India Asserts Tax Claim Against Vodafone

by Mary Swire, Tax-News.com, Hong Kong

07 June 2010

The Indian tax authorities have reasserted their belief that they have jurisdiction to levy withholding tax on the USD11.1bn sale to Vodafone of a 67% stake in Hutchinson Essar in 2007.

The dispute arises out of the purchase of the majority shareholding in Hutchinson Essar, an Indian telecom company, by Vodafone International Holdings BV (VIH), a Dutch company, from a Cayman Islands subsidiary of Hutchison Telecommunications International Ltd (HTIL), Hong Kong. A Mauritian intermediate company was also interposed between the Cayman Islands company and the shares in Hutchinson Essar.

The Indian tax authorities have contended that the shares in the Cayman Islands company were merely the mode or the vehicle to transfer the assets situated in India, and that, therefore, the effective transaction between the VIH and HTIL was a transfer of interests, tangible and intangible, in an Indian company and not merely an acquisition of shares of a shell foreign company.

Vodafone received notices later in 2007 from the Indian tax authorities of a potential tax liability in connection with an alleged failure by VIH to deduct withholding tax from consideration paid to the HTIL in respect of HTIL’s capital gain on its disposal of its shares in Hutchinson Essar. Vodafone then filed writs seeking orders that the notices be quashed and that the tax authorities take no further steps under the notices.

Initial court hearings were held, with the effect that in January 2009 the writs were dismissed and the court referred the question of the tax authority’s jurisdiction to seek to pursue tax back to the tax authority for adjudication on the facts. VIH was granted permission to appeal that decision back to the High Court should it disagree with the tax authority’s findings.

In October 2009, VIH received a notice from the tax authority requiring it to show cause as to why it believes that the tax authority does not have competent jurisdiction to proceed against VIH for the default of non-deduction of withholding tax, and VIH provided its response in January this year.

The Income Tax Department’s reassertion of its jurisdiction over the share transfer will now mean that the matter will end up in court. VIH has stated that it accepts no liability for withholding tax, contends that the legal advice it has received supports its contention, and intends to defend its position vigorously

While no figure has yet been put on the tax which would be payable, it could obviously be substantial. Some reports have put the liability at USD2bn.

As a postscript, an analogy has been drawn in some quarters between the Indian tax authorities’ stance and the scrutiny now being placed in China on overseas indirect equity transfers in Chinese companies by non-Chinese tax residents. While this has not yet been cited by the Indian authorities, the Chinese Circular No. 698, issued in December 2009, specifically addressed various tax issues arising from such equity transfers. It was aimed at countering the avoidance of Chinese tax on gains by those means and, interestingly, made effective retrospectively.

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