Today India is considered a hot destination for investment by global investors in view of the demographic advantage and plethora of growth opportunities. Even today, while the developed world struggles to get over the recessionary trends, the Indian economic environment looks strong and is upbeat about growth. Perhaps this is what keeps overseas investors keenly interested in India.
Recently, the Indian Revenue authorities had been seeking to tax transactions where the shares of Overseas Company Holding Company (being the owner of shares in the Indian company) are sold by the non- resident transferor on the ground that there is transfer of capital assets situated in India as the underlying assets are situated in India.
This debate was initiated in the Hutchison-Vodafone transaction in which Vodafone International Holding BV (Vodafone) acquired 100 per cent shares in CGP (Holdings) Limited (CGP) based in Cayman Island from Hutchison Telecommunication International Holdings Limited (HIL), a BVI company. CGP held more than 50 per cent shares in Hutchison Essar Limited (HEL), an Indian entity through a chain of Mauritian entities. The Revenue authorities in India issued notices to Vodafone for failure to deduct taxes on payments made to Hutchinson. Vodafone challenged the said notices by way of writ petition filed before the Bombay High Court. The Bombay High Court decided the issue in favour of the Revenue authorities and held that the show cause notice, cannot be termed extraneous or irrelevant or erroneous on its face or not based on any material at all.
The Apex Court yesterday reversed the decision of the Bombay High Court and held that the sale of CGP shares by HIL to Vodafone would not amount to transfer of a capital asset within the meaning of Section 2(14) of the Income Tax Act, 1961. The present case concerns the transaction of “outright sale” between two non-residents of a capital asset (share) outside India. Further, Section 195 would apply only if payments made from a resident to another non-resident and not between two non-residents situated outside India. Also, Section 163(1)(c) is not attracted as there is no transfer of a capital asset situated in India.
The Court also observed that Limitation of benefits (LOB clause) has to be expressly provided for in the treaty and such clauses cannot be read into the Section by interpretation. It has also held that Section 9(1)(i) is not a “look through” provision and cannot by a process of interpretation be extended to cover indirect transfers of capital assets/property situate in India.
The Apex Court also observed that in cases of treaty shopping and/or tax avoidance, there is no conflict between McDowell and Azadi Bachao.
It further observed that the parties to the transaction have not agreed upon a separate price for the CGP share and for what the High Court calls as “other rights and entitlements” (including options, right to non-compete, control premium, customer base etc.). Thus, it was not open to the Revenue to split the payment and consider a part of such payments for each of the above items. The essential character of the transaction as an alienation cannot be altered by the form of the consideration.
The above judgment of the Supreme Court shall provide the much needed clarity, certainty and confidence to global investors and shall have positive impact on the investments in India.
(The author is Tax Partner, Ernst & Young. Views expressed are personal)