Vodafone Judgment Day!

We live in a complex world of business and finance, where companies operate and transact in several jurisdictions, all at once.

In a nod to this complex world, the Supreme Court of India has delivered a far-reaching judgment today.

At its very heart, the case can be simply described as the overseas sale & purchase of the single share of a Cayman Island company that consequently led to the transfer of 67% economic interest in an Indian business - namely Hutch Essar.

The buyer - Vodafone- argued that being an overseas transaction, it is not taxable in India. Revenue argued that it is taxable in India as the transaction maybe overseas but the underlying asset is Indian.

The 3 judge bench of the Supreme Court said in a majority judgment that if the form has substance, then it cannot be ignored. What does this mean for Indian business and those investing in India?

On this special show, I am joined by Rupak Saha of GE; Dinesh Kanabar of KPMG; Porus Kaka, Senior Advocate, Supreme Court; Rohan Shah of ELP and Roy Rohatgi, a well know tax professor.

Let's listen to what the councils on both sides have to say.

Harish Salve, Vodafone Counsel
"Two important things which I read in the judgment and which I am very happy about -the clarity which has come in- this constant issue of tax avoidance versus tax evasion. The court- for the first time in India because these transactions are new to India- for the first time the court looked at a complex structure. The second important message is that the court is not going to stretch the law under the name of purposive interpretation to try and loop in transactions. That's the important call."

Girish Dave, FMR Chief Commissioner, IT (Mumbai)
"I would affirm India's usual track record of defeat at the end while putting a valiant effort- whether it is a battle, whether it is a hockey match,a cricket match or any other event- Department after putting its valiant effort have lost in the last."

Doshi: That's typical Girish Dave speak and that's Harish Salve, characteristically, in a leather jacket in Delhi today-victorious.

I'd like to start with the very first issue and that is the on going debate for several years now of form versus substance and it seems to my amateur eye that this judgment has not pitched one against the other. They have said if form is supported by substance, then form prevails. Have I understood this correctly?

Kaka: Absolutley. In fact it is fair- a slight tangent was McDowell which equated evasion with avoidance. Azadi brought it back into line and this judgment merely reaffirms what we already know that you require some form and that is commercial form- you don't require there after huge substance. Merely having a tax avoidance device or a tax evasion argument is not enough. If you have form, the courts will respect it and that form is commercial form.

Saha: I agree with this. What is important is that you need to see the transactions in totality and if those transactions in totality do not result in any commercial outburst, you cannot just disregard the transaction and say that attribute that to a tax evasion. What is remarkable is that in the judgment the Judges went into detail in ensuring that there are commercial rational for most part and the reason why I said most part because I am not sure whether he went through the entire nuance, minutiae of the transactions but for most part, he attributed the reasons.

Kanabar: What the court, very rightly said is, that you do not need to either pierce the corporate veil, you do not need to ignore or go to the so called substance of the transaction unless you find that the transaction is a colorable device, unless you find that the transaction is a sham otherwise you would respect the transaction for what it is. So if the transaction is for transfer of a share, we got to respect it as a transfer for share and not say that the substance of that transaction really was something else. That was one part and to my mind, the way in which the judges have got out of this whole controversy of Azadi Bachao versus McDowell and put it simply to say that both of them are harmonious, they lead to the same conclusion. So long as the transaction is genuine, that is not an evasion transaction, avoidance is absolutely acceptable.

Doshi: I am going to pick from that before you answer that question and take it a little forward. In the run up to this judgment, for the past several weeks, there have been all these debates about McDowell versus Azadi Bachao or Westminster versus Ramsay and all that - can you explain to me if this judgment puts all of that to rest in some fashion and lays out from here some sort of forward guidance as to how you go about determining whether it is a colorable device or not and therefore whether the corporate veil needs to be lifted and therefore whether the transaction needs to be judged based on  its underlying and not just on its form?

Shah: In all these judgments- Westminster/Ramsay, McDowells in relation to Azadi Bachao - all sort to strike a balance between commercial realities, in terms of seeking to get a transaction done and a pure intent to evade tax. Now what this judgment does very well is balance these two issues in terms of recognizing the concept or saying, 'Intent to participate in investment' which is a genuine desire to do a transaction for which he says there are various points of guidance. How did they invest, the tenure of that investment, taxes paid, business done, timing of exit, continuity of business beyond that.

So he gives full play to the fact that all of these are indicators of a genuine investment transaction. Balance that with a factor of saying if you didn't find these or if you didn't find that this was the dominant intention, then you might lean towards the issue of tax avoidance. But also places in a very sharp analysis the issue of holding companies, subsidiary company and SPVs and says that even an SPV may have a commercial purpose. And therefore analysis of the fact that these are structures which are recognized in other laws from an investment perspective a consolidation perspective and don't only have a tax significance.

So what they have done very well is bring these two together and the moment you bring these two together, then Westminster and Ramsay also can be read in a manner which is harmonious and McDowell can also be read in a manner which is effectively harmonious with Azadi Bachao. I think this ability to balance the realities of why you do a transaction, the fact that it may have a consequence but why did you do it because you wanted a certain commercial result or you wanted a certain tax result- I think that is really the heart of it and they have really put that balance very finely in the scales.

Kanabar: Taking on further from what Rohan mentioned, this issue regarding what is a substance in a holding company has been a matter of considerable debate. Because at the end of the day, a holding company's substance is determined that once an investment is made, it has nothing further to do than simply hold the shares and then you disregard it. I think this judgment really goes deep into that entire thing to say a holding company can have a purpose. There will be separation of liability, separation of different businesses and as Harish Salve mentioned earlier on this entire understanding of the corporate myriad as to how it functions and the real time reality being accepted by the court is something very unique.

Shah: Importantly, it also places the onus of establishing that it is avoidance on the department. And given the guidelines which are there, its literally now department will have to rise to the level and say for  reasons A,B,C it is not a pure and genuine commercial transaction but solely activated by the instinct of taxation evasion.

Doshi: Weigh in on where you think this judgment sits with regards to the form versus substance today. Because what I seem to be gathering from the comments here is that if form is supported by substance, then form prevails and this judgment, the majority one, also attempts to lay out what the judges consider will have substance or what is considered to be substance. How do you holistically look at transaction etc?

Rohatgi: I will take a more global view rather than just an Indian view because that's my field. I think taking just avoidance and evasion as two points is not correct because there is a whole spectrum from avoidance to evasion; there are different levels. There is no such thing as avoidance; there is acceptable avoidance or unacceptable avoidance- so therefore again there are differences. Now more and more, internationally, even tax avoidance- if you look at the Organization of Economic Co-operation and Development (OECD) commentaries around the world, tax avoidance is effectively also not acceptable in many cases.

Doshi: So are you saying that this judgment is then unique in the way it approaches matters?

Rohtagi: Therefore I think the first thing which in fact I would suggest really, first of all this distinction legislated into boxes is too simplistic and if I look at where the world is moving today, this is incomplete. I will be very honest with you. This case is following the English jurisprudence. If you look at United States, United States follows economic substance.

Doshi: So the same case in the United States would not have resulted in such an outcome?

Rohtagi: No, it would not have given the same decision in my view. I would be very honest. Even in UK today, I would be doubtful, because it is moving more and more from a literal interpretation to a purposive interpretation.

Kaka: I don't agree with this. Because if you look at the judgment what Rohan has said, it marries economic realities and legal realities. The court has laid down what they called as an intention to participate. They have laid down the test. They have also said look at the transaction as a whole. Don't dissect it at the time of sale. You accept it for 15 years, you accept it for all other government realities and you disregard it only at the time of sale- that is incorrect. They have certainly gone to economic realities. Let's admit that a corporate structure of subsidiaries and parent companies and holding companies is not something which is unique to India. It is across the world and it is accepted and to my knowledge the revenue authorities and the multinationals of the other countries do not accept this underlying asset sale principle derived by the Indian revenue. So I don't agree that this is the international norm.

Doshi: I want to move to the next point and that has to do with the impact this judgment is going to have on what has been a rather beleaguered M&A sector in this country simply because it has been facing fire on the Mauritius front, then the Vodafone sword hanging over it. We have got a variety of other tax issues. We have got cases that have been getting negative judgments or outcomes for the last several months now and what it also means for India's image as an investor friendly destination.

Since you have been the contrarian voice on this ,you would admit that even if in principle you do not agree with what this judgment does in keeping with international trends, it does good things for India.

Rohatgi: I think this judgment is correct to be honest because essentially for the last 50 years, revenue has allowed this to happen and as a result therefore I would have been very unhappy if they had taken a contrary decision because you can't, in retrospect, put in a law. Henceforth, I think essentially things would happen and I would reckon that many of the things which has been talked about here would be taken care of in the DTC and elsewhere. So the point which is really clear, it will have to be written down and it will have to be specific- that is the lesson which the revenue is learning; you can't just retrospectively do it because it does not provide legal certainty if you do that.