The Centre on Friday moved the Supreme Court seeking review of the January 20 judgment, holding that the Income-tax Department did not have the jurisdiction to levy Rs.11,000 crore as tax on the overseas deal between Vodafone International Holdings (VIH) and Hutchison Group.

In its 101-page review petition, the Ministry of Finance through its Secretary and the Assistant Director of Income-tax assailed the judgment saying that it suffered from error apparent on the face of the record and failed to consider the case submitted by them at least on 15 aspects.

The petition pointed out that it was a patent error in the finding that the offshore transaction, which gave the Vodafone holding company a 67 per cent stake in Hutch-Essar, was “bonafide,” “structured FDI (foreign direct investment)” into India.

The instant case did not involve any inflow of funds into India as would be clear from the characterisation of the transaction as an offshore transaction and the incontrovertible fact that no investment or inflow of funds into India took place.

A three-Judge Bench headed by the Chief Justice of India, S. H. Kapdia, had, on January 20, commended both Vodafone and Hutch saying they were not “fly by night” operators or short-term investors and had contributed substantially — Rs.20,242 crore — to the exchequer between 2002-03 and 2010-11, both by way of direct and indirect taxes. Vodafone was asked by the IT Department in October 2010 to pay Rs.11,217 crore plus by way of capital gains tax and this was upheld by the Bombay High Court. The Bench allowed Vodafone's appeal and quashed the Bombay High Court verdict.

Assailing both the judgments written by the CJI and Justice K. S. Radhakrishnan, the review petition said the sale consideration was admittedly paid outside India by VIH, a British Virgin Island company, to Hutchison Telecommunications International (Cayman) Holdings Limited, a Cayman Island company, and was, therefore, not a case of FDI into India at all.

It said the FDI policy was in no way under challenge or scrutiny in the instant case and could not have been so as the FDI and interpretation of taxing statutes operate in two different realms. Justifying the imposition of capital gains tax, it said it was imposed on account of relinquishment of an asset and this was done by way of a specific amendment in the law which could be traced to the decision of the Bombay High Court.

Pointing out that the court had relied on the Direct Taxes Code Bills of 2009 and 2010, while allowing the appeals in favour of Vodafone, the Centre said there was no judicial precedent to rely on pending legislation to interpret existing legislation. Further, these codes were not even presented as Bills in Parliament but were only in public discussion. The Centre said the court had failed to appreciate that Vodafone had a presence in India at the time of the transaction; it was a joint venture with Bharti Airtel. Further, the court failed to appreciate that the sale consideration included amounts by which HTIL would also extinguish its rights and obligations to its Indian partners.

The judgment would undermine the existing legislative and regulatory framework that required approvals from competent authorities in India even for transactions routed outside India through tax havens. Such monies held in tax havens had the effect of compromising the ability of the State to manage its affairs in consonance with what was required from a constitutional perspective.

It said the January 20 judgment had the effect of legitimising the routing of transactions through tax havens and preventing the income-tax department from looking at the substance of the transaction. By creating an interposed holding or operating company, foreign investors would be able to avoid lengthy approval or registration process which would have far reaching consequences, it said and sought a review of the judgment.

PTI reports:

The review petition is listed for hearing on February 27.