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Home >> News Brief

Saga of Retrospective effect in Vodafone case to continue
By TII News Service
Sep 11, 2019 , Hong Kong


THE Vodafone India retrospective income tax case has not made headway if latest disclosure made by Hong Kong-based CK Hutchison Holdings (CKHH) group is any indication. The disclosure about the case has been made by CK Hutchison International (19) (II) Limited (CKHIL) in its offering memorandum to global subscribers of its twin-bonds issue dated Sep 03, 2019. The company is wholly owned subsidiary of CKHH Limited. Both are incorporated in Cayman Islands. CKHH was incorporated in 2015 as part of the reorganization and combination of Cheung Kong, Hutchison and their respective subsidiaries, associated companies and joint ventures.

The case has its origin in 2007 sale of entire stake in Hutchison Telecommunications International Limited (HTIL) by CKHH's company CGP Investments (Holdings) Limited to Vodafone Group Plc's Dutch subsidiary. The deal was completed for a totalcash consideration of about $11.1 billion. HTIL had realized a pre-tax gain of about $8.89 billion from this deal. CGP, through its subsidiaries, held indirectly majority stake in Vodafone's Indian operations then known as Vodafone Essar group.

Indian Income Tax Department (ITD) initiated an investigation into Vodafone Netherlands' obligations to withhold tax from the acquisition proceeds. Vodafone Netherlands disputed ITD's jurisdiction in this matter by filing a Writ Petition with the Bombay High Court. On Jan 20, 2012, the Indian Supreme Court gave its ruling that the ITA did not have the jurisdiction as the sale was not taxable in India. On May 28, 2012, the Government amended Income Tax Act to create retrospective provision for levy and collection of withholding tax in such cases. ITD first served retrospective tax demand on Vodafone group. Later, ITD also served separate demand notice on HTIL.

CKHIL's offering memorandum says: "If, as a consequence of the Retrospective Provisions, Vodafone Netherlands is required to pay taxin India, this could lead to a dispute between Vodafone Netherlands and HTIL (Vodafone Dispute)". HTIL received ITD's assessment order (AO) dated Jan 25, 2017 in respect of the same transaction. The AO imposes tax of approximately Rupees 79 billion (US$1.185 billion) on theafore-mentioned gains as well as interest on the unpaid CGT (capital gains tax) of approximately Rs 164.3billion (US$2.46 billion). HTIL also received a penalty order from the ITD dated July 3, 2017 for a penalty of approximately Rs 79 billion (US$1.185 billion) relating to the CGT.

As put by CKHIL, "HTIL believes that the Taxes cannot be validly imposed, and it has obtained legal advice that the AO and the PO cannot create any liability for taxes, interest, penalties or otherwise that is legally enforceable". It adds: “CKHH has not made a provision in respect of either (i) any Taxes that may arise as a consequence of the Retrospective Provisions or (ii) the Vodafone Dispute. If HTIL is eventually required to make apayment in respect of these items, there may be a material adverse effect on CKHH's financial condition and results of operations".

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