Indirect transfer rights provision would apply prospectively – Government withdraws infamous retrospective amendment – Litigation, mediation and arbitration

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The Indian government eventually passed a bill to remove the retroactive nature of the Indirect Transfer Tax Amendment. The provision was introduced after the verdict of the Honorable Supreme Court in the Vodafone case. Gains resulting from the indirect transfer of Indian assets in connection with a transaction between Vodafone and Hutchison Essar have been held not to be taxable under the provisions of the law. According to the government, the verdict was inconsistent with the intention of the law, and therefore an amendment was made by the 2012 finance law, with retroactive effect from 1961. The amendment clarified that the gains resulting from the sale of a foreign company are taxable in India if such share derives, directly or indirectly, its value substantially from assets located in India.

Overview of the Vodafone and Cairn cases

This amendment affected around 17 cases, among which Vodafone and Cairn Energy were strongly affected. India’s tax department slapped a demand for around $ 295 million1 on Vodafone and $ 1,600 million2 on Cairn under the retrospective amendment. The companies had initiated international arbitration proceedings against the Indian government under the respective bilateral investment treaty. The companies argued that India had violated the guarantee of fair and equitable treatment under bilateral investment treaties.

In response to requests for arbitration, the Indian government argued that the Tribunal’s exercise of jurisdiction over a domestic tax dispute is inappropriate. Furthermore, the claim is based on the alleged violation of Indian income tax laws, which are not covered by the scope of the bilateral investment treaty. After years of protracted battle, arbitral tribunals in both cases ruled in favor of the taxpayers. The Indian government has been ordered to make the following payments in addition to the tax already deposited with interest:

Society Claims payable by the Government of India
Vodafone
  • 60% of legal representation and assistance costs amounting to USD 6.02 million3;
  • 50% of the fees paid by the company for the appointment of the arbitration authority amounting to 3,540 USD3
Cairn energy The court ordered India to pay US $ 1,200 million in damages for the “total damage” suffered by Cairn as a result of the violations committed by India.

India has appealed against the two arbitration orders. However, Cairn Energy is not moved by the counter appeal. Legally, Cairn can initiate proceedings to enforce the award in jurisdictions where India has assets, and which recognize and enforce the award made in the Netherlands. The company is said to have initiated proceedings in courts in the United States, the United Kingdom, France, the Netherlands, Quebec and Singapore to enforce the award against India. The French court accepted the company’s request to freeze assets held by the Indian government in Paris. The company has also filed a similar complaint in the United States. The result of the trial is awaited.

The Indian government has proposed to withdraw the retrospective amendment, initial demands against companies can now be rescinded if the following conditions, among others, are met:

  • The Companies withdraw or undertake to withdraw arbitration, conciliation or mediation initiated under any applicable law or under any agreement entered into by India with any other country or territory outside of India, whether for investment protection or otherwise.
  • Companies are also required to waive the right to seek or exercise any remedy or claim regarding indirect transfer income that might otherwise be available under any currently applicable law, in equity, under any law or under any law. under any agreement India has entered into with any country or territory outside of India, whether for investment protection or otherwise.

Key points to remember

With this bill, we hope to put an end to the litigation on this issue. Also, the government has promised that no new claims will be made in the area of ​​indirect transfer rights, which is done before May 28, 2012. However, it would be interesting to see if Vodafone and Cairn would opt for the withdrawal of the procedure. ‘arbitration. because they risk losing interest on the demand already paid.

It is uncertain whether the entirety of the retrospective change introduced in 2012 resulted in the collection of taxes, but it did succeed in portraying India as a hostile tax jurisdiction for foreign companies. Despite the delay in dropping this controversial amendment, it is still a pragmatic move by the Indian government that will bring fiscal certainty and hopefully boost foreign investor sentiment.

Note: All figures in the item are approximate numbers converted to USD at the average conversion rate.

1 USD = 75 INR, 1 £ = 1.39 USD, 1 € = 1.18 USD

1 commercial standard

2 Kluwer Arbitration Blog, July 2, 2021

3 CPA case n ° 2016-35: Prix Vodafone International Holdings BV (Netherlands) v. India (page 121)

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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