Tag Archives: Section 234B

Cairn faces a INR 10,000 crore Tax spill

The Income-tax Appellate Tribunal has upheld a INR ~10,000 crore (approx USD 1.5 billion) capital gains tax demand on Cairn Energy UK, on a transaction which caused inversion of the group holding structure and resulted in the currently listed Indian entity of the group [Cairn India] becoming the holding company for the group’s oil and gas assets in India. The transaction in question happened before the sale of the group to Vedanta.

Grants interest relief

The Tribunal however spared the dual interest levies for non-filing of Tax return and non-payment of Taxes in India, in a total sum of further INR 14,000 crore. The Tribunal ruled that interest could not be levied as the Tax demand emanated from retrospective change to the Tax law. The Tribunal also held that there was no obligation for Cairn UK to remit advance tax in India on account of the retrospective change; as also for the reason that in the case of non-resident Taxpayers, the applicable taxes have to be deducted by the payer of income.

Ruling Debrief

The facts of the case

A simplified version of the complex facts of the Transaction is as follows. Cairn Energy Plc, the erstwhile ultimate holding company of the Cairn Group held diverse Oil and Gas assets across the globe – with Indian assets being most significant in value. The complex restructuring exercise leading to divestment of 30% of its Indian assets through an IPO in India was carried out through the following steps:

(i) The Indian holdings [held through various SPVs] of Cairn Plc were first transferred to Cairn Energy UK.

(ii) Cairn Energy UK in-turn hived off the Indian holdings to Cairn India Holdings, an entity based in Jersey.

(iii) Cairn Energy UK then moved its entire stake in Cairn India Holdings, Jersey to another of its subsidiaries in India – Cairn India. Cairn India acquired the Cairn India Holding, Jersey stake from its parent Cairn Energy UK partly by way of issue of shares and partly for cash consideration.

It is this transfer of Cairn India Holding, Jersey by Cairn Energy UK to Cairn India, which was subject to capital gains taxation by Indian Revenue authorities.

(iv) Subsequent to the above acquisition of Cairn India Holdings, Jersey, the Indian entity came-up with an IPO. Part of the IPO proceeds were used to pay Cairn Energy UK for acquisition of its stake in Cairn India Holdings, Jersey

Through the process, close to 30% of the Indian oil and gas assets were monetized / divested by the Cairn group, while retaining the balance 70%.

The Technical challenge to the Tax notice

The Tribunal first dealt with the elaborate filibuster on range of technical objections to the Tax Notice for re-assessment, which formed the basis for the proceeding culminating in the tax demand. The Notice was challenged on following grounds:

  • That the Tax notice was not in prescribed legal format, as it did not clearly state that due approvals have been obtained for issuance of the same
  • That the Tax notice was based on information which was already in possession of the Department as filed by the Indian entity [Cairn India] and not on basis of fresh material, and therefore not in conformity with legal requirements
  • the survey report which formed the basis for the Tax notice was ‘probably’ not in possession of the Tax officer at the time he issued the notice
  • the  communication which contained the “reasons” for issuance of Tax notice was not signed by the Tax officer
  • the authorization for the Tax notice was not from the appropriate officer

The Tribunal however rejected the technical objections and upheld the validity of the Tax notice, after a review of the record presented by the Tax Department to show that applicable legal processes were duly followed.

The core of the case

On merits, the Tax demand was resisted for following reasons:

  • That the transaction was in the nature of internal group re-structuring which did not result in ‘real income’ accruing to the group
  • That the retrospective change in Tax law was not constitutionally valid and Indirect transfers were not taxable in India, as held by the Supreme Court in Vodafone’s case
  • The Domestic Tax law which was prevalent  at the time India entered into Double Taxation Avoidance agreement with United Kingdom had to be applied (Another way of arguing that retro-amendment to the Tax law was not applicable)
  • That in any case, there was no gain arising in the hands of Cairn Energy UK, since Cairn Energy UK had acquired its stake from Cairn Plc and the cost of acquisition was the same as the sale consideration since the transaction of acquisition and disposal happened within a short time-frame

The Tribunal did not agree that the transaction was in the nature of internal group re-organization, not resulting in any ‘real income’ to Cairn Energy UK. Reference was made to the financial statements of Cairn Energy UK wherein the gain was disclosed and further stated to be tax exempt in UK. The Tribunal also did not agree that the law prevailing as on the date of entering into India-UK DTAA was applicable to the case.

The issue of constitutional validity of retro-amendment was not decided on the basis that such an issue can only be decided by a constitutional institution [i.e. a proper Court of law] and not by a Tax Tribunal, which is a creature of the Tax statute.

The Tribunal also rejected the contention on behalf of Taxpayer that there was no gain in the hands of Cairn Energy UK, since acquisition and transfer of the Indian business had happened over a short time-span; and that the cost of acquisition would be equal to sale consideration. The Tribunal held that since the earlier steps in the transaction were not brought to tax, the entire gain could be taxed in the hands of Cairn UK.

Our View & comments

While most of the arguments presented on behalf of the Taxpayer seem to have been dealt with appropriately, the argument to the effect that cost of acquisition at fair value should be equal to the sale consideration seemed the most attractive one, which may save the day for the Taxpayer at a higher forum. Perhaps a more refined argument would be to admit a certain upside [earned between the time of acquisition and disposal] as the Taxable gain. If such an argument were to be accepted, this would still leave a significant upside [between the time the assets were originally acquired by the group till the same was transferred to Cairn Energy UK pursuant to the re-organization] going un-taxed, which would obviously leave the Revenue dis-satisfied.

Perhaps the need of the hour is to have enabling mechanism in Tax laws to deal with taxation of complex re-organisation transactions which result in part disposal of stakes, while retaining larger control. A pragmatic and fair resolution in such cases would be to proportionately tax the divestment component [for instance, the 30% dilution to public in this case]. Properly used, the General Anti-Avoidance framework which comes into force from 1st April 2017 could well be the tool for equitable taxation of such complex arrangements.

 

234B Interest levy not to apply when tax was “deductible” at source : Delhi HC

The De-Brief

234B interest – what’s that

234B interest is levied when there is short-fall in payment of Advance Tax by a Taxpayer.

The controversy

The controversy has a connection with Section 209 – which lays down how advance tax liability is to be computed. As per Section 209, a Taxpayer can take into account the amount of tax which is “deductible” at source from his income while determining the quantum of Advance Tax payable.

(Note – the law has since changed with the amendment to Section 209 by the Finance Act, 2012. Currently, the Advance Tax liability has to be determined with reference to the  taxes actually deducted)

Quite often, there is a mis-match between the amount of tax which is “deductible” from the income of the Taxpayer and the amount which is actually deducted by the payers of such income. In all such cases, the Taxpayer contends that interest under section 234B should not be applied in case of short-fall in payment of Advance Tax on account of non-deduction or short-deduction of taxes by the payers of the income.

The non-residents’ angle to the controversy

In the case of a non-resident, the entire income is liable to tax deduction at source under section 195. Thus, a non-resident would, in theory, never have any Advance Tax payment obligation since the payer of the income would have to deduct the entire tax amount while making the payment.

However, in practice, on account of different views being taken by the Taxpayer and the Revenue authorities on the issue relating to taxability in India of income of a non-resident, the dispute on taxability led to an incidental dispute on the Advance Tax obligations and consequent applicability of Section 234B interest levy.

The defense of non-resident taxpayers was similar to that taken by resident taxpayers – that since tax was “deductible” from their income, they cannot be held to be in default of payment of Advance Tax. This defense was taken even while contending that the income was per se not liable to tax. By and large, the above defense for non-levy of interest was accepted by various Courts.

The ‘Bombshell’ ruling in case of Alcatel Lucent

However, the division bench of Delhi High Court in the case of Alcatel Lucent had upheld the levy of Section 234B interest on the Taxpayer. The Court had reasoned that since the Taxpayer was denying tax liability, it is quite conceivable that the Taxpayer had influenced its customers (the payers of the income) not to deduct the tax at source. Accordingly, the Court upheld the levy of interest under section 234B on the Taxpayer.

The Present ruling in GE packaged power- Anti-dote to Alcatel Ruling

In a more recent ruling involving various overseas GE group companies that were charged to tax in India on the ground that they had a Permanent Establishment (‘PE’)  in India, the Delhi High Court has held the ruling in case of Alcatel Lucent was rendered in the context of its own “peculiar facts” and did not lay down any general proposition of law.

Similar to the case of Alcatel Lucent, the GE entities were denying the charge from Revenue authorities that their operations resulted in a PE exposure, and consequently denying any tax liability in India. The entities also raised the defense that in any event, interest should not have been levied on the basis that the income was liable to tax deduction at source ( as explained in detail above).

The Revenue relied on the earlier Division Bench ruling of the Delhi High Court in the case of Lucent Alcatel to contend that the 234B interest was applicable.

The court did not accept the Revenue’s contention and reiterated the principle which was widely applied earlier (i.e. before the Alacatel ruling) – that the Taxpayer was entitled to consider the tax that was “deductible” from its income – and since in the case of a non-resident, the entire tax was “deductible” at source by the payer of income under section 195, the payee Taxpayers (GE entities involved in the case) cannot be charged with Section 234B interest levy.

The Court also noted that in Alcatel ruling, the stand of Taxpayer was “vacillating” and after denying PE-related tax liability, the Taxpayer had admitted to tax liabilities in India, and it is only in consideration of those peculiar set of facts and on grounds of equity, that the earlier ruling was rendered.

Lessons from the Ruling

A natural, and perhaps unintended, consequence of the above ruling would be that Taxpayers who are facing similar tax liabilities in India, who might have been considering admitting some tax liability to ‘close-out’ on open disputes would now think twice, since the Revenue authorities are sure to pounce on them and cite their “vacillating” stand and contend that the ratio of Alcatel Lucent ruling should apply to them and Section 234B interest would be applicable. Sticking to the ‘not taxable’ stand now would seem to be an added compulsion to avail 234B interest reprieve!