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Vodafone tax case: Supreme Court rejects petition seeking review of order

-The Economic Times

 

The Supreme Court has declined to reconsider its ruling that the tax authorities had no jurisdiction to tax Vodafone's offshore acquisition of its Indian mobile unit, handing what could be a pyrrhic victory to the telecom major.

The tax demand, government officials familiar with the case said, could be revived once the provisions in the Union Budget seeking to tax overseas deals are approved by Parliament later this year.

"We find no merit in the review petition. The petition is, accordingly, dismissed," said a Bench comprising Chief Justice SH Kapadia and Justices KS Radhakrishnan and Swatanter Kumar.

"We look forward to the return of our deposit immediately," Vodafone Plc said in a brief statement. The immediate consequence of Tuesday's ruling is indeed likely to be a refund of Rs 2,500 crore deposited by Vodafone. This was virtually confirmed by Law Minister Salman Khurshid. "No curative petition to my knowledge... I suppose the government will have to refund Vodafone money," he told reporters after a meeting of top ministers called by the finance minister.

"We will issue the refund as directed by the Supreme Court," a finance ministry official said. But from then on, the going may get rougher for the UK-based company as the government is likely to issue a fresh demand notice after the Finance Bill is enacted by Parliament, possibly generating a fresh round of litigation.

"The dismissal of the tax department's review petition by the Supreme Court reaffirms the rule of law, and is certainly good reason for the government to reconsider its stance, and avert conflict between the judiciary, executive and legislature going forward," said Fresthe Sethna, Mumbai-based partner at law firm DMD, who represents Vodafone.

But the tax authorities have been unyielding in their pursuit of the company based in Newbury, England, and there is little indication that would change soon.

"The department would be well within its right legally to raise a fresh demand. But demand can be raised only after the Finance Bill is passed. The department could use the validation clause after the passage of the Finance Bill," another finance ministry official said.

Validation Clause Key

The so-called validation clause, part of the Finance Bill, will play a key role in the government's legal strategy in case of a fresh round of court battles.

Constitutional Challenge

The clause, one of several controversial amendments to the Income-Tax Act, seeks to validate tax demands arising out of the transfer of capital assets situated in India.

In language that has been criticised by some for its sweeping nature, it seeks to shield any notice sent or "purported to be sent" or a tax demand from legal challenges. Such notices or demands, it says, shall not be questioned on "the ground that the tax was not chargeable or any ground including that it is a tax on capital gains arising out of transactions which have taken place outside India". Some lawyers say the wordings may make it difficult for Vodafone to contest fresh demands from tax authorities.

In words that seem squarely directed at the Supreme Court ruling on Vodafone, it also says that "the clause shall operate notwithstanding anything contained in any judgement".

The validation clause is part of a slew of changes asserting the state's right to tax overseas deals in which significant part of the assets are in India. Legal experts say Vodafone's only recourse may be to challenge the constitutional validity of the changes on the grounds that they are arbitrary.

"More likely than not a constitutional challenge will happen once the law (Finance Bill) is passed," said Nishith Desai, founder of the eponymous law firm, which specialises in tax.

"The debate is if such Act (retrospective amendment and validation) is unreasonable or arbitrary. There are several constitutional questions that arise if the issue goes back to court," said Mukesh Butani, chairman, BMR Advisors.

"They (the government) have proposed to amend the law. We will see what has to be done with the amended law. What happens next depends on the government. (But) I will be surprised if Vodafone happily writes a cheque," Harish Salve, counsel for Vodafone, told ET NOW.

The Centre had moved the court seeking recall of its January 20 order that had handed out a major victory to the UKbased telecom giant in its case against the Income-Tax Department.

With the dismissal of the review petition, the only remedy now available to the government is to file a curative petition to recall the apex order in the case.