By Menaka Doshi
After a four-year long court battle and several crore rupees spent on advisory and lawyer fees Vodafone won a long-pending tax battle when the Supreme Court said its purchase of an Indian telecom company from Hutch was not taxable in India. For the last four years the tax fraternity in India has been divided into two camps.
One, that believes that since the underlying asset was Indian, the Hutch-Vodafone transaction must be taxed in India. The other believes that the way Income Tax Act, 1961 is worded does not support an Indian tax claim on an overseas transaction. The pro-revenue lot were deeply disappointed with the Supreme Court decision. In online debates considerable vitriol has been splashed on the judgment, the Chief Justice's
'activist' views on FDI and alleged issues of conflict regarding his son's employment with Ernst & Young have all been hot topics of discussion. A review petition has been filed by the Government and its fate was eagerly awaited. But now that may not mean much. Because the Government has proposed to change the tax law in order to tax Vodafone-like transactions retroactively.
That means after winning a four-year long tax battle Vodafone may still end up a loser.
Senior tax counsel Dinesh Vyas believes that even if the Finance Bill is passed and the retrospective amendments come into force Vodafone maybe spared (without having to mount a challenge) because he says "In the past, whenever the retrospective amendment was brought in to deal with an SC judgment, that particular SC matter which was decided, was excluded specifically."
The National Agricultural Co-operative Marketing Federation of India (NAMFED) case (2003) makes a mention of this principle
"Such curative legislation does not in fact touch the validity of a judicial decision which may have attained finality albeit under the pre-amended law."
The same principle has been relied upon in other cases as well. For instance the Supreme Court's decision in the S.R. Bhagwat & Ors vs The State Of Mysore on 12 September, 1995 cites this
"A Constitution Bench of this Court in the case of Cauvery Water Disputes Tribunal (1993 Supp. (1) SCC 96(II) had to pronounce on the validity of Karnataka Kauvery Basin Irrigation Protection Ordinance, 1991 by which an interim order passed by a statutory Tribunal supported by the decision of this Court dated 26th April 1991 which had ruled that the Tribunal had power to consider the question of granting interim relief since it was specifically referred to it, was sought to be displaced. Sawant, J., speaking for the Constitution Bench held that the said provisions were unconstitutional and ultra vires. In paragraph 76 of the Report the following observations were made : "The principle which emerges from these authorities is that the legislature can change the basis on which a decision is given by the Court and thus change the law in general, which will affect a class of persons and events at large. It cannot, however, set aside an individual decision inter partes and affect their rights and liabilities alone. Such an act on the part of the legislature amounts to exercising the judicial power of the State and to functioning as an appellate court or tribunal."
So Mr. Vyas says Vodafone maybe spared but that may not be the case for other offshore transactions leading to the indirect transfer of Indian assets - they may be assessed/re-assessed under the retrospective amendments. He also indicated that the proposed amendments in the Budget may bring cases as old as 16 years under scrutiny. ELP Managing Partner and tax lawyer Rohan Shah concurred with that.
Senior tax counsel Porus Kaka believes if Vodafone chooses to do so (once the Finance Bill becomes law) it could successfully challenge the retrospective amendments because (Mr. Kaka's opinion paraphrased by the author)
- They are not 'clarificatory' amendments as is being made out to be but 'substantive' amendments
- They do not meet the tests laid out by the Supreme Court ('reasonable' being one such test)
The National Agricultural Co-operative Marketing Federation of India (NAMFED) case (2003) offers some guidance on retrospective amendments...
"The legislative power either to introduce enactments for the first time or to amend the enacted law with retrospective effect, is not only subject to the question of competence but is also subject to several judicially recognized limitations. The first is the requirement that the words used must expressly provide or clearly imply retrospective operation. The second is that the retrospectivity must be reasonable and not excessive or harsh, otherwise it runs the risk of being struck down as unconstitutional. The third is apposite where the legislation is introduced to overcome a judicial decision. Here the power cannot be used to subvert the decision without removing the statutory basis of the decision."
But here's the twist - whether Vodafone is spared the effect of retrospective amendments or successfully challenges them in court, it may never get all its money back. Remember, it had deposited Rs 2500 cr with the Income Tax department. The remaining Rs 8500 cr of tax was paid via guarantees and those guarantees were placed with the Supreme Court (Vodafone has confirmed to the author).
The reason why it may not get its money back lies in Item 113 of the Finance Bill. The item, criticised for its breathless length, is harsher in what it attempts to do. It is draconian and pointed mostly at Vodafone. It seeks to deny any refunds to Vodafone and the like, irrespective of any court order. Here try reading it
113. Notwithstanding anything contained in any judgment, decree or order of any Court or Tribunal or any authority, all notices sent or purporting to have been sent, or taxes levied, demanded, assessed, imposed, collected or recovered or purporting to have been levied, demanded, assessed, imposed, collected or recovered under the provisions of Income-tax Act, 1961, in respect of income accruing or arising through or from the transfer of a capital asset situate in India in consequence of the transfer of a share or shares of a company registered or incorporated outside India or in consequence of an agreement, or otherwise, outside
India, shall be deemed to have been validly made, and the notice, levy, demand, assessment, imposition, collection or recovery of tax shall be valid and shall be deemed always to have been valid and shall not be called in question on the ground that the tax was not chargeable or any ground including that it is a tax on capital gains arising out of transactions which have taken place outside India, and accordingly, any tax levied, demanded, assessed, imposed or deposited before the commencement of this Act and chargeable for a period prior to such commencement but not collected or recovered before such commencement, may be collected or recovered and appropriated in accordance with the provisions of the Income-tax Act, 1961 as amended by this Act, and the rules made there under and there shall be no liability or obligation to make any refund whatsoever.
Well known Chartered Accountant T P Oswal says if 113 comes into force Vodafone will be denied any refund. Unless it challenges 113 in court and wins, Vodafone may have to bid adieu to the Rs 2,500 crore deposited with the Income Tax Department. The bank guarantees should have been cancelled by now or will be returned by the Supreme Court and so, that amount may revert or has already reverted to Vodafone. Lucky!
The Finance Ministry has launched multiple attacks on the Hutch-Vodafone transaction and other such indirect transfers in the hope of collecting large tax amounts. I wonder how the Supreme Court will view these desperate attempts? And whether Vodafone will ever get all its money back?
But the bigger worry is the number of retrospective amendments in this Finance Bill. More than 20! Through these the Government is trying to invalidate a score of important tax judgments it has lost in the past few years. What message does this send to the tax payer? That it is pointless to honestly argue your tax position in a court of law because a win may mean nothing. And then we wonder why so many Indians and Indian businesses are always looking for a 'way out' or some manner in which to 'influence' tax policy and implementation!
Menaka Doshi is the corporate editor, CNBC-TV18
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Updated Date: Dec 20, 2014 07:06:44 IST