article_does retro_mukesh_indian law news_apr1366714025.pdf
Post on 14-Apr-2018
213 Views
Preview:
TRANSCRIPT
-
7/30/2019 Article_Does retro_Mukesh_Indian law news_Apr1366714025.pdf
1/5India Law News 1 Winter/Spring Issue 2013
IndiaLawNewsA quarterly newsletter of the India Committee
VOLUME 4, ISSUE 1, WINTER/SPRING ISSUE 2013
n the Indian Finance Act of 2012, Parliament
made several amendments to the income taxlaws, with retrospective effect. The express purpose of
the legislation was to overrule the January 2012
judgment of the Supreme Court of India in the Vodafone
case. This article discusses whether the retroactive
aspect of the legislation undermines the doctrine of
separation of powers or compromises judicial
independence to the extent of making the retroactive
law unconstitutional.
The Vodafone case involved a sale of shares from
Hutchison Telecom International Ltd. (HTIL), aCayman Islands entity owned by the Hutchison group,
to Vodafone International Holdings BV, a company
incorporated in the Netherlands. HTIL owned
Hutchison's operations in India though a series of
companies incorporated in Mauritius. The Indian
Revenue authorities contended that as the transaction
resulted in the sale of business assets located in India
from Hutchison to Vodafone, Vodafone was liable to
pay tax on the transaction even though the shares were
purchased from HTIL and not Hutchinson. Vodafone
challenged the decision. The Supreme Court of India
ruled that the wording of section 9 of the Income Tax
Act does not permit a look through(piercing thecorporate veil). Hence, the sale of shares of a foreign
company by a foreign company to another foreign
company could not be brought within the scope of
taxation in India.
The Indian Parliament, to counter the Supreme
Court judgment, introduced retroactive substantive
amendments to sections 9 and 2(47) of the Income Tax
Act in the form of clarifying explanations to amend the
scope of section 9, so as to bring within the ambit o
Indian taxation the sale of shares of a foreign companyif such shares have derived substantial value from
Indian assets. The legislation had the effect o
retroactively making the Vodafone transaction taxable
in India. Many have argued that overruling the
Supreme Court by retroactively effective legislation
undermines the rule of law and the separation o
powers.
continued on page 6
DOES RETROACTIVE LEGISLATION COMPROMISE JUDICIAL INDEPENDENCE? THECONSTITUTIONALITY OF THEVODAFONE LEGISLATION
B Mukesh Butani and Rahul Yadav
-
7/30/2019 Article_Does retro_Mukesh_Indian law news_Apr1366714025.pdf
2/5India Law News 6 Winter/Spring Issue 2013
continued frompage 1
Parts I, II and III of the Constitution of India
provide for separation of powers among the Executive,
Parliament and Judiciary. Indian courts have
consistently upheld the doctrine of separation of
powers, and that each branch of the government must
operate within the limits set forth in the Constitution.
There must be no transgression or attempt by onebranch to supplant, derogate or encroach upon the
designated space of the other branches.
THE CONSTITUTIONALITY OF RETROACTIVELEGISLATION
The power to enact laws lies within the exclusive
domain of the legislature. The power to legislate
includes the power to legislate retroactively (also
referred to by the courts as retrospective legislation),
including within the field of taxation:
Legislative power conferred on the appropriate
legislature to enact laws in respect of topics covered by
several entries in the three lists can be exercised both
prospectively and retrospectively. Where the
legislature can make a valid law, it may provide not
only for the prospective operation of the material
provisions of the said law, but it can also provide for
the retrospective operation of the said provisions. Rai
Ramkrishna v. State of Bihar (1963) 50 ITR 171 (SC).
While legislative power to introduce amendments
for the first time or to amend an enacted law with
retrospective effect is recognized, it is nevertheless
subject to constitutional limitations. Judicial principles
require that amendments made retroactive (a) should
use words expressly providing for or clearly implying
retroactive operation; (b) must be reasonable and not
excessive or harsh, otherwise they run the risk of being
struck down as unconstitutional; and (c) where the
legislation is introduced to overcome a judicia
decision, the power cannot be used to subvert the
decision without removing the statutory basis of the
decision.
It is also a settled principle that legislative actions
are subject to judicial review by the Indian High Courtsand Supreme Court. There is no doubt that the
legislature is empowered to enact laws retrospectively
as well as prospectively. No such enactment, however
should result in an alteration of the basic structure of
the Constitution. Kesavananda Bharti v. State of Kerala
AIR 1973 SC 1461). The general rule is that any
amendment or enactment that violates fundamenta
rights may be struck down by the courts as
unconstitutional.
Accordingly, pursuant to the writ jurisdictionconferred upon under Articles 226 and 32 of the
Constitution, the High Courts and Supreme Court act
as watchdogs to safeguard fundamental rights. Such
powers have been exercised with great caution by
Indian courts. On numerous occasions, when the courts
have been called upon to consider the validity of
legislation, the courts have shown great restraint
Unless the legislation patently violates fundamenta
rights and there is no recourse to prevent such a
violation but to declare the law unconstitutional and
strike it down, the courts will find the legislationconstitutional.
LIMITS ON RETROSPECTIVE LEGISLATION
The power to legislate includes the power to
validate a law which has been held invalid by the
courts by making retrospective amendments. This can
be done by removing the infirmities in the law or by
filling the lacuna therein. The obvious question is
DOES RETROACTIVE LEGISLATION COMPROMISE JUDICIAL INDEPENDENCE? THECONSTITUTIONALITY OF THE VODAFONE LEGISLATION
-
7/30/2019 Article_Does retro_Mukesh_Indian law news_Apr1366714025.pdf
3/5India Law News 7 Winter/Spring Issue 2013
whether by exercising such power the legislature
violates separation of powers by limiting the power of
judicial review.
A retrospective amendment to overcome a
judgment does not, by itself, render the amendment
invalid or unconstitutional, even if it has the effect of
neutralizing the judgment of a court, making the
judgment virtually ineffective. Such amendments do
not amount to the statutory overruling of judicial
decisions. I.N. Saksena v. State of M.P (1976) IILLJ 154
SC.
"A competent legislature can always validate a lawwhich has been declared by courts to be invalid,
provided the infirmities and vitiating factors noticed in
the declaratory judgment are removed or cured. Such a
validating law can also be made retrospective. If, in the
light of such validating and curative exercise made by
the legislature granting legislative competence the
earlier judgment becomes irrelevant and unenforceable,
that cannot be called an impermissible legislative
overruling of the judicial decision. All that the
legislature does is to usher in a valid law with
retrospective effect in the light of which the earlierjudgment becomes irrelevant." Ujagar Prints v. Union of
India [1989] 179 ITR 317 (SC)
Accordingly, the judiciary accepts that the
legislature is competent to render a judgment
ineffective, provided that the legislature removes the
statutory basis of the judgment with retrospective
effect. However, such retrospective amendment must
satisfy the test of constitutional validity, including inter
alia, the test of reasonableness. Taxing statutes, like any
other statutes, are subject to amendment withretrospective effect.
THE DOCTRINE OF SMALL REPAIRS
Legislative power to enact retroactive legislation
has to adhere to constitutional limitations, of which the
most important is the principle of small repairs,
which is an index of whether the law is harsh and
oppressive, or a valid exercise of the power to enact
retrospectively. The principle of small repairs, is an
expression that originated in an article in the Harvard
Law Review where it was observed that it is necessary
that the legislature should be able to cure inadvertent
defects in statutes or their administration by making
what has been aptly called small repairs. This
principle was subsequently adopted by the Indian
Supreme Court (Assistant Commissioner of Urban Land
Tax v Buckingham and Carnatics Co Ltd 75 ITR 603 (SC)
Virender Singh Hooda and Ors v State of Haryana AIR
2005 SC 137), and has been applied by Courts in
determining the constitutional validity of retrospective
legislation. The doctrine seeks to provide a touchstone
by which the limits of legislative power to enacretrospective legislation, including tax legislation, may
be tested.
A close analysis of the relevant jurisprudence
specifically in relation to tax legislation, demonstrates
that retrospective legislation has been upheld by courts
principally in two situations, cumulatively reflecting
what amounts to small repairs: (a) the imposition of a
tax, where the intention to impose the tax was always
clear but such imposition failed due to a formal defect
or (b) the imposition of a tax, where the intention toimpose the tax was always clear, but the imposition
originally failed due to sheer inadvertence.
The doctrine of small repairs also assumes
importance against the backdrop of the legitimate
expectations of the taxpayers. Lord Scarman in R v
Inland Revenue Commissioners ex p. Preston (1985) AC 835
(House of Lords, England) laid down emphatically tha
unfairness in the purported exercise of power can
amount to an abuse or excess of power. Thus the
doctrine of legitimate expectations is applied in thecontexts of reasonableness and natural justice.
The doctrine of small repairs permits retrospective
amendment where the aim of such amendment is to
convey the meaning or to clarify the intent of the
provision as it was always meant to be; to remove a
patent defect which, but for the modification, would
have absurd results; to supply an obvious omission in a
former statute; or to explain a formal statute. Therefore
-
7/30/2019 Article_Does retro_Mukesh_Indian law news_Apr1366714025.pdf
4/5India Law News 8 Winter/Spring Issue 2013
retrospective legislation which does not satisfy the
requirement of small repairs but in fact leads to
substantive amendments which are neither clarificatory
nor declaratory in nature, may be struck down by the
Courts as ultra vires and unconstitutional on the
grounds that it is unreasonable, harsh or oppressive.
THE QUESTIONABLE CONSTITUTIONALITYOF THE RETROACTIVE LEGISLATIONINVODAFONE
The amendments made to section 9 of the Income
Tax Act by the Finance Act of 2012, which outlines the
deemed source rule of taxation, cannot be said to
have been made to rectify a formal defect or aninadvertent error. Further, the severity and magnitude
of these amendments does not appear to be
clarificatory even though they have been introduced in
the statute under the garb of clarificatory explanations.
They clearly seem to fall outside the four corners of the
doctrine of small repairs.
The constitutional validity of these amendments
has yet to be tested in a court of law. Nevertheless, we
are of the opinion that the amendments cannot
rationally be held to be clarifying the intent of the
Income Tax Act so as to include the offshore sale of
shares by one foreign company to another foreign
company (such as Vodafone) within the ambit of
section 9 of that statute. This does not seem to be a
valid exercise of legislative power, as it amounts to a
substantive amendment levying a fresh charge, which
cannot be given retrospective operation as per settled
legal principles. Not only are these amendments
unreasonable, they fasten substantive liability insofar
as their retrospective operation is concerned, and theyare also harsh and oppressive. While the amendments
may stand the test of constitutional validity insofar as
their prospective operation is concerned, whether or
not Courts uphold their retrospective operation
remains to be seen (writ petitions have been filed
challenging the constitutional validity of section 9 by
McLeod Russel (India) Limited (an Indian company) in
the Calcutta High Court and SABMiller Limited (an
Australian Company) before the Bombay High Court).
To conclude, while the legislature has the power to
render a courts verdict ineffective by removing the
statutory basis of its judgment, the exercise of such
power has to conform to constitutional requirements
and the limitations are even more rigorous in the case
of a retrospective enactment. A practice whereby the
legislature, in an attempt to remove the basis of the
judgment, ushers in substantive amendments
retrospectively (which do not qualify as smal
repairs) in the garb of clarificatory or declaratory
amendments is not a valid exercise of legislative power
Such an attempt by the legislature not only undermines
the independence of the judiciary but also disturbs the
critical balance between the three branches ofgovernment.
Judgments and decisions of the Supreme Court
being the highest court in India, are the law of the
land as expressly provided for under Article 141 of the
Constitution of India. Thus, it remains to be seen
whether the retroactivity of section 9 will stand up to
judicial scrutiny if and when the McLeod Russell and
SABMiller cases wind their way to the Supreme Court.
Every democracy aspires to achieve the goal ogood governance in accordance with the Rule of
Law. For the Rule of Law to prevail it is imperative
that there exists a sense of responsibility and mutua
respect among the three branches of government
Therefore, no branch should be surprised when its
attempt to usurp the power of another in derogation of
the constitution is challenged until defeated.
Mukesh Butani is the Managing Partner of BMR
Legal and specializes in International Tax and
Transfer pricing with over 25 years experience in
advising Fortune 500 multinationals and Indian
business houses on a wide range of matters. He is a
member of the Advisory Group on International Tax
and Transfer Pricing constituted by the Indian
Ministry of Finance. He is also a member of the
OECD Business Restructuring Advisory Group, the
International Fiscal Associations Permanent
Scientific Committee and the OECD-BIAC
-
7/30/2019 Article_Does retro_Mukesh_Indian law news_Apr1366714025.pdf
5/5India Law News 9 Winter/Spring Issue 2013
committee. Mukesh can be reached at
Mukesh.Butani@bmrlegal.in.
Rahul Yadav is an Advocate and international tax
dispute expert at BMR Legal and has worked
extensively on several cross border transactions.
Rahul can be reached atrahul.yadav@bmrlegal.in.
mailto:Butani@bmrlegal.inmailto:yadav@bmrlegal.inmailto:yadav@bmrlegal.inmailto:Butani@bmrlegal.in
top related