Budget 2012: Amendment to overcome judgment of the Supreme Court in case of Vodaphon Explanations for the removal of doubts – very unfortunate trend on legislation in law.

[C.A. DEV KUMAR KOTHARI]

Vodafone International Holdings B.V. Versus Union of India & Anr. 2012 -TMI - 208574 - SUPREME COURT OF INDIA  in appeal no. - 733/2012  Dated - 20 January 2012

The Supreme Court decided matter in favor of Vodafone on 20.01.2012 and just  on 25^th day thereafter that is  on 16.03.2012 proposes to amend the law to nullify the favorable judgment of the Supreme Court to deny the non taxability of offshore deal and to impose tax in India though the shares were transferred of a foreign company and  transfer took place outside India which the Supreme Court held that did not attract capital gain tax in India.

We find there are important  amendments concerning  off shore deals having impact on control of business in India and in some other situations.

The purpose of such amendment is just to overcome judgments of courts. The name given is for removal of doubts, but the question is how legislative intention as on 1^st April 1961, is ascertained on 16tha March 2012?

Why doubt about legal position:

There can be doubt about understanding of law, for that reason we find courts having different views, and then the Supreme Court has the final say on the law. How there can be doubt about the language used in law. The law is to be read as it is written  because that is the expression of legislative intention. If there is a change in legislative intention, it can only be for future. For example , a tax advantage allowed as per law, is as per legislative intention. How it can be withdrawn by changing law for earlier period?

Readers having interest and involvement in such matters are advised to read un-amended and amended clauses very carefully. The honorable Finance Minister and his team are also requested to have a relook to remove any inconsistency in proposals vis a vis legislative intentions so as to avoid need of further amendments with retrospective effect say again after twenty – thirty years.

 The impressions given herein about the related proposed provisions  are preliminary impressions and need in-depth study of existing and post amendment provisions.

Proposed amendment	REMARKS
Amendment of section 2.
03. In section 2 of the Income-tax Act,—                (i) in clause (14), at the end, the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1962, namely:—                 ‘Explanation.—For the removal of doubts, it is hereby clarified that “property” includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever;’;	Amendment of definition of ‘capital asset’ and ‘transfer’  vide the sub-clauses (i) (iv) appears to overcome the judgmentof the Supreme Court in the case of Vodaphone.  The questions arises are: a)      how legislative intention as prevailing as on 01.04.1962 is ascertained now? b)      Why cut-off date is kept 01.04.1962? c)      How it will serve any purpose by keeping effective date as 01.04.1962? d)     Suppose, IT Act 1921 was continued and IT Act 1962 was not enacted, whether retrospective effect w.e.f.01.04.1921 would have been intention? e)      Is it legislative intention or bureaucratic whim? Retrospective amendments create inequality amongst tax payers. It hampers stability and assurance which law allow. Such amendments should be avoided. One has to see whether expected tax collection of  about Rs.40000 crores is more important and can be accepted even in wake of  a big question mark on credibility of our legislative system, administrative system, government and judiciary?
(iv) in clause (47), the Explanation shall be numbered as Explanation 1 thereof and after Explanation 1 as so numbered, the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1962, namely:—                 ‘Explanation 2.—For the removal of doubts, it is hereby clarified that “transfer” includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India;’.	(see comments in relation to sub-clause (i)
Amendment of section 9.
04. In section 9 of the Income-tax Act, in sub-section (1),—
(a) in clause (i), after Explanation 3, the following Explanations shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1962, namely:—
‘Explanation 4.—For the removal of doubts, it is hereby clarified that the expression “through” shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of” or “by reason of”.
Explanation 5.—For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.’;                                           (b) in clause (vi), after Explanation 3, the following Explanations shall be inserted and shall be deemed to have been inserted with effect from the 1st day of June, 1976, namely:—
‘Explanation 4.—For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.
Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not—
(a) the possession or control of such right, property or information is with the payer;       (b) such right, property or information is used directly by the payer;       (c) the location of such right, property or information is in India.
Explanation 6.—For the removal of doubts, it is hereby clarified that the expression “process” includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;’.

Retrospective amendments:

We find that out that all related amendments ,if enacted, will apply w.e.f. 01.04.1961.

The moot  question is why amendments with retrospective effect should be allowed. Why we cannot expect timely amendments, why we cannot apply care and foresight while drafting original provisions or provisions to amend existing law.

Retrospective amendments creates inequality before law. A person whose assessment has attained finality and limitation for further proceedings by way of rectification, revision or reassessment has lapsed is not affected by retrospective amendment. Whereas in case of assessee where assessment has not attained finality, limitations for further proceedings have not lapsed or cases in which appeals are pending will be affected. Thus cases where retrospective amendments have longer period of retrospective effect will adversely affect few assesses and major numbers will not be affected.

Retrospective amendments also put a big question mark on credibility of law, legislation process, judicial processes and entire legal system of country. As Finance Minister Pranab Da may not be able to agree, but author hopes that as an ordinary  person or a tax payer he  must be of the same view that in   reality  retrospective amendments is bound to create  lot of bad will for the government and the country. Now that bad will is bound to spread world over, because during last few years, many amendments have been made with retrospective effect, which have far reaching effect on tax liability of foreigners, non-residents etc.

Legislative intention should be expression of public at large and not few people who administer the tax laws. Unfortunately, we find that there is hardly any discussion and application of mind by public at large (through their representatives) in relation to such laws. Empirical studies and past experience shows that the members in parliament are just interested on issues which have an impact on their political mileage, which have impact on political waves and are least bothered about provisions which have impact on business and industry. It is again unfortunate that our members in parliament do not even raise meaningful voice on retrospective amendments which put a big question mark on reliability of our laws.  

Why there is attempt to realize tax of about Rs.40000 crores only by amending meaning of capital asset, transfer and accrual of income etc. and why any meaning full attempt is not being made to bring back ill gotten  money lying in foreign banks on account of Indians.

An attempt to improve working in government departments just by ten percent can save many times more of this 40000 crores but no one raise meaningful voice about the same.

In view of uncertainty of law, contingency of amendments one may not like to do business or invest in India. If such trends continue, people will have to look after other locations to do business and invest. 

Retrospective amendment should therefore be stopped altogether.