Background:

Vodafone was involved in a $2.5 billion tax dispute in India over its purchase of Hutchison Essar
Limited(HEL) in April 2007. The transaction involved purchase of assets of an Indian Company, and
therefore the transaction, or part thereof was liable to be taxed in India as per the allegations of tax
department. In 2012, Supreme Court of India gave a verdict in favour of Vodafone International BV
saying that the transaction was not taxable in India.

Timeline
• Feb 2007: Vodafone International Holdings Bv buys 100% stake in CGP and in turn 67%
stake in Hutchinson Essar limited an Indian entity for $11.2 billion.
• Sept 2007: Income tax dept. issues a show cause notice to Vodafone.
• Oct 2007: Vodafone files a writ petition in the Bombay high court.
• Sept 2010: Bombay high court gives a verdict in favor of IT department.
• Sept 2010: Vodafone challenges the Bombay HC order in supreme court.
• Oct 2010: IT dept. issues tax notice for Rs. 11200 crore plus interest.
• Jan 2012: Supreme court delivers a judgment in favor of Vodafone and it is not liable to pay
the tax.

Vodafone entered into India in 2007 through a subsidiary based in the Netherlands, which acquired
Hutchison Telecommunications International Ltd’s (HTIL) stake in Hutchison Essar Ltd (HEL) by
buying 100% stake in CGP Investments Holdings Ltd (CGP)—the joint venture that held and operated
telecom licences in India. This agreement gave Vodafone control over 67% of HEL and extinguished
Hong Kong-based Hutchison’s rights of control in India, costing the world’s largest telco Vodafone
$11.2 billion at the time. But Vodafone decided to take the roundabout route. Vodafone International
Holdings BV, a subsidy of Vodafone exchanged cash for shares with a similar holding company for
Hutchison Essar, in far off Cayman Islands. At the time, Indian tax authorities did not have a say in
the company’s doings as the deal was done entirely offshore.
And thus began the case of “wherever you go, we will follow” between the Income Tax department
and Vodafone. In one of India's biggest tax controversies, the Tax Authority demanded approximately
US$2.5 billion in capital gains tax from UK-based Vodafone, with additional penalties in a similar
range.
The IT Department has claimed capital gains under section 9(1)(i) of the Income-Tax Act (the Act) as
it is of the view that the transaction involved (i) transfer of an Indian asset and (ii) profit made by HTIL
from the sale of shares to Vodafone was generated in India. Therefore, according to the IT Department,
Vodafone had an obligation to pay withholding tax in India before making the payment of the purchase
price to HTIL.
VEL challenged the show cause notice issued by the IT Department regarding the levy of capital gains
tax and filed a writ petition in the Mumbai High Court. VEL contended that capital gains accruing
from the sale of shares of did not satisfy any of the conditions for it to be taxable in India as the transfer
of shares between the two companies were outside the jurisdiction of India.
The Bombay High Court, on September 8, ruled that when the underlying assets of the transaction
between two or more offshore entities lies in India, it is subject to capital gains tax under relevant
Income Tax laws (ITL) in India. The court came to the conclusion that Vodafone was liable to pay
taxes at source (TDS).Vodafone appealed before the Supreme Court to revisit the judgement, which
made them liable for a record amount of Rs 12,000 crores going to the tax authorities.
The Supreme Court ruled in 2012 that Vodafone’s actions were “within the four corners of law” .It
also advised Indian taxmen to “look at” the transaction instead of “looking through” it to attribute
motives to the deal. The Supreme Court emphasized on the theory of Corporate personality wherein
the identity of the shareholder is distinct from that of the company. The Court said that the authorities
must look at the transaction at its face value rather than the hidden intent behind it.

According to the views expressed by the Supreme Court, there were two possible structures available
for such a transaction to include a tax-free entity, to either include CGP or route the deal through
Mauritius. Therefore, by structuring the deal through CGP, they have transitioned the business in a
smooth manner. Thus, the sole purpose of the CGP acquisition was not to control Hutchison-Essar.

The Indian government saw over ₹20,000 crore in unpaid taxes, interest and penalty slipping out of its
hands. Government changed its Income Tax Act retrospectively and made sure that any company, in
similar circumstances, is not able to avoid tax by operating out of tax-havens like Cayman Islands or
Lichtenstein. It decided to strike fear into the heart of companies by coming up with the General Anti-
Avoidance Rule (GAAR). This rule basically said that the government could dig up past deals, all the
way back to 1962. In May 2012, Indian authorities confirmed that they were going to charge Vodafone
about 20000 crore (US $4.5 billion) in tax and fines.

References:

 https://www.vccircle.com/vodafone-hutchison-case-and-its-implications/
 https://www.pwc.in/services/tax/news_alert/2012/pdf/pwc-news-alert-21-january-2012-vodafone-
international-bv.pdf
 https://www.thehindubusinessline.com/opinion/all-you-wanted-to-know-about-the-vodafone-tax-
case/article22994858.ece
 https://blog.ipleaders.in/vodafone-avoid-capital-gains-tax-clever-structuring-2/