Calcutta HC raises question over retro tax tweaks in McLeod case

Written by Indu Bhan | Indu Bhan | New Delhi | Updated: Aug 9 2012, 06:15am hrs
The Calcutta High Court has asked the Union finance ministry to explain why the retrospective amendments to tax laws introduced in Budget 2012-13 should not be declared arbitrary and unconstitutional.

The courts missive to the ministry on a petition filed by BM Khaitan Group company McLeod Russel India, the worlds largest tea planter, comes at a time when new finance minister P Chidambaram has placed these controversial tax changes under review. It is expected that the review will lead to considerable dilution of amendments.

Earlier, former finance minister Pranab Mukherjee had stoutly defended these amendments in Parliament, sparking concerns among foreign investors.

According to sources, the income tax department may seek more time on August 22, the next date of hearing, to respond to the HC's notice as it is yet to finalise its views.

The retrospective amendments were made to help authorities levy capital gains tax on past cross-border transactions involving underlying Indian assets. While the amendments could impact a slew of past deals, the Vodafone case, where it was asked to pay $2.2 billion in taxes for taking over Indian telecom assets, has been in the eye of a storm.

Before these amendments were brought in, Vodafone, had won a case in the Supreme Court in January 2012.

The court dismissed the governments tax demand. The court had ruled that Indian authorities have no jurisdiction over transactions taken place outside the country.

McLeod Russels dispute with the revenue authorities is with regard to its cross-border deal in 2005. The retrospective amendment has, in effect, confirmed a tax deduction at source obligation on the company for its share purchase agreement with Williamson Tea Holdings Plc, UK (WTH) for acquiring the latters wholly-owned subsidiary, Borelli Tea Holdings Ltd, UK for 17.5 million pounds.

McLeod Russel challenged the constitutional validity of the amendments on the grounds that such enactments were substantive, not clarificatory (as claimed by the government) and made just to negate the Supreme Court ruling in the Vodafone case.

The amendments are substantive and seek to alter and/or affect the substantive rights and can be made if at all prospectively and no retrospective effect can be given thereto... the Supreme Court did not proceed on any assumption that the interpretation as made by them was a doubtful one... the petition stated, adding that the retrospective changes are violative of Article 14 (right to equality) and Article 19 (right to carry on business) of the Constitution.