Interview with Girish Dave, retired Chief Commission of Income Tax, Mumbai.
GIRISH DAVE retired as Chief Commissioner of Income Tax from Mumbai in early 2010 after serving in the Income Tax Department for more than three decades. He is widely seen as the architect of the I.T. Department's notice demanding tax from Vodafone, but is modest enough to give the credit for pursuing the case to the team of officers working with him. Excerpts from an interview he gave Frontline:
What, according to you, are the legal flaws in the judgment?
The review petition filed by the [Income Tax] Department enlists the flaws, legal as well as factual. No comments at this stage need be made beyond what has been stated in the said petition as the matter is sub judice.
Another area which comes to mind is the reference to FIPB [Foreign Investment Promotion Board] approval while drawing certain conclusions in the judgment. In fact, some of the agreements may have been drawn by the involved parties, that is, Analjit Singh, Asim Ghosh, HTIL [Hutchison Telecommunications International Limited] and Vodafone, after the FIPB accorded its approval, and, therefore, the FIPB could not have decided otherwise though it had real doubts about the relationship of holdings of Analjit Singh and Asim Ghosh with Hutchison. It would have been appropriate if the records of FIPB proceedings would have been called for to reappraise the circumstances leading to this approval.
What are the consequences of the judgment for tax revenue and development?
Common perception (except that of those whose survival thrives on the structuring of such deals) is that this judgment will have the effect of legitimising tax havens. Tax havens will now be used with impunity for structuring similar deals by the M&A [mergers and acquisitions] industry.
The judges seem to have reached the decision by their curious interpretation of the judgment in the McDowell case. Is their interpretation of the McDowell judgment, especially Justice O. Chinnappa Reddy's observations on the need to depart from the Westminster principle, correct?
The hon'ble court has held that the McDowell would apply only in the context of artificial and colourable devices, not to the present transaction because HTIL's corporate structure could not be considered a sham. It is respectfully submitted that Chinnappa Reddy, J. had, in fact, observed very clearly that the courts are now concerning themselves not merely with the genuineness of a transaction but with the intended effect of it for fiscal purposes.
It was thus held that no one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it. It is respectfully submitted that not going ahead with the test formulated in McDowell and proceeding to determine the transaction on the basis of HTIL's corporate structure appears [to be] an error apparent on the face of the record.
Did the Bench miss the subtle distinction between the terms tax planning and tax avoidance and tax avoidance and tax evasion?
The tax avoidance arrangement employed in the transaction between Hutchison and Vodafone has been equated with tax planning. In fact, globally, the distinction between tax avoidance and tax evasion has blurred.
The exclusion of indirect transfers from Section 9 of the Income Tax Act and as a consequence the refusal to consider it as a look through (rather than as a look at) provision was seen as a setback to the I.T. Department.
The issue is not whether transfer is direct or indirect. The issue was, what is the subject matter of the transaction' if construed in a realistic and commercial sense. The principles for interpretation of contracts are very well discussed in the renowned work of Sir Kim Lewison.
The judgment has, in fact, impliedly inserted words direct in Section 9 by saying that indirect transfer is not covered by these provisions. Further, there is no judicial precedent to rely on pending legislation to interpret existing legislation as has been done while referring to the Direct Tax Bill, 2010.
In Paragraph 73, the Bench seeks to distinguish between preordained transaction and a transaction which evidences investment to participate. In the latter, a dissecting approach is not warranted. Is the Bench correct in its emphasis on look at approach rather than on the dissecting approach?
The court held that the department had dissected the transaction. The court's findings did not consider any of the submissions advanced by the department, whereunder the department had submitted that the transaction had to be viewed as one consolidated whole. The Supreme Court's conclusion that the famous Ramsay ruling of the U.K. House of Lords prescribed the look at doctrine appears to be not correct. In fact, the Ramsay doctrine was heavily relied on by the Revenue in this case in order to free taxing statutes from the shackles of literal interpretation and thus requiring the court to look at the real transaction and the mode which had been adopted to avoid the tax net.
The Supreme Court has held that it is a share sale and not an asset sale. In paragraph 89, they say it is an outright sale between two non-residents of a capital asset (share) outside India. So there is no liability to deduct TAS. Is this view correct?
At so many places, the hon'ble court has said that the present case concerns transfer of investment in entirety (refer para 75). The transaction in the present case was of divestment (refer para 80). It concerns the sale of an entire investment (refer para 88).
This entire investment was not in purchase of one share of one U.S. dollar of CGP's only capital. The investment was in the Indian mobile telecommunication business. CGP had no balance sheet as it had no accounts, no profit and loss account, so a question arises how this value of U.S. $11.2 billion was arrived at when no accounts of CGP were available even in the due diligence report of E&Y. If this investment was in the telecom business in India, a natural corollary would be that it was this investment in entirety which was in fact sold. Investment was not in one share of CGP, for which in the year 1998 Hutchison may have paid one U.S. dollar to Ms Nicole Melia from whom it acquired that one share.
Do you think 'Azadi' was incorrectly decided? From the Solicitor General's submissions, can we say the government too agrees to it though it was a respondent in that case?
What the learned Solicitor General has submitted for the consideration of the hon'ble court was that the reading of McDowell by the hon'ble judges who decided the Azadi Bachao case was not correct, and consequently the basis of the judgment in Azadi Bachao led to a wrong inference, which needs to be corrected. This was so as McDowell was a decision of five judges whereas Azadi Bachao was decided by two judges, and therefore this correction can be done by the present Bench of three judges. To explain this history of Form vs Substance, the learned Solicitor General sought to explain an entire chain of cases, which included the latest in the series, the case of Tower MCashback LLP decided by a Bench of seven Lords and reported in  2 WLR 1131. This case surely missed the attention of the hon'ble judges as it does not find mention in the analysis of the subject Form vs Substance.
Justice K.S. Radhakrishnan has held, in paragraph 90 of his judgment, that the principle of Duke of Westminster is still valid. Your comments.
In my humble submission, all principles are valid, including those of Ramsay and McDowell, and the application of these principles would depend from case to case.
You also mentioned six positives in the Supreme Court judgment. Could you explain those?
These are not positives as understood by you. These six postulates suggested in the judgment are in para 68 and may become possible areas of future controversies when given effect to, to the exclusion of each other.