SC posers for Vodafone counsel3 min read . Updated: 14 Oct 2011, 01:18 PM IST
SC posers for Vodafone counsel
SC posers for Vodafone counsel
New Delhi: Chief Justice of India (CJI) S.H. Kapadia’s bench questioned Vodafone counsel Harish Salve on a series of points this week as the senior lawyer resumed arguments in the ongoing Rs11,217 crore tax case before the Supreme Court.
Salve was responding to the Income Tax Department’s claim that the transaction through which the British company entered the Indian telecom market was an “artificial tax avoidance scheme". Vodafone Plc’s subsidiary acquired Hong Kong-based Hutchison Whampoa Group’s joint venture stake in Hutchison Essar Ltd (HEL) between February and May 2007 for $11.076 billion.
The Supreme Court’s questions ranged across a variety of issues, but primarily revolved around the taxability of the Cayman Islands transaction, which gave Vodafone a direct holding of roughly 42% in HEL. Tax authorities, represented by solicitor general Rohinton Nariman, had argued that the income tax act’s provisions were wide enough for the department to “look through" the string of companies and levy a demand on the deal.
Salve refuted this argument saying the department could use a “look-through" approach (also known as “lifting the corporate veil") only if there was any “mischievous" intent on the part of Vodafone and Hutchison. “It is not a mischievous device to avoid tax liability."
He also countered Nariman’s claim that Cayman Islands-based HTIL had “extinguished property rights in India", which would give the department the right to pursue tax from the deal. “In order for there to be an extinguishment of rights, first of all there must be rights in India," said Salve.
Salve also added that the clause in the agreement between Vodafone and Hutchison which expressly terminated the rights of HTIL’s directors in the group companies was inserted for “convenience".
But CJI Kapadia’s bench, observing that this matter “is going to affect a number of cases", put several queries to Salve.
The Bombay high court’s judgement in the case last September had conferred some jurisdiction to the tax department, mainly arising out of the supplementary agreements, and not the Cayman Islands share transfer. This has been called the ‘A+B’ approach by the Supreme Court’s bench, and leading the judges to ask: “Is the high court right in saying in this ‘A+B’ approach, this ‘+’ will bring the transaction within the physiology of India?"
Salve maintained that it did not matter where the assets are located, but it matters where a transaction is carried out in order for it to attract tax. “Source in this case is outside India. It doesn’t matter where the goods are, the sale is outside India."
India’s 1983 tax treaty with Mauritius, through which the Vodafone-Hutchison holding eventually entered India, was also debated by the court and Salve.
“We want to know if the Mauritius route was available in this transaction or not," asked the court.
“Fully available," said Salve. “If I had structured my transaction appropriately. The fallacy is to fit this transaction into the Mauritius treaty and say it is not available. That’s not done."
The court then asked: “If $11 billion is payable to HTIL, is the Mauritius route available? All this transaction (sic) and the agreements are focused on HTIL. If we accept the contention of the other side that we should pass through all these companies (in Mauritius) and go straight to HTIL because it was was the one that was paid. (HTIL) distributed dividend."
Salve reiterated that the tax authorities had no reason to doubt the motives behind the structure of the transaction. “If I head on sold the Indian shares, there would be no tax (because of the India-Mauritius treaty). You say I sold an upstream share (in the Cayman Islands) because my Indian shares were taxable. The key issue is whether the Indian shares were taxable. They were not."
“If the legal owners (of shares in HEL) are Mauritius companies, and payment was made directly to HTIL, to whom does capital gains accrue?" asked the court.
“The Mauritius companies," answered Salve. “That’s the McDowell judgement - even if someone else receives money on my behalf, I am still liable to pay capital gains tax. You have to look at it with a holistic perspective. Either you reject my entire structure bag and baggage and say since 1999 you were planning a fraud. Or you accept that this is a genuine FDI (foreign direct investment) structure." Some of the companies in Hutcison’s structure were incorporated in the late 1990s. Tax authorities had argued that parts of the deal were structured with the intent of mitigating the tax liability.