Harish Salve, Vodafone’s counsel, began the hearings on August 18, the first day since the court recessed six days earlier by continuing to address questions from the bench about the permissibility of the company’s structure.
Salve elaborated on the difference between, and the different tax consequences attached to, vertical and horizontal structures in transactions. He stressed that Vodafone’s vertical structure is common among multinationals and that tax authorities around the world find it these structures acceptable for tax purposes.
In this vertical structure, the telecommunications groups used Vodafone International Holdings BV, a Dutch subsidiary, to buy the stake in Hutchison.
Though vertical transactions are not viewed to be sham transactions, he distinguished these from horizontal structures, which are often disregarded.
Salve also laid the groundwork for another argument to attack Revenue’s decision to scrutinise the structure. He stated that when a company has used a structure for many years, a shift in the taxing jurisdiction alone is not sufficient to warrant Revenue’s lifting the corporate veil and disregarding it.
Tax havens
Using reports and publications from international organisations such as the OECD and UN, Salve argued that the key characteristics of a tax haven were not relevant in Vodafone’s structure. One such key attribute, Salve said, is that in a tax haven, domestic law allows its residents to avoid paying taxes.
With this definition, Salve attempted to show that the Cayman Islands are not a tax haven.
Salve further argued that in the absence of specific provisions in the Indian law or the relevant double tax avoidance agreement, a Vodafone type of a structure cannot be taxed in India.
Tax evasion and motive
Vodafone’s counsel reiterated that the company had not demonstrated any motive to avoid tax in India. Since Revenue failed to establish motive, he argued, it was precluded from further investigation into the company’s structure.
He explained that a direct sale by a Mauritius company of an Indian company’s shares would not have tax consequences in India, which meant that Vodafone would not have any intention to avoid paying tax on this transaction, since no tax would have been liable.
Azadi Bachao Andolan
Day 7 of the hearing began with Salve defending the Supreme Court’s decision in Azadi Bachao Andolan and arguing that its rulings were applicable to the Vodafone-Hutchison transaction.
In Azadi, the court held that a company would be entitled to treaty benefits so long as an investor had a valid tax residency certificate issued by the Mauritius tax authorities.
When Chief Justice SH Kapadia asked if the importance of the decision was confined to the validity of a circular issued by the Central Board of Direct Taxes, Salve answered that on the contrary, the decision dealt with important issues of the India-Mauritius tax treaty that are relevant to the present case.
The bench queried Salve on the meaning of “liable to tax” in the context of the definition of a resident under the treaty. Salve answered that a Mauritius entity must be liable to tax in Mauritius, otherwise it could not be considered a resident of the country and would not be able to claim relief under the treaty.
Salve went on to explain the Hutchison group structure, saying that many of the Mauritius entities existed before the Vodafone transaction in 2007. He claimed that because some of the Mauritius entities were acquired by the Hutchison group from outside parties the structure was not created with intent to avoid tax before the transaction.
The hearing will resume on August 24.
Read about what happened in week one here
Read about what happened in week two here
