1. In a thumping judgment, the Supreme Court (SC) has unequivocally pronounced total freedom
from Indian taxation vis-a-vis purchase consideration paid byVodafone International Holdings
BV (Vodafone) for acquisition of share capital of CGP Investment (Holdings) Ltd (CGP) in
pursuance of which Vodafone gained indirect control in Hutchison Essar Ltd (HEL), a company
belonging to the Hutchison Group.
The SC has laid down a number of tenets and principles while arriving at this conclusion. The
SC has reiterated the reasoning laid down in several cases by English courts that when a
document or transaction is genuine, the court cannot go behind it for some supposed underlying
substance (Westminster principle).
It is the task of the court to ascertain the legal nature of the transaction, and while doing so, it
has to look at the entire transaction as a whole and not to adopt a dissecting approach as
adopted by the Revenue. The apex court has quoted with approval the English decision in
Craven v/s White where it was held that Revenue cannot start with the question as to whether
the transaction was a tax deferment or a saving device and that genuine strategic tax planning
cannot be abandoned.
The Supreme Court has also reconciled major judgments in McDowell's and in the case of
Azadi Bachao. The SC has ruled that McDowell's could be invoked only where the taxpayer
chooses to use an artificial and colourable device devoid of any commercial objective and one
cannot read McDowell's in a manner to characterise all tax planning as illegal or illegitimate.
The Supreme Court has analysed the unfavourable Bombay High Court decision and differed
with it when it comes to the treatment of other valuable rights and entitlements that flow as a
consequence of sale of shares in CGP Holdings.
The SC has categorically ruled that the Vodafone case concerns a sale of shares simplicitor and
not an asset sale. It is only by acquiring the shares of CGP that Vodafone got an indirect control
over three kinds of companies in the group structure of Hutchison and the fact that it is a sale of
shares of a foreign company, which, under the law, is not subject to tax in India is undisputed.
In other words, the Supreme Court has concluded that other rights like control premium, non-
compete agreement, customer base, brand licenses, operating licenses, etc, were transferred
only as a consequence of the transfer of shares in CGP, and the high court erred in attempting
to dissect the transaction and split the payment in each of the above items.
In conclusion, the apex court has observed that FDI flows towards a location with strong
governance and infrastructure that includes enactment of laws and how well the legal system
works.
Certainty is integral to rule of law and stability in complying with the rule of law forms the basic
foundation of any fiscal system. Tax policy certainty is crucial for taxpayers (including foreign
investors) to make rational choices in the most efficient manner.

2. The apex court has reiterated the advice in Azadi Bachao to the government to incorporate
suitable provisions in the domestic tax law and in the tax treaties if the intent is to look through
intermediary companies and tax indirect transfer of business assets in India to let investors
know where they stand before they conclude a transaction in India.
The Vodafone judgment in a way elevates the dispute from the level of a mere transaction to the
realm of pragmatic tax policy that should not disturb settled positions of law just because an
unusually-high tax demand can be foisted on a taxpayer in a given transaction.
It is noteworthy that the Supreme Court gave its decision in Azadi Bachao in 2004, but no suitable
legislative amendments have been mooted by the government since then to respond to the observations
of the Supreme Court.
Of course, we now have a proposal to tax indirect transfers of business assets in India and introduction of
General Anti-Avoidance Rules (GAAR) in the Direct Taxes Code (DTC).
It remains to be seen whether, stung by the Vodafone judgment, the government would post-haste bring
suitable amendments in the Finance Bill, 2012, at the time of the presentation of the Budget to give
legislative teeth to its attempt to tax such indirect transfers in future.
It would do good for the government to gracefully acknowledge the verdict in the Vodafone case and give
further clarity that no indirect exit transactions till date will be pursued any further after this judgment.
Whatever legislative action needs to be taken to tax similar transactions should be duly brought before
Parliament, which in any case is the right forum to debate and pass such legislations. This is a great
opportunity for the government to demonstrate grace and maturity in responding to this landmark
judgment.