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Vodafone case: SC dismisses review petition-Nikhil Kanekal, Remya Nair & Surabhi Agarwal

The Supreme Court dismissed the government’s review petition in the Vodafone tax case on Tuesday, affirming its January ruling that put overseas transfers of shares outside the Indian tax net.

The review petition and last week’s budget proposals seeking retrospective changes have revived the uncertainty over tax laws, according to government officials, the Planning Commission and businesses.

If Parliament passes the budget in its current form, the judgement in the Vodafone case may be overruled. The government may then proceed to raise a fresh demand on Vodafone and other firms.

The Supreme Court, which rarely reviews its own judgements, on Tuesday seemed unperturbed by the budget’s proposed changes in tax laws.

“We have carefully gone through the review petition filed by the Union of India on 17th February 2012. We find no merit in the review petition. The review petition is, accordingly, dismissed,” wrote the court’s three-judge bench headed by Chief Justice S.H. Kapadia.

The proposed clarifications to the income-tax (I-T) law will make deals such as the $11.076 billion (around Rs.55,715 crore today) Vodafone-Hutchison transaction, which gave Vodafone entry into the Indian mobile phone services market, taxable.

The court had ruled on 20 January that the transaction between Vodafone Group Plc’s Netherlands subsidiary and Hutchison Whampoa Ltd’s Cayman Islands subsidiary was outside the purview of Indian tax laws. The court’s reasoning was based on the premise that the Cayman Islands share transfer was the main element in the transaction and that the share purchase agreement, relied on by the revenue authority during the final arguments, was incidental to the share transfer.

“All three of them are unanimous,” said Anuradha Dutt, Vodafone’s counsel. “They are going by the rule of law, that’s what they’re upholding. I do hope that the government rethinks its strategy.”

Dutt added that it was “extremely unfortunate for Vodafone to be told by the Supreme Court that you were right and then the government to go after them like this”.

Government officials said they were not surprised by the court’s order. “Since the review petition was going to come up before the same bench that delivered the judgement, the court’s decision was on expected lines,” said a former government official closely associated with the case.

Former Central Board of Direct Taxes chairman M.C. Joshi said the ball was now in Parliament’s court.

“If Parliament passes the Finance Bill along with the retrospective clarification, then that law will prevail over the Supreme Court ruling till some party decides to challenge the retrospective clarification in the budget in the court,” he said. It was during Joshi’s tenure that the Supreme Court ruled against the I-T department in the Vodafone case.

“But the tax department would have to return the cash deposit to Vodafone as directed by the Supreme Court because till the Finance Bill is not passed, the apex court order will hold. Once the Finance Bill gets passed, the tax department will have to raise a fresh demand,” Joshi said.

Similar cases currently being contested by the tax department in various courts include Shantha Biotech’s acquisition by Sanofi Aventis, SABMiller Plc’s global acquisition of Foster’s Group Ltd, and the purchase of a stake in Idea Cellular Ltd from AT&T by Aditya Birla Nuvo Ltd and Tata Industries.

The environment in India is tough right now, especially with the budget announcements of last week, John Flannery, president and chief executive of GE India, said in New Delhi on Tuesday.

“The political situation is very fluid,” he said at a Nasscom meeting. At a US-India business council meeting recently, the first reaction of most participants was “What’s going on?”, he said.

Flannery added that GE had been in India for a long time and the “India growth story” needs to be intact. GE is fighting multiple tax cases, including those related to the sale of Genpact in 2005.

Montek Singh Ahluwalia, deputy chairman of the Planning Commission, said he hoped investors won’t get the wrong impression.

“On the issue that certain kinds of transactions are taxable, my information is that what they want to put in place as subject to tax is in line with current Organisation for Economic Co-operation and Development practices,” he said. “As far as anybody looking ahead is concerned, I don’t believe that what is being proposed would be any different from what exists in most jurisdictions. But I would hope that there is no transmission of a negative message.”

The current scenario was, however, causing uncertainty for investors, Ahluwalia said.

“We are aware that in order to attract investment, you need to have clarity which is absolutely true,” he said. “But this is also an evolving situation where there would be redefinitions, things which were not clear would be made clear, so some changes do take place.”

Finance secretary R.S. Gujral had said on Sunday that the government could potentially get revenue of Rs.35,000-40,000 crore from the various cases that were being contested.

The government strongly defended the retrospective changes that had been proposed, saying it was only clarifying the original intention of the legislature that such indirect transfer of shares, where the underlying assets are in India, are taxable under Indian law.

Vodafone lawyer Dutt disagreed on the grounds that it would be difficult to interpret the changes as being in line with what lawmakers wanted in 1961, when the I-Tax Act was passed.

“Clarificatory amendments can be there when there is ambiguity,” she said. “The Supreme Court has said there is no ambiguity in section 9 of the I-T Act. The word being used is ‘clarificatory’—but it is a substantive amendment. Even if substantive amendments are retroactive, they have to pass the test of not being harsh.”

Dutt said it was too early for Vodafone to plan on challenging the constitutional validity of any changes to the law. Such a move, however, could not be ruled out, she said.

Sudhir Kapadia, national tax leader at audit and consulting firm Ernst and Young, said it would be well within Vodafone’s rights to challenge the retrospective amendment.

“There have been cases before also when an apex court order has been overturned through retrospective amendments by the government,” he said. “Other companies that will be affected by the judgement may also challenge the government’s move. Vodafone can always argue that when the Supreme Court passed its judgement, the amendment was not available.”

The I-T department was supposed to return, on Tuesday, the Rs.2,500 crore cash deposit and Rs.8,500 crore bank guarantees furnished by Vodafone last January.

“The department is hereby directed to return the sum of Rs.2,500 crore, which came to be deposited by the appellant in terms of our interim order, with interest at the rate of 4% per annum within two months from today,” the court had ruled on 20 January.

The court is expected to hear an application from the government on Friday on the refund not yet having been made by the I-T department. The government had made the application seeking an extension of time to return the money.

Law minister Salman Khurshid said the government will most likely have to return the money since the review petition has been dismissed.

“I suppose government will have to refund the Vodafone money. You can only tax on the basis of existing law. We have no right to tax them. Current law will prevail so long as the law is not changed,” he told news agency PTI.

Vodafone said in a statement: “This once again emphasizes the legality and bona fides of the transaction. The apex court’s clear and unambiguous ruling today, based on the existing laws of India, reiterates that the Indian tax authority does not have the jurisdiction to tax the transaction. We look forward to the return of our deposit immediately.”

India also has a bilateral investment treaty with the Netherlands that makes it incumbent on them to protect investments. Vodafone’s investment was routed into India through a Netherlands-based subsidiary.