Retrospective tax changes face legal challenge

Retrospective tax changes face legal challenge

Kolkata: The legal challenge to contentious amendments that allow India to retrospectively levy tax on overseas sales of Indian businesses has begun.

Kolkata-based McLeod Russel (India) Ltd—the world’s largest tea plantation company —moved the Calcutta high court last month challenging the “constitutional validity" of the amendments announced in the national budget in March.

It is perhaps the first company to challenge the modifications because it has been disputing for the past few years a tax claim that has been made stronger by the change in tax laws.

Controlled by the family of Brij Mohan Khaitan, McLeod Russel’s dispute with income-tax authorities stems from its 2005 acquisition of Williamson Tea Assam Ltd, another plantation company, from the UK-based Magor family, one of the firm’s co-founders.

The Khaitans and the Magors were partners in a larger tea business for decades before it was carved up in 2001.

In June 2005, McLeod Russel concluded a deal to acquire for around 170 crore the entire share capital of Borelli Tea Holdings Ltd, the UK-based company through which the Magors owned a 70% stake in Williamson Tea Assam. The Magors exited India.

McLeod Russel moved the income-tax tribunal, disputing the tax claim. The dispute has not been resolved yet.

For years, Indian tax authorities have been trying to realize tax from such overseas transactions through which the ownership of Indian businesses was transferred.

The most notable among such transactions was Hutchison Telecommunications International Ltd’s 2007 sale of its 67% stake in an Indian mobile phone network to the UK’s Vodafone Group Plc.

Vodafone held that the asset in question in such transactions was the share capital of an overseas company, and hence, Indian tax authorities didn’t have right to levy tax on it.

This view was endorsed by the Supreme Court, when it ruled in January that Hutchison’s overseas stake sale in its Indian mobile phone network took place outside the jurisdiction of Indian tax authorities because it was effected through the sale of shares of a company based in the Cayman Islands.

Following the apex court ruling in the $2.5 billion (around 14,000 crore today) tax dispute, tax claims over other overseas transactions such as the one between McLeod Russel and the Magor family would have died a “natural death", according to the partner of a Kolkata-based law firm, who declined to be named.

These companies would have simply cited the Supreme Court ruling on the Vodafone-Hutchison deal and got the tax claims against them quashed, he said. But these tax disputes got a “new lease of life" and “became stronger, thanks to the retrospective amendment of the income-tax laws".

In an interim order, the Calcutta high court has stayed till 31 August all proceedings at the income-tax tribunal in the dispute between McLeod Russel and the income-tax department, according to a statement made by Khaitan and Co., the law firm representing the tea producer.

McLeod Russel’s managing director Aditya Khaitan refused to comment.

The dispute over the constitutional validity of the retrospective amendments to the income-tax law is likely to be decided by the Supreme Court, and not by high courts, according to the unnamed lawyer cited above.

At some point, all such cases are likely going to be transferred to the top court of the country, since it has already passed a significant judgement in this matter, he said, adding that to save time, the government is likely going to file a transfer petition and move all similar disputes to the Supreme Court, allowing it to decide on the “merit of these tax claims in the light of the amended tax laws".

Remya Nair in New Delhi contributed to this story.