It was really a great matter of fact & concern that the Indian Government have to amend the sections with a retrospective effect, for the purpose to made tax payable to Vodafone International Holdings in India who have to deduct TDS amount while purchasing the CGP Holding in Mauritius from Hutchison Group.
Here, I present the steps which were taken to resolve that Cases :
1. Bombay High Court Decision
2. Supreme Court Decision
3. Amendment in Section 2(47), 2(14) & 9
4. Memorandum Explaining Provision of Finance Bill, 2012
Vodafone International Holdings B.V. Vs. Union of India
(Bombay High Court)
Hutchison Essar Limited (HEL) is an Indian Company which is the Joint Venture of Hutchison Group and Essar Group. HEL is carrying on the business of providing telecommunication services in India.
Hutchison Telecommunication International Limited(HTIL) is a foreign company, registered in Hong Kong. This foreign company has a wholly owned subsidiary company CGP Investments Ltd. (CGP) which is also a foreign company registered in Cayman Islands, Mauritius. The Company CGP holds 51.95% shares in HEL and through its foreign subsidiary companies, CGP also holds 15.05% shares in HEL. Essar Group holds 33% shares in HEL.
A company Vodafone International Holdings B.V. (Foreign Company registered in Netherland) with a view to acquire the controlling interest in HEL purchased the 100% shares in CGP from HTIL. The agreement of sale of shares of CGP took place outside India.
Mainly two issues arise on sale of CGP shares by HTIL to Vodafone. Firstly, whether HTIL by reason of instant transaction, had earned income liable for capital gains tax in India as this income was earned towards sale consideration of transfer of its business/economic interests in India as a group in favour of the Vodafone. Secondly, whether, on payment made by the Vodafone to HTIL on such transaction, Vodafone was liable to deduct tax at source under section 195 from the sale consideration paid to HTIL.
The Income Tax department issued a show cause notice under section 201 to Vodafone as to why it should not be treated as an assessee in default for not deducting TDS under section 195 on the payment made to HTIL which is taxable in India in hands of HTIL as capital gains. Vodafone filed a writ petition in Bombay High Court challenging the legal validity of the show cause notice.
The Bombay High Court held as under:
- The transfer of shares of CGP by HTIL to Vodafone amounts to transfer of controlling interest in Indian Company HEL to Vodafone. The dominant purpose of sale of shares of CGP was to transfer the controlling interest of Indian Company.
- Vodafone has acquired a source of income in India, HTIL by reason of this transaction has earned capital gains taxable in India as the income was earned towards sale consideration of transfer to Vodafone of its Indian business/ economic interests as a group.
- In the instant case, the subject matter of transfer as contracted between the parties is not actually the shares of a Cayman Island Company, but the assets situated in India.
- Vodafone was therefore liable to deduct TDS on the payment made to HTIL and therefore show cause notice under section 201 is a valid notice.
Bombay High Court Dismissed The Writ Petition of Vodafone and the court rejected the argument of Vodafone that what was transferred was only shares of an Cayman Island Company i.e., CGP, and therefore, the argument that no capital gains will arise on sale of shares in CGP was rejected.
The very purpose of entering into agreements between the two foreign companies is to acquire the controlling interest which one foreign company held in the Indian company. This being the dominant purpose of hte transaction, the transaction would certainly be subject to municipal laws of India, including the Indian Income Tax Act.
It was held that Income of HTIL was deemed to have accrued or arisen in India and therefore, it squarely fell within the ambit of seciton 9 and hence, chargeable to Income tax under the head capital gains.
Vodafone International Holdings B.V. Vs. Union of India
Vodafone filed a review petition in Supreme Court and Supreme Court in January, 2012 reversed the Bombay High Court decision. Supreme Court held that Assessing Officer in India had no jurisdiction to tax the transaction which took place outside India and what was transferred was the shares of a foreign company namely CGP of Cayman’s Island and not the Indian business.
The Supreme Court reversed the Bombay High Court judgment in the case of Vodafone International Holdings B.V. and held that capital gains arising to Hutchison, Hong Kong, from sale of Shares of CGP located in Cayman’s Island, is not taxable in India. The Supreme court held as under:
- Transfer of shares of a foreign company (CGP) which has an indian company as its subsidiary does not amount to transfer of capital asset situated in India within the meaning of 4th limb of section 9(1)(i). The legal fiction in section 9(1)(i) does not mean that if foreign company has a subsidiary in India, then shares of a foreign company has deemed to be situated in India.
- Section 9(1)(i) covers only the income arising form transfer of a capital assets situated in India and does not cover the income arising from Indirect transfer of capital asset situated in India.
- The source of income in relation to a transaction is construed to b where the transaction of sale takes place and not where the item of value, which was subject of transaction, was acquired or derived from. Where a foreign holding Company sells the shares of its foreign subsidiary company, then it cannot result in extinguishment of holding company’s right of controlling the Indian company nor it can be said that it constitutes extinguishment and transfer of asset/management and control of property situated in India.
- The Bombay High Court had held that Vodafone on purchase of shares of CGP got indirect interest in HEL. Vodafone acquired controlling right of HTIL in HL namely the right to appoint directors in HEL, the right to use Hutch brand in India and non-complete agreement with Hutch brand in India, which all constituted a capital asset as per section 2(14). The Supreme Court reversing the Bombay High Court judgement held that controlling interest is not an identifiable or distinct capital asset independent of holding of shares and therefore does not satisfy the definition of capital asset in 2(14).
Supreme Court held that subsidiary company is not a puppet of holding company and it has a separate existence. The controlling interest of holding company in subsidiary company is not a capital asset.
Supreme Court held that since the capital gains was not taxable in India, Vodafone was not required to deduct TDS on the said Capital gains.
The Finance Act, 2012 has retrospectively amended the definition of:
- Transfer under section 2(47);
- Capital asset under section 2(14);
- Deemed accrual of income under section 9
to affirm the judgment of Bombay High Court in the case of Vodafone International Holdings B.V. and to nullify the Supreme Court Judgement in the said case.
Section 2(14): Amendment in Definition of Capital Asset
Following Explanation has been added to section 2(14) i.e. the definition of Capital Asset:
Explanation – For the removal of doubts, it is hereby clarified that:
- “Property” includes and shall be deemed to have always included
- any right in
- or in relation to
- an indian company,
- including rights of management or control or any other rights whatsoever.
Therefore, capital asset shall include the rights of Hutchison Hong Kong in Indian Company including right of management and control, e.g., right to appoint directors, right to use Hutch brand in India and non-compete agreement. Therefore, Hutchison Hong Kong has transferred to Vodafone a capital asset in India, being rights in Indian Company including right of management and control.
Section 2(47): Amendment in Definition of Transfer
Following Explanation has been added to Section 2(47):
For the removal of doubts, it is hereby clarified that:
- “transfer” includes and shall be deemed to have always included
- disposing of or parting with an asset or any interest tyherin, or
- creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily,
- by way of an agreement (whether entered into in India or outside India) or otherwise,
- notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from
- the transfer of a share or shares of a company registered or incorporated outside India.
Therefore, as per the amendment, the Hutchsion Hong Kong has made a transfer to Vodafone of the rights in Indian Company including rights of management and control since it has by transferring the shares of CGP Mauritius:
- disposed of or parted with the rights in Indian company
- created interest of Vodafone in Indian Company by indirect means i.e. transfer of shares of CGP
- by way of agreement
- and such transfer of rights take place by transfer of shares of a company incorporated in Mauritius.
Section 9 : Amendment in concept of “Income Deemed to accrue or arise in India”
[Section 9] Provides that the following income shall be deemed to accrue or arise in India:
All income accruing or arising, whether directly or indirectly,
- through or 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
- through the transfer of a capital asset situated in India.
Following two Explanation have been added by Finance Act, 2012:
Explanation 4:- For the removal of doubts, it is hereby clarified that the expression “through” shall mean and include and shall be deemed to have always meant and include “by means of “, “in consequence of” or “by reason of”.
Explanation 5:- For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.
As per the Explanations added by Finance Act, 2012, the income shall be deemed to accrue or arise in India in hands of Hutchison Hong Kong if such income arises directly or indirectly by means of or by reasons of transfer of Capital asset situated in India i.e., transfer of rights in India Company.
Explanation 5:- provides that the shares of CGP Investment Mauritius being the share in a company registered/incorporated outside India shall be deemed to be situated in India as the shares of CGP derives its value substantially from the business of Indian Company located in India.
Although It all happened but still the case has not resolved till date, the interest and the penalty amount for the Vodafone International Holding is increasing day by day.
CA-Final Classes, Direct Tax Modules, CA. Vinod Gupta