New Delhi, Feb. 17: The Centre today filed a petition in the Supreme Court for a review of its verdict on the Vodafone case that said the Indian tax authorities had no right to slap a Rs 11,000-crore levy on the overseas deal between Vodafone International Holdings (VIH) and Hutchison Group.
The review petition of solicitor-general Rohinton Nariman has contended there is a need to reconsider the January 20 verdict as the law on deciding the case has not been correctly interpreted.
The petition will be heard by the same bench ' that had passed the verdict ' on February 27.
The government said the apex court erred in holding that the transfer of management rights could not be taken to mean extinguishing property rights when determining tax liability.
The government also questioned the wisdom of the court in dubbing it a case of foreign direct investment. "… case does not involve any inflow of money into India because the sale consideration was admittedly paid outside by VIH, a British Virgin Island company, to Hutch Telecommunications International (Cayman) Holdings Limited, and was therefore not a case of FDI investment in India at all."
Through the $11.2-billion deal in May 2007, Vodafone had acquired a 67 per cent stake in Hutchison-Essar Ltd (HEL) from Hong Kong-based Hutchison Group through companies based in the Netherlands and Cayman Islands.
The petition pointed out that the government's FDI policy was a completely different realm from the interpretation of tax statutes, which was the subject matter of the Vodafone case.
Besides, the court had relied upon "entirely extraneous and irrelevant considerations of the taxes averred to have been paid historically by HEL…. such payments have nothing to do with the (tax) liability or otherwise of the instant transaction".
The petition goes on to add that "… the department is not aware of this figure which is not based on any public records and was not provided at the time of hearing or in written submissions… Even assuming the figures stated by the court to be correct, the court failed to appreciate that given the nature of telecom companies and the tax holidays given to the same, the taxes paid must largely (if not wholly for the initial years) comprise indirect taxes paid for by the Indian consumer."
The government was concerned because the judgment could allow the creation of an interposed holding company to avoid the lengthy approval and registration processes required for a direct transfer of an equity interest on a foreign invested Indian company.
According to the petition, this will undermine the existing legislative and regulatory frameworks that require approvals from competent authorities in India even for transactions routed outside India through tax havens.
Vodafone today said it had noted the filing of the tax authority's review petition, which will be evaluated by the same bench that ruled on the Vodafone-Hutchison case, and that it had no further comment to make at this stage.
On January 20, the Supreme Court clearly and unambiguously ruled that there was no tax to pay on the Vodafone-Hutchison transaction, its press release said.
The Supreme Court's judgment had allowed Vodafone to avoid a tax liability of Rs 11,000 crore.
A three-judge bench, comprising Chief Justice S.H. Kapadia and justices Swatantar Kumar and K.S. Radhakrishnan, ruled that the transaction was a participative piece of investment, not a tax avoidant transaction.
The review will now go before the same bench.
"It is between a Cayman Islands company and a company incorporated in the Netherlands. The subject matter was the transfer of a company incorporated in Cayman Islands. Consequently, Indian tax authorities had no territorial jurisdiction to tax the offshore transaction," the bench said.
The offshore transaction, was "bonafide", "structured FDI" into India, the judges held.
Vodafone International Holdings BV, a company resident for tax purposes in the Netherlands, acquired the entire share capital of CGP Investments (Holdings) Ltd, a company resident for tax purposes in Cayman Islands, on February 11, 2007.
Indian revenue authorities claimed that this would give the Netherlands-based company a 67 per cent controlling interest in Hutchison-Essar, a company resident for tax purposes in India.
However, Vodafone disputed this saying that it only controlled a 67 per cent interest, but not controlling interest, in Hutchison Essar Limited.
Anyhow, if tax were to be paid, it would be paid by the seller, not the buyer, the company claimed.
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