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Direct Tax Alert - Retrospective applicability of indirect transfer taxation nullified

09 August 2021


The Hon’ble Supreme Court in 2012 had held1 that gains arising from indirect transfer of Indian assets were not taxable under the then extant provisions of the Income-tax Act, 1961 (IT Act). As the verdict of the Supreme Court was inconsistent with the legislative intent, the provisions of the IT Act were amended by the Finance Act, 2012 (FA 2012) with retrospective effect, to clarify that gains arising from sale of shares of a foreign company would be taxable in India if such shares, directly or indirectly, derived their value substantially from the assets located in India. The FA 2012 also provided for validation of demand, etc. relating to indirect transfer of Indian assets. Different stakeholders criticised the retrospective amendment as it was against the principle of tax certainty. This amendment was seen as a sore point by foreign investors.

Hence, with a view to nullify the retrospective effect of the amendment, the Finance Minister Smt. Nirmala Sitharaman recently introduced the Taxation Laws (Amendment) Bill, 2021 (hereinafter referred to as the “Bill”) in the Lok Sabha. This Bill proposes to further withdraw tax demands made in those cases where the indirect transfer was undertaken prior to the date when the Finance Bill 2012 received President’s assent i.e. 28 May 2012 (effectively making the amendment prospective).

We, at BDO in India, have analysed and summarized the Bill hereunder:

Proposals in the Bill

Clause 2 of the Bill seeks to amend section 9 of the IT Act relating to income deemed to accrue or arise in India so as to provide that no tax demand shall be raised in future if the transaction was undertaken before 28 May 2012 (i.e., the date on which the Finance Bill, 2012 received the assent of the President). The proposed amendment seeks to insert fourth, fifth and sixth provisos in Explanation 5 (indirect transfer of Indian assets provisions) to section 9(1)(i) of the IT Act. It also proposes to insert an Explanation to empower the Board to make rules to provide for

  • the form and manner in which an undertaking shall be submitted; and
  • any other condition to be fulfilled for the purposes of fifth and sixth provisos.

The Fourth and Fifth Proviso to Explanation 5 to Section 9(1)(i) of the IT Act provides that the provisions of indirect transfer of Indian assets shall not apply, in respect of income accruing or arising through or from the indirect transfer of Indian asset made before 28 May 2012, to:

(a) an assessment or reassessment to be made under Section 143, Section 144, Section 147 or Section 153A or Section 153C;

(b) an order to be passed enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under Section 154; or

(c) an order to be passed deeming a person to be an assessee in default under Section 201(1).

It is further proposed to provide that the demand raised (including penalty demand under section 221) for indirect transfer of Indian assets made before 28 May 2012 shall be nullified on fulfilment of specified conditions.

Specified conditions as proposed under Clause 2

The taxpayer should satisfy following conditions for nullification of the demand:

  • where the taxpayer has filed any appeal before an appellate forum or any writ petition before the High Court or the Supreme Court against any order in respect of said income, he shall either withdraw or submit an undertaking to withdraw such appeal or writ petition, in such form and manner as may be prescribed;
  • where the taxpayer has initiated any proceeding for arbitration, conciliation or mediation, or has given any notice thereof under any law for the time being in force or under any agreement entered into by India with any other country or territory outside India, whether for protection of investment or otherwise, he shall either withdraw or shall submit an undertaking to withdraw the claim, if any, in such proceedings or notice, in such form and manner as may be prescribed;
  • the said taxpayer shall furnish an undertaking, in such form and manner as may be prescribed, waiving his right, whether direct or indirect, to seek or pursue any remedy or any claim in relation to the said income which may otherwise be available to him under any law for the time being in force, in equity, under any statute or under any agreement entered into by India with any country or territory outside India, whether for protection of investment or otherwise; and
  • such other conditions as may be prescribed.

The relevant forms are yet to be prescribed

Amendment proposed in section 119 of FA 2012

Section 119 of the FA 2012 had inserted a validation clause to validate all demands raised / notices issued in connection with the indirect transfer of assets. It also provides that any decision of any Court, Tribunal, etc., including the decision of the Supreme Court in Vodafone's case which has held such indirect transfer as not falling within the scope of section 9(1)(i) of the IT Act will be disregarded.

Clause 3 of the Bill proposes to amend section 119 of the FA 2012 by inserting two provisos to the said section. The first proviso provides that this section shall cease to apply to the taxpayer who fulfils the specified conditions mentioned above.

Grant of refund on nullification of the retrospective amendment

The proposed amendment provides that where any amount becomes refundable due to the nullity of retrospective effect, then such amount shall be refunded to the taxpayer without any interest under section 244A of the IT Act.

BDO comments

This is a welcome proposal as it will bring an end to the open litigations pertaining to indirect transfers made before 28 May 2012. It may be mentioned here that in case of Vodafone Group Plc, the International Arbitration Court had decided the case against the Government of India and overturned the tax demand raised on account of such retrospective amendment. In the case of Cairn Energy also, the Government has been unsuccessful in defending it’s stand on the retrospective legislation in the international forum. This step will help boost investor confidence and reaffirm the commitment of the Government on their endeavour to bring about certainty in taxation related matters.

1Vodafone International Holdings B.V. [2012] 17 202 (SC)