TG
SERVICE TAX ON CONSTRUCTION
Service Tax on Construction Service
PREV.
Bombay High Court Pronounces on FDI Policy
SERVICE TAX ON CONSTRUCTION
Service Tax on Construction Service
PREV.
Bombay High Court Pronounces on FDI Policy
Posted: 29 May 2015 03:26 AM PDT
It
is not very often that courts in India have had the occasion to
interpret and rule on the Foreign Direct Investment (FDI) Policy of the
Government of India. Earlier this month, the Bombay High Court issued
its ruling in IDBI Trusteeship Services Ltd. v. Hubtown Ltd.,
which relates to the legalities of a foreign investment structure that
involved compulsory convertible debentures (CCDs) issued by an Indian
company to a foreign investor the proceeds of which were in turn used by
the Indian company to invest in optionally convertible debentures
(OCDs) of two other companies operating in the construction development
sector. The specific issues in question relate to the permissibility of
assured returns to the foreign investor and the nature of downstream
investments. Sandip Bhagat, et. al., discuss the facts, issues and
decision in an articleon The Firm.
Here, I propose to highlight some of the key implications of this judgment that may be of wider relevance:
1.
The Bombay High Court has demonstrated its willingness to view the
transaction as a whole by transcending beyond the form and into the
substance. In other words, although the transaction involved two stages
of foreign investment into a holding company, which in turn invested in
two operating companies, the court effectively viewed the transaction as
a whole and not in separate parts. The openness to re-characterizing
the transaction may cause some amount of uncertainty in structuring
foreign investments. Moreover, the reliance of the Court in doing so on
judgments of the Supreme Court relating to aspects such as taxation and
cases involving fraud leaves the debate somewhat open.
2.
The implications of the judgment on downstream investments are
categorical in that foreign owned/controlled investment companies in
India must follow all aspects of foreign investment regulations
(including types of investment instruments such as equity shares or
CCDs). This enhances the compliance requirements of downstream
investments.
3.
In essence, the Court declined to validate the transaction due to the
presence of an assured return. This will have to be considered in the
context of pronouncements by the Reserve Bank of India (RBI) of its
intention to liberalize greater flexibility in the pricing of
instruments, including an assured return, in the context of optionality
clauses, as discussed here.
In
any event, this does not appear to be the final word as the Court was
only determining whether there are triable issues in a summary suit that
require further adjudication. The hearing in the suit is to follow.
