Cross Border Investments – A Contemporary Appraisal : The Vodafone Tax Case

Businesses in the present day are growing vertically and horizontally across nations. Due to such international migration of businesses, the current challenges before a business are myriad, i.e., challenges of new laws and regulation, language, government and bureaucracy and amongst all an encounter with the local tax systems of each nation they seek to embark upon.

Every sovereign has been bestowed with the right to legislate and enact the tax laws for their territory and choose the best form of tax governance systems as it may suit the need of their economy. However, due to increased globalization and the world economy growing into a local market for all, every nation aims at aligning its tax system to promote capital inflows into its country.

Today, a stable tax framework is the necessary accessory for a government engaged in the welfare of people and growth of economy on the whole. More than the economic rationale, taxation also has a social utility of distributing wealth to create a fairer, and more organized community. Progressively, tax is also seen as a means of equalizing the market imperfections.

Thus, a fair tax regime is creating a balanced approach by raising revenue and sharing the same through effective expenditure for the public.

Another mandate for a fair tax policy in the globalised economy is certainty and stability in tax policies. The recent judgment of the Hon’ble Supreme Court of India in the case of Vodafone International Holdings B.V. involving a USD $2 billion tax claim is a classic example of the role of certainty in tax systems as the very premise of the judgment of the Supreme Court seems to be that the case involved genuine inflow of foreign capital and therefore with the aim of securing certainty, have accepted the structure.

The facts of the litigation that prevailed for over four years briefly posits that in 2007, Hutchison Telecommunications International Limited (“HTIL”), a Cayman Islands company, sold 100% of its interest in CGP Investments (Holding) Limited (“CGPC”), also a Cayman Islands company, to Vodafone International Holdings B.V. (“VIH BV”), a company incorporated in The Netherlands, for approximately US$11.08 billion. At the time of the sale, HTIL effectively controlled an interest of approximately 67% in Hutchison Essar Limited (“HEL”), which is based in India. The Indian tax authorities alleged that the sale of the CGPC shares had resulted in the transfer of shares of an entity (that is, HEL) to VIH BV and so attracted capital gains tax in India and VIH BV was therefore under an obligation to withhold taxes in respect of the acquisition under the provisions of Income Tax Act 1961 (the “Act”).

The highest court of India has announced its verdict in favour of Vodafone holding that the offshore transaction is not liable to be taxed in India as the same does not fall within the strict language of the charging provisions of the Act and therefore, in the interests of protecting foreign inflow of capital and providing certainty to the tax systems of the country, has held that the said investment cannot be dissected and should be looked at in its entirety.

The Supreme Court observed that tax planning is legitimate, provided, it is within the framework of law and that a colourable device or sham or subterfuge cannot be a part of tax planning. Further, they observed that holding structures are recognized in corporate as well as tax laws. It is a common practice in international law, which is the basis of international taxation, for foreign investors to invest in Indian companies through an interposed foreign holding or operating company, such as Cayman Islands or Mauritius-based company for both tax and business purposes.

The Court held that while scrutinizing such holding structures, one must adopt the “look at” principle according to which the Revenue or the Court must look at a document or a transaction in a context to which it properly belongs. While doing so, the Revenue/Courts should keep in mind the following factors: the concept of participation in investment; the duration of time during which the Holding Structure exists; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; and, the continuity of business on such exit.

There is a conceptual difference between a preordained transaction that is created for tax avoidance purposes, on the one hand, and a transaction that evidences investment to participate in India.

The Court has held that the Hutchison structure has been in place since 1994. Moreover, the SPA indicates “continuity” of the telecom business on the exit of HTIL and therefore, it cannot be said that the structure was created or used as a sham or avoid  tax as HTIL was not a “fly by night” operator/ short time investor.

To suggest in plain language, the application of tax laws should be certain which is the suggested mandate in view of the dipping of FDI inflows. According to Adam Smith, the Father of Economics, “a very considerable degree of inequality … is not near so great an evil as a very small degree of uncertainty.”

Therefore, the lessons that Vodafone judgment preaches is that for ensuring a fair tax system, changes to the underlying rules should be kept to a minimum and there should be a justifiable economic and/or social basis for any change to the tax rules and this justification should be made public and the underlying policy made clear.

An extreme view that emerges from the judgment is whether tax avoidance, which places a burden on taxpayers who do not, or cannot, avoid tax and thus creates unfairness in the tax system has been side-lined by the Indian judiciary on the mere pretext of absence of any specific legislation on the same with the sole objective of ensuring a continuous flow of foreign capital flows.

The immediate reaction that emerges from the business community is that all rational people will always attempt to minimize their tax bills within the four corners of law. Tackling tax avoidance in today’s scenario of cross border transactions can therefore be effective only if backed by legislation because of differing policy framework of taxation across the globe.

Thus, the pressing question that emerges is that to what extent the government should focus on ensuring competitive tax systems so as to encourage investment, capital and trade while the exchequer is seeking to raise their revenue streams by attacking cross border transactions and re-characterizing them to charge income to tax.

Mr. Aseem Chawla is a Partner, and Ms. Surabhi Singhi is an Associate, Amarchand & Mangaldas & Suresh A. Shroff & Co., based out of Delhi, India. Mr. Chawla leads the tax practice group of the firm and can be contacted at Ms. Singhi is an Associate with the tax practice group of the firm and can be contacted at



By: Aseem Chawla and Surabhi Singhi



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