incentivise companies to release new and improved medications and drugs.

Deceptively similar trademarks in pharmaceutical industry

The term “deceptively similar” is defined under Section 2(1)(h) of the Trade Mark Act of 1999, as a mark shall be deemed to be deceptively similar to another mark if it so nearly resembles that of the other mark as to be likely to deceive or cause confusion. This assessment involves comparing the two marks, taking into account various factors such as their visual appearance, phonetic similarity, and overall impression. The aim is to determine whether the similarities between the marks are significant enough to cause consumers to mistakenly believe that they are dealing with the same company or product.

The concept of “deceptively similar” marks is important because it protects the rights of trademark owners and prevents unfair competition. It ensures that consumers are not misled into purchasing goods or services under the false belief that they are from a particular brand or company. By establishing clear guidelines for determining deceptive similarity, the Trade Mark Act helps to maintain the integrity of the trademark system and promotes fair practices in the marketplace.

Similarity in trademarks can be categorised into three types, which are as follows:

Visual similarity

It refers to a similarity in appearance or visual elements between two trademarks. It involves the assessment of visual elements such as syllables, prefixes, suffixes, shapes, length and other common aspects between two marks.

Phonetic similarity

It refers to similarity when two marks are considered to sound similar and their pronunciation is identical. This type of similarity can be determined based on the way the marks are pronounced, their enunciation, the number of syllables or even the length of the marks. To understand, here are a few examples: Starbucks and Charbucks (a small New Hampshire coffee roaster); Louis Vuitton and Chewy Vuiton (a line of dog toys introduced by Haute Diggity Dog); Xceed and Xseed.

Conceptual similarity

This type of similarity includes both phonetic and visual aspects, as it pertains to both what is seen and what is heard, referencing both the eyes and the ears. It involves assessment by considering the message conveyed by a mark. To understand, here are a few examples: Gluvita and Glucovita; Apple Inc. and Apple Corps Ltd.

To consider a mark to be ‘deceptive’, an important factor is whether, by its average intelligence, the common man is able to distinguish between the two products and not get confused regarding the source of goods.

In India, if a mark is found to be deceptively similar, it amounts to trademark infringement as well as rejection by the Registrar of Trademarks to register a “deceptively similar” trademark.

The deception in trademarks can be further classified by its nature, a person with an average intellect may be deceived by a trademark and have confusion about the following:

Misrepresentation of products: If a product has a mark that looks too much like other brands, and it’s not owned by that brand, someone might buy it thinking it’s from the brand they had in mind.
Source of trade: An individual might buy the products upon identifying the mark, believing that they come from the same origin as other goods featuring a similar mark that they are already familiar with.
Connection between trade: In this situation, although the goods carrying the marks may not be the same, they still bear a resemblance to the mark associated with different goods. In such cases, the person buying the goods may not assume that they belong to the exact brand they had in mind. However, because of the likeness between the marks, there’s a possibility that the buyer thinks there’s some connection or association between both marks.

Impact of deceptively similar trademarks in pharmaceutical industry

When it comes to pharmaceutical products, confusion among customers regarding the product’s origin is more likely to occur when trademarks are deceptively similar. Since pharmaceuticals deal with people’s well-being and health, deceptively similar trademarks have negative health effects and lead to a loss of time and money for consumers.

If medicine boxes look the same, it’s easy to pick the wrong one by mistake, which will further lead to the consumption of the wrong medicine. This mix-up can lead to health problems, making people sick instead of better. Even doctors and pharmacists might get confused and prescribe the wrong medicine, leading to adverse reactions or ineffective treatments.

Pharmaceutical companies invest heavily in research, development and brand building. The similarity in trademarks can trigger legal disputes with companies pursuing legal action to protect their intellectual property rights. These legal disputes can go on for a long time, be very expensive, and have an effect on the company’s reputation, which is important to maintain a strong and trustworthy brand. Deceptively similar trademarks can damage the reputation of established brands, as consumers may associate inferior or counterfeit products with genuine brands, leading to a loss of trust and credibility.

Competitors or small-scale companies, in order to capitalise on the brand value and goodwill of established brands, may purposefully use deceptively similar trademarks to capture market share. This unfair competition has the potential to influence market dynamics, spoil fair competition and restrict the availability of genuine pharmaceutical products by providing cheap alternatives that might not be of the same quality, causing a threat to public health.

Remedies to deceptively similar trademarks in pharmaceutical industry

In the pharmaceutical industry, deceptively similar trademarks pose a serious threat to public health and lead to confusion among customers. Even though there are rules and regulations to address the issue of deceptively similar trademarks, stricter and more robust laws are still required, especially for the pharmaceutical sector.

It’s critical to enhance the legal frameworks that are already in place. Strong trademark laws and regulations need to be specifically framed to suit the pharmaceutical industry and must be passed by the government and regulatory bodies.

In pharmaceutical trademarks, the brand name or medicine name is derived from the medicine’s intended use, salt content or any other medical term. Pharmaceutical products are frequently named after their components. However, it can be easy to trace these characteristics to the ingredients that constitute them, they are seen as weak and non-differentiable because a similar base element may be present in several medicines. Therefore, strict criteria for trademark approval are required to ensure that similarities between drug names are thoroughly examined before approval.

According to the World Health Organisation on International Non-Propriety Names (INN), trademarks cannot be obtained from international non-proprietary names and should not include their generic stem. Section 13 of the Trade Marks Act of 1999 states that terms that are frequently used for individual chemical compounds, elements or INNs are not eligible to be registered as trademarks.

The enhancement of public awareness is crucial. Healthcare professionals, pharmacists and consumers need to be educated about the risks of taking the wrong medication due to similar trademarks that can help in early detection and reporting to curb the problem at the source.
Another step that can help in the prevention of deceptively similar trademarks is encouraging collaboration among pharmaceutical companies and regulatory bodies to establish industry-wide initiatives for sharing information on trademark applications, which would reduce any potential conflicts. Transparency and cooperation can help foster a collective responsibility to safeguard public health. Despite the existence of rules and regulations intended to address the issue, there is a pressing need for stricter and more robust laws specifically tailored to the pharmaceutical sector. The current legal framework may be inadequate to deter unscrupulous manufacturers from exploiting loopholes and engaging in deceptive practices.

To safeguard public health, it is essential that trademarks in the pharmaceutical industry be highly distinctive and not easily confused with existing brands. Regulators should implement stringent guidelines that ensure that new trademarks meet rigorous criteria before being approved. This can include conducting thorough searches to identify potential similarities with existing trademarks and requiring a minimum level of dissimilarity to prevent confusion.

Furthermore, there should be enhanced penalties for violations. Stiff fines, injunctions, and even criminal charges should be considered to discourage manufacturers from intentionally using deceptively similar trademarks. This would send a strong message that such practices will not be tolerated and would serve as a deterrent to potential offenders.

Additionally, it is crucial to enhance public awareness about the dangers of deceptively similar trademarks in the pharmaceutical industry. Educational campaigns can be conducted to inform consumers about the importance of carefully checking the brand name, generic name, and dosage of their medications. Healthcare professionals should also be vigilant in educating their patients about this issue and reporting any suspected cases of deceptive trademark practices.

By implementing stricter laws, enhancing penalties, and raising public awareness, we can create a more robust system that safeguards public health and protects consumers from the dangers posed by deceptively similar trademarks in the pharmaceutical industry.

Case study

In the Indian pharmaceutical sector, there have been many cases relating to infringement of trademarks in the pharmaceutical industry. The courts have been extremely careful in deciding these cases, as the margin of error in interpreting these drug-related cases needs to be zero. Here are a few examples of cases relating to infringement of pharmaceutical trademarks:

Cadila Healthcare Ltd. vs. Cadila Pharmaceutical Ltd. (2001)

In this case between Cadila Healthcare Ltd. and Cadila Pharmaceuticals Ltd., the dispute between the companies revolved around the use of trademarks for their respective medicines targeting cerebral malaria. The company Cadila Healthcare Ltd. had the trademark “FALCIGO” registered, while Cadila Pharmaceuticals Ltd. launched “FALCITAB” after one year. Cadila Healthcare Ltd. filed a complaint seeking an injunction to prohibit the use of “FALCITAB,” claiming that both medicines treat the same condition, cerebral malaria and had misleadingly similar labels.

The plaintiffs argued that both drugs were prescribed as a last resort for cerebral malaria, highlighting the potential for confusion. However, the defendants asserted that the term ‘Falci’ was derived from the disease called Falciparum malaria and was used commonly in the pharmaceutical industry.

The Supreme Court found the information insufficient to prevent confusion, despite both drugs requiring a prescription for purchase. The court came to the conclusion that the criteria for determining a deceptively similar trademark required an amendment, given the potentially fatal consequences of misleading medicinal products. Therefore, the court granted the injunction in this case.

The Supreme Court highlighted the factors for evaluating the similarity of pharmaceutical trademarks, including type of trademarks, degree of similarity, nature of products or services, characteristics of rival products, types of buyers, their level of education and caution, purchasing habits and any other relevant information helping in the determination of dissimilarity among competing trademarks. This decision highlighted the need to provide a comprehensive framework for assessing the similarity of pharmaceutical trademarks to avoid potential risks and confusion.

Mankind Pharma Ltd. vs. Novakind BioSciences Pvt. Ltd. (2021)

In the recent case between Mankind Pharma Ltd. and Novakind BioSciences Pvt. Ltd; the High Court of Delhi granted a temporary injunction in favour of Mankind Pharma. This prevented Novakind BioSciences Pvt. Ltd., the defendants from producing or selling any pharmaceutical products with the “KIND” suffix.

The case centred on the use of the suffix “KIND” in pharmaceutical product names. Mankind Pharma, a well-established pharmaceutical company in India, had been using the “KIND” suffix in its product names for several years. Novakind BioSciences Pvt. Ltd., a relatively new entrant to the market, began using the “KIND” suffix in the names of its pharmaceutical products. Mankind Pharma, asserting its rights over the “KIND” suffix, filed a lawsuit against Novakind BioSciences Pvt. Ltd. for infringement of its trademark.

During the trial, Mankind Pharma presented evidence demonstrating its extensive use of the “KIND” suffix over a long period of time. The company also submitted evidence showing that the use of the “KIND” suffix by Novakind BioSciences Pvt. Ltd. was likely to cause confusion in the minds of consumers, leading them to believe that the products of Novakind BioSciences Pvt. Ltd. were associated with Mankind Pharma.

After carefully considering the evidence presented by both parties, the High Court of Delhi ruled in favor of Mankind Pharma. The court held that Mankind Pharma had established a strong case for infringement of its trademark and that there was a likelihood of confusion among consumers. Accordingly, the court granted a temporary injunction restraining Novakind BioSciences Pvt. Ltd. from producing or selling any pharmaceutical products with the “KIND” suffix.

The decision of the High Court of Delhi is a significant victory for Mankind Pharma and sends a strong message to potential infringers. The ruling reinforces the importance of protecting intellectual property rights and ensures that companies invest in innovation and brand building without fear of unauthorised exploitation.

Moreover, the ruling has wider implications for the pharmaceutical industry in India. It sets a precedent for future cases involving trademark infringement and provides guidance to companies on how to protect their intellectual property rights. The decision is expected to foster a more competitive and innovation-driven pharmaceutical industry in India, benefiting consumers by providing them with a wider range of high-quality products.

Cipla Ltd. vs. M.K. Pharmaceuticals MIPR (2007)

In the case between Cipla Ltd. vs. M.K. Pharmaceuticals, the plaintiff, Cipla Ltd., sold “NORFLOXACIN” tablets under the trademark “NORFLOX-400”, packaged in orange oval shaped blister packaging. The plaintiff alleged that the defendant, M.K. Pharmaceuticals MIPR, had infringed upon its trademark and packaging rights by selling NORFLOXACIN tablets under the trademark “NORFLOX-M” and packaged in similar orange, oval-shaped blister packaging.

The plaintiff presented evidence demonstrating that it had been using the trademark “NORFLOX-400” and the orange, oval-shaped blister packaging for several years, and had developed a significant reputation and goodwill associated with these elements. The plaintiff also submitted evidence that the defendant’s use of a similar trademark and packaging was likely to cause confusion among consumers and dilute the distinctiveness of the plaintiff’s brand.

The court considered the evidence presented by both parties and found in favor of the plaintiff. The court held that the defendant’s use of the trademark “NORFLOX-M” and the orange, oval-shaped blister packaging was indeed an infringement of the plaintiff’s trademark and packaging rights. The court issued an injunction restraining the defendant from further using the infringing trademark and packaging, and awarded damages to the plaintiff for the losses suffered as a result of the infringement.

This case highlights the importance of protecting intellectual property rights, such as trademarks and packaging, in the pharmaceutical industry. Companies that invest significant resources in developing and marketing their products are entitled to legal protection against infringement by competitors. The courts play a vital role in upholding intellectual property rights and ensuring fair competition in the marketplace.

Conclusion

The deceptive similarity of trademarks in the pharmaceutical industry is not just about logos or names; it’s about the health and safety of society at large. We can see how confusingly similar packaging and names can lead to serious health problems where someone might take the wrong medicine without realising it. This can have deadly consequences, as people depend on medications for their well-being.

The companies use deceptively similar trademarks in order to cash in on the success of established brands and offer a cheaper alternative to the expensive products of renowned brands but in this case, the disadvantages surpass the advantages of using similar trademarks. The complexity of this problem has revealed the challenges faced by both consumers and healthcare professionals, and it highlights the need for a balance between innovation and ensuring the safety of the public.

The pharmaceutical industry is constantly evolving and has witnessed tremendous growth in the past decade. Due to the expansion of the market and investment by more companies, intellectual property rights protection becomes imperative for the companies. As we strive for progress and breakthroughs in medicine, it is crucial to prioritise clarity and transparency in the way medications are presented to the public. The responsibility lies not only with the pharmaceutical companies but also with the government and regulatory bodies to enforce guidelines that safeguard against confusion.

In the end, it’s not just about trademarks; it’s about creating a healthcare system that the public can trust, knowing that they will receive the right medications. Everyone must take a step towards ensuring a safer and more secure future for the public who put their utmost faith in medications for their health and well-being by addressing the problem of deceptively similar trademarks.

References

Artificial intelligence (AI) for food safety

Vanshika Kapoor

April 6, 2024

This article has been written by Gopalakrishnan Kumar pursuing a Training program on Using AI for Business Growth from SkillArbitrage.

This article has been edited and published by Shashwat Kaushik.

Table of Contents

Introduction

Food is the first and foremost basic need of all the living organisms in the world. The word safety indicates the importance of safeguarding food from waste. The wastage happens predominantly due to the effect of microorganisms on the food. There are several factors, like purchasing food from unrecognised sources, practising poor personal hygiene, cleaning and sanitation, and chemical, physical and biological factors, that are all responsible for the contamination of the food. Salmonella and E. coli are among the most common foodborne diseases that cause illness and death, along with norovirus, Clostridium perfringens, campylobacter, and listeria. Food should be biologically, chemically and physically consumable so that it does not result in food borne diseases like food poisoning after consumption. There are a number of conventional methods used to make the food free from contamination. As this is a global concern and an ongoing challenge to feed the millions of people in the world, including humans and animals, there have been a number of studies done on food safety. Though we are living in the era of artificial intelligence, the basic needs of all the living organisms in the world are food and nutrition, which cannot be compromised. A remarkable breakthrough in the twenty-first century is the application of artificial intelligence to food safety.

Need and importance of AI in food safety

Food is the most important factor that supplies energy to our body to keep us fit and healthy. Food is in the form of solids and liquids, which are the sources of nutrients. Nutrients are components of food that provide nourishment. The nutrients are classified into macronutrients such as carbohydrates, proteins and fats and micronutrients such as vitamins and minerals, as well as dietary fibre and water. Eating the right type of food with the proper quantity of nutrients is needed for growth, development, health and the maintenance of the body. So keeping the food free from bacteria and germs is vital; – else we would be prone to various food borne diseases. Though there are conventional methods followed to ensure food safety, the advent of AI in food safety provides a very wide scope and avenues for making the food free from contamination. The use of AI in this process is effective, efficient and economical in terms of cost and time.

Artificial intelligence (AI) offers a transformative approach to enhancing food safety and ensuring the well-being of consumers. Here’s how AI can contribute to protecting food safety:

AI-powered predictive analytics:
- AI algorithms can analyse historical data on foodborne illnesses, consumer complaints, and environmental factors to predict potential food safety risks.
- This predictive capability enables food producers, distributors, and retailers to proactively identify high-risk food items, production lines, or geographic regions.
- Early detection of potential outbreaks allows for timely interventions and targeted preventive measures.
Real-time food quality monitoring:
- AI-based systems can monitor food quality in real time using sensors, cameras, and other IoT devices.
- Continuous monitoring of temperature, humidity, and other environmental parameters helps ensure optimal storage and transportation conditions.
- AI algorithms can detect anomalies, such as sudden temperature changes or unusual patterns, indicating potential food spoilage or contamination.
Automated food safety inspections:
- AI-powered visual inspection systems can automate food safety checks, reducing the need for manual inspections.
- These systems use computer vision algorithms to detect foreign objects, mould growth, or other defects in food products.
- Automated inspections ensure consistency, accuracy, and speed, minimising the risk of human error.
Food traceability and supply chain management:
- AI can enhance food traceability by tracking food products throughout the supply chain, from farm to fork.
- Blockchain technology, coupled with AI, can create a secure and transparent ledger of all transactions, ensuring the authenticity and integrity of food products.
- Real-time tracking allows for rapid identification of contamination sources and facilitates efficient product recalls, minimising consumer exposure to unsafe food.
Risk assessment and decision-making:
- AI algorithms can analyse vast amounts of data to assess food safety risks associated with specific food products, processes, or regions.
- This risk assessment helps food businesses prioritise their efforts and allocate resources effectively.
- AI can also provide decision-support tools to help food regulators and policymakers make informed decisions regarding food safety standards and regulations.
Personalised food safety recommendations:
- AI can personalise food safety recommendations for consumers based on their individual preferences, dietary restrictions, and health conditions.
- AI-powered apps can provide tailored guidance on food storage, cooking temperatures, and other safe food handling practices.
- This personalised approach empowers consumers to make informed choices and reduces their risk of foodborne illnesses.
Food fraud detection:
- AI algorithms can analyse food product labels, ingredient lists, and consumer reviews to detect potential food fraud, such as mislabeling or adulteration.
- By identifying fraudulent products, AI helps protect consumers from deceptive practices and ensures the authenticity of the food they consume.
Collaboration and data sharing:
- AI facilitates collaboration and data sharing among stakeholders in the food supply chain.
- Real-time data exchange between food producers, distributors, retailers, and regulators enables a coordinated response to food safety incidents.
- This collaborative approach enhances overall food safety management and reduces the risk of widespread outbreaks.

Early exposure to technology in food safety

We have been witnessing the application of technology in all walks of life for the past two decades in general and food safety in particular. The concepts of healthy food and nutrition have been reflected in the fields of school and higher education. Later on, there have been opportunities to become professionals in the food industry with the advent of technology such as machine learning and further advancements in artificial intelligence. There were two such experiences worth mentioning.

Detection of e coli in farm water

Before discussing the different ways in which AI can be used to protect food from contamination and make it fit for consumption, I would like to mention my project experience, as an undergraduate student in Chemical Technology to detect the E. coli present in the agricultural pond. In the project titled “Application of Novel Metal oil to convert Non Potable water to Potable water,” the main objective was to detect the count of microbes (E. coli) present in the water by using E. coli solution and Agar Agar. This laboratory method took almost fifteen days to almost a month to complete the project.

Detection of plant health

Another experience as a budding data analyst in the agribusiness sector four years ago was a kind of preparatory step towards using artificial intelligence in the field of agriculture.

Initially, my senior consultant presented me with a problem definition for detecting good, Bad and blight leaves from a file containing approximately 3000 plant images of an agricultural farm. In this project, hyperspectral image processing and analysis techniques were used to detect plant health, which helps in better agricultural produce.

Hyperspectral imaging technology

Using image processing and analysis methods and techniques, the spatial characteristics or colour attributes of food and agricultural products and crops or plants growing in

The fields are classified. Since surface or external characteristics are important to the consumer’s perception about product quality and, in many cases, are also a good indicator of product maturity and/or internal quality, imaging technology is being widely used in inspecting, monitoring, and grading a large class of agricultural and food products based on colour, size/shape, and surface texture during postharvest handling, packing,and processing.

Procedure adopted to classify the leaves

I was given plant images quantumwise, in which each quantum consisted of approximately 300-400 images. In this manner, I received 9-10 quantums of images. The images were taken by a digital camera and coloured. Computer size resolutions of imaging sensors of 640×480 pixels were used for the images. The purpose of the project was to convert the digital camera images of leaves into visual form, which should clearly indicate the health of the leaves, leading to the classification of good, bad, and blight. I must say that I enjoyed the whole process of the project, as I was given full freedom to choose the appropriate programming language of my choice. As a first step, using Spyder-Python, the raw images were converted to EPS images.

Artificial intelligence (AI) and its application in food safety

As far as the impact of Artificial Intelligence in Food industry is concerned, it plays a significant role in food production, quality, nutrition and waste. Where ML is focused on the ability to learn and make predictions, AI encompasses the ability to sense, reason, engage and learn. Though AI tools can be used in a number of ways, it can be classified in to

Vision,
Text,
Interactive,
Analytical, and
Prediction.

As far as the agriculture sector is concerned, AI and robotics, with their sensors, can monitor crops, soil condition, climate, moisture level, rainfall, temperatures and water availability, thus increasing food production. Computer Functional Solutions. These tools can be applied in the food industry sector, which includes cultivation, quality checks, tracking the food supply chain, automated packaging, the shelf life of food industry produce, trend analysis, and predictive analysis. The revolution created by AI, machine learning and robotics is manifold, of which two important aspects are discussed below.

Artificial intelligence (AI) in agriculture

Computer Vision (CNN) as a field of artificial intelligence can analyse images, which helps in pathogen detection and identification and protects crops to give good yields. Analytical tools are very effective in the agricultural process to predict hazards, monitor and adopt better agricultural techniques. The data pertaining to the environment is processed using analytical tools such as random forest and gradient boost to predict the presence of pathogens.

Artificial intelligence (AI) in supply chain

AI applications in food safety across agri-food supply chains have the potential to support traceability, monitoring, inspection, and other purposes and processes.In the field of retail, computer vision ( CNN) is used for foreign object detection and safety practice verification. Moreover, with the help of natural language processing, outbreak tracking can be monitored, which helps to check and improve food safety.

Artificial intelligence (AI) in warehousing storage

AI helps in inventory management to avoid stock outs and overstocking, which helps very much in reducing the waste of food products. The prediction analysis helps in determining the shelf life of products, ordering new stocks, delivery time and delivery date to customers, thus helping in customer satisfaction and an efficient supply chain.

Food safety laws in India

Food safety laws in India are a complex and comprehensive set of regulations designed to protect consumers from unsafe food. These laws are enforced by the Food Safety and Standards Authority of India (FSSAI), which is an autonomous body under the Ministry of Health and Family Welfare.

The FSSAI is responsible for setting food safety standards, regulating food businesses, and monitoring food imports and exports. It also works to raise awareness of food safety issues and promote safe food practices.

The Food Safety and Standards Act, 2006, is comprehensive legislation that aims to ensure the safety and quality of food in India. It is the primary law governing food safety in the country and provides a framework for the Food Safety and Standards Authority of India (FSSAI) to regulate the food industry. The act covers a wide range of food products, including processed foods, packaged foods, and imported foods.

The Food Safety and Standards Act, 2006 seeks to achieve its objectives through a number of provisions, including:

Establishing a food safety regulatory system: The Act establishes the FSSAI as the central authority responsible for regulating food safety in India. The FSSAI is responsible for developing and enforcing food safety standards, monitoring the food industry, and taking action against violators.
Regulating the food industry: The Act provides a framework for regulating the food industry, including the licensing of food businesses, the registration of food products, and the inspection of food premises. It also sets out the requirements for food labelling and advertising.
Ensuring food safety: The Act contains a number of provisions aimed at ensuring the safety of food, including the requirement for food businesses to follow good manufacturing practices and the prohibition of the sale of unsafe food. It also provides for the recall of unsafe food products and the imposition of penalties for violations.
Promoting food safety awareness: The Act also includes provisions aimed at promoting food safety awareness among consumers. These provisions include the requirement for food businesses to provide consumers with information about food safety and the establishment of a food safety education program.
Strengthening the food safety infrastructure: The Act provides for the establishment of a number of institutions and mechanisms to strengthen the food safety infrastructure in India. These include the establishment of food safety laboratories, the development of a food safety information system, and the establishment of a food safety advisory board.

The Act covers a wide range of food safety issues, including:

Food hygiene and sanitation
Food labeling and packaging
Food additives and contaminants
Food import and export regulations
Food recall procedures

The FSSAI has also developed a number of regulations under the Food Safety and Standards Act, 2006. These regulations provide more specific guidance on food safety requirements for specific types of food businesses.

The FSSAI is also responsible for enforcing food safety laws. It has the power to inspect food businesses, collect samples for testing, and take enforcement action against businesses that violate food safety laws.

The FSSAI also works to promote food safety awareness among consumers. It does this through a variety of channels, including public awareness campaigns, food safety education programs, and food safety information resources.

The FSSAI is committed to ensuring that food in India is safe for human consumption. It works closely with food businesses, consumers, and other stakeholders to achieve this goal.

Conclusion

The role played by artificial intelligence is so immense and indispensable that it has reached the doorsteps of all households in the world, especially in India, where online shopping portals such as Amazon, Big Basket, Jio Mart and Flipkart have been performing a vital role, especially during pandemic times.

References

Arbitration vs. litigation

Vanshika Kapoor

April 6, 2024

This article is written by Shreya Patel. This article emphasises the meaning of arbitration and litigation and the key differences between them. This article further discusses the merits of choosing arbitration over litigation, situations where arbitration is preferred over litigation, factors to consider when choosing between arbitration and litigation, and the overlap between arbitration and litigation.

This article has been published by Shashwat Kaushik.

Table of Contents

Introduction

Who does not want quick and affordable justice? Over the period of time, the desire for a speedy and inexpensive judicial system has increased. Litigation, which is a traditional method of seeking justice, is seen as a burden to the justice system due to its long procedures, which often result in long delays. There was a need for an alternative dispute resolution system that could solve these problems and reduce the burden as well as time on courts in the country. This dispute resolution is known as Alternative Dispute Resolution (ADR). The name itself explains to us the function of ADR, which is an alternative for dispute resolution other than the courts. ADR comprises various techniques, which include arbitration, conciliation, mediation, negotiation, and Lok Adalat. Arbitration is one of the most common and popular alternative dispute mechanisms.

What does arbitration mean

Arbitration is one technique among the alternative dispute resolution mechanisms. Arbitration is a process in which a neutral third party is appointed to resolve the matter. The procedures and other frameworks are very similar in both arbitration and litigation. As seen in litigation, in place of a judge, arbitration has an arbitrator who acts as a neutral party.

As per Section 2(1)(a) of the Arbitration and Conciliation Act, 1996 (hereinafter mentioned as the “A&C Act”), arbitration is arbitration regulated or not regulated by an arbitral institution that is permanent. When parties agree to submit a dispute to one or more arbitrators, wherein the decision made is binding in nature, this is called arbitration as per the WIPO.

Arbitration is a flexible and private dispute settlement resolution mechanism. When the disputed parties prefer to keep the dispute matter private and simultaneously want to avoid the lengthy procedure of litigation in court, they choose arbitration to resolve the dispute. Arbitration is one of the most effective and efficient methods to resolve commercial disputes. Arbitration is a consensual method. In arbitration, the parties decide the place where arbitration proceedings can take place. Arbitration is an outside-the-court settlement option for the parties that do not want to settle the dispute through the national judicial system; it is a private dispute resolution mechanism. All the rules for the arbitration proceeding are decided by the parties themselves, and they also appoint the arbitrator after discussion between them.

In India, arbitration is governed by the A&C Act. The A&C Act is the principal law for arbitration in India. The A&C Act is primarily adapted from the UNCITRAL model law on international commercial arbitration. India is also a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

An arbitration agreement often acts as a precondition for solving the dispute through an arbitration process. An arbitration agreement can be a whole separate agreement mentioning the details of arbitration, or it can also be a singular clause in the agreement between the parties. The award of arbitration, which is the decision or order of an arbitration proceeding, has a similar effect as the court’s order.

What does litigation mean

Litigation, in simple words, means when a dispute is taken to court by the parties to the dispute. Litigation has various stages in the whole procedure. The legal rights of an individual can be defended as well as enforced in litigation. Each side of the party/parties will present their arguments and evidence in court in a litigation procedure.

The courts in India have a single hierarchy system. The Apex Court of India is the Supreme Court, followed by the High Courts, and then the District and subordinate courts. Litigation is not only bound to civil and criminal matters; it also deals with guardianship disputes, disputes related to taxation, intellectual property disputes, etc. There are specific courts established to deal with some types of disputes pertaining to one law. For example, there are family courts that resolve disputes related to marriage dissolution, custody of children, domestic violence cases, etc.

The litigation proceedings end with one party having the decree in their favour while the other does not. The parties in the litigation are referred to as the plaintiff and the defendant. The parties in the litigation are represented by a legal professional. All the arguments that take place before the judge in court, along with the submission of crucial evidence from both sides of the litigation. The litigation process also includes the examination of witnesses and the recording of their statements.

Advantages of arbitration over litigation

Arbitration, in many ways, fills the gaps present in litigation. Arbitration has its own set of advantages, which make it an easier option for solving disputes than litigation. Some of the reasons why arbitration is more advantageous than litigation are given below:

In arbitration, the problem is solved by sitting together and reaching common ground. In litigation, there are two opposite parties, and, in the end, one party wins and the other loses. In arbitration, in the end, both parties win, i.e., a decision that is beneficial for both is taken.
Arbitration is also more advantageous as it can provide expertise. When there is a dispute related to a specific expertise, the parties to the dispute can hire an arbitrator who specialises in the dispute matter. The decision taken with the aid of this expertise can be considered more just. For instance, in a dispute related to taxes and insolvency, an arbitrator with expertise in taxation can be chosen by the parties.
Confidentiality is one of the key reasons why arbitration is more advantageous than litigation. With litigation, only some information can be kept private. In arbitration, the place where arbitration proceedings are conducted, the cause of the dispute, the parties to the dispute as well the decisions in some instances (when exclusively mentioned in contracts), the decisions can be kept private as everything is decided among the parties themselves. There is no involvement of a third party other than the arbitrator, which is chosen by the parties. The parties often, along with the arbitrator, sign a confidentiality agreement, or in some instances, the arbitration agreement itself includes a confidentiality clause.
Arbitration is more advantageous than litigation as the evidence is also kept private along with the dispute and the proceedings.
The consent of the parties on where to conduct the arbitration proceeding, the language in which the arbitration proceeding will take place, etc. are given more importance in arbitration, which makes it more advantageous.
Arbitration is less expensive than litigation, which makes it a more convenient option. It is important to note that arbitration is not cheap; it is only less costly than litigation. If the clauses related to arbitration are not mentioned precisely, it can be expensive as well.
Arbitration is more advantageous than litigation because it is more collaborative as compared to litigation. Communication and the preservation of relationships are encouraged in arbitration. Maintaining and preserving relationships and communication in commercial disputes is beneficial; hence, arbitration is often used to solve commercial disputes.

Instances of promoting arbitration over litigation

Over the years, the Indian government has taken many initiatives to promote arbitration over litigation. These instances of promoting arbitration over litigation have been put into action to ease the burden on the courts, which has also impacted the efficiency of the courts. The first and key instance of promoting arbitration over litigation was the enactment of the A&C Act, 1996. In order to follow a total dispute resolution mechanism, having a set of established rules and regulations is a must. People will be more aware of the dispute resolution mechanism if there is documentary proof.

The enactment of the A&C Act acts as legal evidence or documentary proof, which is backed by the government of India. The A&C Act has also been amended time and again. These Amendments are made in order to accommodate the new developments that have taken place and in accordance with the changes that take place in society. The A&C Act contains provisions relating to fixed time limits for deciding arbitration cases. It also contains provisions where the option to fast-track the cases is also there. These provisions act as incentives to choose arbitration for dispute resolution over litigation.

One of the other initiatives taken to promote arbitration over litigation is that the A&C Act is also compatible with the rules and regulations of international arbitration. To promote arbitration over litigation, the India International Arbitration Centre has also been established, with the aim of providing an independent body solely to open the doors for institutional arbitration.

When litigation is preferred over arbitration

Despite having many advantages over litigation, there are some aspects where litigation is preferred over arbitration. The following are the reasons why litigation is preferred over arbitration:

One of the key reasons why litigation is preferred over arbitration is the need to create a public record. Solving a dispute through litigation means it will be conducted through court proceedings. This will create a public record. Public records are basically documents that are open to everyone. The information in these documents can be seen by anyone and is not considered confidential. When a public record is created, it acts as a legal precedent for future cases. These public records are also used for educational and research purposes for the development of the laws in the country. People can get great transparency from public records.
Litigation gives the court an opportunity to set legal precedents. The courts can use these established legal precedents to solve disputes that are similar in nature in the future. These legal precedents can also be used for the legal development of the country. The legal precedents help in bridging the gaps that are found in the legal system. They also help in uploading the rule of law. The parties involved in the dispute can rely on the legal precedents. With legal precedent, the parties can expect the outcome of the proceeding. They also ensure equality in society.
Litigation is preferred over arbitration when any of the parties to the dispute are uncooperative. Arbitration cannot be useful if both parties are not ready to compromise and reach a common ground. In litigation, the courts can compel the parties to cooperate. A dispute can have more than two parties; in the case of litigation, it becomes easier to handle the dispute, and proceedings can be held jointly in court.
In litigation, an appeal can be made if the parties are not satisfied with the decision or they feel they are aggrieved by the decisions made by that particular court. An appeal can be made in a superior court. For example, if a decision is made in the district court, the parties can appeal in a high court and then in the Supreme Court. It is very hard to appeal in arbitration, or you cannot appeal at all if the award is legally binding.
Evidence plays the most vital part in the litigation proceeding. All the facts are proved with the aid of evidence. If there is strong evidence, it is indicated as a clear advantage. In the case of arbitration, the evidence is given less importance, as the main motive of arbitration is to solve the dispute by reaching a common ground rather than winning or losing.
Litigation uses a set of predetermined rules and regulations that are set by the responsible authorities. While in arbitration, there are no clear rules to follow. Because of this, many times litigation is preferred over arbitration.
With litigation, there is always a result at the end, even if it takes more time than arbitration. The result can be in favour of or against the party, but it will be definitive in nature.
The other instance where litigation is preferred over arbitration is when the opposite party is at fault for medical, monetary, or any other kind of damages. In these cases, litigation is often preferred over arbitration. For example, if a car accident has taken place due to the negligence of the other party, which has resulted in economic damages, then in this case litigation is preferred rather than arbitration.

Litigation

The presiding officers in the proceedings of litigation are the judicial officers (judges) who are appointed by the courts themselves. The courts have their own eligibility criteria to choose these judges. The whole appointment procedure is overseen by the authorities at the court.

Tabular representation of key differences between arbitration and litigation

Basis of Difference	Arbitration	Litigation
Meaning	Arbitration is opting for dispute resolution outside the court in a more private manner. There is a third party that is independent in nature, and the dispute is submitted to them for making a decision by agreement of the parties.	When dispute resolution takes place in a courtroom, it is called litigation.
Nature	Arbitration is flexible, consensual, and informal in nature. Arbitration proceedings can take place as per the requirements of the dispute.	Litigation is rigid and formal in nature. Proceeding in litigation takes place as per the rules prescribed.
Scope	The scope of arbitration is very limited in nature.	The scope of litigation is very wide. Appeals can be made against the superior court if it is not satisfied.
Applicability	Arbitration is applicable only to some types of disputes. Disputes that require some type of expertise can be resolved through arbitration. Disputes that require confidentiality can also be resolved through arbitration.	Litigation is preferred when the issues are very complex and their outcomes can affect society and the general public. Issues related to policies and public interest are applicable to litigation.
Cost effectiveness	Arbitration is less expensive as compared to litigation.	Litigation can be expensive as it includes costs related to documentation, fees for lawyers and courts, and other expenses.
Time consumed	Arbitration is faster and moves more swiftly than litigation.	Litigation takes more time.
Confidentiality	The arbitration is more confidential in nature, as it is held privately in a closed room. Only the parties to the arbitration are present.	In litigation, confidentiality can be maintained only in some cases; otherwise, all the information is public. People who are not parties to the litigation can also attend the proceedings.
Cooperation	Arbitration proceedings are more convenient and cooperative in nature.	Litigation can sometimes be complex as well as less flexible in nature. Parties may not be as cooperative as compared to arbitration.
Appeal	An arbitration award is final in nature and cannot be appealed in India. The award can be set aside only as per Section 34 of the A&C Act.	The decision made by the lower courts can be appealed in the superior courts if the parties are not satisfied with the result.
Control	In arbitration, the control of the proceeding is in the hands of the parties. They decide the crucial matters themselves.	In litigation, the judge is in control. All the decisions are taken as per legal precedents and established laws.
Presiding officer	In arbitration, the parties to the dispute choose the preceding officer. If the parties cannot come to an agreement, then they can ask an independent body to appoint such an officer. There can be a specific clause regarding the same in the arbitration agreement stating who should be appointed as an presiding officer (arbitrator).	In litigation, the parties do not have any say in selecting the preceding officer. The court chooses the judicial officers. The courts have their own criteria for selecting the judicial officers.

Overlap of arbitration and litigation

An overlap of arbitration and litigation can be seen frequently. Sections 9 and 17 of the A&C Act allow the parties to file an interim relief application with the arbitration tribunal and court. Parties can apply for interim relief when the proceedings of arbitration are going on. Another instance of overlap is seen when arbitral awards are challenged before the courts. There are very limited grounds on which an award can be challenged before the court. But parties can, in some instances, seek the intervention of the judiciary if they feel that the arbitration award is against public policy or that their rights are being violated.

Despite being two different methods of dispute resolution in India, there are a few situations where both arbitration and litigation overlap due to the requirements of procedures, enforcement mechanisms, etc. There are also some instances where a contract contains clauses related to both arbitration and litigation, or, in some cases, some disputes related to some aspects are to be resolved through litigation while others are by means of arbitration.

Arbitration vs. Litigation : factors to consider

There are many factors that need to be considered before choosing whether to opt for litigation or arbitration.

Many contracts contain a clause where it is stated that, if in the future any dispute arises, the same will be solved using arbitration. This is known as an arbitration clause. In this case, it is mandatory for the parties to proceed with arbitration.
The next factor that is to be considered is the preference of the client and the nature of the case. Many times, there can be disputes that are more suitable for arbitration and can be solved through discussions. If the nature of the dispute is more complex, then litigation can be more useful. It is crucial to keep the nature of the dispute in mind and then choose accordingly. There can be instances where arbitration is considered a better option than litigation from an industry point of view.
Cost is one of the other vital factors that is considered when choosing between litigation and arbitration. Some parties might find arbitration a better option, as it is comparatively less expensive than litigation.
Parties also consider the level of control that they want when choosing between arbitration and litigation. In litigation, the parties do not have control over the proceedings; the court and the judge have the superior power.
The next important factor to consider is privacy. There can be circumstances when the parties want to keep the matter extremely private. This can be achieved through arbitration. An arbitration proceeding takes place in a private place, i.e., in a closed room, in the presence of only the parties and the arbitrator. This setting helps in keeping the dispute between the parties themselves. And if someone breaches the same, it will result in a penalty.
Expertise is also one of the crucial factors that is taken into consideration at the time of choosing between arbitration and litigation. With arbitration, the parties can appoint an arbitrator who acts as a neutral party with expertise similar to the dispute. For example, if there is a dispute between a hospital and a pharmaceutical company, then they can appoint an arbitrator with medical expertise. This flexibility is not present in the case of litigation. The judges hear cases relating to all general matters rather than one specific area of law. Having industry-specific expertise and knowledge can act as a plus point for the parties to a dispute in arbitration.

Disputes that cannot be resolved by arbitration

Under Indian law, there are some disputes that cannot be resolved by arbitration. Section 8 of the A&C Act refers the parties to arbitration. Section 34(2)(b) and Section 48(2) of the A&C Act state that the arbitration award can be refused or set aside if the nature of the matter is such that a settlement is not capable under the arbitration law. The Supreme Court has, in the recent case of Vidya Drolia v. Durga Trading Corporation (2019), proposed a fourfold test, which can help in determining the issue of arbitration and adjudication of the same. The disputes will not be considered arbitrable if the subject matter and/or cause of action:

If the matter is action in rem and no other subordinate action in personam occurs out of it.
Are not subject to the law of arbitration under a specific statute, and this is mentioned either explicitly or by implication;
Has an impact on the rights of the third parties, or there is a requirement for centralised adjudication as well as mutual adjudication that will not be considered appropriate and/or have an egra omnes effect;
Is relating to a sovereign and public interest function which is inalienable, i.e., it is not transferable.

There are some exceptions where the parties are not referred for arbitration, including:

Disputes that are criminal in nature

Criminal offences cannot be referred to arbitration because of the nature of the crime. For example, a murder case cannot be referred for arbitration, as murder is a heinous crime and a non-compoundable offence. Offences related to rape will also not be referred to arbitration. India gives the right to a free trial to everyone; hence, criminal offences are non-arbitration in nature.

Matrimonial disputes

The disputes related to judicial separation, divorce, custody of a child, and restitution of conjugal rights are all non-arbitration in nature. India does not follow a uniform civil code; all religions have their own personal laws that deal with divorce and custody of children. There are separate courts established for handling family disputes.

Matters of guardianship

The matters related to guardianship are also non-abrital in nature. These disputes cannot be referred to arbitration. The disputes that arise out of the trust deeds are also not considered arbitral in nature. This was made eminent by the Supreme Court in the case of Shri Vimal Kishor Shah v. Jayesh Dinesh Shah & Others (2016).

Testamentary suits

In India, disputes related to inheritance and wills cannot be referred to arbitration. In the case of Ashwin Maganlal Savani v. Himadri Davda (2022), the Bombay High Court held that the directions in a will would not be construed as an arbitration clause.

Petitions for insolvency

Matters related to insolvency are also non-arbitral in nature. Litigation is the only way to solve these disputes. There are well-established, time-bound laws to deal with these issues. Insolvency matters are considered non-arbitral in nature in India because the right in rem is exercisable.

Tenancy Matters

The matters related to tenancy or eviction are also non-arbitral in nature. If these disputes arise, they cannot be resolved through arbitration. In the case of Himangani Enterprises v. Kamaljeet Singh Ahluwalia, the judge has given the decision that the dispute between the tenant and the landlord is non-arbitrary in nature because it opposes public policy.

Conclusion

Both arbitration and litigation have their own pros and cons. Arbitration is more speedy, less costly, and can be beneficial for disputes that need to be kept private. Litigation, despite being a complex and lengthy process, is essential for some kinds of disputes, like criminal offences. The parties can choose any one after weighing their advantages and disadvantages and selecting the one that proves to be the best as per their circumstances. It is very vital to choose a dispute resolution mechanism that will be helpful in resolving the dispute. For example, in the case of murder or theft, arbitration cannot be used to resolve the dispute, as these disputes are offences that include one’s right to a fair trial as well as other human rights. In such instances, one party is clearly at fault. Arbitration can be helpful for disputes that can be solved through discussion, and a mutual understanding between both parties can be found to resolve the issues.

Frequently Asked Questions (FAQs)

What types of cases can be solved through arbitration?

The disputes related to commercial as well as civil matters, which include disputes between business partners, disputes amongst consumers and companies, winding up, disputes related to trust deeds, disputes regarding, etc., can be resolved using arbitration.

Can an arbitration award be challenged?

An arbitration award cannot be challenged if it is legal and binding in nature. An award can only be challenged when it is non-binding to the parties.

What are the benefits of arbitration?

Some of the key merits of arbitration are that it is less costly, faster than litigation, private in nature, can be more flexible for the parties, is less formal in nature, and is a very effective way to solve disputes.

Is there a limitation period for arbitration cases in India?

There is a limitation period for arbitration cases in India. The limitation period is a time period during which the dispute can be brought in for a claim.

Is there an average time for cases to get solved through arbitration?

There is an average time for cases to get solved through arbitration. The award is to be made within 12 months from the date since the arbitral tribunal entered into the case, as per Section 29A of the A&C Act.

Which Act governs the arbitration in India?

In India, arbitration is governed under the A&C Act.

What is an arbitration agreement?

The meaning of an arbitration agreement is stated in Section 7 of the A&C Act. In simple words, an arbitration agreement can be described as an agreement that is signed by the parties and states that if any dispute arises, it will be solved using arbitration. The agreement has to be in writing.

Which court has jurisdiction for arbitration cases under the A&C Act?

The original jurisdiction’s principal civil court has jurisdiction for arbitration cases under the A&C Act. This also includes the original jurisdiction’s high courts as well.

Who is an arbitrator?

An arbitrator is a neutral party in the arbitration procedure that helps in solving the dispute between the parties to the proceedings. An arbitrator acts as an umpire between the two parties.

Where can an arbitration proceeding take place?

The arbitration proceeding can take place anywhere, as per the joint decision of the parties. The place can also be mentioned in the arbitration agreement itself. When there is an absence of the same, the arbitrator can decide the place for arbitration proceedings.

In which language will the arbitration proceeding take place?

The parties in arbitration can decide the language in which the arbitration proceeding can take place.

What is an arbitral tribunal?

When there is more than one arbitrator in the proceeding, it is known as an arbitration tribunal. The whole panel will be responsible for adjudicating the dispute.

What do you mean by an arbitration award?

Similar to a judgement/order in litigation, an arbitration award is the final decision of the arbitration proceeding. The award is decided on the basis of merits in an arbitration.

How can an arbitration proceedings be terminated?

An arbitration proceeding gets terminated when an order is given by the arbitral tribunal or when a final arbitral award is given.

What happens to an arbitration proceeding in case of the death of any party to an arbitration agreement?

When the death of any party takes place, the arbitration proceeding shall not be discharged. The decision will be enforced by or against the legal representatives of the deceased party.

Does litigation and arbitration adhere to the same set of rules and procedures?

No, both arbitration and litigation have their own set of rules and regulations. The courts handle the litigation, and the rules and procedures related to court proceedings are to be strictly adhered to. While arbitration has its own statutes, rules, and procedures to resolve the dispute.

References

Section 16 of the Arbitration Act, 1996

Rachit Garg

April 6, 2024

This article is written by Arundhati Pawar and further updated by Jyotika Saroha, The author, in this article, has discussed the concept of jurisdiction and its scope under Section 16 of the Arbitration Act. The article also discusses the applicability of Section 16 and its essential features, further, it talks about the fundamental doctrine of which found its inception under Section 16 of the Act. It also deals with the criticism and some important judgments related to Section 16 of the Arbitration and Conciliation Act, 1996.

Table of Contents

Introduction

Arbitration is a private practice of resolving disputes arising out of contractual agreements whereby the parties mutually decide to have their disputes resolved by one or more private individuals, i.e., the arbitrators, rather than by a court of law. It is a process where parties resolve disputes without approaching the formal course of the judiciary, i.e., the court.

The present article deals with Section 16 of the Arbitration and Conciliation Act, 1996 and particularly talks about the competency of an arbitral tribunal to rule on its jurisdiction.

Section 16 of Arbitration Act : meaning, scope and application

Meaning of Section 16 of Arbitration Act

Section 16 of the Arbitration and Conciliation Act, 1996 originated from Article 16 of Chapter IV of UNCITRAL Model Law on International Commercial Arbitration (1985). Section 16 of the Act deals with the competence of an arbitral tribunal to decide upon its jurisdiction. It gives power to the arbitral tribunal to decide on the issue of jurisdiction in the dispute.

Section 16 of the Arbitration and Conciliation Act, 1996, emphasises the competence of the arbitral tribunal to rule on its jurisdiction. It entitles the parties to raise jurisdictional questions. The provisions of Section 16 have been established in the UNCITRAL Model Law. Section 16 gives statutory recognition to the doctrine of “Kompetenz-Kompetenz.”

The purpose of adding this particular provision to the Act was to save the time and money of the parties to the dispute and also with regard to the time period of raising such an issue of jurisdiction of an arbitral tribunal. Jurisdiction refers to the power or authority of a person to decide upon particular issues pertaining to a dispute. It makes sure that there is no interference of the judiciary in the minimal matters of arbitration proceedings.

Scope of Section 16 of Arbitration Act

Section 16 specifies that the Arbitral Tribunal has the power to decide whether it has the locus to adjudicate the dispute or not. This provision is read along with Section 5 of the Arbitration and Conciliation Act, 1996. It envisages that civil courts have no power to intervene except where it is specifically stated. The arbitrators are entitled to make a conclusive ruling that defines their jurisdiction.

Before the 2015 Amendment Act, the Constitutional Bench of the Supreme Court held in Arcelor Mittal Nippon Steel India Ltd. v. Essar Bulk Terminal Ltd. (2021) that the jurisdiction issues should be decided at the commencement of the arbitration proceeding. It has to be decided under Section 11. This decision was subsequently reversed, and the principle was subsequently maintained in M/s Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd. (2018). It said that the issue of limitation is a jurisdictional issue, which would be required to be decided by the arbitrator under Section 16, and not the High Court at the preference stage under Section 11 of the Act. Once the arbitration agreement is undisputedly accepted by both parties, all issues, including the question of jurisdiction are to be decided by the arbitrator.

Application of Section 16 of Arbitration Act

It is necessary to delve into the depth of Section 16 to understand the competence of the arbitral tribunal to rule on its jurisdiction.

Section 16(1) states that the arbitral tribunal may decide on its own jurisdiction which includes the ruling on any issues or objections that pertain to the actuality or reasonableness of the arbitration agreement and for the said purpose:

If, in any contract, there exists an arbitration clause, then that clause shall be treated as an arbitration agreement in itself.
If the tribunal declares that the contract is frustrated i.e., null and void then also the arbitration clause will be valid and reasonable.

In the case of Shree Subhlaxmi Fabrics Pvt. Ltd. v. Chand mal Baradia (2005), the Hon’ble Supreme Court stated that, if any question arises regarding the invalidity of the arbitration agreement, then the proper forum to decide upon such a question is the arbitral tribunal.

Section 8 of the Act also mandates the courts to refer the matter to arbitration, and there should be a proper arbitration agreement between the parties which is not invalid. Whereas a combined reading of Section 16(1)(a) and 16(1)(b) determined that the proper authority or forum to decide upon whether there exists an arbitration agreement or not and whether the matter should be referred to arbitration or not should be decided by the arbitral tribunal.

Section 16(2) states that the plea with respect to claiming or arguing of no jurisdiction shall not be raised after the statement of defence has been submitted. However, this does not prevent the party from raising such a plea only because he has participated in the appointment of an arbitrator.

Section 16(3) states that the plea regarding the arbitral tribunal that it is exceeding its authority or working outside its jurisdiction shall be raised as soon as the matter alleged to be beyond the scope of the authority is raised during the course of arbitral proceedings.

Section 16(4) states that the delay in filing pleas under sub-section (2) and (3) shall be condoned if the delay is justified.

Section 16(5) states that, if the arbitral tribunal rejects the plea filed under sub-section (2) and (3), then the arbitral tribunal will continue with the course of proceedings and shall pronounce the arbitral award.

Lastly, Section 16(6) talks about the remedy available to the aggrieved party who can make an application under Section 34 of the Act against such arbitral award in order to set aside such award.

The Doctrine of Kompetenz-Kompetenz

The term “Kompetenz-Kompetenz” is derived from Germany which normally refers to “competence-competence”. The term signifies that an arbitral tribunal has the power to decide or rule on its own jurisdiction. Gary Born, a popular lawyer, stated that the principle of “Kompetenz-Kompetenz” forms a substratum and is a necessary factor in the arbitration proceedings, it aims to make the procedure of arbitration a bit more different and effective in the resolution of dispute”.

Features of the doctrine

The doctrine empowers an adjudicating body to make decisions on the issues submitted before it in its own jurisdiction. There are three major facets of this doctrine which are as follows:

Firstly, the arbitral tribunal has the power to rule upon its own jurisdiction.
Secondly, the issues regarding jurisdiction shall be dealt with by the tribunal first and then by the Court.
Thirdly, there shall be no interference of Courts and it should be limited to decide merely on the existence of the arbitration agreement.

The doctrine of “Kompetenz-Kompetenz” found its place under Section 16 of the Arbitration and Conciliation Act, 1996. Section 16(1) states that the arbitral tribunal has the power and authority to rule on its own jurisdiction. This includes any issues or objections raised about the existence or validity of the arbitration agreement.

Section 16 recognizes two basic principles that are mentioned below:

It deals with the arbitration clause, which is a specific provision that specifies the idea of arbitration for settling the dispute as mentioned in the contract.
Another basic principle is that, if the entire contract is null and void as determined by the arbitral tribunal, it does not mean that the arbitration clause is also invalid. These issues are to be addressed separately by the tribunal.

Section 11 of the Arbitration and Conciliation Act, 1996 deals with the power of the Supreme Court and High Courts to appoint an arbitrator in situations where the parties are unable to decide upon the appointment of an arbitrator. But, after the amendment made in the year 2015, which inserted section 11(6A) in the Arbitration and Conciliation Act, 1996, it restricts the power of courts merely to look upon whether the agreement exists or not or whether it is valid or not. If in case the agreement exists, then the arbitral tribunal has to be constituted and it will adjudicate upon the matter.

Limitations

It can be stated that the doctrine is of utmost importance for the arbitral tribunals as it makes them free to rule on their own jurisdiction. It also helps the arbitration process to work smoothly.

The main aim of this doctrine is minimal judicial interference at the time of preliminary objections raised by the parties. This position was determined in the case of Uttrakhand Purv Sainik Kalyan Nigam v. Northern Coal Field Ltd. (2020) wherein the question came up before the Supreme Court whether as per Section 11 of the Arbitration and Conciliation Act, 1996 the Court can consider the issue of limitation at pre-reference stage. The Supreme Court by looking into the recommendations made by the Law Commission in its 246th report stated that the amendments were made regarding the limited judicial intervention and this intervention was expected only at the time of deciding on the existence of an arbitration agreement. It was stated that as per the requirements of new amended provisions in Section 8 and Section 11 of the said Act, the judicial authority will abstain itself from referring the parties to arbitration only if it is found that there is no valid arbitration agreement. On the other side, if it finds that there exists a valid arbitration agreement between the parties then it will refer the parties to arbitration. In the same case, while looking into the point of limitation, the Supreme Court stated that this was a mix question of facts, law and jurisdiction. Further, the Supreme Court placed reliance on the case of National Thermal Power Corporation Ltd. v. Siemens Atkiengesellschaft (2007) and submitted that the question of limitation would be dealt with by the arbitral tribunal under Section 16 of the Arbitration and Conciliation Act, 1996.

Negative effect of the doctrine

The doctrine provides power to the arbitrators to rule upon their jurisdiction but does not allow the Court to consider the question regarding jurisdiction at any later stage but only at a preliminary stage. The negative effect here states that the Court will not review the jurisdictional issues of arbitrators and refer such questions to the tribunal.

In P. Anand Gajapathi Raju v. PVG Raju (2000), it was held by the Supreme Court that as per Section 8(1) of the Arbitration and Conciliation Act, 1996 once the Court comes to its conclusion regarding the existence of an arbitration agreement then the parties should be directly referred for arbitration and it is compulsory for the Court to refer the parties to arbitration. Whereas in, S.B.P. & Co. v. Patel Engineering Ltd. & Anr. (2005) the Supreme Court expanded its scope as per Section 11 of the Act. The Supreme Court in the present case appointed an arbitrator and also decided on the existence and validity of an arbitration agreement. In the present case, the Supreme Court went against the principle as it expanded its scope and acted outside its purview.

Whereas, in the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. & Ors. (2011) the Supreme Court Court reversed its earlier verdict in S.B.P. & Co. v. Patel Engineering Ltd. & Anr (2005) and held that the Court cannot decide upon the dispute in which arbitration is involved and that needs to be done by the tribunal itself.

Essential features of Section 16 of Arbitration Act

In the case of M/s Indian Farmers Fertilizer Co-operative Ltd. v. M/s Bhadra Products (2018), the jurisdiction has been interpreted in a new light and features have been laid down to decide competent jurisdiction. Until these conditions are satisfied, the tribunal has no jurisdiction to adjudicate the matter.

Where there exists a valid arbitration agreement

Section 16 of the Arbitration and Conciliation Act enables the arbitrator to decide about the existence of an arbitration clause. In Pradeep V. Naik v. Sulakshana A. Naik (2005), it was held that the issue about the existence of an arbitration agreement can only be decided by an arbitrator under Section 16 of the Act and not under Section 11 unless parties lead evidence. The arbitration clause is an independent part of the contract and has to be treated as an individual agreement. The whole contract, if deemed void, will not invalidate the arbitration clause. The arbitration clause would itself be referred to as a valid arbitration agreement.

Where the arbitral tribunal is properly constituted

An Arbitral Tribunal must be constituted according to the arbitration agreement with the mutual consent of the parties. It may constitute a sole arbitrator or a group of arbitrators.

Where the subject matter is arbitrable

The subject matter should be arbitrable and should be in accordance with the agreement. Disputes pertaining to criminal cases, matrimonial disputes, tenancy disputes, and insolvency disputes are not arbitrable. It should not be barred by law or public policy.

Objection to the jurisdiction of Section 16 of Arbitration Act

Section 16(2) states that any objections about jurisdiction have to be raised before filing a statement of defence. The objective of this provision is to avoid wastage of time and acknowledge jurisdictional issues at the commencement stage of the proceeding. These limitations are subject to the power given to the arbitrator, which provides that the tribunal may, in either of the cases, admit a later plea if it considers the delay justified.

If the tribunal allows the objection raised by the parties, in such a scenario, an appeal can be made under Section 37 of the Arbitration and Conciliation Act, 1996. If the Tribunal rejects the objection raised by the parties, the Arbitral Tribunal continues its proceedings, and the party can set aside the award under Section 34 of the Act.

When to consider the objection

Section 16(2) of the Act states that the plea regarding whether the arbitral tribunal has jurisdiction or not shall be raised before the submission of a statement of defence which implies that any kind of issue related to the jurisdiction of the arbitral tribunal should be raised at a preliminary or initial stage so that an appeal can be made under Section 37 of the Arbitration and Conciliation Act, 1996. There is a catena of judgments in which it has been ruled that the objection regarding the jurisdiction should be raised during the preliminary stage.

In some cases, it was opined that the jurisdictional issues shall be raised as a preliminary ground whereas in other judgments it was held that it is not necessary to raise a jurisdictional issue on a preliminary stage and the same can also be raised at the time of pronouncing the final award.

In Mcdermott International Inc. v. Burn Standard Co. Ltd. & Ors. (2006), Kvaerner Cementation India Ltd. v. Bajranglal Agarwal & Anr. (2001) and A. Ayyasamy v. A Paramasivam & Ors. (2016), it was stated that It is necessary to determine the issue related to jurisdiction to be raised as a preliminary ground. While in Maharshi Dayanand University & Anr. v. Anand Coop. L/C Society Ltd. & Anr. (2007) the Hon’ble Supreme Court held that it is not obligatory to decide the issue related to jurisdiction as a preliminary ground and the same can be considered or decided at the time of pronouncing the final award.

An amendment was also made with respect to Section 16 of the Arbitration and Conciliation Act, 1996 which talks about the stages of consideration or when the issue related to jurisdiction shall be considered. The said amendment came into effect with an aim to make the procedure of arbitration cost-effective and less time-consuming.

The time limit for filing such an objection

The objections raised regarding the jurisdiction of an arbitral tribunal shall be raised before the submission of a statement of defence and not later than that. Moreover, a party shall not be inhibited from raising such a plea only because he/she has not participated in the appointment of the arbitrators. The arbitral tribunal may accept the plea at its own discretion if it thinks that the delay in filing such a plea is justified and reasonable.

Criticism of Section 16 of Arbitration Act

Lack of appeal under Section 16

There is no provision for an appeal under Section 16. If the tribunal decides it does not have competent jurisdiction, the decision rejecting the plea can be put forward only at the time of final award under Section 37 of the Act. This compels the parties to raise all kinds of objections while appointing the arbitrator, causing an unreasonable delay.

Preliminary issue

The Act does not specify whether the objection raised should be treated as an interim issue or at the final award. Since this position is not settled, the tribunal ends up wasting the time and money of the parties in cases where it does not have jurisdiction. This provision is widely misused by the parties, encouraging them to prolong proceedings, thereby defeating the very purpose of a speedy trial under the Act.

Failure to raise an objection

If the party fails to file an application raising objections to the jurisdiction at the commencement of the proceeding, it is permitted to do so at the final hearing by applying to set aside an arbitral award under Section 34. The timeline for setting aside such an award is 3 months from the date of award and not any further. This provision has been taken from Article 16 of the UNCITRAL Model Law, as adopted by the United Nations Commission. If the objection is accepted, the arbitral tribunal will not proceed further, and the proceeding shall be discontinued according to Section 37 of the Act.

In M/s Lion Engineering Consultants v. State of Madhya Pradesh and Ors (2015), the award was made in favour of the appellant, and the respondent sought to amend its applications three years after their rejection by the Trial Court. It was held that the amendment being “beyond limitation” is not allowed. But there is no restriction on requesting a question of jurisdiction be raised by way of an objection under Section 34 of the Act even if no such objection was raised under Section 16 of the Act.

Case laws

M/s Uttrakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd.(2019)

Facts of the case

In this case, an agreement was made between the petitioner and the respondent and the petitioner has to provide the amount of security by 27th November 2019. Later on, a dispute arose between the petitioner and the respondent i.e., a company with respect to the payment as per the contract and the deduction of the security amount from the bills. The petitioner sent a legal notice to the respondent and asked for the payment with proper interest and also requested the said respondent company to appoint a sole arbitrator to settle their dispute but the petitioner did not receive any reply. The petitioner also suggested an arbitrator by himself but again he has yet to receive a response from the respondent company. The petitioner, in the present case, approached the High Court and prayed before the Court to appoint an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996. The High Court while considering the petition of the petitioner stated that the claims made by him are barred by limitation and the court cannot appoint an arbitrator for the said case. Lastly, the petitioner went to the Supreme Court by way of a Special Leave Petition under Article 136 of the Indian Constitution.

Issue

The issue before the Hon’ble Supreme Court was whether the High Court erred while rejecting the application filed by the petitioner under Section 11 of the Arbitration and Conciliation Act, 1996 on the ground of bar on limitation.

Judgment

The Hon’ble Supreme Court in this case set aside the judgement of the High Court and relied upon the doctrine enshrined under Section 11 of the Arbitration and Conciliation Act, 1996 and held that the issue regarding the period of limitation shall be decided by the arbitral tribunal and not by the High Court. The High Court has mistaken it by not appointing an arbitrator in the present case. The Supreme Court appointed an arbitrator in the present case and also finalised the seat of arbitration as per the agreement.

S.B.P. & Co. v. Patel Engineering Ltd. & Anr (2005)

Facts of the case

In the present case, the State of Maharashtra handed over the responsibility of civil work of the Koyna Hydroelectric Project to respondent No.1 by way of its Department of Irrigation and, for the said purpose, respondent No. 1 and petitioner entered into a subcontract. Later on, some issues arose between the two parties. Respondent No. 2 was appointed as an arbitrator by the petitioner, whereas respondent No. 1 appointed S.N. Huddar as his arbitrator but he refused as he was directly involved in the said project. Later on, S.L. Jain was appointed as the arbitrator by respondent No. 1. He wrote a letter to respondent No. 2 that he could not act as a sole arbitrator and, as per the conditions of Section 15(2) of the Arbitration and Conciliation Act, 1996, there has to be an appointment of an arbitrator within the period of 30 days. In the said letter, three names of judges were mentioned from the High Court of Bombay who can act as a third arbitrator. Respondent No. 2 rejected the stance and said that there was no need for the appointment of a third judge regard to that respondent No. 2 approached the High Court of Bombay and in respect of that the application filed by him was accepted and the Court appointed a retired judge as a third arbitrator for the said purpose. Being aggrieved, respondent No. 2 approached the Supreme Court by way of filing a petition under Section 11 of the Arbitration and Conciliation Act, 1996.

Issue

Whether the power given to the Chief Justice of India or the Chief Justice of the High Court or to the judge appointed by him to do so for the appointment of arbitrators a judicial power or an administrative power?

Judgment

The Supreme Court in the present case overturned its earlier judgement in the case of Konkan Railway Corporation Ltd. & Anr. v. Rani Construction Pvt. Ltd. (2002) which declared that the power of the Chief Justice to appoint arbitrators is purely administrative in nature which leads to the limited scope of judicial intervention in the procedure of arbitration.

The Supreme Court in the present case by overturning its above judgement held that the power given under Section 11(6) of the Arbitration and Conciliation Act, 1996 is judicial in nature. The power given under the said section not only gives the power to appoint arbitrators but also to keep a check upon the whole procedure of arbitration on how it is being conducted. After the present judgement, it allows judicial intervention in the cases of arbitration wherever it is required.

Bhaven Construction through Authorised Signatory Premjibhai K. Shah v. Executive Engineer Sardar Sarovar Narmada Nigam Ltd. & Anr. (2021)

Facts of the case

In the present case, the respondent, who is the Executive Engineer of Sardar Sarovar Narmada Nigam, made a contract with the appellant of the present case, Bhaven Construction, in order to supply bricks. There was an arbitration clause in the said contract. Later on, some dispute arose between the two parties and the appellant sent a notice seeking the appointment of a sole arbitrator for settling the said dispute. The respondent in reply filed an application and challenged the jurisdiction of the sole arbitrator in the present dispute under Section 16 of the Arbitration and Conciliation Act, 1996. The sole arbitrator rejected the application filed by the respondent. Subsequently, the respondent approached the Gujarat High Court by filing a special civil application under Articles 226 and 227 of the Indian Constitution, but the bench led by a single judge dismissed that application too. Later on, the respondent preferred a Letters Patent appeal before the Division Bench of the High Court which was allowed and the Division Bench of the High Court set aside the appointment of a sole arbitrator. Aggrieved by the order of Division Bench of High Court of Gujarat the appellant approached the Supreme Court by filing the Special Leave Petition.

Issue

Whether the process of arbitration can be interrupted by Articles 226 and 227 of the Indian Constitution and in what situations?

Judgment

The Supreme Court while setting aside the order of the High Court passed by the Division Bench of the High Court of Gujarat stated that the High Court should not have used its power at this stage of arbitration. The High Court in the present case erred in using its inherent powers provided in Articles 226 and 227 of the Indian Constitution.

Conclusion

The arbitration law in India with respect to jurisdiction does not have a settled position. Various judgments referred to above have put forward inconsistent conclusions. The jurisdictional issues raised have shortcomings that need a solidified position in order to prevent misuse of this provision for slowing down the proceeding. The Arbitration and Conciliation Act has introduced the provision of Section 16 to expedite the proceedings of the Tribunal. The power to rule on its own jurisdiction is stipulated to help the Arbitral Tribunal self-sustain with minimal judicial intervention. The liberal approach taken by the courts hampers speedy remedy, thereby defeating the legislative intent behind this Section. Therefore, Section 16 should be modified to prevent its abuse.

Frequently Asked Questions (FAQs)

Whether the tribunal should rule on an objection under Section 16 as a preliminary issue?

The Delhi High Court in Cadre Estate Pvt. Ltd. v. Salochna Goyal and Ors. (2010) has held that any kind of objection about jurisdiction should be raised before the filing of a Statement of Defense. The Act does not bar or prevent the party from raising such a plea at a later date if the Arbitral Tribunal is justified about the reasonable delay.

The Tribunal may reject the application under Section 16 and may further continue with the Arbitration proceedings. The party objecting to the decision of the Tribunal can object to setting aside the arbitral award under Section 34. The Act does not provide a separate provision for appeal against Section 16.

In Maharshi Dayanand University and Ors. v. Anand Coop. L/C Society Ltd. and Ors. (2007), it was held that the court is at its discretion to decide whether to decide the jurisdictional question at the beginning of the proceeding or at the time of the final award. It is expressly opined by the court that there is no compulsion on the court/Tribunal to decide the jurisdictional issue at the early stage and it can be decided at the time of the final award.

In Shri Pankaj Arora v. AVV Hospitality LLP & Ors. (2020), an objection was raised under Section 16 that the arbitrator did not possess the requisite jurisdiction to adjudicate on the counter-claims. The objection was disposed of and was to be decided at the stage of the final argument. It was held that, though the decision on an application under section could be deferred until after the recording of evidence, the issue has to be decided “before making the final arbitral award,” not in the final award itself.

In M/s MSP Infrastructure Ltd. v. M.P. Road Development Corporation Ltd. (2014) it was held that the question of jurisdiction can be raised either under Section 16 or at the stage of the final award. The Supreme Court overruled the MSP Infrastructure judgement and held that there is no restriction to raising an objection under Section 34 of the Act. The objection can be raised at the first instance or the finality of the award.

In the case of Cadre Estate Pvt. Ltd. v. Sulochna Goyal and Ors. (2010) and Maharshi Dayanand University and Ors. v. Anand Coop L/C Society Ltd. and Ors. (2007), the Court upheld that the arbitrator has to decide jurisdiction as a preceding issue, while, in Pankaj Arora v. AVV Hospitality LLP & Ors. (2020), it stipulates that there is no such mandate to decide the jurisdiction at the commencement of the proceeding.

Whether the decision of the Tribunal under Section 16 constitutes an order or an award?

The Arbitration Act does not clarify this position of the law. The Delhi High Court has discussed this issue in the case of Union of India & Anr. v. M/s. East Coast Boat Builders (1998), where it was held that the order under Section 16 would change its nature in two different situations if the order rejects the prayer of no jurisdiction, it becomes an interim award; if the arbitral tribunal allows the plea of no jurisdiction, it is not an interim award and only appealable. Therefore, it can easily be interpreted that in either case, it is only a preliminary order and not an interim award.

The intention appears to be that in such a case, the arbitral tribunal shall continue with the arbitral proceedings and make an award without delay and without being interfered with in the arbitral process at that stage by any court in their supervisory role.

What is the Kompetenz-Kompetenz principle?

The principle of Kompetenz-Kompetenz found its basis under Section 16 of the Arbitration and Conciliation Act, 1996. It is a German term which means competence-competence, it is considered as a bedrock or an essential doctrine in the field of arbitration. It refers to the power or authority of an arbitral tribunal to rule on its own jurisdiction. It basically derives the capability of the tribunal to decide the jurisdiction on its own and settle the dispute accordingly.

References

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Role of independent directors in corporate governance

Guest Post

April 6, 2024

This article is written by Sudhi Ranjan Bagri and further updated by Pruthvi Ramakanta Hegde. This article covers independent directors, meaning, appointment, and need of an independent director. Further covers corporate governance and its meaning and the role of independent directors in corporate governance.

Table of Contents

Introduction

Directors play a very important role in the company’s success. There are many types of directors in a company, among which independent directors act like guardians within a company. Normally, they are not involved in day-to-day operations and do not have close ties to the company’s management. Instead, their job is to ensure that the company is running properly, fairly, and ethically. Different categories of independent directors belonging to different backgrounds and holding varied expertise is beneficial to the company. It helps the company to make better decisions because they consider different points of view. Moreover, independent directors are like most trusted advisors in a company. They do not have any personal interests at stake. They also help in making decisions by considering the interests of everyone.

History of emergence of the concept of independent directors

The idea of independent directors emerged as part of the evolution of corporate governance. In 1999, the Securities and Exchange Board of India (SEBI) formed a committee led by Kumar Mangalam Birla to improve corporate governance standards. Their recommendations led to the inclusion of Clause 49 in the Listing Agreement in 2000, which dealt with corporate governance.

According to the committee, independent directors are those who, apart from their director’s pay, do not have any significant financial relationship with the company, its management, or its subsidiaries that could affect their judgement.

After huge scams like Enron and WorldCom, governments around the world, including India, realised that they needed stronger rules to ensure that the companies functioned in an honest and responsible manner. Therefore, in 2002, the Indian Government set up a committee led by Mr. Naresh Chandra to suggest improvements. One important suggestion was about independent directors.

In 2002, another significant development took place when SEBI formed a committee chaired by N.R. Narayana Murthy to review the extent to which the listed companies were following corporate governance practices. As a result, the committee made changes to Clause 49 of the Listing Agreement, which outlines corporate governance standards for listed companies. One of the key revisions was to include the updated definition of an independent director. The main aim of this change is that independent directors must be truly independent so that they could act in the best interests of the company without being influenced by the company’s management or other parties. Revised Clause 49 also defines an “independent director” as a non-executive director of the company who meets the following criteria:

They do not have any significant financial interest in a company which includes its owners, its directors, its top managers, or its affiliated companies, that might affect their independence.
They are not related to the company’s owners or people in high-ranking management positions.
They have not been an employee of the company in the last three financial years.
In the last three years, they have not been a partner or an employee of certain firms that have a close relationship with the company, such as audit firms, legal firms, or consulting firms.

In India, before 2004, independent directors had to be at least 21 years old according to the rules set by SEBI. Then, in January 2013, SEBI suggested some new rules to make companies run better, which were supposed to start in October 2014. The Companies Bill of 2009, later the Companies Act of 2013, introduced detailed guidelines for independent directors, including a specific “Code for Independent Directors” in Schedule IV.

In India, the Companies Act of 2013 introduced provisions for independent directors, inspired by international best practices like those outlined in the Sarbanes-Oxley Act (SOX). Corporate scandals such as Enron and WorldCom, emphasised the significance of independent directors on corporate boards in the US. Accordingly, SOX was enacted in 2002 in the United States. These directors provide unbiased advice, enhance transparency, and contribute to the credibility of a company’s governance. Additionally, SOX mandated that the majority of members on audit committees within companies must be independent directors. These independent directors are not directly tied to the company’s management. This requirement ensures that the audit committee can effectively scrutinise financial reports, and can maintain transparency and accuracy in financial reporting, thereby enhancing investor confidence and trust in the company’s operations. Similarly, Clause 49 of the Indian Companies Act specifically addresses the role of independent directors. It mandates that listed public companies must have at least one-third of their directors as independent directors and also specifies the composition of audit committees based on the presence or absence of an Executive Chairman. A comparative analysis reveals certain similarities between SOX and Clause 49. For example, both of them say companies should have independent directors. These are people on the company’s board who are not tied too closely to the company’s management. They are like referees, making sure everything is fair.

Who is an independent director

Under Section 149(6) of the Companies Act, 2013, independent director means someone who:

Is considered by the Board to be a person of integrity with relevant expertise and experience.
Is not a promoter of the company, its parent, subsidiary, or associated companies.
Is not related to the promoters or directors of the company or its related entities.
Does not have any financial relationship with the company, its parent, subsidiary, or associated companies, or their promoters or directors for the past two financial years or the current financial year.
Does not have any relatives with significant financial dealings with the company or its related entities.
Has not been part of the company’s management or employed by the company, its parent, subsidiary, or associated companies in the past three financial years.
Has not been associated with certain professional firms (like auditors, company secretaries, legal, or consulting firms) that have had significant transactions with the company.
Does not hold a significant portion of voting power in the company either individually or with relatives.
Is not a Chief Executive or director of a nonprofit organisation that receives a significant portion of its funds from the company or its related entities.
Possesses any other qualifications as may be prescribed by law.

Appointment of independent directors

The appointment process of independent directors is governed as per Section 149(6) of the Companies Act, 2013, along with Rule 5 of the Companies (Appointment and Qualification of Directors) Rules, 2014, and Regulation 25 of the Securities Exchange Board of India (Listing and Obligations Disclosure) Regulations 2015, It includes:
- The board must trust that the person is reliable and has the right skills and experience.
- The individual must not be the promoter of the company or have close family ties with the promoter. They also should not have close relationships with current directors.
- They should not have done any financial transactions with the company or its leaders recently, nor should their family members have.
- The person or their family should not have held certain important roles in the company in the past few years, or worked for specific auditing or consulting firms that significantly dealt with the company.
- They should not have significant ownership in the company’s shares or lead a non-profit heavily reliant on the company’s funding.
- They should also meet any other qualifications that may be required by law.

Independent directors should have the right skills and knowledge in areas like finance, law, management, sales, marketing, and more, relevant to the company’s business as per Rule 5 of the Companies (Appointment of Directors) Rules, 2014. The Ministry of Corporate Affairs clarified the concept of a ‘Pecuniary Relationship’ for independent directors under the Companies Act. If a company does business with an independent director and pays them a fair amount, just like it would with anyone else, then that director is not seen as having a financial connection with the company. Transactions like getting paid for attending board meetings or being reimbursed for expenses are not considered financial relationships. Independent directors can also earn commission as part of their pay for being a director without it being seen as a ‘Pecuniary Relationship’.
The government and certain groups keep a list of qualified people (databanks) who could be independent directors. This list has information like their background, education, work experience, and any legal issues they might have. If someone wants to be an independent director, they can apply to be on this list. However, companies should still check and research before picking someone from this list. The list is available online, so companies can easily find potential candidates.
Additionally, there is a platform called the Independent Directors Repository, supported by professional groups and the government. It helps to connect eligible individuals with companies looking for independent directors.
One needs to approach the potential director to give written consent using Form DIR-2, and sign a declaration in Form DIR-8, confirming that they are not disqualified to be a director under the Act. Lastly, they must disclose any conflicts of interest using Form MBP-1.
Other procedures
- Nomination and Remuneration Committee (NRC): If required by law, the NRC recommends a candidate for independent director to the company’s Board of Directors.
- Board meeting: The Board sends notices to its members and holds a meeting to discuss appointing an independent director. They decide on the director’s term, review potential conflicts of interest, and authorise someone to file necessary paperwork.
- Shareholder approval: Within 30 days of the Board meeting, a general meeting of shareholders is held to approve the appointment through a special resolution. After approval, the company files Form DIR-12 with the Registrar of Companies (ROC).
- Disclosure requirements: The company must promptly disclose the appointment to the stock exchange and its website. Details of the general meeting proceedings and voting results must also be submitted to the stock exchange.
- Appointment letter: An appointment letter is issued to the newly appointed independent director, outlining their roles, responsibilities and compensation.
- Insider trading disclosure: The company obtains a disclosure form related to insider trading from the director within 7 days of their appointment.
- Statutory register: The company maintains necessary registers, including those of directors and key management personnel (KMP), and registers of contracts or arrangements in which directors have interests.

Number of independent directors on the Board

As per the Companies Act, 2013, specific requirements are set for the appointment of Independent Directors:

For listed public companies: At least one-third of the total directors should be independent directors, as per Section 149(4).
For certain other public companies:Rule 4 of the Companies (Appointment & Qualification of Directors) Rules, 2014 mandates that companies meeting certain criteria must have at least two independent directors. These criteria include:
- Public companies with a paid-up share capital of Rs. 10 crore or more,
- Public companies with a turnover of Rs. 100 crore or more, or
- Public companies with outstanding loans, debentures, and deposits exceeding Rs. 50 crore, in aggregate.

Letter of appointment for independent directors

The appointment of independent directors should be formalised through a letter of appointment, which should include the following details:

Term of appointment: This specifies the duration for which the independent director has been appointed.
Expectations from the director: The letter should outline the expectations of the board and specify the board-level committees in which the director is expected to serve, along with their respective tasks.
Fiduciary duties and liabilities: It should clarify the fiduciary duties and liabilities associated with the appointment.
Code of business ethics: The company’s expectations regarding the code of business ethics that directors and employees are required to follow.
List of prohibited actions: The letter should include a list of actions that a director should refrain from while serving in the company.
Remuneration: Details about remuneration, periodic fees, reimbursements for participating in board and other meetings, and any profit-related commission should be mentioned.
Directors & officers insurance: Provision for directors & officers insurance, if applicable, should be addressed.

The terms and conditions of appointment of independent directors should be available for inspection at the company’s registered office during business hours and should also be posted on the company’s website. Additionally, the Letter of Appointment along with detailed profiles of independent directors must be disclosed on the company’s website and the stock exchanges, within one working day from the date of appointment. These measures ensure transparency and accountability in the appointment process of independent directors, fostering good corporate governance practices.

Need for independent directors in a company

Having independent directors in a company is important for various reasons. They help keep an eye on what is happening inside the company and can alert shareholders and the public if there is any wrongdoing or mismanagement. They also help to solve mistakes made by the management team and make sure the company follows the rules and acts fairly. Lastly, they also help make decisions that may affect the company’s future.

What is corporate governance

Corporate governance is like a set of rules and guidelines that companies follow to make sure they behave properly. The board of directors is really important in making sure this happens. Other important players are proxy advisors (people who advise on voting in company decisions) and shareholders (the people who own parts of the company). Companies often talk about their corporate governance to show they are doing things right. Having good corporate governance is important for companies as it helps in ensuring transparency and accountability. When a company has good corporate governance, it can be easier for them to get money from investors. For example, Apple Inc. talks about its leaders and provides information about how they make decisions.

Independent directors and corporate governance:

Independent directors are important because they are expected to be impartial to the company’s management, and they will act in the best interests of the shareholders. They need to know what is happening within the company and speak up when needed. Their role is outlined in a set of rules mentioned under Schedule IV of the Companies Act, 2013. These rules explain what independent directors should do such as protecting the interests of all stakeholders. In the case of minority shareholders, these directors resolve conflicts of interest, evaluate how well the management is doing, and help out in disputes between management and shareholders. Independent directors also need to attend company meetings and stay informed about what is going on in the company.

Participation in board meetings

Section 173(2) of the Companies Act, 2013 says that directors can join board meetings either in person or through video conferencing or similar methods. These methods must be able to record who participated and store what was discussed in the meeting, including the date and time. However, the government can specify certain topics that cannot be discussed in meetings held through video conferencing or similar methods.

Board committees and independent directors

The Companies Act of 2013 requires certain committees to include independent directors, as outlined below:

Corporate Social Responsibility (CSR) Committee:

Section 135 of the Act mandates that companies meeting specific financial thresholds must constitute a CSR committee. This committee must consist of three or more directors, with at least one being an independent director. However, private or unlisted public companies are not obligated to appoint independent directors, and only two directors may form the CSR committee.

As per Companies (Corporate Social Responsibility Policy) Rules, 2014, foreign companies must form a CSR committee with at least two persons, one specified under Section 380(1)(d) and another nominated by the company. A person specified under 380(1)(d) is a person residing in India who has been authorised to accept legal documents on behalf of the company.

Nomination and Remuneration Committee

The Companies Act of 2013 requires certain companies to establish a Nomination and Remuneration Committee (NRC). Section 178 mandates every listed company and certain prescribed companies to form an NRC. The committee must consist of three or more non-executive directors, with at least one-half being independent directors. The chairman of the company, whether executive or non-executive, cannot preside over the NRC but can be a member. The chairman of the NRC must be an independent director.

Role of independent directors

Independent directors have a variety of roles to fulfil in their official capacity. Some of these major roles are :

Towards shareholders and stakeholders

Independent directors make sure that the company’s operations are transparent and clear. They especially guide shareholders with their expertise. When the company’s management or Board makes decisions that could harm shareholders, creditors, or employees, independent directors help to protect their interests. They also keep an eye on deals between the company and related parties and they support mechanisms like whistleblower policies that help expose any wrongdoing, all to safeguard stakeholders’ interests.

Towards the board

The independent director must check that all those concerns that are important for the company are properly addressed by the board of directors. The objectives and duties of the independent directors are the same as those of the executive directors. However, as compared to the executive directors, the time that is needed to be devoted by the independent director and the degree of skill and care required for the company, are much lesser.

Responsibilities of independent directors towards a good corporate governance

The responsibilities of an independent director are important. As a member of the Board, their responsibilities are very much similar to any other director of the Board. In the risk management committee, independent directors will assist in searching for problems that could affect the company and find ways to handle it. They need to give their thoughts and use their knowledge to understand these problems better without being biassed towards any side. Further, independent directors need to keep communication between the company and its stakeholders honest, which helps to build trust and credibility in the eyes of the public. In this way, independent directors play a vital role in a company. To exemplify, after the financial crisis in 2008, companies like JP Morgan, added more of these guardians to watch things more closely. These directors also advise because they know a lot about business. Another example would be that of Sheryl Sandberg who helped Walt Disney with its plans for the internet and digital strategies.

Another important job of the independent directors is to make sure that the company does what is best for itself and the entities who own it (shareholders). Sometimes, it also includes making tough decisions. A good independent director usually has worked in business for a long time and knows a lot. They have to be honest, have their own opinions, and must not be influenced by others too much. Susan Decker is a good example of a strong independent director. She worked at big companies like Yahoo! and Berkshire Hathaway. When she joined Intel’s board, she brought a lot of experience and helped the company to make good decisions.

Duties and conduct of an independent director

The independent directors have many duties. Section 166 of the Companies Act, 2013 consists of the following duties for every director including independent directors. It includes the following:

Directors must follow the rules and guidelines set out in the company’s articles of association.
Directors should make decisions that benefit the company’s goals and the interests of its members (shareholders), employees, and the community, as well as protect the environment. They should always act honestly and with integrity.
Directors must perform their duties with care, skill, and diligence expected from someone in their position. They should make informed decisions and take reasonable steps to understand the company’s operations and challenges.
Directors should avoid situations where their interests conflict with the interests of the company. They should not use their position for personal gain or advantage, and if they do, they must repay any undue gain to the company.
Directors cannot transfer their roles to someone else. Any attempt to do so is invalid.
As per Section 166 (7) of the Companies Act 2013, if a director breaches any of these duties under this Section, they can be fined between one lakh rupees to five lakh rupees.

In essence, directors are responsible for acting honestly, and in the best interests of the company and its stakeholders. Some of the general duties and conduct of such independent directors include:

Independent directors need to uphold ethical standards by being honest in every situation.
They need to act constructively and objectively while performing their responsibilities.
They need to make decisions that help the company grow by spending time understanding issues to make good decisions. Further decisions must be made based on what is best for the company, and not based on personal or any other interests.
Understand the company and its operations by undergoing training and staying updated.
Try to attend the company’s general meetings and meetings with the board of directors and its committees.
Have enough knowledge about the company and the industry it operates in.
Inform the company if they notice any unethical behaviour, fraud, or violations of the company’s rules.
Use their authority to safeguard the interests of the company, its shareholders, and its employees.
Avoid blocking the company’s progress or the work of the board committees.
Be involved in the board’s committees as a chairperson or member.
They must not share confidential information unless the board approves or the law requires it.
Make sure there is a way for people to report issues without facing negative consequences.
Independent directors are part of different committees of the company. Similarly, they share unbiased opinions because they are not part of the company’s management team.

Remuneration of independent directors

Independent directors can only receive payment for attending meetings, according to the Companies Act. They are not allowed to get stock options or any other forms of payment unless approved by shareholders. The Nomination and Remuneration Committee, as required by the Companies Act, needs to create a policy for how directors are paid, and this policy must be disclosed in the company’s report. Additionally, under the revised clause 49 II.C of the Listing Agreement, pay for non-executive directors, including independent directors has to be decided by the Board of Directors and approved by shareholders in a general meeting.

Tenure of independent director

According to Section 149(10) of the Companies Act 2013, an independent director can work for a maximum of consecutive five years but is subject to Section 152 of the Companies Act 2013. If the company wants to extend their tenure, they must pass a special resolution, and it should be mentioned in the Board’s Report. According to Section 149(11), independent directors can serve for a maximum of two consecutive terms, each lasting up to five years. After completing these two terms, they must take a break for three years before becoming eligible for reappointment. During this break, they cannot have any direct or indirect connections with the company.

However, the Ministry of Corporate Affairs issued a circular in 2014 that clarified about the appointment and tenure of independent directors through a circular in 2014. When an independent director is appointed for any term, whether it is for five years or less, it counts as one term. Even if they serve for less than 10 years in two consecutive terms, they must step down after two terms. After completing consecutive terms of less than 10 years, they can be reappointed only after a cooling-off period of 3 years.

Retirement by rotation

Section 149(13) of the Companies Act, 2013 states that the rules regarding the retirement of directors by rotation, as outlined in Section 152(6) and Section 152(7) of the Companies Act, do not apply to the appointment of independent directors. Thus independent directors are not required to retire by rotation.

Liability of an independent director

Under Section 149(12) of the Company Act of 2013, the liabilities of the independent directors have been considered limited. Accordingly, this Section states that independent directors and non-executive directors, excluding promoters or key managerial personnel, will only be held accountable for specific actions or inactions of the company if:

They were aware of these actions or inactions.
These actions or inactions were a result of established Board processes.
They provided consent or were complicit in these actions or inactions.
They did not act diligently to prevent these actions or inactions.

In Sunil Bharti Mittal vs. CBI Case (2015), the Honourable Supreme Court clarified that directors can be held responsible for the company’s actions if there is strong evidence showing they were actively involved and had bad intentions, or if specific laws say they are responsible.

Along with this, if an independent director is found liable for breach of duties, they may face civil consequences also, such as:

They may be required to compensate the company or affected parties for any losses incurred as a result of their breach of duties.
They may be subject to legal action brought by the company, shareholders, or regulatory authorities, which could result in financial penalties or other remedies.
In severe cases, if an independent director is found to have engaged in serious misconduct or repeated breaches of duties, they may be disqualified from serving as a director of other companies for a specified period.

The specific punishment, if any, would be determined by the relevant legal proceedings or regulatory actions initiated against the director.

Companies which are not required to appoint independent directors

Certain types of unlisted public companies are exempt from appointing independent directors as per the Companies (Appointment and Qualification of Directors) Rules, 2014. These exemptions apply to:

Joint ventures: Companies formed through a partnership between two or more entities.
Wholly-owned subsidiaries: Companies entirely owned by another company, known as the parent company.
Dormant companies: Companies that are inactive and not engaged in any significant business activities, as defined under Section 455 of the Companies Act.
Section 8 companies and specified IFSC public companies: These are not required to appoint independent directors. This exemption was granted by the Ministry of Corporate Affairs through notifications issued on June 5, 2015, for section 8 companies and on January 4, 2017, for specified IFSC public companies. As a result, the rules and requirements regarding independent directors, including their definition and other related provisions, do not apply to these types of companies.

However, if any of these exempted companies are required to appoint a higher number of independent directors due to the composition of their audit committee, they must comply with this requirement. If an exempted company no longer meets the criteria for exemption (joint venture, wholly-owned subsidiary, or dormant status) for three consecutive years, it must then comply with the provisions regarding the appointment of independent directors until it meets one of the exemption criteria again.

Challenges faced by independent directors

Independent directors face many challenges that can make their jobs difficult in Indian companies. Some of the major challenges include:

Sometimes, independent directors might feel pushed by other people in the company to put their interests first, rather than focusing on what is best for the company and its stakeholders.
Independent directors might not have enough authority to make important decisions or bring about needed changes in the company. It can also be hard for them to get others to listen to their ideas and suggestions.
Independent directors might not know enough about the company’s operations, its industry, or the markets it is in. This makes it tough for them to spot and deal with problems related to how the company is run.
Independent directors might need more help, like money, time, and assistance, to do their job well. They might also need help getting the information they need to make good decisions.

Are Indian independent directors really independent

In Indian companies, there is a question about whether independent directors who are supposed to be independent are really independent or not. Independent directors should be free from any strong financial ties to the company. But often, the people already on the board and the big owners of the company are involved in choosing them. This might mean they are not completely independent and might lean towards the company’s interests. Promoters of most of the companies exert significant control as they own a substantial number of shares. This can affect who gets picked for the board. Even though other shareholders have the right, the promoters might have more power and pick directors who agree with them. Independent directors might worry about not getting picked again when their term ends. This fear could stop them from disagreeing with the owners, making it hard for them to truly act independently. Even though rules try to make sure directors are independent, the way they are picked and the power of owners can make it tough for them to be truly independent.

How can we enhance powers of an independent director

An Independent director’s power can be enhanced by approaching the following ways, that include:

It is important to regularly check if independent directors are still truly independent. This means looking into their connections with the company from time to time to make sure they are not too close.
Independent directors should also listen to what employees and customers have to say about the company.
Companies should try to have a mix of different people on their boards, including independent directors.
Whistleblowers are people who report when something seems fishy in a company. Independent directors should encourage whistleblowers to come forward if they notice any wrongdoing. This helps keep the company ensuring honest practices.
Companies should regularly review how well their independent directors are doing their jobs by looking at their performance and how well they work with others.

Best practice for handling independent directors in a company

While selecting independent directors one needs to cross-check their skills. These directors should be skilled and have experience, and they shouldn’t be too close to the company’s leaders. It is also good to have a mix of people with different backgrounds and genders, so they can bring in fresh ideas.
Training for the directors will also help them to perform their functions better. They should stay updated on the best ways to manage a company. This might involve attending workshops or talking to experts to learn about new trends and risks.
Making an environment where independent directors feel safe to raise a concern if they see something wrong. Companies should provide ways for directors to report problems, and also ensure those issues get fixed.

Conclusion

Independent directors play an important role in corporate governance. The Companies Act 2013, confers powers on the Independent Director for the fair and smooth functioning of the Board of Directors and the company itself. These directors always act impartially; this will ensure that the company follows the rules and maintains its integrity. They are not involved in daily operations but help in making crucial decisions. Their role emerged to improve corporate governance after scandals like Enron. They are unbiased advisors who ensure companies follow rules, act in shareholder’s interests, and maintain transparency. Their appointment follows strict criteria to ensure they are truly independent. Lastly, it can be safe to conclude that they play a crucial role in risk management, communication with stakeholders, and decision-making by acting honestly, objectively, and in the company’s best interests.

Frequently Asked Questions (FAQs)

Who approves the independent director’s appointment?

The appointment of independent directors is approved by the company in a general meeting.

Can a practising company secretary be appointed as an independent director?

Yes, an Independent Director is a Non-executive Director, and as such, a practising Company Secretary can indeed be appointed as an Independent Director.

Can an independent director of a Company also serve as an independent director of its holding, subsidiary, or associate company?

Yes, an independent director of a company can also serve as an independent director of its associate. Additionally, according to the revised clause 49 of the listing agreement, at least one independent director on the Board of Directors of the holding company must also be a director on the Board of Directors of a significant non-listed Indian subsidiary company.

Can an independent director serve more than two consecutive terms, even if they do not complete a total term of ten years?

No, an independent director cannot be appointed for more than two consecutive terms. However, an independent director can be reappointed after a period of three years from the cessation of their previous term. During these three years, they cannot be appointed in or be associated with the company in any other capacity, either directly or indirectly.

Can independent directors have any financial interests in the company?

Independent directors must not have any material financial interests in the company, however, they are eligible to receive remuneration in the form of sitting fees.

Is there a limit on the number of independent directorships a person can hold at a point?

Yes, according to the Companies Act, 2013 in India, there is a limit on the number of independent directorships a person can hold at a point in time. As per Section 165 of the Companies Act, 2013, a person can hold a maximum of 20 directorships in total, which includes both independent and non-independent directorships. However, specific provisions regarding the maximum number of independent directorships are not explicitly mentioned in the Act.

References

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Brand valuation and brand licencing in IP: all you need to know

Vanshika Kapoor

April 5, 2024

This article has been written by Sangita Sengupta pursuing a Diploma in US Intellectual Property Law and Paralegal Studies from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

Brand valuation and licencing form an indispensable part of the business strategy for the growth of any company today. A bundle of intangible assets that creates an impression of a company in the minds of consumers becomes the brand of that company. These include, but are not limited to, domain names, product design rights, logos, trademarks, slogans, catchphrases, trade dress, packaging, copyrights in associated colours, smells, sounds, descriptors, and logos, and advertising material that forms a major part of a company’s net worth. Exclusivity in a market gives any Brand a competitive edge. Such exclusivity is generated by seeking legal protection of the Intellectual property associated with the Brand, thereby stopping others from piggybacking on their goodwill. Extensive risk analysis and due diligence are necessary to ascertain the various laws and measures in place to safeguard a brand’s intellectual property rights.

In summarising the international best practices and principles to be followed for brand valuation, ISO 10668-Monetary Brand Valuation 2010 stresses legal analysis along with financial and behavioural analysis.

In this article, we will discuss various IP valuation methods, their suitability in different business strategies, and the key considerations to be taken into account while drafting a licencing agreement for a brand.

Need for brand valuation

In today’s competitive business landscape, brands have become invaluable assets, representing a significant portion of a company’s overall value. Brand valuation has emerged as a crucial practice that provides numerous benefits to organisations. Here are several reasons why brand valuation is essential:

Quantifying brand assets

Brand valuation enables companies to quantify their intangible assets, such as brand recognition, reputation, and customer loyalty. By assigning a monetary value to the brand, organisations can make informed decisions regarding brand investments and strategies.

Mergers and acquisitions

Brand valuation plays a vital role in mergers and acquisitions. It helps determine the fair value of a company, ensuring that both parties involved in the transaction receive a fair deal. Accurate brand valuation ensures that the acquiring company pays a reasonable price while the selling company receives adequate compensation for its brand.

Licencing and franchising

Brand valuation is crucial for companies engaged in licencing and franchising. It establishes the appropriate royalty rates and fees associated with the use of the brand, safeguarding the brand owner’s interests while providing clarity to licensees and franchisees.

Brand performance evaluation

Brand valuation serves as a benchmark for evaluating brand performance over time. By tracking changes in brand value, companies can assess the effectiveness of their marketing efforts, monitor brand health, and identify areas for improvement.

Financial reporting

In certain jurisdictions, companies are required to disclose their brand value in financial statements. Brand valuation provides a reliable basis for such disclosures, ensuring transparency and compliance with reporting standards.

Investment decisions

Brand valuation assists investors in making informed decisions regarding potential investments. It provides insights into the strength and value of a company’s brand, helping investors evaluate the potential return on their investment.

Strategic planning

Brand valuation is a key element in strategic planning. By understanding the value of their brand, companies can develop strategies that leverage brand strengths, differentiate themselves from competitors, and maximise brand equity.

Brand protection

Brand valuation supports brand protection efforts. A strong brand valuation can deter potential infringers and counterfeiters from exploiting the brand, as it demonstrates the significant financial consequences of unauthorised use.

Employee motivation

A valuable brand can boost employee morale and motivation. When employees recognise the strength and value of the brand they work for, it instills a sense of pride and promotes a positive work environment.

Competitive advantage

In a highly competitive market, a strong brand can provide a distinct advantage. A well-valued brand attracts and retains customers, builds trust, and commands a premium price.

How to licence your brand

Licencing your brand under intellectual property (IP) rights can be a strategic move that allows you to expand your reach, generate revenue, and establish brand recognition. Here’s a comprehensive guide to help you navigate the process of brand licencing:

1. Assess your brand’s potential:

Evaluate your brand’s unique attributes, strengths, and market value.
Determine if your brand has the potential to be licenced to other entities.

2. Identify licencing opportunities:

Research potential markets, industries, and partners where your brand could align well.
Look for companies that complement your brand’s values and target audience.

3. Protect your IP rights:

Ensure your brand name, logo, and other elements are legally protected through trademarks, copyrights, and patents.
File for IP protection in the countries where you plan to licence your brand.

4. Develop a licencing strategy:

Define your licencing goals, whether it’s brand extension, revenue generation, or market expansion.
Determine the scope of the licence, including product categories, geographic territories, and duration.

5. Create a licencing agreement:

Work with legal counsel to draft a comprehensive licencing agreement that outlines the terms and conditions of the partnership.
Specify royalties, fees, quality control measures, and termination clauses.

6. Select the right licensee:

Evaluate potential licensees based on their reputation, financial stability, and commitment to your brand’s values.
Conduct due diligence to ensure the licensee aligns with your business objectives.

7. Negotiate the terms:

Negotiate the terms of the licencing agreement, including royalties, minimum guarantees, and marketing support.
Ensure fair compensation and protection of your brand’s integrity.

8. Manage the licencing relationship:

Establish clear communication channels with the licensee to maintain a positive working relationship.
Monitor the licensee’s use of your brand and enforce compliance with the licencing agreement.

9. Monitor brand usage:

Regularly review the licensee’s products, marketing materials, and customer interactions to ensure they align with your brand standards.
Take appropriate action if there are any violations of the licencing agreement.

10. Evaluate and renew:

Periodically assess the success of the licencing agreement based on pre-defined metrics.
Consider renewing or renegotiating the agreement based on performance and mutual benefits.

By following these steps, you can effectively licence your brand under IP rights, create new revenue streams, and extend your brand’s reach while maintaining control over its reputation and quality.

IP valuation

IP valuation plays a pivotal role in the negotiation table for brand licencing. An IP valuation report ensures an enlightened negotiation on the terms and conditions of the proposed licence. A company decides on their course of action based on the IP valuation report in case of an infringement, i.e., whether to go for a court action, take to mediation or arbitration, or licence. The quantum of damages and deciding whether to quantify damages based on the profits made by the infringer using the asset or a fair royalty decided on the valuation report.

Prerequisites IP valuation

Before starting the valuation, we need to identify the IP assets of a brand. The IP associated with the Brand must have some tangible manifestation in the form of a contract, a licence, a registration document, a computer diskette, a listing of customers recorded on a set of financial statements, etc. It should have been created and will terminate at an identifiable time or as a result of an identifiable event. It should be legally enforceable and transferable. The asset should be able to generate income independently of the other assets of the company and can be sold separately.

IP valuation is condoned by certain factors:

Premise of valuation: circumstances under which and the purpose for which the valuation is made.
Time or date of valuation: Whether it is made at the beginning when the asset is created or at a time nearing it’s expiry
Nature, scope and Strength of the IP assets
The type of valuation method applied

Various valuation methods

Cost method

The cost method determines the value of an IP asset by calculating the cost of developing the same or similar IP asset either by reproduction of the exact asset or replacement with something that has the same utility as the IP at the time of valuation. The cost incurred in the procurement and development of the IP is adjusted to inflation and discounted for obsolescence. Obsolescence in the case of IP may be functional, technological, or economic.

Functional obsolescence: It happens when the use and maintenance of the IP incur excess operational costs compared to the alternatives available on the market.
Technological obsolescence: It happens when the technology becomes outdated at that point in time.
Economic obsolescence: It happens when the IP can no longer sustain an adequate return on investment.

Cost method valuation is generally done for internal bookkeeping purposes or as a supplementary method to the income method. This method is used when the IP is no longer generating a return.

Market method

This valuation method is based on the actual price of a similar IP asset in the market under similar circumstances. This kind of valuation requires an active market for the asset, price information, identical IP assets, and variables to control for the differences between the actual IP and the similar IP, if any.

This kind of valuation is usually done during cross-licencing, licencing during settlement, etc. Stringent due diligence is required for the accuracy of this method. The determining factors here are the variables that control the differences between the actual IP and the similar IP.

This method most likely predicts the market value of an IP, thereby better representing the market sentiments for its associated brand.

Income method

In this type of valuation, the projected economic income of the IP asset is discounted to its present value. The economic income is determined by determining the projected revenue flow of the IP in the rest of its remaining useful life, offsetting that with the cost incurred in maintaining the IP asset, and then discounting the amount of income to its present-day value by using the discount rate. The measure of economic income varies from case to case, so the discount rate should be in sync with the measure of economic rate used.

Brand licencing

Licencing is a crucial tool in business relationships. Companies licence some or the entire bundle of IP assets associated with a brand in collaboration with one or more enterprises, who may be vendors or subcontractors in the supply chain, or when they collaborate on a strategic alliance or joint venture or enter a new geographical market or business. Often, to avoid expensive lawsuits, the infringer is coerced into being a licencee.

There are basically three types of licencing that companies engage in:

Licencing in:
- This happens when a company acquires IP assets from an external source, like other companies or collaborators.
Licencing out:
- This happens when a company gives permission to external sources like contractors or franchisees to use their IP assets for expansion of the business or entering a new market.
Cross licencing:
- This happens when two companies mutually licence their IP assets to each other.

Brand licencing agreement: key considerations

A brand licencing agreement is a contract that allows one party (the licensor) to grant another party (the licencee) the right to use its trademark, logo, name, or other distinctive features of its brand in exchange for a fee or royalty. A brand licencing agreement can be a lucrative way to expand the reach and recognition of a brand, but it also involves some risks and challenges. Therefore, it is important to consider the following points when drafting a brand licencing agreement:

Definitions section

The definitions reflect the parties’ understanding and intention of certain words and phrases when they signed the licence agreement, which is the relevant time for interpreting the true purpose or intent of the parties under the licence agreement.

Scope of rights clause

This section defines the scope of rights. The licensor may choose to provide exclusive or non-exclusive licences, which may further include other limitations like territorial limitations, product or service limitations, market sector limitations, and the duration for which the licence is valid.

Financial clause

This clause defines the payment arrangement, whether it be an upfront lump sum payment, a royalty payment, or both. The provisions of the royalty section also include the timeline of royalty payments, penalties for not meeting the timeline, tax issues, interest on outstanding payments, and the method of payment.

Variation, alternation, amendment, and waiver clause

This clause clearly states the scope of variation and alteration that can be made in the agreement after it has been executed and the people with the authority to make such alterations.

Trade name

Licencees or sub-licencees are allowed to use one or more of the trademarks that are licenced under the trademark licence agreement in their trade name or corporate name. On termination of such a licence agreement, the licencee often does not take steps to remove such a trademark. Thus, a clause mentioning the name of the person among the licensors, with the power of attorney on behalf of the licencee, will execute measures to delete the relevant trademarks.

Return of materials

This clause ensures the immediate return of the confidential information provided to the licencee during the course of the agreement upon termination of such agreement.

Responsibilities of the parties

The licensor must lay down the quality standards for the licencee to enforce for the intellectual property that is licenced. This ensured the brand’s connection to the source company remained relevant and, thereby, it’s exclusivity. In cases of third-party infringement, the responsibility of the licencee and licensor to counter that should be clearly laid out in the licencing agreement. The non-compete clauses during the term of the agreement and post-termination should also be clearly mentioned in the agreement for each jurisdiction.

Termination issues

This clause should include a list of conditions, the abuse of which may initiate termination of licence agreement. This also includes obligations of the licencee post-termination of the licence.

Conclusion

In the current age of the knowledge economy, IP assets is equally valuable as physical assets. Thus, understanding the interplay of the nuances of intellectual property assets’ valuation and licencing is imperative to strategising the brand positioning, expansion and growth of any company.

References

E-governance of social security

Vanshika Kapoor

April 5, 2024

This article has been written by Shio Murti Thakur pursuing a Personal Branding Program for Corporate Leaders from SkillArbitrage.

This article has been edited and published by Shashwat Kaushik.

Table of Contents

Introduction

“Social security is a fundamental human right that exercises social protection and grants access to the existing schemes in the country.” Considering the hectic life of individuals, social security is essential for leading a trouble-free life. E-government will intensify its improvement & monitor its users to realise its full benefits, while also saving costs and creating more transparency through effective technology communication. Good governance delivers public state services and also implements human rights such as education, health & food. E-government also provides opportunities for improving the quality of citizen services , good governance, a sense of responsibility and participation, and creating a relationship between e-governance and social responsibilities. It is expected that the government & corporate sectors will willingly support e-governance social securities for the common people, not only in India but also abroad, as it is directly related to the state & national economies.

Social security scheme

It’s a programme that provides retirement benefits to literate people, spouses, children, and survivors. As announced by the government, there are health and medical benefits, unemployment insurance, life & disability insurance, maternity & child care, and rural job guarantees.

Understanding its objective is crucial

it’s necessary as it provides society & government with people’s security, support if needed and financial freedom. As per the International Labour Organisation (ILO), social security establishes protection for individuals, households & their healthcare & income security, mostly for senior citizens, unemployment, health, as well as work injuries & their maternity.

We should also recognise its characteristics to build confidence among families regarding their livelihood, quality of life, medical care and income security.

The current global economic crisis has revealed the diminished effectiveness of households’ social protection, which contributes to wealth for an effective country’s economy. As the global economic crisis has affected every country, it’s important to have adequate protection systems to support individuals & families.

So far, broadening coverage & its effectiveness in social protection should be a decent work agenda that will guide the International Labour Organisation (ILO) in strengthening social protection through the global jobs’ pact. So, effective implementation of social protection schemes will increase their broad coverage through good governance.

Understanding the impact of effective e-governance on enhancing social security

E-governance has information technology which is an initiative for improving the interaction between government and citizens as well as businesses, and internal government operations. For “trusted” services, e-governance should focus on their effectiveness, efficiency, Flexibility & transparency. If the citizen derives maximum benefit from the provision of e‐services, the e‐service must possess the following attributes :

The information should be available on e service.
Users should be aware of its benefits.
It should be approachable for users easily.
It should also be accessible.
It should be comprehensive and readily understandable with respect to language and structure.
The provision should be confidential.

From the attributes, the “value” of information held and processed by the e-governance service requires protection at all levels (i.e., application, infrastructure, operation & management), intends to safeguard the information assets and is determined in terms of confidentiality, integrity and availability.

Confidentiality: Should protect sensitive information or intelligible interception.

Integrity: To safeguard the accuracy and information of the software that will protect data from unauthorised, unanticipated or unintentional modification.

Availability: Ensuring vital IT services are available when required.

For safeguarding its valued information, effective measures limited to risks and vulnerability also need to be implemented harmoniously for the computing environment.

For any information security system, essentially a combination of application infrastructure as well as operations to enforce security is essential at each level to achieve a fairly secure environment. The probabilities of simultaneous failures of securities are low, which approaches being most effective.

E-governance security standards framework or exploring the layers of security

To keep security measures at different levels in place, a risk analysis must also be performed to consider the intent, motivation & sources of threat, as well as the potential frequency of methods of attack and the consequences of a successful attack.

A better framework to establish information security can be assured through the selection of suitable security controls and management . The activities involved in assuring information security are:

Framed information systems.
Layering the security controls.
Formulate risk assessment.
Control based on risk assessment.
Monitoring and analysis of the effectiveness of security control.

Social security in India has a number of statutory insurances and social grant schemes at the central and state levels. Food security in India is guaranteed under the National Food Security Act, 2013, in which the government provides subsidised food grains to economically disadvantaged people.

Enhancing social security in India through e-governance and welfare schemes

The government’s social security and welfare expenditures are an essential portion of the official budget of social security bodies. Local governments are formulating their development and implementation of social security policies and additional welfare measures.

The social protection system of India should be categorised as follows: social support (in the form of welfare payments by cash or kind funded through taxation), as well as provisions for retirement pensions and provident funds, healthcare insurance and medical benefits, sick pay and leaves, unemployment benefits and paid parental leaves.

E-governance utilises Information and Communications Technology (ICT) for guiding governance functions and achieving results. Which involves leveraging electronic systems to enhance efficiency, transparency, and accessibility in government processes . One important area where e-governance plays a vital role is in the management of social security welfare schemes. Let’s divide this further:

Social Security Welfare Schemes:

The Indian government has introduced several social security schemes providing financial protection and support to citizens, especially the poor and underprivileged.
Notable among these are the Jan Suraksha Schemes, which were announced in the Budget for 2015-16. These schemes pertain to the insurance and pension sectors and aim to enhance social security for all Indians.
E-governance facilitates the efficient disbursement of government entitlements, such as NREGA, Social Security Pension, and Handicapped Old Age Pension, by using technologies like Aadhaar authentication.

E-shram:

E-shram is an initiative that focuses on providing social security to unorganised workers.
Through e-governance, workers can access information, apply for benefits, and receive entitlements related to social security schemes.
The use of technology streamlines the process, reduces paperwork, and ensures timely disbursement of benefits.

E-governance plays a pivotal role in managing social security programmes, making them more accessible, efficient, and transparent for citizens across India.

So the e ‘Governance of Social Security’ is a better tool that contributes to strengthening the financial governance of social protection in the country.

So through this, we are moving towards the bright future goal of social protection for all.

E governance in present times

E-governance, also known as digital government, is the use of information and communication technologies (ICTs) to support government operations and interactions with citizens, businesses, and other stakeholders. It encompasses a wide range of applications, including:

Online services

Citizens and businesses can access government services online, such as paying taxes, applying for benefits, and renewing licenses. This can save time and money, and it can also make it easier for people to access services that they might not otherwise be able to. For example, people who live in rural areas or who have disabilities may find it difficult to travel to a government office in person. Online services can also make it easier for people to compare different services and providers.

Electronic document management

Governments can manage documents and workflows electronically, which can improve efficiency and transparency. This can help to reduce the amount of paper that governments use, and it can also make it easier for employees to find the information they need. For example, a government employee who is working on a case may be able to access all of the relevant documents electronically, instead of having to search through paper files.

Case management

Governments can use electronic case management systems to track and manage cases, such as child welfare cases or criminal cases. This can help to improve the efficiency and effectiveness of the justice system. For example, a case manager may be able to use an electronic case management system to track the progress of a case, schedule hearings, and communicate with other parties involved in the case.

Collaboration

Governments can use ICTs to collaborate with other governments, businesses, and stakeholders. This can help to improve the coordination of government services and to reduce duplication of effort. For example, a government agency may be able to use ICTs to collaborate with a non-profit organization to provide services to low-income families.

Transparency

Governments can use ICTs to make their operations more transparent, such as by publishing open data and providing access to public records. This can help to increase public trust and confidence in government. For example, a government may be able to publish open data on its budget, spending, and performance.

Participation

Governments can use ICTs to engage citizens in decision-making processes, such as by conducting online polls and surveys. This can help to ensure that government decisions are made with the input of the people who will be affected by them. For example, a government may be able to use ICTs to conduct an online poll to get public input on a proposed policy change.

E-governance can provide a number of benefits, including:

Efficiency: E-governance can streamline government processes and improve efficiency. For example, online services can allow citizens and businesses to complete transactions without having to visit a government office in person.
Transparency: E-governance can make government operations more transparent. For example, publishing open data can allow citizens to access and analyse government data.
Participation: E-governance can allow citizens to participate more easily in decision-making processes. For example, online polls and surveys can allow citizens to voice their opinions on government policies.
Accountability: E-governance can make government more accountable to citizens. For example, electronic document management systems can track the progress of government cases and ensure that they are handled in a timely and efficient manner.

Challenges for e-governance in India

Challenges for e-governance in India are:

Digital divide:
- Unequal access to technology and digital literacy creates a barrier for citizens, especially in rural and marginalized communities.
Cybersecurity and data privacy:
- Ensuring the security of sensitive data and protecting citizens’ privacy in an increasingly digital ecosystem remains a critical challenge.
Legacy systems and infrastructure:
- Many government agencies still rely on outdated IT systems, making it difficult to implement modern e-governance solutions.
Lack of standardisation and interoperability:
- Inconsistent standards and lack of interoperability between different government departments hinder seamless data sharing and service delivery.
Capacity and skill development:
- Building a skilled workforce with adequate knowledge of e-governance technologies and processes is essential for successful implementation.
Regulatory and legal framework:
- Developing a robust legal and regulatory framework to address issues related to digital transactions, data protection, and cybercrimes is crucial.
Financial constraints:
- Limited budgetary resources can hinder the adoption and implementation of comprehensive e-governance initiatives.
Citizen awareness and trust:
- Building public awareness and trust in e-governance services is essential for their widespread adoption and usage.
Language barriers:
- India’s linguistic diversity poses a challenge in providing accessible and inclusive e-governance services in multiple languages.
Resistance to change:
- Resistance from traditional bureaucratic structures and reluctance to embrace digital transformation can slow down e-governance efforts.
Sustainability and scalability:
- Ensuring the long-term sustainability and scalability of e-governance initiatives is crucial to maintain their effectiveness and impact.
Integration with existing government systems:
- Integrating e-governance solutions with existing government systems and processes seamlessly is a complex task.
Public-private partnerships:
- Developing effective public-private partnerships to leverage private sector expertise and resources for e-governance initiatives is essential.
Evaluation and monitoring:
- Implementing robust evaluation and monitoring mechanisms to assess the effectiveness and impact of e-governance initiatives is necessary.
Data analytics and artificial intelligence:
- Leveraging data analytics and artificial intelligence to enhance decision-making, improve service delivery, and combat cyber threats remains a challenge.

Summary

E-governance of social security refers to the use of electronic means, particularly information and communication technologies (ICT), to improve the delivery of social security services by government agencies. This approach leverages digital platforms, databases, and online systems to streamline processes, enhance accessibility, and ensure efficient management of social security programmes. Here are some key aspects of e-governance in social security:

Online application and enrollment: Citizens can apply for social security benefits, such as unemployment benefits, disability benefits, or retirement pensions, through secure online portals. This reduces paperwork and waiting times for applicants.
Digital verification and authentication: E-governance systems utilise digital identity verification methods to authenticate individuals applying for benefits, ensuring accuracy and minimising fraud.
Integrated databases: E-governance platforms integrate various databases to facilitate efficient management of social security programmes. This includes linking databases from government agencies, such as tax authorities or healthcare providers, to verify eligibility and streamline processes.
Electronic payment systems: Social security benefits can be disbursed electronically through direct deposit into bank accounts or prepaid debit cards, eliminating the need for paper checks and reducing administrative costs.
Online access to information: Citizens can access information about their social security benefits, eligibility criteria, payment history, and other relevant details through secure online portals. This promotes transparency and empowers individuals to manage their benefits effectively.
Mobile applications: Government agencies may develop mobile applications to provide convenient access to social security services, allowing citizens to apply for benefits, track their applications, receive notifications, and access relevant resources from their smartphones or tablets.
Data analytics and predictive modelling: E-governance systems leverage data analytics and predictive modelling techniques to analyse trends, identify patterns of fraud or abuse, and improve decision-making in social security administration.
Cybersecurity measures: Robust cybersecurity measures are implemented to protect sensitive personal information and prevent unauthorised access to e-governance systems, ensuring data privacy and confidentiality.
User feedback mechanisms: E-governance platforms may incorporate feedback mechanisms to gather input from users, allowing government agencies to continuously improve the quality of social security services and address issues promptly.

Overall, e-governance plays a crucial role in modernising social security systems, enhancing efficiency, accessibility, and accountability in the delivery of benefits and services to citizens.

References

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Introduction

Overview of design law in India

Historical perspective of design law

Evolution of the Designs (Amendment) Rules, 2021

Key changes brought in by the Amendment Rules

Speaking the global language of design

Startups take centre stage

Fees get a friendly redesign

Paperless power

Clarity is key

Comparative analysis with early design rules

Classification conundrum

Startups soar

Fee flexibility

Efficiency encompassed

Clarity canvas

Beyond the brushstrokes

Issues associated with the amendments

Industry feedback and responses

Potential resolutions and recommendations

Recommendations for stakeholders

Suggestions for designers and applicants

Embrace the digital realm

Seek clarity

Stay informed

Explore the startup advantage

Balance novelty and originality

Guidance for legal practitioners

Insights for regulatory authorities

Prioritise clarity

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Conclusion

References

Swadeshi Cotton Mills v. Union of India (1981) : case analysis

Introduction

Details of Swadeshi Cotton Mills v. Union of India (1981)

Case Name

Case No.

Judgement date

Parties to the case

Appellant

Respondent

Represented by

Appellant

Respondent

Equivalent Citations

Type of case

Court

Act Involved

Provisions and statutes involved

Bench:

Author of the Judgement

Dissenting opinion

Background of Swadeshi Cotton Mills v. Union of India (1981)

Facts of the case

Issues

Arguments of the parties in Swadeshi Cotton Mills v. Union of India (1981)

Appellant’s Arguments

Respondent’s arguments

Judgement of the court

Cases cited in the judgement

Keshav Mills Company Ltd. v. Union of India

Mohinder Singh Gill v. Election Commissioner of India

A. K. Kraipak v. Union of India

Maneka Gandhi v. Union of India

Dissenting opinion in Swadeshi Cotton Mills v. Union of India (1981)

Natural Justice and Fundamental Legal Maxims

Audi alteram partem

Impact of the judgment in Swadeshi Cotton Mills v. Union of India (1981)

Conclusion

Frequently Asked Questions (FAQs)

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References