Vodafone case verdict on jurisdiction flawed, says former law officer

The Supreme Court’s Vodafone judgment is erroneous, Bishwajit Bhattacharyya, an expert on tax laws, said a day after he demitted office as Additional Solicitor General. The judgment held illegal the Income Tax department’s demand asking the multinational telecom company to pay Rs. 11,000 crore as tax.

In his book, My Experience with the office of Additional Solicitor General of India, Mr. Bhattacharyya, who served as ASG till November 9, says: “I have not been able to persuade myself to agree with the Vodafone verdict. I thought the Supreme Court had missed the exchange control angle of the transaction of the remittance of approximately US dollars 11 billions.”

The former Chief Justice of India, J.S. Verma, who released the book here on November 10, endorsed his views on the Vodafone judgment. It “is [in] the trinity of those judgments of the Supreme Court which are best forgotten or allowed to pass.” He said the commitments of the judiciary should be to the Constitution, and not to the ruling party. The flaws pointed out by the author should be corrected, said Justice Verma.

The former Press Council of India Chairman, Justice G.N. Ray said: “Mr. Bhattacharyya has touched upon several vices in the system very safely. He has succeeded in highlighting what needs to be changed in the system.”

In a chapter on ‘Vodafone judgment’, Mr. Bhattacharyya raised two fundamental questions. He said that on February 20, 2007 the company filed an application with the Foreign Investment Promotion Board of the Union Finance Ministry. On May 7, 2007, the FIPB conveyed its approval of the transaction subject to compliance with all applicable laws and regulations in India. The very next day, Vodafone remitted approximately $11 billion to Hutch, the funds travelling from the Cayman Islands to Hong Kong.

‘How is it FDI?’

Mr. Bhattacharyya says: “For the judiciary to say that there is no jurisdiction, in my view, is erroneous. Supreme Court says that India has no jurisdiction: first if the FIPB has territorial jurisdiction over the remittance/transaction, why not the Central Board of Direct Taxes? And [the] second question is: how is the transaction [Foreign Direct Investment] when not a dollar came to India?”

According to him, “the funds effectively represented foreign outward remittances from India, arising [out] of Indian operations. If the general permission [by FIPB] had not been granted, the funds would have come to India first. The question of foreign outward remittances would have arisen only subsequent to that. The facility to remit funds outside India directly as a sequel to permission [by FIPB] in no way makes Indian tax provisions redundant and nugatory.”

He is of the view that the Supreme Court missed the exchange control angle of the transaction, and Parliament rightly nullified the judgment with a retrospective amendment.

Mr. Bhattacharyya, during his three-year tenure as ASG handled a number of cases relating to tax laws. He recounts how the Union of India has deliberately squandered its tax cases, involving claims of thousands of crores. His prescription for improving the country’s fiscal health is two-fold: at the policy level and at the enforcement level. Curbing subsidy is an easy option, but a better and harder one is to ensure that subsidies reach the intended beneficiaries. The surest way of reducing subsidy is to utilise it effectively without leakage. Secondly, he favours dismantling the Planning Commission and suggests that it be brought within the ambit of the Finance Ministry. The tug of war between plan expenditure without accountability and non-plan expenditure must end.