The High Court in their ruling in Vodafone International Holdings B. V. v. Union of India (2010) 329ITR126 dated 08.09.2010 held that the transfer of the CGP share in the company situated in the Cayman Islands for acquisition of Hutch business in India was not adequate in itself to achieve the object of consummating the transaction between Hutchison and Vodafone hence it rejected the hypothesis that all that was transferred was that which was attached to and emanated from the solitary share. In the view of the High Court that, intrinsic to the transaction was a transfer of other “rights and entitlements” which rights and entitlements constituted in themselves “capital assets” within the meaning of Section 2(14) of the Income Tax Act, 1961. According to the High Court therefore Vodafone acquired the CGP share with other rights and entitlements whereas, according to the assessee, whatever it obtained was through the CGP share. Thus, primarily the fight is on the vital question whether the whole transaction can be dissected into value for transfer of share and transfer of rights and entitlements.
In the recent judgement of the Supreme Court delivered on Friday, the 20th January 2012 against ITA No. 733/2012 in Vodafone International Holdings B.V. vs. Union of India and others the Hon’ble Supreme Court have not denied the fact that the entire transaction did involve transfer of underlying rights and entitlements so to say. However, on their scrutiny and analysis of the Indian income tax law they did not find any authority under section 9 expressly to tax such indirect resulting transfer of such rights and entitlements. Thus essentially they found it difficult to tax Vodafone due to absence of express provisions and further on account of principles under the law of ‘look through’ holding them from taxing such nature of transactions.
But time and again the Supreme Court pursued it further all along and presented a view that it can be taxed if the law is amended.
For instance in Paragraph 167 of the ruling as reproduced herein below the Apex Court has said that legislation can rope in value derived from share transfer on the scale of source rule:
“167. Source in relation to an income has been construed to be where the transaction of sale takes place and not where the item of value, which was the subject of the transaction, was acquired or derived from. HTIL and Vodafone are offshore companies and since the sale took place outside India, applying the source test, the source is also outside India, unless legislation ropes in such transactions.”
Then in Paragraph 170 the Supreme Court reiterated that an invitation to purposively construe Section 9 applying look through provision without legislative sanction, would be contrary to the ratio of Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667.
And yet again in the next Paragraph 174 the judgement mentions that shifting of situs can be done by express legislation as under:
“174. Section 9 has no “look through provision” and such a provision cannot be brought through construction or interpretation of a word ‘through’ in Section 9. In any view, “look through provision” will not shift the situs of an asset from one country to another. Shifting of situs can be done only by express legislation. Federal Commission of Taxation v. Lamesa Holdings BV (LN) – (1998) 157 A.L.R. 290 gives an insight as to how “look through” provisions are enacted. Section 9, in our view, has no inbuilt “look through mechanism”.”
The Supreme Court even went beyond when on their reference to the draft Direct Taxes Code Bill 2009 and revised 2010 version so commented that the proposed legislation do make provision of the order desired in this case at the instance of the revenue.
The Supreme Court in their final conclusion shown a difficulty in going by the High Court only for the sole reason that the legislation in this case did not provide express authority to tax the rights and entitlements emanating from the transfer of solitary CGFP share. The self speaking conclusion expressing the difficulty read as follows:
- I, therefore, find it difficult to agree with the conclusions arrived at by the High Court that the sale of CGP share by HTIL to Vodafone would amount to transfer of a capital asset within the meaning of Section 2(14) of the Indian Income Tax Act and the rights and entitlements flow from FWAs, SHAs, Term Sheet, loan assignments, brand license etc. form integral part of CGP share attracting capital gains tax. Consequently, the demand of nearly Rs.12,000 crores by way of capital gains tax, in my view, would amount to imposing capital punishment for capital investment since it lacks authority of law and, therefore, stands quashed and I also concur with all the other directions given in the judgment delivered by the Lord Chief Justice.”
In my view the judgement is as much a win for the revenue as much as it is for the assessee. It does not see any difficulty in taxing the underlying assets if there is an express law so stating in the Act on the lines of other provisions in section 64 in the Income tax Act, 1961. To further score over such observation there is every reason for the revenue to cheer and put in place a desired law with retrospective effect as it would only amount to expressly stating the situs for underlying assets comprising of rights and entitlements and not bringing out a new charging provision per se. In fact the whole exercise can be completed by inserting just one explanation in section 9 (1) (i) to reset the gear and to make way for Direct Taxes Code Bill enactment.