Vodafone Case

Vodafone International Holdings vs. Union of India [2012] 341 ITR1 (SC)

Facts
The abovementioned case concerns a dispute between Vodafone and Income tax authorities of
India relating to an acquisition transaction executed by Vodafone International Holdings BV,
which is a company registered for taxation purposes in Netherlands. Vodafone International
Holdings BV acquired the entire share capital of a company registered in Cayman Islands named
CGP Investments Ltd on February 11, 2007 for approximately $11 billion (which translates to
about Rs 50,000 crore) from Hutchison Telecommunications International Ltd. CGP controlled
67% of Hutchison Essar Limited, an Indian company. The acquisition resulted in Vodafone
acquiring control over Hutchison Essar which had the telecom licenses to provide cellular
telephony in different circles in India since 1994. Because the sale was supposed to have been
made overseas, no taxes were paid in India.

The main contention of the Income tax authorities of India was that the original objective of the
transaction was, basically, to acquire 67% controlling interest in the Indian Company, Hutchison
Essar Limited. Thus, the capital gains from the transactions are liable to be taxed as under
Section 9(1)(i) of the Indian Income Tax Act 1961. They put forward the submission that even
though CGP is not an Indian Company, it still holds the underlying Indian asset as a consequence
of capital gains arising from the transaction. As per the tax authorities, the profits ascertained by
Hutchison Hong Kong, from the selling of its shares of Hutch-Essar to Vodafone, was accrued
and arisen in India. Therefore, Vodafone, the buyer of the shares, had an obligation to pay the tax
in India, before making the payment to Hutchison. The amount of tax demanded was $2.5 billion
(which translates to approximately Rs 11,000 crore) Vodafone contested, stating that neither
Vodafone nor Hutch was liable to pay the tax as both the companies were located outside India
and the transaction of the deal materialized outside India.
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Vodafone filed a writ petition in the Bombay High Court challenging the jurisdiction of the tax
authorities. In September 2008, the Bombay High Court held that the transaction was one of
transfer of capital assets situated in India, and accordingly, Income Tax Authorities of India had
proper jurisdiction over this whole matter. It concluded that it would be simplistic to assume that

1
Varman, R, 2012, Whats really at stake in Vodafone tax case, www.infochangeindia.com, Accessed 05-08-14
the entire transaction between Hutchison Telecom International Limited and Vodafone
International Holdings BV was fulfilled merely upon the transfer of a single share of CGP in the
Cayman Islands. The high court bench inferred from the commercial and business understanding
and thoughtfulness between the parties that, fundamentally, the controlling stake in Hutchison
Essar Limited was the subject of the deal. The basic objective of the deal was the transfer of the
controlling interest in Hutchison Essar Limited from Hutchison Telecommunications
International Ltd. to Vodafone International Holdings BV and Hutchison Essar was always
regarded to be the target company.

Issues Raised
The issue before the Apex court was whether the Indian Taxation and Revenue Authorities had
the jurisdiction to tax an offshore transaction of transfer of shares between two foreign (for the
matter of taxation) companies whereby the controlling stake of an Indian resident company is
acquired by virtue of this transaction.

Arguments
The argument put forward by the legal counsel for Vodafone was that the provisions of Section 9
of the Income Tax Act, which defines the scope of incomes which are taxable in India, should be
interpreted sternly to deem incomes to be categorized as accruing and arising in India only when
the capital asset is situated in India. The transfer of the share was then argued to be at the place
of registration of the company i.e. Cayman Islands and not India holding the manner in which the
share is valued as irrelevant. It was further put forward that in the absence of the provision for
look-through in Section 9, the substance of the transaction could not be questioned.
On the other hand, the Taxation Authorities were of the view that Section 9 must be interpreted
widely and more purposively. It was urged that by looking at the terms of the various documents
filed with regulatory authorities and the time to time press releases issued by Vodafone and
Hutchison International, the intention of the parties was clearly to transfer the controlling interest
in Hutchison Essar, which was situated in India.
The Authorities raised the question of reliance onto the previous Supreme Court judgment
delivered in the case of Azadi Bachao Andolan which has served as a preceding landmark
decision on tax planning and also involving tax treaties. Vodafone, to the above argument of the
Taxation Authorities, argued that the form of the transaction should be respected and that the
corporate veil could be lifted only in the case where there is the presence of fraud. The
Authorities, on the other hand, were arguing that the decision of the Apex Court in the Azadi
Bachao Andolan case should be reconsidered in light of the previous distinguishing decision in
the case of McDowell. Heavy reliance was also placed by the Authorities on the Ramsay
principle enunciated by the UK Courts which allows application of the approach of substance
over form.
With regard to the requirement to withhold tax, it was contended by Vodafone that it should be
triggered only if the presence is there in India whereas the Revenue Authorities argued that the
term any person in the Section should also include a foreign company. It was further argued
that Vodafone had a presence in India on account of its shareholding and joint venture with
another Indian telecom company

Judgment
The court held in the abovementioned judgment that sale of CGP share by Hutchison
Telecommunications International Ltd. to Vodafone did 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
did not attract capital gains tax.
The order of High Court of the demand of $2.5 billion (which translates to approximately Rs
11,000 crore) by way of capital gains tax would amount to imposing capital punishment for
capital investment and it lacked authority of law and therefore was overruled.
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The Supreme Court, through this judgment, recognized the various principles of tax planning and
agreed to the point that business entities or individual may arrange the affairs of their business so
as to reduce their tax liability in absence of any statutory stipulation prohibiting the same. The
court also recognized that the multinational companies often establish corporate structures and
all these established structures should be established for business and commercial purposes only.
The Apex court was of the view that the corporate veil may be lifted in cases where facts and
circumstances reveal that the transaction or corporate structure is sham and intended to evade
taxes. Also, the transactions should be looked holistic manner and not in a dissecting manner and
the presence of corporate structures in tax investor friendly nations should not lead to the
conclusion that these are meant to avoid taxes.
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.
-Manu Gupta

2
Vodafone vs UOI, www.lawsenate.com, Accessed 05-08-14