Finance Bill: Vodafone & Tax Treaties
This week saw the Budget sequel play out. As the Finance Bill came up for voting in the Lok Sabha, the Finance Minister toughened his stance and yet softened some blows. As a result the retroactive amendments stayed put and GAAR made an exit with the promise to return April 1st next year. Opposition Leader Yashwant Sinha made some funny noises but didn’t do much else to change the course of the bill which any day now will become law. At the end of several speeches in Lok Sabha and a Budget overdose I’m left with 3 unanswered questions:
Does Vodafone have no option but to pay Tax?
Will Tax Treaties neutralise Retroactive Amendments?
And can the yet-to-be announced GAAR rules level the playing field?
To answer the first two questions I am joined by Former Revenue Officials both heavy weights, G C Srivastava and D P Sengupta joining us from Delhi and Tax lawyer Aliff Fazelbhoy of ALMT Legal in Mumbai.
Doshi: My first question is Does Vodafone have no option but to pay Tax – and the reason I ask this because the retrospective amendments to sections 2, 9 and 195 are about to become law any day now. Aliff, this question to you…How will these amendments impact the proceedings of section 163 that are going on against Vodafone in the Bombay High Court adjourned recently but expected to resume in June?
Fazelbhoy: I think it will definitely affect the proceedings because now the law will be that such kind of indirect transfers are liable to tax in India and then the question to be determined by the court would be whether Vodafone can legitimately be classified as a representative assessee of Hutchison or not because the tax liability is on Hutch, they have made the gain but 163 says the representative assessee - you can proceed against the representative assessee so the question then comes is Vodafone having acquired a business in India is it a representative assessee of Hutch or not and that issue will be before the court.
Doshi: Your answer is premised on the fact that we are looking at 163 in isolation?
Doshi: The question I would like to put to you Mr. Sengupta & Mr. Srivastava is this…if Vodafone challenges the retroactive amendment to sections 2, 9 and 195 then what will be the impact on the case under section 163. To my mind there seem to be three possible scenarios. Scenario one, the Supreme Court strikes down the retroactive amendments as arbitrary, unreasonable, unfair etc in which case the Supreme Court judgement in the Vodafone case saying that the Vodafone transaction is not taxable that stands as is the revenue may have a very weak case under the section 163 proceeding.
Scenario 2 the Supreme Court upholds the retroactive amendments but reads down or carves out the Supreme Court decision in the Vodafone matter in that case what applies in the section 163 proceedings, is it the amended section 9 which says that such an offshore transaction must be taxable or is it the supreme court judgement which says such a transaction is not taxable and the third scenario, the Supreme Court upholds the retroactive amendments but does not read down those amendments or carve out the supreme court judgement in the Vodafone case in which case the revenue has reasonably strong case when it comes to the section 163 proceedings. Mr. Sengupta what are the options facing Vodafone?
Sengupta: If the retrospective amendment of section 9 is tracked down it will definitely have some effect on section 163 proceedings but I do not know to exactly to what extent.
Doshi: It seems to me from the precedence that we know of such retroactive amendments and their challenges in the Supreme Court that in majority of cases the Supreme Court has upheld the retroactive amendment as the right of the legislature to pass such an amendment but in some cases the Supreme Court has protected a previous specific decision made by the supreme court in a related matter. If the same were to happen in the case of the Vodafone wouldn’t that kill revenues case when it came to the section 163 proceedings and do you think that is going to be the likely outcome that we see?
Srivastava: Coming to the second part first the likely outcome I will not like to predict but yes, if there is a challenge to that – there are two different kinds of amendments; one to section 9 and section 214 and 247 making these incomes chargeable to tax and the other is the validation class which validates the notices and orders which are held to be invalid. So one challenge could be to the provisions of the act which has been made retrospectively, there of course if Vodafone decides to one more round of litigation yes, that’s one possibility and there the stand of the revenue has been made explicit by the speech of the finance minister that they believe that the parliament has the power to amend the law and correct if any misinterpretation by the court which is not reflecting the true intent of the law. That is their stand. Now its for the courts to decide whether that amendment fits into that concept of not interpretation, not carrying out the true intent of the law and that would be the key question. The other part of the validation class in the finance bill which seeks to validate the orders and notices set-aside by the courts there of course the challenge would be – could be if they seek to challenge whether in that specific case the parliament could do that. So yes, if chargeability as per the amendment provisions is not upheld then every provision is affected whether it be 201 or 163 but that’s a very key question that courts will have to be addressed if they are called up on to.
Doshi: It’s very difficult to figure out what is going to happen, this is a uniquely complicated case but what intrigued me the most is that if the Supreme Court upholds the retroactive amendments as seems to be what precedent indicates and yet reads them down with regards to the specific decision in the Vodafone matter that Supreme Court has already made then what applies in the section 163 proceedings. Does the Supreme Court judgement in the Vodafone case apply to section 163 in which case then section 163 is on a very weak leg because the transaction itself is not taxable or will the amended section 9 apply to 163 in which case the 163 case gets strengthened because section 9 now amended say such an offshore transaction is taxable?
Fazelbhoy: Again it depends on how much the Supreme Court waters it down because what was before the Supreme Court was whether Vodafone was liable to withhold tax. The incidental question was, is the transaction taxable or not and the Supreme Court held it’s not taxable. If the Supreme Court reiterates that because of our Supreme Court judgement you cannot overwrite that then of course everything is affected but if Supreme Court says this decision stands but it doesn’t prevent the government from going against Hutch because the assessment against Hutch is also pending..
Doshi: interrupts….and going against Hutch in parenthesis means going against Vodafone as an agent of Hutch.
Fazelbhoy: Exactly. So if you go against Hutch and say that transaction is taxable because the legislation has clarified its intent so now you can go against Hutch then they can go against Hutch and try and get Vodafone in under 163 whether they will succeed against Vodafone or not we do not know because whether Vodafone legitimately is a representative assessee is another question.
Doshi: Mr. Sengupta, I am curious, every week we discover new permutations and combinations to this Vodafone case and it is now beyond even the best of tax experts and lawyers to put their neck on the line. Do you think maybe the best option in front of Vodafone as oppose to fighting this in courts for the next ten years is to possibly settle out of court is that even an option available to Vodafone under the present law?
Sengupta: There is nothing called out of court settlement. There is a procedure for settlement of cases that is application before the settlement commission. That is one option. The other option that could have been available was the mutual agreement procedure but that is also not available in this case because there is no DTA involved.
Fazelbhoy: I don’t know whether Vodafone has an option to settle because as Mr. Sengupta also said the income tax doesn’t contain any provisions that allows an assessee to settle the matter.
Doshi: So how does it work?
Fazelbhoy: The settlement commission whether you can fit into the four corners of that also we do not know because that applies only in specific cases. So it’s as much as Vodafone option it is the government option also. Do they want to settle, does the government want to settle and I would as much as urging Vodafone I would urge the government to settle the matter because in the international community the government is coming out with a very sorry face in this whole dispute.
Doshi: Given the parameters of settlement does this case have a chance to get settled?
Sengupta: Prima facie I would think that they can approach the settlement commission but this is a very fact intensive case so it’s always dangerous to give any opinion on the basis without knowing all the facts and other things.
Doshi: The second question I want to ask this panel is will tax treaties protect those affected by retroactive amendments?
All of us heard the finance minister reiterated in parliament this week that the retroactive clarificatory amendments will not overwrite tax treaties. This has been the general expectation from within the tax community and now that the FM has confirmed it does it mean and I ask for the relevance of why he brought this up that the impact of the amended section 9 will now be neutral or less harsh on offshore transactions that are done in a foreign country whose treaty with India allows for the foreign country to impose a capital gains tax i.e. Mauritius or Singapore. So will section 9 be more muted with regards to transactions or structures in Mauritius or Singapore?
Srivastava: It’s not diluted. Let me be very clear. There is already an existing provision in the law which says that treaty or domestic law whichever is more beneficial shall apply.
Fazelbhoy: It’s not a new clarification that is the law…
Doshi: ….interrupts….I understand that but he reiterated in parliament and everybody was worried – the environment is one of hyper fear, right, so I am wondering what does this mean. That means that if I am doing an offshore transaction or Vodafone had done this through Mauritius is there a good chance that they may not have had to pay tax at all?
Fazelbhoy: But that would have been the case even without this clarification or without this amendment.
Doshi: I am saying section 9 stands amended today, right, which means that offshore transactions were the underlying asset in India will be taxed in India. If Vodafone had been done through Mauritius despite the amended section 9 they may not have had to pay tax because Mauritius would retain the right to tax the capital gains?
Fazelbhoy: Done through Mauritius means what. Would it have sold held Indian shares through Mauritius and sold the Indian shares or sold the Mauritius company because done through Mauritius can be interpreted many ways. So let’s be clear, section 9 doesn’t apply to treaties. It applies only in case where the treaty doesn’t apply. So if for e.g. you have a US company hold shares in a Mauritius company which holds shares in the Indian company. If the Mauritius company sold, which means indirectly the Indian company is sold which treaty applies. Would it be US or Mauritius? First of all a treaty – I mean Indian shares are not transferred at all so you are taxing it under the indirect transfer which is section 9 but does section 9 apply because India has treaties with both these countries and if you are disregarding Mauritius then the US treaty applies which again you can tax it in India. So this clarification means nothing.
Doshi: Mr. Sengupta what do you make of the finance minister’s comments?
Sengupta: I think all of you are making too much noise about, not about the retrospective amendment but about something else if you are forgetting that is GAAR. I think if GAAR had come in then it would have been a different story. But without GAAR I agree that the position remains as it were.