Post Vodafone verdict, govt should demonstrate grace and maturity-Jan 23, 2012

Post Vodafone verdict, govt should demonstrate grace and maturity

Sudhir Kapadia Jan 23, 2012, 04.49AM IST


In a thumping judgment, the Supreme Court (SC) has unequivocally pronounced total freedom from Indian taxation vis-a-vis purchase consideration paid by Vodafone International Holdings BV (Vodafone) for acquisition of share capital of CGP Investment (Holdings) Ltd (CGP) in pursuance of which Vodafone gained indirect control in Hutchison Essar Ltd (HEL), a company belonging to the Hutchison Group.

The SC has laid down a number of tenets and principles while arriving at this conclusion. The SC has reiterated the reasoning laid down in several cases by English courts that when a document or transaction is genuine, the court cannot go behind it for some supposed underlying substance (Westminster principle).




It is the task of the court to ascertain the legal nature of the transaction, and while doing so, it has to look at the entire transaction as a whole and not to adopt a dissecting approach as adopted by the Revenue. The apex court has quoted with approval the English decision in Craven v/s White where it was held that Revenue cannot start with the question as to whether the transaction was a tax deferment or a saving device and that genuine strategic tax planning cannot be abandoned.

The Supreme Court has also reconciled major judgments in McDowell's and in the case of Azadi Bachao. The SC has ruled that McDowell's could be invoked only where the taxpayer chooses to use an artificial and colourable device devoid of any commercial objective and one cannot read McDowell's in a manner to characterise all tax planning as illegal or illegitimate.

The Supreme Court has analysed the unfavourable Bombay High Court decision and differed with it when it comes to the treatment of other valuable rights and entitlements that flow as a consequence of sale of shares in CGP Holdings.

The SC has categorically ruled that the Vodafone case concerns a sale of shares simplicitor and not an asset sale. It is only by acquiring the shares of CGP that Vodafone got an indirect control over three kinds of companies in the group structure of Hutchison and the fact that it is a sale of shares of a foreign company, which, under the law, is not subject to tax in India is undisputed.

In other words, the Supreme Court has concluded that other rights like control premium, non-compete agreement, customer base, brand licenses, operating licenses, etc, were transferred only as a consequence of the transfer of shares in CGP, and the high court erred in attempting to dissect the transaction and split the payment in each of the above items.

In conclusion, the apex court has observed that FDI flows towards a location with strong governance and infrastructure that includes enactment of laws and how well the legal system works.

Certainty is integral to rule of law and stability in complying with the rule of law forms the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational choices in the most efficient manner.

The apex court has reiterated the advice in Azadi Bachao to the government to incorporate suitable provisions in the domestic tax law and in the tax treaties if the intent is to look through intermediary companies and tax indirect transfer of business assets in India to let investors know where they stand before they conclude a transaction in India.

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