How has our constitutional law evolved in the last 75 years? (Part 3)

Case: The Tata Cellular v Union of India (1994) case concerns an arbitrary government tender process. Tata Cellular, a telecommunications company, challenged its disqualification from a government tender to provide mobile telephone services. Tata alleged that, although they had submitted a highly competitive bid, their company was disqualified because the government altered the evaluation criteria after the bidding process had started and unfairly scored competitors. The Supreme Court held that if tender terms are tailor-made to favour a specific bidder and exclude others, it violates Article 14 on account for its arbitrariness, as the procedures adopted were improper, illegal, and irrational.

Case: Vodafone International Holding B.V. v Union of India (2012) relates to Retrospective Taxation. A law made with retrospective effect is contrary to the rule-of-law elements of certainty, transparency, and objectivity in legislation. While the Constitution specifically bars retrospective criminal laws (Article 20(1), there is no such bar on retrospective civil or tax laws. The Supreme Court has not always struck down such laws, holding that if Parliament was competent to legislate prospectively, it can also legislate retrospectively. But retrospectively enacted civil laws can be challenged under Article 14 when they impose an unduly oppressive and confiscatory financial burden on citizens and are so unreasonable that it is impossible to carry out the fundamental right of business under Article 19(1)(g).¹

But retrospective legislation, when it impacts the economy, raises the cost of doing business by depriving enterprises of equity, fairness, and tax neutrality. Vodafone, a UK-based telecommunications company, acquired Hutchinson Essar (an Indian telecom company) from its parent Hutchinson Telecommunications International Limited (Hong Kong-based) in 2007. The transaction was completed entirely outside India. The Indian Income Tax authorities demanded about $2 billion in capital gains and withholding taxes from Vodafone on the ground that, although the money had been fully exchanged offshore, the underlying asset (Hutchinson Essar), which Vodafone had bought, was located in India.

Vodafone challenged the tax demand in the Supreme Court on the ground that the Indian tax authorities lacked jurisdiction over offshore transactions. The Supreme Court ruled in favour of Vodafone because Indian tax authorities were not competent to tax transactions between two foreign companies and that Indian tax laws at the time of the transaction were complete and did not provide for retrospective taxation of foreign transactions. Tax planning by a taxpayer to minimise taxes is legitimate when done within an existing legal framework, unless there is evidence of fraudulent avoidance structures.

To bypass this judgement, the Indian government amended the Income-tax Act, 1961, in 2012 to allow retrospective taxation of offshore transactions when the underlying asset was located in India. This amendment was made applicable from 1962 onwards, giving the government the power to open and scrutinise earlier settled transactions. Fresh tax demands were made from Vodafone and about 16 other companies.

Vodafone took the matter to international arbitration, which ruled in its favour in 2020. Similar tax demands were made against Cairns Energy (a UK-based company) that had undertaken an offshore restructuring in 2006 in preparation for the launch of Cairns India. This transaction had been approved by regulatory authorities in India at the time. Cairns too dragged its case to international arbitration and received a ruling in its favour.

Deep international embarrassment and loss of investor confidence caused by these two cases led the government to pass the Taxation Laws (Amendment) Act 2021, scrapping the retrospective taxation law on offshore transactions. The government withdrew all tax demands against Vodafone, Cairns, and several other companies, refunded the money collected, and compensated for losses.

The Vodafone case is also an instance of a threat to the rule-of-law principle of separation of powers. By overriding the Supreme Court’s interpretation of the tax law with another retrospective amendment on the same issue, the Legislature undid the Judiciary’s interpretation of the law. It changed the very framework of that interpretation from a back date.

Footnotes

1. Rai Ramkrishna v. State of Bihar (1963the) ↩