Source: https://www.bna.com/reconciling-vodafoneindia-tax-n17179875161/
Timestamp: 2019-04-18 10:59:41+00:00

Document:
The Vodafone case, decided by the Supreme Court in January 2012, has been the defining decision of recent years, as far as Indian tax law is concerned. The following article examines the case and its influence on Indian tax policy.
Sometime in 2005, Vodafone eyed entering the Indian telecom market.3 This, it successfully did by acquiring the interest of the Hutchison Whampoa Group (“the Hutch group”) in the Indian joint venture of Hutchison Essar Ltd. (“HEL”). The acquisition was, however, made not through a direct slump purchase of business or by acquiring the shares held by the Hutch group in HEL; but by Vodafone acquiring the sole share of a Cayman Islands based company called CGP Investments (Holdings) Ltd. (“CGP”), which share was held by a step-down subsidiary of the Hutch group.
The transaction of sale and purchase of this one share of CGP took place between Cayman Islands-based Hutchison Telecommunications International Ltd. (“HTIL”)4 -- a group company of the Hutch group -- as the seller and Netherlands-based Vodafone International Holdings bv (“VIH”) -- a group company of the Vodafone group -- as the purchaser. The transaction was completed by execution of a Share Purchase Agreement dated 02/11/2007 between HTIL and VIH.
Vodafone's experience with the tax administration in India has since been far from pleasant, to say the least!
There appears to be some lack of clarity in the media and other reports regarding the (chronology of) events leading to the Indian Supreme Court (“the SC”) rendering its much publicised decision in January 2012, holding Vodafone as not liable to withhold tax on the aforesaid transaction. Similarly, there is ambiguity regarding the events subsequent thereto. The latest that is available is that the Government of India and Vodafone are exploring the possibility of amicably resolving their ever-continuing disagreements about Vodafone's tax liability, by way of “conciliation”.
The purpose of this Paper is to recount the relevant events and controversies surrounding the Vodafone-Hutch deal, a quick recap of the key principles laid down by the SC, events leading to the proposal for conciliation and some legal and practical issues which may possibly arise with regard to the conciliation methodology being explored at the moment.
By the end of 2006, the Hutch group, through a maze of subsidiaries, controlled 67 percent interest in HEL; the remaining 33 percent being held by the Essar group.
In December 2006, Vodafone, through Vodafone Group Plc, made a non-binding open offer to the Hutch group for USD 11.055 billion, being the enterprise value of Hutch's 67 percent interest in HEL. After an initial revision, the offer was again revised to USD 11.076 billion, which was accepted and ultimately resulted in the execution of the Share Purchase Agreement dated 02/11/2007, under the terms of which HTIL agreed to sell the single share of CGP held by one of its BVI subsidiaries to VIH.
The SPA was acted upon by the parties and the single share of CGP was sold by the Hutch group to VIH and the consideration in lieu thereof was paid by VIH to HTIL, without VIH withholding tax in relation thereto. Before acting upon the SPA, the parties also sought necessary approvals from the Foreign Investment Promotion Board (“FIPB”) which, after enquiries and investigations spanning over almost three months, granted the approval on 05/07/2007.
This transaction completed pursuant to SPA dated 02/11/2007 became the subject matter of the dispute between Vodafone and the Indian tax authorities.
The view of the Indian tax authorities was that the aforesaid transaction of sale of the share of CGP was taxable in India inasmuch as it resulted, according to the Indian Revenue, in the transfer of Hutch's interest in HEL to Vodafone and that consequently VIH, being the purchaser, was required to withhold tax on capital gains arising to Hutch.
On this reasoning, the Indian tax authorities issued a notice on 09/19/2007 under sections 201(1) and 201(1A) of the Indian Income-tax Act, 1961, (“ITA”), seeking an explanation from VIH for failing to withhold tax on the above transaction.
By an order passed on 12/03/2008,9 the Bombay High Court declined to exercise its writ jurisdiction at the preliminary stage of issue of the show cause notice. Vodafone's appeal to the SC against the order passed by the Bombay High Court was also dismissed10 and the SC instead directed the assessment officer to determine and adjudicate VIH's objections to the jurisdiction of the Indian tax authorities. However, considering the seriousness of the issue as well as the quantum of tax involved, the SC directed the High Court to entertain the writ petition in the event that the assessment officer were to uphold his jurisdiction to tax the transaction in question.
(c) directed VIH to pay the amount representing the capital gains tax on the transaction and interest thereon.
Separately, the tax authorities also passed a penalty order against VIH for failing to withhold tax.
Against the order dated 05/31/2010, VIH filed another writ petition, which was dismissed by the Bombay High Court on merits on 09/08/2010;11 the High Court thereby upholding the jurisdiction of the Indian tax authorities to tax the transaction in question.
This order of the High Court was challenged in an appeal before the SC, which culminated in passing of the elaborate and path breaking judgment12 by a three-judge bench of the SC on 01/20/2012. In its 120-page judgment, the SC laid down and reiterated several key principles concerning the taxability of indirect transfer(s) as well as on other legal propositions.
(g) the situs of the shares is where the company is incorporated and where its shares can be transferred and not where the “underlying assets are situated”.
On the basis of the above reasoning, the SC held that the Indian income tax authorities had no jurisdiction to tax the transaction of sale of the CGP share by HTIL to VIH. The SC also directed the Revenue Department to refund along with interest @ 4 percent per annum the sum of INR 2500 crores (approx. USD 560 million) which had been deposited by VIH in terms of an interim order passed by the SC.
Rather than following the directions of the SC and refunding the tax collected, the Government, in an unsuccessful bid, filed a petition on 02/17/2013 requesting the SC to review its judgment. The review petition was however dismissed by the SC on 03/20/2013.
In a similar counter-intuitive move, the Ministry of Finance mooted proposals to: (a) retrospectively amend the relevant ITA provisions so as to make indirect transfer of assets resulting from the sale of shares of non-resident companies taxable in India; and, (b) validate the proceedings, tax levied and collected from Vodafone, in the Finance Bill, 2012, presented to the Parliament on 03/16/2012.
Interestingly, the SC had given the Government a period of two months from the date of its judgment (i.e., 01/20/2012) to refund the tax already collected. The Budget was tabled before the date the two-month period was to elapse.
The unwelcoming mood surfacing from various corners notwithstanding, the Finance Act, 2012, was passed by both the Houses of the Indian Parliament and signed by the President of India on 05/28/2012. With the enactment of the Finance Act, 2012 the aforementioned amendments became part of the statute book.
However, in order to ward off any doubts that the retrospective amendments brought about by the Finance Act 2012 may result in “reassessment” of concluded transactions, the CBDT issued an administrative Clarification,15 clarifying that no reassessment notices would be issued in respect of taxpayers and transactions where final scrutiny assessment orders had been passed on or before 04/01/2012 and that the amended law would not be applicable to such assessees.
The Attorney General for India has however opined that the enforcement of demand of tax, interest and penalty would be permissible in view of section 119 of the Finance Act 2012.
One of the other provisions to be enacted in the Finance Act 2012 was the insertion of general anti-avoidance rules in ITA. This proposal was met with severe criticism and opposition from the industry. In view of the representations received by the Indian Prime Minister from different stakeholders, an Expert Committee (“EC”), headed by Dr. Parthasarathi Shome, was constituted on 07/17/2012, to examine the feasibility of implementing GAAR in India.
The enactment of the Finance Act, 2012, was shortly followed by a change in incumbency of the Finance Ministry. On 07/22/2012, the then Finance Minister, Mr. Pranab Mukherjee, swore in as the President of India. The Finance Ministry was thereafter assigned to Mr. P. Chidambaram on 07/31/2012, who continues to be Finance Minister till date.
(g) in cases of conflict between retrospective amendments and the provisions of a tax treaty entered into by India with another country, the latter should be given precedence.
Earlier, when the Finance Ministry had tabled the Finance Bill, 2012 seeking to overrule the SC judgment and relegate Vodafone to a “paper-decree-holder”, VIH took recourse to the Indo-Netherlands Bilateral Investment Promotion and Protection Treaty (“the Treaty”)18 and served the Government of India with the Notice of Dispute on 04/17/2012.19 In the Notice, VIH averred violation of the legal protection conferred and guaranteed to VIH, being an “investor” under Article 1(d) of the Treaty. In particular, VIH pointed out that under the Treaty, India was obliged to accord fair and equal treatment, provide protection and security, fulfill the legitimate expectations of the investors and not take steps to indirectly expropriate the investment.
Under the Treaty, like many other BITs, service of Notice of Dispute with a view to amicably settle the dispute(s) through negotiations is a condition precedent to resorting to conciliation under Article 9(2) of the Treaty. Only in the event that the parties to the dispute do not, within one month, agree to conciliation or where the conciliation proceedings are unsuccessfully terminated, “the dispute may be referred to arbitration”.
Despite the recommendations of the Shome Committee and the assurances signaled by the new Finance Minister that the tax authorities would take no “rash action”22 against VIH, sometime in the first quarter of 2013, VIH was issued reminder notices for payment of demand.23 In response to these notices, VIH proposed a non-binding conciliation of the tax dispute.
This proposal was however rejected by the then Law Minister on 04/05/2013, on the ground of absence of requisite authority under the Indian laws to do so.24 The Attorney General endorsed this view.
On 06/04/2013, the Cabinet Committee on Economic Affairs approved a proposal for a non-binding conciliation between the Government of India and VIH for resolution of their long pending dispute. The Cabinet however clarified that the proposal for conciliation was to be administered under the Indian conciliation law. The outcome of this non-binding conciliation will be, it is proposed, taken back and presented before the Parliament for approval by way of an amendment. Cabinet's proposal has been followed by the Department of Revenue formally writing to VIH on 06/15/2013.
VIH however continues to weigh its options, including thinking about and insisting on the conciliation process to be administered under the Treaty, which provides for UNCITRAL Rules.
1. Save as otherwise provided by any law for the time being in force and unless the parties have otherwise agreed, this Part shall apply to conciliation of disputes arising out of legal relationship, whether contractual or not and to all proceedings relating thereto.
It is in this context that the Indian courts have read the requirement of “arbitrability” as a precondition to reference of any dispute to arbitration.
The law relating to “arbitrability” in India has been succinctly explained by the SC in the case of Booz Allen & Hamilton Inc v. SBI Home Finance Limited26,where the SC held that “arbitral tribunals are private forums” and that “[a]djudication of certain categories of proceedings [is] reserved by the legislature exclusively for public forums as a matter of policy.” As an “example of non-arbitrable disputes”27, the SC referred to those disputes for the resolution of which “specified courts are conferred jurisdiction”28 The SC further held that rights in rem cannot be the subject matter of determination by arbitration.
Similarly, in Gujarat UrjaVikas Nigam Ltd v. Essar Power Ltd,29 it was held that the statutory mechanism provided under the law cannot be allowed to be bypassed by the private contract between the parties. Further, the Delhi High Court in Union of India v. Reliance Industries Ltd30 observed that “the question of arbitrability of the claim which is a larger question affecting public policy of state should be determined by applying laws of India”.
Inasmuch as the income tax law creates “public” rights and obligations which are in the nature of rights in rem, for the resolution of disputes pertaining to which specified courts have been set up under the ITA, which cannot be permitted to be bypassed on account of the prescription contained in the Constitution Article 265,31 a tax dispute would, under the A&C Act in its present form, be non-arbitrable. In fact, the question arose more directly before the Himachal Pradesh High Court in the old case of Yash Pal Garg v. Chief Conservator of Forests,32 where the Court held that “a question of levy of tax […] cannot be a matter which may be decided by the arbitrator.” In the case of Titagarh Paper Mills Ltd v. Orissa SEB,33 the SC declined the claimant's request for reference to arbitration in respect of a dispute relating to surcharge leviable under Electricity Supply Act 1948.
For the foregoing reasons, there remain serious doubts on whether the tax dispute between Vodafone and the Government of India can be the subject matter of conciliation.
(e) whether, in the case of a failed conciliation, VIH would be entitled to still challenge the constitutional validity of ITA section 119, inasmuch as attempting conciliation once may be viewed as an implied acceptance of the legality of the provision validating the tax demand against VIH.
The finality in the resolution of Vodafone's almost-seven-year old tax dispute still appears to be far in the future. The parties are likely to take strong positions and the conciliators will have to face many problems to reach a settlement agreeable to both VIH and the Government. Apparently, there is, at present, no time frame specified for the conciliators to complete the conciliation process. The time it may take to initiate the process, arrive at the settlement and formally execute the conciliation award is likely to be of the essence, particularly in the wake of the upcoming General Elections scheduled in first half of 2014, which, to add to Vodafone's woes, may see a change in the ruling party, which may repudiate this authorisation-less ad hoc mechanism for resolving an otherwise non-conciliable tax dispute.
Therefore, all the intriguing questions and issues highlighted above must secure clear and categorical ex anteanswers from the Government, lest Vodafone should be entangled in another never-ending litigation, albeit about implementation of the conciliation award, hinged on yet another retrospective legislation.
The advice to the Government would be: introspect, don't retrospect!
Amit M. Sachdeva is a Senior Associate at Vaish Associates, New Delhi. He can be contacted at mask.sachdeva@gmail.com.
1 Senior Associate, Vaish Associates, New Delhi. LLM, London School of Economics (LSE). The author acknowledges the assistance of Mr Gaurav Ishpuniani and Mr Madhur Anand of Vaish Associates.
2 https://www.vodafone.in/documents/pdfs/pressreleases/pr_1168.pdf, last accessed on 07/04/2013.
3 Vodafone first entered India on 10/28/2005, when it agreed to acquire 5.61 percent shareholding in Bharti Televentures Ltd and 4.39 percent shareholding in Bharti Enterprises Ltd.
4 HTIL had a wholly owned subsidiary called HTI (Cayman) Holdings Ltd in Cayman Islands, which had a wholly owned subsidiary Amber International Holdings bv in British Virgin Islands (BVI), which, in turn, had another wholly owned BVI subsidiary, HTI (BVI) Holdings Ltd, which finally held the sole share of CGP.
6 See, K.D. Sharma v. Steel Authority of India Ltd.: (2008) 12 SCC 481; Chandra Sankla v. Vikram Cement: (2008) 14 SCC 58; G. Veerappa Pillai, Proprietor, Sathi Vilas Bus Service v. Raman and Raman Ltd: 1952 SCR 583, Secretary, ONGC Ltd. v. VU Warrier: (2005) 5 SCC 245.
8 Rashid Ahmed v. Municipal Board, Kairana:  SCR 566; K.S. Rashid v. The Income-tax Investigation Commission  SCR 739; Union of India (UOI) v. T.R. Varma: AIR 1957 SC 882.
11  329 ITR 126 (Bom).
13 Far from the Vodafone controversy, the Ministry of Finance also drafted the Direct Taxes Code, the first version of which was made public in August 2009. The August 2009 version did not provide for taxation of indirect transfer of capital assets. The Direct Taxes Code was revised and the Direct Taxes Code Bill, 2010, was drafted after receiving comments on the earlier version, in which section 5(4)(g) provided for taxation of indirect transfer of capital asset as a result of transfer of shares. DTC Bill awaits enactment.
14 http://www.itatonline.org/articles_new/index.php/why-the-vodafone-retrospective-law-will-ruin-india-harish-salve/, last accessed on 07/03/2013.
18 India, as on05/06/2013, has a strong investment treaty network and has entered into BITs with 82 countries--almost all of India's trading partners. See, http://pib.nic.in/newsite/erelease.aspx?relid=95593, last accessed on07/01/2013.
19 http://www.vodafone.com/content/index/media/group_press_releases/2012/ bit.html, last accessed on07/02/2013.
20 Award dated11/30/2011 in the matter of UNCITRAL Arbitration between White Industries Australia Ltd v. The Republic of India, available at http://www.italaw.com/sites/default/files/case-documents/ita0906.pdf, last accessed on07/04/2013.
22 http://articles.economictimes.indiatimes.com/2012-09-03/news, last accessed on 03.07.2013.
23 http://www.indianexpress.com/news/revenue-department-sends-vodafone-tax-reminder/1055142, last accessed on 07/04/2013.
24 http://www.indianexpress.com/news/law-ministry-rejects-vodafones-proposal-to-reconcile-tax-dispute/1098428/, last accessed on 07/04/2013.
25 http://www.thehindu.com/business/Industry/vodafone-offer-law-ministry-makes-uturn/article4715088.ece, last accessed on 07/04/2013.
31 Under Article 265 of the Constitution, “no tax shall be levied or collected except by authority of law.” Thus, the quantum of tax which can be imposed has to be determined “by authority of law”. Similarly, any alteration thereof must be preceded by “authority of law”.

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