Recent Indian Tax Case Law
Vodafone and Beyond
6th Asia / Africa IFA Conference
Mauritius
May 10, 2012
Girish Dave
Advocate, Director General of Income Tax (Retd.)
Mahesh Kumar
Senior Associate, Nishith Desai Associates
Nishith Desai Associates
Legal & Tax Couns eling W orldwide
Mumbai | Silicon Valley | Bangalore | Singapore | Mumbai-BKC | New Delhi
Tax Planning
Over a Century of Jurisprudence
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Tax Planning: Over a Century of Jurisprudence
•
Taxpayers require certainty to efficiently plan their economic behavior.
•
Cape Brandy Syndicate v. IRC, (1921) 1 KB 64 (pg 71), per Rowlatt, J:
“ In a taxing act one has to look merely at what is clearly said. There is no room for any intendment. Nothing
has to be read in, nothing has to be implied. One can only look fairly at the language used.”
•
IRC v. Fisher’s Executors [1926] AC 395 at 412 (HL)
"My Lords, the highest authorities have always recognised that the subject is entitled so to arrange his affairs
as not to attract taxes imposed by the Crown, so far as he can do so within the law, and that he may
legitimately claim the advantage of any expressed terms or of any omissions that he can
find in his favour in taxing Acts. In so doing, he neither comes under liability nor incurs blame.“
•
Duke of Westminster (1935) All ER 259 principle continues to prevail:
“Every man is entitled if he can to order his affairs so that the tax attaching under the
appropriate Acts is less than it otherwise would be….Given that a document or transaction is
genuine, the court cannot go behind it to some supposed underlying substance.”
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“Anyone
may arrange his affairs so that his taxes shall be as low as possible; he
is not bound to choose that pattern which best pays the treasury. There is not even a
patriotic duty to increase one’s taxes. Over and over again courts have said that there is
nothing sinister in so arranging one’s affairs to keep taxes as low as possible. Everybody does so,
rich or poor, and all do right, for nobody
owes any public duty to pay more than the
law demands: taxes are enforced exactions, not voluntary contributions.”
- Learned Hand, J
(Commissioner v. Newman, 159 F.2d 848 CA-2, 1947)
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“If one scans through the various judgments of the House of Lords in England, which we have
already done, one thing is clear that it
has been a cornerstone of law, that a tax payer
is enabled to arrange his affairs so as to reduce the liability of tax and the fact that
the motive for a transaction is to avoid tax does not invalidate it unless a particular enactment so
provides.”
(Vodafone International Holdings v. Union of India, (2012) 341 ITR 1, para 115 of Supreme Court’s
decision dated January 20, 2012)
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The Mauritius Route
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Union of India V. Azadi Bachao Andolan
[2003] 263 ITR 706
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Challenge to Circular 789 of 2000 and treaty shopping using SPVs based in Mauritius.
•
Circular 789 of 2000 provides that tax residency certificate issued by Mauritius Revenue Authority is sufficient
evidence for purpose of tax treaty entitlement.
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Delhi High Court struck down the Circular and held that treaty shopping is illegal.
•
On appeal, Supreme Court set aside Delhi High Court’s order and held that:
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Circular 789 of 2000 is valid.
−
In the absence of a limitation of benefits provisions, treaty shopping is legitimate tax planning.
Taxpayers have a right to plan their affairs within the four corners of law
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“There are many principles in fiscal economy which, though at first blush might appear to be evil, are
tolerated in a developing economy, in the interest of long term development. Deficit financing, for
example, is one; treaty shopping, in our view, is another. Despite the sound and fury of the
respondents over the so called abuse of treaty shopping, perhaps, it may have been intended at
the time when Indo-Mauritius DTAC was entered into. Whether it should continue, and, if so, for
how long, is a matter which is best left to the discretion of the executive as it is dependent upon
several economic and political considerations.”
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Mauritius Route Consistently Upheld
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E* Trade Mauritius v. DIT, (2010) 324 ITR 1
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Praxair Pacific v. DIT, (2010) 326 ITR 276
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D.B. Zwirn Mauritius v. DIT, (2011) 240 CTR (AAR) 6
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In Re : Ardex Investments Mauritius, (2012) 340 ITR 272
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Vodafone International Holdings v. Union of India, [2012]341ITR1
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Vodafone
(2012) 341 ITR 1 (Supreme Court)
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Netherlands
Cayman Islands
British Virgin
Islands
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Transaction in a nutshell
Hutchison
Telecommunications
International Limited, Cayman
Islands
Intermediate
BVI
Companies
SPA
Vodafone International
Holdings BV,
Netherlands
USD 11.1
Billion
Transfer of CGP
Shareholding
CGP Investments
(Holdings) Limited,
Cayman Islands
Intermediate
Mauritian / Indian
Companies
Vodafone Essar Limited, India
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Revenue’s Case
Consideration paid by Vodafone to Hutch is taxable in India because in substance it led to
the transfer of interests and business in India
Vodafone should have withheld tax on the transaction
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Revenue’s Arguments
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Sale of share of Cayman company was an artificial anti-avoidance scheme
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Cayman company interposed in the last minute
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Transaction led to the transfer of direct and indirect rights in Hutch Essar (India)
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Entire purpose of acquiring Cayman company was to assume control over Indian business
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Controlling interest and other rights are transferable property rights
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Transaction led to transfer (extinguishment) of Cayman seller’s property rights in India
•
Sale of Cayman company’s share was only a mode to transfer capital assets in India
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Court must use the Dissecting Approach
−
Identifying substance by dissecting individual elements / agreements of the transaction instead of
‘looking at’ the form of the transaction as a whole
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Revenue’s dissecting approach
1.
Right to direct / indirect equity interest in HEL
2.
Right to do telecom business in India
3.
Right to jointly own and avail of telecom
licenses
8.
Right over assigned loans and advances used
for business in India
Right of subscribing at par value in certain
Indian companies
4.
Right to use Hutch brand
5.
Right to appoint / remove directors on HEL’s
Board
9.
6.
Right to exercise control over HEL’s
management & affairs
10. Right to exercise call options with Indian
companies
7.
Right to take part in HEL’s investment,
management & financial decisions
11. Right to control premium
12. Right to non-compete against HTIL within
Indian territory
13. Right to consultancy support (Oracle license)
14. Goodwill, other intangible rights, etc.
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Supreme Court’s Verdict
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Revenue does not have jurisdiction to proceed against Vodafone
•
Offshore transaction was bonafide and not a sham
•
Revenue was not justified in disregarding the form of the transaction
•
Subject matter of the transaction was the transfer of shareholding in a foreign company
•
No transfer of rights and entitlements in India
•
There is no provision in law permitting the taxation of such a transfer
•
Revenue does not have territorial tax jurisdiction to tax such an offshore transaction
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Vodafone was not require to withhold an tax on the USD 11.1 billion paid to Hutch
•
Revenue to return INR 2,500 crores deposited by Vodafone along with 4% interest
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Respecting the form of the transaction
•
Revenue to ‘look at’ at the transaction documents in its proper context and ascertain true legal nature of
transaction
•
Look at the transaction holistically: Do not apply dissecting approach
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Difference between pre-ordained tax-avoidance transaction and investment to participate in India
•
Strategic investment by foreign residents to be viewed in a holistic manner:
•
−
Participation in investment
−
Duration of holding structure
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Period of business operation
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Generation of taxable revenues in India
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Continuity of business on exit
Corporate veil to be pierced only if the transaction is sham
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Dynamics of cross-border holding structures
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MNCs create elaborate horizontal and vertical holding structures for a number of strategic reasons
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Corporate governance
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Operational efficiency
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Ring fencing legal liabilities
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Hedging business risks
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Consolidation
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Leverage
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Mobility of investments
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Tax efficient structures to prevent double taxation
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Efficient exit route
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Maximizing value to shareholders
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Respecting the corporate veil
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Company and shareholders are distinct legal entities having separate corporate personalities (Rule in
Salomon v. Salomon [1897] AC 22)
•
•
Corporate veil should not be lifted just because:
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Parent company holds 100% of shareholding in subsidiary
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Subsidiary has received all its funds from its parent company
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Parent company exercises shareholder control or specific management rights over subsidiary
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Foreign holding company has no assets other than investment in India
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Parent company has played a role in the negotiation of contracts entered into by the subsidiary
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Subsidiary transfers all its profits to the parent company
Decisive criteria: Does the parent company exercise “such steering interference with the subsidiary’s
core activities that the subsidiary can no longer be regarded to perform those activities on the
authority of its own executive directors”
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Vodafone-Hutch structure is legitimate tax planning
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Supreme Court applied the ‘look at’ test while holding that the Vodafone-Hutch structure is not a sham
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Hutch structure was in place since 1994
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Hutch India has paid direct / indirect taxes of around INR 20,242 crore
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There has been continuity of telecom business by Vodafone post transaction
−
Downstream Hutch subsidiaries were not mere puppets. They only exercised persuasive power over
subsidiaries in the interest of smooth functioning of the group
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Exit rights (including options, right of first refusal, tag along rights) coupled with continuity of business
indicates commercial / business substance of a transaction
−
Rights identified by the Revenue neither flowed from the share purchase agreement nor were legally
transferable by the Cayman company
−
Sale of the Cayman company allowed Vodafone to acquire interests in other key operating companies
which would not have been possible if it directly acquired the shares of Hutch India from the Mauritian
holding companies
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Consideration paid to Hutch not taxable in India
•
Vodafone – Hutch transaction was a straightforward sale of shareholding of a foreign company
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USD 11.1 billion valuation was based on various economic realities / perceptions and the basis for such
valuation is irrelevant for tax purposes
•
Controlling interest is not a distinct, identifiable asset and cannot be separated from shareholding
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Other rights identified by the Revenue were not really transferred by the Cayman seller
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“Where a transaction involves transfer of shares lock, stock and barrel, such a transaction cannot be broken
up into separate individual components, assets or rights”
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Values provided to FIPB do not determine contractual intent. The intention was to sell the interest in the
Cayman company for a lump sum consideration
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The offshore transaction did not give rise to a transfer of a capital asset in India. The consideration received
by Hutch was not taxable since the income did not arise in India
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Mauritius route upheld
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The Supreme Court upholds its earlier decision in Azadi Bachao Andolan (2003) 263 ITR 706
•
Mauritius tax treaty does not have a ‘limitation of benefits clause’
“No presumption can be drawn that the Union of India or the Tax Department is unaware that the quantum of
both FDI and FII do not originate from Mauritius but from other global investors situate outside Mauritius.”
Para 95, Radhakrishnan, J
•
LOB and look through provisions cannot be read into a tax treaty
“In the absence of LOB Clause and the presence of Circular No. 789 of 2000 and TRC certificate, on the
residence and beneficial interest/ownership, tax department cannot at the time of sale/disinvestment/exit
from such FDI, deny benefits to such Mauritius companies of the Treaty by stating that FDI was only routed
through a Mauritius company” Para 97, Radhakrishnan, J
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TRC does not prevent enquiry into tax fraud, sham, round tripping, etc.
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Impact of Vodafone on
similar M&A cases
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AT&T , Aditya Birla Nuvo
2011 (113) Bom LR 2706
New Cingular Wireless
Services Inc. India
AT&T Mauritius
Financial
Institutions, India
32.91%
1.7%
Transfer of AT&T
Mauritius shares for
USD 150 million
Transfer of Idea shares
for USD 150 million
Birla Group,
India
Tata Industries,
India
33.7%
31.69%
Idea Cellular, India
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Sanofi
(2012) 340 ITR 353
Groupe Industrial Marcel
Dassault, France
Transfer of ShanH shares for INR 25 billion
Groupe Industrial Marcel
Dassault, France
Sanofi Pasteur
Holding, France
ShanH, France
80%
Shantha Biotechnics, India
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A Mauritus, In re
[2012] 20 Taxmann 52
US
Parent Co
Singapore
Parent Co
US Co
Singapore Co
Mauritius Co
25.06%
SHARE BUYBACK
48.87%
27.37%
Indian Co
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Thank You
Girish Dave
girishdav@gmail.com
Mahesh Kumar
mahesh@nishithdesai.com
Nishith Desai Associates
Legal & Tax Couns eling W orldwide
Mumbai | Silicon Valley | Bangalore | Singapore | Mumbai-BKC | New Delhi