Page 259 - DCOM509_ADVANCED_AUDITING

Advanced Auditing

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Case Study Vodafone Tax case - A Case Study for Investments
in India

ndia Inc has been surging ahead audaciously with the support of its Information
Technology developments with its repertoire of resources. Global players have been
Ieying 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 (USA).
However, the very same image is said to have taken a beating with the recent Vodafone
Tax case, which has 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 India and abroad.
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) of the Income Tax Act and reading Sections 5(2) , 9(1) and 195 , the court
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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.
Contd....

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