Ringing judgment

The Supreme Court delivered a landmark judgment that the income tax department did not have jurisdiction to tax Vodafones 11.07-billion acquisition of Hutchisons 67 per cent stake in its Indian telecom joint venture with the Essar Group in May 2007. It upheld the rule of law,by looking at the deal through the Income Tax Act as it stands today,instead of looking through the deal to reflect the governments policy intentions. They were closely tracking the case not because of the Rs 11,217.95-crore tax claim the department had slapped on Vodafone or even because the fate of over 300 such big Mamp;A deals impinged on its outcome but primarily because the cases uniqueness called on question the fair play of judiciary in interpreting existing laws.

The apex court sifted the facts to drive home the point that the acquisition was neither a preordained one nor a sham transaction and said that the department cannot deny genuine strategic tax planning. It pointed out that the shares of CGPC,a company in Cayman Islands which held a Mauritius company,which in turn held several other Mauritian companies which finally held majority stake in Hutchison Essar Ltd acquired by Vodafone International Holdings BV,a Dutch firm,resided in Cayman Islands. Hence,tax authorities in India did not have jurisdiction over the deal. This will reassure global investors that the legal system works just fine in India. Delivering the majority judgment,Chief Justice S.H. Kapadia said,Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers including foreign investors to make rational economic choices in the most efficient manner.

Besides addressing the specific case of taxing overseas transactions,the judgment will also lend clarity to several issues such as sanctity of tax planning,situs of shares and applicability of withholding tax provisions when non residents have no presence in India. The chief justice has observed that there seemed to be no reason to refer todays decision for reconsideration by a larger bench. For now,the government has set up a core committee to study the SC order and decide on the next step. Its proposed Direct Taxes Code envisages imposing capital gains tax on overseas transactions if the company being acquired has 50 per cent or more assets in India. The intention is to net such transactions but the government should take the right lessons from the courts clear message for stability and certainty in the tax regime.