BackGovt seeks Vodafone case review
Govt seeks Vodafone case review
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New Delhi: The government filed a review petition before the Supreme Court on Friday in an attempt to reverse the decision in the Vodafone Group Plc tax case, which cost the exchequer a potential ₹ 11,218 crore in revenue and likely closed the door to such levies being imposed on more deals.
The verdict may affect more than half a dozen similar transactions that the I-T department has sought to levy tax on and is contesting in various courts.
The review petition comes ahead of the 16 March budget announcement in which the government has been expected to incorporate some provisions of the proposed Direct Taxes Code (DTC) to empower it to tax overseas share transactions where the majority of underlying assets are in India.
The I-T department contends that several submissions made on its behalf by solicitor general Rohinton F. Nariman were not considered by the court in arriving at its decision.
The case involved the overseas transfer of a single share of a company with underlying assets in India. Vodafone International Holdings BV, a Dutch unit of the British telecom operator, acquired the Indian business operations of Hutchison Telecommunications International Ltd (HTIL) through the sale of a Cayman Islands-based firm called CGP Investments (Holdings) Ltd, a unit of HTIL, also a Cayman Islands company.
HTIL is owned by Hong Kong-based Hutchison Whampoa Ltd, controlled by billionaire Li Ka-shing.
The I-T authorities held that even though the transaction took place outside India, the underlying assets were in the country and, hence, Vodafone was liable to withhold the tax on capital gains accruing to Hutchison. Vodafone disputed the claim, leading to the litigation.
The review petition chooses to tackle the judgement with three fundamental arguments: the implications for foreign direct investment was not an issue to be considered by the court; the court did not consider the real nature of the transaction (form versus substance), including the sale-purchase agreement between Hutchison and Vodafone; the reliance on the DTC Bill to determine whether or not the current I-T Act has the power to tax such a deal was not the right approach.
The petition argues that the language in the I-T Act and DTC is the same, and gives the tax department power to tax transactions where the underlying assets are based in India. DTC only clarifies the provisions in the I-T Act by stating that only those transactions where more than 50% underlying assets are in India are subject to tax.
Besides these points, the petition argues that there are other errors apparent in the verdict and these need to be set aside by the court. It argues that, in effect, the judgement legitimized the routing of transactions through tax havens.
A review petition is not heard in open court. It will be circulated to the same bench of judges that heard the oral arguments—in this case Chief Justice S.H. Kapadia and justices Swatanter Kumar and K.S. Radhakrishnan—to review the matter “in chambers". Also, no new facts are normally allowed to be introduced in a review petition and the judges may only be persuaded to consider issues that their decision has perhaps left unanswered, or if there was an error apparent.
If the judges consider a review may be necessary, they may ask Nariman to appear and argue the points raised in the petition at a later date. The court may also issue notice to Vodafone’s lawyers.
Vodafone said it had noted the review being filed and that it had no further statement to make at this stage.
After the 20 January judgement, the finance ministry had constituted a committee comprising senior officials of the tax department to study the judgement and make recommendations.
“The committee had suggested various options, including amending the I-T Act to plug such loopholes in the law and filing a review petition in the Supreme Court," said a person familiar with the committee’s recommendations.
Some analysts and legal experts questioned the government’s strategy behind filing the review petition, given that the firm had won the case outright.
“It is an ill-conceived move and will create uncertainty for a few days. The points made by the government in the review petition are not new and were already made before the Supreme Court bench at the time of hearing the case," said Sudhir Kapadia, national tax leader at audit and consulting firm Ernst and Young. “But the apex court was persuaded by the arguments made by Vodafone and not by those of the I-T department."
Mergers and acquisitions currently being contested by the tax department in courts include the purchase of a stake in Idea Cellular Ltd from AT&T Inc. by Aditya Birla Nuvo Ltd and Tata Industries; SABMiller Plc’s global acquisition of Foster’s Group Ltd; and Vodafone’s purchase of Essar’s 33% stake in Vodafone Essar Ltd, in which Vodafone had withheld tax of $880 million.
In its judgement, the apex court had criticized the government over its failure to bring in legislative changes to tax share transfers between international companies. Following this, finance ministry officials had indicated that the government is likely to amend the I-T Act to incorporate some of the provisions of DTC in the forthcoming budget itself to empower it to tax overseas share transactions where the majority underlying assets are in India.
nikhil.k@livemint.com
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