The Hutch-Vodafone tax controversy presently pending before the Bombay High Court can have important legal implications not just for Vodafone (which faces a US$2 Billion tax bill) and the Indian Revenue (which stands to gain an opportunity for taxing several similar transactions); but may have an impact on several other players. For instance, the decision of the Court is likely to affect and decisions on investments in
The dispute arose because of the acquisition of shares in a
The capital gains arising out of a sale of a capital asset situate in
Vodafone’s arguments in the Court proceeded at the following levels:
The retrospective change in law is constitutionally invalid as it is arbitrary under Article 14.
In any event, the transaction being a sale of shares of a
In any event, the provisions of the Income Tax Act dealing with deduction of tax at source do not apply to non-resident companies. That being the case, even if the capital gains accruing in the hands of
The Department in its oral arguments argued the following:
The petition is not maintainable at the stage of show-cause notice because it is premature and because Vodafone has an alternative remedy in terms of departmental appeals and appeals under the Income Tax Act once the assessment proceedings are over.
The transfer of the sale of the
No distinction can be drawn between residents and non-residents in the matter of withholding tax at source. The word ‘person’ cannot be read as ‘resident’; as that would be reading down a procedural section which is a tool for recovery of tax.
On the maintainability issue, it is hard to see which alternative forum Vodafone could have approached given that the constitutionality of a statute is called in question. While there appears to be some merit in the argument that the petition for quashing the show-cause notice is premature, it appears that the Court is unlikely to accept this plea either, particularly since detailed hearings were heard on the merits. On the merits, the Department’s strongest point was that the arrangement had been referred to the FIPB. To this, the Senior Advocate for Vodafone stated that the matter was referred to the FIPB merely as a precaution and not as a legal necessity. It will be interesting to find out what view the Court will take of the matter on this issue; particularly given that the learned ASG stated that the Department was not alleging any fraud or evasion. Now, if the Court takes this statement to mean that this was only a case of tax avoidance, the ratio of the Supreme Court’s judgment in Azadi Bachao Andolan might preclude the Bombay High Court from looking at the substance of the transaction while ignoring the form. Thus, it appears that the Court ought to hold that there has been no transfer of a capital asset situate in
(Update: The judgment is now out, and not quite as I predicted. See this post.)