This document summarizes a case study involving Vodafone's acquisition of Hutch Essar Limited (HEL) in India through a series of transactions with intermediate companies in Mauritius and the Cayman Islands. The Income Tax Department argued that capital gains tax should have been paid in India on the transaction. The Bombay High Court initially agreed with the tax department. However, the Supreme Court later overturned this decision, finding that the transaction did not involve the transfer of a capital asset situated in India and thus was not taxable.

1. A Case Study
VODAFONE V/S INCOME
TAX AUTHORITY
S Gautam & Associates

2.  The case examines one of the largest merger and
acquisition deals in India, how, Vodafone, one of the
world’s largest mobile telecommunications company gained
control over Indian Telecom Company Hutch Essar
through intermediate companies situated in Mauritius
(Cayman Islands).
 The company Involved in this Case are as Follows:
1. Vodafone Group Plc (London)
2. Vodafone International Holdings BV (Netherlands) Subsidiary of
Vodafone Group Plc.
3. Hutchison Telecom International Ltd.(Hong Kong)
4. CGP Investments Holdings Ltd.(Mauritius)
5. Hutchison Essar Ltd.(India)

3. Corporate Structure
Vodafone Group Plc:
 Vodafone Group Plc incorporated in London (England )is one
of the world's leading mobile telecommunications company.
 It is world’s Fourth largest mobile operator in terms of
subscribers and largest in terms of revenue.
 The Company's ordinary shares are listed on the London
Stock Exchange and the Company's American Depositary
Shares ('ADSs') are listed on the NASDAQ Stock Market.
 The Company had a total market capitalization of
approximately £71.2 billion at 12 November 2009.

4. Corporate Structure
Hutchison Whampoa:
 Hutchison Whampoa Limited (HWL) of Hong Kong is a
Fortune 500 company and one of the largest companies
listed on the Hong Kong Stock Exchange.
 Hutchison deals in the businesses of ports and related
services, property and hotels, retail, energy, infrastructure ,
investments and telecommunications.
 It belongs to the Cheung Kong Group and employs around
2, 20,000 people worldwide.
 Flagship companies include Hutchison Port Holdings, H W
Properties, Cheung Kong Infrastructure and Hutchison
Telecommunications International Ltd.(HTIL)

5. Corporate Structure
CGP Investments Holding :
 CGP Investment Holdings Limited , is type of SPV
Situated in Cayman Island , Owned by HTIL (Hong Kong).
 CGP holds the controlling interest of Hutchison Essar
(Indian ).
 CGP Holds directly 61.95 % shares and indirectly 5.05 %
shares through other subsidiary .

6. Corporate Structure
Essar Group:
 The Essar Group is a multinational conglomerate Corporation
in the sectors of Steel, Energy, Power, Communications,
Shipping Ports & Logistics as well as Construction
headquartered at Mumbai, India.
 Essar is managed by Shri Shashi Ruia, Chairman – Essar
Group and Shri Ravi Ruia, Vice Chairman Essar Group.
 Essar began as a construction company in 1969 and diversified
into manufacturing, services and retail.
 Essar has its foot print over Asia , Africa, Europe and the
America, and employs more than 50,000 people across the globe.

7. Corporate Structure
Hutchison Essar:
 Hutchison Essar Ltd. (“Hutch India”), a company incorporated in
India in 1994.
 It was a joint venture of the Hong Kong-based Hutchison
Telecommunications International Ltd and the India-based Essar
Group.
 Hutch India was in the business of providing tele communications
service in India.
 It covers twenty three telecom circles in India and is based in
Mumbai.
 In Hutchison Essar, 66.9848% shares were held by CGP
Investments (Holdings) Ltd, directly 61.95 % and Indirectly
through other subsidiary 5.05% and Remaining 33.0152% were
held by Essar Group of Companies.

8. Hutchison Telecom
International Ltd
(Hong Kong)
CGP
Investments
Holdings
Ltd.
(Maurutius)
Hutchison Essar Ltd
(Indian Co.)
Diagrammatic View
Holding 67 %
Shares in HEL
Essar Group
Ltd(India)
Holding 33
% in HEL

9. Facts of the Case
 On February 11, 2007, Vodafone agreed with HTIL to
acquire the controlling interest of CGP Investments holdings
Ltd for US$ 18.8 billion. Out of which Value of Hutch-Essar
was US$11.1 billion . The Transaction closed on May 8,
2007.
 Despite the Official name Being Vodafone Essar , its
products are simply branded “Vodafone”
 As a result of this sale, capital gains, estimated at $ 2 billion
accrued to CGP Investment Holdings
 Considered from the point of view of jurisdictions, it is clear
that the sale transaction took place between the Dutch SPV
(owned by a UK group) and the Cayman Islands SPV (owned
by a Hong Kong company).

10. Understanding the fact of the Case Diagrammatically
Vodafone Group
plc (London)
HTIL (Hong Kong)100%
Holding in CGP
(Mauritius)
CGP Investments
Holding 67 % in
Hutchison Essar
Ltd.(India)
Hutchison Essar
Ltd (Indian Co.)
Vodafone Essar
Ltd. (Indian Co)
Turned To
Vodafone
International
Holdings BV
(Netherlands)

11. Definition of “Income”
Section 9(1)(i) define Income as ,
“all income accruing or arising, whether directly or indirectly,
-through or from any business connection in India, or
-through or from any property in India, or
-through or from any asset or source of income in India, or
-through the transfer of a capital asset situated in India.”
Definition of “Capital Assets”
Section 2(14) defines capital assets in IT act .
As per this section , capital assets means Property of any kind
held by an assessee whether or not connected with his business or
profession .

12. Assessing Officer’s Appeal
 Since the deal was offshore, neither party thought it was
taxable in India. But the tax department disagreed. It claimed
that on capital gains ,Tax should have been deducted by
Vodafone while paying Hutchison.
 The Income Tax Department has claimed capital gains under
Section 9(1) (i) of the Income Tax Act as it is of the view that the
transaction involved transfer of an Indian Asset and that the
profit made by HTIL from the sale of shares to Vodafone was
generated in India.
 Therefore, Vodafone had an obligation to pay withholding tax
u/s 195 (1) in India before making payment of purchase price to
HTIL.

13. Continued…….
 Transfer of rights in HEL (India) via CGP Investment
Holding Ltd . CGP Investment Holding Ltd. Is merely
created to take benefits of Tax Heavens in Cayman Island
(Mauritius).
 As Capital gains arise on transfer of shares are exempt in
Mauritius.
 But if we consider a concept a Substance over Form,
which clearly depicts that substance of a transaction is to
transfer the rights in HEL Situated In India.

14. Understanding the fact of the Case Diagrammatically
Vodafone Group
plc (London)
HTIL (Hong Kong)100%
Holding in CGP
(Mauritius)
CGP Investments
Holding 67 % in
Hutchison Essar
Ltd.(India)
Hutchison Essar
Ltd (Indian Co.)
Vodafone Essar
Ltd. (Indian Co)
Turned To
Vodafone
International
Holdings BV
(Netherlands)

15. Bombay High Court Decision
 On 08 September 2010 ,It was held that appeal done by CIT is
up to the mark Because of the following reasons:
 As the purpose of entering into agreement is to acquire the
controlling interest ,which HTIL (Foreign Co.) had in
HEL(Indian Co.) and as acquired (controlling interest) by
Vodafone International .
 Income Tax Reference : Income Shall be deemed to be accrued
or arise in India U/s 9(1)(i).

16. Definition of “Income”
Section 9(1)(i) define Income as ,
“all income accruing or arising, whether directly or indirectly,
-through or from any business connection in India, or
-through or from any property in India, or
-through or from any asset or source of income in India, or
-through the transfer of a capital asset situated in India.”
Definition of “Capital Assets”
Section 2(14) defines Capital Assets in IT act .
As per this section , capital assets means Property of any kind
held by an assessee whether or not connected with his business or
profession .

19. Assessee’s Explaination
 If today you buy 10% of the shares of a particular company, let
us say Jet Airways, does this mean that you automatically own
10 % of all of Jet Airways assets ?
 Does this mean that 10 % of the entire fleet of aircraft now
belongs to you ? by buying out a company that holds 67 % of
HEL , it doesn’t mean that Vodafone know owns 67 % of assets
of HEL.
 Those assets continue to belong to HEL , which is a Separate
legal entity based in India .

20. Assessee’s Defend Diagrammatically Explained
Vodafone
International
Holding BV
(Netherlands)
CGP Investments Holding
67 % in Hutchison Essar
Ltd.(India)
Hutch Essar Ltd.
(Indian Co.)
Vodafone’s Defend
By Becoming
holding Co. of
CGP it doesn’t
means that
I(Vodafone) holds
67 % of all assets in
HEL (Indian Co.)

21. Supreme Court decision
 Vodafone filed a review petition in Supreme court in 20,January, 2012.
 Supreme Court Reversed the decision of Bombay High Court Because :
 Assessing officer had no jurisdiction to tax the foreign transactions, as
sale of shares in Cayman island.
 Transfer of shares in CGP doesn’t amount to transfer of Capital assets
situated in India , as per section 9(1)(1) under the 4th limb.
 Bombay high court judgment held that transfer of Controlling interest ,
which is not an identifiable or distinct capital assets, independent of
holding of shares and also not covers in Definition of Capital Assets u/s
2(14).
 As Capital Assets is not taxable in India , so there is no Question of
Deducting tax at Source u/s 195(1).

22. Tax Deduction at Source U/s 195 (1)
Any Person responsible for Paying to a non –Resident , not being a
Company , or to a Foreign company, any interest (not being interest
on securities) or any other sum chargeable under the provision of this
act being chargeable under the head “Salaries” shall at the time of
credit of such income to the account of the payee or at the time of
payment therof in cash or by the issue of a cheque or draft or by any
other mode which ever is earlier, deduct income tax theron at the rates
in force.

27. CONCLUSION
I, therefore, find it difficult to agree with the conclusions arrived at by
the High Court that the sale of CGP
share by HTIL to Vodafone would amount to transfer of a
capital asset within the meaning of Section 2(14) of the Indian.
Income Tax Act.