Although I have tried to desist from doing so, I believe it is almost obligatory for the editor of the BCAJ, to make at least a noticeable reference to the judgment of the Supreme Court in the case of Vodafone. The decision is undoubtedly a landmark event in the annals of Indian income-tax jurisprudence. But the comments/opinions/presentations that many of us have been subject to in the aftermath of the judgment are arguably an overdose. In the last two weeks, my inbox has been flooded with no less than 100 emails claiming to be “exclusive expert comments”, “in-depth review” or “executive summaries” of the decision. Over the last nearly 30 years of my practice, I cannot remember a single tax judgment that received so much publicity in the wider media. There have been numerous landmark rulings in various areas of tax law that are routinely cited as precedents and have undoubtedly left indelible marks on tax jurisprudence. I wonder if they were in any way less important than the Vodafone judgment. Or was the tag line of “Rs. 11,000 crores” that made Vodafone a more appetizing news item? Or is the amplified hype only an inevitable consequence of the diffused internet-based communication network that we live amidst today? The ruling is hailed as a victory for India’s independent judiciary. One wonders what would have been the reaction had the verdict gone against Vodafone!
On a more serious note, the Supreme Court, while delivering the judgment, carried out a broad review of precedents – it considered the principle laid down in Westminster’s case, visited the ghosts of Ramsay and spirit of McDowell, discussed the decision in Dawson and took in to account the freedom given to Mauritius companies by the decision in Azadi Bachao. To put it in a nutshell, it ultimately held that if the transaction is genuine and for business purposes then sale of shares by a non-resident in a foreign company having downstream subsidiaries, which in turn hold shares in an Indian company that has business in India, does not result in capital gain which can be considered to have accrued or deemed to have accrued in India.
Interestingly, while deciding the above issue, the Court developed a possibly new concept of ‘puppet subsidiary’. The Court held that “where the subsidiary’s executive directors’ competences are transferred to other persons/bodies or where the subsidiary’s executive directors’ decision making has become fully subordinate to the Holding Company with the consequence that the subsidiary’s executive directors are no more than puppets then the turning point in respect of the subsidiary’s place of residence comes about.”
While this concept of ‘puppet subsidiary’ certainly needs further consideration, it would be interesting to see how the assessing officers react. Many of us may recall that for several years after the decision in McDowell nearly every assessment order while making addition drew support from the decision and held that the assessee had resorted to a ‘colourable device’ or subterfuge or that the transaction was ‘sham’. One wonders whether after the decision in Vodafone, assessing officers will start viewing every subsidiary as a puppet of its holding company.
The majority judgement delivered by the honourable Chief Justice Kapadia did not decide the issue whether a non-resident having no tax presence in India is required to deduct tax at source u/s 195.
Over the next few months tax professionals will be busy analysing the Vodafone decision, digesting what is meant by ‘look at’ test, doctrine of ‘look through’, doctrine of ‘economic substance’, ‘dissecting approach’, ‘investment to participate’ and ‘purposive interpretation’ approach.
The reaction of the Government has been understandably muted. May be it is considering whether to play the oft-used trump card – ‘amend the law’. Or maybe politicians are far too busy with the election campaigns in Uttar Pradesh, Punjab, Uttarakhand, Goa and Manipur, whose proceedings have been, arguably, at least as interesting as the Vodafone judgement.
While many states are going to polls, so are various cities and towns in Maharashtra. Elections to the Municipal Corporation of Greater Mumbai (MCGM) will be held on 16th February 2012. MCGM is the richest municipal Corporation in the country with a budget of possibly more than that of a small state. The corporators that we elect have great influence in governance of this city which has many problems – bad roads, pollution of every kind, corruption – the list is long. We deserve better governance. Just as it is our right to expect good governance from the corporators, it is also our duty to cast vote in the forthcoming elections. So do cast your vote.
This issue has interesting articles and features dealing with the current issues – reference to OECD Commentary for interpretation, XBRL, accounting of foreign currency fluctuations and SEBI’s action against professionals.
We take this opportunity to congratulate the doyen of our profession Mr. Y. H. Malegam on his being conferred Padma Shri.
