tax havens & recent retrospective amendments in income tax act, discussion on vodafone vs union...
TRANSCRIPT
Tax Havens &
Recent Retrospective Amendments In Income Tax Act
Discussion On
Vodafone v/s Income Tax Authority
What Does Tax Haven Means?
A tax haven is a state, country or territory where certain taxes are levied at a low rates or
not at all.
Advantages of Tax Havens
• Levy no significant taxes. Or very low tax rates
• Tax income earned in the country only.
• Some jurisdictions have tax treaties to avoid
double taxation
• Special Tax Incentive for offshore Business
setups
Types of Tax HavensNo Particular Example of Countries
1 No corporate tax Bermuda, Cayman
Island
2 Low-taxed Countries Hong Kong, Ireland,
Jersey
3
Jurisdictions with no (or very few) tax
treaties that offer nil (or very low) or
negotiated tax regimes for offshore entities
British Virgin Islands,
Cook Islands, US
Virgin Islands
4No or nil tax regimes for offshore
companies with the benefit of tax treaties
Cyprus, Malaysia,
Mauritius
5
Fiscally beneficial regimes for intermediary
holding finance or licensing companies
with full benefits of treaty network
Austria, Belgium,
Denmark, France,
Germany
No Particular Example of Countries
6
Special tax concessions for entities engaged
solely in management services and
coordination activities for multinational
activities
Belgium, Denmark,
France, Germany,
Malaysia
7Jurisdictions with fiscal incentive for new
residentsIreland, Israel
8Retirement havens for high net worth
individuals Cyprus, Sri Lanka
9Offshore jurisdictions for estate planning or
asset protection trusts
Bahamas, Cayman
Island
10 Special incentives for shipping operations Singapore, Cyprus
11 Encourage captive insurance activities Ireland, Mauritius
Types of Tax Havens Cont…
HTIL
• Hutchison Telecommunications International Limited
• Situated in Hong Kong
• Holding 100% Shares in CGP Investments Holdings Ltd
CGP
• CGP Investments Limited
• Situated in Cayman Island, Mauritius (a tax haven country)
• Holding 67% Shares in HEL
HEL
• Hutch Essar Limited
• Situated in India
• Formed by Merger of HTIL and Essar Group
VIH
• Vodafone International Holdings
• Situated at Netherland
• Subsidiary of Vodafone Group Plc
The Deal – A Diagrammatic View
HTIL(Cayman Island Co.)
VELVodafone Essar Limited
HEL(Indian Co.)
VIH (Vodafone International
Holdings)
CGP(Cayman Island Co.)
Sold 100% holding of CGP to VIH
Renamed as
Apparent UnderstandingLook At Approach
Foreign Company 1
(HTIL)
Sold Foreign Company 2
(CGP)
To Foreign Company 3
(VIH)
Transaction Took Place Outside
India in Foreign Currency
There is no Territorial Nexus
Resultant Capital Gain can’t be taxed in India
Contention Of The Income Tax Dept.Contention 1
Offshore Share Transaction
Result in Transfer of Shares in HEL from HTIL to VIH
Indirect Transfer of Capital Asset Situated in India
Relevant Provision :- S. 9 (1) (i) L-4Income accrues/Arising, Directly/Indirectly through transfer of Capital Asset situated in India = Deemed to accrue/arise in India.
Contention 2
Controlling Interest In HEL is Capital Asset situated in India u/s 2(14)
On account of transfer of shares in CGP Inv Ltd by HTIL to VIH
Controlling Interest of HTIL in HEL gets extinguished
Extinguishment of Right = Transfer u/s 2(47)
Activates S.9(1)(i) L-4
Indian Income
Comes within the Scope of Total Income S. 5
Comes within the Charging Section 4
Taxable In India
If it is Taxable in India
Section 195 Attracts to VIH
Resultant Gain
Action by Income Tax Dept.
Specifies as to why it should not be treated as an Assessee In Default
(AID) U/s 195?
Issued a Show Cause Notice u/s 201
Bombay HC
Filed a Writ Petition
Action By The Assessee
• Challenging the legal validity of the SCN
• Contending that the transaction was only in respect of shares of CGP in Cayman islands; and
• That being a capital asset situated outside India,
• No income had accrued or arisen in India
Decision of Bombay HC
• Bombay High Court Concurred with the Viewpoint of the department
• Bombay High Court refuses to Interfere
• SCN was not Quashed
• Vodafone was, therefore, liable to deduct TDS on the payment made to HTIL and therefore SCN is a Valid Notice.
Supreme Court
Aggrieved By the Order of HC. Files an Appeal to
Response to the Order By The Assessee
Decision Of Supreme Court
The word ‘Indirectly’ qualifies for ‘accruing/arising’ and doesn’t qualify for ‘transfer’
S.9(1)(i) cannot by a process of interpretation be extended to cover indirect transfer of CA situated in India
To do so would amount to changing the ambit of S.9(1)(i)
Therefore language employed in S.9 (1) (i) L-4, you cannot bring indirect transfer within its fold
Such Interpretation will make the words ‘…situated in India…’ meaningless or nugatory.
Contention 1
Verdict of the Case !!!
• Present law doesn’t cover indirecttransfers or off shore share transactions
• Don’t follow Look Through Approach
• Follow Look at Approach
Decision Of Supreme Court –Contention No.2
• Shares in a Company = Bundle of Shares
• One such Right = Voting Right
• If Share Holding Increases VR Increases then Controlling Interest also increases
• Control of a Company resides in Voting Power• Controlling Interest is a natural Incident of ownership of
share.• Controlling Interest is not Independent / Distinct
/Dissectable Capital Asset
• Shares and the right which eminate from them flow together and cannot be dissected.
• CI gets automatically shifted as a result of transfer of shares.
• Control and management is a facet of holding shares
• Conclusion: This is a Straight jacket case of transfer of Shares in a foreign Company between two non residence outside India .
• Therefore section 9(1)(i) L – 4 doesn’t apply• S.5 X S.4 4 – X, Not taxable, No TDS Deduction u /s 195.
SCN = Invalid• Note: S.195 applies only to a payment made by a
resident. If the Payer is NR s.195 doesn’t apply.
Major Amendments
No Section NameAmendment
Inserted
1 2(14) Capital Asset Exp.
2 2(47) Transfer of Capital Asset Exp. 2
3 9(1)(i) Income Deemed to
Accrue or Arise in India
Exp. 4
4 9(1)(i) Exp. 5
5 195(1) Other Sum paid to Non-
Resident Exp. 2
Section Amended: Section 2 (14)
Segment of Ruling Superseded
Amendment – Explanation inserted to clarify that
Controlling interest is not anidentifiable or distinct capitalAsset independent of theholding of shares
“Property” includes anyright in or in relation to anIndian company , includingrights of management orcontrol or any other rightswhatsoever
Section Amended: Section 2 (47)
Off shore transfer ofshares in a foreignholding companydoes not result inextinguishment oftransferor’scontrolling interest inthe Indian subsidiaryand therefore, there isno element of transfer
Explanation – 2 is inserted below S.2(47)to clarify that “ transfer” includes
Disposing of or parting with an asset orany interest therein, or
Creating any interest in any asset in anymanner whatsoever,
Directly or indirectly, absolutely orconditionally, voluntarily orinvoluntarily, by way of anagreement(whether entered in to in Indiaor outside India or otherwise,
Notwithstanding that such transfer of rights has beencharacterized as being effected or dependent upon or flowingfrom the transfer of a share or shares of a company registered orincorporated outside India”
Section Amended: Section 9(1) (i)
Segment of Ruling Superseded
Amendment– Explanation 4 inserted to clarify that
Indirect transfer of capitalasset situated in India is notcovered by s. 9(1)(i). Theargument of look throughlacks merit
The expression “through”shall mean “ by means of” inconsequence of” or “byreason of”
Section Amended: Section 9(1) (i)
Segment of Ruling Superseded
Amendment – Explanation 5 inserted to clarify that
To read indirect transfer intoS.9(1)(i) would render thewords ‘capital Asset Situatedin India’ nugatory
Capital Asset situated inIndia will also cover share ofinterest in a foreigncompany/ entity registeredor incorporated outsideIndia if such share /Interestderives, directly or indirectly,its value substantially fromthe assets located in India
Section Amended: Section 195(1)
Segment of Ruling Superseded
Amendment
ResidentNon
ResidentApplicable
Payer Recipient S.195(1)
Non Resident
Non Resident
Not Applicable
Non Resident
Non Resident
Applicable
Conclusion of the Case
Income accruing or arising, through orfrom transfer of a capital asset situate in India, inconsequence of transfer of shares of a companyregistered or incorporated outside India shall bechargeable to tax in India & accordingly, tax shallbe withheld in accordance with provisions ofS.195