Each time, Hutch-Essar replied that the shareholding pattern of the company in India did not change even post-transaction and whatever changes have happened took place at a much higher level between Hutch group and Vodafone outside the country and so, there was no case for paying any taxes in India. The tax department, at no stage till May 2007 when the transaction closed, in any of the letters, challenged the position taken by Hutch-Essar that even if the shareholding pattern changed overseas and not in India, there was a case for paying the taxes since the underlying assets lay in the country.
The claim by finance secretary RS Gujral that Vodafone was also informed about withholding the tax falls flat if the correspondence between the two sides are perused. It was on March 28, 2007, that the tax department for the first time wrote to Vodafone, but not directly at their addresses. The letter was sent to Hutch-Essar, marked for Vodafone. On April 1, 2007, Hutch-Essar replied to the tax department that they were not the authorised agent of Vodafone in India and cannot receive or reply to any letter on behalf of them. The letter was returned to the tax department. The company, even at this stage, reiterated that there was no case for paying any taxes in India as the shareholding pattern of Hutch-Essar does not change.
Sources in Vodafone told FE that in a scenario where the department was seeking taxes on the assumption that the shareholding pattern of Hutch-Essar had changed and did not challenge the structure of the deal which was done between two parties overseas and since the dominant legal advice was that in such a scenario, theres no case for paying any taxes, the company could not have withheld the tax amount from its payment to Hutchison.
Though Hutch-Essar operated in India, it was controlled by a special purpose vehicle of Cayman Islands (CGP Investments Holding). CGP was owned by HTIL, Hong Kong. Thus, the controlling interest of Hutch-Essar was with HTIL, Hong Kong through the intermediary CGP. When Vodafone bought the controlling interests in 2007, the companys subsidiary in Netherland entered into an agreement with HTIL, Hong Kong, to buy the shares of CGP. Since CGP was holding directly 42.34% shares of Hutch-Essar, the share transfer resulted in the passing of control of the company from HTIL, Hong Kong, to Vodafone International Holding, Netherland.
In India, Hutchisons direct and indirect holding in Hutch-Essar was 67% and the balance 33% was held by the Essar Group.
Since Vodafone Netherland bought the shares in CGP from HTIL Hong Kong, the shareholding pattern changed overseas, while in India, it remained intact with only the name of the entity changing. Later, the tax department made out a case for capital gains tax since the underlying assets were in India. However, as documents point out, at that time, it did not provide this logic and interpretation. The department won the case in the Bombay High Court, but lost in the Supreme Court this January. Later, in the Budget, the government made changes to the Income Tax Act, 1962, empowering itself to tax overseas deals where the underlying assets lay in India. This change has been made retrospectively so that it can now tax Vodafone.
Since then, a war of words is on between the two sides on the legality and morality of the changes in the law with the finance secretary making statements in the media that Vodafone was informed about withholding the tax before making payment to Hutchison which has been officially rebutted by the company.