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Retrospective Amendments: Testing The Waters

Published on Mon, Apr 06,2015 | 14:21, Updated at Mon, Apr 06 at 14:21Source : 

By: Ajay Rastogi, Partner – Tax & Regulatory Services, PwC India

The Indian judiciary system is preoccupied these days in testing whether the amendments made in the statutes are constitutionally valid. Recently, the Supreme Court of India had struck down the provisions of Section 66A of the Information Technology Act, 2008 on the grounds that it infringes the fundamental right to free speech and expression. Now, in a recent case relating to an Oil & Gas company, the Gujrat High Court has held that the retrospective amendment made in section 80-IB(9) of the Income Tax Act, 1961 (the Act) by the Finance (No 2) Act 2009 is clearly unconstitutional, arbitrary and violative of Article 14 of the Constitution of India and is liable to be struck down.

Section 80-IB (9) of the Act allows a seven-year tax holiday to an undertaking on the commercial production of mineral oil. The Finance (No 2) Act 2009 added an explanation defining the term ‘undertaking’ (for the purpose of tax holiday) to mean ‘all blocks licensed under a single contract’ with retrospective effect from 1 April 2000.  The amendment restricted the availability of tax holiday per contract instead of the tax holiday to each well or cluster of wells. 

Briefly stated, the company entered into a production-sharing contract with the central government for the exploration, development and production of ‘mineral oil’ for certain blocks. It claimed a tax holiday by treating each well or cluster of wells as an ‘undertaking’.  While tax authorities challenged the position of the company, the Tax Tribunal held that each well or cluster of wells constituted a separate undertaking and thus, was eligible for the deduction. Later on, the law was retrospectively amended to provide that the ‘undertaking’ will  mean ‘all blocks licensed under a single contract’, restricting the tax holiday of seven years per contract.

The company challenged the constitutional validity of the retrospective amendment on  grounds of it being arbitrary and unreasonable and thus ultra vires of Article 14 (equality before the law) of the Constitution of India by invoking a writ jurisdiction. A writ is generally invoked if the executive or legislative body exceeds or violates the rights enshrined under the Constitution of India.

The court allowed the petition and held that each well or cluster of wells is a separate undertaking entitled to a seven-year tax holiday.  It concluded that the retrospective amendment was not clarificatory, declaratory or curative and neither did it make ‘small repair’ in the Act, but on the contrary, took away the accrued and vested right of the company which had matured after the judgments of the tribunals. Therefore, the amendment was a substantive law, which is clearly unconstitutional and violates   Article 14 of the Constitution of India and is liable to be struck down.

The other issue dealt by the court in the aforesaid case was whether, for the purpose of a tax holiday, the term ‘mineral oil’ will include natural gas prior to the insertion of the explanation in 2009.  The Finance (No 2) Act 2009 inserted the explanation, providing that the tax holiday will be available on the gas produced from the blocks licensed under the NELP-VIII and CBM-IV round of auction. The court held that the insertion of the explanation cannot be interpreted to mean that the term ‘mineral oil’ does not include natural gas for the purpose of tax holiday under contracts entered prior to the NELP VIII.

It is not the first time that a retrospective amendment has been struck down by the courts as constitutionally invalid. Courts have held in the past also, that a retrospective amendment is liable to be quashed if it is arbitrary, lacks rationale, is unreasonable and imposes an unforeseen financial burden. In such scenarios, the court will examine the scheme of the statute prior and subsequent to the amendment to determine whether it is clarificatory or substantive.  The Gujarat High Court observed that the amendment had widened the scope of section 80-IB(9) and imposed a  new tax altogether by widening the tax net. This widening will be applicable for different periods depending upon the date of starting the commercial production, and will bring about a substantive change in the law with different tax liabilities. Such a substantivefunctional provision can only be taken as prospective in operation. Thus while the court held that the amendment cannot have a retrospective applicability, it however appears that it can still be applied on a prospective basis and if so the impact may need to be analysed.

Generally, a decision of the high court is binding only on those authorities functioning within its territorial jurisdiction and may have persuasive value for tribunals functioning in other jurisdictions.  The Bombay High Court in the case of Smt Godavaridevi Saraf, had held that once a provision is declared ultra vires by a competent high court, that decision has to be accepted by the Tribunal wherever constituted, that is, even in the jurisdiction of another high court unless there is a contrary judgment to that extent.

It is possible that some companies may have missed claiming tax deduction on each well / cluster of wells by not treating them as a separate undertaking. It will be interesting to see if they can make amends by filing additional claims on well-wise tax holiday for the years which are still open at various levels.

This judgment has provided a much needed relief to the oil and gas sector grappling with the uncertainties of the current tax policy regime. It is now on the government to proactively accept this well-reasoned judgment and show its commitment of providing a non-adversial tax regime. It may consider issuing a clarificatory circular regarding its applicability same as it did recently in the transfer pricing case involving a leading telecom company where they have accepted the judgement and applied its ratio on all pending cases.

With inputs from Shailendra Gupta, Manager and Manish Aggarwal, Assistant Manager PwC India


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