A few lessons from Vodafone's case

Hutchison Essar is an Indian Company, the controlling interest of Hutchison Essar is held by an SPV of Cayman Island (CGP Investments Holding Ltd). CGP is owned by Hutchison Telecommunications International Ltd (HTIL), Hong Kong.

In this manner the controlling interest of Hutchison Essar is held by HTIL, Hong Kong through an intermediary Cayman Island company (CGP). Vodafone International Holdings, Netherland entered into an agreement with HTIL, Hong Kong to buy the shares of CGP (Cayman Island).

Since CGP is holding 67 per cent shares of Hutchison Essar (India), the above transaction results in trans-fer of shares and controlling interest of Hutchison Essar (India) from HTIL, Hong Kong to Vodafone International Holding, Netherland.

The consideration for transfer is stated to be $11.1 billion. In view of the interesting legal issue involved and the quantum of tax in dispute, the Vodafone's case has received an unprecedented publicity in India.

The income-tax department issued a notice to Vodafone to show cause as to why it should not be treated as assessee in default for not withholding the Indian Capital Gain Tax on the payment made by it to HTIL for the transaction of sale of share of CGP (which in turn holds controlling interest of HTIL). Vodafone challenged the show cause notice by way of writ. The Hon'ble High Court dismissed the writ.

Thereafter Vodafone approached the Supreme Court for stay of Mumbai High Court's decision. The Supreme Court on 27/09/2010 ordered that Vodafone has to deposit a part of the amount in dispute before its case is heard by the Court.

It may first of all be pointed out that the case has neither been decided by the High Court nor by the Supreme Court, in that what the High Court has held is that the show cause notice issued by the tax department is a valid notice, and the Supreme Court has held that the income- tax department should determine the exact tax liability which it considers is payable by the petitioner to the department.

The Supreme Court will then decide how much amount is to be deposited by Vodafone out of the tax amount calculated by the department. After deposit of amount, the Supreme Court will hear the case of Vodafone.

Whereas the case is yet to be decided, certain observations of the High Court need particular attention of all foreign companies.

Vodafone's main contention is that since the transaction between HTIL and Vodafone took place outside India between the two Non-resident Companies, the Indian tax authorities do not have any jurisdiction in the matter.

The High Court held that "the very purpose of entering into agreements between the two foreigners is to acquire the controlling interest which one foreign company held in the Indian Company, by other foreign company. This being the dominant purpose of the transaction, the transaction would certainly be subject to municipal law of India, including the Indian Income-tax Act".

The Indian Law does not permit use of any "colourable" device by any tax payer for perpetuating tax evasion in India. The High Court remarked that "the present is a case of tax evasion and not tax avoidance". It is apparent that in the present case a chain of foreign companies located in full or part tax haven countries was used to avoid payment of tax in India.

Indian Law does not permit holding back any vital information from the tax department.

The High Court observed:" The Petitioner was requested to produce certain documents for proper adjudication in the matter. In spite of repeated demands by the Respondents, the same have not been produced, leaves us with no option but to draw an adverse inference against the Petitioner".

In view of the fact that Vodafone had clandestinely used a chain of foreign companies to avoid jurisdiction of Indian law, and further that it did not disclose crucial documents despite repeated demands, the Hon'ble High Court was compelled to throw out Vodafone's case by dismissing the writ.

The author is a Sr. Partner in S.S. Kothari Mehta & Co.