Indirect transfer tax provision to apply prospectively as govt withdraws infamous retrospective amendment

In response to the arbitration claims, the Indian government argued that the exercise of jurisdiction by the Tribunal over a national tax dispute is improper. Furthermore, the claim is based on the alleged violation of the Indian income-tax laws, which are not covered within the scope of the Bilateral Investment Treaty. After years of prolonged battle, the arbitrational Tribunals in both cases ruled in favor of the taxpayers. The Indian government was directed to disburse the following payments in addition to tax already deposited along with interest:

 India has filed an appeal against both the arbitration orders. However, Cairn Energy is unmoved by the counter appeal. Legally, Cairn can initiate proceedings to enforce the award in jurisdictions where India has assets and which recognize and enforce the award made in the Netherlands. The company had reportedly initiated proceedings in courts of the US, UK, France, Netherlands, Quebec, and Singapore to enforce the award against India. The French court has agreed with the company’s application to freeze assets owned by the Indian Government in Paris. The company has also filed a similar lawsuit in the USA. The result of the lawsuit is awaited.

The Indian government has proposed to withdraw the retrospective amendment, orginal demands raised on the companies now can be nullified, if the following conditions, among others, are satisfied:

• The companies withdraw or undertake to withdraw arbitration, conciliation, or mediation initiated 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.

• The companies are also required to waive the right to seek or pursue any remedy or any claim in relation to the income from indirect transfer which may otherwise be available to 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.

With this bill, it is hoped that litigation on this matter would be put to rest. Also, the government has promised that no new demand would be raised in respect of indirect transfer tax, which is carried out prior to 28 May 2012. However, it would be interesting to see whether Vodafone and Cairn would opt for withdrawal of the arbitration process as they may stand to lose out the interest on the demand already paid.

It is unsure whether the entire retrospective amendment introduced in 2012 resulted in any collection of tax, however it managed to portray India as an unfriendly tax jurisdiction for foreign business. Despite the delay in scrapping this controversial amendment, it is still a pragmatic move by the Indian government that will render tax certainty and hopefully boost the foreign investor sentiment.