Tax havens & recent retrospective amendments in income tax act, etrospective amendments in income tax act

1. Tax Havens
&
Recent Retrospective
Amendments In Income Tax Act
Discussion On
Vodafone v/s Income Tax Authority

2. Tax Havens

3. What Does Tax Haven Means?
A tax haven is a state, country or territory
where certain taxes are levied at a low rates or
not at all.

4. Advantages of Tax Havens
• Levy no significant taxes. Or very low tax rates
• Tax income earned in the country only.
• Some jurisdictions have tax treaties to avoid
double taxation
• Special Tax Incentive for offshore Business
setups

5. Types of Tax Havens
No Particular Example of Countries
1 No corporate tax
Bermuda, Cayman
Island
2 Low-taxed Countries
Hong Kong, Ireland,
Jersey
3
Jurisdictions with no (or very few) tax
treaties that offer nil (or very low) or
negotiated tax regimes for offshore entities
British Virgin Islands,
Cook Islands, US
Virgin Islands
4
No or nil tax regimes for offshore
companies with the benefit of tax treaties
Cyprus, Malaysia,
Mauritius
5
Fiscally beneficial regimes for intermediary
holding finance or licensing companies
with full benefits of treaty network
Austria, Belgium,
Denmark, France,
Germany

6. No Particular Example of Countries
6
Special tax concessions for entities engaged
solely in management services and
coordination activities for multinational
activities
Belgium, Denmark,
France, Germany,
Malaysia
7
Jurisdictions with fiscal incentive for new
residents
Ireland, Israel
8
Retirement havens for high net worth
individuals
Cyprus, Sri Lanka
9
Offshore jurisdictions for estate planning or
asset protection trusts
Bahamas, Cayman
Island
10 Special incentives for shipping operations Singapore, Cyprus
11 Encourage captive insurance activities Ireland, Mauritius
Types of Tax Havens Cont…

7. An Interesting Issue on
Tax Haven !!!

8. Vodafone Union of India

9. HTIL
• Hutchison Telecommunications International Limited
• Situated in Hong Kong
• Holding 100% Shares in CGP Investments Holdings Ltd
CGP
• CGP Investments Limited
• Situated in Cayman Island, Mauritius (a tax haven country)
• Holding 67% Shares in HEL
HEL
• Hutch Essar Limited
• Situated in India
• Formed by Merger of HTIL and Essar Group
VIH
• Vodafone International Holdings
• Situated at Netherland
• Subsidiary of Vodafone Group Plc

10. The Deal – A Diagrammatic View
HTIL
(Cayman Island Co.)
VEL
Vodafone Essar Limited
HEL
(Indian Co.)
VIH
(Vodafone International
Holdings)
CGP
(Cayman Island Co.)
Sold 100% holding of CGP to VIH
Renamed as

11. Apparent Understanding
Look At Approach
Foreign
Company 1
(HTIL)
Sold Foreign
Company 2
(CGP)
To Foreign
Company 3
(VIH)
Transaction Took
Place Outside
India in Foreign
Currency
There is no
Territorial Nexus
Resultant Capital
Gain can’t be
taxed in India

12. Contention Of The Income Tax Dept.
Contention 1
Offshore Share Transaction
Result in Transfer of Shares in HEL from HTIL to VIH
Indirect Transfer of Capital Asset Situated in India
Relevant Provision :- S. 9 (1) (i) L-4
Income accrues/Arising, Directly/Indirectly through
transfer of Capital Asset situated in India = Deemed to
accrue/arise in India.

13. Contention 2
Controlling Interest In HEL is Capital Asset situated in India u/s 2(14)
On account of transfer of shares in CGP Inv Ltd by HTIL to VIH
Controlling Interest of HTIL in HEL gets extinguished
Extinguishment of Right = Transfer u/s 2(47)
Activates S.9(1)(i) L-4

14. Indian Income
Comes within the Scope
of Total Income S. 5
Comes within the
Charging Section 4
Taxable In India
If it is Taxable in India
Section 195 Attracts to
VIH
Resultant Gain

15. Action by Income Tax Dept.
Specifies as to why it should not be
treated as an Assessee In Default
(AID) U/s 195?
Issued a Show Cause Notice u/s 201

16. Bombay
HC
Filed a Writ Petition
Action By The Assessee
• Challenging the legal validity of the SCN
• Contending that the transaction was only in
respect of shares of CGP in Cayman islands; and
• That being a capital asset situated outside India,
• No income had accrued or arisen in India

17. Decision of Bombay HC
• Bombay High Court Concurred with the
Viewpoint of the department
• Bombay High Court refuses to Interfere
• SCN was not Quashed
• Vodafone was, therefore, liable to deduct
TDS on the payment made to HTIL and
therefore SCN is a Valid Notice.

18. Supreme
Court
Aggrieved By the Order of HC.
Files an Appeal to
Response to the Order
By The Assessee

19. Decision Of Supreme Court
The word ‘Indirectly’ qualifies for ‘accruing/arising’ and
doesn’t qualify for ‘transfer’
S.9(1)(i) cannot by a process of interpretation be
extended to cover indirect transfer of CA situated in
India
To do so would amount to changing the ambit of S.9(1)(i)
Therefore language employed in S.9 (1) (i) L-4, you
cannot bring indirect transfer within its fold
Such Interpretation will make the words ‘…situated in
India…’ meaningless or nugatory.
Contention 1

20. Verdict of the Case !!!
• Present law doesn’t cover indirect
transfers or off shore share transactions
• Don’t follow Look Through Approach
• Follow Look at Approach

21. Decision Of Supreme Court –
Contention No.2
• Shares in a Company = Bundle of Shares
• One such Right = Voting Right
• If Share Holding Increases VR Increases then Controlling
Interest also increases
• Control of a Company resides in Voting Power
• Controlling Interest is a natural Incident of ownership of
share.
• Controlling Interest is not Independent / Distinct
/Dissectable Capital Asset
• Shares and the right which eminate from them flow
together and cannot be dissected.
• CI gets automatically shifted as a result of transfer of
shares.
• Control and management is a facet of holding shares
• Conclusion: This is a Straight jacket case of transfer of
Shares in a foreign Company between two non
residence outside India .
• Therefore section 9(1)(i) L – 4 doesn’t apply
• S.5 X S.4 4 – X, Not taxable, No TDS Deduction u /s 195.
SCN = Invalid
• Note: S.195 applies only to a payment made by a
resident. If the Payer is NR s.195 doesn’t apply.

22. Major Amendments
No Section Name
Amendment
Inserted
1 2(14) Capital Asset Exp.
2 2(47) Transfer of Capital Asset Exp. 2
3 9(1)(i)
Income Deemed to
Accrue or Arise in India
Exp. 4
4 9(1)(i) Exp. 5
5 195(1)
Other Sum paid to Non-
Resident
Exp. 2

23. Retrospective Amendments To
Supercede The Ruling Of
Supreme Court

24. Section Amended: Section 2 (14)
Segment of Ruling
Superseded
Amendment – Explanation
inserted to clarify that
Controlling interest is not an
identifiable or distinct capital
Asset independent of the
holding of shares
“Property” includes any
right in or in relation to an
Indian company , including
rights of management or
control or any other rights
whatsoever

25. Section Amended: Section 2 (47)
Off shore transfer of
shares in a foreign
holding company
does not result in
extinguishment of
transferor’s
controlling interest in
the Indian subsidiary
and therefore, there is
no element of transfer
Explanation – 2 is inserted below S.2(47)
to clarify that “ transfer” includes
Disposing of or parting with an asset or
any interest therein, or
Creating any interest in any asset in any
manner whatsoever,
Directly or indirectly, absolutely or
conditionally, voluntarily or
involuntarily, by way of an
agreement(whether entered in to in India
or outside India or otherwise,
Notwithstanding that such transfer of rights has been
characterized as being effected or dependent upon or flowing
from the transfer of a share or shares of a company registered or
incorporated outside India”

26. Section Amended: Section 9(1) (i)
Segment of Ruling
Superseded
Amendment– Explanation 4
inserted to clarify that
Indirect transfer of capital
asset situated in India is not
covered by s. 9(1)(i). The
argument of look through
lacks merit
The expression “through”
shall mean “ by means of” in
consequence of” or “by
reason of”

27. Section Amended: Section 9(1) (i)
Segment of Ruling
Superseded
Amendment – Explanation 5
inserted to clarify that
To read indirect transfer into
S.9(1)(i) would render the
words ‘capital Asset Situated
in India’ nugatory
Capital Asset situated in
India will also cover share of
interest in a foreign
company/ entity registered
or incorporated outside
India if such share /Interest
derives, directly or indirectly,
its value substantially from
the assets located in India

28. Section Amended: Section 195(1)
Segment of Ruling Superseded
Amendment
Resident
Non
Resident
Applicable
Payer Recipient S.195(1)
Non
Resident
Non
Resident
Not
Applicable
Non
Resident
Non
Resident
Applicable

29. Conclusion of the Case
Income accruing or arising, through or
from transfer of a capital asset situate in India, in
consequence of transfer of shares of a company
registered or incorporated outside India shall be
chargeable to tax in India & accordingly, tax shall
be withheld in accordance with provisions of
S.195

30. Thank You