Vodafone gives the game away

Call it Freudian slip or whatever, Vodafone has clearly guilt-tripped and given the game away, at least morally.

Before the Supreme Court, its contention was that the Bombay High Court was wrong in imposing capital gains tax on transfer of shares of a Camay Island-controlling company on the ground that these shares, in fact, represented the Indian telecom company's assets.

It pleaded that there was no way that the transfer of a foreign company's shares could be brought to tax in India in the absence of a clear provision to this effect in the Indian income tax law.

The following provision of law contained in Section 9(1) of the Income-Tax Act, 1961, found to be adequate to apply the pincer on Vodafone by the Bombay High Court, was not found to be adequate by the Supreme Court:

“The following incomes shall be deemed to accrue or arise in India :-

(i) All income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situated in India.”

Inclusive Law

It is common for a legislature to make an inclusive law, as opposed to an exhaustive law.

The above provision is clearly inclusive when it talks of all income arising abroad being roped into the Indian income-tax net, should there be a direct or indirect nexus between such incomes through business dealings in India.

The Bombay High Court found this to be enough to tax Hutchison on the capital gains earned abroad through the effective transfer of controlling interest in the Indian operating company through transfer of controlling interest in the Cayman Island company that effectively controlled the Indian operating company.

Vodafone successfully argued before the Apex Court that this was not enough, despite knowing that an inclusive legislation is designed to give a wide berth or amplitude to the taxman.

After all, the Parliament cannot legislate for every contingency and situation.

An inclusive legislation obviously cannot spell out everything and is designed to give a long rope to the taxman. Be that as it may.

Clutching at Straws

With the Finance Bill, 2012, the Government is seeking to give itself the explicit power to reach out to deals of such genre — transfer of shares of companies abroad whose substratum exists in India.

Vodafone now says that there is nothing wrong in this proposed amendment, but it should not be retrospective.

The Indian Government, however, says it is not retrospective but clarificatory, as indeed it is, given the inclusive nature of the enumeration of situations in Section 9(1) that should stand legal scrutiny, especially after things are spelt out.

To pre-empt the inevitable passing of this clarificatory amendment by Parliament soon, which would definitely be followed by a fresh notice of demand to pay tax with interest, Vodafone is now clutching at straws — Bilateral Investment Promotion and Protection Agreement (BIPA) between India and the Netherlands — and is in the process giving the game away, morally at least.

How can it take advantage, if at all, on the basis of an agreement between India and the Netherlands merely because Vodafone Holdings, which in turn controls the Camay Island company, is a Dutch company?

Because the Indian tax authorities' contention was precisely on the same lines — the Camay island company's shares effectively represented and subsumed controlling interest in the operations of the Indian company Hutch sold to Vodafone.

It does not lie in Vodafone's mouth to say that the Camay Island company is actually the conduit of the Dutch company and take advantage of the Indo-Dutch agreement, having earlier pooh-poohed the same argument made by the Indian tax authorities — the Camay Island company was a conduit through which foreign investment was channelised into India.

Clearly, Vodafone has not only guilt-tripped but is also guilty of inconsistency in its stand.

If conduits should not be taken note of by the Indian tax authorities, they should not be taken note of by Vodafone as well.

(The author is a New Delhibased chartered accountant >blfeedback@thehindu.co.in )

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