VODAFONE CASE SUMMARISED

Facts of the
Case: ‘Hutchison (Hongkong)’ is a Non resident having no tax in India. ‘Cayman
Island (Mauritius)’ was a 100 % Subsidiary of Hutchison (Hongkong). Hutchison
Essar was an Indian co. in which Cayman Island (Mauritius) was holding 67 %
shares and Essar had
total holding of 33 % only. MauritiusMauritius is considered as a tax Heaven Country, So
Cayman Island was incorporatedansaction exclusively. Vodafone is a co. incorporated
in Nederland (UK), treated as foreign co. in India.

Transactions: Cayman has acquired 67 % shares in Hutchison Essar

initially, Hutchison (Hongkong) has sold Cayman Island to Vodafone (UK) @ $ 10
billion in 2007 and Vodafone has paid entire sum to Hutchison (Hongkong)
without deducting any TDS.

Impact: As per Indian tax law, this transaction was not taxable in India, because Buyer and
seller both were non resident of India and company sold (Cayman Island) was also a foreign
co. Indirectly the controlling Interest of Hutchison Essar (Indian Co.). has been sold
through this transaction. Because Cayman Island was only a paper co., which has no value in
itself without controllingn Hutchison Essar (Indian Co.). Hutchison has sold shares of Indian
co. in form of Cayman Island to Vodafone UK. But by this method they have saved capital
gain taxes
(Ought to be arisen in India) on such Transaction.

Game Begins
Here: Assessing officer (Indian Income Tax Dept.) has issued a show cause notice u/s 201
to Vodafone for imposing penalty u/s 271C (Total demand of Rs. 11000 Crore) on non
deduction of TDS u/s 195 for amount paid to Hutchison (HK). Vodafone has not replied to
that notice
and filed a writ petition to challenge the ‘jurisdiction of Income tax Department’ for
issuing such notice, before Mumbai High Court. Honourable Mumbai High Court has
rejected their petition with cost. Then Vodafone has filed an SLP before Supreme Court
against such rejection. Honourable Supreme Court has transferred the case to Income Tax
department with specific instructions to examine Facts and determine that whether dept. had
jurisdiction or not for issuing such notice. SC asks Vodafone to appear before Income Tax Dept
in such case. The court also made it clear that if the I-T Department passes any order for
penalty, it would not be enforced, till Supreme Court further decides the main matter of tax
dispute.

Some Other Interesting Facts of this Case: Hutchison (Hongkong) is still not a party to any
proceeding but the A.O. who has opened this case, has been promoted to Chief
Commissioner of Income tax directly. Law has been amended retrospectively to stop tax
evasion by this method and thereafter Income tax Dept. Has opened more than 50 similar
cases; Like- The revenue
department is embroiled in a legal battle with US-based General Electric for its 60% stake sale
in Genpact. Stakes was sold for $500 million in 2007.

Few Questions whichstill unanswered: Does asking a non-resident to comply with Indian
legal procedures amount to Extra Territorial Jurisdiction? Can a company merely having a
incorporation certificate of a tax heaven country and a few files in its office, should be
allowed to evade taxes by various methods?

Updates in Case: The tax office had asked Vodafone to pay $2.5 billion (Approx Rs.
11218 Crore). On 15th Nov 2010 – India’s top court (Supreme court) directed Vodafone
(VOD.L) to
deposit $550 million within three weeks in relation to a $2.5 billion tax dispute. Vodafone has
also been directed to make a bank guarantee worth 1.9 billion within eight weeks.
On 4th AUG, 2011: Referring section 9 of the I-T Act, which defines Income deemed to accrue
or arise in India, Vodafone said it does not mention any such transfer of control to be
taxed. “Even the Indian firms which pay their dividends outside India are non-taxable under
the Act,”.

On 5th AUG, 2011: Vodafone told the Supreme Court that the Revenue
Department cannot impose a Rs 11,000-crore tax relating to its acquisition of Hutchison
Whampoa Ltd’s Indian operations unless Parliament made a specific laws to impose
capital gains tax on such deals.
On 13th Sep. 2011: Vodafone has paid Rs.3,900-cr Tax ‘Under Protest’.

The Judgement Day: 20th Jan 2012:

Supreme Court’s held ruling to set aside the Bombay High Court judgement asking the
company to pay income tax of INR 11,000 crore.
The court also asked the IT department to return Rs 2,500 crore deposited by Vodafone, in
compliance of its interim order, within two months along with 4 per cent interest.
“The government has no jurisdiction over Vodafone’s purchase of mobile assets in India as the
transaction took place in Cayman Islands between HTIL & Vodafone.” Chief Justice S.H. Kapadia
said.

The Income Tax department can file a review petition on the Supreme Court’s judgement.
Technically the government can go in for a review but I do not think this is a fit case for that
because extensive hearings have