Experts CornerKhaitan & Co

Indian tax law is routinely amended by the Parliament. While well-reasoned amendments serve as a tool to rectify lacunae in the existing law, retrospective amendments are inherently controversial.

 

Retrospective amendments introduced in 2012 enabled the Government to tax gains on certain transactions from 1-4-1961. The tax net was widened to include share transfers of foreign entities deriving substantial value from assets in India (also colloquially referred to as “indirect transfer”). Against this backdrop, there was widespread apprehension on the possible negative impact of capital inflows in an emerging economy like ours.

 

Fast forward to today, the Government has passed a separate amendment[1] (2021 Act) in the Income Tax Act to nullify the retrospectivity in the law on offshore indirect transfers undertaken prior to 28-5-2012. Accordingly, orders raising demand on account of retrospective charge would stand nullified where the taxpayers agree to withdraw all pending litigation and waive their rights in all forums (including international arbitrations). As part of such trade-off, the Indian Government will refund all taxes collected on account of such retrospective application of law.

 


Background


Offshore indirect transfers took center stage during the Vodafone[2] controversy wherein the  Supreme Court unequivocally held that Indian domestic tax law (at the time) did not permit taxing an offshore indirect transfer. However, the legislature expressed that the Supreme Court judgment was   inconsistent with the legislative intent of the then existing provisions under Indian tax law (as acknowledged by the Statement of Objects and Reasons of the Bill of 2021 Act). Subsequently, the Parliament retrospectively amended the statute to “clarify” that an offshore indirect transfer in India has always been deemed to be a taxable event.

 

In some other parts of the world too, Revenue Authorities have sought to tax offshore indirect transfers (such as Bharti Airtel’s acquisition of Zain Telecom in Africa and purchase of Petrotech by Ecopetrol in Peru). From a source country perspective, transferring source country’s assets through indirect share transfers at an offshore level is nothing but an effective “transfer” of assets in the source country. The source country naturally wants its share of the pie and claims tax on proportionate gains attributable to value derived from the assets located in the source country.


Ensuing disputes and arbitrations


The need to undertake concrete measures to address the negative effect on foreign investor sentiment was evident almost immediately. An Expert Committee chaired by Dr Parthasarathi Shome in 2012 made a case for the amendments to be made effective prospectively[3]. However, despite successive changes of Governments, the amendments stayed in the statute.

 

According to Government’s own data, tax demands were raised in 17 cases involving indirect transfers undertaken prior to 2012. Out of the above, two cases were stayed by the High Courts and bilateral investment treaties (BITs) with UK and the Netherlands were invoked in other four. In the past few months, Arbitral Tribunals ruled in favour of the taxpayers in the arbitrations of Vodafone International Holdings BV v. Republic of India (Vodafone)[4] and Cairn Energy Plc and Cairn UK Holdings Ltd. v. Republic of India (Cairn)[5]. The tribunals based their view upon violation of the “fair and equitable treatment” standard guaranteed to the investors under bilateral investment treaties. Consequently, the Arbitral Tribunal awarded Cairn a billion dollar in damages for the “total harm” suffered by them as a result of breach of BIT with India. Such cases are a reminder of limits placed by international law upon sovereign right of taxation. International law recognises States sovereign right to tax and determine whether a specific transaction is chargeable to tax or not. However, the manner and imposition of tax on the foreign investor can be tested on the anvil of “fair and equitable treatment” under various BITs.

 

Until recently, news reports suggested that India did not accept the arbitration awards and appealed the decision in both Vodafone[6] and Cairn case[7].  At the same time, Cairn moved the United States District Court in the Southern District of New York (SDNY) on 14-5-2021 stating that they intended to enforce the arbitration award[8]. Cairn sought seizure of assets of Air India as “an alter ego of Indian Government” on the premise that Air India is State owned and “legally indistinct” from the State. For now, the US District Court has stayed the proceedings in light of any potential settlement that might be agreed between Cairn and India[9].

 


Course correction


 

The key aspects of the 2021 Act are as follows:

  • Non-levy of taxes on offshore indirect transfers undertaken prior to 28-5-2012 i.e. the law on taxation of indirect transfers has been made prospectively applicable from the date of the amendment.
  • Government would nullify the demands raised, subject to withdrawal of pending litigation by the taxpayers (including, international arbitration). The taxpayers are also required to furnish an undertaking waiving their rights to seek or pursue any remedy in connection thereto.
  • Refund of taxes which were collected pursuant to demand raised on account of indirect transfers. However, the Government would not be paying any interest on refund of the tax amounts.

 

The enactment of 2021 Act as a means to settle the long-drawn controversy is a welcome move. Though delayed, the amendment, along with the Government’s efforts to revamp the tax ecosystem to bring out a change in how taxpayers are assessed could enhance investor confidence. Having said that denial of interest on principal tax amount not only denies the existing right of a taxpayer enshrined in the statute book, but it also results in inequitable treatment. However, the larger construct behind the enactment cannot be faulted with.

 


Way forward


It is hoped that 2021 Act will draw the final curtains to the decade long controversy. There are however some notable lessons that may be drawn from this matter:

  • Changes in law, specifically tax law, should be guided by sound policy rather than revenue considerations alone. While the controversy disparaged India’s image as an investment jurisdiction, no meaningful revenue was collected from such measure. In a world driven by cross-border investments, having a sound tax policy will ensure that India is seen positively as a country that honours its treaty obligations and presents tax certainty which will in turn attract more investment, possibly leading to higher tax collections.
  • In addition, considering the changing international tax ecosystem, it would serve well if the dispute resolution mechanisms were relooked at to provide for a faster resolution of tax disputes.

Partner, Khaitan & Co.

†† Associate, Khaitan & Co.

[1] Taxation Laws (Amendment) Act, 2021, See HERE

[2] Vodafone International Holdings BV v. Union of India, (2012) 6 SCC  613 : (2012) 341 ITR 1.

[3] See HERE.

[4] (2012) 6 SCC  613

[5] PCA Case No. 2016-7.

[6]See HERE.

[7]See HERE.

[8]See HERE.

[9]See HERE.

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Supreme Court: The 3-judge bench of SA, Bobde, CJ* and AS Bopanna and V. Ramasubramanian, JJ has directed telecom giants Bharti Airtel and Vodafone-Idea to disclose information/details regarding segmented offers to TRAI. It asked TRAI to ensure that such information is kept confidential and is not made available to the competitors or to any other person.

Facts leading to this order

  • The Telecommunication Tariff (63rdAmendment) Order, 2018 issued by TRAI on 16.02.2018 was challenged by Bharti Airtel Limited, Idea Cellular Limited and Vodafone Mobile Services Limited. Apart from “Reporting Requirements”   and   “Significant   Market   Power”(SMP), a grievance was also raised against insistence of TRAI about the disclosure of segmented discounts/concessions.
  • TDSAT issued an interim arrangement on 24.04.2018 staying the relevant clauses relating to the Reporting Requirements and the definition of SMP. However, the Tribunal permitted TRAI to ask for details of segmented discounts/concessions for analysis but exempted the Telecom Service Providers (TSPs) from disclosing the names of their customers and other sensitive information.
  • After the High Court refused to interfere with the aforementioned order, the TDSAT heard the appeals finally and allowed them partially by a final order dated 13.12.2018, setting aside the Telecom Tariff 63rd Amendment Order in so far as it changes the concepts of SMP, Non-predation and the related provisions;
  • TRAI hence moved the Supreme Court against TDSAT’s order and sought an interim direction to the service providers to disclose information/ details sought by the appellant regarding the segmented offers.

The TSPs argued before the Court that segmented offers constitute “confidentially designed trade practices” and the same has been recognised by TDSAT in it’s order. However, at the same time TDSAT allowed TRAI to seek the number of segmented offers made available to their existing customers, along with a declaration that the principles of non-discrimination were being followed. According to the TSPs, they are complying with the said direction.

TRAI, on the other hand, submitted before the Court considering the number of segmented offers provided by TSPs from January, 2019 to December, 2019 in various states, the details of these offers are not even disclosed to TRAI and that therefore, despite being a regulator, TRAI is not in a position to analyse whether the plans are transparent and non-discriminatory and whether predatory pricing is resorted to by TSPs in the garb of segmented offers or not. It was contended that the TSPs are under a statutory obligation to offer tariffs in a transparent and non-discriminatory manner and to report all tariffs to the authority.

Considering the facts and circumstances, the Court said that that the information being sought by TRAI to ensure adherence to the regulatory principles of transparency, non-discrimination and non-predation, cannot be said, at least prima facie to be either illegal or wholly unjustified.

[Telecom Regulatory Authority of India v. Bharti Airtel Ltd., 2020 SCC OnLine SC 910, order dated 06.11.2020]


*Justice SA Bobde, Chief Justice of India has penned this order

Case BriefsSupreme Court

Supreme Court: In some relief to the financially stressed telecom giant Vodafone Idea, the bench of UU Lalit and Vineet Saran, JJ has directed a tax refund of Rs.733 Crores to the company within 4 weeks. The Court also directed the Income Tax department to conclude the proceedings initiated pursuant to notice under sub-section (2) of Section 143 of the Act in respect of AY 2016-17 and 2017-18 as early as possible.

Background of the case

Vodafone Idea had, however, sought Rs 4,759.07 crore in tax refund from for Assessment Years 2014-15, 2015-16, 2016-17 and 2017-18. The IT Department had, however, withheld the returns on account of multiple issues like Transfer Pricing Adjustment, Capitalization of Licence Fees, 3G Spectrum Fees, Asset Restoration Cost Obligation including the effect of amalgamation of group entities which required thorough scrutiny and determination. It had argued that processing any refunds, in light of pending special audit, scrutiny and tax demands of more than Rs 4,700 crore, will be prejudicial to the interest of the revenue department.

Vodafone Idea, on the hand, argued that after the lapse of the one-year period, by reason of second proviso to Section 143 (1), the right to claim refund is vested in any assessee. This is independent of the Revenue’s power to issue a scrutiny notice under Section 143 (2), for which the period of limitation is longer. However, if the Assessing Officer does not issue any notice, or intimation, if the assessee can claim refund, that right is a statutorily vested one if, within the said period of one year, a reasoned order is not made under Section 143 (1D) within the said one year period.

On relevance of non-obstante clause under Section 143 (1D)

The Court explained that the power under sub-section (1) of Section 143 of the Act is summary in nature designed to cause adjustments which are apparent from the return while that under sub-sections (2) and (3) is to scrutinize the return and cause deeper probe to arrive at the correct determination of the liability of the assessee. It further said that if the power under sub-section (2) of Section 143 of the Act is initiated in a manner known to law, there cannot be any insistence that the processing under sub-section (1) of Section 143 be completed and refund be made before the scrutiny pursuant to notice under sub-section (2) of Section 143 is over.

It, however, going into the legislative intent behind introduction of the non-obstate clause under Section 143 (1D), said that the intent to have the general principle emanating from subsection (1) of Section 143 overridden, in case where the proceedings are initiated pursuant to notice under sub-section (2) of the Act, gets more pronounced and emphasized by use of non-obstante clause in sub-section (1D).

It explained,

“irrespective of some change in the text of said provision which was sought to be introduced by Finance Act 2016 and not accepted by Finance Act, 2017, the legislative intent is clear from the expression, “… the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2)” and by use of non-obstante clause.”

The bench, further, said that though the period for which it would not be necessary to process the return was sought to be specified by Finance Act, 2016, mere absence of such period in the provision as it stands today, makes no difference.

“As against the general principle which mandates an action in a particular manner, when an exception is to be carved out, the relevant provisions stipulate “it shall not be necessary” to adhere to and follow the manner mandated by such general principle; and if the contingency contemplated by such exception arises, the general principle is to stand overridden.”

On whether separate intimation to the assessee is mandatory or not

On the issue whether any intimation is required to be given to the assessee that because of initiation of proceedings pursuant to notice under sub-section (2) of Section 143 of the Act processing of return in terms of sub-section (1) of Section 143 of the Act, would stand deferred, he bench held that a separate intimation was neither contemplated by the statute nor would it achieve any purpose. It said,

“the issuance of notice under sub-section (2) of Section 143 is enough to trigger the required consequence.”

The Court explained that the  processing of return in terms of subsection (1A) of Section 143 of the Act is to be done through centralized processing and the scope of processing under subsection (1) of Section 143 of the Act is purely summary in character. Once deeper scrutiny is undertaken and the matter is being considered from the perspective whether there is any avoidance of tax in any manner, issuance of notice under sub-section (2) itself is sufficient indication.

“Sub-section (1D) of Section 143 of the Act does not contemplate either issuance of any such intimation or further application of mind that the processing must be kept in abeyance. It would not, therefore, be proper to read into said provision the requirement to send a separate intimation.”

[Vodafone Idea Ltd. v. Assistant Commissioner, Income Tax Circle 26 (2), 2020 SCC OnLine SC 418 , decided on 29.04.2020]

Hot Off The PressNews

Supreme Court:  The bench of Arun Mishra and MR Shah, JJ has dismissed a petition filed by Vodafone against the levy of one-time spectrum charges (OTSC).

When Senior advocate Abhishek Manu Singhvi, appearing for Vodafone, told a bench that the charges are related to the adjusted gross revenue (AGR), a rather furious Justice Mishra said,

“Don’t pay anything… not this, not AGR. You will still not be touched,”

The Department of Telecommunications (DoT) had sought to levy a one-time spectrum charge on telecom service providers. This comes after the telecom companies paid their AGR dues to the Central government after the Supreme Court pulled them up for violating its earlier order and not paying the money on time.

Last year, in Union of India v. Association of Unified Telecom Service Providers of India, 2019 SCC OnLine SC 1393the bench of Arun Mishra, SA Nazeer and MR Shah, JJ had refused to change the definition of gross revenue as defined in clause 19.1 of the licence agreement granted by the Government of India to the Telecom Service Providers. It had held,

“The definition in agreement is unambiguous, clear, and beyond the pale of doubt, and there is no confusion in the definition of gross revenue, which is the basis for realisation of the licence fee. Licensees have made a futile attempt to wriggle out of the definition in an indirect method, which was rejected directly in the decision of 2011 between the parties and it was held that these very heads form part of gross revenue.”

Vodafone Idea’s total AGR dues, as estimated by the DoT stand at Rs 53,038 crore, which includes Rs 24,729 crore of spectrum dues and Rs 28,309 crore as the license fee. On the other hand, Bharti Airtel’s total AGR dues reportedly amount to Rs 35,586 crore.

(Source: ANI)

Case BriefsSupreme Court

Supreme Court: A Bench comprising of A.K. Sikri and Ashok Bhushan, JJ. dismissed an appeal filed against the judgment of Bombay High Court whereby it held that Competition Commission of India had no jurisdiction to pass order in the instant matter as the issues were covered by Indian Telegraph Act, 1885 and Telecom Regulatory Authority Act, 1997 and the appropriate forum was the Telecom Dispute Settlement and Appellate Tribunal (TDSAT).

In the present matter, the Court was faced with determining the width and scope of the powers of the CCI under the Competition Act, 2002 pertaining to telecom sector vis-a-vis the scope of the powers of TRAI under the TRAI Act, 1997.

Factual Matrix

On 21-10-2013, Reliance Jio Infocomm Ltd. was granted a licence under Section 4 of the Telegraph Act by the Department of Telecom (DoT) for providing telecommunication services in all 22 circles in India. Soon thereafter, RJIL executed interconnection agreements with existing telecom operators including Airtel, Idea and Vodafone. RJIL  requested these companies to augment Point of Interconnection (POIs) for access as the capacity already provided to it was causing huge POI congestion, resulting in call failures on its network. According to RJIL, these companies intentionally ignored the aforesaid request.

Subsequently, in November 2016, RJIL filed information under Section 19 of the Competition Act before the CCI, As per RJIL, the respondent service providers, along with Cellular Operators Association of India, formed a cartel and acted in an anti-competitive manner which is prohibited by the Act. The CCI passed order dated 21-4-2017 under Section 26(1) as per which it came to a prima facie conclusion that case for investigation was made out and directed the Director-General to cause investigation in the case. Aggrieved thereby, respondents filed writ petitions before the High Court which quashed the order of CCI on the ground that CCI lacked jurisdiction to entertain such complaints/information filed under Section 19 as such matter falls within the exclusive jurisdiction of another regulatory authority, namely, TRAI.

Challenging this order passed by the High Court, the appellants were before the Supreme Court.

The Supreme Court considered the matter on following points:

(a) Jurisdiction of CCI

After noting salient features of Competition Act and TRAI Act, the Court concluded that as TRAI is constituted as an expert regulatory body which specifically governs the telecom sector, the aforesaid aspects of the disputes were to be decided by TRAI in the first instance. These were jurisdictional aspects. The High Court was right in concluding that the concepts of “subscriber”, “test period”, “reasonable demand”, etc, arising out of TRAI Act and the policy so declared, are the matters within the jurisdiction of TDSAT under the TRAI Act. Only when the jurisdictional facts in the present matter were determined by the TRAI against the respondents, the next question would arise as to whether it was a result of any concerted agreement between the respondents. It would be at that stage the CCI can go into the question as to whether violation of the provisions of TRAI Act amounts to ‘abuse of dominance’ or ‘anti-competitive agreements’.

(b) Whether TRAI has the exclusive jurisdiction to deal with matters involving anti-competitive practices to the exclusion of CCI altogether?

The function that is assigned to CCI is distinct from the function of TRAI. It is within the exhaustive domain of CCI to find out as to whether a particular agreement will have an appreciable adverse effect on competition within the relevant market in India. Such functions not only come within the domain of CCI, but TRAI is not at all equipped to deal with the same.

The Court, thus, did not agree with the appellants that CCI could have dealt with this matter without availing the inquiry by TRAI. It also did not agree with the respondents that insofar as the telecom sector is concerned, the jurisdiction of the CCI under the Competition Act is totally ousted.

In incidental issues, the Court decided that the petitions field by other companies before the Bombay High court were maintainable. When such jurisdictional issues arise, the writ petition would clearly be maintainable. In view of the above discussion, the Court dismissed the appeal while upholding the decision of the High Court. [CCI v. Bharti Airtel Ltd., 2018 SCC OnLine SC 2678, decided on 05-12-2018]