The Vodafone Case dates back to 2007-08 when India was promoting FDI in the telecom sector. Noticing it, a company in Netherlands called Vodafone wanted to tap the telecom markets in India. But, instead of setting up its own infrastructure in India by searching for employees, finding customers, etc. It wanted to opt for an easy method. To search for the viable options, its researchers came to India and contacted the Big 4 companies too. These researchers informed Vodafone that there is a company of Hongkong origin called Hutch Essar of HTIL or Hutchison Telecommunications Investment Limited which is ready to sell itself off and already has 22% of the market share of the Indian telecom sector.Vodafone agreed for the same and were also informed by the researchers that there is an option through which Vodafone will not have to pay any single penny in the form of tax to the Indian authorities. This method was as follows :
HTIL had an investment holding in a far away located nation of Cayman Islands called CGP Investments Limited. Cayman Island is a tax heaven country which means that there is no need to pay any tax on any purchase sale transaction. So, Vodafone instead of purchasing HUTCH ESSAR in India, purchased CGP Investments in Cayman Islands. Indirectly, Vodafone purchased Hutch Essar and renamed it in India. All of this happened without the Indian Authorities receiving a single amount in the form of TDS from Vodafone. Finally, the Tax Authorities sent a notice to Vodafone asking them to pay Rs.10,000 crores.
After receiving the notice from Indian Income tax department Vodafone filed the case in Bombay high court. Vodafone argued that India doesn’t have jurisdiction to tax the Hutchison deal because it was structured as a transaction between two foreign companies. But according to the tax authorities transaction amounting to transfer of capital assets in India by divestment of controlling take in an Indian company held by a foreign company to another foreign company resulting in extinguishment of right would attract the provisions of income tax or in other words what counts for the purpose of taxation was whether capital gains were generated in India. On 3 December, 2008 Bombay high court declared Vodafone as assessee in default and asked it to deposit 2.5 billion dollars with Indian IT department. Vodafone deposited the amount but challenged the decision in Honorable Supreme Court Of India. On January 20, 2012 Supreme court held that Vodafone is not guilty and has followed all the provisions of INCOME TAX ACT. The Supreme Court further noted that the words ‘directly or indirectly’ used in section 9(i) refer to income and not to capital asset transfer and such use would amount to changing the content and ambit of section. Finally, the supreme court ordered the IT department to refund 2.5 billion dollars along with 4% interest. This was a major setback for Indian government and due to this there were retrospective amendments in the provisions of Indian IT act so that this type of transactions do not repeat in the future.
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