Vodafone Tax Case

Description of the Vodafone Essar Transaction

y

One non-resident company, Hong Kong-based Hutchison Telecommunications International Limited(HTIL) Transferred to a second non-resident company, UK-based Vodafone Group plc An indirect controlling interest in the Indian company Hutchison Essar Limited(HEL). Change in the ownership of an Indian company by virtue of a transfer of shares in an offshore holding entity whether is a disposition giving rise to a taxable capital gain in India?

Brief History
Vodafone International Holdings BV (Vodafone) entered into a Share Purchase Agreement (SPA) with HTIL, y purchasing the singular equity share of CGP Investment (Holdings) Ltd (CGP), a Cayman based wholly owned subsidiary of HTIL. y CGP in turn, directly and indirectly, owned approximately 67 percent of the share capital of HEL an Indian entity. y The acquisition resulted in Vodafone acquiring control over CGP and its subsidiaries, including VEL.
y

Tax issue

Contentions of Tax Authority

 Transaction involved transfer entitlements of local assets composite of rights and

 The underlying asset was situated in India and was central to the valuation of shares  HTIL sold its rights in the Indian asset and the right to do business in India;  Vodafone resulted in having operational control over the Indian asset

Contentions of Vodafone
Vodafone did not consider that the transaction was taxable in India and claimed the following: The transaction was between 2 non-resident entities, by virtue of a contract executed outside India, wherein consideration was paid outside India for the purchase of a capital asset of an offshore company; The tax liability was to be borne by Hutchinson Telecom International Ltd. (HTIL), the seller; Vodafone was not liable to withhold tax.

Statutory Provisions
 India does not have a double taxation avoidance agreement with Cayman Islands.  Section 195 Requires any person making any payment to any other person to withhold tax at applicable rates if such payment is chargeable to tax under Indian law.  Income which accrues or arises in India, or is deemed to accrue or arise in the hands of a non-resident, is taxable in India.  Additionally, any income which a non-resident receives from the transfer of a capital asset situated in India is deemed to accrue or arise in India.

Judgment of the SC
y

y y

The Bench stated that a look-at approach needs to be adopted for the transaction, rather than a look through approach. Investment structures had to be respected ,whether an investment was made for participation in the entity or whether it was a pre-ordained transaction aimed at avoidance of taxes. Genuine strategic tax planning could not be ruled against. The CGP structure was in place since 1998, and it could not be said that this was a preordained transaction.The CGP share was located outside India and therefore India had no jurisdiction to tax the same. Thus, the withholding tax provisions would not be triggered in the current case.

The Supreme Court ruled that the company is not liable for payment of taxes amounting to $2.2 billion slapped on it for the $11bn acquisition of the Indian assets of China's Hutchison Telecommunications in 2007 in an overseas deal. y The Indian government is asked to return the taxes with 4 percent interest by the apex court. y Section 9 defines the scope of income taxable in India, should be construed strictly to deem income to accrue and arise in India only when the capital asset is situated in India.
y

Implications for tax planners

The judgment blesses the right of the tax payer to take advantage of legitimate means of tax planning within the framework of law y It distinguishes between a genuine business transaction and one arranged in with the sole objective of taking advantage of loopholes in law y Such transactions, though having a legal form, should not be viewed as genuine for the purposes of revenue collection
y

Implications for non-resident nonbusiness

The court has implicitly confirmed the obligation of a non-resident to check whether the recipient of payments has tax liabilities in India, even if the recipient is also a non-resident y If the transaction does not give rise to any taxable income in India, there's no tax obligation y But if there's taxable income, the fact that two non-residents are involved in a transaction does not mean no taxes need be paid. y The DTC provisions include that capital gains will be taxed in India on overseas acquisitions if the acquired company holds over 50 percent assets in India.
y

Union of India v. Azadi Bachao Andolan, Andolan, (2003)

y y y

Section 90 : taxation of income from dividends and capital gains under the Indo-Mauritius DTAC is not ultra vires. A tax treaty or convention must be given a liberal interpretation. A holistic view has to be taken in this regard. The contention of respondents that the DTAC between India and Mauritius is ultra vires is not acceptable even if the DTAC is susceptible to treaty shopping on behalf of the residents of third countries. Central Government to enter into Double Taxation Avoidance Convention (DTAC for short) with foreign governments. An assessee who is covered by the provisions of DTAC is entitled to seek benefits there under, even if the provisions of the DTAC are inconsistent with the provisions of Income-tax Act, 1961.

References
http://www.vccircle.com/columns/thevodafone-hutchison-case-and-itsimplications y http://www.bmradvisors.com/upload/docu ments/TaxEdgeSpecial%20%20Vodafone%20Final1327163166.pdf y http://www.bdoindia.co.in/uploadedfile/1/2 /-1/BDO%20First%20Look%20%20The%20Vodafone%20Judgement.pdf y http://indiankanoon.org/doc/1960330/
y

Thank You