The long drawn battle between Vodafone and the Income-tax Department was settled by the Hon’ble Supreme Court vide its decision dated 20.01.2012 reported in 341 ITR 1. It was believed that Vodafone will no longer be required to pay any tax in India. But a few months after the decision by the Hon’ble Supreme Court, the Budget 2012 was placed before the Parliament on 16.03.2012. In the Budget, the legislature has taken all steps in order to ensure that the decision of the Supreme Court is superseded. In other words, the amendments proposed are such that it supersedes the entire decision of the Supreme Court and fate of Vodafone has again been left in dilemma.Out of several aspects decided by the Supreme Court, one such aspect is regarding as to when a transaction can be said as designed for tax avoidance or evasion.
The Hon’ble Supreme Court observed that “It is the task of the Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach”.
It has further been observed by the Hon’ble Supreme Court that genuine tax planning cannot be ruled out.However, Authority for Advance Rulings (AAR) without going into the context in which the aforesaid observation was made by the Supreme Court, has drawn a conclusion that consortium contracts should not be dissected to determine the liability to tax. (Alstom Transport SA, 2012 TII 28 ARA INTL.)
If the view of the AAR is to be accepted, then the entire consideration of any composite or consortium agreement will become taxable in India even though a part of the consideration is in respect of non-taxable activities. Reference in this context may be made to the case of Ishikawajima – Harima Heavy Industries Limited 288 ITR 408 wherein it has been held by the Hon’ble Supreme Court that “where different severable parts of a composite contract were performed in different places, as in this case, the principle of apportionment could be applied to determine which fiscal jurisdiction could tax that particular part of transaction.”
However, the AAR has rejected the views taken by Apex Court in Ishikawajima–Harima’s case by holding that the dissecting approach in the Vodafone’s case cannot be held as non-applicable.AAR has further observed that Ishikawajima – Harima is a two judge bench decision whereas Vodafone is a three judge bench decision.
It may be stated here that although Ishikawajima – Harima was a two judge bench decision, however, there is a three judge bench decision also wherein it has been held that a composite contract needs to be dissected in order to determine the tax liability.
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Reference in this regard may be made to the decision of the Hon’ble Supreme Court in the case of of Continental construction Ltd. v CIT 195 ITR 81 (three judge bench), wherein the Apex Court has held as under:
“That, since the contracts in this case obliged the appellant to make available information and render services to the foreign government of the nature outline in section 80-O, it was the duty of the revenue, and the right of the appellant, to see that the consideration paid under the contract legitimately attributable to such information and services was apportioned and the appellant given the benefit of deduction available under the section to the extent of such consideration.” It will be clear from the aforesaid discussion that the applicability of Vodafoneobservations will be relevant in specific circumstances only, i.e. where it is to be decided whether a particular transaction is designed for tax evasion or not.
Further reference in this regard may also be made to a recent decision of Kolkata Tribunal in the case of Dongfang Electric Corporation v Deputy DIT dated 22.06.2012 wherein the Hon’ble Tribunal has held that Vodafone observations relating to non-dissecting approach can be applied when the overall transaction is split in an unfair and unreasonable manner with a view to evade taxes
It is felt that Vodafone’s case does not alter the well-established legal principle that a divisible or severable contract has to be dissected to determine the tax liability arising out of the contract unless it is proved that the composite contract has been made with a view to evade taxes.
The author is a Sr. Partner in S.S. Kothari Mehta & Co. e-mail: hp.agrawal@sskmin.com