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Bombay High Court Dismisses Vodafone's Petition in Landmark Case
In September 2007, the Indian Revenue authorities issued a show cause notice to Vodafone International Holdings BV ('Vodafone') requiring it to show cause why it should not be treated as an 'assesee-in-default' under section 201 of the Income-tax Act, 1961 ('the Act') for failure on its part to deduct tax at source under section 195 of the Act in relation to payments made to Hutchison Telecommunications International Limited ('HTIL'), a Cayman Islands company. Taxand India reviews Vodafone's move to challenge the show cause notice and analyses the subsequent landmark court case that ensued.
In October 2007, Vodafone moved the Bombay High Court ('HC') challenging the Revenue authority's jurisdiction to issue the show cause notice. The HC dismissed the writ petition in December 2008 against which Vodafone filed a special leave petition before the Supreme Court ('SC'). The SC in its order dated 23 January 2010 directed that the jurisdictional issue should be determined by the income-tax authority after Vodafone has submitted all the documentation and that the Revenue has right to seek the documentation to come to a conclusion if it indeed has the jurisdiction. The SC order further stated that if the jurisdictional issue is decided against Vodafone, it may move the Bombay HC to question the decision on the preliminary issue (of jurisdiction) and the SC left all questions of law open.
In pursuance to the SC order, the Indian Revenue authorities passed an order on 31 May 2010 after issuing fresh notices holding that it has valid, lawful and competent jurisdiction to treat Vodafone as an assessee-in-default under section 201 of the Act.
Vodafone questioned the legality of the order by filing a petition before the HC under Article 226 of the Constitution on the jurisdiction issue.The HC in its decision rendered on 8 September 2010 held that the series of transactios in question had a 'significant nexus' with India since the essence of it was change in controlling interest in Hutchison Essar Ltd ('HEL'), the Indian operating (telecom) company, which constituted a source of income in India. The transaction between the parties covered within its ambit diverse rights and entitlements and not merely offshore transfer of shares of CGP investments; a Cayman island company. The fact that Vodafone has a nexus with Indian jurisdiction can be substantiated by diverse agreements that it entered into with HTIL. In these circumstances, the HC concluded that the proceedings which have been initiated by the Indian Revenue authorities cannot be held as lacking jurisdiction.
The Revenue Authorities have been directed to compute income changeable to tax in India, however, not to pass final orders for eight weeks to allow Vodafone to challenge the decision in the SC.
The observations made by the Court are significant inasmuch as they strengthen the Revenue's stand on taxability of offshore transactions between non-residents. The observations of the Court would certainly embolden the Revenue authorities to investigate offshore transactions, which have a connection with India or cases where limited interest exists in India. The Court's dismissal of Vodafone's plea seems to have been driven predominantly by its reluctance to exercise powers (under a writ route) to intervene and quash the Revenue's show cause, given the administrative nature of proceedings.
The Court's reference to the proportionality principle raises a question whether a simple transfer of shares of an offshore company (which has interest in an Indian company) would be liable to tax in India. An optimistic view suggests that it should not be taxed. However, if such offshore transfers result in acquisition of controlling interest (in an Indian company), to that extent, the consideration would be taxable in India. The fact that in Vodafone's case the transacting parties had bundled all entitlements under a single consideration lead the Court to apply the proportionality theory. The Court also meant that a portion of the income is not taxable - but, it hasn't stated what portion and has left the determination to the Revenue authorities. Hence, answer to the question in relation to other transactions of similar nature is open as the Vodafone ruling, besides establishing jurisdiction, establishes the principles for territorial nexus.
Though Vodafone had taken a plea challenging the constitutional validity of retrospective amendments to withholding tax provisions, the Court in its wisdom chose to not intervene as the Revenue did not invoke the provisions in the order against which Vodafone had filed the petition. It seems that the Court was driven by a sole objective to answer Vodafone's plea for quashing the show cause notice issued by the Revenue. The decision should not directly impact availability of treaty benefits where shares in Indian companies are sold directly by holding companies that are residents of countries with which India has tax treaties such as Mauritius, Singapore and Cyprus, subject of course to fulfillment of treaty conditions. However, the possibility of the Revenue authorities seeking to look through such holding companies and attempting to tax the ultimate parent company (as the ultimate beneficiary) cannot be ruled out.
Vodafone is likely to appeal to the SC against the HC decision and immediately seek a stay of the HC order until the SC decides the matter. The HC has directed the Revenue to compute income changeable to tax in India, however, not to pass final orders for eight weeks to allow Vodafone to challenge the decision in the SC.
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