Supreme Court Judgment in Vodafone case

Indian Tax authorities have imposed capital gain tax against Vodafone International Holdings, a Netherland based company for the capital gains for that they received by the acquisition of C.G.P Instruments Holdings,  a Cayman Islands Company.  Tax authorities say that, by this acquisition Vodafone has acquired 65% interest in Hutchison Essar Limited. Thus taxable for the gains in India. The claim of Indian tax authorities are based on an interpretation of Section 9(1) (i) of Income tax Act. The said Section states,” all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situate in India”.

As per the section 5(2) of Income Tax Act a non-resident (including a company incorporated outside India) is chargeable to income tax in India for the income that received or deemed to be received, accrues, or arises or deemed to accrues or arise from India. Indian Tax authorities argued that by acquiring stake in C.G.P instrument, Vodafone has acquired 67% interest in Hutchison Essar, an Indian company. Hence, they have indirectly gained from the property or asset or source of income in India. According to the interpretation of the tax authority the word used in Section 9(1)(i) is relating to the asset or source of income in India. Hence, indirect sale of parent company would also attract capital gain tax.  Full bench of the Supreme Court of India comprising Justice S. H. Kapadia, Justice Swatantar Kumar, Justice K. S. Radhakrishnan consider the appeal against Mumbai High Court judgment, upholding the arguments of tax authorities. Supreme Court in a detailed Judgment decided against the tax authorities interpreting Section 9(1) (i)  court observed that the legislature has not used the word “indirect transfer” in section 9(1)(i). The direct or indirect used in relation to the income and is not in relation to the assets. On the other hand if the word indirect used in section connected to the  word asset then the word “ Capital asset situate in India” would be rendered  nugatory. Court in its detailed judgment discussed about the FDI policy of the country, share holding structures, tax havens,  and other related  the section in detail while arriving at the conclusion, Court further re emphasizes the legitimacy of tax planning and approved investments through tax havens. This land mark judgment once again demonstrates the independence of Indian judiciary and its resole to implement law appropriately without interference from the executive.

However, to nullify the judgment the legislature introduced amend to section 9(1) (i) is with amendments as follows

“Certain judicial pronouncements including the Supreme Court judgment in the case of Vodafone International Holdings have created doubts about the scope and purpose of sections 9 and 195. Further, there are certain issues in respect of income deemed to accrue or arise where there are also conflicting decisions of various judicial authorities.

Therefore, there is a need to provide clarificatory retrospective amendment to restate the legislative intent in respect of scope and applicability of section 9 and 195 and also to make other clarificatory amendments for providing certainty in law.

 

Hence, the following clarifications have been inserted in various sections:-

 

Clarification regarding section 9(1) (i)

 

(i) Explanation 4 has been inserted in section 9(1) (i), w.e.f. A.Y. 1962-63 to clarify that the expression ‘through’ (used in section 9(1) (i) in relation to any asset or source of income in India) shall mean and include and shall be deemed to have always meant and included “by means of”, in consequence of” or “by reason of”.

 

(ii) Explanation 5 has been inserted in section 9(1) (i), w.r.e.f. A. Y. 1962-63 to clarify that an asset or a 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 the share or interest derives, directly or indirectly, its value substantially from the assets located in India”.

This amendment was internationally criticized sating that foreign investor’s faith in Indian legislative process and the certainty of taxation have been critically   impacted. Retrospective amendments and introduction of explanations to counter and nullify Supreme court judgements, whereby foreign investors are charged with huge tax liability has highly impacted FDI flows in to this country. This amendment is again challenged before Supreme Court and is pending consideration.

Rajesh Vellakkat

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