Vodafone’s Friction With The Taxman... Again!
Last week, the Delhi High Court delivered a judgment that rejected a plea by Vodafone Mobile Services Ltd. Vodafone had asked the court to direct the Department of Revenue to issue four-years worth pending tax refunds due to it. The revenue department successfully defended its actions by invoking relevant provisions to withhold refunds in situations where there is the likelihood of a demand on uncompleted assessments. The arguments were based on anticipated tax demands which could arise because of transfer pricing adjustments, denial of deduction on license fees, amortisation of spectrum charges and so on.
Amendments made via Finance Act, 2017 [Section 143(1D)] coupled with the insertion of Section 241A empower the tax department to delay the refund and offer an overriding power to deny refunds in situations where there could be potential tax demands, even if such demands have not been crystalised. The High Court has given a literal interpretation of the amended law while dismissing Vodafone’s writ.
What Changed In 2017?
As the decision of the High Court is binding on taxpayers and lawmakers alike—at least in the Delhi jurisdiction—taxpayers could find the principles onerous and burdensome.
It is interesting to see how a simultaneous insertion of the Section 241A in 2017, along with an amended Section 143(1D) included that very year, was likely motivated to withhold refunds; a retrograde policy move and against the grain of streamlining the issuance of tax refunds.
As per the law, returns & consequential tax refunds, if any are to be processed within two years from the end of the relevant financial year (Section 143(1)).
Until 2001, the revenue department had the power, under Section 241, to withhold refunds in exceptional situations, with the approval of the commissioner. That section was removed in 2001 to gain taxpayer confidence, and reduce discretionary powers.
Starting 2017, Section 143(1D) permitted the non-processing of return and refund if a notice had been issued. The time limit for issuing a notice is 18 months from the end of the financial year for which the tax return is required to be filed.
This means that processing of a return before the completion of a regular assessment was removed from the statute, the limitation for which now stands extended to four years from the financial year.
That same year a new section was introduced – 241A that permitted the withholding of a refund, in situations where it would adversely impact the interest of the revenue department, once a notice for assessment is issued.
That these amendments have gone unchallenged, seems to me as an instance of a fundamental right violation, denying a legitimate tax refund claim.
Vodafone did challenge the Constitutional validity and the Delhi HC has not adjudicated on the same.
Perhaps, the motivation for amending the law in 2017 was a judgment rendered by the Delhi High Court in Tata Teleservices case that was adverse to the revenue department. An administrative circular of 2015 that attempted to delay tax refunds was quashed as being unsustainable by the court.
The cumulative impact of the amendment seems to have caught taxpayers unaware of the consequences and the High Court, in the Vodafone case, has merely affirmed a literal interpretation.
Turning The Policy Clock Back
Other than the outcome of the recent judgment, there are a couple of tax policy aspects I wish to highlight.
1. The Central Processing Centre Initiative
Set up in 2009 as an effort to improve the tax administration process, the Central Processing Centre was meant to automate and fast-track the refund process. It sought to eliminate the need for a taxpayer to interface with the jurisdictional officer. This was a landmark reform in tax legislative history.
Independent of the CPC process, the jurisdictional officer is responsible for completing the assessment. The officer is governed by the statutory limitation periods, first for the issuance of a notice and subsequently for completion of an assessment.
The inaction of the CPC and the arbitrary invoking of legal provisions by field officers clearly seems to have caused a financial prejudice to Vodafone.
The reason I use the term ‘arbitrary’ is that there are several provisions in the statute prescribing that the revenue department has ‘to records reasons’ before exercising such discretionary powers. However, I remain circumspect as to how judiciously such powers are often exercised!
While I do not doubt that the revenue department did record the reasons in Vodafone’s case, it doesn’t seem to me that the High Court has dealt with the larger intent that lawmakers expressed when establishing the CPC – namely, a time-bound, hassle-free refund process. It is equally not discernible from the judgment if Vodafone did argue this aspect.
2. The Spirit Of The Refund Process
Diving deeper into the history of intimation for provisional assessment procedure, the law in Section 143(1) came into force as a result of Taxation Amendments Act, 1989.
This resulted in the rationalisation of the procedure for assessment and refunds. The objective at that time was precisely to address the harassment that taxpayers—particularly the salaried and retired—faced at the hands of rent-seeking tax officials at lower levels. The said provision, as a result of several amendments, benefitted both, the tax administration and taxpayers (large and small), who automatically received refunds. This also caused less strain on the exchequer by way of interest on delayed refunds. The 1989 amendment received a boost by way of the 2009 CPC initiative when the Business Process Re-engineering Committee of the Government of India implemented its flagship initiative by amending the law in 2008.
This aspect, the intent to simplify the refund process, also was left unanswered by the High Court, which in my view is an important consideration which ought to have been weighed. Besides, I doubt the correctness of the decision, in part pertaining to denial of refunds for all four years (including three pertaining for periods prior to amendment). By doing so, the High Court has interpreted the applicability of such amendments having retroactive effect.
It’s an opportune time for the lawmakers to intervene by reexamining the noble objectives of amendments to liberalise the law in the past two decades:
- the benefits that it has brought,
- the intent of amendments (in 1989, 2008, 2012 and 2017) for issuing and withholding refunds,
- discretionary authority meant to be exercised in exceptional situations or situations which make the revenue department believe that the taxpayers would flee the country.
I am sure Vodafone does not fall in that category.
Wishing all of you good luck for 2019.
Mukesh Butani is the founder of BMR Legal. Views are personal. He was assisted by his associate Shreyas Shah.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.