Just as the study of economics can have conflicting schools of belief for each given situation, in law, too, situations do arise where two schools of thought can apply to a particular judgement, as it has in the case of Vodafone. It is, however, rare in modern jurisprudence for any particular judgement to attract so much mileage for such a long period of time, covering diverse aspects of the law. This position is similar to a 20:20 match in which the situation is periodically in flux. It makes one believe that the Vodafone case is not a mere taxation issue.
It is a well-known fact that the Companies Act, 1956, does not equate ownership of shares with ownership of assets. If the logic that a sale of shares amounts to sale of assets is considered veracious or accurate, does that mean that, for example, shares in a real estate company that are transferred by shareholders will amount to the sale of a derivative (that is, the land bank of the company since land is the underlying asset)? This logic does not sound rational because assets are the property of the company and not of the shareholders.
The farce involved in the Vodafone case can be understood through this theoretical example. Steel company A has its factory and mines and so on in Jamshedpur, Jharkhand. Now, let us imagine that 50 per cent of the shares of this steel company is transferred within the group structure from one group to another. The transfer of shares takes place in Mumbai, where the company’s registered office is situated. In that case, will it be said that the transfer of shares is analogous with a transfer of manufacturing works, land and building, rights in the mines and so on? Should the stamp authorities in Jharkhand demand stamp duty because there has been a transfer of derivative assets? What is cardinal here is that only 50 per cent of the company’s shares have been sold, not the assets of the company. The assets will belong to, and remain with, the company. The facts in the Vodafone case cover the same grounds.
The Bombay High Court in a milestone verdict, however, held that a change in controlling interest attracts tax. The verdict was given on the basis of an evaluation of agreements entered into by the parties and various disclosures made by the parties for ascertaining the subject-matter of the transaction and the business understanding of the parties to the transaction.
The Supreme Court commented that the principals laid down in the judgements of McDowell and Azadi Bachao Andolan could be invoked only when the taxpayer chooses to use an artificial and colourable device devoid of any commercial objective and one cannot read McDowell’s case in a manner to characterise all tax planning as illegitimate. The proper course in construing revenue acts is to give a fair and reasonable construction to their language without leaning to one side or the other, but keeping in mind that no tax can be imposed without words clearly showing an intention to lay the burden and that equitable construction of the words is not permissible.
A person cannot be guided by a law that did not exist at the time when the action occurred. It is fundamentally unfair to hold a person to be in contravention of the law when that law did not exist when the alleged contravention occurred. The Union Budget tabled in Parliament for the ensuing fiscal year has, by way of a clarificatory amendment, endeavoured to tax transactions covered with retrospective effect from 1 April, 1962, meaning several foreign investments will now be open to taxation, especially those completed in the last five to six years. It is undisputed that the legislature does have the power to legislate with retrospective effect, but in doing so it must ensure two conditions:
(a) a legislature can by a retrospective amendment in law validate such law that has been declared by court to be invalid, provided the infirmities and vitiating factors noticed in the declaratory-judgment are removed or cured;
(b) if by such a validating and curative exercise made by the legislature, the earlier judgment becomes irrelevant and unenforceable, that cannot be called an impermissible legislative overruling of the judicial decision.
Whatever the arguments for or against Vodafone, it is pertinent to note that business will be attracted to a country only when there is certainty and fair play. The lessons to be learnt from here are that business should be more careful when it comes to dealing with government because, as the saying goes, whether the knife falls on the watermelon or the watermelon falls on the knife, it is the watermelon that gets cut.
As for the tax authorities, they ought to be more proactive in the law-making process because uncertainty will lead to a loss of confidence, given the current uncertain global economic situation. With this retroactive amendment, the finance ministry has, like a typical Bollywood villain, suggested, “Picture abhi baki hai, mere dost” (The story isn’t over, my friend). Vodafone must be feeling like the South African cricket team did in the semi-final of 1992 Cricket World Cup, when it was done in by the Duckworth-Lewis Method.
The author is Company Secretary, Rustomjee Group of Companies