Government reinforces the ‘legislative will’ and overrules Vodafone and Ericsson AB decisions – ( No refund to Vodafone ?) : 16-03-2012

By S Sivakumar

IN what could be treated as a major googly, the Government has retrospectively amended
Sections 2(14) and 2(47) of the Income tax Act, 1961 by introducing Explanations with effect
from April 1, 1962 (the day, Income tax Act, 1961 came into effect)…

In terms of these retrospective amendments, the following explanation is being added to
Section 2(14) of the Income tax Act, 1961 which deals with ‘capital asset’, with effect from April
1, 1962:

‘Explanation .-For the removal of doubts, it is hereby clarified that “property” includes andshall
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;’;

In another amendment, the following explanation is being added with effect from April 1, 1962
to Section 2(47) dealing with ‘transfer’:

‘Explanation 2.-For the removal of doubts, it is hereby clarified that “transfer” includes andshall
be deemed to have always included disposing of or parting with an asset or any interesttherein,
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 enteredinto in
India or outside India) or otherwise, notwithstanding that such transfer of rights has
beencharacterised as being effected or dependent upon or flowing from the transfer of a share
orshares of a company registered or incorporated outside India;’.

The Government has also inserted the following Explanation s, with effect from 1 st April, 1962
under Section 9(1)(i) of the Income tax Act, 1961 :

‘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
assetbeing any share or interest in a company or entity registered or incorporated outside India
shallbe deemed to be and shall always be deemed to have been situated in India, if the share
orinterest derives, directly or indirectly, its value substantially from the assets located in India.’;
The implications arising out of these retrospective amendments are that, the law laid down by
the Supreme Court in the Vodafone case, would stand statutorily overruled, on a retrospective
basis. It was widely expected that the Government would not go for a retrospective
amendment, but only a prospective amendment, if at all. What has now come out from the
Government’s stead is a totally unexpected retrospective tax proposal, aimed at scuttling a
decision of the Apex Court.

The story of major retrospective direct tax amendments, to overcome unfavourable decisions
does not end here. In another equally important retrospective amendment effective from 1 st
June, 1976, the Government has also amended Section 9(1)(vi) of the Income tax Act, 1961 by
inserting the following Explanations:

‘Explanation 4.-For the removal of doubts, it is hereby clarified that the transfer of all or
anyrights in respect of any right, property or information includes and has always included
transfer ofall 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 andhas
always included consideration in respect of any right, property or information, whether ornot-

(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
(includingup-linking, amplification, conversion for down-linking of any signal), cable, optic fibre
or by anyother similar technology, whether or not such process is secret;’.

The issue involving the taxation of income of non-residents, arising out of the supply of
software licenses has been a highly litigated matter. Very recently, the Karnataka High Court
had taken the view, in the Samsung case that, payments for import of shrink wrapped software
packages are taxable in India and consequently, the Indian importer would have to deduct tax
at source. The Delhi High Court however, in the Ericsson AB case, had taken a contrary view
that, such payments are not taxable in India. Interestingly, the Bombay ITAT, in the Solid Works
Corporation case had taken the view that the Delhi High Court decision would prevail over the
decision of the Karnataka High Court. This has clearly been, not to the liking of the Government,
which has settled the matter once and for all, by going for a retrospective amendment effective
June 1, 1976. The petitioners have already gone to the Supreme Court asking for the Samsung
decision of the Karnataka High Court to be quashed, by this now seems to be academic.

Before parting…

I am not against the Government reinforcing the will of the ‘legislature’ by amending the tax
provisions, when it feels that the Courts have not rightly interpreted the law. This is especially
so in the Vodafone case, where the Apex Court has clearly expressed its view that, in the
absence of clarity (in respect of indirect deemed accrual of income) in the law, it could not
interpret the law otherwise. But, to retrospectively amend the law going back to 1962 and 1976
is clearly obnoxious. The tax payer, whether in India or outside India, cannot be made to suffer
for lack of clarity in tax provisions created by the Government itself, in the first place.

The retrospective amendment to Section 9(1)(vi) would come as a big blow for software
importers, who have been expecting that that the Supreme Court would overrule the decision
given in the Samsung case.

There can be little doubt that, these retrospective amendments could do a lot of damage to the
so-called stability of the tax regime in India, as perceived by the foreign investors and foreign
service providers.

For most of us, tax practitioners, Section 9 has been ‘the’ Section of the Income tax Act, 1961.
This is one Section on which tons and tons of views have been expressed, in respect of which
numerous case laws are available and, more importantly, this is one Section which has been
feeding most of the big time Consultants and Lawyers. The Government would seem to have
the final laugh, after all. Our beloved Section 9 will never be the same.

(The Author is Director, S3 Solutions Pvt Ltd, Bangalore)

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