New Delhi, March 20
The Supreme Court today rejected the government’s plea for a review of the SC verdict holding that Vodafone International Holding (VIH) need not pay Rs 11,000 crore towards capital gains tax for the purchase of Hutchison Whampoa Ltd’s Indian mobile business in 2007.

In the January 20 verdict, a three-member Bench headed by Chief Justice SH Kapadia had ruled that the Indian Income Tax Department did not have jurisdiction to levy tax on the deal struck overseas.

In its appeal, the government had contended that the SC had failed to appreciate that the deal was nothing but an artificial avoidance scheme and that the IT Department had the right to decide whether capital gains had been factually and legally assigned to a Mauritian entity or to a third party and whether the Mauritian company was a façade.

“The review petition is dismissed,” the SC said in an order today after the Bench, comprising the CJI and Justices KS Radhakrishnan and Swatanter Kumar, had considered the government plea. The review petition had been listed for consideration at 1.30 pm “through circulation” within the Judges’ chamber and not through arguments in the open court. The one-line order was placed on the SC website in the evening.

Even when its review plea was pending in the SC, the government has sought to nullify the SC verdict by inserting in the 2012-13 Budget an explanation in Section 2(14) pertaining to “Capital Asset” to treat “any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever” as a capital asset. Under the proposal, any sale of rights in relation to an Indian company, including rights of management or control would be taxable under the head capital gains.

Similar amendments are also proposed to the definition on transfer (Section 2(47)) by inserting an explanation with “retrospective effect” notwithstanding if the rights were held by any company incorporated outside India.

In the January 20 verdict, the CJI and Justice Swatanter Kumar had ruled that “the offshore transaction herein is a bonafide structured FDI investment into India which fell outside India’s territorial tax jurisdiction, hence not taxable,” pointing out that the deal had taken place in Cayman Islands.

In a separate but concurring verdict, Justice KS Radhakrishnan had said the capital gains tax slapped on the company amounted to “imposing capital punishment for capital investment since it lacks authority of law and, therefore, stands quashed.”

The SC ruling was expected to stimulate FDI flows into the country. The verdict itself clarified that “FDI flows towards location with a strong governance infrastructure which includes enactment of laws and how well the legal system works

“Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner.”