Vodafone International Holdings B.V. v. Union of India
(2012) 6 SCC 613
Judges: S.H. Kapadia, CJI, K.S. Radhakrishnan and Swatanter Kumar, JJ.
Date of Decision: 3-2-2012.
In February 2007 Vodafone acquired a single share of CGP from HTIL. CGP, which was then a subsidiary of HTIL, effectively held a 67% share of the economic value of Vodafone Essar Ltd through various Mauritian and Indian companies. The Indian Income Tax Authority contended that the transfer of a single share in CGP to Vodafone resulted in the transfer of HTIL’s interests in Vodafone Essar Ltd to Vodafone. The authority alleged that, in addition to transfer of the share, other rights and entitlements were transferred as an intrinsic part of the transaction. The authority therefore initiated proceedings against Vodafone for a failure to deduct tax under section 195 of the Income Tax Act, 1961, seeking to recover $2.1 billion from Vodafone as alleged withholding tax liability.
In September 2007 the Income Tax Department issued a show cause notice to Vodafone under section 201 of the Act, seeking to treat Vodafone as an ‘assessee in default’ for not deducting tax at source in terms of section 195 of the Act. In October 2007 Vodafone filed a writ petition before the Bombay High Court challenging the jurisdiction of the department to issue the notice.
In December 2008 the High Court held that the transaction was prima facie liable to tax in India. Vodafone then filed a special leave petition before the Supreme Court challenging the High Court’s ruling. In January 2009 the Supreme Court directed that the jurisdictional issues in relation to the power to tax the transaction first be determined by department. The court also mentioned that Vodafone was entitled, if necessary, to challenge the department’s order before the High Court.
In May 2010 the department passed an order under section 201 of the Income Tax Act, 1961 claiming jurisdiction to tax the transaction and treating the transaction as chargeable to tax in India. Vodafone was therefore treated as an assessee in default. In June 2010 Vodafone filed a writ petition before the High Court challenging the department’s order. In September 2010 the High Court ruled that:
• Section 9 of the Income Tax Act, 1961 was wide enough to cover the transaction;
• income is chargeable to tax in India; and
• the department had jurisdiction under the act to pass an order in relation to the transaction.
Vodafone again challenged the order of the High Court before the Supreme Court, through a special leave petition. The hearings began on August 3, 2011 and concluded on October 19, 2011, after 28 days of arguments.
Whether section 195 of the Income Tax Act, 1961 is applicable when the transaction is liable to tax in India. And in the event that the transaction is not liable to tax in India, the said section 195 has no applicability.
The Supreme Court’s judgment clarifies the law, based on the provisions contained in the Income Tax Act, 1961. While delivering its judgment, the court recognised that it is important to provide certainty with regard to the interpretation of law and the maintenance of a robust judicial system, so that investors can determine the tax position for investment in India. If the government wishes to propose a limitation of benefits or ‘look-through’ provisions, this should be a policy decision introduced either under the extant law or the tax treaties.
The court ruled that it is important for both the tax administration and the courts to look at the legal nature of the transaction in its entirety and holistically; a dissecting approach should not be adopted. The ‘look-through’ approach is permissible only in instances where it can be established on the basis of facts and circumstances that the transaction is a sham or is for the purposes of tax avoidance.
The court observed that section 9 of the Income Tax Act, 1961 cannot be extended to cover indirect transfers of capital assets or property situated in India, as the legislature has not used the words ‘indirect transfers’ in section 9(1)(i) of the Act. If these words are read into this section, the express statutory requirement of section 9(1)(i)(4) of the Act would be rendered worthless. The Direct Tax Code Bill, 2010 specifically proposes that such indirect transfers be liable to tax in India. In the absence of such a provision in the existing statute, indirect transfers should not fall within the ambit of section 9(1)(i) of the Act and are thereby not liable to tax in India.
The court noted that no purposive interpretation can be rendered to a legal statute. The effect of the language of the section should be given, especially when the language is unambiguous. A legal fiction has a limited scope and cannot be expanded by giving a purporsive interpretation, particularly if the result of such interpretation is to transform the concept of chargeability.
The situs cannot be determined on the basis of the location of the underlying assets. In the case at hand, the situs of the shares would be where the company was incorporated and where its shares could be transferred.
The court also noted that the basis of valuation cannot be the basis of taxation. Taxation is based on profits, income or receipt. In contrast, valuation may be a science, not law — to arrive at the value it is necessary to take into consideration the business realities, including the business model, the duration of its operations and concepts such as cash flow, discounting factors, assets and liabilities, and intangibles.
The court further held that it was difficult to agree with the conclusions arrived at by the High Court that the sale of CGP share by HTIL to Vodafone would amount to transfer of a capital asset within the meaning of section 2(14) of the Indian Income Tax Act and the rights and entitlements flow from FWAs, SHAs, Term Sheet, loan assignments, brand license etc., form integral part of CGP share attracting capital gains tax. Consequently, the demand of nearly ` 12,000 crores by way of capital gains tax, would amount to imposing capital punishment for capital investment since it lacks authority of law and, therefore, stands quashed.