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This is a landmark case, as it is for thefirst time that the tax departments have

sought to tax a company through a

mechanism of tracing the source of

acquisition

Presented by :-Ekta suriAnirban chakrabortyVishal mohlaSumit guptaSwati karki

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Introduction

y Vodafone Group Plc is a global telecommunications companyheadquartered in London, United Kingdom.

y The name Vodafone comes from voice data fone, chosen by thecompany to "reflect the provision of voice and data services over

mobile phones"y It is the world's largest mobile telecommunications company

measured by revenues and the world's second-largest measured bysubscribers (behind China Mobile), with over 391 millionsubscribers as of September 2011.

y Vodafone owns and operates networks in over 30 countries andhas partner networks in over 40 additional countries.

y It owns 45% ofVerizon Wireless, the largest mobiletelecommunications company in the United States measured bysubscribers.

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HISTORY

y The Company was incorporated under English law in 1984 as RacalStrategic Radio Limited .

y After various name changes, 20% of Racal Telecom Plc capital was

offered to the public in October 1988.y The Company was fully demerged from Racal Electronics Plc and

became an independent company in September 1991, at which timeit changed its name toVodafone Group Plc.

y

After the merger with AirTouch Communications, Inc. whichcompleted on 30 June 1999. The Company changed its name toVodafone AirTouch Plc in June 1999 but then reverted to its formername,Vodafone Group Plc, on 28 July 2000;

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Cont.

y The acquisition of Mannesmann AG completed on 12 April 2000.Through this transaction vodafone acquired businesses in Germanyand Italy and increased there indirect holding in SFR.

y through a series of business transactions betcompanyen 1999 and2004 they acquired a 97.7% stake in Vodafone Japan. This wasthen disposed of on 27 April 2006; and

y on 8 May 2007 it acquired companies with interests in VodafoneEssar for US$10.9 billion (5.5 billion), thereby getting controls

of Vodafone Essar.

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Other transactions that have occurred

since 31 March 2008 are as follows:-

y 19 May 2008 Arcor: company increased their stake in Arcor for460 million (366 million) and now own 100% of Arcor.

y 17August 2008 Ghana: company acquired 70.0% of GhanaTelecommunications for cash consideration of 486 million.

y 9 January 2009 Verizon Wireless: Verizon Wireless completed itsacquisition of Alltel Corp. for approximately US$5.9 billion (3.9billion).

y 20 April 2009 South Africa: company acquired an additional 15.0%

stake in Vodacom for cash consideration of ZAR 20.6 billion (1.6billion). On 18 May 2009 Vodacom became a subsidiary.

y 10 May 2009 Qatar: Vodafone Qatar completed a public offering of40.0% of its authorised share capital raising QAR 3.4 billion (0.6billion

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y 9 June 2009 Australia: Vodafone Australia merged with Hutchison3G Australia to form a 50:50 joint venture, Vodafone HutchisonAustralia Pty Limited.

y 10 September 2010 China Mobile Limited: company sold theirentire 3.2% interest in China Mobile Limited for cash consideration of4.3 billion.

y 30/31 March 2011 India:The Essar Group exercised itsunderwritten put option over 22.0% of Vodafone Essar Limited(VEL), following which company exercised their call option over theremaining 11.0% of VEL owned by the Essar Group.The totalconsideration due under these two options is US$5 billion (3.1billion).

y 3April 20

11SFR: company agreed to sell their entire 44% interestin SFR to Vivendi for a cash consideration of 7.75 billion (6.8

billion). company will also receive a final dividend from SFR of 200million (176 million) on completion of the transaction which, subjectto competition authority and regulatory approvals, is expected duringthe second calendar quarter of 2011.

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y 9 June 2009 Australia: Vodafone Australia merged with Hutchison 3G

Australia to form a 50:50 joint venture, Vodafone Hutchison Australia PtyLimited.

y 10 September 2010 China Mobile Limited: company sold their entire3.2% interest in China Mobile Limited for cash consideration of 4.3 billion.

y 30/31 March 2011 India:The Essar Group exercised its underwrittenput option over 22.0% of Vodafone Essar Limited (VEL), following whichcompany exercised their call option over the remaining 11.0% of VELowned by the Essar Group.The total consideration due under these twooptions is US$5 billion (3.1 billion).

y 3

April 2011

SFR: company agreed to sell their entire 44% interest inSFR to Vivendi for a cash consideration of 7.75 billion (6.8 billion).company will also receive a final dividend from SFR of 200 million (176million) on completion of the transaction which, subject to competitionauthority and regulatory approvals, is expected during the second calendarquarter of 2011.

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TAX ISSUE INVOLVED

y Vodafone International Holdings BV, based in Netherlands andcontrolled by Vodafone UK, obtained the controlling interest andshare of CGP Investments Holdings Ltd (CGP) located in CaymanIsland for a value of $11.01 billion from HutchinsonTelecommunications International Ltd (HTIL)

y HTIL had stake in Hutchinson Essar Ltd (HEL) that handled thecompany's mobile operations in India.

y HEL had its stake in CGP Holdings, from which Vodafone bought67% of HEL's stake in 2007, thereby vesting controlling interest overthem.

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y In September 2007, the Revenue Authorities issued a show-cause notice to VIHB for failure to withhold tax on theamount paid for acquiring the said stake, as the RevenueAuthorities believed that HTIL was liable for capital gains it

earned from the transfer of shares of CGP, as CGP indirectlyheld stake in HEL.

y I-T Department of india claimed that since capital gains were

made in India through the deal, Vodafone was liable to pay thetax and issued a show cause notice to it asking as to why itshould not be treated as a representative assessee of theVodafone International Holding.

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The holding structure of this transaction

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Turn of events in the case

y TheTelecom major had challenged the income tax demand of Rs.11,000 crore that was levied on them by the tax department for theoverseas deal with Hutchison.

y

Vodafone challenged the showcause notice by IT department beforethe Bombay high court.

y The appeal was rejected by the high court in December 2008 whichwas challenged by Vodafone.

y The Supreme Court had also dismissed Vodafone's appeal in January2009 and directed IT Department to decide whether it had

jurisdiction to tax the transaction.

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Highlights of bombay high court ruling(329 ITR 126)

y Under Section 9(1)(i) of the Income-tax Act, 1961 (the Act) income ischargeable to tax in India

y Vodafone received the following rights and entitlement from HTILwhich constitute capital assets as per Section 2(14) of the Act:

y

Indirect interest in HELy Controlling rights in certain indirect holding companies of HEL

y Controlling rights through shareholders agreement which includedthe right to appoint directors in certain indirect holding companies ofHEL

y

Interest in form of preference share capital in indirect holdingcompanies of HEL

y Rights to use Hutch brand in India

y Non compete agreement with Hutch brand in India

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CONTDy Apportionment of income

y Where a source of income or a capital asset is situated in India, incomewhich accrues or arises directly or indirectly through or from it, isdeemed to accrue or arise in India

y Assessing Officer (AO) was asked to do apportionment between

income that has deemed to accrue or arise as a result of nexus with Indiaand that which lies outsidey Extra territorial operation of Section 195 of the Act

y The provisions of Section 195 can apply to a non-resident providedthere is a sufficient territorial connection or nexus between him andIndia

y Vodafone by virtue of its diverse agreements has nexus with Indianjurisdiction

y Proceedings initiated under Section 201 for failure to withhold tax byVodafone cannot be held to lack jurisdiction

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y T

he Supreme Court, however, had observed that Vodafone wouldbe at liberty to challenge the IT department's decision if it wentagainst Vodafone and the question of law would also be open.

y The IT Department passed an order in May 2010 and held that ithad competent jurisdiction to treat Vodafone as an 'assessee in

default' for failure to deduct tax at source.y This decision of the IT department was challenged by Vodafone

before the Bombay high court.y The high court, by its September 8, 2010 judgement, dismissed

Vodafone's petition and held that "the essence of the transactionwas a change in the controlling interest in HEL which constituteda source of income in India". It was challenged by Vodafonebefore the Supreme Court on September 14, 2010.

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y The Supreme Court, by its interim order on September27, 2010, refused to stay the High Court verdict andasked the IT department to compute the tax liability of

Vodafone.y On November 15, 2010 the apex court asked Vodafone

to deposit Rs 2,500 crore and a bank guarantee of Rs8500 crore before the hearing of the case began.

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Arguments of government of India

y Since capital gains were made in India through the deal, Vodafone wasliable to pay the tax.

y Income from the sale of CGP share would fall within Section 9 of theIncomeTax Act, 1961 (the Act) as that section provides for a lookthrough.

y HTIL, under the Share Purchase Agreement (SPA), had extinguished itsrights of control and management over HEL and consequent upon suchextinguishment, there was a transfer of capital asset situated in India.

y Introduction of CGL was only with intention to avoid tax and it had nobusiness and commercial purpose.

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- CGP was a mere holding company and since it could not conductbusiness in Cayman Islands, the situs of the CGP share existed where theunderlying assets are situated, that is in India.

- The transfer of the CGP share was not adequate in itself to achieve theobject of consummating the transaction between HTIL and VIH and thatthere was a transfer of other rights and entitlements, and these rightsand entitlements constituted in themselves capital assets.

- As the transfer of controlling interest is taxable in India, VIHB shouldhave deducted tax at source under Section 195 of the Act. HEL can beproceeded against as representative assessee under Section 163 of theAct.

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Argument of the company

y The Revenue Authorities had no jurisdiction over thetransaction, as the transfer of shares had taken place outsideIndia between two companies incorporated outside India

and the subject of the transfer was shares, the situs of whichwas outside India.

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Supreme Courts observations

and ruling

y Every strategic foreign direct investment (FDI) coming to India, as aninvestment destination, should be seen in a holistic manner. Whiledoing so, the Revenue/Courts should keep in mind the followingfactors: the concept of participation in investment, the duration of

time during which the Holding Structure exists; the period of businessoperations in India; the generation of taxable revenues in India; thetiming of the exit; the continuity of business on such exit.

y In short, the onus will be on the Revenue to identify the scheme andits dominant purpose.

y Hutchison structure has been in place since 1994. It operated duringthe period 1994 to 2007. It has paid income tax ranging from INR 3crores to INR 250 crores per annum during the period 2002-03 to2006-07.Thus, it cannot be said that the structure was created or usedas a sham or tax avoidant.

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y The question of providing look through in the statute or in the

treaty is a matter of policy. It is to be expressly provided for inthe statute or in the treaty. Similarly, limitation of benefits(LOB) has to be expressly provided for in the treaty. Suchclauses cannot be read into the Section by interpretation. Hence,court held that Section 9(1)(i) is not a look through provision.

y

On the facts and circumstances of this case, under theHTIL structure, as it existed in 1994, HTIL occupied only apersuasive position/influence over thedownstream companies qua manner of voting, nomination ofdirectors and management rights. Hence, there was no

extinguishment of rights as alleged by the Revenue.y The sole purpose of CGP was not only to hold shares insubsidiary companies; but also to enable a smooth transition ofbusiness, which is the basis of SPA. Therefore, it cannot be saidthat CGP had no business or commercial purpose.

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Supreme Court Ruling

Transfer of shares of a Foreign Company, a Special Purpose Vehicle,which holds underlying assets in India, by a non-resident to anothernon-resident would not be liable to tax in India [VodafoneInternational Holdings B.V. v. Union OfIndia & Anr (Civil Appeal No.

733 of 2012)] The Supreme Court ruled that the company is not liable for payment

of taxes amounting to $2.2 billion slapped on it for the $11bnacquisition of the Indian assets of China's Hutchison

Telecommunications in 2007 in an overseas deal. The Indian government is asked to return the taxes with 4 percent

interest by the apex court.

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NOTES

y 1. Section 201 of the Act broadly provides that any person (referred to inSection 200 of the Act), and in cases referred to in Section 194, theprincipal officer and the relevant company, who does not deduct the whole

or any part of the tax, or after deducting fails to pay the tax as required byor under the Act, he or it shall, without prejudice to any otherconsequences which he or it may incur, be deemed to be an 'assessee indefault' in respect of the tax.

2. Section 5(2) enunciates that the income of a non-resident from whatever

source derived is included in the total income if (i) it is received in India;(ii) deemed to be received in India; (iii) accrues in India; (iv) deemed toaccrue in India; (v) arises in India; or (vi) deemed to arise in India.

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y 3. Section 9(1) explains the circumstances in which income isdeemed to accrue or arise in India and includes all incomeaccruing or arising in India, whether directly or indirectly (a)through or from any business connection in India; or (b)through or from any property in India; or (c) through orfrom any asset or source of income in India; or (d) throughthe transfer of a capital asset situated in India.

4. Section 195 provides for deduction for tax at source upona payment to a non-resident or foreign company

5.The proposed DTC says that if 50 per cent of the value of

the shares being transferred is derived from assets situated inIndia, it is deemed to be taxable in India.

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Impact on other cases

y Idea Cellular-AT&T $ 150 mn deal pending in BombayHC

y GE-Genpact $ 500 mn deal pending in Delhi HC

y Mitsui-Vedanta $981 mn deal in Sesa Goa pending inGoa HC

y Sabmiller-Fosters 2006 deal pending in Bombay HC

y SanofiAventis-Shantha Biotech $770 mn deal pending inBombay HC

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Cases referred

y Azadi Bachao Andolan case

y

McDowell and Co Vs. CTO

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Azadi Bachao Andolan case

y Income arising on sale of shares is generally classified asCapital Gains and is generally taxed in the Country in whichthe gain arises.This taxation rule is called the Source Rule ofTaxation.

y In accordance to Article 13 of the Treaty, Capital Gains aretaxed in the Country of Residence as against the SourceCountry. To explain this, if a resident of Mauritius earnsCapital Gains from sale of shares in India, he will be taxed

only in Mauritius and not in India.

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AZADI BACHAO ANDOLAN & OTHERS

Summary of facts

1994 Central Board of Direct Taxes (CBDT) Circular , clarification on Treatyprovision surge in FII investment

2000 Circular No. 789 (on April 13, 2000) (Circular), clarifying that capital gains

derived by a Mauritius resident from the sale of shares of an Indian company, shallin view of the Treaty be taxable only in Mauritius and not in India

Circular challenged in the High Court in a Public Interest Litigation

2002 Special Leave Petition in the Supreme Court filed by the Government ofIndia and CBDT

Ruling

Supreme Court upheld the India-Mauritius treaty (Treaty) for avoidance of doubletaxation by upholding that the benefits of treaty should be available to third countryresidents investing in India via Mauritius.

Judgment discusses important international tax issues of double non-taxation,treaty shopping, tax avoidance v. tax planning, form and substance in tax law

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McDowell and Co Vs. CTO

y Mcdowell And Co. Ltd. vs CommercialTax Officer on 17April, 1985

y Equivalent citations: AIR 1986 SC 649, (1985) 2 CompLJ137 SC, 1985 (5) ECC 259

y Bench: Y Chandrachud, D Desai, O C Reddy, EVenkataramiah, R Misra

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y McDowell and Co Vs. CTO, 154 ITR 148 SC is a watershed in theevolution of tax jurisprudence in India.

y For the first time, Supreme Court took a serious view of taxavoidance devices, and held that such devices will not stand thescrutiny of law if the object is only tax avoidance.

y It sought the aid of emerging techniques of interpretation in tryingto relate such tax avoidance devices to existing legislation.

y It chose to rely on the famous British ruling in Ramsey's case, inorder to expose the devices for what they really are, and to refuseto give judicial benediction.

y The tax department utilised the ruling to send tremors amongcorporate houses trying to take advantage of the legal frameworkof the law to reduce the tax burden.