Vodafone Victory - Measuring Arm’s length…and width

Attorney General Mukul Rohatgi’s epoch-making ‘advice’ has turned out to be biggest affirmation yet of the government’s intent to improve the investment climate of India. Vodafone, Shell, Essar and many other corporates will profusely agree.

Jan 29, 2015 01:01 IST India Infoline News Service Sudhir Raikar |

The government decision in agreement with the Bombay High Court ruling in the 3200 crore Vodafone tax dispute case will undoubtedly bring cheers for global investors, those battling similar disputes with the Indian taxmen as also prospective India entrants.

In the same decisive breath, the government has finally and formally acknowledged the futility of needless litigation that seeks to unduly stretch hypothetical arguments beyond the boundaries of legal truths. Both developments spell great news for Indian industry and economy going forward.

For those unaware of the facts of the Vodafone case, here’s a brief account of the much-talked about dispute:

Opponents: Tax authorities Vs Call center Vodafone India Services, a wholly-owned subsidiary of Vodafone Teleservices India Holding Mauritius (both companies owned by Vodafone London)

Opposition: When Vodafone India issued 2,89,224 equity shares to its Mauritius-based holding company at premium of Rs 8509/- per share, tax authorities placed the arm’s length price at Rs 53,775/- per share and deemed the difference between fair market value and transacted value– Rs 45,266 per share amounting to Rs. 1309 crore – as loan and slashed Rs 88.35 crore as interest amount.

Vodafone India contended that section 92 (1) can’t be enforced since there’s no income from the equity sale. It further cited Section 2(24) (xvi), notes (i) (e) to Section 92B and 92 (2) which respectively state that:
  • Capital receipts are not part of income unless specifically provided for,
  • Only the present or future income on account of business revamp alone can be subjected to tax,
  • And, that the objective of ensuring against overstated losses/understated profits didn’t apply to the Vodafone equity issuance.
Outcomes: Vodafone moved the Bombay High court against the tax diktat which in turn instructed the Dispute Resolution Panel to decide on the matter. The Panel upheld the Assessing officer’s jurisdiction to impose Chapter X following which Vodafone again moved the Bombay High Court. The court ruled in favor of Vodafone on October 10 rightly pointing out the difference between charge of tax and measure of tax. It held that the issue of shares at a premium by Vodafone India to its non-resident holding company did not result in income from the international transaction.

The government nod to Attorney General Mukul Rohatgi’s counsel against challenging the High Court decision has brought a conclusive end to this unduly lingering issue. It was amply evident, all along, that when a wholly owned subsidiary issues additional to its holding company, the capital inflow has no impact whatsoever on its income. And in the absence of any ensuing income, arm’s length pricing is devoid of the very coordinate plane to support its applicability. The tax authorities clearly went too far in their hypothetical arguments, whether in misconstruing the inclusivity of the income definition as per statute or taking recourse in seemingly accommodating words like ‘any income from an international transaction’, turning more wishful than wise in their desperate contention.  

The Attorney General’s momentous ‘advice’ on the Vodafone case is not a brownie point for the ruling government as it is being made out to be. It’s a supremely objective opinion on a sticky issue forcibly made sentient by tax authorities all this while. No wonder, his favorite book is Ayn Rand's ‘Atlas Shrugged’: the most authoritative endorsement of the virtues of objectivism which in the context of law courts implies settlement of disputes according to objectively defined laws.    

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