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Analysis of the “Vodafone taxation case”

Name of the case:

Vodafone International Holding V. Union of India

Provisions involved:

Section 9(1)(i) of Income tax Act, 1955

Section 163 of Income tax Act, 1955

Section 195 of Income tax Act,1955

Facts of the case:

In February 2007, the Dutch company Vodafone International Holding (VIH) acquired a 100% stake in CGP Investments (Holding) Ltd (‘CGP’), a Cayman Islands company, worth USD 11 billion from Hutchison Telecommunications International Limited. CGP manages 67% of the Indian company Hutchison Essar Limited (“HEL”) through various legal organizations. With this acquisition, Vodafone took control of CGP and its subsidiaries, including Hutchison Essar Limited. HEL is a joint venture between the Hutchison meeting and the Essar meeting. As of November 1994, the company had acquired telecommunications licenses for mobile communications in various Indian circles. In September 2007, the Indian tax authorities sent an important message to the Vodafone Company explaining why the HTIL tax was not retained in connection with the above transaction. The Tax Department claims that the CGP share transfer transaction triggers the transfer or transfer of indirect assets in India.

Vodafone specifically appealed to the Bombay High Court regarding the jurisdiction of the tax authorities on this matter, and the court ruled that Indian Income Tax authorities are responsible for this issue. The order was later raised by the Supreme Court of India. In 2009, the Court ordered the tax authorities to first determine the issue of jurisdiction filed in this case.

In May 2010, tax authorities said they had taken action against Vodafone on the grounds that they could not withhold tax in accordance with Section 201 of the Income Tax Act. The order was discussed by Vodafone before the High Court in Bombay. The Bombay High Court dismissed the Vodafone appeal. Vodafone filed a Special Leave Petition (SLP) in the Supreme Court in accordance with Section 136 of the Indian Constitution. SLP was confirmed in November 2010. The Supreme Court also ordered Vodafone to deposit a total of 25,000,000 Indian rupees within three weeks and provide a bank guarantee of 85,000,000 for approximately two months from the date of order.

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The issue that came before the Supreme Court was that whether it was allowed to tax foreign capital transfers between two non-resident companies by the Indian Tax Authorities.

Issues and the Judgment

1.The first observation that Supreme Court made was in respect to whether Indian Tax Authorities can put a tax on indirect transfer of capital assets situated in India?

Section 9(1)(i) of the Income Tax Act provides that 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 capital asset situated in India shall be deemed to accrue or arise in India.[1] [kk1] With respect to this Section 9(1)(i) Court observed that the word indirect transfer is not present in Section 9(1)(i) in relation to the transfer of capital assets in India. Therefore Section 9(1)(i) does not recognize the indirect transfer of capital assets in India and as a result Court can’t cover the indirect transfer of capital assets in India under this Section. Hence, the shares that were transferred to the CGP cannot be considered as the transfer of capital assets in India and therefore Indian Tax Authorities cannot put tax on the same.

2.The second observation that the Supreme Court made was in respect with whether the transfer of HTIL’s property rights by extinguishment through Sale Purchase Agreement (SPA)?

It was argued by the Tax Authorities that HTIL was having property rights which were extinguished under Sale Purchase Agreement which was signed on 15 March 2007 which makes the transfer of capital assets taxable which are situated in India. But the Court in this question observed that the extinguishment that took place was due to the transfer of CGP shares and not because of the clauses mentioned in Sales Purchase Agreement. In addition, the Supreme Court ruled that the CGP was not only intending to own the shares of its subsidiaries, but also to ensure a smooth transition of the business. Therefore, it cannot be said that CGP does not have business or commercial content. However, the tax authorities agree that some transfers by CGP itself are not sufficient to achieve the purpose of transfers between HTIL and Vodafone, and that this type of transfer is a transfer of rights and other privileges and argued that such type of rights and privileges established capital assets which results in capital gains and the capital gains which occurred  through those transfers can be subject to taxation.

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3.The third observation was with respect to the interpretation of Section 195 of Income Act, 1955 and whether Vodafone can be treated as a Representative Assesse under Section 163 of Income Act, 1955?

The Supreme Court in this observation laid how to interpret Section 195 of Income Tax Act. It was interpreted that the question of tax should be with reference to the transaction that is in question and not with reference to transactions that are not related to the transaction in question. It was also interpreted by Supreme Court that Section 195 will only be applicable in those cases which involves payments or transactions made by Indian resident to a non-resident and not the payment or transactions between two non-residents and also while examining whether the transaction is subject to taxation or not, the legal aspects of the transaction should also be examined. With respect to Section 163 of Income Tax Act, the Supreme Court observed that the transaction that took place in this case was between two Non-resident companies  and also the transaction was executed through a contract and the consideration for a contract was also passed  outside India and therefore Vodafone International Holding doesn’t come under the scope of Section 163 of Income Tax Act, 1955.

Final decision of the Supreme Court

The Indian Supreme Court upheld the landmark judgment in Vodafone International Holding (VIH) v. Union of India (UOI). The bank, formed by the Supreme Court Justice, SH Kapadia, KS Radha Krishnan and Swatanter Kumar, overturned the High Court’s ruling of 12,000 crores as capital gains tax and relieved VIH of responsibility for paying 12,000 crores as capital gains tax on the transaction dated February 11, 2007 between VIH and Hutchinson Telecommunication International Limited or HTIL (non-resident company for tax purposes). The court ruled that the Indian tax authorities are not authorized to levy taxes on a foreign transaction between two non-resident companies in which the non-resident company acquires a majority stake in a resident (Indian) company in the transaction. Observation:

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I would conclude stating that the Supreme court issued a landmark ruling in Vodafone International Holding v Union of India and removed the uncertainty surrounding the introduction of taxes. With this judgment, the Supreme Court recognized:

  • The principles of tax planning, Companies or individuals can regulate their company’s business in such a way that their tax liability is reduced if there are no legal provisions prohibiting it.
  • Multinationals often establish corporate structures, and all of these structures should only be set up for commercial and commercial purposes.
  • The corporate veil can be lifted if the facts and circumstances reveal that the transaction or corporate structure is false and taxes must be avoided.

In the end, it can be said that this ruling helped toremove uncertainties regarding the introduction of taxes and recognized the principle that the reason for the transaction to avoid taxes is not necessarily the acceptance of tax evasion and the Supreme Court has advocated for legitimate tax planning.

Cite this article (The Bluebook 20th ed.)-

Udita Prakash, Analysis of the “Vodafone taxation case”, Ex Gratia Law Journal, (March 26, 2021),


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Udita Prakash
Student - University of Petroleum and Energy Services