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Vodafone SC hearing: Week nine

Week nine of the Supreme Court hearing saw the Solicitor General complete his arguments by forcefully reiterating that the Cayman Islands structure was an “artificial tax avoidance scheme”.

Rohington Nariman’s arguments only lasted six days compared to the 18 days taken by Vodafone’s counsel, Harish Salve.

The final day began with the court asking Nariman whether a structure can be disregarded merely on the basis that it achieves tax mitigation. He argued that an “artificial” tax avoidance scheme is not permissible.

Chief Justice SH Kapadia observed that each scheme needs to be evaluated independently based on the facts and if the court comes to the conclusion that there was a business motive, then the structure cannot be regarded as artificial.

The Chief Justice also added that the decision in Azadi Bachao Andolan may need to be evaluated concerning observations relating to tax avoidance and not in the context of the India-Mauritius treaty.

Nariman concluded by claiming that the opinions of foreign tax specialists produced before the court should be ignored as they were based on the specific terms of the deal and on the respective foreign laws and not Indian law.

Substance vs form

The week had begun with the court hearing Nariman rely heavily on a Swiss court’s judgement which disapproved of treaty shopping.

Nariman explained the dictionary meaning of the words “through” and “transfer”, appearing in section 9(1) of the Income Tax Act 1961. He submitted that the word “through” meant “end to end”', “by way of”, “by means of” and “by the intermediary of”. As for the word “transfer”, he stated that it was an inclusive definition and included direct or indirect transfer.

The Solicitor General emphasised the fact that the word “transfer” was one of general meaning and was meant to expand the scope of section 9 of the Act and not to limit it. He said that the transfer need not be in India but only the capital asset has to be in India.

Chief Justice Kapadia asked the Solicitor General if the tax department was rejecting the transaction. Nariman replied that they were accepting the transaction but added that even if the Supreme Court accepts Vodafone’s arguments that the effect of the share purchase agreement (SPA) was only to affect the transfer of a solitary share, then the transaction would be hit by section 9(1) of the Act.

Nariman then laid great stress on a Swiss court’s ruling from 2005 in A Holdings ApS (8 ITLR), where the court denied the benefits of the Swiss-Denmark tax treaty to a Danish company on the ground that it was not a beneficial owner of the dividends. The Swiss court held that the interposition of the Danish company was for the sole purpose of getting the treaty benefit.

Relying heavily on the form vs substance doctrine, Nariman said that the true nature of the transaction ought to be derived from the covenants of the contract. He relied on some Supreme Court rulings to argue that business common sense of the SPA should prevail over the words that may be used in the agreement. He argued that $11 billion was not paid for nothing. Kapadia then observed that the term “business common sense” is relative and a businessman would interpret it in a different way. Nariman responded that the court should look at it the way Hutchison, from whom the stake in Hutchison Essar was purchased, and Vodafone looked at it. Hutch said that they were divesting direct and indirect equity interest and other rights in the Indian entity. He argued that this is business common sense. 

The summary of proceedings in this article is based on the editorial feed provided by which is covering the hearing in technical detail on a daily basis.

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