Does The Vodafone Verdict Deserve So Much Contempt?

The debate over whether the Supreme Court’s verdict in Vodafone International is right or wrong will never cease. While some hail the verdict as “revolutionary“, others can’t conceal their contempt for it for permitting India to become a “banana republic” where foreigners can “loot its resources” without even paying due taxes. We are now at a critical juncture where the Govt is debating whether the retro amendments should be rolled back or not.

This issue is important now because Prime Minister Manmohan Singh announced that a decision would be taken soon on whether the retrospective amendments seeking to supersede the Vodafone verdict would be implemented or not.

Joining the chorus of respected voices who consider the Vodafone verdict to be wrong are two respected voices. That of Ex Chief Justice of India J. S. Verma and Ex Additional Solicitor General Bishwajit Bhattacharyya.


Ex CJI Verma could barely conceal the contempt in his voice. “The Vodafone judgement is one the three judgments of the Supreme Court which are best forgotten or allowed to pass”, he said. The other two judgements that he is referring to is the much reviled “Habeas Corpus case” (where it was held that even fundamental rights like the right to life stood abrogated during Emergency) and the “JMM Bribery case” (where it was held that MPs who have received bribes are immune from prosecution).

Does Vodafone really deserve to be put in the same boat as these two other controversial judgements which are universally regarded as the worst judgements to have been delivered by the great Institution?

Verma was irked by the fact that Vodafone, though a 3-Judge judgement, bypassed the law laid down in McDowell, a 5-Judge Constitution Bench judgment, that one has to see the “substance” of the transaction and not just its “form”.

Verma pointed out that in formulating the “Look At, Not Look Through” doctrine, the Judges in Vodafone had done the “opposite” of what the Constitution Bench had laid down in McDowell that one had to “Look Through” the transaction to determine what the transaction really was.

Verma was also upset by the fact that the Vodafone ruling had sanctified “illegitimate tax avoidance by adopting a subterfuge“.

He expressed concern that the effect of benefiting a multi-billion dollar conglomerate is to cast a higher tax burden on the common man. “When an illegal tax avoidance is upheld, you cast a higher tax burden on the honest tax payer“, he emphasized.

Bishwajit Bhattacharyya also did not mince words in criticizing the Vodafone judgment. In his book, My Experience with the office of Additional Solicitor General of India, Bhattacharyya has given two arguments to contend why Vodafone is wrong. The first, he says, is that the Supreme Court is wrong in terming the transaction as “Foreign Direct Investment”.

He points out that Vodafone filed an application for approval with the Foreign Investment Promotion Board (“FIPB”) on 20.2.2007 which was granted on 7.5.2007. On the next day, Vodafone remitted $11 billion to Hutch, the funds travelling from the Cayman Islands to Hong Kong.

Bhattacharyya argues that when not a single dollar came into India, the transaction cannot be called “Foreign Direct Investment” but it is a “Foreign Outward Remittance” from India, arising out of Indian operations.

Bhattacharyya’s second argument is that the Supreme Court is wrong in stating that the Income-tax department had no “jurisdiction” to tax the transfer of the shares. He points out that if the FIPB had territorial jurisdiction over the transaction and the remittance that was made by Vodafone to Hutch, then how could it be said that the Income-tax department had no jurisdiction over the same transaction and remittance?

Anyway, whatever may be the merits or demerits of the verdict, the million, (nay, billion) dollar question now is whether Manmohan Singh will let Vodafone off the hook or not. My bet is that Vodafone will be allowed to escape scot free. The Shome Committee recommendations have set the stage for that. What’s your bet?

Vellalapatti Swaminathan Iyer
Hyderabad (tax2.me)

13 comments on “Does The Vodafone Verdict Deserve So Much Contempt?
  1. Tapas Misra says:

    Dear Siddheshwar, Mcdowell’s case concerned itself with an entirely different provison of law. For contextual interpretation of the principles you will aporeciate that the over enthusiastic tone on Mcdowell’ s case has been played down to rational levels in subsequent cases such as Playworld Electronics and Azadi Bachao Andolan. These judgments were delivered much before Vodafone controversy even arose.

    Besides, Vodafone decision had two aspects: 1: if a transaction in shares of a foreign company between two foreign companies can be taxed in India in the absence of a specific provison enabling such taxation. 2: can Vodafone, foreign company, be held liable to deduct tax and deposit the same with the government of India, and be liable to pay such tax as an assessee in default? The Supreme Court answered both in negative and rightly so. You must remember that in the decades of signing tax teaties it has never been the stand of the Indian government to demand tax on such transactions. Just because an over enthusiastic assessing officer raised this issue it was in my opinion a dishonest act on the part of the government to agitate this issue to this extent and then making a retrospective amendment!

  2. Siddheshwar says:

    @Tapas:

    “No law is perfect at any given time, but it has to be followed and applied as it stands until the law is amended. This is what the Supreme Court did in Vodafone case and that is the reason this judgment deserves a lot of respect”

    Sir, may I point that the *law* was what was laid down by the 5 Judge Bench in McDowell. This *law* was NOT followed in Vodafone. So, I think your comment “in Vodafone case the court refused to do any violence to the law. That requires immense judicial discipline and strength of character” appears to be misplaced.

  3. Tapas Misra says:

    It is sad that an eminent ex CJI and a decent lawyer get carried away by economics of a transaction and turn a blind eye to the law. No law is perfect at any given time, but it has to be followed and applied as it stands until the law is amended. This is what the Supreme Court did in Vodafone case and that is the reason this judgment deserves a lot of respect.

    There is one important aspect in which McDowell case, JMM Bribery case and Habeas Corpus cases are similar to each other and different from Vodafone case. In those three cases the judges let their beliefs or compulsions get precedence over the law, whereas in Vodafone case the court refused to do any violence to the law. That requires immense judicial discipline and strength of character. Let us salute this significant judgment.

  4. venkat says:

    I totally agree with bhavanesh. It is income of hutch which sold shares….. vodafone res was to just deduct tax……right?

  5. P C Sinha says:

    It is not surprising that this government has appointed a Committee to give relief to Vodafone. They had the tenacity to refuse to deduct tax at source and then go to court. They did not allow the normal course of law to take place and went for writ. Now the committee wants to support such blatant action. The decision of the Supreme Court is order on this short cut method applied by them. In the judgement Mauritius has been qouted to justify the tax haven route. The SC should have closed the Mauritius route, instead, they have opened the floodgate to transact Indian assets tax free.

  6. Raj Kumar says:

    This government is certainly going to let Vodafone escape without paying the taxes.
    However I will support the retrospective amendments passed by the parliament as they are in spirit of the McDowell judgement.

    The other way to punish the tax avoider is in the hand of the people of India, switch to local service provider in protest to their illegitimate tax avoidance.

  7. Forgive me if I am wrong, I still do not understand one thing. Why is the Govt not going after Essar who actually sold the stake. If we are talking about TDS, then it is a taxable transaction. Then why not tax the Capital Gains of the seller? Can someone please clarify?

  8. Deepak Rai says:

    “Look at” – when ever the judiciary attempts to look at business – the law ends up being more asinine that it already is.

    The 2G drama is enough evidence that government mechanics are always clueless about business. Always have been and always will be.

    How can the judiciary ever be competent to “look at” business? There is a similar presumption in the entire legislation on international taxation – but to imagine that clerks that have never ever germ questioned on profitability of anything in thier lives – can sit in judgement of business at large and get competent enough to actually “look at” business is laughable and naive.

    We have a plethora of PSUs which are crying for this talent – the need for “looking at” business and “making profit”.

    Justice Kapafia and the Vodafone judgement just hi light this fact – that never mind the legislation on International Tax – – how is any judicial authority ever going to assess what to look at.

    The current 2G debacle is evidence of this mindless kite flying.

  9. Hemant Joshi says:

    First it was Azadi Bachao Andolan’s case in which the Supreme Court clipped the Income Tax Officer’s wings by denying him the right to probe the residence claim of a Mauritian resident. Then came the Vodafone blunder! It seems that the quality of the Supreme Court judgments is going from bad to worse!

  10. K. C. AGARWAL says:

    Academically speaking the vodafone judgement may be debatable for one more reason. The income attracted tax also because it was an income on assets in India. It is no less surprising that this aspect was not thrashed or even taken up while considering to go for review. However, the damage cannot be undone by resorting to retrospective taxation as it would be a still bigger damage as it amounts to throwing to winds the important constitutional values of India. For preserving constitutional values is more important than recovering tax.

  11. kms@sncaindia says:

    superb

  12. Sarosh Irani says:

    Is it morally right for the Government to do so ? This is my question. Additionally I personally am still of the opinion that Vodafone was legally required to pay taxes as well. Now after the retrospective amendments I see no doubt in it. I agree that the Shome Committee was formed only to let Vodafone go scot free. I want to ask the Government, for Anna Hazare they say Parliament is Supreme, then in the case of Vodafone, once the Parliament has passed the Finance Bill with its retrospective amendments, who the hell is the Shome Committee to give its recommendations. It will be a very sad day, if the President of India, who so strongly opposed the entire world to get the retrospective amendments passed in the Parliament, will be forced to repeal them because the new Finance Minister thinks otherwise.

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