TaxTMI 
TaxTMI 
2022 (10) TMI 508
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....entities which offer payment aggregation services are concerned, they would have to obtain "authorisation" from RBI to continue their operations. The criteria fixed for obtaining the authorisation are outlined in various sub-clauses i.e., subclause 3.1 to 3.6. 3. Clause 4, inter alia requires Payment Aggregators [hereafter referred to as "PAs"] that were existing on the date of issuance of the 2020 Guidelines, to achieve a net worth of Rs. 15 crores by 31.03.2021, and to have the same scaled up to Rs. 25 crores by the end of the third Financial Year ("FY") i.e., on or before 31.03.2023. The PAs are required to maintain a net worth of Rs. 25 crores at all times after 31.03.2023. Pertinently, the timeline for applying for authorization and complying with the minimum positive net worth requirement of Rs. 15 crores for the FY ending on March 31, 2020, was extended till 30.09.2021 because of the RBI circular dated 21.05.2021. 3.1 Insofar as new PAs are concerned, they are also required to have a minimum net worth of Rs. 15 crores to be eligible for obtaining authorisation, which is required to be enhanced to Rs. 25 crores by the end of the third FY of grant of authorisation. Such PAs ....
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....ion that it is instrumental in developing NACH, and its role is confined to providing electronic infrastructure for processing, transmitting and clearing transactions concerning participating member banks. 9. Thus, before we proceed further, it would be relevant to capture the submissions advanced on behalf of the petitioners and the RBI, which is, in effect, the contesting respondent. Submissions of the petitioners: 10. On behalf of the petitioners, the arguments were advanced by Ms Abiha Zaidi, while submissions on behalf of RBI were made by Mr Gopal Jain, Senior Advocate, instructed by Mr Ramesh Babu, Advocate. 11. The arguments advanced by Ms Zaidi can be broadly paraphrased as follows: 11.1 The petitioners perform the role of an intermediary, and in doing so, carry out the following functions: (a) Petitioner no.1 collects funds from customers on behalf of its clients i.e., merchant clients/e-commerce marketing companies. These funds are then placed in a special bank account, known as the "nodal bank account." The nodal bank account is maintained in a designated Nodal Bank. (b) The funds are remitted from the nodal bank account to petitioner no.1's merchant clients/e-c....
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....stinction between "payment system"1, "system participant2" and "system provider"3. Petitioner no.1 only provides an intermediary tool, which is used by the payment system to facilitate the remittance of payments received from the customers to the merchant clients/e-commerce marketing companies. The intermediary, thus, cannot be treated as a "payment system". The RBI, which is invested with the authority to regulate and supervise payment systems in the country, cannot regulate PAs, which act as intermediaries between merchant clients/ecommerce companies and banks. The PAs are, in effect, "system participants", as defined in Section 2(1)(p) of the 2007 Act. 12. That petitioner no.1 acts as an intermediary is recognised by the 2009 Directions. The petitioner no.1 and similarly circumstanced intermediaries are thus required to comply with not only the 2009 Directions, but also the 2020 Guidelines. 12.1 The RBI, in its counter-affidavit, has accepted the fact that PAs and PGs act as third-party interfaces, which facilitate e-commerce sites and merchants in accepting various payment instruments issued by their customers, and thus do away with the need to create an independent system fo....
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.... platforms i.e., entities such as petitioner no.1, which act as intermediaries between the customers and its merchant clients. 12.7 RBI's discussion paper, which was posted on its website on 17.09.2019, has accepted the position that it has not faced any major complaints regarding indirect regulation of intermediaries for at least ten years before the issuance of the 2020 Guidelines. Clause 4 of the2020 Guidelines would lead to the closure of a large number of small business enterprises, as it unnecessarily creates a trade barrier. The clause i.e., Clause 4 would be beneficial to, existing big businesses, albeit at the expense of small enterprises. 12.8 Clause 8 of the 2020 Guidelines, which obliges non-bank PAs to place the amount collected by them in an escrow account, disregards the fact that the PAs are presently functioning smoothly, by remitting the monies collected from the customers to the nodal accounts. 12.9 This condition ignores the fact, that the core function of PAs is limited to providing a technical interface, and therefore does not need to have a beneficial interest in the money held on behalf of their merchant clients. 12.10 Furthermore, the impugned claus....
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....lines violate Article 14 and Article 19(1)(g) of the Constitution of India. In support of the aforesaid pleas, reference was made to the following judgments: 1. State of T.N vs. P. Krishnamurthy (2006) 4 SCC 517 (paras 15,16) 2. Union of India & Ors. vs. S. Srinivasan (2012) 7 SCC 683 (paras 21,32) 3. Global Energy Ltd. vs. Central Electricity Regulatory Commission (2009) 15 SCC 570 (paras 36, 39) 4. N.K. Bajpai vs. Union of India & Anr. (2012) 4 SCC 653 (paras 14 and 20) 5. Ramana Dayaram Shetty vs. The International Airport (1979) 3 SCC 489 (paras 10 and 21) 6. Elloy de Freitas vs. Permanent Secretary of Ministry of Agriculture, Fisheries, Land and Housing & Ors.[1983] 3 WLR 675 (page 9) 7. Global Energy Ltd. vs. Central Electricity Regulatory Commission (2009) 15 SCC 570 (paras 36, 39) 8. U.P. Stock Exchange Brokers' vs. Security and Exchange Board of India 2014 (6) AWC 5697 (para 53) 9. Modern Dental College & Research Centre vs. State of M.P. (2016) 7 SCC 353 (para 60) 10. Mohd. Faruk vs. State of Madhya Pradesh 1970 SCR (1) 156 (para 10) 11. Mohd. Yasinvs. Town Area Committee AIR 1952 SC 115 (para 5) 12. Om Kumar vs. Union of India, (2001) 2 SCC 38....
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.... PAs, and shores up the confidence of the customers. 14.6 The provision in the 2020 Guidelines for a baseline net worth was put in after RBI had received feedback from various stakeholders vis-a-vis the Discussion paper uploaded on its website on 17.09.2019. 14.7 Likewise, the provision made in Clause 8 of the 2020 Guidelines, which requires PAs to place the amount collected from customers in an escrow account was taken after a comprehensive and detailed discussion and examination of the issue by the Board for Regulation and Supervision of Payment and Settlement Systems [in short, "the Board"]. 14.8 Under the 2009 Directions, PAs were allowed to open a nodal account, which was an internal account of the concerned bank. The nodal account was shown as a liability of the concerned bank and was not included in the balance sheet of the PAs. The PAs and/or merchant clients had no beneficial interest in the amount retained in the nodal account. Therefore, it was considered prudent to manage the funds collected by the PAs on behalf of the customers through an escrow account, while providing a return on the core portion of the money retained therein. The PAs not only have a beneficial in....
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....hich are, after a particular time gap, transferred or remitted to their merchant clients. 15.3 It is important to bear in mind, that the intention behind treating PAs as designated payment systems under Section 23A of the 2007 Act is to protect the funds collected, which is in the interest of the customers. Subsection (2) of Section 23A, as submitted above, mandates the utilisation of the amount held in the escrow account, only for discharging the liability of the customers, or for repaying the customers. Thus, even if a PA, such as petitioner no.1, were to undergo liquidation, the funds collected from its customers would remain protected and can be utilised only for discharging their liability or for repaying monies to them. 15.4 Likewise, sub-section (3) of Section 23A makes it clear, that the persons entitled to receive payment under sub-section (2) of the said provision shall have a first and paramount charge on the balance held in that account, and the liquidator or receiver or assignee (by whatever name called) of the system provider of the designated payment system or the scheduled commercial bank concerned, whether appointed as provisional or otherwise, shall not utilise ....
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....] Analysis and reasons: 16. Having heard the learned counsel for the parties, it is apparent, that the main plank of the petitioners' case rests on the argument, that PAs who perform the work of intermediaries do not fall within the scope and ambit of the definition of "payment system" incorporated in the 2007 Act. 16.1 To deal with this argument, one would have to examine the contours of the definition of the term payment system, outlined in Section 2(1)(i) of the 2007 Act. For the sake of convenience, the same is extracted hereafter- "2. Definitions. - (1) In this Act, unless the context otherwise requires, - .................................................................................... .. (i) "payment system" means a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange; Explanation. - For the purposes of this clause, "payment system" includes the systems enabling credit card operations, debit card operations, smart card operations, money transfer operations or similar operations;" 16.2 Besides this, one will also have to set down wh....
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....there are several such examples that legislatures, usually, in most situations, act ex-post facto. Advancement in science and change in societal attitudes, often raise issues, which require courts to infuse fresh insight into existing law. This legal technique, if you like, is often alluded to as the "updating principle". Simply put, the court by using this principle, updates the construction of a statute bearing in mind, inter alia, the current norms, changes in social attitudes or, even advancement in science and technology. The principle of updating resembles another principle which the courts have referred to as the "dynamic processing of an enactment". The former is described in Bennion on Statutory Interpretation at page 890 in the following manner: - "..An updating construction of an enactment may be defined as a construction which takes account of relevant changes which have occurred since the enactment was originally framed but does not alter the meaning of its wording in ways which do not fall within the principles originally envisaged by that wording. Updating construction resembles so-called dynamic interpretation but insists that the updating is structured rather t....
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....assic example of application of the updating of construction principle, is the judgement, in the case of Fitzpatrick v. Sterling Housing Association Ltd, 1999 (4) All E.R. 705, where the word 'family' was read to include two persons of same sex who were cohabitating and living together for a long period of time with a mutual degree of inter-dependence." (Also see : State (through CBI) v. S.J. Choudhary (1996) 2 SCC 428, paragraph 10) 16.9 Technology is changing at a rapid pace, and Courts have to keep that in mind at times, while examining the scope and ambit of legislation, such as the 2007 Act. There can be no dispute, that RBI, being the Central bank of our country, is inter alia responsible for regulating and supervising payment systems in India. As a matter of fact, a plain reading of the Statement of Objects and Reasons of the 2007 Act states so in so many words. 17. Importantly, the Statement of Objects and Reasons of the 2007 Act, as amended on 13.05.2015 ["The Payment and Settlements (Amendment) Act, 2015"] brings forth this aspect of the matter, and the rationale for making the amendments (i.e., to secure the interests of the customers to fore). The relevant part of....
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....eral provided by system participants towards their settlement obligations, return the excess collaterals to system participants; (d) to insert a new Section 23-A relating to protection of funds collected from the customers by the payment system providers;..." 17.1 It is pertinent to note, that because PGs do not handle funds, and are only concerned with providing technology infrastructure to route and/or facilitate the processing of online payment transactions, the impugned clauses of the 2020 Guidelines i.e., Clauses 3, 4 and 8 are not made applicable to them. The scope of the work function of a PG in the RBI's discussion paper reads thus: "A technology infrastructure provider to route and facilitate processing of an online payment transaction, without any involvement in the actual handling of funds..." 17.2 Therefore, in our view, the answer to the poser, as to whether PAs fall within the ambit of the definition of payment system can only be in the affirmative, for the reasons given above. That being said, as alluded to above, there is, perhaps, merit in the responses received by the RBI to its Discussion paper, that separate legislation may have to be enacted for payment ....
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....20 Guidelines, which obliges an applicant, who wishes to function as a PA, to have a minimum net worth of Rs.15 crores and have the same scaled up to Rs. 25 crores by the end of the third FY. 17.7 This requirement is stipulated in Clause 4, both for existing PAs and new PAs. In this context, the argument advanced on behalf of the petitioners, that the requirement to have a minimum net worth of Rs.15 crores would drive out small entrepreneurs and start-ups also, does not find resonance with us, the reason being that from a proposed net worth of Rs.100 crores, the RBI has brought it down to Rs.15 crores, which, as indicated above, would have to be scaled up to Rs.25 crores by the end of third FY. This step modulation was brought about based on the responses received by RBI to the Discussion paper published on its website. 17.8 Contextually, it is relevant to note that RBI has taken an emphatic stand in its counter-affidavit, that it had received 57 responses to its Discussion paper, and that out of the 57 respondents, only 19 objected to a minimum net worth requirement of Rs 100 crores proposed in the Discussion paper. On behalf of the RBI, it has been conveyed to us, that despite ....
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....r to prevent the affairs of such designated payment system from being conducted in a manner prejudicial to the interests of the customers, may require a system provider of such payment system to inter alia deposit and keep deposited monies in a separate account or accounts held in a scheduled commercial bank. 19.1 The RBI, thus, in consonance with the provisions of section 23A of the 2007 Act has provided, via clause 8 of the 2020 Guidelines, that PAs would deposit payments received from customers in an escrow account maintained with a scheduled commercial bank. There can be no doubt about RBI being invested with such power. There is also no doubt, that PAs would be operating a designated payment system, as defined in explanation (a) to section 23A of the 2007 Act. 19.2 As alluded to hereinabove, as a matter of fact, the RBI has issued a circular dated 17.11.2020 whereby PAs can maintain one additional escrow account. Therefore, the argument advanced on behalf of petitioners concerning the spreading of financial risk has been taken care of, to some extent, with the issuance of the said circular. 19.3 Besides this, since the operations of PAs are treated as designated payment sys....