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Our Bureau

Mumbai, Dec. 5

The subject matter of transfer as contracted between Vodafone International and Hutchison Telecom International is not actually the shares of a Cayman Islands company but the assets situated in India, a Division Bench of the Bombay High Court observed in its dismissal on Wednesday of Vodafone’s writ petition challenging the Income-Tax authorities on the matter of withholding tax in its acquisition of Hutch Essar Ltd.

The Court also remarked that the petitioner had “wilfully failed” to produce the original agreement of February 11, 2007, and other agreements entered into with HTIL for the acquisition of Hutch-Essar.

“The said agreement has not been produced by the petitioner either before the respondent or even before us,” said the Court. Without the agreement, it would be impossible for the court to find out the true nature of the transaction, it said.

“In spite of repeated demands by the respondents, the same have not been produced, left us with no option but to draw an adverse inference against the petitioner, since it clearly amounts to withholding of the best evidence, even assuming that the onus of proof does not lie on the petitioner.”

Vodafone International had been issued a show-cause notice by the Income-Tax Department on why it should not be treated as an assessee in default in not having deducted and paid Indian government withholding tax (TDS) when it acquired Hutchison Essar Ltd (HEL) from HTIL last year.

Vodafone had acquired HEL through buying shares in a Cayman Islands company which in turn held shares in HEL, the Indian telecom operator, now known as Vodafone Essar Ltd.

One of Vodafone’s arguments in its writ petition was that the transaction was between two international companies in a third overseas company and that this would not come under Indian tax jurisdiction.

“It would be too simplistic to answer away all the facts and circumstances by a submission of the petitioner (Vodafone) that what was transferred was only shares of an unknown Cayman Islands company which is a shell company and the same was not even considered in the enterprise value of Hutch,” the Court said.

The choice of the petitioner in selecting a particular mode of transfer of these rights will not alter or determine the nature or character of the asset, it said.

The Bench said that Revenue has made out a strong prima facie case that the transaction entered upon by the petitioner (Vodafone) amounts to transfer of a capital asset, especially in the light of the fact that the interest in telecom licence is jointly held with the Essar Group with the use of brand and goodwill as well as non-compete rights given by HTIL.

“Shares in themselves may be an asset but in some cases like the present one, shares may be merely a mode or a vehicle to transfer some other assets — in the instant case, the subject matter of transfer as contracted between the parties is not actually the shares of a Cayman island company but the assets situated in India,” said the Court.

The Indian Income-Tax Act has a twin basis for taxation; one is based on resident or domicile and the second is based on source of income. Non-residents are taxed only on income which has its source in India.

The income or capital gains made by HTIL in the deal are deemed to have accrued or arisen in India, said the court agreeing with the respondent (Income-Tax department).

It is inconceivable as to how HTIL can transfer its controlling interest in HEL without extinguishing its rights in the shares of the Indian group and without which a transferee cannot acquire a controlling interest, said the Court. It involves not only extinguishingof HTIL’s shares in HEL but also relinquishment of their assets.

More Stories on : Telecommunications | Courts/Legal Issues | Taxation

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