Why Vodafone verdict is only a temporary relief

Within hours of the Supreme Court dismissing the review petition in the Vodafone's tax case, government on Tuesday refunded about Rs 2,500 crore plus four percent interest to the firm. TDS on tax has, however, been withheld by the tax department.

Even after its last defeat, the government decided to give itself another go at Vodafone after the Supreme Court ruled in favour of the company in January in the Rs 11,000 crore tax case. And again, the government has been restrained as the apex court dismissed the review plea, saying the petition had no merit.

AFP

After a five-year legal battle, Vodafone in January won the verdict that it was not liable to pay any tax on its $11 billion acquisition of Hutchison's Indian mobile business, from which the government demanded a tax of Rs 11,000 crore.

The Supreme Court ordered the government in January to pay back to Vodafone with a 4-percent interest the money the company had deposited pending a final verdict. Last month the government filed a plea seeking a review of the verdict."We find no merit in the review petition. The review petition is, accordingly, dismissed," a three-judge panel, led by Chief Justice S.H. Kapadia, said in a joint order on Tuesday. The same judges had ruled in favour of Vodafone in January.

Though Law Minister Salman Khurshid said yesterday that the government would not file any curative petition, through which it could again ask the court to reconsider the order, tax experts say that once the Income Tax Act amendment was done, it would override any judgments of the court.

Harish Salve, who represented Vodafone in the Supreme Court, said the apex court had shown "robust independence". "You have a long battle for four years and then you treat the judgment like this. Then you say you have removal of doubts. I don't think they are being fair to the Supreme Court, but the government has its own problems and it will deal with them," he told CNBC-TV18.

Reacting to the verdict, Mukesh Butani, chairman of BMR Advisors, told CNBC-TV18 that even though SC's decision is welcome news, the retrospective amendment, which is in the form of Bill right now, still exists and one needs to analyse the implications of whether it can impact the Vodafone case or not.

"This matter is closed as far as the current laws are concerned," Sudhir Kapadia, national tax leader at Ernst & Young, told Reuters. "But now if the government makes retrospective changes in tax rules through legislative intervention then it would reopen the entire issue."

Finance Minister Pranab Mukherjee included a proposal in the Budget that, if passed by parliament, will allow India to retrospectively tax cross-border transactions in which the underlying assets are located in India.

"The Budget proposal widens the scope of state's power to tax all past income arising as a result of existence of actual economic nexus, irrespective of the place of residence of the entity deriving the income, " said Sanjay Sen, Managing Partner, Praxis Partners in an Economic Times column.

He argues that allowing a party to the case to change the rules on which the case was argued and decided and, then, reverse the outcome, offends the rule of law. This in turn questions the functioning of courts and erodes investor confidence. If the amendment is allowed, the Supreme Court's order to refund Vodafone will become liable to be confiscated by the proposed Validating Act, he said.

Even Hitesh Jain, partner at ALMT Legal agrees that the game is far from over and in fact, this is just the beginning of the battle between the government and Vodafone. "Once the Finance Bill is passed, the real see-saw between the government and Vodafone can again begin in terms of whether the government is going to initiate a fresh demand or whether the government is going to file a curative petition in the Supreme Court," he told CNBC-TV18.

Hemant Joshi, Partner at Deloitte Haskins & Sells, said the Vodafone deal is a temporary relief as the government has proposed retrospective amendment to the income tax law to tax this transaction.""However, the jury is not out yet. It is not an open and shut case. (The) matter will be litigated."