Vodafone International Holdings Limited vs Union Of India & Anr, 2012: A case that shook Indian taxation rules




Vodafone case reflects the loophole in the Indian taxation system, and this case forced the Indian Government to amend the Capital Gain taxation rule. In order to understand the case, you have to know about three companies, which are Hutchinson Essar Limited (HEL), Hutchinson Telecom International Limited (HTIL) and CGP Investments Holdings Limited (CGP). Before making any discussion regarding the Vodafone case, let’s have an overview of the stated companies.











Hutchinson Essar Limited (HEL):





v  Originated in India and registered under Companies Act 1956.




v  Involved in providing Telecommunication Services in India.









CGP Investments Holdings Limited (CGP)




v  This company was registered in Mauritius and situated at Cayman Island, Mauritius




v  It owned 67% shares in Hutchinson Essar Limited




v  It was a dummy company




v  This company was established for the purpose of benefitting the Mauritius Government




v  The transactions made in the country are tax-free and this was the reason for establishing the company in Mauritius









Hutchinson Telecom International Limited (HTIL)




v  This company was registered and situated in Hong Kong




v  The primary operation of the company was to provide telecommunication services in the global platform




v  The company owned CGP Investments Holdings Limited (100% investment in the company)











With the help of the above diagram and discussion, it is to be clear to all that the Hutchinson Telecom International Limited owned CGP Investments Holdings Limited, and CGP Investments Holdings Limited was the holding company (as it owned more than 50% share) of Hutchinson Essar Limited. Due to this reason, Hutchinson Essar Limited (HEL) was also the subsidiary company of Hutchinson Telecom International Limited (HTIL).




In this circumstance, Hutchinson Telecom International Limited had transferred 100% shares of CGP Investments Holdings Limited for Rs. 56,000 crores to Vodafone International Holding BV. By this transfer, Hutchinson Telecom International Limited sold the rights in Hutchinson Essar Limited to Vodafone International Holding BV. In finance, this kind of transactions is known as an indirect transfer.  




Being a tax haven country, the government of Mauritius does not impose any tax on any business transactions. However, Indian Government through the Assessing Officer appealed to the Bombay High Court that the transfer of rights of Hutchinson Essar Limited (India) through CGP Investment Holdings Limited was done to take the advantage of Tax Havens in Cayman Island, Mauritius. In this regard, it is to be stated that the capital gain tax arises on the transfer of shares is exempt in Mauritius. The Assessing Officer claimed that the actual right of an Indian company was transferred and therefore the capital gain tax liability arises as the substance of the transaction was to transfer the rights in Hutchinson Essar Limited, which was an Indian company.




Bombay High Court’s View:




The Hon. Bombay High Court considered the appeal of the Commissioner of Income Tax as up to the mark as the purpose of the transaction was to acquire an Indian company. In this regard, it is to be noted that Income Tax Act 9 (1) (i) states that in this type of cases, where a foreign company acquires the controlling interest of an Indian company, the Income shall be deemed to be accrued or arise in India.




The assessee’s argument in this regard was that the holding of 67% share in a company does not mean holding 67% of the total assets of that company. In accordance with the Companies Act, 1956, this argument was true.




This argument of the defendant challenged the verdict of the decision of Bombay High Court, now the case to be heard on Hon’ble Supreme Court of India.




Hon’ble Supreme Court’s view:




Hon’ble Supreme Court of India denied the point of the Assessing Officer on the basis of the following three aspects:




1.      Under section 9(1)(i) of the Income Tax Act 1961, Transfer of shares does not amount to transfer of Capital Assets, which are situated in India.




2.      Under section 2(14) of the Income Tax Act 1961, controlling interest is not a capital asset. Thus Bombay High Court’s view was overruled.




3.      Based on the above judgments, as the capital asset is not taxable in India, section 195(1) is not applicable and therefore there shall be no question of Tax Deducting at Source.



From the above discussion, it is clear that due to the loopholes in the Income Tax Laws, the Assessing Officer lost the case. The Government of India was to make amendments with retrospective effects in order to get capital gain tax and TDS for similar cases in the future. This amendment will be discussed in the next blog.














Reference: