ISSUES WITH TRANSEFR PRICING (VODAFONE-HUTCH) :
By manipulating the income tax laws, MNC’s avoid payment of taxes. There is loss of revenues to the countries because of manipulation of the laws. Vodafone-Idea transaction is the most popular case of Transfer pricing in India. To deal with isuues with transfer Pricing ,The countries have come up with the ideas of Armed length Price (ALP), General Anti Avoidance rule (GAAR) Advanced Price Agreement (APA), and Base erosion Profit Sharing (BEPS). Here is the brief of the case with the timeline :
February 2007:
Vodafone International Holding (Netherlands company) acquired a 100% stake in CGP Investments (Holding) Ltd (CGP), at the cost of $ 11 billion from Hutchison Telecommunications International Limited (HongKong).
- CGP Investments (Holding) Ltd (CGP) is in Cayman Islands company
- CGP holds 67% shares in an Indian company Hutchison Essar Limited ("HEL").
- Hutchison Essar Limited (HEL) has its operations in India.
- With this acquisition of CGP, Vodafone acquired control of CGP and its subsidiaries, including Hutchison Essar Limited (HEL).
September 2007:
Indian tax authorities questioned the Vodafone Company on following grounds:
- Why the capital gains tax had not been withheld from the HTIL purchase transaction.
- Transaction triggers the transfer of indirect assets in India as the company Hutchison Essar Limited (HEL) has its operations in India.
- Transaction involved purchase of assets of an Indian Company, so there is liability to be taxed in India to an amount of 12000 crores.
Response of Vodafone:
Vodafone appealed to the Bombay High regarding the jurisdiction of the tax authorities in this case.
September 2010:
Bombay High -Court dismissed the Vodafone arguments and ordered Vodafone to pay the Capital Gains tax to the authorities.
Vodafone Response:
The order of Bombay High -Court was subsequently challenged in the Supreme Court of India by Vodafone.
20 January 2012:
The Supreme Court delivered its verdict on the case on 20 January 2012 with the key highlights:
- Indian
authorities do not have jurisdiction on an overseas transaction as visible
in this case as the tax is levied on the basis of the source and the
source is the location where the sale takes and not where the product is
derived or purchased from.
- Tax
policy should be stable and certain as it is crucial for taxpayers
(including foreign investors) to make rational economic choices in the
most efficient manner.
- The
demand of nearly 12,000 crore in the form of capital gains tax,
would amount to imposing capital punishment for capital investment since
it lacks authority of law and therefore stands squashed.
Budget 2012 ---RESPONSE OF GOVERNMENT OF INDIA :
- In Budget 2012, the government of India proposed an Amendment to the Finance Act and changed the Supreme Court’s decision.
- As per the Finance Act, Income Tax Department can retrospectively tax such deals applicable to residents or non-residents, having business connection in India,
- Accordingly, The buyer (Vodafone in this case) will have to deduct tax at source and pay it to the government even if the deal is executed on a foreign soil.
- Finance bill 2012, also redefined the concept of indirect transfer.
As per the new definition, any asset company or entity registered or incorporated outside India shall be deemed to be situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.
- With the passage of the Finance Bill, 2012 by Parliament, the British telecom giant Vodafone might have to pay Rs 20,300 crore as tax, interest and penalty on its acquisition of Hutchison stake in Hutchison Essar in 2007.
Response to Finance Bill 2012:
- Provisions in the finance bill 2012 were criticised by investors globally.
- This impacted the market sentiment and the flow of foreign funds to India.
Reaction of the Government:
- Because of international criticism and negative impact due to the provisions, GOI tried to resolve the matter with Vodafone, but the Finance Ministry failed to settle the issue and in 2014, the Vodafone Group initiated arbitration against India at the Permanent Court of Arbitration at the Hague,
- When NDA government came to power in 2014, it said it would not create any fresh tax liabilities for companies using the retrospective taxation route.
- But the government did not take back route on provision in Finance Act and those provision wrt vodafone taxation remained.
Response of Vodafone :
Vodafone approached ICJ against the decision of the Indian Government and ICJ constituted Permanent Court of Arbitration (PCA).
Dec 2020:
In Dec 2020, Vodafone won arbitration against India over the retrospective tax demand of Rs 20,000 crore . The International Court of Justice (ICJ) ruled that:
- The conduct of Indian Income-Tax department was in breach of fair and equitable treatment .
- The imposition of tax liability on Vodafone violated the investment treaty agreement between India and the Netherlands.
