Vodafone SC hearing: Week eight

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Vodafone SC hearing: Week eight

Week eight of the Supreme Court hearing saw the tax department begin their arguments by claiming that the sale of the share from the Cayman Islands company was nothing but an “artificial tax avoidance scheme”.

Solicitor General Rohington Nariman began by saying that facts would determine the outcome of the case, and that the facts as well as the law are in his favour.

He then stated that the original idea of the parties was to sell shares in the Indian company Hutchison Essar (HEL) directly, but somewhere down the line, CGP Investments (a Cayman Islands company) was introduced since the Mauritius treaty would not apply.

When Chief Justice Kapadia questioned why the Mauritius tax treaty would not apply if the Mauritius entities had directly sold their holdings in HEL, Nariman contended that since Hutchison Telecommunications International Limited (HTIL), the seller entity based in the Cayman Islands, wanted to declare a special dividend out of the $11 billion payment, it would have been HTIL which would have “pocketed” the gains and not the Mauritius entities. He further argued that under article 13 of the India-Mauritius tax treaty, capital gains income should be derived by a Mauritian company to avail of treaty benefits.

Arguing that there was a conceptual confusion in Vodafone counsel Harish Salve's submissions on substance versus form, Nariman stated that when an agreement has to be construed based on a factual matrix, and that one has to look at the real intention and not the stated intention.

To a pointed query from the court as to whether the intention was tax avoidance, Nariman concurred immediately. While accepting Vodafone's contention that the structure was legal, he stated that CGP was fished out of this structure as an artificial tax avoidance scheme contrivance. He further argued that CGP was merely a “vehicle”.

Nariman wound up his first day by arguing that the 10% stake held by Vodafone in Bharti (before acquiring Hutch) was a clear presence in India for the purpose of section 195 of the Income Tax Act, 1961.

Bogus structure

Day 19 of the hearing began with Nariman claiming that the entire corporate structure of Hutch group's investments was bogus.

Nariman stressed the fact that CGP was registered as an exempt company in Cayman Islands, which meant that it could only do business abroad, since Cayman Islands law does not permit an exempt company to do any business there. He further stated that exempt companies in Cayman Islands are allowed to keep their shareholder register anywhere.

He concluded this argument by pointing out that more than 18,500 companies were registered at the same address as that of CGP.

Finally, the Solicitor General placed substantial reliance on a due diligence report issued by Ernst & Young, which stated that the target structure also included CGP which was not originally within the target group. Based on this report, Nariman submitted that CGP was interposed sometime in January 2007, just a few weeks before the deal was announced on February 11 2007.

The case continues.

The summary of proceedings in this article is based on the editorial feed provided by Taxsutra.com which is covering the hearing in technical detail on a daily basis.


Vodafone SC hearing: Week seven

Vodafone SC hearing: Week six

Vodafone SC hearing: Week five

Vodafone SC hearing: Week four

Vodafone SC hearing: Week three

Vodafone SC hearing: Week two

Vodafone SC hearing: Week one

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