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Vodafone Verdict Is Wrong: Prashant Bhushan

Prashant Bhushan

Vodafone Verdict Is Wrong: Prashant Bhushan

Editorial Board

Prashant Bhushan launches a scathing criticism of the Vodafone verdict and argues that India will be seen as a “banana republic” where foreign companies can loot our resources and even avoid paying taxes on their windfall gains from the sale of those resources.

Prashant Bhushan, legal crusader, has launched a scathing criticism of the judgement of the Supreme Court in Vodafone International vs. UOI. In an article published in the Hindu, Prashant Bhushan argues that the Supreme Court has again made a wrong call on tax avoidance and set a precedent that jeopardises thousands of crores of potential revenue for the exchequer.

Prashant Bhushan points out that tax avoidance through artificial devices has become a very lucrative industry today and that a large part of the income of the ‘Big 5′ accountancy and consultancy firms is derived from such schemes. McDowell 154 ITR 148 (SC) had put the issue in the correct perspective, though two later decisions (Azadi Bachao Andolan & Wallfort) reverted to calling artificial tax avoidance devices “legitimate tax planning” rues Prashant Bhushan.

vodafone judgement

Prashant Bhushan contemptuously calls Mauritius companies set up by third-country foreign companies as ‘Post Box Companies‘ and says that the benign attitude of the Indian tax authorities has resulted in “blatant evasion“. He also singles out Yashwant Sinha, the then Finance Minister, for responding to the distress call of the FIIs and issuing the circular which stated that once a company had obtained a tax residence certificate from Mauritius, it would not be taxed in India. The government’s appeal against the verdict of the Delhi High Court which had struck down the Circular effectively offered a tax holiday to the FIIs rues Bhushan. The consequent judgement of the Supreme Court (Azadi Bachao Andolan 263 ITR 706 (SC)) which called this device an act of legitimate tax planning was in defiance of the Constitution bench judgment in McDowell 154 ITR 148 (SC) says Bhushan.

Prashant Bhushan rues that though in Vodafone, the Supreme Court had the opportunity to correct the transgression of the McDowell 154 ITR 148 (SC) principle, it did not do so. Instead, the Court held that despite the fact that the entire object and purpose of the transaction between Hutch and Vodafone was to transfer the shares, assets and control of the Indian telecom company to Vodafone, the transaction has nothing to do with the transfer of any asset in India!

Prashant Bhushan calls this approach a “welcoming wink” towards tax avoidance devices and says that it is unlikely that any foreign company would be called upon to pay capital gains tax in future in India. This jeopardizes thousands of crores of tax revenue, and the future attitude of courts towards innovative tax avoidance devices.

Prashant Bhushan is not able to resist the temptation to contrast the Vodafone verdict with the 2G telecom verdict. He says that there is a “sharp contrast” and that the latter judgement “enforces the constitutional principle of equality and non-arbitrariness“.

Prashant Bhushan signs off with the warning that our courts must send the clear signal that India is not a “banana republic” where foreign companies can be invited to loot our resources and even avoid paying taxes on their windfall gains from the sale of those resources.

(Click Here To Read The Full Article)

11 comments on “Vodafone Verdict Is Wrong: Prashant Bhushan
  1. Rangarajan says:

    For a legal analysis please see
    ssrn.com/abstract=2163337

  2. vswami says:

    One may read:

    B.S.RAGHAVAN
    Government as a client before courts of law

    “Is the Government — whether at the Centre or in the State — appearing as a client before a court of law through counsel any different … ”

    The well meaning, unbiased write-up (published in BL today) supplies one more axe to chop off, or strike at the root, the unacceptably in equitable propaganda mooted by those few protagonists, including professionals, whether competent or suitably equipped or otherwise, against the courts’ rulings on the related propositions, exclusively of ‘law’. Attempting to bypass or sidetrack the reality that, such propositions are , by the very nature, essentially required to be adjudicated having regard to considerations such as, ‘constitutionality’, principles of natural justice, or the like; not on emotional or purely mundane considerations sans equitable grounds .

  3. ca pradip modi says:

    I am of the opinion that if at all decision is wrong , the government has to amend law like what had been done past, after announcement of land mark judgments of supreme court. it is true that being patriotic person, we we fel that exchequer is lookijng tax of throusand of crores but what supreme court can do is to interprete law and not to read what is not provided. Shri Kapadia , CJI has very brillinantly drafted the judgment not sparing any arguments of either parties. It is true that true gain of this judgment may be derived by large legal and accounting firms. however at the same it is establised that Judiciary in india is at par excellence. I salute to them. Result may be win or defeat but conclusion is more important.

  4. vswami says:

    ….WORTH PURSUING, FOLLOWED UP BY SINCERE ACTION TO TAKE THE MATTER FORWARD, THEN THE PRESENTLY RAGING CONTROVERSY FOR /AGAINST THE SC VERDICT, SHOULD, FOR OBVIOUS REASONS, ON THEIR OWN, PALE INTO INSIGNIFICANCE. PROPER APPRECIATION THEREOF IS POSSIBLE PROVIDED ONE KEEPS IN FULL FOCUS THE HISTORY OF THE LEGISLATION ON TAXATION OF CAPITAL GAINS, ESPECIALLY THE CASE LAW AND AMENDMENTS MADE from time to time TO THE APPLICABLE PROVISIONS. PARTICULARLY, SC IN “SRINIVASA’S” CASE. THOUGH ‘Srinivasa’ IS a case of ‘no conceivable cost’ , NOT A ‘NIL’ COST SITUATION. For an elaboration of this aspect, one may refer –
    (2006)5 CAT 432 (Mag); perhaps, also (2006) 153 Taxman 126 .

    being continued IN THE HOPE/fervent expectation THAT, EXPERTS ACTIVE, ESPECIALLY the ones SUITABLY EQUIPPED AND HAVING THE REQUISITE EXPOSURE IN THE FIELD, WOULD EARNESTLY MAKE AN ATTEMPT TO FIND A LASTING SOLUTION, THEREBY TRY AND PUT AN END TO THE VEXED CONTROVERSY; WHICH OTHERWISE IS BOUND TO CONTINUE RAGING FOR EVER, AS EVER BEFORE, WITH NO RESOLUTION, SAME WAY AS A BLIND AND MINDLESS ATTEMPT TO “REACH THE HORIZON”.

    WITH THE SAME BREATH, IT MAY BE ADDED, WITH THE SAME OBJECTIVE, THE PROPOSED RELATED PROVISIONS OF THE DTC ALSO REQUIRE TO BE CLOSELY STUDIED, FOLLOWED UP BY A SUITABLE FEEDBACK AS CONSIDERED NECESSARY/DECIDED. FOR, OTHERWISE, inevitably, ALL TALKS ABOUT SIMPLIFICATION OF THE ENACTMENT MIGHT TURN OUT TO BE A USELESS TINSEL /MYTH.

    to be contd…

  5. vswami says:

    REGRET SO FAR NO SINGLE COMMENT ON THE CONTENTS OF POST OF MARCH 5.

    WHAT NEEDS TO BE REALIZED IS THAT, SHOULD THEY BE AGREED TO HAVE SUBSTANCE AND WORTH PURSUIUNG

    Request to ignore the one line post on March 6th: reason is obvious that the REFERRED previous comments found missing (MAY BE OWING TO A TEMPRORAY as referred are now in view.

  6. vswami says:

    I was just looking for any new comments, but found all the previous ones missing; Reason?

  7. K.Bhaskar says:

    Well said. India need not stoop down to this level to attract FDI. India should have strong tax laws and ensure that such transactions are taxed and thus help India and the Indian Government. Many MNC’s in India are easily manipulating various laws pertaining to income tax, labour laws and other laws with the help of Indian Directors and a few india Managers who are bought by paying higher salaries but at the cost of our country’s interest. Most of them are closely held MNC’s and are successful in the above.

  8. vswami says:

    BSR’s article published in a recent Issue of BL > “Going back to Constitutional basics” is seen to have appropriately analysed the points under debate.

    For enlightenment in a proper light, on the question as to what should be the right approach of the SC in any such issue arising under the Constitutional law, the observations In a tax case, 287 ITR 547 may help.

  9. If the supreme court can tax leasehold interest in land/building then why it can’t tax controlling/underlying interest in several business rights in a transaction of transfer in share. Even a small vendor knew of sale of business of hutch when overnight hutch signboards got replaced with voda signboards. why blame big 5 or lawyers/consultants when our present law is capable of handling such kind of transactions. our transfer definition in the act is wide enough to rope in transactions of this kind without even lifting a veil. SC went arounnd section 9 and 5 majorly but did not chose to go deep into transfer definition u/s 2(47) which is inclusive. the matter is not free from doubt. hope better wisdom will prevail as SC has now and then reiterated that TDS is tentative deduction. the matter needs proper scrutiny.

  10. vswami says:

    Readers are requested to care to and closely read the proposed new provision in the DTC. It is seen to, by laying down a formula (in one’s view, it seems to suffer from the malady of faulty logic), somehow accomplish the same result as the Department sought to, by ‘testing fresh waters’, in the infamous Vodafone case.

    In any such matter, whatever be the motive or compelling reasons or circumstances, the oft canvassed and well established dictum or constitutional principle that the powers of court, including the apex court, are strictly and profoundly confined to what is known as – ‘interpretation’, of any enactment, having regard to both the letter and spirit, as could be readily understood from the language of it; NOT REWRITE IT.

    to be contd.

  11. vswami says:

    The scathing criticism said to have been launched by a legal crusader ( seemingly deserving to be projected as a national crusade), to put across in a very simplistic way, is founded on the premise that , if looked at or through, the subject matter of transaction, resulting in gains to the seller, is the ubiquitous ‘CONTROLLING INTEREST’.

    Even granting that is the only or right premise, or a better one, there could conceivably be no two views or controversy on the fundamental that what is sold can only be what was acquired. In other words, if what is sold is controlling interest, then what was acquired could not have been anything else except the very same controlling interest; NOT THE ‘SHAREHOLDING’.

    In either view, cost of its acquisition remained same i.e. what was paid for, for acquiring the ‘capital asset’.

    On sale, going by common sense, with- by any imagination wild or otherwise- no scope for tweaking or twisting the reality, the seller has to be taken to have demanded and received, and the buyer has to be taken to have agreed and paid, such an amount as considered a fair market value or its intrinsic value.

    In the nature of things, there could again be no denying that, the seller has been able to realize more than what he paid for, only because of the appreciation in the value of the capital asset. There could be no doubt that it is such appreciation in value which in tax parlance is referred to as/termed ‘cost of improvement’.

    Now, translating the foregoing into an arithmetical exercise:

    Cost of acquisition (of controlling interest) being the cost/equivalent of the shareholding held – say. X

    Sales price – say, Y

    Cost of improvement (being excess of Y over X ) – i.e. Y-X

    Cost + Improvement cost = X + (Y -X)

    CG = Y – (X + (Y – X))

    i.e. Y – X – Y + X

    Is not the Result – ‘ZERO’ ?

    Is that puzzling /any well reasoned comment ?

    Readers may please be enlightened !

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