On 20 January 2012, the Supreme Court of India (Civil Appellate Jurisdiction) decided the appeal in Vodafone International Holdings B.V. v Union of India & Anr.

This matter involved a complicated transaction in which Vodafone’s Netherland subsidiary (Vodafone International Holdings B.V.) had acquired all the shares in CGP Investment Holdings Limited (a company incorporated in the Cayman Islands) from a Hong Kong group. CGP Investment Holdings Limited had a 67% stake in Hutchison Essar Limited (an Indian resident company). Therefore, Vodafone had indirectly acquired a 67% stake in Hutchison Essar.

The Indian tax authorities had decided that since the company indirectly acquired (being Hutchison Essar) was based in India and had its assets in India, the seller of the CGP Investment Holdings Limited shares was liable for capital gains tax, and Vodafone, being the buyer, had a duty to withhold such tax. This despite the fact that the asset sold was the shares in a foreign company. Effectively the tax authorities had looked through the corporate shareholding structure to levy tax on the transaction. Vodafone lost in the Indian High Court in 2010, but was victorious in the Supreme Court.

The Supreme Court came to the conclusion that the buyer and the seller were foreign companies. The shares sold were also shares in a foreign company. The Indian tax authorities therefore had no jurisdiction to tax the transaction.

Should SARS attempt to willy-nilly re-characterise the rights and/or obligations flowing from a transaction because the true target taxpayer is a man of straw or inaccessible, such attempt should be resisted strenuously. SARS should first be put through its paces to show that re-characterisation of the transaction is warranted either:

  • in terms of the principles laid down in South African case law; or
  • under sections 80A-L of the Act.  

Re-characterisation as a short-cut to the pot of gold at the end of the rainbow is not on.

The Supreme Court also summarised its view as follows:

“Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal system. Tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner. Legal doctrines like “Limitation of Benefits” and “look through” are matters of policy. It is for the Government of the day to have them incorporated in the Treaties and in the laws so as to avoid conflicting views. Investors should know where they stand.”

It highlights two critical aspects for India:

  • it affirms the rule of law in India; and
  • it indicates that India is a safe place for a foreign investor to do business.

It is speculated that the tax authorities may seek to change the tax laws to the effect that, where an acquired company has more than half of its assets in India, the disposal of the shares in that company will be subject to capital gains tax in India.