HIGH COURT OF BOMBAY – Vodafone International Holdings B.V. Versus Union of India & others

The Bombay High Court has dismissed a petition filed by Vodafone International Holdings against the tax department, saying the transaction is chargeable to income tax and the department has the jurisdiction over cross-border mergers since the assets lies in India.

Cross Boarder mergers – divestment – taxability in India – jurisdiction of Indian Tax Department – TDS u/s 195 – capital asset u/s 2(14) – Held that: – The submission of Vodafone International Holdings  BV that the transaction involves merely a sale of a share of a foreign company from one nonresident company to another cannot be accepted. The edifice of the submission has been built around the theory that the share of CGP, a company situated in the Cayman Islands was a capital asset situated outside India and all that was transferred was that which was attached to and emanated from the solitary share. It was on this hypothesis that it was urged that the rights and entitlements which flow out of the holding of a share cannot be dissected from the ownership of the share.

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The transfer of the CGP share was not adequate in itself to achieve the object of consummating the transaction between HTIL and VIH BV. Intrinsic to the transaction was a transfer of other rights and entitlements. These rights and entitlements constitute in themselves capital assets within the meaning of Section 2(14) which expression is defined to mean property of any kind held by an assessee. – income is taxable in India u/s 5(2) – once this Court comes to the conclusion that the transaction between HTIL and VIH BV had a sufficient nexus with Indian fiscal jurisdiction, the issue of jurisdiction would have to be answered by holding that the Indian tax authorities acted within their jurisdiction in issuing a notice to show cause to the Petitioner for not deducting tax at source.

From the perspective of Income Tax Law what is relevant is the place from which or the source from which the profits or gains have generated or have accrued or arisen to the seller. The income accrued and arose and was derived as a consequence of the divestment of HTIL’s interest in India. If there was no divestment or relinquishment of its interest in India, there was no occasion for the income to arise. The real taxable event is the divestment of HTIL’s interests which comprises in itself various facets or components which include a transfer of interests in different group entities.

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