Vodafone Essar Limited, formerly known as Hutchison Essar is a telecom service
provider in India that covers twenty three telecom circles in India and is based in Mumbai.
Vodafone holds sixty seven percentage stake in Vodafone Essar Limited and Essar holds the rest
thirty three percentage stake. It is the second largest mobile phone operator in terms of revenue
after Bharti Airtel, and third largest in terms of customers. It has around ten thousand employees
across India. It has a subscriber base of approximately one hundred and six million and
commands a market share of twenty four percent in India.
On February 11, 2007, Vodafone agreed to acquire the controlling interest of sixty seven
percentage held by Li Ka Shing Holdings in Hutch-Essar for US$11.1 billion. The company was
valued at USD 18.8 billion. The transaction closed on May 8, 2007. Despite the official name
being Vodafone Essar, its products are simply branded ‘Vodafone’. It offers both prepaid and
postpaid GSM cellular phone coverage throughout India.
Arguments of Vodafone:
Vodafone argued that the transaction took place between offshore entities owned by itself
and Hutchison and was outside India’s jurisdiction and moreover the deal was not taxable in
India as the funds were paid outside India for the purchase of shares in an offshore company.
Vodafone’s contention was that the provisions were not applicable as the primary
obligation to discharge the tax was with the payee i.e. HTIL. Moreover withholding tax
provisions cannot have extra-territorial application and is applied to companies of Indian
residence only.
Arguments of Tax Authority:
But the tax department seeks to show that since most of the assets were in India, the deal
was liable to Indian capital gains tax. Hutch had sold Vodafone valuable rights - including tag
along rights, management rights and the right to do business in India and that the offshore
transaction had resulted in Vodafone having operational control over the Indian asset, which is
the second largest telecom service provider in India.
The taxman’s argument was focused on proving that even though the Vodafone-Hutch
deal was offshore, it was taxable as the underlying asset was in India and so it pointed out that
the capital asset; that is the Hutch-Essar or now Vodafone-Essar joint venture is situated here and
was central to the valuation of the offshore shares. It also argues that under Indian law, the buyer
in a deal is required to withhold any capital gains tax liability and to pay it to the treasury.
Treatment of Capital Gains on extra territorial transaction: The Indian Parliament, under the provisions of the Constitution, has the competence to
enact a legislation having an extraterritorial application. But it is unsure whether the Income Tax
Act has such powers. According to Section 9 of the Income Tax Act, where a non-resident earns
any income by a transfer of capital asset in India (whether direct or indirect), the capital gains tax
would apply. But Section 9 does not state that the transfer of the capital asset can be direct or
indirect. It is only income which can be direct or indirect.
Pursuant to Section 195 of the Act, every person paying any sum, which is chargeable to
tax in India to a non-resident, must deduct income tax at source at the time of payment or credit.
This applies to both residents as well as non-residents.
provider in India that covers twenty three telecom circles in India and is based in Mumbai.
Vodafone holds sixty seven percentage stake in Vodafone Essar Limited and Essar holds the rest
thirty three percentage stake. It is the second largest mobile phone operator in terms of revenue
after Bharti Airtel, and third largest in terms of customers. It has around ten thousand employees
across India. It has a subscriber base of approximately one hundred and six million and
commands a market share of twenty four percent in India.
On February 11, 2007, Vodafone agreed to acquire the controlling interest of sixty seven
percentage held by Li Ka Shing Holdings in Hutch-Essar for US$11.1 billion. The company was
valued at USD 18.8 billion. The transaction closed on May 8, 2007. Despite the official name
being Vodafone Essar, its products are simply branded ‘Vodafone’. It offers both prepaid and
postpaid GSM cellular phone coverage throughout India.
Arguments of Vodafone:
Vodafone argued that the transaction took place between offshore entities owned by itself
and Hutchison and was outside India’s jurisdiction and moreover the deal was not taxable in
India as the funds were paid outside India for the purchase of shares in an offshore company.
Vodafone’s contention was that the provisions were not applicable as the primary
obligation to discharge the tax was with the payee i.e. HTIL. Moreover withholding tax
provisions cannot have extra-territorial application and is applied to companies of Indian
residence only.
Arguments of Tax Authority:
But the tax department seeks to show that since most of the assets were in India, the deal
was liable to Indian capital gains tax. Hutch had sold Vodafone valuable rights - including tag
along rights, management rights and the right to do business in India and that the offshore
transaction had resulted in Vodafone having operational control over the Indian asset, which is
the second largest telecom service provider in India.
The taxman’s argument was focused on proving that even though the Vodafone-Hutch
deal was offshore, it was taxable as the underlying asset was in India and so it pointed out that
the capital asset; that is the Hutch-Essar or now Vodafone-Essar joint venture is situated here and
was central to the valuation of the offshore shares. It also argues that under Indian law, the buyer
in a deal is required to withhold any capital gains tax liability and to pay it to the treasury.
Treatment of Capital Gains on extra territorial transaction: The Indian Parliament, under the provisions of the Constitution, has the competence to
enact a legislation having an extraterritorial application. But it is unsure whether the Income Tax
Act has such powers. According to Section 9 of the Income Tax Act, where a non-resident earns
any income by a transfer of capital asset in India (whether direct or indirect), the capital gains tax
would apply. But Section 9 does not state that the transfer of the capital asset can be direct or
indirect. It is only income which can be direct or indirect.
Pursuant to Section 195 of the Act, every person paying any sum, which is chargeable to
tax in India to a non-resident, must deduct income tax at source at the time of payment or credit.
This applies to both residents as well as non-residents.
