I-T on overseas deal: Vodafone wins legal battle in SC

Vodafone International Holdings today won a major legal battle when the Supreme Court set aside a Bombay High Court verdict holding that Income Tax department has the jurisdiction to levy Rs 11,000 crore as tax on an overseas deal.

The apex court held that Vodafone's transaction with Hong Kong-based Hutchison Group was a "bonafide" FDI which fell outside the tax jurisdiction of the Indian authorities.

"We hold, that the Offshore Transaction herein is a bonafide structured FDI investment into India which fell outside India's territorial tax jurisdiction, hence not taxable," a bench headed by Chief Justice S H Kapadia said.

The three-judge bench wrote two separate judgements in the keenly watched high-profile corporate case and set aside the Bombay High Court verdict which had upheld the decision of the I-T dept to levy tax from Vodafone International Holdings (VIH).

Justice KS Radhakrishnan, in his judgement, concurred with the findings of the Chief Justice and Justice Swatanter Kumar saying the offshore transaction between the Vodafone Group and Hutchison Group was not a "sham" deal entered into with an attempt to avoid tax.

"The said Offshore Transaction evidences participative investment and not a sham or tax avoidant preordained transaction. The said Offshore Transaction was between Hutchison Telecommunications International Limited (HTIL, a Cayman Islands company) and VIH (a company incorporated in Netherlands).

"The subject matter of the transaction was the transfer of the CGP (a company incorporated in Cayman Islands). Consequently, the Indian Tax Authority had no territorial tax jurisdiction to tax the said Offshore Transaction," the judgements, running into 256 pages, said.

The apex court asked the I-T department to return Rs 2,500 crore deposited by Vodafone, in compliance of its earlier interim order, within two months along with four per cent interest from the date of withdrawal of the money by the tax department.

It also asked the Supreme Court registry to return within four weeks, the bank guarantee of Rs8,500 crore given by the telecom major.

Through the USD 11.2 billion deal in May 2007, Vodafone acquired 67% stake in the Hutchison-Essar Ltd (HEL) from Hong Kong-based Hutchison Group through companies based in Netherlands and Cayman Island.

Terming the tax policy certainty as "crucial" for tax payers including the foreign investors, the bench said that it was up to the government of the day to have treaties, policies and law which are not conflicting and give a clear view to the investors.

"FDI flows towards location with a strong governance infrastructure which includes enactment of laws and how well the legal system works. Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal system.

"Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner," the bench said.

"It is for the government of the day to have them (policies) incorporated in the treaties and in the laws so as to avoid conflicting views.

"Investors should know where they stand. It also helps the tax administration in enforcing the provisions of the taxing laws," it added.

The bench rejected the contention of IT department that it could levy tax on Vodafone-Hutchison deal as the capital gains arose in India.

"Shareholding in companies incorporated outside India (Cayman Island-based CGP in this case) is property located outside India. Where such shares become subject matter of offshore transfer between two non-residents, there is no liability for capital gains tax. In such a case, question of deduction of TAS (tax at source) would not arise," the bench said.

Justice Radhakrishnan also observed that "substantial territorial nexus between the income and the territory which seeks to tax that income, is of prime importance to levy tax".

He said the expression used in Section 9(1)(i) of Indian Income Tax Act, is "source of income in India" which implies that income arises from that source and there is no question of income arising indirectly from a source in India.

"Expression used (in the Act) is 'source of income in India' and not 'from a source in India'," he said.

Chief Justice Kapadia said the transaction of deal was a "single consolidated bargain" which between two foreign companies and rejected the IT department's contention that the par of capital gains arising in India could be taxed.

"In the case of transfer of the structure in its entirety, one has to look at it holistically as one single consolidated bargain which took place between two foreign companies outside India for which a lump sum price was paid of USD 11.08 billion," the bench said.