It is true that many of the amendments to the Income-tax Act, 1961 (the tax law) have been provoked by Supreme Court rulings found to be unfavorable to the tax administration. Sale of self-generated goodwill was tax-free, said the apex court. Pronto came the amendment nullifying it. Conversion of capital asset into stock-in-trade was not liable to tax said the apex court, and soon came the amendment nullifying it.
But the move by the Finance Bill, 2012 to bring in retrospective amendments pummelling Vodafone was least expected, given the fact that the government has already filed a review petition and the DTC's resolve to rope in such transactions into the tax net retrospectively.
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But in the face of a clear-cut retrospective amendment, the jurisdictional assessing officer in Vodafone's case would have no option but to reopen the matter, notwithstanding the fact that it had acquired finality with the Supreme Court having the last word on it just a couple of months ago.
SUPREME COURT PRECEDENT
The Supreme Court had said that when Vodafone UK acquired control of Vodafone India's operations not by acquiring control over the Indian company, but over the parent company abroad, there was no scope for imposing capital gains tax on the seller inasmuch as the subject of sale was not Indian shares but shares of a foreign company — only capital gains from sale of Indian shares can be deemed to arise in India. What the government is seeking to do is to jettison this technicality or what some may call legal sophistry, and ask for tax.
And what lends support to its move to collect tax through the seemingly pusillanimous resort to retrospective legislation is the fact that equity has always been on its side.
To be sure, the law was not on its side as pointed out by the Supreme Court. That omission is being made good now through a retrospective amendment. Those opposed to the retrospective amendment have it that it is wrong to ask Vodafone UK to pick up the tax tab of Hutchison, Hong Kong from whom it had bought the controlling interest in the Camay Island controlling company.
How could the buyer have withheld tax when he did not have a clue as to the unfolding tax liability? Well, the government would for good measure quote section 195 (2) glibly in defence:
“Where the person responsible for paying any such sum chargeable under this Act …considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of such sum so chargeable, and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of the sum which is so chargeable.”
VODAFONE STRATEGY
Vodafone in retrospect would be cursing itself for not making use of this dispensation to tell Hutch that under law it would pay it only the amount as pared down by the income-tax officer. It could have saved its skin and shifted the blame onto the assessing officer. After all, it was not as if Hutch and Vodafone were entirely innocent.
Consummating deals in tax havens through multi-layered companies has always been the devious strategy to hoodwink tax authorities in high tax destinations.
Both were presumably aware of the possible tax liability in India and the Cayman Island company was incorporated by Hutch with cunning and stunning foresight.
(The author is a New Delhi-based chartered accountant.)