Vodafone not the only retro rule in Budget,there there are 25 others

Several of these changes seek to overturn earlier court judgments.

Written by P Vaidyanathan Iyer | New Delhi | Published: March 28, 2012 1:11:11 am

Retrospective amendment in the Finance Bill,2012,is not restricted to the Vodafone case,where the taxman hopes to realise Rs 12,000 crore in capital gains tax despite a Supreme Court ruling against the government. An analysis of the Bill shows that Finance Minister Pranab Mukherjee has proposed 25-odd explanations or amendments that will empower revenue authorities to reopen cases beyond six years. Several of these changes seek to overturn earlier court judgments.

For instance,the Bill has added an explanation to Section 9(1)(vi) to treat income realised from sale of computer software and granting of a licence as royalty that can be then taxed. This explanation,according to the Bill,is with effect from June 1,1976.

Significantly,Delhi High Court had settled the issue in a case filed by the I-T department against Ericsson. It held that software supplied as part of GSM system was not taxable as royalty. It had noted that consideration paid merely for right to use can’t be termed as royalty.

Another example — innocuously inserted as explanation for “removal of doubts” — pertains to bringing under the ambit of the term “process” all income earned from providing transmission services by satellite (uplinking,amplification,conversion of downlinking of any signal),cable,optic fibre or any other technology. This would impact many telecom companies that have imported network equipment since there is invariably some software element embedded in such equipment.

Here too,Delhi High Court had ruled in favour of Asia Satellite Telecommunications that income from rendering data transmission services is not eligible to tax as royalty. The new explanation will overturn the court ruling and will be retrospectively effective from June 1,1976.

Another amendment that has spooked corporate India relates to the format of residency certificate required from foreign countries to claim benefits under the tax treaties that India has signed with these countries. This amendment to Section 90,proposed prospectively from April 1,2012,states that a non-resident assessee must furnish a certificate containing particulars prescribed by the income-tax department.

At present — for instance in the case of Mauritius — the Supreme Court (in the Azadi Bachao Andolan case) has held that a tax residency certificate is sufficient proof to claim benefits under India’s double tax avoidance agreement with Mauritius.

“There may be nasty surprises in the format that the I-T department now prescribes. They can ask for 25 different things,” said an executive from a tax and audit firm who did not wish to be named — adding that the officer can ask for shareholding details and various other information.

“Why would,say,the Internal Revenue Service of the United States of America provide all information that the Indian revenue authority asks for when a normal residency certificate is enough?” the executive asked. “This seems to be an attempt to over-ride the Mauritius treaty. What else can it be?” he said.

Further,most countries,even if they make retrospective amendments,do not reopen cases where courts have given rulings favouring the assessee.

Legal experts said there are not many precedents of courts overturning retrospective changes that are clarificatory in nature,or that just clarify the intent of the legislature. “An amendment can be challenged in the courts since it suggests substantive changes to the existing law. But the revenue authority masks substantive changes by merely stating that these are clarifications to ensure they pass the muster without a serious challenge to their Constitutional validity,” said a lawyer.

But from the aggressive stance that Mukherjee has adopted in defending the amendments,it seems that the finance ministry is keen to pursue Vodafone-like cases to their intended conclusions,the lawyer said. In a post-budget interaction with reporters,the finance minister had said that retrospective amendments had a long history. “This is not to reopen cases,but to protect further outflow of taxes already collected,” he had said. There were eight such amendments in 2008,five in 2009,four in 2010 and two in 2011.

Some of the other amendments and explanations in Finance Bill,2012 are:

Section 92C that proposes reduction in the allowed variation between arm’s length price and transfer price from 5 per cent to 3 per cent. This is applicable to all assessment proceedings pending before an assessing officer as on October 1,2009

Section 92B that is effective April 1,2002,and brings under the ambit of transfer pricing business restructuring or reorganisation irrespective of impact on profit

Section 234D that provides for levy of interest on excess refund granted to the assessee states that provisions would be applicable to any proceeding completed on or after June 1,2003 irrespective of the assessment year to which it pertains.

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