Decision in the Vodafone Tax Case

An earlier post mentioned that the decision of the Bombay High Court in the Vodafone case had gone against the petitioners, i.e. Vodafone. However, the text of the judgment which was not available as on the date of that post has become available since, and throws up some interesting issues for discussion.

The issues before the Court were (a) the constitutionality of the certain amendments introduced by the 2008 Finance Act, and (b) the validity of the show-cause notice issued by the Department to the petitioner. On the constitutionality, the Court held that constitutional validity cannot be challenged in abstracto and has to be assessed in the context of specific facts. Here, the petitioner had not presented before Court the agreement between the parties to the transaction, and in the absence of such basic facts, the Court drew an adverse inference and refused to examine constitutional validity. On the challenge to the show-cause notices, the Court relied on a series of Supreme Court and High Court decisions decided in the last couple of years for the proposition that “Unless, the High Court is satisfied that the show cause notice was totally non est in the eye of law for absolute want of jurisdiction of the authority to even investigate into facts, writ petitions should not be entertained for the mere asking and as a matter of routine and the writ petitioner should invariably be directed to respond to the show cause notice and take all stands highlighted in the writ petition. Whether the show cause notice was founded on any legal premises is a jurisdictional issue which can even be urged by the recipient of the notice and such issues also can be adjudicated by the authority issuing the very notice initially, before the aggrieved could approach the Court.” Thus, the threshold required to be established by the Department was only a prima facie existence of jurisdiction and nothing more. Since a decision on these two matters were theoretically sufficient for the Court to decide the issue before it, following the strict rules of judicial precedent, this decision should not be of great relevance in the litigation on the merits of the dispute that is bound to follow.

However, what makes the decision one of possible significance is the fact that the Court spent considerable time discussing the merits of the dispute and in arriving at conclusions that would be of persuasive value in any subsequent litigation. For one, the Court repeatedly asserted that the transfer was not of the shares of a Cayman Islands situated company, but of assets situated in India. For arriving at this conclusion, they relied on prior statements by officials of the company indicating the intent to take over the Indian part of Hutchison’s business, the fact that the approval of the FIPB had been sought before the transaction, and other circumstances (renaming of the new entity, sharing of the license to carry on business etc.). All these make it a clear case of lifting the corporate veil, and determining the nature of the transaction by giving precedence to substance over form.

In light of the issues discussed in a number of earlier posts, on recent trends in this area, in both the Indian and English law, this decision of the Court to apparently lift the veil is one of the enormous significance.

The Court also discussed and relied on the ‘effects doctrine’, which is a principle of international law granting a State jurisdiction over actions which, although carried out outside its territory, have effects within. Following the application of this principle in few recent decisions on the scope of the MRTP Act, the Court held that since 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”, it would be taxable in India. The fact that this principle was used independent of the decision on lifting the veil seems to suggest that even if the veil were not to be lifted, the mere existence of this effect would be a sufficient basis of taxation. The use of this principle in this manner seems to mark a significant departure from the principle of strict interpretation of charging provisions in tax statutes, and also from the attitude that seemed to form the basis of prior decisions of the Apex Court in cases like Azadi Bachao Andolan.

For extracts of relevant parts of the decision and another take on it, see http://legaldevelopments.blogspot.com/2008/12/bombay-high-court-decision-in-vodafone.html.