Page 327 - DCOM301_INCOME_TAX_LAWS_I

Income Tax Laws – I

Notes 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) of the Income Tax Act and reading Sections 5(2), 9(1) and 195, 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 ` 12,000 crores going to the tax authorities’ kitty.
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 Cairn Energy 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 India. 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
Contd...

322 LOVELY PROFESSIONAL UNIVERSITY