Players in the Vodafone Case

Vodafone UK based Telecom company.

Hutch Hong-Kong based company.

Hutchison Essar
India based company
Ltd. (HEL)

CGP Investments Cayman Island based company, has 67% stakes in Hutch-
Holdings Ltd Essar India. CGP itself is owned by Hutch, Hong Kong.

Income Tax dept. India based *insert whatever word you want*

You and I, because we’ve to prepare such topics for

Innocent Bystanders
competitive exams.

Timeline of Events
December 2006: Hong Kong
Hutchison Telecommunication International Ltd (HTIL) Boss: My Indian arm
“Hutchison Essar Limited (HEL)” is not making good money. I want to quit from
India.
(To his Secretary ) as you know, I own CGP Investments Holdings Ltd, located in
Cayman. And CGP holds 67% in HEL (India). So, just make an announcement
that I want to sell CGP and start talking with prospective buyers.
Secretary: but why all this complex procedure?
HTIL boss: oh come on man, don’t you know that Cayman Island is a Tax Haven.
They don’t have Capital Gains Tax! Better we sell via Cayman route and we’ll
save a truckload of ca$h in tax.

February 2007, London

Vodafone (UK) Boss: (To his Netherland subsidiary manager) Take these
suitcase full of 11 billion US Dollars, go to Cayman Island, buy that CGP holdings
Ltd. From HTIL (Hong Kong) and give me “miss call” when the deal is finished.
March 2007, Mumbai
Income Tax Commissioner’s Office.
Minister (on Phone): Mast bakraa haath mein aayaa hai .Send a notice to
Vodaphone, ask them to pay Rs. 12000 crores under capital gains tax because
they purchased an Indian Company HEL (Hutch Essar Ltd) for 11 billion dollars!
IT Commissioner: Sir, may I humbly point it out that It is a common practice
among multinational companies (MNCs) to establish such SPV (Special purpose
vehicles/ flimsy companies) in Tax havens of Mauritius / Cayman Island.
And then those flimsy companies (SPV) such as CEG Ltd., buy shares of an
Indian company (HEL).
When the MNC wishes to sell or acquire an Indian company, they don’t directly
come and buy in India, they simply purchase or sell the shares of these flimsy
companies in Cayman’s Island because the transfer of shares of an SPV outside
India, is not taxable in India. And Cayman Island itself has very negligible tax
rates. It is a win win situation for them.
And This is not the first case, there have been truckload of merger and
acquisitions like this, in past and we’ve never sent any notice to any such
company because this matter is outside my Jurisdiction, sir.
Minister: Betaa, don’t give me this “GYAN”, get me some “CASH” ! I’ve to give
Rs.71,000 crores in debt-waiver scheme to farmers in 2008 to win the General
elections.

 We are already giving billions of rupees in subsidies on diesel, LPG,

Kerosene, Fertilizers.
 We’ve to pay crores of rupees to Government employees under 6th Pay
Commission.
 We’re running Development schemes like MNREGA (Rs.40,000 crores a
year), and in future we are thinking of starting Food security Act (2 lakh
crores a year). Where is the money to pay for all this?
 I’ve to give crores to that loss-making Air India.
 I’ve to pay Rs.28000 crores Common Wealth games arrangement.
 All these things requires huge huge huge cash, man. Money doesn’t fall
from sky. We cannot tax the aam-aadmi beyond a level and
 We couldn’t get decent money from sale of 2G spectrum, or coal mines
auction
 Reliance isn’t paying much from KG Basin gas exploration.
 Don’t you understand? We’ve to find new ‘sources’ of income. Vodafone is
a good “bakraa”. Let’s rip him apart.
  Then we use it to create bogus Developmental schemes, siphon off the
money and use it to fight election. This shall help us get absolute majority
in Bihar and Uttar Pradesh because Public of UP and Bihar is so Gullible
they will vote for anyone who tells them ki “hum aap ke liye Delhi se paisa
bhejte hai

IT Commissioner: as you wish. I’ve sent the notice to HEL (India).

Minister: Mogembo khush hua.
HEL(India) Boss: (To IT Commissioner) Why the hell are you sending notice to
me? I am not a party to any of this! Don’t you see I’m getting ‘sold’ here. Ask the
buyer Vodafone of UK or the seller Hutch of Hongkong about your Capital gains
tax!

In the mean time

Vodafone International boss: (To HEL Boss): I’ve purchased majority shares
of your company. You shall take my name like an obedient wife. From this day
on, you shall be known as VEL (Vodafone Essar Limited) and not HEL
(Hutchison Essar limited).
HEL boss: as you wish my lord. Mr. HEL transforms into Mr.VEL.
IT Commissioner: caught you now! Mr.VEL, you’re the Indian agent of
Vodafone, now you pay the capital gains tax or I’ll start your ragging worst than
that in B.J.Medical College, Ahmedabad.
Vodafone files appeals in Bombay highcourt and supreme-court, stay orders here
and there, sometimes victory sometimes defeat
Fast-forward to

Sept 2010
Bombay HC: Yes IT Department is right. Mr. Vodafone you’ve to pay the Capital
Gains Tax.
Mr.Vodafone: I’ll go to supreme court.
Leftist Media: Shame shame. You’re going to Supreme Court!! We are going to
report this as in such a tone as if you’re the main culprit here and doing
something immoral.
Mr.Vodafone: When the kinds of Shibu Soren, Sanjay Dutt and Vikas Yadav can
goto Supreme court, why can’t I? Saving tax is a legal activity. I’ve done nothing
wrong. I’m the innocent bystander here. You don’t have the guts to cover
blackmoney issue until Anna Hazare and Baba Ramdev raised it, but just
because I’m a rich MNC company I must be the bad guy, right? All you
mediawalla want, is money to keep your mouth shut.

Aug-Oct 2011
Location: Supreme Court, Delhi
IT Commissioner: Your Honor, this Mr.Vodafone here, has purchased
ownership of an Indian mobile company called HEL (Hutch Essar Limited) for
USD 11 billion and now he is not giving me Rs.12,000 crores as Capital Gains
tax.
Mr.Vodafone: Get your facts right Commissioner Gordon. Please see this
diagram again.

Long thing cut short, I purchased a Cayman Island company from Hutch
Hongkong. Now this Cayman Island company happens to have 67% shares of
Hutch Essar ltd (HEL, India), and thus I only have “Shares” of HEL. I did not
purchase any assets like trucks, buildings or mobile towers from the HEL (India)
itself. So where is the capital and where are the gains?
IT commissioner: No that is incorrect. Capital Gains tax applies!! Because You
gained Assets of an Indian company.

Gurmeet (from court viewers): This is utter nonsense. If today you buy 10% of
the shares of a particular company, let us say Jet Airways, does this mean that
you automatically own 10% of all of Jet Airways’ assets? Does this mean that
10% of the entire fleet of aircraft now belongs to you? By buying out a company
that holds 67% of HEL, it doesn’t mean that Vodafone now owns 67% of the
assets of HEL. Those assets continue to belong to HEL, which is a separate
legal entity based in India. Read the Company law, Damnit. Because there has
been no transfer of assets, there has been no capital gain.

Judge: order, order.

Mr. Vodafone: Yes your honor, there is a difference between the sale of shares
in a company and the sale of assets of that company. It is an elementary
principle of company law that ownership of shares in a company does not mean
ownership of the assets of the company. Thus, an individual who owns 45 per
cent share capital does not own 45 of that company’s assets. The assets belong
to that company which is a separate legal entity. So I have not received any
‘capital asset’ from the Indian company. I cannot be taxed for capital gains!

IT commissioner: ya But still, you purchased the shares of a company.

According to Indian law, capital gains tax applies to sell of shares!

Mr.Vodafone: Agreed that a person has to pay Capital gains tax on the sell of
shares according to Indian Income tax act. But This share-purchase took place in
Cayman’s island, between two Non-Indian companies. They don’t have any
capital gains tax there. So how come you hold me responsible for paying Capital
Gains Tax in India? You don’t have any jurisdiction over this matter! And If this is
your logic, why didn’t you arrest Sunny Leone when she came to participate in
Big Boss season #5? She is a porn actress, and watching porn is illegal in
India (except for Karnataka MLAs). But you cannot arrest Sunny Leone in India,
because you don’t have jurisdiction over her activities in America. It is completely
legal to shoot porn in California State of USA. So why this Kolaveri Di with me?

T.V. SIVAKUMARAN (from Court audience): Let me give another simpler

illustration. ICICI Bank shares are listed in the US Stock exchange. As a US
citizen, I own some shares. If I sell them and make a profit, should I be made
liable to pay Capital Gains Tax in India, U.K. and other countries, where ICICI
Bank holds Assets?

Judge: order, order.

IT Commissioner: umm…well….ahhh… oh yes, you and Hutchison
International, have intentionally conspired to make this deal in Cayman’s Island.
Because it is a tax haven. Because Cayman island doesn’t have capital gains
tax. You guys are very smart, you intentionally create such flimsy companies in
Tax havens, and then make merger and acquisitions to avoid as much tax as
possible. You’re not the only culprit; plenty of Indian companies are doing the
same thing. [But since you’re a big ‘bakraa’ worth Rs.12000 crores we’ve special
interest in you]

Mr. Vodafone: of course. Why not? It is a completely legal activity to save tax
through legal means. What’s wrong in that? Blame it to your outdated laws and
tax-treaties. If a drunk rich brat kills 15 people in drunk driving, he still gets out of
jail on bail, thanks to your outdated laws So who is to blame? The drunkard or
the Government?

Yes we save taxes by running the show through tax havens in Mauritius and
Caymand island, but you cannot ignore the enormous employment generated
because of me. See how many people got jobs in Vodafone outlets and the
substantial increase in excise duty, sales tax and other duties. Not to mention all
those people who got jobs, they also pay income tax, they go out purchase
homes, automobiles, perfumes and skin whitening creams and what about that
indirect employment generated in those industries?

You cry about the puny 12000 crores in capital gains, what about the million
dollar happiness in the lives of all those people benefitted directly or indirectly
because of my entrepreneurship?.

January 2012
Landmark Judgment of Supreme court
Saare sabuto aur gawaaho ko madde nazar rakhte hue, ye adalat iss natije par
pahuchi hai ki Indian authorities do not have jurisdiction on an overseas
transaction.

 Certainly and stability form the basic foundation of any fiscal system. Tax
policy certainty is crucial for taxpayers (including foreign investors) to make
rational economic choices in the most efficient manner
 This offshore transaction evidences participative investment in India and
not a sham.
 The demand of nearly 12,000 crore by way of capital gains tax, in my view,
would amount to imposing capital punishment for capital investment since
it lacks authority of law and therefore stands squashed.
Location: Finance minister’s Office, Delhi
There is pindrop silence in the office. Babus are not even playing that
“Solitaire/Hearts” card-game in their Windows 98 computers.
Some of them are busy in toilet, actually leaking information about ‘possible
future-moves of their minister’ to their journalist friends in TimesNow, via SMS
from their Antique Nokia-1100 mobile phones.
Minister (entering the Office) : Itnaa Sannaataa kyo hai bhai?
(IT Commissioner: Because

We have suffered a humiliating defeat in Supreme court, in that Vodafone

case.
Minister: You mean as humiliating as Team India’s defeat in Austrialian test-
matches?
IT Commissioner: Well, not *that* humiliating, but still very humiliating.
Minister: I cannot let this matter go. Rs. 12000 crores is not a small amount! I’ve
Gujarat Assembly elections ahead, I need the ca$h! Gang up the best tax-
lawyers, study the judgement and File a review petition in Supreme Court again!

March 2012
Supreme court rejects the review petition.
Those Best Tax-lawyers demand lakhs of rupees as consultation fees from
Government of India.
IT Commissioner (to self): Khaayaa piyaa kucchh nahi, glass fodaa….

Budget 2012
Minister (announcing in Parliament): I propose an amendments in the Income
Tax Act with retrospective effect from 1962 so that all persons, whether residents
or non-residents, having business connection in India, will have to deduct tax at
source and pay it to the government

even if the deal is executed on a foreign soil!

With this ‘move’, I’m trying to get around the court’s decision which said that

the government cannot tax a deal between two foreign entities, even if the
transaction includes an Indian asset.

Our party has ‘history’ of trying to outsmart judiciary, whether it was Shah Bano
case or 42nd Constitutional amendment or….
Random MP: (putting his i-pad aside) What does this “retrospective effect”
mean?
Peon: Retrospective effect means if Government passes such law in 2012, still
the past deals between companies made in 2007 can be taxed. Only Civil laws
can be made with retrospective effect. But criminal laws cannot be made with
retrospective effect.
Random MP: Elaborate
Peon: Criminal law cannot be made with retrospective effect, meaning if in 2012,
Government passes a law that mobile phone thieves will get life time
imprisonment, then only those thieves who’re caught in 2012, after the
commencement of that law, will be jailed for lifetime.
But, If a thief stole the mobile phone in 2007, he cannot be given lifetime
imprisonment, he has to be tried under the punishment provision that were in
effect during that time. On same logic, people are still languishing in jail under
TADA and POTA cases, even though those acts are scrapped now.
Random MP:That means I must hurry and do as much corruption as I can,
before that Lokpal thing comes in effect, Whaat an idea Sir-ji.

Outside Parliament

Salman to Media: Right now we only know that it is a unanimous judgement that
has gone against the revenue authorities… We have to examine. We
obviously need revenue for the government’s important programmes.

Epigue
Anand: Just like the Govt insists on tax revenue, even when the supreme court
dismissed their case,
we citizens need to insist that the revenue is spent wisely by the Govt on the
welfare of its citizens.
The extra tax revenue that the govt would have got from Vodafone would not
benefit any citizen.
Instead 90% of the money would find their way into the pockets of our politicians,
while the rest is frittered away as salaries for a burgeoning bureaucracy.