During the years 2007 to 2008, India witnessed an immense hike of Foreign Direct Investments (FDI) in its Telecommunication Industry. The Indian telecom industry generated revenues of approximately 32 billion US Dollars in 2007-08 with a growth rate of 60 percent[1] over the previous financial year. The industry further witnessed a Compound Annual Growth Rate (CAGR) of approximately 29 percent from 2002-03 to 2007-08. Being a country with the third largest telecom network and second largest among emerging economies in the world at that moment, attracted a lot of telecom and mobile phone companies to setup their businesses in India.
During the boost in the following industry, Vodafone International Holdings (Vodafone), a Dutch company desired to enter the markets of India. Vodafone had two ways to setup their business in India, one was to start from the scratch by setting up the whole infrastructure, establishing branches and recruiting the whole work force; the other way was to takeover any telecom company that was well established in India. The Dutch company followed the latter way to enter the Indian Markets.
In the year 2007, Vodafone procured 100% shares in CGP Investments (Holding) Ltd situated Cayman Island (a Tax Haven)[2] for 11.1 billion Dollars from its parent company Hutchison Telecommunication International Ltd. (HTIL). It is to be further noted that, CGP Investments held 67% shares of Hutchison Essar Limited (HEL), an Indian telecommunication company, through various organizations and actions. Hence, the transfer of shares in CGP subsequently led to the power shift in HEL resulting in its ownership being transferred to Vodafone International Holdings. In October 2009, a show-cause notice was issued to the Vodafone by the Income Tax Department of India over the transaction mooting transfer of shares of CGP between Hutchison (HTIL) and Vodafone. The notice was issued under section 201 and 201 (1A)[3] of the Income Tax Act for non-deduction of TDS on the said transaction and ordered Vodafone to furnish approximately Rs 10,000 cr. Here, the assessee was contended to be at fault with respect to section 9(1)(i) of the Income Tax Act, 1961 which states that any income that deems to accrue or arise in India from any asset in located India shall be subjected to taxation.
Vodafone challenged this notice in the High Court of Bombay and contended that the said income was not taxable in India because the transaction was wholly between two foreign companies with no income accruing or arising in India. Hence, they are not liable to deduct TDS on the said transaction. The Bombay HC decided in the favor of the respondents (i.e., Income Tax Dept) and stated that TDS should have been deducted because the transfer of shares between the two foreign companies is directly affecting the ownership of an Indian Company and is resulting in transfer of capital asset and change in the management and other activities (name, logo, etc.) of an Indian Company. And owing to the same explanation, the Indian Tax laws will be applicable to the said transfer of assets and subsequently the TDS should have been deducted. The High Court further imposed a penalty of Rs 7900 cr.
The said decision of the High Court was challenged by the Vodafone in the Supreme Court of India. The SC analyzed the Indian tax laws that were applicable in the said matter and reversed the judgment of the Bombay HC. The SC analyzed the scope and meaning of section 9 of the Income Tax Act and concluded that the section imposes a tax liability in the cases where there is a buying/selling of Indian assets. But in the following case Indian Assets are not being transferred (shares) as the transaction was between two overseas non-resident entities and the Indian tax authorities had no territorial tax jurisdiction over this transaction and hence, the petitioners are not liable to deduct TDS or pay any penalty. Further, the SC extensively mentioned the importance of difference between tax evasion and tax planning.
In February 2012, the Income Tax Authorities filed a review petition over the previous decision of SC. The following petition was dismissed by the Supreme Court as non-maintainable.
Later in 2012, the then Finance Minister of Government of India, Mr. Pranab Mukherjee brought an amendment in the Income tax laws via Finance Act, 2012. The following amendment added an explanation to Section 9 of the Act which stated that any foreign company that derives the value of its shares from Indian assets, the following share will be deemed to be located in India, and transfer of such shares will be taxable under the Indian laws at the hand of the recipient under the head ‘capital gains’. The following amendment was retrospective in nature i.e., the amended law will take effect from a date in the past. The government mentioned that amendment was a mere clarification to provide certainty and remove ambiguity in the laws.
Owing to the said amendment in the laws, the Income Tax Department issued a fresh notice to Vodafone demanding a sum of approximately Rs 11,000 cr. In 2013, a committee was setup to resolve the dispute as Vodafone sought to settle the case but the committee failed to reach any amicable decision. Later in 2014, Vodafone invoked clause 9 of the India-Netherland Bilateral Investment Treaty (BIT), 1995 and served an arbitration notice to Indian Tax Department. In September 2020, the Hague-based arbitration court ruled in the favor of Vodafone as well and stated that the retrospective amendment made in the tax laws is against the BIT between the two countries and hence Vodafone is not liable to pay any tax or penalty in such case. The Indian government was however not satisfied with the decision and filed an appeal in December 2020 against this decision in the Singapore Court of Appeal which has now been transferred to Singapore International Commercial Court (SICC). The decision of the commercial court is currently awaiting.
Recently, on 5th August 2021, the present Finance Minister Ms. Nirmala Sitharaman introduced a ‘Taxation Law (Amendment) Bill, 2021. The bill talks about the removal of the retrospective nature of the tax laws that were brought in by the Finance Act, 2012. The Bill further states that any transaction made before 28th May 2012[4], the amendment will not be made applicable to them, in a nutshell, the law was turned prospective in nature. The following is subject to a condition that no interest on the refund of withheld tax will be provided under section 244A[5] of the Act. The following Amendment Bill, 2021 was passed in both the Houses of Parliament and received the Presidential assent on 13th August 2021.
The removal of the retrospective nature of the amended tax laws was long overdue. This clever move by the Indian Government led to global criticism from the investors and damaged India’s image as an enticing investment destination. Even though the government posses the power to amend and legislate laws with retrospective effect; to the contrary, in the following case it showcased selfish intentions of the government that are further violative of the International Investment Treaty. The following amendment not only affected Vodafone but other companies as well. Cairn Energy was another company that was widely affected, but ended up being yet another case where Indian government was concluded to be at default. The recent Amendment Act of 2021 is definitely a step towards improving India’s image and attracting adequate investments in the telecom industry.
[1] TRAI (Telecom Regulatory Authority of India) Report, 2007-08.
[2] Tax Haven: It is a country that offers very low and effective rates of taxation for foreign investors and offers financial secrecy.
[3] Section 201 states that any person liable to deduct TDS on the income distributed, makes default in the deduction and/or payment of TDS, shall be treated “assessee in default” and penalty U/s 221 of Income Tax Act shall be payable by such assessee. Section 201 (1A) talks about interest for delay in payment of TDS should be paid before filing the TDS return.
[4] The Finance Act, 2012 received presidential assent on the following date i.e., the law was made applicable from the following date.
[5] According to this section an assessee is entitled to receive interest on refund at any tax collected at source.
Author Bio
