Case Commentary on Vodafone International Holdings B.V. vs. Union of India (UOI) and Ors. (20.01.2012 – SC) and Formula One World Championship V CIT.
TAX OPINION PAPER- CASE SUMMARY FOR VODAFONE AND FORMULA ONE CASE
Vodafone International Holdings B.V. vs. Union of India (UOI) and Ors. (20.01.2012 – SC): MANU/SC/0051/2012
Vodafone International Holdings, a copany resident for tax purposes in Netherlands had acquired 100 per cent shares in CGP investment holdings, a company resident for tax purposes in Cayman Islands for 1.1 billion from Hutchison Telecommunications International Limited (HTIL). CGP had acquired over 67 per cent of the controlling interest in HEL (an Indian Company) through which Vodafone came about getting command over CGP, its subsidaries and HEL. HEL was a result of a joint venture between Hutchison gahering and the Essar gathering. It had acquired telecom licenses to give cell communication in various circles in India starting from November 1994. A show cause notice was served to Vodafone by the Income Tax Department in India in the year 2007 to explain why tax was not retained when installments were being made to HTIL in connection with the above concerned transaction. The government of India argued that Vodafone before making payments to Hutchison should have deducted tax at source. The department was of the view that the transfer of shares in CGP had an impact of indirect transfers of assets in India and thus the matter was under their jurisdiction. The demand notice was challenged by Vodafone in the Bombay High Court, which ruled in favour of the Income Tax Department. Vodafone then filed a Special Leave Petition (SLP) against the High Court decision in the Supreme Court under Article 136 of Indian Constitution. In November 2010, the SLP was accepted and admitted, the Supreme Court ruled that Vodafone Group’s interpretation of the Income Tax Act of 1961 was correct and that it did not have to pay any taxes for the stake purchase. The conclusion of the case wad finally reached by looking at the various provisions of the Income Tax and other principles and concepts like corporate veil and substance over form principle.
The most important questions that were raised in the judgement revolved around the application of Section 9(1)(i)[1] and Section 195 (1)[2] of the Income Tax Act for the transfer of shares of Hutchison Essar Limited from CGP Investments Ltd. to Vodafone International Holding via indirect transfer of shares.[3] Section 9 states that income is deemed to accrue in India if it arises in India from a transfer of capital asset in India even for a non- resident. The court with repsect to Section 9 recognised that there exists ommission of words “ indirect transfer” under subsection (1)(i) . The court further was of the opinion that the statute does not have a “look through” the provision that could be stretched to include the reading of “indirect transfers” of Capital assets into the statute. Thus the court concluded that the transaction stands outside the jurisdiction of the Indian Revenue, the transfer of shares to CGP did not amount to transfer of Capital Assets situated in India and was as not subjected to taxation. With repect to the application of Section 195, the court stated that chargeability and enforceability are two separate lawful ideas and that the interpretation of the section is based on two requirements. [4]Firstly, there must be an installment or a payment made to a non-resident and such payment must be an aggregate chargeable under the Act, the laibility charge, emerges if the expense is assessable in India, etc. The court mentioned this two-fold requirement discarding Revenue’s belief that after establishing nexus of a non-resident to a taxable income in the country no further requirement is needed. The transaction of Vodafone, which is outside the nation, with the consideration also being paid outside the nation, also suggests that the application of the provision is not possible in this case. Tax presence in India is an important consideration as the section does not extend beyond India as per the envision of the legislature. Ther ruling of the apex court was a big slap on the wrists of the income tax authority of India. It is safe to consider this case as a test case where the Revenue aimed at stretching the meaning of Income Tax to include within its ambit of taxation the overseas transfers with an underlying value if the transaction was done with an intention of transfering the underlying value. The opinion of the court that one could not look through or pierce the corporate veil of a legitimate holding company that was used as an investment vehicle and tax the subsidaries is praiseworthy and will hopefully set the tone for future. Along with this the CJI was wise enough to recognise that foreign direct investment flows towards locations with a strong governance infrastructure – good laws and efficacious enforcement of laws by the legal system and thus taxing them would act as a severe blow and setback onto the future investments in the counrty. The CJI’s ruling and judgement of how one needs to look at the transaction and not look through a transation as long as it is not concerned with detection of fraud is noteworthy.[5] The judgement also brought clarity on the issue of tax avoidance versus tax evasion. The court held that tax avoidance within the parameters continues to prevail and that the principle lay down with respect to the same topic in the case of Azadi Bachao Andolan continues to hold true. The Supreme Court was very clear in its opinion that one cannot impose limitation of benefits in a tax treaty. The concurring judgement of Justice Radakrishnan is remarkable as it lays down certain interesting principles. He mentions the DTAA provisions, LOB Clause and Mauritius route of FDI in the nation and mentions about how there’s a popular notion of the Mauritius route being used as a way of investment to fraudulently not pay any taxes in the Indian nation by foreign companies not situated in Mauritiusa.[6] He deals at a length with the India- Mauritius Tax Treaty saying that the India-Mauritius Tax Treaty would be respected where a Mauritius company holds a Tax Residence Certificate, unless a Mauritius entity has been interposed at the time of disposal of shares solely with a view to avoiding taxes. Justice Radhakrishnan was of the belief that in absence of Limitations of Benefits (LOB) the benefit of tax treaties should be given to Mauritius and on recognition of Tax Residency Certificate the principles of corporate veil and substance over form principle should not be used until prima facie there is a case of fraudulent transaction. The judgemnet comes as a sigh of releif to several assessees who make offshore payments on which the Indian Tax Office seeks to impose withholding obligations by reteirating the importance of how payments made by one non – resident to the other would not be subjected to withholding tax in India as long as one does not have a tax presence in India. While the judgement is considered as a victory of the Indian Judicial System and reaffirms the faith of foreign investors, the victory was short lived. In 2012 the government of India circumvented the SC ruling and introduced an amendment to the Finance Act,[7] which gave power to the Income Tax Department to retrospectively tax such deals. The Amendment stated that the transfer of capital asset directly or indirectly situated in India would lead to taxation in India. The amendment was not taken on kindly by the investors and the business world as such a sudden amendment would ruin their previous tax planning and would thereby reduce the FDI flow into the counrty. The amendment was called by the investors “perverse” in nature and it hurt the market sentiments of the investors globally. The matter was finally taken up and adjudicated by the International Abritration Court[8] that gave a postive judgement for foreign investors in India and the Indian order was in violation of United Nations Commission on International Trade Law (UNCITRAL). The judgement in over all was in favour of the foreign investors and lays solid foundations and standards for tax assessments in the country.
FORMULA ONE WORLD CHAMPIONSHIP V CIT (Civil Appeal No. 3849 of 2017)
The Supreme Court delivered first of its kind landmark judgement in the case of Formula One World Chnapions V CIT and laid down principles with respect to Permanent Establishment (PE). The judgement is considered to be ahead of it times and one of the most progressive judgements in matters of Tax Avoidance and Permanent Establishment. In the brief facts of the case, the taxpayer Formula One World Chmapionship Limited (FOWC), a UK tax resident had acquired commercial rights in the F1 Championships held all across the world for about 100 years. In India they had struck a business deal with Jaypee Sports International Limited (JSIL) to host one of their races in the Buddh International Circuit, Greater Noida. The contract involved many clauses and agreements. It involved the payment of a consideration of huge amounts to the taxpayers (FOWC), which were not willing to pay considering their Non- Residential Status. The convention of the Organization of Economic Cooperation and Development (OECD) Conventions that regulate all the Double Tax Avoidance Agreement (DTAA) was the source of legal issues for the present case. The case involved an in depth understanding of what Permanent Establishment is and Section Article 5[9] of the OECD Convention for the DTAA for India and UK. The defintion of permanent establishment has a two-fold requirement[10], a permanent establishment and business being conducted which is taxable. The Supreme Court held that FOWC, the holder of commercial rights to the Formula one grand pix had a permanent establishment in India at the Buddh Internationa Circuit where the event was held. The apex court concluded that the company that was a UK resident company had a permanent establishment in India as per Article 5(1) of the India UK double Tax Treaty [11]. The facts of this case alone are a sufficient enough proof to show that the Buddh International Circuit was a fixed establishment and the F1 race was an event with a business nature to it where the definition of ‘business’ as per the IT act was fulfilled as there was revenue (profits) for this activity to be earned. The court realising that Article 5(1) of India- UK treaty is identical to the OECD Model which defines “permanent establishment” as “a fixed place of business through which the business of an enterprise is wholly or partly carried on also recognised certain essential characteristics described in the OECD commentry such as the place of business should be fixed at a distinct place with a certain degree of permanence, the business activity should have been carried on through the same fixed palce of business for a considerable period of time. The court keeping in mind these observations ruled that circuit was put at the disposal of FOWC under the Race Promotion Contract, which granted them along with their contracters and other licensees the access to the circuit for a three-week period starting 14 days before the day of the race and ending seven days after the race.[12] It also held that the circuit was a distinct place in order to qualify as fixed. The court also dealt with the more complicated issues of how long should the place place of business endure to have a sufficient degree of permanence and if the business was carried on from the fixed place. In addressing the issue of whether FOWC carried on the business at that place, the court was of the opinion that the exploitation of the F1 commercial rights is a group exercise by FOWC. The court very safely assumed that he entire event is taken over and controlled by FOWC and its affiliates. The court although recognises the point that FOWC were bestowed upon with all the valuable rights, the question of whether its affliates had any sort of permanent establishments in the country that could be taxed was not considered deeply. The Supreme Court also failed in dealing fairly with the issue related to the time requirement. The court by laying emphais entirely on the five-year length of the contract, failed to recognise that the circuit was only accessible for three weeks a year and that the requirements for a permanent establishment are cumulative. [13]It misses the point that it does not really matter if group activies over a course of time is aggregated, what matters is the sufficient duration of the place to meet the stability requirement[14]. The Supreme Court of India unlike the apex courts of other countries did not base their analysis on the double tax treaties by recognising and applying the codified principles of treaty interpretation in articles 31-33 of the Vienna Convention on the law treaties but instead relied more on secondary material such a textbooks. The court also relied on the Canadian case law of Fowler v MNR which is much criticized in Canada and considered to have very little or low precendential value. Even though there were shortcomings in the legal analysis of the case this case is considered to be one of the first rulings by the Indian SC in the context of PE especially when the operations of the foreign enterprise were carried out only for a short duration and has also paved ways to the changing attitudes towards the taxation of multinational enterprises.
[1] Section 9(1)(i), Income Tax Act, 1961
[2] Section 195(1), Income Tax Act, 1961
[3] Para 91, Vodafone International Holdings B.V. vs. Union of India (UOI) and Ors. (20.01.2012 – SC): MANU/SC/0051/2012
[4] Para 144, Vodafone International Holdings B.V. vs. Union of India (UOI) and Ors. (20.01.2012 – SC): MANU/SC/0051/2012
[5] Para 136, Vodafone International Holdings B.V. vs. Union of India (UOI) and Ors. (20.01.2012 – SC): MANU/SC/0051/2012
[6] Para 136, Vodafone International Holdings B.V. vs. Union of India (UOI) and Ors. (20.01.2012 – SC): MANU/SC/0051/2012
[7] Amendments brought in by the Finance Act, 2012, 2 (2012), https://icmai.in/upload/Students/Circulars/Amendments-Direct-Tax-2012.pdf (last visited Nov 10, 2020).
[8] Vodafone International Holding BV V Government of India, PCA Case No. 2016-35 (Dutch-BT)
[9] Article 5, Organization for Economic Co-Operative Development, 2003
[10] Article 5(1), Organization for Economic Co-Operative Development, DTAA UK-INDIA
[11] Schwarz, J., (Editor), S., & Valente, P. (2017, May 21). F1’s Indian Permanent Establishment: Car crash or racing to the future? Retrieved November 16, 2020, from http://kluwertaxblog.com/2017/05/21/f1s-indian-permanent-establishment-car-crash-racing-future/
[12] Schwarz, J., (Editor), S., & Valente, P. (2017, May 21). F1’s Indian Permanent Establishment: Car crash or racing to the future? Retrieved November 16, 2020, from http://kluwertaxblog.com/2017/05/21/f1s-indian-permanent-establishment-car-crash-racing-future/
[13] Schwarz, J., (Editor), S., & Valente, P. (2017, May 21). F1’s Indian Permanent Establishment: Car crash or racing to the future? Retrieved November 16, 2020, from http://kluwertaxblog.com/2017/05/21/f1s-indian-permanent-establishment-car-crash-racing-future/
[14] Patnaik, S. (2017, September 01). Formula One: SC Lays Down The Formula For Permanent Establishment – Tax – India. Retrieved November 16, 2020, from https://www.mondaq.com/india/corporate-tax/625496/formula-one-sc-lays-down-the-formula-for-permanent-establishment
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