Vodafone verdict: When law is not on your side

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The case shows that the letter always trumps the spirit in any law.
The case shows that the letter always trumps the spirit in any law.

The earnest if plaintive plea of the Income Tax Department that the Hong Kong-based Hutchison Whampoa's sale of 67 per cent equity in the Cayman Island-based CGP Investment Ltd to Vodafone International Holdings BV, Netherlands for a whopping US $ 11.2 billion was effectively for acquiring control over the telecom operations in India of Hutchison-Essar Ltd (later christened as Vodafone India), has not cut any ice with the Supreme Court.

Despite the contention that the Cayman Island company was a special purpose vehicle floated in a tax haven exclusively to nurse the investments in its Indian operations, the Apex Court has not only absolved Vodafone of any tax liability in India, but also given it a clean chit. As a result, the Court has asked its registry to release the bank guarantee for Rs 8,500 crore furnished by Vodafone India in compliance with its earlier direction, and also directed the I-T Department to refund the tax of Rs 2,500 crore paid under protest in compliance once again with its order — the two aggregating to a demand of Rs 11,000 crore.


The Department had it coming. The law was simply not on its side, though equity perhaps was. Its contention that the whole convoluted and layered transaction ultimately was about the shares of the Indian telecom operations cannot be shrugged off. But a fiscal law more than anything else is not about equity. It is, on the contrary, about the letter of the law.

The Direct Taxes Code 2010 (DTC) before the Parliament vide Section 123 seeks to cut the Gordian knot by permitting the tax authorities to term certain transactions as “impermissible avoidance arrangement” and reach out for the substance. But it appears the executive has to do better than this because once again it would be up against an impenetrable wall — how can one put a tax shovel into an Indian company when capital gains have been earned by a non-resident?

The law as it stands, the one on the strength of which the Department went for Vodafone India's jugular, does not support its case. It wanted the Indian operating company to be the representative assessee of Hutchison, which made the capital gain by selling out to Vodafone. But the truth of the matter was the Indian operating company never had any business connection with Hutchison. If anything it has had such a relationship only with the Cayman Island SPV, which alas happened to be the buyer of controlling interest.

Indeed, the Department was trying to brazen it out and went on to treat the Indian operating company as an assessee in default for not deducting tax at source. Pray, deduct from what? Tax can be deducted at source only by the payer. Similarly, tax can be collected at source only by the receiver. Vodafone India admittedly was neither the payer nor the receiver of the staggering US $11 billion. In the event, there was no way it could have complied with the TDS provisions. To be sure, all residents have to deduct tax at source before making any payment to non-residents.

But then, it is not even the I-T Department's case that the Indian operating company forked out funds to Hutchison on behalf of Vodafone International Holdings, the Netherlands based subsidiary of the Vodafone group UK.


Yet, one cannot help sympathising with the Department. Its pleadings do strike a chord. The whole deal was about the shares of the Indian telecom operations of Hutchison-Essar. And the underlying assets of shares are solid telecom assets, including infrastructure located in India. These were the arguments that weighed with the Bombay High Court, when it upheld the Department's contention that it had jurisdiction to tax the deal, as the underlying assets represented by the shares, at the end of the day, were located in India.

The Apex Court, however, has viewed the deal differently — as a transaction between two non-residents consummated abroad on which Indian tax authorities simply have no jurisdiction.

It is not enough to term smart, structured transactions as “impermissible avoidance arrangements”. The DTC may have to bring in something similar to the business connection rule that the tax authorities now rely on to extract tax from deals that may be consummated outside India, but which are courtesy a business connection in India.

But that would not be easy, given the fact that in these cases, the Department goes for the Indian resident's (with whom the non-resident has business connection and through the exercise of which he earns and receives income abroad) jugular.

In Vodafone-like situations, on the other hand, the Indian resident does not make the payments. It would take the cooperation of the government of the foreign country, where the SPV is located, to squeeze tax out of the non-residents. However, experience shows that such cooperation would always remain a pipe dream with governments of tax havens looking askance at the shenanigans of the crooks and the sophisticates. Tax information exchange agreements with some of these countries might, if at all, bring in information. But not money.

(The author is a New Delhi-based chartered accountant.)

(This article was published on January 20, 2012)
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One is unable to understand how the Supreme Court verdict is a victory for Vodafone or for those who want more FDI to come to India. How can we welcome some thing that will rob our government of its revenue?
While some lawyers and tax experts may welcome the verdict in the Vodafone case, as an independent country we need to be very pragmatic and rational in our response to the Supreme Court verdict. There is no need for despair. Our legal experts must examine the practice of taxing such transactions in similar situations in other countries. If necessary, an immediate amendment in our related tax law can be made. This would restrain companies from avoiding taxation and also make redundant the unnecessary litigation. Our officials in the Central Board of Direct Taxes have to be far more alert. They should also examine the Mauritius tax treaty as well to ensure that such treaties are not used to escape tax net.

from:  Narendra M Apt
Posted on: Jan 21, 2012 at 17:22 IST

Let us see this vodafone verdict in proper perspective.I as an Indian resident invest in a share and after 3 years it sky rockets to 5 times,I pay 15%+surcharge on capital gains.If the same thing happens to a multinational who sell their holdings abroad not going through our stock exchange, they don't need to pay any capital gains tax.This is how indian government writes its laws because the crooked elements who run this country write laws in such a way they deem themselves as NRI, do a off shore deal in Mauritius and pay no tax.Idiots like me who has no wayout has to pay the tax.It is time all genuine straight forward Indians consider this crooked situation and decide what course to take.Crooks have completely taken over this country extracting severe pound of fleash from those who cannot escape.I have disgust on the likes of chiddu and his deviant servants working in government.

from:  shiv
Posted on: Jan 22, 2012 at 09:50 IST
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