Vodafone Tax Case

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Vodafone Tax Case

- By Rohit Jain [email protected]


The tax dispute between – the Indian Tax Authorities; and – Vodafone

in connection with taxability of the $ 11.2 billion HUTCH-VODAFONE DEAL is one of the biggest controversies in Indian history.

The quantum of tax demand by the Indian Revenue Authorities in this particular case was aroundR s . 11 , 0 0 0 c ro re p lu s i n t e re s t .

Why this case study is so important???


First let us understand Some Basic Terms

• Merger – A merger involves the mutual decision of two companies to combine and become one entity. Eg. A + B = AB

• Acquisition – Acquisition is purchase of one company by another in which no new company is formed. Eg. A + B = A

• Merger is like two persons getting married.

• Acquisition is like an animal eats any other.


What does Tax Heaven Mean?

A tax heaven is a state, country or territory where certain taxes are levied at a low rates or not at all.

Wikipedia

World’s Top 10 Tax Heaven Countries

• Switzerland• Cayman Islands• Luxembourg• Hong Kong• USA

• Singapore• Jersey• Japan• Germany• Bahrain

TheRichest.Com


Companies Involved in Transaction

• HTIL (Hutchison Telecommunications International Limited)– Situated in Hong Kong – Holding 100% Shares in CGP Investments Holdings Ltd

• CGP (CGP Investments Holdings Limited)– Situated in Cayman Island, Mauritius (a tax haven country)– Holding 67% Shares in HEL

• HEL (Hutch Essar Limited) – Situated in India– Formed by Merger of HTIL and Essar Group

• VIH (Vodafone International Holdings)– Situated at Netherland– Subsidiary of Vodafone Group Plc


The Deal – A Diagrammatic View

HTIL

VELHEL

VIH CGP

Sold 100% holding of CGP to VIH

turned to

Vodafone Essar Limited


What is so interesting here?CGP is a dummy company

CGP is situated in Cayman Islands, which is a tax heaven.

VIH wanted to acquire HEL.

To save Tax, VIH opted to acquire CGP, holding Company of HEL.

Now VIH is neither liable to pay tax - in India because they have made no transaction in Indianor - in Mauritius because it’s a tax heaven.

Conclusion: Vodafone acquires Hutch in India with Nil Tax Liability.


Indian Revenue Authorities’ Opinion

CGP was created to

take benefits of Tax

Exemption.

Concept of

Substance Over Form

Transaction was to transfer Rights

in

HEL VELto

The Indian Revenue Authorities alleged that

VIH, had failed to Deduct Tax on the

payment of consideration made to

HTIL.

Hence, sought to assess tax in its hand as a taxpayer in default and it issued a

notice to Vodafone.


Vodafone petition to HC and SC

Instead of responding to the Notice of Indian Revenue Authorities, VIH filed a writ petition to the Honourable Bombay High Court challenging jurisdiction of Income Tax Department.

The Honourable Bombay High Court upheld the matter in favour of Indian Revenue Authorities.

VIH filed Special Leave Petition (SLP) before the Honourable Supreme Court of India. The Supreme Court disposed the case with a direction to Tax Authorities to decide the preliminary issue of jurisdiction.

December 2008

January 2009


Decision by Indian Tax Authorities and HC

After going through the terms of Share Purchase Agreement and other documents, it can be interpreted that the intention

of the parties was ultimately to transfer the controlling interest in HEL which was situated in India.

Further, HTIL had extinguished its right of control over HEL and extinguishment of “Rights and Entitlements” constituted as

“Capital Assets”.

CGP was a mere holding company and was not engaged into any business in Cayman Islands, thus, the situs of shares

existed where the “underlying assets” i.e. in India.

The Tax Authorities passed an order under section 201 holding that they had jurisdiction to proceed against Vodafone for

failure to deduct tax. May 2010


Vodafone Petition to HC and SC (II)

Vodafone filed a writ petition to the Bombay High Court challenging the order of Income Tax Authorities.

The Bombay High Court dismissed Vodafone’s writ petition against the order of the Tax Authorities.

Vodafone filed Special Leave Petition (SLP) before the Honourable Supreme Court of India. The Supreme Court admitted the SLP and directed Vodafone to deposit Rs. 2,500 crore and provide a bank guarantee for the balance Rs. 8,500 crore.

November 2010

September 2010


The Supreme Court’s Decision

The Indian Revenue Authorities had no jurisdiction to tax the foreign transactions, as sale of shares was in Cayman Island.

Transfer of shares in CGP doesn’t amount to transfer of Capital Asset situated in India, as per Section 9(1)(i).

The transfer of “Rights and Entitlements” (Controlling Interest) is not covered in Definition of “Capital Assets” under section 2(14).

As Capital Asset is not taxable in India, so there is no question of Deducting Tax at Source under section 195(1).

The Supreme Court reversed the decision of Bombay High Court.January 2012


Retrospective Amendments in Tax Law

Certain Retrospective Amendments were made in Tax Law by Finance Act 2012 to nullify the judgment of the Supreme Court.

Section 9(1)(i)Income Deemed to

Accrued or arise in India

Section 2(47)Definition of Transfer

Section 2(14)Definition of Capital Assets


Shares of CGP were registered outside India.

But the shares derive its value substantially from the asset

located in India.

SECTION 9(1)(i)

All incomes accrued or arise, whether directly or indirectly through transfer of a “Capital Asset” situated in India.

Explanation for Capital Assets:A Capital Asset being any share in any Entity (whether registered outside India) deemed to be situated in India,

if the share derives its value substantially from the asset located in India.

Applicable w.e.f April 1, 1961

Co-relate with case


Explanation to SECTION 2(14)Applicable w.e.f April 1, 1961

HTIL have rights in Indian Co. (HEL)

Explanation to Section 2(14):“Property” includes and shall be deemed to have always included:- Any rights in Indian Company- Any rights in relation to an Indian Company

Co-relate with case


Explanation to SECTION 2(47)

HTIL transferred rights in Indian Co. to Vodafone,

indirectly Vodafone created interest in asset in India

By way of an agreement entered outside India

Explanation to Section 2(47):“Transfers” includes and shall be deemed to have always included:- Disposing of or parting with an asset or any interest

therein- Creating any interest in any asset in any

manner whether indirectly or otherwise- By way of an agreement (whether entered into

in India or outside India) or otherwise- Notwithstanding that such transfer of rights have

been characterized as being effected or dependent upon or flowing from the transfer of share of a company registered or incorporated outside India.

Co-relate with case

Applicable w.e.f April 1, 1961


The Second Phase of Dispute is about to start.

Prepared by-Rohit Jain (CA-Final)

[email protected]

www.irohitjain.blogspot.com

mailto:[email protected]

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Vodafone Tax Case

Economy & Finance

honourable

indian revenue

capital asset

tax authorities

capital assets

capital asset

deduct tax

tax law