The Bombay High Court has dismissed
the writ petition filed by Vodafone International
Holdings BV, (Vodafone)
against the alleged violation of withholding
tax obligation in relation to purchase
of the business operations in India. In nutshell, the tax department had
issued a show cause notice to Vodafone
for levy of approximately USD 2 billion
by way of withholding tax from Vodafone
in relation to purchase of shares of
Cayman Island company. The tax department
contended that, in effect, the
purchase was of the business operations
of the Indian company whose
shares were ultimately held by the Cayman
Island Company.
The facts are unique and unprecedented
and the outcome may have a
telling impact on some of the overseas
mergers and acquisitions having similar
set of facts.
Key Facts of the Case:
Vodafone, a mobile service provider
had acquired 100% shares in CGP Investments,
a company incorporated in
the Cayman Islands for a consideration
of about USD 11.2 billion from HTIL,
another Cayman Islands company. CGP
Investments held stake in a series of
Mauritian and Indian Companies which
cumulatively held about 67% stake in
Vodafone Essar Limited (VEL). The tax
department issued show cause notices
to both Vodafone and VEL as to why
they should not be held as “assesses in
default”, the former on the ground of
failure to withhold taxes at source and the latter as a “representative assessee”.
Both VEL and Vodafone filed respective
writ petitions before the Court challenging
the validity of these Notices.
The structure and the flow of transfer are
explained in the following chart:
Issues before the High Court
- The Show Cause Notice (SCN) issued by the tax department is without jurisdiction.
- In an offshore transaction involving
two non‐residents, where the asset
transferred is not situated in India
and the payment is made outside India,
the transaction is not chargeable
to tax in India.
High Court Ruling
After considering the arguments of both the sides, the
High Court held that the totality of the circumstances
indicated that the tax authorities have made out a
strong (prima facie) case that the transaction was one
of transfer of a capital asset situated in India. It would
be too simplistic to hold that, under the circumstances,
Vodafone had merely acquired shares of an unknown Cayman Islands company. On the issues involved, the
High Court observed as follows: |