Vodafone Judgment: Silver Lining?

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Vodafone has lost the case in the Bombay High Court against the Income Tax Department. The High Court says the IT Department does have jurisdiction to tax the Hutch-Vodafone deal. The judgement says that the transfer of the one solitary share of the Hutch Cayman Island's holding company reflects only part of the arrangement. The court found that the Hutch-Vodafone deal price factored in diverse rights and entitlements and as a result the Hutch-Vodafone transaction was in fact a composite transaction not just that of one Cayman Island company share.

The court held that the transfer of these rights and entitlements constitutes capital, which can be taxed as part of NRI income. However, the court has asked these assessing officer to apportion income resulted to Hutchison Telecom International (HTIL) i.e. Hutch between that, which is result of nexus within Indian tax jurisdiction and that which lies out. So there is proportionality to this judgement as well.

Vodafone now has eight weeks to appeal before the Supreme Court. The IT Department cannot pass any order for the next eight weeks because Bombay High Court has stayed its order for the next eight weeks.

CNBC-TV18's corporate editor Menaka Doshi caught up with Nishith Desai of Nishith Desai Associates-a well-known tax lawyer in the country and he has also been advisor to Vodafone on this case in the past-to discuss the implications of this judgement.

Below is a verbatim transcript of the interview. Also watch the video.

Q: What do you make of this judgement and what it means for the principle of taxing offshore transactions in India?

A: The immediate takeaway for me is that all is not lost. When we heard the summary of the judgement in the afternoon, it appeared that case was lost. But all is not lost. In fact, interestingly, court has tried to interpret the law as it is and indicated that when it's a case of a non-resident and he is taxable on this Indian source income then he can be taxed only on that Indian source income and not on the foreign source income. But in a case like this possibly there is a composite transaction of maybe transfer of shares outside India and there are number of entitlements including the control premium used and right to the Hutch brand and non-compete agreement and value of non-voting and non-convertible preferential shares and so on.

Now, would this have source in India or not? The court has said that if there is part of the source in India and part is outside then only that portion that is sited in India can be taxed and it has gone on to say that is not for this court to determine at this point in time. All that really speaking has happen is that the High Court has said the tax department is jurisdiction to proceed in this matter against Vodafone but I would say all is not lost that is my basic takeaway.

Q: This apportionment angle seems to be a twist in the tail because what we were expecting was quite simply a direction from the court on whether such offshore transactions are in fact taxable in India or not. They have mange to establish an India nexus on the basis of these contractual rights and entitlements that came along with the share transfer that in fact took place offshore. How does one in the tax department or outside of it breakup the deal value to be able to apportion? What part of that value lies with the contractual rights and entitlements and what part of it lies with the controlling interest, which was transferred through shares, which was transferred offshore? This is a difficult complicated and potentially even more litigious exercise, right?

A: Absolutely, but I believe that next game will be what is sited in India, what is taxable in India and what is not taxable. How do you attribute values to some of these things which I talked about, it is going to be very tricky issue, but that is what is the next ground on which we are going to play.