Budget 2012-13: Ouch! Vodafone back to square one?
Published on Fri, Mar 16,2012 | 17:33, Updated at Fri, Mar 16 at 17:38Source : Moneycontrol.com
By: Payaswini Upadhyay, CNBC-TV18
Budget 2012 has made retrospective amendments to Sec 2(14), Sec 2(47) and Sec 9 of the Income Tax Act. CNBC TV18’s Payaswini Upadhyay gets quick reactions from experts on what this means for Vodafone and similar transactions.
Daksha Baxi, Executive Director, Khaitan & Co
“These are not amendments in the law. The Finance Bill has included clarifications, saying that “for removal of doubt, it is clarified that….. shall mean and include and shall be deemed to have always meant and included….”
With regard to Sec 9, it means that they are saying that the interpretation that the Supreme Court gave to Section 9 is not correct since the intention of the legislature was something different which they are now clarifying :
(i) That when it says ‘through’, it means “by means of or in consequence of or by reason of the transfer of a capital asset situated in India”;
(ii) A capital asset has always been meant to be situated in India when a foreign company transfers its shares and the shares derive their value substantially and directly or indirectly from assets located in India;
Coupled with a change in the definition of ‘transfer’, it means that the Finance Bill is clarifying that the transfer of the type in case of Vodafone was always covered by the existing provision of the IT Act. Effectively, it is proposing to overrule or negate the SC decision in case of Vodafone. However, unrelated to Vodafone and this particular aspect of law, there are at least 2 old SC judgments where the law laid down is that when the intention of the legislature is not clearly coming out from the language of the statute, it cannot be said that the legislature intended something different than the clear language of the provision. Also, that where two interpretations are possible : one in favor of the Revenue and the other in favor of the assessee, then the interpretation in favor of the assessee should be given effect to. These two rulings which laid down the law with respect to interpretation and intention of the statute have nothing to do with Vodafone. Also, they are not overruled by the clarifications which are proposed in section 9(1) (i). In my view, these clarifications themselves will be challenged before the SC, in light of the two judgments that I have referred to.
In the interim, this change of meaning of section 9(1)(i) coupled with the significant number of years of increase in the years for which the assessment can be reopened means that there will be a spate of tax demands raised on Vodafone type of transactions and a huge amount of litigation.
As regard S. 195 and clarification therein, in my view, with all due respect, the interpretation of the honorable judge that Sec. 195 did not apply where the transaction took place between two non residents was indeed not exactly correct. Thus, this will only put to rest a confusion created on something which we always believed was applicable.”
Porus Kaka, Senior Tax Counsel
”The spate of retrospective Amendments made clearly to overcome the Judgment of the Hon’ble Supreme Court in Vodafone’s case on all its aspects, seriously undermines the concept of the Rule of law and imposes significant financial burdens by creating a retrospective charge, which is unreasonable and unconstitutional.
A retrospective Amendment to target individual Court decisions is indeed condemnable and considering that it happens practically in every budget such acts of the Executive are contrary to the Constitutional doctrine of legitimate expectation, reasonableness and suffer from excessivity and will perhaps require to be tested before the Courts.
Though it is absolutely within the power of the legislature to make changes prospectively, overruling decisions of the Supreme Court retrospectively, whether it be non-residents cases (like Vodafone) or as in the past in Residents cases conflicts with the accepting notions of Rule of Law and may not satisfy our Constitutional requirements.”
Sandeep Ladda, Executive Director - Tax & Regulatory Services, PwC India
“The Finance Bill 2012 presented today in the Parliament has proposed a retrospective amendment (with retrospective effect from 1 April, 1962) to the following provisions of the Income tax Act, 1961 with a view to expand the scope to neutralize the Supreme Court decision in the case of Vodafone -
1. Section 2(14) dealing with definition of 'income' to clarify that 'property' includes rights in relation to an Indian company, rights of management or control or any other rights whatsoever
2. Section 2(47) dealing with definition of 'transfer' to include disposing or parting of an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India
3. Section 9 dealing with chargeability of transfer of a capital asset situated in India to clarify that the expression “through” shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of” or “by reason of”. Further, it has been clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.
4. Section 195 dealing with Withholding provisions for payments made by a 'person' to a non-resident to now also apply to all payers who are non-residents whether or not such non-resident has a residence or place of business or business connection in India or any other presence in any manner whatsoever in India.
5. Section 201 dealing with treating an assessee in default to require filing of return of income after due payment of taxes, for the said assessee not to be treated as an assessee in default only in those cases where no tax has been deducted at source.
In light of the above, "uncertainty" as regards attracting Foreign Direct Investments in India, will be paramount given the flip-flop in the policies of the government, especially given the fact that the amendment is retrospective, hence sending a clear message across the larger Global investing community that even a Supreme Court landmark judgment is subject to retraction by the changes that the Government can bring about by amending the law retrospectively.”
M Lakshminarayanan, National Head - Tax and Partner, Deloitte Haskins & Sells
“Clause 4 of the Finance Bill seeks to amend section 9 of the Income tax with retrospective effect with a view to tax transactions similar to Vodafone and other cases of indirect transfers of shares which have derived value substantially from assets located in India.
This would lead to unsettling the law which has held good for more than 50 years and has a very disturbing trend of reversing a Supreme Court ruling which has laid down the law in very clear terms. This would lead to a further spate of unwarranted litigation as taxpayers will challenge the retrospective amendment. At the time when the Economic Survey talks of need of cushion of foreign reserves, this retrospective amendment will send wrong signals to the foreign investor community.”
Pallavi Bakhru , Partner & Practice Leader, Tax & Regulatory Services at Walker Chandiok & Co
“The amendments made to Sec 2(14), Sec 2(47) and Sec 9 to counter Vodafone and similar transactions was anticipated but a retrospective amendment is surprising. We suspect that the constitutional validity of such an amendment will be questioned. “
Sachit Jolly, Head – Direct tax, Vaish Associates Advocates
“Whereas the Supreme Court had shown great maturity in not getting swayed by the quantum of tax involved in the Vodafone case, unfortunately the Government has shown myopic vision in amending the law retrospectively. To add to that introduction of GAAR, without heeding to the recommendation of the Parliamentary Committee for laying the detailed guidelines before the Parliament prior to its introduction, taxation of software royalty with retrospective effect, introduction of transfer pricing to domestic transactions…the Government seems to have lost the plot. All these amendment, especially the retrospective amendment are likely to shake investor confidence and lead to further litigation. It would, however, have to be seen whether these amendment stand the test of constitutional scrutiny by the Courts.”
Shefali Goradia, Partner, BMR Advisors
"Government's attempt to overrule SC verdict in case of Vodafone will create uncertain tax environment. Attempt to tax offshore transfers with retrospective effect could be challenged in the Courts. In past, courts have struck down retrospective amendments where new income is brought to tax."