Vodafone Case

-Hutch Group formed and invested in India in HEL (Hutchison Essar Ltd.) in 1992 and thus invested in telecomm sector in India.
-On 12-01-1998, Hutch Group Co. HTIL (Hutchison Telecommunication International Ltd.) formed CGP -Investments Ltd. In Cayman Islands and acquired 100% shares in CGP Investments Ltd.
-HTIL was also incorporated in Cayman Islands.

-CGP acquired 52% shares in HEL and had option to purchase another 15% shares in HEL
-HTIL sold entire shareholding of CGP Investments Ltd. To Vodaphone International Holdings (VIH)
-Thus VIH through CGP acquired 67% holding in HEL
-Sale of shares in CGP by HTIL to VIH is non taxable in Cayman Islands.
-Revenue authorities made a case:
True intention of sale of shares in CGP is to transfer controlling interest in HEL and there by rights and entitlements of HEL like customer base, non compete rights, options etc.
Hence there is transfer of capital asset in India
S. 9(1)(i) gets attracted
TDS u/s 195 leviable on consideration paid to HTIL


High Court confirmed the view of revenue authorities


Held by Supreme Court:
-HEL and CGP are two distinct entities Holding- subsidiary relation to be honored and corporate veil can not be lifted.
-Department should prove tax abuse to justify lifting of corporate veil
-Section 9(1)(i) is not look through provision . It covers " Income accruing or arising directly or indirectly through or from transfer of capital Assets in India" . Hence indirect income shall stand covered under section 9 but not indirect transfer of capital assets. Whenever law intends to cover indirect transfers under its ambit, it provides for the same specifically E.g. u/s 64 all income arising to son's wife directly or indirectly is included in income of assessee from assets transferred directly or indirectly and the same has been noticed by Supreme Court in CIT vs. Kothari 2 SCR 531.On comparison of s.64 with s.9 what is discernible is that legislature has not used words " indirect transfers"
- Further DTC 2010 specifically covers transactions for sale of shares in foreign company where fair market value of shares is represented by more than 50% of FMV of assets in India. Since the transaction is covered under DTC, current provisions do not expressly provide for the same
.  High Court ought to have applied look at approach taking holistic view of transaction. Because entire maze of holding subsidiary has been transferred through this transactions. No bifurcation of consideration in terms of factors like customer base, non compete rights, options etc. has been made.
-S. 163 (1) may result in treating a person as agent of non resident on the grounds that from him or through him non resident is in receipt of income. But this can not lead to collection of tax from him.
- Further it was held that s. 195 is not applicable to transactions between two non residents
In Finance Bill 2012 following amendmends made as consequence to Vodafone case
through Clauses 3, 4, 62, 75 of Finance Bill 2012:

- Section 2(14) definition of capital assets amended retrospectively w.e.f. 1-4-1962 to include in property any rights in relation to indian company, including rights of management or control or other rights 
- Section 9 Expl. 4 inserted w.e.f.1-4-1962, to define throgugh shall include -by means of, in consequence of , by reason of
- Section 9 Expl. 5 inserted w.e.f. 1-4-1962, that asset or capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if share or interest derives, directly or indirectly , its value substantially from the assets located in India
- Now u/s s. 163 assessment on agent of non resident can be completed in six years. Eralier it was only 2 years
- Now u/s s. 195 obligation to deduct tax shall fall upon non resident also, whether or not he has place of business or business connection in India or any other presence whatsoever in India