However, both counsels convinced the court that it was not necessary and that the bench could pass a judgement, balancing the divergent rulings.
Kapadia stated that the tax department had applied McDowell in many cases. He also observed that there were many cases pending before the Supreme Court wherein Azadi Bachao was relevant and hence there was a need for court to provide a certainty on legal principles.
Back to his feet
Vodafone’s counsel, Harish Salve, began his rejoinder on Tuesday getting back to his feet to argue that under the acquisition of the Cayman entity’s share, Vodafone acquired rights in the entire structure and that the right to manage the Indian company arose from the voting rights in the share.
After a brief hiatus in the hearing, Salve offered up his rejoinder despite already spending 18 of hearing’s 24 days arguing for the telecommunications company.
The court asked Salve as to whether the call options would have been left out of the transaction if the Cayman Island company (CGP) had not existed. He explained in detail that there was no transfer from Hutchison Telecommunications International Limited (HTIL) to Vodafone, under the option agreements and framework agreements. He then said that the value of these options was already factored in the valuation of the CGP share. Salve stated that there was no separate transfer of rights.
Salve also argued that there is a distinction between a legal right and a contractual right. He said that the definition of transfer under section 2(47) of the Income Tax Act, 1961, which provides for “extinguishment”, is attracted for transfer of a legal right. Relying on the decision of the Supreme Court in Grace Collis [248 ITR 323], Salve claimed that in the Hutch-Vodafone transaction, there was no “extinguishment” of rights by Hutch that gave rise to capital gains tax in India.
Vodafone’s counsel concluded day one of his rejoinder by contending that HTIL could not have owned or controlled more than 52% in Hutchison Essar Limited (HEL), because of foreign direct investment restrictions, since Essar already held a 22% stake in HEL via Mauritius (due to a 74% FDI cap in the telecommunications sector). He informed the court that Vodafone had to pay 67% of the value of the 52% stake.
Other valuable rights
On day two of the rejoinder the judges asked Salve a string of questions on the approach of the Bombay High Court that other valuable rights which had passed through the share purchase agreement (SPA), apart from the transfer of shares.
Referring to it as the “A + B approach”, Chief Justice Kapadia asked Salve whether A (shares) could have been transferred if B (various rights) would not have been transferred. Furthermore, he asked Salve what would have been the consequences of various call and put option agreements and loan agreements if the SPA would not have been entered into and why a reference in SPA was required for these agreements.
Salve claimed that even if the SPA was torn apart, nothing would have happened to those agreements. He added that references to the framework agreement, call and put options and loan agreements were required in the SPA as a transition provision. He said that these agreements continued before and after May 2007. Salve further mentioned that these clauses were part of the SPA out of requirements of practice and not out of law. He then claimed that the tax department wrongly proceeded on the assumption that there was a transfer of rights and forcefully argued that there was no assignment of any rights and in fact, the guarantees for loans were “obligations” and not “rights”. Salve mentioned that in the court’s A+B theory, B did not exist.
Salve concluded day two dealing with Solicitor General Rohington Nariman’s arguments on the availability of the Mauritius route and the use of CGP in the SPA instead of Array Holdings (the Mauritius entity which was initially proposed to be transferred). Salve submitted that if the shares of HEL had been sold directly, then the India-Mauritius treaty benefit would have been available, even if the payment was made directly to HTIL. He further clarified that his reliance on the India-Mauritius treaty argument was in the context that there was no motive to avoid taxes in India.
Salve has completed his arguments relating to the facts of the transaction and will be arguing on section 9 of the Act and the India-Mauritius tax treaty today.
The summary of proceedings in this article is based on the editorial feed provided by Taxsutra.com which is covering the hearing in technical detail on a daily basis.
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Vodafone SC hearing: Week three
