1. Vs
ASHISH KUMAR
AFB 2011-13003

2. INTRODUCTION
• One of the most controversial areas in taxation
under the Indian Income Tax Act, 1961 in recent
days has been the Vodafone tax controversy.
• Several important questions of law in the area of
taxation of non-residents – pertaining to both
chargeability and machinery provisions – are at
issue in the Vodafone controversy.
• The case provides a useful backdrop for anchoring
the theoretical arguments on the taxation of non-
residents.

3. Vodafone Controversy:
An Introduction
• The Supreme Court decided the long awaited tax
controversy between Vodafone International Holdings
B.V (VIH) and Tax Authorities in India.
• The Judgement led VIH benefited with Rs. 12,000 Cr.
The Judgement is a landmark judgement and has laid the
guidelines for deciding the taxability of income under
some of the controversial provisions of the Income Tax
Act, 1961 such as interpretation of Section 9 in the Indian
Tax legislations.
• However, the facts and circumstances play a decisive
role.
• In this case, the motley assortment of the facts and
circumstances are jumbled to the extent that it was really
hard to decide whether the income is taxable under the
Act or not.

4. HISTORY
A non-resident company, Hutchinson International, held
67% shares in an Indian company named Hutchinson-
Essar.
 This Indian company was a joint venture between
Hutchinson International and Essar.
The 67% shareholding in the Indian company was not a
direct shareholding. Hutchinson held 100% shares of a
foreign company, which in turn held 67% shares in the
Indian company.
Hutchinson transferred this shareholding of the foreign
company to Vodafone. Thus, indirectly, the interest in the
67% shareholding was also transferred to Vodafone
The question which arose was, whether the income
accruing to Hutchinson as a result of the transaction could
be deemed arise in India by virtue of section 9 of the Act.

6. • Under Section 9, income received through the transfer of a
capital asset „situate in India‟ is taxable in India.
• The shares of a Mauritius company are situate in the
Mauritius, not in India. Hence, the Revenue‟s argument is
that the transaction is not a sale of shares simpliciter, but
is (in substance) the sale of a capital asset situate in India.
• The two main justifications advanced by the Revenue are
based on lifting of the corporate veil over the Mauritius
company on principles of corporate law; and over the
application of general substance-over-form doctrines used
in taxation.
• The Indian Income Tax Department issued a show cause
notice to Vodafone asking it to show cause as to why action
should not be taken against it for failing to deduct tax at
source under Section 195 of the Act while making payment
of the consideration to Hutch.

7. • This show cause notice was challenged by Vodafone in a
writ petition before the Bombay High Court under Article
226 of the Constitution of India. The issues which arose
were, inter alia:
• (a) Whether the transfer of the shares of a foreign company
by a non-resident to a non-resident results in income being
deemed to accrue or arise in India under Section 9 by
virtue of the fact that the foreign company in turn held
shares in an Indian company effectively resulting in
controlling interest in an Indian company being
transferred?
• (b) Whether, assuming that the income could be said to
have deemed to accrue or arise in India, there was any
liability on Vodafone – the buyer/payer – to deduct tax at
source? In other words, does Section 195 have an extra-
territorial application so as to cast an obligation on
Vodafone to deduct tax at source?

8. Statement of Facts
• The matter is in relation to the acquisition of entire share
capital of CGP Investment (Holdings) Ltd. (CGP) by VIH.
According to the revenue authorities, VIH acquired 67% of
the controlling interest in HEL.
• On the other hand, VIH agreed to acquire the companies
that control the 67% of the interests but not the controlling
interests.
• The revenue authorities issued a show cause notice to VIH
on the grounds that VIH failed to withhold tax for
acquiring the said stake, resulting in the capital gains
which HTIL Hutchinson Telecommunications
International Limited, an Indian Company from Cayman
Islands (HTIL) earned from the transfer of shares of CGP.

9. Contentions of the VIH
• VIH filed a writ petition in the Bombay High Court
challenging the show cause notice of the revenue
authorities.
• The appellant raised the question on the jurisdiction of
the revenue authorities over the transactions, as the
transfer of the share was on a foreign land, between the
companies incorporated in other countries and the subject
matter, i.e., the shares being transferred, are not the
rights, for e.g. the right to vote, right to call for and attend
general meeting, etc.
• There is no „look-through‟ provision in the Indian Tax
Legislations. The „look-through‟ provision imposes tax on
the gains arising out of a transfer of share outside the
country if it results in the passing of control over a
company which holds specified assets/property in the
country. There is no such provision in Section 9 of the Act.

10. Contentions of the Revenue authorities
• The revenue authorities contended that the transfer
is not mere transfer of shares in CGP but also of
composite rights of HTIL. There is also a „look
through‟ provision in the Section 9 of the Act and
the gains from the sale of CGP shares and rights are
taxable in India.

11. Observations of the High Court
• The Bombay High Court observed that the shares are a
bundle of indivisible rights that cannot be separately
transferred. These rights are inseparable from the
ownership of the shares.
• Vodafone purchased these rights from HTIL which
constitute the „capital assets‟ under section 2 (14) of the
Act. This income is taxable in India under Section 9 (1) of
the Act.
• The Assessing Officer was asked to do this apportionment
of the income between the income arising or deemed to
arise directly or indirectly in India and the income that lies
outside India.
• The Vodafone directly or indirectly, through its different
agreements, entered into a nexus with the Indian
jurisdiction. This made the appellant liable to pay interest
under section 195 of the Act.

12. Appeal before the Supreme Court
• VIH aggrieved by the decision of the Bombay High
Court moved to the Supreme Court challenging the
decision of the High Court. While delivering the
decision following observations were made by the
Supreme Court:
• First revenue has to be ascertained based on the facts
and circumstances that the transaction is sham or tax
avoiding before applying the principle of piercing of
corporate veil.
• Section 9 (1) (i) is not a „look through‟. For the fair
interpretation of the „lookthrough‟ provision, it has to
be expressly provided in the statue or treaty, which is
not in any of the Act or treaty in current situation.

13. • The structure of VIH or HTIL is not tax avoiding by
nature. It is clear from the facts that the appellant has
paid income tax ranging from Rs. 3 crore to 250 crore
p.a. during the period of 2002 to 2007. Hence, it cannot
be said that VIH is a short-term investor.
• It is in Cayman Island where the transfer of CGP shares
occurs and the register of the members of CGP is being
maintained; and not in India. Hence, the revenue
authority argument that the situs of CGP shares is
situated in India is not admissible.
• Section 195 of the Act does not hold well in current case
as the transaction is of „outright sale‟ between two non-
residents of a capital asset outside India.

14. Conclusion by the Supreme Court
• The three member bench of the
Supreme Court, viz, S.H.
Kapadia, C.J Swatender Kumar
and K.S. Radhkrishnan, headed
by Justice Kapadia delivered the
decision in the favour of Vodafone
• S.C gives order to Bombay High
Court to imposition of capital
punishment of 12,000 Crore.

15. VODAFONE’S INDIAN ODYSSY KEY
MILESTONE
2007
February;-
Vodafone buys 67% in HUTCHISAN
ESSAR for $11.5 billion, company
renamed VODAFONE ESSAR.
April;-
FIBP clears deal subject to condition that
minority shareholders can sell only the
resident Indians.
September;-
Income tax department slaps Vodafone
with a tax demand of 11,000 Crore . Says
asset for which deal for done is in India.
October;-
Vodafone goes to Bombay High Court.
Saying “it was a share transfer carried
outside India

16. 2008
February ;-
Government amend section 201
of IT Act, makes withholding
tax mandatory with
retrospective effect
December;-
HC dismisses Vodafone‟s
petition, says that department
has right to investigate the
case, Vodafone appeals to
Supreme court

17. 2009
January;-
S C dismisses Vodafone‟s appeal, leaves
decision on jurisdiction of deal to the I
t department. Also refers cash back to
Bombay high court.
October;-
I.T department issues a new Showcause
notice, minority shareholders Analjit
Singh & Asim Ghosh want to sell stake
to Vodafone
December;-
FIPB approves stake sales by Singh &
Ghosh.

18. 2010
January;-
Vodafone replies to I.T notice saying I.T department
doesn't have jurisdiction
April;-
Vodafone reaches 100 m customer in India
May;-
Price war in India cause Vodafone group plc to written
down value of Vodafone Essar by $2.3 Billion (Rs.15157
cr.)
Vodafone pays 11618cr for 3g spectrum in 9 circles.
June;-
Vodafone files petition in Bombay h c challenging I.T
department‟s order that claims jurisdiction
September;-
High court says Vodafone must pay capital gains tax on
the deal. Vodafone appeals to S C.
Sc ask I.T department to qualify tax liability.
November;-
S C ask Vodafone to deposit Rs. 2500 Cr. and provide
bank Aurantees of Rs. 8500cr pending final verdict.

19. 2011
March;-
Vodafone recieves tax notice from I.T department
asking it to explain why it should not be Laible for
penalties of up to 100% of tax found due.
May;-
Vodafone makes 1st ever profit in India of 15 m
Euros in 2010-11
April;-
S C says I.T department from enforcing any liability
until October of final hearing
August;-
S C begins hearing the case.
Vodafone sells 5.5% of India business to Piramal
healthcare for $640 million(around Rs. 2890 cr.)
to comply with FDI rules

20. 2012
January;-
Vodafone appoints investment bank N M
Rothschild to manage initial public
offering(IPO)
Jan 20 Vodafone wins tax case in S C

21. Voda tax case:
Pranab defends amendment of IT Act
• Mar 31, 2012
• Statement made by Finance Minister
Pranab Mukherjee in Kolkata;-
• “We came to the conclusion that we
will not be able to tax on Indian assets
purchased outside the country,”
• “We will have to decide whether India
will be a no tax country or India will
tax…If the answer is yes that it will be
taxed, then whether to be taxed in
India or at source of the company.”

22. IMPACT
• The instant Judgement would help to resolve several
contentious issues regarding the scope of Indian Tax
legislation
• The SC ruling has caused a deep hole in the kitty of
the tax department to the tune of Rs 11,000 crore.
• The slippage in direct tax revenue collection and
increased subsidies has pushed the fiscal deficit to
5.9 percent of the Gross Domestic Product in the
Revised Estimates for 2011-12.
• Consequently, the direct tax collection has fallen
short by Rs 32,000 crore of the 2011-12 Budget
estimates.