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This article is written by Raghav Mittal, pursuing Diploma in Law Firm Practice: Research, Drafting, Briefing and Client Management from LawSikho. The article has been edited by Priyanka Mangara (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).

Introduction

Dating back to 2012, the then ruling government has just received a setback from a Supreme Court decision made in favor of Vodafone stating that no tax liability can be attracted as the transfer of assets between the 2 entities is held outside India, therefore no tax liability can be made out of the transaction value of $11 billion back to 2006-07 when Vodafone had acquired 67% stakes in a telecom company Hutchison Campoa in India. Here, the Indian tax authorities demanded Vodafone to pay around Rs 11,218crore in form of taxes and Rs. 9500 crore in form of penalties. 

Just after receiving this setback from the Supreme Court, the central government introduced an amendment through the Income Tax and Finance Act, 2012 stating that all the transactions involving the indirect transfer of Indian assets made after 1962, shall be liable to taxes as capital gains arising in India. As a result, the transaction that was done by Vodafone in 2007 was now brought under the tax net and was thus made liable to pay taxes to the Indian tax authorities. Later in 2016, this tax demand was increased to around Rs.22,000crore. Vodafone refused to pay such taxes and initiated an arbitration process.

To date, the government was able to collect Rs. 45crore only as taxes from Vodafone.

It was observed that the 2012 amendment was made especially to bring the Vodafone transaction under the tax bracket but resulted in a different scenario.

Brief discussion of the case

A total of 17 cases were registered which came into existence just after the retrospective effect was introduced in the income tax act. 

One of the high profile cases that arose was of UK based company Cairn energy PLC, where a British giant had made transactions in 2006 on which the government made Cairn energy liable in 2014 for non-payment of taxes and a tax liability was imposed of Rs 10,247 crore arising from the retrospective application of transfer of  Indian assets.

In 2006, Cairn energy initiated an internal re-organization in its business in India, the idea behind this was to bring all of its assets under a single holding company “Cairn India ltd” and due to which Crain UK had transferred some shares of Cairn India holdings to “Cairn India ltd”. These transfer dealings were taken by the Indian tax authorities as “indirect transfer” of Indian assets and assessed tax liability of Rs. 10,247crore and later in 2015 the government decided that Cairn energy had also made some capital gains in the transfer of assets process and re-assessed the tax liability to Rs. 31,881crore along with the penalties and interest. Vedanta group acquired majority stakes in Cairn India in 2011 and when Cairn energy was to transfer its 10% stake to Vedanta in 2014 it was made subject to payment of retrospective taxes. Cairn energy refused the payment of such taxes and initiated an arbitration process.

Indian authorities then started other means to set off the tax liability against Cairn energy Plc by seizing its dividends of the value Rs. 1,140 crore, selling its 5% holdings in Vedanta group, withheld tax refund to set off its tax demands to the tune of Rs. 1,590 crore. To date, Indian authorities have managed to collect Rs. 7,800 crore in form of taxes from Cairn energy itself and has been seen actively taking up cases in court against Cairn for the payment of the taxes due to the government.

Since the government has given the retrospective effect to the implication of tax, it has managed to recover around Rs. 8,100 crore in the form of taxes from all the 17 cases combined and most of the recovery being from Cairn Energy Plc of Rs. 7,800 crore. Some of the cases that have been initiated because of retrospective application of taxes being – ITC, Sanofi-shantha Biotech, Aditya Birla Nuvo.

International arbitration awards

Now, coming back to the present times, up till last year all the 17 entities were facing notices of either tax authorities demanding payment of taxes or either court notices, but with time out of all, 2 of the cases were stayed by the high courts, 4 of them invoked arbitration clause under Bilateral Investment Protection Treaty.

In 2 of the high-profile cases of Vodafone and Cairn Energy, The Permanent Court of Arbitration at the Hague, Netherlands gave the awards in favor of the companies and against the Indian government. First, on 25th September 2020, the award was made in favor of Vodafone, and the Indian government was ordered to pay £4.3million as the legal cost incurred to Vodafone. Second, on 21st December 2020, India was ordered to pay $1.4billion to Cairn energy.

These two international arbitral awards came as a huge setback to the Indian government as the liability to pay the awards was huge amid the pandemic, loss of revenue, huge deficit, and high costs. Still, Indian authorities maintained a firm stand on the awards made and said that they will utilize all the legal remedies available to them and the current finance minister Nirmala Sitharam also indicated the intention of the government to appeal against these awards on the grounds that these awards are questioning the sovereign power of India to levy tax. The Indian government is of the view that the taxation is not a subject of a bilateral investment treaty, like the UK-India Bilateral Investment Protection Treaty, through which Cairn has sought the relief and has been awarded by the Court and therefore award should be appealed.

As the arbitral awards do not contain the provision for appeal and can only be set aside by the arbitral tribunal itself on specified grounds only, the Indian government’s hopes to get the awards reversed were low.

In both the cases of Vodafone and Cairn Energy’s case, the Permanent Court of Arbitration states the same thing that the retrospective tax breached the “Guarantee of fair and equitable treatment” and “India failed to accord Cairn Energy’s investment fair and equitable treatment”, under Bilateral Investment Protection Treaty.

Cairn’s action against India

Even after getting relief from the international arbitration court, Indian authorities were not executing the award in favor of the company. So, taking a step further Cairn Energy initiated court proceedings against the Indian authorities in various countries all across the globe for freezing its assets or maybe the sale of these assets to settle off the award.

Cairn Energy got an order from the French court to freeze 20 of the Indian assets worth around Rs. 195.5crore, partly enforcing a $1.4billion award in favor of Cairn Energy by an international tribunal.

Cairn Energy also moved to US court to freeze the Air India properties, as this airline is a public entity, on the pretext that since the management of the said airline is under the control of the Indian government, so, this entity can be taken as property belonging to the Indian government and hence the alter ego of the Indian government.

Role of the Indian Government

In 2014, there was a formation of a new government. One of the initial statements that were given with concern to the retrospective applicability of laws was that this government does not promote the ex-post-facto laws and the government will never make any laws that are against the fundamental principles of natural justice. Then finance minister Arun Jaitley even said that this government will not retrospectively create any fresh tax liability and that all fresh cases arising out of 2012 retrospective amendments will be scrutinized by a high–level committee before any action is initiated and that all the cases that have been taken up in various legal fora are at different stages of pendency and will naturally reach to its logical end. Still, the government at that time desisted from withdrawing the tax.  

It almost looked like that the authorities were waiting for the right time to make their next move as there were 2 big fishes caught in the legal fish net that can generate India a lot of revenue once the decision is announced in India’s favor. The government was of the view that there is nothing that they can do with respect to retrospective tax policy as the cases are sub-judice at various levels and thus have to wait for their logical conclusions. They were aware of the fact that this law has been seen with a sore eye by the investors and this has reflected the image of India as that of unstable nature. Even in 2012, when this government was in opposition termed this retrospective amendment as a “Tax Terror” and was against its applicability, and this stance was also maintained to an extent by this government as there were no ex-post-facto laws made by the current government.

There are now various verdicts like that of Cairn, Vodafone, devas multimedia etc. that got decided against the government internationally and therefore a liability has occurred to either refund the monies collected or compensate for the legal costs that occurred to the other party and the same amounts to billions of dollars. To maintain a firm stand in the eyes of the public, the government authorities gave various statements regarding taking up and exhausting all the legal remedies that are available against the arbitral awards. Also, the government was of the view that no international court can question the sovereign right of India to impose taxes and that the Indian government does not promote such action.

Cairn’s successful attempt to move to the French court and obtaining a decision in his favor was seen as a raised eyebrow by the Indian government. India has the option to appeal against such an order of the French court in the higher court.

Income Tax (Amendment) Bill, 2021

On 6th August, the central government passed an amendment in the Taxation Act in the Lok sabha and then later in Rajya Sabha on 9th august without any difficulty and is now once the bill will get the assent of the president it will become law.  This bill has tried to create an image in the eyes of international investors or maybe at the international forum that the Indian government has never been in favor of applicability of the tax structure from the backdate i.e retrospective effect and now that it will set things straight that has been set otherwise by the opposing parties, when in power. 

This amendment aims to nullify the retrospective effect of the Income Tax Act and Finance Act 2012, which though introduced in 2012 was applicable on every transaction held involving the indirect transfer of Indian assets but post amendment, only the indirect transfers that were done after 28th may 2012 will only attract the tax liability under the head of capital gains. This amendment bill also states that any demand raised for indirect transfer of Indian assets made before 28th May 2012 shall be nullified on fulfilment of conditions such as withdrawing or furnishing of an undertaking for withdrawal for pending litigation, and furnishing of an undertaking to the effect that no claims such as cost, damages, interest shall be filed. It also goes on to propose to refund any amount that was being paid to the government authorities but without any interest thereon.

Impact on investors and stakeholders

Even though this restructure in the tax policy is delayed, it has sent out a clear message to all the investors that have already invested and especially to those who will now invest in India’s economy that India will correct its course and is even ready to bite the bullet even if the circumstances around it are not exactly propitious. This step has cleared the stand of the government on the principles of tax policies. 

Even though this restructure in the tax policy is delayed, it has sent out a clear message to all the investors that have already invested and especially to those who will now invest in India’s economy that India will probably go to any length and will not step back away from its responsibilities and do what needs to be done and despite being criticized, this step has cleared the stand of the government on the principles of tax policies. 

This move by the government is grabbing the eyes of international investors as it has been seen as one of the “boldest” “brave” moves taken by the government. This step is welcomed by many industrialists and many international investors’ faith in the laws of India now seem to be restored. Some of the opposition leaders have also welcomed the move. 

Now, all the cases that were taken up after the retrospective tax are given a winning deal. There is no such demand the government will make and even if any amount is collected will be refunded back to them. So, now the entities should naturally drop their cases against the government as there is no point in taking up cases against the government as they have waived their claim.

There is also a view given by experts while welcoming the removal of retrospective tax that with this step, there is now more clarity for the deals between the countries, where these are not covered under any of the tax treaty benefits and thus it has improved the stance of India in the way of ease of doing business in India. Now, the stakeholders will have the confidence in the Indian laws that they will get all that is needed to work in the ideal environment. It has now made India a transparent, unambiguous, clear, and fair taxation land.

This is a much better way out available to the parties that they can settle the dispute outside the court and it is much better if it is settled amicably, without any third person’s involvement. It is more of a general rule and unsaid rule of the arbitration process that if a party is willing to make a reasonable settlement that is equally acceptable to the other party, then the other party must try to settle instead of going on with the arbitration and carrying on with the dispute

This change in law does not amend the current laws, the law governing the indirect transfer of Indian assets is still intact and the tax authorities will be imposing tax liabilities on the entities involving in such transactions and all that is done is that an easy way out has been given to the parties who were trapped because of the retrospective application of the law and now if we see it through this angle then only those 17 companies against whom such cases were taken up by the tax authorities are being given relief and no such change in the law is proposed in the law. The government is hoping that this rectification will attract more and more foreign investment and present India as an investor-friendly nation.

Conclusion

A retrospective tax is treated as a statute that takes away, impairs any vested right acquired under existing law or creates a new obligation, or imposes a new duty or attaches a new disability in respect of completed transactions or considerations. Especially the penal laws are never made given retrospective effect and the logic being that any action performed which was not an offense at the time of performance then, the performer of such act cannot be penalized in the future on that performance, upon being made as an offense at a later date.

The same logic also stands true to an extent to taxation laws, therefore it is said that no tax should be applied retrospectively as it creates a negative impact on the minds of the taxpayers. Also, these kinds of laws are not welcomed at the international level as it creates a negative impact on the nation globally because the investors will not be able to trust such laws as they will always have a fear of receiving a demand notice from the tax authorities asking for payment of tax dues arose by some legislation affecting any past transaction. It has an effect on the tax planning in the totality of the affected party.

Statements from the Indian government were given explaining the need and the importance of such a move and in one of the statements it was mentioned that India has kept the sovereign right to tax intact and they don’t support the notion of adjudication of Indian tax law in foreign tribunals and that this is a solution out of the sovereign means of Indian laws but such a strong stand was not taken when there was a discussion regarding Global Minimum Corporate Tax among the nations. Does this stand differ from case to case? The stand regarding Sovereignty is not something that should be shifted as per the requirement, because if this stand gets compromised then the day will not be far away when India will recreate the pre-independence era as it will not have a say in deciding upon such internal matters of the country.

References


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