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Breaking live updates: Vodafone lawyer says retrospective amendment of tax rules unconstitutional, won’t stand up; ALMT partner says is fine

Vodafone: Not happy with UnRule of Law?
Vodafone: Not happy with UnRule of Law?

The Union Budget’s plan to tax Vodafone’s Indian Hutch takeover and similar transactions retrospectively going back to 1962 is unconstitutional and would not pass scrutiny of the courts, said Dutt Menon Dunmorrsett Mumbai-based partner Fereshte Sethna, who represented Vodafone in its dispute with the tax office in the Mumbai High Court and the Supreme Court.

Sethna said: “To my mind it’s a closed chapter as far as the courts are concerned. I don’t really see this at all adversely effecting Vodafone.”

“I would have serious doubts that something like that could withstand judicial scrutiny,” she added. “They may seek quite clearly to bring other transactions within [the net but the] Vodafone judgment can not be reversed in that backhanded manner.”

One possible outcome could be that the Income Tax department will try to make a new tax claim against Vodafone under the amendments of the Finance Bill, which Vodafone might need to challenge in the courts.

Section 4 of the Finance Bill will amend section 9 of the Income Tax Act with retrospective effect:

4. In section 9 of the Income-tax Act, in sub-section (1),—

(a) in clause (i), after Explanation 3, the following Explanations shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1962, namely:—

‘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 amendment purports to capture a situation such as Vodafone’s takeover of the Cayman Islands-based holding company, which in turn generates its value from the mobile phone network and assets based in India.

The Supreme Court held in January that Vodafone would not have to pay tax on the indirect transfers of Indian assets.

The amendment was not part of finance minister Pranab Mukherjee’s budget speech that started at 11:00am today.

Update 14:47: ALMT Legal Mumbai-based partner Hitesh Jain, who had represented Vodafone in the earliest stages of the dispute, said that the government’s move was expected.

“I said before that the government is not going to take this easily. They are aware that legally they have no answer – even in the review they do not have a good case. The only way to tackle Vodafone is to bring in a retrospective amendments,” said Jain.

However, he added that there have been previous cases of retrospective amendments to the Income Tax Act that were upheld by the courts. For example, he explained, around 1987 cases related to section 44(b)(b) of the Act were retrospectively amended to introduce a compulsory tax on offshore drilling contracts by increasing the number of nautical miles from shore that would be effected.

Jain said: “I don’t think it’s unconstitutional – in the past there have been cases where a retrospective levy has been upheld.”

He noted, however, that making such retrospective amendments to laws would put India on a “circumspect list” with foreign investors, who would seek stronger indemnities against government intervention, although it would not discourage them significantly from investing in a country such as India where the fundamentals of the economy were strong.

Update 16:08 Lalit Bhasin, managing partner of Bhasin & Co and chairman of the Society of Indian Law Firms (SILF), commented: “They should honour the Vodafone judgment rather than trying to frustrate the entire exercise. If Supreme Court declares a law it should be respected and honoured, you should not go by way of amending the law and retrospectively doing it.”

“They go against the spirit of the rule of law and they don’t inspire confidence for foreign investors.”

Update 16:11: Read Mint and Legally India’s collaborative coverage of Vodafone more to follow in tomorrow’s edition.

NDTV has quoted finance secretary RS Gujral saying that “the new amendment is only a clarification reiterating the point that such transactions are to be taxed in India”.

Update 16:45: Potentially the most damaging section for Vodafone and companies like it is this section in the Finance Bill:

113. Notwithstanding anything contained in any judgment, decree or order of any Court or Tribunal or any authority, all notices sent or purporting to have been sent, or taxes levied, demanded, assessed, imposed, collected or recovered or purporting to have been levied, demanded, assessed, imposed, collected or recovered under the provisions of Income-tax Act, 1961, in respect of income accruing or arising through or from the transfer of a capital asset situate in India in consequence of the transfer of a share or shares of a company registered or incorporated outside India or in consequence of an agreement, or otherwise, outside India, shall be deemed to have been validly made, and the notice, levy, demand, assessment, imposition, collection or recovery of tax shall be valid and shall be deemed always to have been valid and shall not be called in question on the ground that the tax was not chargeable or any ground including that it is a tax on capital gains arising out of transactions which have taken place outside India, and accordingly, any tax levied, demanded, assessed, imposed or deposited before the commencement of this Act and chargeable for a period prior to such commencement but not collected or recovered before such commencement, may be collected or recovered and appropriated in accordance with the provisions of the Income-tax Act, 1961 as amended by this Act, and the rules made thereunder and there shall be no liability or obligation to make any refund whatsoever.

Read Legally India’s previous coverage on Vodafone and its background:

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