761-page Income Tax order tries to pin Vodafone

The Income Tax Department has, in a 761-page order, asserted its jurisdiction to tax Vodafone Group Plc’s $11.2 billion deal with Hutchison Telecommunications International in 2007, saying the deal was designed to hoodwink tax authorities by showing it had taken place abroad.

“The transaction was structured in a way to show as if it was a transfer of a Cayman Island company, a subsidiary of Hutchison, for which payment was made outside India. This was designed in this manner so as to claim that Indian tax authorities had no jurisdiction,” a senior I-T department source said.

The lengthy order, based on dozens of agreements between Vodafone, Hutchison and Essar, also said Vodafone is the beneficial owner of Asim Ghosh and Analjit Singh’s stake in the telecom company.

The tax dispute concerns the England-based Vodafone Group’s acquisition of 67% stake in Hutchison Essar from the Hong Kong-based Hutchison Telecommunications International in February 2007.

The I-T department is of the opinion that the transaction is taxable by it, which is being disputed by Vodafone Essar.

Hutchison Telecommunications International, the seller, controlled its Indian subsidiary through companies that finally led to a Cayman Islands-registered entity to receive the payment from the Vodafone Group of England.

Arguing that the Indian authorities have no jurisdiction to tax it over the deal, Vodafone had moved the Supreme Court in January 2009, but the apex court had refused to intervene in the matter and had directed the I-T department to revert on its jurisdiction.

The I-T department passed an order saying it has the jurisdiction to tax Vodafone, since the deal concerned the sale of 66.98% of interest in Hutchison-Essar, which was an Indian company.

“The undisputed conclusion which has emerged from the factual and legal matrix outlined in the order is that the deal was the telecommunication operations of the Hutchison group in India along with all accompanying assets, interests, rights, whether tangible or intangible, which was sold by Hutchison Telecom International to Vodafone by virtue of the sale and purchase agreement dated February, 2007,” the I-T department source said.

Having concluded that the income is chargeable to tax in India, Vodafone was under an obligation to deduct tax at source at the time of making payment of sale consideration to Hutch Telecom in terms of Section 195 of the Act.

The facts narrated in this order clearly prove that on the date of payment i.e. on May 8, 2007, Vodafone had sufficient nexus and presence in India and it cannot claim that it was not bound by Indian laws including tax laws and the withholding tax provisions contained in Section 195 of the Act, the department said.

The provisions of section 195 were clearly attracted and the plea of payment being from one non-resident to another is not sustainable.

Some key excerpts from the order:
- Bharti Airtel’s ‘ no objection’ to the acquisition of interest in Hutchison Essar by Vodafone group was also in compliance to one of the requirements of Press Note 1 (2005 series) issued under the Indian Telecom Policy.”

- It is not surprising that Ernst & Young (which conducted due diligence for Vodafone ) by its own admission has observed that only limited information was made available to it about CGPC and accordingly it was not in a position to comment on the tax risks associated with this company and advised that a warranty be sought from the vendors to protect from unforeseen tax consequences.

- If in actual fact the transaction related only to the sale and purchase of one share of $1 of CGPC, why was there a need to stipulate in Clause 1.18 of the Agreement that in the case of a claim, the value of the claim will be translated into dollars at the RBI reference rate.

- A tax deed dated May 8, 2007, was executed between Hutch Telecom and Vodafone, pursuant to the SPA dated February 11, 2007. Clause (4) of this deed describes reciprocal secondary liabilities indemnities and provides in its sub-clause (1) that Hutch Telecom agrees to pay to Vodafone among others, any amount on account of taxation for which a wider group company becomes liable, in consequence of failure by any member of Hutch Telecom Group to discharge taxation primarily attributable to that member of the group.

- Soon after “completion” of the transaction, Vodafone entered into “Framework and Other Agreements” with Asim Ghosh, Analjit Singh and IDFC Group of Companies. The main effect of these agreements was that Vodafone could acquire the shares held by Ghosh, Analjit Singh, and the IDFC Group of companies by paying a pre-determined price, lower than the market price. It was necessary for Vodafone to enter into these elaborate agreements/arrangements in order to safeguard its interests and exercise control of Hutchison Essar and its subsidiaries, again highlighting the fact that the subject matter of the transaction was the acquisition of 66.9848% interest of Hutch Essar.

- Thus, it is abundantly clear that by virtue of the option agreements entered into by Hutchison Telecom with Ghosh and Singh, it was Hutch Telecom that was the beneficial owner of the interest held in the name of  Ghosh and Singh. These option agreements were subsequently transferred by Hutch Telecom to Vodafone and formed part of the consideration paid by Vodafone to Hutch Telecom on completion of the transaction. The eventual exercise of the options at the predetermined price, much below the market price goes to show that the options agreements were loaded in favour of first Hutch Telecom and then Vodafone and enabled them to exercise actual control over Hutch Essar and its subsidiaries.

- The fact that vide confidential memorandum dated September 21, 2007, Vodafone group stood guarantee for raising a huge loan of $3,590 million for Essar from Standard Chartered Bank only goes to show the extent to which Vodafone was willing to accommodate its Indian joint venture partner for safeguarding its interest in the Indian telecom business.

- The correspondence between Vodafone, HTIL and Ghosh/ Singh/IDFC which resulted in signing of option agreements by Vodafone has not been submitted.

- It is also apparent that post transaction and particularly after the proceedings have been initiated by the undersigned, numerous letters and emails have been exchanged between Hutch Telecom and Vodafone, of which not all have been submitted on the grounds that they are not relevant. In this connection, it is stated that unless full documents are submitted, it is not possible to decide their relevance or otherwise. It also needs to be noted that only “relevant extracts” of the due-diligence report prepared by Ernst & Young have been submitted by Vodafone and not the entire report on account of commercial secrecy.  It is thus clear that Vodafone has not been fully forthcoming in submitting the documents requisitioned.

Giri works for Bloomberg-UTV.