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Will the Vodafone case create a negative perception of India in the eyes of foreign


As could be seen from the High Court order, the action of the Indian Tax Authorities in this
particular case is based on a proper and detailed analysis of the facts and circumstances of
this case and the relevant provisions under the domestic Income-tax law which are very
widely worded. It is important to note that no tax treaty is applicable in this particular case
and hence it is not a case that the Indian Government is not honouring its commitment to
foreign investors by proposing to tax the impugned transaction in the case of Vodafone. Also,
here it is not the claim of Vodafone that there is double taxation on the income from the
transfer of controlling interest in HEL. Further, it has to be appreciated that tax cost is only
one of the various costs of a business and business decisions are not taken entirely on the
basis of tax cost.

The order of the High Court has not been stayed by the Supreme Court, on the contrary the
Supreme Court directed the Income-tax Department to pass an order to quantify the tax
liability. Thus, the action of the tax authorities in this particular case has not only been held
as reasonable and not without substance, but also legal, and it will be taken in the right
perspective by foreign investors and it should not have an adverse impact on M&A activity in

Whether withholding is required on the entire consideration or there needs to be an

The High Court has held that an enquiry on the aspect of apportionment of the total
consideration would lie outside the purview of the proceedings before it and the aspect of
apportionment lies within the jurisdiction of the Assessing Officer during the course of the
assessment proceedings. Thus, it would be for the Assessing Officer to determine during the
course of assessment proceedings whether there is any income out of the total consideration
which cannot be said to have accrued or arisen in India or cannot be deemed to have accrued
or arisen in India and hence cannot be taxed in India. The observations clearly relate to
assessment and not to deduction of tax.

It would also be relevant to note that the High Court while laying down the principles
governing the interpretation of the provisions of S. 195 held that S. 195(1) provides for a
tentative deduction of income tax, subject to a regular assessment.

The High Court has only held that the composite payment by Vodafone had nexus with and
included payment giving rise to income accruing or arising in India. Consequently, the High
Court has decided the question before it, viz., whether the Indian Tax Authorities have the
jurisdiction to take action against Vodafone for having made the payment without deducting
tax as it was required to do u/s.195.

The High Court has not gone into, nor made any observations or given any decision about
whether the whole or part of the payment would be liable to deduction of tax, the rate at
which tax is to be deducted, etc. The High Court was not required to and has expressed
absolutely no views on any of these matters which the Officer has to adjudicate.