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Tax alerts: the Vodafone case
The Hutch-Vodafone deal that took place in 2007 involved transfer of shares of a foreign company outside India, which indirectly held the shares of an Indian company.
In one of India's biggest tax controversies and the Tax Authority demanding approximately US $2.5 billion in capital gains tax from Vodafone, with additional penalties in a similar range, the Supreme Court (SC), in January 2012, held that indirect transfer would not be taxable in India and therefore there was no obligation for Vodafone to withhold tax on the sale consideration. This landmark judgement covered various significant international tax aspects such as tax avoidance, use of tax havens, interpretation of favorable tax treaties, substance over form of a transaction, etc.
On 20 March 2012, the SC also dismissed the review petition filed by the Union of India and the Tax Authority in February 2012. The review petition was filed on the basis that the Vodafone decision “suffered” from many errors apparent on record and had failed to consider the case submitted by the Tax Authority.
The Finance Act 2012 enacted on 28 May 2012 includes a 'clarificatory' amendment on taxation of such transfer of shares if its value is substantially from assets located in India. This amendment is effective retrospectively from 1 April 1961. It would thus appear that the litigation on this issue is far from over. Watch this space for more updates.