New Delhi: The Supreme Court’s (SC) refusal to intervene in the tax dispute between telecom

firm Vodafone and the income-tax (I-T) department on Friday has partially addressed concerns
raised by both sides, but has also effectively set the clock back on the issue.

The dispute concerns Vodafone Group Plc.’s acquisition of a 67% stake in Hutchison Essar from
Hong Kong’s Hutchison Telecommunications International Ltd. The I-T department is of the
opinion that the transaction is taxable in the country. Vodafone disputes this claim.

Click here to watch video

Friday’s order, delivered by a bench headed by justice S.B. Sinha, said I-T authorities should
deal with the fundamental question of whether the transaction falls within their tax jurisdiction.
Simultaneously, the order has allowed Vodafone to bypass the department’s grievance redressal
mechanism and approach the high court if it disagrees with the department’s tax assessment
order.

This will allow Vodafone to reduce the time it takes to solve a dispute or have its money locked
up through part-payment of a disputed tax demand. “That appears to be the logical interpretation
of the Supreme Court order,” said Sudhir Kapadia, partner at audit and consulting firm Ernst and
Young (E&Y).

Also Read Taxing Times (PDF)

Vodafone paid $11.1 billion (Rs54,600 crore today) for a 67% stake of Hutchison Essar (since
renamed Vodafone Essar) in 2007. The government approved the deal in May of the same year.
Hutchison, the seller, controlled its Indian subsidiary through a cobweb of companies that finally
led to a Cayman Islands-registered firm to receive the payment from Vodafone.

The I-T department felt the Cayman Islands transaction was essentially a transfer of an Indian
asset and said that Vodafone should have deducted tax at source when it paid Hutchison. In
2007, Vodafone received a show-cause notice asking it why it had not done this. Following this,
the company approached the Bombay high court.

The case was significant on account of the tax amount involved (around $2 billion) and the
precedent it could set for taxation of transactions, which involve transfer of Indian assets, but are
concluded overseas. The tax incidence makes this “perhaps the highest tax matter in the
country”, N.B Singh, chairman of the Central Board of Direct Taxes, had said in December
2008.

After the Bombay high court in December dismissed Vodafone’s petition challenging the I-T
department’s notice, the company appealed to the Supreme Court in January. The primary
question that Vodafone requested the apex court to answer was whether Indian authorities have
the jurisdiction to tax a transaction that occurred outside India between parties that do not have a
presence in India.
The Supreme Court has not ruled on this or set a precedent, which could be used in getting a
sense of tax liabilities in subsequent transactions, experts said.

Mukesh Bhutani, who heads the tax practice at BMR Advisors, said the Supreme Court order
has the issue “back at square one”. “But now Vodafone also has the Supreme Court directive that
says they can approach the Bombay high court. So, they will not have to go through the entire
rigmarole and the high court will have to admit its challenge to the I-T authorities’ decision.”

Uncertainty continues to loom over transactions similar to the one between Vodafone and Hutch,
Bhutani said. “Most people had expected that the Supreme Court would not just look into the
Vodafone plea, but lay down principles in law relating to the taxability of such transactions,” he
said.

The Supreme Court order, however, provided relief to Vodafone on two important counts. It
allows the company to bypass the I-T department’s grievance redressal mechanism if it disputes
the assessing officer’s tax demand.

“In my view, it would save at least two-three years,” said E&Y’s Kapadia.

Also, the I-T department’s grievance redressal mechanism could ask Vodafone to pay a part of
the tax demand till the dispute is finally resolved. Generally, a company that disputes a tax
demand never gets a “complete stay” on the entire demand, Kapadia said, referring to part-
payments that might have to be made on disputed tax demands.

The bench, however, gave Vodafone an option to move the high court if it wishes to challenge
the tax authorities’ decision.

The Bombay High Court, in its December order, drew an adverse inference from the fact that
Vodafone had not disclosed its shareholder agreement.

On Friday, senior counsel for Vodafone, Fali Nariman, told the Supreme Court bench that the
agreement had been given to the tax department and Additional Solicitor General Mohan
Parasaran appearing for the Union government.

Vodafone’s refusal to disclose this to the Bombay high court was one of the factors that led to
the court dismissing the company’s petition.

“It is a moral victory for the revenue department. The Supreme Court has not disturbed the high
court’s observations that were against Vodafone. Vodafone could be apprehensive that the high
court’s negative observations can be used against them by the income-tax authorities,” BMR
Advisors’ Bhutani said.

According to a Vodafone media statement, “Given the fact that the petition filed by Vodafone
involves important questions of jurisdiction, the Honourable Supreme Court of India has asked
the Tax Authorities to decide, as a preliminary issue only, whether it has jurisdiction to proceed
against Vodafone... Should Vodafone be aggrieved by the order of the Tax Authorities’
preliminary adjudication on jurisdiction, Vodafone has been permitted to again directly approach
the High Court.”

sanjiv.s@livemint.com 24-01-2009

(Reuters) - The Dutch government has approached India on behalf of Vodafone's(VOD.L)

Netherlands unit to settle a three-year-old tax dispute involving a 110-billion-rupee claim, The
Economic Times reported on Monday.

The Netherlands has asked India to consider an alternate dispute resolution that will run parallel
to the ongoing court process, the paper said, quoting unnamed tax and government officials.

Indian tax authorities had asked Vodafone to pay 112.18 billion rupees ($2.5 billion) tax on its
2007 purchase of Hutchison Whampoa Ltd's mobile business in the country, which the company
is fighting in court.

"The Dutch government has been in discussion with Vodafone and we believe it has initiated a
formal process under the tax treaty between the Dutch and Indian governments," the paper
quoted a Vodafone spokesperson as saying.

(Reporting by Prashant Mehra; editing by Malini Menon) A woman holds a new Vodafone sim
card in central London May 30, 2006.

Credit: Reuters/Alessia Pierdomenico/Files

MUMBAI | Mon Nov 15, 2010 9:22am IST

MUMBAI | Sun Nov 14, 2010 10:39pm EST

MUMBAI Nov 15 (Reuters) - The Dutch government has approached India on behalf of
Vodafone's (VOD.L) Netherlands unit to settle a three-year-old tax dispute involving a 110-
billion-rupee claim, The Economic Times reported on Monday.

The Netherlands has asked India to consider an alternate dispute resolution that will run parallel
to the ongoing court process, the paper said, quoting unnamed tax and government officials.

Indian tax authorities had asked Vodafone (VOD.L) to pay 112.18 billion rupees ($2.5 billion)
tax on its 2007 purchase of Hutchison Whampoa Ltd's (0013.HK) mobile business in the
country, which the company is fighting in court. [ID:nSGE69L0HR]

"The Dutch government has been in discussion with Vodafone and we believe it has initiated a
formal process under the tax treaty between the Dutch and Indian governments," the paper
quoted a Vodafone spokesperson as saying.
($1=44.8 rupees) (Reporting by Prashant Mehra; editing by Malini Menon)

Bloomberg

Judgment on Vodafone’s India Tax Dispute

Due Today
September 08, 2010, 3:22 AM EDT

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By Ketaki Gokhale

(Updates with legal expert’s comments in fourth paragraph.)

Sept. 8 (Bloomberg) -- The Bombay High Court will rule today on Vodafone Group Plc’s
dispute with Indian authorities over taxes stemming from the purchase of Hutchison Whampoa
Ltd.’s mobile-phone operations in the country. The judgment may set a precedent for tax liability
in other cross-border deals.

Judges D.Y. Chandrachud and J.P. Devadhar will deliver their verdict after Indian tax authorities
and Vodafone completed their final arguments Aug. 18, according to a notice on the court’s
website.

The case in being closely watched by overseas investors for the approach India takes on taxes
acquisitions routed through tax havens, according to Akil Hirani, a managing partner at Mumbai-
based law firm Majmudar & Co. Britain’s Prime Minister at the time Gordon Brown wrote in
December to his Indian counterpart Manmohan Singh that taxing cross-border deals such as
Vodafone’s could create uncertainty for foreign investors and affect the country’s investment
climate.

“If they lose in the high court, we’re going to see an adverse impact on M & A transactions,
especially offshore transactions,” said Hirani. “In fact, the impact is already being felt, because
over the last two years as the Vodafone controversy has ballooned, people have been wary, and
deal structures are being looked at differently.”

Vodafone’s $10.7 billion acquisition of Hutchison’s Indian mobile phone operations in 2007 was
through a Cayman Islands entity. India’s tax department has argued the world’s biggest mobile
phone company failed to withhold taxes on its acquisition of Hutchison’s stake in Hutchison
Essar Ltd.

Overseas Companies

Vodafone announced its purchase of a 67 percent stake in Hutchison Essar in February 2007.
The transaction took place between Netherlands-based Vodafone International Holdings BV and
Hutchison, based in Hong Kong. The Hutchison stake Vodafone acquired was owned by a
Cayman Islands-based holding company.

The Indian tax authority approached Vodafone in September 2007, with a demand that it owed
the government taxes from the purchase. At the time, Vodafone Essar Chief Executive Officer
Arun Sarin said the carrier would contest the $2 billion claim.

The dispute, which went up to India’s Supreme Court in January 2009 and ended back in the
high court last month, has been closely watched by investors, who have had high hopes for
Vodafone’s foray into India, the world’s second-largest market for mobile phone services.

Vodafone argued that since the transaction took place between two overseas companies and the
target asset was registered in the Cayman Islands, it doesn’t owe taxes in India.

‘Indian Nexus’

The Indian tax authority has argued that the deal should be taxed because, although the share
transfer was of a Cayman Islands entity, the deal had an “Indian nexus,” according to Mohan
Parasaran, the department’s senior counsel.

Today’s decision may mark an end to some of the uncertainty over Vodafone’s India operations,
fueled by the company booking a $3.3 billion impairment charge in May for its India unit.
Vodafone Essar Ltd. is India’s third-largest wireless operator, with more 111 million mobile-
phone subscribers and a 17 percent share of India’s 652 million phone accounts at the end of
July, according to the nation’s telecommunications regulator.

Link to Company Litigation News:{VOD LN <Equity> TCNI LAW <GO>}

--Editors: Young-Sam Cho, Suresh Seshadri.

To contact the reporter on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net.

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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Vodafone tax dispute sours Indian adventure

By Andrew Parker

Published: November 25 2010 22:37 | Last updated: November 25 2010 22:37

Vodafone’s Indian adventure is in serious danger of turning into a nightmare.

The UK group’s 2007 deal to secure control of one of India’s fast-

growing mobile phone operators for $10.9bn was billed as a defining
acquisition for Arun Sarin, Vodafone’s former chief executive.

But India has turned into an expensive and highly unpredictable project
for Vittorio Colao, Mr Sarin’s successor.

The Indian authorities are pursuing Vodafone for $2.5bn (£1.6bn) in tax
that they maintain is due on the 2007 deal. Senior government officials
have also said Vodafone might have to pay $1bn in retrospective radio
spectrum fees.

These tax and spectrum issues could well come to a head in the first half of next year. “The next
six months are going to be fairly decisive for what is Vodafone’s most important emerging
market investment,” says Robin Bienenstock, analyst at Bernstein.

Mr Sarin bought mobile operators in developing countries because Vodafone’s core businesses
in Europe offered little or no growth by the middle of the last decade. Most Europeans own a
mobile.

And for Mr Sarin, the deal to buy a controlling stake in Hutchison Essar, then India’s third-
largest mobile operator by revenue, was a very personal affair. He was born in India.
Vodafone agreed a hefty price for Hutchison Essar – the implied enterprise value of $18.8bn was
17 times the operator’s 2007-08 underlying earnings. This rich multiple was partly justified by
the fact that the group was buying into the world’s fastest growing mobile market.

Initially, Vodafone’s Indian business – renamed Vodafone Essar – reported decent profitability
as well as strong growth.

In 2007-08, the business recorded a profit margin of 33 per cent at the level of earnings before
interest, tax, depreciation and amortisation. But by 2009-10, that margin had slipped to 26 per
cent.

This decline reflects how India’s mobile operators have for the past two years been slugging it
out in a brutal price war that has hit revenue and profit.

The price war stems from the government’s decision to let 15 network operators into the Indian
market, in the belief that it was the quickest way to get a mobile phone to 1.1bn Indians.

But 15 network operators is an unusually large number – in European countries there are
typically three or four – and it has resulted in heavy competition.

This led Vodafone to take a £2.3bn writedown on its Indian business in its 2009-10 results.

However, Vodafone has secured a reasonable performance in the circumstances.

Since 2008, Vodafone Essar’s revenue market share has increased by 5 percentage points to 19
per cent at mid-2010, which means it is the second-largest operator after Bharti Airtel. The
price war is now showing tentative signs of easing and, moreover, the market still has good
growth prospects.

Only 43 per cent of people own a mobile, according to Informa, the research firm, which
estimates that India will overtake China to become the world’s largest mobile market in 2012.
But investors are increasingly focused on India’s costly and uncertain regulatory framework,
particularly when it comes to spectrum and tax matters.

An auction of spectrum suitable for 3G mobile services such as web browsing, held in May,
raised $14.5bn for the government, which was almost double the amount expected.

At the same time, the telecoms regulator outraged Vodafone and certain rivals by saying they
should pay retrospective fees for retaining some of their 2G spectrum based on the 3G auction’s
inflated prices. Government officials have signalled they want to implement the regulator’s
proposal by requiring Vodafone, Bharti and another operator to each pay as much as $1bn.

Vodafone is strongly opposing the regulator’s proposal for retrospective 2G spectrum fees.

“The [regulator’s] recommendations ... are retrograde for the industry and against the interests of
consumers,” it said on Thursday.
Vodafone is also fighting all the way through the Indian courts against the $2.5bn tax bill the
Indian authorities claim is due on the Hutchison Essar deal.

No tax is due on the transaction because it was conducted between two non-Indian companies,
according to Vodafone. India’s supreme court is due to hear the case in February.

Mr Colao has ratcheted up his rhetoric about the case over the past few months, warning it could
deter foreign investment in India. Analysts say it is unlikely that Vodafone would pull out of the
country over the tax issue – instead the group may have to compromise through an out-of-court
settlement.

For Vodafone and its rivals, their best hope is that the Indian government relaxes rules that
prevent consolidation between the operators.

Fewer operators could eventually bring more rational market pricing. On this medium- to long-
term scenario, Vodafone’s fast-developing nightmare could yet turn into a pleasant dream.

Copyright The Financial Times Limited 2011. You may share using our article tools. Please
don't cut articles from FT.com and redistribute by email or post to the web.

Vodafone looks for India tax dispute settlement - report Mumbai, Nov 15, Reuters:
The Dutch government has approached India on behalf of Vodafone's(VOD.L) Netherlands unit
to settle a three-year-old tax dispute involving a 110-billion-rupee claim, The Economic Times
reported on Monday.
The Netherlands has asked India to consider an alternate dispute resolution that will run parallel
to the ongoing court process, the paper said, quoting unnamed tax and government
officials.Indian tax authorities had asked Vodafone to pay 112.18 billion rupees ($2.5 billion) tax
on its 2007 purchase of Hutchison Whampoa Ltd's mobile business in the country, which the
company is fighting in court.

"The Dutch government has been in discussion with Vodafone and we believe it has initiated a
formal process under the tax treaty between the Dutch and Indian governments," the paper
quoted a Vodafone spokesperson as saying.

The British government is hopeful that the three-year old dispute of Vodafone’s joint venture in
India involving a tax claim of over Rs.11,000 crore ($2.5 billion) will be settled amicably, a
British official said Wednesday.   Vodafone is one of the important companies in India. Its joint
venture is rapidly growing and like other foreign investors they need to have stability in tax
regime,’ said Vince Cable, Britain’s secretary of state for business, innovation and skills.

Talking to reporters here after the annual meeting of the India-UK Joint Economic and Trade
Committee (JETCO), Cable said the British government was expecting a good outcome of the
dispute.
‘We have discussed this in a very amicable way and look forward to a good outcome,’ Cable said
without elaborating as the case was sub judice.

India’s income-tax department has raised a demand of over Rs.11,000 crore on Vodafone
International Holdings , a unit of the world’s largest telecom operator Vodafone Group Plc , on
account of its $11-billion deal to acquire Indian telecom firm Hutchison Essar in 2007.

Commerce and Industry Minister Anand Sharma said India would continue to liberalise policies
to attract more foreign investment.

‘Indian foreign direct investment (FDI) policy regime is robust, stable and irreversable. That is
something which is very reassuring and comforting for our partners,’ Sharma told reporters after
co-chairing the JETCO meet here.

He said India would emerge as the second most favoured FDI destinations in the world after
China in the coming years.Sharma said several British companies are likely to increase their
investments in India.

‘Two-way investments are healthy with $18 billion UK investment in India and much more are
in the pipeline. Similarly $20 billion of Indian investments have already been made in British
economy,’ he said.

On India-Britain bilateral trade, Sharma said it had crossed $10 billion in 2010.

‘According to the initial figures that we have, bilateral trade between India and UK has once
again reached $10 billion,’ trade minister added.

Vodafone Tax case - A Case Study for Investments in India

Madhu S
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India Inc has been surging ahead audaciously with the support of its Information
Technology developments with its repertoire of resources. Global players have been eying
 the Indian market, owing to immense opportunities that the continent provides; both in
terms of expansion and profit. Investment patterns in India have shown positive growth
over the years with significant process on the de-regulation front. India has been greatly
involved with the G-8 and G-20, including signing of the Double Taxations Avoidance
Agreements/Treaties (DTAA) with various tax-haven countries. This has boosted the
image of India as a 'lookout destination' for investment and an emerging hub for
economical activities. World Report 2010 ranked India as the 9th most attractive
investment destination, while Bloomberg Global Poll conducted in September 2010 put
India in the third position, above the United States of America (US).

However, the very same image is said to have taken a beating with the recent Vodafone
Tax case, which has been revolving in courts since 2009. With clear signs of the court
ruling in favour of the tax authorities, many global companies are said to be rethinking
their investment plans in India, keeping in mind the impact of the judgment on the
taxation front. The Doing Business Report 2011 of World Bank has ranked India at 134,
below neighbouring countries like Pakistan and Bhutan. This is a result of procedural
difficulties for start-up companies and investment companies, in India and abroad.

Tax regulations play a major role in cross border transactions and investments in a
country. Tax havens, open borders and DTAA countries are major destinations for
investment through Foreign Direct Investment (FDI) or other routes. The Vodafone tax
case throws an interesting question on the taxability of a non resident company acquiring
shares of a resident company through an indirect route. This is a landmark case, as it is for
the first time that the tax departments have sought to tax a company through a mechanism
of tracing the source of acquisition. While we have heard about lifting the 'corporate veil',
this instance has set a rare example wherein the Indian tax authorities have gone to length
to interpret the existing tax laws, to bring a global company like Vodafone to its tax
ambit.

Facts

Vodafone International Holdings BV, based in Netherlands and controlled by Vodafone

UK, obtained the controlling interest and share of CGP Investments Holdings Ltd (CGP)
located in Cayman Island for a value of $11.01 billion from Hutchinson
Telecommunications International Ltd (HTIL), which had stake in Hutchinson Essar Ltd
(HEL) that handled the company's mobile operations in India. HEL had its stake in CGP
Holdings, from which Vodafone bought 52 per cent of HEL's stake in 2007, thereby
vesting controlling interest over them. The Bombay High Court, on September 8, ruled
that where the underlying assets of the transaction between two or more offshore entities
lies in India, it is subject to capital gains tax under relevant income tax laws in India. The
Court invoked the nexus rule wherein a state can tax by connecting a person sought to be
taxed with the jurisdiction, which seeks to tax. The treatment of the company as an
Assessee in Default (AID) under Section 201(1)1of the Income Tax Act and reading
Sections 5(2)2, 9(1)3 and 1954, the court came to the conclusion that Vodafone was liable
to deduct tax at source (TDS). Vodafone has now appealed before the Supreme Court to
 revisit the judgment, which makes them liable for a record amount of Rs 12,000 crores
going to the tax authorities' kitty.

Impact

Vodafone raises pertinent questions on the issue of taxation of non-resident entities. The
judgment will have direct impact on transactions of major acquisitions like SABMiller-
Foster and Sanofi Aventis-Shanta Biotech. Similar transactions that existed earlier are
Sesa Goa, AT&T and General Electric. British firm Cairn Energy has already agreed to
pay tax in India as well as the UK on selling its stake in Cairn India to Vedanta Resources
from $6.65 billion to $8.48 billion. Depending upon the size of the stake sale, the tax
liability could range between $868 million and $1.1 billion. The judgment would
definitely throw a cautious note to major investors and M&As in India; however, it does
not have that great an impact to curtail the investment flow to an emerging destination like
India. The judicial propriety of the case is still to be settled when the matter comes for
final stages in the Supreme Court. Going by the events in the lower courts, the Supreme
Court is unlikely to disturb the Bombay High Court ruling.

The global community is keenly watching the current trends happening in the Indian
subcontinent, especially since it has become an emerging player at the socio-economic
and political levels. United Nations Conference on Trade and Development (UNCTAD)
has reported that India is set to dislodge the US by December 2012 to become the second
best destination for FDIs, the major component of which is M&As. India is also set to
revamp its taxations norms with significant changes at the regulatory level. The proposed
Direct Tax Code contains key provisions, which will have a major impact on investments
in India5. India has improved its rankings in the WB 'Doing Business' Report on the
number of regulatory changes taken in the existing year. This shows that the country is set
to make a global footprint by branding itself as a 'Must Invest' destination.

The Vodafone tax case has given India the opportunity to create a model for other
countries, which follow source-based taxation principles6. It is an opportune time to bask
in the glory of India, which is said to have had one third share of the world market in
ancient times, as pointed out by economist Amartya Sen in his book The Argumentative
Indian. Let's hope that we can revive the 'Real India' soon.

Notes:

1. Section 201 of the Act broadly provides that any person (referred to in Section 200 of
the Act), and in cases referred to in Section 194, the principal 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 by or under the Act, he or it shall, without prejudice to any other
consequences which he or it may incur, be deemed to be an 'assessee in default' 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 to accrue in India; (v) arises in India; or (vi)
deemed to arise in India.

3. Section 9(1) explains the circumstances in which income is deemed to accrue or arise in
India and includes all income accruing 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 or from any asset or source of income in India; or (d) through the
transfer of a capital asset situated in India.

4. Section 195 provides for deduction for tax at source upon a 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 in India, it is deemed to be taxable in India.

6.Countries like India have been following resident-based taxation mechanism, wherein
whoever is the resident of India is taxed. Source-based taxation provides for a taxation
regime which goes into the source of the asset which is liable for tax.

The author is a Project Associate with ADR Centre, Centre for Public Policy
Research. He can be reached at adr@adrcentre.com

Hutch Vodafone Merger – An Issue Of Tax Planning Under Income Tax Act, 1961

It is a landmark case that will severely impact the Mergers & Acquisitions (M&A) landscape in
India. No matter which way it goes, the Vodafone versus IT department tax case will have an
indelible impact on the M&A landscape of India. Last year British Telecom giant Vodafone paid
Hong Kong based Hutchison International over USD 11 billion to buy Hutchison’s 67% stake in
Indian telecom company Hutchison Essar. The transaction was done through the sale and
purchase of shares of CGP, a Mauritius based company that owned that 67% stake in Hutch
Essar
Since the deal was offshore, neither party thought it was taxable in India. But the tax department
disagreed. It claimed that capital gains tax most people paid on the transaction and that tax
should have been deducted by Vodafone whilst paying Hutch. The matter went to court and was
heard over by the court.

Vodafone argued that the deal was not taxable in India as the funds were paid outside India for
the purchase of shares in an offshore company that the tax liability should be borne by Hutch;
that Vodafone was not liable to withhold tax as the withholding rule in India applied only to
Indian residence that the recent amendment to the IT act of imposing a retrospective interest
penalty for withholding lapses was unconstitutional.

Now the taxman’s argument was focused on proving that even though the Vodafone-Hutch deal
was offshore, it was taxable as the underlying asset was in India and so it pointed out that the
capital asset; that is the Hutch-Essar or now Vodafone-Essar joint venture is situated here and
was central to the valuation of the offshore shares; that through the sale of offshore shares, Hutch
had sold Vodafone valuable rights - in that the Indian asset including tag along rights,
management rights and the right to do business in India and that the offshore transaction had
resulted in Vodafone having operational control over that Indian asset. The Department also
argued that the withholding tax liability always existed and the amendment was just a
clarification.

The tax officers are saying that Hutch is taxable on the profit they made from the sale - that is
one aspect. The second aspect is that Vodafone as a payer was liable to deduct tax at source
because they paid income to Hutch. Those are the two different issues. The case was mainly
about the second issue where the Vodafone was liable or not and in principle; it is possible that
the department is right on the first and yet not right on the second.

To give you an example, assuming for a moment that Hutch is taxable, the question would be -
was Vodafone liable to deduct tax and the arguments made on behalf of Vodafone were that the
Section 195, which is dealing with this duty to deduct, does not apply outside India.

The taxability of Hutch would probably arise only after Hutch, if at all, decides to file a tax
return in India. In all probability, it appears that the tax office may issue a notice to them to file a
tax return in which case Hutch would have to decide whether it is taxable or not. In all
probability, reading the law and considering the fact that shares of a foreign company have been
sold outside India by another foreign company, the tax return that they would file only show nil
income. Therefore a different battle will start once that tax return is filed or if a notice is issued
and Hutch decides to challenge the jurisdiction of the notice itself.

If the tax return is filed then it will have to probably go through the entire realm of the appellate
process that we have, which is the commissioner appeals at the first stage of tribunal and then the
courts. But if they decide to challenge the notice itself, then probably the dispute will definitely
go on the virus of the notice if that challenges to the courts itself.

The provisions of Section 195, they came into force in 1939 in the old act. One never intended to
cover payments outside India and that was on assumption of the legislature - that was the enquiry
committee report, which said that it is not intended to apply outside India. Not only that that, it
was the assumption of the Department, they had issued circulars on that basis, that tax deduction
provisions do not apply outside India, even if overseas income were taxable in India.

Vodafone has very vehemently argued that even if Section 195 were to be interpreted the way
the Department wants; to interpret to mean that a person would include a non-resident, it has to
be read contextually and the territorial limitation has to be read into that section. It cannot apply
to any and every transaction that may happen outside India in relation to any goods or any
services or any other assets that may happen outside India. Unless the Act specifically provides
so and in the Act as it is standing today, I do not think there is any specific provision in the law.

The interpretation of Section 91, where they have said that the direct and the indirect aspect of
the income is applicable only to the accruing; it does not apply when there is a transfer of a
capital asset situated in India. So that I think is the main argument and in any case I think the
issue really is whether the capital asset which is really transferred situated in India, the Indian
asset may have the bearing on the value of the foreign asset. But is it really a capital asset which
was in India. That is really the issue, which will have to be sort of dealt with when one has to
give a verdict on the taxability of the transaction.

It is always self-evident, that if I buy shares of a company, in effect the shares are valued based
on the underlying asset that is contained in the company - so that is self evident. For example, let
us say today the Suzuki company was sold to Toyota overseas. Is there an argument to say that
the sale consideration that was paid-obviously what Suzuki will be paid by Toyota; it will
include the value of the business in India, it will include the value of the business everywhere the
Suzuki operates - so is there going to be an argument now that consideration should be split and
to the extent the consideration relates to Suzuki’s Indian business that is taxable in India. So I
think we have got a huge broader issue that we are dealing with here and therefore I do not think
these arguments about value being the underlying value are anything significant. These are self
evident in any transaction where you buy shares of a company that has assets. So I think that
there is a huge overall perspective here.

The two other aspects that I did want to touch upon because that might be one bizarre outcome
-Let us say that the Bombay High Court holds that there maybe an argument that the capital asset
is actually situated in India but they hold that the provisions of Section 195, that is the obligation
to withhold tax being a procedural obligation does not apply amongst to non-residents. I am not
certain but I think that there could be another argument where the Department may say that the
Vodafone paying entity becomes what is called representative assessee of Hutchison. It is a very
technical issue; normally a representative assessee can only be a person in India. But if a foreign
entity buys a capital asset from another foreign entity, which is situated in India, then it becomes
a representative assessee, in which case it becomes primarily liable for the tax liability not for
withholding tax.

So that is not the issue before the court. But if the court came up with some distinction of this
kind that we do not believe Section 195 applies because of extraterritoriality then that does not
necessarily mean that the avenues for the tax department are shut out. It depends a bit on what
the court holds when it deals with the taxability at least in a prima facie level.

In so far as the arguments mentioned, I am not sure it was taken up-it came up at some stage.
One of the things that is important to consider is that we have a decision of the Supreme Court in
the case of Mauritius companies - the famous decision of Azadi Bachao-which basically said that
if you have a Mauritian special purpose entity with no substance but to hold shares, you cannot
pierce its corporate veil and go upward because the tax residency certificate protects the
substance of the Mauritian entity. So in other words, you cannot pierce the corporate veil
upwards.

Now what we are doing is piercing the corporate veil backwards. We are saying the Mauritius
company had it sold the shares, it would not have been taxable and you could not look beyond
the Mauritius company to see who actually made the money because ultimately the money from
the Mauritius company went to the beneficial owner who was a resident in a non-treaty
jurisdiction. But the argument put on its head is you could not pierce the corporate veil upwards.
But when the shareholder of the Mauritian entity sold the shares, you could pierce the corporate
veil downwards, which I think is a bit bizarre because if you cannot pierce the corporate veil of
the Mauritian entity; because that is what the Supreme Court said in Azadi Bachao, then I am not
terribly sure on how you can pierce the corporate veil downwards.

The department has itself signaled that other M&A deals will be looked at by them and I believe
they have issued notices to other companies on similar lines, I believe they are also pursuing
cases of participatory notes.

But leaving that aside, everyone has talked about M&A deals. But if the logic of the Department
were to prevail, then every transaction on the New York Stock Exchange in a US company
which has shares in the Indian company would have some part of it’s value derived from the
Indian assets. Then they would say that the New York buyer by their logic under Section 195
should be deducting tax on that proportion. I think it’s completely laughable but it necessarily
follows from the stand the department has taken. So either their stand is right in which case it
should work the way I am saying, or their stand is wrong and I do believe their stand is wrong.

Second and the surprising part for me is the macro perspective, other deals over the past
-overseas deals or an overseas company, who are owning assets in India, is not new to us. We
had the Sterling Tea Companies for example; we had Calcutta Tramways which was a company
whose only asset was by its name suggested the tramways in Calcutta. If you had a sale of those
shares on the stock market in London, who never sought to tax that. There were many companies
with those features in the past we had other sales like CEAT, Dunlop, Shaw Wallace, which
happened overseas it has never been sought, to be taxed by the department on the sales for public
knowledge. So why did the department change its stand.

The issue really is that it will definitely open up a lot of issues for Indian investors investing
abroad if a similar transaction was sought to be taxed by the tax authorities in other countries; we
had a situation where in the context of some other provision, particular position was taken by the
tax authorities and some other country decided to tax the software companies abroad and that
issue had to be resolved ultimately through mutual bilateral talks and to bring an end to that. So I
do agree that yes, if such a thing happens then we can have responding actions and there could
be pressure from other countries also to do something similar. So one needs to be very careful
when one deals with such issues.

Taxability apart, I don’t want to get into that but I think this applying, withholding tax or tax
deduction obligations in offshore transactions is going to have a huge element of uncertainty
when you do transactions, two foreign companies sitting in New York are selling businesses or
companies to each other and they are now going to have to wonder how much tax they should
withhold- should they apply to the Indian Tax Authorities. I think it creates a great degree of
uncertainty and even if the Tax Department wants to go after taxability of these transactions, I
think we need to divorce the procedural issue of tax deduction at source from the arguments on
whether or not the transaction is taxable and be a little more realistic and rational to bring in
certainty to transactions rather than bring in an element of uncertainty here.

Today we are doing transactions offshore, what do we tell people? You are buying shares of an
offshore company but by the way you may have withholding tax obligations; should you apply to
the Tax Department to deduct taxes? So it becomes very complicated.

Dutch govt invokes treaty in Vodafone tax

case
0 Comments | DNA : Daily News &amp; Analysis; Mumbai,
Dec 03, 2010 | by Giri, Arun
Three years of continuous litigation seems to have finally taken its toll on Vodafone.

The Dutch revenue authorities have written to the Indian finance ministry, requesting for
discussions in the `11,200 crore Vodafone tax case.

The Dutch authorities have filed a formal application under mutual agreement procedure (MAP)
route, stating that the obligation of Vodafone, as sought to be imposed by the Indian tax
department, is inconsistent with the provisions of the India-Dutch tax treaty, according to a
government source familiar with the development.

The Dutch authorities had a few weeks ago informally asked the government about invoking
MAP in this case.

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MAP entitles the competent authority of a country to take up tax disputes on behalf of its
taxpayer, with the revenue authorities of the country where the tax payer is facing tax litigation.

In the case of $11 billion Hutch-Vodafone deal, the payment was made by a Netherlands entity
of the United Kingdom-headquartered Vodafone group.

However, tax department sources say Vodafone cannot take the shelter of MAP, as the case
pertains to an issue falling under the Indian Income tax act and does not involve any element of
double taxation.

Noted tax expert T P Ostwal expressed surprise at Vodafone's application. "Generally only the
taxpayer who is subjected to tax or against whom proceedings have been initiated to tax his
income can initiate MAP proceedings. In this case, Hutchison has received the income and they
could have initiated MAP, but there is no tax treaty between India and Hong Kong. It is difficult
to see how the Indian authorities will accept Vodafone's MAP application," said Ostwal.

"Vodafone's plea under MAP is independent of the ongoing court proceedings. It does not in any
manner mean that Vodafone is giving up its right to argue on the aspect of jurisdiction before the
Supreme Court," said Mukesh Butani of BMR Legal.

The income tax department is seeking to recover over `11,000 crore in capital gains taxes from
Vodafone for failing to deduct tax before making payment of $11 billion to Hutchison for
acquiring a 67% stake in Indian telecom company Hutchison Essar (now renamed Vodafone
Essar).

But Indian courts have twice rejected Vodafone's writ petition to dismiss the tax case. The
Bombay High Court ruled a couple of months ago that Vodafone acquired an Indian asset and
hence should have deducted tax at source on its payment to Hutch.

Vodafone has appealed the ruling to Supreme Court, which ordered Vodafone to deposit `2,500
crore till it decides the case.����������������

Credit:Arun Giri
DETAILS ABOUT HUTCHISON
ESSAR
Hutchison Essar is a leading India telecommunications
mobile operator with 25 million customers currently,
representing a 16.4% national market share. Hutchison
Essar has over 6,000 employees, operates in 16 circles
and has licenses in an additional six circles. In the year
to 31 December 2005, Hutchison Essar reported
revenue of US$1.3 billion, EBITDA of US$415 million,
and operating profit of US$313 million. In the six
months to 30 June 2006, Hutchison Essar reported
revenue of US$908 million, EBITDA of US$297 million,
and operating profit of US$226 million.