TAX NEWS - JUNE 2010
Tax on global transactions
Claiming that both the seller and purchaser were located outside India, tax was not deducted under Section 195 of the Income-Tax Act which is more like a residuary section exhorting taxpayers to deduct tax on "any other sums".
Vodafone sought solace from the Supreme Court which remained non-committal and threw the ball back into the court of the tax authorities. The mega-judgment (761 pages) comes to the conclusion that the transaction was taxable in India and, being taxable, the tentacles of Section 195 would apply to it.
The Reasoning
The Department reasoned that Section 5(2)(b) clearly uses the terms ' accrue or arises or is deemed to accrue or arise'. Full effect to all the words employed in Section 5(2) has to be given. The term 'accrue or arise' forming the first part of Section 5(2) refers to income that in the ordinary course can be regarded as accruing or arising in India without taking recourse to the provisions of Section 9(1).
Merely because Section 9(1) separately covers the situation where income accrues or arises whether directly or indirectly through the transfer of capital asset situated in India, it cannot be concluded that Section 5(2) cannot cover a situation of the transfer of a capital asset when that results in income accruing or arising in India. Separate, independent structure of the intermediate subsidiaries has neither been recognised nor maintained by HTIL. The conduct of the parties to the Share Purchase Agreement shows that HTIL has functioned as a single entity and for all intent and purposes it has regarded the downstream companies as its own extended hands.
The Revenue need not lift the corporate veil which has already been discarded by the vendor. The undisputed conclusion which has emerged from the factual and legal matrix outlined in the order is that the deal was acquisition of the telecommunication operations of the Hutchison group in India along with all accompanying assets, interests, rights, whether tangible or intangible, which was sold by Hutchison Telecom International to Vodafone by virtue of the sale and purchase agreement.
Sufficient nexus
It went on to rule that on the date of payment, that is, on May 8, 2007, Vodafone had sufficient nexus and presence in India and it cannot claim that it was not bound by Indian laws, including tax laws and the withholding tax provisions. Having concluded that the income is chargeable to tax in India, Vodafone was under an obligation to deduct tax at source at the time of making payment. The tax authorities made note of the fact that not all documentation was forthcoming from the appellant and only "relevant extracts" of the due-diligence report were provided.
This, coupled with the facts that the Group stood guarantee for a $3590 million loan for the transaction, proved to what extent the Group was prepared to bend its back. The tax authorities laid their hands on a tax deed dated the same date as the acquisition date which describes reciprocal Secondary Liabilities Indemnities and provides in its sub-clause (1) that HTIL agrees to pay Vodafone, among others, any amount on account of taxation for which a Wider Group Company becomes liable, in consequence of failure by any member of the HTIL Group to discharge taxation primarily attributable to that member of the HTIL Group.
Way forward
Having battled so much, it is unlikely that Vodafone would throw in the towel. It could knock on the doors of the apex court again. However, as recent rulings (Samsung, etc) on Section 195 prove, Indians are taxed on their global income irrespective of transactional territories in some instances. Just to ensure that the money comes into the kitty early, the withholding provisions in Section 195 encompasses all transactions.
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