The decision of Supreme Court of India has brought much needed clarity on a number of issues surrounding cross-border transactions involving investments in India. The Supreme Court has not only provided relief to Vodafone, but has also ushered an environment of certainty and fairness.
The controversy surrounded the acquisition of the entire shareholding of CGP, a
company resident in the Cayman Islands by Vodafone, a company resident in the
Netherlands, from HTIL, another company resident in the Cayman Islands. CGP
indirectly held a 67% interest in the then Hutch Essar Limited (now Vodafone Essar Limited) through a number of downstream subsidiaries and call options in
Mauritius and India. The moot question was whether this transfer of shareholding of CGP would amount to the transfer of a capital asset situate in India? The Revenue contended so, arguing that the capital gains arising from such a transaction was liable to tax in India. Consequently, it held Vodafone ought to have withheld taxes from the same and was liable to make good to the Indian tax treasury the default sum of approximately USD 2 billion. Vodafone challenged this order by way of a writ petition before the Bombay High Court on the basis that the Revenue had no jurisdiction to levy taxes on an offshore transaction between two non-resident entities with no territorial nexus with, or taxable presence in India. It was contended by Vodafone that no capital assets situate in India had changed hands due to which the question of taxation in India did not arise.
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