Vodafone International Holdings B.V., a company incorporated under the provisions of the Companies Act
Vs.
Union of India (UOI), Ministry of Finance and Asstt. Director of Income Tax (International Taxation)

Equivalent Citation: 2009(4)BomCR258, (2008)220CTR(Bom)649,

This recent case which has come to the limelight deals with transfer of shares of an Indian Company held by a foreign company to another foreign company. Transfer of Capital Assets in India and Chargeability of transaction to tax under Income Tax Act Section 9 (1) of Income Tax Act, 1961.

Quick brief about the facts of the case: The Petitioner- the assessee- Vodafone purchased shares of a foreign company based in Cayman Islands which in turn held shares of an Indian company Hutch Essar from another foreign company (HTIL). The Respondent- the Assessing Officer, issued a show cause notice asking the assessee why it should not be treated as an assessee in default (AID) for its failure to withhold taxes at source and credit the same to the Central Government on the transaction in issue. The assessee challenged the said Show Cause Notice on the ground that the transaction in issue was a simple transfer of shares between two foreign companies and not transfer of any capital asset in India and as such, said transaction did not attract the provisions of Income Tax Act.

Question of law involved: Whether the transfer of shares between two foreign companies, resulting in extinguishment of controlling interest in the Indian Company held by a foreign company to another foreign company, amounted to transfer of capital assets in India and as such chargeable to tax in India.

Issues raised and adjudged:
It was held that, a divestment or extinguishment of right, title or interest must necessarily precede the divestment of the controlling interest and any divestment by one of any interest of enormous value in shares of high intensity would certainly amount to acquisition of enduring benefit to the other, resulting in acquisition of a capital asset in India Therefore, transaction entered upon by the Petitioner amounted to transfer of a capital asset and not merely a transfer simplicitor of controlling interest ipso facto in a corporate entity and as such chargeable to tax in India.

It was further held that any profit or gain which arose from the transfer of a group company in India has to be regarded as a profit and gains of the entity or the company which actually controls it, particularly when on facts, the flow of income or gain can be established to such controlling company. In the present case, by reason of the transfer, the income accrued not to Cayman Island Company (CGP), but to HTIL(which held CGP) and was treated as profits of HTIL, therefore, the recipient of the sale consideration was none other than HTIL and this was a consequence of divestment of its Indian interests in Hutchinson Essar Group to Petitioner, and therefore, liable for capital gains.

As per Effects Doctrine Extra-territorial operation of Section 195 of the I.T Act, it was held, that any state may impose liabilities, even upon persons not within its allegiance, for conduct outside its borders that has consequences within its borders which the State represents. Therefore, when the dominant purpose of entering into agreements between the two foreigners is to acquire the controlling interest which one foreign company held in the Indian company, by other foreign company, the transaction would certainly be subject to municipal laws of India, including the Indian Income Tax Act.

On the ground of maintainability of availability of efficacious alternative remedy Jurisdiction of High Court to entertain writ Article 226 of Constitution of India, the respondent contended that writ is not maintainable as the petitioner had an efficacious alternative remedy available under Income Tax Act and therefore, failure to invoke same would not entitle the petitioner to invoke writ jurisdiction. It was held that where a right or liability is created by a statute which gives a special remedy for enforcing it, the remedy provided by that statute only must be availed of. In the present case, the Act provides for a complete machinery to challenge an Order of assessment, and the impugned Orders of assessment can only be challenged by the mode prescribed by the Act and not by a petition under Article 226 of the Constitution.

On grounds of Constitutional validity of provisions and non-production of vital documents the respondent contended that the petitioner has not produced vital documents that are crucial to the determination of the issue of chargeability to tax in India and therefore, the petitioner cannot challenge validity of provisions in issue. It was held that even if the burden of proof does not lie on a party, the Court may draw an adverse inference if he withholds important documents in his possession which can throw light on the facts at issue. Therefore, when the Petitioner has challenged the constitutional validity of the Amendment to Sections 191 and 201 of the I.T. Act by the Finance Act, 2008, then the same must be in context of certain facts pleaded and proved by evidence in the form of documents on record and not in vacuum or in the abstract.

Ratio Decidendi:
Transaction amounting to transfer of capital assets in India, by divestment of controlling stake in an Indian Company held by a foreign company to another foreign company resulting in extinguishment of right, would attract provisions of Indian Income Tax Act.

Any profit or gain which arose from the transfer of a group company in India has to be regarded as a profit and gains of the entity or the company which actually controls its, particularly when on facts, the flow of income or gain can be established to such controlling company and as such is taxable in India.

When the dominant purpose of entering into agreements between the two foreigners is to acquire the controlling interest which one foreign company held in the Indian company, by other foreign company, the transaction would certainly be subject to municipal laws of India, including the Indian Income Tax Act as per Effects Doctrine.
Where a right or liability is created by a statute which gives a special remedy for enforcing it, the remedy provided by that statute only must be availed of.
Even if the burden of proof does not lie on a party, the Court may draw an adverse inference if he withholds important documents in his possession which can throw light on the facts at issue.

The potential investors would need to be therefore extra careful while structuring their cross-border mergers and acquisitions transactions lest they are slapped with unwarranted and unexpected tax liability from strange quarters which they have not factored in their negotiations and to minimize the chances of litigation.
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# [2009]311ITR46(Bom)

The  author can be reached at: suyash.upes@legalserviceindia.com