Vodafone Case Analysis

Case name: Vodafone international holding v/s Union of India

Citation: 2009(4) Bom CR 258 – Date of decision: 07th May 2018 – Bench: Hon’ble Justice Manmohan

Statues involved: Code of civil procedure (amendment) Act, 2002 · Constitution of India (Article 31) – Constitution of India (Article 21) – · The Arbitration Act,1940 – Company Act,2013 – Income Tax Act,1961

Background of the case:

In February 2007, the Dutch company Vodafone International Holding (HIV) acquired a 100% stake in CGP Investments (Holding) Ltd (hereafter CGP), a Cayman Islands company for $ 11 billion from Hutchison Telecommunications International Limited. CGP manages 67% of an Indian company Hutchison Essar Limited (“HEL”) through various conversion/practice law organizations. With this acquisition, Vodafone acquired control of CGP and its subsidiaries, including Hutchison Essar Limited. HEL is a joint venture of the Hutchison meeting and the Essar meeting. It had acquired telecommunications licenses to offer mobile communications in various circles in India from November 1994.

In September 2007, Indian tax authorities sent an important message to Vodafone Company explaining why the HTIL tax had not been withheld from the previous transaction. The Tax Department states that the CGP share transfer transaction triggers the transfer or transfer of indirect assets in India.

Vodafone specifically appealed to the Bombay High Court regarding the jurisdiction of the tax authorities in this case, and the court ruled that the Indian tax authorities are responsible for this case. The order was subsequently raised by the Supreme Court of India. In 2009, the court ordered the tax authorities to rule first on the jurisdictional issue presented in this case.

In May 2010, the tax authorities stated that they had taken action against Vodafone on the grounds that they could not withhold taxes in accordance with Section 201 of the Income Tax Law. Vodafone argued the order in the Bombay High Court. The Bombay High Court dismissed Vodafone’s appeal. Vodafone has filed a Special Leave Petition (SLP) for a Supreme Court ruling in accordance with Article 136 of the Constitution of India. The SLP was confirmed in November 2010. The Supreme Court also ordered Vodafone to deposit a total of 25,000,000 Indian rupees in three weeks and provide a bank guarantee of 85,000,000 for approximately two months from the date of the prescription.

Observations made by the court

The first observation that Supreme Court made was in respect to whether Indian Tax Authorities can put a tax on indirect transfer of capital assets situated in India?
Section 9 (1) (i) of the Income Tax Act provides that all income which is earned or arises, directly or indirectly, 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 by the transfer of an asset located in India will be deemed to have been accrued or originated in India[1]. Regarding this Section 9 (1) (i), the Tribunal noted that the word indirect transfer is not present in Section 9 (1) (i) with respect to the transfer of fixed assets in India. Therefore, section 9 (1) (i) does not recognize the indirect transfer of fixed assets to India and therefore the court cannot cover the indirect transfer of fixed assets to India under this section. Therefore, the shares which have been transferred to CGP cannot be considered as a transfer of fixed assets in India and therefore the Indian tax authorities cannot apply taxes to them

The second observation that the Supreme Court made was in respect with whether the transfer of HTIL’s property rights by extinguishment through Sale Purchase Agreement (SPA)?
The tax authorities alleged that HTIL had property rights that were terminated under the purchase contract signed on March 15, 2007, which makes the transfer of the fixed assets located in India taxable. But the Court observed in this case that the termination that occurred was due to the transfer of CGP shares and not to the clauses mentioned in the purchase contract. In addition, the Supreme Court ruled that CGP intended not only to own the shares of its subsidiaries but also to ensure a smooth transition of the company. Therefore, it cannot be said that CGP does not have commercial or commercial content. However, the tax authorities agree that some transfers by the CGP itself are not sufficient to achieve the purpose of transfers between HTIL and Vodafone, and that this type of transfer is a transfer of rights and other privileges and made argue that this type of established rights and privileges Fixed assets that generate capital gains and capital gains resulting from such transfers may be subject to tax.

The third observation was with respect to the interpretation of Section 195 of Income Act, 1955 and whether Vodafone can be treated as a Representative Assessee under Section 163 of Income Act, 1955?
In this observation, the Supreme Court established how to interpret section 195 of the Income Tax Act. It was interpreted that the tax issue should relate to the transaction in question and not to transactions that are unrelated to the transaction in question. The Supreme Court also interpreted that section 195 will only be applicable in cases involving payments or transactions made by an Indian resident to a non-resident and not the payment or transactions between two non-residents AND also when considering whether the transaction is subject to taxation or not, the legal aspects of the transaction should also be considered.

With regard to Section 163 of the Income Tax Law, the Supreme Court observed that the transaction which took place, in this case, was between two non-resident companies and that the transaction was also executed through a contract and that the consideration of a contract had also been accepted. Outside India and therefore Vodafone International Holding does not fall within the scope of section 163 of the Income Tax Act 1955.

Decision of the Supreme Court

The Supreme Court of India upheld the landmark ruling in Vodafone International Holding (VIH) v. Indian Union (UOI). The bank, consisting of Supreme Court Justice SH Kapadia, KS Radha Krishnan, and Swatanter Kumar, overturned the High Court ruling of Rs 12,000 under capital gains tax and exempted HIV from the responsibility to pay 12,000 rupees in capital gains tax on the February transaction. 11 of 2007 between VIH and Hutchinson Telecommunication International Limited or HTIL (non-resident company for tax purposes). The court ruled that Indian tax authorities are not allowed to levy taxes on a foreign transaction between two non-resident companies in which the non-resident company acquires a controlling stake in a resident (Indian) company in the transaction.

Judicial decision

The sale of CGP shares by HTIL to Vodafone or HIV does not constitute a transfer of fixed assets within the meaning of section 2 (14) of the Income Tax Law and, therefore, all the rights and claims of the agreement. Shareholders, etc., which are an integral part of GCP’s shares, are not subject to any capital gains tax. The High Court’s order to impose almost 12,000 rupees as a capital gains tax would constitute a capital punishment for capital investment and has no legal power and will therefore be repealed.


The Supreme court has issued a landmark ruling in Vodafone International Holding v Union of India and raised the uncertainty surrounding the introduction of taxes.

With this ruling, the Supreme Court recognized:

The principles of tax planning companies or individuals can regulate the activities of their company in such a way as to reduce their tax liability in the absence of legal provisions that prohibit it.
The corporate veil can be lifted if the facts and circumstances reveal that the transaction or the corporate structure is false and taxes should be avoided.
Transactions should be viewed holistically rather than dissected, and the existence of corporate structures in tax neutral / investor-friendly countries should not lead to the conclusion that they should avoid tax.
In the end, it can be said that this decision helped eliminate uncertainties about the introduction of taxes and recognized the principle that the motive for the operation to evade taxes is not necessarily the acceptance of tax evasion and the Supreme Court argued in favor of legitimate tax planning.

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