INTRODUCTION
The infamous amendment to section 9(1)(i) by the Finance Act, 2012 with retrospective effect, dealing with the taxation of indirect transfers, had invited serious opprobrium in international fora and caused a serious dent in the image of India as an attractive investment destination.
Now, the Taxation Laws (Amendment) Act, 2021 [TLA, 2021] has nullified the retrospective nature of the original amendment. The ‘Statement of Objects and Reasons’ to The Taxation Laws (Amendment) Bill, 2021 candidly highlighted the ill-effects of the retrospective amendment.
BACKGROUND
In order to understand the purpose behind the latest amendment, it is necessary to draw the readers’ attention to the series of events that took place prior to the amendment.
It all started in the year 2007 in the landmark case of Vodafone International which entered the Indian telecom market by acquiring the telecom business of Hutchinson India. Vodafone International, a Dutch-based Vodafone entity, acquired indirect control in Hutchison Essar Limited (HEL), an Indian company, from a Cayman Islands-based company, viz., Hutchison Telecommunications International Limited (HTIL). It did this by acquiring a single share in CGP Investment (CGP), another Cayman Islands company, from HTIL in February, 2007. CGP held various Mauritian companies, which in turn held a majority stake in HEL.
In September, 2007 the Revenue authorities issued a show cause notice to Vodafone International for failure to withhold tax on the amount paid for acquiring the said stake as they believed that HTIL was liable for capital gains it earned from the transfer of the share of CGP, as CGP indirectly held a stake in HEL. Vodafone International was also sought to be treated as a ‘representative assessee’ u/s 163 and a capital gains tax demand of Rs. 12,000 crores was sought to be recovered from Vodafone International.
But Vodafone International claimed that the Indian Revenue authorities had no jurisdiction over the transaction as the transfer of shares had taken place outside India between two companies incorporated outside India and the subject of the transfer was shares, the situs of which was also outside India. The matter was litigated up to the Supreme Court which, in 2012, in the landmark judgment in Vodafone International Holdings B.V. vs. Union of India1, absolved Vodafone of the liability of payment of Rs. 12,000 crores as capital gains tax in the transaction between it and HTIL.
The Court held that the Indian Revenue authorities did not have jurisdiction to impose tax on an offshore transaction between two non-resident companies wherein controlling interest in a resident company was acquired by the non-resident company.
But the Indian Government believed that the verdict of the Supreme Court was inconsistent with the legislative intent as they believed that India, in its sovereign taxing powers, was empowered to tax such indirect transfers of assets located in India. Thus, an amendment was brought about by the Finance Act, 2012 with retrospective effect, to clarify that gains arising from the sale of shares of a foreign company are taxable in India if such a share, directly or indirectly, derives its value substantially from the assets located in India. Section 119 of the Finance Act, 2012 also provided for validation of demand, etc., under the Income-tax Act, 1961 for cases relating to indirect transfer of Indian assets.
Pursuant to this amendment, an income tax demand has been raised in 17 cases which include the prominent cases of Vodafone and Cairn Energy. It is believed that the total estimated demand in these 17 cases totals up to an enormous sum of Rs. 1.10 lakh crores2.
In the ‘Statement of Objects and Reasons’ to The Taxation Laws (Amendment) Bill, 2021 it has been noted that in two out of these 17 cases, assessments are pending due to a stay granted by the High Court.
The ‘Statement of Objects and Reasons’ to The Taxation Laws (Amendment) Bill, 2021, observes that in four cases, arbitration under the Bilateral Investment Protection Treaty (BIT) with the United Kingdom and the Netherlands had been invoked against the demands. Of these four cases, in two, Vodafone and Cairn Energy, the result of arbitration has been against the Income-tax Department.
In the case of Vodafone, the Singapore seat of the Permanent Court of Arbitration of The Hague ruled that India’s imposition of a tax liability on Vodafone, as well as interest and penalties, breached an investment treaty agreement between India and the Netherlands3. The Arbitral Tribunal held that the imposition of the asserted liability notwithstanding, the Supreme Court judgment is in breach of the guarantee of fair and equitable treatment laid down in Article 4(1) of the BIT between India and the Netherlands. The Arbitral Tribunal directed India to reimburse the legal costs of approximately INR 850 million to Vodafone.
The said arbitral award was challenged by the Indian Government in Singapore because according to it taxation is not a part of the BIT and it falls under the sovereign power of India.
Similarly, in the case of Cairn Energy, a Scottish firm, the Permanent Court of Arbitration having its legal seat in the Netherlands, in December, 2020 awarded it $1.2 billion (over Rs. 8,800 crores) plus costs and interest which totalled $1.725 million (Rs. 12,600 crores) as of December, 20204. The Tribunal held that India had failed to comply with its obligations under the India-UK BIT. India appealed against the said award in a court in The Hague, Netherlands.
Meanwhile, Cairn moved courts in nine jurisdictions, namely, the US, the UK, the Netherlands, Canada, France, Singapore, Japan, the UAE and Cayman Islands, to get the international arbitration tribunal award registered and recognised. Cairn also threatened seizure of the Indian Government’s assets in these jurisdictions in case India did not return the value of the shares seized and sold, dividend confiscated and tax refund held back to adjust a Rs. 10,247-crore tax demand raised using the retrospective legislation.
In June, 2021, the Tribunal Judiciaire de Paris, a French court, allowed Cairn’s application to freeze 20 residential real estate assets owned by the Indian Government. The properties directed to be frozen are worth approximately $23 million, a fraction of the Arbitral Award5. Cairn also filed a lawsuit in the U.S. District Court for the Southern District of New York, seeking to make Air India liable for the Arbitral Award that was awarded to it. The lawsuit argued that the carrier as a state-owned company, being an alter-ego of the State, is legally indistinct from the State itself and was bound to discharge the duties of the State (India).
Thereafter, Cairn made a plea before the U.S. Court to make Air India deposit money under the apprehension that New Delhi may sell the airline by the time the decision seeking seizure of the national carrier’s aircraft is pronounced by the U.S. Court6. Despite the toughening stand taken both by Cairn and India before the U.S. Court, it has come to light that discussions are taking place between the officials of Cairn and the Income-tax Department whereby Cairn is hopeful of an amicable settlement in light of the recent amendment to the provisions of Explanation 5 to section 9(1)(i) vide TLA, 2021. The CEO of Cairn has also given a statement accepting the Government’s offer to settle the disputes and accept the refund of Rs. 7,900 crores and has also stated that the shareholders are in agreement with accepting the offer and moving on7.
And recently, on 13th September, 2021, Cairn and Air India jointly asked the New York Federal Court to stay further proceedings in Cairn’s lawsuit targeting Air India for enforcement of the $1.2 billion arbitral award awarded to Cairn by the Permanent Court of Arbitration at the Hague in light of the amendment vide TLA, 2021. Both the parties requested for stay of any further proceedings in the matter till 31st October, 2021 and requested for new dates in November, 2021 by stating that the stay of proceedings would give them additional time to evaluate the effects and the implications of the TLA, 20218.
Union Finance Minister Nirmala Sitharaman, while indicating that the Government would appeal the Arbitral Award rendered in favour of Cairn Energy, also stated that ‘We have made our position clear on retrospective taxation. We have repeated it in 2014, 2015, 2016, 2017, 2019, 2020, till now. I don’t see any lack of clarity’, indicating the current Government’s stand of not raising any new demands on the basis of the retrospective amendment made vide the Finance Act, 20129.
TLA, 2021
Considering the adverse impact that the retrospective legislation had on the image of India in the International fora and in order to promote faster economic growth and employment, the Taxation Laws (Amendment) Bill, 2021 was proposed by the Ministry of Finance.
The said Bill was introduced by the Ministry of Finance in the Lok Sabha on 5th August, 2021 and was passed by the Lok Sabha and the Rajya Sabha on 6th August, 2021 and 9th August, 2021, respectively. Thereafter, the TLA, 2021 received the assent of the President of India on 13th August, 2021.
As per the said Act, the following amendments have been made to Explanation 5 to section 9(1)(i) of the Income-tax Act, 1961:
A. Vide the newly-inserted 4th proviso to Explanation 5 to section 9(1)(i), it has been provided that nothing contained in Explanation 5 shall apply to:
i. an assessment or reassessment to be made under sections 143, 144, 147,153A or 153C; or
ii. an order to be passed enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee u/s 154; or
iii. an order to be passed deeming a person to be an assessee in default under sub-section (1) of section 201,
in respect of income accruing or arising through or from the transfer of an asset or a capital asset situate in India in consequence of the transfer of a share or interest in a company or entity registered or incorporated outside India made before the 28th day of May, 2012.
B. Vide the newly-inserted 5th proviso to Explanation 5 to section 9(1)(i), it has been provided that where:
i. an assessment or reassessment has been made under sections 143, 144, 147,153A or 153C; or
ii. an order has been passed enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee u/s 154; or
iii. an order has been passed deeming a person to be an assessee in default under sub-section (1) of section 201; or
iv. an order has been passed imposing a penalty under Chapter XXI or u/s 221,
in respect of income accruing or arising through or from the transfer of an asset or a capital asset situate in India in consequence of the transfer of a share or interest in a company or entity registered or incorporated outside India made before the 28th day of May, 2012 and the person in whose case such assessment or reassessment or order has been passed or made, as the case may be, fulfils the specified conditions, then, such assessment or reassessment or order, to the extent it relates to the said income, shall be deemed never to have been passed or made, as the case may be.
C. Vide the newly-inserted 6th proviso to Explanation 5 to section 9(1)(i), it has been provided that where any amount becomes refundable to the person referred to in the 5th proviso as a consequence of him fulfilling the specified conditions, then, such amount shall be refunded to him, but no interest u/s 244A shall be paid on that amount.
Vide the Explanation inserted below the newly-inserted 6th proviso, the conditions to be satisfied for the purposes of the 5th and 6th provisos have been provided. To paraphrase, the following conditions have been provided:
• where the said person has filed any appeal before an appellate forum or a writ petition before the High Court or the Supreme Court against any order in respect of the said income, he shall either withdraw or submit an undertaking to withdraw such appeal or writ petition, in such form and manner as may be prescribed;
• where the said person has initiated any proceeding for arbitration, conciliation or mediation, or has given any notice thereof under any law for the time being in force or under any agreement entered into by India with any other country or territory outside India, whether for protection of investment or otherwise, he shall either withdraw or shall submit an undertaking to withdraw the claim, if any, in such proceedings or notice, in such form and manner as may be prescribed;
• the said person shall furnish an undertaking, in such form and manner as may be prescribed, waiving his right, whether direct or indirect, to seek or pursue any remedy or any claim in relation to the said income which may otherwise be available to him under any law for the time being in force, in equity, under any statute or under any agreement entered into by India with any country or territory outside India, whether for protection of investment or otherwise; and
• such other conditions as may be prescribed.
Necessary amendments have also been effected to section 119 of the Finance Act, 2012 which provided for validation of demand, etc., under the Income-tax Act, 1961 for cases relating to indirect transfer of Indian assets.
From the above amendments, one may clearly observe that a two-tier amendment has been made.
The first tier of amendment, consistent with the position of the Government not to levy or raise any new demands in light of the retrospective amendment vide the Finance Act, 2012, makes a necessary provision to that effect so as to provide that no tax demand shall be raised in future on the basis of retrospective amendment vide the Finance Act, 2012 for any offshore indirect transfer of Indian assets if the transaction is undertaken before 28th May, 2012 (i.e., the date on which the Finance Bill, 2012 received the assent of the President). It would be pertinent to note that in various instances, in the case of retrospective amendments, the law has expressly provided for provisions to ensure that past concluded assessments are not disturbed. In this regard, a useful reference may be made to the proviso to section 14A(1), section 92C(2B) and section 92CA(2C). Thus, the first tier of amendment made vide the newly-inserted 4th proviso is in line with the said provisions and provides protection in respect of transfers made prior to 28th May, 2012 from any fresh proceedings. It is rather wider than the said provisions, as it also provides protection from proceedings under sections 153A, 153C and 201(1).
As regards the second tier of amendment, it provides for nullification of assessments already made in respect of indirect transfer of Indian assets made before 28th May, 2012 (as validated by section 119 of the Finance Act, 2012) on fulfilment of certain conditions as specified.
Pursuant to such amendments, the CBDT has published the draft rules for implementing the amendments made by the TLA, 2021 on 28th August, 2021 inviting comments from all stakeholders latest by 4th September, 2021. Vide the said draft, CBDT has proposed to insert Rule 11UE along with Forms 1 to 4 which specify the conditions to be fulfilled and the process to be followed to give to the amendment made by the TLA, 2021.
The said rules provide for furnishing various undertakings including irrevocable withdrawal, discontinuance or an undertaking not to pursue any appeal / application / petition / proceedings. It is also required to forgo any awards received by it by virtue of any such related orders.
IMPACT OF TLA, 2021
The newly-inserted 5th proviso deals with nullification of assessment or reassessment. However, it does not deal with nullification of any demand raised or any interest levied u/s 234B or interest levied u/s 220(6) [which may have been levied due to non-payment of demand]. Thus, the question that would arise is whether nullification of assessment or reassessment would also lead to nullification of demands of tax and consequential interests. It may be noted that as per the legal jurisprudence that has evolved, ‘assessment’ has been held to be the entire process commencing from filing of return to passing of an assessment order and raising of consequential demand. Thus, when the ‘assessment’ is nullified, it would indicate that the demands along with interest would also get nullified. It may also be noted that the Supreme Court in
ITO vs. Seghu Buchiah Setty [1964] 52 ITR 538 has held that there must be a valid order of assessment on which a notice of demand may be founded. Consequentially, when the assessment or reassessment to the extent it relates to income accruing or arising from indirect transfers is deemed to have never been made, the consequential demand and interest would also not survive.
It would be pertinent to note that by virtue of the amendment, the purchaser or payer who was liable to deduct tax at source by virtue of section 195 in respect of capital gains accruing to a non-resident assessee by virtue of indirect transfer under Explanations 5 to 7 to section 9(1)(i), can no longer be treated as an assessee-in-default u/s 201(1) if such purchaser or payer fulfils the conditions specified. However, it would be pertinent to note that the issue of treating a person as an assessee-in-default for non-deduction of tax at source in respect of past transactions in light of retrospective amendments, is no longer res integra in light of the decision in Engineering Analysis Centre of Excellence Private Limited vs. CIT [2021] 432 ITR 471 (SC)/[2021] 125 taxmann.com 42 (SC), wherein it has been held that a person mentioned in section 195 of the Income-tax Act cannot be expected to do the impossible, namely, to apply retrospective provision at a time when such provisions were not actually and factually in the statute. Thus, from the payers’ point of view, the amendment nullifying its liability as an assessee-in-default u/s 201(1) is not of much relevance in light of the judgment in Engineering Analysis (Supra). As a result of the same, even if the deductors / payers who have been held to be in default choose not to comply with the conditions mentioned in the Explanation to the newly-inserted 5th and 6th provisos, the litigation continuing in the normal course as provided in the Income-tax Act would result in favourable verdicts for them in light of the judgment in Engineering Analysis (Supra). A deductor / payer may therefore not choose the option of the 5th proviso which requires him to forgo interest on refund. He would rather stay in the normal stream where he has more than a reasonable chance of success and in such event he need not forgo interest.
In certain cases, assessment may have been made by the Department on the purchasers or payers u/s 161 read with sections 160 and 163 in their capacity as agents (representative assessees) of the non-residents in respect of the income accruing or arising in respect of indirect transfers under Explanations 5 to 7 to section 9(1)(i) [for instance, the case of Vodafone]. In such case, the assessments made on such agents would be nullified if the conditions specified therein are satisfied.
It may be noted that clause (iii) of the newly-inserted 5th proviso to Explanation 5 to section 9(1)(i) only deals with an order deeming a person to be an assessee in default u/s 201(1) and does not deal with the case of deductors / payers in whose case disallowance u/s 40(a)(i) is made. It may also be noted that nullification of an order u/s 201(1) does not automatically absolve a person of the disallowance u/s 40(a)(i). However, the same may not be of much significance, given that the payment made towards acquisition of shares of a foreign company is not ordinarily claimed as revenue expenditure in respect of which a disallowance u/s 40(a)(i) may be made.
It may be possible that in certain cases, in order to put an end to litigation, the said person as specified in the newly-inserted 5th proviso may have made an application under the Direct Tax Vivad se Vishwas Act, 2020 and duly paid the amount as specified in the Form No. 3 issued by the designated authority u/s 5(1) of the said Act. Section 7 of the said Act provides that any amount paid in pursuance of a declaration made u/s 4 shall not be refundable under any circumstances. It may be noted that as per the later part of the newly-inserted 5th proviso to Explanation 5 to section 9(1)(i), the assessment or reassessment or order, to the extent it relates to the income in respect of income accruing or arising through or from the transfer of an asset or a capital asset situate in India in consequence of the transfer of a share or interest in a company or entity registered or incorporated outside India made before the 28th day of May, 2012, shall be deemed never to have been passed or made. When the assessment or reassessment or order to the extent it relates to the said income is deemed never to have been passed or made, the question of the same being ‘disputed tax’ u/s 2(j) of the Direct Tax Vivad se Vishwas Act, 2020 does not arise as the very demand ceases to exist in the eyes of law. In such circumstances, it cannot lie in the mouth of the Revenue to refuse the grant of refund of the amount paid as specified in the Form No. 3 issued by the designated authority u/s 5(1) of the said Act. If a sum is paid outside the aforesaid Act, the bar of refund should not apply to such payment as held in Hemalatha Gargya vs. CIT [2003] 259 ITR 1 (SC).
The newly-inserted 6th proviso to Explanation 5 to section 9(1)(i) provides that where any amount becomes refundable to the person referred to in the 5th proviso as a consequence of him fulfilling the specified conditions, then such amount shall be refunded to him, but no interest u/s 244A shall be paid on that amount. The said proviso appears to be violative of Article 14 of the Constitution as it is discriminatory and arbitrary. It may be noted that though taxing statutes being fiscal legislations enjoy a greater presumption towards the constitutionality of the same, the same must nevertheless satisfy the tests of Article 14 of the Constitution in order to save them from the vice of unconstitutionality. The newly-inserted 6th proviso may be discriminatory on the following three fronts:
a) There appears to be a clear discrimination between persons referred to in the 4th and 5th provisos. It may be noted that as regards the persons referred to in the 4th proviso, no new assessment would be made in respect of indirect transfers which have taken place prior to 28th May, 2012. Thus, no prejudice would be caused to them. However, in respect of persons referred to in the 5th proviso, who have already been assessed and recoveries may have been made from them, such recoveries are refundable without interest u/s 244A. While persons covered in the 4th proviso would not have parted with any funds and hence are justifiably not entitled to any compensatory interest, the persons covered in the 5th proviso having parted with funds are justifiably entitled to compensatory interest. These two categories of persons are in unequal situations but are treated equally insofar as non-payment of compensatory interest is concerned. This causes discrimination.
b) There also appears to be discrimination between persons to whom a sum is refundable on account of any other provision of the IT Act and persons to whom a sum is refundable under the newly-inserted 5th and 6th provisos. In case of the former, interest u/s 244A being a normal incident of refund would automatically accrue as held by the Supreme Court in Union of India vs. Tata Chemicals Ltd. [2014] 363 ITR 658 (SC). However, as regards the persons referred to in the 5th proviso, they would not be entitled to any refund despite there being a wrongful retention of sums by the Revenue in light of a non-existent demand.
c) The third type of discrimination occurs between persons who have effected indirect transfers but action is time-barred at the time when the TLA, 2021 was enacted and the persons referred to in the newly-inserted 5th and 6th provisos. As per section 149(1)(b) (as amended vide the Finance Act, 2021), the maximum time limit available to issue notice u/s 148 is ten years from the end of the relevant assessment year. Without going into the applicability of the said clause, it may be noted that even if the Department were to reopen past concluded assessments or assess any person in connection with income accruing or arising as a result of indirect transfer, it could at the maximum have done so in respect of A.Y. 2011-12 and for A.Y. 2012-13 (in respect of transfers concluded prior to 28th May, 2012 due to bar under the newly-inserted 4th proviso). Thus, in respect of transfers which have taken place prior to A.Y. 2011-12, no action under sections 147 and 148 would lie. However, in respect of persons who fall under the 5th and 6th provisos (which would include the above cases under sections 147 and 148), no interest on refund would accrue u/s 244A, leaving them in a position worse off than those who have escaped any action due to non-availability of any recourse under the provisions of the IT Act to the Department.
Thus, the validity and constitutionality of the 6th proviso being discriminatory on the above three counts may be subjected to challenge as violative of Article 14 of the Constitution.
It may be noted that the Draft Rule 11UE(3)(b)(I), in addition to furnishing of undertaking by the declarant, also requires furnishing of declaration by any of the interested parties which, as per Part K and Part L of the Form 1, refers to all the holding companies in the entire chain of holding as defined under the Companies Act, 2013 of the declarant, and all persons whose interest may be directly or indirectly affected by the undertaking in Form 1. Though Explanation (iv) to the newly-inserted 5th and 6th provisos is wide enough to empower the Board to prescribe any other conditions, such power does not extend to imposing conditions on persons other than the declarant assessee. Thus, the draft Rule 11UE(3)(b)(I)(ii) requiring such undertaking from interested third parties, if enacted without any change, may be subjected to challenge on the basis of being contrary to the provisions of the Act.
CONCLUSION
TLA, 2021 is a landmark step by the Indian Legislature in bringing about certainty in tax matters and restoring the faith of foreign investors in India as an attractive investment destination. It provides a great opportunity for various Multinational Groups or Companies who have been subjected to endless litigation to settle their disputes once and for all. It would enable them to receive refunds of huge amounts deposited with the Income-tax Department at various stages of litigation, thereby having a positive impact on their working capital situation.
