2012 Supreme(SC) 65

2012 (1) Supreme 394
SUPREME COURT OF INDIA
S. H. Kapadia, CJI and Swatanter Kumar, J.
Vodafone International Holdings B.V. — Appellant(s)
versus
Union of India & Anr. — Respondent(s)
Civil Appeal No.733 of 2012
(arising out of S.L.P. (C) No. 26529 of 2010)
Decided on : 20-1-2012

IMPORTANT POINT
Where shares of a company incorporated outside India become subject matter of offshore transfer between two non-residents, there is no liability for capital gains tax.

Headnote:(a) Tax Laws – Anti avoidance doctrine – Court has to ascertain the legal nature of the transaction – It has to look at the entire transaction as a whole and not to adopt a dissecting approach. (Para 60)

        1935 All E.R. 259 – Relied upon

        (b) Interpretation of Statutes – Tax Laws – “Device” which was colourable in nature had to be ignored as fiscal nullity – Revenue is empowered to restructure transactions in certain circumstances. (Paras 61 and 62)

        (1981) 1 All E.R. 865; (1984) 1 All E.R. 530 – Relied upon

        (c) Tax Laws – Anti avoidance doctrine – Tax planning may be legitimate provided it is within the framework of law – Colourable device cannot be a part of tax planning and it is wrong to encourage the belief that it is honourable to avoid payment of tax by resorting to dubious methods – It is the obligation of every citizen to pay the taxes without resorting to subterfuges. (Para 64)

        (2004) 10 SCC 1; (1985) 3 SCC 230; (1999) 8 SCC 667; (1988) 3 All E.R. 495 – Relied upon

        (d) Anti avoidance doctrine – A corporation is “a person” separate from its members – Tax liabilities of Non Resident Enterprises – “Look at” and “fiscal nullity” tests – Factors to be considered by Revenue/ Courts. (Para 68)

        (1897) A.C. 22; (1981) 1 All E.R. 865; (1988) 3 All. E.R. 495 – Relied upon

        (e) Income Tax Act, 1961 – Section 9 r/w section 5(2)(b) – Elements for attracting section 9(1)(i) for assessing income of non-residents are a transfer during previous year, existence of a capital asset, and situation of such asset in India – For a resident, it is immaterial whether the place of accrual of income is within India or outside India – Income accruing or arising to a non-resident outside India on transfer of a capital asset situate in India is fictionally deemed to accrue or arise in India, liable to be taxed – Section 9(1)(i) cannot be extended to cover indirect transfers of capital assets/property situate in India – The words directly or indirectly in Section 9(1)(i) go with the income and not with the transfer of a capital asset (property) – Therefore Section 9(1)(i) is not a “look through” provision. (Para 71)

        (f) Income Tax Act, 1961 – Section 9 – Valuation cannot be the basis of taxation – The basis of taxation is profits or income or receipt. (Para 85)

        (g) Income Tax Act, 1961 – Section 9 – Shares in a company consist of a “congeries of rights and liabilities” – 67% of the economic value of HEL is not 67% of the equity capital – Shares constitute a bundle of rights – Hence transaction involving transfer of shares lock, stock and barrel cannot be broken up into separate individual components, assets or rights. (Para 88)

        [1936] 1 All ER 762; AIR 1951 SC 41; (1965) 57 ITR 299 (SC) – Relied upon

        243 ITR 367 (Mad); 131 ITR 445 (MP) – Cited with approval

        (h) Income Tax Act, 1961 – Section 195 – Shareholding in companies incorporated outside India (CGP) is property located outside India – Object of Section 195 is to ensure that tax due from non-resident persons is secured at the earliest point of time – Where such shares become subject matter of offshore transfer between two non-residents, there is no liability for capital gains tax – In such a case, question of deduction of tax at source would not arise and section 195 would not be attracted. (Para 89)

        (i) Income Tax Act, 1961 – Section 163 – Section 163 does not relate to deduction of tax – It relates to treatment of a purchaser of an asset as a representative assessee – Merely because a person is an agent or is to be treated as an agent, would not lead to an automatic conclusion that he becomes liable to pay taxes on behalf of the non-resident – If there is no transfer of a capital asset situated in India, Section 163(1)(c) is not attracted – Consequently, VIH cannot be proceeded against even under Section 163 of the Act as a representative assessee. (Para 89)

       Facts of the case:

        1. This matter concerns a tax dispute involving the Vodafone Group with the Indian Tax Authorities [the Revenue], in relation to the acquisition by Vodafone International Holdings BV, a company resident for tax purposes in the Netherlands, of the entire share capital of CGP Investments (Holdings) Ltd., a company resident for tax purposes in the Cayman Islands vide transaction dated 11.02.2007, whose stated aim, according to the Revenue, was “acquisition of 67% controlling interest in HEL”, being a company resident for tax purposes in India.

        2. This is disputed by the appellant saying that VIH agreed to acquire companies which in turn controlled a 67% interest, but not controlling interest, in Hutchison Essar Limited (“HEL”). According to the appellant, CGP held indirectly through other companies 52% shareholding interest in HEL as well as Options to acquire a further 15% shareholding interest in HEL, subject to relaxation of FDI Norms. In short, the Revenue seeks to tax the capital gains arising from the sale of the share capital of CGP on the basis that CGP, whilst not a tax resident in India, holds the underlying Indian assets.

       Finding of the Court:

        1. There is no conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal.

        2. HTIL, as a Group holding company, had no legal right to direct its downstream companies in the matter of voting, nomination of directors and management rights.

        3. Situs of the CGP shares was not situated in India.

        4. The offshore transaction herein is a bonafide structured FDI investment into India falling outside India’s territorial tax jurisdiction, hence not taxable. Accordingly Section 195, Income Tax Act, 1961 is not attracted in the instant case.