Vodafone's $2bn tax case
Summary of Supreme Court Proceedings
In February, 2007 Vodafone (through its Netherlands entity) entered into an agreement with Hutchison Telecommunications International Limited, Cayman Islands (‘HTIL’), for acquisition of 66.9848% equity and interests in the Indian telecom business of Hutchison Essar Ltd. (hereinafter referred to as ‘HEL’). The total value of the transaction was $ 11.206 billion. [pic]
The IT Department alleged that Vodafone (Netherlands), the buyer, had failed to deduct Indian tax on the payment of consideration made to HTIL and a show cause notice was issued to Vodafone BV in September 2007 for failure to withhold tax.
Bombay High Court, in September 2010, dismissing the writ petition filed by Vodafone, held that share transfer had a significant nexus with India. HC also held that “The essence of the transaction was a change in the controlling interest in HEL which constituted a source of income in India. The transaction between the parties covered within its sweep, diverse rights and entitlements. The Petitioner (Vodafone) by the diverse agreements that it entered into has a nexus with Indian jurisdiction. In these circumstances, the proceedings which have been initiated by the Income Tax Authorities cannot be held to lack jurisdiction.”
Accordingly, Bombay High Court has held that the share transfer by Cayman entity is liable to tax in India. The total tax impact of the transaction is over Rs 11,000 cr.
Vodafone has filed an appeal before the Supreme Court against Bombay High Court decision. A 3 judge bench of Supreme Court led by Chief Justice SH Kapadia, began hearings in Vodafone case from August 3rd, 2011.
Vodafone Counsel, Former Solicitor General Harish Salve has argued for 17 days over 7 weeks. Solicitor General Rohinton Nariman, argued on behalf of the Income-tax department for 6 days.
Taxsutra.com has been covering daily proceedings at Supreme Court since last 2 months. This summary has been prepared to provide an overview of the key arguments presented by Vodafone and Income-tax Department before the Supreme Court (upto September 29th, 2011). The hearings are likely to get over by October end. To read the blow by blow account of each day’s proceedings, kindly visit Taxsutra.com
The contents provided in this compilation is only for information and are not intended to be and must not be taken as the basis for any decision either by itself or in conjunction with any other information. You should make your own investigation of the contents provided, including the merits and risks involved and the legal consequences, independently and without reliance on TAXSUTRA or their respective employees, agents and affiliates. Nothing on this compilation constitutes, or is meant to constitute, advice of any kind. If you require advice in relation to any legal or financial matter you should consult an appropriate professional.
TAXSUTRA expressly disclaims any and all liability for any harm, loss or damage, including without limitation, indirect, consequential, special, incidental or punitive damages resulting from or caused due to your reliance and actions/inactions on the basis of this summary.
Summary of arguments by Vodafone counsel Harish Salve
‘Situs’ of CGP shares outside India and not taxable under Sec 9 • Sec 9 (1)(i) allows taxation of income deemed to accrue or arise in India through the transfer of a capital asset 'situated in India’. It is abundantly clear from the provision that the capital asset ought to be 'situated in India’. • Letter of law should be strictly construed and hence, transfer of a capital asset (in Hutch-Vodafone case, Cayman Island company’s shares) situated outside India, falls outside the ambit of Sec 9(1)(i). • Source of income lies where the transaction is effected and not where...