executive summary of vodafone case pronounced by supreme court of india

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Mayur Batra & Co., Chartered Accountants Page 1

Executive Summary of Vodafone case pronounced by Supreme Court of India

A. Tax Dispute

Taxability over Capital Gains on an overseas transaction between 2 foreign companies (having non

residential status in India) of sale of investments comprising of shares of an Indian Company;

Withholding Tax obligations of the Non Resident Buyer while making payment of lump sum

consideration to Non Resident Seller under the provisions of the Income Tax Act, 1961 (Act) of India.

B. Facts of the Case

Vodafone International Holdings BV, Netherlands (VIH) entered into a Share Purchase Agreement

(SPA) with Hutchison Telecommunications International Limited, Cayman Islands (HTIL), for

purchasing equity share holding of its subsidiaries i.e. CGP Investment (Holdings) Ltd., Cayman

Islands (CGP);

CGP in turn, directly and indirectly, owned approximately 52% share capital of an Indian Company

named as Hutchison Essar Limited (HEL"). The acquisition resulted in VIH acquiring control over

CGP and its subsidiaries, including HEL;

The Revenue Authorities held that the gains were taxable in India as there was transfer of controlling

stake / business situated in India and accordingly alleged failure on part of VIH to withhold tax on

gains arising to HTIL on the transfer of shares of CGP.

C. Appellate Proceedings - Decisions of the Honble BombayHigh Court and the Apex Court

of India i.e. Supreme Court

VIH filed a writ petition in the year 2010 before the Honble Bombay High Court. The tabular statement of

principal arguments before the Honble Bombay High Court is as under:

S.no. Contention of VIH Contention of Revenue Authorities 1. As per section 9 of the Act, the

income is taxable in India only when the Capital Asset is situated in India. The situs of share is at the place where the company was registered i.e. Cayman Islands, the transfer of CGP shares cannot be deemed as Transfer of Capital Asset in India and accordingly, cannot be taxed in India.

Section 9 of the Act gives the widest possible meaning and should be interpreted purposively. The gains were taxable in India as there was transfer of controlling stake/business situated in India. CGP was a mere holding company and was not engaged into any business in Cayman Islands, thus, the situs of share existed where the underlying assets are situated i.e. in India. Further, HTIL had extinguished its right of control over HEL and extinguishment of rights and entitlements constituted as Capital Assets.

2. The formation of the transaction should be respected and the corporate veil could be lifted only

After going through the terms of Share Purchase Agreement and other documents, it can be interpreted that the intention of the parties was ultimately to transfer



if it is a case of a fraud. the controlling interest in HEL which was situated in India.

3. The requirement of withholding tax under section 195 of the Act can be triggered only if there is a tax presence in India.

Under section 195 of the Act, the term any person also includes foreign company. Further, VIH has a presence in India on account of its shareholding and joint venture with another Indian telecom company.

The Honble Bombay High Court upheld the matter in favour of Revenue Authorities. VIH filed petition

before the Honble Supreme Court of India. The tabular statement of principal observations of the Honble

Bombay High Court and Supreme Court is as under:

S.no. Bombay High Court Supreme Court 1. The income from the sale of CGP

shares fall within the ambit of section 9 of the Act as the section provides for a look through, thus though the transaction between VIH and HTIL has been transacted overseas, the underlying assets / business of HEL is in India and gains from transfer should be subjected to Capital Gain Tax in India.

Three elements i.e. transfer, existence of a capital asset and location of such assets in India should exist to conclude that income deemed to accrue or arise in India under the provisions of Section 9 of Act. Here, neither a Capital Asset exists in India nor situated in India, therefore, provisions of section 9 of the Act cannot be invoked. The look at approach needs to be adopted rather than a look through approach. Further, the word underlying asset is not covered anywhere in section 9 of Act.

2. HTIL had extinguished its right of control and management over HEL and consequently, the intrinsic to the transactions was the transfer of other rights and entitlements which include option, right to non-compete, control premium, customer base etc. These bundle of rights also constitute Capital Assets.

Direct transfer of foreign company shares offshore cannot result in indirect transfer of shares of Indian Company & extinguishment of the holding company right of control over the Indian Company. HTIL held only 52% shareholding of HEL and thus had only a persuasive position / influence over HEL in terms of voting, nomination of directors and management rights. Hence, there was no extinguishment of rights. Moreover sale of shares of HEL was not made directly and it occurred indirectly by virtue of change of shareholding of HTIL.

3. The business understanding of VIH and HTIL was to transfer the controlling interest in HEL which has significant nexus with India.

The investment structure /shareholding pattern should be examined and it is to be determined as to whether an investment was made for participation in the entity or aimed at avoidance of tax. Further, CGP directly or indirectly holds only 52% of shares in HEL.

4. The consideration should be allocated in respect of various rights transferred in the transaction and accordingly, taxed in India.

The payment of US$ 11.08 billion was for purchase of the entire investment made by HTIL. The parties to the transactions have not agreed upon a separate price for shares of HEL. Further, no separate value is assigned to the rights and entitlements. Each right and asset could not be segregated to apply provisions of Section 9 of Act.

5. Since, the nexus with India exists, withholding tax obligations under section 195 of the Act would arise including on a non-resident.

The offshore transaction was between two foreign companies (non-residents in India) entered into on principal to principal basis. It is outside Indias territorial tax jurisdiction and hence not taxable in India so should not be subjected to withholding tax obligations in India.



The Honble Supreme Court upheld against Revenue Authorities and directed Revenue Authorities to

return the sum of INR 2,500 Crores (which was depsoited by VIH in terms of interim order) along with the

interest @ 4% p.a.

D. Important Findings

The transaction for transfer of shares of a Foreign Company (though directly or indirectly holds

shares of an Indian Company) between two non-residents on principal to principal basis abroad

cannot be deemed as Transfer of Capital Asset situated in India and accordingly, cannot result into

levy of capital gains tax in India.

The provisions of Section 9 of Act will be attracted only when capital asset is located / situated in

India.

The transaction should not be structured in a manner for avoidance of income tax. The investment

structure should be examined and seen in a holistic manner.

The lump-sum consideration for purchase of an entire investment cannot be allocated or dissected in

order to calculate the value of specific rights and entitlements.

The withholding tax obligations in India would arise only when such income is taxable in India.

The aforesaid judgment of Honble Supreme Court will certainly have a persuasive effect for

transactions of similar nature. However the possibility of amendment in the provisions of Act

may not be ruled out.

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executive summary of vodafone case pronounced by supreme court of india

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