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Facts of the Case:
Vodafone International Holding (VIH) and Hutchison telecommunication international limited or HTIL are two non-resident companies. These companies entered into transaction by which HTIL transferred the share capital of its subsidiary company based in Cayman Island i.e. CGP international or CGP to VIH.
The Indian Revenue authorities issued a show cause notice to VIH as to why it should not be considered as “assesse in default” and thereby sought an explanation as to why the tax was not deducted on the sale consideration of this transaction. The Indian revenue authorities thereby through this sought to tax capital gain arising from sale of share capital of CGP on the ground that CGP had underlying Indian Assets.
Procedural History:
The Indian Revenue Authorities issued a show-cause notice to Vodafone (VIH) when the transaction took place. VIH filed a writ petition in the High Court challenging the jurisdiction of Indian revenue authorities. This writ petition was dismissed by the High Court and VIH appealed to the Supreme Court which sent the matter to Revenue authorities to decide whether the revenue had the jurisdiction over the matter. The revenue authorities decided that it had the jurisdiction over the matter and then matter went to High Court which was also decided in favor of Revenue and then finally Special Leave petition was filed in the Hon’ble Supreme Court of India.
Issues:
There were three prime issues in this case:
- Whether the situs of shares happened in India or in Cayman Islands?
- Whether, in this transaction, there was a sale of assets?
- Whether to lift the corporate veil of CGP to determine if the company had all the interests in India?
Holding:
In the first issue, the Indian Revenue Authorities contested that the situs of shares has taken place in India to which the Court observed that the situs of shares has happened in Cayman Island which is not a part of Indian jurisdiction. The Court observed that shares of CGP were registered in Cayman Island and law of Cayman also does not recognize multiplicity of registers and hence site of shares and transfer of shares is situated in Cayman and shall not shift to India.
In the second issue, the Indian Revenue Authorities contested that while buying the CGP’s investment of Hutch, they have acquired the control over an Indian subsidiary and, therefore, this is a transfer of assets and such transfer of assets are covered under the Indian Income Tax Act.
To this, the Court said, that the entire investment was bought by the Vodafone Holdings. This kind of transaction is not equivalent to sale of assets in an item-wise basis. It was not like controlling the interests in a split manner. The entire transaction is to be seen as a whole. The Court, therefore, held that this is not sale of assets. This is a sale of shares in Cayman Islands. Sale of shares as a whole is not sale of assets.[1]
In the third issue, the Indian Revenue Authorities contested that if the CGP’s corporate veil is lifted, it can be observed that the Company has all the interests in India.
To this, the Court said, this is not required as this is not a case of tax evasion or forgery. The directors of the company are not personally benefitting from the transaction. The Indian Courts do not have a jurisdiction on this.
The Indian Revenue Authorities lost in this case but later the decision was legislatively overturned by a retrospective amendment.
[1] To put it in a simpler way, a sale of share is construed as sale of asset but if an entire investment is sole, it is not just sale of assets.
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