Under Tax Regime in India, every Assesses are liable to pay tax in respect of
income arised or accrued outside India received by them irrespective of the
Residential Status and place of accrual of the assesses. "Accrue" means right to
receive income or earned income and "Arised" means originated.
Certain incomes are deemed to accrue or arise in India under section 9 of the
Act, as discussed below:
- Income by virtue of business connection:
Income derived from or arising from a business connection to any assessee is
deemed to accrue or arise in India if a business connection exists, whether
or not through a regular agency, branch, or other type of commercial
- Income arising from any asset or property in India:
Income earned in a foreign country from a property in India is considered to
have accrued or arisen in India. The term "property" refers to all tangible
properties, whether movable or immovable.
- Capital asset:
Capital gains arising to an assessee from the transfer of a capital asset
located in India are deemed to accrue or arise in India, regardless of
whether the capital asset is movable or immovable property, tangible or
- Income from salaries
When income is charged under the heading Salaries, it is deemed to accrue or
arise in India in all cases. If the services are rendered in India, the
income is said to be earned in India.
- Taxability of Interest
Interest will be deemed to accrue or arise in India in the following cases,
and will be taxable in the hands of the recipient regardless of his
residency status (i.e. ROR, RNOR or NR).
Interest payable by:
- Government; or
- A Resident in India, except where interest is payable in respect of
moneys borrowed and used for the purpose of business or profession carried
outside India or earning any income from any source outside India (i.e.
Interest payable by a Resident for loan used in India for any purpose,
whether for business or profession or otherwise);
- A Non-Resident in India provided interest is payable in respect of
moneys borrowed and used for a business or profession carried on in India
(i.e. Interest payable by a Non-Resident for loan used for only business or
profession in India).
- Taxability of Royalty
In the following cases, royalties will be deemed to accrue or arise in India and
will be taxable in the hands of the recipient, regardless of his residency
status (i.e. ROR, RNOR, or NR).
Royalty payable by:
- Government; or
- A Resident in India except where it is payable in respect of any right/
information/ property used for the purpose of a business or profession
carried on outside India or earning any income from any source outside India
(i.e. Royalty payable by a Resident for right/information/property used for
any purpose in India whether business or profession or for earning other
- A Non-Resident in India provided royalty is payable in respect of any
right/ information/ property used for the purpose of the business or
profession carried on in India or earning any income from any source in
India (i.e. Royalty payable by a Non-Resident for right/information/property
used for any purpose in India whether business or profession or for earning
- Taxability of Fees for Technical Services:
Fees for technical services will be deemed to accrue or arise in India in the
following cases, and will be taxable in the hands of the recipient regardless of
his residency status (i.e. ROR, RNOR or NR).
Fees for technical services payable by:
- Government; or
- A Resident in India except where services are utilized for the purpose
of a business or profession carried on outside India or earning any income
from any source outside India (i.e. Fees for technical services payable by a
Resident for services utilised for any purpose in India whether business or profession or for
earning other incomes);
- A Non-Resident in India provided fee is payable in respect of services
for the purpose of a business or profession carried on in India or earning
any income from any source in India (i.e. Fees for technical services
payable by a Resident for services utilised for any purpose in India whether business or
profession or for earning other incomes);
- Taxability of Dividend
Regardless of whether the dividend is an interim dividend or a final dividend,
and whether it is an actual dividend or a notional dividend, any dividend paid
by an Indian company outside India is deemed to accrue or arise in India, and
the income is thus subject to income tax.
Vodafone Case Analysis
Vodafone Group Plc is a company based in the United Kingdom, the business that
Vodafone does in India is taken care of by its subsidiary Vodafone International
Holding BV. The subsidiary is based in Netherlands. Similarly, Hutchison
Telecommunications International Limited (HTIL) company is based in Hong Kong.
It provided telecommunication services to countries like Indonesia, Sri Lanka
and India but does not operate directly. It also operates through its
subsidiaries like CGP Investments Holdings Ltd. based in Cayman Island. CGP
investment is fully owned by HTIL.
During the years 2007 to 2008, India witnessed an immense hike of Foreign Direct
Investments (FDI) in its Telecommunication Industry. During the boost in the
following industry, Vodafone International Holdings (Vodafone), desired to enter
the Indian Market.
Vodafone had two ways to setup their business in India, one
was to start from the scratch by setting up the whole infrastructure,
establishing branches and recruiting the whole work force; the other way was to
takeover any telecom company that was well established in India. Vodafone
decided to go on with the latter way.
In the year 2007, Hutchison Telecommunications International Limited (HTIL)
company decided to exit Indian market. Vodafone offered to buy a 67% stake of
HTIL for 11.1 Billion Dollars. The deal took place between the companies based
in Netherland (Vodafone) and Cayman Island(Hutch).
The deal took place in Cayman
Island (Tax Haven) and the assets that were transferred were of an Indian
company. Hutchison Essar Limited (Indian Company) became Vodafone Essar Limited.
The deal got completed in May 2007. The Income Tax (IT) Department of India
being not very happy with the deal and initiated an investigation against
Vodafone in September 2007.
On October 30, 2009, Income Tax Department served a
show cause notice to Vodafone International Holdings BV asking for 7,900 Crore
Rs. as capital gains and withholding tax under Section 201 and 201(A) of the
Income Tax Act,1961. The Government held Vodafone in fault under section 9(1)(i)
of the Income Tax Act,1961.
The section 9(1)(i) of the Income Tax Act,1961 state
that any income that deems to accrue or arise in India from any asset in located
India shall be subjected to taxation. The contention of the Indian authorities
was very simple: the sale involved an Indian asset, so any gain made in this
transaction is taxable in India.
Vodafone however, did not agree to this
contention as they believed that the deal had taken place outside India and
involved a Dutch company and a company based in Cayman Island and therefore,
they do not have to pay any tax to the Indian government.
The Income Tax Department continuously sent recovery notices to the Vodafone
group. Vodafone challenged this notice in the High Court of Bombay and contended
that the said income was not taxable in India because the transaction was wholly
between two foreign companies with no income accruing or arising in India.
Hence, they are not liable to deduct TDS on the said transaction.
High Court on September 8, 2010, ruled in the favour of the Income Tax
Department of India and held, "the very purpose of entering into agreements
between the two foreigners is to acquire the controlling interest which one
foreign company held in the Indian Company, by another foreign company.
being the dominant purpose of the transaction, the transaction would certainly
be subject to the municipal law of India, including the Indian Income-tax Act."
Bombay High Court further stated that this was a case of tax evasion and not tax
avoidance and imposed a penalty of Rs.7900 Crore on Vodafone.
The said decision of the High Court was challenged by the Vodafone in the
Supreme Court of India. The SC analyzed the Indian tax laws that were applicable
in the said matter and reversed the judgment of the Bombay HC. The SC analyzed
the scope and meaning of section 9 of the Income Tax Act and concluded that the
section imposes a tax liability in the cases where there is a buying/selling of
The Supreme Court in its January 20, 2012, ruling held that the
transaction took place between the two non-resident entities and the contract
was executed outside India. Consideration was also passed outside India. This
transaction was in no way under the jurisdiction of the Indian tax authorities
and therefore the order of asking tax was quashed.
The Government of India filed a review petition against the judgement on
February 17, 2012, but on March 20, 2012, the Supreme Court dismissed the review
petition on the ground that it was non - maintainable.
Later in the year 2012, the Indian Government being disappointed with the
decision of the Supreme Court took a big revolutionary step. The then Finance
Minister Mr Pranab Mukherjee, the late ex-President of India did something quite
unpredictable. To avoid the judgement of the supreme court, he introduced an
retrospective amendment in the Income Tax Act, 1961. This move was first
announced in the budget speech of 2012-13.
The retrospective change became
effective from the year 1962 itself. This Finance Bill 2012 amended Section
9(1)(i) of the Income Tax Act,1961 and validated the tax duty that was imposed
on Vodafone. The government said that the amendment was only a clarification to
remove ambiguity that was already present and provide certainty. On the other
hand the move damaged the image of India as an investment destination.
India was not the only and first country to bring an restrospective amendment to
a taxation law. The US, the UK, the Netherlands, Canada, Belgium, Australia, and
Italy have also retrospectively taxed the companies that took advantage of the
loopholes present in their previous law.
In January 2013, the Income Tax Department issued a fresh demand to the Vodafone
group for INR 11,280 in crores. Retrospective taxes are not favoured globally
and the international pressure forced the Indian government to settle the matter
with Vodafone. The Tax Administration Reforms Commission (TARC) headed by Dr.
Parthasarathi Shome was formed to look into the matter afresh. The commission
report also suggested retrospective legislation should be avoided. The committee
failed to reach to any amicable solution.
The dispute being unsettled Vodafone looked for other legal methods and in the
same order, it reached the Permanent Court of Arbitration in Hague in 2016,
where it invoked Clause 9 of the Bilateral Investment Treaty (BIT) signed
between India and the Netherlands in the year 1995. 
In September 2020, the Hague-based arbitration court ruled in the favour of
Vodafone as well and stated that the retrospective amendment made in the tax
laws is against the BIT between the two countries and hence Vodafone is not
liable to pay any tax or penalty in such case. The arbitration panel consisted
of three members one of which was neutral and one each nominated by the party to
the case. The decision was unanimously against India which means all the three
members voted in favour of Vodafone.
The reason why the decision went in the favour of Vodafone was the violation of
the bilateral investment treaty and the United Nations Commission on
International Trade Law (UNCITRAL). Article 9(1) of the BIT says that "any
dispute between an investor of one contracting party and the other contracting
party in connection with an investment in the territory of the other contracting
party shall as far as possible be settled amicably through negotiations between
the parties to the dispute".
Article 3(5) of the Arbitration Rules of UNCITRAL,
says that the "constitution of the arbitral tribunal shall not be hindered by
any controversy with respect to the sufficiency of the notice of arbitration,
which shall be finally resolved by the arbitral tribunal."
The Judgement in Vodafone International Holdings BV (The Netherlands) v.
Government of India was as follows:
Claimant's claim that the breach of a bilateral investment treaty between the
Kingdom of the Netherlands and the Republic of India for promotion and
protection of investments done at The Hague on November 6, 1995, is considered
and the Tribunal has jurisdiction over it.
There is a breach of Article 4(1) of the Bilateral Investment Treaty, by the
Indian Government "the protection of the guarantee of fair and equitable
treatment" is also violated.
3. The Government of India is not entitled to claim any tax from Vodafone and
should stop any effort to recover the same.
The 60% cost of arbitration has to be paid by the government of India to the
The Indian government was however not satisfied with the decision and filed an
appeal in December 2020 against this decision in the Singapore Court of Appeal
which has now been transferred to Singapore International Commercial Court (SICC).
The decision of the commercial court is currently awaiting.
The Ministry of Finance on August 5, 2021, introduced the Taxation Laws
Amendment Bill, 2021 in Lok Sabha. This bill removes the contentious
retrospective tax demands. According to this new bill any tax demanded for
indirect transfer of Indian assets before May 2012, would be nullified on
fulfilment of specific conditions.
The conditions include withdrawal of pending litigation by such taxpayers and
also a promise that no demand for damages will be made in future. The amendment
also proposes to refund the taxes already paid by the concerned taxpayer, but
without any interest.
This move of the central government will benefit Vodafone who is having a legal
battle with the Government of India. The removal of the retrospective nature of
the amended tax laws was long overdue. The recent Amendment Act of 2021 is
definitely a step towards improving India's image and attracting adequate
investments in the telecom industry.
Whatever happened between Vodafone and the Indian Government in the Vodafone tax
case builds a very bad image of the Indian Government. According to me, the step
of bringing a retrospective effect, that to after losing the case in the highest
court of the land, proved the selfish motive of the government. Their this step
proved that they just wanted to in anyway take tax from the Vodafone company.
This decision somewhere should the failed attempt of democracy and also many
companies hesitated to invest in India after what happened with Vodafone and
cairn and many other companies. In my opinion, what Vodafone did was just tax
planning and not tax evasion because what they did was found a loophole in the
existing Indian law and used it in their benefit.
So, I conclude saying that the recent development of amending the Income tax Act
in 2021, somehow proves that government can't just take any steps, it is for and
by the public and Government can�t just use people of the country for their
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accessed on 15th March,2022.
- The international arbitration case of Vodafone against India : the case
study - iPleaders, last accessed on 15thMarch,2022.
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accessed on 15th March,2022.
- Vodafone Case Analysis
Hutch Vodafone Merger - An Issue of Tax Planning
A Case Study Of Vodafone International Holding v/s Union Of India