Conclusion of Vodafone Case

At the first glance if some sees he/ she will say that in case if any Non-Resident sells its shares of
foreign company to NRI and if the transaction has taken place out of India, then the company is not
liable to pay the tax but that would be only one side of the argument.

According to the Income Tax (IT) Department transfer of CGP shares (the company that was sold to
Vodafone) was a Cayman company is invalid as CGP is sham entity and the actual transfer of 67%
share in Hutchison Essar Limited (HEL). As transferred assets and capital gains that are generated out
of this deal is in India, so it is liable to pay Tax in India.

To Understand the issue, we need to understand what a tax haven is.

Tax havens are designed to help the rich and powerful people and MNCS to avoid /evade taxes in
regular countries like United States, India, France Etc. There was great uproar in USA and EU
countries in the Financial Crisis of 2008 and onwards as these tax havens are bleeding regular
countries of its taxes. Vodafone is very similar case where accusation of CGP in Cayman Islands was
used to avoid taxes that would be charged in India.

How tax was avoided

Transfer Pricing was used i.e., transferring taxable profit to tax haven using detailed paper trail. The
fact that Transfer payment provisions exist in the Income-tax Act, does not mean that in the absence
of TP provisions the assessing officer was not able to tax income transferred outside India.

Shifting Capital gains to tax havens from host country by claiming that SPV is all together a new
entity that is separate and legal. when you buy or sell shares it would be done through this SPV so
invariably transferring the transaction in a tax haven. In this case apart from operating company rest
of the structure was a sham. It does not need any specific provision in law to ignore this structure, to
recognize that – the controlling shareholding in an Indian company has been sold. Department is
fully entitled to ignore all tax haven SPVs and tax the income arising in India.

This is done through curbing the legal system.

This case was taken to TPO Transfer Pricing Officer and AO Assessing Officer that ruled in favor of the
Indian Government. Vodafone appealed this to Bombay High court regarding the jurisdiction of the
tax authorities in the case. Then this case was taken to the Supreme court which ruled that sale of
CGP share was a legal traction so was the transfer of 67% share in Hutchison Essar Limited (HEL). All
the revenue arguments were rejected.

With this ruling, the Supreme Court recognized:

 The principles of tax planning companies or individuals can regulate the activities of their
company in such a way as to reduce their tax liability in the absence of legal provisions that
prohibit it.
 The corporate veil can be lifted if the facts and circumstances reveal that the transaction or
the corporate structure is false, and taxes should be avoided.
 Transactions should be viewed holistically rather than dissected, and the existence of
corporate structures in tax neutral / investor-friendly countries should not lead to the
conclusion that they should avoid tax.
Following these events, the Government of India did not give up the government introduced
retrospective amendments to Indian Income Tax Act in 2012.

The law would retrospectively amend Section 9(1) of the Income Tax Act, 1961 with effect from April
1, 1962. The objective was intended to clarify the ambit state’s sovereign right to tax profits and
capital gain by a foreign entity for the transfer of an Indian company to different foreign company.
This would empower the tax authorities to gain tax profits and capital gains from offshore
transaction in case there was a tax avoidance in India.

This was challenged in the year 2014 at International Attribution Tribunal by Vodafone as it invoked
the Bilateral Investment Protection Agreement (BIPA) that was signed between India and
Netherlands in the year 1965. The International Attribution Tribunal at Hugues ordered in favor of
Vodafone and said that the imposition of Tax liability, interests and penalty by the India on Vodafone
is a breath of and investment treaty that was signed between India and Netherlands.

The Supreme Court has observed as under :

“At the outset, we need to reiterate that in this case we are concerned with the sale of shares and
not with the sale of assets, item-wise. The facts of this case show sale of the entire investment made
by HTIL, through a Top company, viz. CGP, in the Hutchison Structure. In this case we need to apply
the “look at” test.”

It further states :

“If one applies the look at test discussed hereinabove, without invoking the dissecting approach,
then, in our view, extinguishment took place because of the transfer of the CGP share and not by
virtue of various clauses of SP
Observation

It was seen that Vodafone Group Plc (it is a UK registered parent company of Vodafone group) made
the offer. The offer was made to Hutchison Whampoa Ltd. (not even to HTIL). The offer was for –
HTIL’s 67% interest in HEL.

Observation 1 :

“Equity interests” and “Controlling interest” are distinguished. Does it suggest that “Equity interest”
and “Controlling interest” are to be treated differently? The revenue has claimed that HTIL has sold
its “Controlling interest” in HEL – the same phrase as used by VIH while reporting to SEC in
Washington and London stock exchanges. (See para 23 of the judgement).

Observations 2 :

It was HTIL which procured sale of shares of CGP; assignment of loans owed by CGP; each “Wider
Group company” would not terminate or modify any rights under any of its Framework agreements;
etc. HTIL also provided several warranties to VIH.

An application was made to FIPB for transfer of share of CGP. In one such communication, it was
stated as under :
Para 32. ….. However, in practice the directors of HEL have been appointed pro rata to their
respective shareholdings which resulted in 4 directors being appointed from the Essar Group, 6
directors from HTIL Group and 2 directors from TII.

Observation 3:

The directors were appointed by HTIL group and not CGP which was supposed to be the investment
vehicle that was sold. The directors were not even appointed by the immediate shareholder
companies of HEL. This shows - who was the real owner of HEL.

Amongst the several steps undertaken after the receipt of FIPB approval, one was the payment of
consideration for sale by VIH to HTIL. (Para 46 (xi)). The funds were not even paid to the shareholder
of CGP. These were straight remitted to HTIL!

CGP did not even have any accounts prior to 2007. It did not even have a bank account. The
companies in between HTIL and CGP also did not have a bank account. The funds were paid directly
to HTIL. All parties involved in the transaction had ignored the existence of CGP. Only when the
taxman asked, they claimed that CGP shares were sold.

Conclusion on Taxability:

HTIL sold its 67% controlling shareholding in the Indian company HEL (together with considerable
other rights) to VIL. This was a transfer of an Indian capital asset. The capital gains are liable to
Indian Income-tax.

In our humble opinion, the decision amounts to miscarriage of justice. This is a fit case for
retrospective amendment of the law to set right the injustice.

The issue is:

Does the non-resident have sufficient nexus with India? In this case Vodafone had sufficient nexus
and it had agreed to abide by the Indian law. In our view, Vodafone is liable to comply with Indian
TDS provisions.

Conclusion :

Hutchison’s income is taxable in India. Vodafone is liable to deduct tax at source and pay to the
Government of India.