NEW DELHI: The government is facing a fresh international challenge to the policy of retrospective tax amendments adopted by it. Now, Earlyguard, a British subsidiary of Japanese conglomerate Mitsui & Co, has commenced arbitration under the India-UK Bilateral Investment Treaty after income tax authorities raised a Rs 2,400-crore demand related to a transaction that took place in 2007.
While Earlyguard commenced arbitration proceeding in February, Mitsui & Co disclosed the details, while releasing its financial results earlier this month.
The Japanese giant said the tax department has demanded capital gains on the sale of shares of Finsider International Co — a UK company that owned a 51% stake in iron ore miner Sesa Goa — by Earlyguard.
“Although Earlyguard treated the capital gain properly according to the tax laws at that time, the payment notice has been issued,” Mitsui & Co said. In earlier filings too, it had disclosed that a tax notice had been received in January 2020.
Neither the tax department nor Mitsui responded to requests for comment.
Like several other entities, proceedings against the Mitsui subsidiary started years after the government decided to retrospectively amend the Income Tax Act to levy capital gains tax on transactions that took place outside India but involved assets located in the country. The amendment was introduced by the then FM Pranab Mukherjee in 2012 after the government discovered that it could not realise any tax on the sale of Hutch Whampoa’s 67% stake in an Indian telecom firm to Vodafone in what was then the largest deal in the country.
Since there was no way to catch Hutch, tax officials came up with demand on Vodafone, accusing it of not deducting tax while making the final payment. Vodafone challenged the notice but lost the case in the High Court, while its stand was accepted by the Supreme Court. Mukherjee and his team then came up with the retrospective amendment, which was cited as part of the tax terrorism that even BJP complained about.
While the Narendra Modi government promised not to use retrospective tax tools, it has done nothing to either stop the earlier proceedings, leave alone reversing it. In fact, officials in the finance ministry have been justifying the move and have challenged two adverse international awards against the amendment.
First Vodafone and then Cairn Energy Plc have won arbitration cases in international tribunals, for violation of bilateral investment treaties. Both the cases have been challenged by the government, which has argued that taxation is the sovereign right of Parliament and is not dictated by commitments under investment agreements.
In several cases, officials have sought to justify the stand on the grounds that tax was not paid in any jurisdiction.