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The lawyer who lost then won $2bn: Vodafone GC Andre Jerome’s insider account of taxes, the value of Salve & dark days

Jerome: Feeling a little horse
Jerome: Feeling a little horse
Exclusive: “I don’t wish it on my worst enemy, and it’s not just a question of wanting to keep the record for myself,” jokes Andre Jerome about whether he’s ever likely to see a comparable case.

It is surprising that Jerome still has a sense of humour about it - as general counsel (GC) of Vodafone India Services Private Limited, he was literally at the beginning, middle and end of the storm surrounding its four-year court battle with the tax man.

He now tells Legally India the in-house story and the dozens of companies, lawyers and advocates that were swept up in the aftermath of one of India’s costliest and most important tax cases of all time.

Long distance calls

Jerome graduated with an LLB from Université de Montréal in his native Quebec in 1993 and worked in the regulatory team at Canadian telecoms company Telus. In 2001 he upped sticks to the Czech Republic, where he became general counsel of regional mobile phone operator Oskar Mobil.

In 2005 Jerome met Vodafone – a company nearing saturation point of its global appetites for expansion – as the telecoms giant bought Oskar. Jerome remained to oversee Oskar’s assimilation into the Vodafone group.

In 2007 when Vodafone bought Hutch in India, Jerome was called in to repeat the exercise and to head up the legal needs of Vodafone Essar Limited (now Vodafone India Limited). In 2010, he became general counsel of Vodafone India – the global Vodafone Group’s outsourced service centre.

Jerome says his choice was easy because India was a fascinating place that was growing fast. His unfortunate – or perfect – timing ensured that his posting would be anything but routine.

Landing in India on 1 August 2007, one week later he and the company received their first show cause notice from the tax department. Jerome describes its content as “Welcome! You owe us 2 billion dollars”.

Serious matters

“I wouldn’t say we didn’t take the matter seriously. But it was apparent to us that in the show cause the tax authorities were making a couple of assumptions that were not factually correct,” Jerome tells Legally India.

In particular, he says, the department claimed that Vodafone had bought the shares of Hutchison Essar Limited. In reality the shares of the Cayman Island holding company was bought by Vodafone. “The transaction took place entirely outside of India, between two non-residents, on the shares of another non-resident, so it was clear to us that this was not taxable in India.”

“So in my mind, as soon as the tax authorities would be presented with the correct facts, it would all go and we would be friends again and there would be no issues.”

Things played out differently.

No unanimous doubt

The legal case throughout was unambiguous, says Jerome, despite media and observers often painting the dispute as a fifty-fifty matter that could go either way.

“In reality these transactions had never been taxed in India for the last 50 years and are not taxable anywhere else in the world. From a pure legal perspective there was no case – there was never any case,” he insists.

There was “absolutely no doubt at the time”, he says, and a number of law and tax firms, both big and small, were involved in the original acquisition and the legal advice was unanimous. “All of them, without exception, advised that this transaction was not taxable in India.”

“When the tax authorities started making noise, Vodafone went back to a number of other advisors. Even then, everyone came back in saying that this transaction could not be taxed in India. So it was not unreasonable for Vodafone to rely on this advice.”

But Vodafone’s $11bn acquisition, one of the largest M&A’s at the time, must have been an attractive test case for the department which had nothing to lose, according to Jerome.

“There were so many zeros,” he says.

Casting thousands

Fazelbhoy: Taxpert
Fazelbhoy: Taxpert

“All throughout the proceedings, there were a cast of thousands involved at different levels, providing various inputs, research, etc,” notes Jerome. “We were a bit surprised at how aggressively this was being pursued and wanted to ensure we had the best advice and support available, checking and double-checking everything.”

In September 2007, Vodafone International Holdings BV, the Dutch holding company, was also served with a show-cause notice from India. Vodafone drafted in Aliff Fazelbhoy, Mumbai partner and tax expert at ALMT Legal, and Dinesh Kanabar, who was then executive director in tax at PricewaterhouseCoopers (PwC) but joined KPMG in late 2009 after the Satyam scandal rocked the firm.

Vodafone quickly went into the offensive in India. In October 2007, Jerome instructed senior counsel Rafiq Dada and filed a writ petition in the Bombay High Court, challenging the jurisdiction of the Income Tax Department to have issue its show cause notice. The Dutch Vodafone company also filed a writ.

Senior counsel Iqbal Chagla and advocate Percy Pardiwala – now also a senior – entered the game at that point in the Bombay High Court, alongside senior advocate and living tax legend Dinesh Vyas – author of seminal tax bible The Law and Practice of Income Tax.

Despite the fire power, the Bombay High Court held in December 2008 that Vodafone’s deal was liable to tax, prima facie.

Dark days

“It was a complete shock frankly,” recalls Jerome. “Throughout the duration of the hearing it appeared that the judges, the bench, understood what the issues were, understood the arguments.”

The criticism then started rolling in domestically – such as picking on Vodafone’s strategy and the advisors it chose - and, “as they should”, says Jerome, some Vodafone managers in the UK too started asking questions without a view of the daily ground realities in India.

“It was a very dark moment for the team responsible for the litigation,” Jerome says, though he admits that partly this was self-induced. “After this defeat at the Bombay High Court there was a lot of introspection from the team itself. ‘Did we do the right thing? Was there anything that we would have done differently?’”

And his golf game suffered too. “I remember playing golf at Willingdon [Sports Club in Mumbai and a friend] started introducing me to people as the guy who had lost $2bn for Vodafone.”

20-20 hindsight

“I remember the CEO of the Indian business at the time, Asim Ghosh, who had said that victory had many parents, but defeat was an orphan,” recollects Jerome. “This is exactly how I felt at the time.”

Vodafone soldiered on and filed a special leave petition (SLP) in the Supreme Court to challenge the Bombay judgment. Senior counsel Fali Nariman appeared.

“Again we kind of had a lot of hopes, but one of the things that was really frustrating was the complete inability to have any certainty over how the process worked. Despite having the best advisors, if we asked three people what they think would happen next, we would get five different opinions, and none of them turned out to be right.

“For example, at the Supreme Court, every single advisor – including Nariman himself who is regarded as legal luminary in India – said don’t worry about it, your leave for appeal is going to be granted by the Supreme Court.”

Jerome, on a darker day
Jerome, on a darker day

Of course, it wasn’t. The Supreme Court sent Vodafone back to tax department to make its assessment, but Justice SB Sinha - a judge whose “intellect and fairness” Jerome says he respects highly – gave Vodafone an automatic right to appeal again.

A big surprise, but “not a bad outcome”, according to Jerome; he believed it showed the court’s reluctance to decide the case without having sufficient background facts.

Square one

Another long process started then. For nine months, Vodafone sent thousands of pages requested by the Income Tax Department. The department, of course, came back with a 700-page order saying that it had jurisdiction and Vodafone was taxable, explains Jerome. “We had no illusions that we were going to prevail before the assessing officer himself.”

And so, in early 2009, Vodafone returned to the Bombay High Court, at which point Jerome started working with senior counsel Harish Salve.

But despite hopes in the Vodafone camp increasing, the Bombay High Court was unsympathetic and in September 2010 Justice Chandrachud ordered Vodafone to pay up.

Meanwhile, behind the scenes, a then fairly low-key litigation firm ploughed away. Jerome went for Dutt Menon Dunmorrsett (DMD) partners Anuradha Dutt and Fereshte Sethna who provided “amazing support”.

White label good

DMD were not well-known, agrees Jerome. “More than the brand name, what was more important was the individuals and the talent.”

In this case, DMD was backed by a reference from PwC, which had worked together on several other high-profile tax cases.

Eschewing brand is a philosophy he has no problem with. “I’ve used some of these big names as well but always because of a particular person. But the next day you would get someone else in a particular firm and you would not receive the same level of support – there are lots of issues around consistency.”

In 2007, for example, he chose S&R Associates – then a two-year-young start-up – and instructed it in commercial, corporate and litigation work, including Vodafone India’s largest IT outsourcing agreement and its Indus Towers JV. Jerome says that S&R did a terrific job.

“I found talent there, with an attitude and perspective that gives a lot of confidence to foreign investors, and a lot of these people have worked or studied abroad and are aware of the expectation.”

Big Law marketing

Of course, those brand names are usually not known outside of India. “When we started doing major deals/transaction in India, the reaction from Vodafone was initially, ‘We need to go with the big firms’. Slowly I introduced some of these less well-known firms – high-quality work, absolutely comparable work, but at a lower cost – and that changed a lot of people’s mentality after that.

“For other people it was more of a learning curve - for me, who had worked in emerging markets for the last 10, 11 years, perhaps I was more used to it.”

But sometimes working with larger, international firms is a must, he cautions, such as when governance issues require having top brand names sign off or multi-jurisdictional advice is required. “But for the general work and getting stuff done, that’s never been my first reaction that we absolutely must work with the largest. And Vodafone has demonstrated that in the last several years.”

Ultimately, the law firm brand or size proved less vital, but it was an issue when it came to the choice of senior counsel, he says.

“It was very important that, considering the stakes, we got the best counsel possible.”

The Harish factor

Moments before the SC verdict, Salve (l), and IT dep't senior counsel Rohinton Nariman talk in the corridors
Moments before the SC verdict, Salve (l), and IT dep't senior counsel Rohinton Nariman talk in the corridors

So is Harish Salve really the best in India?

“I wouldn’t want to get into a debate on if he is,” laughs Jerome, “but after Friday I think he’s the best in the world.

“This being said, I think he’s widely recognised. Certainly, if he’s not the best, I think there is a consensus in India that he’s amongst the best three or five, and perhaps even more so in tax matters particularly, where he argues the majority of the big tax matters in the Supreme Court.

“When you combine all of that, it wouldn’t be too contentious to say that he is probably the best man for the job.”

Is Salve probably also the most expensive?

“Yes,” he says bluntly. “Salve is quite expensive, but when you win a $5bn case you say it doesn’t really matter.”

“As a publicly listed company, there is no way a company like Vodafone could say, ‘We didn’t give it all that we could’. You can’t lose a case like this and say, ‘Well, at least we saved a bit of money on advisors’.”

But if you had lost the case, he then muses, you would probably have a different view.

“At the end of the day in your role as GC, you’re trying to manage your litigation and there’s a cost component… But remember, at the early days we kind of underestimated the impact.”

The human cost

Although Jerome declined to confirm the total advisors’ fees, he says that the total budget for the case was “exceeded many times”.

Salve’s fees alone can only be guessed at. The Supreme Court gossip mill had rumoured the senior counsel to have been on more than Rs 30 lakh per day fighting in the Reliance Industries v Reliance Natural Resources KG basin dispute almost two years ago. In Vodafone, the Supreme Court presided for almost 30 days, and that takes no account of preparation, Bombay High Court and other work.

“In this case it was Vodafone, which had the resources to do it, but in another case a lot of the companies are facing a kind of a similar situation and would have no chance in hell to expend the kind of resources they would have to in defending this case without suffering irreparable harm [or bankruptcy],” claims Jerome. “So a lot of them just give up.”

The Revenue, on the other hand, has no cost and no consequences one way or another - a situation Jerome likens to David against Goliath in most cases.

“There is a tremendous cost to India for having aggressive behaviour like this, not only what you pay to advisors but the energy that you expend, and not focusing on working, on investing and growing the business and the market in India, in addition to the uncertainty that this creates, not only for the company but for many potential investors.”

Even within Vodafone itself, every time the question would come of whether the company should invest in a new project or initiative, some would ask whether in light of the tax case, that was the right thing to do, recalls Jerome. “And fair enough, it is the right question to ask.”

Posting goals

The Supreme Court: Ends games
The Supreme Court: Ends games

Salve, DMD and Jerome won the case resoundingly in the Supreme Court on 20 January 2012.

“I have been hearing a lot of things [that because of the judgment] FDI confidence will be restored,” Jerome tells Legally India. “And it is absolutely true that this judgment is not only a win for Vodafone, but a win for the judicial system and India as a whole, where the rule of law prevails.”

Jerome has no problem about the government potentially reforming tax laws, introducing the direct tax code (DTC) or other moves to draw such deals into the tax net in future. The only issue he has, he says, is if the government changed “the goal posts in the middle of the game” by retrospective legislation.

Court policy

Jerome says he was pleased that the Supreme Court had apparently also considered public policy.

“In his judgment, the Chief Justice [Kapadia] I think reiterated the importance of FDI in India and the importance of having a clear and consistent legal framework… And [he] may have taken a few shots at the way the tax authority has done things.

“Justice Radhakrishnan went further in his concurrent judgment [and said], ‘It is like imposing capital punishment on capital investment’ – a very bold statement.”

Jerome dismisses the criticism of a few commentators that it is not the Supreme Court’s job to make policy, or even to take it into account. “I agree it’s not its job, but the decision was based on legal principles,” he argues. “And it’s good to have the apex court take India’s best interest in consideration, particularly when the feeling is that not many others are doing it.”

GC of small things

Kapadia’s judgment was clearly one of his career highlights, says Jerome, but he doesn’t expect that he’ll have to retire tomorrow because nothing will surpass it. He is still waiting for the “next big thing”.

Last October, the tax authorities started new transfer pricing proceedings against Vodafone India, looking for a transfer pricing adjustment of Rs 8,500 crores ($1.72bn).

“Ironically,” notes Jerome, “I refer to it as the small case.”

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