It is good the government has decided to smoke the peace pipe with Vodafone in particular, and foreign companies in general, by magnanimously agreeing to refrain from putting a shovel on capital gains earned and received abroad even though the assets are in India.
Vodafone UK had acquired Hutch’s Indian operations in 2008 by acquiring 67 percent of the stakes in the controlling company incorporated in Camay Islands notorious for its shell companies. The Income Tax Department asked Vodafone India to pay tax in its representative capacity on behalf of Hutch which it refused to.
On appeal, the matter reached Supreme Court (SC) which in 2011 held Vodafone was not liable. While doing so, the SC made it clear it was bailing out Vodafone on technical grounds---business connection rule in the Income Tax Act talked only about business income and not capital gains.
The then Finance Minister late Pranab Mukherjee took the cue and brought in a clarificatory amendment in 2012 and slapped a fresh notice on Vodafone. Aggrieved, Vodafone called in the arbitrator and The Hague permanent court of arbitration ruled in its favor.
Fiscal experts bridle with anger at retrospective amendments and rightly so. In fact the SC has made it clear on numerous occasions that retrospective amendments are kosher only if they are beneficial to the taxpayer, but not when it puts a fresh shovel into their income. This became a grey area. While some contended that it was a fresh shovel, the government contended it was just a clarificatory amendment and thus not a fresh demand. Anyway, with the government magnanimously withdrawing from the fight, the chapter is closed.
While the government must be applauded for its magnanimity, it should have simultaneously brought in another amendment to end the invidious practice of foreign companies calling in the arbitrator. Some matters are not arbitrable. The Supreme Court recently stepped in to fill the void in the Arbitration Act as to what all are not arbitrable. It rightly applied the acid test of right in rem ( word at large) was right in personam (between two persons).
Historically, arbitration is invoked when the rights in personam are involved. To wit, shipping company and the shipper. Accordingly it held that the following six matters are outside the pale of arbitration---- (1) disputes which give rise to or arise out of criminal offences; (2) matrimonial disputes, (3) guardianship matters; (4) insolvency and winding up matters; (5) testamentary matters; and (6) eviction or tenancy matters.
It is curious that the SC did not deem it fit to expressly bar tax matters from the scope of arbitration, but in its earlier judgment in Vidya Drolla, it had clearly said that if a matter relates to inalienable sovereign and public interest functions of the State or is expressly or by necessary implication non-arbitrable under a specific statute, then it is not arbitrable.
Income tax is admittedly an inalienable sovereign and public interest function of the government. And in any case, the income tax law has put in place an elaborate hierarchy of appeals. In these light, the Indian government should have right from the beginning maintained that it will not be a party to arbitration on an income tax dispute.
It has allowed the matter to fester and work against the nation’s interest by not shutting out the arbitrators from tax matters. So much so that Cairn Energy armed with arbitration award in its favor is daring the Indian government to refund the tax it collected through coercive means on facts similar to Vodafone though varying in minutiae. If not, then Cairn Energy says it would seize Air India planes in France, the US and other places and recover its dues from the Indian government. Air India, it says, is the alter ego of the Indian government.
Better late than never. The Indian government should without any further delay expressly state in the income tax law as well as in other fiscal laws that any dispute the taxpayer wants to raise must be through the hierarchy of appeals laid down in the statute and cannot be resolved by calling in the arbitrator. Otherwise, anyone with deep pockets can call in the arbitrator as soon as the assessing officer slaps a notice on him, thus subverting the appellate mechanism and thumbing his nose at the Indian legal system when rights in rem are involved. There would be utter chaos if in the absence of a specific bar one is free to choose between the appellate mechanism put in place by the statute or call in the arbitrator.
(The writer is a senior columnist and tweets @smurlidharan)
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