SSRana Newsletter 2022 Issue 17

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Trademark Search and Seizure in India – An Analysis

By Vikrant Rana and Priya Adlakha

The 161st Report of the Parliamentary Standing Committee on Review of Intellectual Property Rights regime in India explicitly mentions about the cumbersome procedures encountered in search and seizure process in trademark infringement proceedings under Section 115(4) of the Trade Marks Act of 1999 (hereinafter referred to as the Act for the sake of brevity).

Legal provision under Section 115 (4) of Trade Marks Act, 1999

Section 115 of the Act provides for cognizance of offences and the powers of the police officer for search and seizure. The relevant extract of Section 115(4) of the Act which been stated to make the procedure of search and seizure in trademark infringement cases cumbersome is reproduced herein below:

Any police officer not below the rank of deputy superintendent of police or equivalent, may, if he is satisfied that any of the offences referred to in sub-section (3) has been, is being, or is likely to be, committed, search and seize without warrant the goods, die, block, machine, plate, other instruments or things involved in committing the offence, wherever found, and all the articles so seized shall, as soon as practicable, be produced before a Judicial Magistrate of the first class or Metropolitan Magistrate, as the case may be:

Provided that the police officer, before making any search and seizure, shall obtain the opinion of the Registrar on facts involved in the offence relating to trade mark and shall abide by the opinion so obtained.

Hence, the two conditions entailed under the impugned provision prior to initiation of search and seizure process are that:

• The search and seizure shall be conducted by a police officer not below the rank of deputy superintendent of police or equivalent;
• The police officer, before making any search and seizure, shall obtain the opinion of the Registrar and shall abide by the opinion so obtained.

Recommendations by the Parliamentary Standing Committee

The Parliamentary Standing Committee while considering the aforesaid mandates under Section 115(4) of the Act, made the following recommendations in its report:

• The cumbersome procedures as regards to search and seizure operations in trademark infringements under Section 115 of the Act should be streamlined and simplified for improving and expediting investigations.
• That depending on the size and ongoing commercial activity of the district, one or more well-trained police officer specialized in tackling IP crimes should be deployed in place of a high ranking officer.
• That the officers being appointed should have an added responsibility of enforcing IP laws in their respective jurisdiction.
• That a monitoring mechanism should be put in place to ascertain the reasons of delay in pursuing opinion from the Registrar along with a reasonable timeframe of 48 hours to render the opinion in a time bound manner.
• That digitalization can help whereby, Police Department and Office of Registrar can be connected through a specific software and there is no leakage of data by doing end to end encryption. This can help in reducing the time taken in getting permission for search and seizure.

DPIIT’s Response to recommendations

In response to the aforesaid recommendation, the Department of Promotion of Industry and Internal Trade (DPIIT) has also released its Action Taken Report¹ , wherein the Department has stated that a proposal has been made to include a platform in e-TMR system, wherein the Police officers may file online request under Section 115 and concerned officer will provide its opinion within 24 hours and that the proposal is being examined in consultation with Controller General of Patents Designs and Trademarks (CGPDTM).

Proviso to Section 115(4) of Trade Marks Act and opinion of the Registrar

The proviso to Section 115(4) that the police officer, before making any search and seizure, shall obtain the opinion of the Registrar on facts involved in the offence relating to trade mark and shall abide by the opinion so obtained has been a bone of contention in several trademark cases for quite some time now and time and again there have been deliberations which reflect that the proviso acts as an impediment in search and seizure process.

Whether it is mandatory to take opinion of Registrar under Section 115(4)?

The Indian Judiciary in several cases has been confronted with the issue whether it is mandatory to take opinion of the Registrar as stipulated under Section 115(4) of Trade Marks Act?

The Hon’ble Bombay High Court in the case of Shrenik Shantilal Dhadiwal v. The State of Maharashtra and Ors². , was confronted with the said issue.

The Hon’ble Court in this case while referring to the statutory provision under Section 115 of the Trade Marks Act stated that the Court shall not take the cognizance of a complaint unless there is a complaint in writing made by the Registrar and that the police officer before making any search or seizure obtains the opinion of Registrar on facts involved in the offence relating to trade mark and shall abide by the opinion so obtained.

Similarly, the Hon’ble Madras High Court in the case of M/S. Venkateshwara & Co vs The Assistant Commissioner³ , refused to prosecute the applicants for trademark infringement as the mandatory procedure provided under Section 115 of the Act i.e. obtaining opinion of Registrar had not been complied with. Hence, the Court was of the view that the proceedings against the applicants would be a misuse of process of law.

The Hon’ble Rajasthan High Court in the case of Pitambra Industries v. State of Madhya Pradesh⁴ , also took a similar view to hold the impugned search and seizure in the case made by the Police Officer without the opinion of the Registrar to be illegal and without jurisdiction. It was also held by the Court in the case that to obtain an opinion is a sine-qua-non and it must be complied to by the Police Officer at the time of search and seizure. Hence, such compliance was mandatory for the police officer prior to search and seizure in case an offence was registered under section 103, 104 and 105 of the Trade Marks Act.

An interesting view pertaining to the issue of non-compliance of provision under Section 115(4) and vitiating of trademark infringement proceedings against the accused was taken up by the Hon’ble Delhi District Court in the case of State vs. Sanjay Malhotra⁵ . In this case the accused argued that search and seizure in the case was vitiated due to non- compliance of section 115 (4) of Act. However, the Court opined that the accused’s submission on non- compliance of section 115 (4) of Trade Marks Act was of no help as it is settled law that defects in investigation, if any, does not necessarily gives benefit to the accused unless serious prejudice is shown to have been caused.

From the aforesaid judgments, it is abundantly clear that a consistent view of the High Courts has been that it is mandatory to obtain Registrar’s opinion under proviso to Section 115(4) for initiating search and seizure procedure.

Section 115(4) of the Trade Marks Act, 1999, and its application in respect to Section 93 of the Code of Criminal Procedure, 1973

Another intrinsic issue that has been raised with respect to provision under Section 115(4) i.e. whether proviso to Section 115(4) of the Trade Marks Act is not applicable to search warrants which are issued by the Courts under Section 93 of the Code of Criminal Procedure, 1973?

The Hon’ble Delhi High Court was confronted with this issue in the case of Sanyo Electric Co. Thr. Its Constituted Attorney Pankaj Gupta v. State⁶ .

The Court in the case, rendered a detailed analysis of both the statutory provisions under Section 115(4) of Trademark Act and Section 93 of Code of Criminal Procedure and held that proviso to Section 115(4) does not override and obliterate the power of the court to issue a search warrant under Section 93 of the Code.

Pursuant to analysing both the impugned provisions, the Hon’ble Delhi High Court observed that the two provisions operate independently as one relates to searches pursuant to warrants issued by the courts and the other relates to searches by police officers without a Court warrant.

It was also held by the Court that the pre-requisite or pre- conditions for a search by a police officer without warrant under the proviso to Section 115(4) of the Trade Marks Act cannot be read into and made a precondition before a search warrant issued by a court under Section 93 of the Code of Criminal Procedure is executed.

The Court finally concluded that a judicial order of the court issuing warrant of search will be a paper order and unexecutable unless the Registrar gave a positive opinion under Section 115(4) and that this is not warranted by the language of the proviso or the legislative intent behind the proviso.

Misuse and abuse of proceedings under Section 115(4) of Trade Marks Act

As observed in the recommendations forwarded by Parliamentary Standing Committee, often delay is caused in obtaining Registrar’s opinion under Section 115(4) eventually delays the initiation of search and seizure procedure. The delay caused in many cases gives the infringer the opportunity to remove the infringing goods from the premises and thereby crippling the whole object of conducting of raid or search and seizure by the designated police officer.

Few of the shortcomings with which the proviso under Section 115(4) suffers is the non- stipulation of timeline or duration within which the Registrar has to render opinion and also that no specialized officer is designated for this purpose i.e. DCP from the IPR Division under the Economic Offences Wing of the Police.

Conclusion

The Committee’s recommendations and DPIIT’s response with respect to Section 115(4) paves a positive path to mitigate the impediments caused in search and seizure process in trademark counterfeiting and infringement proceedings.

It is expected that the DPIIT’s proposal to include a platform in e-TMR system, wherein the Police officers may file online request under Section 115 and concerned officer provides opinion within 24 hours soon sees light of the day as its implementation will strengthen the procedure of trademark protection and enforcement in India and prove to be a big boon for brand owners.

This article was first published in Lex Witness Issue of June 2022 here-  SS Rana & Co. – India’s All New Labour Laws – Aggressively Slow

1. The 169th Action Taken Report on Review of IPR regime in India has been tabled before the Rajya Sabha on April 05, 2022.
2. Criminal Appl. No. 1289/07, Bombay High Court, August 1, 2018
3. CRL.O.P.No.86 of 2019 on February 26, 2019
4. 2018(4) MPLJ 691
5. FIR No. 81/09
6. Crl. Rev. Petition No. 154/2010, Delhi High Court, August 30, 2010

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CIVIL AND CRIMINAL RAIDS INDIA

 

Striking a Balance between Commercial Speech and Brand Protection: DABUR V. BAIDYANATH

By Ananyaa Banerjee and Diksha Singh

Dabur India Limited (“Plaintiff”) had brought about a suit for grant of injunction against telecasting, broadcasting and publishing five advertisements by Shree Baidyanath Ayurved Bhavan Pvt. Ltd (“Defendant/ Respondent”) via all electronic mediums, TV Channels and other print media. With the trend of comparative advertising, and the need to secure honest trade practices and healthy competition in market, the verdict of Hon’ble Calcutta High Court underscored the doctrines governing trade mark disparagement and limitations of freedom of speech in an advertisement.[1]

The Plaintiff

Dabur India Limited (referred to as “Plaintiff”) is a company incorporated in India and a leading manufacturer in Ayurvedic and Natural Health Care products. The Plaintiff has been manufacturing and selling the well-known ayurvedic preparation “Dabur Chyawanprash” in India for several years.

The Defendant

Shree Baidyanath Ayurved Bhavan Pvt. Ltd (referred to as “Defendant”) is a company established in 1917, and a pioneer of heath care and herbal treatment with backing of modern science and technology. The Defendant has been identified for many of its ayurvedic products including “Chyawanprash”.

Facts of the case

The Defendant had launched 5 commercial advertisements wherein it claimed that its “Chyawanprash” is a mixture of qualities of 52 herbs, whereas its rival has only 42 ingredients:

• Advertisement No. 1 released by the Defendant claimed that the “ordinary Chyawanprash” contained only “42 herbs” whereas the Defendant’s product contained “52 herbs”. Screenshot of the advertisement is copied below:

• Advertisement No. 2 claimed that while “other Chyawanprash” use a mixture of vegetable oil and ghee, the Defendant’s Chyawanprash contains only “100% pure desi ghee”. It further stated that “ordinary Chyawanprash” contained only “42 ingredients” while the Defendant’s product contains complete “52 ayurvedic ingredient”. Screenshot of the advertisement is copied below:

• Advertisement No. 3 stated that the “complete Chyawanprash” is one which is formulated as per correct formulation and claimed that the Defendant’s product is made with the traditional recipe, with 52 ingredients and 100% pure desi ghee, while the “other Chyawanprash” contained a mixture of vegetable oil and ghee and contained only 42 ingredients. Screenshot of the advertisement is copied below:

• Advertisement No. 4 released by the Defendant on national television did not make any claims in respect of the number of ingredients present in its products in comparison with the “other Chyawanprash”:

• Advertisement No. 5 is a full- fledged video advertisement, wherein a husband walks into the living room with a bag containing grocery items in his hand, and when his wife takes out the bottle of Chyawanprash from the grocery bag, she is shocked to see that the label reads “Chyawanprash 42 ingredients’ and is disappointed to see that her husband has bought ordinary “Chyawanprash” with only “42 ingredients”.

During the course of the advertisement, the wife questions the choice of the husband in purchasing the “Chyawanprash” with only “42 ingredients”, and goes on to say that to prevent illness and “win”, one needs the power of total “52 Ayurvedic ingredients” and not just 42 ingredients, declaring that the Defendant’s Chyawanprash is the one which is made with centuries old and complete Ayurvedic recipe.

CONTENTIONS OF THE PARTIES

The Contentions of the Plaintiff:

To this end, the Plaintiff submitted that:

• As per the Drugs & Cosmetics Act, 1940, no Chyawanprash in the market contains only 42 ingredients, and in fact, the minimum number of ingredients required is 47 as per various Ayurvedic texts. However, the Dabur’s Chyawanprash advertises “more than 41 ingredients”, which has been clearly identified and targeted by the Defendant.
• The Plaintiff’s product uses “til oil” (sesame oil) alongwith ghee, and “vegetable oil”, which has been mischievously used by the Defendant in its advertisement, with the colour scheme of bottle of “ordinary Chyawanprash” being similar to that of the Plaintiff’s product.
• The Plaintiff owns 63% of the market share and was primarily targeted by the Defendant’s advertisements to persuade the customers to shift from the Plaintiff’s product to that of the Defendant.
• That the Defendant’s advertisements have caused generic disparagement to the entire class of “Chyawanprash” and had made untruthful comparison by exploiting the lack of customer’s knowledge.
• The Defendant   misleadingly    implies     that   its “Chyawanprash” is complete whereas “other Chyawanprash” are incomplete, and therefore the impugned advertisements are misleading and false.

The Contentions of the Defendant:

The Defendant based their arguments on the right to freedom of speech and expression guaranteed under Article 19 (1) (a) of the constitution, stating that:

• The Defendant’s advertisement and right to commercial speech is a part of the freedom of speech and expression.
• The comparison between the products is allowed and it is for the advertiser to state that its product is best, and the same does not constitute disparagement.
• The Plaintiff being a major market share holder cannot restrain others from advertising their products, by claiming that they would be an obvious target of such advertisements.
• The Defendant’s advertisements make a comparison of its own product with an unnamed fictitious product and its focus is on highlighting the benefits of its own products rather than focusing on the other product.

Court’s Observations and Order

While deciding if the Defendant’s advertisements were disparaging the Plaintiff’s product, the Hon’ble Calcutta High Court referred to various judgments cited by both parties and relied upon the following grounds which are imperative to the issue at hand:

• Comparing the qualities of one’s product with those of another is only permitted if it is in the nature of a ‘puff’, but a comparison in the nature of “GoodBad” is not allowed;
• A trader should not be permitted to advertise facts, data, figures and deficiencies of the products of another, especially a rival, either directly or indirectly;
• Generic disparagement of a rival’s product (i.e., without specifically identifying or pin pointing the rival product) would still be objectionable;
• If an advertisement gives out an impression that a rival product has a defect or demerit (which is not true) then such impression would make it disparaging;
• An advertisement should be “comparison positive” and any message which is slanderous or indiscriminate should be “comparison negative “and should be restricted by the Court;
• Some leeway has to be given to an advertiser, but at the same time, right to free speech cannot be stretched to allow them to become defamatory, disparaging or denigrating.

On the basis of the same, the Court held that:

• Advertisement No. 1 suggested that “ordinary Chyawanprash” are incomplete or deficient and therefore, it falls under the ambit of “negative comparison” as it portrays the Plaintiff’s product as incomplete and ordinary, and the same was permanently injuncted.
• Advertisement No. 2 referred to “other Chyawanprash” (which includes the Plaintiff’s Chyawanprash) as ordinary as the same contains only 42 ingredients. Thus, if the comparison of 42 ingredients is removed, then the advertisement is not disparaging.
• With regard to Advertisement No. 3, the declaration that the Defendant’s product is “complete” as it contains 52 ingredients and is made with 100% pure desi ghee, would not be disparaging as it is true. However, the comparison of 42 ingredients is based on false statements and thus, it is disparaging. Therefore the advertisement, in its present form, is injuncted. However, this advertisement may be displayed after removal of the reference to “42 ingredients”.
• With regard to Advertisement No. 4, there was no negative comparison between the two products, and therefore, the same was not injuncted.
• Advertisement No. 5 deceives, manipulates, or is likely to deceive or manipulate the consumer. A bottle highlighting 42 ingredients and labeled as “Chyawanprash” is shown in the Defendant’s advertisement. Under Section 3(a) of the Drugs & Cosmetics Act, 1940 and as agreed by both parties, there can be no Chyawanprash available in the market with 42 ingredients. The very statement that Chyawanprash is available in the market with “42 ingredients” is a mischievous and false statement that would create confusion in the minds of the general public. Thus, the said advertisement was permanently injuncted. However, if advertisement was modified to remove reference to “42 ingredients”, the advertisement can be permitted to be shown on television, social media and other platforms.

Conclusion

The Courts have time and again adjudicated upon the matters of disparagement and usage of commercial speech to determine the rights of the parties and promote healthy competition in the market.

The Courts have also highlighted that the freedom to commercial speech branching from Article 19(1)(a), may be creative, engrossing and have an engaging storyline, however, it cannot be allowed to extend its ambit to allow the defamation, disparagement and denigration of a competing product. However, true statements can be made even if it denigrates a rival’s product, but false and misleading statements cannot be allowed under the guise of free speech.[2]

In the present matter, the Hon’ble Court has based its reasoning on the precedents cited by both parties and held that the advertisement to the extent of disparagement and / or any false or misleading statements, shall be injuncted. Thus, some of the Defendant’s advertisements were allowed to be advertised on television, social media and other platforms, after the removal of disparaging parts, thereby striking a balance between the rights of the two parties.

Titiksha Sinha, Associate Advocate at S.S. Rana & Co. has assisted in the research of this Article.

See also:

Free flow commercial information overstepping the grey area advertising/

Legality comparative advertisements in india

Dettol withdraws advertisement claiming soap bars ineffective

[1] Dabur India Limited v Shree Baidyanath Ayrved Bhavan Pvt. Ltd. (C.S. No. 232/2022)

[2] Id.

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“CMO” is now the “Chief Metaverse Officer” – How this innovative designation is gaining (virtual) ground!

By Vikrant Rana, Ragini Ghosh and Pranit Biswas

In the third re-invention of the Internet (“Web 3.0”), the user experience is about to become more immersive, 3-D, and create a “Metaverse”- a virtual reality of shared virtual spaces and a continuous virtual economy, enabled by use of VR (virtual reality) and AR (augmented reality) devices, moving away from centralized servers, and allowing online commerce through ownership of digital goods (such as NFT’s and digital avatars) and blockchain based digital currencies (cryptocurrencies). For more information about the basics of the Metaverse, please see our article Click here (first published in Bar & Bench). With the gradual immersion of the idea of the Metaverse into the mainstream, the notion of having employees in an organization, solely dedicated to Metaverse related services, is unsurprising.

We all know the designated abbreviation “CMO” to stand for “Chief Marketing Officer”. But in today’s tech world, where the onset of the Metaverse is the hot new development shaking things up, “CMO” may come to stand for something a little different- Chief Metaverse Officer!

The role in fact already exists in a handful of companies, and more and more are considering talent acquisition to fulfil this sudden need. Entities like Futures Intelligence Group, Zepeto, MetaFrames, Shadow Factory and PHYGICODE have already set up the role internationally, and prominent brands such as Nike, Balenciaga and Disney are locking in the position as well.

India already has around 8-10 CMO (or equivalent) positions filled in in various tech based companies, looking to the future, and it is anticipated that most brands globally will need to consider an executive metaverse-focussed role by at least 2023, and by 2025, 8-10% of Indian companies will need to recruit a CMO (or equivalent) in order to devise and lead their metaverse strategy in the super digital era to come.

In view of such developments, we explore just what such a role can entail.

Skills of a Metaverse Officer

“CMO’s” will need to be individuals who lead corporate strategies towards building or developing the future metaverse. In fact, the job profile calls for a professionally trained futurist and strategist, who can help brands understand how the advent of the metaverse is going to affect their business and develop strategies to thrive in it. Chief Information Officers and Chief Technological Officers having experience in computer gaming, simulations, Web 3.0 environments, and more will be the need of the hour. In fact, already 15-18% of CIO and CTO roles actually need individuals who are equipped to be able to lead teams into developing products and experiences for the metaverse. In fact, it is hard to disagree with the notion that CMO’s should also have a good hand at law in addition to being very future-ready tech savvy (although one might argue that such companies may already have robust legal departments who may have the necessary know-how to deal with the legalese involving Metaverse!). After all, one must navigate the world of Metaverse with all due caution, keeping in mind considerations such as intellectual property (for more information on this, please read our article here).

Firms entering into metaverse-related marketing have so far needed to consult external experts, but are now actively considering bringing such services in-house, having consideration to the scope of growth in the field. Part marketing, part strategy, a CMO’s role promises to blend both technical and creative aspects and requires someone who will be able to oversee and integrate projects relating to a brand’s role and appearance in the metaverse. The CMO will essentially need to act as translator between the technical and business and creative sides of an enterprise, and liaise between necessary people for a range of projects. These could include virtual goods, avatars, NFTs, gaming, extended reality, and more. Additionally, they will need know-how of cryptocurrencies, blockchain technology, cloud computing, gaming engines, digital design, etc.

Who needs a “Chief Metaverse Officer”?

Businesses across the world have already started building workspaces, labs and other interactive spaces within the metaverse. For example, Dell has built a virtual factory for assembling laptops; Sears has a virtual showroom for its wares; Mediahub has launched a virtual office space; and Starwood Hotels has introduced “Aloft”, a virtual concept hotel. Companies like Gather, Teamflow and Virbela are already facilitating the creation of third party virtual offices.

Industries such as IT/ITeS, gaming, fashion, retail, communications, designs, software development, and many others are feeling the need for dedicated virtual online strategies, targeted eventually at incorporation into the metaverse. Fashion brands are diversifying to hire content creators as opposed to traditional fashion executives, to make their mark in purely digital marketplaces.

Some brands have started to assemble teams dedicated to metaverse collaborations, viewing them as essential to their future survival and success. This requires a lead to co-ordinate among vested interests, collaborate across the bandwidth of a business’s skilled resources depending on expertise and needs, who needs to be involved and when, and who does not, to envision and then implement a company’s future roadmap in expansion into uncharted virtual space. In fact, it will probably not be long until the term “metaverse” in a brand’s business plan becomes equal to, if not surpasses, the value of “marketing”, in terms of resolving into valuable sales metrics, as digital marketing catches up to its physical counterpart (a trend already very prevalent today). Marketing heads will need to account for the dissolution of geographical barriers, and the need for universal appeal in the metaverse, given that subjective digital avatars will negate the value of demographic and cultural indicators (such as race, sex, age, etc.).

Considering strategy in the metaverse can appear daunting, given how new and rapidly developing it is at the moment. Brands that move fast now will be best able to succeed in exploiting the limitless potential of the metaverse and create a brand experience far beyond that of the traditional advertising, promotional and marketing parameters today. For decision makers, sitting at the brink of yet another digital revolution, they need to refer back to the strategies adopted at the time of the previous digital revolutions, i.e. the arrival of the Internet; rise of social media; growth of mobile internet and the hyper-local; and user-driven content creation. The challenge will be to in fact ensure opportunities for both the brand and the consumer to co-create content, whether by way of collaborations or otherwise, thereby giving the brand the flexibility of operations, and the consumer, the flexibility of choice. This will be in the true spirit of Web 3.0, with its commitment to decentralization.

Conclusion

Web 3.0, with its inception of the Metaverse, guarantees a “gamification” of the online space (i.e. rendering a more immersive, alternate reality experience, much like an online or video game environment, such as a MMORPG) to navigate which will require guidance and leadership coming from someone who understands and has had experience of such a space as well as its intrinsic qualities and its language. This is where the role of a CMO will come in. The role has also received its share of criticism, with sceptics considering it to be akin to the position of a “social media guru”, i.e. more hyperbole than practical logic. However, with Web 3.0 already partially implemented, and the metaverse knocking on our doors, for businesses to succeed and appeal to a new, wider and barrier-less audience demographic, they will need their strategy to be guided not only by a Chief Marketing Officer, but rather a dedicated Chief “Metaverse” Officer. After all, if a world famous singer like Ariana Grande can do a concert in a world like Fortnite, one can imagine how a skilled CMO can whip up amazing marketing strategies to propel the brand to the Web 3.0!

BIBLIOGRAPHY

Click here

What is a chief metaverse officer and do we need one/

Time for the cmo to become the chief metaverse officer

Disney chief metaverse officer/

Is it time to hire a chief metaverse officer

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In India TDS Deduction Norms for Virtual Digital Assets

By Rupin Chopra and Apalka Bareja

In March 2020 the Supreme Court in re Internet and Mobile Association of India v. Reserve Bank of India[1] overturned the RBI circular banning the trade of cryptocurrencies in India. Since then the Indian crypto industry has grown manifold to develop into a market with the highest number of crypto asset holders. In light of this proliferation and mass adoption of crypto assets across India and its seemingly unregulated & anonymous nature, the Government of India was pressed to bring in provisions via the Finance Act, 2022 to levy tax and TDS on these assets. With effect from July 1, 2022, the provision put in place for Tax Deduction at Source (TDS) of Virtual Digital Assets (VDA) would become effective. These latest norms are by the virtue of the new section 194S of the Income Tax Act, 1961 (hereinafter referred to as ‘IT act’), which was added via the Finance Act, 2022[2].

Tax Deduction at Source (TDS) for Virtual Digital Assets

Section 194S of the Income Tax Act, 1961 brings to fruition the Government’s plan to tax VDAs in all their forms. For this purpose, the latest amendments to the IT Act has defined VDA as:

1. any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;

2. a non-fungible token or any other token of similar nature, by whatever name called;

3. any other digital asset, as the Central Government may, by notification in the Official Gazette specify.[3]

This definition, effectively, gives the central government the sole power and authority to define and designate what amounts to a VDA.
 
Moving further, Section 194S of the act lays down the following norms:

1. A mandatory TDS @1% for transfer of a VDA to a resident for any consideration amount.

2. This section mentions two thresholds till which TDS deduction is not mandated, first for an individual or HUF whose total income do not exceed beyond₹ 50 Lakhs in case of a profession or ₹1 Crore worth of total sales in case of a business. For such a scenario the upper limit for not paying TDS on VDAs is ₹50 thousand worth of VDA transactions in a financial year. In case of an individual or a HUF (including firms, LLPs, companies) which does not fall in the aforementioned classification, this upper limit is capped at ₹10 thousand per year.

Effect of Amendment

The new tax regime for VDAs, on one hand, gives some semblance of recognition to crypto as a legitimate asset but on the other hand, imposes a considerable and foreboding tax burden on current and potential investors. In this context, the following are the major effects on investors, platforms, and future crypto-related policies:

1. Section 194S when read with new section 115BBH applicable w.e.f. 1.4.2022 paints a worrisome picture for crypto investors in India. While section 194S mandates TDS @1%, subject to the aforementioned thresholds, section 115BBH imposes a flat tax of 30% plus applicable surcharge and cess on income from VDAs. Except for the cost of acquisition, there are no other deductions available to the taxpayer like the facility to set off losses.

2. Further, the new amendment puts the onus on deducting TDS on the crypto exchanges. Thereby, increasing their compliance and regulatory burden. In case the buyer and seller of VDAs are individuals, both need to pay TDS with respect to the transfer of VDAs.[4]

3. It must be noted that the definition of VDA, as mentioned in the IT act, excludes foreign currency from its ambit. Therefore, implementation of these tax norms with respect to countries like El Salvador which have declared Bitcoin as a legal tender poses a visible loophole.

It is pertinent to note that the new tax regime for VDAs will increase the tax burden on the budding crypto industry. The resultant tax and compliance burden is being interpreted as the government’s way to wean the Indian investors off investing in VDAs. Given the current bear market situation in crypto, these new norms pose another hurdle to inflow of equity in the market and makes it even more unprofitable for those who want to cut their losses short and take the exit route.

[1] 2020 SCC online SC 275

[2] THE FINANCE ACT, 2022

[3]Section 2(47), ibid

[4] CBDT Circular No. 13/2022 dated 22.06.22

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