The Supreme Court of India ("Supreme Court") on January 20, 2012 has overturned a 2010 decision of the Bombay High Court which ruled that Vodafone was liable to pay $2 billion to the Indian tax authorities because Indian capital gains taxes applied on share transfers between two non-resident entities, as long as the underlying assets transferred were within India.
The case in question involved Vodafone International Holdings BV's acquisition of CGP Investments from Hutchison Telecommunication International Limited ("HTIL"). HTIL, a company incorporated in BVI, owned CGP Investments, a company incorporated in Cayman Islands, which through its Mauritius subsidiaries owned and/or controlled approximately 67% of one of India's leading mobile phone operators - Vodafone Essar Limited (previously Hutchinson Essar Limited). The Bombay High Court ruled in favor of the Indian tax authorities since it found sufficient nexus between India and the transaction. Vodafone filed an appeal against the decision of the Bombay High Court.
The Supreme Court has ruled in favor of Vodafone. The Supreme Court noted that Indian tax law does not contain a specific provision to tax off-shore transactions. In allowing the appeal, the Supreme Court has provided some clarity to foreign investors on their potential tax liabilities when transacting in shares of off-shore intermediaries having underlying assets in India.