India’s Adjustments to Oblique Transfers in Tax Regulation

Thursday, August 26, 2021

The Government of India has the Taxation Laws (Amendment) Bill, 2021 (“invoice“Before the Lok Sabha proposed amending the indirect transfers provisions in Section 9 of the Income Tax Act 1961 (“ITA“). The infamous indirect transfer tax rules were introduced in the ITA as a knee-jerk reaction to the Supreme Court’s decision in the Vodafone International Holdings1 case, with retroactive effect from April 1, 1962. The indirect transfer tax rules essentially expanded the withholding rules for capital taxation in India for non-residents to earn income from the sale of shares in companies based outside India. Following the introduction of the indirect transfer tax provision, the income tax department of Vodafone International Holdings BV sought $ 2.1 billion as defaulting agent for non-withholding taxes on payments to the selling Hutch company.

The new bill provides for an embargo on future tax claims from indirect transfers of Indian assets before May 28, 2012. It is also proposed that any indirect transfer tax claims already made be withdrawn before May 28, 2012, subject to certain conditions being met.


Before going into the changes proposed by the draft law, it is important to briefly summarize the impact of the indirect transfer provisions on foreign investors. Since its inception, the provisions on indirect transfer tax for foreign investors have led to protracted litigation (as recognized in the explanatory memorandum of the new bill) and tax uncertainties. From the ambiguity about the applicability threshold of the regulations, the way in which profits are valued and divided, the applicability to mutual funds, the availability of treaty benefits – the saga of the indirect transfer tax has taken a few twists and turns. Prominent cases dealing with indirect transfer provisions include the Delhi High Court’s decision in DIT v Copal Research Limited2 clarifying the meaning of “material” in the indirect transfer tax provisions prior to the law defining it The term has been changed, the Delhi Tribunal in Cairn UK Holdings Limited3 ruling maintaining a US $ 1.6 billion tax claim against Cairn UK Holdings Limited in connection with the corporate restructuring of Indian assets and the Andhra High Court ruling Pradesh in Sanofi Pasteur Holding SA4, according to which retroactive unilateral changes to the ITA have no effect on the interpretation of tax treaties. The indirect transfer tax provisions have received fierce criticism from stakeholders and the international community as such retrospective changes run counter to fundamental principles of tax security and damage India’s reputation as an attractive investment destination.

The explanatory memorandum for the draft law states that, due to the introduction of the provisions on indirect sales tax, tax claims were raised in 17 cases. The claims raised as part of the indirect transfer tax also led to arbitration proceedings within the framework of investment agreements against India – including Vodafone International Holdings BV against the Republic of India (“Vodafone arbitration“); and Cairn Energy Plc and Cairn UK Holdings Limited v Republic of India (“Cairn arbitration“).

In the past few months, the respective arbitration tribunals in the Vodafone and Cairn arbitration proceedings have ruled in favor of foreign investors against India:

  • The arbitration tribunal set up in the Vodafone arbitration5 found that India had violated Vodafone International Holdings BV’s standard of “fair and equitable treatment” guaranteed under the 1995 bilateral investment promotion and protection agreement between the Republic of India and the Kingdom of the Netherlands; and

  • The arbitration tribunal set up in the Cairn arbitration6 found that India had failed to meet its obligations under the 1994 bilateral investment treaty between the Republic of India and the United Kingdom and under international law.

Proposed amendment to the draft law

The bill proposes:

  • An embargo on future tax claims: The draft law provides that the rules on indirect transfer tax will not apply to income that arose or arises as a result of an indirect transfer made before May 28, 2012. This is to be achieved by the legislator prescribing the non-application of indirect taxes transfer tax provisions on (i) assessments or new assessments that were initiated according to certain sections, (ii) issued orders to improve a tax assessment or reduce a refund and (iii) issued orders which any person is deemed to be in default of withholding tax in respect of indirect transfers prior to May 28, 2012.

  • Cancellation of levied tax claims: The Bill provides that claims made prior to May 28, 2012 on indirect transfers of Indian assets will be void, subject to the following conditions being met by the person making the claim:

    • Withdrawal or obligation to withdraw a complaint filed in an appeals court or a written petition filed in a High Court or the Supreme Court of India;

    • Withdrawal or obligation to withdraw any arbitration, conciliation or mediation process initiated by such a person, e.g. B. under a bilateral investment agreement; and

    • Establishment of a company that waives its right to seek or pursue any remedy or claim in respect of such income in India or outside of India.

  • Refund of the amounts paid: The bill provides that the government will reimburse the taxes paid if the application of the indirect transfer tax rules is withdrawn due to the fulfillment of the above conditions. However, the bill stipulates that the government will not pay interest on such a tax refund.


The bill is a positive and welcome move by the Government of India, which has been trying to take a thorn in the side of foreign investors since the retroactive tax came into effect in 2012.

The devil, however, lies in the details and timing of the bill’s introduction. First, the bill is not intended to provide relief to taxpayers who have paid indirect remittance tax claims before May 28, 2012, without contesting its applicability. This can lead to an unreasonable situation where taxpayers have paid heavy tax claims out of their own pocket for a tax rule that was invalidated prior to May 28, 2012, paving the way for constitutional challenges to the bill. It also does not address a situation where notices have been issued but no tax claim has been made. Second, the bill provides that taxpayers who have paid the disputed tax claim and are now withdrawing their appeal / arbitration will have their tax refunded without interest, in violation of Section 244A of the ITA. This seems very unreasonable and unfair to taxpayers whose disputes have been pending for decades. The repayment provision under Section 244A is an equitable provision that seeks to compensate a taxpayer for wrongly refusing to use his funds, just as the government charges interest on late payments by the taxpayer. A taxpayer’s refusal to pay, enshrined in law, can set a dangerous precedent. Third, the bill does not provide a remedy for taxpayers whose assets have been confiscated or sold by the tax authorities on the basis of a tax claim under the indirect corporate tax rules. For example, the tax department sold a portion of Cairn UK’s shares to Vedanta to collect a portion of the tax receivable, and raised and confiscated proceeds of $ 216 million. In addition, it confiscated dividends of USD 155 million from Cairn UK and set off a tax refund of USD 234 million to Cairn UK for an overpayment of capital gains tax on a separate matter. Even if Cairn UK pulls its case against the Income Tax Service, it is unclear how Cairn will be compensated for these amounts confiscated by the Tax Service.

While the intent of the amendment proposed by the bill is fully recognized, one cannot ignore the damage caused by the previous nine-year saga and wonder how much of it could have been avoided by faster government action. Both the Vodafone and Cairn arbitrations have been followed extensively by the international tax community and the investor community in general, giving them cold feet on potential investment plans in India. The arbitration tribunals’ awards in both proceedings were a severe blow to the Indian government as both companies actively sought to enforce their international arbitral awards. In fact, Cairn recently moved to a French court to freeze the Indian government’s assets in the country in lieu of damages.7 It also has Air India Ltd. brought before a U.S. court to seek payment of the award. 8

With this in mind, while the bill will provide relief for taxpayers, it is hoped that it will also serve as a learning experience for Indian and other governments about the pitfalls of aggressive and unilateral laws to expand their tax base in a world increasingly deprived of cross-border marginal investment and resource sharing . The actual impact and effectiveness of the bill will depend on whether taxpayers actually withdraw their appeals / arbitration from international courts based on this commitment from the Government of India.

1 Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613. It should be noted that the Supreme Court not only the demand of 120 billion Vodafone plus interest 4% pa within two months

2 DIT v Copal Research Limited (2014) 371 ITR 114 (Delhi HC)

3 Cairn UK Holdings v. DCIT, decision of March 9, 2017, ITA No. 1669 / Del / 2016

4 Sanofi Pasteur Holding SA v. DoR [2013] 257 CTR 401 (AP)

5 The arbitral tribunal, consisting of LY Fortier, R. Oreamuno Blanco and F. Berman, ordered India to reimburse Vodafone for legal costs of approximately INR 850 million

6 PCA case no. 2016-7. A tribunal consisting of Mr. Laurent Levy, Mr. Stanimir Alexandrov and Mr. J. Christopher Thomas QC ordered India to pay 90,000 million

7 Upadhyay, P. (2021 August 5). Subsequent taxation of indirect transfers to be made prospectively: New draft law. The Bloomberg Quint.

8 Nag, Anirban. (2021, May 5th). Cairn is suing Air India in US court over tax dispute with the state. The Bloomberg Quint.

Nishith Desai Associates 2021. All rights reserved.National Law Review, Volume XI, Number 238