Vodafone India Services Pvt. Ltd vs Union Of India, Ministry Of Finance and Anr. - The retrospective amendment

Vodafone India Services Pvt. Ltd vs Union Of India, Ministry Of Finance and Anr. -  The retrospective amendment

Author :- Varshita kushwaha, 4th Year B.COM LLB (TAXATION LAW) - A student of University of petroleum and energy studies 

FACTS- The Vodafone international holding wanted to enter the Indian telecom market but did not want to commence their business with the traditional means that is by starting up a new entity instead they bought CGP investments holding situated in Cayman Islands which was the subsidiary company of Hutchinson telecom international limited which was a Hong Kong based company the transaction took place for approximately 11.1 billion dollars.

CGP investment was also the parent company of Hutch Essar limited which was a major player in the field of Indian telecommunications CGP investment holds approximately 67% shares of HSR at that time which they had to transfer to Vodafone international offer CGP limited and their four was the parent company of the CGP investment limited in 2017 wanted to exit the Indian market meanwhile  the Vodafone international holdings wanted to enter the market does resulting the agreement between the two foreign companies with the consideration amount of 11.1 billion dollars against to the ownership of CGP investment which eventually lead to the holding of 67% shares of Hutch Essar which was possessed by the CGP investments.

The companies involved in the transaction were the foreign companies making them the non-resident of the country. So, it was believed that the tax authorities or Indian government would not charge capital gains tax from the

transaction: a tax that would otherwise be levied had the companies been resident or the transaction taking place within the territory of India. Regardless of the existing laws, the Indian government and Income tax department raised the possible amount of 11,217.8 crores via notice to Vodafone on the grounds of section 165, 201(A) and 201(1A) of the Income Tax Act. These grounds are basically related to deduction of TDS which was supposed to be deducted by the companies. These sections put Vodafone Essar under the category of an assesses of Vodafone International, and as an assesses in-default because of failure to pay tax. After dissenting with the notice sent by the Indian tax authorities Vodafone filed the special leave petition in the Bombay high court.

According to Vodafone international holding the residential status of the companies were not India but it was in Netherlands and Cayman Islands. The place of receipt which is the place of payment of the consideration for the agreement between the foreign companies arose was in Cayman Island. The place of accrual means the place where the liability of one company arose to pay the other company in the context of paying for the consideration which took place under the Ambit of the agreement between the two foreign companies.

The Bombay High Court dismissed the petition of Vodafone International and held that the Indian tax authorities had jurisdiction in the matter. The Bombay high court also highlighted that The CGP investment holding company was incorporated and only to avoid the payment of tax in India as the place where the CGP investment holding corporation was incorporated is Cayman Island. And it is a well-known fact that Cayman Islands is a tax haven for wealthy companies as well as individuals.

Hence, the Bombay high court ordered the Vodafone international holdings to pay 2500 crores to income tax department. It also suggested that if Vodafone has any reasonable reason to believe that there is no liability for them to pay taxes, they can proceed with those reasonings, if satisfised the penalty to pay tax will be deducted or exempted.

Judgement of Supreme Court- The Supreme court in their decision highlighted the fact that there is no mention of a term known as “Indirect transfer.” Hence making the offshore transaction bonafide in nature and was a part of structured FDI in India which falls outside the territorial tax jurisdiction of India as there was the transfer of share of CGP investment company. Indian tax authorities had no territorial tax jurisdiction to levy tax on this transaction. The supreme court highlights the fact that if there is any loophole in the legislature it must be corrected by the government as it is their duty but supreme court as a judicial authority can only interpret laws and have no powers to amend them. The Court also stated that this act of Vodafone International Holdings was very much a move based on tax planning, just as other companies follow this arrangement for legitimate tax planning reasons. The Court stated that the doctrine of piercing the corporate veil, which was also the one of the contentions of the revenue department, could only be applied when it stands proven that the transaction is a sham, unlike this transaction. The Supreme court set asides the decision of Bombay high court and directs The income tax department to return the amount of penalty of Rs. 2500 crores with the interest of 4% per annum within the period of 2 months.

Permanent Court of Arbitration 

The Vodafone International Holdings Limited BV moved to the permanent court of arbitration situated in The Hague, Netherlands, under Article 9 of the India-Netherlands Bilateral Investment Treaty. This Article allowed parties to move the permanent court of arbitration when disputes regarding investors of the contracting parties regarding an investment arose.

Under Article 4.1 of the treaty, Vodafone argued that the amendment for retrospective legislation violated the principles of equitable and fair treatment. It also argued that the government violated Article 4.1 by introducing legislation to deliberately opposed the country's supreme court's decision and thus creating an unstable and unpredictable business environment for the company in question. 

In 2014, Vodafone again started procedures against India, this time under the India-United Kingdom bilateral investment treaty. Even though the Indian government prevailed at getting a non-arbitrary order by the High Court of Delhi, it was subsequently excused on the ground that it was a maltreatment of interaction.

The Permanent Court of Arbitration awarded Vodafone International Holdings Limited BV, stating that the Indian government had broken Article 4.1 of the India-Netherlands Bilateral Investment Treaty (BIT). It also ordered the Indian government to pay Vodafone 5.5 million US dollars to cover its legal fees.

In the end, the Indian government faced multiple defeats, both in their home country as well as internationally, which led it to come up with another Finance Bill in 2021, so that retrospective taxation could be disposed of from the economy. This time, however, amendments were done only in two sections, namely, 9(1)(i) and 119. This amendment waived the tax levied on Vodafone International Holdings Limited BV. The government of India learnt their lesson the hard way but they there are still amendments which includes transfer of shares of Indian company, directly or indirectly, as a transaction between the two foreign companies or Indian companies which have their substantial interest in the concerned shares, and the liability to pay tax becomes inevitable. 

Analysis 

After looking at the facts and judgement of different courts such as Bombay High court supreme court of India as well as permanent court of arbitration. The basic question which came into our minds was whether the Vodafone international holding was trying to evade tax or not? 

The countries like Cayman Islands who are considered as the tax haven for super wealthy individuals which offer the great opportunity to keep their money in Off shore accounts for tax avoidance and other purposes. Tax havens lower or no taxes to allow outside to easily set business. There a shell company is created which is a legal entity. 

Maybe Hutchinson telecom international limited which was the parent company of the CGP investments made the subsidiary company in Cayman Islands to avoid taxes but the transaction between the Vodafone international holdings and CGP investments was completely bonafide and was made under a good faith. 

In other Words, for Hutchinson telecom international limited it would have been a source of base erosion and profit shifting. For Vodafone international holding it was a part of strategic tax planning. 

The government has reacted in such a proper manner by enacting the retrospective taxation which not only promotes uncertainty but also affects the foreign investment in a way that would hinder the flow retrospective taxation should only be introduced in the rarest of rare cases such as to protect the tax base.