Daily Tax Update - January 20, 2012: Vodafone Wins Widely Watched Tax Case In India

VODAFONE WINS WIDELY WATCHED TAX CASE IN INDIA: Today, India’s Supreme Court ruled that Vodafone Group PLC is not liable to pay taxes on its 2007 purchase of a majority stake in the Indian assets of Hutchison Essar Ltd. The decision is a huge victory for Vodafone, which has spent four years fighting for this outcome.

  • In September 2007, Indian tax authorities imposed more than $2 billion of capital gains tax on Vodafone for its $11 billion acquisition of a 67-percent stake in the Indian assets of Hong Kong’s Hutchison Whampoa Ltd.
  • The Indian assets were owned and sold to Vodafone by a non-Indian-organized affiliate of Hutchison Whampoa.
  • The Supreme Court, overturning a ruling by a lower court in Mumbai, agreed with Vodafone that the deal is not taxable, even though the main asset involved in the transaction was a majority stake in an Indian cellphone company.
  • The Supreme Court’s majority verdict included the following rulings:
    • The Indian tax authorities lack jurisdiction over offshore transactions between companies that are not residents in India;
    • No see-through provision is appropriate without specific GAAR (general anti-avoidance rule) legislation;
    • The tax department cannot ascribe direct or indirect transfer of ownership assets;
    • A rejection of the tax department’s extinguishment of property rights argument;
    • Acceptance of Vodafone’s intermediary location argument;
    • Acceptance of form over substance doctrine (advising tax authorities to focus on the corporate “form” of a merger deal);
    • A determination that Hutchison is not a “fly-by-night” operator, i.e. short-term investor;
    • A determination that a capital gains tax should not be imposed on this transaction;
    • A determination that this was a bona fide foreign direct investment transaction.
    • A determination that Section 195, which obligates the payer to deduct tax at source (TAS) from payments made to non-residents, does not apply to this case.
  • The Supreme Court also ordered India’s tax department to refund the 25 billion rupees ($500 million) that Vodafone had deposited, along with 4% interest.
  • Indian tax authorities can now file a "review petition"
    to receive more information from the court on some aspects of the case, but it is not clear whether they will choose to do so.
  • The rulings can be accessed here and here.
  • For additional information, contact Philip R. West - pwest@steptoe.com

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