Indirect transfer tax provision to be applied prospectively when government withdraws infamous retrospective amendment


The Indian government finally passed a bill to remove the retroactive nature of the Indirect Transfer Tax Amendment. The provision was introduced after the Supreme Court verdict in the Vodafone case. Gains arising from the indirect transfer of Indian assets in a transaction between Vodafone and Hutchison Essar have been found not to be taxable under the provisions of the law.

According to the government, the verdict was inconsistent with the intent of the law, and so an amendment was made by the Finance Act 2012, with retroactive effect from 1961. The amendment clarified that gains arising from sale of the assets of a foreign company are taxable in India if such action, directly or indirectly, derives its substantial value from assets situated in India.

Overview of the Vodafone and Cairn case

This amendment has impacted about 17 cases, of which Vodafone and Cairn Energy have been heavily affected. The Indian Revenue Commissioners had slapped a claim of around $295m on Vodafone and $1,600m on Cairn under the retrospective amendment. The companies had commenced 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 provided for in bilateral investment treaties.

In response to the arbitration requests, the Government of India has argued that the Tribunal’s exercise of jurisdiction over a domestic tax dispute is improper. 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, the 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:

Company Claims to be paid by the Government of India
Vodafone · 60% of legal representation and assistance costs amounting to USD 6.02 million;· 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 $1,200 million2 in damages for the “total prejudice” suffered by Cairn as a result of India’s breaches.
India appealed against both arbitration orders. However, Cairn Energy is unmoved 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 sued in courts in the United States, 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 also filed a similar complaint in the United States. The outcome of the trial is awaited.
The Indian government has proposed to withdraw the retroactive amendment, original requests made to companies can now be revoked, if the following conditions, among others, are met:

• The Companies withdraw or agree to withdraw arbitration, conciliation or mediation commenced under any applicable law or under any agreement entered into by India with any other country or territory outside India , whether for investment protection or otherwise.

• The Companies are also required to waive the right to seek or pursue any remedy or claim in connection with the Indirect Transfer Income which may otherwise be available under any law now in effect, in equity, under any law or under any agreement entered into by India with any country or territory outside India, whether for the protection of investments or otherwise.

Key points to remember

With this bill, it is hoped that the disputes on this issue will be settled. Also, the government has promised that no new request would be lifted under the indirect transfer rights, which is carried out before May 28, 2012. However, it would be interesting to see if Vodafone and Cairn would opt for the withdrawal of the procedure of transfer. ‘arbitration. because they risk losing the interest on the demand already paid.

It is uncertain whether the entire retrospective amendment introduced in 2012 resulted in any tax collection, but it succeeded in portraying India as a tax jurisdiction unfriendly to foreign companies. Despite the delay in removing this controversial amendment, it is still a pragmatic move by the Indian government that will return tax certainty and hopefully boost foreign investor sentiment.

The author, Maulik Doshi, is Senior Executive Director at Transfer Pricing and Transaction Advisory Services Nexdigm (SKP). Opinions expressed are personal

First post: STI


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