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June 30, 2008
The Vodafone Tax Controversy
NDA Commentaries on Court Proceedings
The Vodafone tax controversy concerns a cross-border M&A
transaction between non-resident entities and its taxability in
India. The facts before the Bombay High Court are unique and
unprecedented, and the outcome could have a telling impact on
global mergers and acquisitions indirectly involving an Indian
subsidiary. Nishith Desai Associates brings you updates on the
proceedings as and when they develop in the courtroom.
On Monday, June 30, 3008, Senior Advocate Mr. Iqbal M. Chagla,
counsel for Vodafone International Holdings BV (“Vodafone”)
began the day in court by refreshing the Hon’ble Bombay High
Court’s memory of
submissions made on
Thursday, June 26, 2008 regarding the interpretation of the expression “person” as used
in Section 195 of the Income Tax Act, 1961 (“ITA”).
The counsel also emphasized before the division bench,
consisting of Justice S. Radhakrishnan and Justice A. V. Nirgude,
that the instant controversy is a “test case” for the Government
and the outcome would have a significant impact on cross-border
mergers and acquisitions involving India.
The submissions advocated by the counsel for Vodafone
essentially examined the constitutional validity of
the retrospective amendment made to Sections 191 and 201 of the
ITA. It is the contention of Vodafone that the impugned
retrospective amendment is against the cannons of reasonableness
and is harsh, burdensome, and arbitrary. Section 191 provides
for recovery of tax from the direct assessee1
, i.e., the receiver of income, for scenarios where the ITA does
not provide for deduction of tax at source. It also provides for
instances where the person liable to deduct tax at source has
not withheld the tax. Section 201 of the ITA, on the other hand
provides for the penal consequences of failure to withhold tax
or to pay tax withheld. Pursuant to the impugned retrospective
amendment, it was submitted by the counsel that, a liability to
pay tax as ‘assessee in default’ has been fastened on Vodafone,
without any attempt being made to recover tax from the direct assessee.
According to the counsel, the provision of the law, as it stood
before the impugned retrospective amendment, clearly and
unambiguously, excluded the facts of the instant case and
contended that no liability as ‘assessee in default’ could be
fastened to Vodafone. The power of the Parliament to make
retrospective amendments was acknowledged as plenary. However,
in the same breath, citing various precedents, it was also
submitted that such retrospective amendments must not be
unreasonable or burdensome, lest they should be struck down as
unconstitutional.
Citing the Supreme
Court judgment in D. Cawasji & Co v. State of Mysore2
, it was stated that while it may be open to the legislature…
retrospective operation [of taxing statutes] has to be justified
on proper and cogent grounds. It was submitted that the
explanatory notes to the impugned amendments, when proposed,
merely stated that it was sought to clarify the legislative
intent of the said provisions, which hitherto left room for
interpretation. To this Mr. Chagla submitted that the impugned
retrospective amendments were not clarificatory, but substantive
in character, since there was no ambiguity in the scope of
Sections 191 and 201. Therefore, it was submitted that since
insufficient and improper reasons have been accorded for the
impugned retrospective amendments, the same should be declared
ultra-vires the Constitution of India. He further submitted that
the impugned amendments sought to levy additional burden on to
assesses, which should “shock the conscience of the court” and
that they must be struck down as constitutionally invalid.
The hearing has been adjourned to Tuesday, July 1, 2008, when
the counsel for Vodafone is expected to continue with
submissions regarding the constitutional validity of the
impugned retrospective amendments and thereafter make
submissions regarding the chargeability of the capital gains
tax.
We will continue to try and bring you regular and accurate
updates and analysis of the Vodafone Controversy as it continues
to unfold in the courtroom.
In
India the payer of tax is called an assessee
150 ITR 648
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