Competition Law Alert - January, 2014

Competition Law Alert

ORDERS By COMPETITION COMMISSION OF INDIA

A.       Anti-Competitive Agreements

          Synopsis of the legal provisions

        Section 3 of the Competition Act, 2002 (“Act”) prohibits an enterprise or association of enterprises or persons to enter into agreements in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause appreciable adverse effect on competition in India.

       Following kinds of agreements between enterprises, persons or association of persons or enterprises, or practices or decisions taken by association of persons or enterprises, including cartels, engaged in similar or identical trade of goods or provision of services is presumed to have appreciable adverse effect on competition:

a)             Agreements or decisions that directly or indirectly determine purchase or sale price.

b)          Agreements that limit or control production, supply, market, technical development, investment or provision of services.

c)            Agreements to share market or source of production or provision of services by way of allocation of geographical area of market or type of goods or services, or number of customers in the market or any other similar way.

d)            Agreements that, directly or indirectly, result in bid-rigging or collusive bidding.

        However, agreements entered into by way of joint ventures are excluded from above restriction if such agreements increase the efficiency in production, supply, distribution, acquisition, or control of goods or provision of services.

       Under the Act, ‘cartel includes an association of producers, sellers, distributors, traders, or service providers who, by agreement amongst themselves, limit control or attempt to control the production, distribution, sale or price of, or trade in goods, or provision of services’.

       Further, under section 19(3) of the Act, following factors are to be considered by Competition Commission of India (“CCI”) in determining whether an agreement has appreciable adverse effect on competition:

a)             Creation of barriers to new entrants in the market.

b)             Driving existing competitors out of the market.

c)             Foreclosure of competition by hindering entry into the market.

d)            Accrual of benefits to consumers.

e)             Improvement in production or distribution of goods or provision of services.

f)              Promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.

B.            Abuse of Dominant Position

          Synopsis of legal provisions

        Section 4 of the Act prohibits any enterprise or group to abuse its dominant position. ‘Dominant position’ has been defined to mean ‘a position of strength enjoyed by an enterprise, in the relevant market, in India, which enables it to –

(i)            operate independently of competitive forces prevailing in the relevant market; or

(ii)          affect its competitors or consumers or the relevant market in its favor’.

In light of the above provisions, we produce the summary of CCI’s orders passed in the month of January, 2014:

1.          Awadh Bihari Singh v. Petroleum and Natural Gas Regulatory Board, decided on January 2, 2014

The case filed by Awadh Bihar Singh (“Informant”) against Petroleum and Natural Gas Regulatory Board (“PNGRB”) alleging that the amendments in PNGRB Act, 2006 (“PNGRB Act”) will encourage anti-competitiveness and abuse of dominance in the market.

PNGRB regulates downstream segments of oil and gas distribution, including City Gas Distribution (“CGD”). PNGRB issue bids for authorizing natural gas distribution networks. Informant alleged that some companies of CGD segment have dominance in the said segment.

Informant further submitted that by way of PNGRB (Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Amendment Regulations, 2013, PNGRB has proposed fresh norms for aforementioned bidding process.

Informant alleged that the said amendment regulations are in conflict with the provisions of the PNGRB Act and would lead to abuse of dominant position held by the established CGD companies, restrict competition, induce formation of cartel, escalate cost of bid bonds to unacceptable levels and unnecessary increase in CGD project cost.

CCI observed that under the PNGRB Act, PNGRB is authorized to formulate regulations to regulate the sector. However, these regulations are required to be put before both the houses of Parliament for its approval. Therefore, the regulations framed by PNGRB are merely subordinate legislation. Informant alleged that such subordinate legislation was contrary to the substantive provisions of the PNGRB Act. CCI held that the Informant should approach the appropriate forum if his grievance in respect of the scope of powers of PNGRB. CCI does not have jurisdiction to take cognizance of the case involving legislative powers of PNGRB.

Based on the above observations, CCI ordered for closure of the case.

2.   Tunuguntla Chandra Shekar and Tunuguntla Sudha Rani v. M/s S.G. Estates Limited and Others decided on January 2, 2014

Mr. Tunuguntla Chandra Shekar and Ms. Tunuguntla Sudha Rani (“Informants”) filed a case against, M/s S.G. Estates Limited and M/s SKI View Hotel Private Limited (“Defendant Developers”) alleging violation of section 4 of the Act.

Informants submitted that in the year 2006 they had booked a space in the commercial real estate project of Defendant Developers at Ghaziabad. As per the Informants, the scheduled date of possession was March 31, 2008.

Informants contended that the said project was not completed within the stipulated time and construction deficiencies were also not removed. Informant further alleged sale deed was heavily one sided and in favor of Defendant Developers.

Informants alleged that the Defendant Developers have made unreasonable demands for maintenance charges, which was not based on the actual expenditure. They further submitted that Defendant Developers have not provided completion certificate of municipality.

Informant stated that at the time of booking of space in the year 2006, the Defendant Developers were the sole player in the market of commercial real estate segment.

CCI noted that the relevant market in the present case shall be the market of development and sale of commercial space in Ghaziabad.  

On the basis of information available in the public domain, CCI observed that there are many other players in the relevant market. Therefore, on the basis of presence of other significant player in the market, CCI held that Defendant Developers are not a dominant player in the market. Therefore no prima facie case of violation of Section 4 of the Act could be established. Hence, CCI ordered for closure of the case.

3. Shyam Lal Gupta v. Cravatex Limited, decided on January2, 2014

The case was filed by Mr. Shyam Lal Gupta (“Informant”) against Cravetex Limited (“Cravatex”) alleging abuse of dominance. 

Informant submitted that in the year 2009, he had purchased a Treadmill from Cravatex for Rs. 27,000. Later in the year 2012, his treadmill went out of order and he approached Cravatex for repair. He was informed by Cravatex that electric motor and MCB board of the tread mill were damaged and needed to be replaced. The replacement cost of the aforesaid parts was stated to be Rs. 28,838, which is more than the purchase price of the treadmill.

Informant alleged that Cravatex is the only pan India Fitness Company with 50 stores in major cities.

In its reply, Cravatex informed CCI that Informant purchased tread mill for Rs. 27,000 at the time of stock clearance sale, whereas the actual purchase price of that treadmill was Rs. 40,900. Cravatex also informed that Informant has not extended warranty of the treadmill and has also not taken any annual maintenance services. Therefore, Cravatex concluded that Informant has used the treadmill, without any periodic maintenance.

Cravatex submitted that it does not manufacture fitness machines, as it only imports such machines from its original manufacturers. Therefore the price quoted for replacement was based on the cost to its manufacturer.

On the basis of the primary functioning of the motorized treadmills, CCI observed that different versions of motorized treadmills are substitutable. Therefore, CCI decided that relevant market in the present case shall be the market for sale of motorized treadmills in India.

On the basis of information available in public domain, CCI observed that there are other players in the market, which manufactures and imports motorized treadmills such as Cosco, Reebok and JERAI. As per CCI, all aforementioned players claim to be the biggest. CCI noted that Informant has not provided any information to prove dominance of Cravatex, except the number of stores across India. However, CCI noted that there are other players, which have stores more than that of Cravatex.

Therefore based on the above mentioned observations, CCI held that Cravatex is not a dominant player in the market. Hence, CCI ordered for closure of the case. 

4. Surinder Saini v. Delhi Metro Rail Corporation Ltd. & Ors.

The case was filed by Shri Surinder Saini (‘Informant”) against Delhi Metro Corporation Limited and 5 other institutions (“Defendant Institutions”) alleging abuse of dominance. Informant runs a firm called M/s Medical Product Services.

Informant stated that in past his firm and two other firms were found in violation of Section 3(3)(d) of the Act by CCI and the same was also upheld by Competition Appellate Tribunal (COMPAT). 

Informant submitted that Defendant Institutions issue tenders for supply of Medical Operation Theatre (MOT) and Medical Gas Pipeline System (MGPS). However, the terms of the tenders restrict such firms, which have been found guilty of bid rigging or cartelization.

Informant informed that there are only 5-6 major players supplying MOT and MGPS, whereas the other players play a very small role. Informant alleged that Defendant Institutions have taken collusive action to restrict its entry in the market. Informant further alleged that Defendant Institutions are government procurement agencies and therefore they are abusing their dominant position by inserting such an anti-competitive condition in their tenders. 

CCI stated that the practice of debarring those firms, which were found guilty of contravention of provisions of the Act is completely in the interest of public at large and can never be considered as unfair and arbitrary. CCI further stated that Defendant Institutions are consumers and they can put such conditions to safeguard their interest as a consumer.

CCI further observed that Defendant Institutions have imposed conditions in their tenders based on the order of CCI and COMPAT, which is in public domain, therefore actions of Defendant Institutions cannot be called to collusive. 

Based on the above observations, CCI held that the said case cannot be examined under Sections 3 and 4 of the Act. Therefore, CCI ordered for closure of the case.

5. Sreeram Mushty, Chartered Accountant v. Shriram Chits Limited

The case was filed by CA Sreeram Mushty (“Informant”) against Sriram Chits Limited (“SCL”) alleging abuse of dominance.

Informant submitted that in the year 1996, he participated with his associates in the chit group of SCL namely BLX-01 with ticket numbers 26, 30 and 35.

Informant alleged that SCL has wrongfully invoked clause 17 of the standard chit fund agreement and has exercised a right of lien over the prize money of aforesaid tickets. Informant further submitted that there was no outstanding amount to be paid on such tickets by him.

Informant alleged that SCL has deposited the prize money of the ticket number 35 as fixed deposit in one of the group company of SCL, when informant failed to pay an instalment. Informant further alleged that SCL has declared Informant as defaulter subscriber and has denied dividends on the chits.

Aggrieved with the above conduct of SCL, Informant has approached CCI.

CCI noted that in the present case the relevant product market is the ‘market of chit fund services’. CCI opined that the ‘market of chit fund services’ is different from conventional banking system, as it entails credit without any collateral security and rate of interest on deposits are relatively higher than any other saving instruments. Therefore, chit fund is a unique product and pertains to a different market.

CCI further noted that chit funds companies need to be registered with the state government and operate under the regulations of their respective states. SCL is registered in Andhra Pradesh, therefore the relevant geographical market shall be Andhra Pradesh.

CCI stated that Informant has not provided any data to establish dominance of the SCL. CCI noted that the 65.55% of the market share of the total chit fund business in India (excluding Kerala) is covered by Margadarsi Chit Funds and SCL. Whereas, Margdarsi accounts of 41.67% and SCL holds 23.88%. However, CCI noted that there is no information on state wise share of chit fund business. Therefore it cannot be ascertained whether SCL is dominant player in the state of Andhra Pradesh. CCI further stated that Informant has not provided any data in the aforesaid respect and there is also no information available even in the public domain.

Based on the above observations, CCI held that SCL does not appear to be dominant player in the relevant market. Therefore it ordered for closure of the case.

6. In re: Pan India Infra Projects Private Limited and Board of Cricket Control in India decided on January 16, 2014

The case was filed by Pan India Infra Projects Private Limited (“Pan India”) against Board of Cricket Control in India (“BCCI”) alleging abuse of dominance in the organization of private cricket leagues.

CCI noted that in February, 2013 it has already decided in its order that BCCI is a dominant player and abused its dominant position. The issue of hostile behaviour towards private cricket league was also dealt in detail in the said order. CCI further noted that in its earlier order, CCI found that BCCI’s approval for initiating any cricketing league was crucial. CCI in its earlier order also held that BCCI has entered into an agreement, whereby it was restricted to give permission for any other private league. Therefore, it was decided that by not allowing ICL, BCCI has abused its dominance. 

CCI noted that the said order was challenged by BCCI before COMPAT and appeal is pending. However, COMPAT has put a stay on the impugned order of CCI. CCI further noted that Pan India has also filed Special Leave Petition before Supreme Court against BCCI citing same grievances. The said SLP is also pending.

Therefore, based on the above observations CCI stated that there is no need to start a fresh investigation against BCCI as all the grievance of the Pan India have already been addressed in its earlier order.

CCI held that if COMPAT upheld order of CCI and even after that BCCI continue to abuse its dominance, than in such case Pan India will have a right to approach CCI.

C.           Combination Registrations

1.             Combination Registration No. C-2013/12/143 decided on January 7, 2014

The notice for the combination was filed by Mahindra Engineering Services Limited (“MES”) and Tech Mahindra Limited (“Tech Mahindra”). As per the proposed combination, the entire business comprised in all undertakings of MES will get amalgamated into Tech Mahindra.

MES is an unlisted company incorporated in India. It provides engineering services comprising of designing and developing parts etc. for automotive and off-highways sector.

Tech Mahindra is a listed company incorporated in India. It provides engineering services largely in the aerospace, automotive, industrial hi-tech and consumer electronics sectors.

As per the notice, Mahindra & Mahindra Limited directly and indirectly holds 80.69% of the share capital of MES. Mahindra & Mahindra Limited together with its promoters also holds 36.46% of share capital of Tech Mahindra. 

Based on the above facts, CCI held that the proposed combination will not have adverse effect on the competition in market. Therefore, CCI approved the combination.

2.             Combination Registration No. C-2013/12/146 decided on January 30, 2014

The notice for combination was filed by Inox Air Products Limited (“Inox”). The proposed combination was in respect of Business Transfer Agreement between Inox and Essar Steel Limited (“Essar”). As per the proposed combination, Esaar’s gas plant situated at Gujarat will be transferred to Inox on slump sale basis.

Inox is incorporated in India and is engaged in business of manufacturing and supplying industrial gases, including oxygen, nitrogen, helium, argon.

Essar is also incorporated in India and is an integrated steel manufacturer. The gas plant at Gujarat produces oxygen, nitrogen, and argon gases. However, the said gases are primarily used for captive purposes at its steel plants.

On the basis of information provided by Inox and Essar, CCI noted that Inox and Essar will enter into a Job Work Agreement. As per the said Job Work Agreement, Inox will provide industrial gases to Essar for its steel plants. CCI also noted that post combination the total production capacity of Inox will not increase significantly.

Therefore, based on the above observations, CCI held that proposed combination will not have appreciable adverse effect on the competition. Hence, CCI approve the combination.

 

3.             Combination Registration No. C-2013/10/136 decided on January 30, 2014

The notice for the combination was filed by Synnex Corporation (“Synnex”). The proposed combination is in respect of a Master Asset Purchase Agreement between Synnex and International Business Machines Corporation (“IBM”). As per the proposed combination, Synnex will acquire customer relationship management business process outsourcing (“CRM BPO”) of IBM.

IBM has two wholly owned subsidiaries in India, namely, IBM India Private Limited (“IBM India”) and IBM Daksh Business Process Service Private Limited (“IBM Daksh”). As per the proposed combination, BPO business of IBM Daksh will get transferred to Synnex.

Synnex is NYSE listed company and is engaged in the business of providing BPO services to resellers, retailers and original equipment manufacturers of various industries. Apart from BPO business, it is also engaged inter alia in the business providing IT distribution, supply chain management. In India, Synnex operates through its wholly owned subsidiary Concentrix Technologies (India) Private Limited (“Concentrix”).

IBM is also a NYSE listed company engaged in the business of manufacturing and marketing computer hardware and software. It also provides infrastructure hosting and consulting services in the areas from mainframe computers to nanotechnology. As stated above, IBM has two subsidiaries in India i.e. IBM Daksh and IBM India. Both the subsidiaries are engaged in providing BPO services in customer care and back office works.

As per the combination, the Indian operations of IBM will also get transferred together with CRM BPO business of IBM.

CCI noted that the major portion of the revenue of IBM Daksh are generated from exports. Similarly, Concentrix revenue from domestic market is also insignificant. CCI further stated that IT BPO industry of India has several large players. Therefore, based on the above observations and analysis, CCI held that the proposed combination will not have appreciable adverse effect on the competition in India. Hence, CCI approved the combination.

4.             Combination Registration No. C-2014/01/149 decided on January 30, 2014

The notice for the combination was field by HDFC Trustee Company Limited (“HDFC Trustee”) and HDFC Asset Management Company Limited (“HDFC AMC”) (HDFC Trustee and HDFC AMC collectively be referred as “Acquirers”). The proposed combination was filed pursuant to a Scheme Transfer Agreement between Acquirers and Morgan Stanley Mutual Fund (“MS Trustees”) and Morgan Stanley Investment Management Private Limited (“MS AMC”) (MS Trustees and MS AMC be collectively referred to as “MS Entities”).

As per the proposed combination, Acquirers will acquire eight Morgan Stanley Mutual Fund (“MS Mutual Fund”) schemes from MS Entities.

As per the notice, HDFC Mutual Fund is a trust established under Indian Trusts Act, 1882, which is co-sponsored by HDFC Corporation Limited and Standard Life Investments Limited. HDFC AMC is the asset management company and HDFC Trustee is trustee of HDFC Mutual Fund. HDFC Mutual Fund is registered under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (“SEBI Mutual Fund Regulations”).

MS Mutual Fund is a trust established under Indian Trusts Act, 1882 sponsored by Morgan Stanley. MS AMC is the asset management company of MS Mutual Fund.

CCI observed that mutual fund business in India is regulated by SEBI Mutual Fund Regulations. As per the official website of SEBI, there are 52 registered mutual funds operating in India. Therefore, there is an ample choice to customers to shift from one mutual fund to other. Moreover, as per the report of Association of Mutual Funds of India, the average asset under management of MS Mutual Fund for the last quarter was insignificant.

Therefore based on the above observations, CCI held that the proposed combination will note have appreciable adverse effect on competition. Hence, CCI approved the combination.

5.             Combination Registration No. C-2013/12/145 decided on January 28, 2014

The notice for the combination was filed by KKR Floorline Investments Pte Ltd (“KKR Floorline”) and Gland Celsus Bio Chemicals Private Limited (“Gland Celus”). The proposed combination was pursuant to the following agreements:

1.      Shares Subscription Agreement between  Gland Pharma Limited ( “Gland Pharma”), the promoters of Gland Pharma and KKR Floorline.

2.      Shareholders Agreement amongst Gland Pharma, the promoters of Gland Pharma and KKR Floorline.

3.      Share Purchase Agreement amongst KKR Floorline, Gland Pharma and EILSF Co-Invest I LLC (private equity investor of Gland Pharma).

4.      Share Subscription Agreement amongst Gland Celsus, the promoters of Gland Celsus and KKR Floorline.

As per the proposed combination, in terms of the above mentioned agreements, KKR Floorline will acquire 37.98% of equity shares of Gland Pharma and 24.9% of equity shares of Gland Celus. Further, Gland Celus will subscribe to additional securities of Gland Pharma, which will increase its shareholding in Gland Pharma to 30.24%.

KKR Floorline is an investment holding company incorporated in Singapore. KKR Floorline is controlled by KKR & Co. LP (“KKR”) incorporated in Delaware, USA. KKR is a global asset funds and investment company, which holds investments in various companies in India.

Gland Pharma is a company incorporated in India, engaged in producing generic versions of medicines and specialized injectables. Further, Gland Pharma also produces active pharmaceutical ingredients (“API”) for in-house consumption.

Gland Celus is an investment holding company and is promoter of Gland Pharma. It currently holds 17.70 % of equity share capital of Gland Pharma, 12.98 per cent of equity share capital of Gland Chemicals Private Limited (“Gland Chemicals”) and 40 % equity share capital of Nicomac Clean Rooms Far East Private Limited (“Nicomac”).

As per the notice filed, Gland Celus does not carry on any business whereas, Gland Chemicals produces API and Nicomac manufactures and supplies modular clean room systems, lab services, equipment etc.

   

CCI noted that KKR holds investment in three health care companies in India. Out of the said three companies, one is engaged in business of providing solutions to medical devise market, the second company is engaged in business of dosage delivery product and the third company is engaged in the business of contract research and clinical development services to the biotechnology and pharmaceutical industries globally.

On the basis of the information provided by the parties, CCI observed that Gland Pharma does not have any vertical relationship with the aforesaid three companies in which KKR holds investments.

CCI further observed that there is a horizontal overlapping of products of said three companies and Gland Pharma and other companies in which Gland Celus has investment. However, the supply of APIs from Gland Chemicals to Gland Pharma or the clean room products from Nicomac to Gland Pharma is not significant enough to result in any competition concern in India.

 

Therefore based on the above observations, CCI held that proposed combination will not have appreciable adverse effect on the competition in India. Hence, CCI approved the combination.

D.           News

1.             Competition Commission cautions against unfair ways in pharma business

CCI vide a public notice has listed out various possible anti-competitive practices in the pharma sector. The said notice is addressed to general public, chemists, druggists, stockists of medicines, whole-sellers and pharmaceutical manufacturers.

The CCI in its several orders had already found several practices with regard to cases concerning all India, state-level, district-level associations of chemists, druggists, stockists, whole-sellers and manufacturers to be anti-competitive.

Few of such anti-competitive practices include (i) issuance of instructions to chemists/druggists/shops/ stockists/whole-sellers/manufacturers restricting discounts on sale of drugs in retail or wholesale; (ii) issuance of boycott calls by the associations to their members against any enterprise for not following their instructions; and (iii) fixation of trade margins at different levels of sale of drugs or medicines.

According to the notice, CCI has already issued cease & desist order against the associations directing them not to indulge in anti-competitive practices. Therefore, non-compliance of the order of will entail severe penalties and can even lead to prosecution.

2.             Coal India appeals against CCI's Rs 1,773 crore penalty order

Coal India has moved to the Competition Appellate Tribunal against a CCI order slapping Rs 1,773 crore penalty on it for unfair trade practices.

CCI in its order observed that Coal India is operating independently of market forces and enjoys an undisputed dominance in the country for production and supply of non-coking coal.

According to the said order, Coal India abused its dominance and did not try to evolve/draft/finalise terms and conditions of Fuel Supply Agreements through a mutual bilateral process with procurers. CCI has also directed Coal India to cease and desist from certain anti-competitive practices.

3.             Government exempts shipping vessel sharing pacts from CCI purview

As per the gazette notification issued by the Ministry of Corporate Affairs, the Central Government has exempted Vessel Sharing Agreements among shipping companies from the ambit of CCI for a period of one year.

Vessel Sharing Agreement allows entities to share space in each other’s vessels is a common practice in the shipping industry. The shipping industry has been seeking exemption for these pacts from the purview of section 3 of the Act (anti-competitive agreements).

Therefore now throughout the exemption period, Vessel Sharing Agreement would only be monitored by the Director General of Shipping.

4.             Competition Commission of India may probe price-fixing in RCF tender

As per the news reports, CCI is looking into an alleged formation of cartel between two railway brake manufacturers, namely Knorr Bremse and Faiveley Transport, when they quoted identical prices for the tenders floated for rail brakes by the Railway Coach Factory at Kapurthala in Punjab. 

According to a complaint filed by Railway Coach Factory, Kapurthala, the Indian subsidiaries of German braking system maker Knorr Bremse and French railway equipment maker Faiveley Transport have formed a cartel to supply ‘Axle Mounted Disk-Break System’ for coaches at Railway Coach Factory. In its complaint to CCI, the complainant has claimed that the two bids were totally identical on three occasions in 2011, when the department had floated emergency tenders.

5.             Competition Commission of India orders another probe against Coal India

CCI has ordered an investigation against Coal India and its subsidiary Western Coalfields on a complaint alleging that the company has abused its dominant position. The investigation is ordered on basis of a complaint from Wardha Power that alleged that the state-run entity forced it to enter into a one-sided Fuel Supply Agreement (FSA) under which the latter did not have bargaining power or power to negotiate. Wardha Power has further alleged that Coal India has increased the price of the coal that was supplied to it from Rs. 1613/- per metric tonne to Rs. 2177/- per metric tonne, without justifying the hike in prices.

CCI in its latest order held that a prima facie case was made out against Western Coalfields and Coal India for investigation for contravention of Section 4 of the Competition Act. Accordingly, investigation was ordered.

CCI had already penalised Coal India and its subsidiaries heavily for abuse of dominance by imposing a penalty of Rs 1773 crore in the month of December, 2013. Coal India has challenged the said December order before COMPAT.

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 DISCLAIMER 

This competition law alert has been prepared by Sarthak Advocates and Solicitors. It is meant to be merely an informative summary and should not be treated as a substitute for considered legal advice. We welcome your comments and suggestions. For any comments, suggestions or further clarifications, please contact us at:

Sarthak Advocates & Solicitors

A-35, Sector - 2, Noida- 201 301,

Uttar Pradesh

Boardline: +91- 120-4309050

Fax: +91- 120-4249060

Email: knowledge@sarthaklaw.com

Real Estate - January - 2014

Real Estate - January - 2014

Supreme Court's Judgements

A.       A.    SH Medical Centre Hospital vs. State of Kerala &Ors.,decided onJanuary 16, 2014.

Facts:

The Appellant, SH Medical Centre Hospital, a registered charitable institution is managed by nuns of the Christian faith.As per the Memorandum of the SH Medical Center, the object of the institution is purely philanthropic and not for profit.The Appellant had constructed several buildings with the aim of building hospital and providing free medical aid to poor. The Respondents, vide an order exempted the Appellant from assessment of building tax. The exemption was in connection with the main building of the hospital. The Appellant’s hospital was visited by an officer from the office of Tehsildar and subsequently the Appellant received a demand notice. Under the said notice, the Appellant was subjectedto building tax under the relevant provisions of the KerelaBuilding Tax Act, 1975 (“Act”).

Aggrieved by notice, the Appellant filed a writ petition before the High Court of Kerala. The High Court, by an order, disposed of the writ petition with a direction to the Tehsildar to reconsider the assessment. The High Court also rejected the request of the Appellant and referred the issue of exemption to the Government.

The Kerala Government, by its order rejected the contention of Appellant and held that as the medical service were given only in the plinth area of the third floor of the main building, only the said portion is exempted from paying building tax.

Aggrieved by the order of the Kerala Government, the Appellant filed a writ petition before the High Court praying to quash the order and to declare the appellant as charitable institution under the Act. The writ petition was dismissed by the single judge on the ground that the building was not primarily used for charitable purposes and thus the present appeal.

Held:

While examining the provisions of the Act and the question of what ‘charitable purpose’ means, the Supreme Court opined that the High Court has correctly interpreted the ‘Explanation’ clause to Section 3(1) of the Act to hold that ‘charitable purpose’ means ‘relief of the poor and free medical relief’. The Supreme Court, while dismissing the appeal,observed that the Appellant already has income tax exemption for the area in which free medical aid is provided. Only the portion of the building utilized for providing free medical aid can be said to be used principally for charitable purpose and thus the High Court was correct in its observation.

Circular

New Sub-Sector CRE-Residential Housing (CRE-RH) Segment within CRE Sector & Rationalisation of Provisioning and Risk Weight.

In September 2009, the Reserve Bank of India (“RBI”) had issued guidelines on classification of certain exposures as Commercial Real Estate (“CRE”) exposures. The CRE exposures are sensitive in view of their inherent price volatilities. Therefore, these exposures generally attract higher risk weights and higher provisioning requirements. Accordingly, it was proposed to carve out a sub-sector of ‘CRE-Residential Housing’ within the CRE sector with appropriate prudential regulatory norms on risk weights and provisioning.

As loans to the residential housing projects under the CRE Sector exhibit lesser risk and volatility than the CRE Sector taken as a whole, it has been decided to carve out a separate sub-sector called ‘Commercial Real Estate–Residential Housing’ (“CRE-RH”) from the CRE Sector. CRE-RH would consist of loans to builders/developers for residential housing projects (except for captive consumption) under CRE segment. Such projects will ordinarily not include non-residential commercial real estate. However, integrated housing projects comprising some commercial space (e.g. shopping complex, school, etc.) can also be classified under CRE-RH, provided that the commercial area in the residential housing project does not exceed 10% of the total Floor Space Index (“FSI”) of the project. In case the FSI of the commercial area in residential housing complex exceeds the ceiling of 10%, the project loans will be classified as CRE and not CRE-RH.

Further, the CRE-RH segment will attract a lower risk weight of 75% and lower standard asset provisioning of 0.75% as against 100% and 1.00%, respectively for the CRE segment.

News

Housing projects allowed in Gurgaon’s commercial zones

The Haryana government has decided to allow mixed land use in commercial zones notified in the master plan. So far, licences in designated commercial zones in development plans have been granted exclusively for integrated commercial complexes but under the new Mixed Land Use (Commercial/Residential) Licensing Policy, these complexes can now house residential properties. As per the policy, the projects will only be allowed on sector roads or 30-metre wide roads. The minimum area required for the project should be 10 acres. Further, the project site should also have an existing approach road, while it should be approachable from the proposed sector roads in future.The maximum permitted Floor Area Ratio (“FAR”) of a project has to be in accordance with the present licensing policy. While the maximum FAR for the residential component cannot exceed one third (33.3%) of the maximum permissible FAR of the project and the remaining two-third (66.7%) must be used for commercial purpose.The policy doesn’t allow independent residential plots to be carved out in commercial zones.

Industrial township in Greater Noida

The central government has approved an investment of over Rs 1,700 crore in creating trunk infrastructure such as roads, bus rapid transit system and telecom and IT infrastructure for an industrial township.The proposed industrial township is part of an “early bird project” with a multi-modal hub also planned in Dadri, which part of the Delhi-Mumbai Industrial Corridor. The township is proposed under the 2021 Master Plan and will be spread over close to 750 acre.

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Newsletter - Real Estate

This newsletter is being provided to the recipient solely for the purpose of his/her/its information. It is meant to be merely an informative summary and should not be treated as a substitute for considered legal advice. This update covers significant legal developments in the field of real estate for the month of January, 2014. If you wish to receive more information about any item in this newsletter, please feel free to contact:

Sarthak Advocates & Solicitors

A – 35, Sector – 2, NOIDA 201 301

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