Vodafone International Holdings B.V. vs. UOI (Supreme Court)

DATE: (Date of pronouncement)
DATE: January 20, 2012 (Date of publication)

Click here to download the judgement (vodafone_transfer_foreign_co_shares.pdf)

Transfer of shares of foreign company by non-resident to non-resident does not attract Indian tax even if object is to acquire Indian assets held by the foreign company

vodafone judgement

A Cayman Island company called CGP Investments held 52% of the share capital of Hutchison Essar Ltd, an Indian company engaged in the mobile telecom business in India. The shares of CGP Investments were in turn held by another Cayman Island company called Hutchison Telecommunications. The assessee, a Dutch company, acquired from the second Cayman Islands company, the shares in CGP Investments for a total consideration of US $ 11.08 billion. The AO issued a show-cause notice u/s 201 in which he took the view that as the ultimate asset acquired by the assessee were shares in an Indian company, the assessee ought to have deducted tax at source u/s 195 while making payment to the vendor. This notice was challenged by a Writ Petition but was dismissed by the Bombay High Court. In appeal, the Supreme Court remanded the matter to the AO to first pass a preliminary order of jurisdiction which the AO did. This order was challenged by the assessee by a Writ Petition which was dismissed by the High Court (329 ITR 126 (Bom). On appeal by the assessee, HELD allowing the appeal:

(By the Court)

(i) The department’s argument that there is a conflict between Azadi Bachao Andolan 263 ITR 706 (SC) & McDowell 154 ITR 148 (SC) and that Azadi Bachao is not good law is not acceptable. While tax evasion through the use of colourable devices and by resorting to dubious methods and subterfuges is not permissible, it cannot be said that all tax planning is impermissible;

(ii) In the taxation of a Holding Structure the burden at the threshold is on the Revenue to establish abuse in the sense of tax avoidance in the creation and/or use of such structure(s). The Revenue may invoke the “substance over form” principle or “piercing the corporate veil” test only after it is able to establish that the transaction is a sham or tax avoidant (e.g. structures used for circular trading or round tripping or to pay bribes) or if the Holding Structure entity has no commercial or business substance and has been interposed only to avoid tax. A strategic foreign direct investment coming to India should be seen in a holistic manner and keeping in mind certain factors like the period of business operations in India etc. On facts, the Hutchison structure was in place since 1994 and could not be said to be created as a sham or tax avoidant. The holding companies were not a “fly by night” operator or short time investor;

(iii) The Revenue’s argument that u/s 9(1)(i) it can “look through” the transfer of shares of a foreign company holding shares in an Indian company and treat the transfer of shares of the foreign company as equivalent to the transfer of the shares of the Indian company on the premise that s. 9(1)(i) covers direct and indirect transfers of capital assets is not acceptable. S. 9(1)(i) (unlike the DTC Bill, 2010) does not use the word “indirect transfer”;

(iv) The argument that CGP, the intervened entity, had no business or commercial purpose and that its situs was not in the Cayman Islands but in India (where the assets were) is also not acceptable. The situs of the shares of a company is where the registered office is;

(v) The High Court’s finding that, applying the “nature and character of the transaction” test, the transfer of the CGP share was not adequate in itself to achieve the object of consummating the transaction between HTIL and VIH and that there was a transfer of other “rights and entitlements” which were “capital assets” is not correct because the transaction was one of “share sale” and not an “asset sale”. It had to be viewed from a commercial and realistic perspective. As it was not a case of sale of assets on itemized basis, the entire structure, as it existed, ought to have been looked at holistically. A transfer of shares lock, stock and barrel cannot be broken up into separate individual components, assets or rights such as right to vote, right to participate in company meetings, management rights, controlling rights, control premium, brand licences and so on as shares constitute a bundle of rights. The sum of US$ 11.08 bn was paid for the “entire package” and it was not permissible to split the payment and consider a part of it towards individual items (Mugneeram Bangur 57 ITR 299 (SC) followed);

Per Radhakrishnan, J (concurring):

(i) On the conflict between McDowell & Azadi, It is a cornerstone of law that a tax payer is enabled to arrange his affairs so as to reduce the liability of tax and the fact that the motive for a transaction is to avoid tax does not invalidate it unless a particular enactment so provides. However, for the arrangement to be effective, it is essential that the transaction has some economic or commercial substance;

(ii) On facts, CGP’s interposition in the corporate structure and its disposition, by way of transfer, for exit, was for a commercial or business purpose and not with the ulterior motive for evading tax. It cannot be considered to be an artificially interposed device and the principle of “fiscal nullity” will not apply. For the principle of “fiscal nullity” to apply, there should be a pre-ordained series of transactions and there should be steps inserted that have no commercial purpose. In that case, the inserted steps can be disregarded for fiscal purpose and one can look at the end result. However, the sale of the CGP shares was a genuine business transaction, not a fraudulent or dubious method to avoid capital gains tax. The situs of the shares was in the Cayman Islands;

(iii) The argument that s. 9(1) should be given a purposive interpretation so as to cover even indirect transfers is not acceptable. On the transfer of shares of a foreign company to a non-resident off-shore, there is no transfer of shares of the Indian company, though held by the foreign company and it cannot be contended that the transfer of shares of the foreign holding company, results in an extinguishment of the foreign company control of the Indian company and it also does not constitute an extinguishment and transfer of an asset situate in India. Transfer of the foreign holding company’s share off-shore, cannot result in an extinguishment of the holding company right of control of the Indian company nor can it be stated that the same constitutes extinguishment and transfer of an asset/ management and control of property situated in India;

(iv) S. 195 applies only if payments are made from a resident to another non-resident and not between two non-residents situated outside India. The transaction was between two non-resident entities through a contract executed outside India, consideration passed outside India and the transaction had no nexus with the underlying assets in India. In order to establish a nexus, the legal nature of the transaction has to be examined and not the indirect transfer of rights and entitlements in India.

See also Aditya Birla Nuvo 59 DTR 1 (Bom), Richter Holding 339 ITR 199 (Kar) & In Re Groupe Industrial Marcel Dassault 340 ITR 353 (AAR) where a similar issue is involved.

3 comments on “Vodafone International Holdings B.V. vs. UOI (Supreme Court)
  1. vswami says:

    Reference is to the narration of the SC’s verdict (on top), which reads, >
    “Transfer of shares of foreign company by non-resident to non-resident does not attract Indian tax EVEN IF OBJECT IS TO ACQUIRE INDIAN ASSETS HELD BY THE FOREIGN COMPANY.”
    In one’s perception, the said sum-up does not bring out what, in fact, is the essence of the Ruling.
    Pending a close reading and understanding of the SC’s Judgment, the point sought to be made may be elaborated thus:
    Going by the facts and circumstances of the case, as also the bone of contention/substance of the arguments of the appellant, in particular as gathered from the narration in (ii) above, one strongly feels that, in essence, the ruling is to the effect that, it is the ‘form’ of the transaction, not its ‘substance’, which should be THE deciding criterion. Barring, of course, in those exceptional cases where the scheme resorted to is essentially and conclusively shown to be for ‘evasion of taxation’. The SC seems to have founded its Ruling on, among others, the ground /strength of its clear finding that this is not one such case.
    If so, in one’s understanding, what the SC is seen to have really held is that, barring those extreme/exceptional circumstances, the ‘result’, in any case the indirect result, or consequence in substance, of a transaction should not be necessarily taken to be the ‘OBJECT’ of it.
    The foregoing, as well as certain other crucial/clinching viewpoints, now stand covered in the subject SC judgment, may be found to have been elaborated at length in the published article (written with reference to the FIRST HC judgment dismissing the WRIT PETITION) > HIGH COURT’S DECISION IN THE MATTER OF VODAFONE-AN ANALYSIS (2009) 176 Taxman pg 82 .

  2. m.r.sivaraman i.a.s (retd) says:

    I am afraid I am unable to accept the logic contained in the judgement of the Hon SC. What is a form without a name and substance.The shares even though transfered by companies registered outside India would have worth nothing had there not been tangible ,income earning assets in India.This is not a stock in trade transaction but the purchase of all the income earning physical assets of a company located in India.If this judgement is not nullified by an an amendment in law the GOI will lose thousands ofcrores of revenue. An interesting episode when I was Revenue Secy with Dr. Manmohan Singh. Dozens of writs were filed when we imposed a service tax on solicitors’ firms. No lawyer wa s there to argue the case when all of them were taken over by the Hon. SC. Some how it was argued as the result was foregone.We lost the case. But we changed the law. It is the courts who by their judgements point out flaws in the laws and the govt. has to correct them or rescind them if they are not in public interest. Here there is a public interest of billions of rupeees of potential revenue to the state.
    M.R.SIVARAMAN IAS (RETD.Former Rev. Secy GOI and ED IMF

  3. Dave says:

    It seems that the argument is with the sufficiency of the corporate veil which is a structure that has been accepted for a 100 of years as an efficient means for large operations requiring expedient scale adjustments. The argument against abusive tax structures can go many ways. Should the corporate veil be seen as a meaningless paper barrier? Should the Dutch company be taxed in every country in which the said shares might be linked to a permanent establishment? Thus, has the potential to be taxed 5, 6 ,or 7 times on the same value without any change in asset structure and while the owners are not even residents of India or ever born in India. An argument for this principle is flawed and its context is riddled with abuse. This is argument is about fighting for scarce resources and not for the sufficiency of tax law.

    All accounting laws across the globe allow a payment for assets, stock, or liabilities to be allocated under a very specific order but tax law chooses to be more complex based on the needs of revenue. Shares are separate from management and control, if for nothing else, the Dutch company was not obtaining majority ownership and the original shares were not with a majority owner. Additionally, stock in itself, has it’s own basis and return outside of the underlying asset. It is securitized to represent the value of the underlying asset but is a separate instrument.

    Hutchinson probably already pays a lot of tax to the Indian government and employees 1000s of Indian workers. The two non-residents should be left alone.

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