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July 2, 2008
The Vodafone Tax Controversy
NDA Commentaries on Court Proceedings*
| The Vodafone tax controversy
concerns a cross-border M&A transaction between
non-resident entities and its taxability in India. The
facts before the Bombay High Court are unique and
unprecedented, and the outcome could have a telling
impact on global mergers and acquisitions, indirectly
involving an Indian subsidiary. Nishith Desai Associates
brings you updates on the final hearings as and when
they develop in the courtroom. |
On July 1, 2008, Senior Advocate Mr. Iqbal M. Chagla, counsel
for Vodafone International Holdings BV (“Vodafone”)
started the day in court by continuing his proposition from the
previous hearing on June 30, 2008. He completed this
proposition examining the constitutional validity of the
retrospective amendments made to Sections 191 and 201 of the
Income Tax Act, 1961 (“ITA”). The counsel ended
the day by introducing his next proposition, which deals with
the very chargeability of a transaction between non-resident
entities wherein an Indian subsidiary could be present.
With respect to the constitutional validity, the counsel
reiterated that while the Parliament has plenary power to make
retrospective amendments, these must satisfy the fundamental
constitutional tenets of reasonableness and equality, lest they
should be struck down as violative of Article 14 of the Indian
Constitution. Article 14 of the Constitution of India provides
that the State shall not deny to any person equality before
the law or the equal protection of the laws within the territory
of India.
It was submitted that the impugned amendments to Sections 191
and 201, which are purported to be clarificatory, were violative
of Article 14 insofar as they operated with retrospective effect
from June 1, 2003 and June 1, 2002 respectively. The counsel
emphasized that a clarification by its very nature must operate
since the commencement of the statute and not for a specific
period as the legislature cannot have different intentions for
different periods of time. It was contended that such an
amendment, if recognized, would amount to an unequal treatment
of equals insofar as the liability of a person entering into a
similar transaction prior to the respective dates of
retrospective amendments would be different from that of a
person thereafter.
It was further submitted that while it is for the legislature to
legislate, it is only for the judiciary to interpret these laws.
The counsel cited the judgment of the Constitution Bench of the
Supreme Court in Union of India v. Elphinstone Spinning &
Weaving Co. Ltd.,1
which states that once a statute leaves Parliament House,
the Court's is the only authentic voice which may interpret
the Parliament. Therefore, he submitted that explanatory
notes to the Finance Bill, 2008 could not dictate the
legislative intent upon the court.
It was further reiterated that the impugned retrospective
amendments were not clarificatory, but substantive in character
and sought to levy additional liabilities, which did not
hitherto exist. The counsel concluded this proposition by
beseeching the Court to strike down the impugned amendments as
unreasonable, inequitable and burdensome.
Towards the end of the day, Mr. Chagla introduced his next
proposition dealing with the chargeability of capital gains tax
in the hands of a non-resident under section 9 of the ITA. It is
the contention of the Income Tax Department (“Revenue”)
that Vodafone is liable to deduct tax at source from the payment
made to a Cayman Islands company (“Vendor”) for
the acquisition of another Cayman Islands company, which
indirectly holds shares in an Indian company. Under the ITA, a
non-resident is liable to tax only with respect to income which
accrues or arises in India or income which can be so deemed to
accrue or arise in India. Under Section 9 and in the facts and
circumstances of the instant controversy, only income
accruing or arising, whether directly or indirectly, through or
from a business connection in India or through the transfer of a
capital asset situated in India can be brought to tax in India
at the hands of a non-resident. It was the counsel’s contention
that the capital gains accruing to the Vendor satisfied neither
of these conditions and hence were not taxable in India. He
submitted, as a corollary, that Vodafone could have no
responsibility to withhold tax from the consideration paid to
the Vendor.
The counsel proposed to make detailed submissions regarding to
the above proposition on Friday, July 4, 2008. We will once
again attempt to bring to you accurate updates and analysis on
the Vodafone Controversy as it unfolds in the courtroom.
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* Previous commentaries:
June 27, 2008 &
June 30, 2008
1
(2001) 4 SCC 139
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