The year 2006 marks the boom of the telecom industry worldwide. Many companies were widening their market reach and harping upon every opportunity in the way. This is the same growth period when BlackBerry phones started to roll out in India. Vodafone was one such conglomerate among many established big fishes which acknowledged the growth and perceived the potential market in South Asia, India. Since the company was alien to the market and its trends, a start-from-scratch approach was never an option for Vodafone.
The conglomerate skeleton behind the corporate veil looks as follows. At the time, C.K Hutchison Holdings, a parent organization was spreading its wings across five major industries such as Telecom, Infrastructure, Retail, Ports, and Energy breathing in the Hong Kong plate registered in the Cayman Islands. Hutchison Whampoa, an Associate Company (holding significant shares), was set up to look after the telecommunication industry, formed Hutchison Asia Telecommunication HAT to look after the telecom sector in Asia. Hutch-Essar was a joint venture of Hutchison telecommunications and Essar group, providing telecom services in India.
Coming back to the expansion strategy adopted by Vodafone, it was quite obvious for Vodafone to acquire an established company rather than opting for starting a brand new company in a market about which it does not possess all the details. Hutch-Essar back then had a 33% market share which was suitable for Vodafone to adopt them as it was already a well-established company.
Now, since all of the Hutchison Whampoa companies are Cayman Islands-registered; to acquire Hutch-Essar, Vodafone had to approach CGP Investments. Interestingly, CGP Investments were holding 67% of Hutch-Essar, which means, if it acquired CGP Investments, Vodafone will automatically land the controls of Hutch-Essar since it holds the majority of the shares. This seemed to be the sought-after path to follow since the Cayman Islands are a part of tax haven islands which means there would be no additional tax liability on Vodafone if it proceeds to acquire Hutch-Essar. Regarding the payment of taxes in India, this sounds out of the box because India had no role to play in this game.
On 11th February 2007, Vodafone officially acquired CGP Investments, which ultimately means Vodafone has acquired over 67% stake in Hutch-Essar and henceforth it will be named as Vodafone-Essar. Soon enough, Vodafone was greeted by the Income Tax Department’s Show Cause notice terming Vodafone as an Assessee-in-default. Show cause pertained that Vodafone has allegedly tried to evade taxes and not paid the Capital Gains Tax.
The next move by Vodafone amplifies the gravity of the situation. The usual course in such a scenario is replying to the authority which served the show cause notice i.e the Income Tax Office. If unsatisfied with the order of the ITO after the reply to the show cause, the assessee can approach the Commissioner of Income Tax (CIT) and finally the Income Tax Appellate Tribunal (ITAT). Post these quasi-judicial bodies, the assessee can then approach the courts. Although this is the hierarchical system laid out by law, Vodafone had surpassed all of it and directly approached the Bombay High Court under Writ jurisdiction.
Vodafone made their point clear by mentioning the fact that the entity receiving the payment is outside India and the currency is not in Indian Rupees. Even the Assets are established and registered outside India hence the question of paying taxes in India stands invalid. The payment of taxes is governed by three things viz,
- the residential status,
- place of receipt and
- place of accrual.
In response to the charges under the then Section 195 of the Income Tax Act, 1961, Vodafone’s counsel Mr. Iqbal Chagla submitted that the relevant section provides for TDS deductions from payment/transaction of interest to NRIs. Even though Vodafone stood strong on its ground, it fell flat on its face when Bombay High Court pronounced the verdict in favour of the IT Department and upheld the show-cause notice. The whole crux of the legal battle was that the CGP Investments was a bogus company, the CGP was incorporated with the intention of tax evasion and the courts finally penalized Vodafone to deposit Rs 2500 Crore to the IT Department. Vodafone deposited the defaulted amount as instructed.
Vodafone, being unsatisfied with the judgment, challenged this in the Apex Court of the country. The hearings for the same began in 2011. On 20th January 2012, a much-awaited judgement and to everyone’s surprise, was in favour of Vodafone reversing the judgement of the Bombay High Court, ruling it as “tax planning and not as tax evasion”. The Supreme Court ruled that it is in fact tax planning and Vodafone should not suffer because of legislative incompetency on the part of lawmakers. The IT Department was also directed to repay the amount of Rs. 2,500 Crore with additional interest of 4% back to Vodafone. It was a clear victory for Vodafone as finally it was established that the whole transaction was a mere indirect transfer of Capital for which there was no provision prevailing in the then Income Tax Act, 1961.
Later on 16th March 2012, the then Finance Minister Mr. Pranab Mukherjee presented the budget for 2012-2013. Some notable amendments changed the way businesses conducted their cost analysis in India. The Finance Act, 2012 gave such powers to the IT Department which enabled them to make the provisions in the act ‘retrospectively’ following which Section 9 and Section 195 of the Income Tax Act were amended to cover all the possibilities that could be thought of at that time. Reportedly, this was a major blow to the private sector and they were reconsidering their investments in India. There was severe resentment against the Government. In the eyes of the global community, this act of the Government made India a land of uncertainties. In an interview with NDTV, when Mr. Pranab Mukherjee was questioned about the same, he tried to show the perspective of the Department, mentioning, “the intention of the legislature is if you pay tax in one country you are not supposed to pay tax in other country and vice versa. The possibility of not paying taxes in any country is nil, this line of argument was accepted even by the Bombay High Court.”
A year later, when Mr. P. Chidambaram was appointed as the Finance Minister, there were again notable changes concerning this case. Firstly, he revived the Vodafone case by involving an international committee to look into the matter, secondly, he promised the corporate world that henceforth no retrospective amendments will take place. Although when it comes to tax bills, retrospective amendments are allowed by the Constitution of India, it was realized that exercising this power has not worked well for the economic prospects of India.
When the very same case was pursued in the International Court of Justice (ICJ) at Hague, it passed the judgement in favour of the Vodafone group. The International Court of Arbitration came out in support of the Vodafone group stating that the imposition of tax liability and a penalty was against the principles of ethical and fair treatment by the Indian government. Also, it violates the covenant of fair and equitable treatment which was the result of the Bilateral Investment Treaty (BIT) between India and the Netherlands.
This should have ideally put the matter to rest altogether but such was not the case. Recently on 08th February 2021, the Government of India through its Tax department went on to challenge the International Court’s verdict in the Singapore High Court, which directed the Government of India to pay the dues of Rs. 22,100 Crore towards all the penalties. The verdict of which is yet awaited