Kapadia questioned Vodafone’s counsel, Harish Salve, whether a subsidiary could simply be told about the price at which its shares would be sold. He also wanted to know if a top tier company could tell the ultimate subsidiary in India that the former would fix the price and sell the shares.
Kapadia referred to Aditya Birla – AT&T, where the Mumbai High Court held that a holding company dictates to the subsidiary details of, in particular, acquiring shares, agreeing a selling price and the agreements to be entered into.
In that case, the Mumbai court held that a sale of shares of an Indian company (Idea Cellular Limited) by Mauritian company (AT&T Mauritius) was in reality a sale by its US parent company (AT&T USA), as the substance of the transaction warrants such an inference
Salve responded by clarifying that there is no law which inhibits the sale of a share of a subsidiary at a price decided by its holding company, especially if the subsidiary is wholly owned.
He then applied the Aditya Birla – AT&T decision to Vodafone. He said this would mean Hutchison would be the beneficial owner of the Cayman Island company shares but the taxability would still not be affected.
Then, in an example of a modern, tech-savvy, chief justice, Kapadia explained how he had visited Vodafone’s website to check their financial statements and found that the company draws distinction between a principal and operating subsidiary.
Day 10 of the hearing was concluded with Salve taking the court through the transaction documents. He said there was no “mother” agreement between Essar and Hutchison, rather there were only three shareholder agreements.
The day ended with some controversy. It is understood that AT&T filed an intervention application against the Supreme Court on the ground that the Vodafone matter is likely to affect its own case.
Situs coming to India
Day 11 began with the bench asking questions about the $340 million payment made by Hutchison to Essar, and the appointment of Ravi Ruia as chairman of Vodafone Essar after the deal.
Kapadia questioned whether the appointment of Ruia could mean situs coming into India.
Salve clarified that while Essar received $340 million (for withdrawing its objections to the Hutch-Vodafone deal) and an assurance that Ruia would be appointed as chairman of Vodafone Essar, it would still not be taxable in the hands of Hutchison
Salve responded by claiming that two tests, incidence and chargeability, need to be applied if a transaction is deemed to be taxable.
The chief justice then posed a hypothetical question to Vodafone’s counsel about the consequences if Hutchison had given the Mauritius company a loan with the purpose to acquire shares of the Indian company. Kapadia wanted to know if the Mauritius company would then be considered a subsidiary. Salve said no.
The day ended with the court allowing AT&T to intervene in the case. AT&T’s counsel has been told to limit his arguments to section 9 of the Income Tax Act. These arguments will be heard after the solicitor general completes his arguments on behalf of the Revenue.Vodafone is expected to conclude its argument on Tuesday September 6.
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.
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