AAR paves way for cap gains tax on Vodafone

MUMBAI: In a determination that may boost
the income-tax department’s opportunities of bringing the $11.1-billion deal
between Hutchison International and Vodafone into the taxation net, the Authority for
Advance Rulings (AAR) have held in a similar lawsuit that dealing of Indian
shares between two foreign physical things is apt for working capital additions taxation in the
country. Aare is a quasi-judicial authority deciding on tax
disputes. AAR’s opinion on Friday refers to dealing of shares
in the Hyderabad-based Three Corporation. In this case, the purchaser and seller
of Three shares were both United States entities. Aare ruled that the purchaser of the shares
will be taken as an 'agent’ under Section 163 of the Income-Tax Act. It
also ruled that the burden of TDS is also on the purchaser under Section 195 of the
Act. In other words, Aare ruled that the purchaser of the shares is
liable to pay working capital additions taxation on the transportation of shares of an Indian company
even if the dealing is offshore and between two non-residents. The decision,
though binding lone on the lawsuit that came up before it, have persuasive value on
similar cases. Non-residents are charged long-term capital additions at the charge per unit of
20% for off-market transactions. Aare have upheld the I-T department’s stand
on the land that since the working capital additions are generated in India, they are
liable to be taxed here. In the lawsuit of the Hutch-Vodafone deal, a
showcause notice have been served on Vodafone Essar, asking why the company
should not be treated as an agent of Vodafone under the I-T Act. After this,
Vodafone Essar had moved the Greater Bombay High Court for quashing the notice. In the
case of Hutchison, the company took a base that since the transportation of shares
had taken topographic point outside Republic Of India between two non-residents, the Indian tax
authorities could not impose working capital additions tax. According to Vodafone
Essar, the shares were transferred directly from Hutchison International via CGP
Investment (Holdings), which is incorporated in the Cayman Islands, to Vodafone. Besides, the companies that control Hutchison Essar (HEL) are based in
Mauritius, which have a dual revenue enhancement turning away understanding (DTAA) with
India. The Greater Bombay High Court, which was hearing the lawsuit of Vodafone
International, had made a funny observation on this issue. The division Bench
comprising Justice FI Rebello and Justice Deodhar observed that the deal, as
claimed by Vodafone International, was not a simple lawsuit of transportation of shares
between two foreign companies. It pointed out that the sale of shares was with
the blessing of FIPB, which was subject to conformity with North American Indian laws and
regulations, including taxation laws. The high tribunal made this
observation during the hearing of the request filed by Vodafone International,
the Netherlands, against whom the I-T section sent a notice for its failure
to subtract taxation while making payment to Hutchison Telecom International, Hong
Kong, for acquiring 67% involvement in Vodafone Essar.