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Vodafone Wins Case Against IT Dept


Vodafone has won the case against the Income Tax department, with the Supreme Court ruling that the IT department has no jurisdiction to tax Vodafone.

Vodafone had acquired Hutch a few years back for USD 11.2 billion, and the acquisition wasn’t in India; the owner of the Indian company was a Hong Kong company (Hutchison Group), and the transaction was in the Netherlands/Cayman Islands. Effectively since there was no money exchanged in India, no one should have been taxed by India. But the IT department maintained that this was effectively a sale of the Indian assets so capital gains would apply, and Vodafone would have to pay.

This is strange, for multiple reasons. Firstly, it is never true that a buying company is responsible for capital gains tax – it’s always the seller. The reason the IT department targeted the buyer – Vodafone – was that they couldn’t do a darn thing about the seller, which was a Hong Kong company. This is stupid because you don’t go after someone just because you can’t go after the real culprit.

As an aside: This reminds me of a story of three teams of cops – British, American and Indian – sent into a forest to capture a lion. The American team brings a lion within an hour. The British team comes back in 2 hours successfully, but there’s no sign of the Indian team even after 10 hours. Fearing the worst, the camera crews and rescue staff go into the forest to find the Indian cops roughing up a bear tied to a tree, saying, “Now admit you’re a lion”. ( “Bol Tu Sher Hai” )

That sounds like the IT department in this case – when it can’t find the real culprit, catch anyone in sight.

Secondly, the issue was about the Indian assets being transferred, by virtue of buying out the owning company. But similar tax rules should have applied when Merrill Lynch was acquired (effectively) by Bank of America – effectively, BoA should have paid the capital gain on whatever ML owned in India, even if the merger was between two companies abroad? And so on for every single merger? Doesn’t entirely make sense.

(Btw, these structures are also used when transferring property – use a company to buy a piece of property, and when you need to sell it, sell the company instead. The idea is to avoid the 5% to 7% stamp duty on property transactions.)

Also, since tax havens have been used, it could be that this deal is unique in that it is executed abroad purely for the sake of avoiding Indian tax. This will be a problem in the new Direct Tax Code, even if this particular judgement went for Vodafone. But the IT department will have to go and hit the “seller” for the tax, in this case, the Hutchison Group. I wonder why a case against them hasn’t been initiated already.

The win also positions Vodafone well for an Indian IPO that they are planning. Also, the clarity is useful in that buyers can’t be chased for cap gains – sellers may still be on the dock for it.


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