Vodafone International: `Victim of Choked Recovery’

Advocate Sameer Bhatia

Introduction

`Any compulsory exaction of money by Government amounts to imposition of tax which is not permissible except by or under the authority of a statutory provision’

CCE vs. Kisan Sahkari Chinni Mills AIR 2001 SC 3379-80

Indian economy has over the years ventured into the compartment of being one of the most promising and ambitious economies of the world. Having collared the roaring and cherished stimulus of development through semblance of pilot projects such as `Make in India’, `Digital India’, `Swachh Bharat Abhiyan’, `Beti Padao Beti Bachao’ to name a few, the commercial confidence has ballooned in multifarious dimensions. With the facet of `taxes’ besides others, being the ace revenue generator, the economy aspired to counter myriad provocative challenges in times to come. Coupled with the inalienable back of Constitutional ethos, any levy/charge/exaction is subject to indomitable legislative essence and judicial inquisition affirming or reversing the imposing norm. Instrumenting the art of putting into motion a legitimate impost, judiciary plays a thumping and credible role with the Hon’ble Supreme Court being the chief arbiter and adjudicator of any lawsuit, cause, action, trial or proceedings. With the judicial razing of amateurish demands and a consequential pressed claim of recovery, a strained and pinched atmosphere has since made deep inroads into the deafening and highly proclaimed non-adversarial tax regime.

Main Body

One among st the main issues surrounding the impasse is the payment of ejected liability carrying a whopping sum of Rs.14000 crore by Vodafone International Holdings B.V. under the parasol of Capital Gains Tax to the Indian tax administration. An issue squarely won by Vodafone in a proactive tax war with the authorities at the Hon’ble Supreme Court of India sometimes designated popularly as the `Tax Terrorism’. The Hon’ble Apex Court had in Civil Appeal No.733 of 2012 titled as Vodafone International Holdings B.V. vs. Union of India (2012) 204 Taxman 408 trashed out the submissions of the learned departmental pleaders in what is called as the most innovative verdicts ever in congenial tax climate. The Court relying upon the accepted canons of jurisdiction accompanied by thorough introspection of various sections construed the demand raised by the tax authorities as unsustainable and labeled the same as imposing capital punishment for having made massive capital investment. On an extensive dissection of the impugned provisions referred to as Sections 2(14), 4, 6, 9, 90, 163 and195 of the Income Tax Act, 1961, nothing perverse seems to have been recorded by the Apex Court concerning the act of mutual transfer entered pursuant to Sale Purchase Agreement (SPA) between the corporate entities. While adjudicating the Source Rule in relation to Income under section 9 of the Income Tax Act, 1961, the Hon’ble Court held that source in relation to an income is construed to be where transaction of sale takes place and not where item of value, which was subject of transaction, was acquired or derived. The Hon’ble court clearly demarcated the segmental proportions of whether Controlling Stake can be designated as an identifiable capital asset solely on the strength of dominion control independent of any shareholding which embraces a devoted right in a shareholder representing an interest governed by Articles of Association. In due reference to construction of section 2(14), the Hon’ble Court settled that Controlling Stake is not an identifiable or distinct capital asset independent of holding of shares and therefore does not partake the character of being a capital asset that can be put to tax. In construing section 6 of the Income Tax Act, 1961 pertaining to residential status, the court established that the mere fact that a parent company exercises shareholder’s influence on its subsidiaries does not generally imply that subsidiaries are to be deemed residents of state in which parent company resides. With reference to section 4, the court affirmed that standalone principle by putting to rest any second thought over the collective taxability of a parent company and its subsidiary company. The court approved, `Whether a subsidiary and its parent are totally distinct taxpayers and, therefore, entities subject to income tax are taxed on profits derived by them on standalone basis, irrespective of their actual degree of economic independence and regardless of whether profits are reserved or distributed to shareholders/participants.

With regard to the coherent principle of `Piercing corporate veil’, the Hon’ble Court stated that tax authorities may invoke `substance over form principle’ or “Piercing corporate veil’ only after it is able to establish on the basis of facts and circumstances surrounding transaction that impugned transaction is a sham or tax avoidance measure. Tax planning within the letter of law will be perfectly permissible so long as it does not par-take the character of Tax Evasion or Tax Avoidance with the intent to defraud the tax administration. It will be pertinent to mention here that Hon’ble Supreme Court of India in Delhi Development Authority vs. Skipper Construction Co Private Limited (1996) 4 SCC 623 held `Where the corporate character is employed for the purpose of committing illegality or for defrauding others the court could ignore the corporate character and will look at the reality behind the corporate veil, so as to enable it to pass appropriate orders to do justice between the parties concerned.’ On a further analysis of section 163, the court propounded and declared that merely because a person is an agent or is to be treated as an agent of the Non-Resident, it would not lead to an automatic conclusion that he becomes liable to pay taxes on behalf of non-resident. On a parallel footing, The Hon’ble Apex Court coming to the aid of the assess company in G.E.India Technology Cen Private Limited vs. Commissioner of Income Tax , Civil Appeal Nos.7541-7778 of 2010 reported in (2010) 193 Taxman 234 (SC), it got settled that the moment remittance is made to a non-resident person, obligation to deduct tax at source does not arise. It arises only when such remittance is a sum chargeable to tax under the Act i.e. Chargeable under section 4, 5 and 9. Hon’ble Court further strengthened the proposition by citing an example – Where there is no obligation on the part of the payer and no right to receive the sum by the recipient and the payment does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the Act. Section 195 contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which have an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under obligation to deduct tax at source in respect of such composite payment. The obligation to deduct tax at source is however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident.

Hon’ble Apex Court in Vodafone International Holdings B.V. vs. Union of India (Supra) settled issues of great magnitude and expanse which could have travelled a long way in relieving off the foreign institutional companies from the clutches of uncertain taxonomic dialect. It will not be out of place to mention here that the Union of India preferred a review petition against the Civil Appeal No.733 of 2012 dated 20/01/2012 in Review Petition (Civil) 458 of 2012 titled as Union of India vs. Vodafone International Holdings B.V. which stood dismissed by the court in the following terms:-

`We have carefully gone through the review petition filed by the Union of India on February 17, 2012. We find no merit in the review petition. The review petition is, accordingly, dismissed.”

In order to water down the effect of the Supreme Court Judgement, the Finance Act, 2012 mooted changes in the statutory definitions to usurp the prominent findings of the highest judicial fora – i.e. The Apex Court. To put in effect, clarification regarding section 9(1) (i) (i) Explanation 4 was inserted in section 9(1) (i), w.e.f. A.Y. 1962-63 to clarify that the expression ‘through’ (used in section 9(1) (i) in relation to any asset or source of income in India) shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of” or “by reason of”. Explanation 5 stood inserted in section 9(1) (i), w.r.e.f. A. Y. 1962-63 to clarify that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. Consequential provisions consequent to insertion of above explanations, the following explanations have also been added to clarify the meaning of (a) “capital asset” given in section 2(14), (b) “transfer” given in section 2(47) and (c) to widen the scope of section 195(1).

(a) An Explanation has been inserted in section 2(14), w.r.e.f. A.Y. 1962-63 to clarify that ‘property’ includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever

(b) Explanation 2 has been inserted in section 2(47), w.r.e.f. A.Y.1962-63 to clarify that ‘transfer’ includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India.

(c) Explanation 2 has been inserted in section 195(1), w.r.e.f A.Y. 1962-63 to clarify that obligation to comply with section 195(1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident has:— (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India.

Choking Fallacy

Very recently, it stood reported in the leading media sections such as The Times of India (dated 16^th February, 2016) , `The I-T department has issued Vodafone a reminder over its Rs.14,200 crore tax demand and threatened to seize assets in the case of non-payment, a move the UK firm said shows disconnect with Prime Minister Narendra Modi’s promise of a tax-friendly environment. The department on February 4 sent a notice to Vodafone International Holdings BV seeking Rs.14,200 crore in taxes, which it says are due from its $11 billion acquisition of Hutchison Whampoa’s India telecom business in 2007. The matter is under international arbitration. “We can confirm that we have received a tax reminder from the tax department that also references asset seizures in the event of non-payment,” a Vodafone spokesperson said. The tax demand relates to a dispute that is currently the subject of international arbitration, he said. The British telecom major has disputed the tax demand over its acquisition of 67% stake in Hutchison, now called Vodafone India, arguing that no tax was due as the transaction was conducted offshore.

The Hindu (dated 17^th February, 2016), `Tax authorities have issued a reminder to Vodafone Group Plc. asking the mobile-phone services company to pay Rs.14,200 crore of tax dues — that the U.K.-based firm has referred to international arbitration — or risk having its assets seized. Vodafone confirmed receipt of the communication from the tax authorities. “We can confirm that we have received a tax reminder from the Tax Department that also references asset seizures in the event of non-payment. This dispute is currently the subject of international arbitration,” Vodafone said in a statement on Tuesday.’ The Indian government stated in 2014 that existing tax disputes, including ours, would be resolved through existing judicial process.” The notice sent on February 4 to Vodafone International Holdings BV pertains to the company’s 2007 acquisition of Hutchison’s 67 percent stake in a telecom venture in India for about $11 billion. The deal was executed through companies that are not based in India.

The arbitration process does not stop the tax department from going ahead and seeking dues that it feels are legitimate tax demands, said a tax consultant.

Sh.B K Sinha, Commissioner of Income Tax (C&S) CBDT told The Hindu, “These cases are from respective jurisdiction and notices are sent from respective assessing officers so it’s not centralised. I am not speaking specifically for tax demand on Vodafone but a legitimate tax demand as per this bible (IT Act) is not tax terrorism.”

“For any action the government takes it is called tax terrorism,” Mr. Sinha said. “If any search is done, where we have enough evidence of tax evasion, you call it tax terrorism.”

Vodafone is one of the largest overseas corporate investors in the country having committed investments of more than Rs. 1.1 lakh crore since 2007.

“In a week when Prime Minister Modi is promoting a tax-friendly environment for foreign investors – this seems a complete disconnect between government and the Tax Department,” Vodafone said in the statement.

It becomes all the more important to cite the observations of former Hon’ble Chief Justice of India, Justice S.H.Kapadia in Vodafone International Holdings B.V. vs. Union of India (Supra) at Para No.90, 91 & 92 as under :-

SUMMARY OF FINDINGS

90. Applying the look at test in order to ascertain the true nature and character of the transaction, we hold, that the offshore Transaction herein is a bona fide structured FDI investment into India which fell outside India’s territorial tax jurisdiction, hence not taxable. The said offshore Transactions evidence participative invstments and not a sham or tax avoidant preordained transaction. The said offshore Transaction was between HTIL (a Cayman Islands company) and VIH (a company incorporated in Netherlands). The subject matter of the Transactions was the transfer of the CGP (a company incorporated in Cayman Islands). Consequently, the Indian Tax Authority had no territorial tax jurisdiction to tax the said offshore Transaction.

CONCLUSION

91.FDI flows towards location with a strong governance infrastructure which includes enactment of laws and how well the legal system works. Certainty is integral to rule of law. Certainty and stability from the basic foundation of any fiscal system. Tax policy certainity is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner. Legal doctrines like “Limitation of Benefits” and “look through” are matters of policy. It is for the Government of the day to have them incorporated in the Treaties and in the laws so as to avoid conflicting views. Investors should know where they stand. It also helps the tax administration in enforcing the provisions of the taxing laws. As stated above, the Hutchison structure has existed since 1994. According to the details submitted on behalf of the appellant, we find that from 2002-03 to 2010-11 the group has contributed an amount of Rs. 20,242 crores towards direct and indirect taxes on its business operations in India.  

ORDER

92. For the above reasons, we set aside the impugned judgment of the Bombay High Court dated 8.09.2010 in Writ Pitition No. 1325 of 2010. Accordingly, the Civil Appeal stands allowed with no order as to costs. The Department is hereby directed to return the sum of Rs. 2,500 crores, which came to be deposited by the appellant in terms of our interim order, with interest at the rate of 4% per annum within two months from today. The interest shall be calculated from the date of withdrawal by the Department from the Registry of the Supreme Court up to the date of payment. The Registry is directed to return the Bank Guarantee given by the appellant within four weeks.

It will also be of immense importance to highlight the observations of Hon’ble Lordship Justice K.S.Radhakrishnan in Vodafone International Holdings B.V. vs. Union of India (Supra) at Para No.188 thereby reversing the judgement of the Hon’ble Bombay High Court and concurring with the view of his Lordship and former Chief Justice, S.H.Kapadia in the following terms:-

`PART-VII – CONCLUSION

188. I, therefore, find it difficult to agree with the conclusions arrived at by the High Court that the sale of CGP share by HTIL to Vodafone would amount to transfer of a capital asset within the meaning of section 2(14) of the Indian Income Tax Act and the rights and entitlements flow from FWAs, SHAs, Term Sheet, loan assignments, brand license etc. form integral part of CGP share attracting capital gain tax. Consequently, the demad of nearly Rs. 12,000 crores by way of capital gains tax, in my view, would amount to imposing capital punishment for capital investment since it lacks authority for law and, therefore, stands quashed and I also concur with all the other directions given in the judgment delivered by the Lord Chief Justice.

Hon’ble Supreme Court of India in Dabur India Limited vs. State of Uttar Pradesh & Ors, 1990 AIR 1814 : 1990 SCR (3) 294 writ established, `This Court would not like to hear from a litigant in this country that the Government is coercing citizens of this country to make payment which the litigant is contending not leviable. Government, of course, is entitled to enforce payment and for that purpose to take all legal steps but the Government, Central or State, cannot be permitted to play dirty games with the citizens to coerce them in making payments which the citizens were not legally obliged to make.’

Hon’ble Supreme Court of India in G.C.Kanungo vs. State of Orissa (1995) 5 SCC 96 : AIR 1995 SC 1655 had declared in its wisdom, `A legislature has no legislative power to render ineffective the earlier judicial decisions by making a law which declares the earlier judicial decisions as invalid or not binding, for such power if exercised would not be a legislative power exercised by it but a judicial power exercised by it encroaching upon the judicial power of the state exclusively vested in courts. Judicial power of state exercisable by courts under the Constitution act as sentinels. Rule of law is a basic feature of the Constitution.’

In another path-breaking judgement titled as Madan Mohan Pathak vs. Union of India AIR 1978 SC 803, the seven judge bench of the Supreme Court adjudicated an issue having a strong bearing on the question whether a final judgement of a court can be annulled through an act of legislature and settled, `The act of legislature cannot annul a final judgement giving effect to rights of any party. A declarative judgement holding an imposition of tax invalid can be superseded by a revalidation statute. But where the factual or legal situation is retrospectively altered by an act of legislature, the judgement stands, unless reversed by an appeal or review. Bringing a legislation in order to nullify the judgement of a competent court would amount to trenching upon the judicial power and no legislation is permissible which is meant to set aside the result of the mandamus issued by a Court even though, the amending stature may not mention such an objection. The rights embodied in a judgement could not be taken away by the legislature indirectly.’

In another welcomed verdict titled as S.R.Bhagwat vs. State of Mysore (1995) 6 SCC 16, the Hon’ble Supreme Court settled that a binding judicial pronouncement between parties cannot be made inefficacious and ineffective by enacting a provision which in form overrules such verdict. The Hon’ble Court held, `It is now well settled by a catena of decisions of this Court that a binding judicial pronouncement between the parties cannot be made ineffective with the aid of any legislative power by enacting a provision which in substance over-rules such judgment and is not in the realm of a legislative enactment which displaces the basis or foundation of the judgment and uniformly applies to a class of persons concerned with the entire subject sought to be covered by such an enactment having retrospective effect.

Conclusion

Going by the pious reasoning of the factual matrix in issue, it becomes a matter of known difficulty as how the recovery is pressed by the Income Tax department and that too with the mischief aid of transferring the resort to seizure of assets. What has been laid down as a secured and bolt norm by the Hon’ble Supreme Court of India with having the review remedy of the Union getting dismissed, it becomes a matter of incessant prejudice and impairment to invoke the coercive mechanism especially when the impugned company Vodafone International Holdings has knocked the doors of international arbitration to acquire solace and consolation from the illicit tax recovery. In what can be called as an allowable credit is pruned into an exercise of disbelief, detriment and disadvantage thereby shaking the commercial confidence of prominent foreign players in India. It will be most reckonable to acknowledge the very factual incidence of the entire last stage litigation with the entire process being designated as Capital punishment for having made huge capital investment by the Hon’ble Supreme Court, the arbiter of final last resort. To conclude, it will be most apposite to refer the famous verse of Hon’ble Justice Bhagwati in a case titled as A.V.Fernandez vs. State of Kerala AIR 1957 SC 657, p.661 : 1957 SCR 837 in the following words:-

`In construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of the law. If the revenue satisfies the court that the case falls strictly within the provisions of law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of taxing statutes, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the Legislature and by considering what was the substance of the matter.’

(Article by – Advocate Sameer Bhatia, R/o, 158/2, Guru Teg Bahadur Nagar, Opposite Mata Gujri Park, Jalandhar – 144003, Punjab Contact Nos:- 9041304900 Email Address: adv.sameerbhatia@gmail.com)

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