The taxman had made a $2.2-billion demand on Vodafone arguing that, under the law, Vodafone had to deduct a withholding tax on its $11.1-billion payment to Hutch for its India operations — this is what the Supreme Court had struck down, and this is what the government had sought to undo with the Budget’s retrospective tax amendment of sections 9 and 195 of the Income Tax Act in March this year.
FE had reported on September 19 that the Shome panel was not in favour of retrospective taxing of such overseas transactions where the underlying asset was in India (http://www.financialexpress.com/news/shome-likely-to-dial-relief-for-vodafone-in-tax-case/1004580/0). The panel had said that while such taxation was permissible, it had to be without retrospectivity.
While the government is keen to resolve the issue which has caused a lot of bad blood between the government and the investor community – to that extent, accepting Shome’s recommendations will be seen as a pro-investor move – the stumbling block is the tax refunds the finance ministry may have to shell out if the proposal is accepted. After Essar sold its 22% holdings in Vodafone Essar to Vodafone, a tax of $883 million was paid – the 22% shares were held by Essar group companies overseas and were sold to Vodafone in an overseas transaction, making it similar to the original Vodafone-Hutch one. Once the Supreme Court ruled in favour of Vodafone, Essar had said it was going to ask for a refund. In addition, there were other Vodafone-type transactions that the taxman was trying to tap – of these, however, only Essar had paid a tax.
It is not clear what argument the finance ministry will make, if any, to ensure it doesn’t have to make any refund since both cases are similar – of overseas sales of assets where the underlying asset is in India.
The only possible difference is that by the time the Essar-Vodafone sale had taken place, Essar knew the taxman was planning to tax such sales. Indeed, by that time, the taxman had even won the case against Vodafone in the Bombay High Court – later, however, the Supreme Court struck this down.
In the case of Vodafone-Hutch, however, Vodafone was taken by surprise. There was only one letter written by the taxman to Vodafone through the entire transaction, and that too was addressed “M/sVodafone, UK,c/o M/s Hutchison Max … Mumbai”. This letter was returned by Hutchison Essar saying it did not represent Vodafone. One other letter was sent from the taxman to Hutchison Essar, asking it to share the letter with Vodafone – Hutchison Essar had replied that since no transaction was taking place in its shares, no tax was applicable. Vodafone had bought the shares of a company called CGP Investments which, in turn, owned 42.34% of Hutchison Essar.