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Updated: March 9, 2012 19:53 IST

Prashant Bhushan responds

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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.)

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Prashant Sir, Bombay HC went into the "intention", while SC may have just interpreted the law. I think HC would have delivered the same judgment if it were only concentrating on the technicalities of the Company or the Tax Law. The question here is how far the courts can go before they enter the executive or legislative territory. This is not evasion but avoidance, which may have been necessitated by the competition among countries to attract foreign funds. However, I think a review by a Constitution bench would be the best possible way forward if you are confident of violation of certain constitutional principles. You are very learned and you may be right...we trust you already and are with you... :-)


from:  Chetan Tirthani
Posted on: Mar 9, 2012 at 18:18 IST

If not for tax avoidance, can the educated lawyers explain to us the rationale to have their head quarters at Cayman Islands?

from:  Balaji
Posted on: Mar 3, 2012 at 10:21 IST

I think Vodafone's actions are legitimate. If Hutch had sold shares registered in Indian Equity market, then there is a case for taxing them. If govt wants to invite FDI, they must have a clear set of rules of what is and what is not taxable. In this case the IT dept is clrealy engaging in an extortionist demand which has no legal basis.

from:  marees
Posted on: Mar 2, 2012 at 17:42 IST

Mr Bhushan may find this verdict distasteful, yet it is legal.

This whole transaction is designed for tax avoidance, there is no doubt about it. The question that courts must answer, under the current laws does Vodaphone owes any tax. The clear answer to that is NO. If transactions like these need to be taxed then the tax code must be updated. We cannot expect the judicial system to cover for the oversight of legislature and executive.

from:  Arun B
Posted on: Mar 2, 2012 at 15:05 IST
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