India's tax regime and the Vodafone problem

The manner in which India has allowed the rule of law to be subverted for over eight years is tragic, notes former additional solicitor general of India Bishwajit Bhattacharyya.

The jubilation over Vodafone's victory in international arbitration at The Hague against India's tax authorities bristles with serious misconceptions.

The issue simply is about India's territorial jurisdiction over 'assets located in India'.

On January 20, 2012, the Supreme Court ruled that India had no territorial jurisdiction if non-residents transfer such assets indirectly.

In March 2012, India's Parliament clarified to the contrary.

The issue continues to fester -- to deny India her legitimate tax dues!

Why did the Supreme Court overrule a brilliant judgment delivered by the Bombay high court on September 8, 2010?

The high court held that India had the territorial jurisdiction, and allowed Vodafone International Holdings BV, Netherlands, to agitate before the tax authority that they had reasonable cause and a genuine belief that tax was not liable to be deducted at source and that no penalty could be fastened on them.

Vodafone was not prepared to yield before the tax authorities.

Instead, an appeal was preferred in the Supreme Court, which ruled that India had no territorial jurisdiction.

The transaction that eluded India her territorial jurisdiction, according to the Supreme Court, went thus: India's company in telecom business, Hutch Essar, changed ownership abroad indirectly from Hutchison Whampoa, Hong Kong, to Vodafone Netherlands.

On February 20, 2007, Vodafone Netherlands filed an application with the Foreign Investment Promotion Board (FIPB), New Delhi.

On May 7, 2007, the FIPB conveyed its approval to Vodafone subject to compliance to India's laws.

On the very next day, May 8, Vodafone remitted about $11 billion from the Cayman Islands to Hong Kong.

This changed the ownership of Hutch Essar located in India.

The Supreme Court's ruling that India's tax authorities had no territorial jurisdiction over this transaction leaves several questions unanswered, given that Vodafone approached the FIPB in India before the transaction.

Why did Vodafone await FIPB's approval before remitting funds from the Cayman Islands to Hong Kong if India had no territorial jurisdiction? The Central Board of Direct Taxes (CBDT) is also located in the same North Block where the FIPB office was.

How could CBDT, and through CBDT the tax authorities, then not exercise territorial jurisdiction, if the FIPB could?

The subject matter in the case clearly is the assets/business located in India, whose ownership had changed abroad for a huge consideration.

Yet the Supreme Court ruled that India lacks the territorial jurisdiction to deal with assets and business located in India.

If such a law is declared by the Supreme Court, which under Article 141 of the Constitution is binding on all courts and tribunals in India, then ownership of every asset/business located in India can be changed by two non-residents -- juridical or natural -- by simply shifting their base outside India, and these transactions can then escape from the clutches of India's laws.

In the teeth of such a ruling, could Parliament have remained silent? It had to clarify that India has jurisdiction to deal with assets located in India.

It is not merely a question of paying tax or deducting tax at source.

It is a question of exercise of territorial jurisdiction by a sovereign democratic republic!

Critical comments about retrospective amendment are misplaced.

It is a settled law that Parliament can legislate prospectively as well as retrospectively, even in fiscal statutes.

Many such amendments have been carried out before.

Retrospective amendment to FCRA (Foreign Contribution Regulation Act) was carried out by Parliament only to bail out the Bharatiya Janata Party and the Congress, to nullify a judgment of trhe Delhi high court, which held both political parties guilty of violating the FCRA norms.

Why this hue and cry only for Vodafone?

The retrospective amendment by the Finance Act, 2012, is worth discussing.

It was only clarified for the removal of doubts, that any share/interest in a company outside India shall be deemed to be situated in India, if the value of such share or interest is derived substantially from assets located in India.

The crucial words are 'assets located in India'.

If assets located in India are bought and sold outside India by two non-residents through any device, then shouldn't India's authorities have the power to look into them? Does it happen in any other country in the world?

Assume that $1 trillion, instead of $11 billion, had been transferred from the Cayman Islands to Hong Kong with a booming value of 'assets located in India', would India still continue to deprive herself of her legitimate tax revenue?

In all this, Vodafone has lost nothing.

It has not challenged the retrospective amendment of 2012.

The income tax department in India has not managed to recover its dues after raising the tax demand on Vodafone.

Vodafone has not even appealed against the tax demand in India.

After 2012, political parties made a noise about the retrospective amendment.

Yet no one has moved to amend the 2012 law.

The present government came to power in 2014 and in 2019 with a thumping majority.

It has not initiated any move to amend the 2012 retrospective amendment.

This is a unique situation.

India's law amended by Parliament has remained only on paper.

The income tax department's tax demand raised on Vodafone has remained only on paper.

And India has yielded to the illegal jurisdiction of international arbitration on a tax matter which is clearly unsustainable under Indian laws and contrary to bilateral treaty.

It is a settled law that treaty obligations have to be in harmony with domestic legislation.

A tax demand cannot be stretched to be given 'national treatment' and 'most favoured treatment' to a foreign investor through the gateway of Article 4 of India-Netherlands BIPA (Bilateral Investment Protection Agreement), bypassing the Income Tax Act, 1961, or in conflict with it.

In fact, Vodafone's triggering BIPA was ab-initio misconceived.

Why did India agree to such a patently erroneous jurisdiction?

The manner in which India has allowed the rule of law to be subverted for over eight years is tragic.

Collecting legitimate tax dues is the bounden duty of the State.

Every investor will ultimately prefer a destination committed to the rule of law rather than a regime that subverts it.

Bishwajit Bhattacharyya is a senior advocate, Supreme Court.

Feature Presentation: Aslam Hunani/Rediff.com