RETROSPECTIVE TAXATION – VODA AND CAIRN CASES

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 RETROSPECTIVE TAXATION – VODA AND CAIRN CASES

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• Retrospective taxation: This allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from a time behind the date on which the law is passed. So, a firm becomes liable from a past date, something that is frightening for most.
• Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes. 
• While governments often use a retrospective amendment to taxation laws to “clarify” existing laws, it ends up hurting companies that had knowingly or unknowingly interpreted the tax rules differently.
• Apart from India, many countries including the US, the UK, the Netherlands, Canada, Belgium, Australia and Italy have retrospectively taxed companies, which had taken the benefit of loopholes in the previous law.
• The Indian Parliament passed the amendment to the Finance Act in 2012. It was criticised by investors globally, who said the change in law was “perverse” in nature.
• The Vodafone case

1. In May 2007, Vodafone had bought a 67% stake in Hutchison Whampoa for $11 billion. This included the mobile telephony business and other assets of Hutchison in India. 
2. In September 2007, the government raised a demand of Rs 7,990 crore in capital gains and withholding tax from Vodafone, saying it should have deducted the tax at source before making a payment to Hutchison.
3. Vodafone challenged the demand notice in the Bombay High Court, which ruled in favour of the Income Tax Department. Then Vodafone challenged the High Court judgment in the Supreme Court, which in 2012 ruled that Vodafone Group’s interpretation of the Income Tax Act of 1961 was correct and that it did not have to pay any taxes for the stake purchase.
4. The then Finance Minister, late Pranab Mukherjee, circumvented the Supreme Court’s ruling by proposing an amendment to the Finance Act, thereby giving the Income Tax Department the power to retrospectively tax such deals. 
5. The Act was passed by Parliament that year and the onus to pay the taxes fell back on Vodafone. The case had by then become infamous as the ‘retrospective taxation case’.
6. Following international criticism, India tried to settle the matter amicably with Vodafone, but was unable to do so. After the new Modi-1 government came to power, it said it would not create any fresh tax liabilities for companies using the retrospective taxation route.
7. In 2014, Vodafone moved the Permanent Court of Arbitration at The Hague. It ruled in Voda’s  favour. Reason? Violation of BIT and the United Nations Commission on International Trade Law (UNCITRAL)

• Bilateral Investment Treaty (BIT)

1. On November 6, 1995, India and the Netherlands had signed a BIT for promotion and protection of investment by companies of each country in the other’s jurisdiction.
2. It stated that both would strive to “encourage and promote favourable conditions for investors” of the other country. The two would ensure that companies present in each other’s jurisdictions would be “at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other”.
3. While the treaty was between India and the Netherlands, Vodafone invoked it as its Dutch unit, Vodafone International Holdings BV, had bought the Indian business operations of Hutchinson Telecommunicaton International Ltd. This made it a transaction between a Dutch firm and an Indian firm.
4. The BIT between India and the Netherlands expired on September 22, 2016.
5. In 2014, when the Vodafone Group had initiated arbitration against India at the Court of Arbitration, it had done so under Article 9 of the BIT between India and the Netherlands.
6. Article 9 of the BIT says that any dispute between “an investor of one contracting party and the other contracting party in connection with an investment in the territory of the other contracting party” shall as far as possible be settled amicably through negotiations.
7. The other was Article 3 of the arbitration rules of UNCITRAL, which, among other things, says that “constitution of the arbitral tribunal shall not be hindered by any controversy with respect to the sufficiency of the notice of arbitration, which shall be finally resolved by the arbitral tribunal”.
8. In its ruling, the arbitration tribunal also said that now since it had been established that India had breached the terms of the agreement, it must now stop efforts to recover the said taxes from Vodafone.

• Cairn Energy case

1. The tax demand against Cairn Energy Plc dates back to the time when, as part of its internal rearrangement, Cairn UK transferred shares of Cairn India Holdings to Cairn India. The Income Tax authorities said Cairn UK had made capital gains and sent a Rs 24,500-crore tax demand.
2. Owing to different interpretations of capital gains, the company refused to pay, which prompted cases in the Income-Tax Appellate Tribunal (ITAT) and the High Court. Cairn lost the case at ITAT; a case on the valuation of capital gains remains pending before the Delhi High Court.
3. Cairn Energy Plc won relief in 2020 as the Permanent Court of Arbitration at The Hague ruled that the Indian government’s retrospective tax demand against the global oil and gas major was “inconsistent” with the UK-India bilateral treaty (BIT).
4. The tribunal ruled that India’s demand of $1.2 billion in retrospective tax was “in breach of the guarantee of fair and equitable treatment”.
5. The judgment has asked the government to pay $1.2 billion (roughly Rs 8,800 crore) to Cairn Energy Plc (at a time when govt. revenues are strained due to the economic slowdown)
6. Cumulatively, corporate advance tax collections until mid-December have been recorded at Rs 2.39 lakh crore, down 4.9 per cent from last year, while advance personal income-tax collections are down 10.4 per cent at Rs 60,491 crore. As per latest data, released for April-October, gross tax collections were at Rs 8.75 lakh crore, down 16.7 per cent from the same period last year.
7. The Cairn ruling is the second arbitral setback to India over its position on retrospective taxation. 
8. On September 25, 2020, the Singapore seat of the Permanent Court of Arbitration had unanimously decided that India’s retrospective demand of Rs 22,100 crore as capital gains and withholding tax imposed on British telecommunication company Vodafone Plc for a 2007 deal was “in breach of the guarantee of fair and equitable treatment”.
9. The tribunal also said that India must not make any more attempts to recover “the alleged tax liability or any interest and or penalties arising from this alleged liability through any other means”.

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