New terms for settling retrospective tax cases may be unwieldy

The new terms for settling retrospective tax cases, particularly indemnifying the government, could be cumbersome and time-consuming for companies. They may struggle to come to terms with sweeping undertakings and declarations from the board and other shareholders, observed legal and tax experts.

Besides, the indemnity bond format provides for any dispute being subject to jurisdiction of Indian courts. This could be another issue for declarants to be comfortable with, they say, adding a declarant may prefer his own home jurisdiction, or at least a neutral one.

The rule says that the Delhi High Court shall have sole jurisdiction to entertain and try any dispute or difference arising out of or in connection with the terms of this bond.

“The company intending to settle is ring-fenced by a large number of declarations running into very detailed averments. Additionally, it has to indemnify the government against any third-party claim if it is sought to be so made,” said Ketan Dalal, founder of advisory firm Katalyst Advisors.

“The language of the indemnity is very sweeping and is intended to totally protect the Indian government from any future potential dispute. Whilst this may be justifiable from a government standpoint, large multinational corporations – involved in litigation – will need to convince their boards/other stakeholders on the advisability of giving such indemnities – and that may not be easy,” added Dalal.

The Central Board of Direct Taxes in an October notification stated that companies will have to indemnify the Indian government against future claims and withdraw any pending litigation or proceeding before any forum to settle their retrospective tax cases.

Also, instead of obtaining a nod from all shareholders, the government has asked the taxpayer (declarant) to obtain an indemnity bond from each of the interested parties and annex it to the declaration being filed seeking refund.

“This new requirement will cost more time and effort by the declarant before filing the declaration. It will take at least two to three months before the declarant gets a refund,” said Rakesh Nangia, chairman, Nangia Andersen India.

Elaborating further, Nangia said the declarant is not only absolving his right to file a case, but also agreeing to indemnify the government if any case is filed by any other party. This has to be supported by way of an indemnity bond by the declarant, as well as all interested parties.

Interested parties have been widely defined to include all companies in the entire chain of holding till the ultimate holding company, any person to whom the declarant has transferred any of his claims, and any person in whose favour any interest has been created or assigned by the declarant.

The government has sought an exhaustive indemnity. The detailed declaration and indemnity sought by the government appropriately safeguards the government against any claim, by any party, at any time in the future, in any part of the world, owing to any reason whatsoever.

This notification shows the intent of the government: that it is willing to undo the wrongs and refund the retrospective taxes collected so far, but only after satisfying itself that no claim will ever arise on account of the retrospective tax proceedings.

In August, the government brought in the Taxation Laws (Amendment) Act, 2021, stating that no tax demand shall be raised for any indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012.

The initial submission of an undertaking to withdraw all pending legal proceedings has to be done in 45 days.

Thereafter the relevant principal commissioner of income-tax has to give a certificate accepting or pass an order rejecting the claim within 15 days from the receipt of application.

After grant of certificate, the companies will have to fulfil the condition of indemnity by all interested parties within 60 days. After this, the order granting relief has to be made within 30 days and only after this will the refund be initiated. Business Standard