Vodafone International Holdings B.V. v. Union of India
[(2012) 6 SCC 613]
A three-judge bench of the Supreme Court comprising of then Chief Justice S.H. Kapadia, Justice Swatenter Kumar and Justice K.S. Radhakrishnan passed a landmark judgment on 20th January, 2012 that reformed the concepts of taxation. The judgement dealt with tax liability of Vodafone that acquired ‘Hutch’ brand in India.
FACTS
- Vodafone International Holdings BV, a Netherlands company acquired the entire share capital of CGP Investments (Holding) Ltd, a Cayman Islands company, for a consideration of USD 11.08 Billion from Hutchison Telecom International Limited. The acquisition involved several agreements including a Share Purchase Agreement (SPA) dated 2007.
- Furthermore, Vodafone acquired a group of companies that resulted in collectively controlling 67% interest in Hutchinson Essar Limited. Hutchison was an Indian joint-venture company between Hutchinson Telecommunication International and Essar Group Limited involved in providing telecommunication services under brand ‘Hutch’.
- In 2010, the Income Tax Department passed an order declaring that the IT Department had jurisdiction to tax SPA transactions. Through this, the IT Department could tax the capital gains arising from the sale of the share capital of CGP due to the presence of SPA dated 2007.
- Aggrieved by this, Vodafone filed a Writ Petition before the Bombay High Court. However, it was dismissed and later filed a Civil Appeal before the Supreme Court.
OBSERVATIONS
Section 9(1)(i) of the Income Tax Act, 1963 is not a ‘look through’ provision
The verbatim of Section 9(1)(i) of the Income Tax, 1963 is mentioned hereunder:
"S. 9 (1) The following incomes shall be deemed to accrue or arise in India:
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India."
The Income Tax Department contended that the capital gain from the sale of CGP shared would amount to the transfer of capital asset in India. They stated that under Section 9(1)(i), they could ‘look through’ the transfer of shares of a foreign company that were holding shares in an India Company and therefore, could treat any transfer of shares of the foreign company in similar with the transfer of shares of an Indian Company. The analogy was drawn from the wordings of the sub-section that states the section covers direct, indirect and even, consequent transfer of capital assets.
However, the Court highlighted the three elements in the sub-section; transfer, existence of a capital asset and situation of such an asset in India. The said section did not contemplate ‘consequent or indirect’ transfer of assets or ‘transfer of underlying assets’. Therefore, the contention would not apply. The Court further observed that Legislators did not want to include the aforementioned terms as there was proposed Direct Tax Code Bill, 2010 that dealt with similar contention of the Income Tax Department. The Court also read Section 9(1)(i) with Section 5(2) that clarified the income accrued or received in India.
Therefore, the Court held that Section 9(1) is not a ‘look through’ provision. The Income Tax Department could not tax the transfer of capital assets outside India and could not even tax any income of non-residents that accrued outside India.
No liability to deduct TDS under Section 195 of the Income Tax Act, 1963
Section 195 of the Income Tax Act, 1963 is mentioned hereunder:
"Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force "
The aforementioned Sectioncast an obligation on payer to deduct Tax a Source or TDS from payments that were made to non-residents. However, these payments must be chargeable to tax. The Court observed that CGP was located outside India and there is off-shore transfer if shares between two Non-Indian Residents. Therefore, this transaction constituted as ‘outright sale’ between two non-residents of a capital asset outside India and as it was Principal to Principal basis, the Court held that no liability would be aroused to deduct TDS.
CGP was not used for avoiding Taxation
The Income Tax Department alleged that CGP was used for avoiding taxation. It was interposed by Hutchinson Telecom International Limited at the last minute and further alleged it under tax planning. Tax planning was considered as violation of the act.
The Court held that the usage of multiple step-up and step-down subsidiaries was perfectly legitimate. Tax planning was further stated as permissible when done under four corners of law. If it was considered as fraud, the party could lift or pierce the corporate veil with the burden of proof on the party alleging such fraud.
The Nature of SPA Transaction as a whole
The Income Tax Department has also alleged that the SPA transaction was a sale of assets on the itemized basis and the individual aspects of the transaction should be considered. This contention was upheld by Bombay High Court. However, the apex court provided with a dissenting view and held that the transaction should be ‘looked at’ as a whole.
The Characteristics of Representative Assessee under the Income Tax Act, 1963
Hutchison Telecom International had a minor investment with Bharti Airtel and inferentially, Vodafone could be considered as ‘Representative Assessee’. The Court observed that merely because a person was an agent or treated as an agent, it could not be concluded that he would be liable to pay taxes on behalf of non-resident. He could only be considered as ‘Representative Assessee’. However, the Court held that Vodafone could not be ‘Representative Assessee’ as there was no transfer of capital situated in India.
CONCLUSION
The Supreme Court set aside the order of the Bombay High Court dated 8th September, 2010 and allowed the appeal. The Court has ascertained the transaction through the tests and removed the doubts pertaining to the transaction. This decision has further limited the powers of the Income Tax Department as it could not levy tax on overseas transaction between companies incorporated outside India. Therefore, the decisionresulted in clarification of the important principles of law pertaining to taxation.
To read the full judgement in details, find the attachment as enclosed below
