Harish Salve, the counsel for Vodafone, took time to explain what the judgment means for business. “What’s most positive about the verdict is the rule of law would prevail, irrespective of the zeroes involved,” he said. Edited excerpts:
Will this set a precedent for cross-border M&As?
The judgment provides clarity on tax avoidance versus tax evasion. The court, for the first time, looked at a complex structure of holding subsidiaries in places like the Cayman Islands and Mauritius, and said you cannot blindly condemn these. This is the first time the court has said we do not disapprove of this. If we accept foreign investment, we accept the way it is made, as long it is done honestly. That’s one important message. The second important message is that the court is not going to stretch the law to try and loop in transactions.
How would this judgment impact similar cases?
As long as they can establish it was a case of foreign direct investment genuinely made, was value created in India, was the structure created to facilitate a tax-free sale? Or was it a structure created to set up business in India? When you invest, you keep the exit option. If you create something to save tax, it would be looked at differently than when you create something as an integral part of investment, keeping in view the fact that some day, there may be an exit.
How would this judgement, in your view, impact other similar cases?
One important thing in all those cases, and they will be seen in individual light, as long as they can establish—and this is what the Chief Justice has laid in broad parameters— was it a case of foreign direct investment genuinely made, was value created in India, was the structure created to facilitate a tax-free sale, where otherwise tax would have been payable, or was it a structure created to set up business in India? If it was a structure created to set up a business in India, and when you are creating it, exit is integral to entry for global investors. Whenever you invest, you keep the exit option. So, whenever you are investing, you create a structure that if and when I exist, I have a convenient structure; that is permissible. This is broadly the thinking; the same process would apply in the UK or the US, or any other country. If you create something to save tax would be looked at differently than when you create something as an integral part of investment, keeping in view the fact that some day, there may be an exit.
How do you think this judgement would influence government policy?
We need to take a hard look at how this is going to impact. We gave the court examples of how other countries have reacted. For instance, in Australia, if you invest in mining assets, and there are downstream companies in which the real value of the upstream is in downstream and the downstream is in mining, you take a call. If you are making money by selling a mining asset, it is nature’s bounty, you have not created wealth, so that we will tax. But like in France, if the downstream is real estate, again you are gaining because of increasing population and increasing pressure on land, but if the downstream is industrial investment, none of these companies tax the upstream. These are policy issues. What the government has to realise is that to promote investment, if you say that we will tax the upstream even if the downstream is industrial investment, you are adding an exit cost; it will be factored into the cost of investing in India; your returns will have to be accordingly higher. Investment will be that much more unattractive or attractive, depending on the cost. Tax for a large investment is a cost. The government has to decide if they want to add this cost. (can be used as a quote)
There was a sense of policy paralysis; will this judgement boost investment?
Judiciary has not gone ahead done something to boost investment because that is not its mandate. The judgement of the chief justice, as does the judgement of justice Radhakrishnan, recognises the importance of foreign direct investment in India; they acknowledge that is the way forward and accepted in India, and they said that we are not going to treat this with suspicion, or allow these kind of allegations to fly without adequate basis. That’s a very positive signal. The rule of law would prevail, irrespective of the zeroes involved. And that’s is very important...
forget the zeroes, ultimately, it is a tax case. An assessee has sold an asset. Is he taxable? No. The matter should end there. In India, we need to start thinking big, if you want big transactions, big takeovers, you will have big tax liabilities. Let’s not get obsessed by the zeroes.
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Is there a dissenting order?
There’s no dissenting order; it is a concurring judgement. I have gone through the judgement quickly, not in great detail. Justice Radhakrishnan follows the same line of reasoning, he accepts almost all the propositions. Chief Justice, in fact, puts it in a very broad base on structuring and exits. Justice Radhakrishan accepted the more detailed submissions like when you sell a share, premium is built into the share. He analyses the high court judgement in detail, and points out, point by point, where the HC judgement went wrong, points out how none of the rights were transferred and so on.
And one important area where the majority judgement doesn’t dwell with but the concurring judgement does is Section 195, which justice Radhakrishnan picks up the point. If you give literal construction to Section 195 that any payment made by any person, it will be absurd. That person must have a presence in India but the department argued that the Vodafone had a presence in India because it had a 3% investment in Bharti. But he (Justice Radhakrishnan) said no, you have to see where is the transaction. In relation to the transaction, does it have a presence? That’s important. The concurring judgement ends with a bit of a flourish, which I can’t resist quoting, it says it was ‘capital punishment on capital investment’
How does this address corporate concerns on taxation in cross border deals?
A lot of them were concerned with immediate issue, which is the construction of the law, and the larger issue: the certainty and the manner in which foreign direct investment is going to be treated in India. Would the Indian courts accept the way global business is done, or look at it with the same degree of suspicion. Or reported concerns on the way these deals are structured—that was worrying foreign investors. I think this judgement lays the law down clearly, that on fiscal law, we are mature enough to recognise how the world does business. As long as it is a genuine investment, we will accept it.
Does this set a precedence that if you have similar structures in tax-neutral zones, you can avoid taxes on sale or exits in cross-border deals?
What the judgement says is that when you make investment, you make structures, that are perfectly lawful. The structures are for commercial purposes, not merely for saving of taxes. When you diffuse investments into 20 subsidiaries, you demonetise it. You can use one subsidiary for pledging and raising of money, one for cross-holdings, and 100 other corporate advantages, which arise out of spreading your shares thin.
Therefore, you have pyramid structure in all these large corporations. It also accepts that when you are setting up a pyramid structure and setting up a subsidiary, you would obviously choose tax-neutral jurisdictions or you will end up adding tax liabilities. This is an important acceptance by the court. If you are while making investments, coming into the country, making investments, creating business and value, you are creating a structure for various purposes and also for strategic tax planning. So, that tomorrow if I decide to make a complete exit, I have a tax-free exit under Indian laws. People consult the law and plan accordingly. As long as it done genuinely, in a bonafide manner, and for good reason (there’s no problem).
On what grounds, the Bombay HC judgement was over-ruled?
The Bombay HC judgement was overturned by the majority on a broad principle. It said the department’s approach was a dissecting approach, it tried to apportion the consideration over a multiplicity of assets but forgot that when you set up a business like this, you can sell the business by selling the share. What the SC found fault with the Bombay HC judgement, which is absolutely correct in my view, is that it tried to get into too many details and what SC has accepted in one line is that all these agreements are facilitative; even the share purchase agreement only smoothens transition. Suppose, they had bought only the CGP shares, what would have happened? All the downstream companies are under their control, and all the agreements are with downstream companies. They would have got exactly the same thing now and made their life simpler. If you go and sign fresh set of agreements and move things along, it doesn’t create a fresh transfer. They said said it was not an asset sale, but a share sale. There are broad ways of selling; you sell it asset-wise or you sell share-wise. If share was sold, the HC listed the wrong thing. That’s way, they have dealt with the Bombay HC judgement. The problem with the Bombay HC judgement was that it said what it did. It accepted the first part that the foreign share can’t be taxed but it mentions certain assets which it thought were transferred, and then it ends by saying all these will be at a later stage but not saying what stage that is and then it dismisses. And the department says later stage will be Hutch but you Vodafone pay us the entire money. Now, the problem is if Vodafone pays the entire money, Hutchison says I am in Hong Kong, and I don’t like to come to India to file a return, the department pockets the whole money, and that was not a good situation for India to be in. It looks like we have grabbed your money and we are sitting on it. That was the problem with HC judgement. On law, it was flawed and the court rejected it.
How much time you spend, pouring into the documents, preparing for this case?
We have put in a lot of work but it is a wrong impression that a lot of credit is due to me. The credit is due to the team which prepared the case, and prepared it very well. I had the honour and pleasure of having Prof Philip Baker, QC, UK (an expert on international taxation, who’s a senior visiting fellow at the Institute of Advanced Legal Studies, University of London) sitting there. He sat through the hearing on our side. There was so much inputs. Whatever questions were asked, we had answers ready. We had put in a lot of work but the team was superb.