Vodafone Tax Case

Vodafone
Tax Case
- By Rohit Jain

iRohit@live.in

www.iRohitJain.BlogSpot.Com

The tax dispute between
; and

in connection with taxability of the $ 11.2 billion

is one of the biggest controversies in Indian history.
The quantum of tax demand by the Indian Revenue
Authorities in this particular case was around


– A merger involves the mutual decision of
two companies to combine and become one entity.
Eg. A + B = AB
– Acquisition is purchase of one
company by another in which no new company is
formed. Eg. A + B = A
• Merger is like two persons getting married.
• Acquisition is like an animal eats any other.

A tax heaven is a
Wikipedia
state, country or territory where
certain taxes are levied at a low rates or not at all.

•
•
•
•
•

Switzerland
Cayman Islands
Luxembourg
Hong Kong
USA

•
•
•
•
•

Singapore
Jersey
Japan
Germany
Bahrain


TheRichest.Com

Sold 100% holding of CGP to VIH

HTIL

VIH

CGP
HEL

Vodafone Essar Limited

VEL

turned to

CGP is a dummy company
CGP is situated in Cayman Islands, which is a tax heaven.
VIH wanted to acquire HEL.
To save Tax, VIH opted to acquire CGP, holding Company of HEL.

Now VIH is neither liable to pay tax
- in India because they have made no transaction in India
nor
- in Mauritius because it’s a tax heaven.

Conclusion: Vodafone acquires Hutch in India with Nil Tax Liability.

Indian Revenue Authorities’ Opinion
CGP was
created to
take benefits
of Tax
Exemption.

Concept
of

Substance Over Form
Transaction was to
transfer Rights

in

The Indian Revenue
Authorities alleged that
to
HEL
VEL
VIH, had failed to
Deduct Tax on the
payment of
Hence, sought to assess tax in its hand
consideration made to as a taxpayer in default and it issued a
HTIL.
notice to Vodafone.

Vodafone petition to HC and SC
Instead of responding to the Notice of Indian Revenue
Authorities, VIH filed a writ petition to the Honourable Bombay
High Court challenging jurisdiction of Income Tax Department.
December 2008

The Honourable Bombay High Court upheld the matter
in favour of Indian Revenue Authorities.
VIH filed Special Leave Petition (SLP) before the Honourable
Supreme Court of India. The Supreme Court disposed the case with
a direction to Tax Authorities to decide the preliminary issue of
jurisdiction.
January 2009

DecisionbyIndianTaxAuthorities and HC
CGP was a mere holding company and was not engaged into
any business in Cayman Islands, thus, the situs of shares
existed where the “underlying assets” i.e. in India.
Further, HTIL had extinguished its right of control over HEL and
extinguishment of “Rights and Entitlements” constituted as
“Capital Assets”.
After going through the terms of Share Purchase Agreement
and other documents, it can be interpreted that the intention
of the parties was ultimately to transfer the controlling
interest in HEL which was situated in India.
The Tax Authorities passed an order under section 201 holding
that they had jurisdiction to proceed against Vodafone for
failure to deduct tax.
May 2010

Vodafone Petition to HC and SC (II)
Vodafone filed a writ petition to the Bombay High Court
challenging the order of Income Tax Authorities.
September 2010

The Bombay High Court dismissed Vodafone’s writ petition
against the order of the Tax Authorities.

Vodafone filed Special Leave Petition (SLP) before the Honourable
Supreme Court of India. The Supreme Court admitted the SLP and
directed Vodafone to deposit Rs. 2,500 crore and provide a bank
guarantee for the balance Rs. 8,500 crore.

November 2010


The Supreme Court’s Decision
The Indian Revenue Authorities had no jurisdiction to tax the
foreign transactions, as sale of shares was in Cayman Island.
Transfer of shares in CGP doesn’t amount to transfer of Capital
Asset situated in India, as per Section 9(1)(i).

The transfer of “Rights and Entitlements” (Controlling Interest) is
not covered in Definition of “Capital Assets” under section 2(14).
As Capital Asset is not taxable in India, so there is no question of
Deducting Tax at Source under section 195(1).
The Supreme Court reversed the decision of Bombay High Court.

January 2012

Retrospective Amendments in Tax Law
Certain Retrospective Amendments were made in Tax Law by
Finance Act 2012 to nullify the judgment of the Supreme Court.
Section 9(1)(i)
Income Deemed to
Accrued or arise in India

Section 2(14)
Section 2(47)

Definition of Capital Assets

Definition of Transfer


SECTION 9(1)(i)
Applicable w.e.f April 1, 1961
All incomes accrued or arise, whether directly or indirectly
through transfer of a “Capital Asset” situated in India.
Co-relate with case

Explanation for Capital Assets:
A Capital Asset being any share in any Entity (whether
registered outside India) deemed to be situated in India,

Shares of CGP were registered
outside India.

if the share derives its value substantially from the asset
located in India.

But the shares derive its value
substantially from the asset
located in India.


Explanation to SECTION 2(14)

Co-relate with case

Explanation to Section 2(14):
“Property” includes and shall be deemed to have always
included:
- Any rights in Indian Company
- Any rights in relation to an Indian Company


HTIL have rights in
Indian Co. (HEL)

Explanation to SECTION 2(47)

Explanation to Section 2(47):
“Transfers” includes and shall be deemed to have always
included:
- Disposing of or parting with an asset or any interest
therein

- Creating any interest in any asset in any
manner whether indirectly or otherwise
- By way of an agreement (whether entered into
in India or outside India) or otherwise
- Notwithstanding that such transfer of rights have
been characterized as being effected or dependent
upon or flowing from the transfer of share of a
company registered or incorporated outside India.

HTIL transferred rights in
Indian Co. to
Vodafone, indirectly
Vodafone created interest
in asset in India
By way of an agreement
entered outside India
Co-relate with case

The Second Phase of Dispute
is about to start.

Prepared byRohit Jain (CA-Final)
iRohit@live.in
www.irohitjain.blogspot.com


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