TaxTMI 
TaxTMI 
2022 (10) TMI 508
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...., Clause 3 mandates, that insofar as non-banking 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....
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....mendment of the 2020 Guidelines. NPCI, however, has taken the position 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) T....
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....ties which do not fall within the ambit of Section 4 of the 2007 Act. 11.9 The 2007 Act makes a clear distinction between "payment system"^1, "system participant^2" 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 variou....
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....liberations carried out by the Bimal Jalan Committee. RBI has, it appears, erroneously applied the same yardstick to digital 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 no....
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....The Courts are empowered to intervene even in policy matters when the same violates Fundamental Rights. The impugned Clauses of the 2020 Guidelines 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 SC....
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.... behalf of the customers. They are obliged to pool the money and transfer the funds to the merchant clients, after the stipulated timeframe. Thus, the requirement to have a baseline net worth provides insurance against breach of such obligations undertaken by 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....
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....r a class of payment system, as may be specified by the RBI from time to time, which is engaged in the collection of funds from their customers for rendering payment service. The PAs, while rendering aggregation services, are directly involved in the collection of funds, which 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 c....
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....hich fall within the realm of economic policy, as these are functions which are best left to the wisdom of the domain experts. [See : R.K Garg & Ors. v. Union of India & Ors.(1981) 4 SCC 675;Peerless General Finance and Investment Co. Limited v. Reserve Bank of India(1992) 2 SCC 343] 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 o....
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....ficiary via the use of technology should fall within the ambit of the payment system. The principle referred to hereinabove, has been explained by this Court in the case of Rama Pandey v. Union of India & Ors. 2015 (221) DLT 756. The relevant paragraphs of the aforesaid judgement are extracted hereunder: - "9.1 It is not unknown, and 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 w....
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....varying degrees of further processing. When practitioners come to advise upon the legal meaning, they need to take account of all this. The Act is no longer as Parliament enacted it; it has been processed." (emphasis is mine) 9.5 The fact that this is a legitimate interpretative tool, available to courts, is quite evident upon perusal of the ratio of the following judgements. 9.6 A classic 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. A....
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....ect to a central counter party , the payment obligations and settlement instructions between the central counter party in accordance with the gross or netting procedure, as the case may be, approved by the Reserve Bank of India; (c) to insert a new sub-section (6) in Section 23 of the said Act so as to provide that the liquidator or receiver of the central counter party shall not re-open the determination which has become final and irrevocable and after appropriating the collateral 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 t....
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....s comes within the definition of a payment system, then axiomatically, the power to have them seek authorization from the RBI for operating as PAs gets traced to section 4 of the 2007 Act. 17.5 Therefore, we see no merit in the argument, that petitioner no. 1, if it chooses to function as a PA, should not be called upon to seek authorization from RBI, as per the criteria laid down in Clause 3 of the 2020 Guidelines. 17.6 Likewise, we find no merit in the submissions advanced on behalf of the petitioners concerning Clause 4 of the 2020 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....
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....the funds being lost, in case the bank concerned were to collapse on account of financial insolvency or otherwise. This submission, in our view, has some weight. That said, the alternative put in place by the RBI, in our opinion, is a more robust mechanism which protects the interests of all stakeholders i.e., the customers, merchant clients and PAs. As noted above, [while recording the submissions advanced on behalf of RBI] under section 23A of the 2007 Act, the RBI, in public interest or in the interest of customers of designated payment systems, or 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....