ASG Venkataraman rebuts ‘anti-investment’ reading of Tiger Global ruling

Had the good fortune of reading the article of our young friend and promising counsel Dhruv Janssen-Sanghavi on Bar & Bench on the recent judgement pronounced by the Hon'ble Supreme Court in Tiger Global.

The alarm bells sought to be rung are not only references that are out of context, but a bit concerning too. The article very skillfully says in one place “Yet, the judgment in the case of Tiger Global is one of the most consequential ones in India’s jurisprudential history. And it might come with an economic cost in terms of foreign investment in India” and in the same breadth, declares “Let me be clear, foreign investors are not penny-wise, pound-foolish. They will not shun the Indian market merely to save on Indian tax costs when there are profits to be earned...”

The Anti-investment slogan is not uncommon or unusual when an important case goes against the trade, but its time now to reveal how shallow this line of thinking is. The contracting parties namely the seller and buyer of shares do not consider paying capital gains tax in India is anti-investment.

How do we say this? All these share purchase agreements including the one which came up before the Hon'ble Supreme Court would carry a vaccine clause on tax liability. Contracting parties envisaged a potential tax liability and also plan how this should be discharged and who needs to absorb it and at what ratios. After a clear understanding of this, they still proceed to invest in the Indian market knowing fully well that they can still pick a lot more cherries even after paying the taxes. Investments happen after factoring such contemplations.

It is interesting that even the article in question has very aptly put the phrase “foreign investors are not penny-wise, pound-foolish. They will not shun the Indian market merely to save on Indian tax costs when there are profits to be earned” and therefore the anti-investment story is more a tale than a truth and it is vested interest who will keep running this engine with a string of bogies attached to it.

The article quotes a passage from the Judgement of Hon’ble Justice Pardiwala on Tax Sovereignty “It is seen historically one more angle of exercise or assertion of tax sovereignty is the power to take or make unilateral moves instead of bilateral moves and frame tax policies on cross border transactions which enter a country. Powerful economies in the world exercise this unilateral power to make their trading partners fall in line to their priorities” and concludes that the Judgement wants India to unilaterally abdicate its obligation under International law and as a protector of Rule of law, such an abdication will be violative of Article 51 of the Constitution and the article further says the Hon'ble Supreme Court has exceeded its Constitutional prerogative.

The above assessment is an offshoot of not just mere misinterpretations or misquoting of phrases, but gravitates it to a Constitutional breach and views that the choice of exercise of discretion may only give rise to the option of referring these matters to a larger Bench for it to be overruled.

Before proceeding to deal a bit on what the Judgement seeks to say on tax sovereignty, a plain reading of the quote in the article would easily bring out the fact that what has been conveyed is about the unilateral approach of powerful economies over growing economies and by no stretch of imagination, can one infer or conclude that the Hon'ble Supreme Court has authorised the Indian executive to breach trade agreements and treaties. To the contrary, after recording the real life situations and happenings, the Judgement only recommends how a Nation should preserve its tax sovereignty so as to subserve the best interest of its people.

The usage of expressions “Sovereign incursions, threats or attacks, or even attempts to weaken it” has been first referred as a continuation to the same sentence in the Judgement “…are no longer confined only to territorial sovereignty” and proceeds further to record “economic sovereignty is gaining importance and in fact occupying centre stage in geo political affairs” The Hon'ble Supreme Court nowhere recommends Indian executive to commit a breach of its international obligations under treaties or agreements

In fact, the Judgement dishes out a list of strengths which India has today namely, size of the Nation, its population, dominating presence of youth, a continuing atmosphere of investment and growth and peace and stability and in this background, the Judgement seeks to deal in depth on what would constitute tax sovereignty and how important it is for a Nation to preserve it to be part of the geo-political power play and not to lose out on its strategies. It’s not just a misquote, but sending clearly wrong signals by portraying a judgement of the Hon'ble Supreme Court as though recommending a Constitutional breach by yet another Constitutional body

The last aspect that needs to be commented upon is the natural aspiration of any losing side to start preparing its grounds for the next best case to be referred to a larger Bench, especially a matter of international importance. The Article refers to the two earlier judgements of Azadi and Vodafone to conclude that some of the aspects of the Judgement are at diametric odds to those decisions

This is again a partial capture. The Hon'ble Supreme Court records and gives detailed reasons that the diametric odds arise only because of the clear and unambiguous amendments carried out in the legislations dating back from 2012. The Hon'ble Supreme Court therefore held these two Judgements rendered prior to 2012 cannot be of assistance to the investor for the subsequent periods which carry a contrary statutory intent.

As a matter of fact, this is an investment which started to flow from 2012 onwards and Parliament by then had started to carry out three important amendments by:

a. Getting over Vodafone (the investment is not a retrospective one, but a prospective investment);

b. Statutory insertion of General Anti Avoidance Rules (GAAR) as part of the Income Tax Act, 1961; and

c. Specific insertion of a Treaty Overriding clause in Section 90.

The golden rule is if treaty is favourable, than the Income Tax Act, Treaty would override it, now carries a golden exception. If a transaction is found to be a tax abusive transaction falling under GAAR, then GAAR would override the treaty. This is a Statutory prescription and therefore the Hon’ble Court had concluded that none of these Judgements would continue to cast its influence in the post amendment regime.

When Investments have started to flow into India from 2012, investors know fully well the regime that would govern them and more so at the time of exit, and in the absence of any legislative grand-fathering expecting Courts to grand-father them, is neither fair nor reasonable.

This Judgement is one which is delivered when the world trade is going through a defining phase and has lent its interpretation in favour of the amendments brought out in the law periodically with foresight and especially when the repeated efforts by the trade to dilute its standards did not find its place in the final print