Category Archives: Vodafone case misery

Vodafone case misery – Indirect controlling interest or a remote connection

In Kwality Restaurant and Ice Cream Ltd. v. Commissioner of Income-tax (2002)253ITR689 the assessee claimed certain expenses in relation to a restaurant run in Germany by a German company on the pretext that it had indirect controlling stake in that company running restaurant. The Appellate Assistant Commissioner held the view that there was a business link because some of the partners were shareholders of the company which controlled Maharaja Restaurant. Before the Tribunal, the assessee contended that its business was to run a number of restaurants in India as well as outside India and hence running a restaurant in Germany either to get profits directly or get other income by way of dividend or interest was part of its business of conducting restaurants and hence the loss claimed was a business loss. The Tribunal rejected the argument of the assessee and held that the restaurant was not run by the assessee but by a limited company and the only remote connection of the assessee even if it was held to be so was that some partners were shareholders of the company. That per se did not make the claim relating to the restaurant a liability of the assessee. The Delhi High Court upheld the order of the Tribunal.

This decision makes a point that the shareholding lead controlling interest cannot be in the nature of any source of income. The High Court held that person exercising indirect controlling interest or stake only assume remote connection or interest in the business of the shareholder lead controlled entity.

Whereas the Bombay High Court in Vodafone International Holdings B. V. vs. Union of India dated 8th September 2010 held the foreign holding company liable to withholding tax for having made an out and