A 3-judge bench of the Supreme Court has decided in favour of Vodafone in the ongoing tussle regarding payment of dues. The UK company was slapped with a $2.6 billion notice for non-payment of taxes following its purchase of a 67 percent stake in Indian mobile operator Hutchison Essar.

From the Court: The Chief Justice of India, S.H. Kapadia stated today that the Government has no jurisdiction over Vodafone’s purchase of mobile assets in India as the transaction took place in Cayman Islands and Indian authorities have no jurisdiction over transactions which have taken place outside the country.

According to the judgment, the Supreme Court states that “Applying the look at test in order to ascertain the true nature and character of the transaction, we hold, that the Offshore Transaction herein is a bonafide structured FDI into India which fell outside India’s territorial tax jurisdiction, hence not taxable…The subject matter of the Transaction was the transfer of the CGP (a company incorporated in Cayman Islands). Consequently, the Indian Tax Authority had no territorial tax jurisdiction to tax the said Offshore Transaction.”

Kapadia further stated that “….the Hutchison structure has existed since 1994. According to the details submitted on behalf of the appellant, we find that from 2002-03 to 2010-11 the Vodafone Group has contributed an amount of Rs. 20,242 crore towards direct and indirect taxes on its business operations in India”.

With regard to the structure of the deal, Kapadia held that “Genuine structuring for investments are permissible. Imposition of tax on the deal amounts to capital punishment on capital investment….”

Justice Radhakrishnan expressed similar views in his concurring judgment, holding that “In the present case, the transaction was between two non-resident entities through a contract executed outside India. Consideration was also passed outside India..” and hence the transaction was outside the jurisdiction of Indian authorities.

The Apex Court has directed the tax authorities to refund the Rs. 25 billion ($496 million) deposited by Vodafone; the said refund must be completed within two months.

Senior Advocate Harish Salve, who represented Vodafone before the Supreme Court had questioned the manner of computation of capital gains tax by the assessing authority. Salve had said the Income Tax department had adopted a curious approach in this case and had erroneously termed the transfer of share capital as capital gain. However, Attorney General G E Vahanvati and Solicitor General Rohinton Nariman had questioned the way Vodafone acquired the 67 percent, claiming that it was liable to capital gains tax.

On hearing the verdict, Salve said that “If the Supreme Court has reacted positively to foreign investment which has created value, it will boost investors confidence… when you are bringing money in, you are creating value and you are structuring it, and that structure is accepted and not a fly by night we will respect that…”

The Supreme Court's decision today marks the culmination of the second round of litigation surrounding the purchase of a 67 percent stake in Indian mobile operator Hutchison Essar by UK-based Vodafone for $11.5 billion in 2007.

The Background:

Vodafone had approached the Bombay High Court for relief and subsequently, in June 2010 obtained a stay on recovery of tax dues. In this round of litigation before the Bombay High Court, Vodafone had engaged Senior Counsels Harish Salve and Abhishek Manu Singhvi. Anuradha Dutt and Fereshte Sethna of Dutt Menon Dunmorrsett had briefed the Senior Counsels on behalf of Vodafone.

On September 8, 2010, the Bombay High Court eventually dismissed Vodafone's petition and upheld the CBDT notice. You can read our coverage here

Vodafone went to the Supreme Court in appeal against this judgment, the result of which was declared today.

Vodafone Case Judgment