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So, Vodafone Knew All Along It Was Playing With Fire?

In the blitzkrieg between Vodafone and the Government, the Government’s revelation that Vodafone was made aware by it, much before the transaction, of the obligation to deduct TDS on payments to Hutchison, has sent shock-waves amongst Vodafone’s supporters. The sympathy that Vodafone garnered from its’ carefully orchestrated plea that it was an innocent buyer which got caught in the crossfire stands eroded says the author.

The battle between Vodafone and the Government is as interesting off the field as it was on the field. After Vodafone lost two times before the High Court, everyone was complacent that its appeal would be thrown out by the Supreme Court. After all, how can you make billions of dollars of profit from Indian operations and claim that you are not liable to pay any tax in India only because you routed your investments through a paper company in the Cayman Islands? However, Lord Denning rightly said that litigation is a game of chance and the Supreme Court shocked everyone by deciding in favour of Vodafone. You must “look at” and not ‘look through” the transaction, the Court thundered, sinking the hopes of everyone in the Finance Ministry who was salivating at the prospect of Rs. 12000 crores in the kitty.


Vodafone and its supporters have been trying all tricks of the trade to try to cajole/ persuade/ threaten/ scare the Government to abandon the proposal to retrospectively amend the law. To its credit, the Government has held its ground so far despite the onslaught of criticism from all fronts

The verdict met with strong reactions. Legal crusader Prashant Bhushan, who single handed brought the marauding telecom companies to book and is well known for his frank and outspoken views, was at the forefront of the attack. He couldn’t hide his disappointment with the verdict calling it a “welcoming wink” towards tax evasion devices. He said courts had to send out a “clear signal” that India was not a “banana republic” where foreigners could come and loot its resources without paying taxes.

After Prashant Bhushan’s spirited attack of the verdict, Vodafone’s supporters would have known that their days of euphoria would be short-lived. Here, one must give credit to the Government for its fast reflexes (whether one agrees with the Government action or not is a different issue). Inspired by the criticism of the verdict and determined not to let the golden goose out of its grasp, the Government hastily came out of mourning and “smuggled in” a retrospective amendment to the law which, if enacted, will nullify the verdict of the apex Court.

Since then, Vodafone and its supporters have been trying all tricks of the trade to try to cajole/ persuade/ threaten/ scare the Government to abandon the proposal to retrospectively amend the law. They got Gordon Brown, the Prime Minister of UK, to say that the proposal was causing “significant concern and uncertainty” amongst overseas investors. They also marshaled US Treasury Secretary Timothy Geithner to say that the proposal had “dampened enthusiasm about India’s investment climate“.

Vodafone also found support amongst the legal fraternity with eminent senior counsel like Soli Dastur and Dinesh Vyas speaking out against the proposed amendments. While Soli Dastur described the proposals as “really unjust and contrary to all principles of equity”, Dinesh Vyas called it a “failure of national governance standards“.

This revelation has caused much disconcertment in the camp of Vodafone’s supporters who were thus far sympathetic to Vodafone’s cause because Vodafone had been cleverly projecting itself as an “innocent bystander” who happened to buy an offshore business and got caught in the crossfire of Indian law

To its credit, the Government has held its ground so far despite the onslaught of criticism from all fronts. Ex CBDT Chief Sudhir Chandra rushed to the Government’s defense by sending out a powerful emotive appeal that permitting billionaires like Vodafone to escape without paying tax would wreck the Indian economy and that common folk like you and me would have to bear the burden of this blunder. The Government also sent out an official press release that “Indian tax laws are very clear that the companies making capital gains from the assets located in India will have to pay taxes either in the country of their origin or in India” and that “It is not a case of double taxation but ensuring that companies that are liable to pay tax must pay some tax“.

But the biggest trump card in the Government’s favour has come in the form of a revelation by R. S. Gujral, the Finance Secretary, that Vodafone had been warned as early as on 23rd March 2007 (before the transaction took place) that the transaction was taxable and that Vodafone ought to deduct tax thereon when it made payment to Hutchison. Business Standard testified that it had seen the “official letters” exchanged between the income-tax department and Vodafone.

This revelation has caused much disconcertment in the camp of Vodafone’s supporters who were thus far sympathetic to Vodafone’s cause because Vodafone had been cleverly projecting itself as an “innocent bystander” who happened to buy an offshore business and got caught in the crossfire of Indian law.

With the revelation that Vodafone was forewarned by the Government and still decided to be a “dare devil” by not deducting tax at source, much of that sympathy is beginning to wear thin. The Hindu Business Line lashed out at Vodafone saying it had “guilt-tripped“, was “inconsistent” and had “tied itself up in knots” on its defense strategy. Firstpost.com was also contemptuous, calling Vodafone “too clever by half” over its strategy of invoking the India-Netherlands DTAA.

A wise judge once said “If you play with fire, you must not complain of burnt fingers

Anyway, so, what now? If the retrospective amendments go through Parliament (as they will because no political party wants to be seen as pro-MNC and anti-common man), the battle ground will shift once again to the Courts. The Government will probably file a petition asking the Court to “review” its verdict while Vodafone will probably file a writ petition (directly in the Supreme Court?) to challenge the validity of the amendments. Will this / should this happen during the tenure of the present Chief Justice (he retires in September 2012) is a dimension that both sides are probably factoring in.

Till then, brace yourself for an exciting journey ahead.

Vellalapatti Swaminathan Iyer
Hyderabad

16 comments on “So, Vodafone Knew All Along It Was Playing With Fire?
  1. DV says:

    The whole matter in Vodafones case has become emotive and no rationality is possible in near future. The author has praised Prashant Bhushn, which out of place on two counts ie one if you want to declare that your country is not banana republic then the right forum to declare so is through legislation. The route followed by Vodafone was well known to every finance person, politician and burocrate ( read Incometax authorities & finance ministry mandarins) since long. So why this loophole was not plugged earlier. Why Government has to wait till Voda happened. Second let mr Prashant Bhushan step into the shoes of Voda and then pay tax. When stamp duty authorities raised a duty demand as on date of registering document why Mr Prashant Bhushan went in appeal on the ground that it was purchased earlier and due to some issue of clearance it was registered. And that case will he accept retrospective change in law. The opponents of Voda are persons who prefer a martyr in others home and when it comes to them they wil find some or excuse.

  2. CA.V.Mahaganapathi says:

    Mr. Vellalapatti Swaminathan Iyer should understand that citizen of India can only follow the law prevailing while a transaction been done. No one can go beyond the law that’s what the apex court did. If a letter from a department can bind an assessee why you need laws and its amendment? can a circular or a notification supersede the act? what vodaphone did was, it perfectly used the gap to exit from the tax liability. More than anything this country still follows justice. Justice is not the essence of laws. Its is above all. The finance ministry slept before the transaction took place. As one of the observer rightly pointed out above why any amendment was not made in the subsequent finance bill? Professionals like CAs and Lawers can only go through the ACT and only take decisions according to the provisions. No point in considering the moods of authorities they write then and there whether with mind or without. The irritating point to all (those who oppose retrospective amendment) is on amending the law retrospectively and by which troubling Vodaphone (assessee). Such attitude is more dangerous than tax evasion. The author need not think that apex court just ignored the law or did not apply its mind. But he should understand that what was delivered by Apex court is the justice based on the law prevailed at that point of time. Advised to view a point with double vision. if you look at with single vision it will always be single sided and the clarity will be very less. More particularly the opposition to the government stand by many people not to be considered as they support vodaphone.

  3. MRKGANDHI says:

    In India we have sympathy for other nationals. Just because we need foreign investment; it does not necessary mean that we accept their means to cheat taxes. Our apex court had absolutely failed to appreciate that once profit is made the organisation or individual has to pay tax either in the home country or the country from where the profit was coming in. In normal parlance, tax belongs to the country where profit is made. It is shocking the wisdom of our apex court failed to ignore rule of purposive construction and a construction should not lead to absurdity. So many times restrospective amendments were brought in order to bring clarity and to protect governments revenue. All our legal luminaries have worked only for the benefit tax evaders and criminals. The assured the guilty rich escaped from the clutches of law. Our apex court always dealt leniently with tax evaders. It is shame our legal luminaries SELL their knowledge and wisdom and do not work for a national or social cause.

  4. vswami says:

    >To finish what I attempted to say, part quoting from the Lyrics:

    Lord, You know how much
    I want to know so much
    In the way of answers and explanations
    I have cried and prayed
    And still I seem to stay
    In the middle of life’s complications
    All this pursuing leaves me feeling like I’m chasing down the wind
    But now it’s brought me back to You
    And I can see again”

  5. vswami says:

    “Why people are obsessed …”?

    In seeking an answer or solace to the not unusually heard lamentation, one may try the lyrics @

    > MAGNIFICENT OBSESSION – STEVEN CURTIS CHAPMAN

  6. jitesh sonee says:

    Why people are obsessed with the matter when other newly inserted provisions and earlier retro amendments for last 5 years in finance act/bill has jeopardised the settled law to the detriment of assessees.

  7. Utsav Shelat says:

    Gordan Brown is not the Prime Minister of UK, David Cameron is the current PM.

  8. vswami says:

    My comment posted in a mood of inevitable exasperation, but impromptu with utmost humility, may be looked up inside the Blog @ http://vswaminathan-vswaminathan-swamilook.blogspot.in/2012/04/meet-in-foreign-soil-us-fm-said-nothing.html

  9. Amol S Joglekar says:

    All the BUREAUCRATS have already started applying WISDOM on how to make the deal REVENUE earning from INDIA’s view point. Let me take an unbiased view. Let TATA disclose what it did in CORES case. Let us ask Aditya Birla what he did in his acquisitions by buying shares in foreign companies and so on. ……………. An intelligent answer to this could be “DTAA with those countries permit us not to do WHT “……….. The next question is “Is DTAA a CONFIRMATORY TEST of taxability or is it the arrangement to share the revenue between 2 countries?” Being Indian I am not at all against my Govt. I would equally love to get the VODAFONE deal taxed in India but definitely NOT in an unfair, biased, ‘looking at revenue figure’ kind of manner.

  10. Dear Sir,

    The Vodafone case was a fit one for lifting the corporate veil. It was clearly a transaction which was aimed at tax evasion.

    But at the same time, one cannot but also look at the fact that the department was barking at the wrong tree. Instead of Vodafone, they should have gone after Essar who received the money and is required to pay capital gains taxes. Why has the income tax department not gone after Essar? Then all these things of FDI being affected, International agreements etc. would not have come into the picture at all.

    CA. Bhavesh Savla

  11. This is a just a tax plannning within the four corners of law. Previously many courts have held that TAX PLNNING is not a sham. In general, If the finance minister goes with the proposed retrospective ammendment in the budget, People will loose faith on the Indian legislature, infact the judgement is delevered by the Apex Court of INDIA. Suoreme will not be able to decide any future questions of law.

  12. M.NARAYANAN says:

    The article by Vellalapatti has brought out two pints of which only one is spoken or written.If the then Finance Secretary clarified even on 23-03-2007, to a single entity Vodafone, why the Government did not bring in the clarification on the statute in the next Finance Bill is a question which the Finance Ministry and the Government will have to answer everyone. Further, when the Supreme Court had interpreted law in assessee’s favour as per the provisions before it, then how can there be a diametrically opposite clarification with retrospective effect? Kindly address the question as to what is the meaning of Judicial interpretation of a provision vis-a-vis parliamentary clarification retrospectively when many of the present legislators were not in parliament retrospectively, nor the formulators of law in the CBDT were not at all concerned with such a formulation (mostly they would not have been IRS at all), on the date from which the provision applies retrospectively. The point is that if a provision does not convey the meaning taken by the present government and there is a litigation on that point, amend the law immediately without waiting for time to nullify the Supreme Court verdict if it is otherwise. Will the Government consider this point and take appropriate action at least in future Let not the Government be a spectator till the litigation wastes money of many including that of the Government. Don’t nullify Supreme Court verdict when you can pre empt its jurisdiction to address the question. Don’t issue clarification of a provision from an early date when you yourself were not there and Supreme Court tells the law to be otherwise.

  13. R.SEKHAR says:

    While Vodafone did what every business entity will do(reduction of tax, based on obscure layering/ advises from Senior Counsels), the warning from the Government in 2007, can not be held against it.For one, its understanding , -though contrary to the interpretation of the Government (interested party)- has been accepted/blessed finally by the Apex Court( but for which the controversial retrospective amendment will be unnecessary).Secondly, it is not uncommon that we have several decisions from the judiciary ignoring/quashing the interpretation of law by the Government.

  14. prasanna says:

    I agree that a big ticket investment would not have been by the vodafone with its eyes closed. More so when there was also and indian company essar as partowner. They must have consulted all the parties before finalizing this deal. The multilayered structure does points to the fact they had assessed the risk properly and were hopeful that the actual location of assets would get obscured/diluted in this maze of various shareholdings.

  15. vinod says:

    LORD DENNING SAID “LITIGATION IS A GAME OF CHANCE” and thats what Vodafone did knowing the consequences very well.
    They had it planned that if the stand failed they could fall back on pressurising the Govt. thru USA and UK as well as Netherland/India pacts.
    God forbid if the Indian Govt. crumbles under their pressure-UPA should be wiped out in the 2014 elections,as it is they have ruined the country thru corruption.

  16. Pawan says:

    I agree with the Government. These transactions should be taxed in India unless India has DTAA and has agreed not to tax if the gain is arising to resident of DTAA country.

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