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Submitted by:Tanmay Gangwar (091202064)

Submitted to: Mr.Bharatish Ballal

held a 67 percent equity interest in Hutchison Essar Limited (“HEL”). tax could not be recovered from the payer. “person” liable to withhold tax (in section 195) could not include a non resident having no presence (in India). . through a host of intermediate companies. on demand by the Revenue authorities. The Indian Revenue authorities issued show cause notice to Vodafone arguing that they had failed to discharge withholding tax obligation with respect to tax on gains made by Hutch on sale of shares to Vodafone. Unless the payee had defaulted in making payment of taxes. a Dutch resident company acquired interest of Hutchison Telecommunications International Limited (“Hutch”) (a company registered in the Cayman Islands) in CGP Investments (Holdings) Ltd (“CGP Investments”) also registered in Cayman Islands. Key Questions before the High Court • Whether the show cause notice issued by the Revenue authorities was without jurisdiction as Vodafone could not be said to be liable under section 201 of the Income tax Act 1961( “Act”) for not withholding tax ? • Whether the provisions relating withholding tax obligation under section 195 of the Act have extra territorial application and a non resident without presence in India has an obligation to comply with it? • Whether the transaction per se resulted in income chargeable to tax in India? Vodafone’s Petition and Arguments • It was not in default (under section 201) for not withholding tax as the law applied to situations where tax had been withheld and not deposited.Background and facts of the case Vodafone International BV (“Vodafone”). an Indian telecom company. Hence. since such an interpretation would amount to treating unequal’s as equal by imposing onerous compliance obligations as applicable to residents or non. Tax is the primary obligation of the payee.residents having a presence in India. • Giving a contextual interpretation. CGP investments. to impose an obligation where no withholding had been made was unconstitutional. Vodafone filed a writ petition in the Mumbai High Court challenging the jurisdiction of the Revenue department.

. motivated to impose an obligation on payer to withhold tax. any country may impose liabilities. What also went in favour of the Revenue Department was its argument that Vodafone’s transaction could not have been a mere acquisition of shares overseas as it was conditional upon approval of Indian regulatory authorities like the Foreign Investment Promotion Board. VERDICT In a landmark ruling the Bombay High court said Vodafone Group Plc is liable for an estimated $2. It held that Vodafone’s basic objective appeared to be acquisition of a business interest in India. even upon persons not within its allegiance. Vodafone also challenged the constitutional validity of retrospective amendments to sections 191 and 201 of the Act. change in controlling interest in Indian companies was only incidental to change in foreign shareholding. According to this doctrine.6 billion in taxes for its 2007 acquisition of one of India's largest mobile phone companies. The Revenue Department also cited statements made by the Chief Executive Officer of Vodafone.• The transfer was with respect to ownership of shares in a foreign company and not a capital asset in India. The American principle of Doctrine of Effects was referred to by the court. in the telecom licenses issued by the Department of Telecommunications. the company’s annual reports and the interest acquired by Vodafone in joint venture with Essar.” Vodafone ‘s argument that its international company had merely acquired a Cayman Islands company which in turn held shares in the Indian company was not accepted by the court which said it found this argument too simplistic. for conduct outside its borders that has consequences within its borders which the country represents. Further.

Direct Taxes Code 2010 (DTC): DTC which will come into effect on April 1. For example. which have already taken place and where the revenue department will make an attempt to take support of the Bombay High Court judgement to tax those transactions.S. in turn. 4 place in the process. India was all set to become the No.the major component of which is M&A -. According to the United Nations Conference on Trade and Development (Unctad).IMPLICATIONS OF VODAFONE CASE Impact on cross-border transactions: This ruling seems to suggest a fundamentally different approach to taxation of transactions where there is a transfer of controlling interest in India regardless of the fact that such transfer is effected by way of sale of shares of an overseas company.. The tax policy direction seems to be to tax only those transactions where there is sale of substantial business interests in the Indian company and not where there is either portfolio sale or a sale of a block of shares not resulting in outright sale of the business in India. 2012 specifically spells out the conditions under which indirect transfer will be subject to tax in India. IMPACT ON FDI’s The Vodafone case. SEVERAL LEGAL ISSUES ARISE FROM THE CASE: (i) Whether a non-resident seller (Vodafone International) is liable to tax in India on sale of shares of the foreign SPV? (ii) Is a non-resident purchaser (HTIL) liable for deduction of tax on purchase of shares of the foreign SPV while making payment to the non-resident seller? . That could be at risk now.e. pushing the December 2012. amongst other countries. sale of a foreign company not being subject to tax in India. Having said this. where there is not an outright sale of business in India but a large interest in the Indian company is indirectly transferred through shares of a foreign company. the earlier position should prevail i. This will create a degree of uncertainty in respect of similar transactions . in cases which can be distinguished on facts and especially in those situations where there is no transfer of business or other valuable commercial rights in India it will still be possible to argue against taxation arising in India. 2 destination for foreign direct investment (FDI) -. could apply the brakes on cross-border deal-making in the country. India has thus joined China . in attempting to tax indirect transfers and to this extent cross-border transactions will need to factor in the current view of Revenue as well as proposed changes in the DTC so as not to be caught by surprise at a later stage. down to the No.

This is because there is a higher tax risk weightage which will be assigned to India as a tax jurisdiction. Therefore. the Bombay High Court ruled that the Vodafone-Hutchison deal is taxable in India. But the implications are wider. experts point out. It is not that people will drop an M&A deal if India is involved. there will no uncertainty. • The return expectation is now going to be higher.(iii) Whether an Indian company can be treated as ‘agent’ of the non-resident purchaser and held liable for deduction of tax? (iv) Can the law impose tax retrospectively? IMPACT ON M&A • The Vodafone issue has been around for the past three years most M&A transactions [since then] have been very careful in structuring the deals. • The key issue in case of Vodafone is not the stated law but the substantive nature of the transaction and the growing tendency of tax authorities worldwide to disregard structures not having commercial substance. The court has stated that the purchase of shares of a foreign company by one non-resident from another non-resident attracts Indian tax if the object is to acquire the Indian assets held by the foreign company. But this is also going to give more clarity on how the Indian government is going to tax such deals. • In a 200-page order delivered on September 8. . while you may ascribe a higher risk weightage because there is going to be higher tax.

the apex court issued notices to the tax authorities directing them to decide within four weeks the liabilities of Vodafone. fighting a tax bill in India from its 2007 purchase of Hutchison Whampoa Ltd’s mobile business in the country. • • • The Vodafone case is being keenly followed in other countries that still don't have their legal position clear. The tax department had raised a demand for Rs. had filed an appeal with the court in June challenging the tax department’s jurisdiction over the bill. “Investors who are planning to enter into India hoping there will be no tax liability will think twice. While refusing to stay the high court order.” said Jagannadham Thunuguntla. 12. The Supreme Court on 27th September 2010 refused to offer any immediate relief to Vodafone. “This will make the deals costlier for strategic buyers and private equity firms. lured by growth prospects in the world’s second-fastest growing major economy. But the decision may prompt overseas firms to be more cautious about plans to enter India through acquisitions. The image of India would be impacted in global scenario as of now the Indian government is now recognized as someone who is laying down the rules for source taxation. . equity head of SMC Capital.Conclusion: The high court ruling came as foreign firms show renewed interest in acquiring Indian companies.000 crore as tax on the 2007 deal.” Vodafone. which has challenged the Bombay High Court order allowing the government to tax the company's USD 11billion deal with Hutch. The case may lead to diversion of FDI’s and further cross border deal from INDIA to other countries leading a loss to economy as a hole.