INTRODUCTION• One of the most controversial areas in taxation under the Indian Income Tax Act, 1961 in recent days has been the Vodafone tax controversy.• Several important questions of law in the area of taxation of non-residents – pertaining to both chargeability and machinery provisions – are at issue in the Vodafone controversy.• The case provides a useful backdrop for anchoring the theoretical arguments on the taxation of non- residents.
Vodafone Controversy: An Introduction• The Supreme Court decided the long awaited tax controversy between Vodafone International Holdings B.V (VIH) and Tax Authorities in India.• The Judgement led VIH benefited with Rs. 12,000 Cr. The Judgement is a landmark judgement and has laid the guidelines for deciding the taxability of income under some of the controversial provisions of the Income Tax Act, 1961 such as interpretation of Section 9 in the Indian Tax legislations.• However, the facts and circumstances play a decisive role.• In this case, the motley assortment of the facts and circumstances are jumbled to the extent that it was really hard to decide whether the income is taxable under the Act or not.
HISTORYA non-resident company, Hutchinson International, held 67% shares in an Indian company named Hutchinson- Essar. This Indian company was a joint venture between Hutchinson International and Essar.The 67% shareholding in the Indian company was not a direct shareholding. Hutchinson held 100% shares of a foreign company, which in turn held 67% shares in the Indian company.Hutchinson transferred this shareholding of the foreign company to Vodafone. Thus, indirectly, the interest in the 67% shareholding was also transferred to VodafoneThe question which arose was, whether the income accruing to Hutchinson as a result of the transaction could be deemed arise in India by virtue of section 9 of the Act.
• Under Section 9, income received through the transfer of a capital asset „situate in India‟ is taxable in India.• The shares of a Mauritius company are situate in the Mauritius, not in India. Hence, the Revenue‟s argument is that the transaction is not a sale of shares simpliciter, but is (in substance) the sale of a capital asset situate in India.• The two main justifications advanced by the Revenue are based on lifting of the corporate veil over the Mauritius company on principles of corporate law; and over the application of general substance-over-form doctrines used in taxation.• The Indian Income Tax Department issued a show cause notice to Vodafone asking it to show cause as to why action should not be taken against it for failing to deduct tax at source under Section 195 of the Act while making payment of the consideration to Hutch.
• This show cause notice was challenged by Vodafone in a writ petition before the Bombay High Court under Article 226 of the Constitution of India. The issues which arose were, inter alia:• (a) Whether the transfer of the shares of a foreign company by a non-resident to a non-resident results in income being deemed to accrue or arise in India under Section 9 by virtue of the fact that the foreign company in turn held shares in an Indian company effectively resulting in controlling interest in an Indian company being transferred?• (b) Whether, assuming that the income could be said to have deemed to accrue or arise in India, there was any liability on Vodafone – the buyer/payer – to deduct tax at source? In other words, does Section 195 have an extra- territorial application so as to cast an obligation on Vodafone to deduct tax at source?
Statement of Facts• The matter is in relation to the acquisition of entire share capital of CGP Investment (Holdings) Ltd. (CGP) by VIH. According to the revenue authorities, VIH acquired 67% of the controlling interest in HEL.• On the other hand, VIH agreed to acquire the companies that control the 67% of the interests but not the controlling interests.• The revenue authorities issued a show cause notice to VIH on the grounds that VIH failed to withhold tax for acquiring the said stake, resulting in the capital gains which HTIL Hutchinson Telecommunications International Limited, an Indian Company from Cayman Islands (HTIL) earned from the transfer of shares of CGP.
Contentions of the VIH• VIH filed a writ petition in the Bombay High Court challenging the show cause notice of the revenue authorities.• The appellant raised the question on the jurisdiction of the revenue authorities over the transactions, as the transfer of the share was on a foreign land, between the companies incorporated in other countries and the subject matter, i.e., the shares being transferred, are not the rights, for e.g. the right to vote, right to call for and attend general meeting, etc.• There is no „look-through‟ provision in the Indian Tax Legislations. The „look-through‟ provision imposes tax on the gains arising out of a transfer of share outside the country if it results in the passing of control over a company which holds specified assets/property in the country. There is no such provision in Section 9 of the Act.
Contentions of the Revenue authorities• The revenue authorities contended that the transfer is not mere transfer of shares in CGP but also of composite rights of HTIL. There is also a „look through‟ provision in the Section 9 of the Act and the gains from the sale of CGP shares and rights are taxable in India.
Observations of the High Court• The Bombay High Court observed that the shares are a bundle of indivisible rights that cannot be separately transferred. These rights are inseparable from the ownership of the shares.• Vodafone purchased these rights from HTIL which constitute the „capital assets‟ under section 2 (14) of the Act. This income is taxable in India under Section 9 (1) of the Act.• The Assessing Officer was asked to do this apportionment of the income between the income arising or deemed to arise directly or indirectly in India and the income that lies outside India.• The Vodafone directly or indirectly, through its different agreements, entered into a nexus with the Indian jurisdiction. This made the appellant liable to pay interest under section 195 of the Act.
Appeal before the Supreme Court• VIH aggrieved by the decision of the Bombay High Court moved to the Supreme Court challenging the decision of the High Court. While delivering the decision following observations were made by the Supreme Court:• First revenue has to be ascertained based on the facts and circumstances that the transaction is sham or tax avoiding before applying the principle of piercing of corporate veil.• Section 9 (1) (i) is not a „look through‟. For the fair interpretation of the „lookthrough‟ provision, it has to be expressly provided in the statue or treaty, which is not in any of the Act or treaty in current situation.
• The structure of VIH or HTIL is not tax avoiding by nature. It is clear from the facts that the appellant has paid income tax ranging from Rs. 3 crore to 250 crore p.a. during the period of 2002 to 2007. Hence, it cannot be said that VIH is a short-term investor.• It is in Cayman Island where the transfer of CGP shares occurs and the register of the members of CGP is being maintained; and not in India. Hence, the revenue authority argument that the situs of CGP shares is situated in India is not admissible.• Section 195 of the Act does not hold well in current case as the transaction is of „outright sale‟ between two non- residents of a capital asset outside India.
Conclusion by the Supreme Court• The three member bench of the Supreme Court, viz, S.H. Kapadia, C.J Swatender Kumar and K.S. Radhkrishnan, headed by Justice Kapadia delivered the decision in the favour of Vodafone• S.C gives order to Bombay High Court to imposition of capital punishment of 12,000 Crore.
VODAFONE’S INDIAN ODYSSY KEYMILESTONE2007February;- Vodafone buys 67% in HUTCHISAN ESSAR for $11.5 billion, company renamed VODAFONE ESSAR.April;- FIBP clears deal subject to condition that minority shareholders can sell only the resident Indians.September;-Income tax department slaps Vodafone with a tax demand of 11,000 Crore . Says asset for which deal for done is in India.October;- Vodafone goes to Bombay High Court. Saying “it was a share transfer carried outside India
2008February ;-Government amend section 201 of IT Act, makes withholding tax mandatory with retrospective effectDecember;-HC dismisses Vodafone‟s petition, says that department has right to investigate the case, Vodafone appeals to Supreme court
2009January;- S C dismisses Vodafone‟s appeal, leaves decision on jurisdiction of deal to the I t department. Also refers cash back to Bombay high court.October;-I.T department issues a new Showcause notice, minority shareholders Analjit Singh & Asim Ghosh want to sell stake to VodafoneDecember;- FIPB approves stake sales by Singh & Ghosh.
2010January;-Vodafone replies to I.T notice saying I.T department doesnt have jurisdictionApril;-Vodafone reaches 100 m customer in IndiaMay;-Price war in India cause Vodafone group plc to written down value of Vodafone Essar by $2.3 Billion (Rs.15157 cr.) Vodafone pays 11618cr for 3g spectrum in 9 circles.June;-Vodafone files petition in Bombay h c challenging I.T department‟s order that claims jurisdictionSeptember;-High court says Vodafone must pay capital gains tax on the deal. Vodafone appeals to S C.Sc ask I.T department to qualify tax liability.November;-S C ask Vodafone to deposit Rs. 2500 Cr. and provide bank Aurantees of Rs. 8500cr pending final verdict.
2011March;-Vodafone recieves tax notice from I.T department asking it to explain why it should not be Laible for penalties of up to 100% of tax found due.May;-Vodafone makes 1st ever profit in India of 15 m Euros in 2010-11April;-S C says I.T department from enforcing any liability until October of final hearingAugust;-S C begins hearing the case.Vodafone sells 5.5% of India business to Piramal healthcare for $640 million(around Rs. 2890 cr.) to comply with FDI rules
2012January;-Vodafone appoints investment bank N M Rothschild to manage initial public offering(IPO)Jan 20 Vodafone wins tax case in S C
Voda tax case: Pranab defends amendment of IT Act• Mar 31, 2012• Statement made by Finance Minister Pranab Mukherjee in Kolkata;-• “We came to the conclusion that we will not be able to tax on Indian assets purchased outside the country,”• “We will have to decide whether India will be a no tax country or India will tax…If the answer is yes that it will be taxed, then whether to be taxed in India or at source of the company.”
IMPACT• The instant Judgement would help to resolve several contentious issues regarding the scope of Indian Tax legislation• The SC ruling has caused a deep hole in the kitty of the tax department to the tune of Rs 11,000 crore.• The slippage in direct tax revenue collection and increased subsidies has pushed the fiscal deficit to 5.9 percent of the Gross Domestic Product in the Revised Estimates for 2011-12.• Consequently, the direct tax collection has fallen short by Rs 32,000 crore of the 2011-12 Budget estimates.