‘THE TAXATION LAWS (AMENDMENT) BILL, 2021 introduced in Lok Sabha on 05th August 2021 (passed on 06th August 2021) proposes to amend the Income Tax Act, 1961 and the Finance Act, 2012 to scrap the effect of RETRO TAX amendment which took place in the year 2012 after Supreme Court judgement dated 20th January 2012 in the case of Vodafone International B.V vs Union of India & Anr.

Before explaining about the proposals made in the Amendment Bill, a brief Introduction is mentioned below for the purpose of understanding the scenario before and after the amendment made in the Finance Act, 2012.

Before Finance Act, 2012 :

Section 9 of the Income Tax Act, 1961 mentions about the Incomes which shall be deemed to accrue or arise in India. (Such deeming provision is mentioned to mainly enable the Scope of Total Income under Section 5(2) of Income Tax Act and thus to cover the same in the Charging Section i.e., Section 4 of Income Tax Act)

Section 9(1)(i) specifies that any Income accruing or arising, whether directly or indirectly, through the transfer of a capital asset situated in India, shall be deemed to be accrue or arise in India.

After Finance Act, 2012 :

Explanation No. 4 and 5 added to the Section 9(1)(i) of Income Tax Act, 1961 as under:

” Explanation 4. – For the removal of doubts, it is hereby clarified 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’. ,

‘Explanation 5. – For the removal of doubts, it is hereby 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. “

ANALYSIS OF AMENDMENT MADE IN FINANCE ACT, 2012

Explanation 5 to the provisions of Section 9(1)(i) covered all the transactions which took place from 1961 till 2012 that involved transfer of the shares of foreign company which derives its value substantially from assets located in India.

Eg., A company XYZ of UK holds shares of a company ABC in USA, The company ABC holds substantial shares of a company PQR in India. Now, as per the amendment made in the Finance Act, 2012; if the company XYZ sells shares of ABC, it shall be deemed (and shall always be deemed) that the transferred shares of ABC of USA (Capital asset) have been situated in India. This would attract the deeming provision mentioned in Section 9(1)(i) and tax would be payable to Indian Government.

The amendment was made retrospectively by mentioning the word “and shall always be deemed”. Huge reactions were received from India and around the world for bringing in a law which goes back to 1961 retrospectively, which created an uncertainty and lack of trust among the foreign investors in India. In response to which view was given by the then Finance Minister, Late Shri Pranab Mukherjee Ji that the amendment is clarificatory in nature and is explaining the intention of the legislature more clearly

The issue however remained unsolved for a long time and huge demands were raised for transactions which took place before 2012 as well.

Later on, the issue was taken to the Permanent Court of Arbitration by invoking the clauses of the Bilateral Investment Treaty with the United Kingdom & Netherlands. In the year 2020, the International Arbitration Court (of Netherlands) ruled in favour of the taxpayer and the said demand raised using retrospective legislation was said to be “breach of the guarantee of fair and equitable treatment” guaranteed under the bilateral investment protection pact between India and the Netherlands.

WHAT IS INTRODUCED IN “THE TAXATION LAWS (AMENDMENT) BILL, 2021”

The bill is introduced in Lok Sabha to scrap the said retrospective clarificatory amendment made in Finance Act, 2012. The Bill proposes to amend the Income Tax Act, 1961 so as to provide that no tax demand shall be raised in future on the basis of the retrospective amendment for any indirect transfer of Indian Assets if the transaction was undertaken before 28th May, 2012 (Date on which the Finance Bill, 2012 received the assent of the President).

The following proposals have been made to scrap the retrospective amendment:

No tax demand to be raised in future for transactions made before 28th May 2012.

Demands already raised for transactions made before 28th May 2012 shall be nullified to the extent it relates to the said income on fulfilment of specified 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., shall be filed.)

Where any amount has been collected as per the retrospective amendment in Finance Act, 2012 or any amount becomes refundable after nullifying the order already passed; such amount shall be refunded to him without any interest under Section 244A on fulfilment of specified conditions.

Further, Section 119 of Finance Act, 2012 provides that “Notwithstanding anything contained in any judgment, decree or order of any Court or Tribunal or any authority, all notices sent or purporting to have been sent, or taxes levied, demanded, assessed, imposed, collected or recovered or purporting to have been levied, demanded, assessed, imposed, collected or recovered under the provisions of Income-tax Act, 1961 (43 of 1961). in respect of income accruing or arising through or from the transfer of a capital asset situate in India in consequence of the transfer of a share or shares of a company registered or incorporated outside India or in consequence of an agreement, or otherwise, outside India, shall be deemed to have been validly made, and the notice, levy, demand, assessment, imposition, collection or recovery of tax shall be valid and shall be deemed always to have been valid and shall not be called in question on the ground that the tax was not chargeable or any ground including that it is a tax on capital gains arising out of transactions which have taken place outside India, and accordingly, any tax levied, demanded, assessed, imposed or deposited before the commencement of this Act and chargeable for a period prior to such commencement but not collected or recovered before such commencement, may be collected or recovered and appropriated in accordance with the provisions of the Income-tax Act, 1961 as amended by this Act, and the rules made thereunder and there shall be no liability or obligation to make any refund whatsoever.”

Accordingly, The Bill also proposes to amend the Finance Act, 2012 so as to provide that the validation of demand, etc., under section 119 of the Finance Act, 2012 shall cease to apply and refunds shall be made on fulfilment of specified conditions.

Specified Conditions have been mentioned as under:

(i) where the said person has filed any appeal before an appellate forum or any writ petition before the High Court or the Supreme Court against any order in respect of said income, he shall either withdraw or submit an undertaking to withdraw such appeal or writ petition, in such form and manner as may be prescribed;

(ii) where the said person has initiated any proceeding for arbitration, conciliation or mediation, or has given any notice thereof 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, he shall either withdraw or shall submit an undertaking to withdraw the claim, if any, in such proceedings or notice, in such form and manner as may be prescribed;

(iii) the said person shall furnish an undertaking in such form and manner as may be prescribed, waiving his right, whether direct or indirect, to seek or pursue any remedy or any claim in relation to the said income which may otherwise be available to him 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; and

(iv) such other conditions as may be prescribed.

Now that the bill has been passed in Lok Sabha, it is expected that the foreign investment may increase and help in promoting faster economic growth and investment as said by the Finance Minister.

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I hope the amendment proposed in the Bill is clear. Any Query or Suggestion is welcome at [email protected]

Disclaimer: The above post is only for the purpose of academic discussion and should not be construed as any legal opinion in any matter whatsoever.

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Qualification: CA in Practice
Company: Prerna Juneja & Associates
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