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July 3rd, 2014

To,

The Honourable Prime Minister, New Delhi

Subject: Cases like Vodafone do not deserve any relief from Retrospective amendment made by the Finance Act 2012 for levying tax on offshore deals for transferring Indian assets

Respected Sir,

First of all, we heartily congratulate you on being elected as the Prime Minister of India. Your charismatic leadership during this election campaign has been truly exemplary. It has inspired hope in us and many fellow countrymen of creating a better India and helping India regain its lost glory. We wish you all the best in your endeavor to take India to its destined role as the leader of the world.

Background

Sir, we are Chartered Accountants based in Pune and have been closely following the developments in the Vodafone capital gains tax dispute with the Indian Revenue authorities, from the period when the matter was litigated before the Hon’ble Bombay High Court. After looking at the relevant documents pertaining to the case as available in the public domain, we were convinced that, for a change, the Revenue authorities had done an excellent job in this case and our Country surely deserves to get it’s due share of taxes on the Vodafone-Hutchison deal. We felt that the Revenue authorities were being wrongly targeted by vested interests who had managed to exploit the general anti-Government sentiment amongst the people to create a perception through the media that Vodafone was being unnecessarily harassed by the Indian Revenue authorities.

The Government, vide the Finance Act, 2012, amended the relevant provisions of the Income-tax Act with retrospective effect to clarify that gains derived from offshore transactions are taxable in India if the value of such transaction is attributable to underlying assets in India. The then Hon’ble Finance Minister, Shri Pranab Mukherjee, had in his speech in the Parliament on 8th May 2012 during discussion on the Finance Bill, 2012, addressed the protests and concerns raised by various groups against the retrospective amendment, by clarifying in detail the rationale for making the retrospective amendment. While being conscious of any implications on foreign investment, he passionately defended the retrospective amendment mainly on the ground that India cannot allow double non-taxation (ie gains neither taxable in India nor in the country of residence) through use of tax havens. The retrospective amendment was also supported by the Bharatiya Janata Party, which was the then main opposition party.

Unfortunately, after the then Finance Minister was elevated to the highest office of the Republic in July 2012, the lobbying by vested interests again became active. Dr. Parthasarathi Shome, who was P. Chidambaram's adviser during his last stint in the finance ministry, was handpicked by the then Prime Minister, Shri Manmohan Singh, in July to head an expert committee to undertake stakeholder consultations and finalize the guidelines for GAAR. By a Notification on September 1, 2012, the scope of this committee was expanded to also “Examine the applicability of the amendment on taxation of non-

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resident transfer of assets where the underlying asset is in India, in the context of all non-resident taxpayers. The Committee instead of only suggesting ways for implementing the above retrospective amendment in different fact patterns to avoid unnecessary harassment of genuine tax payers, it went on to question the desirability and clarificatory nature of the retrospective amendment itself and recommended that the provisions should be applied only prospectively. It also recommended that in case the Government opts for retrospective taxation of indirect transfer, the buyer should not be treated as an assessee in default and the provisions should be applied only on the seller. In effect, Vodafone should go scot free even if the provisions are implemented with retrospective effect. The Shome Committee, however, surprisingly, did not comment anything on the very basis on which the retrospective amendment on indirect transfer was rationalised by the Parliament, ie avoiding double non-taxation through use of tax havens; Nor did it comment on the observations made in the ‘White Paper on Black Money’ issued by the Finance Ministry in May 2012 wherein one of the measures suggested for tackling the menace of black money is effective curbing of structuring through tax havens and it has been stated therein that the legislative measures included in the Finance Bill 2012 can create necessary deterrence against such structuring and thereby plug this loophole for tax evasion. It is also surprising that if retrospective amendment was a matter of concern, then why only the amendment pertaining to indirect transfer of assets was referred to the Shome Committee, why not also refer the other retrospective amendments in the definition of ‘Royalty’ in section 9(1)(vi) and the Transfer Pricing related amendments which surely affect a substantially larger number of foreign investors’ vis-à-vis those affected by the Vodafone related amendment?

The above unusual developments after the new Finance Minister, Shri P. Chidambaram, took over from Shri Pranab Mukherjee, raise a doubt as to whether some section of the then Government was keen on helping Vodafone escape the tax liability in India?

Just before the proposed Budget 2014, again there is noise and fury over the retrospective amendment pertaining to Vodafone case and some media reports are suggesting that in the upcoming Union Budget 2014, the Government is likely to modify the retrospective application of the aforesaid amendment and make it applicable only prospectively, as a measure to improve investment sentiment. Such a measure will bring relief to Vodafone surely and may be to a few others. The cost to the Indian Exchequer on account of relief to Vodafone alone will be approx Rs 22,600 crores (Tax: Rs 7,900 crores + Interest: Rs 6,800 crores + Penalty: Rs 7,900 crores).

Our prayer

Sir, as a general rule, we are firmly against the concept of retrospective amendments, especially when such amendments are made to negate the effect of judicial pronouncements. However, there may be exceptional situations when retrospective amendment becomes a necessity and the Parliament needs to step in for safeguarding National interest and for ensuring that laws are followed in its true spirit. We strongly believe that the Vodafone case was one such exceptional situation and it was therefore that the Indian Parliament in its wisdom, despite substantial lobbying from vested interests, took the strong decision of amending the law with retrospective effect, vide the Finance Act, 2012, to safeguard National interest.

Sir, we have full confidence that your Government will not entertain any kind of lobbying and will ensure that National interest is given utmost priority for deciding on the issue of whether any relief is to be given

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for offshore transactions undertaken before the aforesaid retrospective amendment. However, in the National interest, we have summarized below some of the peculiar aspects in the Vodafone case based on which we believe that cases like Vodafone do not deserve any such relief and it will be gross injustice to the citizens of our Country if we fail to collect taxes rightfully due to the Country from Vodafone like cases. Further details on each of this aspect have been given in the enclosed Annexure.

Particulars Annexure Para Ref

Why cases like Vodafone do not deserve any relief from Retrospective operation

1. Vodafone was well aware in advance of making payment to Hutchison of the impending tax liability and chose to ignore the warning given by Revenue authorities

Vodafone was warned in advance by the Indian Revenue authorities by their letter dated 23rd March 2007 that there was a tax liability in India on the proposed acquisition and it should approach the Indian Revenue authorities if it proposes to advance any other view and remit money to Hutch without deduction of tax. Vodafone consciously chose to ignore the above warning and made payment to Hutchison on 8th May, 2007 without deducting tax at source.

Would Vodafone show similar disregard to the Revenue authorities of any developed country, like UK or USA? Why treat India an inferior country? Further, having given an opportunity by the Indian Revenue authorities well before the deal was closed, should Vodafone now be allowed to play victim?

Refer para 1 of the Annexure along with Exhibit 2

2. Not levying tax on Hutch-Vodafone deal would mean legitimizing the use of Tax Havens. This would be contrary to our Government’s commitment to fight the menace of black money and would therefore be against National interest:

Vodafone claims to have paid approximately INR 50,000 crores for acquisition of the entire share capital of a Cayman Island company, CGP (which was only 1 share of 1 US$), and: Vodafone was not able to provide even the financial statements of CGP to the Indian

Revenue authorities; Vodafone was not able to provide sufficient information about CGP even to the

professional firm who was appointed by it to conduct due diligence for the deal; CGP was registered in a 5-storeyed building where more than 18,000 other entities were

also registered which is a typical mode of operation in tax havens; Vodafone did not provide any material to substantiate the economic and commercial

substance of CGP or justify its economic and commercial purpose; Cayman Island is known to be a tax haven and CGP was only a post box/ shell company. In fact, Hutchison had itself disregarded the corporate structure of all its intermediary downstream subsidiary companies in the tax havens of British Virgin Island, Cayman Island and Mauritius and treated these companies as paper/ shell companies. The exit of Hutchison from the Indian telecommunication business was structured at the last minute as a sale of a Cayman Island company to avoid paying any taxes either in India or Cayman Island.

Tax havens undermine the rule of law, impede countries, especially developing countries, from guaranteeing basic human rights such as health, education or housing; from protecting the environment, and from building infrastructure for economic development. Across the

Refer para 2.1 of the Annexure Refer para 2.2 of the

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Particulars Annexure Para Ref

world, tax havens are under attack. Leading global organizations like the G20 and OECD have put cracking down on offshore tax avoidance at the top of their agendas.

Taking appropriate steps against use of tax havens is all the more important for a developing country like India where a significant proportion of the population is still below the poverty line. The “White Paper on Black Money” issued by the Ministry of Finance in May 2012 clearly recognizes the role of tax havens in generation of black money. The White Paper has discussed the problem of misuse of corporate structure by MNC’s through the use of tax havens and it has actually cited the example of Vodafone case in this regard. One of the measures suggested in the White Paper for tackling the menace of black money is effective curbing of structuring through tax havens and it has been stated therein that the legislative measures included in the Finance Bill 2012 can create necessary deterrence against such structuring and thereby plug this loophole for tax evasion.

The Bharatiya Janata Party has also in its Election Manifesto for 2014 polls committed its resolve to fight the menace of black money.

As stated earlier, the retrospective amendment was approved by the Parliament after due deliberations and discussions as an anti-tax evasion measure to discourage double non-taxation through use of tax haven locations, and after taking into account all relevant factors, including FDI related aspects.

Annexure Refer para 2.3 of the Annexure and Exhibit 4

3. The Hon’ble Supreme Court Judgment in the Vodafone case was flawed In our humble view, the Hon’ble Supreme Court Judgment in the Vodafone case was flawed. We have explained in detail the reasons for the same in Para 3 of the Annexure read with Exhibit 5.

The Supreme Court judgement in the Vodafone case has also been criticised by the former Chief Justice of India, J. S. Verma, and by the former Additional Solicitor General of India, Bishwajit Bhattacharyya. Shri J.S. Verma went to the extent of saying that the Vodafone judgement is one the three judgments of the Supreme Court which are best forgotten or allowed to pass. He was upset by the fact that the Vodafone ruling had sanctified ‘illegitimate tax avoidance by adopting a subterfuge’. He also expressed concern that ‘When an illegal tax avoidance is upheld, you cast a higher tax burden on the honest tax payer’.

Refer para 3 of the Annexure along with Exhibit 5

4. Intense lobbying by vested interests: There seems to be a concerted effort to create a perception that roll back of the aforesaid retrospective amendment will provide certainty to foreign investors and it will be useful in reviving the economy. However, considering the points summarized below, there is hardly any merit in this argument. This was not the first time that a retrospective amendment was done in the Income-tax

Act. There have been more that 350 retrospective amendments till date and some of these were carried out to anul the judgments of various Courts including the Supreme Court;

Apart from the Vodafone related retrospective amendment, there were certain other

Refer para 4 of the Annexure

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Particulars Annexure Para Ref

retrospective amendments by the Finance Act 2012, in the definition of ‘Royalty’ in section 9(1)(vi) and Transfer Pricing related amendments to to anul the judgments of various Courts. Isn’t it surprising that there is not much noise by the media and the so called intellectuals, asking for roll back of these retrospective amendments, when these amendments surely affect a substantially larger number of foreign investors’ vis-à-vis those affected by the Vodafone related amendment, and considering that the then Hon’ble Finance Minister did not even clarify in the Parliament the rationale for making these retrospective amendments;

India is not the only country that has made retrospective amendment in its tax laws. Australia, China and Britain had in the recent past resorted to retrospective tax action to protect their National interest;

We believe that the talk of negative sentiment about India was mainly due to the Policy

paralysis that existed in the functioning of the Government; lack of confidence in taking policy decisions and lack of determination in implementing these decisions. Whether tax is levied on Vodafone or not, would not affect the sentiment of genuine investors. Structuring an offshore deal for selling Indian business/ assets would anyways be taxable going forward and hence every investor has clarity on this tax position of India. As regards retrospective taxability, the then FM has clearly explained the exceptional situation in this case of double non-taxation through use of tax haven. Foreign Investors are attracted to India because of the huge market it offers and not because they expect India to offer a favorable tax regime with low/ nil taxes like a tax haven.

Sections of media may be in conflict because of the large number of advertisements that are run by Vodafone and hence may never say that the retrospective amendment is actually in National interest as payment of such substantial taxes by Vodafone will reduce the burden on the common man. The spokesperson of the then ruling Congress party was in his individual capacity standing as a lawyer in the Bombay High Court and Supreme Court defending Vodafone and challenging the constitutional validity of the amendment made to section 201 of the Income-tax Act by his own Government and no one in the media thought that this was even worth mentioning as a news item.

Sir, we hope that your Government does not fall for such lobbying pressure and evaluates the various factors on merits. 5. Some other considerations Vodafone should not have been allowed a fast track route and made to go through the ordinary litigation process under the Income-tax Act.

Giving relief to cases like Vodafone may lower the morale of hard working and sincere officers of the Revenue department Significant loss of tax revenue in case of roll back of the retrospective amendment may not be justified, especially considering the fact that the Government is taking tough measures (like increasing rail fares and fuel prices, reducing subsidies, etc) affecting the common man in

Refer para 5.1 Refer para 5.2 Refer para 5.3

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Particulars Annexure Para Ref

India, on the ground that our economy is in a bad shape and such measures are a need of the hour.

Sir, considering the above, if the new Government now reconsiders the retrospective amendment, after supporting the same when it was in opposition, genuine foreign investors may get a perception that the Indian Parliament has no confidence in a decision taken by it and it can be generally influenced by lobbyists. Thus, instead of addressing the concerns of genuine foreign investors, it will only add to the concerns of such investors. By not implementing the retrospective proposals on Vodafone, the Government would only address the concerns of Vodafone and not prospective investors. However, in cases of retrospective application, if the taxpayer is ready to cooperate and deposit the due taxes, the Government could clarify that no penalty will be levied in such cases. In such cases, the Government may also consider waiving of the interest cost for the period from the date of the transaction to the date when the demand was communicated to the taxpayer.

Sir, we understand the importance of FDI for India in the current economic situation and the need to give comfort to every investor on the aspect of ‘certainty’ in application of laws. We strongly believe that this can be achieved by bringing about some meaningful changes from a long term perspective rather than doing something superficially by rolling back the retrospective amendment in the case of Vodafone just to show to the world that the Government is concerned of the interest of foreign investor. We have given in Part-II (para 6) of the enclosed Annexure some of the measures that could be considered by your Government for improving the investor sentiment.

Sir, we have a lot of hopes from your Government as we believe that your Government will give the highest priority to National interest while taking any decision and you will not encourage Crony Capitalism in any form. We are sure that when you spread the message of “Aache Din aayenge”, you meant “Aache Din” for the common man of India and not for any corporate groups who refuse to follow the laws of India in their true spirit.

Thanking You,

Yours Faithfully,

CA Manoj Solanki & CA Sarosh Irani

Enclosures: Exhibit 1: Representation dated January 27th, 2012, sent by us along with few other CA’s to the then FM Exhibit 2: Copy of letter dated 23rd March, 2007 sent by Indian Revenue authorities to HEL Exhibit 3: Investment structure of Hutchison Exhibit 4: Excerpts of Pranab Mukherjee’s & Yashwant Sinha’s speech in Parliament on Vodafone Issue Exhibit 5: Technical analysis of the order of the Supreme Court in the Vodafone case CC: (i) Shri Arun Jaitley, Minister of Finance & (ii) Smt. Nirmala Sitharaman, Minister of State for Finance

ANNEXURE

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Part-I Why cases like Vodafone do not deserve any relief from Retrospective operation

1. Vodafone was warned in advance by the Indian Revenue authorities by its letter dated 23rd March 2007 that there was a tax liability in India on the proposed acquisition and it should approach the Indian Revenue authorities if it proposes to advance any other view and remit money to Hutch without deduction of tax:

A copy of the above letter is enclosed as Exhibit 2. Though, the letter was addressed to Hutchison Essar Limited (‘HEL’), it is clear from para 864 of the Assessment Order, dated 31st May 2010, passed by the Revenue authorities under section 201(1) & (1A) that the letter was forwarded by HEL to Vodafone. Thus, Vodafone was well aware in advance of making payment to Hutchison of the impending tax liability and it consciously chose to ignore the warning of the Indian Revenue authorities and made payment to Hutch on 8th May, 2007 without deducting tax at source and without following the advice of the Indian Revenue authorities to confirm its view of non-taxability by making an application to the Indian Revenue authorities along with relevant transaction documents.

If Vodafone had received similar letter from the Revenue authorities of any developed country, say from the UK authorities, would it dare to show such royal attitude?

Having given an opportunity by the Indian Revenue authorities well before the deal was closed on 8th May 2007 after the FIPB approval was obtained on 7th May 2007, should Vodafone now be allowed to play victim? It is very much likely that Vodafone may have consciously taken such tax risk and appropriate adjustment may have been made for the tax risk in the consideration agreed for the deal with Hutchison.

2. Not levying tax on Hutch-Vodafone deal would mean legitimizing the use of Tax Havens and this would be contrary to our Government’s commitment to fight the menace of black money

2.1 Hutchison’s entire investment in the Indian company, ie Hutchison Essar Limited (HEL), was held through a complex investment structure involving a maze of subsidiaries in British Virgin Islands, Cayman Islands and Mauritius. The investment structure (as reproduced in the Supreme Court ruling) is enclosed as Exhibit 3 for ready reference to give a perspective of the complex structure. Vodafone claims that the deal with Hutchison pertains to acquisition of the entire share capital of a Cayman Island company, ie CGP; CGP through its downstream subsidiary companies in Mauritius indirectly held 52% shareholding in HEL and also Option rights to acquire further 15% shareholding interest in HEL. Vodafone claims that the transfer of interests in HEL from Hutchison to Vodafone is only an incidence of the transfer of the aforesaid share capital of CGP. Cayman Island is known to be a tax haven (also referred to as offshore financial centre). The entire share capital of CGP was only 1 share of 1 US$. Vodafone claims to have paid approximately INR 50,000 crores for acquisition of this 1 share of CGP. Vodafone was not able to provide the financial statements of CGP to the Indian Revenue authorities and it claims to have paid approximately INR 50,000 crores for acquiring this company. CGP was registered in a 5-storeyed building where more than 18,000 other entities were also registered which is a typical mode of operation in tax havens. Vodafone did not provide any material to substantiate the economic and commercial substance of CGP or justify its economic and commercial purpose in the investment structure. Vodafone had appointed Ernst & Young to undertake a tax due diligence for the deal and in the due diligence report issued by Ernst & Young, it was clearly stated that CGP was introduced as a target at a very later stage

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in the deal, at the behest of Hutchison, and that only certain limited information about CGP was made available to it which was not sufficient for Ernst & Young to be able to comment on any tax risks associated with CGP. Vodafone claims to have paid approximately INR 50,000 crores for acquiring a company in respect of which sufficient information was not provided even to the professional firm who conducted due diligence for the deal. The Share purchase agreement (‘SPA’) documenting the terms and conditions of the deal between Hutchison and Vodafone was signed by Hutchison Telecommunications International Limited (‘HTIL’), a higher tier company who was not the owner of CGP (please refer the Ownership structure in Exhibit 3). CGP was owned by HTI (BVI) Holdings Limited, a British Virgin Island company, and such owner was not a party to the SPA. The sale consideration was paid not to the legal owner of CGP but to a higher tier company at the behest of HTIL, as HTIL’s nominee. Further, as evident from the Assessment Order, dated 31st May 2010, passed by the Revenue authorities under section 201(1) & (1A), the directors on the board of all the intermediate Mauritius companies were the same; Further, a majority of the board of directors of the Mauritian companies (4 directors) were also directors on the board of CGP and they constitute a majority of the board of directors of CGP; The agenda of the Board meetings of all the eleven Mauritian companies were substantially the same and the board meetings of all these eleven companies have taken place on the same date, almost in sequence, without any time gap, and identical resolutions were passed in respect of the same agenda by all the companies. The above clearly evidences that Hutchison had itself disregarded the corporate structure of its intermediary downstream subsidiary companies in the tax havens of British Virgin Island, Cayman Island and Mauritius and treated these companies as paper/ shell companies.

The exit of Hutchison from the Indian telecommunication business was structured at the last minute as a sale of a Cayman Island company to avoid paying any taxes in India. Further, Cayman Island being a tax haven, no taxes were payable in Cayman Island on the gains made by Hutchison. The entire appreciation in the value of the investment made by Hutchison, representing the capital gains, was a consequence of the economic operations carried out in the Indian territory, however, no taxes were paid in India by abusing the corporate structure through misuse of tax haven.

2.2 Tax havens undermine the rule of law, impede countries, especially developing countries, from guaranteeing basic human rights such as health, education or housing; from protecting the environment, and from building infrastructure for economic development. World over, countries have realised the harmful effects of misuse of corporate structures by MNC’s by routing the investments through paper/ shell companies located in tax havens and hence, across the world tax havens are under attack. In June 2013, an expose by the International Consortium of Investigative Journalists (ICIJ) has claimed that leaked documents related to more than 120,000 offshore companies and trusts reveal how simple it is to misuse tax havens for illegitimate purposes, including tax evasion. Leading global organizations like the G20 and OECD have put cracking down on offshore tax avoidance at the top of their agendas. Every country is taking strong measures to safeguard its tax base. Taking appropriate steps to tackle the menace of tax havens is all the more important for a developing country like India where a significant proportion of the population is still below the poverty line. The Bharatiya Janata Party has also in its Election Manifesto for 2014 polls committed its resolve to fight the menace of black money.

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The “White Paper on Black Money” issued by the Ministry of Finance, Government of India, in May 2012 as a step towards dealing with the menace of black money, recognizes the problem of Tax havens. The relevant extract of the White Paper which discusses the characteristics of Tax havens is reproduced below:

“Various studies on tax havens have shown that tax havens are typically small countries/ jurisdictions, with low or nil taxation for foreigners who decide to come and settle there. They usually also offer strong confidentiality or secrecy regarding wealth and accounts, making them very attractive locations for safe keeping of unaccounted wealth. They also offer a very liberal regulatory environment and allow opaque existence, where an entity can easily be set up without indulging in any meaningful commercial activity and yet claim to be a genuine business unit, merely by getting itself incorporated or registered in that jurisdiction. This makes them highly desirable locations for multinational entities wishing to reduce their global tax liabilities. These multinational entities consisting of a network of several corporate and non-corporate bodies may set up conduit companies in tax havens and artificially transfer their income to such conduit companies in view of the low tax regime there. There is increasing global awareness and concern about the role of tax havens and their facilitation of certain abusive and undesirable arrangements that result in significant fiscal challenges to other countries and also pose a threat in terms of potential financing of terrorism and other activities that threaten peace and security.”

The “White Paper on Black Money” also discusses the problem of Misuse of Corporate Structure by MNC’s (please refer para 2.9 of the said White Paper). In fact, it cites the example of the Vodafone case as misuse of corporate structure for avoiding the payment of taxes. in this regard, para 2.9.3 of the White Paper is reproduced below for ready reference:

“2.9.3 The Vodafone tax case provides an instance of the misuse of corporate structure for avoiding the payment of taxes. In this case, the Hutchison Group had made investments in India from 1992 to 2006 through a number of subsidiaries having ‘separate corporate personality’ but which were essentially post box companies based in the Cayman Islands, British Virgin Islands, and Mauritius. The Hutchison Group sold its entire business operation in India in February 2007 to the Vodafone Group for a total consideration of US$ 11.2 billion and the same was effected through transfer of a solitary share of a Cayman Islands company. When the tax authorities requested the accounts of the said company, the answer given was that as per Cayman Islands law, the company was not required to prepare its accounts.”

One of the measures suggested in the White Paper for tackling the menace of black money is ‘Effective Curbing of Structuring through Tax Havens’, which is reproduced below:

“C.8 Effective Curbing of Structuring through Tax Havens

5.2.62 India has consistently taken the stand against structuring of transactions through tax havens by creating a complex chain of subsidiaries for avoidance of taxes. Indian tax administration has always been of the view that foreign investors in India should pay taxes on their income either in India or the country of their residence, and does not endorse attempts to avoid taxes in both the countries by use of such opaque tax-avoidance structures. The legislative measures included in the Finance Bill 2012 and

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the introduction of GAAR can create necessary deterrence against such structuring and thereby plug this loophole for tax evasion.”

2.3 The then Hon’ble Finance Minister, Shri Pranab Mukherjee, had in his speech in the Parliament on 8th May 2012 during discussion on the Finance Bill, 2012, passionately defended the retrospective amendment on the Vodafone case primarily on the ground that there cannot be a situation where somebody will make money on an asset located in India and will not pay tax either to India or to the country of its origin by making some arrangements through certain tax haven locations through a complicated setting up of a series of subsidiaries, and having huge capital gains on the assets located in India. The relevant extract of the speeches by Shri Pranab Mukherjee & Shri Yashwant Sinha (former FM) is reproduced in Exhibit 4 for ready reference. It is evident from the speech that the decision on retrospective amendment was taken after due evaluation of all relevant policy considerations, including the impact on foreign investment and it included a clear message to investors that we cannot declare India as a tax haven simply to attract foreign investment. When the corporate world and paid media was lambasting our Hon’ble Finance Minister on the retrospective amendments, the then World Bank Chief Mr. Zoellick came to his defense. He said: “The Indian government is sensitive that they want to have an environment that draws both domestic and foreign investments and so I hope investors give the Indian government time ...” He further went on to say, “Heart of the policy is that the government believes people should pay tax somewhere.” Need we say any more?

The above proposal of retrospective amendment was supported even by the then main opposition party, ie, Bharatiya Janata Party.

In view of the above, we humbly submit that granting of relief to cases like Vodafone in the upcoming Budget would indirectly mean legitimizing the use of Tax havens. This would be contrary to our Government’s commitment to fight the menace of black money and would therefore be against National interest.

3. The Hon’ble Supreme Court Judgment in the Vodafone case was flawed

3.1 In our humble view, certain important aspects seem to have missed the due attention of the Hon’ble Supreme Court resulting in a flawed judgment. We have enclosed in Exhibit 5 a technical analysis done by us wherein we have captured some important aspects that seem to have missed the due attention of the Hon’ble Supreme Court.

3.2 The Hon’ble Supreme Court at the very outset summarised the issue as (refer para 2 of the order): “In short, the Revenue seeks to tax the capital gains arising from the sale of the share capital of CGP on the basis that CGP, whilst not a tax resident in India, holds the underlying Indian assets” With due respect, in our humble view, the Supreme Court has failed to appreciate the legal case of the Revenue. The primary contention of the Revenue in this case was that on evaluation of the SPA and other transaction documents executed by HTIL and Vodafone, it can be established that the subject matter of the transaction (ie ‘Form’ of the transaction) is transfer of composite rights of HTIL in HEL and the transfer of the share capital of CGP is only one of the means for facilitating the transaction. Taxability on the basis of indirect transfer of Indian assets was only an alternative argument put forth by the Revenue.

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The Supreme Court did not adequately address the Revenue’s main argument which was also upheld by the Bombay High Court that in assessing the true nature and character of a transaction, the label which parties may ascribe to the transaction is not determinative of its character; the nature of the transaction has to be ascertained from the covenants of the contract and from the surrounding circumstances. The Supreme Court simply proceeded on the understanding that in this case, they were concerned with the sale of shares and not with the sale of assets (refer para 73 of the order).

In our humble view, the Supreme Court did not give adequate importance to the following facts which clearly indicated that the transaction was for acquisition of HTIL’s interest in 67% of the equity shareholding of HEL and the transaction had sufficient nexus with the Indian territory and thus, it fell within the jurisdiction to the Indian Revenue authorities:

- Public announcements by Vodafone, including filings with the SEC in USA, that it has agreed to acquire a controlling interest in the Indian company, HEL. These announcements had no mention of CGP;

- HTIL’s letter to Vodafone requesting that an offer be submitted for its aggregate interest in 67% of the issued share capital of HEL;

- Vodafone’s offer to HTIL for HTIL’s shareholding in HEL; - Various rights and warranties provided in the SPA entered between HTIL and Vodafone; - Essar filed objections with the FIPB against the proposed sale to Vodafone and HTIL agreed to pay

US$ 415 million to Essar in return for its acceptance of the SPA between HTIL and Vodafone. The Settlement Agreement between HTIL and Essar clearly stated that the transaction was for the disposal of HTIL’s interests and rights in relation to HEL;

- As per the SPA, the transaction was subject to FIPB approval and if such approval was not obtained by Vodafone, HTIL was permitted to terminate the agreement. Such regulatory approvals would not be required if the transaction was only for transfer of CGP share. If the FIPB authorities in India had jurisdiction over this transaction then why the Revenue authorities should be denied jurisdiction over this transaction;

- As per the SPA, in the event of breach, the agreement would be treated as requiring HTIL to procure delivery of 67% of share capital of HEL to Vodafone;

- The consideration was determined as 67% of the total enterprise value of HEL, which implies that no value was ascribed to CGP or any of the intermediate companies between CGP and HEL;

- HTIL had to adopt several steps to consummate the transaction to transfer all its rights in HEL, like procuring assignment of loans, facilitating framework agreements, transferring management rights, etc and such steps were independent of the transfer of CGP share;

- The option rights in respect of 15% of the equity shareholding in HEL could not have been legally transferred to Vodafone only by the transfer of CGP share. Separate agreements were executed whereby HTIL group waved off its rights and the relevant Indian companies acknowledged the legal right of Vodafone to such options.

It appears that the Hon’ble Supreme Court seems to have treated the transaction as an offshore transfer of CGP share primarily on the ground that legal form of the transaction needs to be respected and one cannot ‘look through’ in the substance of the transaction. However, the Supreme Court has not given due importance to the legal form of the above agreements, especially agreements with Indian parties, without which all rights in HEL could not have been legally transferred to Vodafone. These agreements were required to be executed independently and in addition to the transfer of CGP share. Thus, the Hon’ble Supreme Court has not followed a consistent approach and has followed a ‘look at’ principle (ie respecting legal form) for transfer of some rights and ‘look through’ principle

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(ie respecting substance) for transfer of other rights. If a holistic approach is to be followed, as also advocated by the Supreme Court, we are unable to understand how the Supreme Court arrived at the conclusion that the transaction is for sale of the Cayman Island company and not for the sale of Indian business. The offer document issued by Hutch, the bids given by the various interested parties, the press releases issued by Hutch and Vodafone, the detailed sale agreement executed between Hutch and Vodafone which created various rights and obligations which cannot be said to be merely incidental to the sale of share of the Cayman Island company, various other transaction documents executed by the parties, obtaining the FIPB approval, etc, if looked at “Holistically” clearly suggest that the transaction was for sale of Hutch’s interest in the Indian telecom business to Vodafone.

3.3 The Supreme Court judgement in the Vodafone case has also been criticised by the former Chief Justice of India, J. S. Verma, and by the former Additional Solicitor General of India, Bishwajit Bhattacharyya. The former Chief Justice of India, J.S. Verma, went to the extent of saying that “The Vodafone judgement is one the three judgments of the Supreme Court which are best forgotten or allowed to pass”. He pointed out that in formulating the “Look At, Not Look Through” doctrine, the Judges in Vodafone had done the “opposite” of what the Constitution Bench had laid down in McDowell that one had to “Look Through” the transaction to determine what the transaction really was. He was also upset by the fact that the Vodafone ruling had sanctified “illegitimate tax avoidance by adopting a subterfuge“. He expressed concern that the effect of benefiting a multi-billion dollar conglomerate is to cast a higher tax burden on the common man. “When an illegal tax avoidance is upheld, you cast a higher tax burden on the honest tax payer“, he emphasized.1

4. Lobbying by vested interests:

There is currently lot of noise in the media suggesting that retrospective amendments in respect of the Vodafone case was the root cause of negative sentiment amongst foreign investors. It is being made out as if this particular retrospective amendment by the previous Government was the biggest mistake which would drive away foreign investors. There seems to be a concerted effort now to create a perception that roll back of the aforesaid retrospective amendment will provide certainty to foreign investors and it will be useful in reviving the economy.

Is there any merit in the above view? In this regard, we invite your attention to the following points:

Was this the first time ever that a retrospective amendment in tax laws was done by India? Certainly No. In an article published on rediff, a fellow CA colleague, Mr M R Venkatesh, says that “since 1961, there have been in excess of 350 retrospective amendments to the Income-tax Act. Some of these were carried out to anul the judgments of various Courts including the Supreme Court. Yet, there has never been a shrill debate in our media as much as it has been on this occasion.However, we have never in the past saw such strong media campaigning against any specific retrospective amendment in tax laws.

Was this the only retrospective amendment done in the Finance Act 2012 and did it affect such larger set of foreign investors so as to deserve the kind of attention it received?

1 Source: An article by Vellalapatti Swaminathan Iyer published on www.itatonline.org

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Apart from the retrospective amendment in respect of the Vodafone case, there were certain other important amendments, as given below, which were made effective with retrospective effect from inception of the relevant provision: - Retrospective amendment done in definition of Royalty in Section 9(1)(vi) to clarify that

payment for use or right to use a computer software is taxable as Royalty, to counter judgements against the Revenue;

- Retrospective amendment done in definition of Royalty in Section 9(1)(vi) to clarify that the term “process” includes transmission by satellite, cable, optic fibre or any other similar technology whether or not such process is secret. This was to counter judgements against the Revenue and bring to tax payments for Satellite transponder charges, Leaseline charges, etc.

- Retrospective amendments in Transfer Pricing provisions, including substantially widening the scope of the definition of ‘international transaction’, to counter some judgements against the Revenue.

The above retrospective amendments in the definition of Royalty and Transfer Pricing provisions surely affect a substantially larger number of foreign investors’ vis-à-vis the retrospective amendments pertaining to the Vodafone case. Isn’t it surprising that there was is not much noise by the media and the so called intellectuals, asking for roll back of these retrospective amendments, when they seem to be concerned of investor sentiment. It is important to note that the then Hon’ble Finance Minister did not clarify in the Parliament the rationale for making the above retrospective amendments even though they affected a much larger number of taxpayers (including domestic taxpayers); however, there was no significant protest against these amendments and everyone was focused only on the Vodafone related amendments. The Vodafone related amendments affect an investor only on exit from India; further, tax is being claimed only on the gains made from investment in India and the intention of the amendments is to target situations of double non-taxation resulting from misuse of Tax havens. However, the above amendments pertaining to ‘Royalty’ and Transfer Pricing provisions affect the day to day business operations of entities set up in India and there is no allegation of any aggressive tax planning or tax evasion against such entities. Accordingly, logically, shouldn’t there be larger protests in the media against the above amendments then those targeted against the Vodafone related amendments. In our view, the only way to rationalize the media approach is that it is a concerted effort by lobbyist’s having vested interest and enjoying the support of money power. We hope, the Government does not fall for such lobbying pressure and evaluates the various factors on merits.

Is India the only country that has made retrospective amendment in its tax laws? Certainly No. Australia, China and Britain had in the recent past resorted to retrospective tax action to protect their National interest. In fact then Hon’ble Finance Minister, Shri Pranab Mukherjee while defending the retrospective amendment on the Vodafone case in his speech in the Parliament on 8th May 2012 referred to the retrospective tax amendment made by Britain in the year 2008. He stated: “One hon. Member mentioned about a British amendment exactly of similar nature. In the year 2008, they made an amendment in the Finance Bill, of Section 58 which gave effect to it from 1987. It means that they are having a retrospective legislation in respect of taxation law which becomes effective from 21 years back. If they are entitled, surely India is equally entitled. India is not an inferior country compared to any other country. Therefore, we have that right.

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We support the stand taken by Shri Pranab Mukherjee.

Can levying tax on Vodafone really affect the sentiment of genuine foreign investors? In our humble view, the talk of negative sentiment about India was mainly due to the Policy paralysis that existed in the functioning of the Government; lack of confidence in taking policy decisions and lack of determination in implementing these decisions. Whether tax is levied on Vodafone or not, would not affect the sentiment of genuine investors. Structuring an offshore deal for selling Indian business/ assets would anyways be taxable going forward and hence every investor has clarity on this tax position of India. As regards retrospective taxability, Shri Pranab Mukherjee has clearly explained the exceptional situation in this case where no taxes were paid either in India or outside India on the substantial gains made from disposal of Indian assets by abusing the corporate structure through use of Tax haven. He has clearly sent out a message that creative and unreasonable tax planning which results in avoiding taxes legitimately due to the country will not be tolerated in India. Why should this position taken by India worry any genuine foreign investor? Every country is now anyway strengthening its controls to protect its tax base, especially by keeping a check on unreasonable tax avoidance schemes of MNC’s. Foreign Investors are attracted to India because of the huge market it offers and not because they expect India to offer a favorable tax regime with low/ nil taxes like a tax haven.

In view of the above, isn’t it obvious that there is hardly any merit in the argument that roll back of Vodafone related amendment would improve investor sentiment. In an ideal scenario, the media should actually be supporting the Government for this amendment as it is in National interest and payment of such substantial taxes by Vodafone will reduce the burden on the common man. But sections of media may never say this because of the large number of advertisements that are run by Vodafone. Which media house will speak the truth at the cost of business? The spokesperson of the then ruling Congress party was in his individual capacity standing in the Bombay High Court and Supreme Court defending Vodafone and challenging the constitutional validity of the amendment made to section 201 of the Income-tax Act by his own Government and no one in the media thought that this was even worth mentioning as a news item.

5. Some other considerations:

5.1 Vodafone should not have been allowed fast track route and made to follow the ordinary litigation process under the Income-tax Act As stated earlier, Vodafone was warned in advance by the Indian Revenue authorities of the impending tax liability and it consciously chose to ignore the warning of the Indian Revenue authorities and made payment to Hutch on 8th May, 2007 without deducting tax at source. In September 2007, the Revenue authorities issued a show cause notice to Vodafone for its failure to withhold tax under the provisions of section 201 of the said Act. Instead of submitting the relevant transaction documents to the Revenue authorities and clarifying the basis on which it proceeded to make payment without deduction of tax, Vodafone chose to file a writ petition with the Bombay High Court challenging the show cause notice.

The Bombay High Court dismissed the writ petition filed by Vodafone and in it’s order, the Bombay High Court also denounced the suppression of SPA by Vodafone.

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Vodafone then filed a SLP before the Hon’ble Supreme Court. The Hon’ble Supreme Court disposed of the SLP and directed Vodafone to approach the Revenue authorities for deciding on the issue of jurisdiction. It was only after this order of the Supreme Court that Vodafone produced the SPA before the Revenue authorities.

In May 2010, Revenue authorities issued an order concluding that it had jurisdiction to treat Vodafone as an assessee in default for failure to withhold tax. As per the normal appellate process, an ordinary tax payer would have been required to first approach the Commissioner (Appeals), thereafter the Income Tax Appellate Tribunal (‘ITAT’), thereafter High Court (only on a question of law) and finally the Supreme Court. However, Vodafone was allowed a fast track route as it was allowed to appeal against the order of the Revenue authorities directly before the High Court. The Vodafone case is primarily based on evaluation of facts. If Vodafone had been made to go through the normal litigation process, there may have been a possibility of further factual data coming to light as the ITAT is the highest fact finding authority under the Income-tax Act. The special treatment to Vodafone is difficult to understand especially considering the fact that it did not provide transaction documents (SPA, etc) to the Revenue authorities until it was forced to do so by the Hon’ble Supreme Court.

5.2 Giving relief to cases like Vodafone may lower the morale of hard working and sincere officers of the Revenue department: Sir, we humbly acknowledge that we have been very impressed with the kind of hard work, preparation and pro-activeness that the Revenue officers have shown in the Vodafone case. A look at the Assessment Order passed by the Revenue authorities in this case could convince any tax professional of the extra-ordinary efforts put in by the Revenue team. This was very unlike the general perception one carries about the Revenue department. However, unfortunately, instead of their efforts being applauded, the Revenue faced severe criticism for this case, atleast until the Bombay High Court judgement, which we believe was due to a concerted effort of vested interests who had managed to exploit the general anti-Government sentiment amongst the people to create a perception through the media that Vodafone was being unnecessarily harassed by the Indian Revenue.

We genuinely believe that if the Revenue officers have done a good job, the Government needs to stand by them and motivate such officers to continue doing their good work. This may motivate the entire team to put in extra efforts; ofcourse, this should be balanced with appropriate control over high handed approach and unreasonable assessments under pressure for increasing tax collections.

In our humble view, any relief to cases like Vodafone may lower the morale of some hard working and sincere officers of the Revenue department, especially the younger generation.

5.3 Significant loss of tax revenue; is the loss justified in the current economic scenario? The cost to the Indian Exchequer on account of relief to Vodafone alone will be approx INR 22,600 crores. Further, there may be many other cases where the parties have already deposited taxes with the Indian Revenue under similar facts pursuant to the retrospective amendment. The Government may have to refund all such taxes in case of roll back of the retrospective amendment. Thus, there is likely to be a significant loss of tax revenue in case of a roll back of the retrospective amendment. Is

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such loss justified, especially considering the fact that the Government is taking tough measures (like increasing rail fares, reducing subsidies, etc) affecting the common man in India, on the ground that our economy is in a bad shape and such measures are a need of the hour.

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Part-II Suggestions for improving investor sentiment

6. Sir, we understand the importance of FDI for India in the current economic situation and the need to give comfort to every investor on the aspect of ‘certainty’ in application of laws. We strongly believe that this can be achieved by bringing about some meaningful changes from a long term perspective rather than doing something superficially by rolling back the retrospective amendment in the case of Vodafone just to show to the world that the Government is concerned of the interest of foreign investor. We have suggested below some of the measures that the Government may consider for gaining confidence of the foreign investors:

6.1 Rolling back the retrospective amendments made by the Finance Act 2012 in the definition of ‘royalty’ in section 9(1)(vi) and Transfer Pricing provisions, Or Atleast, clarifying on the floor of house the rationale behind making these amendments and the reason for making them with retrospective effect.

As stated earlier, the above retrospective amendments in the definition of Royalty and Transfer Pricing provisions affect a substantially larger number of foreign investors’ and the then Finance Minister did not clarify in the Parliament the rationale for making the above retrospective amendments.

6.2 In respect of the Vodafone case related retrospective amendment, ie taxability of offshore transactions in India if the value of such transaction is attributable to underlying assets in India, the Government should clarify the following aspects: - Meaning of the term ‘substantially’ in Explanation 5 to section 9(1)(vi); - Meaning of the term ‘interest’ in Explanation 5 to section 9(1)(vi); - To clarify that if the share of an overseas company is deemed to be situated in India by virtue of

Explanation 5 to section 9(1)(vi) on account of it deriving its value substantially from assets located in India, then only proportionate amount of gain corresponding to the proportion of Indian assets out of the total assets of the overseas company should be taxable in India;

- To clarify the methodology to be used for determining the value of the share attributable to Indian assets;

- To clarify that Explanation 5 to section 9(1)(vi) would be applicable only in situations where the person transferring the shares of the overseas company owns more than a particular % (say 26% or more) of the shareholding in such overseas company;

- To clarify that provisions of Explanation 5 to section 9(1)(vi) would not apply in case the non-resident is eligible for Tax treaty benefit and the capital gains are taxable in the country of residence as per the Tax treaty. Wherever necessary, the Government should initiate the process to amend the Tax treaties to provide for a Limitation of Benefits clause to ensure that post box companies/ shell companies do not qualify for the Tax treaty benefit.

6.3 A significant quantum of income-tax litigation in India is in the area of Transfer Pricing and it has only been increasing year on year. The quantum of additions made by the Revenue authorities on account of Transfer Pricing during the period 2004-2012, as provided in the “White Paper on Black Money” issued by the Ministry of Finance, Government of India, in May 2012, is given in the table below:

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Transfer –pricing Adjustments 2004-2012

Financial Year Number of TP Audits Completed

Number of Adjustment Cases

% of Adjustments Cases

Amount of Adjustment (in Rs Crore)

2004-2005 1,061 239 23 1,220 2005-2006 1,501 337 22 2,287 2006-2007 1,768 471 27 3,432 2007-2008 219 84 39 1,614 2008-2009 1,726 670 39 6,140 2009-2010 1,830 813 44 10,908 2010-2011 2,301 1,138 49 23,237 2011-2012 2,638 1,343 52 44,531

The quantum of Transfer Pricing additions during 2012-13 is estimated to be in the range of approximately INR 70,000 crores as per information available in the public domain.

It’s been 13 years since Transfer Pricing provisions were introduced in India. However, there has been negligible guidance from the CBDT for clarifying the stand of the Revenue on matters of common disputes between the Revenue authorities and Tax payers. Even internally the Revenue officers don’t seem to be following a uniform approach while applying the Transfer Pricing provisions on similar facts for different tax payers. Transfer Pricing is a very subjective area and hence it becomes all the more important that there is guidance from the CBDT atleast on common issues so as to provide certainty to the tax payers and reduce unnecessary litigation. As could be seen from the table above, out of 2,638 TP audits done during 2011-12, the Revenue made Transfer Pricing additions in 1,343 cases, which is more than 52%. Every alternate case is resulting in a Transfer Pricing addition suggests that there is a significant gap between the way Revenue authorities are interpreting the Transfer Pricing provisions and the way Tax payers are interpreting it. In our humble view, the CBDT should study the data of these Transfer Pricing addition cases, including the rulings by the Appellate authorities in these cases and come out with an appropriate set of guidelines for the Tax payers as well as Revenue authorities clarifying the stand of the Revenue on at-least the most common matters of disputes.

6.4 The Government could consider setting up a system to ensure accountability of the Revenue officers; to make them accountable for any unreasonable assessment orders or for promoting unnecessary litigation.

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Representation made by us earlier in January 2012 to the then Finance Minister stressing the need for a review of the Hon’ble Supreme Court Order

January 27th, 2012

To,

The Honourable Finance Minister,

New Delhi.

Subject: Necessity for Government to file a Review Petition in respect of Honourable Supreme Court’s judgment in Vodafone tax case

Respected Sir,

We are a group of Chartered Accountants who are extremely disappointed with the recent judgment of Honourable Supreme Court in Vodafone tax matter.

World over the courts are coming down heavily on tax avoidance and are ruling in favour of substance over form. At such a time the Supreme Court of India’s decision in the Vodafone case is a big jolt to the entire anti-tax evasion drive. It is common knowledge that Hutchison sold its Indian telecom business to Vodafone in February 2007 and made capital gains of approximately Rs 50,000 crores on the transaction. When the Income Tax Department tried to levy tax (@ 20% rate ) on this deal, Hutchison and Vodafone claimed that the transaction involved the sale of a Cayman Island company – CGP and since the deal was between 2 foreign companies, no tax is payable in India. Not once but twice the Bombay High Court rejected the contentions of Vodafone. Bombay High Court rightly ruled in September 2010 that the transaction was for the sale of Indian telecom business, after undertaking a detailed scrutiny of the sale agreement and other transaction documents executed by the parties in connection with this deal and held that it was not merely a sale of the Cayman Island company. The High Court also ruled that “In assessing the true nature and character of a transaction the label which parties may ascribe to the transaction is not determinative of its character. The nature of the transaction has to be ascertained from the covenants of the contract and from the surrounding circumstances.” The High Court rightly concluded that if one share of Cayman Island was enough to consummate the transaction then Hutch and Vodafone need not have entered into complex documentation running into hundreds of pages.

Unfortunately the Supreme Court overruled the Bombay HC judgment by inventing a new principle called “Look At.” The Honourable Chief Justice of India Shri S.H. Kapadia ruled that while viewing a transaction, “Look At” principle needs to be applied. i.e. the transaction needs to be looked at “Holistically.” Using this very same “Look At” principle and “Holistic” approach, surprisingly the Honourable Supreme Court arrived at the conclusion that the transaction is for sale of the Cayman Island company and not the sale of the Indian business. One is unable to understand how the Honourable Supreme Court arrived at this conclusion inspite of following a holistic approach to ascertain

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Representation made by us earlier in January 2012 to the then Finance Minister stressing the need for a review of the Hon’ble Supreme Court Order

the nature of the transaction. The offer document issued by Hutch, the bids given by the various interested parties, the press releases issued by Hutch and Vodafone, the detailed sale agreement executed between Hutch and Vodafone which created various rights and obligations which cannot be said to be merely incidental to the sale of share of the Cayman Island company, various other transaction documents executed by the parties, obtaining the FIPB approval, etc, if looked at “Holistically” clearly suggest that the transaction was for sale of Hutch’s interest in the Indian telecom business to Vodafone.

Another question that needs to be asked is - If the transaction was between 2 foreign companies then why was the permission of FIPB (Foreign Investment Promotion Board) needed, especially since obtaining of FIPB approval was a pre-condition to the completion of the contract between Hutch and Vodafone.

One important point that seems to have been ignored by the Honourable Supreme Court is the clause on ‘Damages’ in the Share Purchase Agreement (between Hutch & Vodafone ) which required Hutch to procure the delivery of shares (67%) of Indian telecom company for Vodafone in case of breach of the contract by Hutch. If the transaction was really for the sale of Cayman Island company, then should not the damages be restricted to procuring the delivery of the share of the Cayman company? This proves that the real transaction was to sell the Indian telecom company.

The Honourable Supreme Court has upheld the substance of the Cayman Island company and the holding structure of Hucthison group primarily for the reason – That the whole structure was in place for over 10 years and therefore it passed the “Duration” test. But the Honourable Supreme Court ignored how the Cayman Island company was a shell company located in a tax haven and which did not even prepare financial statements. Does this mean that if one plans a tax avoidance scheme well in advance then that person or entity is safe?

How did the Honourable SC ignore the fact that the directors of Cayman Island company and all the intermediary Mauritius companies were common?

We have enclosed a technical analysis wherein the important aspects that seem to have missed the due attention of the Honourable Supreme Court have been captured.

It is a loss of Rs 11,000 crores that was rightfully due to the Indian government. We all know that the Tax Department is likely to fall short of the tax collection target since a loss of Rs 11,000 crores is a big amount. The GDP of India is driven by millions of hard working citizens – both in rural and urban places.

In the national interest as also the interest of justice, we the undersigned request your goodself to kindly consider filing a Review Petition/ referring the case to Larger Bench of the Honourable Supreme Court.

Thanking You,

Yours Faithfully,

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Text of Shri Pranab Mukherjee’s (Finance Minister) Speech in Parliament on Vodafone Issue

8th May, 2012

The last point, which was referred to by Shri Advani ji, is about the operation against black money. My whole argument on the Vodafone was on that point. It is because my point is very simple. I would like to be guided either by the Double Taxation Avoidance Agreement or tax. There cannot be a situation where somebody will make money on an asset located in India and will not pay tax either to India or to the country of its origin by making some arrangements to certain tax haven areas, to certain tax haven locations through a complicated setting up of a series of subsidiaries, and having huge capital gains on the assets located in India.

I have explained that retrospective effect, to clarify the legislative intention, must be with reference to the date of enactment. How can the intentions of the legislature have any other reference point than the date of enactment, whether it is 1961 or 1951 or 1948? If clarificatory retrospective arrangement is to be made, it will be with reference to the date of enactment. But, the effect of the retrospective amendment in respect of the taxation will be covered by other laws. Here, the Income Tax Act Section 161 says that no tax can be levied beyond six years. Therefore, the mention of 1961 is academic, but the tax liability will arise retrospectively, six years before, from the current date of assessment.

Yesterday I clarified three issues. The assessment which has been closed, which has been made, there is no question of re-opening it. One hon. Member mentioned about a British amendment exactly of similar nature. In the year 2008, they made an amendment in the Finance Bill, of Section 58 which gave effect to it from 1987. It means that they are having a retrospective legislation in respect of taxation law which becomes effective from 21 years back. I. If they are entitled, surely India is equally entitled. India is not an inferior country compared to any other country. Therefore, we have that right.

We cannot declare India as a tax haven simply to attract the foreign investment. I want foreign investment for technology, for development, for resources. I can have. We are having and we shall have. I have no doubt.

Please remember that when the investment was also not there, we did not eat lizards. Till today, the investment requirement is substantially met by the rate of our domestic savings. Today it has come down to 33 per cent or 34 per cent, but it had reached as high as 35 per cent or 36 per cent of GDP. The rate of investment was 37 per cent or 38 per cent. Therefore, we are not in that distressed a situation that a country of 121 crore people will be treated as tax haven like Cayman Island, The Isle of Man or Virgin Islands. We cannot be equated with them.

Either you pay tax here or you pay tax in your own country with which we have a Double Taxation Avoidance Agreement. It is as simple as that. The rule of law is there. Our Supreme Court has given a verdict. Somebody has said how we could go against the judgement of the Supreme Court. Many eminent lawyers are here. They are Ministers. I am not like them, but most respectfully I would say that I am fully aware of my right as a legislator. Law-making power only vests with the Parliament. The Supreme Court may interpret law, but equally the Parliament has the right, Legislature has the right to express its intention by making amendment to correct the judgement of the Supreme Court. The very first amendment to Constitution of India, which is not an ordinary law, for insertion of

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Article 35A and introducing certain other relevant changes, was done in 1951. It arose out of the judgement of the then Supreme Court. Parliament considered that the Supreme Court did not reflect the intention of the law-makers. So, the Constitution, the basic document, was changed. When did we not fight with the Supreme Court? Did we not fight against it in Golaknath case and Keshvanand Bharati case?

From 1950 to 1968, the general perception was that Indian Parliament can make any amendment to the Constitution. In Golakhnath case, the verdict came that Parliament cannot alter Fundamental Rights, and a series of legal enactments, social legislations, were declared null and void by the Supreme Court, including the Banks Nationalisation Act, Privy Purses (Abolition) Act. Then, Lok Sabha was dissolved in 1970. The then Prime Minister, Shrimati Indira Gandhi, went to the electorate saying ‘I want to bring social legislations. I want to transform the society. I want the power to amend the Constitution.’

She said, “I do not have two-thirds majority, give me two-thirds majority.” The Indian electorate gave her two-thirds majority, and there came the Twenty-fourth Amendment to the Constitution where the ‘constituent power’ was vested in Parliament. If you read the text of the Constitution from 1950, before the Twenty-fourth Amendment made to Article 368, you will not find the word ‘constituent power’. ‘Constituent power’ of Parliament was first invented and put in the text of the Article 368 of the Constitution through that Twenty-fourth Amendment.

Not only in India but everywhere, in all developed societies, Legislature’s intention is what matters because we are representing more than 70-crore people of this country. Each constituency has 1.5 million or 1.6 million voters. Their intention is what matters. Yes, as far as the Supreme Court and the Judiciary is concerned, the Constitution has given them the power to interpret the law. However, the law is to be framed by us. If we find that there is a conflict between the ‘intent’ of the Legislature and the ‘interpretation’ of the Constitution, most respectfully I submit that by interpretation of the law, our right of amending it or asserting our right is not taken away. That is the power of the Constitution which is vested in us.

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Yashwant’s Sinha’s (former Finance Minister) speech excerpts

There has been great controversy over the retrospective legislation and it has been debate vigorously in the press. I have with me the letter dated 5.2.2010 written by the Prime Minister which the Finance Minister must be aware of. It is addressed to the then UK Prime Minister Gordon Brown. It concerns the tax liability of Vodafone and I want to bring it on record. I am quoting:

“I can assure you that Vodafone will have the full protection of the law and access to the legal system in India.”

We know they had the full protection of the law. They went to the Supreme Court. The judgement came in their favour. We know that you went in for a review petition. The review petition was rejected by the Supreme Court. So, they had the full protection of the law.

The Prime Minister further says:

“I also understand – this is critical – that there is no retrospective application of taxation and a recent Court judgement has affirmed this position. There is no retrospective application of taxation.”

This is what the Prime Minister of India is saying in his letter to the Prime Minister of the U.K. The Prime Minister was himself the Finance Minister for 5 years. I do not know how the Prime Minister has said: “There is no retrospective application of taxation.” How did he make this statement? Was this draft prepared in the Finance Ministry? If the draft has been prepared in the Finance Ministry, I am quite sure they would not have made a crucial mistake of this kind. This Parliament is competent to pass legislation which will have retrospective effect and no court and nobody can take away this authority of the Indian Parliament. But in the application of retrospectivity, we have to exercise great sense of responsibility. That is our look out and I am not commenting on individual case. You deal with that case in the most judicious and equitable manner. But the point I am making is whether it is transfer pricing, whether it is capital gains, whether it is anything else, the Parliament has a right to legislate, and, as I said that right cannot be taken away by anybody.

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Technical Analysis of SC ruling in Vodafone case:

Honourable Supreme Court judgement in the case of Vodafone Page 1 of 5

With utmost deference to the esteemed judgment delivered recently by the Honourable Supreme Court in the case of Vodafone, we humbly believe that certain aspects, as highlighted below, seem to have missed the due attention of the respected judges.

Introduction

The Honorable Chief Justice of India (‘CJI’) has summarised the issue in the Introduction (para 2 of the order) as: “In short, the Revenue seeks to tax the capital gains arising from the sale of the share capital of CGP on the basis that CGP, whilst not a tax resident in India, holds the underlying Indian assets” With due respect to the Honourable CJI, we believe, the primary contention of the Revenue in this case is that on evaluation of the SPA and other transaction documents executed by HTIL and Vodafone, it can be established that the subject matter of the transaction (ie ‘Form’ of the transaction) is transfer of composite rights of HTIL in HEL and the transfer of the share capital of CGP is only one of the means for facilitating the transaction. This is also evident from para 72 of the order wherein it has been stated that “The primary argument advanced on behalf of the Revenue was that the SPA, commercially construed, evidences a transfer of HTIL’s property rights by their extinguishment.” Thus, as per the primary argument, the Revenue is not seeking to tax the transaction in India on the ground that there is an indirect transfer of underlying assets situated in India on account of a transaction of transfer of share capital of a foreign company. Lifting of Corporate Veil In the context of international tax aspects of Holding Structures, the Honourable CJI has stated in para 67 on page 38, “However, where the subsidiary’s executive directors’ competences are transferred to other persons/bodies or where the subsidiary’s executive directors’ decision making has become fully subordinate to the Holding Company with the consequence that the subsidiary’s executive directors are no more than puppets then the turning point in respect of the subsidiary’s place of residence comes about. Similarly, if an actual controlling Non-Resident Enterprise (NRE) makes an indirect transfer through “abuse of organisation form/legal form and without reasonable business purpose” which results in tax avoidance or avoidance of withholding tax, then the Revenue may disregard the form of the arrangement or the impugned action through use of Non-Resident Holding Company, re-characterize the equity transfer according to its economic substance and impose the tax on the actual controlling Non-Resident Enterprise. Thus, whether a transaction is used principally as a colourable device for the distribution of earnings, profits and gains, is determined by a review of all the facts and circumstances surrounding the transaction. It is in the above cases that the principle of lifting the corporate veil or the doctrine of substance over form or the concept of beneficial ownership or the concept of alter ego arises.” Further, the Honourable CJI has, in the context of lifting of corporate veil by courts, stated the following in para 74 on page 58 of the order, “The fact that the parent company exercises shareholder’s influence on its subsidiaries cannot obliterate the decision-making power or authority of its (subsidiary’s) directors. They cannot be reduced to be puppets. The decisive criteria is whether the parent company’s management has such steering interference with the subsidiary’s core activities that subsidiary can no longer be regarded to perform those activities on the authority of its own executive directors.” The above principles laid down by the Honourable CJI are very important in the context of a Holding company structure. However, in the instant case, the Honourable CJI has not analysed whether CGP or its downstream subsidiaries satisfied the above tests or their directors were mere puppets of the ultimate Parent company, ie HTIL. It is relevant to note that in the order dated 31st May 2010 passed by the Revenue under section 201(1) and 201(1A) of the Income-tax Act, 1961, the Revenue has provided a Chart giving details of the resignations submitted by the Board of Directors of the various intermediate subsidiary companies with reference to the sale of HTIL’s interests in HEL under the SPA dated 11th February 2007 and which were

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to take effect on Completion, as defined in the SPA. Further, the Revenue has also provided in such order a Chart giving the details of the resolutions passed for accepting such resignations of the Board of Directors. The said Charts are enclosed in Exhibit 1. As could be seen from the Exhibit, the directors on the board of all the intermediate Mauritius companies are the same. Further, a majority of the board of directors of the Mauritian companies (4 directors) are also directors on the board of CGP and they constitute a majority of the board of directors of CGP. In the said order, the Revenue has also made the following observations: - All these directors of the intermediate subsidiary companies are nominated by the ultimate holding

company HTIL and some of them namely, Susan Chow, Ting Yu Chan are in the board and management of the ultimate holding company HTIL, as evidenced in the annual report of HTIL for the year 2007;

- The agenda of the Board meetings of all the eleven Mauritian companies are substantially the same and the board meetings of all the eleven companies have taken place on the same date, almost in sequence, without any time gap, which only shows that the meetings were mere formality;

- The resolutions passed are identical in respect of the same agenda by all the companies.

The above clearly seem to suggest that the board of directors of CGP and the intermediate subsidiary companies in Mauritius have acted merely as puppets of the ultimate Parent company, ie HTIL and accordingly, as per the principles cited above by the Honourable CJI, the principle of lifting the corporate veil could apply in the facts of the present case. The argument that CGP and the intermediate subsidiary companies between CGP and HEL were merely paper companies and did not have any commercial substance also derives support from the following: The Honourable CJI has stated that in this case Enterprise Value is made up of two parts, namely, the value of HEL, the value of CGP and the companies between CGP and HEL (on page 84 of the order). However, the consideration paid by Vodafone in this case was determined at 67% of the enterprise value of HEL, which implies that no value was ascribed to CGP or any of its intermediate companies between CGP and HEL. Tests laid down for distinguishing a transaction from Tax Avoidance scheme The Honourable CJI has laid down certain tests in para 73 on page 54 in order to find out whether a given transaction evidences a preordained transaction which is created for tax avoidance purposes or it evidences an investment to participate in India. Such tests have been reproduced below: “One has to take into account the factors enumerated hereinabove, namely, duration of time during which the holding structure existed, the period of business operations in India, generation of taxable revenue in India during the period of business operations in India, the timing of the exit, the continuity of business on such exit, etc.” Based on application of the above tests to the facts of the present case and applying the ‘look at’ test (ie looking at the entire transaction holistically), the Honourable CJI concluded that in the present case, it cannot be said that the structure was created or used as a sham or tax avoidant. In our humble view, the tests laid down above would help in finding out only those cases where the only motive of entering into a transaction is avoidance of tax and there is no business purpose which is sought to be achieved by the transaction. However, there could be a situation where in a Holding company structure, the legal form of the intermediate subsidiary companies is misused to avoid payment of tax at the time of alienating the investment in the operating company by seeking to clothe the transaction with a legal form which is different from the actual transaction entered into between the parties. This is what appears to be the fact in the instant case. In such cases, as there is a business purpose of exiting the operating company, the same may satisfy all the above tests, as has been concluded even in the present case by the Honourable CJI, even though the legal form of the intermediate subsidiary company may have been misused for disguising the true nature of the transaction. Accordingly, for such cases, it is imperative to apply the tests laid down in para 67 of the order (which have been reproduced above under ‘Lifting of Corporate Veil’) and para 74 on 58 of the order (wherein it has been provided that “The decisive criteria is whether the parent company’s management has such steering interference with the subsidiary’s core activities that subsidiary can no longer be regarded to perform those activities on the authority of its own executive directors”) to find out if the subsidiary companies had a commercial substance and they acted in their own authority and its executive directors were not merely puppets of the Parent company. In this regard, one could also draw support from the following observations of the Supreme Court in the case of McDowell & Co. Ltd (154 ITR 148):

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“In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it.” “It is neither fair nor desirable to except the legislature to intervene and take care of every device and scheme to avoid taxation. It is upto the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of ‘emerging’ techniques of interpretation as was done in Ramsay, Burma Oil and Dawson, to expose the devices for what they really are and to refuse to give judicial benediction.” Nature of the transaction Transfer of HTIL’s property rights by Extinguishment? The Honourable CJI has commenced his analysis in para 73 by stating that, “At the outset, we need to reiterate that in this case we are concerned with the sale of shares and not with the sale of assets, item-wise. The facts of this case show sale of the entire investment made by HTIL, through a Top company, viz. CGP, in the Hutchison Structure. In this case we need to apply the “look at” test. In the impugned judgment, the High Court has rightly observed that the arguments advanced on behalf of the Department vacillated. The reason for such vacillation was adoption of “dissecting approach” by the Department in the course of its arguments. Ramsay (supra) enunciated the look at test. According to that test, the task of the Revenue is to ascertain the legal nature of the transaction and, while doing so, it has to look at the entire transaction holistically and not to adopt a dissecting approach.” The entire investment made by HTIL in the Hutchison Structure was made in HEL in India. Further, in the absence of any financial statements of CGP, it is difficult to arrive at the conclusion that the entire investment in the Hutchison Structure was made through CGP. It may also be relevant to note that the entire share capital of CGP was only 1 share of US$ 1. Accordingly, on applying the “look at” test as suggested by the Honourable CJI, ie looking at the entire transaction holistically, after taking into account the various transaction documents (like SPA, Term Sheet agreements, Framework agreements, etc) a reasonable conclusion would be that the transaction is for transferring the rights associated with the investment in shares of HEL and not CGP. In fact, it is only on adopting a “dissecting approach” and ignoring the effect of the various transaction documents that one can conclude that the transaction is for transferring the share capital of CGP. With due respect, the Honourable CJI’s statement that the High Court has rightly observed that the arguments advanced on behalf of the Department vacillated doesn’t appear to be correct. The Department’s argument being vacillated was one of the contentions of the Petitioner as could be seen in para 53(1) of the High Court order. However, on a detailed analysis of the facts, the High Court held that the transactional documents are not merely incidental or consequential to the transfer of the CGP share, but recognized independently the rights and entitlements of HTIL in relation to the Indian business which were being transferred to VIH BV (refer para 134 of the High Court order). The High Court thus rejected the submission of the Petitioner that the transaction involves merely a sale of the CGP share and it also noted that it was based on such false hypothesis that it was being urged by the Petitioner that the rights and entitlements which flow out of the holding of a share cannot be dissected from the ownership of the share (refer para 136 of the High Court order). Management/ control rights over HEL and the effect of SPA The Honourable CJI came to the conclusion that HTIL, as a Group holding company, had no legal right to direct its downstream companies in the matter of voting, nomination of directors and management rights and the concept of “de facto” control, which existed in the Hutchison structure, conveys a state of being in control without any legal right to such state. (refer para 76 on page 61 & 62 of the order). The Revenue’s contention was that control over the management of the Indian company, ie HEL, was governed by the Term Sheet agreement entered into by HTIL with Essar in 2003. Such Term Sheet agreement also granted HTIL a ‘Right of First Refusal’ over any sale of shares in HEL by Essar and it also granted Essar ‘Tag Along Rights’ in respect of Essar’s shareholding in HEL. The fact that the aforesaid Term Sheet agreement entered into with Essar was given effect to in the SPA entered into by HTIL with Vodafone as it gave Essar the right to Tag Along with HTIL and exit from HEL, proves that the Term Sheet agreement was a legally binding contract. The Term Sheet agreement had a legal effect is

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also demonstrated by the fact that by a specific settlement dated 15.03.2007 between HTIL and Essar in respect of a dispute that arose between them, the said Term Sheet stood terminated which was necessary because the Term Sheet bound the parties in the first place. It is relevant to note that under such Settlement agreement (dated 15.03.2007), HTIL agreed to pay US $415 mn to Essar for the following (this has also been noted by the Honourable CJI in para 34 of the order):

- acceptance of the SPA; - for waiving rights or claims in respect of management and conduct of affairs of HEL; - for giving up Right of First Refusal (RoFR), Tag Along Rights (TARs) and shareholders rights; - for giving up its objections before FIPB.

In our humble view, the above facts clearly suggest that the Term Sheet agreement was a legally binding contract and accordingly, one may reasonably conclude that the management/ control rights over HEL vested in HTIL pursuant to such legally binding contract and hence HTIL legally held these rights. It is also interesting to note that the letter addressed by HEL to the FIPB dated 14.03.2007 stated that in practice the directors of HEL were appointed pro rata to their respective shareholdings (refer para 84 on page 81 of the order). HTIL held 42.34% of the share capital of HEL through its wholly owned subsidiaries. Further, HTIL had an indirect (on a pro rata basis) shareholding of 9.62% through Minority shareholdings in Indian companies, TII and Omega. These Indian companies (TII and Omega) in turn held together 25% of the share capital of HEL. As HTIL through its wholly owned subsidiaries was only a minority shareholder in TII (37.25%) and Omega (45.79%), it did not have a controlling interest in these Indian companies. Thus, through the acquisition of CGP, Vodafone could have acquired a shareholding of only 42.34% in HEL. As, after the acquisition, Vodafone was only a minority shareholder in TII and Omega, it could not have been in a situation to nominate its directors on the board of HEL in respect of the shareholding of TII and Omega in HEL, if the shareholder/ framework agreements are to be ignored. Thus, if the representation on the board of directors of HEL was to be computed in the proportion of the shareholding in HEL as per the practice followed by HEL, Vodafone could have effectively appointed directors only to the extent of 42.34%. However, by virtue of the Term Sheet agreement entered into between Vodafone and Essar dated 15.03.2007, Vodafone had the right to appoint 8 directors (ie approx 67%) out of the total 12 directors on the board of HEL. The Honourable CJI has held that the facts indicate that the object of the SPA was to continue the “practice” concerning nomination of directors on the Board of Directors of HEL which in law is different from a right or power to control and manage and which practice was given to keep the business going, post acquisition (refer para 84 on page 82 of the order). In our humble view, the right to have representation on the board directors is a valuable right and if such right is capable of being transferred through a contract between the shareholders, such right should not be ignored. As explained earlier, the Term Sheet Agreement between HTIL and Essar can be said to be a legally binding contract and HTIL has extinguished its rights in such Term Sheet agreement with its joint venture partner (Essar) in favour of Vodafone by allowing Vodafone to step in its shoes and become the joint venture partner of Essar. It would also be worthwhile to consider that Clause 9.5 of the SPA stipulated that for the purpose of assessing damages suffered by Vodafone for any breach of the agreement, the agreement shall be treated as requiring in HTIL to procure the delivery of 66.9848 % of the issued share capital of HEL to the purchaser and the vendor will be deemed to have transferred 66.9848 % of the issued share capital to the purchaser on completion (refer page 161 of the Bombay High Court order). This is an important fact which seems to have missed the attention of the Honourable Bench of the Supreme Court. If the transaction was for transfer of the share capital of CGP which held directly/ indirectly only 42/ 52% of the share capital in HEL, why was HTIL required to procure delivery of 67% of the share capital of HEL to Vodafone as damages in case of a breach of the agreement. It is also interesting to note that as per the SPA entered into between HTIL and Vodafone, CGP is an indirect wholly owned subsidiary of HTIL and it owns, directly or indirectly, companies which control the Company Interests. In the SPA, ‘Company Interests’ are defined to be the aggregate interests in 66.9848 % of the issued share capital of HEL. (refer para 125(ii) of the Bombay High Court order). In light of this definition in the SPA and considering the above clause on Damages, it would need to be evaluated if the Honourable CJI’s conclusion that 67% of the economic value of HEL is not 67% of the equity capital of HEL (refer page 91 of the order) gets diluted.

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Controlling Interest not being distinct from Shares The Honourable CJI has held that control and management is a facet of the holding of shares and applying the principles governing shares and the rights of the shareholders to the facts of this case held that this case concerns a straightforward share sale (refer page 88 of the order). The general principle that ‘controlling interest which a shareholder acquires is an incident of the holding of shares and has no separate or identifiable existence distinct from the shareholding’ should be applicable in a situation where controlling interest is acquired as an incidence of acquisition of a particular number of shares. However, it should be evaluated in further detail if the above general principle will hold good in a situation where transaction between the parties is explicitly for acquisition of controlling interest in a subsidiary company and the same is given effect to by transferring shares of an overseas parent company (as is the situation in the present case). In our humble view, such evaluation doesn’t seem to have been done in the judgment.