The battle between the Income Tax Department and telcom giant Vodafone which continued for over four years has finally come to an end with the Supreme Court giving its ruling in favour of Vodafone International Holdings. The Supreme Court in its landmark decision on Friday has set aside the Bombay High Court judgment asking Vodafone to pay Rs. 11,000 crore to the Income Tax department, on the ground that Indian authorities do not have jurisdiction on the instant overseas transaction.

The Apex Court held that the Government has no jurisdiction over Vodafone’s purchase of mobile assets in India as the transaction took place in Cayman Islands and Indian authorities have no jurisdiction over transactions, which have taken place outside the country.

The Supreme Court has also ordered the IT department to refund Vodafone Rs. 2,500 crore with 4 percent interest.

This long awaited decision will boost the investor confidence globally re-establishing the independence of Indian Judiciary.

Bar & Bench spoke to Amarchand Mangaldas Tax Partner Aseem Chawla on the recent Vodafone ruling. Aseem shared his initial thoughts on the decision, the basis of the decision and whether the government will amend the tax laws retrospectively.

Aseem Chawla said, “The judgment is progressive in nature and it will give much needed respite to the international community, which had significant doubts on the prevailing uncertain tax environment. The Vodafone decision seeks to provide clarity on several aspects especially on a) indirect transfer of underlying Indian assets / shares b) general principles of tax planning and c) looking at holding structure.”

Aseem commending the judiciary said, “The Court has given its authoritative viewpoint on aspects where the revenue department’s activity was  being a little overreach, and the revenue department should take a cue from this particular decision while examining cross border transactions. Although the litigation has been time consuming but yet the lessons to be learnt are that India won’t compromise with certainty and stability as also suggested by the Bench in its judgment."

Further, the Supreme Court in its decision has emphasized that the extant tax laws of India, do not provide for such offshore transactions to be taxed in India. The Court held “Certainty and stability form the basic foundation of any fiscal system. Tax Policy certainty is crucial for taxpayers to make rational economic choices in the most efficient manner.”

Aseem said, “The decision is based on analysis of historical facts because the decision largely hovers around the determination of whether a capital asset was acquired in India and the genuineness of the transaction. A reading of the fine print of  the decision suggests that the Supreme Court has analyzed the corporate structure and observed that Hutchison was not a ‘fly by night’ operator and the structure was in place for bona fide commercial reasons In other words, the approach of the court has been to understand the efficacy of it and then suggest the legitimacy of it."

Although this has been a welcome decision especially with the investor community, there are apprehensions in certain quarters that the decision may preempt an amendment to the tax laws to provide support to the tax authorities to tax such similar transactions.

As regards the legislature’s ability to amend the tax laws to bring Vodafone like transactions under India’s tax net, Aseem observed "Article 245 of the Constitution of India empowers the Parliament to legislate in the area of taxation. As such, nothing prevents the Parliament if it in it’s wisdom introduces taxing prescription for levying tax on such indirect transfers. Under the present Income-tax Act, 1961 there is none, as has been vindicated and confirmed by the Supreme Court. The proposed Direct Tax Code Bill (DTC) suggests that indirect transfers where the FMV of the underlying assets is more than 50 percent may be taxable in India. The DTC hasn’t seen the light of the day but  it is indicative  of the legislative mindset”.

Aseem added, “The amendment cannot possibly be retrospective in nature as it affects substantive rights of taxpayers with regard to levy of taxation. At best, the amendment may be prospective in nature ”.

This is a very welcome decision. The Indian judiciary must be lauded for rendering clarity to the taxpayers. It would now be interesting to see the course of action the Revenue will adopt in the future.