SC rejects Govt’s review petition in Vodafone case

The dismissal by a bench of Chief Justice of India S H Kapadia and Justices K S Radhakrishnan and Swatanter Kumar followed a government proposal in the Union Budget providing for a “clarificatory retrospective amendment” in the Income Tax Act,with effect from 1962,to “restate the legislative intent” that overseas deals which derive their value substantially from domestic assets can be taxed.

Welcoming the Supreme Court oder,Vodafone said: “This once again emphasises the legality and bona fides of the transaction. The Supreme Court’s clear and unambiguous ruling today,based on the existing laws of India,reiterates that the Indian tax authority does not have the jurisdiction to tax the transaction.”

The government explained that the need for a clarification was triggered by “certain judicial pronouncements” which have “created doubts”.

In a majority judgment in January,the CJI’s Bench had held that the offshore deal between Hutchison Telecommunications International Ltd (a Cayman Islands company) and Vodafone International Holdings (a company incorporated in Netherlands) — to transfer shares of CGP (a company incorporated in Cayman Islands) — was a “bona fide structured foreign direct investment into India which fell outside India’s territorial tax jurisdiction,hence not taxable”.

Through the US $11.2 billion deal in May 2007,Vodafone had acquired 67 per cent stake in Hutchison-Essar Ltd. The court had observed that the offshore transaction was “not a sham or tax avoidant preordained transaction”.

On February 17,the government had contended in its review petition that the court failed to appreciate that the deal did not involve FDI inflow into India. The review had criticised the SC verdict,saying it had the effect of legitimising transactions routed through tax havens and thus binding the hands of IT authorities.

Government lawyers who were part of the Vodafone litigation in the SC said the January 20 judgment was based on the tax law now prevalent,and once the proposed amendment to tax laws was passed in Parliament,the onus would be on Vodafone to challenge it.