Vodafone Has Failed To Produce Pact With Hutchinson: I-t Dept

[Honest 836]

Vodafone has failed to produce pact with Hutchinson: I-T Dept

7 Jul, 2008, 2245 hrs IST, PTI

MUMBAI: In the eagerly-watched case involving the I-T Dept and Vodafone, the Income-Tax Department on Monday said telecom major has failed to produce its agreement with Hutchinson which alone can reveal the true nature of the transaction between the two mobile companies.

The I-T Dept submitted this before the Bombay High Court which was hearing a petition filed by Vodafone Essar contesting I-T Department's notice for capital gains tax to the tune of around $2 billion.

Vodafone International (a Dutch company) picked up Hutchinson's (based in Cayman Islands) 66 per cent stake in Hutchinson-Essar to form the Vodafone-Essar here in $11.2 billion deal in 2006.

While the I-T department has said it does have a capital gains claim because the assets are in India, Vodafone has maintained that that transfer of shares between two foreign companies is not taxable in India.

I-T Department's counsel argued today that Vodafone had failed to produce its agreement with Hutchinson which alone can reveal the true nature of the transaction.

Also, the Constitutional validity of the provisions of the I-T Act, which has been challenged by Vodafone, cannot be determined in the absence of the agreement, he said.

The amendment to Income Tax Act which was introduced by the latest finance act, seeks to expand definition of the term 'assessee-in-default' to include the seller who does not deduct tax at the source. It has retrospective effect.

[Honest 836]

Govt makes overseas call for Hutch-Voda details

9 Jul, 2008, 0124 hrs IST

NEW DELHI: India has written to UK and Dutch tax authorities seeking details of the Hutch-Vodafone transaction to acquire Hutch-Essar.

Sources close to the development said that the Indian government had sought the ‘sale and purchase’ agreement that Vodafone International Holdings had entered into with Hong Kong’s Hutchison. This comes even as the tax authorities and the company battle out their dispute on payment of capital gains tax in the Bombay High Court.

The missive sent out to seeks details of the agreement between Vodafone and Hutchison which the Income Tax department believes would have been given to tax authorities in these countries. A subsidiary of Vodafone Group, Vodafone International (a Netherlands-registered company) had picked up Hutchison’s (based in Cayman Islands) 52% stake in Hutchison-Essar to form the Vodafone-Essar in a $11.2 billion deal.

Vodafone International had bought out a Cayman Islands company called CGP investments, which was owned by Hutchison. CGP owned 52% stake in Hutchison Essar, the Indian telecom company, through several Mauritius entities.

The I-T department counsel had on July 7 said in the High Court that Vodafone had failed to produce the agreement between Hutchison and itself, which alone could reveal the true nature of the transaction.

The department is yet to carry out an assessment of the transaction and books of accounts which takes place only after it has examined the reply to the show cause notice. It may be pointed that Vodafone had approached the court soon after the I-T department issued it a show cause notice.

Vodafone, at Tuesday’s hearing in the HC, offered to file the ‘sale purchase agreement it had signed with Hutchison’.

The department had issued a show-cause notice to Vodafone Essar asking ‘why it should not be treated as an agent of Hutchison International’.

The department is claiming capital gains under Section 9(1)(i) of the Income-Tax Act as they are of the view that the transaction involved transfer of an Indian asset for which even the Foreign Investment Promotion Board’s nod was taken.

Vodafone is contesting the claim that the Indian unit (Vodafone Essar, erstwhile Hutchison Essar) was as an ‘agent’ of the non resident (Hutchison International) under Section 163 of the Income-Tax Act, 1961.

The case is being keenly watched in India and in global arena as decision in this case would set the course for future and impact many such cross border transactions.

It may also be pointed that the government retrospectively amended tax deducted at source provision in the Income Tax Act through the Finance Act, 2008. The amendment seeks to expand definition of the term ‘assessee-in-default’ to include the seller who does not deduct tax at the source.

[manishag 17]

voda-Hutch to suru se hi Chor hain

chor chor mosere bhai

so how can they submit the documents

specially when lots of black money is involved in the transaction

[Honest 836]

^^^

Ha Ha Ha

Very true my dear friend.

Regards.

[Honest 836]

HC reserves order on Vodafone capital gains tax issue

9 Jul, 2008, 2122 hrs IST, PTI

MUMBAI: The Bombay High Court on Wednesday reserved its order on the dispute between the Income Tax Department and Vodafone over capital gains tax to the tune of around $2 billion, arising out of the telecom major's acquisition of Hutchisson-Essar in 2006.

The division bench of Justices S Radhakrishnan and Anand Nirgude has asked Vodafone and the Income Tax Department to submit their written arguments in the matter within one week.

Vodafone is contesting IT Department's notice for capital gains tax to the tune of around $2 billion saying that transfer of shares between two foreign companies was not taxable in India.

Vodafone International (a Dutch company) picked up Hutchisson's (based in Cayman Islands) 66 per cent stake in Hutchisson-Essar to form the Vodafone-Essar here in $ 11.2 billion deal in 2006.

But IT Department has argued that Vodafone is chargeable for capital gains tax as the asset in question is in India even if the transfer of stakes took place between two foreign companies.

[Honest 836]

Vodafone, I-T dept battle may shift to SC

10 Jul, 2008, 0227 hrs IST, ET

MUMBAI: The next battle between Vodafone International and the Income Tax (I-T) department will be fought in the Supreme Court. The party that loses in the Bombay High Court will approach the apex court, both sides confirmed to ET.

Lengthy arguments by Vodafone and the I-T department before the division bench of Justice S Radhakrishnan and Justice AV Nirgude concluded on Wednesday. The bench is expected to pronounce its judgement after July 18. The final hearing in the case, having ramifications for MNCs and cross-border transactions, had started on June 23.

The British telecom giant has been fighting against the imposition of a $2.1-billion capital gains tax on the purchase of 67% stake in Hutchison Essar from Hutchison Telecom International (HTIL) for $11.2 billion.

The division bench has asked the two parties to make written submissions in the case. While Vodafone will give its submissions by July 14, the I-T department will have to do so by July 18. After that, the bench will pronounce its judgement. The bench has not specified any date for giving its verdict. The party that loses will almost certainly approach the Supreme Court.

The I-T department, being represented by Additional Solicitor-General Mohan Parashar and counsel Beni Chatterjee, has sought a copy of the agreement between Hutchison and Vodafone. They argued that the company was liable to pay tax.

On May 16, Parliament passed an amendment to allow the government to take action against companies which do not withhold taxes when making a transaction. It also stipulates that tax has to be paid even by the buyer of shares of an Indian company.

This amendment will come into effect retrospectively from 2002. Effectively, the department is seeking capital gains tax of $2.1 billion as well as 18% interest on it as penalty for not withholding tax, taking the total claim to nearly $2.5 billion.

Appearing on behalf of Vodafone, counsel Iqbal Chagla reiterated that Vodafone has no withholding obligations in India as provisions of the I-T Act do not apply to non-residents who do not have any presence in India. While Vodafone International is based in the Netherlands, HTIL is a Cayman Islands firm.

Assuming, if tax authorities establish that the transaction is taxable in India, then they can proceed against Vodafone only if Hutch does not discharge its tax liability, he argued.

Further, the amendments to Section 191 and 201 of the Income-Tax Act in the latest Finance Bill, retrospectively seeking to hold a person who has not withheld taxes under Section 195 as an assessee in default are “unconstitutional”.

The transaction is not taxable in India because it was for an overseas sale of shares in a foreign company. There is no business connection that would give rise to taxable income in India nor is there transfer of any capital asset or property situated in India.

[Honest 836]

Vodafone could face tax bill over Hutchison Essar row

11 Jul, 2008, 1651 hrs IST, ET

LONDON: British mobile phone giant Vodafone could face a tax bill of more than $4.0 billion (2.5 billion euros) if it loses a court battle with the Indian government over its investment in Hutchison Essar, the Financial Times reported on Friday.

Indian authorities are seeking to tax Vodafone's 11.1-billion-dollar purchase of a majority stake in Hutchison Essar, the country's fourth-biggest wireless operator.

A spokesman for Vodafone declined to comment about the ongoing legal action at Mumbai's High Court.

India's tax department claims that the company should have withheld around 2.0 billion dollars of capital gains on the government's behalf, the FT reported.

The daily business newspaper, which did not cite its source, said Vodafone could face a penalty of 100 percent of the tax owed, plus 12 percent interest a year if it loses the case.

A verdict was expected in the coming weeks after hearings on the case ended this week, according to the paper.

Vodafone had agreed to buy a 67-percent stake in Hutchison Essar from Hong Kong-based Hutchison Telecommunications International in April 2007.

The transaction, India's biggest foreign direct investment, was part of the group's strategy to expand its footprint in emerging markets amid shrinking demand in mature Western countries for mobile phone services.

[Honest 836]

Hutchison informs SEC of likely tax liability

17 Jul, 2008, 0134 hrs IST, ET

MUMBAI: Hutchison Telecommunications International has admitted in a document submitted to the United States Securities and Exchange Commission (SEC) that there could be a tax liability on it in India on account of its $11-bn sale of telecom company Hutch-Essar to Vodafone.

The document submitted to SEC says that if the company pays the tax, it will have an adverse impact on its financial health. It has also stated that the company did not believe that either it or Vodafone is liable to pay tax in India.

Vodafone faces a tax demand in India, amounting to about $2 bn, in the wake of $11-bn acquisition of Hutch-Essar from Hutchison International. Vodafone has already dragged the income tax department to the Bombay High Court claiming that the Indian tax authorities have no locus standi on a transaction that took place between two parties outside India.

The I-T department took a totally different view, claiming that since the profit had been generated in India, proportionate capital gains tax is payable in India. The tax authorities sent notice to Vodafone, claiming that the company should have withheld taxes before making payment to Hutchison.

While the matter was being hotly debated in the high court, the Indian government brought in an amendment to the relevant provisions in the income-tax laws, to the effect that if the seller of the shares did not pay tax in India, the buyer is bound to pay the same. The Bombay High Court last week completed the hearing of the case. The verdict is going to be out in a couple of months.

The document filed before the SEC says, "We may have financial exposure as a result of warranty or indemnity obligations assumed in connection with the sale of CGP Investments Holdings (an associate company). We may be subject to claims or have to make payments as a result of warranty or indemnity obligations assumed in connection with the sale of interests relating to CGP to Vodafone... Furthermore, Indian tax authorities may consider the gain arising from this sale to be taxable in India. Indian tax authorities have initiated an attempt to investigate certain aspects of such sale, focusing on whether Vodafone should have withheld tax from the acquisitions proceeds. Vodafone has taken court action in India to quash such attempt."

The company further said: "We believe that the sale is not taxable in India and therefore, neither is any Indian tax payable by us nor was Vodafone required to withhold any Indian tax. Accordingly, we have not provided for any claims or Indian tax liabilities in connection with the sale. However, we cannot assure you what the final outcome will be. If we eventually make any such payments or suffer any Indian tax on this sale, it may have a material adverse effect on our financial position."

[Honest 836]

Vodafone-Essar friction seen over Loop play

11 Aug, 2008, 0128 hrs IST, ET

MUMBAI: Differences have cropped up between Vodafone, the world’s largest telecom company by turnover, and its Indian joint venture partner, the Ruias of the Essar Group, over the latter’s plan to set up a wireless telephony firm.

Vodafone is understood to be exploring various options, including legal action, to counter Essar’s moves, since the new company would compete directly with Vodafone Essar, their joint venture. The British company, which owns a 67% stake in Vodafone Essar, has sought advice of leading law firm Majmudar & Co. The issue at hand is an Essar Group company, Loop Telecom, which has licence to launch a pan-India wireless telephony network.

While the final course of action is still undecided, Vodafone has been advised that it could move the Company Law Board against the Ruias for “breach of shareholders’ agreement”, for entering into competition with Vodafone Essar, India’s fourth-largest telecom firm. However, no legal proceedings have been initiated as yet and attempts are on to resolve the issue. All that has happened so far is Vodafone has sought legal advice on whether Essar’s plans affect their telecom venture or not.

Both companies are already fighting a separate legal battle over BPL Mobile, which was to be merged with Vodafone Essar. However, this merger has not happened yet. The BPL Mobile issue is now pending before an arbitration panel. When contacted, a Vodafone spokesperson from London said: “Vodafone continues to enjoy a productive and successful partnership with the Essar Group. Both partners are committed to the continuation of strong operational performance of Vodafone Essar.’

He added, we do not comment on discussions between the two partners on matters relating to the shareholders’ agreement.” A Ruia spokesperson denied that Vodafone has any problem over Loop Telecom.

Vodafone sought legal advice soon after the Ruias decided to rope in a foreign partner for Loop Telecom. According to a senior industry source, the Ruias are talking to Egyptian telecom giant Orascom, Qatar Telecom and Russian firm Sistema for offloading their stake in Loop Telecom. Loop Telecom, which is yet to start operations, has been valued at $3 billion, based on its 23-circle licence and spectrum.

“The Ruias are talking to almost all big global telecom players. This is something which has alarmed the new Vodafone management in London,” said a person familiar with the development. “The joint venture agreement clearly states that there is a non-compete agreement between the two partners,” he said.

ET had reported on June 4 that Loop Telecom could sell up to 74%, the ceiling for foreign investment in telecom, to a foreign partner with the Ruias holding the rest. Loop Telecom is a subsidiary of BPL Mobile, in which Ruias hold 9.9% with the balance being held by friends and other investors.

While Ruias’ equations with Vodafone may be less frosty than their relationship with earlier JV partner, Hutchison, it’s not exactly warm either. When Hutchison sought to sell its stake to Vodafone in early 2007, Essar had claimed that it had the right of first refusal. After Vodafone’s former CEO Arun Sarin convinced the Ruias, they stepped back and the deal between Hutchison and Vodafone was finally inked.

Banking sources said Essar may also look at the option of combining its stake in BPL Mobile, which operates in the lucrative Mumbai circle. This is interesting as BPL Mobile's majority shareholding is under arbitration following a dispute with Vodafone JV. “BPL figures in early dialogue with potential suitors, but it's not clear as to how it will be structured as part of the Loop transaction,” a source said, while explaining that the final valuation of Essar's standalone telecom interests would depend on the structure they put before the investors.

[Honest 836]

Vodafone seeks hefty damages from Ruias

22 Aug, 2008, 0825 hrs IST, ET Bureau

MUMBAI: Vodafone Essar (VEL, earlier Hutchison Essar) has sought damages, which could be upwards of Rs 1,100 crore, from the Ruias of the Essar group for not transferring the shares of Mumbai-based BPL Mobile to the company.

Countering the claim of Rs 1,300-crore damages made by the Ruias, VEL said it should be compensated for non-transfer of shares of BPL Mobile as that has adversely affected its business plans.

“In case BPL Mobile is not transferred to Vodafone, the company will claim the consideration it has paid (Rs 1,617 crore), interest on this amount and damages for not transferring the shares. As the business plans for merger of licences (of VEL and BPL Mobile) could not take place, VEL has suffered loss of business and it wants to be compensated for the same,” sources told ET. Sources in the legal fraternity peg the damages due to business loss at over Rs 1,100 crore.

However, if the Ruias agree to handover BPL Mobile to VEL, the amount of damages due to delay in the transfer will be much lower, sources added. The claims were made before the three-member arbitration panel set up for settling the dispute between Ruias-managed BPL and VEL.

The tribunal last met on August 5 and is now slated to meet next month. “Apart from claiming damages, VEL has also disputed the liability of Rs 1,300 crore. They have contended that shares of BPL Mobile must be transferred to them and that the termination of the agreement by the Ruias was illegal,” sources added.

BPL is seeking Rs 1,300 crore damages, saying an injunction on the sale of its shares has hurt its shareholders.

Spokespersons of Vodafone as well as the Essar group declined to comment.

BPL Mobile is now far more valuable to the Ruias than it was two years ago when the matter was referred to arbitration by the Bombay High Court. BPL is now the Ruias’ vehicle for their telecom initiatives, which extend beyond their 33% stake in Vodafone Essar, India’s third largest cellular operator. The Ruias have acquired a separate unified access service licence (UASL) under Loop Telecom — a subsidiary of the disputed BPL Mobile. Loop Telecom is now learnt to be scouting for a foreign joint venture partner.

The Ruias had acquired BPL on behalf of Hutch in 2006, but have been refusing to transfer the shares. They had terminated the agreement for sale of BPL Mobile citing non-receipt of Department of Telecom (DoT) clearance for the merger of BPL with Hutch (now VEL) after its share purchase agreement expired on July 31, 2006.

Neither the Ruias nor VEL is ready to give up BPL Mobile because the single circle operator has 14.4 lakh subscribers in India’s most competitive Mumbai circle.

Meanwhile, the Ruias have pumped in Rs 200 crore into BPL Mobile in the last almost two years, ramping up networks, brand and increasing value added services. BPL Mobile is also offering BlackBerry services and its subscriber base, which was stagnant for a long time, has increased by around 3.5 lakh in the last one year.

[Honest 836]

Vodafone-Essar mobile phone dispute deepens

9 Sep, 2008, 1344 hrs IST, ET

MUMBAI: Differences between Vodafone and Essar, its Indian partner has reportedly deepened after the former won an order blocking the sale of shares of a mobile phone unit controlled by the Essar Group.

According to the London-based Financial Times, an arbitration panel has ordered Essar to freeze the sale of any shares of the mobile unit, BPL Mobile Communications, including those of one of its most important subsidiaries, Loop Telecom.

The order has imposed significant constraints on the ability of BPL and Loop to dispose of their assets pending the arbitration outcome.

Loop, which holds 21 mobile phone network licences, has been touted for sale at a price tag of up to 2.5 billion dollars.

The arbitration order could stop the Loop sale but a person familiar with the issue said Loop could still bring in strategic investment using means other than the direct sale of existing shares.

Vodafone's partnership with Essar began last year when it bought a controlling 67 per cent stake in Hutchison Essar, the country's number three mobile operator, from Hong Kong conglomerate Hutchison for 11 billion dollars.

Essar, controlled by the Ruia family, retained a 33 per cent stake in the joint venture, which was renamed Vodafone Essar, after a period of intense negotiations over the terms and conditions of the partnership with the UK group's former chief executive officer Arun Sarin.

As part of the deal, Vodafone inherited a dispute between Hutchison and Essar over the ownership of BPL Mobile Communications, a small mobile phone company with operations in Mumbai and about one million subscribers.

Hutchison had agreed to buy the company from Essar more than two years ago for 400 million dollars.

The deal ran into trouble after the Indian group claimed its Hong Kong partner had missed a deadline for obtaining regulatory approval for the sale. When the sides could not agree a solution, the dispute moved into arbitration.

[Honest 836]

Bombay HC dismisses Vodafone's petition against I-T Dept

Press Trust of India l 3 Dec l Mumbai

The Bombay High Court, in a very significant ruling, on Wednesday dismissed telecom major Vodafone International's petition challenging the Income Tax Department's show-cause notice for payment of capital gains tax of around USD two billion.

The division bench of Justices S Radhakrishnan and Anand Nirgude, however, continued the earlier stay on the I-T Department's show-cause notice for further eight weeks to enable Vodafone file an appeal.

Vodafone's representative said that the company would be filing an appeal in the Supreme Court very soon.

Vodafone Holdings International, a Netherland-based company, picked up the stake of Hutchisson in Hutchisson-Essar to form the new entity Vodafone-Essar in a USD 11.2 billion deal in 2006.

I-T authorities issued a notice to Vodafone Essar last year for capital gains tax to the tune of around USD two billion. Though seller of assets has to pay this tax, I-T expected Vodafone to deduct the tax before making payment to Hutch.

Vodafone's lawyer Iqbal Chhagla had argued that Vodafone is a Dutch company, Hutchisson is incorporated in Cayman Islands and Income Tax Act does not apply in such a situation.

Secondly, he had argued, a share-purchase did not amount to tranfer of capital assets which could be taxed.

The I-T Department held Vodafone liable because it expected the company to deduct capital gains tax while making payment to Hutchisson.

[Honest 836]

Vodafone to move to SC over tax matter with IT dept

Economic Times l 3 Dec l Mumbai

Vodafone will challenge the verdict of the Bombay High Court which dismissed the petition filed by the UK telecom firm contesting Income Tax Department’s show-cause notice for capital gains tax to the tune of $2 billion arising out of its acquisition of Hutch shares.

Hitesh Jain, one of the lawyers for Vodafone, told ET, “when the court dismissed its application they sought a stay on the order so that they could challenge it in the apex court which was allowed by the court”.

Earlier, Counsel Beni Chatterji, representing the Income Tax Department, said the court has stayed the order dismissing Vodafone's petition for 8 weeks, allowing time to Vodafone if it wanted to contest the order in the Supreme Court.

Division bench of Justices S Radhakrishnan and Anand Nirgude had earlier asked Vodafone why they should not be treated as "assessee in default" as they did not deduct tax at source (TDS) in respect of transaction between Hutchison Hong Kong and Vodafone International as the asset in question is in India even if the transfer of stakes in it took place between two foreign companies.

Vodafone, which is fighting tax demands over its acquisition of Hutchison Essar in India in the Bombay High Court for more than a year, said earlier that a share purchase deal between two foreign companies was not taxable in India.

“As the deal (between HTIL and Vodafone) is through transfer of a Mauritius-based entity that holds majority stake in Hutch-Essar, IT department's demand of tax on capital gains will not stand," a senior executive of an international chartered accountant firm said.

All will depend on which company's shares are being transferred, if it is an Indian company then the tax demand is justified, he said, adding that this is not the case with the HTIL-Vodafone deal.

Vodafone, which picked up the stake of Hutchison in Hutchison-Essar to form Vodafone-Essar in a $11.2-billion deal, had challenged IT Department's notice for capital gains tax to the tune of around $2 billion.

[Honest 836]

Vodafone verdict may impact M&A deals

Business Line l 4 Dec l Mumbai

Wednesday’s High Court dismissal of Vodafone’s writ petition against the income tax demand on them could have a potential implication on several other M&A deals, industry watchers feel.

Mr Rajesh Chaturvedi, Managing Partner of CA firm Chaturvedi and Shah, who were representing the income tax department in the case feels that this High Court judgement cannot be applied as a general rule for all M&A activity in the country.

“If the transfer of shares were done through a country such as Mauritius, with which India has a tax treaty, then the laws governing the tax treaty would have applied. Since India does not have any treaty with Cayman Islands, local Indian laws would apply,” he said.

A senior CBDT official said this would have a bearing on only deals in which both the parties are incorporated overseas. “Where even one of the parties is resident in India, such a situation would not apply,” he said.

No transfer of assets

Mr Uday Ved, Tax Head, KPMG: “A non-resident is taxable in India under Section 9 of the Income-tax Act only if income accrues or arises through or from a business connection or transfer of capital asset situated in India. In the present case, there was no business connection in India. Further, there was no transfer of capital asset situated in India because the situs of shares of the Cayman Island company were situated outside India. By acquiring shares of the Cayman Island company, Vodafone did not acquire any right or controlling interest in the assets of the Indian company.

“Under the Income-tax Act, the tax needs to be withheld only when income is taxable in India. If the income is not taxable in India, there is no question of withholding of any tax in India,” Mr Mukesh Bhutani, partner, BMR Advisors said:

“The written ruling is not out as yet. The case was evenly balanced on an issue of law, which was not clear. The Bombay High Court move would strengthen the revenue department’s resolve to bring to tax in India a number of cases where there was offshore transfer of ownership of shares.”

[Honest 836]

Tax dept to issue notices on other Vodafone-type deals

Business Standard l 5 Dec

India’s income tax department today said it would scrutinise more than a dozen cases of offshore mergers and acquisitions (M&As) in which the deal results in an ultimate change of ownership of Indian firms.

The latest move by the tax department comes in the background of a favourable ruling from the Bombay High Court yesterday in a case filed by Vodafone International Holding BV.

“The high court’s decision has strengthened the hands of the income tax department in its attempt to bring to tax in India transactions involving transfer of assets situated in India between entities located outside the country,” the Central Board of Direct Taxes (CBDT) Chairman NB Singh told reporters here.

“This was a test case. There may be other similar cases that may have escaped scrutiny,” added Director General of International Tax, CBDT, Prakash Chandra. We will now be issuing notices on over a dozen cases,” he said.

The department did not disclose which deals are under scrutiny. But if the tax department succeeds in its efforts to tax such overseas transaction involving Indian assets, it stands to gain substantial payment of tax along with penalty and penal interest. (Recent offshore M&A deals of India-registered companies are listed in the table on Page 7, though it is not certain whether these face similar tax issues.)

Vodafone, the world’s largest wireless service provider, picked up controlling stake in Hutchison Essar Ltd, India’s third largest mobile service provider, by acquiring a company in 2007 that is registered in Cayman Islands, a known tax haven.

Vodafone contended that the transactions relate to two overseas entities and thus not liable to tax in India. But the tax department rejected the contention and sent out a show cause notice saying the overseas transaction relate to assets in India. Thereafter, Vodafone moved the Bombay High Court to reject the department’s notice.

The department is aiming to collect over $2 billion (around Rs 10,000 crore) from Vodafone by way of tax deducted at source on the $11.2 billion it paid to Hong Kong’s Hutchison International.

Meanwhile, with the Bombay High Court giving Vodafone eight weeks time for Vodafone to file an appeal in Supreme Court, the department will move a caveat in Supreme Court seeking a hearing before giving any further stay in the case. This is important for the department to proceed with the case and other similar cases.

A tax expert said the development may have a negative impact on foreign investment. “For a foreign investor India seems to be a very tax-challenging environment. The ruling will obviously have negative impact on similar cases and future investments on Indian assets,” said an income tax expert.

[Honest 836]

Vodafone, Hutchison Tele transfer relates to assets in India, says HC

Business Line l 5 Dec l Mumbai

The subject matter of transfer as contracted between Vodafone International and Hutchison Telecom International is not actually the shares of a Cayman Islands company but the assets situated in India, a Division Bench of the Bombay High Court observed in its dismissal on Wednesday of Vodafone’s writ petition challenging the Income-Tax authorities on the matter of withholding tax in its acquisition of Hutch Essar Ltd.

The Court also remarked that the petitioner had “wilfully failed” to produce the original agreement of February 11, 2007, and other agreements entered into with HTIL for the acquisition of Hutch-Essar.

“The said agreement has not been produced by the petitioner either before the respondent or even before us,” said the Court. Without the agreement, it would be impossible for the court to find out the true nature of the transaction, it said.

“In spite of repeated demands by the respondents, the same have not been produced, left us with no option but to draw an adverse inference against the petitioner, since it clearly amounts to withholding of the best evidence, even assuming that the onus of proof does not lie on the petitioner.”

Vodafone International had been issued a show-cause notice by the Income-Tax Department on why it should not be treated as an assessee in default in not having deducted and paid Indian government withholding tax (TDS) when it acquired Hutchison Essar Ltd (HEL) from HTIL last year.

Vodafone had acquired HEL through buying shares in a Cayman Islands company which in turn held shares in HEL, the Indian telecom operator, now known as Vodafone Essar Ltd.

One of Vodafone’s arguments in its writ petition was that the transaction was between two international companies in a third overseas company and that this would not come under Indian tax jurisdiction.

“It would be too simplistic to answer away all the facts and circumstances by a submission of the petitioner (Vodafone) that what was transferred was only shares of an unknown Cayman Islands company which is a shell company and the same was not even considered in the enterprise value of Hutch,” the Court said.

The choice of the petitioner in selecting a particular mode of transfer of these rights will not alter or determine the nature or character of the asset, it said.

The Bench said that Revenue has made out a strong prima facie case that the transaction entered upon by the petitioner (Vodafone) amounts to transfer of a capital asset, especially in the light of the fact that the interest in telecom licence is jointly held with the Essar Group with the use of brand and goodwill as well as non-compete rights given by HTIL.

“Shares in themselves may be an asset but in some cases like the present one, shares may be merely a mode or a vehicle to transfer some other assets — in the instant case, the subject matter of transfer as contracted between the parties is not actually the shares of a Cayman island company but the assets situated in India,” said the Court.

The Indian Income-Tax Act has a twin basis for taxation; one is based on resident or domicile and the second is based on source of income. Non-residents are taxed only on income which has its source in India.

The income or capital gains made by HTIL in the deal are deemed to have accrued or arisen in India, said the court agreeing with the respondent (Income-Tax department).

It is inconceivable as to how HTIL can transfer its controlling interest in HEL without extinguishing its rights in the shares of the Indian group and without which a transferee cannot acquire a controlling interest, said the Court. It involves not only extinguishingof HTIL’s shares in HEL but also relinquishment of their assets.

[Honest 836]

Vodafone case: ‘No definitive findings on taxability of deal’

Business Line l 17 Dec l New Delhi

The court’s decision is unlikely to be considered a legal precedent that would apply to other similar deals of the past or the future

The observations of the Bombay High Court in the Vodafone tax case appear to be only prima facie; the court has not made any definitive findings on the taxability of the deal, say most of the international tax advisors’ assessments of the case.

As it currently stands, the court’s decision is unlikely to be considered a legal precedent that would apply to other similar deals of the past or the future; each would be considered on its own merit, observes one of the international law firms in its private communication to clients.

Vodafone had filed a writ petition at the court challenging the Revenue department’s show-cause notice (SCN) to the company asking why it should not be considered an “assessee in default” for not paying withholding tax (TDS) upon its acquisition of Hutchison Essar (Now Vodafone Essar).

Vodafone contended that its Netherlands arm had acquired shares in a Cayman Islands company (which in turn held shares in Vodafone Essar) from Hong Kong-based Hutchison Telecom: and that all the companies being overseas ones, revenue had no jurisdiction in the matter.

The court dismissed Vodafone’s petition. (The other petition filed by Vodafone Essar Ltd challenging revenue department’s SCN seeking to treat it as an agent of the foreign company is still pending in court.)

Issues still open

One law firm observed that the court, “unfortunately”, had not given its considered view of the jurisdiction of the tax authorities to issue the SCN to Vodafone. Nor had the court given its considered view on either the applicability of withholding tax to transactions outside India generally, or to this transaction in particular.

In view of this, all issues are still open for the tax authority to make a decision based on the facts of this case, and of similar cases, say legal experts.

The court’s decision ought not to squarely apply to all overseas mergers and acquisitions. A different set of facts may result in the possibility of a different view being taken, said an analysis of the case by another international law firm.

The court’s decision in a significant move establishes that acquisition of shares in an overseas company where the underlying assets (with a bundle of rights) are Indian creates a nexus for the transaction in India.

Doctrine of Effects

The American principle of Doctrine of Effects was referred to by the court. According to this doctrine, US internal competition laws are applicable to firms outside the country’s territory when their transactions produce an “effect” in the domestic territory.

Vodafone ‘s argument that its international company had merely acquired a Cayman Islands company which in turn held shares in the Indian company was not accepted by the court which said it found this argument too simplistic. It held that Vodafone’s basic objective appeared to be acquisition of a business interest in India.

What also went in favour of the Revenue Department was its argument that Vodafone’s transaction could not have been a mere acquisition of shares overseas as it was conditional upon approval of Indian regulatory authorities like the Foreign Investment Promotion Board.

The Revenue Department also cited statements made by the Chief Executive Officer of Vodafone, the company’s annual reports and the interest acquired by Vodafone in joint venture with Essar, in the telecom licenses issued by the Department of Telecommunications.

In view of all this, companies involved in such M&A activities will have to lay some emphasis on “perception management” said a legal expert.

Document

One of the issues that drew adverse conclusions from the court for Vodafone is that the company refused to produce the documents of its deal with Hutch before both the court and the Revenue Department. To determine taxability of the deal, these voluminous documents would have to be examined, said the court.

The revenue authorities’ move is unprecedented which is why Vodafone had not anticipated such a development, said legal experts. “It does set a new trend in Indian tax authorities’ view on cross-border M&A taxation,” said one of them.

To play it safe, overseas companies in cross-border M&A deals are likely to file with the Authority for Advance Rulings before finalising transactions. This authority will determine whether and by how much a transaction made by non-resident entities is taxable. An alternative way would be to route the transaction through territories such as Mauritius (and not Cayman Islands) that afford treaty protection, said legal experts.

[Honest 836]

Bombay High Court defers Vodafone tax hearing to February 8

MUMBAI: The Bombay High Court on Tuesday deferred to February 8, 2011, a hearing of Vodafone Plc's petition against a move by Indian tax office to treat it as an agent of the seller in its 2007 acquisition of Hutchison Whampoa's mobile business in India, a spokesman for Vodafone in India said.

Vodafone had filed a writ with the court on October 15, saying the tax office's move to treat the company as an agent of the seller was an "unusual move".

Courtesy : Economic Times

[Honest 836]

SC permits Vodafone bank wire transfer, next hearing on Jul 19

NEW DELHI: The Supreme Court on Friday allowed the request of British telecom giant Vodafone to deposit Rs 2,500 crore, as directed by it earlier, through banking wire transfer instead of bank draft.

The apex court also postponed the date of hearing to July 19, 2011, from the previously scheduled hearing on February 5.

Wire transfer or credit transfer is a method of electronic funds transfer from one person or institution (entity) to another.

A bench headed by the Chief Justice S H Kapadia allowed the Vodafone plea after the company counsel and senior advocate Harish Salve submitted that the money would come through international transactions.

"We need to transfer this amount (Rs 2,500 crore) directly from bank to the Supreme Court registry. It would save us a lot of money. If we get a bank draft it would be price over for us," Salve said.

Accepting it, the court said that the Vodafone will deposit Rs 2,500 crore and a bank guarantee, issued by any nationalised bank, within 3 and 8 weeks, respectively.

The bench also made it clear that the time period would start from November 15 when it had directed the company to deposit the sum.

Courtesy : The Economic Times

[Honest 836]

Faced with 500 mn pound license bill, Vodafone might take till 2020 to make Indian business turnaround

NEW YORK/NEW DELHI: British mobile operator Vodafone's foray into India has been a disaster, so much so that insiders and experts have gone on record to say that it could take the firm until 2020 to make an economic profit.

According to a Wall Street Journal (WSJ) report, in 2007, Vodafone paid 5.5 billion pounds to acquire 67 percent of Hutchison Essar. In 2010, it was forced into a 2.3 billion pound write-down after regulatory changes flooded the market with an unprecedented level of competition and sparked a price war. Now, it faces a disputed tax bill and possible retrospective charges on licenses, which could amount to a monumental 500 million pounds.

Vodafone entered India with high expectations, paying 16 times earnings before interest, taxes, depreciation and amortization for its majority stake. Including the cost of 3G licences, it has invested 7.2 billion pounds in the country to date.

It is committed itself to a further 3.1 billion pounds for the final 33 percent of the Indian business if Essar Group decides to sell its stake before May.

With the bill rising. India is chasing Vodafone for 1.6 billion pounds in tax charges which the mobile operator is contesting.

If it decides to impose additional charges for 2008 licenses, the market puts Vodafone's likely bill at 500 million pounds.

Vodafone insists it is committed to India, but the best it can promise now is that it will cover its cost of capital sometime before 2020--and that distant target assumes double-digit revenue growth as mobile penetration and data use rises, market consolidation, and capital expenditure falling to midteens as a percentage of sales.

The Indian unit delivered 48 percent revenue growth in 2009 and still booked an operating loss.

Capital expenditure is currently almost 30 percent of sales, with a scheduled 3G rollout next year maintaining pressure on investment. Regulation remains highly uncertain and market consolidation some way off.

Courtesy : The Economic Times

Now I got to know why they are looting us right from their entry into the Indian Cellular Market.

Highest Tariffs for Voice Calls and Highest Tariffs for Data Usage in the market. They are the costliest.

Lagta hai Tax ka paisa humse he wasool karna hai poora ka poora.

[Honest 836]

I-T dept expects to collect Rs 2500-cr in Vodafone case

MUMBAI: Mumbai Income Tax authorities expect to collect Rs 2,500 crore on accounts of the ongoing Vodafone case .

The collection would help the department achieve its tax collection target for this fiscal, a department press release said here today.

Mumbai zone has been given a target of over Rs 1,50,000 crore for FY 11.

"The department expects to be able to collect Rs 2500 crore in Vodafone case. The collection would help the department achieve is target of Rs 1,50,480 crore for this fiscal," the release said.

British Telecom giant Vodafone, which is contesting the Rs 11,000 tax demand from the income tax department, had been directed by the Supreme Court to deposit Rs 2,500 crore along with a bank guarantee of Rs 8,500 crore before it.

The apex court would start its final hearing in this matter from February 5, 2011.

The department also said that the advance tax collection in Mumbai was growing at 18 per cent.

Courtesy : The Economic Times

[Honest 836]

SC to waive Rs 25 crore fee on Vodafone's deposit

4 Jan l The Economic Times l New Delhi

The Supreme Court said it would waive the 1 per cent court fee on the Income Tax Department , on the Rs 2,500 crore deposited by the Vodafone International Holdings , if the government gives an undertaking that it would not make claim of "unjust enrichments".

A bench comprising Chief Justice S H Kapadia and Justices K S Radhakrishnan and Swatanter Kumar expressed willingness to waive off the fee, if the government gives an undertaking before it that it would not make "unjust enrichments" if they lose their case against Vodafone.

"If you make statement that we will not make unjust enrichments claims if you lose (then we would)," the bench said to the Attorney General Goolam E Vahanvati, representing the government.

The "doctrine of unjust enrichment" has been propounded as an equitable concept created to remedy injustices that occur where one person makes a substantial contribution to the property of another person without compensation.

Vahanvati said the stake in this matter was big and he would make statement on Monday, after consulting the government.

He further submitted that 1 per cent court fee must be waived off, otherwise in the event of losing the case, the government will pay back Rs 2,475 Crore only to Vodafone.

In December, the government had moved an application requesting the Supreme Court to waive the fee for letting it withdraw Rs 2,500 crore, deposited by Vodafone.

Instead, it had requested the court to direct Vodafone to submit Rs 25 crore extra, so that the government gets the full amount of Rs 2,500 crore.

Vodafone had deposited the sum as court fee for the adjudication of its appeal against the government's demand of over Rs 11,000 crore in taxes for its deal to buy Hong Kong based Hutchison Telecom, which had substantial cellular assets in India through a JV with the Essar group.

In 2007, Vodafone, through its group firm Vodafone International Holdings, bought Hutchison Telecommunications India's 67 per cent stake in Hutchison Essar for about USD 11 billion (Rs 55,000 crore).

The tax authorities claim that the deal attracts a tax of over Rs 11,000 crore, even though the deal was done by two MNCs outside the country.

On November 15, the Supreme Court had directed Vodafone, which is contesting the tax demand to deposit Rs 2,500 crore, along with a bank guarantee of Rs 8,500 crore, before it within 8 weeks for adjudication of its suit.

The apex court had also stipulated that the government can withdraw Rs 2,500 crore on an undertaking by the Directorate General of International Tax (DGIT) that if the verdict goes in favour of Vodafone, then it will refund Rs 2,500 crore along with the interest.

As the government approached the apex court to withdraw the funds deposited by Vodafone, it was asked to deposit one per cent of Rs 2,500 crore, totalling Rs 25 crore, as commission under a set of rules.

[Honest 836]

Vodafone made no capital gains: British envoy

14 January l The Economic Times l New Delhi

British High Commissioner to India Richard Stagg today said telecom operator Vodafone should not be made pay the proposed Rs 11,000 crore tax from its deal with Hutchinson Essar as it had not made any capital gains ".

"We believe that Vodafone have not made capital gain, which would attract the proposed tax. But these issues are lying in the Indian Supreme Court, we respect the court of land ... but we have an opinion," Stagg told reporters here.

In 2007, Vodafone, through its group firm Vodafone International Holdings, had bought Hutchison India's 67 per cent stake in Hutchison Essar joint venture for about USD 11 billion (Rs 55,000 crore).

The tax authorities claim that the deal attracts a tax of over Rs 11,000 crore, even though the deal was done by two MNCs outside the country.

The IT department fixed tax liability of Rs 11,217.95 crore on Vodafone International Holdings BV, treating it as an assessee in default for its failure to deduct tax at source, as required, before making a payment of USD 11,076 million (about Rs 55,000 crore) to HTIL. Following the stake transfer in 2007, Hutchison Essar was renamed Vodafone Essar.

In November last year, the Supreme Court had directed Vodafone, which is contesting the tax demand to deposit Rs 2,500 crore, along with a bank guarantee of Rs 8,500 crore, before it within eight weeks for adjudication of its suit.

[Honest 836]

Vodafone tax row will be settled amicably: Britain

19 January l The Economic Times l New Delhi

The British government is hopeful that the three-year old dispute of Vodafone's joint venture in India involving a tax claim of over Rs.11,000 crore ($2.5 billion) will be settled amicably, a British official said Wednesday.

'Vodafone is one of the important companies in India. Its joint venture is rapidly growing and like other foreign investors they need to have stability in tax regime,' said Vince Cable, Britain's secretary of state for business, innovation and skills.

Talking to reporters here after the annual meeting of the India-UK Joint Economic and Trade Committee (JETCO), Cable said the British government was expecting a good outcome of the dispute.

'We have discussed this in a very amicable way and look forward to a good outcome,' Cable said without elaborating as the case was sub judice.

India's income-tax department has raised a demand of over Rs.11,000 crore on Vodafone International Holdings , a unit of the world's largest telecom operator Vodafone Group Plc , on account of its $11-billion deal to acquire Indian telecom firm Hutchison Essar in 2007.

Commerce and Industry Minister Anand Sharma said India would continue to liberalise policies to attract more foreign investment.

'Indian foreign direct investment (FDI) policy regime is robust, stable and irreversable. That is something which is very reassuring and comforting for our partners,' Sharma told reporters after co-chairing the JETCO meet here.

He said India would emerge as the second most favoured FDI destinations in the world after China in the coming years.

Sharma said several British companies are likely to increase their investments in India.

'Two-way investments are healthy with $18 billion UK investment in India and much more are in the pipeline. Similarly $20 billion of Indian investments have already been made in British economy,' he said.

On India-Britain bilateral trade, Sharma said it had crossed $10 billion in 2010.

'According to the initial figures that we have, bilateral trade between India and UK has once again reached $10 billion,' trade minister added.

[Karthik R 246]

In related news..

Vodafone: Object To Essar Group Merging Essar Telecommunications Into India Securities

Vodafone Group PLC (VOD.LN) Tuesday said its unit - Vodafone International Holdings B.V - had expressed concerns over a potential merger between an Indian-listed company, majority owned by the Indian billionaire family of the Ruias, with the family's privately held company, which owns an indirect stake in the British telecommunication firm's Indian venture.

"Vodafone has written to both the Bombay Stock Exchange and the Securities and Exchange Board of India [the Indian market regulator] to express its concerns regarding the reverse listing of ETHPL [Essar Telecommunications Holdings Pvt. Ltd.] into ISL [india Securities Ltd. (500204.BY)]," the firm said in a note to the press.

Essar Telecommunications Holdings Pvt. Ltd. owns an indirect 11% stake in the Indian telecommunications company Vodafone Essar Ltd., in which Vodafone bought a 67% stake for $11.2 billion in 2007 from Hutchison Whampoa Ltd.

Vodafone said it was concerned that after the merger, the value of India Securities could be misinterpreted as a fair market value of Vodafone Essar.

Vodafone’s objection motivated, snaps Essar group

The battle between UK telecom major Vodafone Group and the Essar group — joint venture partners in Vodafone Essar — is intensifying. The Essar group on Friday hit back hard against Vodafone saying the latter’s objections to the merger of Essar Telecommunications Holdings (ETHPL) and India Securities (ISL) are ‘motivated’ and is an attempt to ‘force’ Essar out of Vodafone-Essar, the second largest Indian teleco by revenue. Essar said that this concern is heightened by the fact that the management of the company, in the last three years, is entirely under Vodafone’s control.

“Vodafone’s objections to the merger are motivated and factually incorrect. It (Vodafone) is attempting to force Essar out of the company and own 100 per cent of the Vodafone Essar at an artificially depressed value. The court process is being sought to be abused through the attempt to intervene and file objections,” said Essar Group in a statement. On Thursday, Vodafone had asked Securities and Exchange Board of India (SEBI) to probe the sudden price movement in shares of Essar firm India Securities and whether Essar has violated the insider trading rules.