UK and International Tax news

India Supreme Court Decision In Vodafone Case

Tuesday 31st January 2012

The Supreme Court of India has recently issued its judgment in the Vodafone case which concerned the appeal by Vodafone International Holdings BV (Vodafone), a Netherlands company, against the decision of the Bombay High Court in September 2010 [see our International Tax News item of 13 September 2010] that it was required to pay a withholding tax of 20% on the purchase price (USD11.2bn) of shares in CGP Holdings Ltd (CGP), a Cayman Islands company, from Hutchinson Telecommunications International Ltd (a Hong Kong company).  CGP through various intermediate companies, controlled Hutchinson Essar Ltd, an Indian company.   

Vodafone had argued that as it had bought shares in a company situated outside India, it was not required to account for tax because of s.9 ITA 1961 which only applied to transfers of capital assets situated in India.

Vodafone had challenged the jurisdiction of the tax authorities in this matter who, in summary, had argued that the transaction was one of a transfer of a capital asset situated in India, and in particular that s.195 applied when the taxpayer has some sort of nexus with India irrespective of the taxpayer/deductor being a non resident.

The Supreme Court has reversed the decision of the Bombay High Court and held that the Indian tax authorities did not have territorial jurisdiction to tax the offshore transaction, could not tax indirect transfers of Indian situs assets and, therefore, Vodafone was not liable for the withholding tax.  It directed the return of INR 25bn which Vodafone had previously deposited together with 4% interest and a bank guarantee.

Whilst this decision is good news for Vodafone, it may not necessarily help future overseas sales or purchases of groups with Indian sudsidiaries as the Direct Taxes Code 2010 [DTC] includes certain provisions which may well apply to tax offshore transactions where underlying assets are situated in India. The DTC was to apply from April 2012 although this has yet to be confirmed.

If you would like more details on this case, please contact Keith Rushen on +44 (0)20 7486 2378.

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