Vodafone International Holding v. Union of India Case Summary
Why this case study is important?
this case is important because this includes controversy between
- the Indian Tax Authorities; and
-Vodafone
- the Indian Tax Authorities; and
-Vodafone
The quantum of tax demand by the Indian Revenue Authorities in this particular case was around
Rs. 11,000 crore plus interest.
First, let us understand some basic Terms
- Merger or Amalgamation-A merger or Amalgamation means an action which results in combining or unification of 2 entity.
- Acquisition-Means purchase of one company by another in whom no new company is formed.
- You can understand a Merger like 2 people getting married
- You can understand Acquisition like an animal eats another.
What does Tax Heaven Mean?
Tax Heaven is a state, country or territory where certain taxes are levied at low rates or not at all.
Following are worlds top Tax Heaven countries:-
- Switzerland
- cayman Island
- Luxembourg
- Hong Kong
- USA
- Singapore
- Jersey
- Japan
- Germany
- Bahrain
Companies Involved in Transaction
- HTIL(Hutchison Telecommunications International Limited).
-Holding 100% shares in CGP Investments Holdings Ltd
- CGP(CGP Investments Holdings Limited)
-Holding 67% Shares in HEL
- HEL(Huch Essar Limited).
-Formed by Merger of HTIL and Essar Group
- VIH(Vodafone International Holding)
-The subsidiary of Vodafone Group Plc
What is so interesting here?
CGP is a dummy company
CGP is situated in Cayman Islands, which is a tax heaven.
VIH wanted to acquire HEL.
To save Tax, VIH opted to acquire CGP, holding company of HEL.
Now VIH is neither liable to pay Tax
-in India because they have made no transaction in India
nor
-in Mauritius because it's a tax heaven.
Vodafone petition to HC and SC
Instead of responding to the Notice of Indian Revenue Authorities, VIH filed a writ petition to the HonourableBombay High Court challenging the jurisdiction of Income Tax Department.
The HonourableBombay High Court upheld the matter in favour of Indian Revenue Authorities.
VIH filed Special Leave Petition (SLP) before the HonourableSupreme Court of India. The Supreme Court disposed of the case with a direction to Tax Authorities to decide the preliminary issue of jurisdiction.
The decision by Indian Tax Authorities and HC
CGP was a mere holding company and was not engaged into any business in Cayman Island, thus, the situs of shares existed where the "underlying assets" i.e. in India.
Further, HTIL had extinguished its right of control over HEL extinguishment of "Rights and Entitlements" constituted as "Capital Assets".
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 the controlling interest in HEL which was situated in India.
The Tax Authorities passed an order under section 201 holding that they had jurisdiction to proceed against Vodafone for failure to deduct tax.
Vodafone Petition to HC and SC (II)
Vodafone filed a writ petition to the Bombay High Court challenging the order of Income Tax Authorities.
The Bombay High Court dismissed Vodafone’s writ petitionagainst the order of the Tax Authorities.
Vodafone filed Special Leave Petition (SLP) before the HonourableSupreme Court of India. The Supreme Court admitted the SLPand directed Vodafone to deposit Rs. 2,500 croreand provide a bank guarantee for the balance Rs. 8,500 crore.
The Supreme Court’s Decision
The Indian Revenue Authorities had no jurisdiction to tax the foreign transactions, as sale of shares was in Cayman Island.
Transfer of shares in CGP doesn’t amount to transfer of Capital Asset situated in India, as per Section 9(1)(i).
The transfer of “Rights and Entitlements” (Controlling Interest) is not covered in Definition of “Capital Assets” under section 2(14).As
As Capital Asset is not taxable in India, so there is no question of Deducting Tax at Source under section 195(1).
The Supreme Court reversed the decision of Bombay High Court.
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