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This article is written by Darshit Vora of Narsee Monjee Institute of Management Studies. The article analyses the case of Vodafone International Holdings BV vs Union of India, the judgments passed by courts, and the impact of finance bills on this case. 


“[We Indians] …endure foolish laws and maddening amendments which benefit none except the legal and accountancy provisions, and instinctively prefer to circumvent the law than to fight for its repeal.” [Nani Palkhivala]

Retrospective means looking backward and opening up the past, closed, and completed transactions. Retrospective taxation refers to a charge imposed by the state by the way of an amendment on the transaction or dealings that were done in the past. Every government has the right to levy taxes but no government has the right to extract tax by causing misery and harassment to the taxpayer. The Indian Constitution grants the legislature gets the power to collect prospective as well as retrospective tax by amending in the income tax act. Though the government might have the legal powers to imply retrospective taxation it will fail the certainty and continuity test.

One such instance of imposing retrospective taxation was seen in 2012 where the state exercised its power given to them by the Constitution. They made this amendment with an intent to charge capital gains tax and to circumvent the Supreme Court’s ruling on Vodafone International Holding BV vs Union of India the amendment was passed with an intent to charge retrospective capital gains tax from a handful of companies namely Vodafone and Cairn Energy. Thus, it created widespread criticism against the Indian Government. Until recently after governments’ defeat at various international forums passed a finance bill of 2021 that held application of retrospective taxation is revoked and will only have a perspective effect post the finance bill of 2012.

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Rules applied in the case 

  • Section 9(1)(i) of the Income Tax act, 1995: 

The provision, mentions income arising directly or indirectly from any business connection situated in India or through the transfer of capital assets situated in India is considered taxable.

  • Section 195 of the Income Tax act, 1995:

The provision, mandates the person who is responsible to pay a non-resident or a foreign company shall deduct income tax rates thereon at the rates in force.

  • Section 163 of the Income Tax act, 1995: 

The provision, mentions that who may be treated as an agent. A person can be treated as an agent if he/she is employed on or behalf of a non-resident, business connection with a non-resident, non-resident in receipt of income directly or indirectly. A person can’t be called an agent if an opportunity is given by the assessing officer to hear that person’s side.

  • Section 2(14) of the Income Tax Act, 1995: 

The provision, mentions what assets can be treated as capital assets. Exceptions are stock in trade, ornaments used for personal purposes, agricultural land, gold bonds, and special bearer bonds.

Facts of the case 

In 1999 when the government scrapped the licensing regime. The act of the government had a positive impact on the telecom sector. Post-1999 one of the finest years in terms of growth was witnessed by the telecom companies. During that period Hutchison Telecom International Limited (Parent Company) formed a subsidiary company named Hutchison Essar Limited in India. The company had a 67% stake in Hutchison Essar Limited which was transferred and controlled by the holding company of Hutchison group named CGP investments holding Ltd which was situated in Cayman Island.

Hutchison decided to exit the Indian market in the year 2007. During that period UK telecom giant named Vodafone International Ltd wanted to enter the Indian market. Therefore, both the companies entered into an agreement where CGP Investments Holdings Ltd would transfer 67% of the stake of Hutchison Essar Ltd to Vodafone International Holdings which is the holding company of Vodafone group situated in the Netherland. The Hutchison Company in return would receive 11.1 billion dollars.

At the time of the transaction, the parties believed that capital gains tax can’t be charged by the Indian Government as the transaction happened between two non-resident companies and the transaction took place outside India. During that period no law obligated the company to pay capital gains tax for any indirect transfer of Indian assets. However, after the Indian tax authorities got to know about this transaction and issued a show-cause notice to the Vodafone Essar Ltd on 06.08.2007 under Section 165 of the Income Tax Act as to why they should not be considered as an assesse of Vodafone. Further assistant Director of Income Tax Mumbai issued show-cause notice under Sections 201(A) and 201(1A) as to why Vodafone should not be treated as an assessee-in-default for failure to withhold tax. Dissatisfied by the action of the Income-tax authority the company moved to the Bombay High Court on 19.09.2007 to challenge the action of the Income-tax authorities under special leave petition on the ground that it lacks jurisdiction.

Analysis of the Bombay High Court Judgment 

Bombay High came to the following conclusions that the transaction between Hutchison Telecom International Limited and Vodafone International Ltd there involved a transfer of controlling interest. Along with the transfer of shares, there is a transfer of other rights and entitlements which are capital assets under Section 2(14) of the Income-tax act. The court also observed that even if the transaction is not happening in India but concerning an Indian asset the Indian Tax authority can claim capital gain tax from the assessee. The court observed that Section 9(1)(i) is applicable in this case as the provision mention income accruing or arising directly or indirectly from any business connection as income is earned through the indirect transfer of asset situated in India.

The court observed that it is important to establish nexus, in this case, nexus is established as the asset is situated in India thus provision of Section 195 of the Income Tax Act shall be applicable. The Bombay High Court observed that Income Tax Act, 1961 has an extraterritorial operation and can be attracted against non-residents if there is any nexus with India.

Thus Bombay High Court in its decree dismissed the petition filed by Vodafone International Holding BV and held that Income-tax authority has the jurisdiction. The Bombay High Court observed that Vodafone can agitate before the Indian tax authorities that it had reasonable cause and a genuine belief to the effect that it was not liable to deduct tax at source and accordingly, no penal liability could be fastened upon it.

The Vodafone International Holding BV preferred an appeal against the order of the Bombay High Court to the Supreme Court of India.

Analysis of the Supreme Court Judgment 

The Supreme Court passed a contradictory judgment as compared to the Bombay High Court it made the following observations that the transfer of shares and shifting controlling interest cannot be seen as separate transactions it forms an inalienable part of shares. Controlling Interest is inherently a contractual right and not a property right. Acquisition of shares may carry acquisition of controlling interest which can’t be made taxable.

The court observed that Section 195 of the Income-tax Act only applies to residents and can’t have extraterritorial jurisdiction. The court observed that as the transaction took place between two non-residents companies and that happened outside India thus having no direct nexus with India. The Supreme Court observed that Section 9(1)(i) covers only income arising from a transfer of a capital asset situated in India and it does not purport to cover income arising from the indirect transfer of a capital asset in India.

The Supreme Court observed that the current act of Vodafone International holding was within the ambit of tax planning many offshore companies situated in Mauritius and Cayman Islands use these arrangements for legitimate tax planning reasons which were done by Vodafone and Hutchison group in this case. The court held that doctrine of piercing of corporate veil can only be applied if it is proved that the transaction is sham or tax avoidant. However, the court held that the action was not a colorable device and was not done to avoid tax. The court also observed that transaction between CGP Investments holding and Vodafone Investments Holding was genuine and was taken the interest of the investors and can’t be considered as a sham or colorable device to evade tax. Therefore, Vodafone is not legally obligated to reply to tax authorities under Section 163 of the Income Tax Act.

Therefore the Supreme Court overturned the judgment of the High Court the Income-tax authority doesn’t have the authority to impose capital gains tax of about 12,000 crores and therefore Vodafone International Holdings BV was protected from all kinds of liability in this case.

Impact of finance bill 2012 on this case 

Post the Judgment of the Vodafone case the government introduced a finance bill the amendments were made in the following sections:

  • Insertion of Explanation 5 in Section 9(1) (i) of the Income Tax Act: 

The explanation, mentioned that transfer of shares of a foreign having a substantial value of India asset shall be taxed and the amendment shall be effective from 1962.

  • Insertion of Explanation 2 of Section 2(47) of the Income Tax Act:

 The provision, implied that any asset; directly or indirectly; absolutely or conditionally; voluntarily or involuntarily; by way of an agreement (entered in or outside India), or otherwise shall be considered as a transfer. 

  • Expanding explanation of Section 2(14) of the Income-tax Act: 

The provision, clarified that property also includes any right concerning Indian Company including rights of management and control. 

  • Expansion of scope of Section 195 of the Income Tax Act: 

The provision, clarified that the provision applies to both resident and non-resident who has a business connection or any presence whatsoever shall deduct tax at source.

The amendment passed by the legislature completely sought to nullify the effect of the Supreme Court’s judgment in Vodafone International Holdings BV vs Union of India. The reason given for passing this amendment was to increase the tax collection and benefit the genuine taxpayers.

Vodafone Investments holdings BV aggrieved by the amendment moved to the permanent court of arbitration. Vodafone Investments Holdings BV moved to the court under Article 9 of the BIT entered between the Netherland and India which mentions that parties can move to the permanent court of arbitration to resolve disputes an investor of one contracting party and the other contracting party in connection with an investment in the territory of the other contracting party.

Permanent court of arbitration judgment

The permanent court of arbitration held that imposition of taxation through retrospective amendment is a breach of Article 4(1) which mentions equitable and fair treatment mentioned under the bilateral investment treaty. The claims made by the Union of India were thus rejected by the Permanent Court of arbitration. 

The tribunal not only barred the state from charging taxes from Vodafone International Holdings BV but also obligated them to pay Rs 40 crores to the company as a part of partial compensation of their legal costs.

Impact of Finance bill 2021 on this case 

After receiving defeats in multiple International forums the government decided to introduce finance bill, 2021 which would nullify the retrospective effect of the finance bill 2012. In the statement of objects and reasons for the amendment, it is held that the amendment is passed as it invited criticism from various stakeholders and negatively affected the investment environment of the country. Through the amendment, changes were made in two provisions:

Section 9(1) (i) of the Income Tax Act, 1995: 

The amendment, changes the state of finance bill 2012, asset or capital asset, which is held by a non-resident by way of investment, directly or indirectly shall be taxable post 1st April 2012.

Section 119 of the Income Tax act, 1995: 

The provision, inserts the first and second proviso in the section which prescribes that section 119 shall cease to apply on fulfillment of specified conditions such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking that no claim for cost, damages, interest, etc.

The state by passing this amendment agreed to waive the taxes of Vodafone International Holdings BV. 

Critical Analysis 

The tax structure of the country should create faith and not hinder national economic goals. It should boost capital formation and international competitiveness. Retrospective taxation not only creates uncertainty among the taxpayers but also negatively impacts foreign investments. In the current case imposition of retrospective taxation to collect capital gains tax from a few companies is unfair and showed an obstinate nature of bureaucracy to collect tax. In an expert committee headed by it was observed that retrospective taxation should be invoked in rarest of the rare case for the following purpose First to correct procedures. Second to apply matters that are genuinely clarificatory and, third to protect the tax base. However, in the current act, the legislature acted to expand the tax base and thus satisfying none of the conditions. 

In the current case, the deal between Vodafone Group and Hutchison group was within the law that existed during that period. Therefore, the Supreme Court rightly said that it would come under the ambit of tax planning. The Supreme Court rightly interpreted the ambit of provision Section 9(1) (i) that it doesn’t include the indirect transfer of assets situated in India. However, the Bombay High Court committed an error interpreting the language.

The Supreme Court also rightly held that transfer shares lead to the transfer of control rights and they both are inseparable. However, the Bombay High Court committed an error interpreting it as a different transaction. The provision in that period was narrow and didn’t cover transactions done by non-residents having indirect nexus. The Supreme Court on this point rightly interpreted those provisions of Income-tax doesn’t have extraterritorial jurisdiction. Therefore, Vodafone Investments Holdings BV used the limited scope of the act and the Investments treaties to their advantage to get tax exemptions which can’t be considered as Tax evasion. Thus, Supreme Court arrived at a correct judgment but to nullify it an unjustified amendment was passed. 

The permanent court of Arbitration rightly passed the order in favor of Vodafone and held that imposition of retrospective taxation is not fair and just. Therefore finally the legislature ratifying its mistake that it committed 9 years ago removed the retrospective application of the law. However, will the government pay Rs 40 crores to the company as compensation is still unknown. 


The Vodafone case on retrospection brings forth a good side and a bad side. The bad side is the obstinate nature of the legislature to pass unfair laws just to increase tax collection and the good side is the Independence of the judiciary that won’t succumb to the pressure imposed by the state. Thus, in the future, it should be ensured that no unjust amendment is passed which would negatively hamper the trust of foreign companies and investors which would, in turn, reduce the growth and development of the country. 








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