The document summarizes the scrapping of retroactive tax provisions in India. It provides background on retroactive taxation laws introduced in 2012 in response to court rulings. It analyzes prominent cases like Vodafone and Cairn Energy that challenged the retroactive taxes under bilateral investment treaties. The Taxation Laws Amendment Act of 2021 was passed to scrap these retroactive provisions and provide tax refunds to affected companies like Cairn Energy. The act aims to improve India's reputation as an investment destination and revive interest from foreign investors.

1. SCRAPPING OF RETRO TAX PROVISIONS :
A REVIVAL OF OVERSEAS INTEREST IN INDIA

2. Legends used
AO Assessing Officer
AY Assessment Year
BIT Bilateral Investment Treaty
CG Capital Gains
FA Finance Act
HC High Court
IAP International Arbitration Proceedings
IT Income Tax
ITD Income Tax Department
PCA Permanent Court of Arbitration
SC Supreme Court
SCN Show Cause Notice
SLP Special Leave Petition
TDS Tax Deducted at Source
WOS Wholly Owned Subsidiary

3. Presentation Schema
Background Retro Tax
Vodafone Case
Analysis
Cairn Case Analysis
Taxation Laws
(Amendment) Act,
2021
Draft Notification Conclusion

4. BACKGROUND

5. Insertion of Retro Tax Legislation
Retro Tax 2012 was inserted
• Consequent to the Honourable SC’s
verdict in Vodafone case in Jan 2012
& also to nullify the stand taken by
many similar cases appealed by Non-
Resident Companies
IT Act was amended in March 2012, by
FA 2012
• With retrospective effect from 1st
April 1962(AY 1962-63) to rationalize
the provisions relating to income
deemed to accrue or arise in India
Provision of IT Act was amended to clarify that,
Sec 9
• Any asset being a
share / interest of an
entity incorporated
outside India deriving
its value substantially
from assets located in
India, shall be deemed
to be situated in India.
• ‘Through’ means &
includes ‘in
consequence of,
‘reasons of’
Sec 2(14)
• ‘Property’ includes &
always included any
rights (management,
control, etc) in relation
to an Indian Company
Sec 45
• ‘Transfer’ includes &
always included
disposing or parting
with an asset or
interest by way of an
agreement (entered in
India or outside India)
even if such transfer is
made by a Foreign
Company
Sec 195
• Obligation to deduct
TDS on account of
payment made to NRI
which are chargeable
to tax in India, shall be
in the hands of the
payee whether or not
such payee has a
residence or Business
connection in India

6. Introduction to Amendment
• Taxation Laws Amendment Bill, 2021 was passed on 5th Aug 2021 stating that no demand shall be raised for
any indirect transfer of Indian Assets if the transaction had been made before 28th May 2012 (being the date
on which the bill was passed by the president).
• The Bill received Presidential assent on 13th Aug 2021, thus scrapping the Retro taxation clause by
amending the IT Act & FA 2012
• The issue of taxability of income, arising on indirect transfer of assets located in India, due to the transfer
of shares of a Foreign Company was a matter of prolonged litigation
• The issue first arose in the case of Vodafone International Holdings BV which had engaged in indirect
transfer of shares in 2006.
• Consequent to decisions in favour of Vodafone, the Retro tax came into picture amending the IT Laws
through FA 2012
• As a result of the Retro Tax effect, IT demand was raised in 17 cases, out of which, arbitration under BIT
with UK & Netherland were invoked in 4 cases
• Out of the 4 cases, the Tribunal ruled in favour of the taxpayer i.e. Cairn & Vodafone – the 2 most
renowned cases since its inception

7. VODAFONE CASE ANALYSIS

8. Vodafone International Holdings BV vs Union Of
India
Hutchison Telecom
International Ltd (HTIL)
CGP
International
Hutch Essar
Ltd (HEL)
WOS
UK
Cayman Island
India
Vodafone International
Holdings BV (VIH)
WOS
Netherlands
Transfer of shares

9. Facts
HTIL, UK based Co, set up its
WOS “CGP International” in
Cayman Islands, which held
major stake in HEL an Indian
JV Co. between Hutch &
Essar.
VIH, a Dutch Co & HTIL,
entered into a transaction
wherein HTIL in Feb 2007
transferred the shares held in
its WOS i.e CGP to VIH for
appr. $11.5 bn (Rs.52,300Cr)
Through this transfer, VIH
acquired a controlling
interest of 67% stake in HEL
which was held by CGP prior
to the dealing.
Claims of Revenue
Revenue stated that the income arising on transfer of shares was a CG in the hands of HTIL & the same
was chargeable to tax in India
Thus, Revenue sent a SCN to VIH seeking explanation as to why TDS was not withheld in India on sale
consideration paid to HTIL

10. Honourable Bombay HC’s Decision
• Whether transfer of shares by HTIL to VIH (2 foreign companies),
resulting in extinguishment of controlling interest in the Indian
Co.(HEL) held by a foreign company(HTIL), was a transfer of
capital assets located in India ?
• Whether such transaction is chargeable to tax in India?
Key Issue
Judgement of the Hon’ble Bombay HC
Any state may impose liabilities, even upon persons not within its territory for conduct outside the borders that has
consequence within the borders of the state
Any Gain from transfer of a company in India (HEL in this case) has to be considered as the Gain of the company
which actually owns & controls it (i.e HTIL).
The transaction was a transfer of Capital Asset & not a transfer of controlling asset and is chargeable to tax in India

11. Honourable SC’s Verdict in 2012
Sale of CGP share by
HTIL to VIH – not a
transfer of capital
assets within the
meaning of Sec
2(14) of IT Act
Hence, all rights &
entitlements that
flow from
shareholder’s
agreements that
form part of share
of CGP does not
attract CG tax
Order of HC
demanding
Rs.12,000 Cr by way
of CG tax would
amount to imposing
capital punishment
for capital
investment
A refund of Rs.
2500 Cr to be made
to VIH collected in
terms of Interim
Order along with
interest
Business entities may arrange affairs of their business to reduce their tax liability in
absence of statutory stipulation prohibiting the same. The word ‘through’ as per Sec
9, does not mean in ‘consequence of’.
MNCs often establish corporate structures & all these structures should be
established for business & commercial purposes only.
The corporate veil may be lifted in case facts & circumstances reveal that the
transaction or corporate structure is sham & intended to evade taxes.
The presence of corporate structures in tax neutral/investor friendly nations
should not be concluded that these are meant to avoid taxes.
1
2
3
4
SC observed the following & cleared the uncertainty w.r.t tax imposition
SC concluded that,

12. Initiation of BIT Arbitration Proceedings
The onus to pay
the taxes fell back
on VIH, after the
retro tax effect
Later in the year
2017, VIH invoked
Clause 9 of BIT
signed between
India &
Netherlands in
1995
In Sep 2020, PCA
at Hague ruled in
favour of VIH as,
the taxation was in
violation of the BIT
& the United
Nations
Commission on
International Trade
Law (UNCITRAL).
It also
directed Indian Gov
to pay $5.47Million
(Rs.38.29Cr appr.)
to the company as
compensation for
its legal costs
Challenging Award by PCA
Taxation is not a part of the BIT & it falls
under the sovereign exercise of the
power of a country.
Legislative & Sovereign power of
taxation must not cease at the whims of
the investors and international
businesses.
In Dec 2020, Indian Government challenged the award by PCA of the Hague in Singapore, which was in favour of
Vodafone, stating that

13. Benefits of BITs
Where a BIT claim does
arise & where a state is
found to have breached its
obligation, foreign investors
can seek assurance for
damages
These agreements can be
used to the advantage of
foreign investors where
unfair treatment arises
Or where foreign investors
are treated less favorably
than local investors, BIT can
be invoked

14. CAIRN CASE ANALYSIS

15. Cairn Energy Plc & Cairn UK Holdings v Republic
of India
• Cairn UK Holdings Limited (CUHL), a holding company in UK incorporated its WOS, Cairn India Holdings
Limited (CIHL) in Aug 2006 in Jersey
• CUHL transferred to CIHL shares constituting the entire issued share capital of 9 subsidiaries of the
Cairn group (engaged in the oil & gas sector) in India,(held directly & indirectly by CUHL) under a share
exchange agreement
• Later in Aug 2006, Cairn India Limited (CIL) was incorporated in India as WOS of CUHL. In October
2006, CUHL sold shares of CIHL to CIL in an internal group restructuring (rearrangement).
• This was done by way of a subscription & share purchase agreement & share purchase deed, through
which shares constituting the entire issued share capital of CIHL were transferred to CIL. The
consideration was partly paid in cash & partly in the form of shares of CIL.
• CIL then divested 30.5% of its shareholding by way of an IPO in India in December 2006. As a result of
divesting appr. 30% of its stake in the Subsidiaries & part of IPO proceeds, CUHL received appr. Rs. 6101
Cr (app.$931Million)

16. Merging of CIL with Vedanta Ltd
• In December 2011, UK-based Vedanta Resources Plc acquired 59.9% stake in CIL.
• In April 2017, CIL (India) merged with Vedanta Ltd (VL) India, the WOS of Vedanta UK.
• Under the terms of Merger, Cairn Energy, a subsidiary of Vedanta Resources Plc, received consideration in
shares in VL in exchange for the residual shareholding of appr. 10% in CIL.
• As a result, Cairn Energy had a shareholding of appr. 5% in VL along-with an interest in preference shares. As
on December 31, 2017, this investment was valued at $1.1bn (appr Rs.7700Cr).

17. Contention of The Government
The Dispute
The retroactive change in law also caught Cairn Energy, who in 2014 were presented with a US$1.4bn claim from the
Indian Government for unpaid tax associated with the 2007 listing of its local subsidiary. In pursuit of its claim the
Government seized Cairn Energy's shares in the subsidiary as well as its dividend payments.
Cairn Energy's response was to commence arbitration proceedings against the Indian Government in 2015 under the
UK-India Bilateral Investment Treaty.
The amount received on dilution of the stake by CIL through an IPO is taxable in India as per the retrospective
effect due to the amendment of section 9 of the Act in the year 2012.

18. Timeline for Events
• AO initiated Reassessment Proceedings against CUHL.
• ITD issued a SCN to CUHL, on account of unassessed income resulting from IPO of CIL in 2007.
2014
• CUHL initiated IAP under India-UK BIT (signed in 1994) against procedures adopted resultant to
retrospective effect.
• A draft order of a demand of $1.6bn of tax plus interest was passed by AO against CIL for failure to
deduct TDS on consideration paid to CUHL in 2006.
• Vedanta UK served a notice of claim against India under the India-UK BIT, challenging the Tax
demand.
2015
• ITD seized & held CUHL’s shares in VL for a value of appr. $1 Million consequently CUHL was unable
to neither freely exercise its ownership rights over those shares nor sell them.
• ITD also sold part of CUHL’s shares in VL, realized & seized its sale proceeds of $216 Million, its
dividends due worth $155 Million and offset of refund of $234 million to recover tax demand
partially & also continued to demand tax against CUHL’s assets in India.
2016 – 2018 (During Pendency of IAP)
• CUHL pleaded to Tribunal of IAP for nullifying the effects of tax assessment & to receive
compensation from ITD for damages caused to Cairn.
2018

19. Order of the IAP
ITD had failed to abide its
obligation under the UK-India
BIT & International Law
ITD had failed to treat the
investments fair & equitable
thus violating the Articles of the
treaty
ITD should compensate
claimants for the harm suffered,
by returning the value of shares
it sold, dividends seized &
refund withheld
2020 (21st Dec)
Tribunal of IAP concluded & ordered that,
We see that BITs between UK – India & Netherland - India signed in 1994 & 1995 had provided relief to
the claimants Vodafone & Cairn respectively in the prolonged litigation

20. Taxation Laws (Amendment) Act,
2021

21. Scrapping of Retro Tax
4th proviso - Any Pending,
•Assessment or reassessment
•Order passed demanding tax liability or reducing refund claimed or
claiming an assessee to be in default
•Any penalty imposed
5th proviso - Any Concluded,
•Assessment or reassessment
•Any order passed demanding tax liability or reducing refund claimed
or claiming an assesse to be in default
•Any penalty imposed
Provisions for Indirect transfer of assets in
India relating to any pending or concluded
proceedings will not apply to the Assets
transferred before 28-05-2012
6th Proviso is amended to refund the amount paid by the assessee
without interest & the validation of demand u/s 119 of FA will no
longer be applicable subject to specified conditions*
Key Amendment
Refund of Amount without interest
The Act inserted 3 provisos(Fourth, Fifth & Sixth
proviso) in Explanation 5 to Sec 9(1)(i) of IT Act &
amend Sec 119 of FA
*CONDITIONS - Include withdrawal
of pending litigation & an
undertaking that no claims would
be filed by the entities who had
been levied the tax.

22. Objective and Reasons
OBJECTIVES
To quash the criticism from stakeholders mainly
w.r.t retro tax
To instantly recover economy in present times
like Covid 19 pandemic, as Foreign Investments
play major role in promoting faster economic
growth & employment
To retain the positive environment created for
investments in India due to major reforms
brought in the Financial & Infrastructure sector
REASONS
Retro tax in many cases continues to be a sore
point with potential investors
Retro tax effect weighed against the principle
of tax certainty & damaged India’s reputation
as an attractive destination

23. Draft Notification
• To implement the amendment made by 2021 Act, CBDT has released draft notification for
suggestions/comments from all stakeholders and the public.
• Draft notification introduces new Rule 11UE in the Income Tax Rules providing the
administrative and procedural aspects to implement the amendment made.
• The New rule provides a time of 45 days to apply to the government for availing the benefits
of the new amendment.
• The draft rule specifies the conditions to be fulfilled and the process to be followed to give
effect to the amendment made by the 2021 Act.

24. Conclusion
Centre has stated that a Refund of Rs. 8100Cr will be made which was collected to enforce such levies.
Of this Rs. 7900Cr ($1.2bilion) will be granted to Cairn Energy alone for shares of the company it had sold, tax
refund withheld & dividends confiscated as a result of scrapping retro tax.
This move as per the Government is expected to go a long way in placing India as a more attractive investment
destination & rekindle the hope that there would be no longer any ghost of retro taxation norms being applied

25. Thank You!
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