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Vodafone

Akshay (CA-Final) (105 Points)

18 July 2012

Anybody here know the case of vodafone (in detail) which recently happened.. Please share, i want to know..

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CA CS CIMA Prakash Somani (Landmark Group) (23502 Points)
Replied 19 July 2012

The Supreme Court's verdict on the Vodafone tax case brings to closure a very contentious chapter in the telecom player's Indian story. More importantly, it sheds light on certain litigious tax issues in cross-border transactions involving Indian companies.

The verdict, simply put, means that the Income-Tax authorities in India will not have any jurisdiction over a sale transaction that happened elsewhere, with neither the buyer nor the seller being Indian residents.

Complexity

If you are wondering what was so contentious about a case, whose verdict sounds seemingly uncomplicated, here's what led to the complexity. For one, the Indian company was owned through a rather intricate holding structure. There were multiple layers between the Indian company and the ultimate owners of the business.

Vodafone International of Netherlands bought shares of a Cayman Island-located company from another Cayman Island-based firm. The Cayman company that was sold, held controlling stake in Hutchinson Essar (later called Vodafone Essar) in India. By buying the Cayman company, Vodafone International indirectly purchased the Indian company. Effectively, the Indian company was not party to the transaction. The buyer, the seller and the company being sold were multiple layers away from the Indian telecom company in the tree of holding.

Interestingly though, Vodafone had applied to the Foreign Investment Promotion Board (FIPB) in India for acquisition of 52 per cent stake in Hutchinson Essar. This change in controlling stake led to the tax authorities contend that there was transfer of assets of the Indian company and that the buyer Vodafone should have withheld tax on the capital gains.

Besides, one of the provisions in The Income Tax Act (Section 9) deems that ‘‘all income arising directly/indirectly… through transfer of a capital asset situated in India, to accrue or arise in India'' . This provision too was quoted by the tax department to demand the tax.

Thus, the multi-layered holding structure, regulatory aspects such as FIPB approval, the intricacy in controlling interest and whether the sale consideration was for transfer of Indian assets were aspects which dragged this case to court. Not to mention, the lucrative income (Rs 11,200 crore of tax and Rs 7,900 crore of penalty) for the revenue department.

Shedding light

The Court's verdict clarified that a complex structure need not automatically warrant a ‘pierce the corporate veil' approach, unless the tax authorities can prove that such a structure was a sham or meant to avoid taxes. Hence the onus was on the tax authorities to prove this.

In this case, the upstream company formed by the Hutchison group was in place since the 1990s and clearly was not formed for the purpose of this sale.

Through such an arrangement, the group has been bringing in investments into India. It had business interest in India and, therefore, cannot be viewed as a means to tax avoidance.

The Court also ruled that the case involved share sale and not asset sale. Section 9 quoted by the Income-Tax authorities talks of ‘income arising directly/indirectly from transfer of capital asset'. The court stated that the term ‘indirectly' needs to be read as income arising from the asset and not the transfer of the asset itself.

The provision cannot, therefore, be extended to cover indirect transfers of capital assets or property situated in India.

There is also no provision in this clause for sale of any underlying asset. Besides, that the Direct Tax Code, 2010 proposes to add a specific clause to tax indirect transfers, is proof that the current law does not provide for the same, asserted the Court.

What the verdict means

Simply put, international investors can structure their investments in India through holding companies in locations such as Mauritius or Singapore for both tax and commercial reasons. They cannot be denied tax benefits simply because the structure enabled tax planning or helped avoid any lengthy registration or approval process in India.

The tax authorities, to ascertain whether the structure was built to avoid tax, can look at the duration for which such a structure has been in existence; the period of operations in India; the timing of the exit and continuity of business in India after such exit.

As of today, a number of international deals, including Idea Cellular-AT&T, GE-Genpact, Mitsui-Vedanta, Sabmiller-Fosters and the Sanofi Aventis-Shantha Biotech have tax cases pending in various high courts in the country.

Most of these cases involve transfer of assets between two foreign companies by way of shares, where the underlying asset is in India.

Unless the Direct Tax Code plugs the loopholes in cross-border transactions and tax avoidance issues suitably, the Vodafone verdict may set a precedent for at least some of the pending cases.