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Retrospective Tax by financial bill 2012

Shantanu Malviya


Ayushi Tandon


Sandeep Panwar

PG 2012


A Non-Resident of India (Hutchison) sold the shares of a Foreign Co. (Cayman Island Co.) to another Non-Resident Vodafone. Payment is completed outside India. All contracts were executed outside India.


  • A. About Retrospective Taxation

  • B. Summary of the case

  • C. Tax Dispute

  • D. Facts of the case

  • E. Appellate Proceedings

  • F. Resistance

  • G. Important Findings

  • H. Current status

Report on retrospective tax of

“Vodafone” case

  • A. Introduction of Retrospective Taxation

    • Retrospective Taxation is nothing but the old proceedings which are being taxed as per the new rules.

    • For eg. Lets say that the current tax rates 10% for the current assessment year, the previous assessment year was (10-2)%. Because of some reason the IT department has arrived at a conclusion that previous assessment year also should be taxed at 10% only not (10-2)%. This is called retrospective taxation. With respect to Vodafone issue there are several complicated reasons because of which IT thinks that the taxation should be higher than they had actually paid.

A. Introduction of Retrospective Taxation  Retrospective Taxation is nothing but the old proceedings which are

B. Summary of the case:

A Non-Resident of India (Hutchison) sold the shares of a Foreign Co. (Cayman Island Co.) to another Non-Resident Vodafone. Payment is completed outside India. All contracts were executed outside India.

Can Government of India tax the capital gains arising from the sale? Shares are situated at the registered office of the company i.e., Cayman Island. Does India have a jurisdiction to tax foreign capital gains!

Assessee’s stand is: Neither the assessee - seller is an Indian resident, nor the source of income is in India. Hence India has no jurisdiction. Hence all proceedings in the matter are voidab-initio.

Comments arising from the second chart: There is an Indian business valued at $11 billion. There

Comments arising from the second chart: There is an Indian business valued at $11 billion. There is an attempt to cover it up under a network of tax haven companies. Doesn’t it look like someone trying to cover up an elephant behind a handkerchief! Even if they use ten handkerchiefs, can they cover the elephant!

Note: the above is a representative chart to explain the case. It does not show exactly the number of tax haven companies involved, or the actual costs of the company. The issue is: in a tax haven, you can form

as many companies as you want. The cost may be from $ 1,000 to $ 10,000 per company. You don’t need

an office or a person there. The local consultant registers a company with the local Government, & opens

a file in the company’s name.

Now whether there were one or ten companies in several tax havens, they were supposed to be the owners of a stake in an Indian business sold for dollars eleven billions.

C. Tax Dispute

  • Taxability over Capital Gains on an overseas transaction between 2 foreign companies (having non residential status in India) of sale of investments comprising of shares of an Indian Company.

  • Withholding Tax obligations of the Non Resident Buyer while making payment of lump sum consideration to Non Resident Seller under the provisions of the Income Tax Act, 1961 („Act) of India.

  • D. Facts of the Case

  • Vodafone International Holdings BV, Netherlands (“VIH“) entered into a Share Purchase Agreement (“SPA”) with Hutchison Telecommunications International Limited, Cayman Islands (“HTIL”), for purchasing equity share holding of its subsidiaries i.e. CGP Investment (Holdings) Ltd., Cayman Islands (“CGP”);

  • CGP in turn, directly and indirectly, owned approximately 52% share capital of an Indian Company named as Hutchison Essar Limited (“HEL"). The acquisition resulted in VIH acquiring control over CGP and its subsidiaries, including HEL;

  • The Revenue Authorities held that the gains were taxable in India as there was transfer of controlling stake / business situated in India and accordingly alleged failure on part of VIH to withhold tax on gains arising to HTIL on the transfer of shares of CGP.

E.Appellate Proceedings

VIH filed a writ petition in the year 2010 before the Honble Bombay High Court. The tabular statement of principal arguments before the Honble Bombay High Court is as under:



Contention of VIH

Contention of Revenue Authorities



As per section 9 of the Act, the income is taxable in India only when the „Capital Assetis situated in

Section 9 of the Act gives the widest possible meaning and should be interpreted purposively. The gains were taxable in India as

India. The situs of share is at the place where the company was registered i.e. Cayman Islands, the transfer of CGP shares cannot be deemed as

there was transfer of controlling stake/business situated in India. CGP was a mere holding company and was not engaged into any business in Cayman Islands, thus, the situs of share existed where the

„Transfer of Capital Assetin India

“underlying assets are situated i.e. in India.

and accordingly, cannot be taxed in

Further, HTIL had extinguished its right of


control over HEL and extinguishment of „rights and entitlementsconstituted as „Capital Assets.



The formation of the transaction should be respected and the corporate veil could be lifted only

After going through the terms of Share Purchase Agreement and other documents, it can be interpreted that the intention of the parties was ultimately to transfer



The requirement of withholding tax under section 195 of the Act can be triggered only if there is a tax presence in India.

Under section 195 of the Act, the term „any personalso includes „foreign company. Further, VIH has a presence in India on account of its shareholding and joint venture with another Indian telecom company.

The Honble Bombay High Court upheld the matter in favour of Revenue Authorities. VIH filed petition before the Honble Supreme Court of India. The tabular statement of principal observations of the Honble Bombay High Court and Supreme Court is as under:


Bombay High Court

Supreme Court


The income from the sale of CGP shares fall within the ambit of section 9 of the Act as the section provides for a “look through”, thus though the transaction between VIH and HTIL has been transacted overseas, the underlying assets / business of HEL is in India and gains from transfer

Three elements i.e. „transfer, „existence of a capital assetand „location of such assets in Indiashould exist to conclude that income deemed to accrue or arise in India under the provisions of Section 9 of Act. Here, neither a „Capital Assetexists in India nor situated in India, therefore, provisions of section 9 of the Act cannot be invoked.

should be subjected to Capital Gain Tax in India.

The “look at” approach needs to be adopted rather than a “look through” approach. Further, the word „underlying assetis not covered anywhere in section 9 of Act.


HTIL had extinguished its right of control and management over HEL and consequently, the intrinsic to the

Direct transfer of foreign company shares offshore cannot result in indirect transfer of shares of Indian Company & extinguishment of

transactions was the transfer of “other

the holding company right of control over the

rights and entitlements” which include option, right to non-compete, control premium, customer base etc. These „bundle of rightsalso constitute „Capital Assets.

Indian Company. HTIL held only 52% shareholding of HEL and thus had only a persuasive position / influence over HEL in terms of voting, nomination of directors and management rights. Hence, there was no extinguishment of rights. Moreover sale of shares of HEL was not made directly and it occurred indirectly by virtue of change of shareholding of HTIL.


The business understanding of VIH and HTIL was to transfer the controlling interest in HEL which has significant nexus with India.

The investment structure /shareholding pattern should be examined and it is to be determined as to whether an investment was made for participation in the entity or aimed at avoidance of tax. Further, CGP directly or indirectly holds only 52% of shares in HEL.


The consideration should be allocated in respect of various rights transferred in the transaction and accordingly, taxed in India.

The payment of US$ 11.08 billion was for purchase of the entire investment made by HTIL. The parties to the transactions have not agreed upon a separate price for shares of HEL. Further, no separate value is assigned to the

“rights and entitlements”.


Since, the nexus with India exists, withholding tax obligations under section 195 of the Act would arise including on a non-resident.

The offshore transaction was between two foreign companies (non-residents in India) entered into on principal to principal basis. It is outside Indias territorial tax jurisdiction and hence not taxable in India so should not be subjected to withholding tax obligations in India.

The Honble Supreme Court upheld against Revenue Authorities and directed Revenue Authorities to return the sum of INR 2,500 Crores (which was depsoited by VIH in terms of interim order) along with the interest @ 4% p.a.

F. The Resistance

According to Pranab Mukherjee there was no other way than to bring into the net Vodafone-type cross- border deals with the retrospective amendment

G. Important Findings

  • The transaction for transfer of shares of a Foreign Company (though directly or indirectly holds shares of an Indian Company) between two non-residents on principal to principal basis abroad cannot be deemed as “Transfer of Capital Asset” situated in India and accordingly, cannot result into levy of capital gains tax in India.

  • The provisions of Section 9 of Act will be attracted only when capital asset is located / situated in India.

  • The transaction should not be structured in a manner for avoidance of income tax. The investment structure should be examined and seen in a holistic manner.

  • The lump-sum consideration for purchase of an entire investment cannot be allocated or dissected in order to calculate the value of specific rights and entitlements.

  • The withholding tax obligations in India would arise only when such income is taxable in India.

  • H. Current status

    • A committee headed by former SEBI chairman M Damodaran recommended scrapping of 'retrospective taxation' as a chief measure to make India an attractive destination to do business.

    • Retrospective taxation is a big obstacle to attracting investment.

    • Retrospective taxation -undesirable effect of creating major uncertainties




significant disincentive for persons wishing to do business in India.

  • The legal powers of the government extend to giving retrospective effect to taxation proposals, it might not pass the test of certainty and continuity.