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Tax On Capital

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an analysis of the vodafone judgement

an analysis of the vodafone judgement

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  • 1. Vodafone Vs. Union of India -An Analysis of the Judgment Complied by: Shuchi Pandey Vth Year University of Burdwan
  • 2. Description of the Vodafone Essar Transaction
    • One non-resident company, Hong Kong-based Hutchison Telecommunications International Limited
    • Transferred to a second non-resident company, UK-based Vodafone Group plc
    • An indirect controlling interest in the Indian company Hutchison Essar Limited
    • Change in the ownership of an Indian company by virtue of a transfer of shares in an offshore holding entity whether is a disposition giving rise to a taxable capital gain in India?
  • 3. Contentions of Vodafone
    • Vodafone did not consider that the transaction was taxable in India and claimed the following:
    • The transaction was between 2 non-resident entities, by virtue of a contract executed outside India , wherein consideration was paid outside India for the purchase of a capital asset of an offshore company;
    • The tax liability was to be borne by Hutchinson Telecom International Ltd. (“HTIL”), the seller;
    • Vodafone was not liable to withhold tax.
  • 4. Contentions of Tax Authority
    • Transaction involved transfer composite of rights and entitlements of local assets
    • The underlying asset was situated in India and was central to the valuation of shares
    • HTIL sold its rights in the Indian asset and the right to do business in India;
    • Vodafone resulted in having operational control over the Indian asset
    • Vodafone also entered into separate agreements with the Indian entities to conduct business in India.
  • 5. Statutory Provisions
    • India does not have a double taxation avoidance agreement with Cayman Islands. 
    • Requires any “person” making any payment to any other “person” to withhold tax at applicable rates if such payment is chargeable to tax under Indian law.
    • Income which accrues or arises in India , or is deemed to accrue or arise in the hands of a non-resident, is taxable in India.
    • Additionally, any income which a non-resident receives from the transfer of a capital asset situated in India is deemed to accrue or arise in India.
  • 6. Liability to tax of Non- Residents in India
    • Based on the nexus connecting the person sought to be taxed with the jurisdiction which seeks to tax.
    • transaction is chargeable to tax is determined by Sections 5(2), 9(1) and 193 of the Act.
    • Section 5(2) enunciates that the income of a non-resident from
    • whatever source derived is included in the total income if:
    • it is received in India;
    • deemed to be received in India;
    • accrues in India;
    • deemed to accrue in India;
    • arises in India; or
    • deemed to arise in India.
  • 7.
    • As per section 9(1) Income is deemed to accrue or arise in India
    • 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.
    • Where an asset or source of income is situated in India or where the capital asset is situated in India, all income which accrues or arises, directly or indirectly, through or from it shall be treated as income which is deemed to accrue or arise in India.
  • 8. Comments by the Court on the issue
    • The essence of the transaction was a change in controlling interest in HEL which constituted a source of income in India
    • Transaction and the agreements executed between the parties indicated that the parties were aware of the composite nature of the transaction
    • It acquired through the agreement
    • the various assets and liabilities including a 52% stake in HEL; and
    • stake in control premium, use and rights to the Hutch brand and a non-compete agreement.
  • 9. Pertinent Finding by the Courts
    • The essence of the transaction was a change in controlling interest in HEL which constituted a source of income in India , chargeable to tax under Section 5(2) of the Act.
    • Vodafone was under a statutory obligation to deduct income tax at source under Section 195 of the Act.
    • In case of cross-border mergers and acquisitions between non-resident entities, wherein, interest is situated in India then such transaction will come under the purview of tax laws.
    • The tax authorities to decide how to apportion the income that has accrued to HTIL as a result of the “ nexus with the Indian jurisdiction.
  • 10. Conclusion
    • The Vodafone case is the first matter where the authorities have attempted to tax capital gains on indirect acquisition of Indian interest.
    • Foreign investors will be more cautious while investing in India
    • The Multinational Enterprises, will face difficulty to reorganize their holding to avoid tax to be charged in India
    • The judgment was more suggestive than conclusive.