February 13, 2012, 0:06 IST


The Vodafone judgment delivered by the Supreme Court in January, 2012, has set the cat amongst the pigeons. At a macro level it has the calculated effect of implicitly legitimizing tax havens, weakens our cause against illicit wealth parked abroad and explicitly sanctions corporate structures that use tax havens primarily as a tax avoidance measure.

Idea of look at
Central to the argument of the Supreme Court, has been the principle of “Look at” in the Westminster case as propounded by the English Courts in 1930’s wherein it was held “given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance.” The Supreme Court holds this to be a cardinal principle to this date in India.

To amplify, the “Look at” principle presumably implies the courts need not be too concerned with the substance but only with the form of a transaction. That has extraordinary implications for the government as a whole in the immediate future.

Subsequent to Westminster, even in Britain, attempts were made to re-look at the entire issue by the English courts in the Ramsay and Dawson cases where the courts sought to overturn the “Look At” principle.

The Courts in Ramsay held “To force the courts to adopt, in relation to closely integrated situations, a step by step, dissecting, approach which the parties themselves may have negated, would be a denial rather than an affirmation of the true judicial process. In each case the facts must be established, and a legal analysis made: legislation cannot be required or even be desirable to enable the courts to arrive at a conclusion which corresponds with the parties’ own intentions.”

The ultimate question that the courts repeatedly ask in such circumstances is whether the relevant statutory provisions, construed purposively, were realistically applied to the transaction.

It may not be out of place to mention that the Irish Court as late as in December, 2011, in Revenue Commissioners vs O’Flynn Constructions & Others had an opportunity to deal with the extant subject. O’Donnell J noted that in Ramsay and Dawson, the courts took a novel approach on the issue of tax avoidance “without reversing or appearing to question the decision in Westminster case.” And that is the crux of the issue.

Alien country; different times
What is equally worrying is that a legal proposition held in an alien country when it was a colonial power has been extrapolated into interpretation of tax laws of a sovereign country in entirely different times, especially when it involves convoluted transactions routed through tax havens. It is in this connection, citing another decision by the Ireland Supreme Court in the case of McGrath vs McDermott, the same court refused to consider the judicial development in the common law of another country. This pronouncement is equally important for the “independent” development of jurisprudence in our country.

Even in India, judicial developments suggests that we were moving out of the Westminster Principle as exemplified by the McDowell case where the Supreme Court frowned on every scheme of tax avoidance. From then on, the courts both in India and abroad, as matter of principle looked through a transaction instead of merely looking at one. What is indeed worrying now is that The Vodafone judgment overturns the well-settled principle of looked through and revives, nay exhumes, the outdated principle of “Look At.”

Naturally, the issues relating to Vodafone are smaller order of smalls. At the root of the present consternation is the idea of “Looked At” embedded in the CBDT circular in the Azadi Bachao Andolan case, which the Supreme Court has heavily relied in the instant case. It is also submitted that the stand of the department is morally nonexistent against Vodafone, as long as Circular No 789 issued by the CBDT continues to occupy our statute books.

It may not be out of place to mention that the question uppermost in the minds of the courts was whether the sale of a single share of CGP – a company in Cayman Islands - and “shoved” into the entire deal at the proverbial eleventh hour consummated in Hutch becoming Vodafone in India. Why Cayman Islands? The answer to that question is obvious as Cayman Island is a tax haven. No wonder, by choosing Cayman Island as a structure, the deal sanctified the idea of “Double Non-Taxation.”

Holding – subsidiary relationship

There is another dimension central to the debate on hand. The judgment re-writes some fundamental assumptions in corporate laws. Introducing the theory of puppets in the context of relationship between a holding company and its subsidiaries, it concludes that the directors of the subsidiaries cannot be held to be mere “puppets” of a holding company.

The judgment further opines that subsidiaries of multinational companies “have great deal autonomy in the country concerned except where subsidiaries are created or used as sham.” The moot question is whether the Cayman Island structure was created for genuine purposes or was it a sham. This is not clear from the reading of the judgment. Nevertheless one hastens to add that one has never heard of genuine structures in tax havens.

In the process the Court has not fully reconciled the idea of directing mind principle in corporate law, the very definition of subsidiaries as enunciated by Companies Act, and its own “puppet theory.” It may not be out of place to mention that the transfer of a single share, several directors owing allegiance to Hutch in downstream companies resigned, and directors appointed by Vodafone assumed control.

It is also respectfully submitted that the idea of borrowing from the DTC (which is still in an embryonic stage) is pregnant with serious legal consequences. By that logic a proposal to abolish capital punishment in India could well be the arguments of convicts to escape the hangman’s noose!

Obviously, the ghosts of Vodafone will continue to haunt Indian business and government for a long time to come. There are some unanswered questions; some answers that require greater appreciation on the facts and circumstances of the case and some are perhaps ahead of our times. Whatever be it, one must concede it is the law of the land, for the Supreme Court is well and truly supreme, through not infallible.


The author is a Chennai-based chartered accountant. He can be contacted at mrv@mrv.net.in


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