For last few years this has been coming into my mind but I am being too lazy to write it down. So, finally I thought to write about it...
As we know Vodafone Historical Tax dispute with the Indian Govt. Has been one of the most important cases involving billions of dollars in the history of India. Vodafone eventually won the case against the GoI in the International Court of Justice recently. India. Govt. Couldn’t have kept strong argument in her favour. This can have implications for other foreign corporates as well.
I am trying to look at how this entire episode could be related to the Foundational results in the Mathematical Logic which could possibly help the Indian Govt or any Govt in the world in not only this particular case but such cases in future which explore the seemingly loopholes in the system of law which leads to the loss of billions of dollars to the exchequer.
So, let’s us look at from the mathematical and scientific logic point of view to look at the case.
Basically, it’s the case of Capital Gain Tax. So the Sections which are applicable in this case are 2(14) dealing with Transfer of Capital and Gain and 9(1) dealing with Non-Resident Indians of the Assessee.
It was basically the transaction between two Non- Residents which eventually changed the ownership of the entity being situated in India virtually.
So, IT department asks the Assessee to pay the tax because the transaction has taken place and the capital gain is there as per the relevant Sections.
Vodafone as the assessee claims that there should not be liability of tax as the transaction has not taken place in India.
Hon’ble Supreme Court announced the judgement in the favour of Vodafone.
Post that There was enforced the Parliamentary amendment as explanatory clause and apply that in retrospective effect and collect tax. Then Vodafone knocked the door of International Court of Justice as the part of Investment Treaty between Netherlands & India as the company is registered there). The International Court ruled in the favoir of Vodafone based on the Equitable Investment Principles Clause as the Investment Treaty Clause.
So, let’s look at the entire episode from the Mathematical Logic Point of View.
There are two important points :
1) There was no need to bring in the extra clarification clause in retrospective effect which led to the violation of the Equitable Investment Treaty and Certainty of the law clause in the International Court of Justice.
It’s quite clear by the words and the logical and scientific sense of the existing Law that the transaction comes.under the tax liability. How ?
Even if the NRIs are Outside India, they have business connections liked to the asset situated inside India..If that’s not taken as the valid argument. Then in Physics why there is the concept of Relative Motion where if the frame of Reference itself changes,why is that considered a motion in Theory of Relativity logic ? Why is there concept of Centrifugal force ?
The analogy is either assets should have been transferred between the parties in India but that didn’t happen. The Parties lie outside the India. But the overall, the transfer has taken place by transferring the Shares of holding companies.
The point arises if this transfer of holding company Shares didn’t effectively lead to the transfer of subsidiary company situated in India for tax perspective then why the same should be considered for ownership purpose. Why the transferring of holding company share would effectively lead to subsidiary company Shares . Why this difference of structural relationship between holding and subsidiary companies for tax perspective and ownershjp perspective ?
If Vodafone intention is not the Hutch India, then if the CGH Company in Cayman Island ( the Holding Company of Hutch India) didn’t have Hutch India Subsidiary , would Vodafone have done this transaction ? If that was not the hidden intention then let CGH company sell Hutch India and then will Vodafone do the transaction ?
And further, if that was not the intention then why just after the transaction,there was brand name change by modifying Hutch India with Vodafone ?
These are some of the important questions to prove tha the hidden intention behind the transaction was Hutch India ownership takeover by Vodafone and it was just exploring the loopholes in the word of the law.
Any set of law of words would have hidden sense and words will have structural Limitations no matter how many times it it amended. Hence it must be analyzed from the sense of the law not words of the law to establish the equity and certainty !
Let’s say a Hypothetical scenaio that Assets are inside the India but Owners keep on transferring the ownership outside the India.
If I draw the Logic from Russell’s Paradox, it would state that If A set lies outside the Set B, then it would like inside the Set B. The relevance is that “Inside and Outside” are not so separable and relatively existing !
Here what once claims to be Outside logic of the NRI to avoid tax is eventually Inside because the Asset involved is lying inside the India. The famous Russell’s Paradox has deep significance and logic for the day to day logic and cases !
2) If there were made some changes, some changes must be there. Can any system of Law be Complete in itself . Godel Reference:
Fresh :
I would be raising some very important fundamental issues related to Law and the Case here.
It also raises question on the future of Laws.
Any Law is the Set of words.
And these words can have many different interpretations. Will any set of words be complete enough to capture all the hidden senses of the words ? Or if complete, will it remain consistent in first place ?
I am referring indirectly to one of the most important breakthroughs in the mathematical logic : Godel Incompleteness Results. It has deep relevance for other areas as well based on the logic e.g. Law, Society etc.
So, I ask some Open Questions:
How to capture all the interpretations emanating from the set of the words ? If not, can it not be misused always ?
Should not investigate the Logic to ascertain the interpretations ?
Let’s take the case of Vodafone Vs IT Deptt.
1961 IT Act Section 9(1) says that directly or indirectly through transfer of asset situated in India..
Logiclly what it intends to say that if a capital situated is transferred from one owner to another owner effectively, tax should be charged...The sense behind capital gain tax is not literally that asset should be transferred directly ...rather the sense is that the control of asset situated in India is transferred from one owner to the another
But If One just goes word by word that asset in India should , then it’s technically impossible to cover all the hidden interpretations of the Logic !
Or else it’s Contradictory/Inconsistent in itself is that how come one asset could be transferred by transferring something other....Then this Subsidiary logic equations should also not be technically Valid !!
Then there should be objection that why the underlying subsidiary Hutch India shares should be considered as transfer by transferring the holding company ??
If by transferring the Holding shares transfers the underlying shares of the Subsidiary using Subsidiary Structure logic /law then then the same transfer logic should be applied under Section 9(1)Income Tax Act as well ? Why this inconsistency and Contradiction ??
There is Logical Inconsistency in the System then!!
By Subsidiary Logic and assuming Internal Structure anything happening to Subsidiary or Holding should considered as the one !!
In one perspective, holding and subsidiary are considered one as internal , and in another perspective they are treated differently as external entities ..This is Inconsistency as per the Logic of Nature !!
One one hand, one law is considered the posible transfer of the underlying with
Vodafone says the this should be not taxable as the transaction between the two foreign entities and this is “INTERNAL” structuring of the Group...and no involvement of Indian assets.
But let’s understand carefully the sense of IT Act : What is the sense and logic of Section 9(i) for any Govt.
External (Outside) & Internal (Inside) are very paradoxical and relative. It depends on the Frame of Reference ! No absolute ae in Physics.
It’s like we are not transferring the Shares of Indian company...That means we are not keeping the Indian company in motion rather we transfer the holding company Shares i.e. observers only..
So, in Physics Laws of motion terms, Motion is created not by moving the body(Indian Asset Hutch India Share)rather Observers( CGP Cayman Company)!
Does that mean Assets can be transferred (in motion) either by transferring the asset directly or changing the reference frame itself ....
Analogy from Physics : Like say IT act talks about Force is applied if a Car moves ...But what Vodafone does that rather than moving the Car itself ,it moves the reference frame of observers only.. then it claims that as per IT act there is no motion ...But effectively motion has taken place by moving the observers (reference frames). So, as per the Newton’s Laws of Motion, if the Frame of Reference changes , that is also considered motion in the Theory of Relativity in Physics. Hence Force is applied.
Now the key Question is if Laws of Physics allows that, why not Laws of Tax ? Hence by Laws of Physics, Transfer of Indian Asset has taken place by transferring the Observers (Ref Frame itself)!!
So, if Cayman Company CGP was transferred ,does that not mean Hutch India(Indian Asset) was transferred effectively in Relative sense ?
Moreover, if we look at the Russell’s Paradox : Set A is inside B if Set A is outside B...This lies at the foundation of Logic & Formal System..So, Something is Internal/Inside if it is Outside/ External and Vice Versa !!
So, Internal & External are paradoxical as well !!
Infact how do we define Internal & External in Science (Physics & Nature) ? There should be uniformity if we define Internal (Newton’s Laws of Motion) . Internal Forces should cancel each other otherwise, it would cause external acceleration which is caused by only External Force on the System.So how can it be Internal by the Nature’s Logic .
Otherwise, let’s say the Hypothetical scenario : all the companies Unite to create The Universe Company . In that case evey transaction would be internal to its structure..Hence it should never be taxed ?? Is it NOT Contradictory in itself ?
Similarly, Can it be called Internal using the Nature’s Laws .? Possibly not .! The reason is there is no uniformity inside...Forces don’t cancel effectively. There is net External Change in the System.
Let’s say in a hypothetical scenarios Sovereignty wise India is External to Other Country. But If a company has subsidiary in many countries, it could claim “Internal” .
Should the definition of Internal & External not be consistent in the Tax context ?
Sovereign External- Internal and MNC External-Intenrla need to be Consistent as few countries are Tax Heaven and not Consistent in that sense ... And so the Validity of External and Internal need to be well defined ??
For that matter.
Logically let’s assume it’s not written law for a while..
If Value is derived from the Asset based in India, shouldnt it be taxed ?
If yes Vodafone should pay logically.
If Not, then does that mean by claiming it’s internal structuring and no Indian Asset is transactions took place ...So, by that logic and maintain the consistency,
Could Vodafone have down this transaction if Cayman company didn’t have Indian Asset ?
So, let’s ask Cayman Sell Indian assets to someone else and then ask Vodafone to do the transaction ? Will it do ? This is is to check the hidden intention .....
Or after selling why it should be allowed to change its Brand and Name visible in India subsequently if it doesn’t have any intention regarding owning the Indian Asset indirectly??
Second why an external foreign company should be allowed Indian assets then if they don’t consider Sovereign Externallity ? The system should be such that let’s say a Hypothetical company sets up subsidiary worldwide and then say it’s all Internal ..So, by that logic...Entire Universe is Internal !! So there should be No tax ..!!
It seems Law should be linked with Laws of Physics and Nature & Maths !! There seems to gap between the two..
I believe there is no need to going on Retrospective ammendment.It can be resolved wbu the original law only.
But anyway if International Court says there should be Equitable Investment Policy with Certainty...For that matter let me ask by going by the Laws of Nature...Do These Institutions not invest in Stock Market as they are highly uncertain ?? Even Nature has some Uncertainty..Remember Heisenberg Uncertainty Principles in Nature ??
What matters is that there should be sound Logic as Law can’t be Complete and can’t capture all the interpretations in words..No matter how many Amendments are amde, there would always remain some to be covered...And this way, if corporates keep on exploiting such fundamental Loopholes dueto structural limitations of the Language, is it not the source of big future loss to the Country ?
Then there should also be proper guidelines in Law of Corporates try to take benefit of such possible Loopholes in the future ?? How to Protect the Country from such Foundational Loopholes which would always exist as long as it’s formal ???
