Educational presentation

1. Aniruddha
Rajesh
Ketan
Pallavi
Mandeep
VODAFONE TAX
CASE

2. Statement given by P. Chidambaram
Finance minister P. Chidambaram indicated
this on Monday when he said the assessing
officer looking into the Vodafone tax case
will not act “rashly” and will take into
account all relevant facts while deciding
whether to send a notice.
Courtesy TOI: 3 Sep 2012

3. Pre Vodafone Scenario
1994: Department of telecommunication gave license to
Hutchison Max telecom Ltd (HMTL) for Mumbai Circle and later
for Delhi, Kolkatta and Chennai Circle.
Hutchison Max Telecom (HMTL) is a JV
Hutchison
telecommunication India Ltd,
Mauritius (49%)
Hutchison Telecom
(India) Ltd, Cayman
Island (60%)
Distacom India (40 %)
Indian Company Max
telecom venture (50%)
Other Company (1%)
1998: Hutchison group incorporated CGP Investment holdings in
Cayman Islands. HTL Hong Kong was sole shareholder for CGP.

4. Pre Vodafone Scenario…
• In 2004, Hutchison Telecommunication International Ltd., Cayman
Islands (HTIL) was incorporated and listed on the Hong Kong and New
York Stock Exchanges. HTIL and its downstream companies held interests
in the mobile telecommunications business in several countries
including India.
• 2004: Distacom India sold its share in 2004 to Essar - JV Hutchison-Essar
ltd. and 19.6 % shares were transferred to Essar Ltd to form a JV by
Hutichson telecommunication India Ltd.
• In 2005, HMTL (which later became HEL and is now VEL) completed a
process of consolidation. Shares of several operating companies were
transferred by diverse holding companies to HMTL, in consideration for
which HMTL issued its own shares to these holding companies. Approval
of the Foreign Investment Promotion Board of the Union Government
(FIPB) was obtained in November 2004 and of the Reserve Bank in
December 2004.
• Many Frame work agreements entered by between the holding
companies and HTL to form a JV between Hutchison-Essar.

5. Pre Vodafone Scenario
• In December 2006, HTIL issued a press statement, stating that it had
been approached by various potentially interested parties regarding a
possible sale of its equity interests in Hutchison Essar Limited (HEL), the
company's mobile operations in India.
• On 22 December 2006, Vodafone Group Plc made a nonbinding offer for
a sum of US$11.055 billion, in cash, for HTIL's shareholdings in HEL.
• On 10 February 2007, Vodafone Group Plc made a final binding offer of
US $ 11.076 billion
• On 6 March 2007, Essar Teleholdings Ltd. filed an objection with FIPB in
relation to the proposed transaction for purchase of a controlling
interest by the Petitioner in HEL through purchase of overseas holding
companies belonging to the Hutchison group
• FIPB queried Vodafone and Hutchison on the transaction and with
Vodafone’s reply dated 14 March 2007 stated that its effective
shareholding in HEL will be 51.96% and Vodafone Essar would be form.
• On 15 March 2007, a settlement was arrived at between HTIL and a set
of companies belonging to the Essar Group by which in lieu of the
payment by HTIL of US $ 373.5 million immediately and a further US $
41.5 million, subsequently, Essar indicated its support to the proposed
transaction.

6. Vodafone Acquisition
Vodafone International Holdings
100% shares for 11.2 dollars
CGP Holdings Limited at Cayman islands
Controls 67% share of HEL through FDI
Hutchison Essar limited (Indian entity)

7. Income Tax Department
• The subject matter of the transaction between
HTIL and Vodafone was a transfer of 67% in HEL.
• The transaction constitutes a transfer of
composite rights of HTIL in HEL and not merely
the transfer of a single share in CGP. The
acquisition of a share is only one means to
achieve the object.

8. Income Tax Department…
• Several vital rights were acquired by Vodafone
(including license to conduct telecom business in
India, management rights, loans, option
agreements, branch license, etc) and that such
rights had direct nexus with India.
• The transaction was chargeable to tax in India
and that Vodafone was therefore required to
withhold appropriate taxes on payments made to
Hutch.

9. Feb 2007: Vodafone buys 67% stake in
Hutchinson Essar limited an Indian entity for
11.2 billion.
Sept 2007: Income tax department issues a show
cause notice to Vodafone.
October 2007: Vodafone files a writ petition in
the Bombay high court.

10. Vodafone stand
• Section 9 seeks to tax capital gains only if they arise from
transfer of capital assets situated in India. The impugned
transaction involved the transfer of shares of a foreign
company outside India and was hence not taxable in
India.
• Several countries have in their legislation “look-through”
provisions by which a tax is imposed on gains arising out
of a transfer of shares outside the country if it results in
the passing of control over a company which holds
specified assets/property in the country. Section 9 does
not contain any such “look-through” rule. Absent such
rule, no tax can be imposed in respect of the impugned
transaction under Section 9 of the Act. A “look-through”
provision cannot be inserted through judicial
intervention.

11. Vodafone stand…
• In the present case, there is no income that accrues or
arises in India since the right to receive the money was
outside India under a contract entered into outside India
and payment was made outside India.
• No tax was required to be withheld by Vodafone from
payments made to HTIL under Section 195 of the Act,
since the transaction was not chargeable to tax in India.
• Section 195 of the Act does not have extra territorial
operation and would therefore not apply to Vodafone,
which is a non-resident without any presence in India.

12. Summary
• Feb 2007: Vodafone buys 67% stake in Hutchinson
Essar limited an Indian entity for 11.2 billion.
• Sept 2007: Income tax department issues a show cause
notice to Vodafone.
• October 2007: Vodafone files a writ petition in the
Bombay high court.
• September 2010: Bombay high court gives a verdict in
favor of IT department.
• September 2010: Vodafone challenges the Bombay HC
order in supreme court.
• October 2010: IT department issues tax notice for
Rs11200crore plus interest.
• January 2012: Supreme court delivers a judgment in
favor of Vodafone and it is not liable to pay the tax.

13. http://www.youtube.com/watch?v=uDvNC
j7-_Sw

14. Post Supreme Court Verdict

15. Current Situation
Uk-based Vodafone on Friday said that it was considering
action against the Indian government against its proposed
amendments in the income tax legislation that would
allow the government to tax Rs.12000 crore on Hutch
deal.
It is difficult for Vodafone to go for arbitration under
bilateral investment pact between Indian and Netherland.
If the company seeks protection under this pact then it
will contradict its stand in the superme court that the
transaction can not be taxed as it took place between two
overseas firms.

16. Current Situation
Uk-based Vodafone on Friday said that it was considering
action against the Indian government against its proposed
amendments in the income tax legislation that would
allow the government to tax Rs.12000 crore on Hutch
deal.
It is difficult for Vodafone to go for arbitration under
bilateral investment pact between Indian and Netherland.
If the company seeks protection under this pact then it
will contradict its stand in the superme court that the
transaction can not be taxed as it took place between two
overseas firms.

17. Conclusion