I-T moves SC to reopen Vodafone case

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SummaryThe government on Monday moved the Supreme Court seeking a review of its January judgment that struck down the income tax department’s demand for $2.2 billion from Vodafone over the UK company’s acquisition of Hutchison’s stake in Hutch-Essar in 2007.

The government on Monday moved the Supreme Court seeking a review of its January judgment that struck down the income tax department’s demand for $2.2 billion from Vodafone over the UK company’s acquisition of Hutchison’s stake in Hutch-Essar in 2007. The department wants the matter heard afresh by a larger seven-judge bench. It has pointed out that the January judgment, delivered by a three-judge bench headed by the then chief justice SH Kapadia, had erroneously interpreted a 1985 ruling by a five-judge bench in the McDowell’s case.

The I-T department has sought the reopening of the case while challenging a different Gujarat High Court order which had absolved the company from payment of any capital gains tax on the demerger of its passive infrastructure assets.

Additional documents filed by the department seeking a reconsideration by a larger SC bench has stated that the rulings in the Vodafone case and the Azadi Bachao case (2004) “require to be overruled, as they are in conflict with the decision of a Constitutional bench of five judges in McDowell case (1985)”.

The application has quoted justice Chinnappa Reddy’s observations in the McDowell’s case regarding the need to depart from the “Westminster” principle as emphatically as British courts have done. Quoting from the 1985 judgment, it has highlighted that the “proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it”.

Quoting the same judgment, the application continues: “There is the large hidden loss to the community by some of the best brains in the country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on one side and the tax-gatherer and his perhaps not so skilful advisers on the other side.”

The government’s intent to reopen the matter was first expressed during the hearing of the Vodfone-Essar Gujarat case last Monday when solicitor-general R Nariman argued that the matter be heard by a seven-judge bench.

The Vodafone judgment was recently criticised by former Supreme Court chief justice JS Verma, who told The Indian Express that the judgment formed part of three infamous SC judgments. Verma said the judgment bypassed the court’s 1985 judgment. About his other reasons for not being convinced with the Vodafone judgment, Verma had said: “The moral foundation is as much available to tax laws as it is to welfare legislation. It is therefore necessary that while interpreting taxation laws, you have to bear that fact in mind. Also, see the implication: While the law permits legitimate avoidance of tax by tax planning, illegitimate tax avoidance by adopting a subterfuge is not permissible. This should be shunned by the courts. This is something that has been settled by most cases. McDowell settled this and is the law of the land.”

Subsequent to the January judgment of the SC, the government had introduced retrospective changes in tax laws in Budget 2012-13, seeking to overcome the ruling. With foreign investors expressing concerns, it subsequently set up a panel to review the change in law asserting Indian jurisdiction to tax cross-border deals involving Indian assets.

On January 20, the SC had ruled that Vodafone – which bought Hutchison Telecommunications’s 67% stake in Indian telecom firm Hutch-Essar for $11.2 billion in an entirely offshore deal in May 2007 – could not be taxed since the law did not explicitly provide for taxing offshore transactions.

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