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Bar & Bench spoke to Vodafone Counsel Anuradha Dutt, Partner at Dutt Menon Dunmorrsett. Anuradha Dutt has been representing Vodafone in this matter since 2008.
Anuradha Dutt spoke to Bar & Bench on her involvement in the matter, initial reactions on the decision, impact of the decision on investor community and revenue department, important principles of law brought out by the Supreme Court in this decision.
Bar & Bench: Your initial reactions on the decision. You have been involved in the matter since 2008.
Anuradha Dutt: Actually, I have been involved since the first round in the Supreme Court in December 2008. On January 23, 2009 the Supreme Court had remanded the matter to the Assessing Officer and then to the Bombay High Court and then to the Supreme Court who remanded Vodafone back to the Assessing Officer for quantification from which the SLP was pending. So we have had a long journey and three years of my life I don’t think I did much of any other work. I was involved in it quite deeply. So apart from the sense of relief, it’s a joy. When you work hard and get a good reward at the end, that’s the feeling that one gets.
I think it’s an important judgement as the certainity in law has been created. I think what is important is that when multinationals take a decision to invest, one of the main factors they consider is what is the rule of law and the state of the judicial system in that country. I think when Vodafone decided to come, it obviously did not envisage such a situation, because not only there was no law but there was no practise of tax department assessing such offshore transactions. Law and practise are very significant for a person outside this country to see what this country is all about. After Vodafone came in and the way Vodafone had to fight the court case which was dragged for over three years, had a huge impact on the foreign investors and had also created lot of anxiety among the potential investors.
I think that this judgement has shown that the rule of law is really supreme and we are a very mature judicial system. The judgement says that these are policy decisions, and if India wants a piece of the cake when an investor is making money when he is exiting, it should make laws. To my mind it is really important to uphold the rule of law and allow the potential investor to know that there is a very mature judicial system in place in this country unlike many other developing countries.
Bar & Bench: Impact of the Vodafone decision on the investor community and of course the revenue department.
Anuradha Dutt: The foreign investors consider various factors like infrastructure, government delays etc before investing in a country. But I think one of the key factors is a judicial system and the rule of law. This decision has definitely given a positive message to the world and I think that is what we really need to celebrate.
This decision has settled a three year long litigation that had created a lot of uncertainty for foreign companies. This decision will repose confidence in cross-border mergers and acquisitions and further boost such investment coming to India.
The point is the tax department started something which they should not have, without amending the law. I think they took their chances, they even held out the first round when Vodafone lost in the Bombay High Court that this is a ‘test case’. The concurring judgement has stated it very well that this demand of Rs.12000 crore is like giving a capital punishment to a capital investor. It is really the sentiment that was being felt by not only Vodafone but lot of other similar cases.
Bar & Bench: Who were the Senior Counsels involved in the matter? What were the main arguments put forth by Vodafone before the Supreme Court?
Anuradha Dutt: We briefed Mr. Harish Salve and Dr. Abhishek Manu Singhvi. There were four grounds that we had raised in the matter. The first ground was that this transaction was not taxable at all and second was, even if the transaction is taxable because it is a payment from one Non Resident to another Non Resident outside India, Section 195 of the Income Tax Act will not apply. These were argued by Mr. Salve.
We had two other issues, that the amendment in Section 201 of Income Tax Act which came in after the Vodafone matter started in Bombay High Court in 2008 and was given retrospective effect was also challenged. Lastly, we challenged that under Section 191 of the Income Tax Act unless Hutch is given a notice, you can’t come against Vodafone. These two aspects were to be argued by Dr Singhvi, but in the end only gave written submissions on these two issues because the Bench said that they would really hear first only the taxability issue and the applicability of Section 195.
So, we had Mr. Salve argue on the aforesaid two aspects and Dr. Singhvi on the latter two aspects. The entire groundwork, pleadings and arguments before Assessing Officer were handled by our firm and principally I and Fereshte Sethna (Partner, Mumbai Office) handled it.
Bar & Bench: Important Principles of law brought out by the Supreme Court in this decision.
Anuradha Dutt: The first important aspect is that the Supreme Court has said that the provisions of Section 9 of the Income Tax Act relate only to a capital asset situated in India. Only if there is a transfer of such a capital asset then Section 9 can be invoked. The Revenue argued that Section 9 is a ‘look through’ and even if there is an indirect transfer i.e. if two foreign companies enter into an agreement and buy shares of a foreign company which has an effect of transferring the control of the Indian company then Section 9 can be invoked. The Court has rejected this argument and observed that Section 9 is not a ‘look-through’ provision and indirect transfers are not covered.
Second aspect they have dealt is to do with the Mauritian Treaty. The Revenue argued that the Mauritian Treaty would not have been available to Vodafone which argument has been rejected. What is more important is that the Court has made a distinction between genuine investors like Vodafone and round tripping (where Indian investor takes money abroad then circulates it and bring it back). The Supreme Court has held that the benefits of the India-Mauritius tax treaty could not be denied in the absence of a ‘Limitation of Benefits’ provision, even if the initial investment did not initiate in Mauritius. However, minority concurring judgment has held that the existence of a tax residency certificate (TRC) does not prevent enquiry into a tax fraud like round tripping or other illegal activities.
Therefore, Essar or such other companies who have Indian investment companies and Mauritian Investments and Mauritian Entities, they will really have to show to the tax authorities, when they claim any Mauritian Treaty benefit you know that this is not round tripping. So it is significant for Indian investors who think that they can set up Mauritian Entities.
Another important aspect is, the majority judgement is saying is that the investment was a bonafide structured investment into India. In fact the Court has not frowned upon tax havens the way the Revenue argued. They have said Mauritius or Cayman Islands are tax neutral jurisdictions, which can be used by Multinationals for their investments to various developing countries including India and they can route it through Mauritius or such other countries which provide Treaty benefits. They have said that it’s a policy decision which the Government of India has taken. And till today Mauritian Treaty is unamended and various other treaties which we had shown to the Court like Singapore, UAE, etc they have brought in limitation of benefit clauses are missing in Mauritius Treaty. In India-Australian Treaty, an indirect transfer is discussed. So, the the majority judgement says these are policy decisions and the government should enact the law. This is not what court is supposed to do. So they have basically said take policy decisions and have the courage to amend the law.
The Supreme Court has also held that tax planning is legitimate because revenue had tried to argue that Azadi bachao is bad law. The Supreme Court has held that the judgments in Azadi Bachai Andolan and McDowell were not conflicting and both adopted the correct interpretation of the law. In McDowell the Supreme Court had upheld tax planning as legitimate as long as it was within the framework of the law; colourable devices though could not be said to be legitimate. The Azadi Bachao Andolan case is good law in the context of the India-Mauritius Tax Treaty and there is no conflict between the Azadi Bacho Andolan case and McDowell case concerning tax evasion/avoidance.
The apex court has listed the host of factors namely, duration of time during which the holding structure existed, the period of business operations in India, generation of taxable revenue during the period of business operation in India, the timing of the exit, continuity of business on such exit, etc. which one is required to consider to reach a finding that the transaction evidences are a preordained transaction or investment to participate.
The Court has laid down a business purpose test which is new to Indian jurisprudence. The ruling also acknowledges that use of holding companies and investment structures are driven by business/commercial purpose and the use of these entities in international structures does not imply tax avoidance.
These are the key issues you know that come out from the majority judgement and the concurring judgement is almost similar. One of the aspect different is that the majority judgement says that you should bring in a law for ‘round -tripping’ but does not go to the extent of saying that in tax fraud and round tripping you can go behind the TRC which the concurring judgment upholds. So let’s see whether that will be the next issue that the Revenue will be raising in future cases.
Bar & Bench: The SC has enunciated the principle of the ‘look at’ approach and the importance of looking at the transaction as a whole. What are your thoughts on the concepts of ‘look through’ and ‘look at’ and how will it affect future the cross border transactions?
Anuradha Dutt: The Revenue had argued that you have to look through a transaction, go behind the transaction and see what is the commercial purpose and then tax it. The majority judgement says you cannot dissect a transaction. Transaction has to be ‘looked at’ holistically and the legal effect of it has to be seen to consider whether a transaction is taxable. The Supreme Court pronounced the principle of ‘look at’ approach and emphasized the importance of ‘looking at’ the transaction in its entirety and then see whether there is some fraud or what is the timing or what is the legal effect. The transaction could not be dissected into transfer of shares outside India and of the transfer of some assets within India.
If the Government wants to apply the ‘look through’ principle, they must bring the changes in the laws or amend the tax treaties. If the tax treaties don’t have the limitation of benefits then they cannot look through those entities and lift the corporate veil to look at the beneficial owners. The decision makes it very clear that government needs to look into the policy reforms and bring in certainty in the tax policies. The government doesn’t want to make policy changes and instead wants judicial pronouncements to help them.
This will definitely have an impact on the cross border transactions. Today there is clarity; people know what is the rule of law in this country and what is the judgement which is the law of the land. Till now, the law was that outside transfers, outside India even if they had an indirect effect of controlling the company were not being taxed, suddenly one big transaction in the country comes with big numbers and the government starts changing its practise and that too without bringing in legislation.
Bar & Bench: Do you think the Government will file a review petition?
Anuradha Dutt: I am hearing that the Government is going to file a review petition. To my mind the Government of India should accept this verdict and bring legislative changes or Treaty changes if they want and not again find means and ways to whittle down this judgement in any manner because that definitely will be a bad signal to the world.
Bar & Bench: According to media reports, the Government is likely to amend tax laws in this coming budget session to ensure that overseas sale of a foreign company with assets in India is subject to capital gains levy. Your views.
Anuradha Dutt: I don’t think any Multinational or any foreign government or anybody else can say that India should not have legislative changes. Let me tell you in Australia they have in all their Treaties and law that if there are any transfer that takes place outside Australia but has the effect of transferring a domestic company’s control which is in mining sector, it will be taxed in Australia. Similarly, UK has it for Oil and Natural Gas
So, India can either across the board or find whichever sector they want to have a piece of the pie, amend laws or treaties, accordingly. However, there has to be express legislation and it has to be prospective and that really is the way to go about according to me.
Bar & Bench: How will this decision have an impact on similar cases under scrutiny?
Anuradha Dutt: The decision will have far-reaching implications as it clearly states that the rule of law will prevail. The Court held that this is a bona fide structure. The decision has laid down certain tests like look at the transaction and not dissect it. Bonafide genuine transactions, continuity, the person who has sold has not wound up the next day etc. are tests that will be applied to a host of cases that are pending in court and wherever these tests are crossed successfully, such cases will escape the tax net and if there is any one of these cases on facts where there is an issue that will have a problem.
Bar & Bench: So now what will be your advise to your foreign clients?
Anuradha Dutt: As of now, my advise is that we have a mature democracy and mature judicial system and prefer that this should be the country you should invest in. At least today we can tell them that these are the tests and if you fulfil the tests definitely this is the law as of today and in future when the law changes of course the advise changes.