For Vodafone International Holdings BV (Vodafone BV) its the saga of the kingdom being lost on account of one horse shoe naïl. The transaction structure is no different from that of the models used since the mid - nineties, in cross border M & As for sale of shares by an offshore company, from another, Hutchison-Telecommunication International Ltd., Cayman Islands (HTIL) under a Share Purchase Agreement (SPA).
The single share in question is not of any Indian company, but of another Cayman Island entity, CGPI. None of the parties had any presence in India, the transaction was consummated offshore, the shares held overseas and so delivered, the governing law was of the SPA was not Indian.
The Indian connection was CGPI’s direct and indirect holdings in various offshore entities, as well as the options and assignments of debt envisaged under the Framework agreements, which potentially worked out to be effectively 67 per cent, in Hutschison Essar Ltd.(HEL), the Indian operating company, was well within the permitted sectional cap.
The approval of FIPB was taken for the purpose of noting, and also since there was a previous collaboration between Vodafone and the Bharti Group, who provided a no-objection as required under the applicable Press Notes. In the process, the FIPB raised queries on the implications of the downstream investments, and on due consideration gave a clean chit, subject to adherence to sectoral caps.
The Revenue’s claim, which the Bombay High Court has upheld in the writ petition filed by Vodafone BV involves the determination of whether the gains derived from the acquisition of the CGP Share were chargeable to tax as having said to have accrued or arisen within the meaning of Section (5)(1)(b) read with Section 9 of the Income Tax Act (the Act), and whether such gains could be dee-med to arise as “the fruits of HTIL’s investment in India” from the subject matter of the transaction, being treated as a Capital asset under Section 2(14) of the Act.
“The Revenue has invoked various provisions of the Act, the most significant is the interpretation given to Section 9(1) which deems accrual of income in India and is contemplated under four categories – through a business connection, from any property, asset or source of income, and through the transfer of a capital asset.” The Court has proceeded on the basis that the transaction amounted to the transfer of a Capital asset and applied the principle of apportionment in respect of an assessee which carries on multiple activities in more than one tax jurisdiction in applying the source rule.
In determining that the sale shares constitute a capital asset, the Court has had to deal with the issue of situs to hold Vodafone BV an assessee in default within the meaning of Section 201 of the Act amended restrospectivly after the Revenue started shooting off notices to Vodafone, BV, i.e. a person who does not deduct the whole or any part of the tax, or after deducting fails to pay the tax as required by or under the Act,, This applies only to a person who has withheld taxes but not deposited the same as opposed to a person who is liable to deduct taxes but has not deducted the same. The Court has avoided deciding the tax authority’s competence to treat Vodafone BV as an assessee in default under Section 201 and the allegation that the amendment was tailor-made for the case, by granting Vodafone BV the liberty to approach the tax authorities for waiver. .
When there is a transfer of shares of a company incorporated in India, between two non-resident Parties, the transaction is chargeable to capital gains, thereby attracting requirement of predeposit before the payment. which is what Section 195(2), of the Act provides for. The Court has interpreted acquisition of a Capital asset to include a bundle of interests, including the debt assignments, and control of shareholding and management to arrive at this conclusion. With due respect, there is no provision in the Act under which any of the above interpretations can be applied to classify the as the deal as transfer of a Capital asset,
Indian Courts have at all times held that a transaction or arrangement which is permissible under law and has the effect of reducing the tax burden of an assessee can not be treated as a contravention, if structured through legitimate and acceptable legal instruments. The Court has not been able to elucidate with clarity in what manner the structure was not legitimate, except in reference to the gains and in construing taxable events where none exist, thereby setting an unfortunate precedent.
The author is a Partner in Rajinder Narain & Co and can be reached at kumkumsen@rnclegal.com
