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Background
Hutchison International, Hongkong (HTIL) CGP Investments, Cayman Islands
Sale of CGP shares
Vodafone, Netherlands
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Intermediate Co., Mauritius
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On 11 February 2007, Vodafone NL acquired 67% stake in Hutch Essar India (52% from HTIL & call option for 15% stake from resident Indians) for US$ 11.1 billion The transaction was expected to realize an estimated before tax gain of US$ 9.6 billion to HTIL In this respect, conditional approval was granted by FIPB to Vodafone stipulating that there should be compliance and observance of applicable laws and regulations in India including tax obligations under Indian tax laws.
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Thereby, Hutchison International incorporated in Hongkong sold its SPV in Cayman Islands CGP Investments to Vodafone. Vodafone got controlling interest in Hutch Essar, India on account of share acquisition of CGP (situated outside India) from a non resident In connection with the transaction, the Indian tax authorities issued notice to Vodafone asking Vodafone as to why it should not be treated as an assessee in default for not withholding taxes on its payments to the Hutch Group. Subsequently, Vodafone filed a writ petition challenging the validity of the notice before the Bombay HC.
Event milestones
February 2007 December 2008 January 2009 May 2010 July 2010 Current status Acquisition of Hutch Essar by Vodafone Bombay HC decision dismissing Vodafone's plea Supreme Court dismisses SLP filed by Vodafone IT Department has issued showcause notice with its final order Vodafone moves Bombay HC against the IT Department order Hearing is completed in Bombay HC on Aug 18, 2010 and the judgement is reserved
IT Departments' argument
Capital asset: The acquisition of one share in CGP by Vodafone NL was a consequence of purchasing interest in the Indian telecom business which encompasses a bundle of rights in India and the transfer of share is incidental to all such rights. Business connection: FIPB approval was mandatory and was a condition precedent to the SPA which indicated that this transaction had nexus with India References made to India in the Share Purchase Agreement (SPA) Due diligence of Hutch Essar India was conducted by Ernst & Young Taxation of capital gains based on economic nexus will quadruplicate taxation in various jurisdictions like Mauritius, Cayman Islands, Hongkong and India There are no specific look through provisions in Indian law to tax non residents for transactions held outside India. For example, look through provisions in certain countries tax capital gains on transfer of shares of companies owning immovable properties in that country FIPB approval was not for the acquisition of 52% and FIPB approval was obtained for the 15% stake in which call options were obtained from the Indian owners and the ownership of the same is not transferred to Vodafone
Vodafones stand
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Judicial precedents
Favouring Vodafone: Sale of shares an isolated transaction, not a business connection (R.D. Agarwal & Co 56 ITR 20(SC)) Against Vodafone: Controlling interest not a separate capital asset distinct from shares (Mahadeo Ram Kumar 166 ITR 477 (Cal))
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IT Departments argument
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Vodafones stand
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Analysis
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Representative assessee
> Representative assessee includes any person : who has any business connection with the non resident who has acquired a capital asset in India Normally a representative assessee can only be a person in India. In this case, since the seller was a non-resident, HTIL was not liable to capital gains tax. Therefore, IT department issued notice to the Vodafone NL treating it as assessee in default for not withholding tax and Hutch Essar India treating it as a Representative assessee i.e. agent of Hutchison International However, in this case as no capital asset is acquired in India the extra territorial application has to be analyzed
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Show cause notice to Vodafone to show cause as to why Vodafone should not be treated as an assessee in default (AID) in respect of failure to deduct tax on the capital gain arising on such transfer Sec 195 applies to any person and Vodafone should have obtained NIL withholding tax certificate Notice issued to Hutch Essar, India to show cause as to why it should not be treated as representative assessee Hutch Essar is a representative assessee with respect to the withholding tax obligation of Vodafone, Netherlands
Representative assessee
Hutch Essar is not a party to the transaction and cannot be treated as a representative assessee Hutch Esaar has no transaction with non resident