Union of India
-An Analysis of the Judgment
University of Burdwan
Description of the Vodafone Essar
One non-resident company, Hong Kong-based Hutchison
Telecommunications International Limited
Transferred to a second non-resident company, UK-based
Vodafone Group plc
An indirect controlling interest in the Indian company Hutchison
Change in the ownership of an Indian company by virtue of a
transfer of shares in an offshore holding entity whether is a
disposition giving rise to a taxable capital gain in India?
Contentions of Vodafone
Vodafone did not consider that the transaction was taxable in India
and claimed the following:
The transaction was between 2 non-resident entities, by
virtue of a contract executed outside India, wherein
consideration was paid outside India for the purchase of a
capital asset of an offshore company;
The tax liability was to be borne by Hutchinson Telecom
International Ltd. (“HTIL”), the seller;
Vodafone was not liable to withhold tax.
Contentions of Tax Authority
Transaction involved transfer composite of rights and
entitlements of local assets
The underlying asset was situated in India and was central to the
valuation of shares
HTIL sold its rights in the Indian asset and the right to do
business in India;
Vodafone resulted in having operational control over the Indian
Vodafone also entered into separate agreements with the Indian
entities to conduct business in India.
India does not have a double taxation avoidance agreement with
Requires any “person” making any payment to any other
“person” to withhold tax at applicable rates if such payment is
chargeable to tax under Indian law.
Income which accrues or arises in India, or is deemed to
accrue or arise in the hands of a non-resident, is taxable in
Additionally, any income which a non-resident receives
from the transfer of a capital asset situated in India is
deemed to accrue or arise in India.
Liability to tax of
Non- Residents in India
Based on the nexus connecting the person sought to be taxed with
the jurisdiction which seeks to tax.
transaction is chargeable to tax is determined by Sections 5(2), 9(1)
and 193 of the Act.
Section 5(2) enunciates that the income of a non-resident from
whatever source derived is included in the total income if:
1. it is received in India;
2.deemed to be received in India;
3.accrues in India;
4.deemed to accrue in India;
5.arises in India; or
6.deemed to arise in India.
As per section 9(1) Income is deemed to accrue or arise in
1. through or from any business connection in India; or
2. through or from any property in India; or
3. through or from any asset or source of income in India; or
4. through the transfer of a capital asset situated in India.
Where an asset or source of income is situated in India or
where the capital asset is situated in India, all income which
accrues or arises, directly or indirectly, through or from it shall
be treated as income which is deemed to accrue or arise in
Comments by the
Court on the issue
The essence of the transaction was a change in controlling interest
in HEL which constituted a source of income in India
Transaction and the agreements executed between the parties
indicated that the parties were aware of the composite nature of
It acquired through the agreement
1. the various assets and liabilities including a 52% stake in HEL;
2. stake in control premium, use and rights to the Hutch brand and a
Pertinent Finding by the Courts
The essence of the transaction was a change in controlling
interest in HEL which constituted a source of income in
India, chargeable to tax under Section 5(2) of the Act.
Vodafone was under a statutory obligation to deduct income tax at
source under Section 195 of the Act.
In case of cross-border mergers and acquisitions between non-
resident entities, wherein, interest is situated in India then such
transaction will come under the purview of tax laws.
The tax authorities to decide how to apportion the income that
has accrued to HTIL as a result of the “nexus with the Indian
The Vodafone case is the first matter where the authorities have
attempted to tax capital gains on indirect acquisition of Indian
Foreign investors will be more cautious while investing in India
The Multinational Enterprises, will face difficulty to reorganize
their holding to avoid tax to be charged in India
The judgment was more suggestive than conclusive.