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Presented By: Abhishek Kumar Singh Mayapati Mishra Sagar Kundu Shashwat Vaish

Vodafone International Holdings BV, based in Netherlands and controlled by Vodafone UK, obtained the controlling interest and share of CGP Investments Holdings Ltd (CGP) located in Cayman Island for a value of $11.01 billion from Hutchinson Telecommunications International Ltd (HTIL), which had stake in Hutchinson Essar Ltd (HEL) that handled the companys mobile operations in India. HEL had its stake in CGP Holdings, from which Vodafone bought 52 per cent of HELs stake in 2007, thereby vesting controlling interest over them.

Vodafone International Holding (Vodafone NL) was issued an order by the Indian Tax Authority assessing a capital gains tax alleged to have arisen on acquisition of controlling interest in an Indian entity, Vodafone-Essar Ltd from Hutchison Essar in September ,2007. The Tax Authority has alleged that Vodafone NL failed to withhold Indian tax on the payment of consideration made to Hutch for acquiring the controlling interest Vodafone NL filed a writ petition in the Bombay High Court (HC) against the Tax Authoritys order The HC commenced proceedings on the writ petition on 4 August 2010

The subject of the transaction is a composite transaction involving a transfer of rights in an Indian company This resulted in an accrual or deemed accrual of income from a source of income in India or from an asset in India or through the transfer of capital asset in India The transfer of shares of the Cayman Islands entity was a means to transfer the controlling interest in India There was a presence of territorial nexus in India for the transaction carried out and accordingly there was liability on Vodafone NL to withhold taxes

The provisions were not applicable to the current case and the primary obligation to discharge the tax was with the payee (Hutchison Telecommunications International Limited) Unless the payee had defaulted in making payment of taxes, on demand by the Revenue authorities, tax could not be recovered from the payer The withholding tax provisions cannot have extra-territorial application i.e. cannot apply in an offshore transaction involving two non residents in respect of a capital asset (i.e. shares) and payment outside India The transaction is not chargeable to tax in India since it involves transfer of shares of a non-resident company by one non-resident to another and is not a transfer of a capital asset situated in India

It holded that the notice is legally tenable and thus dismisses the writ petition The following are the observations made by the High Court: Income was earned towards consideration for transfer of its business/economic interests as a group The subject matter of the present transaction is nothing but transfer of interests, tangible and intangible in Indian companies and not an innocuous acquisition of shares of a Cayman Islands Company The interest in Telecom License is jointly held with the Essar Group along with the use of Brand & Goodwill and non-compete rights given by HTIL and so there is a right to enter into Telecom Business in India, with a premium for the controlling interest As there was admittedly a transfer of controlling interest in the Indian company, there was an extinguishment of rights and relinquishment by the transfer or in the shares of the Indian company which constituted a transfer 7

The shares in the Cayman company were merely the mode or the vehicle to transfer the assets situated in India The choice of the assesse in selecting a particular mode of transfer of such assets will not alter or determine the nature or character of the asset As the assesse (Vodafone) had wilfully failed to produce the primary/original agreement and other prior and subsequent agreements/documents , so it was impossible to appreciate the true nature of the transaction and the constitutional validity of Income-tax provisions could not be gone into It is settled law that a writ cannot be entertained against a mere show-cause notice unless the Court is satisfied that the show cause notice was totally unjustified in the eye of law for absolute want of jurisdiction of the authority to even investigate into facts

Vodafone raises pertinent questions on the issue of taxation of non-resident entities. The judgment will have direct impact on transactions of major acquisitions like SABMiller-Foster and Sanofi Aventis-Shanta Biotech. Similar transactions that existed earlier are Sesa Goa, AT&T and General Electric. For example British firm Cairn Energy has already agreed to pay tax in India as well as the UK on selling its stake in Cairn India to Vedanta Resources from $6.65 billion to $8.48 billion. Depending upon the size of the stake sale, the tax liability could range between $868 million and $1.1 billion.

The Supreme Court today ruled in favour of Vodafone in the $2 billion tax case saying capital gains tax is not applicable to the telecom major. The apex court also said the Rs 2, 500 crore which Vodafone has already paid should be returned to Vodafone with interest. The decision, experts said, will be a big boost for cross-border mergers and acquisitions here. The Income tax departments contention, if upheld, would have rendered standard transaction structures too risky forcing foreign companies to weigh potentially new litigation and insurance costs. "The government has no jurisdiction over Vodafone's purchase of mobile assets in India as the transaction took place in Cayman Islands between HTIL & Vodafone," Chief Justice S.H. Kapadia said.

Can effect Indias as a favourable investment destination. Since the new law proposed is retrospective in nature , many past deals will be under the ambit of taxmen.Thus the investors will feel jittery about it. Mr Mukherjee has gone a step ahead and introduced the so-called validation clause in the Finance Bill to revive tax demands arising out of transfer of capital assets situated in India. The provision is expected to play a key role in government's strategy if there are fresh legal battles-which is bound to happen in this case if the new law is passed.

Finance secretary R S Gujral told reporters that "we are saying that there is certainty of tax". His colleagues added that the proposal was not unique as there was a long history of the Income Tax Act being amended with retrospective effect to overcome the decisions of the court and their constitutional validity has been upheld They also dismissed suggestions that the proposed amendments would diminish India's attractiveness and argued that other countries such as China "make retrospective clarification" to protect their tax base. "Foreign investors are not seeking certainty of no tax in India. But they are looking for certainty of taxing provisions which have been provided by of these amendments," an official said. More than the tax issues, a large market and cheap cost of operations are among the key drivers of

First, Vodafone pays the tax after the government revives the tax demand. If this were to happen, can the government look at paring dues of the company by working out a compromise formula? A possible compromise could be waiver of interest and penalty to bring down tax dues to around Rs 9,000 crore(out of total 19,900 crores )? However, a compromise, if any, could set a precedence as the government is also looking at raising tax demands on other such deals since it sees a revenue gold mine. Second, Vodafone challenges the constitutional validity of the Budget proposal. That looks likely. Then Indian courts will take a decision. So, it could mean a long battle ahead for Vodafone. The government took 17 years to end its legal wrangle with ITC. How long would it take to settle the tax dispute with Vodafone is anybody's guess. www.


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