The apex court’s decision in favour of Vodafone is expected to have a significant impact on the future of India-focussed investments and M&As
Netherlands-based Vodafone International Holdings BV (Vodafone) on Friday received major reprieve from the Supreme Court of India, which ruled that the $2 billion (about Rs11,000 crore) capital tax gain is not applicable to the telecom company. The three-judge bench, while setting aside a Bombay High Court judgement asking Vodafone to pay $2.1 billion, also told the tax department to return Rs2,500 crore paid by the company with interest.
Investors and professionals around the world have been anxiously awaiting the final conclusion to the Vodafone tax saga, with the hope that it would provide much-needed certainty in India’s international tax environment. The decision is expected to have a significant impact on the future of India-focussed investments and mergers and acquisitions (M&As).
While delivering the majority judgement, Chief Justice SH Kapadia said, “The government has no jurisdiction over Vodafone’s purchase of mobile assets in India as the transaction took place in Cayman Islands between Hutchison Telecommunication International (Hutch) Vodafone.”
The Supreme Court also directed its registry to return within four weeks the bank guarantee of Rs8,500 crore given by Vodafone. Justice Kapadia noted that Hutch Essar, whose Indian operations were acquired by Vodafone, was not a fly-by-night operator and was in India since 1994 and had contributed Rs20,242 crore by way of direct and indirect taxes.
Justice Kapadia delivered the majority judgment along with Justice Swatanter Kumar. However, Justice KS Radhakrishnan differed with the judgment.
According to a PTI report, Vodafone which is the second largest telecom operator in India, said the judgment underpins its confidence in the country. "We welcome the Supreme Court's decision, which underpins our confidence in India. We will continue to grow our Indian business - including making significant investments in rural areas and in 3G network coverage - for the benefit of Indian consumers," Vodafone CEO Vittorio Colao said in a statement.
Earlier in 2010, the Bombay High Court upheld the revenue department’s jurisdiction to proceed against Vodafone on its $11.1 billion acquisition of Hutchison’s Indian telecom operations back in February 2007.
In 2007, Vodafone bought Cayman-based CGP Investments from Hutchison Telecommunication International (Hutch). CGP Investments held a number of underlying subsidiaries in Mauritius, which along with certain Indian companies, ultimately held about 67% stake in Hutchison (now Vodafone) Essar, one of largest players in the Indian telecom industry.
Later in September 2007, the Income Tax (I-T) Department initiated proceedings against Vodafone in an attempt to recover around $2.1 billion in taxes which, in its view, should have been withheld from payments made to Hutch. It justified its position by piercing the corporate veil of numerous intermediary entities to hold that the transaction led to the indirect transfer of controlling interest in the Indian operating company. After moving the high court and then the Supreme Court, the matter was finally sent back to the I-T Department to formally decide on the issue of whether it had jurisdiction to proceed against Vodafone.
After scrutinizing innumerable transactional documents, the Department, in May 2010, issued a voluminous order establishing that it had the necessary jurisdiction to proceed against Vodafone. Apart from stressing on its ability to look through the structure of the transaction, the Department argued that the form of the transaction itself contemplated transfer of a bundle of assets situate in India rather than a single share of a Cayman-based company.
Vodafone, then, immediately filed a writ petition before the Bombay High Court challenging the Department’s jurisdiction to pursue an offshore transaction of this nature, having absolutely no nexus with the territory of India. The Court also held that for the transfer to be taxed in India there should be sufficient nexus between the asset transferred and the territory of India.
However, in a situation where such nexus does exist, the high court was of the view that any income arising from the transfer of the India situs asset (and chargeable to Indian tax) may be subject to withholding taxes even if it is a transfer between two non-residents. The high court in its 196-page order dismissed the petition by stating that these diverse rights and entitlements acquired by Vodafone had sufficient nexus with the territory of India for the revenue department to initiate proceedings against Vodafone.
There are several such deals which came under the scanner of the tax deparment in India and are now in various High Courts. This includes, the $981 million deal for buying 51% interest in Sesa Goa between Japanese Mitsui Co and Vedanta group, which is pending before the Goa High Court. There is another case involving Idea Cellular, the Tata group and US-based AT&T. The Tata Group, which later exited Idea Cellular, had bought AT&T's Mauritius-based subsidiary, which held 16.5% in the telecom company, for $150 million. The case is pending before the Bombay High Court.
The other cases involving tax issues are GE and Genpact's $500 million deal (pending before Delhi High Court). SABMiller's deal to buy Foster's Indian subsidiary and Sanofi Aventis's deal to buy majority stake in vaccine company Shantha Biotech for $770 million are also pending before the Bombay High Court. The Vodafone decision is likely to help these companies as well.
“Indian consumers are the second most confident about their personal finances out of respondents in all the countries surveyed” – Credit Suisse survey
The Credit Suisse Research Institute published its second annual Emerging Consumer Survey - a detailed study profiling consumer sentiment within the BRIC nations (Brazil, Russia, India and China), Turkey, Saudi Arabia, Egypt and Indonesia.
Survey findings related to India include: Indian consumers are the second most confident about their personal finances out of respondents in all the countries surveyed - On a weighted basis, this confidence has strengthened over the past year, but this was driven by the highest earners. Education accounts for a high share of Indian spending, underpinning a long term bullish macro story for India. Increases in spending on smaller-ticket items are above average, but the growth of spending on technology has been more muted. 70% of Indian respondents said they had no computer at home, only 19% say they have access to the internet, which is among the lowest rates in the survey. Technology spending could benefit if we see a shift away from spending on essential items. Indian bank account penetration is the highest among the countries surveyed.
Distinguishing features of the Indian consumer include a continued appetite for extra educational expenditure and a propensity to save. There is a structural opportunity in technology spending. The Indian consumer remains the second most confident in his/her personal finances looking forward (after Brazil). On a weighted basis, this has strengthened over the year but the shift has been driven by the highest income earners.
“India’s high rate of spending on education reflects a very positive long term macro trend for the economy,” said Jatin Chawla, vice president, research, Credit Suisse. “The confidence of Indian consumers, though down compared to last year, is an encouraging sign for investors. Low current rates of spending on technology hold the promise of substantial upside for those sectors as, once income levels rise, the proportion of spending on food and housing will decline.”