Doing business in India

Doing business in India IFA – Technical Session – London - 19th April 2012 Massimo Ferrari, Des Webb - Vodafone

Vodafone India Tax Case 2

Vodafone – Hutchison structure of deal VIHBV buys CGP Shares British Virgin Islands HTI (BVI) (Seller) VIHBV (Acquirer) Netherlands Completed May 2007 No transactions below this line CGP Cayman Islands Essar 33% Others 15% 14 Holding Co’s Mauritius 52% Hutch Essar India

Background to structure • Vendor, Purchaser and CGP were non-Indian resident companies, having no presence in India. • Purchaser inherited the existing structure of corporate entities, which all had business, commercial and economic purposes. • None of the companies created for the purpose of this transaction • Number of the companies held a significant amount of debt and cash. • Many of the non-Indian companies were acquired from third parties by the HTIL group as early as 1992 - most recent one was incorporated in 1999. • The legal structure of HTIL’s shareholding in Hutchison Essar had previously been reviewed and approved by Indian regulatory authorities as being in compliance with applicable laws in India. • At the time of the transaction, Vodafone received extensive tax and legal advice that transaction would be clearly outside jurisdiction of Indian tax law. In nearly 50 years since the introduction of the Income Tax Act, these types of transactions had never been subjected to tax

Timeline of events Supreme Court decision: Tax Office to determine whether they have jurisdiction. VIHBV has right to appeal directly to High Court Supreme Court decision: transaction is not taxable in India and VIHBV does not have a withholding tax obligation 01/09 Bombay High Court decision: tax office has right to investigate and can’t rule out chargeability to tax 01/12 Bombay High Court decision: some aspects of transaction could be Indian source and tax office should be allowed to proceed VIHBV files writ petition in Bombay High Court Acquisition 12/08 Announcement - Completion 10/07 09/10 02/07 05/07 02 - 05/07 09/07 Tax Office requests information Tax Office notice to VIHBV 03/12 05/10 02/08 Finance Bill announced proposing extensive retrospective law changes to 1962 and overturning SC judgment Tax Office concludes it has jurisdiction Retrospective law change relevant to withholding tax obligation

Supreme Court decision – 20 January 2012 • Two separate judgments were handed down by the three judge bench and both were unanimously in favour of VIHBV. • The first Judgment, from two of the judges, found that the transaction was not subject to tax in India at all and so VIHBV had no obligation to withhold tax. Specifically it said; • Legal form can only be disregarded in case of tax avoidance – not present here • Holding companies have separate corporate existence to subsidiaries • S9 is not a “look through” provision • Legally what was transferred here was the share capital of CGP • Need to “look at” the transaction itself • The second also found that the transaction was not taxable but further found that even if it had been taxable, that VIHBV would not have had any withholding liability anyway as it was a non-resident company and as such not subject to Indian withholding tax obligations.

Developments since 20 January 2012 • Review petition filed on 17 February 2012 –Now completely dismissed by the Supreme Court • Public Interest Litigation filed on 22 February 2012 alleging Judge conflicted amongst other allegations – dismissed by SC on 2 March 2012 • Refund of deposit made by tax office on 20 March 2012 due to pledge made to Supreme Court

India – 2012 Key Developments 8

Three major developments in 2012 The SC tax ruling on Vodafone. The SC telecoms ruling. The Union Budget. 9

The SC telecoms ruling The SC ruled eight companies would lose some or all of their telecoms permits (following the scandal-tinged 2008). Some operators have thrown in the towel… Some are willing to invoke the protection of Bilateral Investment Protection Agreements… 10

The (retrospective) Indian 2012 Union Budget Retroactive taxation of indirect disposals of assets situated in India; Retroactive amendments of the definition of royalty; Retroactive amendments of the taxation income from satellite services; Retroactive imposition of withholding obligations on non residents. The CBDT empowered to retroactively define many terms used in tax treaties. On top of: The “nuclear weapon” given to the Indian Tax Authorities in form of a GAAR; TP rules made applicable to domestic transactions. 11

The “Key Assumption” India’s capacity to attract FDI is not jeopardised by its taxation policies and practices. But: FDI into India have fallen in 2011 vs. 2009 (-3%); While they have grown in all other BRIC countries: Brazil +150%, China + 31%, Russia +31%. Of course tax cannot be the only reason, but… 12

The international reaction so far: Hot topic in the media in India and elsewhere. Seven business association from UK/US/Canada/Japan/Hong Kong sent their complaints to the Indian Government, on top of TEI and BIAC. The UK Government clearly made the point during the recent visit to India. 13

Current discussion topics in India Proposed amendments are not in line with international tax law and practice and trigger unrelieved double taxation. They are not consistent with the international approach to retroactive tax legislation which is either not permitted or strictly restricted/controlled. E.g. the recent case in UK (which has become extremely popular in India…). Nowhere else retroactive changes affect final and definitive court decision (and in most countries not even ongoing litigations). This would contravenes fundamental principles: Respect of the rule of law; The independence of the judiciary; The separation of powers between the judiciary, the legislature and the administration; Etc. 14

Possible developments The Finance Bill 2012 is not approved in its current form (but the Government is currently taking a defensive stance…). The proposed amendments are ruled unlawful as a matter of the Indian Constitutional Law. BIPA protection? 15

Doing business in India