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Does the Vodafone ruling need a relook?

Does the Vodafone ruling need a relook?
13 Jun 2013

This article was first published in the Financial Express, 11 June 2013

"With the Supreme Court ruling that there is no conflict between ABA and McDowell, attempts by the revenue department to unsettle the settled judicial view do not augur well for domestic and foreign investors." Mukesh Butani, Taxand India, discusses the possibility of reopening the Vodfone case.

The Andhra Pradesh High Court recently ruled in favour of Sanofi Pasteur Holding, a French resident, on the taxability of gains arising from an offshore transfer of shares of another French company holding substantial shares in an Indian company. The high court ruled that such gains would not be taxable in India in line with the principles articulated by the Supreme Court (SC) in the case of Azadi Bachao Andolan (ABA) and Vodafone International Holdings, and that it could be taxable only in France as per the agreement for avoidance of double taxation between India and France.

Assailing the high court ruling, the revenue department filed a special leave petition (SLP) before the SC. The revenue department also sought reconsideration of the judgments of the SC in Vodafone (three-judge bench) and ABA (two-judge bench) by seeking reference to a larger bench of the apex court, for purportedly being in direct conflict with the earlier ruling in the case of McDowell (five-judge bench). The rationale, in the words of the revenue department, as gleaned from media reports, is “the conflict between the judgments are writ large which would require final determination by a larger bench in order to ensure certainty."

As per convention and judicial discipline, substantial question(s) of law, seized of by the SC, are referred to larger benches of the SC, in cases where either there are contradictory decisions of the SC or where a bench of the SC, when called upon to adjudicate an issue, does not subscribe to an earlier view expressed by another bench. So, only vexed issues involving complex questions of law are dealt by larger benches of the SC to provide certainty.

In the context of Vodafone and ABA vis-a-vis their alleged conflict with the judgment of McDowell, it appears inconceivable as to how Vodafone and ABA militate against the principles enunciated by the majority view (of the SC) in McDowell case. ABA interpreted the McDowell decision to hold that the extreme views of Justice Chinnappa Reddy were not echoed by the majority view expressed through Justice Ranganath Mishra. McDowell decision was not discarded in ABA, rather applied in proper context to conclude that majority judgment in McDowell held that tax planning may be legitimate, provided it is within the framework of law and that colourable device cannot form part of tax planning. ABA does not run in conflict with the ratio of McDowell, it eliminates the ambiguity surrounding McDowell. In Walfort Share & Stock Brokers case, the SC opined that there is no conflict between ABA and McDowell as all forms of legitimate tax planning can’t be frowned upon, applying the ratio of McDowell case. Recently, the interpretation of McDowell decision by the SC in ABA received a stamp of approval in Vodafone, which held there is no conflict between ABA and McDowell. Striking a balancing note, Vodafone reiterated the principle that while artificial schemes and colourable devices which constitute dubious methods and subterfuges for tax avoidance are impermissible, they must be distinguished from legitimate measures and, in cases of treaty shopping and/or tax avoidance, there is no conflict between McDowell and ABA. Further, review petition against Vodafone ruling was dismissed by the SC.

Tracing the SC’s decisions, amongst others where ABA has been applied, leads to a conclusion that the SC has time and again held that there is no conflict between the judgments of McDowell and ABA and both the decisions resonate a principle that legitimate tax planning cannot be discarded. Revenue continues to assert that ABA (and now Vodafone) runs against the principles, enunciated in McDowell and therefore both ABA and Vodafone need reconsideration by the SC through constitution of a larger bench. In December 2012, similar reconsideration of Vodafone ruling was sought by revenue in the case of Vodafone Essar Gujarat case.

Your Taxand contact for further queries is:
Mukesh Butani
T.  +91 124 339 5010

This article was first published in the Financial Express, 11 June 2013

Taxand's Take

The task of interpretation of legislation or a judgment is within the domain of courts. With the SC ruling that there is no conflict between ABA and McDowell, attempts by the revenue department to unsettle the settled judicial view do not augur well for domestic and foreign investors. Strong governance along with robust legal system is integral to attract foreign investment. Certainty in tax policy and stability are foundation stones of any fiscal system. Attempts of the executive, despite judicial consensus on the legal position on interpretation of law and treaties, may prove counter-productive. Not only do they erode an element of certainty and confidence amongst the investors in the Indian legal and fiscal system, we can see the adverse impact on FDI prospects for India. It also runs the risk of subverting the rule of law, of which certainty is an integral part. While the issues arising from the Sanofi ruling of the high court are sub judice before the SC, and it is premature to comment on the outcome of the SLP, a plea for reconsideration of the judgment in ABA as affirmed by Vodafone, may neither be legally tenable nor be desirable from a strategic and economic standpoint.

Taxand's Take Author