Vodafone Not Liable Under Retrospective Law: Soli Dastur
Editorial Board
Eminent Senior Advocate Mr. S. E. Dastur considers whether the retrospective amendments proposed in the Finance Bill 2012 to nullify the Supreme Court’s verdict in Vodafone International are constitutional and achieve their purpose. He opines that the provisions are unreasonable & arbitrary and explains why they may not stand up to challenge
Shri. S. E. Dastur, eminent Senior Advocate, gave a lecture yesterday (20.3.2012) where he meticulously analyzed the Finance Bill 2012 and provided brilliant insights into its implications.
On the retrospective amendments made to overcome the judgement of the Supreme Court in Vodafone International vs. UOI 341 ITR 1, Mr. Dastur pointed out that while parliament had the power to enact retrospective legislation, there were three aspects to be considered.
the better course of action would have been for the Government to have waited till the retrospective amendments became law and then filed a review petition pointing out that the basis of the law had changed and so the judgement required review
The first was whether a retrospective amendment could affect the party itself who had secured a favourable verdict from the Court.
The second was whether such an amendment was constitutional in the peculiar facts of Vodafone’s case.
And the third was whether the proposed amendments achieved the object of bringing an off-shore transaction to tax.
On the first aspect, Mr. Dastur suggested that while the retrospective law could affect other parties, it could not affect the party who had secured a favourable verdict from the Court. In support of this proposition, he cited the judgement of the Supreme Court in Re Cauvery Water Disputes Tribunal 1993 SCC Supl. (1) 96 where it had been held:
“The legislature can change the basis on which a decision is given by the Court and thus change the law in general, which will affect a class of persons and events at large but it cannot set aside an individual decision inter-parties and affect their rights and liabilities alone. Such an act on the part of the legislature amounts to exercising the judicial power of the State and to functioning as an appellate court or Tribunal”
(see also S.R. Bhagwat & Ors vs The State Of Mysore 1996 AIR 188)
Mr. Dastur suggested that the better course of action would have been for the Government to have waited till the retrospective amendments became law and then filed a review petition pointing out that the basis of the law had changed and so the judgement required review. He cited the judgement in Raja Shatrunji Vs. Mohammad Azmat Azim Khan (1971) 2 SCC 200 where it had been held that one of the grounds for review is an error apparent on the face of record and where a statute has been amended retrospectively, a judgment applying the unamended law would constitute an error apparent on the face of record.
the principal could not tell his agent that though the agent was right in not deducting tax at source on the basis of the law as it then stood, the agent should now pay up because of a change in law made by the principal. That would be contrary to Article 14 of the Constitution as being harsh, unreasonable and arbitrary
He stated that the fact that the Government had already filed a review petition, which had been dismissed, raised the issue as to whether a second review petition was maintainable.
On the issue of constitutional validity of the amendment, Mr. Dastur pointed out that the case was not one of an assessee who had earned the income (the recipient) but was one of a payer who was sought to be held liable for non-deduction of tax at source.
He explained that Vodafone was being treated as the statutory agent of the Government for purposes of TDS. He said that the principal could not tell his agent that though the agent was right in not deducting tax at source on the basis of the law as it then stood, the agent should now pay up because of a change in law made by the principal. That would be contrary to Article 14 of the Constitution as being harsh, unreasonable and arbitrary opined Mr. Dastur. It would be “really unjust and contrary to all principles of equity” for a party who has not deducted tax at source – and who according to the Supreme Court was right in doing so – to now be called upon to pay the tax said Mr. Dastur.
On the third aspect, Mr. Dastur explained that to overcome Vodafone, two approaches had been taken. The first was the proposed amendment of s. 2(47) and 2(14) and the second was the proposed insertion of Explanations 4 & 5 to s. 9(1)(i). On the first aspect, Mr. Dastur pointed out that s. 2(14) and 2(47) provided that if rights in India are transferred owing to a transfer of an asset outside India, then those rights are deemed to be a capital asset giving rise to capital gains. However, if one confined the capital asset to the “rights” such as the “right to vote”, the “right to control” and the “right to carry on business”, then as no cost of acquisition can be determined in respect of these rights, there would be no liability as per B. C. Srinivasa Setty 128 ITR 294 (SC).
As regards the proposed insertion of Explanations 4 & 5 to s. 9(1)(i) to provide in effect that where there is a share situated abroad in respect of which substantial rights are situate in India, that share is deemed to be situated in India, the problem is as to what is meant by the term “substantially” and “indirectly”.
The government’s intent to tap in a particular assessee , especially wherein the Supreme Court laid a law, is highly improper…No doubts the government has the power to bring in amendments, but the way and the intention behind brings an uncertainty of Indian judicial system in the eyes of the world… The department is hell bent on recovering tax to which they had an opinion that it should have been in the tax net… even when the assessee has won a battle like situation from the Supreme Court…. At last after such an amendment , what fate is written for the assessee is still to be seen…… The power of retrospective amendment should at least to used not with an intent to punish any person at the sweet will of department , but it should be concentrated in safeguarding and stabilasation.
Though the government has within the power provided the retrospective ammendment to nullify vodafone case but I think that there should be a special provision in the law that even though retrospective ammendments are made but those landmark judjment becoz of which such a step is taken should not be affected by it. It takes a hell lot of time, energy, money, efforts to win a case till supreme court. Landmark cases should be given their due.
Thank you for the detailed analysis Sir and I fully agree to your learned views.
In continuation I would like to state here is if the Govt wanted to show the right intention of the tax legislation that was made 40 years back , it should have made all these retrospective amendments in 2009 when this case first got into litigation. This would have reduced all the efforts , time and money and would have provide some kind of stability and certainty on such indirect transfers. Unfortunately the only certainty in tax laws in India is the uncertainty.
Bringing the already completed transaction to the tax net, by hook or crook, is not the right way. Yes, the Government has been caught unawares, and has lost tax revenue, owing to ambiguity, or lack of clarity, in the taxing provisions, which had led Vodafone (and other organizations), to tax-efficiently structure their business activity. The government should accept it’s loss in this case and move forward. The next question would be to ask if it is rightful to amend the law and bring such transaction to tax. Prospectively, yes perhaps. Since the business “interest”, in whatever connotation, lies in India (Hutch Essar), had these interest been held by an Indian entity and transferred to another India entity, the transaction would have attracted tax. Merely by trans-locating these interests to an outside-India entity and transferring these interests outside India, the rightful tax liability should not be avoided. But amending it retrospectively is incorrect, unreasonable and smacks of a loser’s desperate gambit.
Since the Govt.has lost substantial revenue in Vodaforne and other similar cases before, they are perfectly correct in bringing in retrospective legislation. As the Finance Minister said all the cases from 1962 cannot and will not be reopened but only the permissible cases under the Income tax Act will alone be reopened. It is upto the foreign investors/companiesZ to realise the futility of such “taxplanning” and do some introspection and take precautions beforehand for meeting such retrospective legislation by suitably modifying their Buy/Sell agreements.
Shall be pleased to know whether the decision in the case of National Agricultural Co-operative Marketing Federation of India Ltd. v. Union of India 260 ITR 548 SC after retrospective amendment of in 1999 of the provisions of section 80P(2)(a)(iii) by the Income-tax (Second Amendment) Act, 1998 (No. 11 of 1999), following the decision of a larger Bench of the Supreme Court in the case of Kerala State Co-operative Marketing Federation Ltd. v. CIT [1998] 231 ITR 814 has alos been duly considered by the eminent Senior Advocate
In his known singularly exemplary style, the author is seen to have critically has analysed the amendment of law in offing and its effect, possible or otherwise, on the Vodafone case in a different light.
Pithily stated, there is, in any event, no doubt left, that is, about the guaranteed litigation, to the delight and pride of the lawyers, vouchsafed, if not for posterity, for minimum of a few more decades.
Granting, of course, the widely rumoured BIG BANG, now given a respite, is not destined to meanwhile overtake by surprise the entire universe, leave alone our beloved country, with peacock for its national bird.
Brilliant analysis sir. I strongly believe that even if retrospective ammendments are made the retrospective law should affect other parties, it should not affect the party who had secured a favourable verdict from the Court. For if such a practice is allowed than it simply means that supreme court should only decide in the favour of revenue and if not than the government will bring retrospective ammendment to nullify the judgement.
Govt is itching for litigation&trouble. Battle royal round -2 begins.