The author argues that Vodafone’s offer to settle the controversy on payment of tax and waiver of interest & penalty is a god-sent opportunity for the Government to salvage the situation. It will save the Government the ignominy of the retrospective amendments being struck down in Court and also boost its image in the International community. If handled properly, even Manmohan Singh can be made to look like a real Statesman with vision and courage, adds the author
Vodafone’s Chairman Analjit Singh went on record yesterday that Vodafone was open to settle with the Government pursuant to which it would pay tax of Rs. 8,000 crores if the Government waived the levy of interest and penalty.
Here’s why the deal makes immense sense and why Finance Minister P. Chidamabaram should immediately grab it.
(i) The retrospective amendments stand the risk of being struck down:
I analyzed this in detail here. Basically, the retrospective amendments can be struck down as being violative of Articles 14 & 19 of the Constitution if Vodafone can show that they are “arbitrary, unreasonable and impose an unforeseen financial burden”.
Litigation is most unpredictable. Who knows what point will appeal to the Judge? Suppose the Courts do uphold Vodafone’s plea and declare the retrospective amendments ultra vires. Imagine the ignominy and the embarrassment that the Country will have to face. Why take the chance?
(ii) The Penalty is in any case not leviable:
It is a pipe dream if the Government feels that it has any chance of recovering penalty. U/s 273B of the Act, penalty cannot be imposed u/s 271C (failure to deduct tax at source) if there was “reasonable cause” for the failure. What can be more “reasonable cause” than that the Supreme Court itself held Vodafone not liable to deduct tax at source. A retrospective amendment cannot convert that which was “reasonable” into something that is “unreasonable”.
But, if Chidu is smart, he won’t tell Vodafone that the Government has no chance of success. Instead, he will use the threat of penalty as a “bargaining chip” to let Vodafone (and the international community) think that they got a good deal by the waiver of the penalty.
(iii) Even the recovery of interest is very dodgy:
The levy of interest u/s 201(1A) is also doubtful because while in normal circumstances, interest is automatic and mandatory, that is not so where the levy arises due to a retrospective amendment. “An assessee is not expected to be clairvoyant and cannot do the impossible”, it was held in Haryana Warehousing Corp vs. DCIT 75 ITD 155 (Del) (TM) & DCIT vs. Indo Rama Syntheitics (ITA 678/ 679/Del/2012) where the demand for interest u/s 234B & 234C arising from a retrospective amendment was quashed.
Here also, Chidu has to play his cards well and negotiate with a poker face so that Vodafone feels that it has got a good deal by the waiver.
(iv) Best case scenario on a platter:
If you look at the best case scenario from the Government’s perspective, it is that the retrospective amendments are upheld by the Courts. However, the recovery of the interest and penalty will get embroiled in litigation for several years because it will start at the lowest level. Worse, all the precedents are in favour of Vodafone. At the end of the day, all that the Government can hope to recover is the tax of Rs. 8,000 – and if Vodafone is ready to hand that over today itself on a platter, what can be better?
(v) Salvaging Manmohan Singh’s sullied reputation:
If handled properly by employing proper PR professionals, the entire settlement exercise can be used to bolster Prime Minister Manmohan Singh’s image which has been sullied by the Washington Post calling him a “tragic figure” and other unmentionable names. Manmohan Singh can now be made to look like a real Statesman with great vision and courage. The ensuing positive sentiment that will sweep the nation will take the winds out of the sails of Mamata Banerjee and the other opponents of the FDI reforms.
The only question is how to give effect to the settlement under the Law. This is not a problem. The AO is yet to pass an order u/s 201. He can pass an order levying tax but not the interest or the penalty. The only thing is that the same terms will have to be offered to all the others who are similarly placed because otherwise the Government will be accused of discrimination.
So, accepting Vodafone’s proposal for settlement will be a win-win for the Government. In one stroke, the Government will snatch victory from the jaws of defeat and come out smelling of roses!