The war for supremacy in the Vodafone transfer pricing controversy has thrown fascinating insights into the brilliant strategies adopted by two of the finest legal minds in the Country, Harish Salve and Mohan Parasaran. Mohan Parasaran has drawn first blood but Harish Salve has his foot firmly in the door. Will Mohan be able to dislodge him? At stake is Rs. 1400 crore
Mohan Parasaran, the wily Solicitor General, has the unenviable job of defending the indefensible. He knows that the weakest link in the department’s case is the merits. On the face of it, the department’s case is unbelievable. Vodafone allotted shares to its holding company as per the FDI norms at a premium of Rs. 8591 per share. The TPO claims that Vodafone should have allotted shares at a premium of Rs. 53,775 per share and that the difference (totaling Rs. 1308 crore) is assessable as income in Vodafone’s hands. How? When a company allots shares at a premium is the premium chargeable to tax as income in the issuer’s hands?
To add insult to injury, the TPO claims further that the said notional premium has to be treated as a deemed loan by Vodafone to its holding company on which it ought to have charged interest at 13.5% p.a. amounting to Rs. 88 crore.
The result of this fantasy: Vodafone is staring at a tax bill on a mammoth addition of about Rs. 1400 crore.
Now, this is where the difference between a skilled lawyer and an ordinary lawyer emerges and you can see why the top lawyers get paid such heavy fees. Faced with relentless attack from Harish Salve, an ordinary lawyer for the department would have defended the merits at the top of his voice, destroying the credibility of his case.
Mohan Parasaran knew that if he fell into the trap, Harish Salve would have torn him to pieces and made mincemeat out of him. The Judges would be forced to rule on the merits, shutting the door for the department forever.
Instead, Mohan Parasaran kept icy cool, maintained a steadfast silence and refused to be drawn into the merits despite repeated goading from Harish Salve and the Bench. Salve taunted him by saying that he was shying away from the merits because he knew the department had no case on merits. Parasaran’s silence also infuriated the Judges and they caustically observed that the department was duty bound to indicate at least a “prima facie, probable or plausible defence” “in a nutshell” and that the department could not “remain silent on merits” and require the assessee to “go through the labyrinth of appeals and revisions, hoping to tire the Petitioner out in terms of time, energy and costs”.
However, one can sense the Judges’ helplessness in the matter because when faced with Parasaran’s adamant stand, instead of taking action, they advised the department to “keep this caution in mind for future”, whatever that means.
So, it is a testimony to Mohan Parasaran’s arguing skill that he was able to get away by maintaining total silence, without making out even a prima facie case in favour of the department.
Harish Salve, on his part, knew that his Achilles heal was the sword of alternate remedy. His client had already filed objections before the DRP and in a similar matter of Vodafone itself, he had lost in Court.
To overcome the handicap, Harish Salve unleashed a barrage of innovative arguments.
First, he attacked the credibility of the DRP, pointing out that it comprised of the Director of Income-tax (Transfer Pricing), the worthy who probably thought up the fantastic addition in the first place. “Can one expect a fair hearing from such a biased body”, Salve thundered, his rich baritone booming across the court room.
However, Parasaran neutralized the point by pointing out that the DRP was not an appellate body but was merely finalizing the assessment. It was not expected to show great judicial impartiality. Also, the worthy who was on the Panel was not the same worthy who was instructing the TPO. “So, how can there be any bias” Parasaran asked in righteous indignation, with an expression of pain on his face, at the unjust aspersions cast on his worthy client.
Second, Harish Salve played the “Department-is-ruining-the-Indian-economy-with-its-insane-additions” card. This card had been played to great success in the Vodafone share transfer issue (341 ITR 1) and it left such a deep impression that Chief Justice Kapadia, even after his retirement, defended the verdict publicly on the ground that it had saved thousands of jobs.
However, it met with limited success in this matter because the Judges were probably wary of stepping out of the legal arena.
Harish Salve then played the emotional card, drawing support from his mentor, Nani Palkhivala. Nani Palkhivala was a master of rhetoric and drama. He mesmerized his audience, in Court and outside, with his out-of-the-box arguments which appealed to their finer senses. “The Government has no right to cause misery and harassment to the taxpayer and the gnawing feeling that he is made the victim of palpable injustice” Harish Salve pleaded, his voice choked with emotion at the great distress that the department had caused his client.
That touched a chord with the Judges though they did nothing more than express the pious hope that in future the department would be more sensitive to the needs of the assessee and not treat it as an adversary. That is like telling a starving tiger it should henceforth eat only grass.
At the end of the day, it must be said that Mohan Parasaran did outwit Harish Salve even if it was by the simple expedient of maintaining complete radio silence over the merits. The Court did pass strictures against the department but this is mere lip-service and has as much effect as water has on a duck’s back.
However, all is not lost for Harish Salve either. He managed to extract an assurance from the Court that if the DRP threw him out on the preliminary issue of jurisdiction, he would be entitled to rush back to the Court despite alternate remedy before the ITAT. Of course, the Bench couched the right by saying that Salve had to show that the DRP’s decision was “patently illegal”, leaving some scope for Parasaran to manoeuvre and wriggle out.
So, for the moment, Mohan Parasaran has won the battle. But will he win the War? Watch this space!
This is called ‘Advocacy’.
When going gets tough the tough gets going.
Fantastic…. A New era has begun… Not only tax officers, but also their Advocates are “Silent” on “Merits”…. Welcome to India….
It is a good judgement by the Bombay High court. The judgement can be welcomed by all the corporates.
Advocacy is the art of argument, a must read for new to the profession.
But really, can we, as a Nation, afford to lose so much of tax revenue because the corporate advocate is good?
There are many colourable schemes devised in the name of tax planning.
Both are chips of great blocks with magnificent back ground. May the good advocate win. Lot need to be learnt by their individual style and art of advocacy.
While the Court may allow the advocates to flourish and reach the pinnacle of advocacy, what happens to Vodafone, if the DRP which Mr. Mohan Parasaran concedes to be part of assessment process, chooses to confirm the farfetched TPO order. The demand crystallizes and Vodafone suffers.
The Income tax Act, 1961 should be amended to provide for DRP to treat such farfetched additions as protective until the High Court decides in favour of the department and till such time the demand to be kept in abeyance.
If such legislation is facilitated, the taxpayer would not be tempted to approach the Court.
Likewise the assessees too need not be compelled to deal with merits unless the preliminary / technical issues are dealt with by the authorities / ITAT
Truth always prevails!
advocacy/presentation/ dramatics of arguments are all secondary. The matter should be ultimately decided on merits only.
Vodafone and Glaxo smithkline are instrumental in major amendment in the Income tax Act in the last two years. This time again ,I am sure, an amendment to treat such transaction as International transaction and subjected to Arms length price and further amendment in Section 56(2)(viib).
Brilliant article written on brilliant people!! Truly inspiring!
More such articles please
Argument without words in defence..
Advocacy may be art of argument, But it should be for welfare of society and nation.
wonderfully exhibiting one of the best legal war