The retrospective clarificatory amendment regarding taxability of indirect transfers and consequent demand raised in a few cases, had created doubts and serious concerns for potential investors in our country and had also tarnished India’s image in the international community. The country today stands at a juncture when quick recovery of the economy after the COVID-19 pandemic, is the need of the hour and foreign investment has an important role to play in promoting faster economic growth and employment. With this objective in mind, the Hon. Finance Minister of India has proposed this Taxation Laws (Amendment) Bill 2021 (“the Bill’), to put an end to the protracted litigation on this subject matter.
The issue regarding taxability of indirect transfer of assets located within the country, by transferring shares of an intermediary foreign company, was first analyzed in the case of Vodafone International Holdings (‘Vodafone’). In that case, Vodafone had acquired 100 percent shares of a Cayman Island based subsidiary company, from Hutchison Telecommunication International Ltd. (‘HTIL’), which was holding 67 percent controlling interest in Hutchison Essar Limited (‘HEL’), an Indian Joint venture company. Through this transaction, Vodafone had indirectly acquired a controlling interest of 67% in HEL, without triggering any taxable event in India. However, the Indian Revenue authorities had served a notice on Vodafone for not withholding tax under section 195 of the Indian Income Tax Act, 1961 (‘the Act’) on the consideration that was paid by it to HTIL.
The controversy was finally settled by the Hon’ble Supreme Court (‘SC’) in 2012 in favour of Vodafone. The SC had ruled that the word “through” in section 9 of the Act does not mean “in consequence of” and “sale of share in question to Vodafone, did not amount to transfer of capital asset within the meaning of section 2(14) of the Act”. Accordingly, an indirect transfer of Indian assets by transferring shares in a foreign company was not chargeable to tax in India and therefore was not liable to any withholding tax.
Retrospective Amendment in Finance Act, 2012:
In order to override the SC decision and tax such Indirect transfer transactions, the Central Board of Direct Taxes (CBDT) had introduced an amendment under section 9(1) of the Act, which was made effective retrospectively from 01 April 1962. The Finance Act, 2012 had inserted a clarificatory Explanation 4 and Explanation 5 to section 9(1)(i), 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”
The above retrospective amendments created doubts in the minds of the stakeholders regarding the stability of India’s tax laws and also invited huge criticism and embarrassment at the international level.
Pursuant to this retrospective amendment, income tax demand had been raised in seventeen cases by the Revenue authorities. In four cases, the aggrieved taxpayers had preferred arbitration under India’s Bilateral Investment Protection Treaty with the United Kingdom and the Netherlands, respectively. Recently, the respective Arbitration Tribunals have, in the case of Vodafone International Holding BV vs. The Republic of India as well as in Cairn Energy PLC vs. The Republic of India, ruled in favour of the assessee and against the Government of India. The government of India has challenged both this arbitration award.
The amendment proposes to insert three provisos (fourth, fifth and sixth) under Explanation 5 to section 9(1)(i), thereby nullifying:
- any pending or concluded assessment or reassessment; or
- any order enhancing the demand / reducing the refund; or
- any order deeming a person to be an “assessee in default” for non-withholding of tax; or
- any order imposing a penalty
with respect to any income accruing or arising from the transfer of an Indian asset pursuant to the transfer of shares in a foreign company.
Therefore, all assessments or rectification applications (pending/ concluded) before the Revenue authorities, to the extent it relates to the computation of income from any indirect transfer of assets, shall be deemed to have concluded/ have never been passed without any additions.
Relief under the proposed amendment would be available only to assessees fulfilling the following specified conditions:
- The assessee shall either withdraw or submit an undertaking to withdraw any appeal filed before the Tribunal, High Court or Supreme Court with respect to the indirect transfer, in such form and manner as may be prescribed ;
- The assessee shall either withdraw or submit an undertaking to withdraw any proceeding for arbitration, conciliation or mediation, with respect to the indirect transfer, in such form and manner as may be prescribed ;
- The assessee shall furnish an undertaking waiving his right, whether direct or indirect, to seek or pursue any remedy or any claim in relation to indirect transfer in such form and manner as may be prescribed .
Pursuant to fulfillment of the specified conditions, where any amount becomes refundable to the person referred to in the fifth proviso, then, such amount shall be refunded to such person, without any interest on such refund under section 244A of the Act.
The amendment is a proactive step aimed at neutralizing the criticism and embarrassment caused by retrospective amendment and regaining the stakeholder’s confidence in Indian judicial system. Such measures from the Government will certainly create a positive sentiment and a sense of tax certainty amongst the investors and hopefully, help in attracting incremental foreign investment into the country, which will play an important role in promoting faster economic growth and development.
 Vodafone International Holdings B.V. vs. UOI (2012) 341 ITR 1 (SC)
 President is yet to give his assent on the said Amendment Bill
 Date on which Finance Bill, 2012 received assent of the President
 Form for submitting undertaking is yet to be prescribed
Such measures from the Government will certainly create a positive sentiment and a sense of tax certainty amongst the investors and hopefully, help in attracting incremental foreign investment into the country, that will play an important role in promoting faster economic growth and development.