In February 2007, Hutchison Telecom announced a deal with Vodafone, wherein the latter agreed to acquire the controlling interest of 67% held by Li Ka Shing Holdings in Hutch-Essar for US$11.1 billion that involved the transfer of shares of a foreign company outside India, which indirectly held the shares of an Indian company. The Indian tax authorities alleged that since transaction involved purchase of assets of an Indian company, and therefore, the transaction was liable to be taxed in India. They were also of the view that Vodafone sold its lower cost (undervalued) shares to third parties at certain market price, thereby making huge capital gains from the deal. The Income-Tax Department imposed $2.5 billion transfer pricing tax on Vodafone. The case aroused great interest amongst the legal and business communities alike, not only in terms of its legal and commercial significance, but also the astronomical figure in question.
Vodafone contended that the transaction represented a transfer of shares executed between its subsidiary and thus, any gain arising to the transferor or to any other person out of this transfer of a share could not be taxable in India. It further contented that the transaction was not an international as the asset was outside India. The Revenue Authorities in May 2010, by a strongly worded order, asserted that under Section 201 of the Income-Tax Act, they had jurisdiction to treat Vodafone as an assessee for failure to deduct tax at source. This order was challenged by Vodafone by a writ petition before the Bombay High Court. The key issue before the High court was whether the Indian Revenue Authorities had the jurisdiction to proceed against Vodafone and the unmitigated interpretation of Section 9(1)(i) of the Income-Tax Act. The High Court dismissed the petition of Vodafone by embracing the argument of the revenue authorities that the matter in question involved transfer of a capital asset situated in India as a result of which the Indian revenue authorities had jurisdiction over the matter.
Subsequently, Vodafone challenged the order before the Supreme Court. The Supreme court heard the matter over a period of two months and delivered the judgment on 20th January 2012 in favour of Vodafone stating that the transactions were made between two non-resident companies outside India and involved assets that were not part of an Indian entity and also asked the IT department to return Rs. 2500 crore to Vodafone with 4% interest. However, the Indian government changed the law that gave it power to tax similar transactions entered into in the past, thus making Vodafone liable to pay tax again. It argued the retrospective amendment was a denial of justice and a breach of the Indian government’s obligations to provide a fair and equitable treatment to investors.
In 2016, The Income-Tax Department served a fresh notice to telecom giant Vodafone seeking past taxes of up to Rs 14,000 crore and on company’s failure to pay the amount, its assets and bank accounts shall be frozen. Both the parties seek to resolve the dispute through international arbitration.