Rollback of retro tax: A step in the right direction

17 九月 2021

by Tanmay Bhatnagar

In January 2012, the Supreme Court of India gave relief to foreign investors through its landmark decision in Vodafone International Holdings BV v. Union of India[1] (‘Vodafone case’). However, in a matter of months, the ratio laid down by the Supreme Court was rendered infructuous by way of amendments to the Income-tax Act (‘IT Act’), which were given retrospective effect from 1962. Considering the controversies surrounding these amendments, now the Taxation Law (Amendment) Act, 2021 (‘Amendment Act’) seeks to undo the retrospective effect of the amendments. 


In the Vodafone case, the Singapore based Hutch group sought to transfer its 67% shareholding in Hutchison Essar Ltd. (‘HEL’), an Indian telecommunications company, to the Vodafone group of UK. The actual transfer was effected by way of sale of shares in CGP, a Cayman Islands SPV company, by HTIL, a holding entity of Hutch in Cayman Islands, to Vodafone, B.V., a Dutch company. CGP was an SPV for Hutch, which either directly or through its Mauritian subsidiaries held 67% of the shares in HEL.

The Indian Income-tax Department (‘Department’) considered the capital gains arising to HTIL from this transaction to be taxable in India since it involved a transfer of controlling interests and rights in an Indian company resulting in an accrual of income for HTIL from a capital asset situated in India. Consequently, Vodafone B.V. was held to be an assessee-in-default under Section 201 for its failure to deduct tax at source under Section 195 of the IT Act on the payment made, and a tax demand of approximately USD 2.2 billion was raised. This decision was upheld by the High Court of Bombay.

In appeal, the issue which arose before the Supreme Court in this case was whether the capital gains arising from an indirect transfer of shares of an Indian company (i.e. capital assets situated in India) could be taxed as per Section 9(1)(i) of the IT Act. The Supreme Court decided this issue in favour of the taxpayers by inter-alia holding that Section 9(1)(i) covers only income arising or accruing directly or indirectly or through the transfer of a capital asset situated in India and could not be extended to cover their indirect transfers. In the absence of a specific legislative provision to this effect, capital gains from such indirect transfer could not be taxed in India since the source of income was not in India.


Finance Act, 2012 – The start of uncertainty

The Government overcame the decision of the Supreme Court in the Vodafone case through two new provisions introduced vide the Finance Act, 2012 with retrospective effect from 1 April 1962.

Explanation 5 to Section 9(1)(i) was inserted as a clarificatory amendment in the IT Act. It laid down that the shares or interest in a company incorporated outside India would be deemed to be an asset or capital asset which has always been situated in India, if such shares or interest derived substantial value from assets located in India.

This was coupled with Section 119 of the Finance Act, 2012, which retrospectively validated any notice or tax demand with respect to income accruing or arising through or from the indirect transfer of a capital assets situated in India. It provided that regardless of the decision of any judicial or quasi-judicial forum on the taxability of such transfers, any notice issued, or demand raised would be valid. Such a notice or demand could not be questioned on the ground that the tax was not chargeable on the indirect transfers at the time when the notice was issued.

Therefore, in one fell swoop, the Department was now able to go after indirect transfers of assets situated in India which had occurred prior to the introduction of the Finance Act, 2012 and realize any demand raised on taxpayers such as Vodafone B.V., even if the taxpayer had a judgment from the Supreme Court in their favour.

The intervening years – Controversies abound

In the post retrospective amendments era, some taxpayers were able to seek refuge of the double taxation avoidance agreements (‘DTAAs’) entered into by India with their country of residence. An instance of this was seen in the decision of the High Court of Andhra Pradesh in the case of Sanofi Pasteur Holding SA v. Department of Revenue, Ministry of Finance[2]. However, such protection was unavailable to the residents of those countries and territories with which India did not have a DTAA as on the date on which an indirect transfer of assets situated in India took place.

Regardless of the protection available under the DTAAs, the amendments were deeply unpopular and led to widespread criticism and condemnation of the retrospective levy. The amendments also led to the initiation of arbitration proceedings against the Indian Government under various Bilateral Investment Protection Treaties.

Vodafone B.V. was one such entity that took the Government to the Permanent Court of Arbitration (‘PCA’) challenging the retrospective levy of tax as a violation of the India-Netherlands Bilateral Investment Treaty (‘BIT’). Vodafone B.V. ultimately succeeded and was awarded damages to cover the tax demands, interest, legal and other costs.

A similar dispute was brought before the PCA by the Cairn Group of the UK for the violation of the India-UK BIT, resulting in an award of USD 1.2 billion plus interests and costs against the Government. As per its own admission, two more arbitration proceedings have been initiated against the Government under the India-Netherlands and the India-UK BITs.

Taxation Laws (Amendment) Act, 2021 – Relief after all

Cognizant of the criticism faced from various stakeholders and in a bid to attract foreign investment in India to help the economy recover from the Covid-19 pandemic, the Amendment Act has been recently passed. The Amendment Act has sought to dilute the impact of levy on indirect transfers by nullifying its retrospective applicability.

The Government is seeking to grant relief in the case of both pending and concluded proceedings involving income from the indirect transfer of an asset or a capital asset situated in India where the transfer has been made prior to 28th May 2012.

In case of pending proceedings, i.e. cases where orders making assessment or re-assessment or rectification or demand of TDS shortfall are yet to be passed, the Amendment Act provides that such orders will be passed without applying Explanation 5 to Section 9(1)(i) to indirect transfers made prior to 28 May 2012. If in such cases taxes have been already paid on such indirect transfers (say either under protest or by way of TDS), the same would be refunded in the normal course upon completion of assessments along with applicable interest.

In other cases where proceedings have been completed and assessment orders or penalty orders have already been passed in respect of income from indirect transfers made prior to 28th May 2012, it shall be deemed as if such orders were never passed. However, this benefit will apply only to those taxpayers who satisfy the following conditions:

  • Where the taxpayer has filed any appeal or writ petition against any order in respect of the said income, it must either withdraw or undertake to withdraw the same;
  • Where the taxpayer has initiated any arbitration, conciliation or mediation proceedings, or given any notice thereof under any law in force or under any BIT or any other treaty, it must either withdraw or undertake the same;
  • The taxpayer undertakes to waive its right to pursue any remedy or claim in relation to the said income which may be available to him under any law in force or in equity or under any statute or under any BIT or any other treaty; and
  • Any other condition which may be prescribed.

Moreover, in case of these concluded proceedings, refund will be granted of the amounts already deposited by the taxpayers but without any interest under section 244A of the IT Act. In other words, the Government will return the amounts already paid by the taxpayers but will not shell out any interest from its pocket for the period for which the money was lying with it.

Taxation of Royalty – The contentious issue

While the Government has decided to nullify the retrospective levy on indirect transfer of assets situated in India, it has not provided any relief in respect of retrospective levy on certain transactions which were deemed to be royalty vide Finance Act, 2012 and sought to be taxed at source in India.

The retrospective amendments were made by inserting Explanations 4, 5 and 6 into Section 9(1)(vi) with retrospective effect from 1 June 1976. Through these explanations, the Government artificially expanded the meaning of the term ‘royalty’ even further.

The purpose behind the insertion of the said explanations was to overcome certain judicial decisions favouring taxpayers wherein the Courts had held that payments made for licensing software or satellite transmission services could not be considered to be ‘royalty’ payments under Section 9(1)(vi) of the IT Act.

The amendments made to the definition of royalty were wide in ambit and contrary to not only the judicial precedents in India but also the accepted international practice regarding taxation of income from software and satellite transmission. These widely worded provisions enabled the Department to retrospectively bring into the ambit of Section 9(1)(vi) transactions that were earlier out of its purview, such as leased line charges, satellite uplinking and downlinking charges, etc. In the absence of any relief in respect of these provisions, for the time being, the only protection against this retrospective levy under Section 9(1)(vi) are the provisions of DTAAs.


Following the amendments introduced by the Amendment Act, some of the taxpayers such as Vodafone B.V. and Cairn have already expressed their interest in settling the disputes under the new provisions by accepting the olive branch extended by the Government. These entities are willing to forego significant amounts of interest and costs awarded to them in arbitration to avoid further legal battle with the Government.

Another interesting thing to note is that while the Government has responded to the criticism regarding the retrospective taxation of indirect transfers of assets situated in India, it has chosen not to amend other similarly criticised provisions introduced by the Finance Act, 2012 for the retrospective taxation of software licence fee and satellite transmission charges under royalty.

Regardless of everything, the Amendment Act is a welcome move on the part of the Government that should boost investor confidence in India by providing some much-needed tax certainty.

[The author is a Senior Associate, Direct Tax Team, Lakshmikumaran & Sridharan Attorneys, New Delhi]



[1] [2012] 341 ITR 1 (SC)

[2] [2013] 354 ITR 316 (Andhra Pradesh)

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