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Will Revenue Make Most of Vodafone Loss?

Published on Sat, Jan 28,2012 | 11:16, Updated at Sat, Jan 28 at 11:40Source : CNBC-TV18 |   Watch Video :

Payaswini has been talking to tax experts to better understand how Revenue hopes to use the Vodafone loss in its favor. Here is the story

Girsh Dave, Former IT Commissioner (Mumbai) to The Firm on 21st Jan, 2012
“Law has been laid down by Lord Justices and that is the law of the land and we should respect it. But some of the guidelines which have been made in this judgment may work in favor of the revenue as well.”

Needless to say, revenue will be quick to pick up several of these guidelines from the SC’s Vodafone order.

One such is likely to be Justice Radhakrishnan’s commentary on the Mauritius route where he says if a Mauritius company has been interposed solely to avoid tax, its open to revenue to look at the transaction even if the entity enjoys a tax residency certificate- an interpretation that will help revenue to guard itself against SC’s decision in Azadi Bacho Andolan that held Tax Residency Certificate to be a conclusive proof of residency.

Mukesh Butani
Managing Partner, BMR Advisors
“As a result of the manner in which Justice Radhakrishnan has written the order- to me it seems, it leaves some scope for the tax administration not to question the validity of tax residency certificate but to look into it that with a valid TRC, has the taxpayer still indulged in a tax avoidance scheme.”

Girish Gokhale
President Legal & Group General Counsel
JSW Steel
“Supposing a structure- a particular vehicle has been created on the eve of the transaction so as the tax benefit can be claimed- however well drafted it may be- Vodafone judgment's benefit may not be available to that purpose.”

Sudhir Kapadia
National Tax Leader, E&Y
“In a situation where you find that, frankly, there have been a series of transactions entered into almost in an off-the-shelf manner- so purchased losses, purchased transactions, create cancellations to an earlier transaction which has given you profits- in fact these are the ones which are enumerated in the English precedence which has been cited by the SC in Vodafone- and those are the ones that can be successfully challenged.”

Another commentary in the order that could bode well for the revenue are the principles laid down by the apex court to test the purpose of a transaction- these being- participation in investment, holding structure’s existence period, period of business operations, generation of taxable revenues in India, timing of exit and continuity of business on such exit

Mukesh Butani
Managing Partner, BMR Advisors
“As a guidance, in the future, for the tax administration – they have laid down these 6-7 criteria. So, I have no doubt in my mind that in future the tax administration would test the genuineness of a structure and the commercial and business purpose test in light of these guidelines – so taxpayers would have to be prepared to meet the text of these conditions that have been laid down.”

Sudhir Kapadia
National Tax Leader, E&Y
“Take a provision like GAAR – the difficulty there would be that are we going to say that we will apply GAAR at the time of exit and if we do, then would some of the pointers of the SC, for eg, flux of time- the fact that a structure is in place, steady for so many years, not really brought in to avoid taxes in the first place- would the taxpayers be able to rely on those principles of SC that even after the GAAR comes in. So if there has been no interposition of an intermediary company after bringing in the GAAR provision, then we are still entitled to the consequence of not having to pay tax- that will be an interesting dimension to this.”

When laying down these principles to test abuse, the Supreme Court has said that the onus to establish this abuse lies on the tax department. But the general anti avoidance provisions under the Direct Taxes Code envisages it differently. It places the burden of proof on the taxpayer.

But an interpretation by the Supreme Court that may hurt revenue is the one of Section 195. Section 195 says “Any person responsible for paying to a non-resident…. shall, at the time of credit of such income …deduct income-tax thereon at the rates in force…”. The apex court says that this Section is applicable only when the transaction is liable to tax in India. Justice Radhakrishnan, in his order, has further elaborated on it to say that Section 195 is applicable only if payments are made by a resident to a non-resident and not between two non-residents. 

Mukesh Butani
Managing Partner, BMR Advisors
“That’s a liberal interpretation because the view that is prevailing is that whether you are a resident or a non-resident, whether as a non-resident you have or you do not have business presence in India- withholding tax obligations will apply. Keeping that practice in mind, it seems to me that this part of the judgment is a liberal interpretation of law.”

Girish Gokhale
President Legal & Group General Counsel
JSW Steel
“Revenue authority has stated or codified the law and in case of an ambiguity, the cardinal principle is that the benefit of it has to go to the assessee - probably that might have weighed on the mind of the SC.”

Sudhir Kapadia
National Tax Leader, E&Y
“I think it is a fair assumption that the revenue will try and see in what ways Sec 195 needs to strengthened further if they believe that the tax base has to be protected by ensuring that non-residents continue to have an obligation to withhold tax even in such circumstances- the challenge, as I said, would be how do you enforce it in a situation where there is absolutely no presence in India.”

Several of these interpretations by the apex court open a window for the tax department to better equip themselves when going after cross border transactions in future. The CBDT has reportedly formed a 10 member Committee to study the Vodafone order. The findings may lead to policy changes in the upcoming budget- changes that are likely empower revenue to not let such cases meet the same fate as Vodafone has.

In Mumbai, Payaswini Upadhyay

 
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