Column : Dialling into tax trouble

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: be subject to domestic laws if their behaviour or transactions produce an “effect” within the domestic territory. The “nationality” of firms is irrelevant. The Indian Supreme Court applied this principle in the context of competition law and now the Bombay High Court has extended it to tax law.

Third, the Court rejected the Vodafone’s contention that the showcause notice must be set aside because it did not have any liability to withhold tax under Indian law based on the nature of the transaction. The Court ruled that a show cause notice does not give rise to any liability and Vodafone should substantiate its position before the tax authorities. The Court reiterated the settled principle that a show cause notice can be challenged only under two circumstances—the government does not have any power to investigate the facts and issue the notice or if the facts as alleged in the notice, even if they are true, do not give rise to any tax liability. The Court held that the Vodafone did not satisfy either of these conditions.

The Court said that it could not make a judgement on the true nature of the transaction or whether provisions of the income tax law were valid because Vodafone failed to produce documents relating to the transaction. This failure seems to have played a big role in the Court’s decision because the Court termed it as a “willful failure” and drew an adverse inference against the petitioner.

Tax analysts will certainly try to confine this ruling to the unique facts of the case. It will certainly affect all cross-border transactions and tax clauses would be extensively negotiated to allocate the burden of tax liability.

This ruling will create new issues: What is the status of all transactions entered in tax-efficient jurisdictions? Would the ruling have been different if Vodafone brought the assets from the intermediary Mauritius entity rather than through the Cayman Islands entity because Cayman Islands does not have a Double Taxation Avoidance Treaty with India? How will this ruling be applied for the transfer of shares in a foreign entity which owns assets located in India and in other jurisdictions? Can the government invoke this ruling reopen the cross border transactions which have already closed? While the full impact of this ruling is not clear, this case certainly shows that Indian courts are willing to expand the scope of Indian tax laws.