17 Oct Supreme Court’s ruling in the Vodafone Case – “A green signal to Global investors”
January 20, 2012 – The Supreme Court of India finally laid down its rule and brought an end to the long saga that has kept global investors on edge about the taxation of foreign acquisitions in India. Vodafone’s win over this case sends a positive signal about India’s legal climate to global investors. This decision of the Supreme Court is speculated to be a big boost for cross-border mergers and acquisitions in India. However, the Indian government is considering new laws that may undo some of this decision’s clarity.
In February 2007 Hong Kong-based telecommunication giant Hutchison Telecommunication International (HTIL) sold 100% of its holding in CGP Investments (based in the Cayman Islands) to Vodafone International Holdings BV (based in the Netherlands) for consideration of $11.2 billion. Subsequently, Vodafone acquired a single share of CGP from HTIL. CGP, which was then a subsidiary of HTIL, effectively held a 67% share of the economic value of Vodafone Essar Ltd through various Mauritian and Indian companies.
This move fuelled up The Indian Income Tax Authority to look into this billion dollar deal more closely. The authorities later figured out, that the transfer of a single share in CGP to Vodafone resulted in the transfer of HTIL’s interests in Vodafone Essar Ltd to Vodafone.
In September 2007 the Income Tax Department issued a show cause notice to Vodafone under Section 201 of the act, seeking to treat Vodafone as an ‘assessee in default’ for not deducting tax at source in terms of Section 195 of the act.
In response, Vodafone filed a writ petition before the Bombay High Court challenging the jurisdiction of the department to issue the notice.
The Bombay High Court in December 2008 held that the transaction was prima facie liable to be tax in India and directed Vodafone to pay the tax under the Income Tax Act. Aggrieved by the said order, Vodafone then filed a special leave petition before the Supreme Court challenging the high court’s ruling. In January 2009 the Supreme Court directed that the jurisdictional issues in relation to the power to tax the transaction first be determined by department. The court also mentioned that Vodafone was entitled, if necessary, to challenge the department’s order before the high court.
The Income Tax department in May 2010 passed an order under Section 201 of the act claiming jurisdiction to tax the transaction and treating the transaction as chargeable to tax in India. Vodafone was therefore treated as an “assessee” in default.
In June 2010 Vodafone again filed a writ petition before the high court challenging the department’s order. In September 2010 the High court ruled that (i) Section 9 of the act was wide enough to cover the transaction (ii) income is chargeable to tax in India and (iii) the department had jurisdiction under the act to pass an order in relation to the transaction.
Vodafone again knocked the doors of the Supreme Court, through a special leave petition. This time Vodafone turned the tables and got the Supreme Court to rule in their favour. The Supreme court held that (i) Section 9 of the act cannot be extended to cover indirect transfers of capital assets or property situated in India, as the legislature has not used the words ‘indirect transfers’ in Section 9(1) of the act (ii) the transfer of shares in an offshore entity between two non-residents cannot be taxed in India (iii) the Hutchinson transaction was a valid structural transaction and the Indian authorities had no jurisdiction to tax such an offshore transaction, and (iv) Section 195 of the act is applicable only when the transaction is liable to tax in India. In the event that the transaction is not liable to tax in India, Section 195 of the act has no applicability. The court’s judgment in this case reiterates its previous judgment in GE India Technology Centre Private Limited v CIT.