Case Law Details
In a 2.5 billion dollar sigh of relief for Vodafone, and for other companies eyeing assets in India, the Supreme Court has ruled in favour of Vodafone. The court has said that the Indian tax department cannot tax the transaction that saw Vodafone acquire 67 per cent stake in Hutchison Essar, a mobile phone operator in India in 2007. The deal was for 55,000 crores or $11.5 billion.
Income-Tax Department asked to return to Vodafone Rs 2,500 crore with 4 per cent interest within two months from today.
Supreme Court Registry asked to return to Vodafone the bank guarantee of Rs 8,500 crore.
“We find that during 2002-11, the Indian arm of vodafone has contributed to Rs 20,242 crore towards direct and indirect taxes to India. We hold that the offshore transaction was bonafide; hence it was non-taxable. The structure was not a sham,” says Supreme Court.
“Genuine structuring for investments are permissible. Imposition of tax (on the deal) amount to capital punishment on capital investment,” it says.
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Yesterday Supreme Court announced the judgment of the much awaited Vodafone case.
I have the following points if anyone has time please read and reply to it.
The Supreme Court has taken a view that “Shareholding in companies incorporated outside India (CGP) is a property located outside India, Such imposition of tax amounts to capital punishment on capital investments.”
In my opinion a related provision exits in section 47(viia) of the act but its related to FCCB and GDR’s issued by an Indian company which is held by a non-resident and is transferred by him to another non- resident outside India, which is again not held as chargeable to capital gains in India.
However, Section 9 which deals with income deemed to accrue or arise in India specifically has a provision which says that ” 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 situated in India.
The Supreme Court says that the capital asset (CGP) was located outside India and hence Indian tax authorities had no territorial jurisdiction on it.
What Transferred was the Net Assets of the Company which incidentally included investments in shares of the Indian entity?
Indian law recognizes that an assessee who engages in legitimate business activity and organizes business around accepted legal structures is entitlement to plan his transactions in a manner that would reduce the incidence of tax. However a colorable device to evade tax is not acceptable.
In this Transaction the Indian Entity does not get a single rupee because what was bought was a stake in the foreign entity and the Indian entity’s stake was separately bought afterwards. Neither was the Indian Entity a agent of the non- resident.
Conclusion: What Supreme Court has done is look beyond the provisions of Indian Law, as if this is not the case then every investment by a foreign company in another foreign company which has investments in India will be subject matter of litigation causing undue hardship and affecting FDI in India.
However Indian Law requires unambiguity and clarity so that India as a country sends out the right signals to those waiting with much needed FDI to invest in India. Right now there are two any conflicting views in Indian tax law which are a subject matter of litigation.
While I continue to look at corporate giants like Vodafone with utmost suspicion, I am proud to see our Supreme Court rising to the heights expected of it!
Mr. Salve being a CA started his practice and subsequently practiced law.. he has won the case for vodafone and it is really awesome that his interpretation finally got accepted by the supreme court..
Cheers to Mr. Harish Salve