Vadafone Sc Judgement

Vadafone Case Source Indian Corporate law blog

Friday, January 20, 2012
Vodafone: Key Points

The Supreme Court’s judgment today in Vodafone is of enormous importance to a number of branches of Indian law. The majority judgment has been delivered by the Chief Justice and Swatanter Kumar J. A concurring judgment delivered by K.S. Radhakrishnan J. in some respects goes even further. A copy of the judgment is available on the Supreme Court’s website. A detailed analysis of the judgment will follow. This post reproduces key extracts from the two judgments with brief comments, on some of the issues before the Court.
1. Azadi Bachao Andolan and McDowell
Both judgments hold that Azadi Bachao Andolan is good law. The Chief Justice holds that there is no conflict between Azadi and McDowell because the observations of Reddy J. are confined to cases in which a colourable device is used. Radhakrishnan J. appears to have gone even further and has expressly said that the “ghost” of the Duke of Westminster has not been exorcised. We will analyse this in detail in the coming days.
CHIEF JUSTICE
[para 64] The words “this aspect” [ed: referring to the majority’s observation that they “on this aspect” agree with Reddy J.’s judgment] express the majority’s agreement with the judgment of Reddy, J. only in relation to tax evasion through the use of colourable devices and by resorting to dubious methods and subterfuges. Thus, it cannot be said that all tax planning is illegal/illegitimate/impermissible. Moreover, Reddy, J. himself says that he agrees with the majority. In the judgment of Reddy, J. there are repeated references to schemes and devices in contradistinction to “legitimate avoidance of tax liability” (paras 7-10, 17 & 18). In our view, although Chinnappa Reddy, J. makes a number of observations regarding the need to depart from the “Westminster” and tax avoidance – these are clearly only in the context of artificial and colourable devices. Reading McDowell, in the manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance, there is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal.
JUSTICE K.S RADHAKRISHNAN
[paras 110, 112] Justice Reddy has, the above quoted portion shows, entirely agreed with Justice Mishra and has stated that he is only supplementing what Justice Mishra has spoken on tax avoidance. Justice Reddy has also opined that the ghost of Westminster (in the words of Lord Roskill) has been exorcised in England. In our view, what transpired in England is not the ratio of McDowell and cannot be and remains merely an opinion or view. 112. Justice Reddy, we have already indicated, himself has stated that he is entirely agreeing with Justice Mishra and has only supplemented what Justice Mishra has stated on Tax Avoidance, therefore, we have go by what Justice Mishra has spoken on tax avoidance
2. Corporate Veil
Both the Chief Justice and Radhakrishnan J. hold that the existence of a holding-subsidiary relationship is no reason to suppose that the two entities are not separate in law. The Chief Justice sets out circumstances in which the Revenue may appeal to India’s “judicial anti-avoidance rule”. Justice Radhakrishnan cites with approval Adams v Cape Industries.
THE CHIEF JUSTICE
[paras 67, 68] However, the fact that a parent company exercises shareholder’s influence on its subsidiaries does not generally imply that the subsidiaries are to be deemed residents of the State in which the parent company resides
In the application of a judicial anti-avoidance rule, the Revenue may invoke the “substance over form” principle or “piercing the corporate veil” test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the impugned transaction is a sham or tax avoidant…the concept of participation in investment, the duration of time during which the Holding Structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; the continuity of business on such exit. In short, the onus will be on the Revenue to identify the scheme and its dominant purpose. The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device. The stronger the evidence of a device, the stronger the corporate business purpose must exist to overcome the evidence of a device
JUSTICE K.S. RADHAKRISHNAN

[paras 58, 61] Legal relationship between a holding company and WOS is that they are two distinct legal persons and the holding company does not own the assets of the subsidiary and, in law, the management of the business of the subsidiary also vests in its Board of Directors
3. Shareholders’ Agreements and Rangaraj
Justice Radhakrishnan has expressed the view that Rangaraj v Gopalakrishnan, which we have discussed on several occasions, may have been wrongly decided because shareholders have the freedom to contract unless there are specific restrictions in legislation.

[paras 63, 64] The nature of SHA was considered by a two Judges Bench of this Court in V. B. Rangaraj v. V. B. Gopalakrishnan and Ors. (1992) 1 SCC 160 … This Court has taken the view that provisions of the Shareholders’ Agreement imposing restrictions even when consistent with Company legislation, are to be authorized only when they are incorporated in the Articles of Association, a view we do not subscribe
64. Shareholders can enter into any agreement in the best interest of the company, but the only thing is that the provisions in the SHA shall not go contrary to the Articles of Association. The essential purpose of the SHA is to make provisions for proper and effective internal management of the company
4. Controlling Interest and Extinguishment
Both the Chief Justice and Justice KS Radhakrishnan have held (on this aspect affirming the legal conclusion of the Bombay High Court in the impugned judgment) that “controlling interest” is not a distinct capital asset.
THE CHIEF JUSTICE
[para 88] As a general rule, in a case 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 such as right to vote, right to participate in company meetings, management rights, controlling rights, control premium, brand licences and so on as shares constitute a bundle of rights
JUSTICE K.S. RADHAKRISHNAN
[para 144] Further, the High Court failed to note on transfer of CGP share, there was only transfer of certain off-shore loan transactions which is unconnected with underlying controlling interest in the Indian Operating Companies. The other rights, interests and entitlements continue to remain with Indian Operating Companies and there is nothing to show they stood transferred in law
5. Section 9
THE CHIEF JUSTICE
[para 71] Hence, it is not necessary that income falling in one category under any one of the sub-clauses [ed: of section 9] should also satisfy the requirements of the other sub-clauses to bring it within the expression “income deemed to accrue or arise in India” in Section 9(1)(i)… The said sub-clause consists of three elements, namely, transfer, existence of a capital asset, and situation of such asset in India. All three elements should exist in order to make the last sub-clause applicable [emphasis added].
JUSTICE K.S. RADHAKRISHNAN
[paras 171-174] Section 9, therefore, covers only income arising from a transfer of a capital asset situated in India and it does not purport to cover income arising from the indirect transfer of capital asset in India. Section 9 has no “look through provision” and such a provision cannot be brought through construction or interpretation of a word ‘through’ in Section 9. In any view, “look through provision” will not shift the situs of an asset from one country to another. Shifting of situs can be done only by express legislation
6. Situs of the CGP Share
Although both the Chief Justice and Justice K.S. Radhakrishnan hold that the situs of the CGP share is the place of incorporation/register of shares, they appear to have adopted different approaches: the Chief Justice applies the Indian Companies Act, while Justice KS Radhakrishnan applies the well-known conflict of laws rules on situs of shares. This will be discussed in more detail in a subsequent post.
THE CHIEF JUSTICE
[para 82] Be that as it may, under the Indian Companies Act, 1956, the situs of the shares would be where the company is incorporated and where its shares can be transferred. In the present case, it has been asserted by VIH that the transfer of the CGP share was recorded in the Cayman Islands, where the register of members of the CGP is maintained.
JUSTICE K.S. RADHAKRISHNAN
[para 127] Situs of shares situates at the place where the company is incorporated and/ or the place where the share can be dealt with by way of transfer. CGP share is registered in Cayman Island and materials placed before us would indicate that Cayman Island law, unlike other laws does not recognise the multiplicity of registers




SCconnects with Vodafone, hopes soarforotherMNCs

BS REPORTERS
New Delhi/Mumbai, 20 January
Senior advocate Harish Salve was grinning from ear to ear before appearing in front of TV cameras this afternoon. The Vodafone counsel had enough reasons to feel happy: After nearly five years, the UK telecom major had today won the ~11,000crore legal battle with the Income Tax Department over payment of tax made to Hutchison Telecom.
While settling the dispute, the three-judge Supreme Court Bench, headed by Chief Justice S H Kapadia, also raised hope among a host of multinationals facing similar tax demands from the government. At least eight other companies, including AT&T, SAB Miller, GE, Cadbury, Sanofi and Vedanta, are involved in similar cases.
The tax department is keeping its cards close to its chest. While Central Board of Direct Taxes Chairman MC Joshi told Business Standard the government would examine the judgment before deciding a future course of action, a finance ministry official said the only option available with the government at this point was seeking review of the judgment.
Turn to Page 16 >UK telecom major wins ~11,000-cr tax battle; govt may amend law prospectively SC JUDGMENT
KEY TAKEAWAYS
|Bombay High Court judgment asking Vodafone to pay ~11,000-crore income tax set aside |Tax authorities do not have jurisdiction on an overseas transaction between companies incorporated outside India |I-T department asked to return ~2,500 crore deposited by Vodafone within two months, along with 4% interest from the date of withdrawal of the money by the department |Supreme Court registry asked to return the bank guarantee of ~8,500 crore given by Vodafone within four weeks
VODAFONE CASE IMPACT
Vodafone judgmentwill have a directbearing on other M&A deals thathave been under the I-T departmentscanner
Various judgments on several M&A deals pending in courts across India SC AXES THE TAXES
THE CASE TIMELINE
2007
FEB Vodafone buys 67% stake in Hutchison India for $11.5 billion
SEPTEMBER Income Tax dept issues showcause notice to Vodafone
2010
8SEPTEMBER Bombay HC delivers verdict in favour of I-T department
2012
20 JANUARY In two separate but concurring judgments by a threejudge bench headed by Chief Justice S H Kapadia, the SC says no tax liability for Vodafone No capital gains, as both buyer and seller are foreign entities
>$150-million Idea Cellular-AT&T deal: Bombay HC
>$500-million GE-Genpact deal: Delhi HC
>$981-million Mitsui-Vedanta deal in Sesa Goa: Goa HC
>SABMiller-Fosters 2006 deal: Bombay HC
>$770-million Sanofi Aventis-Shantha deal: Bombay HC
“We are a committed long-term investor. We have made it clearwe have faith in the Indian judicial system”
VITTORIO COLAO
Vodafone Group CEO
“Policycertaintyis crucial for taxpayers (foreign investors, too) to make rational economic choices
SH KAPADIA
Chief Justice of India
COMPANIES 2 >>Vodafone an easy target: Sarin
>Big blowto taxdepartment
>Good news forinvestment
>Vodafone IPO on a speed dial
ECONOMY 5 >>CJI scores hat-trickin a day
>This is a first: Harish Salve
GRAPHIC: SAMIR KUMAR, ILLUSTRATION: AJAY MOHANTY
________________________________________
Click here to read more...>

SC connects ...
Some experts said the legal precedent may be short-lived. The Direct Taxes Code (DTC), due to be implemented in 2013, has provisions designed to make transactions similar to Vodafone’s liable to be taxed. Sandeep Ladda, executive director, PwC India, said, even as the judgment settled a prolonged litigation, DTC contained aproposal to tax similar transactions. “So, this ruling may have limited relevance after implementation of DTC,” he added.
For the moment, however, all is well. The Supreme Court said the government could not seek capital gains tax from Vodafone’s purchase of Hutchison’s wireless assets in 2007, because the transaction took place between foreign companies. The court also directed the government to return the ~2,500-crore deposit that Vodafone made on the contested tax bill, plus four per cent interest.
The decision ends the uncertainty whether investors based outside the country could use offshore holding companies to avoid paying Indian taxes. Vodafone, seeking to expand in one of its fastestgrowing mobile-phone markets, had said the case was one of the key issues that had to be resolved in the region before the company could consider publicly listing its local unit.
Vodafone and Hutchison conducted their transaction offshore, with Vodafone’s Dutch subsidiary, Vodafone International Holdings BV, acquiring CGP Ltd, a Cayman Islands holding company controlled by Hong Kong-based Hutchison, and maintained that since the share transfer was carried outside India, authorities here had no jurisdiction to tax its deals.
However, the tax department in September 2007 sought capital gains tax, saying Vodafone should have withheld that amount from its payment to Hutchison. But the apex court today ruled that “such imposition of tax amounts to capital punishment on capital investments”. Vodafone Group CEO Vittorio Colao said: “We are a committed longterm investor in India and we have made it clear all along that we have faith in the Indian judicial system.” He said the company would continue to grow its Indian business, including making significant investments. Vodafone stock rose 1.60 per cent till the time of going to the press on the London Stock Exchange.
The Bombay High Court had ruled in December 2008 against Vodafone’s challenge of the tax bill. The carrier’s appeal to the Supreme Court was dismissed in January 2009. At that time, the Supreme Court had allowed Vodafone to present its challenge over the jurisdiction of the transaction to the tax department.
Experts said the judgment would give amajor boost to foreign investors looking at buying out stakes in Indian companies. Hemant Joshi, partner, Deloitte Haskins & Sells, said the telecom sector had been plagued by various uncertainties. With this decision, a strong signal goes out to investors regarding the predictability and certainty of tax laws in the country.
Nishith Desai, the head of Nishith Desai and Associates, an international law firm, said the freedom to go ahead with such transactions had now been established. “It makes a lot of difference. We spend around 25-30 per cent of our dealmaking time in negotiating tax indemnities. Now, that will come down,” he said.
FROM PAGE 1

Big blow to tax dept, but FinMin may amend law to tax such deals in future

VRISHTI BENIWAL
New Delhi, 20 January
The government may have to take a hit of ~11,000 crore in tax revenue, with the Supreme Court’s ruling in favour of Vodafone in a longpending tax dispute. The revenue loss may go up if the verdict has a bearing on similar deals pending before various courts. But the government could introduce amendments to tax laws, negating impact of this decision on future deals.
Prospective investors may not benefit from the Vodafone case, as provisions under the proposed Direct Taxes Code (DTC) make income from such cross-border deals liable to tax in India. As the DTC rollout is likely to be delayed, experts say the finance ministry may make some provisions in the Income-Tax Act itself in the upcoming Budget, to bring such income to taxation in all future transactions.
“While the ruling sets back the tax authorities in their quest for getting a bigger share of revenue in India, the victory may be short-lived, as they have other aces up their sleeves. The General AntiAvoidance Rules and amendments to the tax law can be expected to be brought in the Budget 2012 itself,” said Neeru Ahuja, partner, Deloitte Haskins & Sells.
PwC India executive director Sandeep Ladda said since DTC contained a proposal to tax similar transactions, this ruling might have limited relevance after its implementation.
Some experts said though tax revenue from other similar cases pending before courts might not be huge, a retrospective amendment to the law to tax past transactions could not be ruled out.
“There are several grey areas which will come into play. One cannot rule out an amendment with retrospective effect,” said Hitesh Sharma, tax partner, Ernst & Young.
Tax on cross-border deals is levied in the range of 10 to 20 per cent. Idea Cellular-AT&T deal of $150 million, GEGenpact ($500 million), Mitsui-Vedanta ($981 million), SABmiller-Fosters and Sanofiaventis-Shantha Biotech ($770 million) are some other disputed cases.
The decision was a setback to the finance ministry, grappling with an expected shortfall in revenue collections. Immediately after the verdict, finance minister Pranab Mukherjee met law minister Salman Khurshid and senior officials of the ministry. A core group, comprising senior officials from the tax department, has been formed to examine the judgment.
“We obviously need revenue for the government’s important programmes and the other thing is the certainty in law — we have to examine both areas,” Khurshid told reporters after the meeting.
While Central Board of Direct Taxes chairman M C Joshi told Business Standard
that the government would examine the judgment before deciding a future course of action, another finance ministry official said the only option available was to seek a review of the judgment.
Pranay Bhatia, associate partner, Economic Laws Practice, however, said the process of seeking a review could take long and even if the government chose to take that recourse, the possibility was that even a larger bench might not take a different view.
After the Bombay High Court passed an order in 2010, asking Vodafone to pay ~11,000 crore to the Income Tax department, the tax authorities got confident that they had acted lawfully in the matter. Besides, Vodafone’s decision in July 2011 to withdraw its petition before a tax authority — contesting its liability to pay withholding tax of about ~3,500 crore on the purchase of stake in Vodafone Essar from its joint venture partner, Essar Group —made the government confident of a victory in the main case, too.
While Vodafone had given a bank guarantee of ~8,500 crore, it had already paid ~2,500 crore to the tax department, which will now be returned within two months with four per cent interest.
Prospective investors maynotbenefitfrom the Vodafone case, as provisions under the proposed DTCmake income from such cross-border deals liable to taxin India. PHOTO: PTI
Good news for investment

KATYAB NAIDU
Mumbai, 20 January
For those tax lawyers and accountants who have been struggling to convince foreign companies to invest in India, the Vodafone judgment might be a blessing from the Supreme Court.
Rajiv Luthra, founder and managing partner of Luthra & Luthra, believes the judgment will lend clarity to the matter that has hitherto been blurred by uncertainty on the working of the system.
With many such test cases from which the Income Tax Department has been trying to claim tax, foreign investors have been confused on ways to work around the country’s tax code. Eighty per cent of foreign companies in India are facing huge tax litigation, and this move could be a game changer. “Tax efficiency created through such structures, which now have the ultimate legal blessing, will surely provide a fillip to foreign direct investment into India,” says Sanjay Sakhuja, CEO, Ambit Corporate Finance.
Nishith Desai, the head of international law firm Nishith Desai and Associates, says the court verdict has now helped establish the freedom to go ahead with such transactions.
Foreign investors, experts say, demand certainty in law. There has been a lot of ire against the tax claim also because the claim was sought retrospectively. “Foreign companies are also perturbed it was from the purchaser — and not the seller — that tax was demanded,” notes N C Hegde, partner (direct taxes), Deloitte.
Corporate tax lawyer H P Ranina believes the verdict could work to the advantage of India, since many countries, especially China, have tax transactions done by foreign entities involving domestic assets.
The cheer, however, could come to an end, if the proposed amendment in the Direct Taxes Code goes through. Ketan Dalal, joint leader of tax practice at PricewaterhouseCoopers, says the court decision puts to rest the issue of taxability of offshore transactions of offshore companies. “Therefore, it should apply to past and future transactions.” Accounting firms and legal experts alike hope any such amendment should be prospective and not retrospective in nature.
Vodafone Plc will now go ahead with the initial public offer (IPO) of its Indian business. “Though the IPO of the Indian entity and the tax burden of the parent company are a different matter, the tax claim would have been an overhang, if it were going for an IPO,” said Alok Shende, principal analyst and cofounder of Ascentius Consulting. While there has been talk about Vodafone appointing investment bankers for an IPO, the company has refused to comment on it. “It (an IPO) is conditional to a number of factors,” said Simon Gordon, a spokesperson of Vodafone Plc. Vodafone IPO on aspeed dial
Sebi gets cracking on listing day price manipulations

BS REPORTER
Mumbai, 20 January
The capital markets regulator, Securities and Exchange Board of India (Sebi), today announced several measures aimed at checking manipulators and reducing wide fluctuations in the share prices of companies making their stock market debut.
At present, there is no limit on share price movements on the day of listing of shares following a public offer. This was allowed to enable price discovery but also leads to huge fluctuations on either side. From day two onwards, the circuit filters which cap stock movements to five per cent, 10 per cent or 20 per cent, depending on the size, come into play.
Sebi now plans to introduce this circuit filter on listing day itself. The new rules, to take effect four weeks from now, will include extending the ‘pre-market call auction’ window on listing day and delivery-based trading for the first 10 days.
“In light of the high volatility and price movement observed on the first day of trading, it has been decided to put in place a framework of trade controls for Initial Public Offer (IPO) and re-listed scrips,” said the regulator in a circular.
Further, for issues of ~250 crore or less, only deliverybased trades will be allowed for the first 10 days after listing. The pre-open call auction window, which currently is used for Nifty and Sensex stocks, will be used for arriving at an equilibrium price on the first day of trade of an IPO and relisting stocks. However, unlike index stocks, where the window is for 15 minutes, IPO stocks will have a one-hour window between 9 and 10 am. The first 45 minutes will be for order entry, modification and cancellation, the next 10 minutes for order matching and trade confirmation, and the remaining five minutes shall be the buffer period to facilitate transition from preopen session to the normal trading session.
In case the equilibrium price is not discovered for relisted stocks, all orders shall be cancelled and the scrip shall continue to trade in the call auction mechanism until the price is determined. For IPO scrips with issue size of less than ~250 crore and re-listed scrips, a 100 per cent margin shall be required for the order to be eligible in the pre-open session.
Under normal trading, stocks with issue size of less than ~250 crore will trade in a price band of five per cent of the equilibrium price. For issues greater than ~250 crore, the price band will be 20 per cent of the equilibrium price. In case the equilibrium price is not discovered in the call auction, similar price bands linked to the issue price will be applicable.
Market experts said the move would definitely help reduce volatility. Arun Kejriwal, director at Kejriwal Research and Investment Services, said, “These were much-need steps. Introduction of trade-to-trade on issue size of below ~250 crore will help in reducing manipulation considerably, if not totally,” “The immediate impact will be fewer issues. All operatordriven IPOs will be out,” said Pavan K Vijay, chairman, Corporate Professionals. “The process of trade to trade will hurt the market. No jobber will come. That will affect liquidity in the stock. Brokers who participate in IPO funding will also take a hit .”
Regulator introduces circuit filters and pre-open call auction for IPO stocks and relisted scrips on Day One
Undernormal trading, stocks with issue size of less than ~250 crore will trade in a price band of five per cent of the equilibrium price