The never-ending disputed retrospective provisions introduced in Income Tax Act, 1961 (“the principal Act”) vide Finance Act 2012 has come to end as the Government is showing willingness to do away with various disputes after extended legal battles across various jurisdictions throughout the World.
The Taxation Law (Amendment) Act, 2021 (“Amendment Act”) got the assent of the President of India on August 13, 2021. Vide this amendment, the Government has withdrawn the disputed retrospective imposition of tax on indirect transfer of Indian assets.
The move seemingly comes because of the various challenges and adverse arbitral awards suffered by the Indian Government in the Vodafone and Cairn Energy disputes. In the Cairn Energy dispute, a French court even passed an order seizing 20 properties owned by the Indian government.
Genesis
The issue of taxability of Gains arising from the transfer of assets located in India through the transfer of the shares of a foreign company (“indirect transfer of Indian assets”) was a subject matter of protracted litigation. Finally, the Supreme Court in 2012 had given a verdict that gains arising from indirect transfer of Indian assets are not taxable under the principal Act.
As the verdict of the Supreme Court was inconsistent with the legislative intent, the provisions of the principal Act were amended by the Finance Act, 2012 with retrospective effect, to clarify that gains arising from sale of share of a foreign company is taxable in India if such share, directly or indirectly, derives its value substantially from the assets located in India. The Finance Act, 2012 also provided for validation of demand, etc., under the principal Act for cases relating to indirect transfer of Indian assets.
Pursuant thereto, income-tax demand had been raised in seventeen cases. In two cases, assessments are pending due to stay granted by High Court. Out of the said seventeen cases, arbitration under Bilateral Investment Protection Treaty with United Kingdom and Netherlands had been invoked in four cases. In two cases, the Arbitration Tribunal ruled in favour of taxpayer and against the Income Tax Department.
Progressive move
The said clarificatory amendments made by the Finance Act, 2012 invited criticism from stakeholders mainly with respect to retrospective effect given to the amendments. It is argued that such retrospective amendments militate against the principle 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 and infrastructure sector which has created a positive environment for investment in the country. However, this retrospective clarificatory amendment and consequent demand created in a few cases continues to be a sore point with potential investors. The country today stands at a juncture when quick recovery of the economy after the COVID-19 pandemic is the need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment.
Amendments
Section 2 of the Amendment Act has inserted proviso clause in Section 9 (Income deemed to accrue or arise in India) of the principal Act so as to provide that no tax demand shall be raised in future on the basis of the said retrospective amendment for any indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012 (i.e., the date on which the Finance Bill, 2012 received the assent of the President)
It is further proposed that the demand already raised for indirect transfer of Indian assets made before 28th May, 2012 shall be nullified on fulfilment of following specified conditions:
- withdrawal or furnishing of undertaking for withdrawal of pending litigation
- furnishing of an undertaking to the effect that no claim for cost, damages, interest, etc., shall be filed
Refund of the amount paid in these cases shall be without any interest thereon.
Section 3 of the Amendment Act also proposes to amend the Finance Act, 2012 so as to provide that the validation of demand, etc., under section 119 of the Finance Act, 2012 shall cease to apply on fulfilment of specified 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., shall be filed.
The Taxation Law (Amendment) Act can be accessed at: http://www.a2ztaxcorp.com/wp-content/uploads/2021/08/THE-TAXATION-LAWS-AMENDMENT-ACT-2021.pdf