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Vodafone Wins Landmark Tax Case
The Supreme Court of India pronounced its much awaited decision in the controversial Vodafone tax dispute case. Whilst deciding the USD 2 billion tax dispute in favour of Vodafone, the SC has laid down important principles with respect to offshore transfer of shares having underlying interest in India and principles to be considered in applying the general anti avoidance rules. Taxand India seeks to provide a summary of the pronouncement of the Supreme Court.
Vodafone International Holdings BV entered into a Share Purchase Agreement with Hutchison Telecommunications International Limited, Cayman Islands for purchasing the singular equity share of CGP Investment Ltd, a Cayman based wholly owned subsidiary of HTIL. CGP in turn, directly and indirectly, owned approximately 67 percent of the share capital of Vodafone Essar Limited, an Indian entity. The acquisition resulted in Vodafone acquiring control over CGP and its subsidiaries, including VEL. The Revenue authorities issued a notice to Vodafone, treating it as an assessee-in-default for failure to withhold taxes on gains arising to HTIL on the transfer of shares of CGP. The Revenue authorities held that the gains were taxable in India as there was transfer of a controlling stake / business situated in India.
Judgment of the High Court
Following the writ petition filed by Vodafone in 2010, the Bombay High Court analysed the transaction documents, the filings made with regulatory authorities and the various public announcements made by Vodafone and HTIL in detail and came to the conclusion that the business understanding of the parties was to transfer the controlling interest in VEL - which had significant nexus with India.
Arguments before the SC
The senior legal counsel for Vodafone argued that the provisions of section 9, that defines the scope of income taxable in India, should be construed strictly to deem income to accrue and arise in India only when the capital asset is situated in India. The situs of a share was then argued to be at the place where the company was registered ie Cayman Islands and not the place where the economic interests lie and the manner in which the share is valued were not relevant. It was further contended that in the absence of "look-through" provisions in section 9, the substance of the transaction could not be questioned. On the other hand, the Revenue argued that section 9 should be given the widest possible interpretation and should be interpreted purposively.
Taxand India provides an in-depth evaluation of the case including details on the judgment of the Supreme Court
This judgment will help address several contentious issues including those with respect to scope and sanctity of tax planning, applicability of anti avoidance rules, taxation of overseas transactions, issues regarding situs of shares, and applicability of withholding tax provisions in case of non residents not having a presence in India.
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