This research examines the tax implications of a non-resident payer in case of overseas transactions between companies incorporated outside India.

1. Vodafone Tax Case Study
Vodafone International Holding vs Union of India
Abhinandan Jain – 170301001, Ankit Kumar – 170301008,
Arya Kishore Sarbadhikary - 170301015, Harsh Vardhan Bardia - 170301023
Nilesh Dutta – 170301030, Soumya Basu – 170301037, Tathagata Banerjee - 170301044

2. Abstract and Purpose
This research examines the tax implications of a non-resident payer in case of
overseas transactions between companies incorporated outside India. Vodafone
International Holdings based in Netherlands acquired Cayman based CGP Holdings
Limited from Hutchison Telecommunications International Limited based in Hong
Kong for $11.1 bn. As a result of this acquisition Vodafone obtained control of
Hutchison Essar Limited India as CGP had 67% shares of the Indian based subsidiary.
The Indian Tax department claimed that the amount paid for the acquisition of CGP
was in fact being paid to acquire the assets of Indian based Hutch and the complex
shareholding structure using tax havens was put in place to avoid tax payment in
India, and demanded capital gains tax to the tune of 25000 million INR. The Bombay
High Court held that a prima facie case was made out by the Tax Authorities of
transfer of Capital Assets, and therefore accrual of Capital Gains and hence Vodafone
was liable to pay the Capital Gains tax. Vodafone filed a special leave petition to the
Supreme Court contending that the Tax Authorities had no territorial jurisdiction
over the transaction as the acquiring company as well as the company acquired were
not based in India. The Apex Court overruled the earlier judgement emphasizing on
the theory of Corporate Personality stating that the acquisition of CGP Holdings was
not solely to gain control over Hutchison Essar Limited India, but the gain in control
was a corollary of the acquisition, and was not the purpose of the acquisition.
Methodology and Approach: FDI in Indian Telecom Industry and Inorganic Growth
In the current era, the focus of companies has been to achieve growth through
Mergers and Acquisitions (M&A, and inorganic growth mode) to exploit economies
of scale, raise larger amounts of capital & share managerial expertise. During the
period of 2007-09, the FDI in telecom Industry in India touched $5000 million,
compared to a few hundred million USD in the preceding years and became
increasingly lucrative for companies to expand their business in India. Vodafone
International Holdings B.V., a Netherlands based company, decided to setup their
business in India during this time. They could either enter the Indian market by
setting up their own infrastructure, open their own offices and branches and recruit
workers or could buy an Indian company at a low price and do away with the hassles
of setting up a fresh one. Vodafone decided to acquire Hutchison Essar Limited (HEL),
but that would have made Vodafone liable to deduct tax at source (TDS) as per

3. Section 195 of Income Tax Act (ITA), which they wanted to avoid. In order to
accomplish this an agreement for Sale and Purchase of Share and Loans (SPA) was
entered into between HTIL and Vodafone NL under which HTIL agreed to procure
and transfer the entire issued share capital of CGP Investments, a Cayman (which is a
tax haven) based Company. Vodafone NL then applied to the Foreign Investment
Promotion Board and obtained approval for 15% additional stake in HEL in addition
to the 52% direct acquisition of HEL through CGP Investments. FIPB granted approval
for the additional 15% stake pertaining to the additional assets such as the control
premium, use and rights to the Hutch brand in India by Vodafone, totaling to 67%
stakes in HEL by Vodafone and Vodafone NL made the payment of consideration to
HTIL for acquiring the entire share capital of CGP Investments, as per the instructions
of the Hutch Group. The Indian IT department however was of the view that in
result, the actual sales were of the underlying assets and business of the Indian
company HEL and hence, this gave rise to income that was taxable in India.
Consequently, there were various repercussions on Vodafone NL and HTIL. This stand
of the Indian tax department resulted in a huge demand on Vodafone NL on the
ground that it had failed to deduct tax at source from the payment that it made to
the seller company HTIL as required by section 195, and Vodafone NL was treated as
a ‘taxpayer-in-default’. Vodafone NL challenged this order in the Mumbai High Court
by way of a writ petition stating that the Tax Authorities had no territorial
jurisdiction over the transaction as the acquiring company as well as the company
acquired were both based out of India. The High Court dismissed the petition stating
that the dominant reason behind the transaction was to obtain the controlling
interest in HEL and the prima facie case made by the IT authorities of transfer of
Capital Assets, and thereby accrual of Capital gains held good and Vodafone was
liable to pay the Capital Gains Tax.
Supreme Court’s Ruling: Tax Evasion or Tax Avoidance
Vodafone paid the tax amount of 25000 million INR as per the High Court
Judgement, but filed a Special Leave Petition before the Supreme Court. The IT
department took a stand stating that the complex shareholding structure was put in
place to consequently hold the shares in the Indian company HEL and was nothing
but a clever tax evasion trick with the primary objective of avoiding tax payment in
India. The Income Tax department contended that the use of various tax havens/tax
friendly jurisdictions (Mauritius, Cayman Islands, and Netherlands) was a clever

4. scheme to avoid paying tax in India. The IT department’s lawyers argued that the
decision of the Supreme Court in the Azadi Bachao Andolan (ABA) needed to be
overruled, based on the McDowell’s case, and that the corporate veil needed to be
pierced and the case needed to be looked through instead of being merely looked at.
In reference to the ABA case, it had been ruled that if an investor had in their
possession a Tax Residency Certificate duly issued by the Mauritian tax authorities,
then the benefits of the treaty would be available to the investor and the Indian tax
authorities could not challenge the validity of the Mauritian tax residency of such an
investor. As per the Westminster principle, from the House of Lords decision in the
case of CIR v Duke of Westminster (1981), every tax payer is entitled to arrange his
affairs so that his taxes are as low as possible and that he is not bound to choose that
pattern which will replenish the treasury. And as per Ramsay ruling, not discarding
the Westminster principle, putting it in the proper context, any colorable device to
avoid tax payment which is a sham can be nullified. Genuine Tax planning should be
‘looked at’ by the Tax Authority as per Craven vs White (1988). It is well established
that a company is treated as a separate legal entity distinct from its shareholders
with legal independence. The Tax Authority may disregard the form of transaction
arranged if the foreign company makes an indirect transfer abusing the form of the
company without any reasonable business objective, with the only intention being
that to avoid tax payment. However, the onus is on the Tax Authority to allege and
establish the abuse and can ‘pierce the corporate veil’ only if it successfully
establishes that the transaction is a sham. The Tax Authority, if it is able to establish
that the holding structure has no commercial substance and has been formed only to
avoid tax, then it can be disregarded applying the Fiscal Nullity Doctrine.
For cross national income, taxation is always complex and often controversial. Trying
to bring in Foreign Direct Investments, Indian Government extends Double Taxation
Avoidance Agreements (DTAA). At the same time, to counter misutilization of DTAAs,
Government has introduced Limitation of Benefits Clause (LOB) as per which, the
foreign investors have to prove that they are a resident of foreign nation to avail
DTAA benefits.
To look in a holistic manner into every strategic FDI into Indian companies, the tax
authority needs to look at the legal nature of the transaction and should also decide
whether to look at the transaction as a whole or to dissect it into smaller parts for a
better understanding. The nature of the transaction would be the proof whether the

5. impugned transaction is an artificial device to evade tax or had a strong business
purpose.
However irrespective of everything, Tax Department has the authority in denying
DTAA benefits, in case they find that an entity is without any commercial substance
or if the entity is made to avoid taxes.
Supreme Court’s Ruling on Hutch – Vodafone Transaction:
In the case of Hutchison – Vodafone transaction, neither HTIL nor Vodafone were
new players in the market. HTIL has been operating from 1994 and only in the year
2007 they sold CGP Investments to Vodafone.
After further investigation, it was found that the sale of CGP Investments share was a
genuine business transaction and not CGP was not an entity without any commercial
substance or made to avoid taxes either.
As per Indian Company Law, Situs of Shares would be where the company is
incorporated and where it can transfer its shares. Considering the fact, CGP
Investments was incorporated in Cayman Island, where they kept the register of
members, the situs of shares of CGP has to be in Cayman Island even though CGP
Investments had properties in India.
Transfer of shares of CGP Investments resulted in a domino effect including transfer
of controlling interest, and that controlling interest as such, cannot be dissected
from CGP Investments share without a specific legal intervention. So, the controlling
interest that went to Vodafone NL from HTIL includes the shares of CGP Investments.
As per Indian Company Law, withholding tax provisions would apply only if payments
are made from a resident to another non-resident, and not between two non-
residents situated outside India.
In this particular case, the transaction was between two non-resident entities
situated outside India were capital was transferred through a contract that was
executed outside India.
Therefore, Vodafone NL cannot be regarded as a taxpayer on the grounds that it is a
non-resident entity and thus there is no liability to withhold tax.

6. The supreme court ruling in this case, holds a huge significance as it acknowledges
that the holding companies, the investment structures as well as the offshore
financial centers, can often be driven by business/commercial purpose. So, any entity
using elements like this, is not necessarily using it for tax avoidance purposes.
Conclusion and Findings
This was a landmark judgement, and most probably the first of its kind worldwide.
Investors from across the globe had eyes set on this case as the result of this case
would have had direct impact on other past and future major foreign acquisitions.
The ruling came as a much-needed welcome relief for MNCs across the globe
planning to invest in India. However as in earlier cases the Indian Government made
retrospective amendments to the Income-Tax Act Section 9(1)(i) making indirect
transfer of Indian assets between non-resident entities taxable as well. Although the
law was amended in 2012, but being retrospective in nature it is applicable on all
transactions which have took place since the Act was first passed in 1962. The Shome
Committee setup for this purpose held that retrospective taxation takes away the
fiscal stability and predictability of the tax system and it is impossible for a company
to take decisions predicting a future law. As the Indian Tax Department issued a
notice to Vodafone to cough up the taxes pertaining to the amendment, Vodafone
has invoked the arbitration clause under the India-Netherlands BIPA and a second
arbitration under India-UK BIPA which are still pending as of date.