VODAFONE TAX CASE | VODAFONE HUTCH CASE | VODAFONE TAX CASE STUDY

The Vodafone Tax Case is one of the most controversial Tax dispute in the history of Indian Income Tax Law.

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1. THE VODAFONE TAX CASE

2. VODAFONE VS INDIAN INCOME TAX AUTHORITY

3. What is a TAX HAVEN? A country or a place where there is low or no taxes for foreign individuals and businesses. Examples of Tax Haven countries: Bermuda, Netherlands, Cayman Islands, Luxembourg, Singapore.

4. THE CAST: Vodafone International Holdings(VIH) - Situated at Netherlands Hutch Essar Ltd. (HEL) - Situated in India CGP Investments Holding Ltd. - Situated in Cayman Islands which is a Tax Haven - Holding 67% shared in Hutch Essar Ltd. Hutchison Telecommunications International Limited (HTIL) - Situated in Hong Kong - Holding 100% shares in CGP Investments Holding Ltd.

5. DIAGRAMMATIC VIEW CGP INVESTMENTS LIMITED HONG KONG HOLDS 100% HOLDS 67% NETHERLANDS CAYMAN ISLANDS INDIA

6. FACTS OF THE CASE: Hutchison Telecom situated in Hong Kong is a non resident with no Tax implications in India. CGP Investments Ltd. situated in Cayman Islands which is a Tax Haven is a dummy company and 100% subsidiary of Hutchison Telecom. It was formed merely for Tax Saving purposes in 1998 by Hutchison Group. Hutchison Essar is an Indian company in which CGP Ltd held 67% of its shares and Essar held 33% Vodafone is a company incorporated in Netherlands and hence treated as Foreign Company with no Tax Implications in India.

7. THE MOTIVE: There was a gradual increase in FDI of India from year 2006-07. The highest share of FDI being in Telecom Sector. Due to this sudden rise in FDI in Indian Telecom Sector, Vodafone Netherlands also wanted to expand its operations in Indian Telecom Market. Now, this can be done in two ways. First, Direct method, by building infrastructure in India, Buying and holding assets, recruiting officials, employees and workers etc. Second, Indirect Method, by acquiring an already set up company in India. Vodafone Netherlands opted for second method.

8. FDI INFLOWS PATTERN

9. THE DEAL: Now, acquiring a company in India will involve a huge flow of Capital Gain Taxes. To avoid these tax burden, Vodafone Netherlands, rather than buying an Indian Company directly, again opted to go for an indirect route. Vodafone Netherlands purchased CGP Ltd of Cayman Island from Hutchison Telecom Hong Kong. This transaction had no Tax Implications as the asset sold is situated in a Tax Haven Country. The Impact of this Transaction was, Vodafone Netherland indirectly acquired Hutch Essar an Indian Company (as CGP Ltd. Cayman Islands had 67% shares in Hutch Essar) and thus entered into Indian telecom Market.

10. THE IMAPCT: HOLDS 100% SHARES HOLDS 67% SHARES VODAFONE NETHERLANDS CGP INVESTMENTS CAYMAN ISLANDS HUTCH ESSAR INDIA STEP DOWN SUBSIDIARY OF VODAFONE NETHERLANDS

11. THE IMAPCT: Vodafone acquires Hutch India Ltd with NIL Tax Liability

12. THE IMAPCT:

13. INDIAN TAX AUTHORITIES VIEW : The transaction was carried out for the transfer of rights in Hutch Essar India via CGP Investments Ltd of Cayman Islands. CGP Investments is merely a dummy company having no business at all created solely for the purpose of tax exemption purposes. As CGP Investment is situated in Tax Haven, the capital gains arising on the transaction gets exempted. But considering the principle of Substance Over Form, the substance of the transaction was to transfer the rights of Hutch Essar India to Vodafone Netherlands by having NIL Tax liability. Thus, Vodafone Netherlands is liable to deduct and pay TDS on this transaction as the underlying asset i.e. Rights and Entitlement in Hutch Essar is situated in India

14. THE COURT CASE: DEC 2008 JAN 2009 SEPT 2007 Income Tax Department issued a show cause notice to Vodafone. Instead of replying to notice of IT deptt., Vodafone filed a Writ Petition in Bombay High Court. Bombay High Court held that Tax Authorities had jurisdiction over the matter. Vodafone then challenged this Decision in Supreme Court. Supreme Court then directed the Indian Tax Authorities to first determine the Jurisdictional Challenge raised by Vodafone.

15. THE COURT CASE: MAY 2010 Tax Authorities held that they had the jurisdiction of the case u/s 201 of Income Tax Act,1962 Again this order was challenged by Vodafone in Bombay High Court. SEP 2010 Bombay High Court dismissed Vodafone’s challenge Then Vodafone again files a Special Leave Petition against the High Court order before the Supreme Court. NOV 2010 SLP was admitted and Vodafone was directed to deposit a sum of INR 25000 million within three weeks and provide a bank guarantee of INR 85000 million within eight weeks from the date of its order.

16. THE FINAL VERDICT : JANUARY 2012 The Judgment was passed in FAVOUR of Vodafone. Supreme court said that Section 9(1)(i) of the Act does not cover indirect transfers of capital assets/property situated in India. Accordingly Supreme Court concluded that the transfer of the share in CGP Cayman Islands did not result in the transfer of a capital asset situated in India, and gains from such transfer could not be subject to Income Tax. Supreme Court held that Indian Income Tax Department had NO JURISDICTION to levy tax on overseas transaction between companies incorporated outside India.

17. THE EFFECT: The Income Tax Authorities had to return ₹ 25000 million , which was earlier deposited by Vodafone, along with 4 per cent interest and return the bank guarantee ₹85000 million The Government of India had to suffer a loss of ₹12000 crore because of losing the case against Vodafone Due to this loss, Government amended the Income Tax Act Retrospectively and made sure that any company in similar circumstances is not able to avoid tax by operating out of tax haven

18. SECTIONS AMENDED: Section 9(1)(i) Income deemed to accrue or arise in India Section 2(47) Definition of Transfer Section 2(14) Definition of Capital Assets

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