Last week the Tax Department asked the Supreme Court to reconsider its judgment, arguing that the country’s tax law was incorrectly interpreted.
In its petition, seen by International Tax Review, the department said, "there is a patent error apparent" in the court's findings, which holds that the deal is a "bona fide structured" foreign investment into India.
The court last month ruled that the authorities do not have the right to tax Vodafone on its $11 billion purchase of a majority stake in an Indian mobile phone company from Hong Kong's Hutchison Whampoa.
The decision meant Vodafone did not have to pay $2.5 billion in taxes, which it had said it shouldn't have to pay because the deal was conducted overseas.
The loss for the government is expected to trigger an amendment to the country’s tax laws when the Finance Bill is released next month.
“From the action taken by the government against all offshore transactions it is clear that as a matter of tax policy the government feels these transactions should be taxed in India,” said Porus Kaka, senior advocate. “That being the case and considering that clear direction in Supreme Court judgment, it would be indeed strange if the government, having made up its mind several years ago, should not give itself the tools to tax these transactions by way of an amendment.”
"It has been constitutionally held that a retrospective amendment is possible and in the past, in many cases, the amendments have been made with retrospective basis to reverse some Supreme Court’s judgments," said Uday Ved, of KPMG. "Thus, the government can theoretically amend the Income Tax Act in this regard with retrospective basis in the forthcoming Finance Bill, 2012 to be presented by the Finance Minister in Parliament on March 16."
The 100 page Review Petition criticises the judgment on numerous counts and is particularly critical of the court’s emphasis on the FDI aspect of the deal, the courts take on the Ramsay doctrine and Azadi Bachao vs McDowell, as well as its understanding of section 9 of the Income Tax Act.
The petition, which is scheduled to be heard in the next two weeks, claimed that the Supreme Court did not consider judgments that the government had cited in support of its legal submissions in more than 15 aspects of the Vodafone tax case.
The government also contends that the court wrongly interpreted that only the Direct Taxes Code (DTC) Bill has provisions to tax such offshore share transactions and not the Income Tax Act.
The petition said that the court, by relying on the provisions of the DTC Bill, has failed to appreciate that there is no judicial precedent to rely on pending legislation to interpret existing legislation.
“The government should introduce major legislative changes in a prospective manner only,” said Sunil Jain of J Sagar Associates. “Retrospective amendments lead to a lot of uncertainty. Any attempt to deal with the Vodafone issue through retrospective provisions in the Finance Bill on the lines of indirect transfer provisions of clause 5 of the proposed DTC Bill will not lead to certainty and reflect flip-flop policy stance.”
However, one taxpayer is frustrated with the petition and feels that that the ruling should be seen as the final resolution in this matter.
“I believe the ruling is quite comprehensive, and would have addressed most if not all facets of the revenue’s contentions,” said Rupak Saha, head of India tax, GE. “I disagree with the suggestion that some topics have not been addressed and I think all the answers can be found in the ruling itself though they may not be stated in an overt manner. In other words, I feel much of the revenue’s contentions were rhetoric to start with, and after laying out the legal framework and the resulting answers to the key questions. Any further observations or comments by the court on the contentions if any that are alleged to have been missed out, in my view would have been unnecessary and superfluous.”
Despite the petition, it has been claimed that the Vodafone ruling could lead to the pending tax disputes, including AT&T-Tata Group, Idea Cellular and Sanofi-Aventis, being resolved in the taxpayer’s favour, especially where similar business structuring is done for legitimate commercial purposes.
“Honestly, most of us were expecting that the action will now shift away from the judicial forum to the legislative amendment on three specific aspects – tax withholding provisions to be explicitly expanded to cover non-residents, GAAR to be introduced and indirect transfer proposal (as contained in the DTC) to be incorporated in the Union Budget 2012,” said Gokul Chaudhri, of BMR Advisors – Taxand.
Final twist
On Tuesday, a petition was filed to the Supreme Court by ML Sharma, an advocate, claiming that Chief Justice Kapadia, who oversaw the case, had a conflict of interest with the matter.
Sharma said that while ruling in favour of Vodafone, the Kapadia-led three-judge bench considered a due diligence report filed by Ernst & Young, with which Kapadia’s son, Hoshnar Kapadia, has been working as senior manager since 2008.
In response to the charge, Supreme Court's deputy registrar HK Juneja confirmed that Hoshnar was employed with Ernst and Young but said he was not part of the tax department of the firm which was engaged by Vodafone.
