Centre notifies new Rules [Relaxation of Validation (Section 119 of the Finance Act, 2012) Rules, 2021; to settle the controversial retrospective tax case concerning Vodafone.

INTRODUCTION

Last year, Vodafone won an arbitration case against the Indian Government of amount worth Rs. 20,000 crores. There was this company Hutch. Vodafone in 2007 bought Hutch. There is a particular tax levied on the capital gain. Vodafone bought Hutch. Hutch got capital gain. Here Vodafone made payment to Hutch.

Legally, Vodafone if is making payment to Hutch; Vodafone will have to hold its capital gain and pay rest to Hutch. Now here the capital gain tax; which was supposed to be paid to Government was Rs. 22,100 Crore; which was not put on hold.

This matter went to the Permanent Court of Arbitration. It held that the taxation put here is wrongful; as there was breach of the guarantee of fair and equitable treatment to the Vodafone.

Background

In May 2007, Vodafone had bought a 67% stake in Hutch for 11 billion dollars. Here Hutch is gaining capital gain. Here instead of Hutch; Vodafone is supposed to pay the tax.

Vodafone contended that, Income Tax Act has no such provisions; and we are not liable to make the payment. Vodafone went to Bombay High Court; however, Bombay High Court ruled in the favour of Income Tax Department. Vodafone challenged it in the Supreme Court.

Supreme Court overruled it and held that Vodafone Group’s interpretation of IT Act, is correct. This ruling was passed in the year 2012. The then finance minister, Pranab Mukherjee, circumvented the Supreme Court’s ruling.

As Government was unhappy with the decision, it decided to amend the Finance Act retrospectively.  There was global backlash upon this decision. After much criticism, Government decided to proceed to amicably settle the dispute. It didn’t go well.

There was an investment treaty between Netherland and India. (Bilateral Investment Treaty – hereinafter referred as Treaty) in the year 1995. Vodafone invoked Clause 9 of the Treaty. This treaty sought to protect the interest of investors. This Court accordingly go to Permanent Court of Arbitration.

The Arbitration Tribunal decided that the retrospective change in the tax law is wrongful. Court also directed India to reimburse a sum of Rs. 40.3 Crore to Vodafone. Afterward, there seems to have a very limited scope now; to pursue the matter anymore.

The new notification

In order to settle the past disputes with the Vodafone, The Central Board of Direct Taxes on 13th October notified “Relaxation of Validation (Section 119 of the Finance Act, 2012) Rules, 2021”. It prescribed the forms and conditions for the declaration; that has to be filed by the company if they decided to settle the case.

Government first of all brought law to scrap the taxes; which was demanded from the Vodafone. Now Government came up with this Rule to settle the dispute. Government clarified, that if any sum was collected as tax before under the 2012 amended IT Law; it will be refunded without any interest. Company also needs to withdraw all pending legal proceedings; in order to claim such benefit.

After this notification, Vodafone will have 45 days to approach the Government for the settlement.

uthor’s Remarks

Article 51(c) of the Constitution seeks to respect the international treaties. The treaty abovementioned; became the major cause for it to go to international forum. The same could not again be challenged before the Supreme Court; as Article 131 of the Constitution, which clearly describe the Jurisdiction of Supreme Court put restraints here.

It clearly describes that if any dispute arises out of treaty, the Court will not have jurisdiction for the same. For the same reason, the scope of further dispute resolution became bleak. Respecting the DPSPs of Constitution and considering the restrictive provisions in the Constitution; Government had no other means; except to adhere to the Tribunal’s award.

Here, to minimize the damages, this rule was brought up. It will now be up to the company to decide on the settlement. If company decides to proceed with the dispute, the Government may have to remit the cost, to the Vodafone.

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Randy Reid