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Case study on Vodafone case

LAW AND LITERATURE

Submitted by:
Gurmukh singh Lamba
2013049
nd
2 SEMESTER

DAMODARM SANJIVAYYA NATIONAL LAW UNIVERSITY


Visakhapatnam
MARCH 2014

CERTIFICATE
LEGAL METHODS
MRS. 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
GAUTAM
2013028
Semester I

ACKNOWLEDGEMENT:

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.

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.

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 crossborder 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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