Mr. Datar's response to my criticism of the Supreme Court's Vodafone judgment is precisely Vodafone's lawyers' arguments before the courts, which is natural since he was one of them. Though the stated object and purpose of the sale purchase agreement between Hutch and Vodafone was to transfer the shares, assets and control of the Indian Telecom Company HEL, which was also evident from their sale purchase agreement, press releases, filings before the SEC, and their FIPB application, they claim to have achieved this by transferring a single share of a Cayman Island-based holding company and then entering into a series of framework agreements. This “device” of using the transfer of the Cayman Island company in the bid to avoid Capital Gains tax is precisely the tax avoidance devices that the Constitution bench in McDowell mandated, must be frustrated by the courts. The Court said: “It is up to the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and … to expose the devices for what they really are and to refuse to give judicial benediction.”
Moreover, in this case, as the Bombay High Court pointed out, the purpose of Vodafone to transfer the assets, shareholding and control of HEL from Hutch could not be achieved by just the transfer of the Cayman Island company. Therefore the set of framework agreements. In their words, “The transaction between HTIL and VIH BV was structured so as to achieve the object of discontinuing the operations of HTIL in relation to the Indian mobile telecommunication operations by transferring the rights and entitlements of HTIL to VIH BV. HEL was at all times intended to be the target company and a transfer of the controlling interest in HEL was the purpose which was achieved by the transaction.”
Tax avoidance devices have been honed to a fine art by clever lawyers and consultants advising such corporations. Unfortunately, in the Vodafone and the Mauritius cases, the court has winked at them instead of frowning upon and frustrating them as mandated by the binding judgment in McDowell.
(Prashant Bhushan is a Senior Advocate and member of the civil society team that drafted the Jan Lokpal Bill.)