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A step back: Vodafone,similar cases since 1962 may be reopened

The move follows the recent Supreme Court ruling that gave a 'reprieve' to British telecom.

Written by ENS Economic Bureau | New Delhi |
March 16, 2012 11:43:08 pm

Finance Minister Pranab Mukherjee today sought to amend a law that threatens to open the Rs 12,000-crore Vodafone tax case by enabling the revenue department to retrospectively tax foreign companies deriving capital gains from assets situated in India.

The move follows the recent Supreme Court ruling that gave a reprieve to British telecom group Vodafone by ordering it was not liable to pay capital gains tax of around Rs 12,000 crore for buying Hutch’s business in India.

“Certain judicial pronouncements have created doubts about the scope and purpose of sections 9 and 195.

“Further,there are certain issues in respect of income deemed to accrue or arise where there are conflicting decisions of various judicial authorities,” said the Explanatory Memorandum to the Finance Bill,2012. It did not explicitly say so but clearly the target was Vodafone and 40-odd companies that were involved in similar transactions.

Accordingly,the Finance BIll,2012 proposes to amend section 9 of the Income Tax Act,1961 so that any asset in a company incorporated outside India “will 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.” This essentially means that any indirect transfer of Indian assets between two foreign parties in an offshore transaction will be taxable if substantial economic value is derived from India.

Mukherjee said the amendments will take place retrospectively from April 1,1962. According to rough estimates,the exchequer hopes to rake in about Rs 35,000-40,000 crore from the amendment,Finance Secretary R S Gujral told reporters in the post-budget conference.

“The SC judgement talks of need to ensure tax certainty…The position of the government is that the intention of the legislature from the very first stage was very clear that transactions like Vodafone are subject to taxation in India. This change is only a clarification re-iterating the original intent of the legislation. These are not cases of double taxation but cases of no taxation. Our stand is very clear,there should not be any cases of no taxation,” Gujral said.

This may translate into nullification of SC’s ruling on Vodafone case in which the government has already filed a petition seeking a review of the verdict that the income-tax department has no jurisdiction to tax the $11.076 billion off-shore deal.

Reacting to the budget proposal,Vodafone said,“We are examining this proposed decision with our lawyers,but we do not believe this retrospective change in tax law should have any impact on the final judgment handed down by the Supreme Court in our tax case. We continue to have faith in the Indian judicial system.”

The department is already looking at deals similar to Vodafone include those of Cairn UK Holding Ltd,Unilever HPC Finance Service Inc USA,Accenture Services Pvt Ltd,Euro Pacific Security Ltd,Tata Industries Ltd,AT&T,Mcleod Russel India,SAB Miller (A&A) and Sanofi Pasteur Holding SA.

The Finance Bill has also proposed that mere Tax Residence Certificate (TRC) will not be sufficient for seeking treaty benefits under Double Taxation Avoidance Agreement (DTAA). “Now for foreign companies,the availability of TRC will not be the only criteria for seeking treaty benefits. The tax authority will still have the right to test substance,that is,if the company has physical presence in the country of residence. This can’t be applied to Mauritius because of circular 789 issued on April 13,2000,” Sanjay Sanghavi,partner,Khaitan and Co.,said. He said that around 60 cases would come under the scrutiny if the bill is passed. Currently many countries including Singapore and Cyprus already have this provision.

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