7/26/2019 Vodafone Indi1

http://slidepdf.com/reader/full/vodafone-indi1 1/14

Vodafone India

Vodafone India, formerly Vodafone Essar  and Hutchison Essar , is the second largest mobile

network operator  in India after   Airtel. It is based inMumbai, Maharashtra and which operates

nationally.[1]

 It has approximately 140.84 million customers as of November 2011.

On July 2011, Vodafone Group agreed terms for the buy-out of its partner  Essar  from its Indian

mobile phone business. The UK firm paid $5.46 billion to its Indian counterpart to take Essar out of its

33% stake in the Indian subsidiary. It will leave Vodafone owning 74% of the Indian business, while

the other 26% will be owned by Indian investors, in compliance with Indian law.[2] On 11 February,

2007, Vodafone agreed to acquire the controlling interest of 67% held by Li Ka Shing Holdings in

Hutch-Essar for US$11.1 billion, pipping Reliance Communications, Hinduja Group, and Essar Group,

which is the owner of the remaining 33%. The whole company was valued at USD 18.8 billion.[3] The

transaction closed on 8 May, 2007. It offers both prepaid and postpaid GSM cellular phone coverage

throughout India with good presence in the metros.

Vodafone India provides 2.75G services based on 900 MHz and 1800 MHz digital GSM technology.

Vodafone India launched 3G services in the country in the January-March quarter of 2011 and plans

to spend up to $500 million within two years on its 3G networks.[4]

 

History

[edit]Hutchison Essar (1992-2007)In 1992, Hutchison Whampoa and its Indian business partner – Max Group, established a company

that in 1994 was awarded a licence to provide mobile telecommunications services in Mumbai and

launched commercial services as Hutchison Max in November 1995. In Delhi, Uttar Pradesh (East),

Rajasthan and Haryana, Essar Group was the major partner. But later Hutch took the majority stake.

By the time of Hutchison Telecom's Initial Public Offering in 2004, Hutchison Whampoa had acquired

interests in six mobile telecommunications operators providing service in 13 of India's 23 licence

areas and following the completion of the acquisition of BPL Mobile that number increased to 16. In

2006, it announced the acquisition of a company (Essar Spacetel — A subsidiary of Essar Group) that

held licence applications for the seven remaining licence areas.

Initially, the company grew its business in the largest wireless markets in India — in cities like

Mumbai, Delhi and Kolkata. In these densely populated urban areas it was able to establish a robust

network, well-known brand and large distribution network – all vital to long-term success in India.

Then it also targeted business users and high-end post-paid customers which helped Hutchison

Essar to consistently generate a higher   Average Revenue Per User  (ARPU) than its competitors. By

adopting this focused growth plan, it was able to establish leading positions in India's largest markets

providing the resources to expand its footprint nationwide.

In February 2007, Hutchison Telecom announced that it had entered into a binding agreement with a

subsidiary of Vodafone Group Plc to sell its 67% direct and indirect equity and loan interests in

Hutchison Essar Limited for a total cash consideration (before costs, expenses and interests) ofapproximately $11.1 billion.

7/26/2019 Vodafone Indi1

http://slidepdf.com/reader/full/vodafone-indi1 2/14

Hutch was often praised for its award winning advertisements which all follow a clean, minimalist look.

 A recurrent theme is that its message "Hi" stands out visibly though it uses only white letters on red

background. Another successful ad campaign in 2003 featured a pug named Cheeka following a boy

around in unlikely places, with the tagline, "Wherever you go, our network follows." The simple yet

powerful advertisement campaigns won it many admirers. Ads featuring the pug were continued by

Vodafone even after rebranding. The brand subsequently introducedZooZoos which gained even

higher popularity than was created by the Pug. Vodafone's creative agency is O&M while Harit Nagpal

was the Marketing Director during the various phases of its brand evolution.

[ edit  ] Timeline

1992: Hutchison Whampoa and MAX group establish Hutchison Max

2000: Acquisition of Delhi operations and entry into Calcutta (now Kolkata) and Gujarat markets

through Essar acquisition

2001: Won auction for licences to operate GSM services in Karnataka, Andhra Pradesh and Chennai

 A 'You and I' print advertisement of Hutch featuringCheeka (dog) 

2003: Acquired AirCel Digilink (ADIL — ESSAR Subsidiary) which operated in Rajastan, Uttar

Pradesh East and Haryana telecom circles and rebranded it 'Hutch'.

2004: Launched in three additional telecom circles of India namely Punjab, Uttar Pradesh (West) and

West Bengal.

2005: Acquired BPL Mobile operations in 3 circles. This left BPL with operations only in Mumbai,

where it still operates under the brand 'Loop Mobile'.2007: Vodafone acquires a 67% stake in Hutchison Essar for $10.7 billion. The company is renamed

Vodafone Essar. 'Hutch' is rebranded to 'Vodafone'.

2008: Vodafone acquires the licences in remaining 7 circles and has starts its pending operations

in Madhya Pradesh circle, as well as in Orissa, Assam, North East and Bihar.

2011: Vodafone Group buys out its partner Essar from its Indian mobile phone business. It paid $5.46

billion to take Essar out of its 33% stake in the Indian subsidiary. It left Vodafone owning 74% of the

Indian business.

[edit]Vodafone acquires Essar's Stake

On March 31, 2011, Vodafone Group Plc announced that it would buy an additional 33% stake in its

Indian joint venture for $5 billion after partner  Essar Groupexercised an option to sell the holding in

7/26/2019 Vodafone Indi1

http://slidepdf.com/reader/full/vodafone-indi1 3/14

the mobile-phone operator. The deal will raise Vodafone’s stake to 75%. Essar will exit the company

after it implemented a put option over 22% of the venture. Vodafone exercised its call option to buy an

11% stake.[5] 

In 2007, Vodafone granted options to Essar that would enable the conglomerate to sell its entire stake

for $5bn, or to dispose of part of the 33 per cent shareholding at an independently appraised fairmarket value. In January 2011, Vodafone objected to Essar’s plans to place part of its 33% stake in

India Securities, a small public company. Vodafone feared the move would give an inflated market

value to Vodafone Essar .[6]

 It had approached the market regulator SEBI and also filed a petition in

the Madras High Court.

The final shareholding pattern post this deal was not provided by the company as it was not clear

whether Vodafone's stake would exceed the 74 per cent FDI limit. Indian laws don't allow foreign

companies to own more than 74% in a local mobile-phone operator. Vodafone has assured it will

comply with local rules. Vodafone will have to sell that 1% to some Indian entity, or they’ll have to

consider an initial public offering. Vodafone also said that final settlement is anticipated to be

completed by November 2011. The completion of the deal would be subject to meeting certainconditions which include Reserve Bank of India's permission as well as valuation of the deal.[7] 

[edit]Vodafone-Hutchison Tax Case

 A billboard of Vodafone showing collaboration with Shaadi.com 

Vodafone was embroiled in a $2.5 billion tax dispute with the Indian Income Tax Department over its

purchase of Hutshison Essar Telecom services in April 2007. It was being alleged by the Indian Tax

authorities that the transaction involved purchase of assets of an Indian Company, and therefore the

transaction, or part thereof was liable to be taxed in India.[8] 

Vodafone Group Plc. entered India in 2007 through a subsidiary based in the Netherlands, which

acquired Hutchison Telecommunications International Ltd’s (HTIL) stake in Hutchison Essar Ltd

(HEL)—the joint venture that held and operated telecom licences in India. This Cayman

Islands transaction, along with several related agreements, gave Vodafone control over 67% of HEL

and extinguished Hong Kong-based Hutchison’s rights of control in India, a deal that cost the world’s

largest telco $11.2 billion at the time.[9]

 

The crux of the dispute had been whether or not the Indian Income Tax Department has jurisdiction

over the transaction. Vodafone had maintained from the outset that it is not liable to pay tax in India;

and even if tax were somehow payable, then it should be Hutchison to bear the tax liability.

In January 2012, the Indian Supreme Court passed the judgement in favor of Vodafone, saying thatthe Indian Income tax department had "no jurisdiction" to levy tax on overseas transaction between

7/26/2019 Vodafone Indi1

http://slidepdf.com/reader/full/vodafone-indi1 4/14

companies incorporated outside India. However, Indian government thinks otherwise. It believes that

if an Indian company, Hutchison India Ltd., conducts a financial transaction, government should get

its tax out of it. Therefore, in 2012, India changed its Income Tax Act retrospectively and made sure

that any company, in similar circumstances, is not able to avoid tax by operating out of tax-havens like

Cayman Islands or Lichtenstein. In May 2012, Indian authorities confirmed that they were going to

charge Vodafone about Rs. 20000 crore (US $4.5 billion) in tax and fines. The second phase of the

dispute is about to start.[10] 

3GOn 19 May 2010, the 3G spectrum auction in India ended. Vodafone paid 11617.86 million (the

second highest amount in the auctions) for spectrum in 10 circles. The circles it will provide 3G in

are Delhi, Kanpur , Gujarat, Haryana, Kolkata, Maharashtra & Goa, Mumbai, Tamil Nadu, Uttar

Pradesh (East) and West Bengal.[11] Vodafone also operates 3G services in Kerala,  Andhra

Pradesh and Uttar Pradesh (West) through an agreement with Idea and in Karnataka through anagreement with  Airtel.. This gives Vodafone a 3G presence in 13 out of 22 circles in India.

On 16 March, 2011, Vodafone launched 3G services in Uttar Pradesh (East) in the city

of  Lucknow.[12] Vodafone had already launched limited 3G services in Chennai and Delhi earlier, but

the Uttar Pradesh (East) launch counts as its first fully commercial launch. This makes Vodafone the

fifth private operator (seventh overall) to launch its 3G services in the country following Tata

Docomo, Reliance Communications,  Airtel and  Aircel. 

On 23rd June, 2011 Vodafone launched 3G service in Kerala by joining with Idea in an Intra Circle

Roaming agreement. Initially Vodafone 3G services will be available in the following cities in Kerala – 

Ernakulam, Aluva, Calicut, Koyilandy, Alappuzha, Cherthala, Malappuram and Manjeri. On 28 June2012, Vodafone launched a new international roaming package under which the users shall have not

to pay multiple rentals in the countries they are visiting.[13] 

Subscriber BaseFollowing is the Vodafone India subscriber base statistics as on January, 2013.[14] 

Subscriber Base Statistics as on January, 2013

Telecom Cicle No. of Subscribers

Gujarat  1,58,01,116

Uttar Pradesh(East)   1,45,26,236

7/26/2019 Vodafone Indi1

http://slidepdf.com/reader/full/vodafone-indi1 5/14

Subscriber Base Statistics as on January, 2013

Telecom Cicle No. of Subscribers

Maharashtra   1,29,77,123

West Bengal  1,11,65,667

Tamil Nadu  97,77,927

Rajasthan  85,65,366

Uttar Pradesh(West) 89,99,073

 Andhra Pradesh   60,80,916

Delhi  84,49,120

Goa   7,134,576

Karnataka 64,52,620

Kerala   60,67,506

Bihar   63,81,278

Kolkata   40,84,284

Punjab   43,09,853

7/26/2019 Vodafone Indi1

http://slidepdf.com/reader/full/vodafone-indi1 6/14

Subscriber Base Statistics as on January, 2013

Telecom Cicle No. of Subscribers

Haryana  44,37,015

Madhya Pradesh   41,01,877

Chennai  20,91,411

Odisha  27,89,575

 Assam   21,88,073

North East   9,28,563

Jammu & Kashmir   6,66,009

Himachal Pradesh   4,75,329

Mumbai 61,60,353

Total number of Vodafone India Subscribers : 141,519,840, i.e. 22.44% of the

total 65,71,58,013 Indian mobile phone subscribers. 

CompetitorsVodafone competes with 14 other mobile operators throughout India. They

are  Aircel,  Airtel, BSNL, Idea, Loop Mobile, MTNL, MTS, Reliance Communications, S Tel, Tata

DoCoMo, Tata Indicom, Uninor , Videocon and Virgin Mobile. 

Awards and recognition

The Brand Trust Report,[15]

 2011 published by Trust Research Advisory has ranked Vodafone[16]

 as

the 16th most trusted brand in India.

7/26/2019 Vodafone Indi1

http://slidepdf.com/reader/full/vodafone-indi1 7/14

Vodafone Tax Case – A Case Study for Investments

in India

India Inc has been surging ahead audaciously with the support of its Information Technology

developments with its repertoire of resources. Global players have been eying the Indian market, owing to

immense opportunities that the continent provides; both in terms of expansion and profit. Investment

patterns in India have shown positive growth over the years with significant process on the de-regulation

front. India has been greatly involved with the G-8 and G-20, including signing of the Double Taxations

Avoidance Agreements/Treaties (DTAA) with various tax-haven countries. This has boosted the image of

India as a 'lookout destination' for investment and an emerging hub for economical activities. World

Report 2010 ranked India as the 9th most attractive investment destination, while Bloomberg Global Poll

conducted in September 2010 put India in the third position, above the United States of America (US).

However, the very same image is said to have taken a beating with the recent Vodafone Tax case, whichhas been revolving in courts since 2009. With clear signs of the court ruling in favour of the tax authorities,

many global companies are said to be rethinking their investment plans in India, keeping in mind the

impact of the judgment on the taxation front. The Doing Business Report 2011 of World Bank has ranked

India at 134, below neighbouring countries like Pakistan and Bhutan. This is a result of procedural

difficulties for start-up companies and investment companies, in Indiaandabroad.

Tax regulations play a major role in cross border transactions and investments in a country. Tax

havens, open borders and DTAA countries are major destinations for investment through Foreign Direct

Investment (FDI) or other routes. The Vodafone tax case throws an interesting question on the taxability of

a non resident company acquiring shares of a resident company through an indirect route. This is a

landmark case, as it is for the first time that the tax departments have sought to tax a company through a

mechanism of tracing the source of acquisition. While we have heard about lifting the 'corporate veil', this

instance has set a rare example wherein the Indian tax authorities have gone to length to interpret the

existing tax laws, to bring a global company like Vodafone to its tax ambit.

Facts 

Vodafone International Holdings BV, based in Netherlands and controlled by Vodafone UK, obtained the

controlling interest and share of CGP Investments Holdings Ltd (CGP) located in Cayman Island for a value

of $11.01 billion from Hutchinson Telecommunications International Ltd (HTIL), which had stake in

Hutchinson Essar Ltd (HEL) that handled the company's mobile operations in India. HEL had its stake in CGP

Holdings, from which Vodafone bought 52 per cent of HEL's stake in 2007, thereby vesting controlling

interest over them. The Bombay High Court, on September 8, ruled that where the underlying assets of the

transaction between two or more offshore entities lies in India, it is subject to capital gains tax under

relevant income tax laws in India. The Court invoked the nexus rule wherein a state can tax by connecting

a person sought to be taxed with the jurisdiction, which seeks to tax. The treatment of the company as an

Assessee in Default (AID) under Section 201(1)1of the Income Tax Act and reading Sections 5(2)

2, 9(1)

3 and

1954, the court came to the conclusion that Vodafone was liable to deduct tax at source (TDS). Vodafone

has now appealed before the Supreme Court to revisit the judgment, which makes them liable for a record

amount of Rs 12,000 crores going to the tax authorities' kitty.

7/26/2019 Vodafone Indi1

http://slidepdf.com/reader/full/vodafone-indi1 8/14

Impact 

Vodafone raises pertinent questions on the issue of taxation of non-resident entities. The judgment will

have direct impact on transactions of major acquisitions like SABMiller-Foster and Sanofi Aventis-Shanta

Biotech. Similar transactions that existed earlier are Sesa Goa, AT&T and General Electric. British firm CairnEnergy has already agreed to pay tax in India as well as the UK on selling its stake in Cairn India to Vedanta

Resources from $6.65 billion to $8.48 billion. Depending upon the size of the stake sale, the tax liability

could range between $868 million and $1.1 billion. The judgment would definitely throw a cautious note

to major investors and M&As in India; however, it does not have that great an impact to curtail the

investment flow to an emerging destination like India. The judicial propriety of the case is still to be settled

when the matter comes for final stages in the Supreme Court. Going by the events in the lower courts, the

Supreme Court is unlikely to disturb the Bombay High Court ruling.

The global community is keenly watching the current trends happening in the Indian subcontinent,

especially since it has become an emerging player at the socio-economic and political levels. United

Nations Conference on Trade and Development (UNCTAD) has reported that India is set to dislodge the US

by December 2012 to become the second best destination for FDIs, the major component of which is

M&As. India is also set to revamp its taxations norms with significant changes at the regulatory level. The

proposed Direct Tax Code contains key provisions, which will have a major impact on investments in India5.

India has improved its rankings in the WB 'Doing Business' Report on the number of regulatory changes

taken in the existing year. This shows that the country is set to make a global footprint by branding itself as

a 'Must Invest' destination.

The Vodafone tax case has given India the opportunity to create a model for other countries, which follow

source-based taxation principles6. It is an opportune time to bask in the glory of India, which is said to have

had one third share of the world market in ancient times, as pointed out by economist Amartya Sen in his

book The Argumentative Indian. Let's hope that we can revive the 'Real India' soon.

Notes: 

1. Section 201 of the Act broadly provides that any person (referred to in Section 200 of the Act), and in

cases referred to in Section 194, the principal officer and the relevant company, who does not deduct the

whole or any part of the tax, or after deducting fails to pay the tax as required by or under the Act, he or it

shall, without prejudice to any other consequences which he or it may incur, be deemed to be an 'assesseein default' in respect of the tax.

2. Section 5(2) enunciates that the income of a non-resident from whatever source derived is included in

the total income if (i) it is received in India; (ii) deemed to be received in India; (iii) accrues in India; (iv)

deemed to accrue in India; (v) arises in India; or (vi) deemed to arise in India.

3. Section 9(1) explains the circumstances in which income is deemed to accrue or arise in India and

includes all income accruing or arising in India, whether directly or indirectly (a) through or from any

business connection in India; or (b) through or from any property in India; or (c) through or from any asset

or source of income in India; or (d) through the transfer of a capital asset situated in India.

4. Section 195 provides for deduction for tax at source upon a payment to a non-resident or foreign

7/26/2019 Vodafone Indi1

http://slidepdf.com/reader/full/vodafone-indi1 9/14

 

The Vodafone Tax Dispute — A Landmark Judgment of the Bombay

High Court

Article Details : 

The ongoing tax dispute between the Indian Tax Authorities and Vodafone in connection withtaxability of the $ 11.2 billion Hutch-Vodafone deal is one of the biggest controversies in Indianmultijurisdictional M&A history. The quantum of tax demand by the Indian Revenue Authorities in thisparticular case could be around Rs.12,000 crore plus interest. Further, the outcome of this disputecould also have implications on other similar cross-border deals being scrutinised by the Indian Tax

 Authorities for possible loss of tax revenue. As a result, the developments of this case are beingclosely followed by many multinationals, M&A consultants and even by the International business andtax fraternity. 

We have summarised below the key aspects of the recent landmark judgment of the Bombay High

Court on the Vodafone tax dispute and have also given our personal comments on some of thequestions generally being raised by fellow professionals post this judgment.

company

5.The proposed DTC says that if 50 per cent of the value of the shares being transferred is derived from

assets situated in India, it is deemed to be taxable in India.

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

of the asset which is liable for tax.

7/26/2019 Vodafone Indi1

http://slidepdf.com/reader/full/vodafone-indi1 10/14

Background of the case :

In December, 2006, Hutchison Telecommunications International Ltd. (HTIL), a companyincorporated in Cayman Islands and having its principal executive office at Hong Kong, held

66.9848% interest in an Indian company, Hutchison Essar Ltd. (HEL) through a maze of subsidiariesin British Virgin Islands, Cayman Islands and Mauritius (around 15 offshore companies) and throughcomplicated ‘option’ agreements with a number of Indian companies. HEL along with its Indiansubsidiaries held licences for providing cellular services in 23 telecom circles in India. The balance33.0152% interest in HEL was held by the Essar Group of Companies.

 Vodafone (through its Netherlands entity) entered into a share purchase agreement with HTIL inFebruary 2007 to acquire the said 66.9848% interest in Hutchison Essar Ltd. and it claims to haveacquired the same through purchase of the solitary share of a Cayman Island company of the HutchGroup [viz., CGP Investments (Holdings) Ltd. (CGP)].

The Indian Revenue Authorities alleged that Vodafone International Holdings B.V., Netherlands(Vodafone BV) had failed to withhold income-tax on the payment of consideration made to HTIL and,hence, sought to assess tax in its hands as a taxpayer in default and it issued a notice to Vodafone.

 Vodafone BV had challenged the issue of this notice before the Bombay High Court and the case wasdecided against it. Vodafone filed a petition before the Supreme Court (SC); however, the same wasdismissed by the SC and it directed the Revenue Authorities to decide whether it had jurisdiction totax the transaction and it also said that if the issue was decided against Vodafone BV, Vodafone BVwas entitled to challenge it as a question of law before the High Court.

The Revenue Authorities by an order in May 2010 held that it had jurisdiction to treat Vodafone BV asan assessee in default u/s.201 of the Income-tax Act, 1961 for failure to deduct tax at source.

This order was challenged by Vodafone BV before the Bombay High Court, by a writ petition. The keyissue before the HC was whether the Indian Revenue Authorities have the jurisdiction to proceedagainst Vodafone BV and tax the transaction.

Primary contention of Vodafone :

The basic contention of Vodafone was that the transaction represents a transfer of a share (which isa capital asset) of a Cayman Island company, i.e., CGP. CGP through its downstream subsidiaries,directly or indirectly controlled equity interest in HEL. Any gain arising to the transferor or to anyother person out of this transfer of a share of CGP is not taxable in India because the asset (i.e.,share) is not situated in India.

Primary contention of Revenue :

The contention of the Revenue is that the share purchase agreement between HTIL and Vodafone

and other transaction documents establishes that the subject-matter of the transaction is not merelythe transfer of one share of CGP situated in Cayman Islands as contended by Vodafone. Thetransaction constitutes a transfer of the composite rights of HTIL in HEL as a result of the divestmentof HTIL’s rights, which paved the way for Vodafone to step into the shoes of HTIL. Such transactionhas a sufficient territorial nexus to India and is chargeable to tax under the Income-tax Act, 1961.

7/26/2019 Vodafone Indi1

http://slidepdf.com/reader/full/vodafone-indi1 11/14

Decision of Bombay High Court :

The High Court dismissed the petition of Vodafone BV and has accepted the argument of the Incometax Authorities that the transaction in question had a significant nexus with India and the proceedingsinitiated by it cannot be held to lack jurisdiction.

(i)  The key aspects observed by the High Court :

Before analysing the facts of the instant case, the High Court made observations on certain generalprinciples, some of which are given below :

- Tax planning is legitimate so long as the assessee does not resort to a colourable device or a shamtransaction with a view to evade taxes;

- A controlling interest which a shareholder acquires is an incident of the holding of shares and has noseparate or identifiable existence distinct from the shareholding;

- S. 195(1) of the Income-tax Act, 1961 provides for a tentative deduction of income-tax, subject to a

regular assessment;

- The Parliament, while imposing a liability to deduct tax has designedly imposed it on a person andhas not restricted it to a resident and the Court will not imply a restriction not imposed by legislation.

(ii) Analysis of facts :  

The High Court analysed the various agreements entered into by the parties (like share purchaseagreement between HTIL and Vodafone BV, term sheet agreement between HTIL and Essar groupfor regulating the affairs of HEL which was later replaced by a similar term sheet agreement between

 Vodafone and Essar group, brand licence agreement granting a non-transferable royalty-free right to Vodafone BV to use IPRs for a certain period, agreement for assignment of loans to Vodafone BV,framework agreements for option rights, etc.) and the various disclosures made by the parties (likedisclosures made by HTIL in its annual reports, disclosures made by Vodafone in its offer letter,

disclosures made by Vodafone before the FIPB, etc.) for ascertaining the subject-matter of thetransaction and the business understanding of the parties to the transaction.

(iii) Conclusions :  

Based on the analysis of the above documents and disclosures, the High Court held that :

The transaction between HTIL and Vodafone BV was structured so as to achieve the object ofdiscontinuing the operations of HTIL in relation to the Indian mobile telecommunication operations bytransferring the rights and entitlements of HTIL to Vodafone BV. HEL was at all times intended to bethe target company and a transfer of the controlling interest in HEL was the purpose which wasachieved by the transaction. The due diligence report of Ernst & Young also emphasises this and italso suggests that the transfer of the solitary share of CGP, a Cayman Islands company was put intoplace at the behest of HTIL, subsequently as a mode of effectuating the goal.

The rights under the option agreements were created in consideration of HTIL financing such Indiancompanies for making their investments in HEL. The benefit of those option agreements with Indiancompanies had to be transferred to Vodafone BV as an integral part of the transfer of control overHEL.

The transfer of the CGP share was not adequate in itself to consummate the transaction. Thetransactional documents are not merely incidental or consequential to the transfer of the CGP share,but recognised independently the rights and entitlements of HTIL in the Indian business, which werebeing transferred to Vodafone BV. These rights and entitlements constitute in themselves capitalassets.

For Income-tax Law what is relevant is the place from which or the source from which the profits orgains have generated or have accrued or arisen to the seller. If there was no divestment orrelinquishment of HTIL’s interest in India, there was no occasion for the income to arise. The realtaxable event is the divestment of HTIL’s interests which comprises in itself various facets or

7/26/2019 Vodafone Indi1

http://slidepdf.com/reader/full/vodafone-indi1 12/14

components which include a transfer of interests in different group entities.

 Apportionment of the consideration lies within the jurisdiction of the Assessing Officer during thecourse of the assessment proceedings. Such an enquiry would lie outside the realm of the presentproceedings.

The transaction between HTIL and Vodafone BV had a sufficient nexus with Indian fiscal jurisdiction.

The essence of the transaction was a change in the controlling interest in HEL which constituted asource of income in India. Accordingly, Indian Tax Authorities have acted within their jurisdiction ininitiating the proceedings against the Petitioner for not deducting tax at source. As regards thewithholding obligation on a non-resident, the High Court held that once the nexus with Indian fiscal

 jurisdiction is shown to exist, the provisions of S. 195 would operate.

Issues involved and our view :

1. Whether all offshore share transactions which indirectly involve transfer of underlyingIndian assets are taxable in India ?  

Ever since the Indian Revenue Authorities initiated proceedings against Vodafone, we have been

hearing this concern from everyone including many international tax experts that how can the IndianRevenue Authorities tax a transaction of sale of shares of a foreign company by one non-resident toanother non-resident by taking an argument that pursuant to such sale of shares, underlying assetsin India get transferred ?

We believe that in the instant case, the Revenue is not seeking to tax the transaction in India on theground that there is an indirect transfer of underlying assets situated in India on account of atransaction of transfer of shares of a foreign company. It seems that the Revenue’s contention is

that on evaluation of the various transaction documents executed by HTIL and Vodafone,it can be established that the transaction itself is for transfer of composite rightsincluding, in particular, rights under a joint venture agreement (which constitute acapital asset situated in India) and the transfer of share of an overseas company is only amode for facilitating the transaction. 

It has to be accepted that for evaluating the taxability of a transaction, one needs to first understandthe true nature and character of a transaction.

The High Court before analysing the facts in the instant case, laid down the general principle thatlegal effect of a transaction cannot be ignored in search of ‘substance’ over ‘form’. However, the HighCourt has also rightly held that in assessing the true nature and character of a transaction, the labelwhich parties may ascribe to the transaction is not determinative of its character. The nature of thetransaction (i.e., ‘form’ of the transaction) has to be ascertained from the covenants of the contractand from the surrounding circumstances. The subject matter of the transaction must be viewed froma commercial and realistic perspective. The terms of the transaction are to be interpreted by applyingrules of ordinary and natural construction.

 After going through the facts available on record, including various public disclosures made by theHutch and Vodafone Group and share purchase agreement and other transaction documents enteredinto between the parties, which have been very well analysed by the High Court in its

 judgment, there is no doubt in the mind of the High Court that the subject-matter of thetransaction in the instant case, even in ‘form’  , is not one share of the Cayman IslandsCompany, but it is a transfer of controlling interest (including various rights andentitlements) in HEL, India. As noted by the High Court, the acquisition of one share ofthe Cayman Islands company was only a mode chosen by the parties to facilitate theprocess. 

The High Court thus rejected the submission of Vodafone that the transaction involves merely a saleof a share of a foreign company, which is a capital asset situated outside India and all that wastransferred was that which was attached to and emanated from such solitary share. The High Courtalso noted that it was based on such false hypothesis that it was being urged by Vodafone that therights and entitlements which flow out of the holding of a share cannot be dissected from the

7/26/2019 Vodafone Indi1

http://slidepdf.com/reader/full/vodafone-indi1 13/14

ownership of the share.

Thus, it is based on the detailed evaluation of the specific facts and documents of this transactionthat the High Court finally concluded that the real taxable event is the divestment of HTIL’s interestsin India and it accepted the argument of the Revenue that the transaction in question had asignificant nexus with India and the proceedings initiated by it cannot be held to lack jurisdiction.

Hence, the High Court ruling does not at all hold that offshore share transactions whichindirectly involve transfer of underlying Indian assets can be taxed in India.

2. Whether withholding is required on the entire consideration or there needs to be anapportionment ?  

The High Court has held that an enquiry on the aspect of apportionment of the total considerationwould lie outside the purview of the proceedings before it and the aspect of apportionment lies withinthe jurisdiction of the Assessing Officer during the course of the assessment proceedings. Thus, itwould be for the Assessing Officer to determine during the course of assessment proceedings

whether there is any income out of the total consideration which cannot be said to have accrued orarisen in India or cannot be deemed to have accrued or arisen in India and hence cannot be taxed inIndia. The observations clearly relate to ‘assessment’ and not to deduction of tax.  

It would also be relevant to note that the High Court while laying down the principles governing theinterpretation of the provisions of S. 195 held that S. 195(1) provides for a tentative deduction ofincome tax, subject to a regular assessment.

The High Court has only held that the composite payment by Vodafone had nexus withand included payment giving rise to income accruing or arising in India. Consequently, theHigh Court has decided the question before it, viz., whether the Indian Tax Authorities have the

 jurisdiction to take action against Vodafone for having made the payment without deducting tax as itwas required to do u/s.195.

The High Court has not gone into, nor made any observations or given any decision aboutwhether the whole or part of the payment would be liable to deduction of tax, the rate atwhich tax is to be deducted, etc. The High Court was not required to and has expressedabsolutely no views on any of these matters which the Officer has to adjudicate.

3. Is there an inconsistency in the observation made by the High Court on the aspect ofcontrolling interest not being a capital asset and its final conclusion ?  

The High Court before analysing the facts in the instant case, laid down the general principle that thecontrolling interest which a shareholder acquires is an incident of the holding of shares and has no

separate or identifiable existence distinct from the shareholding. After a detailed evaluation of thespecific facts and documents of this transaction, the High Court finally concluded that the essence ofthe transaction was a change in the controlling interest in HEL which constituted a source of incomein India. With due respect to the High Court, is there an inconsistency in the observation made by theHigh Court and its final conclusion ?

In our view, there is no inconsistency, as the entire order needs to be read harmoniously. The term ‘controlling interest’ in the general principle laid down by the High Court that ‘the controlling interestwhich a shareholder acquires is an incident of the holding of shares and has no separate oridentifiable existence distinct from the shareholding’ seems to refer to controlling interest acquired asan incidence of acquisition of a particular number of shares. The High Court has not made anygeneral observations about a case where the subject matter of the transfer is the ‘controlling interest’and the requisite number of shares are transferred or delivered, directly or indirectly, for achieving

the transfer of the ‘controlling interest’. In any case, the term ‘controlling interest’ used by the HighCourt in its final conclusion represents the entire business interest of HTIL in the Indian mobile

7/26/2019 Vodafone Indi1

http://slidepdf.com/reader/full/vodafone-indi1 14/14

telecommunication operations, i.e., HTIL’s interest in HEL, which includes (a) Equity interest of42.34% held by HTIL through its subsidiaries (b) Equity interest of 9.58% held by HTIL throughminority equity holdings of its subsidiaries in certain Indian companies which in turn held equityinterest in HEL (c) Rights (and call and put options) representing HTIL’s ec onomic interest in 15.03%equity of HEL (d) Assignment of loans (e) Other rights and entitlements.

Further to the above, it may also be worthwhile to evaluate if the above general principle will holdgood in a situation where the transaction between the parties incidentally results in the acquisition ofcontrolling interest in a subsidiary company (say, an Indian company) as a consequence oftransferring shares of an overseas parent company. The same does not seem to have been evaluatedby the High Court in the instant case, may be because such evaluation was not necessary here as thetransaction was for transfer of entire business interest in HEL which included various rights andentitlements which anyway could not have been transferred in the manner in which they weretransferred by the transfer of one share of CGP and the consideration was for the transfer of suchentire business interest as a package.

4. Will the Vodafone case create a negative perception of India in the eyes of foreigninvestors ? 

 

 As could be seen from the High Court order, the action of the Indian Tax Authorities in this particularcase is based on a proper and detailed analysis of the facts and circumstances of this case and therelevant provisions under the domestic Income-tax law which are very widely worded. It is importantto note that no tax treaty is applicable in this particular case and hence it is not a case that the IndianGovernment is not honouring its commitment to foreign investors by proposing to tax the impugnedtransaction in the case of Vodafone. Also, here it is not the claim of Vodafone that there is doubletaxation on the income from the transfer of controlling interest in HEL. Further, it has to beappreciated that tax cost is only one of the various costs of a business and business decisions are nottaken entirely on the basis of tax cost.

The order of the High Court has not been stayed by the Supreme Court, on the contrary the SupremeCourt directed the Income-tax Department to pass an order to quantify the tax liability. Thus, theaction of the tax authorities in this particular case has not only been held as reasonable and notwithout substance, but also legal, and it will be taken in the right perspective by foreign investors andit should not have an adverse impact on M&A activity in India.