Supreme Court`s landmark decision on Vodafone case

Category: International Finance Sub-category: International Taxation
Document type: case study

16-Feb-2012 | 15:50 IST | Edited by: Sharmila Maitra

The Indian Supreme Court's decision in the Vodafone case brings to an end the long saga that has kept global investors on edge about the taxation of foreign acquisitions in India. Against settled principles of the taxation of cross-border acquisitions, the Indian tax authorities has taken a highly aggressive position that has subjected a sale of stock of a non-Indian corporation by and between two non-Indian residents to Indian taxation. Vodafone's win sends a positive signal about India's legal climate to global investors. However, the Indian government is considering new laws that may undo some of this decision's clarity.

Background of the case:
In 2007, Vodafone International Holdings B.V., a Netherlands company (Vodafone), purchased from Hutchison Telecommunications International (Cayman) Holdings Ltd. (HTIL) all of the outstanding shares of CGP Investments Holdings Ltd., a Cayman Islands company (CGP), which in turn held a majority interest in Hutchison Essar Limited (HEL), an Indian company. The consideration for the acquisition was approximately $11.1 billion and was paid outside India. Vodafone did not make any withholdings on account of Indian taxes from the consideration paid to HTIL. Soon after the transaction closed, the Indian tax authorities issued a notice to Vodafone and sought to impose a tax liability of approximately $2.5 billion on Vodafone for its failure to withhold Indian taxes from the purchase price paid to HTIL. Vodafone argued that the sale involved a share transfer of a Cayman Islands company between two foreign entities, and therefore, it did not believe that it gave rise to any withholding tax obligations under the tax laws of India. The Indian tax authorities argued that the sale was effectively an indirect transfer of Indian capital assets by a foreign seller, and therefore, Vodafone should have withheld taxes on the purchase price it paid to HTIL. In September of 2010, the Mumbai High Court shocked global investors and corporate executives by holding in favor of the Indian tax authorities. Vodafone posted a partial tax payment of $500 million dollars as security and appealed the case to the Supreme Court of India

Decision of the court:
On January, 2012, the Indian Supreme Court ruled in favor of Vodafone. It holds that the transaction between HTIL and Vodafone is a bona fide structured foreign investment into India and fell outside the scope of India's territorial tax jurisdiction. The Supreme Court has also observed the principle that a taxpayer can legitimately arrange it's affairs to minimize It's taxes so long as it does not violate particular laws or legislation. The Supreme Court has underscored the distinctions between "tax planning" and improper "tax avoidance" and holds that the Vodafone transaction is a planned investment not undertaken for improper tax avoidance purposes. The Supreme Court has stated that the following facts and circumstances must be used in order to determine whether a transaction can be considered to be improper tax avoidance or tax planning. They are :

  • extent of participation in investment by the foreign entities;
  • duration of time that the holding structure existed;
  • period of business operations in India; and
  • generation of taxable revenue in India during the period of business operations in India; timing of exit.

The Vodafone judgment however reiterates the benefits of tax planning in cross-border acquisitions involving India and provides comfort to global investors that Indian courts will uphold the rule of law.