'Vodafone ruling sends strong signals'

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Mumbai: Legal experts are of the view that the Bombay High Court’s judgment dismissing Vodafone’s $1.7 billion tax plea in the Hutchison Essar acquisition case sends a strong message to many companies that have been setting up various layers of firms, that they cannot escape paying tax for the value of the actual controlling interest in India. “The present judgment doesn’t surprise me,” maintains HP Ranina, legal expert and an advocate of the Supreme Court. “Ultimately, companies will have to pay for the value of the controlling interest they have in India,” he added.

The Bombay High Court on Wednesday had dismissed a Vodafone petition against the revenue department’s claim of $1.7-billion capital gains tax on the acquisition of Hutchison Essar. UK-based Vodafone had bought 52% stake in Hutchison Essar for $11 billion in 2007. The court said that Vodafone is liable to pay tax although both the parties to the acquisition were offshore entities, and said that the transfer of shares between the two offshore companies impacted the beneficial ownership of Hutchison Essar in India.

Ranina said that although it is difficult to understand what the basis of the judgment could be unless the copy of the judgment is available, it was a fact that companies in the past have been setting up layers and layers of companies for their own benefit.

“The facts are unique and unprecedented and may have a telling impact on some of the overseas M&As having similar set of facts,” said a KPMG note Wednesday. TP Oswal of accounting firm Chaturvedi & Shah is of the view that there will be no long-term impact on investments coming to India. “The judgment applies only to cases from non-treaty countries (countries that are not members of the International Double taxation Avoidance Agreement),” Oswal said. “There are 90 countries that are signatories to the treaty. This judgment will not impact those,” he added.

“In nutshell,” KPMG said, “the tax department has levied approximately $2 billion by way of withholding tax from Vodafone in relation to purchase of shares of Cayman Island company. The tax department contested that in effect the purchase was of the business operations of the Indian company whose shares were held ultimately by the Cayman Island company.”

No escape

• High Court dismissed Vodafone petition

• Vodafone liable to pay tax