Case study on Vodafone case

LAW AND LITERATURE

Submitted by:Gurmukh singh Lamba

20130492nd SEMESTER

DAMODARM SANJIVAYYA NATIONAL LAW UNIVERSITYVisakhapatnamMARCH 2014

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CERTIFICATE

LEGAL METHODSMRS. K. SUDHA MAM

Particulars Date and signature of the faculty Remarks

Abstract

First consultation

Second consultation

Third consultation & final

Submission

I, ASHUTOSH GAUTAM, hereby declare that this Project titled “ CHILDREN PROTECTION ACT FROM SEXUAL OFFENCES,2012” submitted by me is an original work undertaken by me. I have duly acknowledged all the sources from which the ideas and extracts have been taken. The project is free from any plagiarism issue.

Place: Visakhapatnam Date: 30-10-2013

ASHUTOSH GAUTAM2013028

Semester I

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ACKNOWLEDGEMENT:

I would like to express my gratitude towards our Vice-Chancellor

Prof.R.G.B.Bhagavath Kumar Sir, for the providing me an opportunity to improve

my skills of writing and research through the form of projects. I would like to

thank our All Legal Methods Lecturers specially Mr.Pradeep Sir for the support he

has provided me in completion of the project successfully.

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Case name:

Vodafone International Holdings B.V., a company incorporated under the provisions of the

Companies Act

Vs.

Union of India (UOI), Ministry of Finance and Asstt. Director of

Income Tax (International Taxation)

Equivalent Citation:  2009(4)BomCR258, (2008)220CTR(Bom)649

This recent case which has come to the limelight deals with transfer of shares of an Indian

Company held by a foreign company to another foreign company. Transfer of Capital Assets in

India and Chargeability of transaction to tax under Income Tax Act Section 9 (1) of

Income Tax Act, 1961.

Quick brief about the facts of the case: The Petitioner- the assessee- Vodafone purchased

shares of a foreign company based in Cayman Islands which in turn held shares of an Indian

company Hutch Essar from another foreign company (HTIL). The Respondent- the Assessing

Officer, issued a show cause notice asking the assessee why it should not be treated as an

assessee in default (AID) for its failure to withhold taxes at source and credit the same to the

Central Government on the transaction in issue. The assessee challenged the said Show Cause

Notice on the ground that the transaction in issue was a simple transfer of shares between two

foreign companies and not transfer of any capital asset in India and as such, said transaction did

not attract the provisions of Income Tax Act.

Question of law involved: Whether the transfer of shares between two foreign companies,

resulting in extinguishment of controlling interest in the Indian Company held by a foreign

company to another foreign company, amounted to transfer of capital assets in India and as such

chargeable to tax in India.

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Issues raised and adjudged:

It was held that, a divestment or extinguishment of right, title or interest must necessarily

precede the divestment of the controlling interest and any divestment by one of any interest of

enormous value in shares of high intensity would certainly amount to acquisition of enduring

benefit to the other, resulting in acquisition of a capital asset in India Therefore, transaction

entered upon by the Petitioner amounted to transfer of a capital asset and not merely a transfer

simplicitor of controlling interest ipso facto in a corporate entity and as such chargeable to tax in

India.

It was further held that any profit or gain which arose from the transfer of a group company in

India has to be regarded as a profit and gains of the entity or the company which actually

controls it, particularly when on facts, the flow of income or gain can be established to such

controlling company. In the present case, by reason of the transfer, the income accrued not to

Cayman Island Company (CGP), but to HTIL(which held CGP) and was treated as profits of

HTIL, therefore, the recipient of the sale consideration was none other than HTIL and this was a

consequence of divestment of its Indian interests in Hutchinson Essar Group to Petitioner, and

therefore, liable for capital gains.

As per Effects Doctrine Extra-territorial operation of Section 195 of the I.T Act, it was held, that

any state may impose liabilities, even upon persons not within its allegiance, for conduct outside

its borders that has consequences within its borders which the State represents. Therefore, when

the dominant purpose of entering into agreements between the two foreigners is to acquire the

controlling interest which one foreign company held in the Indian company, by other foreign

company, the transaction would certainly be subject to municipal laws of India, including the

Indian IncomeTax Act.

On the ground of maintainability of availability of efficacious alternative remedy Jurisdiction

of High Court to entertain writ Article 226 of Constitutionof India, the respondent contended that

writ is not maintainable as the petitioner had an efficacious alternative remedy available under

Income TaxAct and therefore, failure to invoke same would not entitle the petitioner to invoke

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writ jurisdiction. It was held that where a right or liability is created by a statute which gives a

special remedy for enforcing it, the remedy provided by that statute only must be availed of. In

the present case, the Act provides for a complete machinery to challenge an Order of assessment,

and the impugned Orders of assessment can only be challenged by the mode prescribed by the

Act and not by a petition under Article 226 of the Constitution.

On grounds of Constitutional validity of provisions and non-production of vital documents the

respondent contended that the petitioner has not produced vital documents that are crucial to the

determination of the issue of chargeability to tax in India and therefore, the petitioner cannot

challenge validity of provisions in issue. It was held that even if the burden of proof does not lie

on a party, the Court may draw an adverse inference if he withholds important documents in his

possession which can throw light on the facts at issue. Therefore, when the Petitioner has

challenged the constitutional validity of the Amendment to Sections 191 and 201 of the I.T. Act

by the Finance Act, 2008, then the same must be in context of certain facts pleaded and proved

by evidence in the form of documents on record and not in vacuum or in the abstract.

Ratio Decidendi:

 Transaction amounting to transfer of capital assets in India, by divestment of controlling stake in

an Indian Company held by a foreign company to another foreign company resulting in

extinguishment of right, would attract provisions of Indian Income Tax Act.

Any profit or gain which arose from the transfer of a group company in India has to be regarded

as a profit and gains of the entity or the company which actually controls its, particularly when

on facts, the flow of income or gain can be established to such controlling company and as such

is taxable in India.

When the dominant purpose of entering into agreements between the two foreigners is to acquire

the controlling interest which one foreign company held in the Indian company, by other foreign

company, the transaction would certainly be subject to municipal laws of India, including the

Indian Income Tax Act as per Effects Doctrine.

Where a right or liability is created by a statute which gives a special remedy for enforcing it, the

remedy provided by that statute only must be availed of.Even if the burden of proof does not lie

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on a party, the Court may draw an adverse inference if he withholds important documents in his

possession which can throw light on the facts at issue.

The potential investors would need to be therefore extra careful while structuring their cross-

border mergers and acquisitions transactions lest they are slapped with unwarranted and

unexpected tax liability from strange quarters which they have not factored in their negotiations

and to minimize the chances of litigation.

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