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December 6, 2008
The Vodafone Judgment: Tax Uncertainty for M&A and PE
Deals
One of the most anticipated judgments in recent times, the Order
of the Bombay High Court (“Court”)
in the Vodafone controversy, is finally out. This judgment
raises uncertainties with respect to taxation of cross-border
mergers and acquisitions between two foreign entities, involving
direct or indirect subsidiaries or affiliates in India. It also
brings uncertainty to private equity funds which acquire shares
of foreign companies in a similar fashion.
We had published our detailed commentaries on the Vodafone
Controversy as it had unfolded in the courtroom and we do not
wish to spill more ink recounting the arguments, which are
available at the footnote.*
The broad facts of the case are briefly summarized as follows:
Shares of CGP Investments, a company incorporated in the Cayman
Islands were transferred by HTIL, another Cayman Islands company
to Vodafone International Holdings BV (“Vodafone”)
for a consideration of about USD 11.1 billion. CGP Investments
held stake in a series of Mauritian and Indian Companies which
cumulatively held about 67% stake in Vodafone Essar Limited (“VEL”).
The Indian Revenue Authorities (“Revenue”)
issued show cause notices (“Notices”)
to both Vodafone and VEL as to why they should not be held as
“assesses in default”, the former on the ground of failure to
withhold taxes at source and the latter as a “representative
assessee”. Both VEL and Vodafone filed respective writ petitions
before the Court challenging the validity of these Notices
The Court has dismissed Vodafone’s writ petition on the ground
of non-maintainability. As we had reported on December 3, 2008,
the Court has dismissed the writ petition and has made five
important observations. In today’s commentary, we have analyzed
these observations and have also set out our analysis of the
judgment. The five observations made by the Court before
dismissing the petition are:
-
Vodafone had approached the Foreign Investment Promotion
Board (“FIPB”)
before effecting the transfer of shares of the Cayman
Islands entity. Therefore it was within the jurisdiction of
the Revenue to proceed against Vodafone and the Notice
served was valid;
-
The transaction amounted to an indirect transfer of
controlling interest in VEL, an Indian company and hence an
indirect transfer of capital asset situated in India;
-
The transaction created a “real link” between India and
Vodafone, so as to bring the consideration to tax in line
with the “Effects Doctrine” as understood in USA;
-
The agreement entered into between Vodafone and the vendor
was not furnished before the revenue authorities or the
Court;
-
The writ petition to impugn the Notice was not maintainable
when an alternative statutory remedy was available to
Vodafone
It must also be pointed out that while the Court made the above
observations, it has not held that Vodafone is liable to pay tax
or penalties under the ITA.
It is pertinent to note that the Vodafone controversy is not
limited to the writ petition filed by Vodafone but also the writ
petition filed by VEL. However, the order seems to dismiss the
entire controversy solely on the submissions made by Vodafone
without hearing the submissions of VEL. With due respect, this
seems to be in the teeth of the principles of natural justice
which require a party to be heard before any judgment is passed.
While the writ petition has been dismissed by the Court, the
issues relating to the Vodafone controversy have not been
settled and the Order leaves much to be desired.
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* We had published our daily commentaries on
the Vodafone Controversy as it had unfolded in the courtroom.
These commentaries can be accessed here:
June 27, 2008,
June 30, 2008
July 2, 2008,
July 8, 2008, July
9, 2008,
July 10, 2008,
December 3, 2008
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