Vodafone Judgment: Silver Lining?

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Q: How do you expect this will impact other M&A transactions, which reportedly also have been under scrutiny over the last two-three years, similar such offshore transactions which in fact did have underlying assets in India? This judgement, does it fit as a precedent for all transactions because this is a pretty unique structure of its own? So, I am wondering if this judgement would apply to all such transactions considering that each one of those transactions would have different structures, may not have this degree of contractual rights or things like that?

A: In a sense if I put it in other words, the judgment is not that bad. I think it is extremely well written, it clarifies principles of law. It also goes to the extent of saying that whatever the law is whether there is chargeability or not that is what you need to find out. If there is an issue of compliance, for example, whether non-resident should withhold tax from payment made to another non-resident, it may cause inconvenience to the non-resident. But if that transaction is chargeable to tax in India, then simply because non-resident is put to some inconvenience cannot take away the fact that it cannot be taxed, the tax department does not have a jurisdiction.

So, to that extent, I would think this judgment on the whole reads pretty good. But it will have to be clarified to what extent the income is taxable and really not. It may happen that, nothing is taxable, it may happen that part of it is taxable.

Q: Nothing is taxable is wishful thinking?

A: In the future, I believe the role of a lawyer is going to be very critical.

Q: This whole debate over substance and form with regards to taxation, how does this unravel in the course of the next two years, the likelihood that Vodafone will appeal to the Supreme Court, so we may not have heard the last word on this on the courts?

A: Two things I would say at this point. One, the Court has very clearly said that there is nothing wrong in tax planning, there is nothing wrong in tax avoidance, everyone is entitled to do his tax planning in a way he can minimise his tax effect. I think that is a very important statement that is reiterated in this judgement.

Two, the form prevails over the substance that is an established rule in India. But form if it not something, which you say it is a form, but the way it is speaking it is something else then the courts have to go into details and find out what exactly is the true nature of the transaction. So, to that extent, again I will say silver lining.

If you prepare a documentation, if you have structures right, if you clarify lot of these things, which are being talked about in this particular agreement in future, I think still one can legitimately avoid taxes, at the same time what is due to India will be paid up. So, one will have to look all the different documents.

The biggest thing that often happens is that some group of people would look at tax, some people would look at Foreign Investment Promotion Board (FIPB), and somebody would look at SEC, if you take a whole picture and then decide as to how to go about doing a transaction then you will be taxed on the right amount and not on the wrong amount. So, it's going to be very important. whatever is due company should be willing to pay up rather than keeping too many things ambiguous and giving department some kind of leeway to apportion what is taxable and what is not taxable.

Q: Do you think Vodafone is kicking itself for not having done this transaction through Mauritius based companies, in which case they would have gotten Considerable Treaty Protection, though nowadays even Treaty Protection is up for question with the tax department?

A: There are always questions up. I think this judgement is extremely well written in many ways.

Q: To rephrase the question if they had done this transaction through a Mauritius based company on both ends that is the buying and the selling end, its good likelihood that they would not where they are today in terms of taxability, right?

A: Right. All that I can see really speaking from this judgement is court is even gone to the extent in some way to say that there must be objective test for interpretation, otherwise how can a citizen decide his behaviour. So, ambiguity in law creates lot more problems for citizens and therefore you have to make sure of as much clarity as we can get.