In 2007, Vodafone International Holding B.V. (Vodafone), a Dutch entity acquired Shares of CGP Investments (Holding) Ltd. (CGP), a Cayman Island entity through HTIL, another Cayman Island entity belonging to the Hutch group. Through CGP, Hutch group owned 67% stake in their Indian JV operations in Hutch-Essar Limited (HEL). HEL was providing telecommunication services in India.

By virtue of transfer of shares of CGP, underlying business interest of Hutch Group in India was transferred to Vodafone
. The deal Value was approx. USD 11.1 billion. Payment was made by Vodafone to HTIL without deducting any taxes as the deal took place in Cayman Islands and it was interpreted that the transaction was not taxable in India.

Issues involved-

Indian Tax Authority was of the view that this transaction would give rise to Capital gains chargeable to Tax in India and thus Vodafone was assessable under section 195 of the I.T. Act, 1961 (withholding taxes). It further stated that as the underlying business of Hutch Group was in India and that its controlling stake got sold, the transaction should stand taxed in India.

On the other hand, Vodafone was of the view that the transaction in the instant case involved transfer of shares of a non-resident company (situated in Cayman Islands) and was thus not a direct transfer of capital asset situated in India. Vodafone maintained that the controlling interest was not an asset separate and distinct from the shares but was an incidence arising from the holding of a particular number of shares in a company and as the Shares of a Non Resident Company having its Registered office in Cayman islands got transferred and as there was no direct transfer of Capital Asset situated in India, the transaction could not be taxed in India.

Brief of Litigation-

On this transaction, Indian Tax Authorities issued notice to Vodafone for not withholding taxes on its payments to the Hutch Group. Against this Tax notice, Vodafone moved to Bombay H.C. which held that the said transaction may be subject to Indian Tax laws as the dominant purpose of the transaction was to acquire the stake of the Indian entity. However, it further ordered that the transaction be investigated by the I.T. Department.
 
The IT Department passed an order in May 2010 and held that it had competent jurisdiction to treat Vodafone as an assessee in default for failure to withhold tax at source. This decision of IT department was challenged by Vodafone before the Bombay High Court. The Bombay H.C. by its September, 2010 judgment, dismissed Vodafones petition and held that “the essence of the transaction was a change in the controlling interest in HEL which constituted a source of income in India”. It said the “the proceedings which have been initiated by the Income Tax Authorities cannot be held to lack jurisdiction”

Supreme Court Order-

As a Landmark Judgment, the matter was finally decided by the three Judge Bench of Supreme Court of India today i.e. on 20th January, 2012 in favor of Vodafone stating that “the government has no jurisdiction over Vodafones purchase of mobile assets in India as the transaction took place in Cayman Islands between HTIL & Vodafone,” The Tax Department has also been directed to return the upfront amount paid by Vodafone (Rs 2500 crore) with interest.

Our Comments-

This is a landmark cases in the history of International Taxation order has come as a big relief for all Cross Border M&A Transactions happening with India focus. This litigation was first of its kind as Indian Tax Authorities attempted to tax capital gains arising on transfer of shares of a foreign holding company of an Indian subsidiary on grounds that such transfer involves an indirect transfer of the Indian subsidiary. Several MNCs would warmly adopt the Supreme Court view in this respect and it should boost Investor Confidence as clarity of Tax Impact has always remained a controversial issue in India.

It is also pertinent to note that under the proposed Direct Taxes Code, new provisions like General Anti-Avoidance Rules (GAAR), Controlled Foreign Corporations (CFC) and change in Residence norms in case of Company Incorporated outside India have been proposed by the Government to tackle Tax leakage on such fronts. Needless to say, Planning is of paramount importance while structuring any of the International transactions.