The Government has introduced the Taxation Laws (Amendment) Bill, 2021 (no. 120 of 2021), which seeks to provide relief in respect of income deemed to accrue or arise to a non-resident due to direct and indirect transfer of capital assets by non-residents. Below is a brief overview of the same.

Amendment to Explanation 5 to section 9(1)(i) of the Income-tax Act, 1961

1. Explanation 5 to section 9(1)(i) inserted by the Finance Act, 2012 retrospectively taxes income deemed to accrue or arise to a non-resident due to direct or indirect transfers involving shares or interest in a company or entity registered outside India that derives its value substantially from the assets located in India.

2. The Taxation Laws (Amendment) Bill, 2021 (the Bill) proposes to insert three provisos in Explanation 5 to section 9(1)(i), to give relief to certain eligible entities impacted by the above retrospective amendment. These amendments propose that the provisions of indirect transfer of assets in India shall not apply to the assets transferred before 28 May 2012 (i.e., the date on which the Finance Bill, 2012 received the assent of the President).

3. The Bill prevents the indirect transfers made before 28 May 2012 from being taxed under section 9(1)(i), on fulfillment of certain conditions, in case of:

(i) Ongoing or completed assessments including reassessments and post-search assessments under section 143, section 144, section 147 or section 153A or section 153C;

(ii) Order to be passed or already passed for enhancing the assessment or reducing refund already made or otherwise increasing liability made pursuant to rectification of mistake apparent on record under section 154;

(iii) Order to be passed or already passed under section 201(1) with respect to withholding taxes, treating any person as ‘assessee-in-default’;

(iv) Order which has been passed imposing a penalty under Chapter XXI or under section 221.

4. The Bill, further, proposes that where any amount becomes refundable to such person, then such amount shall be refunded to him, but no interest under section 244A shall be paid on that amount.

5. The relief in cases of concluded assessments shall be given to only those assessees who satisfy the following conditions:

(i) Withdraws or submits an undertaking to withdraw pending appeals and writ petitions against any order in respect of income from indirect transfer.

(ii) Withdraws or submits an undertaking to withdraw any proceeding arbitration, conciliation or mediation initiated under any law for the time being in force or under any agreement entered into by India with any other country or territory outside India, whether for protection of investment or otherwise.

(iii) Withdrawal or undertaking of withdrawal of notice for arbitration, conciliation or mediation given under any law or under any agreement entered into by India with any other country or territory outside India either for protection of investment or otherwise.

(iv) Undertaking of waiver of right to seek or pursue any remedy or any claim in relation to the income from indirect transfer which may otherwise be available to under any law for the time being in force, in equity, under any statute or under any agreement entered into by India with any country or territory outside India, whether for protection of investment or otherwise.

(v) The undertaking shall be in the prescribed form.

(vi) Compliance with other conditions as may be prescribed.

Consequential amendment to section 119 of the Finance Act, 2012

Section 119 of the Finance Act, 2012 had inserted a validation clause to validate all demands raised / notices sent in connection with the indirect transfer of assets. It also provides that any decision of any Court, Tribunal, etc., including the decision of the Supreme Court in the case of Vodafone International Holdings B.V. [2012] 17 taxmann.com 202 (SC), which had held such direct or indirect transfers as not falling within the scope of section 9(1)(i) and not taxable in India.

The Bill proposes a consequential amendment to the above provision by inserting a proviso to Section 119 of the Finance Act, 2012. It provides that this section shall cease to apply to the person who fulfills certain conditions, such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking to the effect that no claim for cost, damages, interest, etc.

VTPA Comments

The retrospective amendments made by the Finance Act, 2012 to tax the income deemed to accrue or arise to a non-resident due to direct and indirect transfers involving shares or interest in a company or entity registered outside India, that derives its value substantially from the assets located in India, had led to huge hue and cry, as these provisions were deemed to be retrograde steps, as it led to uncertainty in taxation.

The Income Tax Department raised demand in 17 cases. Out of these 17 cases, arbitration under Bilateral Investment Protection Treaty with the United Kingdom and the Netherlands had been invoked in 4 cases. In 2 cases, the Arbitration Tribunal ruled in favour of the taxpayer and against the Income Tax Department.

Probably considering that the pending demand could not be recovered by the Income Tax Department due to the taxpayers litigating the same in India and internationally by invoking the bilateral investment treaties/agreements signed by India and it also had the ability to tarnish the economic image of India, the government deemed it pragmatic to move ahead, and distance itself from this controversy. Thus, this Bill is introduced in the Parliament, which proposes revocation of the retrospective amendments made in section 9(1)(i). Further, the economic and fiscal hardships caused by COVID-19 pandemic must have also weighed on the government’s mind, from the perspective of attracting foreign investment, so as to promote faster economic growth and employment.

However, it also needs to be borne in mind that when this whole episode is looked from an equitable perspective, then the justification of large multinational enterprises escaping taxation in juxtaposition to an individual citizen having to pay taxes at source or from gains, may not meet the end of an equitable system of taxation.

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