Important Judgment of the Supreme Court on Vodafone Tax Dispute

On 20-1-2012 the Supreme Court of India gave its judgment on the issue of Rs 11000 crore tax dispute case of Vodafone. The judgment held that the Rs 11000 crore tax levied by Income Tax Departmetn on Vodafone is not maintainable.

In 2007 Vodafone acquired 67% stake in the Hutchinson Essar Ltd (remember Hutch?) from the Hongkong based Hutchinson group through companies based in Netherlands and Cayman Islands. The transaction was outside India, between companies registered outside India. The Income
Tax Department issued notice to Vodafone to pay Rs 11000 crore as capital gain tax(Capital gains tax is a tax on the increase in the value of  shares  over the purchase price of the shares). The Income Tax Departmetn maintained that since the assets on which the transaction was made are in India, the capital gains are made in India and hence the tax can be imposed.

Vodafone challenged it in the Bombay High Court on the ground that since the deed of transfer of shares took place outside India between companies registered outside India, the tax need not be paid. But the Bombay High Court rejected the petition of Vodafone on the ground that the capital gain was made on the assets in India. Vodafone appealed to the Supreme Court of India. On 20-1-2012 the Supreme Court of India gave its judgment as per which Vodafone need not pay the Rs 11000 crore income tax. The judgment of the Supreme Court said, “Section 195, in our view, would apply only if payments made from a resident to another non-resident and not between two non-residents situated outside India. In the present case, the transaction was between two non-resident entities through a contract executed outside India. Consideration was also passed outside India. That transaction has no nexus with the underlying assets in India. In order to establish a nexus, the legal nature of the transaction has to be examined and not the indirect transfer of rights and entitlements in India. Consequently Vodafone is not legally obliged to respond to Section 163 notice which relates to the treatment of a purchaser of an asset as a representative assessee.”

Thus the existing Income Tax law, as per the Supreme Court judgment is not providing for taxing the capital gain on the assets in India, when the transaction takes place between two non-resident companies registered outside India. This is the defect in the law. The judgment of the Supreme Court is hailed by the foreign and Indian big capitalists since it is clarified that if they register their companies outside India in places like Cayman Island or Maldives etc and sell and purchase the assets existing in India but held by such companies, no capital gains tax need be paid.

This shows the defect in the law. Now it is to be seen what the Government will do—whether they will amend the law to remove this defect or whether they will allow this defect in the law for the benefit of the big capitalists. Finance Ministry which is in dire need of funds will naturally wish for such an amendment in the law so that a large amount of tax can be collected. But what about the policy makers consisting of the “reforms” oriented Prime Minister Manmohan Singh and others, who want to give such grand gifts in the name of “creating confidence”   to the “investors”? Let us wait and see what will happen on this issue in the budget session of the Parliament in February.

But justice requires that instead of increasing petrol prices or instead of reducing the expenditure on subsidies given to the poor and middle class, sufficient money for the development of the economy and for providing funds for the subsidies can be collected by the Government by collecting the taxes on such capital gains and by curtailing the lakhs of crores of rupees concession given to the Corporates in taxes.