“I'm the Parliamentary Draftsman, I compose the country's laws. And of half the litigation, I'm undoubtedly the cause.”

Pranab Mukherjee proved THAT right. Introducing retrospective amendments through the Budget wasn’t a smart move, which is what anyone with a rational mind has been screaming since March. The result was evident – the investor community was outraged, the Rupee took a sharp fall. The moment Mukherjee got elected as President, the Government almost fell over itself in a haste to soothe investor sentiment. The Prime Minister appointed a Committee to review GAAR and the retro tax policies (with respect to indirect transfers). And in a lot of press conferences, Chidambaram has been advocating a ‘non-adversarial tax regime’ (whatever that means).

And oh, Justice S.H. Kapadia retired. :( Not that this has any specific relevance, it is just sad. In this regime of flip-flops, he was truly a shining beacon of steadfastness. 

Despite having a SUPREME COURT ruling in its favour, it absolutely flabbergasts me to see that there still remains a doubt as to whether Vodafone could be made liable to tax. IT BLOODY WELL CANNOT. And I do hope it doesn’t cave and ‘settle.’ Incidentally, the Committee appointed to review the retrospective amendments in relation to indirect transfers (the Shome Committee) has recommended that the amendments be made applicable ‘prospectively.’ 

The Committee’s Report, made public on October 9, states, “The Committee concluded that retrospective application of tax law should occur in exceptional or rarest of rare cases, and with particular objectives: first, to correct apparent mistakes/anomalies in the statute; second, to apply to matters that are genuinely clarificatory in nature, i.e. to remove technical defects, particularly in procedure, which have vitiated the substantive law; or, third, to ‘protect’ the tax base from highly abusive tax planning schemes that have the main purpose of avoiding tax, without economic substance, but not to ‘expand’ the tax base.” This is an interesting point. An amendment seeking to ‘widen’ or ‘increase’ the tax base cannot be considered as ‘clarificatory.’ 

The Supreme Court said “Sec 9(1)(i) is not a ‘look through provision’ and cannot, by a process of interpretation be extended to cover indirect transfers of capital assets/property situate in India. To do so, would amount to changing the content and ambit of Section 9(1)(i). We cannot re-write Section 9(1)(i). … The question of providing ‘look through’ in the statute or in the treaty is a matter of policy. It is to be expressly provided for in the statute or in the treaty.”

Does this lead to a not-so-merry go round?

Who the hell would want to invest in such a climate? Please, Parliamentary Draftsman, ACCEPT the recommendations, end the confusion and establish some certainty. You’re already the cause for half the litigation, don’t become the SOLE cause.

Boohoo, we didn't get to tax the Zoozoo - In other words, Union Budget 2012

So, the Government has decided to recover its $ 2 bn by acting like Paris Hilton - "I WANT IT, I WANT IT!!" The Budget for 2012-13 was announced a few days ago and it brought with it some a lot of stuff that qualifies as 'Braking News.' Although I have never had the pleasure of listening to Palkhivala's post-Budget speeches, I am sure he'd have quite a lot to say if he was still with us. Here goes:

1. Retrospective amendment to Section 9(1)(i) with effect from 1962 for bringing indirect transfers within its ambit

After IN-DEPTH analysis of the jurisprudence surrounding Section 9 (taxing income 'deemed' to accrue or arise in India), the Supreme Court categorically held that in its present form, it DOES NOT cover indirect transfers of a capital asset situated in India. The Supreme Court also said that if the Government wants to tax indirect transfers, it should enact a provision to that effect first. This is how the Government heard it - "So, all we need to do is get a time machine, go back to 1962 and insert suitable Explanations in order to bring indirect transfers within the ambit of Section 9. Easy-peasy! Thanks, Supreme Court, wonder why WE didn't think of this UNTIL NOW."

So, through Finance Bill 2012, not only did they enact a retrospective amendment, COMPLETELY disregarding what the highest judicial authority of the country has held (after extensive deliberation), but they also introduced a Validation Clause to tell the Supreme Court that its exercise was totally in vain. By way of this clause, any Court ruling can be nullified if it was pronounced on basis of the 'mistake in the law' which has now been 'corrected' by way of the retrospective amendment.

How ethical is this? While no one's challenging the Government's authority to amend law retrospectively, it ought to keep in mind that it has to play by its own rules. I recollect a statement made by the Supreme Court while staying the 27% OBC reservations in 2007 - "You cannot play the game first and devise the rules later." Instead of heeding the Court's advice, the Government has gone one step ahead this time. It has played by its rules, lost the game fair and square, gone back to the point before the game started and THEN changed the rules. While I'm not sure whether the retrospective nature of the amendment will be struck down, the Validation Clause definitely will be.

2. Retrospective amendment to Section 9(1)(vi) with effect from 1977 to bring within its ambit 'copyrighted articles.'

With the Delhi High Court upholding the distinction between a copyright and copyrighted article, and the Karnataka High Court rejecting it, a clarification in this respect was needed. But did it really have to be retrospective? I mean, common sense dictates that if you buy software when you walk into a store, you don't buy the COPYRIGHT in it, you just buy the damn software. You don't care how it works, as long as it serves its intended purpose. The amendment (in line with Karnataka HC) says that it doesn't matter whether you actually buy the copyright in it or not; for tax purposes, its royalty anyway. There's no distinction in paying for simply acquiring a software on a CD and paying for the right to OWN the copyright in that software. For tax purposes.

So wait, for COPYRIGHT purposes there's a distinction but for tax purposes, there isn't? *scratches head* B-but, shouldn't the definition of COPYRIGHT under the COPYRIGHT ACT supersede the definition under the Income tax Act, because you know, the former is where the CONCEPT actually COMES FROM? No such luck.

3. General Anti-Avoidance Rules:

While this doesn't affect Vodafone, it is another disrespectful piece of legislation. Only a few days before the Budget was to be announced, the Parliamentary Standing Committee on Direct Taxes Code submitted a detailed report to the Government. The report stated that the GAAR rules proposed in DTC needed substantial change. Again, COMPLETELY disregarding most of the Standing Committee's recommendations, Finance Bill 2012 has sought to introduce GAAR from April 2013, with an added insult to the Supreme Court.

CJI Kapadia in Vodafone's case had specifically stated that "every strategic foreign direct investment coming to India, as an investment destination, should be seen in a holistic manner. While doing so, the Revenue/Courts should keep in mind the following factors: the concept of participation in investment, the duration of time during which the Holding Structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; the continuity of business on such exit.”

Clearly displeased with this observation, the Finance Bill states that in determining whether a transaction lacks commercial substance, the following factors shall NOT be taken into account:

(i) the period or time for which the arrangement (including operations therein) exists;

(ii) the fact of payment of taxes, directly or indirectly, under the arrangement;

(iii) the fact that an exit route (including transfer of any activity or business or operations) is provided by the arrangement

Moreover, SC has clearly mentioned that "the onus will be on the Revenue to identify the scheme and its dominant purpose." As per the proposed GAAR rules however, the taxpayer carries the burden of proof. What constitutes 'dominant purpose' has not been defined either. There are no provisions to protect the transactions ALREADY structured, as per the existing law (is it stable, is it not, is it stable, is it not).

On one hand - such blatant disrespect for the SUPREME Court (there's a reason why its called the SUPREME Court). On the other hand - Kapil Sibbal wants to censor social media. Are we moving towards anarchy?

4. Negative List for Service Tax:

I guess this isn't that bad a move. Except for the 2% hike. Only thing I'm wondering is, whether renting of immovable property could be considered a service. The matter is still pending before the Supreme Court. It would be interesting to see what would happen if the Supreme Court says it isn't...

One positive thing for salaried individuals is that the exemption limit is proposed to be raised to Rs. 2 lakhs.

While there are a horde of other changes, discussing all of them here isn't feasible. This article stemmed mainly from the outrage I felt at the Government's obstinacy. And I have spoken about that in detail. All in all, it is certainly a good time to be a tax lawyer, no matter whose side you're on. In the words of Palkhivala (what can I say, the man is a source of endless charm) - "To preach the virtue of stability to our Finance ministry is like seeking to preach the value of peaceful coexistence to Genghis Khan. Who has benefited from the chronic tinkering with the (Income tax) law, except lawyers and chartered accountants?"

Vodafone is out of coverage area. Literally.

"FDI flows towards location with a strong governance infrastructure which includes enactment of laws and how well the legal system works. ... Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner." - CJI Kapadia

"We will continue to grow our Indian business - including making significant investments in rural areas and in 3G network coverage - for the benefit of Indian consumers" - Vittorio Colao, Vodafone CEO

"The damage to the economy of our country and the welfare of our people, arising from the maddening instability of our laws, is truly incalculable." - Nani Palkhivala

Vodafone International Holdings vs. UOI. Awaited with bated breath and received with jubilation. Undoubtedly a landmark judgment, not only because of the high stakes (a $ 2bn tax liability) and the legal intricacies involved, but because it welcomes foreign investment into India. (LOL, this brings to mind a statement made by Anna Hazare not so long ago - "FDI in retail will enslave India." Tell that to the Supreme Court, Mr. Hazare). How I dearly wish Palkhivala were alive today.

The moment it became clear that Vodafone (based in Netherlands) has no liability to pay any capital gains tax on the purchase of a Cayman Island company (CGP Investments Ltd), sold to it by Hutch (HTIL, based in Hong Kong), I simply sat there, grinning from ear to ear like a Zoozoo. I have all along been thoroughly opposed to the tax liability imposed on Vodafone. I always thought that in the glaring absence of a specific provision, it will be unfair to tax Vodafone on an 'indirect' transfer of assets situated in India. And I am happy that the Supreme Court too thought so.

Few of the key legal conclusions laid down by the SC are:

1. Section 9, taxing non-residents on income deemed to accrue or arise on transfer of capital assets situated in India, does NOT cover indirect transfers and is not a 'look-through' provision. A legal fiction, a deeming provision, has to be literally interpreted. It is only a capital asset 'situated in India' whose transfer will attract capital gains, and not transfer of an foreign company who happens to own this asset. If the Government wants to tax indirect transfers, a separate enactment will be required (which the DTC happens to incorporate).

2. Section 195 (TDS) is applicable only to payments made by an Indian resident to a non-resident. Justice Radhakrishnan in his judgment, made this expressly clear. "A literal construction of the words 'any person responsible for paying' as including non-residents would lead to absurd consequences. A reading of Sections 191A, 194B, 194C, 194D, 194E, 194I, 194J read with Sections 115BBA, 194I, 194J would show that the intention of the Parliament was first to apply Section 195 only to the residents who have a tax presence in India. ... The expression 'any person', in our view, looking at the context in which Section 195 has been placed, would mean any person who is a resident in India." Hence, Vodafone was not obliged to deduct any tax while making payments to Hutch. (The original tax liability is on Hutch, being the seller)

3. Azadi Bachao Andolan and McDowell are not in conflict with each other and Ramsay does not override Westminster. Upholding the correctness of the decision given in Azadi, SC held that "it cannot be said that all tax planning is illegal/illegitimate/impermissible." SC finally put to rest the debate, whether Azadi had correctly interpreted McDowell. McDowell, while relying on Ramsay, had laid down that colourable devices cannot be a part of tax planning and it is wrong to encourage the belief that it is honourable to avoid payment of tax by resorting to dubious methods. The key word is 'dubious.' Unless the transaction is clearly a case of tax 'evasion,' its structure cannot be disregarded and as laid down in Westminster, "given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance."

An important thing to be noted here is that the Supreme Court accepted the genuineness of the purchase of CGP Investments Ltd (Cayman Island), because purchasing this company enabled Vodafone to derive certain additional advantages that it would not have derived had it purchased Array Holdings (Mauritius), rejecting the Department's contention that the Mauritius route was not open to it. The additional advantage was obtaining (indirectly) call option rights held by 3GSPL in the companies that held a 15% stake in HEL, which was beneficially owned by HTIL. Had Vodafone opted for the Mauritius route, it would not have obtained these rights. Hence, the taxpayer should be able to SHOW why he opted for a particular transaction structure. If the ONLY purpose is avoiding tax, the transaction will not be bondafide. There has to be a commercial reason behind its structure, other than  saving tax. This will prove to be a major factual difference, while applying the principles of this judgment to other cases.

Lastly, why do I care so much about this judgment, people have asked. I care because it not only carries academic interest but because I am now a taxpayer myself. If I can save tax, I will. Through this judgment, the Supreme Court has reaffirmed that there is indeed a difference between tax avoidance and tax evasion and that the former is legitimate. If I can legally opt to pay lesser tax, then I will choose that option. Especially when I see how the Government chooses to spend the money *I* earn. I work hard to earn it and if I give some part of it to the Government, I don't want to see it wasted on salaries paid to MPs who merely rant, rave and tear papers in the Parliament, taking inordinate amounts of time to actually come to a conclusion about anything. You want my money, you give me good governance.