The much awaited Supreme Court (SC) ruling in the Vodafone tax controversy was pronounced on 20th January and leading Indian law firm Khaitan & co have analysed the outcome.
The firm issued a statement that read: “To the enormous relief of the international investor community, the SC has held that the offshore transaction whereby Hutchison International (Hutchison) sold one share of the CGP Cayman Islands’ company (Cayman Company) to Vodafone International (Vodafone) is outside the jurisdiction of Indian Tax Authorities and hence not taxable in India.
“While reaching this decision, the SC has considered many aspects threadbare. One of the very important principles that the SC brought out is the importance for investors to have certainty and know where they stand with regard to taxation in India. “
The SC has considered and elaborated upon the following in their determination:
- The Indian Tax Authorities had no jurisdiction over this offshore transaction as it involved sale of shares of a foreign company i.e., the Cayman Company, which was an offshore asset.
- The SC enunciated the principle of the ‘look at’ approach and emphasized the importance of looking at the transaction as a whole. The transaction could not be dissected into transfer of shares outside India and of the transfer of some assets within India.
- A ‘look-through’ approach cannot be read into section 9(1)(i) of the Income Tax Act, 1961 (Act) as it stands today.
- Tests, such as duration for which the holding structure had been in place, timing of exit etc., would be relevant to structures involving holding companies, SPVs and subsidiary companies. Factually, the SC recognized that the holding structure in the present transaction was in place since 1994 and existed till February 2007 and Hutchison was not a ‘fly by night’ company.
- An offshore transaction is a bona fide structure involving foreign direct investment into India. In this case, there was investment made to participate in business. It was neither a ‘sham’ nor ‘preordained’ for Indian tax avoidance. The Cayman Company was an investment vehicle, the purpose of which was not only to hold shares in subsidiaries but also to ensure smooth transitioning of the business and this was a reasonable business purpose. The separate legal entities had to be respected and the corporate veil cannot be lifted in this case.
- ‘Limitation of benefit’ and ‘look-through’ are policy matters and cannot be presumed to be present unless, specifically provided for under the relevant tax treaties or the law.
- Section 195 of the Act does not apply to offshore transactions.
- Section 163 of the Act, which was relied upon to make Vodafone a ‘representative assessee’ of Hutchison, was also not applicable in the SC’s view.
- The Azadi Bachao Andolan case is good law in the context of the India-Mauritius Tax Treaty and there is no conflict between the Azadi Bacho Andolan case and McDowell case concerning tax evasion. A tax payer is well within his right to carry out genuine tax planning to minimize his tax cost. There is no need for any reconsideration of the law on tax planning versus tax evasion.
“This indeed is a path breaking judgment which has taken into consideration the interpretation of law, the business exigencies, the international practices, nuances specific to holding structures and the investor need and may be also the economic growth of India. We salute the conviction and astuteness of the Indian judiciary.
“This judgment brings relief to the international investor community, investing in India. The SC has reiterated that genuine tax planning is the tax payer’s right.
“This decision however, may prompt the Finance Ministry seeking to amend the legislation to bring transactions, such as the Hutchison-Vodafone sale-purchase, within the Indian tax net. It will be fair to expect some major legislative changes in the forthcoming Finance Bill this March!”
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