Ncell tax issue prolongs as court upholds order not to collect duesThe legal battle between the tax authorities and Ncell and its parent firm, Axiata, over capital gains tax is set to prolong as the Supreme Court continued its interim order to the government to not collect the dues from the mobile company.
The legal battle between the tax authorities and Ncell and its parent firm, Axiata, over capital gains tax is set to prolong as the Supreme Court continued its interim order to the government to not collect the dues from the mobile company.
A joint bench of Justices Sapana Pradhan Malla and Prakash Kumar Dhungana on Tuesday decided to continue the interim order issued by a single bench of Justice Bam Kumar Shrestha on April 25. The bench also decided to send the case to the full court. Another hearing will take place on June 4.
When the Supreme Court on April 9 released the full text of its February verdict on the Ncell capital gains tax issue, it was largely believed that the matter was finally put to rest and that the debate as to who should clear the tax liability—buyer (Axiata) or seller (Teliasonera)—had come to an end.
In line with the court order, the Large Taxpayers Office on April 16 determined the capital gains tax liability for Ncell and Axiata at Rs39.06 billion and asked them to clear the dues within seven days.
But the telecom company filed a writ petition at the Supreme Court on April 22, just a day ahead of the expiry of the deadline to pay the dues, saying that the tax authorities had wrongly determined their dues. They also said that their tax liability stood at Rs14.36 billion, and not Rs39.06 billion, from the three-year-old Ncell buyout deal.
The company argued that the Large Taxpayers’ Office determined the tax on Ncell and Axiata as per Sections 101 (6) and 102 (E) of the Income Tax Act, without allowing these companies to furnish clarification. With the writ raising questions whether the tax authority followed the due legal process, the court said that it had to continue the interim order.
Lawyers from both the parties had presented their arguments on Monday and Tuesday.
While the writ petitioners argue that it had been clear only after the Supreme Court passed the verdict that Ncell had to provide transaction details to the tax authorities for determining the tax. So the petitioners claim that the tax authorities should not impose a revised tax as per Section 101 of the Income Tax Act by incorporating interest and fees on top of applicable taxes.
But, according to Sanjeev Raj Regmi, the joint attorney who argued on the government’s behalf on Tuesday, as per the court’s February verdict, tax liability for Ncell and Axiata was created on April 13, 2016 when the Ncell buyout deal was completed between Teliasonera and Axiata.
“Although the tax authority had earlier determined the tax liability for Teliasonera, which sold Ncell to Axiata, the liability was transferred to Ncell and Axiata as per the court verdict,” Regmi told the Post. “So there is no question of giving an opportunity to Ncell and Axiata for clarification, as such an opportunity given to TeliaSonera in the past is now applicable to Ncell and Axiata too.”
Amid this, tax collection from Ncell and Axiata has become further complicated, as they have initiated an international arbitration, citing the Bilateral Investment Treaty between Nepal and the United Kingdom.
On April 26, the Malaysia-based Axiata, the parent company of Ncell, made an announcement in the name of its shareholders that Axiata Investments (UK) Limited and Ncell Private Limited have filed a Request for Arbitration with the International Centre for the Settlement of Investment Disputes (ICSID) pursuant to the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Nepal for the Promotion and Protection of Investments.
The Bilateral Investment Treaty between Nepal and the United Kingdom has made the provision of referring the dispute over investment to ICSID, the international body under the World Bank Group founded in 1966. The ICSID Convention came into force for Nepal on February 6, 1969.
However, legal experts say Nepal has a strong case against the arbitration.
Semanta Dahal, a corporate lawyer, told the Post that because Axiata UK invested in Nepal indirectly, it might not be able to invoke the jurisdiction under the bilateral investment treaty.
“In the previous investment treaty arbitrations, it has been found that a passive investor which conducts no business of its own but merely holds shares in a company established in the host country, cannot invoke the jurisdiction under the bilateral investment treaty,” he said. “Such decision has been taken in a dispute between the Standard Chartered Bank and the Republic of Tanzania when Standard Chartered invested there through its branch in Hong Kong.”
Axiata is a Malaysian company and the investment came directly from Raynold Holdings registered in Saint Kitts and Nevis, a tax haven in the Caribbean with which Nepal has not signed bilateral investment treaties. Axiata (UK) owned the Raynold Holdings.
There is, experts say, ample ground to doubt if Axiata UK’s indirect acquisition of Ncell’s shares qualifies as an investment in Nepal.
Dahal also argued that the bilateral investment treaty cannot be applicable to taxation as long as the host country imposes taxes deliberately to deprive investors of their justifiable return on investment. In previous cases, bilateral investment treaty was applicable when the host country applied retrospective legislations in arbitrary and discriminatory ways, according to Dahal.
As per the ICSID Convention, parties may refer the dispute to arbitration if they are unable to resolve it within three months ‘through pursuit of local remedies or otherwise’.
“Ncell and Axiata have not fulfilled the obligations of seeking local remedies before resorting to arbitration under the Nepal-UK Bilateral Investment Treaty,” said Dahal. “They could have made an appeal for administrative review or reached out to the Revenue Tribunal first.