Case Law – Vodafone Case Vs Income Tax Department

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Case Law– Vodafone Case Vs Income Tax Department

Vodafone Case CAknowledge

Vodafone India, previously Vodafone Essar and Hutchison Essar, is the 2nd largest mobile network in India.

Vodafone India introduced 3G Solutions in the country in January– March quarter of 2011 and plans to spend as much as $500 million within 2 years on its 3G network.

Vodafone India
Registered Workplace Netherland
Market Telecommunications
Predecessor( s) Hutchison Essar
Established 1994
Head Office Mumbai (Maharashtra) India
Products Mobile telephone systems
Wireless broadband services
Owner( s) Vodafone Group Takshi Group
Parent Vodafone International Holdings BV (VIH)

A Fight Over Jurisdiction

2 concerns emerge on sale of CGP shares

  • Whether HTIL by reason of instantaneous transaction, had earned earnings responsible for capital gains tax in India as this earnings was earned towards sale factor to consider in India as a group in favour of vodafone.
  • Whether, on payment made by the vodafone to HTIL on such deal, vodafone was responsible to deduct tax at source u/s 195 from sale consideration paid to HTIL.

Tax Authority’s Contention

  • — Tax Authority competed that the transfer of a single share in CGP to Vodafone resulted in the transfer of HTIL’s interests in Vodafone Essar Ltd to Vodafone
  • — In addition to move of the share, other rights and privileges were moved as an intrinsic part of the deal.
  • — Thus it initiated proceedings against Vodafone for a failure to subtract tax u/s 195 seeking to recuperate $2.1 billion from Vodafone as alleged withholding tax liability.

Vodafone’s Plea

  • — The arrangements were not appropriate to the existing case & the main commitment to discharge the tax with the payee (HTIL)
  • — Unless the payee had defaulted in making payment of taxes, on demand by the income authorities, tax might not be recovered from the payer
  • — The withholding tax provisions can not have additional– territorial application i.e. can not use in an overseas deal involving two non-residents in respect capital asset & payment outside India.
  • — the transaction was not chargeable to tax India considering that it involves transfer of shares of a non-resident company by one non-resident to another & is not a transfer of capital property in India.

Bombay High Court Decision

High Court Dismissed the petition of Vodafone BV & accepted that the deal had a considerable nexus with India and proceedings initiated by it can not be held to do not have Jurisdiction

Secret Observations:

  • Tax preparation is legitimate so long as the assesses does not turn to a colorable device or a sham transaction with a view to avert taxes;-LRB-
  • A managing interest which an investor acquires is an occurrence of the holding of shares and has no separate or recognizable presence distinct from the shareholding


  • The essence of the deal was a change in the controlling interest in HEL which made up an income source in India.
  • Accordingly, Indian Tax Authorities have actually acted within their jurisdiction in starting the procedures versus the Petitioner for not subtracting tax at source. The provisions of S. 195 would run

Supreme Court’s Decision

— Supreme Court held that situs of shares locates at the location where the company is included and/ or the place where the shares can be handled by method of transfers. Thus the situs of shares of CGP is not in India.

— Area 9 covers just income occurring from a transfer of a capital property located in India; it does not purport to cover income occurring from the indirect transfer of capital asset in India

— Section 195 would apply only for payments made from a resident to a non-resident, and not between two non-residents situated outside India.

In the instant case, the Hon’ ble Court observed that the deal was in between 2 non-resident entities through a contract performed outside India. Consideration also passed outside India. The deal has no nexus with the underlying assets in India

It includes transaction between two non-residents in regard of shares of a company integrated outside India. The Indian Tax Authorities have no territorial tax jurisdiction over the said transaction

Supreme Court held that given that the capital gains was not taxable in India, Vodafone was not required to subtract TDS on the said capital gains.


  • As a result Vodafone was having a commitment to Pay Rs. 20000 Crores.
  • These amendments will work retrospectively from 1st April, 1962 and will appropriately use in relation to the evaluation year 1962-63 and subsequent evaluation years

Prepared By– CA Sanjay Assudani

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