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Vodafone Calling — Time To Rejoice

23 January, 2012

Finally the Supreme Court (SC) verdict is out and has hailed peace for M&A deals and also corporate restructuring exercises. The decision has reinstated the faith in the Indian Judiciary and hopefully the global investors will now be more optimistic about India!

Some of theheadlines of the ruling are:

Not applicabilityof withholding tax provisions to offshore transactions 

Not applicability of representative assessment of buyers in absence of absent a nexus with India.

The question of providing “look through” in the statute or in the treaty is a matter of policy. It is to be expressly provided for in the statute or in the treaty. 

Every strategic foreign direct investment coming to India, as an investment destination, should be seen in a holistic manner. 

Validity of Tax Residency Certificate under India-Mauritius tax treaty

Apart from the above the SC, in this judgment has very sensitively discussed many soft aspects that have a direct impact on the macro and micro economics of a developing country like India. 

The judgment has an extensive discussion on a number of economic aspects like importance of FDI in a developing country like India,relevance of certainty in tax policy of a country in its economic interest, corporate governance, legal sanctity of national and international corporate structures.

The SC has also humbly observed that the Hutch Group had contributed an amount of Rs. 20,242 crores towards direct and indirect taxeson its business operations in India.

It is accepted that a corporate structure is primarily created for business and commercial purposes and multi-national companies who make offshore investments always aim at better returns to the shareholders and the progress of their companies. SC order states “On incorporation, the corporate property belongs to the company and members have no direct proprietary rights to it but merely to their “shares” in the undertaking and these shares constitute items of property which are freely transferable in the absence of any express provision to the contrary.”

The SC has also noted:

Corporate structure created for genuine business purposes are those which are generally created or acquired at the time when investment is being made; or further investments are being made; or the time when the Group is undergoing financial or other overall restructuring; or when operations, such as consolidation, are carried out. In transnational investments, the use of a tax neutral and investor-friendly countries to establish SPV is motivated by the need to create a tax efficient structure to eliminate double taxation wherever possible and also plan their activities attracting no or lesser tax so as to give maximum benefit to the investors. Such factors could go increating a corporate structure and also restructuring.

A corporate structure may also have an exit route,especially when investment is overseas. Burden should be on the Revenue to show that the incorporation, consolidation, restructuring etc. has been effected to achieve a fraudulent, dishonest purpose, so as to defeat the law.

Tax avoidance is a problem faced by almost all countries following civil and common law systems and all share the common broad aim that is to combat it. Many countries are taking various legislative measures to increase the scrutiny of transactions conducted by non-resident enterprises. 

The proposed Direct Tax Code Bill (DTC) 2010, envisages creation of an economically efficient, effective direct tax system, proposing GAAR. GAAR intends to prevent tax avoidance, what is inequitable and undesirable. Necessity to take effective legislative measures has been felt in this country, but we always lag behind because our priorities are different. Lack of proper regulatory laws, leads to uncertainty and passing inconsistent orders by Courts, Tribunals and other forums create difficulties for tax payers.


There is no doubt that this landmark ruling will hugely impact Global M&A /PE deals. The judgement has substantially been successful in removing the uncertainty which prevailed hitherto on such transactions with regard to Indian tax. It will also create a major impact on the tax regulators of other countries who were all looking upto this issue while applying the same in their jurisdiction. 

This ruling will create an impetus on the deal flow and should be the cause of improvement in the deal flow which is otherwise drying up. This ruling is an apt reply from India to the World with a message that judiciary continues to be very well respected. It’s a good start to 2012 and this should create momentum as we move ahead in the year.Now the only hope is that the Indian Government should not overturn this landmark and progressive decision of the SC by amending the Legislature!But for the moment it’s time to rejoice!

(Anil Talreja –Partner, Urmi Rambhia – Deputy Manager, are from Deloitte Haskins & Sells. Views expressed are personal.) 

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Vodafone Calling — Time To Rejoice

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