Brief Analysis of the Taxation Laws (Amendment) Bill 2021
Material Facts of the Case
The issue of taxability of income arising from indirect transfer of assets located in India has been a debatable issue.
Dutch-based Vodafone International Holdings BV (‘Vodafone BV’) acquired a 67% stake in Indian telecom company Hutchison Essar Limited (‘HEL’) for USD 11.1 billion. The transaction was undertaken in 2007 when Vodafone BV entered into an agreement with Hutchison Telecommunications International Limited (Hutch) involving Caymanian-based CGP Investments (‘CGP’). CGP held various underlying subsidiaries in Mauritius, which along with certain Indian companies ultimately held a 67% stake in HEL
The sale of shares from Hutch to Vodafone BV indirectly derives value from assets located in India.
The Indian Revenue Authorities contended that :
- Income arising pursuant to the sale of shares of CGP Investments to Vodafone BV is taxable in India.
- Accordingly, withholding taxes ought to be deducted by Vodafone BV at the source on payments made to HEL.
The Bombay High Court ruled in favour of the Revenue and held that the transaction is liable to tax in India. The case was then carried to the Supreme Court wherein, the decision of the Bombay High Court was reversed and it was held that no taxes are payable by Vodafone & it’s interpretation of the Income Tax Act 1961 (‘ITA’) is correct.
Retrospective Amendment to the ITA
Following the decision of the Supreme Court, the late Pranab Mukherjee proposed an amendment to the Finance Act thereby giving the Income Tax Department the power to retrospectively amend the ITA. Accordingly, s. 9 & s. 12 of the ITA were retrospectively amended w.e.f AY 1962 – 63.
Explanation 5 to s. 9(1)(i) was inserted to clarify that an asset or capital asset, being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if the share or interest derives, directly or indirectly, it’s value substantially from assets located in India.
Following this amendment, the Income Tax Authorities have raised demands in seventeen cases.
Proposed Amendment by Taxation Laws (Amendment) Bill, 2021
The Taxation Laws (Amendment) Bill 2021 (‘TLA 2021’) proposes to amend the ITA so as to provide that no tax demand shall be raised in the future on the basis of such retrospective amendment for an indirect transfer of capital assets undertaken prior to 28th May 2012.
It is proposed to introduce the Fourth, Fifth & Sixth Proviso to Explanation 5 to s. 9(1)(i) so as to provide relief to such organizations which were impacted by such retrospective amendment.
- The Fourth Proviso to Explanation 5 to s. 9(1)(i) gives relief on pending assessments and states that Explanation 5 shall not be applicable in respect of income accruing or arising through or from an indirect transfer of Indian assets made before 28th May 2012, to:
- An assessment or re-assessment to be made under s. 143, s. 144, s. 147 or s. 153A or s. 153C;
- An order to be passed enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under s. 154; or
- An order to be passed deeming a person to be an assessee in default under sub–section (1) of s. 201.
- The Fifth Proviso to Explanation 5 to s. 9(1)(i) gives relief in respect of concluded assessments and states that Explanation 5 shall not be applicable in respect of income accruing or arising through or from an indirect transfer of Indian assets made before 28th May 2012, to:
- An assessment or reassessment made under s. 143, s. 144, s. 147 or s. 153A or s. 153C;
- An order passed enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under s. 154; or
- An order passed deeming a person to be an assessee in default under sub–section (1) of s. 201.
- An order passed imposing penalty under Chapter XXI or under s. 221.
- The Sixth Proviso to Explanation 5 to s. 9(1)(i) sates that where any refund becomes due to the person referred to the fifth proviso as a consequence of him fulfilling the specified conditions, then such amount shall be refunded to him, however, no interest under s. 244 shall be paid.
- In order to claim relief in terms of Para 2 and 3 above, the following conditions are to be satisfied:
- Where a person has filed an appeal before any appellate forum or any writ petition before the High Court or Supreme Court against any order in respect of said income, he shall either withdraw or submit an undertaking to withdraw such appeal or writ petition, in such form and manner which may be prescribed.
- Where the said person has initiated any proceedings 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 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 provision 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.
- Such other conditions as may be prescribed.
- Amendments have also been made to s. 119. Proviso has been inserted to s. 119 stating that where certain conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking that no claim for cost, damages, interest, etc. are filed, the provisions of s. 119 shall not apply.
The clarificatory amendments which were introduced by the Finance Act 2012 invited criticism from stakeholders mainly with respect to the retrospective amendment given to the amendments. It is argued that such retrospective amendments mitigate the principles of tax certainty and damage India’s reputation as an attractive destination. In the past few years, major reforms have been initiated in the financial & infrastructure sector which has created a positive environment for investment in the country. However, this retrospective clarificatory amendment and consequent demand created in dew cases continue to be a sore point with few potential investors. The country today stands at a juncture when quick recovery of the economy after COVID –the19 pandemic is the need of the hour & foreign investment has an important role to play in promoting faster economic growth and employment.