The Hindu Business Line : Is the ‘assessee in default’ amendment aimed at Vodafone?

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Is the ‘assessee in default’ amendment aimed at Vodafone?

Does Vodafone have something to worry about in the latest Finance Bill? Seems so, according to tax experts, who cite the proposed amendment to Section 201 of the Income-Tax Act, 1961 about ‘assessee in default’.

Significantly, the planned tax change is to be retrospective, travelling backwards by more than five years.

“A noticeable trend which has been observed in the last few annual Budgets is the introduction of amendments to the I-T Act, most often with retrospective effect, with a view to overrule rightful technical arguments adopted by tax assessees, or certain legal precedents favouring the tax assessees,” observe N. C. Hegde and Surojit Ray, Partner and Deputy Manager, respectively, in Deloitte Haskins & Sells, Mumbai.

Continuing the ‘retrospective’ trend, a couple of amendments proposed in Finance Bill, 2008 which conspicuously stand out are those in relation to Section 191 and Section 201 of the Act, they add, in the course of a recent e-mail exchange with Business Line.

Excerpts from the interview:

Can you explain Section 201, as it stands now?

Section 201 of the Act broadly provides that any person (referred to in Section 200 of the Act), and in cases referred to in Section 194, the principal officer and the company of which he is a principal officer, who does not deduct the whole or any part of the tax, or after deducting fails to pay the tax as required by or under the Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an ‘assessee in default’ in respect of the tax.

In this context, it is pertinent to note that a plain reading of Section 200 of the Act provides that the said Section includes only persons ‘who have deducted tax’ as opposed to persons who are ‘liable to deduct tax but have not deducted the same’.

Further, interestingly, the explanation to Section 191 of the Act (which broadly provides that where a payer has failed to deduct tax while making a payment, and further the payee has also not deposited such tax on its own accord, the defaulting payer shall be construed as an assessee in default as referred to in Section 201(1) of the Act) also has a similar reference to Section 200 and Section 194 of the Act.

Did the section lend itself to creative interpretation?

Having regard to the above, an argument was always possible that the provisions of Section 201 of the Act cannot be extended to apply to a person who has not withheld taxes; rather, they apply only to a person who has withheld taxes but not deposited the same into the exchequer (in the light of Section 200 of the Act).

Now the Budget plugs the loophole?

Perhaps with a view to plug in the anomaly, the Finance Bill, 2008 proposes to retrospectively amend Section 201 (w.e.f. June 1, 2002), and Section 191 (w.e.f. June 1, 2003), to clarify that any person who is required to deduct any sum in accordance with the provisions of the Act would be regarded as an ‘assessee in default’ in the context of Section 201 of the Act.

How does the proposal impact Vodafone?

The proposed amendment does bear some significance in terms of the writ petition filed by Vodafone before the Mumbai High Court in the recent past. The writ petition, as you may remember, was filed against the notices issued by the Revenue authorities to Vodafone.

The company had acquired the shares of a non-resident company from the Hutch Group, which through its step down subsidiaries ultimately held the Indian telecommunication business of the erstwhile Hutch in India.

But Vodafone has been contending against the Revenue’s stand?

The argument put forth by Vodafone is that since the shares procured by it are shares of a non-resident company (and not an Indian company), the capital gains arising to the Hutch Group in connection with this transaction are not liable to tax in India.

As per Section 9(1)(i) of the Act, the transaction could be taxed in India only if the capital asset that has been transferred is situated in India.

Further, shares of a non-resident company, which have been transferred, as per the facts of the case, could in no way be said to be situated in India. Accordingly, Vodafone does not have any withholding tax obligations in India in context of the said transaction, it argued.

Further, it is believed that Vodafone has also taken an alternative argument that even if it were liable to withhold tax on the transaction, it cannot be treated as an assessee in default under Section 201 of the Act (since the same applies only to a person who has withheld taxes but not deposited the same into the exchequer as opposed to a person who is liable to deduct taxes but has not deducted the same).

Do you see, therefore, an impact of the proposed amendment on the company?

The aforesaid proposed amendment may not significantly impact Vodafone’s case in the current scenario. Because the company’s principal argument is that since the capital asset is not situated in India, the capital gains arising to the Hutch Group are not liable to tax in India and, hence, the question of Vodafone being liable to deduct any taxes in India does not arise at all.

Yet, it is likely that the alternative argument gets negated in case the court were to for some reason hold that Vodafone was liable to deduct tax in India while making payments to the Hutch Group.

It is thus astonishing to witness how a single high-stake matter has probably resulted in the amendment of a crucial provision of the legislation.

D. MURALI

http://Detaxification.blogspot.com

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