Fereshte Sethna: Vodafone’s Lawyer and Her Take on the Tax Case


February 8, 2012

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Fereshte Sethna was part of the legal team that represented Vodafone Group Plc during its successful appeal in the Indian Supreme Court of a government tax demand. The apex court’s ruling in favor of Vodafone earlier this month spared the British telecommunications giant of having to pay a tax bill of more than $2 billon on the deal it struck in 2007 with Hong Kong’s Hutchison Whampoa to enter India. The decision, which said India doesn’t have authority to tax the deal because it was between offshore entities – a Dutch subsidiary of Vodafone and Cayman Islands subsidiary of Hutch – laid down some important long-term precedents for Indian tax law and provided more clarity for potential foreign investors.

OB-RO732_ivodaf_DV_20120129235951Ms. Sethna answered some questions for Amol Sharma of India Real Time about the meaning and impact of the verdict:

IRT: What should other foreign companies outside of telecoms that are interested in India take away from the Supreme Court judgment?

Fereshte Sethna: The sanctity of a corporate structure created for business purposes by a foreign investor at the time of “entry” into India, through entities incorporated in countries which have a beneficial tax treaty with India, will not be liable to rejection by the Indian tax authorities, on the mere ground that the tax authorities are being deprived of revenue at the point of “exit.”

For those foreign investors who fall within the ambit of regulated sectors, and have thus secured clearances from the Foreign Investment Promotion Board (Ministry of Finance, Government of India), the bona fides of the corporate structure will not be liable to challenge by the Indian tax authorities.

Above all, the “rule of law” prevails in India, by virtue of an independent judiciary, which must signal a clear protection available to foreign investors, and fortify the choice of India as an attractive investment destination.

IRT: What should the Indian tax authorities take away from the judgment regarding their jurisdiction and powers?

FS: The Indian tax authorities have no “territorial jurisdiction” with respect to an overseas transaction between two foreign companies – involving the transfer of share capital of a foreign company, for which monies were paid and received overseas (in this case, Vodafone paid Hutchison) — notwithstanding the fact that down the corporate chain there may well lie assets situated in India.

The Indian tax authorities are not at liberty to dissect or “look through” a transaction for purposes of assailing commercial substance, but shall “look at” a transaction holistically. The Court held that the relevant parameters the tax authorities must consider with respect to the right of strategic investors to exit are: (i)   duration of time during which a holding structure existed; (ii)  duration of business operations in India; (iii)  the timing of an exit; (iv) the continuity of business on such exit; (v)  the generation of taxable revenue in India during the period of business operations in India.

To the extent that a corporate deal structure involves “round-tripping,” the Indian tax authorities would be at liberty to reject it. The burden of proof would lie squarely with the tax authorities to establish sham investments aimed at tax evasion.

IRT: Is Indian law, as interpreted by the decision, now in accordance with international tax practice? If not, where are the divergences?

FS: Indeed, the Vodafone tax case judgment squarely brings India in conformity with the international tax law position. Tax planning is legitimate, if within the framework of the law, whereas tax evasion through colorful devices and dubious subterfuge remains frowned upon. The Supreme Court, in reaching its conclusions, extensively analyzed diverse foreign judgments. India is now marching in step with the times.

IRT: What do you consider to be the most important single line in the judgment and why?

FS: “Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner” and “it also helps the tax administration in enforcing the provisions of the taxing laws…”

Foreign investors have taken a step in the direction of shedding the perception that prevailed until the Vodafone judgment that the Indian tax authorities are inclined to mulct them. After all, tax is a mere cost to be factored into the economics of any transaction.

IRT: What are the key tests established by the court of whether a deal has been structured solely to avoid tax?

FS: The “timing test,” in that if a corporate structure were put into place immediately prior to and in anticipation of a transaction involving an exit through a tax efficient jurisdiction, it may risk being classified as a “fiscal nullity.” In this case, the Hutchison telecom structure evolved starting from 1992 and the Hutchison Group entity which the Indian tax authorities classified as an “interloper” was incorporated with sound business purpose back in 1998. Those were key factors kept in perspective by the Court in returning its favorable verdict.

IRT Is there a danger the government could write a new tax law that effectively reverses the decision and re-instates the ability of tax authorities to tax these deals?

FS: Although theoretically possible, given that it would be a retrograde step, by virtue of the fact that it would be an extremely poor signal for the Indian government to send out to foreign investors globally, we would rule it out.