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Retroactive Amendment Challenge?

Published on Sat, Apr 21,2012 | 10:46, Updated at Mon, Apr 23 at 11:51Source : |   Watch Video :

Did Vodafone invoke the Bi-lateral Investment Treaty because challenging the retroactive amendments in the Supreme Court may not yield success? Does the India - Netherlands tax treaty offer any protection to Vodafone? Joining me to discuss Vodafone's legal options are Tax Counsel Dinesh Vyas, ELP's Rohan Shah and Former CBDT Chairman BM Singh.

Doshi: I want to get one first minor question regarding the tax treaty out of the way and the reason why I bring this up is because when Vodafone issued a notice to the government regarding invocation of the investment treaty, some sources in the finance ministry told our reporters in Delhi that we don't understand why Vodafone has invoked the investment treaty it should have instead invoked the double tax avoidance agreement between India and Netherlands. But from what I understand Rohan, a DTAA provides no protection when it comes to such a tax dispute of retrospective measure or even one in which the liability is vicarious, have I understood that correctly?

Shah: That is right. There is no standalone protection in terms of retrospectivity under the Double Taxation Agreement (DTA). Probably what they were saying is given the nature of the clauses of this DTA and particularly Article 13 of this DTA the situation is it would be possible under the DTA to contend that the tax should have been fixed in relation to the jurisdiction of the company whose shares were sold.

Doshi: The jurisdiction of the company whose shares were sold lies in Cayman Islands; does it?

Shah: To the extent that you are effectively seeking to come through your Netherlands treaty and if you look only at those particular treaty provisions, one of the significant factors there is the only look through in terms of taxation where you can tax, based on the underlying assets, is in terms of immovable property. So while I am not very clear on what the tax department meant saying look under the treaty, the only sense I can make of it, if you look at the treaty provisions on tax and given that the look through is only on immovable assets maybe that is what they have been looking at or talking of at that point in time.

Doshi: Let me ask Mr Singh whether he can understand why finance ministry sources indicated that the DTA maybe a better one to move?

Singh: Yes. I don't know why they are saying about the tax treaty about the DTA because that is not applicable to retrospective amendment. No retrospective amendment that they had, no protection was ever sought under the DTA earlier. There is no cause to seek protection or seek the terms of the Netherland's DTA because the two parties they were not situated in Netherlands as such.

Doshi: Transaction took place with regards to Cayman Island company, we have no treaty with Cayman Islands so I am also confused as to how a tax treaty can come into play. I will give the last word on this issue to Dinesh Vyas.

Vyas: Number one, which treaty to apply - that itself is an open question and I would feel that even assuming that one or the other treaty applies, it offers no protection, it offers no guarantee whatsoever. As far as the retrospective amendment of the law- which is going to be enacted by the parliament -so even on merits it is a non-starter according to me.

Doshi: Then we will get to the core issue that I do want to address that is if there is no tax treaty to invoke, the only option then that Vodafone has is the option to challenge the retroactive amendments and the validation clause once they become law. So wait for the amendments and the clause to become law, wait for the tax department to issue a notice and then go to the Supreme Court (SC) and challenge the constitutional validity of these retroactive amendments.

I will come to you Mr Vyas on this because you, along with Nani Palkhivala fought that famous Lohia Machines case, it seems to me that most of the precedence- when it comes to retroactive amendments being challenged in the Supreme Court- have gone in favor of government that is the Supreme Court has upheld the legislatures' ability to move retroactive amendments – do you think Vodafone has any grounds whatsoever to make for a successful challenge of these retroactive amendments.

Vyas: I certainly feel that it has a fairly strong, very good arguable case to challenge the constitutional validity of the retrospective operation. The reasons are this. First of all the very first case which you have just now mentioned about 80J deduction- the famous Lohia case, Mr Palkhivala and we and many other lawyers were present in that, that if you will see in detail contains no decision of the majority as far as the constitutional validity is concerned, but there was Justice AN Sen who of course gave a dissenting opinion but in his dissenting opinion Justice AN Sen was clearly beyond the shadow of doubt that according to him that particular piece of retrospective legislation was not valid because according to him it was unconstitutional. 

Doshi: That is a dissenting judgment by one judge in a bench of five judges- would you concede that in most cases of such manner of retrospective amendments, the SC has upheld the legislators right to do so and that puts Vodafone on a weak ground?

Vyas: If I sum of the position in law in one sentence, it is this that yes, the legislature has the power to amend, check laws retrospectively but on the other hand the SC always still has the power to declare it as unconstitutional - if it is not reasonable or if it is arbitrary or if it is not in public interest.

Doshi: Do you believe the retrospective amendments facing Vodafone are reasonable, fair and all of that?

Vyas: Frankly speaking, in the circumstances and the manner in which it has happened, to me, my personal opinion is that it is not reasonable. The reason is this, yes, the universal application is never accepted but remember as far as Vodafone tax is concerned, it is not just a question of levying tax retrospectively, here is a question which is different, different in the sense that it deals with the situation where it is required to carry out an obligation with regard to deduction of tax and when the SC, on merit, has held that the amounts which Vodafone had paid were not taxable on the law as it stood. Alright, at the most, the amendment could be with regard to the levy of tax itself but here in case of Vodafone, it goes beyond and it deals with the obligation to deduct tax.

Doshi: You believe that they have strong grounds?

Vyas: Yes, certainly they have.

Doshi: Let me ask Mr Shah if he agrees with that view.

Shah: My sense here is yes, they have some statable grounds and to add to what has been said, the test is ultimately going to be-  is this essentially a provision to negate a judgment or is it a provision to fill a lacuna in the law and offer clarity. Now if the courts are of the view that it is to fill a lacuna, then those have been upheld even if the consequence is that it negates the judgment but if squarely the purpose is to say that we are trying to negate a judgment, which takes a view contrary to us, then the chances that Vodafone will succeed are high.

Also clearly here you change not only the charging provision, you change Section 195 in terms of the withholding provisions and Vodafone will, in addition to this, have an additional argument, which is to say that if the issue has inter partes become final i.e. between Vodafone and the government, including the fact that the review has been dismissed, then to that extent whether a retrospective amendment can seek to upset that position. We also have judgments there to say that it cannot do so. So I think for a different set of issues, they will be able to mount a challenge and I won't say that their challenge is such that it is so weak that they had to reach out to bilateral investment treaty etc. I think they will have statable case, are they sure to win, that is conjecture but they certainly have a statable case.

Doshi: I am not trying to preempt the SC if and when this ever gets there. Mr Singh would you agree with the views of both our lawyers on the panel that yes, Vodafone has a statable case?

Singh: Yes, generally, substantially I do agree with them that they do have a case and if you look at the amendments, which have been made retrospectively especially one regarding the Validation Clause and regarding the obligation to deduct tax, I feel SC will frown upon such an amendment because they have held that such a tax deducted source was not on in the light of the provisions as they existed all these years. Now they are trying to say that it was an amendment made retrospectively to make a clarification or certain doubts and of course because the judicial pronouncements that is in the explanatory notes that certain decisions have taken place. Now if that is the intention of the government that the underlying assets would be taxable in India, then you must go through all the other DTAs, which took place where we have not brought to tax such underlying assets but only the shares, the transfer of shares have been brought to tax in the country where the company existed and as far as taxation of the immovable property is concerned, only that has been taxed in the country or is proposed to be taxed in the country where the immovable property existed. So that was the intention of the government as far as our treaties are concerned and I think the government will have a hard time to explain to the SC that this was the intention of the government all along.

Doshi: I find it interesting because you were the Central Board of Direct Taxes (CBDT) Chairman when this case first got started under your charge, so I find it interesting that you believe that it might in fact go in favor of Vodafone. That begs the question- has the government played its cards wrong? At this point I want to bring up what Soli Dastur had suggested in his post budget analysis, he believes that these retroactive amendments will not stand up in court and he had suggested that the better course of action would have been for the government to have waited till the retrospective amendments became law and then filed a review petition pointing out that the basis of the law had changed and so the judgment required review. Do you believe Mr Shah that that could have been the better option for the government?

Shah: I have great respect for what Mr Dastur says, I only wonder this that you already have the judgment, now the judgment has been decided in a certain framework of fact in a law and as we know for SC to review its judgment is extremely rare. The fact that you would have now said here is a new set of provisions and my review is coming post that, you would have had a completely new matter, which had to then be argued in relation to this and if it came before the same Bench- headed by the current Chief Justice- I don't know what their approach would have been but most people believe that if it comes before the same Bench who is already very familiar with the issue, it will make for a very interesting approach in terms of how they deal with this. So if I read the government's approach, their situation is let this come, let it take its own time, let various people file a writ-petition, they will ultimately all get brought together under Article 32- we may well be 6-8 months down the line, a year down the line we will be before different sets of judges- that seems to be the approach that they are adopting now and in terms of what Mr Dastur says, I don't know if they would have been better placed, it would have been a different approach but I don't know if they would have been better placed.

Doshi:  Mr Vyas ,would you put or place as much important as Rohan is on the current composition of the bench that might look at this, the psychology of the Supreme Court is as you call it.

Vyas: Yes. I will go a step further. Remember, today the Supreme Court is a much mightier and much stronger institution than it was 20 years ago. I don't want to make any statement which may appear to be contemptuous or anything of that sort. But if I say positively Supreme Court today is in a very assertive mood. It wants to protect its own position, high pedestal that has been given to it. It is no more in a mood to be bowing or appearing to bowing down to any other or organ of the constitutional structure. We in fact are looking forward to a very positive judgment of the Supreme Court which will strike down the constitutional validity of this provision.

Frankly speaking, apart from the legalities, it is a question of constitutional discipline. This is an indiscipline. If Supreme Court, as the highest look out of the law, has decided and laid down the law of the land, I think the federal structure, the constitutional structure demands that it be respected.

Doshi: Let me ask you a follow up question- We have established in precedent - most times out of many- the Supreme Court has upheld retrospective amendments. In precedent as well, the Supreme Court has said that the retrospective amendment cannot however set aside an individual decision inter parties thereby ensuring that a decision of the Supreme Court cannot be over turned specifically by a retrospective amendment. Keeping that in mind do you think it is possible that the Supreme Court might uphold the retrospective amendment but strike down the notice that goes out to Vodafone once that amendment become law thereby protecting Vodafone but maybe not the rest of the deals that get impacted by these retrospective amendments.

Vyas: That is very much possible and in a way the doctrine of reading down can be invoked by the Supreme Court that once the law is declared by the Supreme Court then it cannot be over turned, it cannot be retrospectively amendment. Therefore, you read down the provisions of the retrospective amendment in a manner whereby it does not affect the party in whose case the Supreme Court has delivered the judgment.

Doshi: You have a view on this.

Shah: In terms of the constitutional mandate, in relation to laws which are arbitrary or laws which are seen as destructive of fundamental rights- it can always fashion that relief it believes is appropriate. But in terms of what you are saying right now what would effectively happen is that this would get read down on the factor of retrospectivity because what the Supreme Court would then be able to do is to say we don't believe this kind of apply retrospectively. However now that it is on the statued books it could be administered in terms of the tax position into the future. But as far as I can see, at this point in time, the situation is they will squarely be asked to rule on retrospectivity because that is what is seen as unconstitutional and if they are asked to rule on retrospectivity, then trying to obtain this sort of a balance may actually be secondary because they will have to answer whether retrospectivity itself is sustainable. 

Doshi: I would like to close the show by quoting from Vodafone's treaty notice that it has sent to the government because this portion of the notice seems to indicate that Vodafone itself does not believe that it may have a very strong case when challenging the retrospective amendments in court. It says in the notice. "However unfair and burdensome as they may be, Vodafone is advised that the measures maybe within the almost unbridled legislative powers of the Indian legislature."

Does that mean Vodafone thinks it does not have much of a case? We will only know over the course of next several months.

Watch the accompanying video for the interview..


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