On 20.January.2012 a Bombay High Court judgment of September 8, 2010 was set aside by the three judge bench of the Apex Court of India. The bench consisted of Hon’ble Chief Justice of India S. H. Kapadia, Hon’ble Justice K. S. Radhakrishnan and Hon’ble Justice Swatanter Kumar.
It has been held in the case that the companies (Vodafone and Hutchison) are incorporated and transacted outside India and has "no underlying nexus" with tax authority in India. Vodafone has no obligation under Section 163 clause 1 (c) of Income Tax Act, 1961.
The Hon'ble Chief Justice pronounced the judgment on behalf of His Lordship and Hon'ble Mr.Justice Swatanter Kumar, while granting leave, to the following effect-
“For the above reasons, we set aside the impugned judgment of the Bombay High Court dated 8.09.2010 in Writ Petition No. 1325 of 2010.Accordingly, the Civil Appeal stands allowed with no order as to costs. The Department is hereby directed to return the sum of Rs. 2,500 crores, which came to be deposited by the appellant in terms of our interim order, with interest at the rate of 4% per annum within two months from today. The interest shall be calculated from the date of withdrawal by the Department from the Registry of the Supreme Court up to the date of payment. The Registry is directed to return the Bank Guarantee given by the appellant within four weeks.”
Hon'ble Mr. Justice K.S. Radhakrishnan pronounced His Lordship's separate judgment
concurring with the judgment delivered by Hon'ble the Chief Justice as under-
"I, therefore, find it difficult to agree with the conclusions arrived at by the High Court that the sale of CGP share by HTIL to Vodafone would amount to transfer of a capital asset within the meaning of Section 2(14) of the Indian Income Tax Act and the rights and entitlements flow from FWAs, SHAs, Term Sheet, loan assignments, brand license etc. form integral part of CGP share attracting capital gains tax. Consequently, the demand of nearly Rs.12, 000 crores by way 254 of capital gains tax, in my view, would amount to imposing capital punishment for capital investment since it lacks authority of law and, therefore, stands quashed and I also concur with all the other directions given in the judgment delivered by the Lord Chief Justice".
ISSUE
The matter in the present case concerns the tax dispute involving the Vodafone group with the Indian Tax Authorities [hereinafter referred to for short as “the Revenue”], in relation to the acquisition by Vodafone International Holdings BV [for short “VIH”], a company resident for tax purposes in the Netherlands, of the entire share capital of CGP Investments (Holdings) Ltd. [for short “CGP”], a company resident for tax purposes in the Cayman Islands [“CI” for short] vide transaction dated 11.02.2007, whose stated aim, according to the Revenue, was “acquisition of 67% controlling interest in Hutchison Essar Limited (HEL for short)”, being a company resident for tax purposes in India which is disputed by the appellant saying that VIH agreed to acquire companies which in turn controlled a 67% interest, but not controlling interest, in “HEL”.
According to Appellant, the Revenue seeks to tax the capital gains arising from the sale of the share capital of CGP on the basis that CGP, whilst not a tax resident in India, holds the underlying Indian assets.
FACTS
On 25.12.2006, an offer comes from Essar Group to purchase HTIL’s 66.99% shareholding at the highest offer price received by HTIL. Essar further stated that any sale by HTIL would require its consent as it claimed to be a co-promoter of HEL.
Through the USD 11.2 billion deal in May 2007, Vodafone acquired 67 per cent stake in the Hutchison-Essar Ltd (HEL) from Hong Kong-based Hutchison Group through companies based in Netherlands and Cayman Island.
To sum up, CGP held 42.34% in HEL through 100% wholly owned subsidiaries [Mauritius companies], 9.62% indirectly through TII and Omega [i.e. pro rata route], and 15.03% through GSPL route. To explain the GSPL route briefly, it may be mentioned that on 11.02.2007 AG Group of companies held 23.97% in TII, AS Group of companies held 38.78% in TII whereas SMMS held 54.21% in Omega. Consequently, holding of AG in HEL through TII stood at 4.68% whereas holding of AS in HEL through TII stood at 7.577% and holding of SMMS in HEL through Omega stood at 2.77%, which adds up to 15.03% in HEL. These holdings of AG, AS and SMMS came under the Option Route. In this connection, it may be mentioned that GSPL is an Indian company indirectly owned by CGP. It held Call Options and Subscription Options to be exercised in future under circumstances spelt out in TII and IDFC Framework Agreements (keeping in mind the sectoral cap of 74%).
OBSERVATIONS
The Hon'ble Supreme Court observed the case of Craven (Inspector of Taxes) v. White (Stephen) (1988) 3 All. E.R. 495 wherein it was held that the Revenue cannot start with the question as to whether the transaction was a tax deferment/saving device but that the Revenue should apply the look at test to ascertain its true legal nature. It observed that genuine strategic planning had not been abandoned.
Further it was argued whether Section 9 is a “look through” provision as submitted on behalf of the Revenue?
According to the Revenue, if its primary argument (namely, that HTIL has, under the SPA, directly extinguished its property rights in HEL and its subsidiaries) fails, even then in any event, income from the sale of CGP share would nonetheless fall within Section 9 of the Income Tax Act, 1961 as that Section provides for a “look through”. In this connection, it was submitted that the word “through” in Section 9 inter alia means “in consequence of”. It was, therefore, argued that if transfer of a capital asset situate in India happens “in consequence of” something which has taken place overseas (including transfer of a capital asset), then all income derived even indirectly from such transfer, even though abroad, becomes taxable in India. That, even if control over HEL were to get transferred in consequence of transfer of the CGP Share outside India, it would yet be covered by Section 9. The court found no merit on the Revenue's submission.
The court said that, to show that in the existing Section 9(1) (i) the word indirect cannot be read on the basis of purposive construction. The question of providing “look through” in the statute or in the treaty is a matter of policy. It is to be expressly provided for in the statute or in the treaty. Similarly, limitation of benefits has to be expressly provided for in the treaty. Such clauses cannot be read into the Section by interpretation. For the foregoing reasons, we hold that Section 9(1) (i) is not a “look through” provision.
The court concluded that
“FDI flows towards location with a strong governance infrastructure which includes enactment of laws and how well the legal system works. Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner. Legal doctrines like “Limitation of Benefits” and “look through” are matters of policy. It is for the Government of the day to have them incorporated in the Treaties and in the laws so as to avoid conflicting views. Investors should know where they stand. It also helps the tax administration in enforcing the provisions of the taxing laws. As stated above, the Hutchison structure has existed since 1994. According to the details submitted on behalf of the appellant, we find that from 2002-03 to 2010-11 the Group has contributed an amount of `20,242 crores towards direct and indirect taxes on its business operations in India”
PWC Indian Executive Director Sandeep LAdda said that though the government will lose out in terms of revenue, the decision is likely to act as a catalyst for future investments and has sent the right signal to the world, especially to investors who want to invest in India. "This settles a prolonged litigation which had created a lot of uncertainty for multinationals having similar structures and/or who had entered into or were proposing to enter into similar transactions.
