The Recent Bombay High Court landmark decision in the Vodafone case has compelled me to write on it. I would deal with this matter in two divided posts – the first one would provide an overview for the reader unacquainted with the controversy in hand and the decision of the Court. In the succeeding post I would cull out the far reaching ramifications of this judgment – both at national and international level. A perusal of following paragraphs, thus, becomes essential in order to berate or appraise the decision.
One might be amazed to note the finding of the court in page 3 of the judgment. The judges have attempted to give graphical overview of complex shareholding patterns in the giant’s involved. With all due respect to the Court, I would like to simplify the situation to the readers in words. The saga began in May 2007, when Vodafone International Holding B.V. (A Dutch subsidiary of Vodafone Group U.K.) acquired 52% stakes in CGP Investments (Holding) Ltd (A Cayman Island based company) from Hutchison Group (A Hong Kong based corporation) in a whopping deal worth US $ 11.01 billion. Central to this controversy is the fact that CGP Investments Ltd was holding 67% shares of Hutch Essar Ltd. (an India based company). As a direct consequence of this deal, Vodafone acquired the interest in Hutch Essar Ltd India with the transfer of the shares from CGP Investments to Vodafone. The Income Tax Authorities (ITA) joined the party pretty soon. The ITA realized that taxable gains which arose due to this transfer significantly involve Indian assets. The ITA, therefore, issued a show cause notice to Vodafone since it failed to discharge this tax obligation. The primo contention of ITA submitted before the court was that tax is owed on the deal because the assets sold by the giants were based in India and that Vodafone, being the buyer, was responsible for adhering to this tax obligation. The contrary submission of Vodafone was that there was no tax obligation owed on the said transaction because it took place between foreign companies and the entity involved in the deal was registered in the Cayman Islands. In the words of Harish Salve appearing on behalf of Vodafone, it was merely a sale of one share of a foreign company from one non-Indian company to another. The main question which arose before the Court was that whether the said transaction between the foreign companies resulted in an income which would be taxable in India, or in other words whether ITA has jurisdiction to tax the remittance occurred in the said transaction?
An HC division bench of Justices D.Y. Chandrachud and J.P. Devadhar in a 196-page judgment, after comprehensively analyzing Indian and International taxation laws, expounded that Vodafone was under an obligation to pay taxes on its $11 billion acquisition of CGP Investments in 2007 and the Indian tax authorities had jurisdiction to tax the gains arising from such transactions as it involved the transfer of rights and entitlements of local Indian subsidiaries. The Court rejected the contention the raised by Mr. Harish Salve that it was merely a sale of one share of a foreign company from one non-Indian company to another. (¶ 136) The Court noted that the transaction in question had a significant nexus with India. The essence of the transaction was a change in the controlling interest in HEL which constituted a source of income in India context. (¶ 144) However, a relief for Vodafone comes from the order of HC where it has asked Tax Authorities not to pass final order before 8 weeks. This provides Vodafone with a chance to appeal to the Supreme Court.
(To be continued….)
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Jeet Soni
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