This post mentioned that Vodafone had lost its case in the Bombay High Court. In the present post I will only highlight a few important conclusions of the Court (in Vodafone International Holdings v. Union of India and Asst. Director of Income Tax, Writ Petition No. 2550/2007) along with a few initial comments:
Revenue has made out a strong prima facie case that the transaction entered upon by the Petitioner amounts to transfer of a capital asset and not merely a transfer simplicitor of controlling interest ipso facto in a corporate entity, especially in the light of the fact that the interest in Telecom License is jointly held with the Essar Group complied with the use of Brand & Goodwill and non-complete rights given by HTIL. There is a right to enter into Telecom Business in
The Petitioner themselves have not disputed that the transaction involves transfer of controlling interest. If any transaction involves a transfer of controlling interest in a company or a group of companies, such a transfer has to be viewed both from the point of view of transferor and transferee. It is inconceivable as to how HTIL can transfer its controlling interest in HEL without extinguishing its rights in the shares of the Indian group and without which, a transferee cannot acquire a controlling interest.
…the purpose of transfer of its interest in HEL was to enable the Petitioner to acquire controlling interest in HEL…
- The Court seems to be advocating looking at the substance of the transaction over the form. A detailed discussion of McDowell and Azadi Bachao Andolan on this point would have explained the rationale of the Court better.
Shares in themselves may be an asset but in some cases like the present one, shares may be merely a mode or a vehicle to transfer some other asset(s). In the instant case, the subject matter of transfer as contracted between the parties is not actually the shares of a Cayman Island Company, but the assets (as stated supra) situated in
- The terminology of “mode or vehicle” seems to be taking Indian tax law back to the pre-Azadi days.
Prima facie, apart from the acquisition of controlling interest, the Petitioner has acquired other interests and intangible rights. The Petitioner accordingly became a successor in interest in the joint venture between HTIL and the Essar group and became a co-licensee with the Essar group to operate mobile telephony in
It is an admitted fact that VEL (earlier HEL), a subsidiary of the Petitioner in which the Petitioner has acquired 67% interest, was a group company of HTIL and now a group company of the Petitioner. Any profit or gain which arose from the transfer of a group company in India has to be regarded as a profit and gains of the entity or the company which actually controls its, particularly when on facts, the flow of income or gain can be established to such controlling company (HTIL). In the present case, by reason of the transfer, the income accrued not to CGP, but to HTIL and was treated as profits of HTIL and accordingly was distributed to the share holders of HTIL in Hong Kong…
- This comes suspiciously close to lifting the corporate veil between entities of the same group. This result seems to be out of accordance with the common law position on group companies. See Adams v.
,  1 All ER 929. Cape Industries
The very purpose of entering into agreements between the two foreigners is to acquire the controlling interest which one foreign company held in the Indian company, by other foreign company. This being the dominant purpose of the transaction, the transaction would certainly be subject to municipal laws of India, including the Indian Income Tax Act
- Again, substance prevails over form.
Petitioner has willfully failed to produce the primary/original agreement dated 11th February, 2007…
…Petitioner has not been able to demonstrate the show cause notice to be totally non-est in the eyes of law for absolute want of jurisdiction of the authority to even investigate into the facts…
In the present case, the Petitioner has been requested to only show cause as to why it should not be treated as an assessee in default. The Petitioner was requested to produce certain documents for proper adjudication in the matter. One of the crucial documents required by the second Respondent was the primary agreement entered upon between the Petitioner and HTIL. The said agreement has not been produced by the Petitioner either before second Respondent or even before us. Without the said agreement and other relevant documents, it will be impossible for us to find out the true nature of the transaction. Inspite of repeated demands by the Respondents, the same have not been produced, leaves us with no option but to draw an adverse inference against the Petitioner, since it clearly amounts to withholding of the best evidence, even assuming that the onus of proof does not lie on the Petitioner…
When the Petitioner has challenged the constitutional validity of the Amendment to Sections 191 and 201 of the I.T.Act by the Finance Act, 2008, then the same must be in context of certain facts pleaded and proved by evidence in the form of documents on record and not in vaccum or in the abstract. The present Petition totally lacks particulars as to the nature of agreement dated 11th February, 2007 and all other agreements preceding or following the same entered into by HTIL and/or the Petitioner.
- This factor of non-production of the original agreement appears to have played a great role in the decision. In oral arguments, Mr. Parasaran, the ASG appearing for the Revenue, had stressed on this aspect a lot. However, it would perhaps have been better if the Court rested its decision on the ground that the authorities were entitled to fully look into the facts, instead of passing observations on the merits of the case.
An initial opinion:
I am still unconvinced that Vodafone deserved to lose on merits. Perhaps, the Court could have limited itself to deciding on grounds of maintainability. A writ petition against a show-cause can be sustained only if the notice is totally non-est. The Court could have simply stopped at saying that there was not enough material for it to come to that conclusion. Instead, the detailed discussion of the merits may render the decision legally untenable.
In an initial post on the arguments in the case, I said “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.” Perhaps, this factor – that the merits were argued in depth – induced the Court to express its opinion on the merits as such. My initial view however, is that those opinions on the merits may not be correct in law. A more detailed post explaining this will follow in a few days.
(Update: The judgment is now available on ITAT online here)
(Note: The detailed post is now available here)