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Budget humbles judiciary

HP Agrawal 

The story of Vodafone’s case in Supreme Court is only a few months old story. Briefly the facts were that Vodafone, Netherlands entered into an agreement with a Hong-Kong Company to acquire shares of a Cayman Island Company which in-turn held controlling interest in an Indian Company. The effect of this transaction was that the controlling interest of the Indian company was effectively transferred to Vodafone although the transaction was carried outside India between two foreign companies.

The issue involved was whether Vodafone was liable to withhold tax in respect of payments made to Hong-Kong Company. The Income-tax Department was of the view that since the transaction resulted in transfer of controlling interest of the Indian company, therefore, Vodafone was liable to withhold tax in respect of capital gain arising to Hong-Kong Company.

The Hon’ble Supreme Court vide its order dated January 20, 2012 decided the issue in favour of Vodafone and held that Vodafone was not liable to withhold any tax because no capital gains arose in the said transaction which would be chargeable to tax in India. The Hon’ble Supreme Court mainly observed as follows:  


  • Section 9 covers only income arising through a transfer of a capital asset situated in India; it does not purport to cover income arising from the indirect transfer of capital asset in India. If the word indirect is read into Section 9(1)(i), it would render the express statutory requirement of Section 9(1)(i) nugatory. 
  • Situs of shares situates at the place where the company is incorporated and / or the place where the shares can be dealt with by way of transfer. 
  • Section 195 would apply only for payments made from a resident to a non-resident, and not between two non-residents situated outside India. 
  • The entire transaction has been carried out outside India and in relation to property which is situated outside India. It involves transaction between two non-residents in respect of shares of a company incorporated outside India. Therefore, the Indian Tax Authorities have no territorial tax jurisdiction over the said transaction.

    The Government in its zest to establish superiority of legislature over judiciary has now proposed the following major amendments in the Income-tax law retrospectively from 01st April, 1962:

  • In section 9(1)(i), to clarify that the word “through” in the said section shall mean and include “by means of”, “in consequence of” or “by reason of”. This explanation has been inserted with an intent to provide that the income arising from indirect transfer of capital asset shall also be included in section 9(1)(i). 
  • In section 2(14), to clarify that the term “property” includes any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever. 
  • In section 2(47), to clarify that ‘transfer’ includes disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. 
  • In section 9(1)(i), to further clarify that “situs of shares” of a company incorporated outside India shall be deemed to be in India if the share derives, directly or indirectly, its value substantially from the assets located in India. 
  • In section 195, to provide that it will also cover payments made by a non-resident to another non-resident. It has been further clarified that the said provision will apply whether or not the non-resident has a residence or place of business or business connection or any other presence in any manner in India.

    The net effect of the aforesaid amendments is that the decision of the Supreme Court in Vodafone’s case is no longer a good law. Now any transaction entered into outside India between two foreign residents shall also be subject to the provisions of the Indian Income-tax Act if the said transaction has any bearing on any asset situated in India.

    The amendments proposed to be made effective from 1962 neither respect the relevance of territorial jurisdiction of Indian law nor the independence of judiciary. This kind of amendment will certainly prove to be a big blow to foreign investments in India.

    The author is a Sr Partner in SS Kothari Mehta & Co e-mail:



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    First Published: Mon, March 19 2012. 00:33 IST