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January 20 verdict has the effect of legitimising routing of transactions through tax havens

The Supreme Court will take up on Tuesday the Union of India's petition seeking review of its January 20 judgment that the Income Tax Department did not have the jurisdiction to levy Rs. 11,000 crore as tax on the overseas deal between Vodafone International Holdings and Hutchison Group.

The hearing, by a Bench of Chief Justice S.H. Kapadia and Justices K.S. Radhakrishnan and Swatanter Kumar, assumes importance in view of the proposed retrospective amendment to the Income Tax Act announced by the Finance Minister in the Union budget. For, any such amendment is likely to have an impact on Vodafone.

In its review petition, the Finance Ministry, through its Secretary and the Assistant Director of Income Tax, said the judgment suffered from an error apparent on the face of the record and the court had failed to consider the case submitted by them at least on 15 aspects. The finding that the offshore transaction, which gave the Vodafone holding company a 67 per cent stake in Hutch-Essar, was a bona fide, structured FDI [foreign direct investment] in India was a patent error.

The case did not involve any inflow of monies into India as would be clear from the characterisation of the transaction as an offshore deal and the incontrovertible fact that no investment or inflow into the country took place, the petition said. The FDI policy was in no way under challenge or scrutiny in that case and could not have been so as the FDI and interpretation of taxation statutes operated in two different realms. Justifying the imposition of capital gains tax, the petition said it was imposed on account of relinquishment of an asset and this was done by way of a specific amendment in the law which could be traced to a Bombay High Court decision.

Pointing out that the court had relied on the Direct Tax Code Bills of 2009 and 2010 while allowing the appeals in favour of Vodafone, the Centre said there was no judicial precedent to count on pending legislation to interpret the existing legislation. Further, these codes were not even presented as Bills in Parliament but were only under public discussion.

The judgment would undermine the existing legislative and regulatory framework that required approvals from competent authorities in India even for transactions routed outside the country through tax havens, the petition said. Such monies held in tax havens had the effect of compromising the state's ability to manage its affairs in consonance with what was required from a constitutional perspective. The January 20 judgment had the effect of legitimising the routing of transactions through tax havens and preventing the Income Tax department from looking at the substance of the transaction, it said.

The rest is here:
SC to hear today Centre's crucial review plea in Vodafone case