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Author: Jagrati Gupta, II Year of B.A.,LL.B(Hons.) From Law School, Banaras Hindu University.

Facts of the Case

The Petitioner, Vodafone International Holdings which is a Dutch company had acquired 100 percent shares of another foreign company named CGP Investments (Holding) Ltd located at Cayman Islands for USD 11.1 billion from Hutchison Telecommunications International Ltd in 2007. CGP previously regulated 67% of Hutchison Essar Limited (HEL), an Indian Company through numerous transnational organisations/ authoritative courses of action. With the procurement of CGP, Vodafone also secured HEL. In November 1994, Vodafone had obtained telecom licenses to provide cell service in different circles in India. The Indian Tax Department in September 2007 issued a show- cause notice to Vodafone to illuminate the justification that for the aforementioned deal which led to the transfer of shares between the companies, why Vodafone failed to pay tax on the payment made to HTIL as the said transaction had an influence on the exceptional or indirect transfer of assets in India.

Issues to adjudicate

Vodafone, on being issued such notice filed a petition with the Bombay High Court challenging the said notice on the grounds of the Department’s non jurisdiction. The question that was raised in the court that the transfer of shares between the two companies which amounted to the extinguishment of the controlling interest in the Indian Company occupied by the foreign company consequently lead to the transfer of capital assets in India, whether such transaction is chargeable to tax in India?

Arguments raised by the Petitioner

Section 9 of the Income Tax Act, 1995 states and elaborates which kind of income is said to arise in India and hence is subjected to tax. The Petitioner argued that the obtainment of the shares from HTIL of the CGP company located at Cayman Islands which indirectly resulted in the acquirement of HEL was not chargeable to tax in India as the income generated was not based in India. It was further contended that Chapter 10 of the said Act does not mention that all amounts involved in the particular transaction are to be taxed which are otherwise non- taxable. The income generated was not taxable and hence ordering such tax on international transaction will be viewed as a penalty on entering into a transaction as by law no taxable income has been generated. The receipt of consideration from Vodafone company on payment to its holding company was argued to be a capital receipt under the Income Tax Act and hence cannot be brought under the ambit of taxable income unless expressly specified (decided in Cadell Weaving Mill Co. P. Ltd. vs Commissioner of Income-Tax) which is also explicitly provided under Section 2(24) of the Act under which capital receipt does not come under the definition of “Income”. Under Section 45(5) of the Act, “capital gains” come within the ambit of “Income”. The Petitioner mentioned that the meaning of the international transaction defined under Section 95 (b) (2) (i) states that capital financing transaction such as borrowing money or lending money to Associated Enterprises would be an international transaction. So, to go by this provision, the Income Tax Department is taxing the impact of the lending or the borrowing of the amount and not the quantum of such amount. The Petitioner further contended that under Section 92(b) of the Act, business restructuring would only be applied if such restructuring has an effect on income and if there is found an effect, then such income is bound to be taxed. But no such impact was found on the income which would be chargeable to tax due to issue of shares.

Arguments raised by the Respondent

The Respondent argued that the writ petition is not valid as the petitioner had a choice to file under an effective remedy under Income Tax Act (as has been decided in Institute of Chartered Accountants of India v. L.K. Ratna & Ors). The petitioner cannot be allowed to invoke the writ jurisdiction under Article 226 of the Constitution as it skipped to effectuate the tax law jurisdiction. The Respondent further asserted that the petitioner had failed to produce the relevant documents which are needed to decide the tax charges (rule applicable in India) which consequently invalidates the challenge of constitutional validity of Amendment to Sections 191 to 201 of the Income Tax Act through the Finance Act, 2008 brought by the Petitioner. The Respondent illustrated a Supreme Court ruling in which the court held that the residents can be charged on the basis of notional profits (the profit he would have made in the future) which could not be made due to the close association with a non- resident (Mazagaon Dock Ltd. V. CIT). The aforesaid provision of Section 42(2) of the 1922 Act was incorporated in its new avatar as Section 92 of the said Act. The Respondent further argued that under Section 92 (1) of the Income Tax Act the income arising in an international transaction is mentioned which can be very well construed as the income of resident-only is not taxable but the income of any party to the transaction could be brought under the ambit of taxable income. It should be noted that the matter of the real income concept (which means the income of the individuals or the nation after acclimating to the extent of inflation) under Chapter 10 of the Income Tax Act has no applicability. Therefore, the difference between Arm’s Length Price (the price that should have been charged from the related parties had those parties were not related to each other) and the contracted price (price mentioned in the contract for the purchase of goods and services) would be added to the total income. Chapter 10 of the Income Tax Act is a comprehensive code that permits the computation of specific incomes as tax-free and does not provide a mechanism to compute Arm’s Length Price and Chapter 10 only applies where Arm’s Length Price (ALP) is to be arbitrated by the Assessing Officer (AO). It is evident that the Petitioner (Vodafone International Holdings) itself had submitted to the jurisdiction of Chapter X of the Act by filing/submitting Form 3-CEB, declaring the Arm’s Length Price (ALP). Thus, there is an ensconced advantage in the deal which should be brought under the ambit of chargeable income and so Chapter 10 can be interpreted to inherently possess the charging section.

Observation made by the Bombay High Court

Under Section 92(2) of the Act, the criteria to apply Chapter 10 of the Act is income from the international transactions. Capital receipts should be mentioned under ‘income’ in Section 2 (24) (vi) of the Act. Therefore, Capital gains are to be taxed under Section 45 of the Act as it is deemed to be income. The Court further held that issuance of shares at a premium is on capital account which does not give rise to income under Section 56 of the Act which can be ultimately taxed. Since there is an absence of any income arising on which the tax could be charged, therefore, the application of Arm’s Length Price to the transfer value does not arise. Therefore, under Chapter 10 of the Act, the transaction could be taxed only after working out the income after finding the Arm’s Length Price of a transaction. The Court made another observation that Section 92(2) of the said Act has no applicability in the present case as no circumstance has arisen where there is no allocation of any cost or expenditure between the petitioner and holding company. But under Section 92(2) deals with a situation in which two or more associated enterprises enter into an agreement to receive any benefit, service or facility. The court also held that since there is a provision under the tax law that deals with the problem at hand, the remedy should be asked under that provision. Thus, in the present case, the Statute provides for a complete mechanism to contest an Order of Assessment which is the most suitable to be invoked and hence the writ petition filed under Article 226 of the Constitution should not be the mechanism. Under Krishnaji Ketkar vs Mahomed Haji Latif & Ors, the Court had held that in the circumstance where the burden of proof does not lie on the party but it has been established that some of the relevant documents have been concealed by the same party, the Court may ask for the same from the part. In this case, the court sought for an explanation from the petitioner for their contestation to the constitutional validity of Amendments in Section 191 and 201 of the Income Tax Act by the Finance Act, 2008. The court held the aforesaid transaction results into a transfer of capital assets and not a transfer of controlling interest ipso facto in a corporate entity and therefore comes under the ambit of income tax. The income generated after the transfer is accumulated by the HTIL and not CGP and hence the recipient was HTIL. Since the interest of the recipient is expropriated to the petitioner, the income is said to be liable for capital gains tax as any profit which arises from the transfer of a company in India is viewed as the profit of the company which in reality owns and regulates. The Effects Doctrine Extra-territorial operation under Section 195 of the Income Tax Act illustrates that any state may levy liability on those persons also who do not come within its territory if there is a probability that any conduct outside its borders can have major consequences within the territory and hence the court held the motive of the contract between the two foreign companies is to procure substantial interest, one of the foreign companies is held in the Indian Company and therefore the municipal laws will be applied and so does the Income Tax law.


  1. Tax Guru, Vodafone Case Analysis, Tax Guru, April5, 2021, [Online] Available from: (Accessed January 13, 2022).

  2. Cadell Weaving Mill Co. P. Ltd. vs Commissioner of Income-Tax, [2001] 249 ITR 265.

  3. Suyash Upes, Vodafone Case, Legal Service India,

  4. Institute of Chartered Accountants of India v. L.K. Ratna & Ors., AIR 1987 SC 71.

  5. Mazagaon Dock Ltd. V. CIT, 1958 AIR 861.

  6. Krishnaji Ketkar vs Mahomed Haji Latif & Ors., AIR. 1968 SC 1413.

  7. Saif Ali, A Case Study of Vodafone International Holding vs Union of India, Legal Service India, [Online] Available from: (Accessed January 15, 2022).

  8. Taxmann, What is Arm’s Length Price, Taxmann, January 22, 2021, [Online] Available from: (Accessed January 16, 2022).

  9. Annapoorna, Real Income, Clear Tax, [Online] Available from: (Accessed January 15, 2022).


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