VODAFONE PETITION DISMISSED BY BOMBAY HC

Broad Contentions of assessee

The transaction represents a transfer of a capital asset viz., the share of CGP. Any gain arising to the transferor or to any other person out of this transfer is not taxable in India because the asset is not situated in India. Hence, there was no sum chargeable to tax in India and the obligation to deduct tax under Section 195 did not, as a result, arise. The submissions can now be summarised. (para 53 page 24-30)

1.   The case of the Department has vacillated

2.   The parties to the transaction understood the expression “equity interest” to be (i) The transfer of direct and indirect control of 42.34% of the equity capital of HEL; (ii) The transfer of prorate control over TII and SMMS which is mandated by the policy of the Government of India which provides a cap on foreign investments in telecommunications; and (iii) The availability of the ‘put’ options. The revised case of the Department is fallacious

3.   In the present case, there is no income that accrues or arises in India since the right to receive the money was outside India under a contract entered into outside India and payment was made outside India;

4.   In Section 9, Parliament has specifically limited gains arising out of transfers of capital assets to an asset situate in India. The share of CGP is situated outside India. A share is situated where it can be transferred.

5.   A lookthrough provision cannot be introduced by judicial interpretation

6.   The SPA represents an arms length commercial transaction which was entered into between the two large foreign corporations. It is not the case of the Revenue that the document is sham or colourable.

7.   The contention of the Department that the right to use the Hutch Brand during the transition period which was royalty free brings about the transfer of some capital assets in India to which the consideration paid for the shares relates, is misconceived.

8.   For the purpose of taxation, the corporate veil can be lifted only where a tax fraud is being perpetrated;

9.   Section 195 is inapplicable to offshore entities making offshore payments.

10. In order that there should be an enforceable obligation under Section 195 against the payer, it must be established that the payment is of a sum chargeable under the Act.

(para 136) The transfer of the CGP share was not adequate in itself to achieve the object of consummating the transaction between HTIL and VIH BV. Intrinsic to the transaction was a transfer of other rights and entitlements. These rights and entitlements constitute in themselves capital assets within the meaning of Section 2(14) which expression is defined to mean property of any kind held by an assessee.

137. Under Section 5(2) the total income of a nonresident includes all income from whatever source derived which (a) is received or is deemed to be received in India or (b) accrues or arises or is deemed to accrue or arise to him in India. Parliament has designedly used the words “all income from whatever source derived”. These are words of width and amplitude. Clause (i) of Section 9 explains the ambit of incomes which shall be deemed to accrue or arise in India. Parliament has designedly postulated that all income accruing or arising whether directly or indirectly, (a) through or from any business connection in India or (b) through or from any property in India; or (c) through or from any asset or source of income in India or (d) through the transfer of a capital asset situate in India would be deemed to accrue or arise in India. Where an asset or source of income is situated in India or where the capital asset is situated in India, all income which accrues or arises directly or indirectly through or from it shall be treated as income which is deemed to accrue or arise in India.

140. In assessing the true nature and character of a transaction, the label which parties may ascribe to the transaction is not determinative of its character. The nature of the transaction has to be ascertained from the covenants of the contract and from the surrounding circumstances. 

On withholding tax u/.s 195 (para 144)

Chargeability and enforceability are distinct legal conceptions. A mere difficulty in compliance or in enforcement is not a ground to avoid observance. In the present case, the transaction in question had a significant nexus with India. The essence of the transaction was a change in the controlling interest in HEL which constituted a source of income in India. The transaction between the parties covered within its sweep, diverse rights and entitlements.

Para 146

However, we clarify that it is open to the Petitioner to agitate before the tax authority that the Petitioner had reasonable cause and a genuine belief that it was not liable to deduct tax at source and that no penal liability can be fastened upon the Petitioner.

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