In this blog post, Shubham Aparijita, a student at Symbiosis Law School, Pune and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, talks about arbitration in an EPC contract.

EPC Industries

EPC stands for Engineering, Procurement, and Construction and it is a form of agreement, or rather, a contracting agreement which in the construction industry or sector. It deals with the detailed engineering design procure equipment and necessary materials and then construction work is done to deliver a proper functioning facility or assets to their respective client.

With the development of this industry, there is a wider scope of dispute as compared and the rights and obligation has also increased proportionately. As almost all construction contracts now a days contain an arbitration clause for the settlement of disputes arising, the arbitration cases number, in both sectors ie. in public as well as private sectors, has accordingly increased. The enactment of the Arbitration & conciliation Act, 1996 has brought several changes in the field of arbitration. This, along with other fact that the engineering & construction industry involves several other laws, including the Indian Contract Act, the Specific Relief Act, the Interest Act, etc. has made the job of understanding one’s rights and obligation more challenging.

EPC CONTRACT

It is the most common form of contract which is used to undertake construction works on large scale and complex infrastructure projects. Under this contract a contractor is required to deliver a complete contract for a fixed price on a fixed date.

It is also referred to as turnkey construction contract because a contractor is required to deliver a complete facility so that the other party only need to turn a key to start working or operating the facility.

Judicial intervention in arbitration

1. Section 8- Making reference in a pending suit.
2. Section 9- Passing interim orders.
3. Section 11-Appointment of arbitrators.
4. Section 14(2) – Termination mandate of arbitrator.
5. Section 27-Court assistance in taking evidence.
6. Section 34- Setting aside an award.
7. Section 36- Enforcement of an award by way of decree.
8. Section 37- Entertaining appeals against orders.
9. Section 39(2)]- Directing giving of award.
10. Section 41- Reference of a dispute to arbitration in insolvency proceedings.

Interim protection

The court and arbitral tribunal both of them have the power to grant interim protection. As per section 9, court can allow interim protection any time before, during arbitral proceedings or after the making of the arbitral award, but before it is enforced (accordance with section 36). Section 17 of the Act gives co-terminus powers to the arbitral tribunals to order interim measures of protection. Parties have right to prevent the tribunal to exercise such powers by mutual agreement. It would operate only during the existence of the arbitral tribunal and its being functional and not pre or post arbitration. If pre arbitration notice invoking arbitration is required the court must be satisfied that effective steps to commence arbitration have been taken.

Section 34 – Setting Aside an Arbitral Award

The power to set aside an arbitral award is very limited. For example:

1. Incapacity
2. Arbitration Agreement invalid
3. No proper notice of appointment or arbitral proceedings
4. Arbitral award outside the scope of the agreement
5. Composition of arbitral tribunal or procedure not in accordance with agreement
6. Court finds that the subject matter is not capable of settlement by arbitration under the law
7. “Patently Illegal” or “illegality

Under section 34 a court can’t re-appreciate evidence.If a possible view is taken in relation to the obligations of the parties then interference by the court is not justified.  

Employee arbitrators

What is the position of employee arbitrator are they neutral?

In government contracts arbitration is carried out by employee of the government, statutory bodies, public sector undertaking.

Case: In Indian Oil Corporation Ltd. and Ors. Vs. Raja Transport, Supreme Court held

A senior officer, who has nothing to do with the contract are independent and impartial and is not barred from acting as an arbitrator just on the ground that their employer is a party to that contract.

Incorporation

Principles of incorporation of arbitration clause by reference has been summarised in M.R. Engineers and Contractors Pvt. Ltd. Vs. Som Datt Builders Ltd. as:

• There should be a clear contain and  clear reference to the documents containing clause; the reference should clearly indicate an intention to incorporate the clause into the contract;
• The arbitration clause should be apt, capable of application in respect of disputes under the contract and should not be repugnant to any term of the contract.General reference given is not helpful it must be specific, If referring contract states “in terms of execution and performance” – arbitration agreement does not follow but if it specifies a section of another contract, , then there is incorporation by reference.

Law governing of arbitration

Dispute referred to international commercial arbitration can be categorised to three different laws:

1. Proper law – Law  which governs the substantive contract
2. Law which governs the construction and validity of the arbitration agreement – This law governs the agreement to arbitrate and also the performance of that agreement.
3. Procedural law of arbitration– This law governs the conduct of the arbitration.

In maximum of cases, all three will be the same. But (1) will mostly be different from (2) and 3), and rare cases, (2) may be different from (3). Where parties are not able to choose the law for arbitration proceedings then it would be the Seat.Seat not to be confused with venue of arbitration.

Foreign Arbitral Awards

There are 2 parts, part 1 applies to domestic arbitrations and Part II applies to foreign arbitrations.

In Bhatia International and Venture Global, Supreme Court had held that for international commercial arbitrations when a party wanted to enforce an award under Part II, Indian courts would also have jurisdiction and Part I will also apply.

In Bharat Aluminum Co. v. Kaiser Aluminum Technical Service Inc the judgment in Bhatia International and Venture Global was overruled. The principles given in Bharat Aluminum are:

Part I is only applicable to international commercial arbitration held in India and is not applicable to international commercial arbitration held outside.

In international commercial arbitrations which are held outside India interim relief can’t be granted by Indian courts. Section 34 applies only if the seat of arbitration is in India. Application of awards rendered in arbitration held outside India would only be subject to the jurisdiction of the Indian courts when that award are sought to be given in India in accordance with provisions contained in Part II. The seat of arbitration will decide applicable law of arbitration. The venue may change but it will not effect on the seat of arbitration. The seat of the arbitration remains the same i.e. the place initially agreed by the parties.

Enforcement of foreign award

Foreign awards can be given under New York and Geneva Convention and can be enforced under the Part II of the Act. It can’t be set aside. The Indian courts may only impose it or refuse to impose it.

Enforcement Conditions:

1. The award must fulfil and satisfy the definition of foreign award under section 44  and section 53 of the respective conventions.
2. A party who applies for enforcement of a foreign award must produce the following document before the court:

1. Original award or a copy of the award which is duly authenticated.
2. Original arbitration agreement or certified copy.
3. Such other evidence to prove that the award is a foreign award.  

Refusal of Enforcement can be on following grounds:

1. Incapacity
2. No proper notice of appointment
3. Arbitral award given outside the scope of the agreement
4. Composition of arbitral tribunal not in accordance with agreement of the parties

Once Final Arbitral Award is passed, the same becomes final and binding between the parties. Section 34 of the Act, provides certain possibilities in which a Final Arbitral Award can be set aside by a court. However, the Courts have, time after time, interpreted and construed this Section in a very narrow way, effectively leaving very little area for the parties to challenges a Final Arbitral Award in court. The Courts are always reluctant to interfere with a final arbitral award since the arbitrator is a judge who is chosen by the parties and his decision should be respected. A final Arbitral Award may be set aside by the Court if the same is totally willful or is based on a wrong proposition of law. A court may interfere if the award is based upon a proposition of law which is unsound in law and which of error in proposition of law vitiates the decision of the Arbitrator. The error must appear from the Award itself. It is generally accepted that a Final Arbitral Award can be set aside by a Court if the Arbitrator has misconducted the proceedings. Misconduct means to legal misconduct which arises if the arbitrator on face of the award arrives at a decision ignoring material documents.

Conclusion

It is the most common form of contract which is used to undertake construction works on large scale and complex infrastructure projects.

In this blog post, Shruti Sharma, a Legal Associate at BetterPlace Safety Solutions Pvt. Ltd. who is currently pursuing a  Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the relation of a public policy with Arbitration.

 DEFINITION OF PUBLIC POLICY

The term “public policy” is a vague concept that connotes the matters or issues relating to the public good.

Public policy as its name suggests is a general policy which always has a foundation for the betterment of the general masses.

It is somewhere equal to the “Policy of law” so therefore, any rules, actions, policies, principles against the public interest shall be denoted as “against the public policy”.

Moreover, being a wide term the public policyincludes any actions which are good for the general public.

PRINCIPLES OF PUBLIC POLICY

The flexibility of the public policy is quite obviousas it includes principles of natural justice which is in the interest of the public.

The courts use the principle of public policy wisely in different circumstances. There is a fine line of difference between the rule in consonance with public policy and against the public policy. The principle of public policy is susceptible to changes and adapts according to the dynamic society.

The court and the government considerthe parameters of public policy in a particular contract and then decide whether it is valid or a void to be implemented on the contemplated parties.

Ultimately, whatever leads to destruction of justice, and are against the principles of natural justice comes under the purview of “Public Policy”.

ARBITRATION AND ITS RELATION WITH PUBLIC POLICY

Arbitration is one of the means for alternate dispute resolution where parties can resolve their disputes without the intervention of the courts.

Alternate Dispute resolution is a method where the disputes are resolved by the various techniques like arbitration, mediation and conciliation.

The main purpose of the arbitration is to resolve the dispute expeditiously and cost effectively which shall in turn reduce the number of litigations in the court.

Increase number of cases is the major issue in our present judicial system; the cases are being pending in the court which ultimately leads to an injustice.

So, the arbitration can play an important role and reduce the piles of pending cases by resolving them by an arbitrator. Indian arbitration and conciliation act, 1996 guides and regulates the law of arbitration and major amendments have been made in this regard.

Arbitral award are enforced in the same manner as any other decree of the Indian court. Therefore, the arbitral award is equivalent to any other decree or order passed by the court which has a binding effect on the parties.

There are two kinds of arbitral award i.e. domestic award and International award.

An international award can also be set aside if it is found to be in contravention to public policy. But the term “public policy” has no where being defined as per New York Convention (NYC). Moreover, in the leading case ONGC Ltd vs.Saw Pipes, Supreme Court stated that domestic arbitral award shall not be enforced if it was against the public policy of India. After Saw Pipes case, the court in PhulchandExports Ltd vs. OOO Patriot, the court has reviewed the merits and illegality of the award on the basis of the public policy.

In Shri Lal Mahal Ltd vs. ProgetoGranoSpa, the Supreme Court interpreted differently and widely of the term “Public Policy” and stated that there is a difference in enforcement of an International arbitral award and domestic award. Moreover, refusing the broad definition of public policy; now the enforcement of an international award can only be opposed to public policy under the following conditions:

• The Fundamental Policy of Indian law;
• The interests of India;
• Justice and morality;
• Patently illegal

As per section 48sub clause (2), if any arbitral award is find against or in conflict with the public policy of India then it may be set aside.

An explanation appended to the section states that if the arbitral award was induced by fraud, corruption or in violation of section 75 or section 81 of 1996 Act will be considered as in conflict with public policy.

• FRAUD: It has been defined under Indian Contract Act,1872 under section 17 as a deception or an intention to deceive others, it is a broad term having various meanings. Moreover, it is a cheating with intent to deceive others.

So if the arbitral award has been based on fraud and misinterpretation shall not be executable.

• CORRUPTION: The term corruption is not confined only to the monetary benefits but any kind of biasness and favours by an arbitrator towards any one of the parties. When the arbitrator shows undue favours towards any of the parties will not make the award executable.

Mere suspicion is not a ground for corruption as there should be something more than the mere suspicion for such allegations. In Chouthmal Jivrajjec poddar vs. Ram Chandra Jivrajjec poddar the court stated that just putting up with parties, dining etc shall not be sufficient to vitiate the proceedings but if arbitrators have a private conference with one of the parties on the subject matter of dispute shall vitiate the proceedings and can be a ground to set aside the arbitral award.

Moreover, if an arbitrator is involved in illegal gratification and have received pecuniary inducement then the award shall be liable to be set aside. It has also been provided under section 11 of the arbitration act that the arbitrator shall be an impartial and independent.

In addition to this section 12 of the act also states the ground of challenges where the impartiality and independence of an arbitrator has been mentioned clearly.

THE RENUSAGAR CASE: The Narrower view

The landmark judgment Renusagar Power Co Ltd v. General Electric Co encapsulates section 7 (1)(b)(ii) of Foreign Awards (Recognition and Enforcement) Act ,1961.

The Supreme Court stated that this section must be construed in the sense that the principle of public policy must be applied in the field of private international law.

This statement was in context of New York convention. Moreover, it has been provided that the award in contravention with public policy of India shall be set aside under section 34(2) (b) (ii). The legal repercussion of this decision that an ward with patent illegality can be enforced until and unless it is not illegal in contrary to the public policy.

THE ONGC CASE: A BROADER VIEW   

In this leading case the Bombay High Court dismissed the petition inter alia on the ground that the award doesn’t come under the purview of “in conflict with public policy”. Therefore, in the appeal proceedings, the Supreme Court held that the term “public policy in India” shall be interpreted in a wider sense under section 34.

In contrast to Renusagar case here the court stated that the term public policy means any matter which is related to the public good and public interests. Moreover, it has also mentioned that apart from three heads provided in Renusagar case, award can be set aside if there is a patent illegality.

Court further said that the award may be set aside if the terms of the award affect the conscience of the court being unreasonable to the society.

             INTERNATIONAL LAW AND PUBLIC POLICY

• GENEVA CONVENTION, 1927

In order to enforcement of the foreign arbitral award the following conditions should not be present in it:

• That party was not properly addressed or represented
• That decisions of the arbitration was beyond its scope
• That the award passed has been void in the country

This convention has suffered withdefects because of which the speedy settlement of

dispute by arbitration was hampered.

• NEW YORK CONVENTION, 1958

To remove the defects in the Geneva convention a new York convention was introduced which states that the rules of the territory where award has been passed should be relied upon.

Moreover, irrespective of the country where arbitral award passed; the court shall refuse to provide enforcement of the award under the following conditions:

• Where the subject matter of the dispute is not capable of consider under arbitration under the law of the country
• Where it is in contrary to the public policy of that country.

• UNCITRAL MODEL LAW, 1985

Under UNCITRAL Model Law it has been clearly stated that Public Policy is a vital criteria and has a great impact on the foreign awards.

CONCLUSION

Arbitration is a means of cheap and fast settlement of dispute but the more court intervention has made Indian arbitration unreliable.

It has been a clearly seen that the judiciary has inclined towards the process of arbitration and in this regard has also provided arbitral awards and arbitration more sanctity and legal binding.

As per 176th report the law commission of India they have added two additional grounds under section 34(1), these two grounds are i) error which is apparent on the face of the award which leads to substantial question of law, and ii) that the award should contain the reasons.

It is true to state that the court would have failed to provide justice to the public and the societal good can be hampered if there have been no modification and development in the public law.

In this blog post, Sayli Petiwale, a BA LLB (Hons.) student from Baroda School of Legal Studies and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the implications of the Indo-Singaporean Tax Treaty on Indian Companies operating in Singapore.

Introduction

The development of international trade corporations has made the issue of taxation of utmost importance. An entrepreneur looking for expansion of his business beyond the realms of his own country, naturally would be concerned about how his enterprise may be taxed, especially if he might have to pay taxes twice in the his own as well as the host country. Understandably the entrepreneur would devise his operations in such a manner as to simplify and minimize the tax liabilities and would want to obtain benefits of the deductions and exemptions available under the respective tax laws of each country.

Now, here is where the Tax Treaties come in action. Various countries sign tax treaties with each other in order to avoid double taxation for the residents of both the countries that are operating in each other’s countries.

India and Singapore had signed an agreement on the avoidance of double taxation (DTA) and prevention of fiscal evasion with respect to taxes on income on 24 January 1994. Later, a second protocol amending the said agreement came into force from 1 September 2011. This treaty is termed as the “Agreement for double taxation and prevention of fiscal evasion with Singapore”. The treaty aims to prevent double taxation on income earned in one jurisdiction by resident in another jurisdiction.  

How are corporations taxed in India and Singapore independently?

Without the existence of a tax treaty the corporations in existence in either of the countries are governed by their respective laws of taxation and taxed accordingly.

In India, the law governing any persons, individuals as well as companies is the Income Tax Act, 1961. In India taxability of an income depends on where the income was received or where it was earned. This would help in determining its taxability. For the purpose of understanding the act classifies the incomes as Income earned/accrued in India as Indian Income and outside India as Foreign Income. With respect to corporations, income can be received mostly in the form of business income, capital gains income, house property income and sometimes as income from salary.

Now under Section 2(17) of this Act,

the term “company” means:

(i) any Indian company, or

(ii) any body corporate incorporated by or under the laws of a country outside India, or

(iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income-tax Act, 1922 (11 of 1922), or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970, or

(iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company:

Provided that such institution, association or body shall be deemed to be a company only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration ;]

Now, institutions falling under the above definition are taxed under the Income Tax Act in India on the basis of their income. Under the Singapore laws, The Income Tax Act of Singapore is the governing statute regarding corporate and individual taxation matters.

Any income that is accrued in Singapore by a person or business is subject to income tax. What it means is that if a customer pays you for your product or service in Singapore, or if you receive money in Singapore from your overseas sales, the money is subject to tax. Taxable income includes: income from your business, salary from employment, interest earned on your deposits and rental income.

 Taxation under the DTA Treaty

Double non-payment of taxes in relation to DTA implies an entity is not paying taxes in both countries i.e. the host as well as the source country. Under the taxation treaty signed between India and Singapore, a company is defined as an entity which is taxable under the laws of both the countries. The main objective of the treaty is to avoid double taxation. In case of an Indian Company operating in Singapore, because it is an Indian Company, it would be taxed under the Income Tax Laws of India.

Now, when two countries sign treaties with respect to taxation, there are exemptions which can be enjoyed with if one person has already paid taxes in another country. For that purpose, the treaty specifically defines what a permanent establishment is. It means a fixed place of business through which the business of the enterprise is wholly or partly carried on. It especially includes:

1. A place of management
2. A branch
3. An office
4. A factory
5. A workshop
6. A mine, an oil or gas well, a quarry or any other place of extraction for natural resources
7. A warehouse in relation to a person providing storage facilities for others
8. A farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on
9. premises used as a sales outlet or for soliciting and receiving orders
10. an installation or structure used for the exploration or exploitation of natural resources but only if so used for a period of more than 120 days in any fiscal year

According to the Double Taxation Agreement (DTA), the profits of an enterprise are taxable only in the state where the business operations are carried out. If an Indian-based business has a permanent establishment in Singapore, the profits attributable to the permanent establishment will be taxed only in Singapore.

In case Singapore and India did not have a DTA in force, the profits of the business could be taxed in Singapore as well as in India. The profits generated by the permanent establishment would bear the tax burden twice in such a case. This emphasizes the importance of the DTA and how it avoids double taxation of business profits.

Now if an Indian Company is operating or carrying on its business in Singapore, how will it be taxed? Will it enjoy any deductions under the Tax laws of Singapore or India? Under the DTAA, for the purpose of corporations, taxation under the following categories is applicable:

Taxation of Business Profits

Business income or profits of an enterprise are taxable in the country in which the enterprise is resident. Yet, if the enterprise carries out business in the other contracting country through a permanent establishment situated in that contracting country, then the profits or income derived from that permanent establishment alone will be liable to tax in the other contracting country.

Taxation of Dividend Income

Dividends paid by a company that is a resident of one contracting country to a resident of the other contracting country may be taxed in that other country. However, such dividends may also be taxed in the source country as:   

1. 15% of the gross amount of the dividends. Note however, that if the recipient is a company that owns at least 25% of the shares of the company paying the dividends then a reduced tax rate of 10% of the gross amount of the dividends will apply.
2. Since there is no dividend tax in Singapore, Indian-resident shareholders who derive dividends from a Singapore-resident company or a Malaysian-resident company that has a source of profit in Singapore, are exempt from Singapore tax on the dividend income.

Taxation of Directors’ Fees

Directors’ fees or other similar payments received by the resident of one contracting country in his capacity as a director of a company that is resident in the other contracting country will be taxed in that other contracting country.

Taxation on Dividends

Dividends distributed by the Indian Subsidiary to the Singapore Holding is not subjected to withholding tax in India. But India does levy a dividend distribution tax at 16.22%. If qualifying conditions are met, the dividend received from the Indian Subsidiary can be exempted from tax under Singapore’s foreign-sourced income exemption scheme. This exemption apply only when the headline corporate tax rate in the foreign country from which the income (which is India in this case) is received is at least 15%, and the income had already been subjected to tax in that particular country.

What are the reliefs available and how they are granted by the respective governments?

India offers its residents double taxation relief by deduction i.e. domestic tax is applied on the income after deducting Singapore tax suffered. Singapore offers its residents tax credit relief for double taxation of income. Thus, Indian tax paid in respect of income from sources within India shall be allowed as a credit against Singapore tax payable in respect of that income.

If India sourced income of a Singapore company is subjected to taxation twice (once in India and then again in Singapore on remittance), then the Singapore company can claim relief under the Foreign Tax Credit (FTC) scheme, which allows the company to claim a credit for the tax paid in India against the Singapore tax that is payable on the same income. The claim is called Double Tax Relief (DTR).

Now mainly there are two main methods by which Singapore and India can enjoy relief from double taxation under the DTAA Treaty:

The Credit Method

Under the credit method, Singapore will typically grant a foreign tax credit (FTC) to an entity that has paid taxes on business profits derived in the source state. The entity can then offset that FTC against its tax liability in Singapore. Singapore’s laws provide that an FTC can only be offset against the tax liability arising from that same income in Singapore, and not against the entity’s other income. Accordingly, if the source country’s tax rate is higher than Singapore’s, the entity will bear the source state’s higher tax rate.

The Exemption Method

Under the exemption method, business profits that have already been taxed in the source state will typically be exempted from taxation in Singapore altogether. If the source state’s tax rate is lower than Singapore’s, the exemption method would be preferable to the credit method as a lower overall tax liability would result.

Singapore’s domestic laws also exempt foreign-sourced dividends, branch profits, and service income remitted into Singapore from further taxation, provided that they have already been taxed in the source country and the highest corporate tax rate (also known as the “headline” tax rate) is at least 15 percent, even if that income has not been taxed at the headline rate.

Conclusion

Signing of this treaty has relaxed many rigorous issues related to tax on corporations. Corporations can freely establish as well as run companies in the two signatory countries of the treaty. Again of course it relates to only residents of both the countries. Indian entrepreneurs are finding it attractive to start a business in Singapore where funding and mentorship is readily available, and when the prototype is successful, take their product and services to the Indian mass market. While some entrepreneurs such as Go! Places have incubated their ventures in the city-state; others have secured funding from either private venture capitalists or the Singapore Government itself. Flipkart is also based in Singapore despite being an Indian Corporation

In the fields of Information Technology, gaming, social media and mobile applications, Singapore is proving to be an ideal test-bed for Indian companies due to its more tech-savvy population. Practo, an online medical appointment scheduler provider, relocated to Singapore recently.

Thus, the treaty has had several positive implications on the Indian Companies already operating in Singapore as well as has expounded the scope for doing business in both the countries. And from the angle of tax exemptions which are available to the corporates, it has proven to be even more beneficial. It has also facilitated trade relations and business in both the countries.

REFERENCES

• https://www.iras.gov.sg/irashome/Businesses/Companies/Working-out-Corporate-Income-Taxes/Companies-Receiving-Foreign-Income/Tax-Exemption-of-Foreign-Sourced-Income/

• http://www.mazars.sg/Home/Doing-Business-in-Singapore/Corporate-Taxation/Taxation-of-Foreign-Corporations

• https://www2.deloitte.com/content/dam/Deloitte/in/Documents/tax/in-tax-india-guide-2015-noexp.pdf

• https://www.quora.com/Why-is-Flipkart-registered-in-Singapore

• http://www.indianeconomy.net/splclassroom/194/what-is-double-nonpayment-of-taxes-in-relation-to-dtaa/

• http://www.asiabriefing.com/news/2014/04/tax-relief-singapore-holding-companies/

• http://articles.economictimes.indiatimes.com/2015-07-29/news/64997159_1_capital-gains-shc-tax-implications

• http://blog.hrblock.in/tax-planning/taxability-income-earned-india-vs-income-earned-abroad/

• http://www.rikvin.com/incorporation/incorporate-in-singapore-to-do-business-in-india/

• http://business.mapsofindia.com/india-tax/double-taxation-india.html

• https://www.iras.gov.sg/irashome/Other-Taxes/Withholding-tax/Non-resident-companies/Tax-Residence-Status-of-a-Company/

• https://www.guidemesingapore.com/taxation/corporate-tax/singapore-corporate-tax-guide

• https://www.iras.gov.sg/irashome/Businesses/Companies/Working-out-Corporate-Income-Taxes/Companies-Receiving-Foreign-Income/Tax-Exemption-of-Foreign-Sourced-Income/

• http://legaladda.myonlineca.in/advantages-of-india-and-singapore-company-registration/

• http://www.incometaxindia.gov.in/DTAA%20Articles/Singapore/108020000000006398.htm

• http://www.conventuslaw.com/report/setting-up-corporate-headquarters-in-singapore/

• http://indianresearchjournals.com/pdf/IJMFSMR/2013/June/17.pdf

• Agreement for avoidance of double taxation and prevention of fiscal evasion with Singapore:  DTTA from the Income Department of India

• https://www.guidemesingapore.com/taxation/double-tax-treaties/singapore-india-dta

In this blog post, Ranjeet Yadav, an Ex-Commissioner of Railway Safety with the Indian Railways and a student pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses the principle of proportional representation while appointing Directors.

Introduction

As per the company’s laws, appointment of directors in a company is usually done through simple majority passing a resolution in the general meeting of shareholders. As such, a simple majority is in a position to elect all the directors and a significant minority as large as 49 percent may not succeed in appointing even a single director. This may jeopardise the interests of minority shareholders in a company. To mitigate this disadvantage of the minority shareholders, section 265 of the erstwhile Company Act, 1956 had provided that the minority shareholders could have an opportunity of placing their representatives on the Board of Directors where the concerned company adopted the system of proportional representation by providing in its ‘articles of association’.  

These provisions relating to proportional representation for appointment of directors in a company are now included in the section 163 of the Companies Act, 2013 which reads as under:

“Notwithstanding anything contained in this Act, the articles of a company may provide for the appointment of not less than two thirds of the total number of the directors of a company in accordance with the principle of proportional representation, whether by the single transferable vote or by a system of cumulative voting or otherwise and such appointments may be made once in every three years and casual vacancies of such directors shall be filled as provided in sub-section (4) of section 161.”

Salient Features of Principle of Proportional Representation for Appointment of Directors in a Company

Overriding authority:  The section 163 of the Companies Act, 2013 begins with ‘Notwithstanding anything contained in this Act ————-‘. Thus, the provisions of this section override all other sections of the entire Companies Act, 2013. Should a company adopt provisions of this section in appointing directors in accordance with the principle of proportional representation, it can enjoy overriding authority of this section.

The section 162 of the Companies Act, 2013 provides for appointment of directors to be voted individually and as such provisions of section 162 are contrary to those of section 163. But, due to overriding authority of section 163, the provisions of section 162 get excluded.

Optional in nature: The provisions of the section 163 say ‘the articles of the company may provide for the appointment———‘and thus they are optional in nature. They will apply only if the articles of association of the company provide for such appointment provision i.e. the articles of association of a company may provide for appointment of directors of the company on proportional representation basis if they choose so. It is not obligatory for a company to adopt the provision i.e. a company may decide not to have appointment of its director following the proportional representation system. This means that the requirements of provisions in the articles is authoritative for invoking section 163.  

Intention of law: This system of appointment of directors in a company based on proportional representation ensures a fair representation of the minority interest of the shareholders group. In normal course, it may not be always possible for minority shareholders to place their nominee directors in the board to safeguard their interests keeping them always apprehensive about the functioning of the company in a fair manner as far as their perspective is concerned. Intention of law to incorporate this provision of appointment of company’s directors on the basis of proportional representation is basically to look after the interests of minority shareholders.    

Applicability: The provisions of this section of the Companies Act, 2013 are made applicable to both public and private companies, unlike the old Act of 1956 which was applicable only for public company or a private company which was subsidiary of a public company. Thus the present provisions provide a wider scope in favour of the minority shareholders  

Tenure of directors: The appointment of directors by way of proportional representation may be made once in every three years. Use of the verb ‘may’ indicates the stipulation of three year tenures is not mandatory.

Number of directors that can be appointed: The section stipulates that the articles of association of a company may provide for the appointment of not less than two thirds of the total number of the directors. Thus, it mandates that where a company adopts proportional representation, it shall appoint at least 2/3rd of its directors by this method. There is no cap however on the maximum number of directors which can be appointed through this system of proportional representation.

Casual vacancies of directors appointed under the system of proportional representation: Casual vacancies vice such directors shall be filled up as provided in sub-section (4) of section 161 of the Company Act, 2013. It stipulates that the resulting casual vacancy, in default of and subject to any regulations in the articles of the company, be filled by the Board of Directors at the meeting of the Board. It is imperative that such appointment of directors will not be effected through circulatory resolution of the board.

It is further provided that any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated.

Method Of Appointment Of Directors Under The System Of Proportional Representation

There are two methods of appointment, viz a) single transferable voting and b) cumulative voting are usually followed for appointment of directors under the system of proportional representation. Their detailed methodology is set forth hereunder:

• Single Transferable Voting – Under this system, each shareholder irrespective of his shareholding is entitled for one vote per post of directors to be appointed.  For example, let us take a situation where there are five posts of directors to be appointed in a company out of a total of eight candidates. Here each shareholder irrespective of number of shares he holds can cast one vote each in favour of up to five candidates. Five candidates getting the highest number of votes in order will get elected.

Minority shareholders can work to a strategy of casting their votes only in favour of their nominated candidate skipping others. This could ensure winnable number of votes for their nominated candidate as other shareholder’s votes may get distributed amongst numerous candidates. This way minority shareholders will be in a position to place their nominee director in the Board.

• Cumulative Voting – Under this system, each shareholder is entitled to have number of votes as per his shareholding. For example, let us take a situation where a shareholder has 500 number of shares in a company and there are 05 number of directors to be elected out of a total of 08 candidates. Here he is eligible to cast 500*5=2500 number of votes. He can use all these votes for a single candidate or he can divide his votes amongst all the candidates.

If a group of minority shareholders decide to cast all their votes to their nominated candidate, there is a good chance of their nominated candidate getting adequate number of votes to enable him to get elected as votes of other shareholders may be distributed in favour of other candidates to fill up remaining vacancies of directors.

Thereby under both the methods, the minority interests are protected in the company.

• Other methods– The company may adopt methods other than the above two, as provisioned in its articles of association and approved by majority shareholders in the general meeting, to appoint directors under the system of proportional representation.

Exemption

The central government vide notification issued on 5th June 2015, has granted exemption for applicability of the section 163 to certain government companies. In such companies, minority shareholders will have no scope of choosing their nominee directors based on the principle of proportional representation.

Removal of Directors

Section 169(1) of the Company Act, 2013 provides for the ways to remove a director of a company with the condition that nothing contained in this sub-section shall apply where the company has availed itself of the option given to it under section 163 to appoint not less than two third of the total number of directors according to the principle of proportional representation.

Therefore, any director appointed in terms of section 163 cannot be removed as per section 169(1). The method of removal of directors appointed through the system of proportional representation is not clear

Conclusion

The concept of ‘Proportional representation for appointment of directors in a company’ is very noble towards safeguarding the interests of minority shareholders, but prospect of its implementation through section 163 of the Company Act, 2013 has serious infirmities due to the provisions being kept optional for the companies. It is left to the choice of a company whether to adopt the provisions of the said section in this regard. There is no clear picture in regard to its acceptability or otherwise by the corporate entities in our country and as such its contribution in taking care of interests of minority shareholders is not well known.