Kudos to IT dept: Vodafone case goes in favour

The Bombay High Court ruling upholding the jurisdiction of Indian tax authorities in the 2007 Vodafone-Hutch cross border deal that led to the creation of Vodafone-Essar is welcome. When tax authority Davids take on multinational Goliaths, tax authorities often lose out, not because they lack a strong case but because they are unable to hire the best legal brains in the game. The small, but significant, victory in the instant case is therefore, heartening. Of course, the bigger battle of determining whether the resultant capital gains are chargeable to tax or not remains, as the ruling is only on jurisdiction. Nonetheless, to the extent the first round has gone to the revenue department, it is cause for quiet satisfaction.

The verdict upholds the principle (consistent with international practice) that substance matters, rather than form. Thus, what matters is where the underlying interest lies. In the Vodafone-Hutch case the deal involved transfer of assets that derive their value from economic activity in India and hence should logically be taxed in India. This is the principle adopted internationally, including the UK so there is no reason why the UK-based Vodafone should expect anything different. True, there are other deals that should rightly have come under the tax net on the same principle but escaped. But that is no justification to absolve Vodafone of its liability. On the contrary! It is, perhaps, reason to reopen cases where revenue authorities have tangible proof of evasion as in the instant case. It is also sound reason to expedite passage of the Direct Taxes Code Bill incorporating deterrents such as the general anti-avoidance rule (GAAR) against questionable tax practices. GAAR gives sweeping powers to income tax commissioners to treat an arrangement as impermissible if ‘the intention of the taxpayer is to derive tax benefit and the transaction lacks commercial substance or is not for a bona fide purpose.’ Benefits available under tax treaties can also be denied if GAAR provisions are invoked. At a time when treaty abuse is rampant and MNCs not above cutting a sharp deal, GAAR is just the right armour for a beleaguered IT department.