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Vodafone Casse Summary

1) The Supreme Court quashed the Indian tax authority's demand of Rs. 12,000 crores in capital gains tax from Vodafone International Holdings (VIH) for its offshore transaction with Hutchison Telecommunications. 2) The court held that Indian authorities do not have jurisdiction to tax an offshore transaction between two non-resident companies, even if it results in a non-resident acquiring a controlling interest in an Indian company. 3) The landmark judgment affirmed that legitimate tax planning is allowed under law and the motive to reduce taxes alone does not invalidate a transaction, recognizing principles of tax planning and corporate structures for commercial purposes.

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2K views4 pages

Vodafone Casse Summary

1) The Supreme Court quashed the Indian tax authority's demand of Rs. 12,000 crores in capital gains tax from Vodafone International Holdings (VIH) for its offshore transaction with Hutchison Telecommunications. 2) The court held that Indian authorities do not have jurisdiction to tax an offshore transaction between two non-resident companies, even if it results in a non-resident acquiring a controlling interest in an Indian company. 3) The landmark judgment affirmed that legitimate tax planning is allowed under law and the motive to reduce taxes alone does not invalidate a transaction, recognizing principles of tax planning and corporate structures for commercial purposes.

Uploaded by

Aman D Sharan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Vodafone International Holdings B.V.

v Union of India & Anr1


Case Summary
The Supreme Court of India pronounced the landmark judgment in Vodafone International
Holding (VIH) v. Union of India (UOI). The Bench consisting of Chief Justice S.H Kapadia,
K. S. Radha krishnan and Swatanter Kumar quashed the order of High Court of demand of Rs
12000 crores as capital gain tax and absolved VIH from liability of payment of Rs 12000
crores as capital gain tax in the transaction dated 11.2.2007 between VIH and Hutchinson
Telecommunication International Limited or HTIL( non-resident company for tax purposes)
The court held that in Indian revenue authorities do not have jurisdiction to impose tax on an
offshore transaction between two non-residents companies where in controlling interest in a
(Indian) resident company is acquired by the non-resident company in the transaction.

Facts leading to the Dispute

Vodafone International Holding (VIH) and Hutchison telecommunication international


limited or HTIL are two non-resident companies. These companies entered into transaction
by which HTIL transferred the share capital of its subsidiary company based in Cayman
Island i.e. CGP international or CGP to VIH.
VIH or Vodafone by virtue of this transaction acquired a controlling interest of 67 percent in
Hutch is on Essar Limited or HEL that was an Indian Joint venture company (between
Hutchinson and Essar) because CGP was holding the above 67 percent interest prior to the
above deal.
The Indian Revenue authorities issued a show cause notice to VIH as to why it should not be
considered as “assesse in default” and thereby sought an explanation as to why the tax was
not deducted on the sale consideration of this transaction.
The Indian revenue authorities thereby through this sought to tax capital gain arising from
sale of share capital of CGP on the ground that CGP had underlying Indian Assets.

VIH filed a writ petition in the High Court challenging the jurisdiction of Indian revenue
authorities. This writ petition was dismissed by the High Court and VIH appealed to the
Supreme Court which sent the matter to Revenue authorities to decide whether the revenue
had the jurisdiction over the matter. The revenue authorities decided that it had the

1
S.L.P. (C) No. 26529 of 2010
jurisdiction over the matter and then matter went to High Court which was also decided in
favour of Revenue and then finally Special Leave petition was filed in the Supreme Court.

Issue before the Supreme Court

The issue before the Apex court was whether the Indian revenue authorities had the
jurisdiction to tax an offshore transaction of transfer of shares between two non-resident
companies whereby the controlling interest of an Indian resident company is acquired by
virtue of this transaction.

Arguments of Revenue

The revenue submitted that this entire transaction of sale of CGP by HTIL to VIH was in
substance transfer of capital assets in India and thus attracted capital gain taxes transaction
led to transferring of all direct/indirect rights in HEL to VIH and this entire sale of CGP was
a tax avoidance scheme and the court must use a dissecting approach and look into the
substance and not at “look at” form of transaction as a whole.

Observations made by the Supreme Court-

Tax planning/ tax evasion/tax avoidance

1. It is cornerstone law that a tax payer is enabled to arrange his affairs so as to reduce the
liability of tax and the fact that the motive for the transaction is to avoid tax does not
invalidate it unless a particular enactment so provided.
2. It is essential that the transaction should have some economic or commercial substance in
order to be effective.
3. The revenue cannot tax a subject without a statute to support and every tax payer is
entitled to arrange his affairs so that his taxes shall be as low as possible and he is not
bound to choose that pattern which will replenish the treasury.
4. All tax planning is not illegitimate and observed that the majority in McDowell case held
that tax planning is legitimate provided it is within the framework of law and colourable
devices cannot be part of tax planning.

Section 195
o The tax presence has to be viewed in context of the transaction in question and not with
reference to unrelated matter.
o The section 195 shall apply in case payments are made by resident to non-resident and not
between two non-resident companies.
o The legal nature of transaction is to be examined.
o The present transaction was between two non-residents entities through a contract executed
outside India where the consideration was also passed outside India and hence VIH is not
legally obliged to respond to the notice under section 163 which relates to the treatment of
purchaser as a representative assesses.

Decision of the Court

Sale of CGP share by HTIL to Vodafone or VIH does not amount to transfer of capital assets
within the meaning of Section 2 (14) of the Income Tax Act and thereby all the rights and
entitlements that flow from shareholder agreement etc. that form integral part of share of
CGP do not attract capital gains tax.
The order of High Court of the demand of nearly Rs.12, 000 crores by way of capital gains
tax would amount to imposing capital punishment for capital investment and it lacks
authority of law and therefore is quashed.

Conclusion

The apex court pronounced a landmark judgment in Vodafone International Holding v. Union
of India and cleared the uncertainty with respect to imposition of taxes. The apex court
through this judgment recognized:

 The principles of tax planning.


 Business entities or individual may arrange the affairs 0of their business so as to
reduce their tax liability in absence of any statutory stipulation prohibiting the same.
 The multinational companies often establish corporate structures and all these
structures should be established for business and commercial purposes only.
 The corporate veil may be lifted in case facts and circumstances reveal that the
transaction or corporate structure is sham and intended to evade taxes.
 The transactions should be looked holistic manner and not in a dissecting manner and
the presence of corporate structures in tax neutral/investor friendly nations should not
lead to the conclusion that these are meant to avoid taxes.

In the end, it can be said that this judgment has helped in removing uncertainties with respect
to imposition of taxes and recognized the principle the if motive of the transaction is to avoid
tax does not necessarily lead to assumption of evasion of taxes and  the supreme court has
endorsed the view of legitimate tax planning.

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