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Vodafone SC hearing: Week two

Vodafone continued to defend its tax position by claiming that there was nothing wrong in using tax saving routes and it was a common practice among multinational companies.

This defence came after the three-member bench, headed by Chief Justice SH Kapadia, wanted to know about the flow of funds in the deal through Mauritius.

In response to a question by the bench over the tripod structure of the company, Vodafone's counsel, Harish Salve said that it was common for multinationals.

Salve cited section 9 of the Income Tax Act, 1961, which deals with the income that accrues or arises in India and section 45, which describes capital gain, but does not mention such transaction overseas to be taxed.

Salve said: "Legislation thought it would be a capital gain but it did not want to be a tax in India. But the IT department cannot bring it back and say that I would tax you".

"Transfer outside India cannot be roped through some other method," he said, in an argument about form and substance of the transaction.


The hearing then saw Salve arguing on the situs of the Cayman Islands company’s share, with the court frequently posing questions to Salve on the issue.

Day three of the hearing opened with the court asking Salve to explain as to how the multi-billion dollar enterprise value of Hutchison Essar had been calculated. Salve stated that it had been calculated on the basis of underlying assets of Hutchison in India.

He continued by arguing that the letter of law should be strictly interpreted and that the capital asset (in this case the Cayman Islands company’s share) was situated outside India, thereby falling outside the ambit of section 9(1)(i) of the Income Tax Act. Chief Justice Kapadia enquired if only the contextual interpretation should be considered and how would the theory of real income reconcile with this.

Vodafone’s counsel concluded by admitting that there were hardly any foreign precedents regarding taxation where change in control happens through transfer of an instrument.

Tax haven

Day four of the hearing began with the bench asking questions on tax havens and offshore financial centres.

Kapadia asked Salve what the difference was between tax havens and offshore financial centres (OFCs). Salve tried to explain the difference as that between opacity and transparency. He reiterated that the Cayman Islands falls in the OFC category and is not a tax haven.

Salve continued by stressing that investors need certainty and the taxability or otherwise of a type of transaction cannot be left to a case to case enquiry by the tax authority.

He stated that the law has not changed over the years and so such structures should not get “taxed in the absence of a specific legislative amendment to that affect”.

The day concluded with Salve explaining the facts of an Australian decision in Lamesa to draw strength that an indirect transfer could not be taxed unless there was a specific provision in the legislation; something which Australia inserted in their tax laws after the Lamesa verdict.

Underlying economic activity

Day five began with Chief Justice Kapadia referring to a couple of articles he had read about Japanese and Taiwanese tax laws, which did not seem to support Salve's arguments.

He observed that the articles were contrary to Salve's core argument that in the absence of specific legislation, the deal could not be taxed on the basis of underlying economic activity in India. Kapadia said that the articles suggest that while law may take time to evolve; courts can invoke the substance theory to tax such economic activity.

Salve then cited opinions of UK experts to support his point that a holding company structure could not be disregarded unless it was a sham.

He argued that the Cayman Islands was added as a tax neutral jurisdiction and not for the purpose of tax avoidance. He stated that had Hutch directly sold the shares of the Indian company through the Mauritius entity, no tax would have been chargeable on the basis of the decision of the Supreme Court in Azadi Bachao.

The case will resume on August 17.

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