In what is been considered as a
major blow to Vodafone, the
Supreme Court has directed it to respond to the show cause
notice of the Indian IT department slapping about $1.7 bn as
capital gains tax. The issue can be traced back to 2007, when
Hutchison Telecommunication International (HTIL), a Cayman
Islands-based company belonging to the Hutch Group of Hong Kong sold its
stake in CGP Investments Holdings (CGPI) another Cayman
Islands-based firm, to Vodafone BV, a Netherlands-based
company belonging to the Vodafone Group of UK. CGPI indirectly holds 67%
of shares of Hutchison Essar Limited (HEL) in India through a chain
of subsidiary companies incorporated in Mauritius and India. HEL
has been a major market player in the flourishing telecom industry
in India. As a result of this transaction, Vodafone BV
acquired controlling interest in HEL, whose name has been
subsequently changed to Vodafone Essar Limited (VEL). The Supreme
Court's directive to the world's biggest mobile phone company clears
the air regarding the tax liability of foreign companies with
operations in India. It sends out a signal that the days of clever structuring
of deals are over and tax authorities in India cannot be hoodwinked.
The issue can be traced back to September 2007, when the
IT department issued a show cause notice to Vodafone questioning
the company "why it cannot be treated as an assessee in
default because HTIL, which had made profits on the disposal of the stake in
India was no longer in the country and that Vodafone International was
its agent here."
For Vodafone, the subject of paying income tax in India
remains more of an issue of jurisdiction than taxability. Vodafone argues
that taxing the deal is outside the jurisdiction of the finance
ministry as both the companies are not India-based. But for the IT
and revenue departments the Vodafone case represents the taxability
of transfer of share capital of Indian entity and, hence, it could
have attracted a capital gains tax. The case exposes Vodafone to
further judicial investigation by tax authorities in India.
Vodafone International – the company's Netherlands-based subsidiary
that acquired Cayman Islands-based HTIL's 67% stake in
Hutchisson Essar for $11.2 bn. Vodafone also has to prove that it need not
submit to the IT department the confidential documents signed
with HTIL at the time of the transfer of shares. If Vodafone fails to do so,
in addition to the $1.7 bn it will have to pay a penalty of an equal sum
and a tax on both sums at 18% per annum. This will be a further
drag on the performance of Vodafone, which has announced recently
that its first-half profit for the 2008-09 has nosedived by 35%, after
its recent spate of acquisitions and stake hikes in existing
operations. Against this backdrop, India remains among the most
promising markets for Vodafone to make up for the losses it is experiencing
in developed markets. |
