A Case StudyVODAFONE V/S

INCOME TAX AUTHORITY

S Gautam & Associates

The case examines one of the largest merger and acquisition deals in India, how, Vodafone, one of the world’s largest mobile telecommunications company gained control over Indian Telecom Company Hutch Essar through intermediate companies situated in Mauritius (Cayman Islands).

The company Involved in this Case are as Follows:1. Vodafone Group Plc (London)

2. Vodafone International Holdings BV (Netherlands) Subsidiary of Vodafone Group Plc.

3. Hutchison Telecom International Ltd.(Hong Kong)

4. CGP Investments Holdings Ltd.(Mauritius)

5. Hutchison Essar Ltd.(India)

Introduction

Corporate Structure

Vodafone Group Plc:

Vodafone Group Plc incorporated in London (England )is one of the world's leading mobile telecommunications company.

It is world’s Fourth largest mobile operator in terms of subscribers and largest in terms of revenue.

The Company's ordinary shares are listed on the London Stock Exchange and the Company's American Depositary Shares ('ADSs') are listed on the NASDAQ Stock Market.

The Company had a total market capitalization of

approximately £71.2 billion at 12 November 2009.

Corporate Structure

Hutchison Whampoa:

Hutchison Whampoa Limited (HWL) of Hong Kong is a Fortune 500 company and one of the largest companies listed on the Hong Kong Stock Exchange.

Hutchison deals in the businesses of ports and related services, property and hotels, retail, energy, infrastructure , investments and telecommunications.

It belongs to the Cheung Kong Group and employs around 2, 20,000 people worldwide.

Flagship companies include Hutchison Port Holdings, H W Properties, Cheung Kong Infrastructure and Hutchison Telecommunications International Ltd.(HTIL)

Corporate StructureCGP Investments Holding :

CGP Investment Holdings Limited , is type of SPV Situated in Cayman Island , Owned by HTIL (Hong Kong).

CGP holds the controlling interest of Hutchison Essar (Indian ).

CGP Holds directly 61.95 % shares and indirectly 5.05 % shares through other subsidiary .

Corporate StructureEssar Group:

The Essar Group is a multinational conglomerate Corporation in the sectors of Steel, Energy, Power, Communications, Shipping Ports & Logistics as well as Construction headquartered at Mumbai, India.

Essar is managed by Shri Shashi Ruia, Chairman – Essar Group and Shri Ravi Ruia, Vice Chairman Essar Group.

Essar began as a construction company in 1969 and diversified into manufacturing, services and retail.

Essar has its foot print over Asia , Africa, Europe and the America, and employs more than 50,000 people across the globe.

Corporate Structure

Hutchison Essar: Hutchison Essar Ltd. (“Hutch India”), a company

incorporated in India in 1994. It was a joint venture of the Hong Kong-based Hutchison

Telecommunications International Ltd and the India-based Essar Group.

Hutch India was in the business of providing tele communications service in India.

It covers twenty three telecom circles in India and is based in Mumbai.

In Hutchison Essar, 66.9848% shares were held by CGP Investments (Holdings) Ltd, directly 61.95 % and Indirectly through other subsidiary 5.05% and Remaining 33.0152% were held by Essar Group of Companies.

Hutchison Telecom

International Ltd (Hong Kong)

CGP Investmen

ts Holdings

Ltd. (Maurutiu

s)

Hutchison Essar Ltd (Indian Co.)

Holding 100

% Shares in

CGP

Diagrammatic View

Holding 67 % Shares in HEL

Essar Group Ltd(India)

Holding 33 % in

HEL

Facts of the Case

On February 11, 2007, Vodafone agreed with HTIL to acquire the controlling interest of CGP Investments holdings Ltd for US$ 18.8 billion. Out of which Value of Hutch-Essar was US$11.1 billion . The Transaction closed on May 8, 2007.

Despite the Official name Being Vodafone Essar , its products are simply branded “Vodafone”

As a result of this sale, capital gains, estimated at $ 2 billion accrued to CGP Investment Holdings

Considered from the point of view of jurisdictions, it is clear that the sale transaction took place between the Dutch SPV (owned by a UK group) and the Cayman Islands SPV (owned by a Hong Kong company).

Vodafone Group plc (London)

HTIL (Hong Kong)100% Holding in

CGP (Mauritius)

CGP Investments Holding 67 % in Hutchison Essar

Ltd.(India)

Hutchison Essar Ltd

(Indian Co.)

Vodafone Essar Ltd.

(Indian Co)

Tran

sfer

100

% S

hares

of C

GP for

Conside

ratio

n of

560

Billio

n.

Turned To

Understanding the fact of the Case Diagrammatically

Vodafone International Holdings BV

(Netherlands)

Section 9(1)(i) define Income as , “all income accruing or arising, whether directly or indirectly,-through or from any business connection in India, or-through or from any property in India, or-through or from any asset or source of income in India, or-through the transfer of a capital asset situated in India.”

Definition of “Income”

Section 2(14) defines capital assets in IT act . As per this section , capital assets means Property of any kind held by an assessee whether or not connected with his business or profession .

Definition of “Capital Assets”

Since the deal was offshore, neither party thought it was taxable in India. But the tax department disagreed. It claimed that on capital gains ,Tax should have been deducted by Vodafone while paying Hutchison.

The Income Tax Department has claimed capital gains under Section 9(1) (i) of the Income Tax Act as it is of the view that the transaction involved transfer of an Indian Asset and that the profit made by HTIL from the sale of shares to Vodafone was generated in India.

Therefore, Vodafone had an obligation to pay withholding tax u/s 195 (1) in India before making payment of purchase price to HTIL.

Assessing Officer’s Appeal

Continued…….

Transfer of rights in HEL (India) via CGP Investment Holding Ltd . CGP Investment Holding Ltd. Is merely created to take benefits of Tax Heavens in Cayman Island (Mauritius).

As Capital gains arise on transfer of shares are exempt in Mauritius.

But if we consider a concept a Substance over Form, which clearly depicts that substance of a transaction is to transfer the rights in HEL Situated In India.

Vodafone Group plc (London)

HTIL (Hong Kong)100% Holding in

CGP (Mauritius)

CGP Investments Holding 67 % in Hutchison Essar

Ltd.(India)

Hutchison Essar Ltd

(Indian Co.)

Vodafone Essar Ltd.

(Indian Co)

Tran

sfer

100

% S

hares

of C

GP for

Conside

ratio

n of

560

Billio

n.

Turned To

Understanding the fact of the Case Diagrammatically

Vodafone International Holdings BV

(Netherlands)

Bombay High Court Decision On 08 September 2010 ,It was held that appeal done by

CIT is up to the mark Because of the following reasons:

As the purpose of entering into agreement is to acquire the controlling interest ,which HTIL (Foreign Co.) had in HEL(Indian Co.) and as acquired (controlling interest) by Vodafone International .

Income Tax Reference : Income Shall be deemed to be accrued

or arise in India U/s 9(1)(i).

Section 9(1)(i) define Income as , “all income accruing or arising, whether directly or indirectly,-through or from any business connection in India, or-through or from any property in India, or-through or from any asset or source of income in India, or-through the transfer of a capital asset situated in India.”

Definition of “Income”

Section 2(14) defines Capital Assets in IT act . As per this section , capital assets means Property of any kind held by an assessee whether or not connected with his business or profession .

Definition of “Capital Assets”

Assessee’s Explaination If today you buy 10% of the shares of a particular

company, let us say Jet Airways, does this mean that you automatically own 10 % of all of Jet Airways assets ?

Does this mean that 10 % of the entire fleet of aircraft now belongs to you ? by buying out a company that holds 67 % of HEL , it doesn’t mean that Vodafone know owns 67 % of assets of HEL.

Those assets continue to belong to HEL , which is a Separate legal entity based in India .

Vodafone International Holding BV

(Netherlands)

CGP Investments Holding 67 % in

Hutchison Essar Ltd.(India)

Hutch Essar Ltd. (Indian

Co.)

Vodafone’s Defend

By Becoming holding Co. of CGP it doesn’t

means that I(Vodafone)

holds 67 % of all assets in HEL (Indian

Co.)

Assessee’s Defend Diagrammatically Explained

Supreme Court decision Vodafone filed a review petition in Supreme court in

20,January, 2012. Supreme Court Reversed the decision of Bombay High

Court Because :

Assessing officer had no jurisdiction to tax the foreign transactions, as sale of shares in Cayman island.

Transfer of shares in CGP doesn’t amount to transfer of Capital assets situated in India , as per section 9(1)(1) under the 4th limb.

Bombay high court judgment held that transfer of Controlling interest , which is not an identifiable or distinct capital assets, independent of holding of shares and also not covers in Definition of Capital Assets u/s 2(14).

As Capital Assets is not taxable in India , so there is no Question of Deducting tax at Source u/s 195(1).

Tax Deduction at Source U/s 195 (1)

Any Person responsible for Paying to a non –Resident , not being a Company , or to a Foreign company, any interest (not being interest on securities) or any other sum chargeable under the provision of this act being chargeable under the head “Salaries” shall at the time of credit of such income to the account of the payee or at the time of payment therof in cash or by the issue of a cheque or draft or by any other mode which ever is earlier, deduct income tax theron at the rates in force.

I, therefore, find it difficult to agree with the conclusions arrived at by the High Court that the sale of CGPshare by HTIL to Vodafone would amount to transfer of acapital asset within the meaning of Section 2(14) of the Indian.Income Tax Act.

CONCLUSION

Thank You…..