Offshore deals may be taxable in India

In a recent judgment passed by Bombay High Court in Vodafone International Holdings v Union of India, writ petition no. 2550 of 2007, it was held that Vodafone was liable under section 9 of the Income Tax Act, 1961, to pay approximately US$2 billion in capital gains tax for its transaction with Hutch International, in which US$11.2 billion worth of shares was purchased from a Cayman Islands company in 2006.

Hutchison Essar (HEL), a cellular telecommunications company in India, was an Indian joint venture of the Hutchison group – a foreign enterprise – and an Indian company, Essar. Hutchison Telecommunications International (HTIL), a foreign Hutch group company, held a 67% interest in HEL. HTIL’s 67% holding included a 51.95% holding through another foreign company, CGP Investments (CGP), which was registered in the Cayman Islands. Vodafone, a Dutch company, entered into an agreement with HTIL to acquire its 67% controlling interest in HEL subject to the approval of Indian authorities.

The Foreign Investment Promotion Board (FIPB) approved the transaction on the condition that Vodafone would comply with Indian laws, including the Indian Income Tax Act (ITA). The Indian partner, Essar, agreed to the arrangement and as a result, a new joint venture – Vodafone Essar (VEL) came into existence, replacing HEL. Thus, through this arrangement Vodafone purchased 100% of the share capital in CGP from HTIL.

Sumes Dewan is a partner and Shradha Puri is a senior associate at KR Chawla & Co Advocates & Legal Consultants. The firm is headquartered in New Delhi and has offices in Chennai and Bangalore as well as a representative office in Singapore.