Govt ignores its recommendations in pursuit of revenue target

Ramadurai Chandrasekaran , Last updated: 29 September 2017  

The Government constitutes Expert Committee and ignores its recommendations in its pursuit of revenue target

The Hon'ble Finance Minister in his Budget speech on the Finance Bill 2012, had the following to say on retrospective amendments:


"Hon'ble Members are aware that a provision in the Finance Bill which seeks to retrospectively clarify the provisions of the Income Tax Act relating to capital gains on sale of assets located in India through indirect transfers abroad, has been intensely debated in the country and outside. I would like to confirm that clarificatory amendments do not override the provisions of Double Taxation Avoidance Agreement (DTAA) which India has with 82 countries. It would impact those cases where the transaction has been routed through low tax or no tax countries with whom India does not have a DTAA."


Vodafone International Holdings, BV, The Netherlands enters into a Share Purchase Agreement with Hutchison Telecommunications International Ltd, Cayman Islands for procurement of share of CGP Investment Holdings Ltd, Cayman Islands.

CGP Investment Holdings Ltd CI, owns 100% of Array Holdings Ltd, Mauritius which owns 100% of CGP India Investments Ltd, MS. The last company owns through a web of subsidiary companies 56.98% of Hutchison Essar Limited (later renamed Vodafone Essar Limited), an India Incorporated Company.

The last said Indian Company controlled 100% interests in the following Indian Companies that had the Universal Access Licence to provide telecom services in majority of the circles in India:

  1. Essar Spacetel Limited
  2. Hutchison Essar mobile services Limited
  3. Hutchison Essar South Limited
  4. Hutchison Telecom east Limited
  5. Aircel Digilink India Limited
  6. Hutchison Essar Cellular Limited
  7. Fascel Limited

The transfer was claimed as a transfer of shares in an overseas location between Non Residents and hence the Capital Gains if any were claimed to be Not Taxable in India.

The Bombay HC in its judgment upheld the Revenue's position and established the India Business connection and treated the transaction as one accruing and arising in India and hence taxable in India.

The SC in its wisdom struck down the Bombay HC order and passed an order that the transaction is not taxable in India.

The transaction happened between a Netherlands registered company (VIH, BV) and a Cayman Islands registered Company (HTIL, CI) of shares held in a Cayman registered company (CGP IHL, CI).

We only have a Tax Information Exchange Agreement (TIEA) with Cayman Islands and not a DTAA.

Hence the FM's Budget proposal covered the levy of Capital Gains Tax on a transaction that involved transfer of shares between the overseas entities in a country with whom India does not have a full-fledged DTAA that resulted in the indirect transfer of ownership of a beneficial interest in India.

The Government had set up an Expert Committee to offer recommendations on the implementation of the above said retrospective amendments.

The Government had clarified that,” the views expressed in Report of the Committee are that of an independent Committee and it should not be construed in any manner whatsoever as the views of the Government” and that,” the views of the Government on the recommendations of the Expert Committee will be formed after receipt of their final Report”.

The Government has now started its Tax Demand collection exercise by sending notices (may be under Section 148) on Hutchison Telecom International Limited. The demand on Vodafone under section 201 for failure to deduct withholding tax was dismissed by the SC that has prompted the retrospectively amend the provisions of Section 9(1) (i).

Recently the Delhi HC has restrained Vodafone's arbitration proceedings against India under a treaty with UK, in the Rs 11,000 Crore tax demand against it in the share acquisition deal.

This suggests that the Govt. is still pursuing it tax demand against Vodafone for non-deduction of withholding tax under section 195.

The above centres around the transferee being treated as assessee in default and consequent interest under section 201(1A) which provides that

If any such person, principal officer or company as is referred to in that sub-section does not deduct the whole or any part of the tax or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest,-

(i)  at one per cent for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted; and

(ii)  at one and one-half per cent for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid.

This means the following:

  • Vodafone International has not deducted WHT while paying the consideration to HTIL, as their contention was that the transaction is outside of the bounds of taxation in India
  • Due to such non deduction of WHT, the Revenue has treated VIH as an assessee in Default
  • Consequent interest for non-deduction at 1% and non-payment of WHT at 1 ½ % for every month of default under section 201(1A) have been charged.

This appears that the Govt. has chosen to ignore or not consider as relevant the recommendations of the Expert Committee formed by it. The committee has recommended that

  • In cases of retrospective amendments, the assessee cannot be held to be assessee in default, as this would amount to the imposition of a burden of impossibility of performance and
  • No interest under section 234A, 234B, 234C and 201(1A) of the Act should be charged in respect of that demand so that there is no undue hardship caused to the taxpayer

Both these recommendations were ignored.

Select observations by Draft Report of the Expert Committee on Retrospective Amendments Relating to Indirect Transfer.

The CBDT also recognized that penal interest should not be levied in cases of retrospective amendments. However, this waiver is limited only to interest chargeable under sections 234A, 234B and 234C. It does not cover interest under section 201(1A) of the Act. Once penal interest is not leviable, then there is no justification for levy of penalty.


(i) No person should be treated as an assessee in default under section 201 of the Act read with section 9(1) (i) of the Act as amended by the Finance Act, 2012, or as a representative assessee of a non-resident, in respect of a transaction of transfer of shares of a foreign company having underlying assets in India as this would amount to the imposition of a burden of impossibility of performance. This would imply that Government could apply the provisions only to the taxpayer who earned capital gains from indirect transfer.

(ii) In all cases where demand of tax is raised on account of the retrospective amendment relating to indirect transfer u/s 9(1)(i) of the Act, no interest under section 234A, 234B, 234C and 201(1A) of the Act should be charged in respect of that demand so that there is no undue hardship caused to the taxpayer. Moreover, in such cases, no penalty should be levied in respect of the income brought to tax on application of retrospective amendments under section 271(1)(c) (for concealment of income) and 271C (for failure to deduct tax at source) of the Act.

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